<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration No. 333-59641
PROSPECTUS
$200,000,000
(PAXSON LOGO)
PAXSON COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE SHARES OF ITS 13 1/4% CUMULATIVE JUNIOR EXCHANGEABLE PREFERRED
STOCK, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING SHARES OF ITS 13 1/4% CUMULATIVE JUNIOR EXCHANGEABLE
PREFERRED STOCK
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON SEPTEMBER 7,
1998, UNLESS EXTENDED
---------------------
Paxson Communications Corporation (the "Company") hereby offers to exchange,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying Letter of Transmittal (the "Exchange Offer"), up to 20,000
shares of the Company's new 13 1/4% Cumulative Junior Exchangeable Preferred
Stock, par value $.001 per share (the "New Junior Preferred Stock") that have
been registered under the Securities Act of 1933, as amended (the "Securities
Act") for up to 20,000 shares of the Company's outstanding 13 1/4% Cumulative
Junior Exchangeable Preferred Stock, par value $.001 per share (the "Original
Junior Preferred Stock"). The Original Junior Preferred Stock and the New Junior
Preferred Stock are sometimes referred to herein collectively as the "Junior
Preferred Stock."
The terms of the New Junior Preferred Stock are substantially identical in
all respects (including liquidation preference, dividend rate and maturity) to
the terms of the Original Junior Preferred Stock for which it may be exchanged
pursuant to this Exchange Offer, except that shares of the New Junior Preferred
Stock will be freely transferable by holders thereof (other than as provided in
the next paragraph) and issued free of any covenant restricting transfer absent
registration. For a complete description of the terms of the New Junior
Preferred Stock, see "Description of the New Junior Preferred Stock and New
Exchange Debentures". There will be no cash proceeds to the Company from the
Exchange Offer.
The Original Junior Preferred Stock was sold on June 10, 1998, in a
transaction not registered under the Securities Act in reliance upon exemptions
provided therein (the "Private Offering"). Accordingly, shares of Original
Junior Preferred Stock may not be offered, resold or otherwise pledged,
hypothecated or transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The New Junior Preferred Stock
is being offered to satisfy the obligations of the Company under the
Registration Rights Agreement (as defined herein) relating to the Original
Junior Preferred Stock. See "The Exchange Offer -- Purpose and Effect of the
Exchange Offer." Every holder receiving shares of New Junior Preferred Stock in
the Exchange Offer, other than a broker-dealer, will represent that it is not
engaging in or intending to engage in a distribution of such shares of New
Junior Preferred Stock. The Company is making the Exchange Offer in reliance on
the position of the staff of the Commission as set forth in Exxon Capital
Holdings Corp., SEC No-Action Letter (April 13, 1989), Morgan Stanley & Co.,
Inc., SEC No-Action Letter (June 5, 1991) and Shearman & Sterling, SEC No-Action
Letter (July 2, 1993). Based on the positions expressed in these no-action
letters addressed to other parties in other transactions, shares of New Junior
Preferred Stock issued pursuant to the Exchange Offer in exchange for shares of
Original Junior Preferred Stock may be offered for resale, resold or otherwise
transferred by the holders thereof (other than any holder which is an affiliate
of the Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such shares of New Junior Preferred Stock are
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to participate in the distribution of such shares
of New Junior Preferred Stock. Any holder who acquired shares of Original Junior
Preferred Stock in the Private Offering and who participates in the Exchange
Offer for the purpose of participating in a distribution of the New Junior
Preferred Stock may not rely on these no-action letters and would have to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any secondary resale. This Prospectus may not be used by such
holders to satisfy these requirements. Each broker-dealer that receives shares
of New Junior Preferred Stock for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such shares of New Junior Preferred Stock. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer -- Purpose and Effect of the Exchange
Offer" and "Plan of Distribution." Broker-dealers may use this Prospectus, as
amended or supplemented, in connection with resales of the shares of New Junior
Preferred Stock received in exchange for the shares of Original Junior Preferred
Stock where such shares of Original Junior Preferred Stock were acquired by such
broker-dealer as a result of market making activities or other such trading. The
Company has agreed that, for a period of 180 days after the Expiration Date (as
defined herein), it will make this Prospectus available to any broker-dealer for
use in connection with any such resale.
There is no established trading market for the Junior Preferred Stock. Any
shares of Original Junior Preferred Stock not tendered and accepted in the
Exchange Offer will remain outstanding. The Company does not currently intend to
list the New Junior Preferred Stock on any securities exchange. To the extent
that shares of Original Junior Preferred Stock are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered shares of Original Junior
Preferred Stock could be adversely affected. No assurances can be given as to
the liquidity of the trading market for either the Original Junior Preferred
Stock or the New Junior Preferred Stock. The Junior Preferred Stock is expected
to be eligible for trading in the Private Offerings, Resales and Trading through
Automated Linkages (PORTAL) market.
The Exchange Offer is not conditioned on any minimum number of shares of
Original Junior Preferred Stock being tendered for exchange. The Exchange Offer
will expire at 5:00 P.M., New York time, on September 7, 1998, unless extended
(the "Expiration Date"). The date of acceptance for exchange of shares of
Original Junior Preferred Stock will be the first business day following the
Expiration Date. Shares of Original Junior Preferred Stock tendered pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise, such tenders are irrevocable. The Company will pay all expenses
incident to the Exchange Offer.
(continued on next page)
---------------------
HOLDERS OF ORIGINAL JUNIOR PREFERRED STOCK SHOULD CAREFULLY CONSIDER THE
MATTERS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 18.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR INADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is August 3, 1998.
<PAGE> 2
(continued from cover page)
Holders of the Junior Preferred Stock are entitled to receive, when, as and
if declared by the board of directors of the Company out of funds legally
available therefor, cash dividends or, subject to certain conditions, dividends
in the form of additional shares of Junior Preferred Stock. All dividends on the
Junior Preferred Stock will be cumulative, whether earned or declared, from the
Issue Date and will be payable at a rate equal to 13 1/4% per annum of the
liquidation preference per share, payable semi-annually beginning November 15,
1998 and accumulating from the Issue Date. Dividends may be paid, at the
Company's option, on any dividend payment date, either in cash or by the
issuance of additional shares of Junior Preferred Stock (and payment of cash in
lieu of fractional shares) having an aggregate liquidation preference equal to
the amount of such dividends. If dividends for any period ending after May 15,
2003, are paid in additional shares of Junior Preferred Stock, the dividend rate
will increase by 1% per annum for such dividend payment period.
The Junior Preferred Stock is redeemable, at the Company's option, in whole
or in part, at any time on or after May 15, 2003, at the redemption prices set
forth herein, plus, without duplication, accumulated and unpaid dividends to the
date of redemption. In addition, prior to May 15, 2001, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings (as defined
herein) or Major Asset Sales (as defined herein) to redeem up to an aggregate of
35% of the shares of Junior Preferred Stock (whether initially issued or issued
in lieu of cash dividends) at 113.25% of the aggregate liquidation preference
thereof, plus, without duplication, accumulated and unpaid dividends to the
redemption date. The Company is required to redeem all of the then outstanding
Junior Preferred Stock on November 15, 2006 at a redemption price of 100% of the
liquidation preference plus accumulated and unpaid dividends to the date of
redemption. Upon a Change of Control (as defined herein), the Company is
required to offer to purchase each holder's Junior Preferred Stock at a price
equal to 101% of the liquidation preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of purchase. The Junior Preferred
Stock ranks junior to all other existing classes of preferred stock and senior
to the Convertible Preferred Stock (as defined herein) and to the Common Stock
(as defined herein). As of March 31, 1998, pro forma for the Transactions (as
defined herein), there would have been outstanding $350.7 million of
Indebtedness (as defined herein) and $228.0 million aggregate liquidation
preference of Preferred Stock ranking senior to the Junior Preferred Stock.
Subject to certain conditions, the Junior Preferred Stock is exchangeable in
whole or in part on a pro rata basis, at the option of the Company, on any
dividend payment date, for the Company's 13 1/4% Exchange Debentures due 2006
(including any such securities paid in lieu of cash interest, as described
herein, the "New Exchange Debentures"); provided, that immediately after giving
effect to any such partial exchange, certain minimum amounts of Junior Preferred
Stock and/or New Exchange Debentures remain outstanding. Interest on the New
Exchange Debentures will
be payable at a rate of 13 1/4% per annum and will accrue from the date of
issuance thereof. Interest on the New Exchange Debentures will be payable
semi-annually in cash or, at the option of the Company, on or prior to May 15,
2003, in additional New Exchange Debentures, in arrears on each May 15 and
November 15, commencing on the first such date after the exchange of Junior
Preferred Stock for the New Exchange Debentures. The New Exchange Debentures
will mature on November 15, 2006 and will be redeemable, at the option of the
Company, in whole or in part, on or after May 15, 2003, at the redemption prices
set forth herein, plus accrued and unpaid interest to the date of redemption. In
addition, prior to May 15, 2001, the Company may, at its option, use the net
proceeds of one or more Public Equity Offerings or Major Asset Sales to redeem
up to an aggregate of 35% of the aggregate principal amount of New Exchange
Debentures (whether issued in exchange for Junior Preferred Stock or in lieu of
cash interest payments) at the redemption prices set forth herein, plus, without
duplication, accrued and unpaid interest to the redemption date; provided, that
after any such redemption certain minimum amounts of New Exchange Debentures
and/or Junior Preferred Stock remain outstanding. Upon a Change of Control, each
holder of the New Exchange Debentures is entitled to require the Company to
purchase such holder's New Exchange Debentures (whether issued in exchange for
Junior Preferred Stock or in lieu of cash interest payments) at the redemption
prices set forth herein, plus, without duplication, accrued and unpaid interest
to the redemption date; provided, that after any such redemption certain minimum
amounts of New Exchange Debentures and/or Junior Preferred Stock remain
outstanding. Upon a Change of Control, each holder of the New Exchange
Debentures is entitled to require the Company to purchase such holder's New
Exchange Debentures at a price equal to 101% of the principal amount thereof,
plus, without duplication, accrued and unpaid interest to the date of purchase.
The New Exchange Debentures will be subordinated to all existing and future
Senior Debt (as defined herein) of the Company. In addition, the New Exchange
Debentures will rank pari passu with the Company's 11 5/8% Senior Subordinated
Notes due 2002 (the "Existing Notes") and any of the Company's Existing Exchange
Debentures (as defined herein) and will rank pari passu or senior to any
Indebtedness that expressly provides that it ranks pari passu or subordinate to
the New Exchange Debentures, as the case may be. The New Exchange Debentures
will be unconditionally guaranteed, jointly and severally, on a senior
subordinated unsecured basis, by each of the Company's subsidiaries (the
"Guarantors") and will be subordinated in right of payment to all existing and
future Senior Debt of the Guarantors. As of March 31, 1998, pro forma for the
Transactions, there would have been $122.7 million of Indebtedness ranking
senior to the New Exchange Debentures and $228.0 million ranking pari passu with
the New Exchange Debentures.
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration Statement on Form S-4 with respect to the shares of
New Junior Preferred Stock being offered hereby (including all exhibits and
amendments thereto the "Registration Statement"). This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is made
to the Registration Statement. Each statement made in this Prospectus concerning
a document filed as an exhibit to the Registration Statement is qualified in its
entirety by reference to such exhibit for a complete statement of its
provisions.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Commission. Reports, proxy statements, and other
information filed by the Company can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C., and at the following regional offices: 7 World Trade Center, Suite 1300,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies can be obtained by mail from the
Commission's Public Reference Section, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site
that contains reports, proxy statements and other information regarding the
Company, the address of which is http://www.sec.gov. Reports, proxy statements,
and other information concerning the Company can also be inspected and copied at
the offices of the American Stock Exchange at 86 Trinity Place, New York, NY
10006.
---------------------
FORWARD-LOOKING STATEMENTS AND ASSOCIATED CONSIDERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE "SAFE HARBOR"
PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT OF 1995 AND INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING THOSE IDENTIFIED BELOW, WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. THE
WORDS "BELIEVE," "EXPECT," "INTEND," "ANTICIPATE" AND SIMILAR EXPRESSIONS
IDENTIFY CERTAIN OF SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATES ON WHICH THEY WERE MADE. ALL STATEMENTS HEREIN, OTHER THAN THOSE
CONSISTING SOLELY OF HISTORICAL FACTS, THAT ADDRESS ACTIVITIES, EVENTS OR
DEVELOPMENTS THAT THE COMPANY EXPECTS OR ANTICIPATES WILL OR MAY OCCUR IN THE
FUTURE, INCLUDING SUCH THINGS AS BUSINESS STRATEGY, MEASURES TO IMPLEMENT
STRATEGY, COMPETITIVE STRENGTHS, GOALS, PROJECTED REVENUES, COSTS AND OTHER
FINANCIAL RESULTS, REFERENCES TO FUTURE SUCCESS AND OTHER EVENTS MAY BE
FORWARD-LOOKING STATEMENTS. STATEMENTS HEREIN ARE BASED ON CERTAIN ASSUMPTIONS
AND ANALYSIS MADE BY THE COMPANY IN LIGHT OF ITS EXPERIENCE AND ITS PERCEPTION
OF HISTORICAL TRENDS, CURRENT CONDITIONS AND POTENTIAL FUTURE DEVELOPMENTS, AS
WELL AS OTHER FACTORS IT BELIEVES ARE APPROPRIATE IN THE CIRCUMSTANCES. WHETHER
ACTUAL RESULTS, EVENTS AND DEVELOPMENTS WILL CONFORM WITH THE COMPANY'S
EXPECTATIONS IS SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES AND IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS, EVENTS AND DEVELOPMENTS TO DIFFER
MATERIALLY FROM THOSE REFERENCED IN, CONTEMPLATED BY OR UNDERLYING ANY FORWARD-
LOOKING STATEMENTS HEREIN, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS, OR OTHERWISE. READERS ARE CAUTIONED NOT TO
i
<PAGE> 4
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. FACTORS TO CONSIDER IN
EVALUATING ANY FORWARD-LOOKING STATEMENTS AND THE OTHER INFORMATION CONTAINED
HEREIN AND WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE ANTICIPATED IN
THE FORWARD-LOOKING STATEMENTS OR OTHERWISE ADVERSELY AFFECT THE COMPANY'S
BUSINESS INCLUDE THOSE SET FORTH IN THE "RISK FACTORS" SECTION OF THIS
PROSPECTUS.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
and the Company's Proxy Statement, dated March 18, 1998, for the Company's 1998
Annual Meeting of Shareholders as heretofore filed by the Company with the
Commission pursuant to the Exchange Act.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Exchange Offer shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents. Any information contained in a document incorporated by
reference or deemed to be incorporated by reference herein shall be deemed
modified or superseded, for purposes of this Prospectus, to the extent that a
statement contained herein or in any subsequently filed document that is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any document incorporated by reference in this Prospectus, other than exhibits
to any such document not specifically described above. Requests for such
documents should be directed to Paxson Communications Corporation, 601
Clearwater Park Road, West Palm Beach, Florida 33401, Attention: Director of
Investor Relations (telephone number (561) 659-4122).
ii
<PAGE> 5
CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA
All market rank, total market television household data and total market
cable television household data has been obtained from U.S. Television Household
Estimates for September 1997 and cable household data for January 1998, as
prepared by Nielsen Media Research ("Nielsen") for each designated market area
("DMA"), except that television and cable household data for San Juan has been
obtained from Strategic Research Corporation as of April 1998 and television and
cable household data for Christiansted, U.S.V.I. has been obtained from BIA
Consulting as of January 1998. The Company has sought to obtain the most recent
data available and does not assume responsibility for the accuracy or
completeness of such data.
Set forth below are certain terms commonly used in the broadcast television
industry that are used in this Memorandum. Unless the context otherwise
requires, such terms shall have the respective meanings set forth below.
1996 Act................... The Telecommunications Act of 1996.
Communications Act......... Communications Act of 1934, as amended.
DMA or market.............. Designated Market Area. There are 211 DMAs in the
United States with each county in the continental
United States assigned uniquely to one DMA. Ranking
of DMAs is based upon Nielsen estimates of the
number of television households.
EBITDA..................... Operating income (loss) excluding nonrecurring
items including 1997 compensation associated with
Paxson Radio asset sales and relocation costs, plus
time brokerage fees, depreciation, amortization and
other non-cash charges, including amortization of
programming rights, and option plan compensation,
minus programming payments (including a ratable
portion of programming deposits). Although EBITDA
is not calculated in accordance with GAAP, it is
widely used as a measure of a company's ability to
service and/or incur debt. EBITDA should not be
considered in isolation from or a substitute for
net income, cash flows from operations and other
income or cash flow data prepared in accordance
with GAAP, or as a measure of profitability or
liquidity.
FCC........................ Federal Communications Commission.
Local/national spot
advertising.............. Broadcast television advertising consisting
primarily of spots of 30 seconds and shorter
duration designed to reach targeted individual or
groups of television markets included within a
particular programmer's distribution system. Local
spots are sold to local advertisers within a given
television market. National spots are sold to
national advertisers within a group or groups of
television markets.
Network spot advertising... Broadcast television advertising consisting
primarily of spots of 30 seconds and shorter
duration aired on a particular programmer's
distribution system.
Prime time................. Monday through Saturday 8:00 PM to 11:00 PM and
Sunday 7:00 PM to 11:00 PM.
Time brokerage agreement... An agreement under which a television programmer
agrees to purchase from a broadcast station
licensee substantially all of the broadcast time on
a station, provides programming and sells
advertising during the purchased time, receives all
the revenue derived from advertising sold during
the purchased time, pays certain expenses of the
station and performs other functions, with the
licensee retaining responsibility for ultimate
control of the station in accordance with FCC
policies. A time brokerage agreement is also known
in the broadcast industry as a "local marketing
agreement." See "Business -- Federal Regulation of
Broadcasting."
iii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements contained elsewhere in this Prospectus and in the documents
incorporated by reference herein. Except as otherwise indicated by the context,
references in this Prospectus to the "Company" include Paxson Communications
Corporation and its direct and indirect subsidiaries. Capitalized terms used
without definition in the following summary are defined elsewhere in this
Prospectus. Unless otherwise indicated, pro forma information in this Prospectus
gives effect to the Transactions (as defined).
THE COMPANY
Paxson Communications Corporation owns and operates the largest group of
broadcast television stations in the United States. The Company commenced its
television operations in early 1994 in anticipation of the deregulation of the
broadcast industry and has expanded in response to federal regulatory changes
that increased the number of broadcast television stations permitted under
common ownership. Upon the completion of the Transactions, the Company will have
88 owned, operated or affiliated stations (including six low-power stations) in
85 U.S. markets containing over 74 million broadcast television households, or
approximately 74% of all U.S. television households (including Puerto Rico and
the Virgin Islands), and will be the only television broadcaster with full-power
stations in all of the top 20 U.S. markets and in 43 of the top 50 U.S. markets.
Management believes that the Company has created a valuable national television
broadcast distribution infrastructure that would be both expensive and difficult
to replicate. The Company has obtained two appraisals which have valued its pro
forma owned and operated stations in a range between $1.5 billion and $1.9
billion (see "Business -- Appraisals"). As of March 31, 1998, the pro forma book
value of the Company's assets was approximately $1.4 billion.
The Company intends to launch its PAX NET programming service on August 31,
1998. PAX NET is the brand name for the programming that the Company expects to
provide, 24 hours per day and seven days per week, to its owned, operated or
affiliated television stations and to certain cable systems and satellite
television providers. PAX NET programming will generally consist of
family-friendly, traditional entertainment programs that have had, or are
having, successful first runs on television in terms of audience ratings.
Management believes that the value of the Company's extensive broadcast
properties will be enhanced by converting to PAX NET programming from the
current long-form paid programming inTV format. The Company intends to sell
airtime for "spot" advertisements during PAX NET programming to commercial
advertisers, enabling the Company to participate in the approximately $37
billion local, national and network television spot advertising market rather
than the management-estimated $2 billion long-form paid programming market into
which the Company currently sells nearly all of its available airtime.
Management believes that the launch of PAX NET will enable the Company to
combine many of the favorable attributes of traditional television networks and
network-affiliated television stations under one operation.
In general, broadcast television networks provide spot advertisers with
significant "reach," or access to viewers, through their extensive nationwide
distribution systems. Although most networks own stations in some of the top 20
U.S. markets, they are able to provide nationwide reach only through affiliation
agreements with non-owned stations (a "network affiliate") which agree to
broadcast network-provided programming during certain times of the day,
including prime time. Most broadcast television networks invest considerable
financial resources to either develop or obtain new first-run programming, the
success of which is dependent upon attaining sufficient audience ratings and
advertising support. Substantially all of a network's revenues are derived from
the sale of advertising airtime during network programs.
Network-affiliated stations are typically independently-owned rather than
network-owned. A network affiliate broadcasts network-provided programming at
times stipulated by the network. At all other times, the network affiliate may
broadcast other programming, such as syndicated shows and other non-network
programming, which it generally purchases or produces. As part of its agreement
with the network, an affiliate relinquishes to the network substantially all of
the commercial airtime available during network programming hours, including the
desirable prime time periods. The network affiliate retains control of nearly
all of the
1
<PAGE> 7
commercial airtime available during non-network programming hours, which it is
able to sell to local and national spot advertisers who typically pay rates that
are more than 50% higher per viewer than those paid by network advertisers.
Network-affiliated stations must incur significant costs for programming and
promotion during non-network programming hours to generate revenue.
Management believes that the launch of PAX NET will enable the Company to
combine under one operation many of the favorable characteristics of traditional
television networks and network-affiliated television stations described above.
Similar to traditional television networks, the Company will provide advertisers
with nationwide reach through its extensive television distribution system.
Since the Company owns and operates almost all of its television distribution
system, it will receive advertising revenue from the entire broadcast day,
unlike a traditional network, which receives advertising revenue only from
commercials aired during limited network programming hours. To maximize
revenues, the Company intends to allocate its advertising inventory among local,
national and network advertisers purely according to demand, rather than
allocating airtime to network advertisers as mandated by a network affiliation
agreement. Further, the Company expects that its station group will enjoy
various economies of scale due to its size and centralized operations, resulting
in programming, promotional, research, engineering, accounting and
administrative expenses that are substantially lower per station than those of a
typical network-affiliated station.
BUSINESS STRATEGY
The Company will seek to maximize its cash flow by maintaining an efficient
operating structure and centralizing many functions that traditionally are
managed at the local station level, optimizing the mix of advertising sales to
achieve the highest possible rates and providing viewers with a schedule of
high-quality destination programming. The principal components of the Company's
business strategy are as follows:
- Maintain a Centralized, Low-Cost Operating Structure. The Company
intends to maintain a low-cost operating structure by centralizing many
station functions, including programming, promotions, advertising,
research, engineering, accounting and sales traffic control. Under its
current inTV format, the Company averages twelve employees per station.
In anticipation of the launch of PAX NET, each of the Company's stations
will be adding an average of six local sales and sales-related employees
whose compensation will be largely dependent upon the amount of local
advertising sold. Accordingly, the Company estimates that each of its
stations will average only 18 employees, compared to an average of 100
employees at network-affiliated stations, and an average of 60 employees
at independent stations in markets of similar size to the Company's.
Unlike other stations, the Company's stations will not be required to
purchase programming individually since they will broadcast PAX NET
programming 24 hours per day. In addition, the Company's stations will
not produce local news programs, thereby avoiding the significant costs
often associated with such production.
As part of its low-cost operating strategy, the Company intends to
promote the PAX NET brand and each of its local television stations by
utilizing a centralized advertising and promotional program. All print
and radio promotional advertisements will be produced at the Company's
headquarters, which will avoid duplicating such operations at the local
stations and the associated local promotional personnel expenses. All
advertisements and other promotional material will share the same basic
content but will be customized to identify and highlight each local
market. Management believes that the Company will have substantial
leverage to negotiate volume discounts on the procurement of print
materials and media time used to promote PAX NET programming and the
Company's television stations.
- Achieve Programming Economies of Scale. The Company seeks to achieve
economies of scale as it purchases PAX NET programming for all of its
stations. The Company has purchased programming centrally and will be
able to deliver its programming by satellite to its stations 24 hours per
day and seven days per week. Each station will offer substantially the
same programming schedule. Generally, the Company has negotiated license
agreements entitling it to exclusive nationwide distribution rights
(regardless of delivery medium) for a fixed cost, independent of the
number of households which will receive such programming. By utilizing a
centralized programming acquisition strategy, the Company
2
<PAGE> 8
expects to incur programming costs per station significantly lower than
those of comparable television stations in similar markets.
- Maximize Advertising Sell-Through and Revenue. Following the launch of
PAX NET, the Company will have access to multiple sources of advertising
revenue: network spot, national spot, local spot and long-form paid
programming. Industry data has shown that an advertiser seeking to target
viewers within specific markets typically purchases airtime at rates 50%
to 100% higher per viewer than those for a single commercial aired across
an entire network. Since networks and station affiliates are usually
owned by different entities, the allocation of spots between local,
national and network advertisers is relatively fixed by an affiliation
agreement. The Company, however, will retain the flexibility to allocate
airtime among various categories of advertisers and will seek to maximize
revenue by optimizing the mix of advertising time it sells among local,
national and network advertisers as well as its current base of long-form
paid programming advertisers. To better allocate its available
advertising airtime, the Company is implementing a new proprietary sales
traffic system designed to deliver to the Company's sales force accurate
and timely data on its available advertising inventory and the demand for
its inventory.
- Provide Proven Family-Friendly Programming. The Company intends to build
the brand recognition of and attract viewers to PAX NET by offering
syndicated family-oriented programming which achieved successful audience
ratings during its original network run. Certain of the programs
purchased by the Company (Touched By An Angel, Promised Land and
Diagnosis Murder) are still in production, and their new episodes
continue to attract significant viewership. The Company has generally
sought to purchase one-hour dramas since management believes that such
programming is more cost efficient than programs of shorter duration.
Consistent with its family-friendly programming strategy, the Company has
agreed to air original children's programming produced by a subsidiary of
The Walt Disney Company. As the brand recognition of PAX NET becomes
established, management believes that PAX NET will become a "destination
channel" to which viewers will turn regularly for family-friendly
programming, and that PAX NET will attract advertisers who want to reach
the broad and desirable viewer demographics attracted by such
programming.
- Continue Airing Profitable Long-Form Paid Programming. The Company
intends to carry a reduced but still significant schedule of long-form
paid programming, including infomercials, primarily during the day on
weekends and during certain hours of weekday mornings. Under its current
inTV programming format, the Company has generated in excess of 30% of
its revenue from weekend daytime programming. Management believes that
network-affiliated stations charge rates for long-form paid programming
which are several times the Company's current rates for similar time
periods and that as PAX NET becomes established as a "destination
channel," the Company can increase its long-form paid programming rates
to such levels. In addition, since the Company will reduce its inventory
of airtime available to long-form paid programmers upon the launch of PAX
NET, management believes that the Company will be able to sell such
airtime at premium rates. As a result, management believes that long-form
paid programming will provide a significant and stable base of revenue
for the Company as it implements the entertainment component of its PAX
NET strategy.
- Expand PAX NET Distribution. Pro forma for the Transactions, the
Company's station group will serve markets comprising approximately 74%
of all U.S. television households (including Puerto Rico and the Virgin
Islands). The Company intends to continue expanding the distribution of
its PAX NET programming service through the addition of broadcast
television station affiliates as well as certain cable systems and
satellite television providers. The Company intends to expand its
distribution to reach as many U.S. television households as possible in
an economically beneficial manner. The Company has entered into an
agreement with a subsidiary of Tele-Communications, Inc. ("TCI"), whereby
the Company will receive cable carriage of its PAX NET programming on TCI
cable systems in certain markets not currently served by the Company's
broadcast television station group. The Company continues to seek to
enter into distribution agreements to reach other markets not currently
served by its television group, with the goal of generating incremental
revenue from additional distribution outlets and leveraging its
relatively fixed cost operating structure to increase cash flow.
3
<PAGE> 9
STATION PORTFOLIO
The following table lists the owned, operated or affiliated stations which
the Company anticipates will air PAX NET programming. This list includes pending
transactions and stations currently under construction. The Company does not
expect that all stations will be completed or will air PAX NET programming by
the announced date of PAX NET's launch. See footnotes to table for additional
information.
PAX NET TELEVISION DISTRIBUTION
(TELEVISION AND CABLE HOUSEHOLDS IN THOUSANDS)
<TABLE>
<CAPTION>
NATIONAL TOTAL TOTAL
TV MARKET MARKET CABLE MARKET TV
RANK MARKET(1) STATION CHANNEL HOUSEHOLDS(2) HOUSEHOLDS(2)
- --------- --------- ------- ------- ------------- -------------
<C> <S> <C> <C> <C> <C>
1 New York, NY WPXN 31 4,825 6,756
2 Los Angeles, CA KPXN 30 3,133 5,009
3 Chicago, IL WCFC(3) 38 1,950 3,140
4 Philadelphia, PA WPPX 61 2,033 2,659
5 San Francisco, CA KKPX 65 1,640 2,298
6 Boston, MA WPXB 60 1,694 2,174
6 Boston, MA* WBPX(4) 46 -- --
7 Washington, D.C. WPXW 66 1,331 1,928
7 Washington, D.C. WWPX(5) 60 -- --
8 Dallas, TX KPXD(6) 68 989 1,899
9 Detroit, MI WPXD 31 1,191 1,782
10 Atlanta, GA WPXA 14 1,144 1,675
11 Houston, TX KPXB 49 918 1,624
12 Seattle, WA KWPX 33 1,104 1,514
13 Cleveland, OH WVPX 23 1,026 1,469
14 Minneapolis, MN KPXM 41 746 1,448
15 Tampa, FL WXPX 66 1,043 1,436
16 Miami, FL WPXM 35 993 1,386
17 Phoenix, AZ KBPX 13 755 1,289
17 Phoenix, AZ* KPPX(7)(8) 51 -- --
18 Denver, CO KPXC 59 741 1,199
19 Pittsburgh, PA Channel 40(3) 40 899 1,140
20 Sacramento, CA* KSPX 29 726 1,127
21 St. Louis, MO WPXS(5) 13 585 1,109
22 Orlando, FL WOPX 56 796 1,041
24 Portland, OR KPXG 22 611 976
25 Indianapolis, IN WIPX-LP(9) 51 618 957
27 Hartford, CT* WHPX(4) 26 792 916
29 Raleigh, NC WFPX 62 512 826
29 Raleigh, NC WRPX(5) 47 -- --
31 Kansas City, MO KPXE 50 518 792
32 Milwaukee, WI WPXE(5) 55 477 791
33 Nashville, TN WNPX 28 496 789
34 Columbus, OH WCPX-LP(9) 62 473 739
36 Salt Lake City, UT KUWB(10) 30 387 690
36 Salt Lake City, UT KCSG(13) 4 -- --
37 Grand Rapids, MI WZPX(5) 43 412 659
38 San Antonio, TX* Channel 26(7)(8) 26 422 649
39 Norfolk, VA WPXV 49 474 636
40 Buffalo, NY WAQF(3)(7) 51 475 630
41 New Orleans, LA* WPXL 49 455 623
42 Memphis, TN* WFBI 50 390 614
43 West Palm Beach, FL WPXP(11) 67 496 593
44 Oklahoma City, OK KOPX 62 374 593
46 Greensboro, NC WGPX 16 367 577
</TABLE>
4
<PAGE> 10
<TABLE>
<CAPTION>
NATIONAL TOTAL TOTAL
TV MARKET MARKET CABLE MARKET TV
RANK MARKET(1) STATION CHANNEL HOUSEHOLDS(2) HOUSEHOLDS(2)
- --------- --------- ------- ------- ------------- -------------
<C> <S> <C> <C> <C> <C>
47 Wilkes-Barre, PA* WQPX(7)(8) 64 452 566
48 Albuquerque, NM Channel 14(3)(7)(15) 14 332 560
49 Providence, RI WPXQ(7)(12) 69 433 559
51 Birmingham, AL WPXH 44 363 547
52 Albany, NY WYPX 55 376 509
53 Dayton, OH WDPX 26 351 503
54 Jacksonville, FL WPXJ-LP(9) 41 376 502
55 Fresno, CA KPXF 61 263 496
56 Little Rock, AR* KYPX(7)(8) 42 301 481
57 Charleston, WV* WKRP(7)(8) 29 353 480
58 Tulsa, OK KTPX 44 299 468
61 Las Vegas, NV KVPX-LP(9) 59 302 450
62 Mobile, AL Channel 61(3)(7)(15) 61 324 450
64 Knoxville, TN* WPXK 54 299 441
66 Toledo, OH WLMB(13) 40 274 408
67 Lexington, KY WAOM(3)(7) 67 277 403
68 Roanoke, VA WPXR 38 263 402
69 Des Moines, IA Channel 39(3)(7)(15) 39 233 383
70 Green Bay, WI WPXG(7) 14 226 381
71 Honolulu, HI* KPXO(7) 66 333 380
72 Syracuse, NY* WAUP(7)(8) 56 279 378
73 Spokane, WA Channel 34(7) 34 233 375
75 Rochester, NY(14) WAQF(3)(7) 51 267 367
76 Shreveport, LA Channel 21(7) 21 217 366
80 Portland, ME Channel 23(7)(8) 23 266 350
81 Champaign, IL WPXU 23 249 331
83 Ft. Myers, FL W57CJ(9) 57 253 320
86 Chattanooga, TN W55CD(9) 55 217 310
87 Cedar Rapids, IA KPXR 48 198 308
89 Davenport, IA Channel 67(3)(7)(15) 67 202 302
90 Jackson, MS Channel 51(3)(7)(15) 51 177 297
95 Evansville, IN WTSN(9)(13) 63 168 274
105 Lansing, MI(14) WZPX(5) 43 157 236
106 Greenville, NC WEPX(3)(7) 38 152 234
120 Eugene, OR KROZ(13) 36 138 210
121 Monterey/Salinas, CA(14) KKPX 65 160 206
131 Bakersfield, CA(14) KPXF 61 129 176
136 Wausau-Rhinelander, WI* WAZW(3)(7) 46 86 163
150 Odessa, TX Channel 30(7)(8) 30 98 134
156 Anchorage, AK KDMD(13) 33 72 122
159 Palm Springs, CA KVCC(9)(13) 58 102 112
187 Tuscaloosa, AL WJRD(9)(13) 49 48 59
NR Juneau, AK KUBD(13) 4 5 5
NR San Sebastian, PR WJWN 38 -- --
NR Ponce, PR WKPV 20 -- --
NR San Juan, PR WJPX 24 661 1,140
NR Christiansted, VI Channel 15(3)(8)(15) 15 18 36
------ ------
TOTAL PAX NET
COVERAGE(2) 49,993 74,332
====== ======
</TABLE>
- ---------------
* Operated or to be operated pursuant to a time brokerage agreement; except
as noted, the Company has an agreement and/or an option to acquire a 100%
ownership interest.
NR Not ranked
(1) Each station is licensed by the FCC to serve a specific community, which is
included in the listed market.
5
<PAGE> 11
(2) Figures represent total cable and television households in each market only
and are not necessarily indicative of the number of households reached by
each station in its market; "--" indicates second station in market; totals
do not double count markets where the Company has more than one station.
(3) Pending acquisition.
(4) The Company does not own, and has no option to acquire, the station;
station will become an affiliate upon acquisition by DP Media, Inc. and the
Company will have a right of first refusal upon a proposed sale of the
station.
(5) Affiliate station; the Company has an option to acquire, or first right of
refusal upon a proposed sale of, the station.
(6) The Company has an 80% ownership interest in this station.
(7) Station is currently under construction or not operating commercially.
(8) 49% ownership interest with an option for the remaining 51%.
(9) A low power station; other low power stations the Company owns or operates,
which simulcast programs aired on an owned and operated full-power
television station in the same market, are not presented.
(10) The Company has a contract to exchange this station for station KUPX,
channel 16, in Salt Lake City.
(11) 90% ownership interest.
(12) 50% ownership interest.
(13) Affiliate station.
(14) Additional markets served by an out-of-market station.
(15) Application for construction permit pending.
6
<PAGE> 12
COMPANY HISTORY
The Company was founded in 1991 by Lowell W. "Bud" Paxson who personally
financed the Company's early growth and continues to lead the Company as
majority stockholder and chief executive officer. Mr. Paxson has been at the
forefront of several innovative broadcasting concepts over the last fifteen
years, including his leadership role in the early growth of electronic retailing
as the creator and co-founder of Home Shopping Network, Inc. and Silver King
Communications, Inc. Mr. Paxson was one of the first radio operators to take
advantage of changes in the law applicable to multiple radio station ownership
and the overall number of stations permitted under common ownership as he built
Florida's largest radio group. In 1997, the Company sold two business segments,
Paxson Radio and Paxson Network-Affiliated Television. Paxson Radio's assets,
which included the Company's radio and billboard operations and an agreement to
purchase three additional radio stations, were sold for aggregate consideration
of approximately $629 million, consisting of approximately $602 million of cash
and the assumption of the purchase commitment for the three stations, resulting
in a pre-tax gain of approximately $305 million. Paxson Network-Affiliated
Television's assets, which consisted of two traditional network affiliated
stations, were sold for aggregate consideration of approximately $119 million,
resulting in a gain of approximately $69 million.
Since commencing its television operations in early 1994, the Company has
established the largest owned and operated broadcast television station group in
the United States. The Company's stations currently broadcast long-form paid
programming, consisting primarily of infomercials, under its inTV format. Upon
the launch of PAX NET, the Company's stations will air traditional entertainment
programming and a reduced amount of long-form paid programming. See
"Business -- Business Strategy." The Company's Class A Common Stock is listed on
the American Stock Exchange under the symbol "PAX". The Company's principal
executive offices are located at 601 Clearwater Park Road, West Palm Beach,
Florida 33401 and its telephone number is (561) 659-4122.
RECENT DEVELOPMENTS
On June 10, 1998, the Company completed the Private Offering and issued
20,000 shares of Original Junior Preferred Stock with an aggregate liquidation
preference of $200 million, generating net proceeds to the Company of $190
million. Concurrently with the Private Offering, the Company issued and sold $75
million aggregate liquidation preference of 9 3/4% Series A Convertible
Preferred Stock, par value $.001 per share (the "Convertible Preferred Stock"),
and warrants to purchase an aggregate of 240,000 shares of Class A Common Stock
at an exercise price of $16.00 per share in a private placement not registered
under the Securities Act (the "Convertible Preferred Offering" and, collectively
with the Private Offering, the "Offerings"), generating net proceeds to the
Company of $71.5 million.
In May 1998, the Company refinanced substantially all of its outstanding
debt under its existing credit facility with a $122 million senior credit
facility maturing June 2002 (the "Credit Facility"). Under the terms of the
Credit Facility, the outstanding debt is secured by substantially all of the
Company's assets and bears interest at a base rate plus 1.75% or LIBOR plus
2.75%, at the Company's option. The Credit Facility requires the Company to
maintain compliance with certain financial ratios subsequent to March 2000 and
contains other restrictions. The Credit Facility requires quarterly principal
payments commencing December 31, 2000.
On May 14, 1998, the Company announced the appointment of Jeffrey Sagansky
as the Company's Chief Executive Officer and President. Prior to joining the
Company, Mr. Sagansky served as co-president of Sony Pictures Entertainment
since October 1996. From September 1994 to October 1996, Mr. Sagansky served as
executive vice president of Sony Corp. of America. Prior to joining Sony, he was
president of CBS Entertainment, where under his leadership CBS developed such
critically acclaimed series as Touched By An Angel, Dr. Quinn, Medicine Woman,
Promised Land, The Nanny, Chicago Hope, Picket Fences and Northern Exposure.
Also on May 14, 1998, the Company announced the election of William E.
Simon Jr., to the position of vice chairman of the Company. Mr. Simon is the
executive director of William E. Simon & Sons, L.L.C., a private investment firm
and merchant bank. As part of the Convertible Preferred Offering, an affiliate
of
7
<PAGE> 13
Mr. Simon purchased from the Company $10 million aggregate liquidation
preference of Convertible Preferred Stock and warrants to purchase 32,000 shares
of Class A Common Stock at an exercise price of $16.00 per share. The Company
also issued to such affiliate additional warrants entitling the holder to
purchase 155,500 shares of Class A Common Stock at an exercise price of $16.00
per share.
THE TRANSACTIONS
In conjunction with the Private Offering and the Convertible Preferred
Offering, the Company intends to effect the Proposed Acquisitions and the Sale
Transactions (collectively with the Private Offering, the Convertible Preferred
Offering and the application of the proceeds thereof, the "Transactions").
THE PROPOSED ACQUISITIONS
The Company has entered into agreements (subject to various conditions
including the receipt of regulatory approvals) to acquire or operate 30
additional television stations for total consideration of $414.8 million, of
which $78.6 million has been funded as of March 31, 1998 in the form of advances
and escrow deposits. The Company expects to spend the balance of $336.2 million
to acquire such stations and $88.4 million in capital expenditures to complete
the construction of certain new stations and to upgrade certain of the Company's
existing stations. The station acquisitions and capital expenditures are
collectively referred to herein as the "Proposed Acquisitions." See "The
Transactions -- The Proposed Acquisitions." The Company is adding the Proposed
Acquisitions primarily to expand the reach of its broadcast television
distribution infrastructure and to increase its national presence.
THE SALE TRANSACTIONS
The Company has entered into agreements to sell or monetize its investment
in four broadcast television stations, one radio station and a minor league
hockey team for aggregate net proceeds of $78.1 million (collectively, the "Sale
Transactions"). The Company anticipates completing the Sale Transactions during
1998. See "The Transactions -- The Sale Transactions."
8
<PAGE> 14
THE EXCHANGE OFFER
Resale..................... 20,000 shares ($200.0 million aggregate liquidation
preference) of Original Junior Preferred Stock were
sold in the Private Offering by the Company on June
10, 1998 to CIBC Oppenheimer Corp. (the "Initial
Purchaser"). The holders of Original Junior
Preferred Stock and New Junior Preferred Stock are
collectively referred to herein as the "Holders."
The Company is making the Exchange Offer in
reliance on the position of the staff of the
Commission as set forth in certain no-action
letters addressed to other parties in other
transactions. The Company has not, however, sought
its own no-action letter, and there can be no
assurance that the staff of the Commission would
make a similar determination with respect to the
Exchange Offer as in such other circumstances.
Based on these interpretations by the staff of the
Commission, the Company believes that the shares of
New Junior Preferred Stock issued pursuant to this
Exchange Offer in exchange for shares of Original
Junior Preferred Stock may be offered for resale,
resold and otherwise transferred by a holder
thereof other than (i) a broker-dealer who
purchased such shares of Original Junior Preferred
Stock directly from the Company to resell pursuant
to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an
"affiliate" (as defined in Rule 405 of the
Securities Act) of the Company, without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that
such shares of New Junior Preferred Stock are
acquired in the ordinary course of such Holder's
business and that such Holder is not participating,
and has no arrangement or understanding with any
persons to participate, in the distribution of such
shares of New Junior Preferred Stock. Holders of
shares of Original Junior Preferred Stock accepting
the Exchange Offer will represent to the Company in
the Letter of Transmittal that such conditions have
been met.
Any Holder who participates in the Exchange Offer
for the purpose of participating in a distribution
of the shares of New Junior Preferred Stock may not
rely on the position of the staff of the Commission
as set forth in these no-action letters and would
have to comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any secondary resale transaction.
This prospectus may not be used by such Holders for
any secondary resale. A secondary resale
transaction in the United States by a Holder who is
using the Exchange Offer to participate in the
distribution of shares of New Junior Preferred
Stock must be covered by a registration statement
containing the selling securityholder information
required by Item 507 of Regulation S-K of the
Securities Act. Each broker-dealer (other than an
"affiliate" of the Company) that receives shares of
New Junior Preferred Stock for its own account
pursuant to the Exchange Offer must acknowledge
that it acquired the shares of Original Junior
Preferred Stock as the result of market-making
activities or other trading activities and will
deliver a prospectus in connection with any resale
of such shares of New Junior Preferred Stock. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of
9
<PAGE> 15
shares of New Junior Preferred Stock received in
exchange for shares of Original Junior Preferred
Stock where such shares of Original Junior
Preferred Stock were acquired by such broker-dealer
as a result of market-making activities or other
trading activities. In addition, pursuant to
Section 4(3) of the Securities Act, all dealers
effecting transactions in the shares of New Junior
Preferred Stock, whether or not participating in
the Exchange Offer, may be required to deliver a
Prospectus. The Company has agreed that, for a
period of 180 days after the date of this
Prospectus, it will make this Prospectus available
to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." Any
broker-dealer who is an affiliate of the Company
may not rely on such no-action letters and must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any secondary resale transaction.
See "The Exchange Offer -- Purpose and Effect of
the Exchange Offer" and "Plan of Distribution."
The Exchange Offer......... The Company is offering to exchange pursuant to the
Exchange Offer up to $200.0 million aggregate
liquidation preference of shares of New Junior
Preferred Stock for up to $200.0 million aggregate
liquidation preference of shares of Original Junior
Preferred Stock. The terms of the shares of New
Junior Preferred Stock are substantially identical
in all respects (including liquidation preference,
dividend rate and maturity) to the terms of the
shares of Original Junior Preferred Stock for which
they may be exchanged pursuant to the Exchange
Offer, except that the shares of New Junior
Preferred Stock are freely transferable by Holders
thereof (other than as provided herein), and are
not subject to any covenant restricting transfer
absent registration under the Securities Act. See
"The Exchange Offer -- Terms of the Exchange" and
"The Exchange Offer -- Procedures for Tendering."
The Exchange Offer is not conditioned upon any
minimum number of shares of Original Junior
Preferred Stock being tendered for exchange.
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time on September 7, 1998, unless
extended (the "Expiration Date").
Conditions of the Exchange
Offer.................... The Company's obligations to consummate the
Exchange Offer are subject to certain conditions.
See "The Exchange Offer -- Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such conditions.
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to the
Expiration Date; otherwise, all tenders will be
irrevocable.
Procedures for Tendering
Shares of Original Junior
Preferred Stock.......... See "The Exchange Offer -- Procedures for
Tendering."
Federal Income Tax
Consequences............. The exchange of shares of Original Junior Preferred
Stock for shares of New Junior Preferred Stock
should not be a taxable exchange for federal income
tax purposes. See "Certain Federal Income Tax
Considerations."
10
<PAGE> 16
Effect on Holders of the
Original Junior Preferred
Stock.................... As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered shares of Original Junior Preferred Stock
pursuant to the terms of this Exchange Offer, the
Company will have fulfilled its obligations
contained in the Registration Rights Agreement and,
accordingly, there will be no increase in the
interest rate on the shares of Original Junior
Preferred Stock pursuant to the applicable terms of
the Registration Rights Agreement due to the
Exchange Offer. Holders of the shares of Original
Junior Preferred Stock who do not tender their
shares of Original Junior Preferred Stock will be
entitled to all the rights and limitations
applicable thereto under the certificate of
designations relating to the shares of Original
Junior Preferred Stock except for any rights which
by their terms terminate or cease to have further
effect as a result of the making of, and the
acceptance for exchange of all validly tendered
shares of Original Junior Preferred Stock pursuant
to, the Exchange Offer. All untendered shares of
Original Junior Preferred Stock will continue to be
subject to applicable restrictions on transfer
under the Securities Act. To the extent that shares
of Original Junior Preferred Stock are tendered and
accepted in the Exchange Offer, the trading market
for untendered shares of Original Junior Preferred
Stock could be adversely affected.
Exchange Agent............. The exchange agent with respect to the Exchange
Offer is The Bank of New York (the "Exchange
Agent"). The address and telephone number of the
Exchange Agent are set forth in "The Exchange
Offer -- Exchange Agent."
Use of Proceeds............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
THE NEW JUNIOR PREFERRED STOCK
The Exchange Offer applies to the 20,000 shares of Original Junior
Preferred Stock outstanding as of the date hereof. The terms of the New Junior
Preferred Stock will be identical in all material respects to the terms of the
Original Junior Preferred Stock, except that the issuance and exchange of the
shares of New Junior Preferred Stock will have been registered under the
Securities Act and, therefore, such shares will not be subject to certain
restrictions on transfer and the certificates representing such shares will not
bear legends indicating restrictions on transfer.
Issuer..................... Paxson Communications Corporation.
Securities Offered......... 20,000 shares (the "Shares") of 13 1/4% Cumulative
Junior Exchangeable Preferred Stock, par value
$.001 per share, plus any additional shares of such
stock issued from time to time in lieu of cash
dividends (the "Junior Preferred Stock").
Liquidation Preference..... $10,000 per share, plus accumulated and unpaid
dividends.
Optional Redemption........ The Junior Preferred Stock is redeemable, at the
option of the Company, in whole or in part, at any
time on or after May 15, 2003 at the redemption
prices set forth herein, plus, without duplication,
accumulated and unpaid dividends to the date of
redemption. In addition, prior to May 15, 2001, the
Company may, at its option, use the net proceeds of
one or more Public Equity Offerings (as defined) or
Major Asset Sales (as defined) to redeem up to an
aggregate of 35% of the aggregate principal amount
of Junior Preferred Stock (whether initially issued
or
11
<PAGE> 17
issued in lieu of cash dividends) at the redemption
prices set forth herein, plus, without duplication,
accumulated and unpaid dividends to the date of
redemption; provided, however, that after any such
redemption there is at least (i) $75.0 million
aggregate liquidation preference of Junior
Preferred Stock or (ii) $130.0 million combined
aggregate liquidation preference of Junior
Preferred Stock and aggregate principal amount of
New Exchange Debentures outstanding, and that such
redemption occurs within 90 days following the
closing of such Public Equity Offering or Major
Asset Sale.
Mandatory Redemption....... The Company is required, subject to certain
conditions, to redeem all of the Junior Preferred
Stock outstanding on November 15, 2006 at a
redemption price equal to 100% of the liquidation
preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of
redemption.
Dividends.................. At a rate equal to 13 1/4% per annum of the
liquidation preference per share, payable
semi-annually beginning November 15, 1998 and
accumulating from the Issue Date. Dividends may be
paid, at the Company's option, on any dividend
payment date, either in cash or by the issuance of
additional shares of Junior Preferred Stock (and
payment of cash in lieu of fractional shares)
having an aggregate liquidation preference equal to
the amount of such dividends. In the event that
after May 15, 2003, dividends are paid in
additional shares of Junior Preferred Stock the
dividend rate will increase by 1% for such dividend
payment period.
Dividend Payment Dates..... May 15 and November 15, commencing November 15,
1998.
Voting..................... The Junior Preferred Stock will be non-voting,
except as otherwise required by law and except in
certain circumstances described herein, including
(i) amending certain rights of the holders of the
Junior Preferred Stock and (ii) the issuance of any
class of equity securities that ranks pari passu
with or senior to the Junior Preferred Stock (other
than certain additional shares of Public Preferred
Stock (as defined) or pari passu securities issued
to finance the redemption by the Company of the
Private Preferred Stock (as defined) and certain
additional shares of the Public Preferred Stock
issuable in lieu of cash dividends in accordance
with the current terms of the Public Preferred
Stock).
Exchange Provisions........ Exchangeable into the New Exchange Debentures, at
the Company's option, subject to certain conditions
in whole or in part, on a pro rata basis, on any
scheduled dividend payment date; provided that
immediately after giving effect to any such partial
exchange, there shall be outstanding shares of
Junior Preferred Stock (whether initially issued or
issued in lieu of cash dividends) with an aggregate
liquidation preference of not less than $75.0
million and not less than $75.0 million of
aggregate principal amount of New Exchange
Debentures. Subject to certain conditions, the
Company has agreed to exchange all outstanding
Junior Preferred Stock for New Exchange Debentures
when such an exchange is permitted under the terms
of certain of its Indebtedness and capital stock.
Ranking.................... The Junior Preferred Stock will, with respect to
dividend rights and rights on liquidation,
winding-up and dissolution of the Company, rank
senior to all classes of common stock and to the
Convertible Preferred
12
<PAGE> 18
Stock and junior to all other classes of preferred
stock of the Company outstanding upon consummation
of the Exchange Offer.
Change of Control.......... In the event of a Change of Control, the Company
will, subject to certain conditions, offer to
purchase all outstanding shares of Junior Preferred
Stock at a purchase price equal to 101% of the
liquidation preference thereof, plus, without
duplication, accumulated and unpaid dividends to
the date of purchase. There can be no assurance
that the Company will have sufficient funds to
purchase all of the Junior Preferred Stock in the
event of a Change of Control or that the Company
would be able to obtain financing for such purpose
on favorable terms, if at all.
Certain Restrictive
Provisions................. The Certificate of Designation will contain certain
restrictive provisions that, among other things,
limit the ability of the Company and its
subsidiaries to: (i) incur additional Indebtedness;
(ii) issue additional preferred stock ranking
senior to or pari passu with the Junior Preferred
Stock; (iii) pay dividends or make certain other
restricted payments; or (iv) merge or consolidate
with or sell all or substantially all of their
assets to any other person.
THE NEW EXCHANGE DEBENTURES
Issue...................... 13 1/4% Exchange Debentures due 2006 issuable in
exchange for the Junior Preferred Stock in an
aggregate principal amount equal to the liquidation
preference of the Junior Preferred Stock so
exchanged, plus, without duplication, accumulated
and unpaid dividends to the date fixed for the
exchange thereof (the "Exchange Date"), plus any
additional New Exchange Debentures issued from time
to time in lieu of cash interest.
Maturity Date.............. November 15, 2006.
Interest Rate and Payment
Dates...................... The New Exchange Debentures will bear interest at a
rate of 13 1/4% per annum. Interest will accrue
from the date of issuance or from the most recent
interest payment date to which interest has been
paid or provided for or, if no interest has been
paid or provided for, from the Exchange Date.
Interest will be payable semi-annually in cash (or,
at the option of the Company, on or prior to May
15, 2003, in additional New Exchange Debentures) in
arrears on each May 15 and November 15, commencing
with the first such date after the Exchange Date.
Optional Redemption........ The New Exchange Debentures are redeemable, at the
option of the Company, in whole or in part, at any
time on or after May 15, 2003 at the redemption
prices set forth herein, plus accrued and unpaid
interest to the date of redemption. In addition,
prior to May 15, 2001, the Company may, at its
option, use the net proceeds of one or more Public
Equity Offerings or Major Asset Sales to redeem up
to 35% of the aggregate principal amount of the New
Exchange Debentures (whether issued in exchange for
Junior Preferred Stock or in lieu of cash interest
payments), at the redemption prices set forth
herein, plus accrued and unpaid interest to the
date of redemption; provided, however, that after
any such redemption, there is at least (i) $75.0
million aggregate principal amount of New Exchange
Debentures or (ii) $130.0 million combined
aggregate liquidation preference of Junior
Preferred Stock and aggregate principal amount of
New Exchange Debentures outstanding
13
<PAGE> 19
and that such redemption occurs within 90 days
following the closing of such Public Equity
Offering or Major Asset Sale.
Ranking.................... The New Exchange Debentures will be subordinated to
all existing and future Senior Debt of the Company.
In addition, the New Exchange Debentures will be
effectively subordinated to all existing and future
Indebtedness of the Company's subsidiaries. The New
Exchange Debentures will rank pari passu with the
Company's 11 5/8% Senior Subordinated Notes (the
"Existing Notes") and will rank pari passu or
senior to any Indebtedness that expressly provides
that it ranks pari passu or subordinate to the New
Exchange Debentures, as the case may be.
Guarantees................. The New Exchange Debentures will be unconditionally
guaranteed, jointly and severally, on a
subordinated basis by each of the Guarantors (the
"Guarantees"). The New Exchange Debenture
Guarantees will be general unsecured obligations of
the Guarantors and will be subordinated in right of
payment to all existing and future Senior Debt of
the Guarantors. See "Description of the New
Exchange Debentures -- Guarantees."
Change of Control.......... In the event of a Change of Control, the Company
will, subject to certain conditions, be required to
offer to purchase all outstanding New Exchange
Debentures at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid
interest to the date of purchase. There can be no
assurance that the Company will have sufficient
funds to purchase all of the New Exchange
Debentures in the event of a Change of Control or
that the Company would be able to obtain financing
for such purpose on favorable terms, if at all. See
"Risk Factors -- Change of Control" and
"Description of Junior Preferred Stock and New
Exchange Debentures -- New Exchange
Debentures -- Change of Control."
Certain Covenants.......... The indenture governing the New Exchange Debentures
(the "New Exchange Indenture") will contain certain
covenants that, among other things, restrict the
ability of the Company and its subsidiaries to: (i)
incur additional Indebtedness; (ii) pay dividends
or make certain other restricted payments; (iii)
sell assets; (iv) enter into certain transactions
with affiliates; or (v) merge or consolidate with
or sell all or substantially all of their assets to
any other person.
For a more complete description of the Junior Preferred Stock and New
Exchange Debentures, including the definitions of certain capitalized terms used
above, see "Description of Junior Preferred Stock and New Exchange Debentures."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Junior Preferred Stock.
14
<PAGE> 20
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical and pro forma financial data, insofar as
it relates to each of the five years in the period ended December 31, 1997, has
been derived from annual financial statements, including the consolidated
balance sheets at December 31, 1996 and 1997 and the related consolidated
statements of operations, of changes in common stockholders' equity and of cash
flows for each of the three years in the period ended December 31, 1997 and the
notes thereto appearing elsewhere herein. The data for the three months ended
March 31, 1997 and 1998 has been derived from unaudited financial statements
also appearing herein and which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the unaudited interim periods. The summary
historical financial data should be read in conjunction with the information
contained in the Company's consolidated financial statements and the notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Selected Historical and Pro Forma Financial Data"
included elsewhere herein.
The unaudited summary pro forma balance sheet data gives effect to the
consummation of the Transactions as if such transactions had taken place on
March 31, 1998. The unaudited pro forma dividends and accretion on preferred
stock give effect to the consummation of the Transactions as if the Transactions
had taken place at the beginning of each period presented. Certain management
assumptions and adjustments are described in the accompanying notes hereto. The
pro forma information should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus. See "Unaudited Pro Forma Balance Sheet Data" appearing
elsewhere in this Prospectus. This pro forma information is not necessarily
indicative of the Company's actual or future financial position or results of
operations.
15
<PAGE> 21
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................................. $ 1,982 $ 4,227 $ 31,784 $ 62,333 $ 88,421 $ 18,937 $ 31,665
Operating expenses, excluding depreciation,
amortization, compensation associated with
Paxson Radio asset sales and option plan
compensation.................................. 4,932 7,221 26,081 46,364 75,241 14,593 27,678
Compensation associated with Paxson Radio asset
sales(a)...................................... -- -- -- -- 9,700 -- --
Option plan compensation(b)..................... -- -- 9,052 6,976 3,370 714 307
Depreciation and amortization................... 321 1,653 4,648 12,888 22,044 4,080 7,950
-------- -------- -------- -------- -------- -------- --------
Operating loss.................................. (3,271) (4,647) (7,997) (3,895) (21,934) (450) (4,270)
Interest expense................................ (170) (6,216) (17,151) (31,526) (37,728) (8,735) (10,505)
Interest income................................. 113 359 1,651 6,741 9,495 1,316 6,180
Other income (expense), net..................... 7 83 (488) (1,756) (5,722) 146 (246)
Gain on sale of television stations............. -- -- -- -- -- -- 14,330
Equity in loss of unconsolidated investment..... -- -- -- -- (2,493) -- (1,290)
-------- -------- -------- -------- -------- -------- --------
(Loss) income from continuing operations before
income tax (provision) benefit and
extraordinary item............................ (3,321) (10,421) (23,985) (30,436) (58,382) (7,723) 4,199
Income tax (provision) benefit.................. (2,960) 1,680 1,280 -- 21,879 -- (1,557)
Discontinued operations(c)...................... (4,671) 3,979 (142) 4,217 251,193 (736) --
Extraordinary item(d)........................... (457) -- (10,626) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net (loss) income............................... (11,409) (4,762) (33,473) (26,219) 214,690 (8,459) 2,642
Dividends and accretion on preferred stock and
common stock warrants(e)...................... (151) (3,386) (13,297) (21,908) (26,277) (6,272) (7,082)
-------- -------- -------- -------- -------- -------- --------
Net (loss) income attributable to common
stock......................................... $(11,560) $ (8,148) $(46,770) $(48,127) $188,413 $(14,731) $ (4,440)
======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings per share(f)(g):
Loss from continuing operations................. $ (0.21) $ (0.36) $ (1.05) $ (1.20) $ (1.17) $ (0.28) $ (0.07)
Discontinued operations......................... (0.15) 0.12 -- 0.10 4.67 (0.02) --
Extraordinary item.............................. (0.01) -- (0.31) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net (loss) income............................... $ (0.37) $ (0.24) $ (1.36) $ (1.10) $ 3.50 $ (0.30) $ (0.07)
======== ======== ======== ======== ======== ======== ========
Weighted average common shares outstanding...... 31,582 33,430 34,430 43,837 53,808 48,778 59,589
Cash dividends declared......................... -- -- -- -- -- -- --
OTHER DATA:
EBITDA(h)....................................... $ (2,949) $ (2,556) $ 7,123 $ 19,487 $ 30,186 $ 5,356 $ 10,575
Capital expenditures(i)......................... -- 2,767 12,581 30,203 36,260 9,262 14,147
Pro forma dividends and accretion on preferred
stock(j)...................................... 62,951 15,963
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------
ACTUAL PRO FORMA(K)
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(l)................................ $ 154,286 $ 69,331
Working capital............................................. 134,817 49,707
Total assets................................................ 1,074,597 1,374,149
Total debt.................................................. 350,713 350,713
Redeemable preferred stock.................................. 218,068 478,608
</TABLE>
(see footnotes on the following page)
16
<PAGE> 22
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(a) Bonuses paid to certain members of the Company's management in connection
with their efforts in assimilating, operating, and arranging for the sale of
the Company's radio stations and related properties in 1997.
(b) Option plan compensation represents a non-cash charge associated with the
granting of common stock options to employees under the Company's Stock
Incentive Plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Continuing Operations" and
"Management -- Stock Incentive Plans."
(c) Includes in 1997 a gain on disposal of discontinued operations of $254.7
million, net of applicable income taxes.
(d) Extraordinary item reflects an extraordinary loss of $457,000 and $10.6
million in 1993 and 1995, respectively, associated with the write-off of
capitalized financing costs on debt retired.
(e) Dividends and accretion on preferred stock and common stock warrants for the
years ended December 31, 1993 to 1997 and the three months ended March 31,
1997 and 1998 represent non-cash dividends and accretion on the Company's
mandatorily redeemable securities. See "Description of Capital Stock."
(f) The Company computes per share data in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Due to losses
from continuing operations, 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.
(g) Loss per share data and weighted average shares outstanding for the years
ended December 31, 1993 and 1994 give retroactive effect to (i) the
Company's recapitalization related to the merger with The American Network
Group, Inc.; and (ii) a stock dividend on common shares outstanding on
January 1, 1995.
(h) EBITDA is defined as operating income (loss), excluding non-recurring items
(including 1997 compensation associated with Paxson Radio asset sales and
relocation costs), plus time brokerage fees, depreciation, amortization and
other non-cash charges, including amortization of programming rights and
option plan compensation, minus programming payments (including a ratable
portion of programming deposits). EBITDA, as so defined, may not be
comparable to similarly titled measures used by other companies.
(i) Includes all capital expenditures by the Company's inTV and corporate
segments including expenditures associated with the upgrade and conversion
of acquired and operated television stations to the inTV format.
(j) The pro forma dividends and accretion on preferred stock give effect to the
consummation of the Transactions as if the Transactions had taken place at
the beginning of each period presented.
(k) The pro forma balance sheet data as of March 31, 1998 gives effect to the
consummation of the Transactions as if the Transactions had occurred on
March 31, 1998.
(l) Includes cash, cash equivalents and restricted cash.
17
<PAGE> 23
RISK FACTORS
Prospective investors should consider carefully the following risk factors
in addition to the other information set forth in this Prospectus in evaluating
an investment in the Junior Preferred Stock.
HIGH LEVEL OF INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS AND SATISFY
PREFERRED STOCK DIVIDEND REQUIREMENTS
The Company is highly leveraged. At March 31, 1998, pro forma for the
Transactions, the Company would have had outstanding $350.7 million of
Indebtedness and redeemable preferred stock with an aggregate liquidation
preference of $503.0 million. In addition, subject to restrictions in the Credit
Facility and the indenture (the "Existing Indenture") governing the Existing
Notes, and in the terms of the Company's Junior Cumulative Compounding
Redeemable Preferred Stock (the "Private Preferred Stock") and redeemable
12 1/2% Cumulative Exchangeable Preferred Stock (the "Public Preferred Stock,"
and collectively with the Private Preferred Stock, the "Existing Preferred
Stock"), the Company may incur additional indebtedness and issue additional
shares of preferred stock from time to time to finance acquisitions or capital
expenditures or for other corporate purposes. Interest expense for the years
ended December 31, 1995, 1996 and 1997 was $17.1 million, $31.5 million and
$37.7 million, respectively.
The level of the Company's indebtedness could have important consequences
to investors in the Securities, including: (i) a significant portion of the
Company's cash flow from operations must be dedicated to debt service and will
not be available for other purposes; (ii) the Company's ability to obtain
additional financing in the future, if needed, may be limited; (iii) the
Company's leveraged position and covenants contained in the Credit Facility (or
any replacement thereof) and the Existing Indenture could limit its ability to
expand and make capital improvements and acquisitions; (iv) the Credit Facility
and the Existing Indenture and the Existing Preferred Stock contain certain
restrictive covenants, including covenants that restrict or prohibit the payment
of dividends or other distributions by the Company to its stockholders; and (v)
the Company's level of indebtedness could make it more vulnerable to economic
downturns, limit its ability to withstand competitive pressures and limit its
flexibility in reacting to changes in its industry and economic conditions
generally. Certain of the Company's competitors currently operate on a less
leveraged basis and may have significantly greater operating and financing
flexibility than the Company.
The Company also has substantial dividend and redemption obligations under
the Existing Preferred Stock. Until December 22, 1999, the Company has the
option to defer cash payment of accrued dividends on the Private Preferred
Stock, in which case all dividends which have accrued as of January 1 and July 1
of each year are added to the liquidation price thereof. Dividends accumulate on
the Private Preferred Stock at an annual rate of 12% of the liquidation price
thereof. To date, the Company has paid no cash dividends on the Private
Preferred Stock, and as of December 31, 1997, there was an aggregate of $13.9
million in accumulated and unpaid dividends thereon. The Company is obligated to
redeem on December 22, 2003, out of unrestricted funds legally available
therefor, all of the shares of the Private Preferred Stock then outstanding, at
a redemption price equal to the liquidation price for such shares, as of the
redemption date, plus the amount of all accumulated and unpaid dividends
thereon, payable in cash. Dividends accumulate on the Public Preferred Stock at
an annual rate of 12 1/2% of the liquidation price thereof. Until October 31,
2002, the Company has the option to pay dividends thereon either in cash or by
the issuance of additional shares of Public Preferred Stock having an aggregate
liquidation preference equal to the amount of such dividends. To date, the
Company has paid no cash dividends on the Public Preferred Stock, and as of
December 31, 1997, the Company has issued additional shares of Public Preferred
Stock in lieu of cash dividends with an aggregate liquidation preference equal
to $20.8 million and an additional $3.6 million of unpaid dividends have
accumulated thereon. The Company is required, subject to certain conditions, to
redeem all of the Public Preferred Stock outstanding on October 31, 2006.
Holders of shares of the Existing Preferred Stock are entitled to require the
Company to redeem their shares of Existing Preferred Stock upon the occurrence
of a bankruptcy or similar event relating to the Company, and holders of the
Private Preferred Stock are entitled to require the Company to redeem their
shares of Private Preferred Stock upon a default by the Company under the terms
of the Stockholders Agreement (as defined). The failure or inability of the
Company to pay amounts which become payable with
18
<PAGE> 24
respect to the Existing Preferred Stock could have adverse consequences to the
holders of the Junior Preferred Stock. See "Description of Capital
Stock -- Private Preferred Stock" and "-- Public Preferred Stock."
The Company's ability to pay cash dividends on, and satisfy its redemption
obligations in respect of, the Junior Preferred Stock and to satisfy its debt
obligations and its dividend and redemption obligations with respect to the
Existing Preferred Stock will depend upon its future operating performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, many of which are beyond its control. If the Company is
unable to service its indebtedness or make required cash payments with respect
to its Preferred Stock (as defined), it will be forced to adopt an alternative
strategy that may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There is no assurance that any of these
strategies could be effected on satisfactory terms, if at all, and the
implementation of any of these alternative strategies could have a negative
impact on the value of the Junior Preferred Stock. In the event of a liquidation
of the Company, the Junior Preferred Stock would be subordinate in right of
payment to the Company's indebtedness and its Existing Preferred Stock, as well
as to any preferred stock which the Company may issue ranking senior to the
Junior Preferred Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
HISTORY OF NET LOSSES; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES
Prior to 1998, the Company had incurred losses from continuing operations
in each of its fiscal years since inception. As a result of the foregoing, for
the years ended December 31, 1995, 1996 and 1997, the Company's earnings were
insufficient to cover combined fixed charges and preferred stock dividend
requirements by approximately $32.6 million, $49.7 million and $84.2 million,
respectively. The Company expects to continue to experience net losses in the
foreseeable future, principally as a result of PAX NET startup costs and non-
cash charges for depreciation and amortization expense related to fixed assets
and goodwill relating to acquisitions, including the Proposed Acquisitions,
which may be greater than the net losses experienced by the Company in the past.
LIMITATIONS ON ABILITY TO PAY DIVIDENDS
The Credit Facility prohibits the payment of cash dividends on the Junior
Preferred Stock through the maturity of the borrowings under the Credit Facility
in 2002. Dividends on the Junior Preferred Stock may be paid, at the Company's
option, on any dividend payment date either in cash or by the issuance of
additional shares of Junior Preferred Stock having an aggregate liquidation
preference equal to the amount of such dividends, provided that if any dividend
payable subsequent to May 15, 2003, is not paid in full in cash, the per annum
dividend rate will be increased by 1.0% for that dividend payment period.
The terms of the Private Preferred Stock provide that the Company may not
declare or pay any cash dividends or make any cash distributions in respect of
the Junior Preferred Stock until all accrued and unpaid dividends on the Private
Preferred Stock have been declared and paid and, in the event the Company is
required to redeem the Private Preferred Stock, monies sufficient for such
purpose have been set aside. The Existing Indenture and the terms of the Public
Preferred Stock also limit the ability of the Company to pay cash dividends to
holders of its capital stock, as will the terms of the Existing Exchange
Debentures if issued.
In addition to the foregoing limitations, under Delaware law the Company is
permitted to pay dividends on its capital stock, including the Junior Preferred
Stock, only out of its surplus or, in the event that it has no surplus, out of
its net profits for the year in which a dividend is declared or for the
immediately preceding fiscal year. Surplus is defined as the excess of a
Company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. In order to pay dividends in cash, the Company
must have surplus or net profits equal to the full amount of the cash dividend
at the time such dividend is declared. In determining the Company's ability to
pay dividends, Delaware law permits the Board of Directors to revalue the
Company's assets and liabilities from time to time to their fair market values
in order to create surplus. The Company cannot predict what the value of its
assets or the amount of its liabilities will be in the future and, accordingly,
there is no assurance that the Company will be able to pay cash dividends on the
Junior Preferred Stock.
19
<PAGE> 25
RISKS ASSOCIATED WITH THE LAUNCH OF PAX NET
The Company announced in November 1997 that it intends to launch PAX NET, a
new television programming service, on August 31, 1998. As the Company intends
to operate PAX NET differently from traditional television and cable networks
and independent stations, and believes its revenues and expenses will likewise
be different, the Company's strategies with respect to PAX NET cannot be tested
against traditional television and cable network and independent station data or
experiences. The success of the Company's stations will depend largely upon the
programming PAX NET offers and the Company's cost of obtaining such programming.
The Company seeks to acquire programming for PAX NET which will generate
sufficient ratings to enable the Company to capture advertising revenues
exceeding the Company's programming costs and other expenses. The Company has
made certain assumptions in formulating its strategies including, among others,
the Company's ability to achieve certain ratings, sell out its advertising time
at targeted rates, locate and hire a significant number of additional employees
which the Company expects will be necessary for the launch of PAX NET, operate
its stations at the anticipated staffing levels, achieve targeted cost savings
through the centralization of certain tasks for its multiple stations, sell time
utilizing limited outside sales representatives, attract affiliates and acquire
additional stations, and continue to sell time for long-form paid programming
during the day and on weekends, at anticipated rates. There can be no assurance
that the PAX NET programming obtained by the Company will generate sufficient
audience ratings for the profitable operation of PAX NET or that the Company's
programming costs will not prove excessive in relation to its advertising
revenues, nor can there be any assurance that any of the Company's assumptions
regarding the start-up and operation of PAX NET will prove correct.
RELIANCE ON TELEVISION PROGRAMMING
One of the Company's most significant operating cost components will be
television programming. There can be no assurance that the Company will not be
exposed in the future to increased programming costs which may materially
adversely affect the Company's operating results. Acquisitions of program rights
may be made several years in advance and may require multi-year commitments,
making it difficult to accurately predict how a program will perform. In some
instances, programs must be replaced before their costs have been fully
amortized, resulting in write-offs that increase station operating costs.
RANKING OF THE JUNIOR PREFERRED STOCK
The Junior Preferred Stock will rank junior in right of payment upon
liquidation to all existing and future indebtedness of the Company and to all
shares of preferred stock of the Company (including the Existing Preferred
Stock) other than preferred stock which by its terms ranks on a parity with or
junior to the Junior Preferred Stock. The Junior Preferred Stock will rank
senior in right of payment upon liquidation to the Convertible Preferred Stock
and the Common Stock. As of March 31, 1998, pro forma for the Transactions, the
Company would have had outstanding approximately $350.7 million of Indebtedness
and $228.0 million aggregate liquidation preference of preferred stock ranking
senior to the Junior Preferred Stock. See "Description of Junior Preferred Stock
and New Exchange Debentures."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Credit Facility and the Existing Indenture contains certain covenants
that restrict, among other things, the Company's ability to incur additional
indebtedness, incur liens, make investments, pay dividends or make certain other
restricted payments, consummate certain asset sales, consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. In addition, the Credit Facility
requires the Company to comply with certain financial ratios and tests, under
which the Company is required to achieve certain financial and operating
results. The Company's ability to meet these financial ratios and tests may be
affected by events beyond its control, and there can be no assurance that they
will be met. In the event of a default under the Credit Facility, the lenders
may declare the indebtedness thereunder immediately due and payable, which would
result in a default under the Existing Notes. There can be no assurance that the
Company would have sufficient assets to pay indebtedness then
20
<PAGE> 26
outstanding under the Credit Facility and the Existing Notes. Any refinancing of
the Credit Facility is likely to contain similar restrictive covenants.
RESTRICTIONS IMPOSED BY TERMS OF EXISTING PREFERRED STOCK
The terms of the Private Preferred Stock provide that the Company may not
declare or pay any cash dividends or make any cash distributions in respect of
the Junior Preferred Stock until all accrued and unpaid dividends on the Private
Preferred Stock have been declared and paid and, in the event the Company is
required to redeem the Private Preferred Stock, monies sufficient for such
purpose have been set aside. So long as any shares of Existing Preferred Stock
remain outstanding, the Company may not directly or indirectly purchase, redeem,
exchange or otherwise acquire the Junior Preferred Stock. The dividend rate on
the Private Preferred Stock will increase to an annual rate of 30%: (i) upon the
occurrence of certain bankruptcy events; (ii) upon a change of control of the
Company, as defined in the Stockholders Agreement; (iii) upon the failure to
choose a successor to Mr. Paxson in the event of his death or incapacity as
provided in the Stockholders Agreement; (iv) if the Company incurs indebtedness
in excess of that permitted by certain financial leverage ratios; (v) upon the
failure to pay cash dividends thereon on or after December 22, 2000, equal to
the amount of dividends payable in any twelve month period; or (vi) if the
Private Preferred Stock remains outstanding after December 22, 2003. Such
increased dividend rate shall remain in effect for so long as any such event
continues and will increase by 5% on each anniversary of such event or, in the
case of a bankruptcy event, upon the failure of the Company to redeem the
Private Preferred Stock at the request of the holders thereof. See "Description
of Capital Stock -- Private Preferred Stock."
The terms of the Public Preferred Stock restrict the Company's ability to
declare or pay any cash dividends or make any cash distributions in respect of
the Junior Preferred Stock, unless the Company is permitted by the terms thereof
to make certain restricted payments. Similar restrictions limit the Company's
ability to, directly or indirectly, purchase, redeem, exchange or otherwise
acquire the Junior Preferred Stock. Further, the terms of the Public Preferred
Stock, among other things, limit the ability of the Company and its subsidiaries
to incur additional indebtedness, issue additional preferred stock ranking
senior or pari passu with the Junior Preferred Stock, or merge or consolidate
with or sell all or substantially all of their assets to any other person. The
Company's failure to comply with such covenants permit holders of a majority of
the outstanding shares of Junior Preferred Stock, voting as a class, to under
certain circumstances elect the lesser of two directors of the Company or that
number of directors of the Company that constitute at least 25% of the Company's
Board of Directors. See "Description of Capital Stock -- Public Preferred
Stock." Upon a "Change of Control" (as defined in the terms of the Public
Preferred Stock), the Company will be required to offer to purchase all of the
shares of Public Preferred Stock then outstanding at 101% of the then effective
liquidation preference plus, without duplication, accumulate and pay dividends
to the repurchase date.
DEPENDENCE ON KEY PERSONNEL
The Company's business depends upon its ability to attract and retain
skilled managers and other personnel, including its executive officers and other
key employees. The loss of the services of certain executive officers,
especially Lowell W. Paxson, could have a material adverse effect on the
Company's operating results. In addition, in the event of Mr. Paxson's death,
the Company may be required, in certain circumstances, to make an offer to
repurchase the Existing Notes and to redeem the Private Preferred Stock. See
"Certain Relationships and Related Transactions -- Stockholders Agreement."
There can be no assurance that if such an event were to occur, the Company would
have, or would have access to, sufficient funds to satisfy such repurchase or
redemption obligations. Mr. Paxson has an employment agreement that expires on
December 31, 1999, unless terminated sooner as permitted therein. See
"Management -- Employment Agreements."
"MUST CARRY" REGULATIONS
Management believes that the Company's growth and success of its television
operations has and will continue to depend materially upon its access to
households served by cable television systems. Pursuant to the 1992 Cable Act,
broadcasters are required to elect, every three years, to exercise either
certain "must carry" or
21
<PAGE> 27
retransmission consent rights in connection with the carriage of their signals
by cable systems in their local market. By electing the "must carry" rights, a
broadcaster can demand carriage on a specified channel on cable systems within
its DMA, provided the broadcaster's television signal can be delivered to the
cable system operator's cable head end at a specified strength. These "must
carry" rights are not absolute, and their exercise depends on variables such as
the number of activated channels on a cable system, the location and size of a
cable system, and the amount of duplicative programming on a broadcast station.
Therefore, under certain circumstances, a cable system can decline to carry a
given station. Alternatively, if a broadcaster chooses to exercise
retransmission consent rights, it can prohibit cable systems from carrying its
signal or grant the appropriate cable system the authority to retransmit the
broadcast signal for a fee or other consideration. The Company's television
stations have elected the "must carry" alternative. The Company's elections of
retransmission or "must carry" status will continue until the next required
election date of October 1, 1999. If the law were changed to eliminate or
materially alter "must carry" rights, the Company could suffer adverse effects.
GOVERNMENT REGULATION
Each of the Company's television stations operates pursuant to one or more
licenses issued by the Federal Communications Commission (the "FCC") that expire
at different times, some of which are currently up for renewal. The Company may
apply to renew those licenses, and third parties may challenge those
applications. The license term for broadcast television stations is eight years.
Although the Company has no reason to believe that its licenses will not be
renewed in the ordinary course, there can be no assurance that the licenses will
be renewed.
The television broadcasting industry is subject to extensive and changing
regulation. Among other things, the Communications Act of 1934, as amended (the
"Communications Act"), and FCC rules and policies require FCC consent to
assignments of FCC licenses and transfers of control of corporations or other
entities holding broadcast licenses. 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 which could, directly or indirectly,
adversely affect the ownership and operation of the Company's broadcast
properties, as well as the Company's business strategies. In addition,
relaxation of existing multiple ownership and cross-ownership rules and policies
by the FCC, as provided in the Telecommunications Act of 1996 (the "1996 Act"),
removes certain restrictions on larger media, entertainment and
telecommunications companies, some with greater access to capital and resources
than the Company, from competing with the Company for the acquisition of media
properties and the negotiation of programming arrangements. Changes in the FCC's
rules following passage of the 1996 Act, such as elimination of restrictions on
the offering of multiple network services by the existing major television
networks, the relaxation of restrictions on the participation by the regional
Bell holding companies in cable television and other direct-to-home video
technologies, the removal of nationwide restrictions and the relaxation of local
restrictions on radio broadcast ownership and the relaxation of restrictions on
nationwide broadcast television ownership could accelerate the existing trend
toward vertical integration in the telecommunications, media and home
entertainment industries and cause the Company to face more formidable
competition in the future. See "Business -- Federal Regulation of Broadcasting."
The Communications Act requires the prior approval of the FCC for the
transfer of control of an FCC licensee. Under certain circumstances, the
exercise by holders of the Junior Preferred Stock of their rights to elect
directors to the Board of Directors and the exercise by holders of other
Preferred Stock of similar rights may constitute a transfer of control of the
Company for FCC purposes and may therefore be subject to prior FCC approval or
other limitations.
MULTIPLE OWNERSHIP RULES; TIME BROKERAGE AGREEMENTS
Current FCC rules prohibit ownership interests in two or more television
stations with overlapping service areas. The FCC generally applies its ownership
limits to attributable interests held by an individual, corporation, partnership
or other entity. In the case of corporations holding broadcast licenses, the
interests of officers, directors and those who directly or indirectly have the
right to vote 5% or more of the corporation's voting stock (or 10% or more of
such stock in the case of insurance companies, certain regulated investment
22
<PAGE> 28
companies and bank trust departments) are generally deemed to be attributable,
as are the interests of officers and directors of a corporate parent of a
broadcast licensee. Changes in the rule for attributing the ownership of media
interests for purposes of the FCC's multiple ownership and cross-ownership rules
could require that the Company restructure or divest itself of some of its
existing broadcast interests.
The 1996 Act eliminated the existing restrictions on the number of
television stations that a single entity may own nationwide and increased the
nationwide ceiling for national television audience reach to 35% of the
television households, with UHF stations counting as only 50% of their
respective market television households. Congress also has directed the FCC to
institute a proceeding to review its present rules to determine whether to
retain, modify or eliminate its present restrictions on the number of television
stations in which a single entity may hold an attributable interest within a
single market.
Prior to passage of the 1996 Act, the FCC initiated rule making proceedings
to consider proposals to modify its television ownership restrictions, including
rule makings that may permit ownership, in some circumstances, of two television
stations with overlapping service areas, and these rule making procedures may be
incorporated in the proceedings required by the 1996 Act. The FCC also is
considering in these proceedings whether to adopt restrictions on television
time brokerage agreements. The television duopoly and one-to-a-market rules
currently prevent the Company from acquiring the FCC licenses of television
stations with which it has time brokerage agreements in those markets where the
Company owns a television station. In addition, if the FCC were to decide that
the provider of programming services under time brokerage agreements should be
treated as having an attributable ownership in the television station it
programs, and if it did not relax the corresponding duopoly rules, or if the FCC
were to adopt restrictions on time brokerage agreements without grandfathering
existing time brokerage agreements, the Company could be required to renegotiate
or terminate certain of its time brokerage agreements. The 1996 Act specifies,
however, that none of the provisions relating to broadcast ownership shall be
construed to prohibit the origination, continuation or renewal of any television
time brokerage agreement that is in compliance with the regulations of the FCC.
The Committee Report accompanying the 1996 Act notes that the Act grandfathers
time brokerage agreements in existence upon enactment of the Act and allows time
brokerage agreements in the future, consistent with the FCC's rules.
Nevertheless, if in individual cases the FCC were to find that the licensee of a
station with which the Company has a time brokerage agreement failed to maintain
control over its operations as required by FCC rules and policies, the licensee
of the time brokerage agreement and/or the Company could be fined or could be
set for hearing, the outcome of which could be a fine or, under certain
circumstances, loss of the applicable FCC license. The Company is unable to
predict the ultimate outcome of possible changes to these FCC rules and the
impact such FCC rules may have on its broadcasting operations. See
"Business -- Federal Regulation of Broadcasting."
CHANGE OF CONTROL
A "change of control" (as defined in the Credit Facility) constitutes an
event of default under the Credit Facility. In the event of a "change of
control" (as defined in the Existing Indenture), the Company will be required to
offer to purchase all of the outstanding Existing Notes at a price equal to 101%
of the principal amount thereof plus any accrued and unpaid interest thereon to
the date of repurchase. In the event of a "change of control" (as defined with
respect to the Junior Preferred Stock), the Company will be required to offer to
purchase all of the shares of the Junior Preferred Stock then outstanding at
101% of the then effective liquidation preference thereof plus, without
duplication, accumulated and unpaid dividends thereon to the repurchase date. A
"change of control" (as defined with respect to the Private Preferred Stock)
will require the Company to pay a significantly higher dividend on the Private
Preferred Stock, unless it is redeemed. A "change of control" (as defined with
respect to the Public Preferred Stock), will require the Company to offer to
purchase all of the shares of Public Preferred Stock then outstanding at 101% of
the then effective liquidation preference plus, without duplication, accumulated
and unpaid dividends to the repurchase date. The repurchase by the Company of
the Existing Notes or the Public Preferred Stock upon a change of control could
also cause a default under the Credit Facility. There can be no assurance that
in the event of any such changes of control, the Company will have, or will have
access to, sufficient funds or will be contractually permitted under the terms
of outstanding indebtedness to repay its indebtedness under the Credit Facility,
23
<PAGE> 29
repay the Existing Notes, or pay the required purchase price for the shares of
Junior Preferred Stock and Public Preferred Stock tendered by holders upon a
change of control. In such event, the Company could be required to seek
third-party financing to the extent it did not have sufficient available funds
to meet its purchase obligations, and there can be no assurance that the Company
would be able to obtain such financing on favorable terms, if at all. Further,
the Existing Indenture and the terms of the Existing Preferred Stock restrict
the Company's ability to repurchase shares of Junior Preferred Stock, including
upon a change of control. See "Description of Capital Stock" and "Description of
Indebtedness."
CERTAIN TAX CONSIDERATIONS
Distributions on the Junior Preferred Stock, whether paid in cash or in
additional shares of Junior Preferred Stock, will be taxable as ordinary
dividend income to the extent of the Company's current and accumulated earnings
and profits. A holder's initial tax basis in any additional shares of Junior
Preferred Stock distributed by the Company in lieu of cash dividend payments on
the Junior Preferred Stock ("Dividend Shares") will equal the fair market value
of such Dividend Shares on their date of distribution. In addition, depending
upon the fair market value of shares of Junior Preferred Stock on the date of
their issuance, holders may be required to include additional amounts of income
based on the difference between (x) the fair market value of such shares on the
date of their issuance and (y) the amount payable in redemption of such shares,
unless the difference is de minimis under the applicable standard (such
difference being referred to as "Preferred Stock Discount"). If shares of Junior
Preferred Stock (including Dividend Shares) bear Preferred Stock Discount, such
shares generally will have different tax characteristics from other shares of
Junior Preferred Stock and might trade separately, which might adversely affect
the liquidity of such shares.
The Company structured the disposition of its radio division in 1997 in a
manner that management currently believes will permit it to defer recognizing
for income tax purposes up to approximately $305 million of gain (before
deferred taxes). Such deferral could be contested by the Internal Revenue
Service ("IRS"). Based on the advice of counsel, management believes that, in
the event of a challenge by the IRS of these tax positions, it is more likely
than not that the Company would prevail. Should the IRS successfully challenge
the Company on these matters, the Company could be subject to a material current
tax liability.
DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS
A portion of the net proceeds of the Offerings is anticipated to be used to
fund the Proposed Acquisitions and related capital expenditures. It is
anticipated that pending such use, such proceeds will be invested in certain
short-term investments. Such funds, with the Company's existing working capital,
will constitute a significant amount of funds available to the Company, as to
the application of which management will have substantial discretion, including
funding additional broadcast and non-broadcast acquisition opportunities that
may arise that are not included in the Proposed Acquisitions. There can be no
assurance the Company will deploy such funds in a manner that will enhance the
financial condition of the Company. See "Use of Proceeds."
ABILITY TO MANAGE GROWTH
Since inception, the Company has experienced rapid growth, primarily
through acquisitions. Rapidly growing businesses frequently encounter unforeseen
expenses and delays in completing acquisitions, as well as difficulties and
complications in integrating acquired operations without disruption to overall
operations. In addition, such rapid growth may adversely affect the Company's
operating results because of many factors, including capital requirements,
transitional management and operating adjustments, and interest costs associated
with acquisition debt. There can be no assurance that the Company will
successfully integrate recently acquired and future acquired operations or
successfully manage the costs often associated with rapid growth. The Company
continuously evaluates the acquisition or operation of additional television
stations.
24
<PAGE> 30
TIME BROKERAGE AGREEMENTS -- RIGHTS OF PREEMPTION AND TERMINATION
The Company operates 14 television stations pursuant to time brokerage
agreements, which stations are not owned by the Company. All of the Company's
time brokerage agreements allow, in accordance with FCC rules, regulations and
policies, preemption of the Company's programming by the FCC licensee of each
station with which the Company has a time brokerage agreement. In addition, each
time brokerage agreement provides that under certain limited circumstances it
may be terminated by the FCC licensee. Accordingly, there can be no assurance
that the Company will be able to air all of the programming expected to be aired
on those stations with which it has a time brokerage agreement or that the
Company will receive the expected advertising revenue from the sale of
advertising in such programming. Although management believes that the terms and
conditions of each of the Company's time brokerage agreements should enable the
Company to air and utilize the programming and other non-broadcast license
assets of the respective stations, there can be no assurance that early
terminations of the time brokerage agreements or unexpected preemptions of all
or a significant part of the programming by the FCC licensee of such stations
will not occur. An early termination of the Company's time brokerage agreements
or repeated and material preemptions of programming could adversely affect the
Company's operations. In addition, the Company's time brokerage agreements
generally have expiration dates ranging from seven to ten years. The Company
expects its future time brokerage agreements to have terms of not more than ten
years. There can be no assurance that the Company will be able to negotiate
extensions of its time brokerage agreements on terms satisfactory to the
Company.
INDUSTRY AND ECONOMIC CONDITIONS; SEASONALITY
The profitability of the Company's television stations is subject to
various factors that influence the television broadcasting industry as a whole.
The Company's television stations may be affected by numerous factors, including
changes in audience tastes, 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 and changes in the willingness of financial institutions
and other lenders to finance television station acquisitions and operations. The
Company 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 it predict what impact, if any, the occurrence of these or other events
might have on the Company's operations. Generally, advertising tends to decline
during economic recession or downturn. Consequently, the Company's broadcasting
revenue is likely to be adversely affected by a recession or downturn in the
United States economy or other events or circumstances that adversely affect
advertising activity. In addition, the Company's operating results in individual
geographic markets 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. Because of the short operating history of inTV
and the start-up nature of PAX NET, the Company's ability to assess the effects
of seasonality on inTV or PAX NET is limited. It appears, however, that inTV
experiences its highest revenues during the first and fourth fiscal quarters.
COMPETITION
The Company's television stations are located in highly competitive
markets. The financial success of each of the Company's television stations
depends, to a significant degree, upon its audience ratings, its share of the
overall television sales within its geographic market, the economic health of
the market and the popularity of its programming. The audience ratings and
advertising of such individual stations are subject to change, and any adverse
change in a particular market could have a material adverse effect on the
revenue and operating cash flow of the Company. The Company's television
stations compete for audience share and advertising revenue directly with other
television stations and with other media within their respective markets. Each
of the Company's television stations is subject to competition from companies
that, in some instances, have or may, in the future, obtain greater resources
than the Company and its ability to compete successfully in its broadcasting
markets may be impeded.
In addition, increased competition for viewers in the cable industry may
result from technological advances, such as digital compression technology,
which allow cable systems to expand channel capacity; the
25
<PAGE> 31
further deployment of fiber optic cable, which has the capacity to carry a much
greater number of channels than coaxial cable; and "multiplexing," in which
programming services offer more than one feed of their programming. The number
of choices available to the Company's television stations' viewing audience as a
result of such technological advances may lead to a reduction in the Company's
market share. There can be no assurance that the Company will be able to obtain
or maintain significant audience ratings and advertising revenue.
The Company will compete for advertising revenue with other television
programming services described above, as well as with other national and
international television programming services, superstations, broadcast
television networks, local over-the-air television stations, radio and print
media, in addition to alternative delivery services that now exist or are
expected to develop in the future. More generally, the Company competes with
various other leisure-time activities such as home videos, movie theaters,
personal computers and other alternative sources of entertainment and
information. See "Business -- Competition."
TECHNOLOGY CHANGES
Television broadcasting is also subject to competition with new media
technologies that are being developed or have been introduced, such as direct
satellite-to-home video programming and so-called video dial tone in which
telephone or other companies provide broad-band wire links for the delivery of
video programming to homes by independent program suppliers. Further, the
Company may be subject to other changes in technology and the manner in which
businesses and individual households adopt such technologies and embrace new
communication and distribution channels available via the Internet, World Wide
Web, and other similar broadband networks. Prospective technology enhancements
may allow for increased economic, distribution and communication efficiencies
which may impact the Company. The Company cannot predict the effect, if any,
that these or other new technologies may have on the industries in which the
Company operates, or on the Company. See "Business -- Federal Regulation of
Broadcasting."
LACK OF PUBLIC MARKET FOR THE JUNIOR PREFERRED STOCK; RESTRICTIONS ON RESALE
There is no existing trading market for the Junior Preferred Stock, and
there can be no assurance regarding the future development of a market for the
Junior Preferred Stock, or the ability of holders of the Junior Preferred Stock
to sell their Junior Preferred Stock or the price at which such holders may be
able to sell their Junior Preferred Stock. If such a market were to develop, the
Junior Preferred Stock could trade at prices that may be lower than the initial
offering price depending upon many factors, including prevailing interest rates,
the Company's operating results and the market for similar securities. The
Initial Purchaser has advised the Company that it currently intends to make a
market in the Junior Preferred Stock. The Initial Purchaser is not obligated to
do so, however, and any market-making with respect to the Junior Preferred Stock
may be discontinued at any time without notice. Therefore, there can be no
assurance as to the liquidity of any trading market for the Junior Preferred
Stock, or that an active market for the Junior Preferred Stock will develop. The
Company does not intend to apply for listing or quotation of the Junior
Preferred Stock on any securities exchange or stock market; however, it is
expected that the Junior Preferred Stock will be eligible for trading in the
Private Offerings, Resale and Trading through Automated Linkages (PORTAL) Market
of the National Association of Securities Dealers, Inc.
LIMITATIONS OF APPRAISALS
Separate appraisals (collectively, the "Appraisals") of certain assets of
the Company were prepared by BIA Consulting, Inc. ("BIA") and Communications
Equity Associates, Inc. ("CEA") (collectively, the "Appraisers"). Each Appraisal
was prepared in accordance with certain procedures, and pursuant to certain
methodologies, as set forth therein. The Appraisals represent the analysis and
opinion of each of the Appraisers as of each of their respective dates, subject
to the assumptions and limitations set forth therein, have not been updated
since they were originally issued, and may not be indicative of the present or
future values of properties of the Company upon liquidation or resale. The
Appraisals are based upon a number of estimates and assumptions that, while
considered reasonable by the Appraiser issuing such Appraisal, are subject to
significant business, economic, competitive and regulatory uncertainties and
contingencies, many of
26
<PAGE> 32
which are beyond the control of the Company or the ability of the Appraisers to
accurately assess and estimate, and are based upon assumptions with respect to
future business decisions and conditions which are subject to change. The
opinions of value set forth in the Appraisals and the actual values of the
assets appraised therein will vary, and those variations may be material. The
inclusion in this Memorandum of the opinions of value set forth in the
Appraisals should not be regarded as a representation by the Company as to the
accuracy of such opinions nor can there be any assurance that the opinions of
value set forth in the Appraisals will be achieved upon the liquidation of the
Company or sale of the assets valued in the Appraisals. Neither the Company nor
the Initial Purchaser nor any of their respective agents or representatives
assumes responsibility for the accuracy or adequacy of the Appraisals.
Prospective purchasers of the Securities are cautioned not to place undue
reliance on the Appraisals. The Company does not intend to have the Appraisals
updated or otherwise revised to reflect events or circumstances of which it
becomes aware after the date thereof or to reflect the occurrence of
unanticipated events. See "Business -- Appraisals."
DEVELOPMENT OF PROPRIETARY SALES TRAFFIC SYSTEM
The Company is developing a new proprietary sales traffic system designed
to deliver to the Company's sales force accurate and timely data on its
available advertising inventory and the demand for its inventory. The Company
intends to implement its sales traffic system prior to the PAX NET launch in
order to meet the needs of PAX NET and better allocate its available advertising
airtime. When first put to use by the Company, the sales traffic system may
contain undetected difficulties or defects that, despite testing by the Company,
are uncovered only after it has been employed by the Company's sales force.
There can be no assurance that such difficulties will not be encountered,
causing significant operational difficulties or delays in the sale and
allocation of its available advertising airtime or requiring significant design
modifications, either of which could adversely affect the Company's ability to
sell advertising airtime to maximize revenues.
CONSEQUENCE OF FAILURE TO EXCHANGE
Holders of shares of Original Junior Preferred Stock who do not exchange
their shares for shares of New Junior Preferred Stock pursuant to the Exchange
Offer will continue to be subject to the restrictions on transfer of such shares
of Original Junior Preferred Stock which apply as a consequence of the offer and
sale of the Original Junior Preferred Stock pursuant to an exemption from, or in
a transaction not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, shares of Original Junior
Preferred Stock may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act or applicable
state securities laws. The Company does not anticipate that it will register the
shares of Original Junior Preferred Stock under the Securities Act. To the
extent that shares of Original Junior Preferred Stock are tendered and accepted
in connection with the Exchange Offer, any trading market for remaining shares
of Original Junior Preferred Stock could be adversely affected.
Issuance of shares of New Junior Preferred Stock for shares of Original
Junior Preferred Stock pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates representing such shares of
Original Junior Preferred Stock, a properly completed and duly executed Letter
of Transmittal and all other required documents. Therefore, holders of shares of
Original Junior Preferred Stock desiring to tender such shares in exchange for
shares of New Junior Preferred Stock should allow sufficient time to ensure
timely delivery. The Company is under no duty to give notification of defects or
irregularities with respect to tenders of shares of Original Junior Preferred
Stock for exchange. Shares of Original Junior Preferred Stock that are not
tendered or that are tendered but not accepted by the Company for exchange will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof under the Securities Act and, upon
consummation of the Exchange Offer, certain registration rights under the
Registration Rights Agreement will terminate.
27
<PAGE> 33
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The shares of Original Junior Preferred Stock were sold by the Company on
June 10, 1998 to the Initial Purchaser who resold them to certain qualified
institutional buyers in the Private Offering. In connection with the Private
Offering, the Company entered into a Preferred Stock Registration Rights
Agreement with the Initial Purchaser (the "Registration Rights Agreement"),
which requires that within 60 days following the issuance of the shares of
Original Junior Preferred Stock, the Company file with the Commission a
registration statement under the Securities Act with respect to an issue of
shares of New Junior Preferred Stock of the Company identical in all material
respects to the shares of Original Junior Preferred Stock, use its best efforts
to cause such registration statement to become effective under the Securities
Act with 150 days following the issuance of the shares of Original Junior
Preferred Stock, and upon the effectiveness of that registration statement,
offer to the Holders of the Original Junior Preferred Stock the opportunity to
exchange their shares of Original Junior Preferred Stock for a like number of
shares of New Junior Preferred Stock, which will be issued without a restrictive
legend. The purpose of the Exchange Offer is to fulfill the Company's
obligations under the Registration Rights Agreement. The shares of Original
Junior Preferred Stock were initially represented by a single global Certificate
in registered form, registered in the name of Cede & Co., a nominatee of The
Depository Trust Company, New York, New York ("DTC"), as depositary.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in Exxon Capital Holdings Corp., SEC
No-Action Letter (April 13, 1989), Morgan Stanley & Co. Inc., SEC No-Action
Letter (June 5, 1991) and Shearman & Sterling, SEC No-Action Letter (July 2,
1993). The Company has not, however, sought its own no-action letter, and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
Based upon these interpretations by the staff of the Commission, the Company
believes that the shares of New Junior Preferred Stock issued pursuant to the
Exchange Offer in exchange for shares of Original Junior Preferred Stock may be
offered for resale, resold and otherwise transferred by a Holder thereof other
than (i) a broker-dealer who purchased such shares of Original Junior Preferred
Stock directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or (ii) a person that is an
"affiliate" (as defined in Rule 405 of the Securities Act) of the Company
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such shares of New Junior Preferred Stock are
acquired in the ordinary course of such Holder's business and that such Holder
is not participating, and has no arrangement or understanding with any person to
participate, in the distribution of such shares of New Junior Preferred Stock.
Holders of shares of Original Junior Preferred Stock accepting the Exchange
Offer will represent to the Company in the Letter of Transmittal that such
conditions have been met. Any Holder who participates in the Exchange Offer for
the purpose of participating in a distribution of the shares of New Junior
Preferred Stock may not rely on the position of the staff of the Commission as
set forth in these no-action letters and would have to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. This Prospectus may not be
used by such Holders for any secondary resale. A secondary resale transaction in
the United States by a Holder who is using the Exchange Offer to participate in
the distribution of shares of New Junior Preferred Stock must be covered by a
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K of the Securities Act.
Each broker-dealer that receives shares of New Junior Preferred Stock for
its own account pursuant to the Exchange Offer must acknowledge that it acquired
the shares of Original Junior Preferred Stock as a result of market-making
activities or other trading activities and will deliver a prospectus in
connection with any resale of such shares of New Junior Preferred Stock. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of shares of New Junior Preferred
Stock received in exchange for shares of Original Junior Preferred Stock where
such shares of Original Junior Preferred Stock were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Letter of Transmittal states that by acknowledging and
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities
28
<PAGE> 34
Act. The Company has agreed that for a period of 180 days after the Expiration
Date, it will make this Prospectus available to broker-dealers for use in
connection with any such resale. See "Plan of Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to
resell, resale or other retransfer of shares of New Junior Preferred Stock.
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, Holders of shares of Original Junior Preferred Stock
in any jurisdiction in which the Exchange Offer or the acceptance thereof would
not be in compliance with the securities or blue sky laws of such jurisdiction.
As described above, the shares of Original Junior Preferred Stock were sold
to the Initial Purchaser and resold by the Initial Purchaser to certain
qualified institutional buyers on June 10, 1998, and there is currently a
limited trading market for them. To the extent shares of Original Junior
Preferred Stock are tendered and accepted in the Exchange Offer, the number of
outstanding shares of Original Junior Preferred Stock will decrease. Following
the consummation of the Exchange Offer, Holders of shares of Original Junior
Preferred Stock will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity for the market for the shares of Original Junior
Preferred Stock could be adversely affected. See "Risk Factors -- Consequence of
Failure to Exchange."
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the "Exchange
Offer"), the Company will accept any and all shares of Original Junior Preferred
Stock validly tendered, and not theretofore withdrawn, prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue one share of New
Junior Preferred Stock ($10,000 liquidation preference) in exchange for each
outstanding share of Original Junior Preferred Stock accepted in the Exchange
Offer, as promptly as practicable after the Expiration Date. Holders may tender
some or all of their shares of Original Junior Preferred Stock pursuant to the
Exchange Offer. The Exchange Offer is not conditioned upon any minimum number of
shares of Original Junior Preferred Stock being tendered for exchange.
The form and terms of the shares of New Junior Preferred Stock are
identical in all material respects to the form and terms of the shares of
Original Junior Preferred Stock except that the shares of New Junior Preferred
Stock will have been registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof. The New Junior Preferred
Stock will be issued pursuant to a Certificate of Designation relating thereto,
which will be identical in all material respects with the Certificate of
Designation relating to the Original Junior Preferred Stock, except for the
provisions thereof relating to the consequences of the Company's failure to
conduct the Exchange Offer. Upon issuance of shares of New Junior Preferred
Stock in exchange for shares of Original Junior Preferred Stock, the shares of
Original Junior Preferred Stock so exchanged shall be cancelled and restored to
the status of authorized but unissued shares of preferred stock of the Company,
undesignated as to class or series.
Holders of shares of Original Junior Preferred Stock do not have any
appraisal or dissenters' rights under the Delaware General Corporation Law in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange and exchanged shares of Original Junior Preferred Stock
validly tendered for exchange when, as and if the Company gives oral or written
notice to the Exchange Agent of acceptance of the tenders of such shares of
Original Junior Preferred Stock for exchange. Exchange of shares of Original
Junior Preferred Stock accepted for exchange pursuant to the Exchange Offer will
be made by deposit of tendered shares of Original Junior Preferred Stock with
the Exchange Agent, which will act as agent for the tendering Holders for the
purpose of receiving shares of New Junior Preferred Stock from the Company and
transmitting such shares of New Junior Preferred Stock to tendering Holders. In
all cases, any exchange of shares of New Junior Preferred Stock for shares of
Original Junior Preferred Stock accepted for exchange pursuant to the Exchange
Offer will
29
<PAGE> 35
be made only after timely receipt by the Exchange Agent of certificates for such
shares of Original Junior Preferred Stock (or of a confirmation of a book-entry
transfer of such shares of Original Junior Preferred Stock in the Exchange
Agent's account at the Book-Entry Transfer Facility (as defined in
"-- Procedures for Tendering" below)), a properly completed and duly executed
Letter of Transmittal (or facsimile thereof) and any other required documents.
For a description of the procedures for tendering shares of Original Junior
Preferred Stock pursuant to the Exchange Offer, see "-- Procedures for
Tendering."
If any tendered shares of Original Junior Preferred Stock are not accepted
for exchange because of an invalid tender, or due to the occurrence of certain
other events set forth herein or otherwise, certificates for any such unaccepted
shares of Original Junior Preferred Stock will be returned without expense to
the tendering Holders thereof (or in the case of shares of Original Junior
Preferred Stock tendered by book-entry transfer, such shares of Original Junior
Preferred Stock will be credited to the account of such Holder maintained at the
Book-Entry Transfer Facility), as promptly as practicable after the expiration
or termination of the Exchange Offer.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of a Letter of Transmittal (or facsimile
thereof), waive any right to receive notice of acceptance of their shares of
Original Junior Preferred Stock for exchange.
Holders who tender shares of Original Junior Preferred Stock in the
Exchange Offer will not be required to pay brokerage commission or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of shares of Original Junior Preferred Stock pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes, in connection with the Exchange Offer. See "-- Fees
and Expenses."
This Prospectus, together with the Letter of Transmittal, is being sent to
registered Holders of shares of Original Junior Preferred Stock as of August 3,
1998.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The Expiration Date shall be 5:00 p.m. New York City time on September 7,
1998, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral (promptly confirmed in writing) or written notice
and will make a public announcement thereof, each prior to 9:00 a.m. New York
City time, on the next business day after the previously scheduled expiration
date of the Exchange Offer.
The Company reserves the right, at any time and from time to time, in its
sole discretion (subject to its obligations under the Registration Rights
Agreement) (i) to delay accepting any shares of Original Junior Preferred Stock
or to delay the issuance and exchange of shares of New Junior Preferred Stock
for shares of Original Junior Preferred Stock, (ii) to extend the Exchange Offer
or, if any of the conditions set forth below under "-- Conditions to the
Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer
by giving oral or written notice of such delay, extension or termination to the
Exchange Agent, or (iii) to amend the terms of the Exchange Offer in any manner.
If the Company extends the period of time during which the Exchange Offer
is open, or if it is delayed in accepting for exchange of, or in issuing any
exchanging the shares of New Junior Preferred Stock for, any shares of Original
Junior Preferred Stock, or is unable to accept for exchange of, or issue shares
of New Junior Preferred Stock for, any shares of Original Junior Preferred Stock
pursuant to the Exchange Offer for any reason, then, without prejudice to the
Company's rights under the Exchange Offer, the Exchange Agent may, on behalf of
the Company, retain all shares of Original Junior Preferred Stock tendered, and
such shares of Original Junior Preferred Stock may not be withdrawn except as
otherwise provided below in "-- Withdrawal of Tenders." The adoption by the
Company of the right to delay acceptance for exchange of, or the issuance and
the exchange of the shares of New Junior Preferred Stock, for any shares of
Original Junior Preferred Stock is subject to applicable law, including Rule
14e-1(c) under the Exchange Act, which requires that the
30
<PAGE> 36
Company pay the consideration offered or return the shares of Original Junior
Preferred Stock deposited by or on behalf of the Holders thereof promptly after
the termination or withdrawal of the Exchange Offer.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by a public announcement thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period. The term "business day"
shall mean any day other than Saturday, Sunday or a federal holiday and shall
consist of the time period from 12:01 a.m. through 12:00 midnight, New York City
time.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Company shall have no obligation to make public, advertise
or otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service. Any such announcement of an
extension of the Exchange Offer shall be issued no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date of the Exchange Offer.
PROCEDURES FOR TENDERING
Only a Holder of shares of Original Junior Preferred Stock may tender such
shares of Original Junior Preferred Stock in the Exchange Offer. To tender in
the Exchange offer, the Holder must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver such Letter
of Transmittal, or such facsimile, together with any other required documents,
to the Exchange Agent so that delivery is received prior to 5:00 p.m., New York
City time, on the Expiration Date. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth below under "-- Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date. In addition, either (i) the certificates
for the tendered shares of Original Junior Preferred Stock must be received by
the Exchange Agent along with the Letter of Transmittal, or such shares of
Original Junior Preferred Stock must be tendered pursuant to the procedures for
book-entry transfer described below and a confirmation of receipt of such
tendered shares of Original Junior Preferred Stock must be received by the
Exchange Agent, in each case, prior to 5:00 p.m., New York City time, on the
Expiration Date, or (ii) the tendering Holder must comply with the guaranteed
delivery procedures described below.
NO LETTERS OF TRANSMITTAL, CERTIFICATES REPRESENTING SHARES OF ORIGINAL
JUNIOR PREFERRED STOCK OR ANY OTHER REQUIRED DOCUMENTATION SHOULD BE SENT TO THE
COMPANY. SUCH DOCUMENTS SHOULD BE SENT ONLY TO THE EXCHANGE AGENT.
The tender by a Holder of shares of Original Junior Preferred Stock made
pursuant to any method of delivery set forth in the Letter of Transmittal will
constitute a binding agreement between such tendering Holder and the Company in
accordance with the terms and subject to the conditions of the Exchange Offer.
The method of delivery of shares of Original Junior Preferred Stock and the
Letter of Transmittal and all other required documents to the Exchange Agent is
at the election and risk of the Holder. Instead of delivery by mail, it is
recommended that Holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure delivery to the Exchange
Agent before the Expiration Date. Holders may request their respective brokers,
dealers, commercial banks, trust companies or nominees to effect the above
transaction for such Holders or for assistance concerning the Exchange Offer.
Any beneficial owner whose shares of Original Junior Preferred Stock are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered Holder
promptly and instruct such registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivery such owner's shares of Original Junior Preferred Stock,
either
31
<PAGE> 37
make appropriate arrangements to register ownership of the shares of Original
Junior Preferred Stock in such owner's name or obtain a properly completed bond
power from the registered Holder. The transfer of registered ownership may take
considerable time.
If the Letter of Transmittal is signed by a person other than the
registered Holder of any shares of Original Junior Preferred Stock (which term
includes any participants in DTC whose name appears on a security position
listing as the owner of the shares of Original Junior Preferred Stock) or if
delivery of the shares of Original Junior Preferred Stock is to be made to a
person other than the registered Holder, such shares of Original Junior
Preferred Stock must be endorsed or accompanied by a properly completed bond
power, in either case signed by such registered Holder as such registered
Holder's name appears on such shares of Original Junior Preferred Stock with the
signature on the shares of Original Junior Preferred Stock or the bond power
guaranteed by an Eligible Institution (as defined herein).
If the Letter of Transmittal or any shares of Original Junior Preferred
Stock or bond powers are signed by trustees, executors, administrators,
guardians, attorney-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing and, unless waived by the Company, must submit with the Letter of
Transmittal evidence satisfactory to the Company of their authority to so act.
Signature on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution unless the shares of
Original Junior Preferred Stock tendered pursuant thereto are (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal,
(ii) for the account of an Eligible Institution, or (iii) for the account of
DTC. See Instruction 4 in the Letter of Transmittal. In the event that signature
on a Letter of Transmittal or a notice of withdrawal, as the case may be, is
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (any of which is referred to
herein as an "Eligible Institution").
The Exchange Agent will establish an account with respect to the shares of
Original Junior Preferred Stock at DTC (the "Book-Entry Transfer Facility") for
the purpose of the Exchange Offer promptly after the date of this Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make delivery of the shares of Original Junior Preferred
Stock by causing the Book-Entry Transfer Facility to transfer such shares of
Original Junior Preferred Stock into the Exchange Agent's Notes account in
accordance with the Book-Entry Transfer Facility's procedure for such transfer.
ALTHOUGH DELIVERY OF SHARES OF ORIGINAL JUNIOR PREFERRED STOCK MAY BE EFFECTED
THROUGH BOOK-ENTRY TRANSFER IN THE EXCHANGE AGENTS ACCOUNT AT THE BOOK-ENTRY
TRANSFER FACILITY, THE LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) WITH ALL
REQUIRED SIGNATURE GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS MUST, IN ANY
CASE, BE TRANSMITTED TO AND RECEIVED AND CONFIRMED BY THE EXCHANGE AGENT AT ITS
ADDRESS SET FORTH BELOW PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE, EXCEPT AS OTHERWISE PROVIDED BELOW UNDER THE CAPTION
"-- GUARANTEED DELIVERY PROCEDURES." DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY
TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT.
All questions as to the validity, form (including time of receipt),
acceptance and withdrawal of tendered shares of Original Junior Preferred Stock
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all shares of Original Junior Preferred Stock determined by the Company not
to be validly tendered or any shares of Original Junior Preferred Stock the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the absolute right to waive any defects,
irregularities or conditions of tender as to particular shares of Original
Junior Preferred Stock. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
32
<PAGE> 38
will be final and binding on all parties. Unless waived by the Company in its
full discretion, any defects or irregularities in connection with tenders of
shares of Original Junior Preferred Stock will render such tenders invalid
unless such defects or irregularities are cured within such time as the Company
shall determine. Although the Company intends to notify Holders of defects or
irregularities with respect to tenders of shares of Original Junior Preferred
Stock, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Any shares of Original
Junior Preferred Stock received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived, as provided for herein, will be returned by the Exchange Agent to the
tendering Holders, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any shares of Original Junior Preferred Stock that
remain outstanding subsequent to the Expiration Date, or, as set forth herein,
to terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase shares of Original Junior Preferred Stock in the open market, privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their shares of Original Junior Preferred Stock
and (i) whose shares of Original Junior Preferred Stock are not immediately
available, or (ii) who cannot deliver their shares of Original Junior Preferred
Stock (or complete the procedures for book-entry transfer), the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may nevertheless effect a tender of shares of Original Junior
Preferred Stock if all of the following conditions are met:
(a) the tender is made by or through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail, hand delivery or
overnight courier) setting forth the name and address of the Holder, any
certificate number(s) of such shares of Original Junior Preferred Stock and
the principal amount of shares of Original Junior Preferred Stock tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the shares of Original Junior Preferred Stock
(or a confirmation of a book-entry transfer of such shares of Original
Junior Preferred Stock in the Exchange Agent's account at the Book-Entry
Transfer Facility) and any other documents required by the Letter of
Transmittal will be deposited Exchange Agent's account at the Book-Entry
Transfer Facility and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) as well as the certificate(s) representing all tendered
shares of Original Junior Preferred Stock in proper form for transfer (or a
confirmation of book-entry transfer of such shares of Original Junior
Preferred Stock into the Exchange Agent's Notes account at the Book-Entry
Transfer Facility) and all other documents required by the Letter
Transmittal are received by the Exchange Agent with five New York Stock
Exchange trading days after the Expiration Date.
A Notice of Guaranteed Delivery is being sent to Holders along with the
Prospectus and the Letter of Transmittal.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of shares of Original Junior
Preferred Stock may be withdrawn at any time prior to 5:00 p.m. New York City
time, on the Expiration Date, as such term is defined above under the caption
" -- Expiration Date; Extensions; Amendments; Termination." If the Company
extends the period of time during which the Exchange Offer is open, or if it is
delayed in accepting for exchange of, or in issuing and exchanging the shares of
New Junior Preferred Stock for, any shares of Original Junior Preferred Stock or
is unable to accept for exchange of, or issue and exchange the shares of New
Junior Preferred Stock for, any shares of Original Junior Preferred Stock
pursuant to the Exchange Offer for any
33
<PAGE> 39
reason, then without prejudice to the Company's rights under the Exchange Offer,
the Exchange Agent may, on behalf of the Company, retain all shares of Original
Junior Preferred Stock tendered, and such shares of Original Junior Preferred
Stock may not be withdrawn except as otherwise provided herein, subject to Rule
14e-1(c) under the Exchange Act, which provides that the person making an issuer
tender offer shall either pay the consideration offered or return tendered
securities, promptly after the termination or withdrawal of the offer.
To withdraw a tender of shares of Original Junior Preferred Stock in the
Exchange Offer, a written or facsimile transmission notice of withdrawal must be
received by the Exchange Agent at its offices as set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having deposited the shares of Original
Junior Preferred Stock to be withdrawn (the "Depositor"), (ii) specify the
serial numbers on the particular certificates evidencing the shares of Original
Junior Preferred Stock to be withdrawn and the name of the registered Holder
thereof (if certificates have been delivered or otherwise identified to the
Exchange Agent) or the name and number of the account at DTC to be credited with
withdrawal of the shares of Original Junior Preferred Stock (if the shares of
Original Junior Preferred Stock have been tendered pursuant to the procedures
for book-entry transfer), (iii) be signed by the Holders in the same manner as
the original signature on the Letter of Transmittal by which shares of Original
Junior Preferred Stock were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
registrar (the "Registrar") with respect to the shares of Original Junior
Preferred Stock register the transfer of such shares of Original Junior
Preferred Stock into the name of the person withdrawing the tender and (iv)
specify the name in which any such shares of Original Junior Preferred Stock are
to be registered, if different from that of the Depositor. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company in its sole discretion, which determination
shall be final and binding on all parties. Any shares of Original Junior
Preferred Stock so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no shares of New Junior Preferred Stock
will be issued with respect thereto unless the shares of Original Junior
Preferred Stock so withdrawn are validly tendered. Properly withdrawn shares of
Original Junior Preferred Stock may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer and without prejudice
to the Company's other rights under the Exchange Offer, the Company shall not be
required to accept for exchange, or exchange shares of New Junior Preferred
Stock for any shares of Original Junior Preferred Stock, and may amend or
terminate the Exchange Offer as provided herein before the acceptance of such
shares of Original Junior Preferred Stock, if, among other things:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer,
which might materially impair the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company, or any material adverse development has
occurred in any existing action or proceeding with respect to the Company
or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred, which might materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which might materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(d) the shares of New Junior Preferred Stock to be received by Holders
of shares of Original Junior Preferred Stock in the Exchange Offer, upon
receipt, will not be transferable by such Holders (other than as
"affiliates" of the Company) without restriction under the Securities Act
and Exchange Act and without material restriction under the blue sky laws
of substantially all of the states of the United States
34
<PAGE> 40
(subject, in the case of Restricted Holders, to any requirements that such
persons comply with the Prospectus Delivery Requirements).
If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may, subject to its obligations under
the Registration Rights Agreement to use its best efforts to consummate the
Exchange Offer, (i) terminate the Exchange Offer and return all tendered shares
of Original Junior Preferred Stock to tendering Holders, (ii) extend the
Exchange Offer and, subject to withdrawal rights as set forth in "-- Withdrawal
of Tenders" above, retain all such shares of Original Junior Preferred Stock
until the expiration of the Exchange Offer as so extended, (iii) waive such
condition and, subject to any requirement to extend the period of time during
which the Exchange Offer is open, exchange all shares of Original Junior
Preferred Stock validly tendered for exchange by the Expiration Date and not
withdrawn, or (iv) delay acceptance or exchange of, or delay the issuance and
exchange of shares of New Junior Preferred Stock for, any shares of Original
Junior Preferred Stock until satisfaction or waiver of such conditions to the
Exchange Offer even though the Exchange Offer has expired. The Company's right
to delay acceptance for exchange of, or delay the issuance and exchange of
shares of New Junior Preferred Stock for, shares of Original Junior Preferred
Stock tendered for exchange pursuant to the Exchange Offer is subject to
provisions of applicable law, including, to the extent applicable, Rule 14e-1(c)
promulgated under the Exchange Act, which requires that the Company pay the
consideration offered or return the shares of Original Junior Preferred Stock
deposited by or on behalf of Holders of shares of Original Junior Preferred
Stock promptly after the termination or withdrawal of the Exchange Offer. For a
description of the Company's right to extend the period of time during which the
Exchange Offer is open and to amend, delay or terminate the Exchange Offer, see
"-- Expiration Date; Extensions; Amendments; Termination" above. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered Holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn: Corporate Trust Trustee Administration, Floor 21W
By Overnight Courier or By Hand:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attn: Corporate Trust Trustee Administration, Floor 21W
By Facsimile:
(212) 571-3083
Confirm by Telephone:
(212) 815-6333
35
<PAGE> 41
FEES AND EXPENSES
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail, however, additional solicitation
may be made by telegraph, telephone or in person by officer and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or other soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$250,000. Such expenses include fees and expenses of the Exchange Agent,
Trustee, Paying Agent and Registrar, accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of shares of Original Junior Preferred Stock pursuant to the Exchange Offer. If,
however, certificates representing shares of New Junior Preferred Stock, or
shares of Original Junior Preferred Stock not tendered or acceptable for
exchange, are to be delivered to, or are to be issued in the name of, any person
other than the registered Holders of the shares of Original Junior Preferred
Stock tendered, or if tendered shares of Original Junior Preferred Stock are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of shares of Original Junior Preferred Stock pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the tendering Holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The shares of New Junior Preferred Stock will be recorded at the same
carrying value as the shares of Original Junior Preferred Stock as reflected in
the Company's accounting records on the date of the exchange. Accordingly, no
gain or loss for accounting purposes will be recognized. The expenses of the
Exchange Offer will be treated as part of the issuance costs of the Junior
Preferred Stock.
36
<PAGE> 42
THE TRANSACTIONS
THE PROPOSED ACQUISITIONS
The Company has entered into agreements (subject to various conditions
including the receipt of regulatory approvals) to acquire, invest in, purchase
the assets of, or finance the acquisition of assets of and enter into time
brokerage or affiliation agreements with respect to, the television stations
listed below, for total consideration of $414.8 million, of which $78.6 million
has been funded as of March 31, 1998 in the form of advances and escrow
deposits. The Company expects to spend an additional $88.4 million in capital
expenditures to complete the construction of certain new stations and to upgrade
certain of the Company's existing stations. The Company currently anticipates
completing the Proposed Acquisitions during 1998.
<TABLE>
<CAPTION>
PURCHASE
STATION MARKET(1) PRICE
- ------- --------- --------------
(IN THOUSANDS)
<S> <C> <C>
WCFC(2).................................. Chicago, IL $135,000
WFBI/WCCL(3)(4).......................... Memphis, TN/New Orleans, LA 55,000
CH40..................................... Pittsburgh, PA 35,000
KPXG*.................................... Portland, OR 30,000
WPXP*.................................... West Palm Beach, FL 19,468
KSPX(3).................................. Sacramento, CA 17,000
CH26(3).................................. San Antonio, TX 13,500
KPPX(3).................................. Phoenix, AZ 12,000
WPXU*.................................... Champaign, IL 9,250
WKRP(3).................................. Charleston, WV 8,070
WAOM..................................... Lexington, KY 8,000
WAUP(3).................................. Syracuse, NY 6,750
CH61..................................... Mobile, AL 6,750
WQPX(3).................................. Wilkes-Barre, PA 6,160
CH34..................................... Spokane, WA 5,677
KPXO(3).................................. Honolulu, HI 5,000
WPXK(3).................................. Knoxville, TN 5,000
CH14..................................... Albuquerque, NM 4,650
CH21..................................... Shreveport, LA 3,938
CH67..................................... Davenport, IA 3,900
CH39..................................... Des Moines, IA 3,750
CH23(3).................................. Portland, ME 3,550
WEPX(3).................................. Greenville, NC 3,550
WAQF..................................... Buffalo, NY 3,000
KYPX(3).................................. Little Rock, AR 2,850
CH51..................................... Jackson, MS 2,250
KWOK(2).................................. San Francisco, CA 2,215
WAZW(3).................................. Wausau-Rhinelander, WI 2,000
CH30(3).................................. Odessa, TX 1,306
CH15(3).................................. Christiansted, VI 200
--------
Total station acquisitions............... 414,784
Expected station capital expenditures.... 88,426
Less: advances and escrow deposits....... (78,630)
--------
Net Proposed Acquisitions................ $424,580
========
</TABLE>
- ---------------
* Acquisition closed subsequent to March 31, 1998.
(1) Each station is licensed by the FCC to serve a specific community, which is
included in the listed market.
(2) The Company has agreed to transfer its interest in KWOK, upon acquisition,
as additional non-cash consideration in connection with its acquisition of
WCFC.
37
<PAGE> 43
(3) Operated or to be operated by the Company pursuant to a time brokerage
agreement.
(4) $36.0 million of the purchase price is not due until December 1999; $15.0
million of the purchase price is attributable to the buyout of existing
affiliation agreements.
The Company regularly considers the acquisition of broadcasting and other
properties and businesses, and at any given time is in various stages of
considering such opportunities. Typically, the consummation of potential
acquisitions is subject to various contingencies, including regulatory
approvals. Consummation of potential acquisition opportunities other than the
Proposed Acquisitions may also be subject to, among other things, the Company
obtaining additional financing and waivers or consents from its lenders and
holders of the Existing Preferred Stock. There can be no assurance that the
Company could obtain any such needed consents or waivers or additional financing
on terms acceptable to it, nor can there be any assurance that the Company will
consummate all of the Proposed Acquisitions or other potential acquisition
opportunities that may arise.
Company investments in broadcast properties (including certain of the
Proposed Acquisitions as noted above) involve arrangements with third parties,
including time brokerage agreements, as well as the co-ownership of certain
television stations. Such investments in broadcast properties permit the Company
to have a presence in additional markets and to enjoy many, but not all, of the
benefits of ownership while at the same time remaining in compliance with FCC
regulations. For a description of the Company's relationships with such third
parties, see "Business -- Time Brokerage Agreements and Other Interests in
Broadcast Stations." The Company has structured its relationships with these
third parties in a manner designed to ensure strict compliance with the FCC's
rules and regulations governing television station ownership.
THE SALE TRANSACTIONS
The Company has entered into agreements to sell or monetize its investment
in four broadcast television stations, one radio station and a minor league
hockey franchise for aggregate net proceeds of $78.1 million. The Company
anticipates completing the Sale Transactions during 1998:
<TABLE>
<CAPTION>
TELEVISION
MARKET
ASSET RANK AMOUNT
----- ---------- --------------
(IN THOUSANDS)
<S> <C> <C>
WNGM -- Atlanta, GA*........................................ 10 $ 50,000
WBPX -- Boston, MA.......................................... 6 15,500
WHPX -- Hartford, CT........................................ 27 15,000
WPXE -- Milwaukee, WI*...................................... 32 6,000
Radio Station............................................... -- 1,000
Hockey Team, net*........................................... -- 1,334
--------
88,834
Less: WNGM Option Exercise.................................. (10,709)
--------------
Net Proceeds from the Sale Transactions........... $ 78,125
========
</TABLE>
- ---------------
* Sale closed subsequent to March 31, 1998.
38
<PAGE> 44
USE OF PROCEEDS
The Company will not receive any cash proceeds from the Exchange Offer. The
net proceeds to the Company of the Offerings were approximately $261.5 million
and, together with net proceeds from the Sale Transactions and cash on hand,
shall be used to fund the Proposed Acquisitions and fund the launch of PAX NET.
The following table illustrates the estimated sources and uses of funds on
a pro forma basis as if the Transactions were consummated on March 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
SOURCES:
Original Junior Preferred Stock............................. $200,000
Convertible Preferred Stock................................. 75,000
Net proceeds from asset sales............................... 78,125
Cash on hand................................................ 84,955
--------
Total sources..................................... $438,080
========
USES:
Fund the Proposed Acquisitions, net of advances and escrow
deposits (excluding expected station capital
expenditures)............................................. $336,154
Fund expected station capital expenditures.................. 88,426
Transaction fees and expenses............................... 13,500
--------
Total uses........................................ $438,080
========
</TABLE>
39
<PAGE> 45
CAPITALIZATION
The following table sets forth the actual and pro forma cash and
capitalization of the Company as of March 31, 1998. Pro forma capitalization
gives effect to the Transactions as if the Transactions had taken place on March
31, 1998. This table should be read in conjunction with the information
contained in "Unaudited Pro Forma Balance Sheet Data" and the Company's
consolidated financial statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-----------------------
ACTUAL PRO FORMA(A)
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash(b)..................................................... $154,286 $ 69,331
======== ==========
Long-term debt (including current maturities)
Senior credit facility(c)................................. $120,000 $ 120,000
11 5/8% senior subordinated notes......................... 228,042 228,042
Other long-term debt...................................... 2,671 2,671
-------- ----------
Total debt........................................ 350,713 350,713
Private preferred stock(d).................................. 44,189 44,189
Public preferred stock(d)................................... 173,879 173,879
Junior preferred stock(e)................................... -- 190,000
Convertible preferred stock(f).............................. -- 70,540
Other equity(g)............................................. 369,180 408,092
-------- ----------
Total capitalization.............................. $937,961 $1,237,413
======== ==========
</TABLE>
- ---------------
(a) Gives effect to the Transactions as if the Transactions had taken place on
March 31, 1998.
(b) Consists of cash, cash equivalents and restricted cash. Restricted cash of
$17.0 million will be used solely to pay interest on the Credit Facility.
(c) In May 1998, the Company refinanced its outstanding debt under its existing
revolving credit facility with the Credit Facility. See "Description of
Indebtedness -- Credit Facility."
(d) See "Description of Capital Stock".
(e) The $200.0 million initial liquidation preference of the Junior Preferred
Stock has been reduced to its carrying value by approximately $10.0 million
of estimated fees and expenses related to the Junior Preferred Stock.
(f) Reflects the issuance by the Company of $75.0 million of Convertible
Preferred Stock, net of issuance costs of approximately $3.5 million and the
allocation of $960,000 of proceeds to the Warrants issued in connection with
the Convertible Preferred Offering. See "Unaudited Pro Forma Balance Sheet
Data."
(g) Other equity is comprised of Common Stock, class A and B common stock
warrants, stock subscription notes receivable, additional paid-in capital
deferred option plan compensation and retained earnings.
40
<PAGE> 46
UNAUDITED PRO FORMA BALANCE SHEET DATA
The unaudited pro forma balance sheet data as of March 31, 1998 gives
effect to the consummation of the Transactions as if the Transactions had taken
place on March 31, 1998. See "The Transactions" for a description of the
Proposed Acquisitions and Sale Transactions. The unaudited pro forma balance
sheet data is based upon available information and upon certain assumptions that
the Company believes are reasonable under the circumstances. The unaudited pro
forma balance sheet data should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere herein.
The unaudited pro forma balance sheet data is not necessarily indicative of the
Company's actual or future financial position.
41
<PAGE> 47
UNAUDITED PRO FORMA BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT MARCH 31, 1998
----------------------------------------
TRANSACTION
COMPANY ADJUSTMENTS PRO FORMA
---------- ------------ ----------
<S> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents................................. $ 137,286 $190,000(a) $ 52,331
78,125(b)
71,500(c)
(424,580)(d)
Restricted cash........................................... 17,000 17,000
Accounts receivable, net.................................. 4,925 4,925
Prepaid expenses and other current assets................. 3,342 (55)(b) 3,287
---------- -------- ----------
Total current assets............................... 162,553 (85,010) 77,543
Property and equipment, net................................. 141,144 115,426(d) 251,392
(5,178)(b)
Intangible assets, net...................................... 536,789 387,784(d) 922,016
(2,557)(b)
Investment in broadcast properties.......................... 106,848 (61,503)(d) 14,326
(31,019)(b)
Investment in cable network................................. 55,551 55,551
Other assets, net........................................... 71,712 (17,127)(d) 53,321
(1,264)(b)
---------- -------- ----------
Total assets....................................... $1,074,597 $299,552 $1,374,149
========== ======== ==========
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and accrued liabilities.................. $ 13,359 $ 100(b) $ 13,459
Accrued interest.......................................... 13,873 13,873
Current portion of long-term debt......................... 504 504
---------- -------- ----------
Total current liabilities.......................... 27,736 100 27,836
Deferred gain............................................... 12,100 12,100
Deferred income taxes....................................... 97,304 97,304
Long-term debt.............................................. 122,167 122,167
Senior subordinated notes, net 11 5/8%...................... 228,042 228,042
Redeemable junior preferred stock 12%....................... 44,189 44,189
Exchangeable preferred, net 12 1/2%......................... 173,879 173,879
Redeemable junior preferred stock........................... -- 200,000(a) 190,000
(10,000)(a)
Convertible preferred, net.................................. -- 75,000(c) 70,540
(3,500)(c)
(960)(c)
Class A common stock........................................ 52 52
Class B common stock........................................ 8 8
Class A and B common stock warrants......................... 1,154 960(c) 2,114
Stock subscription notes receivable......................... (2,813) (2,813)
Additional paid-in-capital.................................. 292,527 292,527
Deferred option plan compensation........................... (1,899) (1,899)
Retained earnings........................................... 80,151 37,952(b) 118,103
---------- -------- ----------
Total liabilities, redeemable securities and common
stockholders' equity............................. $1,074,597 $299,552 $1,374,149
========== ======== ==========
</TABLE>
See footnotes on the following page)
42
<PAGE> 48
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET DATA
(a) To reflect the issuance by the Company of $200.0 million of Junior
Preferred Stock, net of issuance costs of approximately $10.0 million, as
if such issuance had taken place on March 31, 1998.
(b) To reflect the Sale Transactions as if such transactions had occurred on
March 31, 1998, as follows (in thousands):
<TABLE>
<S> <C>
Sale of television broadcast stations, net of approximately
$10,700 used to exercise the Company's options to acquire
interests in such stations................................ $45,291
Collection of amounts due under financing arrangements
related to investments in broadcast properties............ 30,500
Sale of radio station....................................... 1,000
Sale of hockey franchise, net of prior deposits received of
approximately $666........................................ 1,334
-------
$78,125
=======
</TABLE>
(c) To reflect the issuance by the Company of $75.0 million of Convertible
Preferred Stock, net of issuance costs of approximately $3.5 million, as if
such issuance had taken place on March 31, 1998. The Convertible Preferred
Stock was issued with warrants to acquire 240,000 shares of the Company's
Class A Common Stock for $16.00 per share. The aggregate fair value of the
Warrants has been estimated at approximately $960,000 which has been
allocated to the Warrants in the pro forma balance sheet.
(d) To reflect the Proposed Acquisitions as if they had taken place on March
31, 1998.
43
<PAGE> 49
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected historical and pro forma financial data, insofar as
it relates to each of the five years in the period ended December 31, 1997, has
been derived from annual financial statements including the consolidated balance
sheets at December 31, 1996 and 1997 and the related consolidated statements of
operations, of changes in common stockholders' equity and of cash flows for each
of the three years in the period ended December 31, 1997 and the notes thereto
appearing elsewhere herein. The data for the three months ended March 31, 1997
and 1998 has been derived from unaudited financial statements also appearing
herein and which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the unaudited interim periods. The selected historical
financial data should be read in conjunction with the information contained in
the Company's consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The unaudited summary pro forma balance sheet data gives effect to the
consummation of the Transactions as if the Transactions had taken place on March
31, 1998. The unaudited pro forma dividends and accretion on preferred stock
data give effect to the consummation of the Transactions as if the Transactions
had taken place at the beginning of each period presented. Certain management
assumptions and adjustments are described in the accompanying notes hereto. The
pro forma information should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus. See "Unaudited Pro Forma Balance Sheet Data" appearing
elsewhere in this Prospectus. This pro forma information is not necessarily
indicative of the Company's actual or future financial position or results of
operations.
44
<PAGE> 50
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................................. $ 1,982 $ 4,227 $ 31,784 $ 62,333 $ 88,421 $ 18,937 $ 31,665
Operating expenses, excluding depreciation,
amortization, compensation associated with
Paxson Radio asset sales and option plan
compensation.................................. 4,932 7,221 26,081 46,364 75,241 14,593 27,678
Compensation associated with Paxson Radio asset
sales(a)...................................... -- -- -- -- 9,700 -- --
Option plan compensation(b)..................... -- -- 9,052 6,976 3,370 714 307
Depreciation and amortization................... 321 1,653 4,648 12,888 22,044 4,080 7,950
-------- -------- -------- -------- -------- -------- --------
Operating loss.................................. (3,271) (4,647) (7,997) (3,895) (21,934) (450) (4,270)
Interest expense................................ (170) (6,216) (17,151) (31,526) (37,728) (8,735) (10,505)
Interest income................................. 113 359 1,651 6,741 9,495 1,316 6,180
Other income (expense), net..................... 7 83 (488) (1,756) (5,722) 146 (246)
Gain on sale of television stations............. -- -- -- -- -- -- 14,330
Equity in loss of unconsolidated investment..... -- -- -- -- (2,493) -- (1,290)
-------- -------- -------- -------- -------- -------- --------
(Loss) income from continuing operations before
income tax (provision) benefit and
extraordinary item............................ (3,321) (10,421) (23,985) (30,436) (58,382) (7,723) 4,199
Income tax (provision) benefit.................. (2,960) 1,680 1,280 -- 21,879 -- (1,557)
Discontinued operations(c)...................... (4,671) 3,979 (142) 4,217 251,193 (736) --
Extraordinary item(d)........................... (457) -- (10,626) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net (loss) income............................... (11,409) (4,762) (33,473) (26,219) 214,690 (8,459) 2,642
Dividends and accretion on preferred stock and
common stock warrants(e)...................... (151) (3,386) (13,297) (21,908) (26,277) (6,272) (7,082)
-------- -------- -------- -------- -------- -------- --------
Net (loss) income attributable to common
stock......................................... $(11,560) $ (8,148) $(46,770) $(48,127) $188,413 $(14,731) $ (4,440)
======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings per share(f)(g):
Loss from continuing operations................. $ (0.21) $ (0.36) $ (1.05) $ (1.20) $ (1.17) $ (0.28) $ (0.07)
Discontinued operations......................... (0.15) 0.12 -- 0.10 4.67 (0.02) --
Extraordinary item.............................. (0.01) -- (0.31) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net (loss) income............................... $ (0.37) $ (0.24) $ (1.36) $ (1.10) $ 3.50 $ (0.30) $ (0.07)
======== ======== ======== ======== ======== ======== ========
Weighted average common shares outstanding...... 31,582 33,430 34,430 43,837 53,808 48,778 59,589
Cash dividends declared......................... -- -- -- -- -- -- --
OTHER DATA:
EBITDA(h)....................................... $ (2,949) $ (2,556) $ 7,123 $ 19,487 $ 30,186 $ 5,356 $ 10,575
Capital expenditures(i)......................... -- 2,767 12,581 30,203 36,260 9,262 14,147
Pro forma dividends and accretion on preferred
stock(j)...................................... 62,951 15,963
Ratio of earnings to combined fixed charges and
preferred stock dividends(k).................. -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
--------------------------
ACTUAL PRO FORMA(L)
---------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(m)................................ $ 154,286 $ 69,331
Working capital............................................. 134,817 49,707
Total assets................................................ 1,074,597 1,374,149
Total debt.................................................. 350,713 350,713
Redeemable preferred stock.................................. 218,068 478,608
(See footnotes on the following page)
</TABLE>
45
<PAGE> 51
NOTES TO SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(a) Bonuses paid to certain members of the Company's management in connection
with their efforts in assimilating, operating, and arranging for the sale of
the Company's radio stations and related properties in 1997.
(b) Option plan compensation represents a non-cash charge associated with the
granting of common stock options to employees under the Company's Stock
Incentive Plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Continuing Operations" and
"Management -- Stock Incentive Plans."
(c) Includes in 1997 a gain on disposal of discontinued operations of $254.7
million, net of applicable income taxes.
(d) Extraordinary item reflects an extraordinary loss of $457,000 and $10.6
million in 1993 and 1995, respectively, associated with the write-off of
capitalized financing costs on debt retired.
(e) Dividends and accretion on preferred stock and common stock warrants for the
years ended December 31, 1993 to 1997 and the three months ended March 31,
1997 and 1998 represent non-cash dividends and accretion on the Company's
mandatorily redeemable securities. See "Description of Capital Stock."
(f) The Company computes per share data in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Due to losses
from continuing operations, 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.
(g) Loss per share data and weighted average shares outstanding for the years
ended December 31, 1993 and 1994 give retroactive effect to: (i) the
Company's recapitalization related to the merger with The American Network
Group, Inc.; and (ii) a stock dividend on common shares outstanding on
January 1, 1995.
(h) EBITDA is defined as operating income (loss), excluding non-recurring items,
(including 1997 compensation associated with Paxson Radio asset sales and
relocation costs), plus time brokerage fees, depreciation, amortization and
other non-cash charges, including amortization of programming rights and
option plan compensation, minus programming payments (including a ratable
portion of programming deposits). EBITDA, as so defined, may not be
comparable to similarly titled measures used by other companies.
(i) Includes all capital expenditures by the Company's inTV and corporate
segments including expenditures associated with the upgrade and conversion
of acquired and operated television stations to the inTV format.
(j) The pro forma dividends and accretion on preferred stock give effect to the
consummation of the Transactions as if the Transactions had taken place at
the beginning of each period presented.
(k) For purposes of this calculation, earnings are defined as net income (loss)
from continuing operations before income taxes, extraordinary items and
fixed charges. Fixed charges consist of interest expense, amortization of
deferred financing costs and the component of operating lease expense which
management believes represents an appropriate interest factor. Earnings were
inadequate to cover combined fixed charges and preferred stock dividends by
$3.4 million, $13.0 million, $32.6 million, $49.7 million, $84.2 million,
$14.0 million and $5.8 million, for the years ended December 31, 1993, 1994,
1995, 1996 and 1997 and for the three-month periods ended March 31, 1997 and
1998, respectively.
(l) The pro forma balance sheet data as of March 31, 1998 gives effect to the
consummation of the Transactions as if the Transactions had occurred on
March 31, 1998.
(m) Includes cash, cash equivalents and restricted cash.
46
<PAGE> 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Since its inception in 1991, the Company has grown primarily through the
acquisition or management of radio and television broadcast stations and radio
networks, as well as subsequent improvement in the operation of these
properties. Two of the Company's former business segments, Paxson Radio and
Paxson Network-Affiliated Television, have been classified as discontinued
operations in the consolidated financial statements for all periods presented as
a result of the Company's sale of these operations during 1997.
The Company currently operates a nationwide group of owned, operated or
affiliated television stations carrying its proprietary programming service,
which broadcasts long-form paid programming consisting primarily of
infomercials. Certain of the Company's television stations were and continue to
be operated under time brokerage and affiliation agreements for various periods.
Pursuant to the time brokerage agreements, the stations' operating revenues and
expenses are controlled by the Company and are included in its consolidated
statements of operations. Pursuant to the affiliation agreements, the Company
includes advertising revenue, related sales costs and affiliation fees in its
consolidated statements of operations. The Company intends to launch its PAX NET
programming service on August 31, 1998. PAX NET is the brand name for the
programming that the Company expects to provide to its television stations,
cable systems and satellite television providers. PAX NET programming will
generally consist of family-friendly traditional entertainment television
programs that have had or are having successful first runs on television. 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.
have 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 acquisitions
throughout such periods. Operating revenues are derived from the sale of
advertising to local and national advertisers. The Company's primary operating
expenses include commissions on revenues, employee salaries and administrative
expenses. Upon the launch of PAX NET, the Company will also incur significant
expenses for syndicated program rights fees, ratings services and promotion. The
costs of operating the Company's television stations do not vary significantly
with revenue, with the exception of costs associated with sales commissions and
agency fees. As such, upon obtaining a certain level of revenue sufficient to
cover fixed costs, additional revenue levels have a significant impact on the
operating results of an individual television station. The Company currently
expects to continue acquiring additional stations which may have similar effects
on the comparability of revenues, operating expenses, interest expense and
operating cash flow as those described above.
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.
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 March 31, 1998. The fair values of the Company's long-term debt and the
Existing Notes were estimated based on market rates of instruments with similar
risks and maturities, and approximates the
47
<PAGE> 53
carrying value as of March 31, 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.
Management believes that the Company's television stations comprise a
valuable national television broadcasting distribution infrastructure. Upon the
completion of the Transactions, the Company will have 88 owned, operated or
affiliated stations (including six low-power stations) in 85 U.S. markets
containing over 74 million broadcast television households, or approximately 74%
of total U.S. television households (including Puerto Rico and the Virgin
Islands), and will be the only television broadcaster with full-power stations
in all of the top 20 U.S. markets and in 43 of the top 50 U.S. markets. In
connection with the launch of its PAX NET programming service, 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. As of March 31,
1998, such programming contracts require collective payments by the Company of
approximately $328.2 million over such periods as follows (dollars in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 41,291
1999........................................................ 78,590
2000........................................................ 73,480
2001........................................................ 63,108
2002........................................................ 32,353
Thereafter.................................................. 39,419
--------
$328,241
========
</TABLE>
The Company had $43.7 million of broadcast rights deposits recorded in
other assets as of March 31, 1998. The Company continues to evaluate additional
programming purchases. The Company expects that under PAX NET, selling expenses
will remain proportionate to revenues and that revenues as well as promotional
and programming expenses will increase significantly.
See "-- Forward-Looking Statements and Associated Considerations" for a
discussion of certain factors which could influence the Company's future
performance and prospects.
DISCONTINUED OPERATIONS
During 1997, the Company sold its interest in its Paxson Network-Affiliated
Television and Paxson Radio segments. Losses from these segments in the three
months ended March 31, 1997, net of tax, were $736,000. Paxson
Network-Affiliated Television generated net income of approximately $10,000 and
Paxson Radio incurred losses of approximately $746,000 in the three months ended
March 31, 1997. Paxson Network-Affiliated Television and Paxson Radio generally
experienced their lowest revenue in the first quarter of the year.
Loss from operations of these segments in the three months ended March 31,
1997 was approximately $811,000. Paxson Network-Affiliated Television generated
income from operations of approximately $10,000 and Paxson Radio incurred losses
from operations of $821,000 in the three months ended March 31, 1997,
respectively.
Loss from operations of these segments in 1997, net of tax, was $3.6
million compared to income of $4.2 million in 1996. The losses in 1997 primarily
reflect the sale of Paxson Network-Affiliated Television on July 31, 1997 and
Paxson Radio on October 1, 1997 compared to full year results of operations for
1996. Paxson Network-Affiliated Television net losses were $937,000 in 1997
compared to net income of $354,000 in 1996. Paxson Radio net losses were $2.7
million in 1997 compared to net income of $3.9 million in 1996.
Income from operations of these segments in 1996, net of tax, was $4.2
million compared to a loss of $142,000 in 1995. The improved results in 1996
were primarily related to Paxson Radio, which had income of $3.9 million in 1996
compared to a loss of $1.4 million in 1995. The increase in income in 1996 for
Paxson Radio primarily reflects revenue increases from radio station and
billboard faces due to acquisitions as well as
48
<PAGE> 54
revenue increases from existing stations. In 1996, Paxson Network-Affiliated
Television had income of $354,000 compared to income of $1.3 million in 1995.
The decline in income in 1996 for Paxson Network-Affiliated Television primarily
reflects increased time brokerage fees paid to operate WTVX-TV, which became a
Company operated station pursuant to a time brokerage agreement in August 1995.
In connection with the disposal of its Network-Affiliated Television and
Radio segments in 1997, the Company recorded gains of $68.7 million and $186.1
million, respectively, net of applicable income taxes. Net proceeds from the
sale of these segments were approximately $722 million.
RESULTS OF CONTINUING OPERATIONS
For purposes of this Prospectus, "operating cash flow" is defined as net
income excluding non-cash items, nonrecurring items including 1997 compensation
associated with Paxson Radio asset sales, discontinued operations and relocation
costs, interest, other income, income taxes and time brokerage and affiliation
agreement fees, less scheduled program rights payments (including a ratable
portion of programming deposits). The Company has included operating cash flow
data because the financial performance of broadcast companies is frequently
evaluated based on some measure of cash flow from operations. Operating cash
flow is not, and should not be used as, an indicator of or alternative to
operating income, net income or cash flow as included elsewhere herein as it is
not a measure of financial performance under generally accepted accounting
principles.
Three Months Ended March 31, 1998 and 1997
Consolidated revenues for the three months ended March 31, 1998 increased
67% (or $12.8 million) to $31.7 million. This increase was primarily due to
television station acquisitions and new time brokerage operations, with WPXN-TV
in New York, which has been operated by the Company since June 30, 1997,
accounting for $6.9 million of the increase. Same station television revenues
increased $1.7 million.
Operating expenses for the three months ended March 31, 1998 increased 85%
(or $16.5 million) to $35.9 million. The increase was primarily due to higher
direct expenses such as commissions which rise in proportion to revenues ($1.8
million), other non-direct costs, which were primarily due to operating new
television stations and to startup costs for the launch of PAX NET ($5.7
million), higher depreciation and amortization, primarily related to assets
acquired ($3.9 million), and increased time brokerage and affiliation agreement
fees, primarily related to new time brokerage operations ($5.6 million), of
which $3.6 million was attributable to WPXN-TV.
Operating cash flow for the three months ended March 31, 1998 increased 97%
(or $5.2 million) to $10.6 million. The increase in operating cash flow was
primarily a result of television station acquisitions and new time brokerage
operations, with WPXN-TV accounting for $5.4 million of the increase.
Interest expense for the three months ended March 31, 1998 increased 20% to
$10.5 million, primarily due to a greater level of senior debt throughout the
period and higher interest rates. At March 31, 1998, total long-term debt and
senior subordinated notes were $350.7 million, compared with the balance of
$311.6 million outstanding one year prior.
Interest income for the three months ended March 31, 1998 increased to $6.2
million, primarily due to higher levels of cash and cash equivalents and cash
held by qualified intermediary resulting from segment asset sales, invested
throughout the period.
Cash (used in) provided by operations of approximately $(380,000) and $8.3
million for the three months ended March 31, 1998 and 1997, respectively,
reflects the operating results of existing properties, acquisitions and time
brokerage properties net of the deferred income tax provision, the equity in
loss of unconsolidated investment and the increase in programming deposits. Cash
provided by investing activities primarily reflects the use of the cash held by
qualified intermediary and proceeds from sales of broadcast properties and 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
exercise of common stock options net of debt repayments. Non-cash activity
relates
49
<PAGE> 55
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.
Years Ended December 31, 1997 and 1996
Consolidated revenues for 1997 increased 42% (or $26.1 million) to $88.4
million from $62.3 million for 1996. This increase was primarily due to
television station acquisitions and new time brokerage operations, with WPXN-TV
in New York, which has been operated by the Company since June 30, 1997,
accounting for $13.3 million of the increase.
Operating expenses for 1997 increased 67% (or $44.2 million) to $110.4
million from $66.2 million for 1996. The increase was due to higher direct
expenses such as commissions which rise in proportion to revenues ($4.0
million), one-time bonus compensation associated with Paxson Radio asset sales
($9.7 million), other non-direct costs, which were primarily due to operating
new television stations ($11.3 million), higher depreciation and amortization
primarily related to assets acquired ($9.2 million), and increased time
brokerage agreement fees, primarily related to new time brokerage operations
($13.4 million, of which $10.3 million was attributable to WPXN-TV), all of
which were partially offset by lower option plan compensation costs ($3.6
million).
Operating cash flow for 1997 increased 55% (or $10.7 million) to $30.2
million, from $19.5 million for 1996. The increase in operating cash flow was
primarily a result of television station acquisitions and new time brokerage
operations, with WPXN-TV accounting for $10.5 million of the increase.
The Company has issued options to purchase shares of Class A Common Stock
to certain members of management and employees during 1997, 1996 and 1995 under
its stock compensation plans. As of December 31, 1997, there were 3,605,461
options outstanding under these plans. Further, the Company recognized total
option plan compensation expense, including amounts recorded in Income (loss)
from discontinued operations, of approximately $6.5 million, $7.9 million and
$10.8 million in 1997, 1996 and 1995, respectively, and expects that
approximately $2.2 million of compensation expense will be recognized over the
remaining vesting period of the outstanding options.
Interest expense for 1997 increased to $37.7 million from $31.5 million for
1996, an increase of 20%, primarily due to a greater level of senior debt
throughout the period. As a result of acquisitions, at December 31, 1997, total
long-term debt and Existing Notes were $350.8 million, compared with the balance
of $231.7 million outstanding one year prior.
Interest income for 1997 increased to $9.5 million from $6.7 million,
primarily due to greater levels of cash and cash equivalents and cash held by
qualified intermediary invested during the second half of the period, primarily
as a result of the receipt of the proceeds from the Network-Affiliated
Television and Radio segments sales during 1997.
At December 31, 1996 the Company had accumulated approximately $70 million
of net operating losses available to offset future taxable income, $7.9 million
of which were limited as to use. The gain realized upon the sale of Paxson Radio
was substantially deferred for tax purposes. The remaining gain on the sale of
the Paxson Radio and Paxson Network-Affiliated Television segments was offset
through the use of net operating losses available at December 31, 1996 as well
as losses generated from operations during 1997.
The deferral of approximately $119 million of taxes on the approximately
$305 million gain upon the sale of Paxson Radio could be contested by the IRS.
Based on the advice of counsel, management believes that, in the event of a
challenge by the IRS of the Company's tax positions, it is more likely than not
that the Company would prevail. Should the IRS successfully challenge the
Company on these matters, the Company could be subject to a material current tax
liability.
Cash (used in) provided by operating activities was $(38.6 million), $(1.1
million) and $11.0 million for 1997, 1996 and 1995, respectively. The increase
in cash used primarily reflects the decrease in accounts payable as well as the
payment of compensation associated with Paxson Radio asset sales. Cash used for
50
<PAGE> 56
investing activities of $58.5 million, $258.5 million and $105.6 million for
1997, 1996 and 1995, respectively, primarily reflects acquisitions of and
investments in broadcast properties and purchases of equipment for acquired and
existing properties net of the proceeds from the above segment sales and asset
sales. Cash provided by financing activities of $117.9 million, $253.3 million
and $141.1 million in 1997, 1996 and 1995, respectively, primarily reflects the
proceeds from borrowings and proceeds of the Company's Class A Common Stock
offering in April 1996 and Public Preferred Stock offering in October 1996, net
of repayments and loan origination costs incurred. Non-cash activity relates to
option plan compensation, stock issued for the Travel Channel, WPXW-TV and
WFSJ-FM acquisitions, a note payable incurred with the WYPX-TV acquisition,
reciprocal trade and barter advertising revenue and expense and accretion of
discount on the Existing Notes, as well as dividends on the Company's Existing
Preferred Stock and common stock warrants.
Years Ended December 31, 1996 and 1995
Consolidated revenues for 1996 increased 96% (or $30.5 million) to $62.3
million from $31.8 million for 1995. This increase was primarily due to
television station acquisitions and new time brokerage operations.
Operating expenses for 1996 increased 66% (or $26.4 million) to $66.2
million from $39.8 million for 1995. The increase was primarily due to higher
direct expenses such as commissions which rise in proportion to revenues ($3.8
million), other non-direct costs, which are primarily due to operating new
television stations ($13.8 million), higher depreciation and amortization,
primarily related to assets acquired ($8.2 million), and increased time
brokerage agreement fees, primarily related to new time brokerage operations
($2.7 million), all of which were partially offset by lower option plan
compensation costs ($2.1 million).
Operating cash flow for 1996 increased 174% (or $12.4 million) to $19.5
million, from $7.1 million for 1995. The increase in operating cash flow was
primarily a result of television station acquisitions and new time brokerage
operations.
Interest expense for 1996 increased to $31.5 million from $17.2 million for
1995, an increase of 83%, primarily due to a higher level of debt outstanding
throughout the period and higher borrowing rates. At December 31, 1996, total
long-term debt and Existing Notes were $231.7 million, compared with the balance
of $240.3 million outstanding one year prior. The balance sheets reflect the
private sale of $230 million of Existing Notes at a discount netting $227.3
million before transaction costs on September 28, 1995.
Interest income for 1996 increased to $6.7 million from $1.7 million,
primarily due to greater levels of cash and cash equivalents invested throughout
the period, primarily as a result of the receipt of the proceeds of the April
1996 Common Stock sale and the October 1996 sale of the Public Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company sold its network-affiliated television operations
for gross proceeds of approximately $119 million and its radio operations
(including billboards) for cash proceeds of approximately $602 million.
Management anticipates that the proceeds from the above segment sales will be
utilized primarily to fund the Proposed Acquisitions, related capital
expenditures and programming payments discussed elsewhere herein and for general
corporate purposes. The completion of each of the acquisitions discussed
elsewhere herein is subject to a variety of factors and to the satisfaction of
various conditions, including FCC approval, and there can be no assurance that
any such acquisitions will be completed.
The Company's working capital at March 31, 1998 and December 31, 1997 was
$134.8 million and $86.9 million, respectively, and the ratio of current assets
to current liabilities was 5.86:1 and 5.29:1 on such dates, respectively.
Working capital increased primarily due to the return of approximately $66
million of cash held by qualified intermediary and not reinvested in like kind
broadcasting properties during the first quarter of 1998. The Company does not
anticipate paying current taxes on the non-deferred gain as it has sufficient
net operating loss carryforwards to offset such gain.
The Company's primary capital requirements are for the acquisition of
broadcasting properties and related capital expenditures, syndicated programming
payments, interest and principal payments on indebtedness and payments
anticipated to be made under agreements whereby the Company obtains access to
51
<PAGE> 57
television households in markets not currently served by its broadcast
television station group. The Existing Notes require semi-annual interest
payments at a fixed rate and mature on October 1, 2002. The Company has $122
million in borrowings outstanding under the Credit Facility, which bear interest
at floating rates and require interest payments on varying dates depending on
the interest rate option selected by the Company. The Company is required to
make quarterly principal payments under the Credit Facility commencing December
31, 2000. The Credit Facility matures on June 30, 2002.
The Company's success will depend largely upon the programming that PAX NET
offers and the Company's cost of obtaining such programming. The Company seeks
to acquire programming for PAX NET which will generate sufficient ratings to
enable the Company to capture advertising revenues exceeding the Company's
programming costs and other expenses. The Company has made certain assumptions
in formulating its strategies including, among others, the Company's ability to
achieve certain ratings, sell advertising at certain rates, sell a majority of
its time on a local basis at higher rates, sell out its time at targeted rates,
locate and hire a significant number of additional employees which the Company
expects will be necessary for the launch of PAX NET, operate its stations at the
anticipated staffing levels, achieve targeted cost savings through the
centralization of certain tasks for multiple stations, sell time utilizing
limited outside sales representatives, attract affiliates and acquire additional
stations, and continue to sell time for long-form paid programming during the
day and on weekends, at anticipated rates. Should any one or more of these
assumptions prove materially inaccurate, the Company's capital requirements for
the launch and operation of PAX NET could be greater than currently anticipated.
The Company believes that the proceeds of the Offerings, cash flow from
operations, existing cash balances and additional capital expected to be made
available to the Company through permitted purchase money borrowings of up to 5%
of the Company's total fixed assets will provide sufficient financial resources
to fund completion of the Proposed Acquisitions, capital expenditures on
existing and acquired properties, syndicated program rights fees, debt service
obligations and the Company's working capital requirements for the next twelve
months. To the extent that the Company pursues future acquisitions or requires
additional working capital, the Company may be required to obtain additional
financing. There can be no assurance that the Company will be able to obtain
such financing on terms acceptable to it. The failure to generate significant
cash flow from operations or to raise funds necessary to finance the Company's
future cash requirements could adversely affect the Company's ability to pursue
its business strategy. In addition, should the Company suffer a significant
impairment to its cash flow from operations due to the occurrence of one or more
adverse events, including those set forth under "Risk Factors," its liquidity
could become insufficient on a short term basis, and it could have insufficient
resources to repay indebtedness under the Credit Facility, the Existing Notes or
other credit instruments when due or to make required payments on the Preferred
Stock.
YEAR 2000 CONSIDERATIONS
In the next two years, many companies will face potentially serious issues
associated with the inability of existing data processing hardware and software
to appropriately recognize calendar dates beginning in the year 2000. Many
computer programs that can only distinguish the final two digits of the year
entered may read entries for the year 2000 as the year 1900 and compute payment,
interest or delinquency based on the wrong date, or are expected to be unable to
compute payment, interest or delinquency. The Company is in the process of
identifying the software applications and hardware devices expected to be
impacted by this issue. The Company is currently developing a new billing and
inventory system to be implemented prior to the launch of PAX NET in order to
meet the needs of PAX NET. This new billing and inventory system will address
the year 2000 compliance issues. The Company's general ledger system is not year
2000 compliant. As a result, and in order to accommodate the Company's future
growth, the Company's management is in the process of evaluating third-party
systems which are year 2000 compliant. While the Company expects that efforts on
the part of current employees of the Company will be required to continue to
monitor year 2000 activities, the Company does not expect the cost of addressing
any year 2000 issue will be a material event or uncertainty that would have a
material adverse effect on future operating results or financial condition.
52
<PAGE> 58
BUSINESS
GENERAL
Paxson Communications Corporation owns and operates the largest group of
broadcast television stations in the United States. The Company commenced its
television operations in early 1994 in anticipation of the deregulation of the
broadcast industry and has expanded in response to federal regulatory changes
that increased the number of broadcast television stations permitted under
common ownership. Upon the completion of the Transactions, the Company will have
88 owned, operated or affiliated stations (including six low-power stations) in
85 U.S. markets containing over 74 million broadcast television households, or
approximately 74% of all U.S. television households (including Puerto Rico and
the Virgin Islands), and will be the only television broadcaster with full-power
stations in all of the top 20 U.S. markets and in 43 of the top 50 U.S. markets.
Management believes that the Company has created a valuable national television
broadcast distribution infrastructure that would be both expensive and difficult
to replicate. The Company has obtained two appraisals which have valued its pro
forma owned and operated stations in a range between $1.5 billion and $1.9
billion (see "-- Appraisals"). As of March 31, 1998, the pro forma book value of
the Company's assets was approximately $1.4 billion.
The Company was founded in 1991 by Lowell W. "Bud" Paxson who personally
financed the Company's early growth and continues to lead the Company as
majority stockholder and chairman of the Board of Directors. Mr. Paxson has been
at the forefront of several innovative broadcasting concepts over the last
fifteen years, including his leadership role in the early growth of electronic
retailing as the creator and co-founder of Home Shopping Network, Inc. and
Silver King Communications, Inc. Mr. Paxson was one of the first radio operators
to take advantage of changes in the law applicable to multiple radio station
ownership and the overall number of stations permitted under common ownership as
he built Florida's largest radio group. In 1997, the Company sold two business
segments, Paxson Radio and Paxson Network-Affiliated Television. Paxson Radio's
assets, which included the Company's radio and billboard operations and an
agreement to purchase three additional radio stations, were sold for aggregate
consideration of approximately $629 million, consisting of approximately $602
million of cash and the assumption of the purchase commitment for the three
stations, resulting in a pre-tax gain of approximately $305 million. Paxson
Network-Affiliated Television's assets, which consisted of two traditional
network affiliated stations, were sold for aggregate consideration of
approximately $119 million, resulting in a gain of approximately $69 million.
Since commencing its television operations in early 1994, the Company has
established the largest owned and operated broadcast television station group in
the United States. The Company's stations currently broadcast long-form paid
programming, consisting primarily of infomercials, under its inTV format. Upon
the launch of PAX NET, the Company's stations will air traditional entertainment
programming and a reduced amount of long-form paid programming. See "-- Business
Strategy."
LAUNCH OF PAX NET
The Company intends to launch its PAX NET programming service on August 31,
1998. PAX NET is the brand name for the programming that the Company expects to
provide, 24 hours per day and seven days per week, to its owned, operated or
affiliated television stations and to certain cable systems and satellite
television providers. PAX NET programming will generally consist of
family-friendly, traditional entertainment programs that have had, or are
having, successful first runs on television in terms of audience ratings.
Management believes that the value of the Company's extensive broadcast
properties will be enhanced by converting to PAX NET programming from the
current long-form paid programming inTV format. The Company intends to sell
airtime for "spot" advertisements during PAX NET programming to commercial
advertisers, enabling the Company to participate in the approximately $37
billion local, national and network television spot advertising market rather
than the management-estimated $2 billion long-form paid programming market into
which the Company currently sells nearly all of its available airtime.
Management believes that the launch of PAX NET will enable the Company to
combine many of the favorable attributes of traditional television networks and
network-affiliated television stations under one operation.
53
<PAGE> 59
In general, broadcast television networks provide spot advertisers with
significant "reach," or access to viewers, through their extensive nationwide
distribution systems. Although most networks own stations in some of the top 20
U.S. markets, they are able to provide nationwide reach only through affiliation
agreements with non-owned stations which agree to broadcast network-provided
programming during certain times of the day, including prime time. Most
broadcast television networks invest considerable financial resources to either
develop or obtain new first-run programming, the success of which is dependent
upon attaining sufficient audience ratings and advertising support.
Substantially all of a network's revenues are derived from the sale of
advertising airtime during network programs.
Network-affiliated stations are typically independently-owned rather than
network-owned. A network affiliate broadcasts network-provided programming at
times stipulated by the network. At all other times, the network affiliate may
broadcast other programming, such as syndicated shows and other non-network
programming, which it generally purchases or produces. As part of its agreement
with the network, an affiliate relinquishes to the network substantially all of
the commercial airtime available during network programming hours, including the
desirable prime time periods. The network affiliate retains control of nearly
all of the commercial airtime available during non-network programming hours,
which it is able to sell to local and national spot advertisers who typically
pay rates that are more than 50% higher per viewer than network advertisers.
Network-affiliated stations must incur significant costs for programming and
promotion during non-network programming hours to generate revenue.
Management believes that the launch of PAX NET will enable the Company to
combine under one operation many of the favorable characteristics of traditional
television networks and network-affiliated television stations described above.
Similar to traditional television networks, the Company will provide advertisers
with nationwide reach through its extensive television distribution system.
Since the Company owns and operates almost all of its television distribution
system, it will receive advertising revenue from the entire broadcast day,
unlike a traditional network, which receives advertising revenue only from
commercials aired during limited network programming hours. To maximize the
revenues, the Company intends to allocate its advertising inventory among local,
national and network advertisers purely according to demand, rather than
allocating airtime to network advertisers as mandated by a network affiliation
agreement. Further, the Company expects that its station group will enjoy
various economies of scale due to its size and centralized operations, resulting
in programming, promotional, research, engineering, accounting and
administrative expenses that are substantially lower per station than those of a
typical network-affiliated station.
BUSINESS STRATEGY
The Company will seek to maximize its cash flow by maintaining an efficient
operating structure and centralizing many functions that traditionally are
managed at the local station level, optimizing the mix of advertising sales to
achieve the highest possible rates and providing viewers with a schedule of
high-quality destination programming. The principal components of the Company's
business strategy are as follows:
- Maintain a Centralized, Low-Cost Operating Structure. The Company
intends to maintain a low-cost operating structure by centralizing many
station functions, including programming, promotions, advertising,
research, engineering, accounting and sales traffic control. Under its
current inTV format, the Company averages twelve employees per station.
In anticipation of the launch of PAX NET, each of the Company's stations
will be adding an average of six local sales and sales-related employees
whose compensation will be largely dependent upon the amount of local
advertising sold. Accordingly, the Company estimates that each of its
stations will average only 18 employees, compared to an average of 100
employees at network-affiliated stations, and an average of 60 employees
at independent stations in markets of similar size to the Company's.
Unlike other stations, the Company's stations will not be required to
purchase programming individually since they will broadcast PAX NET
programming 24 hours per day. In addition, the Company's stations will
not produce local news programs, thereby avoiding the significant costs
often associated with such production.
As part of its low-cost operating strategy, the Company intends to
promote the PAX NET brand and each of its local television stations by
utilizing a centralized advertising and promotional program. All
54
<PAGE> 60
print and radio promotional advertisements will be produced at the
Company's headquarters, which will avoid duplicating such operations at
the local stations and the associated local promotional personnel
expenses. All advertisements and other promotional material will share
the same basic content but will be customized to identify and highlight
each local market. Management believes that the Company will have
substantial leverage to negotiate volume discounts on the procurement of
print materials and media time used to promote PAX NET programming and
the Company's television stations.
- Achieve Programming Economies of Scale. The Company seeks to achieve
economies of scale as it purchases PAX NET programming for all of its
stations. The Company has purchased programming centrally and will be
able to deliver its programming by satellite to its stations 24 hours per
day and seven days per week. Each station will offer substantially the
same programming schedule. Generally, the Company has negotiated license
agreements entitling it to exclusive nationwide distribution rights
(regardless of delivery medium) for a fixed cost, independent of the
number of households which will receive such programming. By utilizing a
centralized programming acquisition strategy, the Company expects to
incur programming costs per station significantly lower than those of
comparable television stations in similar markets.
- Maximize Advertising Sell-Through and Revenue. Following the launch of
PAX NET, the Company will have access to multiple sources of advertising
revenue: network spot, national spot, local spot and long-form paid
programming. Industry data has shown that an advertiser seeking to target
viewers within specific markets typically purchases airtime at rates 50%
to 100% higher per viewer than those for a single commercial aired across
an entire network. Since networks and station affiliates are usually
owned by different entities, the allocation of spots between local,
national and network advertisers is relatively fixed by an affiliation
agreement. The Company, however, will retain the flexibility to allocate
airtime among various categories of advertisers and will seek to maximize
revenue by optimizing the mix of advertising time it sells among local,
national and network advertisers as well as its current base of long-form
paid programming advertisers. To better allocate its available
advertising airtime, the Company is implementing a new proprietary sales
traffic system designed to deliver to the Company's sales force accurate
and timely data on its available advertising inventory and the demand for
its inventory.
- Provide Proven Family-Friendly Programming. The Company intends to build
the brand recognition of and attract viewers to PAX NET by offering
syndicated family-oriented programming which achieved successful audience
ratings during its original network run. Certain of the programs
purchased by the Company (Touched By An Angel, Promised Land and
Diagnosis Murder) are still in production, and their new episodes
continue to attract significant viewership. The Company has generally
sought to purchase one-hour dramas since management believes that such
programming is more cost efficient than programs of shorter duration.
Consistent with its family-friendly programming strategy, the Company has
agreed to air original children's programming produced by a subsidiary of
The Walt Disney Company. As the brand recognition of PAX NET becomes
established, management believes that PAX NET will become a "destination
channel" to which viewers will turn regularly for family-friendly
programming, and that PAX NET will attract advertisers who want to reach
the broad and desirable viewer demographics attracted by such
programming.
- Continue Airing Profitable Long-Form Paid Programming. The Company
intends to carry a reduced but still significant schedule of long-form
paid programming, including infomercials, primarily during the day on
weekends and during certain hours of weekday mornings. Under its current
inTV programming format, the Company has generated in excess of 30% of
its revenue from weekend daytime programming. Management believes that
network-affiliated stations charge rates for long-form paid programming
which are several times the Company's current rates for similar time
periods and that as PAX NET becomes established as a "destination
channel," the Company can increase its long-form paid programming rates
to such levels. In addition, since the Company will reduce its inventory
of airtime available to long-form paid programmers upon the launch of PAX
NET, management believes that the Company will be able to sell such
airtime to those long-form paid programmers willing to pay
55
<PAGE> 61
a premium for such airtime. As a result, management believes that
long-form paid programming will provide a significant and stable base of
revenue for the Company as it implements the entertainment component of
its PAX NET strategy.
- Expand PAX NET Distribution. Pro forma for the Transactions, the
Company's station group will serve markets comprising approximately 74%
of all U.S. television households (including Puerto Rico and the Virgin
Islands). The Company intends to continue expanding the distribution of
its PAX NET programming service through the addition of broadcast
television station affiliates as well as certain cable systems and
satellite television providers. The Company intends to expand its
distribution to reach as many U.S. television households as possible in
an economically beneficial manner. The Company has entered into an
agreement with a subsidiary of Tele-Communications, Inc. ("TCI"), whereby
the Company will receive cable carriage of its PAX NET programming on TCI
cable systems in certain markets not currently served by the Company's
broadcast television station group. The Company continues to seek to
enter into distribution agreements to reach other markets not currently
served by its television group, with the goal of generating incremental
revenue from additional distribution outlets and leveraging its
relatively fixed cost operating structure to increase cash flow.
PAX NET PROGRAMMING
The Company has purchased programming for broadcast on PAX NET including:
<TABLE>
<S> <C>
Touched By An Angel Promised Land
Dr. Quinn, Medicine Woman Diagnosis Murder
Highway to Heaven Life Goes On
I'll Fly Away Dave's World
Christy The Father Dowling Mystery Series
Neon Rider Love Boat
The New Flipper Seventh Heaven
</TABLE>
In addition, the Company has purchased theatrical and made-for-television
movies and agreed to air original children's programming of a subsidiary of The
Walt Disney Company.
ADVERTISING
Television stations derive their revenues primarily from the sale of
national, regional and local advertising. All network-affiliated stations are
required to carry advertising sold by its networks, reducing the amount of
advertising available for sale directly by the station affiliates. Network
affiliated stations are generally compensated for the broadcast of the network
advertising by the network. The compensation paid is negotiated,
station-by-station, based on a fixed formula, subject to certain adjustments.
The station affiliates sell directly any remaining advertising time made
available during network programming and all of the advertising during
non-network programming, retaining all of the revenues received from the sales
of such advertising, net of any commissions paid. The Company has entered into
certain barter and cash-plus-barter arrangements whereby a national syndicated
program distributor retains a portion of the available advertising time for the
programming it supplies in exchange for no or reduced fees to the station for
such programming.
Spot advertising rates are based upon factors which include the size of the
market in which the station operates, the audience ratings generated by the
programming, the number of advertisers competing for available time, demographic
characteristics of the market serviced by the station, the availability of
alternative advertising media in the market, aggressive and knowledgeable sales
forces and the development of projects, features and marketing programs that tie
advertiser messages to programming. Long-form paid programming rates are
primarily based on the number of television households reached, the
effectiveness of the advertisement, the nature of the advertiser, the nature of
the advertisement and ultimately the demand for available airtime by long-form
paid programming advertisers. The Company attempts to maximize long-form paid
programming revenue by increasing the number of television households reached,
thereby providing advertisers with increased viewership.
56
<PAGE> 62
Following the launch of PAX NET, the Company will have access to multiple
sources of advertising revenue: network spot, national spot, local spot and
long-form paid programming. Industry data has shown that an advertiser seeking
to target viewers within specific markets typically purchases airtime at a rate
50% to 100% higher per viewer than that for a single commercial aired across an
entire network. Since networks and station affiliates are usually owned by
different entities, the allocation of spots between local, national and network
advertisers is relatively fixed by an affiliation agreement. The Company,
however, will retain the flexibility to allocate airtime among various
categories of advertisers and will seek to maximize revenue by optimizing the
mix of advertising time it sells among local, national and network advertisers
as well as its current base of long-form paid programming advertisers. To better
allocate its available advertising airtime, the Company is implementing a new
proprietary sales traffic system designed to deliver to the Company's sales
force accurate and timely data on its available advertising inventory and the
demand for its inventory.
Local advertising time is sold by the Company's local sales force and is
offered to merchants and businesses operating within a station's local market
and local advertisers seeking to target viewers in specific markets, including
retailers, insurance companies, automobile dealers, financial service providers
and general merchandisers. National and network programming and time is sold by
national advertising placement agencies and the Company's own in-house national
and network sale force. National and network advertising appeals to advertisers
who desire to reach viewers in targeted television markets and all television
markets served by the Company's television distribution system, respectively.
The Company maintains network and national sales offices in New York, Los
Angeles, Chicago, Atlanta, Dallas, Detroit, San Francisco, Philadelphia and at
the Company's headquarters in West Palm Beach.
DISTRIBUTION
The television stations included in the Company's broadcast distribution
group are either: (i) owned, in whole or in part, by the Company; (ii) operated
by the Company pursuant to time brokerage agreements entered into with FCC
licensees; or (iii) owned by independent television station operators that enter
into affiliation agreements with the Company. Since January 1998, the Company
has adopted new call letters for more than 40 of its television stations in an
effort to more closely align each station's call letters with the letters in the
words PAX NET.
The Company has typically acquired non-network affiliated stations with
marginal operating results that have been acquired at a relatively low cost
compared to network affiliated stations. Certain of these stations are licensed
by communities outside the center of major television markets, but within such
markets' DMAs. By virtue of the "must carry" rules of the FCC, these stations
are generally entitled to carriage on cable systems throughout the DMA. Through
the exercise of "must carry" rights and the improvement of its stations' over-
the-air signals, the Company has increased both its broadcast television and
cable household coverage within its markets.
The Company also seeks to continue expanding its distribution capacity by
entering into agreements with cable system operators and satellite television
providers pursuant to which it obtains access to television households and
markets not currently served by its broadcast television station group. These
agreements typically are expected to provide for the Company to pay fees or
purchase advertising time at rates based upon the number of television
households made available, and to provide a certain amount of advertising
airtime.
COMPETITION
The Company's television stations compete with the other television
broadcasting stations in their respective market areas, as well as with other
advertising media, including newspapers, radio, magazines, outdoor advertising,
transit advertising, direct mail marketing and cable television networks.
Competition within the television broadcasting industry occurs primarily in
individual market areas, so a station in one market does not generally compete
with stations in other market areas. In each of its markets, the Company's
television stations face competition from other stations with substantial
financial resources, including, in certain instances, stations whose programming
is directed to the same demographic groups. In addition to management
experience, factors that are material to competitive positions include a
station's rank in its
57
<PAGE> 63
market, authorized power, assigned frequency, audience characteristics, local
program acceptance and the programming characteristics of other stations in the
market area.
Although the television broadcasting industry is highly competitive, some
barriers to entry exist. The operation of a television broadcasting station
requires a license from the FCC, and the number of television stations that can
operate in a given market is limited by the availability of stations that the
FCC will license in that market. The television broadcasting industry
historically has grown in terms of total revenue, despite the introduction of
new technologies for the delivery of entertainment and information, such as
cable, and direct satellite. There is no assurance that market fragmentation
resulting from the application of new media technologies will not have an
adverse effect on the television broadcasting industry.
The Company's successful development of PAX NET is subject to obtaining
sufficient audience ratings for its programming and converting such ratings into
advertising revenue sufficiently greater than the related programming and other
operating costs. PAX NET's family-friendly programming is subject to competition
from several sources including certain programming of major broadcasting and
cable networks targeted to family viewers.
TIME BROKERAGE AGREEMENTS AND OTHER INTERESTS IN BROADCAST STATIONS
Time Brokerage Agreements. The Company has entered into time brokerage
agreements with third parties pursuant to which the Company enjoys many, but not
all, of the benefits of operating a television station while not owning the FCC
license. The Company is currently operating, or will operate upon consummation
of pending acquisitions or construction, pursuant to time brokerage agreements
stations KAJW-TV, Phoenix, Arizona, KSPX-TV, Sacramento, California, Channel 26,
San Antonio, Texas, WPXL-TV, New Orleans, Louisiana, WFBI-TV, Memphis,
Tennessee, WPXP-TV, West Palm Beach, Florida, WQPX-TV, Wilkes-Barre,
Pennsylvania, KYPX-TV, Little Rock, Arkansas, WKRP-TV, Charleston, West
Virginia, WPXK-TV, Knoxville, Tennessee, KPXO-TV Honolulu, Hawaii and WAUP-TV,
Syracuse, New York. The Company may in the future enter into other time
brokerage agreements to operate stations prior to their acquisition or to enable
the Company to operate additional television stations that it might not be able
to own itself under current FCC multiple station ownership restrictions.
The Company also operates or intends to operate pursuant to time brokerage
agreements certain stations that the Company is not in the process of acquiring.
The Company currently operates WHPX-TV, Hartford, Connecticut, and WBPX-TV,
Boston, Massachusetts, under time brokerage agreements. The Company operates
WHPX-TV pursuant to a time brokerage agreement with an entity owned and
controlled by Steven Roberts and Michael Roberts jointly ("Roberts
Broadcasting"), and operates WBPX-TV pursuant to a time brokerage agreement with
The Christian Network, Inc.
With limited exceptions, the time brokerage agreements that the Company
enters into, other than in anticipation of an acquisition, involve a basic
transaction structure. The Company (i) finances the acquisition by a third party
of some or all of the assets of the brokered stations and secures such financing
by encumbering such assets including, to the extent permitted under FCC rules
and regulations, the FCC license and all of the capital stock of the acquiring
company; and (ii) enters into a time brokerage agreement with the third party
that allows the Company to operate the brokered station in accordance with FCC
guidelines. In general, payments made to the FCC licensee under a time brokerage
agreement are established based upon increases in expenses. Under FCC
regulations, the FCC licensee remains primarily liable for those expenses, which
include the indebtedness owed by such FCC licensee to the Company or to third
parties. In certain circumstances, the Company may acquire certain tangible
assets useful in the construction or operation of the brokered station and lease
such assets to the brokered station. In addition, unless prohibited by FCC rules
and regulations, the FCC licensee also grants the Company an option to purchase
the station for an amount payable in cash together with the forgiveness of all
indebtedness. The Company has no ownership interest in the parties with which it
has entered into time brokerage agreements.
Affiliation Agreements and Other Investments in Television Properties. The
Company has several affiliation agreements with third parties, including DP
Media, Inc. (an entity owned and controlled by members of Mr. Paxson's family).
The affiliation agreements with DP Media, Inc. include the following
58
<PAGE> 64
television stations: WPXE(TV), Kenosha, Wisconsin; WWPX(TV) Martinsburg, West
Virginia; WPXS(TV) Mt. Vernon, Illinois; WRPX(TV) Rocky Mount, North Carolina;
and WZPX(TV) Battle Creek, Michigan. Upon DP Media's acquisition of WBPX-TV,
Boston, Massachusetts, from CNI and WHPX-TV, Hartford, Connecticut, from Roberts
Broadcasting, the Company will provide programming for such stations under an
affiliation agreement. In connection with the Company's acquisition of WCFC-TV,
Chicago, Illinois, the FCC required the Company to sell WPXE-TV, Kenosha,
Wisconsin in order to comply with FCC multiple ownership rules. Accordingly, the
Company sold WPXE-TV to DP Media and, in connection therewith, entered into an
affiliation agreement pursuant to which WPXE-TV airs the Company's programming.
The Company has options to acquire WWPX(TV) and WRPX(TV) and has or will have a
right of first refusal upon any proposed sale of WPXS(TV), WZPX(TV) WHPX-TV and
WBPX-TV.
The Company advanced funds to finance the construction of KWOK-TV, San
Francisco, California, and subsequently acquired the corporation holding an
option to acquire the station from the licensee. Upon completion of the
station's construction, the Company will exercise its option to acquire KWOK-TV,
and then include the station as partial consideration for the Company's pending
acquisition of WCFC-TV, Chicago, Illinois.
The Company also extended financing for the construction of television
station WPXP-TV, West Palm Beach, Florida, and subsequently acquired the
corporation which owns 33% of the licensee, exercised an option to increase its
ownership to 90%, and began operating WPXP pursuant to a time brokerage
agreement with the licensee.
FEDERAL REGULATION OF BROADCASTING
The FCC regulates television broadcast stations pursuant to the
Communications Act. The Communications Act permits the operation of television
broadcast stations only according to a license issued by the FCC upon a finding
that the grant of the license would serve the public interest, convenience and
necessity and to provide a fair, efficient and equitable distribution of
broadcast service throughout the United States.
The Communications Act empowers the FCC, among other things, to determine
the frequencies, location and power of broadcast stations; to issue, modify,
renew and revoke station licenses; to approve the assignment or transfer of
control of broadcast licenses; to regulate the equipment used by stations; to
impose fees for processing applications; and to impose penalties for violations
of the Communications Act or FCC regulations. The FCC may revoke licenses for,
among other things, false statements made to the FCC or willful or repeated
violations of the Communications Act or of FCC rules. Legislation has been
introduced from time to time to amend the Communications Act in various respects
and the FCC from time to time considers new regulations or amendments to its
existing regulations. The Telecommunications Act of 1996 (the "1996 Act")
changed many provisions of the Communications Act and required the FCC to change
its existing rules and adopt new rules in several areas affecting broadcasting.
The following is a brief summary of certain provisions of the
Communications Act and the rules of the FCC. Reference should be made to the
Communications Act and the rules, orders, decisions and published policies of
the FCC for further information on FCC regulation of television and radio
broadcast stations.
License 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. In making
licensing determinations, the FCC considers an applicant's legal, technical,
financial and other qualifications. Broadcast station licenses are granted for
specific, limited periods and upon application, are renewable for additional
terms. The license term for both television and radio broadcast stations is
eight years. The Company's full power licenses, and the licenses of stations
with which the Company has time brokerage and affiliation agreements expire on
the following dates:
<TABLE>
<CAPTION>
OWNED TELEVISION STATIONS MARKET(1) LICENSE EXPIRATION
- ------------------------- --------- ------------------
<S> <C> <C>
WPXN...................... New York City June 1, 1999
WIPX...................... New York City April 1, 1999
KPXN...................... Los Angeles December 1, 1998
</TABLE>
59
<PAGE> 65
<TABLE>
<CAPTION>
OWNED TELEVISION STATIONS MARKET(1) LICENSE EXPIRATION
- ------------------------- --------- ------------------
<S> <C> <C>
WPPX...................... Philadelphia August 1, 1999
KWOK...................... San Francisco December 1, 1998
KKPX...................... San Francisco December 1, 1998
WPXB...................... Boston April 1, 1999
WPXW...................... Washington October 1, 2004
KPXD(3)................... Dallas August 1, 1998
WPXD...................... Detroit October 1, 2005
WPXA...................... Atlanta April 1, 2005
KPXB...................... Houston August 1, 1998*
KWPX...................... Seattle February 1, 1999
WVPX...................... Cleveland October 1, 2005
KPXM...................... Minneapolis April 1, 2006
WXPX...................... Tampa February 1, 2005
WPXM...................... Miami February 1, 2005
KBPX...................... Phoenix October 1, 1998
KPPX(4)................... Phoenix October 1, 1998
KPXC...................... Denver April 1, 2006
WOPX...................... Orlando February 1, 2005
WPXP...................... West Palm Beach February 1, 2005
KPXG...................... Portland, OR February 1, 1999
WFPX...................... Raleigh December 1, 2004
KPXE...................... Kansas City February 1, 2006
WPXE...................... Milwaukee December 1, 2005
WNPX...................... Nashville August 1, 2005
KUWB...................... Salt Lake City October 1, 1998
WPXV...................... Norfolk October 1, 2004
KOPX...................... Oklahoma City June 1, 2006
WGPX...................... Greensboro December 1, 2004
WQPX(4)................... Wilkes-Barre August 1, 1999
WPXQ(5)................... Providence April 1, 1999
WPXH...................... Birmingham April 1, 2005
WYPX...................... Albany June 1, 1999
WDPX...................... Dayton October 1, 2005
KPXF...................... Fresno December 1, 1998
WKRP(4)................... Charleston October 1, 2004
KTPX...................... Tulsa June 1, 2006
WPXR...................... Roanoke October 1, 2004
WPXG...................... Green Bay December 1, 2005
WAUP(4)................... Syracuse June 1, 1999
WPXU...................... Champaign December 1, 2005
KPXR...................... Cedar Rapids February 1, 2006
WJWN...................... San Sebastian, PR February 1, 2005
WKPV...................... Ponce, PR February 1, 2005
WJPX...................... San Juan, PR February 1, 2005
</TABLE>
<TABLE>
<CAPTION>
TIME BROKERAGE AND AFFILIATED
TELEVISION STATIONS MARKET(1) LICENSE EXPIRATION
- ----------------------------- --------- ------------------
<S> <C> <C>
WBPX........................ Boston April 1, 1999
WWPX........................ Washington October 1, 2004
KSPX........................ Sacramento December 1, 1998
WPXS........................ St. Louis December 1, 2005
WHPX........................ Hartford/New Haven April 1, 1999
</TABLE>
60
<PAGE> 66
<TABLE>
<CAPTION>
TIME BROKERAGE AND AFFILIATED
TELEVISION STATIONS MARKET(1) LICENSE EXPIRATION
- ----------------------------- --------- ------------------
<S> <C> <C>
WRPX........................ Raleigh December 1, 2004
WZPX........................ Grand Rapids October 1, 2005
WCCL........................ New Orleans June 1, 2005
WFBI........................ Memphis August 1, 2005
KYPX(4)..................... Little Rock June 1, 2005
WPXK........................ Knoxville August 1, 2005
KPXO........................ Honolulu February 1, 1999
</TABLE>
<TABLE>
<CAPTION>
RADIO STATIONS(2) MARKET(1) LICENSE EXPIRATION
- ----------------- --------- ------------------
<S> <C> <C>
WHNZ-AM................... Tampa/St. Petersburg February 1, 2004
WYCL-FM................... Pensacola February 1, 2004
</TABLE>
- ---------------
* License renewal pending.
(1) Each station is licensed by the FCC to serve a specific community which is
included in the listed market.
(2) The formal call sign assigned by the FCC does not include the "AM" suffix
and does not necessarily include the "FM" suffixes. These stations are
contracted for sale.
(3) 80% owned
(4) 49% owned
(5) 50% owned.
Generally, the FCC renews licenses without a hearing. The Communications
Act authorizes the filing of petitions to deny during specified periods after
the renewal applications have been filed. Interested parties, including members
of the public, may file petitions to deny as a means to raise issues concerning
the renewal applicant's qualifications. The FCC will renew broadcast licenses if
the incumbent meets three requirements: (1) the station has served the public
interest, convenience and necessity; (2) the licensee has not seriously violated
the Communications Act or the FCC's rules; and (3) there have been no other
violations, which, taken together, would constitute a pattern of abuse. If an
applicant for renewal fails to satisfy this tripartite standard, the FCC
nevertheless may renew the license on appropriate terms and conditions,
including renewal for less than a full license term. The FCC may not consider
applications for the channel by other parties until it first has decided to deny
renewal to the incumbent. Before denying renewal to an incumbent, the FCC must
first allow the licensee a hearing on the licensee's alleged failure to satisfy
the statutory standard.
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 an assignment of a broadcast license or a transfer of control of a
broadcast licensee, the FCC considers, among other things, the financial and
legal qualifications of the prospective assignee or transferee, including
compliance with FCC restrictions on alien ownership and control, compliance with
rules limiting the common ownership of certain attributable interests in
broadcast, cable and newspaper properties, and the character qualifications of
the transferee or assignee and the individuals or entities holding attributable
interests in them.
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 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,
as are positions of an officer or director of a corporate parent of a broadcast
licensee. The FCC treats all partnership interests as attributable, except for
those limited partnership interests that are insulated under FCC policies. For
insurance companies, certain regulated investment companies and bank trust
departments, that hold stock for investment purposes only, such interests
becomes attributable with the ownership of ten percent or more of the stock of
the corporation holding broadcast licenses.
The Communications Act permits an entity to hold an attributable interest
in television stations reaching up to 35% of the United States television
households. The FCC utilizes a UHF discount in determining the reach of UHF
television stations by considering them to reach only fifty percent (50%) of the
households
61
<PAGE> 67
within their markets. The FCC also has rules that limit the number of co-located
television broadcast stations in which a single entity may own an attributable
interest. No single entity may hold an attributable interest in television
stations with overlapping Grade B service contours. The 1996 Act directs the FCC
to conduct a rule making proceeding to determine whether these rules should be
retained. The FCC has established a liberal waiver policy to permit common
ownership of a radio station and a television station in any of the nation's 25
largest markets, and in some circumstances involving failed stations and in
other situations where more stringent waiver standards can be met. The 1996 Act
extends this waiver policy to the top 50 markets.
The FCC's cross-ownership rules prohibit the common ownership of
attributable interests in certain combinations of media outlets serving the same
geographic area. Under these rules, a single entity may not have an attributable
interest in: (i) both a radio station and a television station that serve
specified overlapping areas; (ii) a daily newspaper and either a radio station
or a television station that serve specified overlapping areas; or (iii) a
television station and a cable television system that serve specified
overlapping areas. The FCC has initiated proceedings to inquire whether it
should change or eliminate its cross interest policy, covering joint ventures
and common key employees. The policy does not necessarily prohibit these
interests, but may require that the FCC consider whether they could have a
significant adverse affect on programming diversity and competition in the
market.
In cases where one person or entity (such as Mr. Paxson in the case of the
Company) holds more than 50% of the combined voting power of the common stock of
a broadcasting corporation, a minority shareholder of the corporation generally
would not acquire an attributable interest in the corporation. If a majority
shareholder of a company (such as Mr. Paxson in the case of the Company) were no
longer to hold more than 50% of the combined voting power of the common stock of
the Company, the interests of minority shareholders that had theretofore been
considered non-attributable could become attributable, with the result that any
other media interests held by such shareholders would be combined with the media
interests of such company for purposes of determining the shareholders'
compliance with FCC ownership rules.
Under the Communications Act, no FCC broadcast license may be held by a
corporation of which any officer or director is an alien or 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 representative thereof, 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 such license. Restrictions on alien ownership also apply, in modified
form, to other types of business organizations, including partnerships.
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 such responsiveness.
Broadcast of obscene or indecent material is regulated by the FCC as well
as by state and federal law. Stations also must follow various rules promulgated
under the Communications Act that regulate, among other things, political
advertising, sponsorship identifications, the advertising of contests and
lotteries, and technical operations, including limits on radio frequency
radiation. Pursuant to the Children's Television Act of 1990, the FCC has
adopted rules limiting advertising in children's television programming and has
required that television broadcast stations serve the educational and
informational needs of children.
Time Brokerage Agreements. Over the past several years a significant
number of broadcast licensees, including the Company, have entered into time
brokerage agreements. These arrangements are subject under FCC rules and
regulations to maintenance by the licensee of each station of independent
control over the programming and station operations of its own station.
Typically, a time brokerage agreement is a programming agreement between
two separately owned broadcast stations serving a common service area, whereby
the licensee of one station programs substantial parts of the broadcast day on
the other licensee's station, subject to ultimate editorial and other controls
being
62
<PAGE> 68
exercised by the licensee of the brokered station. The broker then sells
advertising time during such program segments for its own account.
The FCC has determined that issues of joint advertising sales should be
left to antitrust enforcement. In addition, it has specifically exempted time
brokerage agreements from its cross-interest policy. Furthermore, the FCC has
held that time brokerage agreements do not per se constitute a transfer of
control and are not contrary to the Communications Act provided that the
licensee of the station maintains ultimate responsibility for and control over
operations of its broadcast station (including, specifically, control over
station finances, licensee personnel and programming) and complies with
applicable FCC rules and with antitrust laws.
The FCC has no present rules on the attribution of television time
brokerage agreements as it does with radio time brokerage agreements. The 1996
Act grandfathered time brokerage agreements existing at the time of its passage
and included a provision that the broadcast ownership section of the 1996 Act is
not to be construed to prohibit the origination, continuation or renewal of any
television time brokerage agreement that complies with FCC regulations.
"Must Carry"/Retransmission Consent. The Communications Act contains
broadcast signal carriage requirements that allow local commercial television
broadcast stations to elect once every three years to require a cable system to
carry the station subject to certain exceptions, or to negotiate for
retransmission consent to carry the station. A cable system generally is
required to devote up to one-third of its activated channel capacity for the
mandatory carriage of local commercial television stations. Additionally, cable
systems are required to obtain retransmission consent for all distant commercial
television stations (except for commercial satellite-delivered independent super
stations such as WTBS), commercial radio stations and certain low power
television stations carried by such systems after October 6, 1993.
The 1996 Act modified the way in which markets for carriage will be
determined for purposes of the "must carry" rules. The 1996 Act provides that
the FCC will determine a broadcast station's market by using commercial
publications that delineate television markets based on viewing patterns. This
modification has resulted in the FCC ruling that for the election period
commencing January 1, 2000, a station's market will be defined by the DMA to
which it has been designated. The FCC is authorized to entertain requests for
expansion or other modification of television station markets, and is now
required to resolve any market modification request within 120 days after the
request is filed or within 120 days of enactment of the 1996 Act, whichever is
later.
Equal Employment Opportunity Requirements. The FCC's existing equal
employment opportunity ("EEO") regulations and reporting forms used by
television broadcast stations has been codified in the Communications Act. In
addition, the FCC has adopted rules providing for a review of the EEO
performance of each television station at the mid-point in its license term (in
addition to an examination at renewal time) and for the FCC to inform the
licensee of any improvements in recruiting practices that may be needed as a
result of the review. The FCC recently proposed rules that would reduce the EEO
record keeping and filing requirements of certain categories of stations.
Syndicated Exclusivity/Territorial Exclusivity. The FCC has imposed on
cable operators syndicated exclusivity rules and expanded existing network
non-duplication rules. These syndicated exclusivity rules allow local broadcast
stations to require that cable operators black out certain syndicated
non-network programming carried on distant signals (that is, signals of
broadcast stations, including so-called super stations, which serve areas
substantially removed from the cable system's local community). The network
non-duplication rules allow local broadcast network affiliates to require that
cable operators black out duplicating network broadcast programming carried on
more distant signals that are not significantly viewed over the air.
Television stations also may be subject to a number of other federal, state
and local regulation, including regulations of the Federal Aviation
Administration affecting tower height and marking, and federal, state and local
environmental and land use restrictions and general business regulation, and a
variety of local regulatory concerns.
Proposed Changes. The Congress and the FCC have under consideration, and
in the future may consider and adopt, new laws, regulations and policies
involving a wide variety of matters that could affect,
63
<PAGE> 69
directly or indirectly, the operation, ownership and profitability of the
Company's broadcast stations, result in the loss of audience and advertising
revenue for the Company's broadcast stations and affect the ability of the
Company to acquire additional broadcast stations or finance such acquisitions.
FCC Proceedings to Revise Broadcast Ownership Rules. The FCC has issued a
further notice of proposed rule making which proposed the following changes in
regulations governing television broadcasting: (i) modifying the reach discount
as it applies to UHF stations; (ii) narrowing the geographic area where common
ownership restrictions would be triggered by limiting it to overlapping Grade A
contours and by permitting certain UHF/UHF or UHF/VHF overlaps; (iii) relaxing
the rules prohibiting cross-ownership of radio and television stations in the
same market; and (iv) treating television time brokerage agreements the same as
radio time brokerage agreements, which would presently preclude certain
television time brokerage agreements where the programmer owns or has an
attributable interest in another television station in the same market. In June
1995, the FCC announced an interim policy for processing television transfer and
assignment applications that include time brokerage agreements. Pending the
adoption of new rules, the FCC has stated that it will not grant applications
that propose a time brokerage arrangement if the arrangement also includes both
debt financing by the time broker and an option for the time broker to purchase
the brokered station. The FCC has stated that it will continue to grant
applications with time brokerage arrangements if they include only one of those
elements (that is, either debt financing by the broker or an option of the time
broker to purchase). The FCC also issued a further notice of proposed rule
making that combined several long-pending proceedings to consider changes in its
ownership rules and policies.
FCC Inquiry on Broadcast of Commercial Matter. The FCC also has initiated
a notice of inquiry proceeding seeking comment on whether the public interest
would be served by establishing limits on the amount of commercial matter
broadcast by television stations. No prediction can be made at this time as to
whether the FCC will propose any limits on commercial advertising at the
conclusion of its deliberation or the effect the imposition of limits on the
commercial matter broadcast by television stations would have upon the Company's
operations.
Advanced High Definition Television System. The FCC has adopted rules for
implementing advanced (high definition) television ("ATV") in the United States.
Implementation of ATV service should improve the technical quality of television
broadcasts. In anticipation of the implementation of ATV operations, the FCC has
adopted ATV technical standards and other rules necessary to protect the public
interest. The FCC has conditioned ATV licenses on recapture of either the new
ATV spectrum or television licensees' initial spectrum. Ten years after it first
issues ATV licenses, the FCC must evaluate its regulation and public acceptance
of ATV, including possible alternative uses of and reduction in ATV spectrum.
The FCC is required to adopt rules permitting ATV licensees to offer
"ancillary or supplementary services" on newly-available ATV spectrum, so long
as such services are consistent with the FCC's ATV standards; do not derogate
required ATV services, including high definition television; and are regulated
in the same manner as similar non-ATV services. The FCC has decided that it will
set aside specific new channel allotments for ATV service. Initial eligibility
for these channels will be limited to existing television licensees.
Beginning in May 2002 the Company will be required to air a certain number
of broadcast hours in the ATV format.
EMPLOYEES
As of April 30, 1998, the Company had approximately 505 full-time employees
and 171 part-time employees. The substantial majority of the Company's employees
are not represented by labor unions. The Company considers its relations with
its employees to be good.
SEASONALITY
Seasonal revenue fluctuations are common within the television broadcasting
industry and result primarily from fluctuations in advertising expenditures.
Because of the short operating history of inTV and the start-up nature of PAX
NET, the Company's ability to assess the effects of seasonality on either inTV
or PAX
64
<PAGE> 70
NET is limited. It appears, however, that inTV experiences its highest revenues
during the first and fourth calendar quarters.
TRADEMARKS AND SERVICE MARKS
The Company has 4 federally registered trademarks and service marks with
another 21 applications pending. It does not own any patents or patent
applications.
APPRAISALS
The Company has obtained appraisals from two independent media valuation
firms which have valued the Company's owned and operated stations in a range
between $1.5 billion and $1.9 billion. As of March 31, 1998, pro forma for the
Transactions, the book value of the Company's assets was approximately $1.4
billion. BIA Consulting, Inc. has prepared a business valuation report which
estimated the value as of March 1, 1998 of the Company's stations using
different valuation methodologies. BIA estimated the value of the Company's
owned and operated stations if sold individually at $1.5 billion and the value
of the Company's owned and operated stations if sold to a single buyer in a
range of $1.8 billion to $1.9 billion. CEA, whose principal was formerly a
member of the Company's Board of Directors, has also prepared a business
valuation report which estimated the value of the Company's owned or operated
stations as of March 1, 1998 at between $1.5 billion and $1.8 billion, using
comparable transactions to arrive at their opinion of the fair market value of
the Company's stations. CEA supported this opinion of value using various other
valuation methodologies. These valuations are subject to certain limiting
conditions and assumptions and must be read in their entirety. In addition,
these valuations represent only the appraisers' opinions with respect to value,
and there can be no assurance that the Company's stations can be sold for the
amounts stated therein.
PROPERTIES AND FACILITIES
The following table sets forth information with respect to the Company's
offices and its studios and broadcast tower locations. Management believes that
the Company's properties are in good condition and are suitable for its
operations.
<TABLE>
<CAPTION>
MARKET(1) PROPERTY OWNED/LEASED LEASE EXPIRATION
--------- -------- ------------ ----------------
<S> <C> <C> <C>
New York, NY................................ Studio Leased March 2001
Offices Leased June 2000
Los Angeles, CA............................. Tower Leased March 2006
Studio/Offices Leased April 2008
Tower Leased June 2005
Chicago, IL................................. Offices Leased June 2000
Philadelphia, PA............................ Sales Office Leased July 1998
Studio Leased September 2000
San Francisco, CA........................... Tower Leased June 2020
Sales Office Leased April 2003
Studio/Offices Leased June 2005
Boston, MA.................................. Studio/Offices Leased February 2006
Tower Leased February 2012
Washington, DC.............................. Tower Owned
Studio Owned
Dallas, TX.................................. Studio Leased October 2001
Tower Leased March 2016
Detroit, MI................................. Studio Leased August 1999
Tower Owned
Atlanta, GA................................. Tower Leased October 2015
Studio/Offices Leased June 2001
</TABLE>
65
<PAGE> 71
<TABLE>
<CAPTION>
MARKET(1) PROPERTY OWNED/LEASED LEASE EXPIRATION
--------- -------- ------------ ----------------
<S> <C> <C> <C>
Houston, TX................................. Tower Owned
Studio Owned
Seattle, WA................................. Tower Leased August 2002
Studio Leased October 2000
Cleveland, OH............................... Tower Owned May 2006
Studio Leased October 1999
Minneapolis, MN............................. Studio Owned
Tower Owned
Tampa, FL................................... WHNZ-AM Tower Owned
WXPX Tower Leased May 2004
WXPX Studio Leased April 2001
Miami, FL................................... Tower Leased October 1999
Studio Leased July 2001
Phoenix, AZ................................. KBPX Studio Leased September 1999
KBPX Tower Leased October 2001
KAJW Tower Leased June 2012
Denver, CO.................................. Studio Leased August 2001
Tower Leased August 2003
Orlando, FL................................. Tower Leased August 2015
Tower Owned
Studio/Offices Leased Month to Month
Portland, OR................................ Tower Leased August 2001
Indianapolis, IN............................ Tower Leased June 1999
Raleigh/Fayetteville, NC.................... Studio Leased January 2003
Tower Leased January 2003
Kansas City, MO............................. Studio Leased August 2004
Tower Leased August 2047
Milwaukee, WI............................... Studio Owned
Tower Leased June 2012
Nashville, TN............................... Studio Leased January 2003
Tower Leased January 2013
Salt Lake City, UT.......................... Studio Leased July 2000
Tower Leased January 1999
Norfolk, VA................................. Studio Leased June 1998
Tower Leased May 1999
West Palm Beach, FL......................... Headquarters Owned
Annex Leased February 2000
Undeveloped
Land Owned
Oklahoma City, OK........................... Studio Leased October 2003
Tower Leased September 2003
Greensboro, NC.............................. Tower Leased October 2011
Studio Leased September 2002
Providence, RI.............................. Tower Leased August 2006
Birmingham, AL.............................. Studio Leased November 1999
Tower Owned
Albany, NY.................................. Tower Owned
Studio Leased November 2003
Dayton, OH.................................. Tower Owned
Studio Owned
Fresno, CA.................................. Studio Leased Month to Month
Tower Leased June 2000
</TABLE>
66
<PAGE> 72
<TABLE>
<CAPTION>
MARKET(1) PROPERTY OWNED/LEASED LEASE EXPIRATION
--------- -------- ------------ ----------------
<S> <C> <C> <C>
Jacksonville, FL............................ Tower Leased July 1998*
Little Rock, AR............................. Tower Leased January 2012
Tulsa, OK................................... Tower Leased December 2006
Studio Leased February 2004
Las Vegas, NV............................... Tower Leased April 2001
Knoxville, TN............................... Tower Leased Year to Year
Studio Owned
Roanoke, VA................................. Studio Leased December 2003
Tower Owned
Green Bay, WI............................... Studio Leased December 2007
Tower Leased January 2012
Champaign, IL............................... Studio Owned
Tower Owned
Cedar Rapids, IA............................ Studio Leased December 1999
Tower Owned
Tower land Leased December 2015
Columbus, OH................................ Tower Leased August 1998
Puerto Rico................................. Towers -- two Owned
Tower Leased Month to Month
Studio Leased November 2001
</TABLE>
- ---------------
* Lease currently being renegotiated.
(1) Market listed may differ from actual location.
LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of management, no material legal
proceedings are pending to which the Company or any of its property is subject.
67
<PAGE> 73
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the Company's directors
and executive officers.
<TABLE>
<CAPTION>
DIRECTORS AGE POSITION, BUSINESS EXPERIENCE AND DIRECTORSHIPS
--------- --- -----------------------------------------------
<S> <C> <C>
Lowell W. Paxson.......................... 63 Chairman of the Board of the Company since 1991
(inception), and Chief Executive Officer of the
Company from 1991 to May 1998. President, Home
Shopping Network, Inc. ("HSN") from 1985 to 1990.
William E. Simon, Jr. .................... 46 Vice Chairman of the Company since May 1998.
Executive Director since 1988 of William E. Simon &
Sons, L.L.C., a private investment firm and
merchant bank. Director, Hanover Compressor
Company and Geologistics Corporation.
Jeffrey Sagansky.......................... 46 President and Chief Executive Officer of the Company
since May 1998. Co-President of Sony Pictures
Entertainment since October 1996 and Executive
Vice President of Sony Corp. of America from 1994
to 1996. President of CBS Entertainment from 1990
to 1994.
James B. Bocock........................... 54 Co-President since May 1998, Chief Operating Officer
since 1991 and President 1991-1998 of the Company.
Vice President -- Broadcast Affiliations of HSN
from 1986 to 1991.
Arthur D. Tek............................. 48 Vice President and Chief Financial Officer of the
Company since 1992, and Treasurer of the Company
since 1994. Chief Financial Officer and Controller
from 1990 to 1992 of Chase Communications, Inc., a
television and radio broadcasting firm.
Bruce L. Burnham.......................... 64 President since 1993 of The Burnham Group, a firm
providing consulting and marketing services to the
retail industry. Director, Forcenergy, Inc., and
J.B. Rudolph, Inc.
James L. Greenwald........................ 71 Chairman and Chief Executive Officer from 1975 to
1994 of Katz Communications, Inc., a broadcast
advertising representative sales firm; Chairman
Emeritus since 1994. Director, Granite
Broadcasting Company and Source Media, Inc.
</TABLE>
68
<PAGE> 74
OTHER EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
EXECUTIVE OFFICER AGE POSITION, BUSINESS EXPERIENCE AND DIRECTORSHIPS
----------------- --- -----------------------------------------------
<S> <C> <C>
Dean M. Goodman........................... 51 President, PAX NET Television since 1998. President
from 1995-1997 of the Company's inTV and Paxson
Network-Affiliated Television divisions. General
Manager from 1993 to 1995 of the Company's Miami
radio group. Executive Vice President until 1993
of the television and radio broadcast group of
Gilmore Broadcasting Corp.
Jon Jay Hoker............................. 59 President, Paxson Television Station Group since
1997. President from 1995-1997 of the Company's
Paxson Radio division. President from 1994 to 1995
of Paxson Networks, Inc. President from 1985 to
1994 of Hoker Broadcasting, a radio station
owner/operator.
S. William Scott.......................... 65 President, Programming since January 1998.
Consultant to various media companies since 1987.
Director of the Company from February 1995 until
his resignation from the Board in February 1998.
Anthony L. Morrison....................... 37 Vice President, Secretary and General Counsel of the
Company since 1995. Attorney with the New York
office of O'Melveny & Meyers from 1990 to 1995.
Kenneth M. Gamache........................ 36 Vice President and Controller of the Company since
1997. Chief Accounting Officer since 1994 and
Controller of the Company since 1993.
Seth A. Grossman.......................... 33 Senior Vice President, Investor Relations and
Corporate Development since 1998. Vice President,
Corporate Development of the Company from
1997-1998. Director of Finance 1995-1997.
</TABLE>
All officers are elected until the next annual meeting of the Board of
Directors or until their respective successors are chosen and qualified.
Directors serve for a one-year term or until their successors are elected.
COMPENSATION OF DIRECTORS
All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. Mr. Burnham and
Mr. Greenwald were granted certain options to purchase shares of Class A Common
Stock in consideration for their services as directors of the Company, which
commenced in 1996. In connection with Mr. Simon's election as Vice Chairman of
the Board of Directors in May 1998, an affiliate of Mr. Simon received certain
warrants to purchase shares of Class A Common Stock. See "Certain Relationships
and Related Transactions -- William E. Simon, Jr." No other directors receive
separate compensation for services rendered as a director.
69
<PAGE> 75
COMPENSATION OF EXECUTIVE OFFICERS
The following table presents certain information concerning the
compensation received or accrued for services rendered during the fiscal years
ended December 31, 1997, 1996 and 1995 for the Company's Chief Executive Officer
and four highest paid executive officers (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
ANNUAL COMPENSATION NUMBER OF
---------------------- OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) UNDERLYING OPTIONS COMPENSATION
- --------------------------- ---- --------- ---------- --------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Lowell W. Paxson......... 1997 $423,500 $1,875,000 $ -- -- $ --
Chairman of the Board 1996 385,000 -- -- -- --
of Directors* 1995 350,000 -- -- -- --
James B. Bocock.......... 1997 325,000 1,885,000 -- -- 33,500(3)(4)
Co-President and Chief 1996 275,000 -- 415,140 225,000 14,750(3)(4)
Operating Officer 1995 225,000 -- 164,325 850,000 --
Dean M. Goodman.......... 1997 300,000 1,099,000 -- -- 31,000(3)(4)
President -- PAX 1996 250,000 101,200 289,340 150,000 13,500(3)(4)
NET Television 1995 200,000 75,000 229,625 223,361 --
Jon Jay Hoker............ 1997 300,000 1,581,000 -- -- 26,200(3)(4)
President -- Paxson 1996 250,000 50,000 201,280 150,000 13,500(3)(4)
Television Station Group 1995 200,000 50,000 182,688 150,000 --
Arthur D. Tek............ 1997 225,000 800,000 1,209,491 -- 23,500(3)(4)
Vice President, 1996 175,000 -- 289,340 125,000 9,750(3)(4)
Treasurer and Chief 1995 150,000 -- -- 150,000 3,000(5)
Financial Officer
</TABLE>
- ---------------
* Mr. Paxson also served as Chief Executive Officer from 1991 to May 1998.
(1) Includes amount Named Executive Officer elected to defer pursuant to the
Company's Profit Sharing Plan.
(2) Represents the difference between the price paid by the Named Executive
Officer upon the exercise of certain of his options granted under the Stock
Incentive Plan and the fair market value of the underlying Common Stock at
the time of exercise.
(3) Includes the following Company contributions to supplemental retirement
plans during 1997: Mr. Bocock -- $32,500; Mr. Goodman -- $30,000; Mr.
Hoker -- $25,200; and Mr. Tek -- $22,500. Includes the following Company
contributions to supplemental retirement plans during 1996: Mr.
Bocock -- $13,750; Mr. Goodman -- $12,500; Mr. Hoker -- $12,500; and Mr.
Tek -- $8,750.
(4) Includes $1,000 Company contributions to the Profit Sharing Plan during 1997
and 1996 for each of Messrs. Bocock, Goodman, Hoker, and Tek.
(5) Represents relocation allowance in excess of general allowance under
Company's relocation plan.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
DECEMBER 31, 1997 DECEMBER 31, 1997
SHARES ------------------------- --------------------
OPTIONS ACQUIRED ON VALUE EXERCISABLE NON- EXERCISABLE/
NAME EXERCISE REALIZED (2) EXERCISABLE NON-EXERCISABLE
- ------- ----------- ---------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C>
Lowell W. Paxson................. -0- $ -0- -0- -0- $-0-/$-0-
James B. Bocock.................. -0- -0- 847,000 180,000 3,455,760/734,400
Dean M. Goodman.................. -0- -0- 180,361 150,000 735,873/612,000
Jon Jay Hoker.................... -0- -0- 269,000 -0- 1,097,520/-0-
Arthur D. Tek.................... 152,000 1,209,491 -0- 100,000 -0-/408,000
</TABLE>
- ---------------
(1) Based on the public trading price of the Class A Common Stock of $7.50 on
December 31, 1997.
(2) Excludes securities underlying options which vested January 1, 1998 as
follows: James B. Bocock -- 45,000; Dean M. Goodman -- 60,000; Arthur D.
Tek -- 25,000.
70
<PAGE> 76
STOCK INCENTIVE PLANS
The Company established its Stock Incentive Plan in November 1994, its 1996
Stock Incentive Plan in October 1996, and its 1998 Stock Incentive Plan in June
1998 (collectively, the "Stock Incentive Plans"), to provide incentives to
officers and other employees who contribute significantly to the strategic and
long-term performance objectives and growth of the Company. The Stock Incentive
Plans are administered by the Compensation Committee of the Company's Board of
Directors.
The Stock Incentive Plans provide for the granting of awards, in the form
of incentive stock options, non-qualified stock options or restricted shares of
Class A Common Stock, to officers and employees as determined by the
Compensation Committee except that the class of persons eligible to receive
awards under the 1996 and 1998 Stock Incentive Plans includes all persons
performing services for the Company or any of its subsidiaries and all persons
who have in the past performed such services (whether or not such persons are
officers or employees of the Company or any such subsidiary), and all persons
performing services relating to the Company in their capacity as an employee or
independent contractor of a corporation or other entity providing such services
to the Company. Under the Stock Incentive Plans, an aggregate of 11,343,575
shares have been made available for issuance pursuant to awards granted
thereunder, and approximately 1,000,000 shares remain available for future
awards.
The exercise price per share of Class A Common Stock deliverable upon the
exercise of each stock option granted under the Stock Incentive Plans is
determined by the Compensation Committee at the date the stock option is granted
and as provided in the terms of the Stock Incentive Plans. Stock options are
exercisable in whole or in part on such date or dates as are determined by the
Compensation Committee at the date of the grant. The Compensation Committee may,
in its sole discretion, accelerate the time at which any stock option may be
exercised. Stock options expire on the date or dates determined by the
Compensation Committee at the time the stock options are granted. Holders of
more than ten percent (10%) of the combined voting power of the capital stock of
the Company may be granted stock options, provided that if any of such options
are intended to be incentive stock options, the exercise price must be at least
110% of the fair market value of Class A Common Stock as of the date of the
grant and the term of the option may not exceed five years.
Nonqualified stock options granted under the Stock Incentive Plans are
transferable, to the extent permitted by applicable law, to family members of
the recipient, trusts for their benefit or partnerships of which they constitute
all of the partners. Incentive stock options are nontransferable except by will
or the laws of descent and distribution. If a participant's employment is
terminated by reason of death, disability or retirement in accordance with the
Company's normal retirement policies or by the Company other than for cause,
options will continue to be exercisable after termination of employment for
periods varying from 90 days to one year (provided that the option will not be
exercisable beyond the expiration date established at the date of grant unless
the Committee determines otherwise). If a participant's employment is terminated
for cause, each option which has not been exercised shall terminate.
The Compensation Committee also has the discretion to award restricted
stock, which are shares of Class A Common Stock which are subject to forfeiture
in whole or in part if the recipient's employment with the Company is terminated
prior to the end of the restrictive period. Participants who receive restricted
stock do not become 100% vested in their restricted stock until five years after
the effective date of the award. During the restricted period prior to vesting,
the participant may transfer the restricted stock to a trust for the benefit of
the participant or an immediate family member, but may not otherwise sell,
assign, transfer, give or otherwise dispose of, mortgage, pledge or encumber
such restricted stock. The Compensation Committee may, in its discretion,
provide that a participant shall be vested in whole or with respect to any
portion of the participant's award not previously vested if the participant's
employment with the Company is terminated because of death, disability or
retirement. To date, the Committee has not awarded any restricted stock under
the Stock Incentive Plans.
PROFIT SHARING PLAN
The Company has a profit sharing plan under Section 401(k) of the Internal
Revenue Code (the "Profit Sharing Plan"). The Profit Sharing Plan provides that
employees of the Company must complete one year of
71
<PAGE> 77
service in order to be eligible to defer salary and, if available, receive
matching contributions under the Section 401(k) portion of the Profit Sharing
Plan. Participants may elect to defer a specified percentage of their
compensation into the Profit Sharing Plan on a pre-tax basis. The Company may,
in its sole discretion, make matching contributions based on a percentage of
deferred salary contributions at a percentage rate to be determined by the Board
of Directors, which matching contributions may be in Company stock. In addition,
the Company may make supplemental profit sharing contributions in such amounts
as the Board of Directors may determine. Participants earn a vested right to
their profit sharing contribution in increasing amounts over a period of five
years. After five years of service, the participant's right to his or her profit
sharing contribution vests 100%. Thereafter the participant may receive a
distribution of the entire value of his or her account at age 55, 62 or 65 or
upon termination of employment, death or disability.
EMPLOYMENT AGREEMENTS
Mr. Paxson has been employed as Chairman and, until May 1998, Chief
Executive Officer of the Company under an employment agreement. The agreement
provides that Mr. Paxson will be employed for a five and one-half year period
commencing on June 30, 1994, unless sooner terminated. Mr. Paxson began
receiving an annual base salary of $350,000 commencing on January 1, 1995, which
increased to $385,000 in 1996, $423,500 in 1997, and will increase to $465,850
in 1998 and $500,000 in 1999. In addition to the base salary, Mr. Paxson may
receive an annual bonus at the discretion of, and in an amount set by, members
of the Compensation Committee that are not employees of the Company. Mr.
Paxson's employment agreement is renewable for successive one-year terms,
subject to good faith negotiation of its terms. Mr. Paxson is eligible to
participate in all employee benefit plans and arrangements that are generally
available to other senior executives and is reimbursed for all reasonable
expenses incurred by him in the discharge of his duties, including entertainment
and travel. Mr. Paxson's employment agreement is terminable by the Board of
Directors before expiration for good cause, as defined in the agreement, or by
Mr. Paxson for good reason, as defined in the agreement. In the event of Mr.
Paxson's permanent disability or death, the Company will pay Mr. Paxson, or his
estate, as the case may be, his then existing salary for the remaining term of
the agreement, in the case of disability, or one year, in the case of death.
Mr. Sagansky is employed as President and Chief Executive Officer of the
Company for a four year term expiring June 30, 2002 pursuant to an employment
agreement entered into in June 1998. The agreement provides for Mr. Sagansky to
receive a base salary of $600,000 with 10% increases each July 1 (commencing
July 1, 1999) and an annual bonus of up to twice his base salary based on the
Company's achievement of targeted financial results. The Company has agreed to
grant Mr. Sagansky options to purchase 1,200,000 shares of Class A Common Stock
at an exercise price of $7.25 per share, which are to become exercisable at the
rate of 30% after the first year of employment, 25% after each of the second and
third years, and 20% after the fourth year. The Company has agreed to pay up to
$200,000 of Mr. Sagansky's housing costs during the first year, and to pay Mr.
Sagansky 5% of any syndication fees received by the Company for any Company-
produced programming (after recouping production costs). Mr. Sagansky is
eligible to participate in all employee benefit plans and arrangements that are
generally available to other senior executives and is reimbursed for all
reasonable expenses incurred in the discharge of his duties, including
entertainment and travel. The Company may terminate Mr. Sagansky's employment
for good cause, as defined in the agreement. If Mr. Sagansky's employment is
terminated by reason of his disability or other than for good cause, or if Mr.
Sagansky terminates his employment for good reason, as defined in the agreement,
the Company will continue to pay Mr. Sagansky his base salary, plus annual
increases, and Mr. Sagansky will continue to be entitled to coverage under
employee benefit plans, for the balance of the employment term, and except in
the case of disability, Mr. Sagansky will continue to be entitled to receive any
annual bonuses he would otherwise have received had he remained employed by the
Company for the balance of the employment term. If Mr. Sagansky dies, the
Company will pay Mr. Sagansky's estate his then existing salary for a period of
one year and a pro rata bonus for the calendar year in which Mr. Sagansky dies.
Mr. Bocock is employed as Co-President and Chief Operating Officer of the
Company for a five year term commencing January 1, 1998 pursuant to an
employment agreement entered into in June 1998. The agreement provides for Mr.
Bocock to receive a base salary of $341,250 with at least 10% increases each
72
<PAGE> 78
January 1 (commencing January 1, 1999) and an annual bonus. Mr. Bocock is
eligible to participate in all employee benefit plans and arrangements that are
generally available to other senior executives and to receive such other cash
and non-cash bonus awards and compensation (including awards under the Stock
Incentive Plans) as the Company may determine, and is reimbursed for all
reasonable expenses incurred in the discharge of his duties, including
entertainment and travel. The Company may terminate Mr. Bocock's employment for
good cause, as defined in the agreement. If Mr. Bocock's employment is
terminated by reason of his disability or other than for good cause, or if Mr.
Bocock terminates his employment for good reason, as defined in the agreement,
the Company will continue to pay Mr. Bocock his base salary for the balance of
the employment term. If Mr. Bocock dies, the Company will pay Mr. Bocock's
estate his then existing salary for a period of one year.
Mr. Goodman is employed as President of PAX NET Television for a five year
term commencing January 1, 1999 pursuant to an employment agreement entered into
in June 1998. The agreement provides for Mr. Goodman to receive a base salary of
$315,000 with at least 10% increases each January 1 (commencing January 1, 1999)
and an annual bonus. Mr. Goodman is eligible to participate in all employee
benefit plans and arrangements that are generally available to other senior
executives and to receive such other cash and non-cash bonus awards and
compensation (including awards under the Stock Incentive Plans) as the Company
may determine, and is reimbursed for all reasonable expenses incurred in the
discharge of his duties, including entertainment and travel. The Company may
terminate Mr. Goodman's employment for good cause, as defined in the agreement.
If Mr. Goodman's employment is terminated by reason of his disability or other
than for good cause, or if Mr. Goodman terminates his employment for good
reason, as defined in the agreement, the Company will continue to pay Mr.
Goodman his base salary for the lesser of two years or the balance of the
employment term in the case of disability; and for the balance of the employment
term in all other cases. If Mr. Goodman dies, the Company will pay Mr. Goodman's
estate his then existing salary for a period of one year.
Mr. Hoker is employed as President of Paxson Television Station Group for a
five year term commencing January 1, 1998 pursuant to an employment agreement
entered into in June 1998. The agreement provides for Mr. Hoker to receive a
base salary of $315,000 with at least 10% increases each January 1 (commencing
January 1, 1999) and an annual bonus. Mr. Hoker is eligible to participate in
all employee benefit plans and arrangements that are generally available to
other senior executives and to receive such other cash and non-cash bonus awards
and compensation (including awards under the Stock Incentive Plans) as the
Company may determine, and is reimbursed for all reasonable expenses incurred in
the discharge of his duties, including entertainment and travel. The Company may
terminate Mr. Hoker's employment for good cause, as defined in the agreement. If
Mr. Hoker's employment is terminated by reason of his disability or other than
for good cause, or if Mr. Hoker terminates his employment for good reason, as
defined in the agreement, the Company will continue to pay Mr. Hoker his base
salary for the lesser of two years or the balance of the employment term in the
case of disability; and for the balance of the employment term in all other
cases. If Mr. Hoker dies, the Company will pay Mr. Hoker's estate his then
existing salary for a period of one year.
Mr. Tek is employed as Vice President, Treasurer and Chief Financial
Officer of the Company for a five year term commencing January 1, 1998 pursuant
to an employment agreement entered into in June 1998. The agreement provides for
Mr. Tek to receive a base salary of $236,250 with at least 10% increases each
January 1 (commencing January 1, 1999) and an annual bonus. Mr. Tek is eligible
to participate in all employee benefit plans and arrangements that are generally
available to other senior executives and to receive such other cash and non-cash
bonus awards and compensation (including awards under the Stock Incentive Plans)
as the Company may determine, and is reimbursed for all reasonable expenses
incurred in the discharge of his duties, including entertainment and travel. The
Company may terminate Mr. Tek's employment for good cause, as defined in the
agreement. If Mr. Tek's employment is terminated by reason of his disability or
other than for good cause, or if Mr. Tek terminates his employment for good
reason, as defined in the agreement, the Company will continue to pay Mr. Tek
his base salary for the lesser of two years or the balance of the employment
term. If Mr. Tek dies, the Company will pay Mr. Tek's estate his then existing
salary for a period of one year.
73
<PAGE> 79
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information as to the shares of
Common Stock beneficially owned on May 31, 1998, by each director and named
executive officer, all directors and executive officers of the Company as a
group, and any person who is known by the Company to be the beneficial owner of
more than five percent of any class of the Company's Common Stock. Beneficial
ownership means sole or shared voting power or investment power with respect to
a security. The Company has been informed that all shares shown are held of
record with sole voting and investment power, except as otherwise indicated.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF AGGREGATE
BENEFICIAL VOTING
CLASS OF STOCK NAME OF BENEFICIAL OWNER(1) OWNERSHIP % OF CLASS POWER
- -------------- --------------------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Common Stock Lowell W. Paxson 23,357,543(2) 44.1% 17.2%
Landmark Communications, Inc.(3) 4,773,097 9.0% 3.5%
James B. Bocock 949,850(4) 1.8% *
Dean M. Goodman 286,836(4) * *
Jon Jay Hoker 316,325(4) * *
Arthur D. Tek 93,350 * *
Bruce L. Burnham 25,850(4) * *
James L. Greenwald 9,500(4) * *
Jeffrey Sagansky 0 * *
William E. Simon, Jr. 0 * *
All directors and executive officers
as a group 25,294,604(5) 47.7% 18.6%
Class B Common Stock Lowell W. Paxson 8,311,639 100.0% 61.1%
All directors and executive officers
as a group 8,311,639 100.0% 61.1%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise specified in the footnotes to this table, the address of
each person in this table is c/o Paxson Communications Corporation, 601
Clearwater Park Road, West Palm Beach, Florida 33401-6233.
(2) Does not include 8,311,639 shares of Class B Common Stock, each share of
which is convertible into one share of Class A Common Stock. Mr. Paxson is
the beneficial owner of all his shares of Class A Common Stock and Class B
Common Stock through his control of Second Crystal Diamond, Limited
Partnership and Paxson Enterprises, Inc.
(3) According to information contained in a Schedule 13D filed with the
Securities and Exchange Commission (the "Commission"), dated July 21, 1997.
Landmark Communications, Inc., whose address is 150 Brambleton Avenue,
Norfolk, Virginia 23510, acquired such shares pursuant to an Asset
Acquisition Agreement dated as of June 13, 1997 in connection with its sale
to the Company of the assets related to The Travel Channel, and continues to
hold such shares for investment purposes.
(4) Includes shares which may be acquired within 60 days through the exercise of
stock options granted under the Company's Stock Incentive Plans as follows:
James B. Bocock -- 892,000; Dean M. Goodman -- 240,361; Jon Jay
Hoker -- 269,000; Bruce L. Burnham -- 8,500; James L. Greenwald -- 7,000.
(5) Includes 1,596,261 shares which may be acquired within sixty (60) days
through the exercise of stock options granted under the Company's Stock
Incentive Plans.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE CHRISTIAN NETWORK, INC. The Company has entered into several
agreements with The Christian Network, Inc. and certain of its for-profit
subsidiaries (individually and collectively referred to herein as "CNI"). CNI is
a non-profit corporation to which Mr. Paxson, Chairman of the Board of the
Company, has been a substantial contributor and of which he was a member of the
Board of Stewards through 1993.
INVESTMENT IN BROADCAST PROPERTIES. The Company has made loans and
advances to CNI to finance television station acquisitions and related capital
expenditures. Such loans generally have borne interest at the prime rate and
been payable on demand. The highest aggregate outstanding balance of such loans
since
74
<PAGE> 80
January 1, 1995, was $26.3 million as of June 30, 1996. At March 31, 1998, the
Company had approximately $15.5 million of advances to CNI to finance television
station acquisitions recorded as investments in broadcast properties. During
1996, the Company acquired certain stations from CNI for total consideration of
approximately $17.2 million. During 1997, the Company acquired television
stations from CNI in Miami, Orlando and Tampa for total consideration of
approximately $14 million. On December 30, 1997, the Company's advances to CNI
totaling approximately $5.5 million under a demand note bearing interest at the
prime rate were repaid out of the proceeds of the sale of television stations by
CNI to the Company in full.
KLDT-TV. During 1995, in connection with CNI securing the rights to
acquire television station KLDT-TV in Dallas, Texas and, prior to such
acquisition, operate the station pursuant to a time brokerage agreement, Mr.
Paxson initially loaned CNI $1 million to make a deposit in respect to such
acquisition and guaranteed the obligations of CNI under the purchase agreement
and the time brokerage agreement. On January 9, 1996, the Company purchased such
note from Mr. Paxson at its face value.
During 1996, as a result of third-party challenges to the FCC license
renewal application by KLDT-TV, CNI withdrew its application with the FCC for
the license of KLDT-TV. In connection therewith, the Company, CNI and certain
parties attempting to acquire KLDT-TV's FCC license entered into a settlement
agreement whereby CNI, and as a result, the Company, would be repaid a total of
$925,000 in connection with their cumulative investments in KLDT-TV. As a result
of the settlement agreement, the Company recorded a charge to operations of
approximately $252,000 in connection with its investment related to KLDT-TV.
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. The Company believes that all of its
agreements with CNI have been on terms as favorable to CNI as it would obtain in
arm's length transactions. The Company intends any future agreements with CNI to
be as favorable to CNI as CNI would obtain in arm's length transactions.
Accordingly, 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. There can be no assurance however,
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. Since August 1, 1994, CNI and the Company have
contracted for the Company to lease CNI's television production and distribution
facility for the purpose of producing television programming. During the year
ended December 31, 1997, the Company incurred rental charges in connection with
this agreement of $231,000.
AIRCRAFT LEASE. During 1997, the Company entered into a three year lease
with a company owned by Mr. Paxson for a Boeing 727 aircraft. The lease provides
for monthly payments of $63,600. The Company incurred rental costs under the
lease of approximately $382,000 during 1997. Additionally, the Company has
recorded at December 31, 1997 leasehold improvements of approximately $107,000
in connection with the lease.
SPORTS VENTURES. During 1996, the Company invested in various ventures
which would own and operate interests in two Arena Football League teams located
in West Palm Beach and Miami, Florida, an inactive American Hockey League
franchise for Palm Beach County, Florida, and a proposed sports arena in West
Palm Beach, Florida. During 1996, the Company included in other expenses, net
the write-off of approximately $1.2 million relating to its investments in the
West Palm Beach Arena Football League team and the proposed sports arena and in
connection with its acquisition of the Arena Football League team in Miami,
Florida. During 1997, in conjunction with the decision to dispose of the Paxson
Radio segment, the Company wrote-off its investments in the remaining sports
ventures, resulting in a 1997 charge to other expenses, net of approximately
$2.9 million which is net of anticipated proceeds from the sale of the hockey
franchise which the Company has contracted to sell for $2.0 million.
75
<PAGE> 81
TODD COMMUNICATIONS, INC. In 1993, Mr. Paxson contributed to the Company a
demand note receivable in the amount of approximately $1.8 million from Todd
Communications, Inc., a company which owned WFSJ-FM (St. Augustine, Florida) and
was beneficially owned by members of Mr. Paxson's family. The note receivable
accrued interest at the short-term annual applicable federal rate prescribed by
the Internal Revenue Service with the balance of principal and interest due upon
demand. Todd Communications also had a note outstanding to Mr. Paxson in the
principal amount of approximately $1.6 million. During June 1996, the Company
acquired Todd Communications for aggregate consideration of $5.0 million,
consisting of the cancellation of the Todd Communications note held by the
Company in the principal amount of approximately $1.8 million, the assumption
and immediate repayment by the Company of the note to Mr. Paxson and the
issuance of shares of Class A Common Stock valued at approximately $1.5 million
to the shareholders of Todd Communications.
WHITEHEAD MEDIA. The Company initially financed the acquisition by
Whitehead Media of each of WTVX-TV and WOAC-TV. Whitehead Media subsequently
obtained refinancing from Banque Paribas, an affiliate of a holder of the
Private Preferred Stock, and Canadian Imperial Bank of Commerce, the proceeds of
which were used to repay the debt owed by Whitehead Media to the Company and to
fund Whitehead Media's acquisition of WNGM-TV, and, in connection with such
refinancing, Mr. Paxson and Second Crystal Diamond, Limited Partnership
unconditionally guaranteed the obligations of Whitehead Media thereunder. In
December, 1996, the terms and conditions of the financing to Whitehead Media
were amended to, among other things, remove Canadian Imperial Bank of Commerce
as a lender thereunder, terminate the guaranty of Mr. Paxson and Second Crystal
Diamond, extend the term and change the interest rate thereof, and provide for
an unconditional guaranty by the Company of all obligations owed by Whitehead
Media to Banque Paribas thereunder. Subsequent to March 31, 1998, all remaining
indebtedness under this financing was repaid upon the Company's exercise of its
option to purchase WNGM-TV and payment of the option exercise price in
connection with the Company's sale of the station.
WORLD TRAVELERS NETWORK. Effective January 1, 1996, Mr. Paxson purchased
certain assets of World Travelers Network, Inc. ("WTN"), a wholly-owned
subsidiary of the Company. WTN's business was unprofitable and the Company had
determined to discontinue its operations. Mr. Paxson purchased all of the assets
of WTN except for its accounts receivable for $70,322 in cash, which price was
equal to the book value of such assets. WTN retained its accounts receivable and
accounts payable.
SOUTH CAROLINA RADIO NETWORK. Effective January 1, 1996, Mr. Paxson
purchased from the Company certain assets of the Company's unprofitable South
Carolina Radio Network. Mr. Paxson purchased all of the assets of the South
Carolina Radio Network other than cash and accounts receivable for $45,413 in
cash paid to the Company, which price was equal to the book value of such
assets. The Company retained the cash, accounts receivable and accounts payable
of the South Carolina Radio Network operation. The parties agreed that if Mr.
Paxson resold such assets at a profit prior to April 1, 1996, the amount of any
profit would be paid to the Company. Mr. Paxson subsequently sold such assets to
a third-party for $150,000, with the excess over $45,413 being paid to the
Company.
HOME SHOPPING NETWORK, INC. In connection with Mr. Paxson's departure from
HSN in 1990, he executed a consulting agreement containing various restrictions
upon activities by him that might be considered competitive with HSN, including
activities as an investor in competitive and other enterprises. Although Mr.
Paxson's consulting services to HSN terminated in 1994, certain of the
restrictions survived. As the Company's business evolved, the possible effect of
the consulting agreement upon Mr. Paxson's role as the Company's chief executive
officer and controlling stockholder became unclear. The Company considered it
advisable to eliminate doubts concerning, among other matters, Mr. Paxson's role
as a chief executive officer and controlling stockholder as the Company's
business developed, and the scope of HSN's rights under the consulting
agreement. Accordingly, on August 25, 1995, the Company and Mr. Paxson agreed
with HSN to, among other things, terminate HSN's rights under the consulting
agreement in consideration of a payment to HSN by the Company of $1.2 million.
In conjunction with this transaction Mr. Paxson advanced $1.2 million to the
Company and the Company executed a note bearing interest at 6%. The Company
repaid the note in October 1995.
76
<PAGE> 82
DP MEDIA, INC. In connection with the acquisition by DP Media, Inc. (DP
Media) of radio station WEBZ-FM, during September 1996, the Company agreed to
loan up to $750,000 to DP Media, a company beneficially owned by members of Mr.
Paxson's family. The loan bore interest at the rate of ten percent and required
monthly principal and interest payments. In 1996, the Company entered into a
five-year sales and related services agreement with DP Media under which the
Company agreed to pay a net minimum monthly fee of $22,000 for all of the thirty
and sixty second spot time of WEBZ-FM and agreed to provide certain other
services. The agreement is cancelable upon six months written notice by either
party.
During May 1997, the Company sold WWPX-TV serving the Washington, D.C.
market to DP Media in exchange for a $2.5 million promissory note. The note bore
interest at an annual rate of 8.25% with the entire principal due twenty-four
months from the date of closing. Upon its sale to DP Media, the station became a
Company network affiliate.
During June 1997, the Company financed DP Media's purchase of WRPX-TV
serving the Raleigh, North Carolina market from Roberts Broadcasting through a
loan of approximately $10.0 million (of which approximately $7.5 million, which
was assumed by DP Media, had been advanced to Roberts Broadcasting through the
date of closing). Upon its sale to DP Media, the station became a Company
network affiliate. The loan bore interest at an annual rate of 8.25%.
The loans to DP Media for WEBZ-FM, WWPX-TV and WRPX-TV were repaid to the
Company on July 30, 1997, using proceeds of third-party financing obtained by DP
Media from Banque Paribas, an affiliate of a holder of the Company's Private
Preferred Stock.
During July 1997, the Company entered into contracts to sell its interest
in television stations WPXS-TV and WZPX-TV, serving the St. Louis, Missouri and
Grand Rapids, Michigan markets for $4.8 million and $7.0 million, respectively,
to DP Media. The sale of WPXS-TV to DP Media was consummated in December 1997.
The sale of WZPX-TV was completed in January 1998. Upon their sale to DP Media,
these stations became Company network affiliates.
During February 1998, the Company contracted to sell WPXE-TV serving the
Milwaukee, Wisconsin market to DP Media for $6.0 million. Upon its sale to DP
Media, the station will become a Company network affiliate.
During 1997, the Company granted 33,000 fully vested non-qualified stock
options with a fair value of approximately $299,000 to the President and
Vice-President of DP Media, members of Mr. Paxson's family, as consideration for
past services as former employees of the Company.
DISCONTINUED OPERATIONS. In order to accelerate the payment of the
proceeds from the sales of the Paxson Network-Affiliated Television segment and
the Paxson Radio segment, the Company entered into certain bridge agreements
with Mr. Paxson or corporations owned and controlled by Mr. Paxson under similar
terms and conditions to those with the ultimate buyers. As of December 31, 1997,
all Paxson Network-Affiliated Television and Paxson Radio properties under these
bridge agreements had been sold to the ultimate buyers. Mr. Paxson did not
realize any direct financial benefit from these transactions with the Company
and, in accordance with the terms of the Company's Existing Notes and Existing
Preferred Stock, the Company obtained a written opinion as to the fairness of
such transactions from an independent investment banking firm.
STOCKHOLDERS AGREEMENT. The Company, certain entities controlled by Mr.
Paxson and entities which are affiliates of the holder of the Company's Private
Preferred Stock are parties to a stockholders agreement whereby the parties to
such agreement were granted registration rights with respect to certain shares
of common stock held by such parties and a right of first refusal to acquire a
pro rata share of any new securities the Company may issue. Additionally, the
stockholders agreement grants certain co-sale rights in the event that Mr.
Paxson should sell more than a predetermined percentage of his ownership
interest in the Company.
S. WILLIAM SCOTT. S. William Scott, a director of the Company from
February 1995 until his resignation from the Board in February 1998, had an
arrangement with the Company to provide consulting services to the Company with
respect to the development of its news programming for its radio and television
broadcast
77
<PAGE> 83
business and its radio network business. Mr. Scott was paid approximately
$10,000, $81,000 and $80,000 for such services during the years ended December
31, 1997, 1996 and 1995. Additionally, in 1996, Mr. Scott received benefits
under the Company's health and benefits plan and was granted options to purchase
20,000 shares of stock under the Company's Stock Incentive Plan. During 1997 the
Company hired Mr. Scott and subsequently named him President of Programming on
January 1, 1998.
WILLIAM E. SIMON, JR. The Company issued to an affiliate of Mr. Simon, who
was elected Vice Chairman of the Board of Directors in May 1998, warrants
expiring June 30, 2003 entitling the holder to purchase 155,500 shares of Class
A Common Stock at an exercise price of $16.00 per share. The Company has the
right to redeem the warrants with respect to up to 93,750 of the shares subject
thereto, at a price of $30.00 per share (less the warrant exercise price), at
such time as the public trading price of the Class A Common Stock averages $30
or more over any ten consecutive trading days.
An affiliate of Mr. Simon purchased, as part of the Convertible Preferred
Offering, $10 million aggregate liquidation preference of Convertible Preferred
Stock and warrants expiring June 30, 2003 to purchase 32,000 shares of Class A
Common Stock at an exercise price of $16.00 per share. The Company paid William
E. Simon & Sons, L.L.C., of which Mr. Simon serves as executive director,
$500,000 for consulting services provided in connection with the Convertible
Preferred Offering and $550,000 in placement fees relating to the placement of
additional Convertible Preferred Stock in the Convertible Preferred Offering.
OFFICER LOANS. During December, 1996, the Company agreed to extend loans
to certain of its key employees, including its executive officers, to finance
the purchase by such persons of shares of Class A Common Stock on the open
market. The loans are the personal obligations of each borrower and are secured
by a pledge of the shares of Class A Common Stock purchased with the loan
proceeds. Each loan accrues interest at a fixed annual rate of 5.75% and is due
and payable in full, with all accrued and unpaid interest, upon the earlier of
March 31, 1999, or the sale of the shares of Class A Common Stock pledged as
security for the loan. As of March 31, 1998, the outstanding balance of
principal and accrued interest on such loans to the Company's Executive Officers
was as follows: Mr. Bocock, $517,882; Mr. Goodman, $520,763; Mr. Hoker,
$416,051; Mr. Tek, $343,315; Mr. Morrison, $273,488; Mr. Gamache, $154,201; and
Mr. Grossman, $125,106.
78
<PAGE> 84
DESCRIPTION OF NEW JUNIOR PREFERRED STOCK AND
NEW EXCHANGE DEBENTURES
THE NEW JUNIOR PREFERRED STOCK
The shares of New Junior Preferred Stock which may be issued in exchange
for shares of Original Junior Preferred Stock in the Exchange Offer will be
issued pursuant to a Certificate of Designation relating thereto, the provisions
of which will be identical in all material respects to the provisions of the
Certificate of Designation relating to the Original Junior Preferred Stock. The
summary contained herein of certain provisions of the New Junior Preferred Stock
does not purport to be complete and is qualified in its entirety by reference to
the provisions of the Certificate of Designation relating thereto. The
definitions of certain capitalized terms used in the following summary are set
forth under "-- Certain Definitions" below. Other capitalized terms used herein
and not otherwise defined under "-- Certain Definitions" below are defined in
the Certificate of Designation.
GENERAL
The Company is authorized to issue 1,000,000 shares of preferred stock,
$0.001 par value per share. As of the date of this Prospectus, 231,282 shares of
Preferred Stock are outstanding, including 20,000 shares of Original Junior
Preferred Stock. The Certificate of Incorporation of the Company authorizes the
Board of Directors, without stockholder approval, to issue classes of preferred
stock from time to time in one or more series, with such designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions as may be determined by the Board of
Directors. The Board of Directors of the Company has adopted resolutions
creating a maximum of 72,000 shares of Junior Preferred Stock and has filed a
Certificate of Designation with respect thereto with the Secretary of State of
the State of Delaware as required by Delaware law. Of the authorized shares of
Junior Preferred Stock, 20,000 shares were issued in the Private Offering and
may be exchanged for a like number of shares of New Junior Preferred Stock in
the Exchange Offer, and the balance will be reserved for issuance as dividends
in the event the Company elects to pay dividends on the Junior Preferred Stock
by issuing additional shares of Junior Preferred Stock. See "-- Dividends"
below. Subject to certain conditions, the Junior Preferred Stock is exchangeable
for New Exchange Debentures at the option of the Company on any dividend payment
date. The Junior Preferred Stock is fully paid and nonassessable, and the
holders thereof do not have any subscription or preemptive rights.
RANKING
The Junior Preferred Stock, with respect to dividends and distributions
upon the liquidation, winding-up or dissolution of the Company, ranks (i) senior
to the Convertible Preferred Stock, to all classes of common stock of the
Company and to each other class of capital stock or series of preferred stock
established after the date of this Prospectus by the Board of Directors of the
Company the terms of which do not expressly provide that it ranks senior to, or
on a parity with, the Junior Preferred Stock as to dividends and distributions
upon the liquidation, winding-up or dissolution of the Company (collectively
referred to with the common stock of the Company as "Junior Securities"); (ii)
subject to certain conditions, on a parity with any class of capital stock or
series of preferred stock issued by the Company established after the date of
this Prospectus by the Board of Directors of the Company the terms of which
expressly provide that such class will rank on a parity with the Junior
Preferred Stock as to dividends and distributions upon the liquidation,
winding-up or dissolution of the Company (collectively referred to as "Parity
Securities"); and (iii) junior to the Existing Preferred Stock and, subject to
certain conditions, to each other class of capital stock or series of preferred
stock issued by the Company established after the date of this Prospectus by the
Board of Directors of the Company the terms of which expressly provide that such
class or series will rank senior to the Junior Preferred Stock as to dividends
and distributions upon the liquidation, winding-up or dissolution of the Company
(collectively referred to as "Senior Securities"). The Junior Preferred Stock
will be subject to the issuance of series of Junior Securities, Parity
Securities and Senior Securities; provided that the Company may not issue any
new class of Parity Securities or Senior Securities (or amend the provisions of
any existing class of capital stock to make such class of capital stock Parity
Securities or Senior Securities) without the approval of the holders of at least
a
79
<PAGE> 85
majority of the shares of Junior Preferred Stock then outstanding, voting or
consenting, as the case may be, together as one class; provided, however, that
the Company may: (A) issue additional shares of Junior Preferred Stock to pay
dividends on the Junior Preferred Stock in accordance with its terms on the
Issue Date, (B) issue additional shares of (i) Public Preferred Stock or Senior
Securities, which Senior Securities are pari passu with the Public Preferred
Stock, or (ii) Junior Preferred Stock or Parity Securities, and which Senior
Securities or Parity Securities require cash dividends at a time and in an
amount not in excess of one percentage point greater than the dividend rate
borne by the Private Preferred Stock (as existing on the Issue Date) and which
does not prevent either the payment of cash dividends on the Junior Preferred
Stock or the exchange of the Junior Preferred Stock for the New Exchange
Debentures, in an amount sufficient to acquire the Private Preferred Stock in
accordance with its terms on the Issue Date (including any premium required to
be paid), plus the amount of reasonable expenses incurred by the Company in
acquiring such Private Preferred Stock and issuing such additional Junior
Preferred Stock, Public Preferred Stock, Parity Securities or Senior Securities
(as the case may be); with such shares being issued no sooner than the date the
Company repurchases, redeems or otherwise retires the Private Preferred Stock
and (C) issue additional shares of Public Preferred Stock as dividends on the
Public Preferred Stock in accordance with the certificate of designation of the
Public Preferred Stock, as in existence on the Issue Date.
DIVIDENDS
Holders of the Junior Preferred Stock will be entitled to receive, when, as
and if declared by the Board of Directors of the Company, out of funds legally
available therefor, dividends on the Junior Preferred Stock at a rate per annum
equal to 13 1/4% of the liquidation preference per share of Junior Preferred
Stock, payable semi-annually. All dividends will be cumulative, whether or not
earned or declared, on a daily basis from the Issue Date and will be payable
semi-annually in arrears on May 15 and November 15 of each year, commencing on
November 15, 1998, to holders of record on May 1 and November 1 immediately
preceding the relevant Dividend Payment Date. Dividends may be paid, at the
Company's option, on any Dividend Payment Date either in cash or by the issuance
of additional shares of Junior Preferred Stock (including fractional shares)
having an aggregate liquidation preference equal to the amount of such
dividends. In the event that dividends are declared and paid through the
issuance of additional shares of Junior Preferred Stock, such dividends shall be
deemed paid in full and will not accumulate. If any dividend payable on any
Dividend Payment Date subsequent to May 15, 2003 is not paid in full in cash,
the per annum dividend rate will be increased by 1.00% per annum for such
dividend payment period. After the date of which such dividend is paid in cash,
the dividend rate will revert to the rate originally borne by the Junior
Preferred Stock. The Credit Facility, the Existing Debt Indentures and the
Existing Preferred Stock restrict the Company's ability to pay cash dividends on
its Capital Stock and will prohibit such payments in certain instances and other
future agreements may provide the same. See "Description of Indebtedness" and
"Description of Capital Stock -- Existing Preferred Stock."
Unpaid dividends accumulating on the Junior Preferred Stock for any past
dividend period and dividends in connection with any optional redemption may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to holders of record on such date, not more than forty-five (45) days
prior to the payment thereof, as may be fixed by the Board of Directors of the
Company.
OPTIONAL REDEMPTION
The Junior Preferred Stock may be redeemed (subject to contractual and
other restrictions with respect thereto and to the legal availability of funds
therefor) at any time on or after May 15, 2003, in whole or in part, at the
option of the Company, at the redemption prices (expressed as a percentage of
liquidation preference) set forth below, plus, without duplication, an amount in
cash equal to all accumulated and unpaid dividends (including an amount in cash
equal to a prorated dividend for the period from the Dividend Payment Date
80
<PAGE> 86
immediately prior to the redemption date to the redemption date) if redeemed
during the 12-month period beginning May 15 of each of the years set forth
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 106.625%
2004........................................................ 103.313%
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, on or prior to May 15, 2001, the Company may, at its option,
use the Net Proceeds of either or both of one or more Public Equity Offerings or
Major Asset Sales to redeem for cash up to an aggregate of 35% of the shares of
Junior Preferred Stock (whether initially issued or issued as a dividend
payment) at a redemption price equal to 113.25% of the liquidation preference
thereof, plus, without duplication, an amount in cash equal to all accumulated
and unpaid dividends (including an amount in cash equal to a prorated dividend
for the period from the Dividend Payment Date immediately prior to the
redemption date to the redemption date); provided, however, that after any such
redemption, there is at least (i) $75,000,000 aggregate liquidation preference
of the Junior Preferred Stock or (ii) $130,000,000 of combined aggregate
liquidation preference of the Junior Preferred Stock and aggregate principal
amount of the New Exchange Debentures remaining outstanding. Any such redemption
will be required to occur on or prior to 90 days after the receipt by the
Company of the proceeds of each Public Equity Offering or Major Asset Sale.
In the event of partial redemptions of Junior Preferred Stock, the shares
to be redeemed will be determined pro rata, except that the Company may redeem
all shares held by any holders of fewer than one share (or shares held by
holders who would hold less than one share as a result of such redemption), as
may be determined by the Company. No optional redemption may be authorized or
made unless prior thereto all accumulated and unpaid dividends shall have been
paid in cash or a sum set apart for such payment on the Junior Preferred Stock.
The certificates of designation governing the Existing Preferred Stock
prohibit or restrict the redemption of the Junior Preferred Stock so long as any
shares of Existing Preferred Stock are outstanding. The Credit Facility and the
Existing Debt Indentures also restrict the ability of the Company to redeem the
Junior Preferred Stock. See "Description of Indebtedness" and "Description of
Capital Stock -- Existing Preferred Stock."
MANDATORY REDEMPTION
The Junior Preferred Stock is subject to mandatory redemption (subject to
contractual and other restrictions with respect thereto and to the legal
availability of funds therefor) in whole on November 15, 2006 at a price equal
to the liquidation preference thereof, plus, without duplication, all
accumulated and unpaid dividends to the date of redemption. The certificates of
designation governing the Existing Preferred Stock prohibit or restrict the
redemption of the Junior Preferred Stock so long as any shares of Existing
Preferred Stock are outstanding. The Existing Debt Indentures and the Credit
Facility also restrict the ability of the Company to redeem the Junior Preferred
Stock and will prohibit any such redemption in certain instances and other
future agreements or certificates of designation with respect to Senior
Securities or Parity Securities may contain similar restrictions and/or
prohibitions. See "Description of Indebtedness" and "Description of Capital
Stock -- Existing Preferred Stock."
PROCEDURE FOR REDEMPTION
On and after a redemption date, unless the Company defaults in the payment
of the applicable redemption price, dividends will cease to accumulate on shares
of Junior Preferred Stock called for redemption and all rights of holders of
such shares will terminate except for the right to receive the redemption price,
without interest. If a notice of redemption shall have been given as provided in
the succeeding sentence and the funds necessary for redemption (including an
amount in respect of all dividends that will accumulate to the redemption date)
shall have been segregated and irrevocably set apart by the Company, in trust
for the benefit of the holders of the shares called for redemption, then at the
close of business on the day when such funds are segregated and set apart, the
holders of the shares to be redeemed shall cease to be stockholders of the
Company and shall be entitled only to receive the redemption price for such
shares. The Company will send a written notice of redemption by first class mail
to each holder of record
81
<PAGE> 87
of shares of Junior Preferred Stock, not less than 30 days nor more than 60 days
prior to the date fixed for such redemption. Shares of Junior Preferred Stock
issued and reacquired will, upon compliance with the applicable requirements of
Delaware law, have the status of authorized but unissued shares of preferred
stock of the Company undesignated as to series and may with any and all other
authorized but unissued shares of preferred stock of the Company be designated
or redesignated and issued or reissued, as the case may be, as part of any
series of preferred stock of the Company.
EXCHANGE
The Company may at its option from time to time on any Dividend Payment
Date exchange, in whole or in part, on a pro rata basis, the then outstanding
shares of Junior Preferred Stock for New Exchange Debentures; provided that
immediately after giving effect to any partial exchange, there shall be shares
of Junior Preferred Stock outstanding with an aggregate liquidation preference
of not less than $75,000,000 and not less than $75,000,000 aggregate principal
amount of New Exchange Debentures are then outstanding; and provided, further,
that (i) on the date of such exchange there are no accumulated and unpaid
dividends on the Junior Preferred Stock (including the dividend payable on such
date) or other contractual impediments to such exchange; (ii) there shall be
legally available funds sufficient therefor; (iii) such exchange would be
permitted under the terms of the Existing Preferred Stock, to the extent then
outstanding, and immediately after giving effect to such exchange, no Default or
Event of Default (each as defined in the New Exchange Indenture) would exist
under the New Exchange Indenture, no default or event of default would exist
under the Credit Facility or the Existing Debt Indentures and no default or
event of default under any other material instrument governing Indebtedness
outstanding at the time would be caused thereby; (iv) the New Exchange Indenture
has been qualified under the Trust Indenture Act, if such qualification is
required at the time of exchange; and (v) the Company shall have delivered a
written opinion to the effect that all conditions to be satisfied prior to such
exchange have been satisfied. The Company intends to comply with the provisions
of Rule 13e-4 promulgated pursuant to the Exchange Act in connection with the
exchange, to the extent applicable. The certificates of designation governing
the Existing Preferred Stock prohibit or restrict the Company from exchanging
the Junior Preferred Stock so long as any shares of Existing Preferred Stock are
outstanding. The Credit Facility and the Existing Debt Indentures currently
prohibit or restrict the exchange of the Junior Preferred Stock and may restrict
the Company's ability to exchange the Junior Preferred Stock in the future. See
"Description of Indebtedness" and "Description of Capital Stock -- Existing
Preferred Stock."
The holders of outstanding shares of Junior Preferred Stock will be
entitled to receive, subject to the second succeeding sentence, $1.00 principal
amount of New Exchange Debentures for each $1.00 liquidation preference of
Junior Preferred Stock held by them. The New Exchange Debentures will be issued
in registered form, without coupons. New Exchange Debentures issued in exchange
for Junior Preferred Stock will be issued in principal amounts of $1,000 and
integral multiples thereof to the extent possible, and will also be issued in
principal amounts less than $1,000 so that each holder of Junior Preferred Stock
will receive certificates representing the entire amount of New Exchange
Debentures to which such holder's shares of Junior Preferred Stock entitle such
holder; provided that the Company may pay cash in lieu of issuing a New Exchange
Debenture in a principal amount less than $1,000. The Company will send a
written notice of exchange by mail to each holder of record of shares of Junior
Preferred Stock not less than 30 nor more than 60 days before the date fixed for
such exchange. On and after the exchange date, dividends will cease to
accumulate on the outstanding shares of Junior Preferred Stock that are to be
exchanged, and all rights of the holders of Junior Preferred Stock that is to be
exchanged (except the right to receive the New Exchange Debentures, an amount in
cash equal to the accumulated and unpaid dividends to the exchange date and, if
the Company so elects, cash in lieu of any New Exchange Debenture which is in an
amount that is not an integral multiple of $1,000) will terminate. The Person
entitled to receive the New Exchange Debentures issuable upon such exchange will
be treated for all purposes as the registered holder of such New Exchange
Debentures. See "-- The New Exchange Debentures."
82
<PAGE> 88
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of the Junior Preferred Stock will initially be entitled to
be paid, out of the assets of the Company available for distribution, $10,000
per share, plus an amount in cash equal to accumulated and unpaid dividends
thereon to the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the last Dividend
Payment Date to the date fixed for liquidation, dissolution or winding-up),
before any distribution is made on any Junior Securities, including, without
limitation, the Convertible Preferred Stock and the common stock of the Company.
If upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, the amounts payable with respect to the Junior Preferred Stock and
all other Parity Securities are not paid in full, the holders of the Junior
Preferred Stock and the Parity Securities will share equally and ratably in any
distribution of assets of the Company first in proportion to the full
liquidation preference to which each is entitled until such preferences are paid
in full, and then in proportion to their respective amounts of accumulated but
unpaid dividends. After payment of the full amount of the liquidation
preferences and accumulated and unpaid dividends to which they are entitled, the
holders of shares of Junior Preferred Stock will not be entitled to any further
participation in any distribution of assets of the Company. However, neither the
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets of
the Company nor the consolidation or merger of the Company with one or more
entities shall be deemed to be a liquidation, dissolution or winding-up of the
Company.
The Certificate of Designation for the Junior Preferred Stock does not
contain any provision requiring funds to be set aside to protect the liquidation
preference of the Junior Preferred Stock, although such liquidation preference
will be substantially in excess of the par value of such shares of Junior
Preferred Stock. In addition, the Company is not aware of any provision of
Delaware law or any controlling decision of the courts of the State of Delaware
(the state of incorporation of the Company) that requires a restriction upon the
surplus of the Company solely because the liquidation preference of the Junior
Preferred Stock will exceed its par value. Consequently, there will be no
restriction upon the surplus of the Company solely because the liquidation
preference of the Junior Preferred Stock will exceed the par value and there
will be no remedies available to holders of the Junior Preferred Stock before or
after the payment of any dividend, other than in connection with the liquidation
of the Company, solely by reason of the fact that such dividend would reduce the
surplus of the Company to an amount less than the difference between the
liquidation preference of the Junior Preferred Stock and its par value.
VOTING RIGHTS
Holders of the Junior Preferred Stock will have no voting rights with
respect to general corporate matters except as provided by Delaware law or as
set forth in the Certificate of Designation. The Certificate of Designation
provides that if (i) the Company fails to redeem the Junior Preferred Stock on
or before November 15, 2006 or fails to discharge any redemption obligation with
respect to the Junior Preferred Stock or (ii) the Company fails to make a Change
of Control Offer if such an offer is required by the provisions set forth under
"-- Change of Control" below or fails to purchase shares of Junior Preferred
Stock from holders who elect to have such shares purchased pursuant to the
Change of Control Offer or (iii) a breach or violation of any of the provisions
described under the caption "-- Certain Covenants" below occurs and the breach
or violation continues for a period of 60 days or more after the Company
receives notice thereof specifying the default from the holders of at least 25%
of the shares of Junior Preferred Stock then outstanding or (iv) the Company
fails to pay at the final stated maturity (giving effect to any extensions
thereof) the principal amount of any Indebtedness of the Company or any
Restricted Subsidiary of the Company, or the final stated maturity of any such
Indebtedness is accelerated, if the aggregate principal amount of such
Indebtedness, together with the aggregate principal amount of any other such
Indebtedness in default for failure to pay principal at the final stated
maturity (giving effect to any extensions thereof) or which has been
accelerated, aggregates $10,000,000 or more at any time, in each case, after a
20-day period during which such default shall not have been cured or such
acceleration rescinded, or (v) any event occurs or condition exists which
results in an increase in the dividend rate borne by the Private Preferred Stock
in accordance with the terms thereof, then the number of directors constituting
the Board of Directors will be adjusted to permit the holders of a majority
83
<PAGE> 89
of the then outstanding shares of Junior Preferred Stock, voting separately and
as a class, to elect the lesser of two directors and that number of directors
constituting 25% of the members of the Board of Directors of the Company. Such
voting rights will continue until such time as any failure, breach or default
giving rise to such voting rights is remedied, cured (including, but not limited
to, in the case of clause (iv) through the issuance of Refinancing Indebtedness
or the waiver of any breach or default by the holder of such Indebtedness) or
waived by the holders of at least a majority of the shares of Junior Preferred
Stock then outstanding, at which time the term of any directors elected pursuant
to the provisions of this paragraph shall terminate. Each such event described
in clauses (i) through (v) above is referred to herein as a "Voting Rights
Triggering Event." The voting rights provided herein shall be the holder's
exclusive remedy at law or in equity.
In addition, the Certificate of Designation provides that except as stated
above under "-- Ranking," the Company will not authorize any additional shares
of Junior Preferred Stock or any class of Senior Securities or Parity Securities
without the affirmative vote or consent of holders of at least a majority of the
shares of Junior Preferred Stock of the Company then outstanding which are
entitled to vote thereon, voting or consenting, as the case may be, as one
class. The Certificate of Designation also provides that the Company may not
amend the Certificate of Designation so as to affect materially and adversely
the specified rights, preferences, privileges or voting rights of the holders of
shares of Junior Preferred Stock, or authorize the issuance of any additional
shares of Junior Preferred Stock (other than shares of Junior Preferred Stock
issued as a dividend on shares of Junior Preferred Stock or under "-- Ranking"),
without the affirmative vote or consent of the holders of at least a majority of
the then outstanding shares of Junior Preferred Stock which are entitled to vote
thereon, voting or consenting, as the case may be, as one class. The Certificate
of Designation also provides that, except as set forth above, (a) the creation,
authorization or issuance of any shares of Junior Securities, Parity Securities
or Senior Securities or (b) the increase or decrease in the amount of authorized
capital stock of any class, including any preferred stock, shall not require the
consent of the holders of Junior Preferred Stock and shall not be deemed to
affect adversely the rights, preferences, privileges or voting rights of holders
of shares of Junior Preferred Stock.
Under Delaware law, holders of Junior Preferred Stock are entitled to vote
as a class upon a proposed amendment to the certificate of incorporation of the
Company, whether or not entitled to vote thereon by the certificate of
incorporation, if the amendment would increase or decrease the par value of the
shares of such class, or alter or change the powers, preferences, or special
rights of the shares of such class so as to affect them adversely.
CHANGE OF CONTROL
Within 30 days of the occurrence of a Change of Control, the Company shall
make an offer to purchase (the "Change of Control Offer") all then outstanding
Junior Preferred Stock at a purchase price equal to 101% of the liquidation
preference thereof plus, without duplication, an amount in cash equal to all
accumulated and unpaid dividends thereon (including an amount in cash equal to a
prorated dividend for the period from the immediately preceding Dividend Payment
Date to the Change of Control Payment Date (as hereinafter defined) (such
applicable purchase price being hereinafter referred to as the "Change of
Control Purchase Price")) in accordance with the procedures set forth below.
Within 30 days of the occurrence of a Change of Control, the Company shall
(i) cause a notice of the Change of Control to be sent at least once to the Dow
Jones News Service or similar business news service in the United States and
(ii) send by first-class mail, postage prepaid, to each holder of Junior
Preferred Stock, at the address appearing in the register maintained by the
Transfer Agent, a notice stating:
(i) that the Change of Control Offer is being made and that all Junior
Preferred Stock tendered will be accepted for payment, and otherwise
subject to the terms and conditions set forth in the Certificate of
Designation;
(ii) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 30 Business Days and no more than
60 Business Days from the date such notice is mailed (the "Change of
Control Payment Date"));
84
<PAGE> 90
(iii) that any Junior Preferred Stock not tendered will continue to
accumulate dividends;
(iv) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Junior Preferred Stock accepted for payment
pursuant to the Change of Control Offer shall cease to accumulate dividends
after the Change of Control Payment Date;
(v) that holders accepting the offer to have their Junior Preferred
Stock purchased pursuant to a Change of Control Offer will be required to
surrender their certificates representing Junior Preferred Stock to the
Company at the address specified in the notice prior to the close of
business on the Business Day preceding the Change of Control Payment Date;
(vi) that holders will be entitled to withdraw their acceptance if the
Company receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the number of shares of Junior Preferred Stock delivered for
purchase and a statement that such holder is withdrawing his election to
have such Junior Preferred Stock purchased;
(vii) that holders whose Junior Preferred Stock is being purchased
only in part will be issued a new certificate representing the number of
shares of Junior Preferred Stock equal to the unpurchased portion of the
certificates surrendered; and
(viii) any other procedures that a holder must follow to accept a
Change of Control Offer or effect withdrawal of such acceptance.
On the Change of Control Payment Date, the Company shall accept for payment
the Junior Preferred Stock tendered pursuant to the Change of Control Offer and
promptly mail to each holder of Junior Preferred Stock so accepted payment in an
amount equal to the purchase price for such Junior Preferred Stock, and the
Company shall execute and issue a new Junior Preferred Stock certificate equal
to any unpurchased shares represented by a certificate surrendered.
Prior to the mailing of the notice referred to above, but in any event
within 30 days following the date on which a Change of Control occurs, the
Company covenants that, if the purchase of the Junior Preferred Stock would
violate or constitute a default or be prohibited under the Credit Facility, any
then outstanding Senior Debt, the Existing Debt Indentures or the Existing
Preferred Stock, then the Company will, to the extent needed to permit such
purchase of Junior Preferred Stock, either (i) repay in full all Indebtedness
under the Credit Facility, such Senior Debt, the Existing Notes and the Existing
Exchange Debentures and, in the case of the Credit Facility and such other
Senior Debt, terminate all commitments thereunder and effect the termination of
any such prohibition under the Existing Preferred Stock or (ii) obtain the
requisite consents under the Credit Facility, the instruments governing such
Senior Debt, the Existing Debt Indentures and the certificates of designation
governing the Existing Preferred Stock required to permit the repurchase of the
Junior Preferred Stock as provided below. The Company will first comply with the
covenant in the preceding sentence before it will be required to repurchase
Junior Preferred Stock pursuant to the provisions described above.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
redemption of the Junior Preferred Stock pursuant to a Change of Control Offer.
This "Change of Control" covenant will not apply in the event of (a)
changes in a majority of the Board of Directors of the Company in certain
instances as contemplated by the definition of "Change of Control" and (b)
certain transactions with Permitted Holders. In addition, this covenant is not
intended to afford holders of shares of Junior Preferred Stock protection in the
event of certain highly leveraged transactions, reorganizations, restructurings,
mergers and other similar transactions that might adversely affect the holders
of shares of Junior Preferred Stock but would not constitute a Change of
Control. The Company could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change of Control, but would increase the amount of Indebtedness outstanding at
such time. If a Change of Control were to occur, there can be no assurance that
the Company would have sufficient funds to pay the purchase price for all the
Junior Preferred Stock that the Company might be required to redeem.
85
<PAGE> 91
Moreover, as of the date of this Prospectus, after giving effect to the sale of
the Junior Preferred Stock and the application of the proceeds therefrom, the
Company would not have sufficient funds available to redeem all the Junior
Preferred Stock pursuant to a Change of Control Offer. In the event that the
Company is required to redeem the Junior Preferred Stock pursuant to a Change of
Control Offer, the Company expects that it would need to seek third-party
financing to the extent it does not have available funds to meet its redemption
obligations. However, there can be no assurance that the Company would be able
to obtain such financing on favorable terms, if at all. In addition, the Credit
Facility, the Existing Debt Indentures and the Existing Preferred Stock restrict
the Company's ability to redeem the Junior Preferred Stock, including pursuant
to a Change of Control Offer. See "Description of Indebtedness" and "Description
of Capital Stock -- Existing Preferred Stock."
None of the provisions in the Certificate of Designation relating to a
repurchase upon a Change of Control may be waived by the Board of Directors of
the Company.
EXCHANGE OFFER; REGISTRATION RIGHTS
Holders of shares of New Junior Preferred Stock will not be entitled to any
registration rights. The Company entered into the Registration Rights Agreement
pursuant to which it agreed, for the benefit of the holders of the Original
Junior Preferred Stock, that it will, at its cost, (i) within 60 days after the
Issue Date, file a registration statement (the "Exchange Offer Registration
Statement") with the Commission with respect to a registered offer to exchange
the Original Junior Preferred Stock for the New Junior Preferred Stock, which
will have terms substantially identical in all material respects to the Original
Junior Preferred Stock (except that the Original Junior Preferred Stock will not
contain terms with respect to transfer restrictions), and (ii) use its best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act within 150 days after the Issue Date. The
registration statement of which this Prospectus is a part constitutes the
Exchange Offer Registration Statement. Upon the Exchange Offer Registration
Statement being declared effective, the Company will offer the New Junior
Preferred Stock in exchange for surrender of the Original Junior Preferred
Stock. The Company will keep the Exchange Offer open for not less than 30 days
(or longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to the holders of the Original Junior Preferred Stock. For each
share of Original Junior Preferred Stock surrendered to the Company pursuant to
the Exchange Offer, the holder of such shares of Original Junior Preferred Stock
will receive shares of New Junior Preferred Stock having a liquidation
preference equal to that of the surrendered shares of Original Junior Preferred
Stock. Dividends on the New Junior Preferred Stock will accumulate from (A) the
later of (i) the last dividend payment date on which dividends were paid on the
Original Junior Preferred Stock surrendered in exchange therefor or (ii) if the
Original Junior Preferred Stock is surrendered for exchange on a date in a
period which includes the record date for a dividend payment date to occur on or
after the date of such exchange and as to which dividends will be paid, the date
of such dividend payment date or (B) the Issue Date, if no dividend has been
paid on the Original Junior Preferred Stock.
Under existing Commission interpretations, shares of New Junior Preferred
Stock would, in general, be freely transferable after the Exchange Offer without
further registration under the Securities Act; provided that, in the case of
broker-dealers, a prospectus meeting the requirements of the Securities Act will
be delivered as required. The Company has agreed for a period of 180 days after
consummation of the Exchange Offer to make available a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any resale of any such New Junior Preferred Stock acquired as described
below. A broker-dealer which delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the civil liability
provisions under the Securities Act, and will be bound by the provisions of the
Registration Rights Agreement (including certain indemnification rights and
obligations).
Each holder of shares of Original Junior Preferred Stock who wishes to
exchange such shares for shares of New Junior Preferred Stock in the Exchange
Offer is required to make certain representations including representations that
(i) any shares of New Junior Preferred Stock to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Junior Preferred Stock
and (iii) it is not an "affiliate," as defined in Rule 405 of the Securities
Act,
86
<PAGE> 92
of the Company or if it is an affiliate, it will comply with the registration
and prospectus delivery requirements of the Securities Act to the extent
applicable. If the holder is not a broker-dealer, it will be required to
represent that it is not engaged in, and does not intend to engage in, the
distribution of the New Junior Preferred Stock. If the holder is a broker-dealer
that will receive shares of New Junior Preferred Stock for its own account in
exchange for shares of Original Junior Preferred Stock that were acquired as a
result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such shares of New Junior Preferred Stock.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 150 days of the Issue Date
or, under certain circumstances, if the Initial Purchaser shall so request, the
Company will, at its own expense, (a) as promptly as practicable, file a Shelf
Registration Statement covering resales of the Junior Preferred Stock (the
"Shelf Registration Statement"), (b) use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act and (c)
use its best efforts to keep effective the Shelf Registration Statement until
the earlier of the disposition of the Original Junior Preferred Stock covered by
the Shelf Registration Statement or two years after the Issue Date (or such
earlier time when the shares of Original Junior Preferred Stock are eligible for
resale pursuant to Rule 144(k) under the Securities Act). The Company will, in
the event of the Shelf Registration, provide to each holder of shares of the
Original Junior Preferred Stock copies of the prospectus which is a part of the
Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Original Junior Preferred
Stock. A holder of shares of Original Junior Preferred Stock that sells such
shares pursuant to the Shelf Registration Statement generally would be required
to be named as a selling securityholder in the related prospectus and to deliver
a prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification rights and
obligations).
If the Company fails to comply with the above provisions or if any such
registration statement fails to become effective, then, as liquidated damages,
additional dividends shall become payable in respect of the Original Junior
Preferred Stock as follows:
If (i) notwithstanding that the Company has consummated or will
consummate the Exchange Offer, the Company is required to file a Shelf
Registration Statement and such Shelf Registration Statement is not filed
on or prior to the date required by the Registration Rights Agreement;
(ii) (A) the Exchange Offer registration statement or Shelf
Registration Statement is not declared effective within 150 days after the
Issue Date or (B) notwithstanding that the Company has consummated or will
consummate the Exchange Offer, the Company is required to file a Shelf
Registration Statement and such Shelf Registration Statement is not
declared effective by the Commission on or prior to the 90th day following
the date such Shelf Registration Statement was filed; or
(iii) either (A) the Company has not exchanged the New Junior
Preferred Stock for all Original Junior Preferred Stock validly tendered in
accordance with the terms of the Exchange Offer on or prior to 60 days
after the date on which the Exchange Offer Registration Statement was
declared effective or (B) the Exchange Offer Registration Statement ceases
to be effective at any time prior to the time that the Exchange Offer is
consummated or (C) if applicable, the Shelf Registration Statement has been
declared effective and such Shelf Registration Statement ceases to be
effective at any time prior to the second anniversary of the Issue Date;
(each such event referred to in clauses (i) through (iii) above is a "Junior
Preferred Stock Registration Default"), the sole remedy available to holders of
the Original Junior Preferred Stock will be the immediate assessment of
additional dividends ("Additional Dividends") as follows: the per annum dividend
rate on the Original Junior Preferred Stock will increase by 50 basis points,
and the per annum accumulate rate will increase by an additional 25 basis points
premium for each subsequent 90-day period during which the Junior Preferred
Stock Registration Default remains uncured, up to a maximum additional dividend
rate of 200 basis points per annum in excess of the dividend rate on the cover
of this Prospectus. All Additional Dividends will
87
<PAGE> 93
be payable to holders of the Original Junior Preferred Stock in cash on each
dividend payment date, commencing with the first such date occurring after any
such Additional Dividend commences to accrue, until such Junior Preferred Stock
Registration Default is cured. After the date on which such Junior Preferred
Stock Registration Default is cured, the dividend rate on the Original Junior
Preferred Stock will revert to the dividend rate originally borne by the
Original Junior Preferred Stock (as shown on the cover of this Prospectus).
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available from the Company upon request.
CERTAIN COVENANTS
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any Restricted Subsidiary of the Company to, directly or
indirectly, incur any Indebtedness (including Acquired Indebtedness) other than
Permitted Indebtedness. Notwithstanding the foregoing limitation, the Company
and its Restricted Subsidiaries may incur Indebtedness if on the date of the
incurrence of such Indebtedness (i) no Voting Rights Triggering Event shall have
occurred and be continuing or shall occur as a consequence thereof and (ii)
after giving effect to the incurrence of such Indebtedness and the receipt and
application of the proceeds thereof, the ratio of the Company's total
Indebtedness to the Company's Adjusted EBITDA (determined on a pro forma basis
for the last four full fiscal quarters of the Company for which financial
statements are available at the date of determination) is less than 7.0 to 1;
provided, however, that if the Indebtedness which is the subject of a
determination under this provision is Acquired Indebtedness, or Indebtedness
incurred in connection with the simultaneous acquisition of any Person,
business, property or assets, then such ratio shall be determined by giving
effect (on a pro forma basis, as if the transaction had occurred at the
beginning of the four quarter period) to both the incurrence or assumption of
such Acquired Indebtedness or such other Indebtedness by the Company and the
inclusion in the Company's Adjusted EBITDA of the Consolidated EBITDA of the
acquired Person, business, property or assets; and provided, further, that in
the event that the Consolidated EBITDA of the acquired Person, business,
property or assets reflects an operating loss, no amounts shall be deducted from
the Company's Adjusted EBITDA in making the determinations described above.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, make any
Restricted Payment if at the time of such Restricted Payment and immediately
after giving effect thereto:
(i) any Voting Rights Triggering Event shall have occurred and be
continuing; or
(ii) the Company could not incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant; or
(iii) the aggregate amount of Restricted Payments declared or made
after the Issue Date (the amount expended for such purposes, if other than
in cash, being the fair market value of such property as determined by the
Board of Directors of the Company in good faith) exceeds the sum of (a)
100% of the Company's Cumulative Consolidated EBITDA minus 1.4 times the
Company's Cumulative Consolidated Interest Expense, plus (b) 100% of the
aggregate Net Proceeds and the fair market value of securities or other
property received by the Company from the issue or sale, after the Issue
Date, of Capital Stock (other than Disqualified Capital Stock of the
Company or Capital Stock of the Company issued to any Restricted Subsidiary
of the Company) of the Company or any Indebtedness or other securities of
the Company convertible into or exercisable or exchangeable for Capital
Stock (other than Disqualified Capital Stock) of the Company which have
been so converted or exercised or exchanged, as the case may be, plus (c)
$10,000,000.
(b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days
after the date of its declaration if such dividend or distribution would have
been permitted on the date of declaration; or (2) the purchase, redemption or
other acquisition or
88
<PAGE> 94
retirement of any Capital Stock of the Company or any warrants, options or other
rights to acquire shares of any class of such Capital Stock (x) solely in
exchange for shares of Qualified Capital Stock or other rights to acquire
Qualified Capital Stock, (y) through the application of the Net Proceeds of a
substantially concurrent sale for cash (other than to a Restricted Subsidiary)
of shares of Qualified Capital Stock or warrants, options or other rights to
acquire Qualified Capital Stock or (z) in the case of Disqualified Capital
Stock, solely in exchange for, or through the application of the Net Proceeds of
a substantially concurrent sale for cash (other than to a Restricted Subsidiary)
of, Disqualified Capital Stock that has a redemption date no earlier than, is
issued by the Company or the same Person as and requires the payment of current
dividends or distributions in cash no earlier than, in each case, the
Disqualified Capital Stock being purchased, redeemed or otherwise acquired or
retired and which Disqualified Capital Stock does not prohibit cash dividends on
the Junior Preferred Stock or the exchange thereof for New Exchange Debentures.
Limitations on Transactions with Affiliates. The Company will not, and
will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into or suffer to exist any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate or holder of 10% or
more of the Company's Common Stock (an "Affiliate Transaction") or extend,
renew, waive or otherwise modify the terms of any Affiliate Transaction entered
into prior to the Issue Date unless (i) such Affiliate Transaction is between or
among the Company and its Wholly-Owned Subsidiaries; or (ii) the terms of such
Affiliate Transaction are fair and reasonable to the Company or such Restricted
Subsidiary, as the case may be, and the terms of such Affiliate Transaction are
at least as favorable as the terms which could be obtained by the Company or
such Restricted Subsidiary, as the case may be, in a comparable transaction made
on an arm's-length basis between unaffiliated parties. In any Affiliate
Transaction involving an amount or having a value in excess of $1,000,000 which
is not permitted under clause (i) above, the Company must obtain a Board
Resolution certifying that such Affiliate Transaction complies with clause (ii)
above. In transactions with a value in excess of $5,000,000 which are not
permitted under clause (i) above, unless such transaction is with a Subsidiary
in which no Affiliate has a minority interest therein the Company must obtain a
valuation of the assets subject to such transaction by an Independent Appraiser
or a written opinion as to the fairness of such a transaction from an
independent investment banking firm or an Independent Appraiser.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "-- Limitation on Restricted
Payments" contained herein, (ii) any transaction approved by the Board of
Directors of the Company with an officer or director of the Company or of any
Subsidiary in his or her capacity as officer or director entered into in the
ordinary course of business, including compensation and employee benefit
arrangements with any officer or director of the Company or of any Subsidiary
that are customary for public companies in the broadcasting industry, or (iii)
modifications of the Existing Preferred Stock.
Merger, Consolidation and Sale of Assets. Without the affirmative vote of
the holders of a majority of the issued and outstanding shares of Junior
Preferred Stock, voting or consenting, as the case may be, as a separate class,
the Company will not, in a single transaction or a series of related
transactions, consolidate with or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets (as
an entirety or substantially as an entirety in one transaction or series of
related transactions) to, another Person (other than a Wholly-Owned Subsidiary
with, into or to another Wholly-Owned Subsidiary) or adopt a plan of liquidation
unless (i) either (1) the Company is the surviving or continuing Person or (2)
the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person that acquires by conveyance, transfer
or lease the properties and assets of the Company substantially as an entirety
or, in the case of a plan of liquidation, the Person to which assets of the
Company have been transferred shall be a corporation, partnership or trust
organized and existing under the laws of the United States or any State thereof
or the District of Columbia; (ii) the Junior Preferred Stock shall be converted
into or exchanged for and shall become shares of such successor, transferee or
resulting Person, having in respect of such successor, transferee or resulting
Person the same powers, preferences and relative, participating, optional or
other special rights and the qualifications, limitations or restrictions
thereon, that the Junior Preferred Stock had immediately prior to such
transaction; (iii) immediately after giving effect to such
89
<PAGE> 95
transaction and the use of the proceeds therefrom (on a pro forma basis,
including giving effect to any Indebtedness incurred or anticipated to be
incurred in connection with such transaction), the Company (in the case of
clause (1) of the foregoing clause (i)) or such Person (in the case of clause
(2) of the foregoing clause (i)) shall be able to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; (iv) immediately
after giving effect to such transactions, no Voting Rights Triggering Event
shall have occurred or be continuing; and (v) the Company shall have delivered
to the Transfer Agent for the Junior Preferred Stock prior to the consummation
of the proposed transaction an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer complies with the
Certificate of Designation and that all conditions precedent in the Certificate
of Designation relating to such transaction have been satisfied. For purposes of
the foregoing, the transfer (by lease, assignment, sale or otherwise, in a
single transaction or series of related transactions) of all or substantially
all of the properties and assets of one or more Subsidiaries, the Capital Stock
of which constitutes all or substantially all of the properties or assets of the
Company, will be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any Restricted Subsidiary to issue any Preferred Stock (except to the
Company or to a Restricted Subsidiary) or permit any Person (other than the
Company or a Restricted Subsidiary) to hold any such Preferred Stock unless the
Company or such Restricted Subsidiary would be entitled to incur or assume
Indebtedness in compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant in an aggregate principal amount equal to the aggregate
liquidation value of the Preferred Stock to be issued.
Transfer Agent and Registrar. First Union National Bank, Charlotte, North
Carolina, is the transfer agent (the "Transfer Agent") and registrar for the
Junior Preferred Stock.
Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or Section 15(d) of the Exchange Act, the
Company will be obligated to provide to the holders of Junior Preferred Stock
all annual and quarterly reports and other documents which the Company would
have been required to file with the Commission pursuant to such Sections 13 and
15(d) had it been so subject and provide to all holders of Junior Preferred
Stock, without costs to such holders, copies of such reports and documents.
THE NEW EXCHANGE DEBENTURES
The New Exchange Debentures, if issued, will be issued under a new Exchange
Indenture (the "New Exchange Indenture"), to be dated as of June 10, 1998
between the Company, the Guarantors and The Bank of New York (the "Trustee").
The following summary of certain provisions of the New Exchange Indenture does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the Trust Indenture Act of 1939, as amended, as in effect on
the date of the New Exchange Indenture (the "TIA"), and to all of the provisions
of the New Exchange Indenture, including the definitions of certain terms
therein and those terms made a part of the New Exchange Indenture by reference
to the TIA as in effect on the date of the New Exchange Indenture. A copy of the
form of the New Exchange Indenture may be obtained from the Company by any
prospective investor upon request. The definitions of certain capitalized terms
used in the following summary are set forth under "-- Certain Definitions"
below. The Credit Facility, the Existing Debt Indentures and the Existing
Preferred Stock restrict the Company's ability to issue the New Exchange
Debentures. See "Description of Indebtedness" and "Description of Capital
Stock -- Existing Preferred Stock."
The New Exchange Debentures will be general unsecured obligations of the
Company and will be limited in aggregate principal amount to the liquidation
preference of the Junior Preferred Stock, plus, without duplication, accumulated
and unpaid dividends, on the date or dates on which it is exchanged for New
Exchange Debentures (plus any additional New Exchange Debentures issued in lieu
of cash interest as described herein). The New Exchange Debentures will be
issued in fully registered form only, in denominations of $1,000 and integral
multiples thereof (other than as described in "-- The Junior Preferred Stock --
Exchange" or with respect to additional New Exchange Debentures issued in lieu
of cash interest as described
90
<PAGE> 96
herein). The New Exchange Debentures will be subordinated to all existing and
future Senior Debt of the Company and will rank pari passu with the Senior
Subordinated Notes and the Existing Exchange Debentures.
Principal of, premium, if any, and interest on the New Exchange Debentures
will be payable, and the New Exchange Debentures may be presented for
registration of transfer or exchange at the office of the Paying Agent and
Registrar. At the Company's option, interest, to the extent paid in cash, may be
paid by check mailed to the registered address of holders of the New Exchange
Debentures as shown on the register for the New Exchange Debentures. The Trustee
will initially act as Paying Agent and Registrar. The Company may change any
Paying Agent and Registrar without prior notice to holders of the New Exchange
Debentures. Holders of the New Exchange Debentures must surrender New Exchange
Debentures to the Paying Agent to collect principal payments.
The New Exchange Debentures will mature on November 15, 2006. Each Exchange
Debenture will bear interest at the rate of 13 1/4% per annum from the Exchange
Date or from the most recent interest payment date to which interest has been
paid or provided for or, if no interest has been paid or provided for, from the
Exchange Date. Interest will be payable semi-annually in cash (or, on or prior
to May 15, 2003, in additional New Exchange Debentures, at the option of the
Company) in arrears on each May 15 and November 15, commencing with the first
such date after the Exchange Date. Interest on the New Exchange Debentures will
be computed on the basis of a 360-day year comprised of twelve 30-day months and
the actual number of days elapsed.
OPTIONAL REDEMPTION
The New Exchange Debentures will be redeemable, at the Company's option, in
whole at any time or in part from time to time, on and after May 15, 2003 at the
following redemption prices (expressed as percentages of the principal amount)
if redeemed during the twelve-month period commencing on May 15 of the year set
forth below, plus, in each case, accrued interest thereon to the date of
redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 106.625%
2004........................................................ 103.313%
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, on or prior to May 15, 2001, the Company may, at its option,
use the Net Proceeds of either or both of one or more Public Equity Offerings or
Major Asset Sales to redeem for cash up to an aggregate of 35% of the aggregate
principal amount of the New Exchange Debentures whether initially issued or
issued in payment of interest obligations thereon at a redemption price equal to
113.25% of the aggregate principal amount so redeemed, plus accrued interest to
the redemption date; provided, however, that after any such redemption, at least
(i) $75,000,000 aggregate principal amount of New Exchange Debentures or (ii)
$130,000,000 of the combined aggregate liquidation preference of the Junior
Preferred Stock and aggregate principal amount of the New Exchange Debentures
remain outstanding. Any such redemption will be required to occur on or prior to
90 days after the receipt by the Company of the proceeds of each Public Equity
Offering or Major Asset Sale.
The Credit Facility restricts the Company's ability to optionally redeem
the New Exchange Debentures. See "Description of Indebtedness."
CHANGE OF CONTROL
Within 30 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding New Exchange Debentures
at a purchase price equal to 101% of the principal amount thereof plus any
accrued and unpaid interest thereon to the Change of Control Payment Date (as
hereinafter defined) (such applicable purchase price being hereinafter referred
to as the "Change of Control Purchase Price") in accordance with the procedures
set forth below.
Within 30 days of the occurrence of a Change of Control, the Company shall
(i) cause a notice of the Change of Control Offer to be sent at least once to
the Dow Jones News Service or similar business news
91
<PAGE> 97
service in the United States and (ii) send by first-class mail, postage prepaid,
to the Trustee and to each holder of the New Exchange Debentures, at the address
appearing in the register maintained by the Registrar of the New Exchange
Debentures, a notice stating:
(i) that the Change of Control Offer is being made and that all New
Exchange Debentures tendered will be accepted for payment, and otherwise
subject to the terms and conditions set forth in the New Exchange
Indenture;
(ii) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 30 business days nor more than 60
days from the date such notice is mailed (the "Change of Control Payment
Date"));
(iii) that any New Exchange Debenture not tendered will continue to
accrue interest;
(iv) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any New Exchange Debentures accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest
after the Change of Control Payment Date;
(v) that holders accepting the offer to have their New Exchange
Debentures purchased pursuant to a Change of Control Offer will be required
to surrender the New Exchange Debentures to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
preceding the Change of Control Payment Date;
(vi) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of the New Exchange Debentures delivered for
purchase, and a statement that such holder is withdrawing his election to
have such New Exchange Debentures purchased;
(vii) that holders whose New Exchange Debentures are being purchased
only in part will be issued a new certificate representing New Exchange
Debentures equal in principal amount to the unpurchased portion of the New
Exchange Debentures surrendered, provided that each New Exchange Debenture
purchased and each such New Exchange Debenture issued shall be in an
original principal amount in denominations of $1,000 and integral multiples
thereof;
(viii) any other procedures that a holder must follow to accept a
Change of Control Offer or effect withdrawal of such acceptance; and
(ix) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment New Exchange Debentures or portions thereof
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all New Exchange Debentures
or portions thereof so tendered and (iii) deliver or cause to be delivered to
the Trustee New Exchange Debentures so accepted together with an Officers'
Certificate stating the New Exchange Debentures or portions thereof tendered to
the Company. The Paying Agent shall promptly mail to each holder of New Exchange
Debentures so accepted payment in an amount equal to the purchase price for such
New Exchange Debentures, and the Company shall execute and issue, and the
Trustee shall promptly authenticate and mail to such holder, a New Exchange
Debenture equal in principal amount to any unpurchased portion of the New
Exchange Debentures surrendered; provided that each such New Exchange Debenture
shall be issued in an original principal amount in denominations of $1,000 and
integral multiples thereof.
The New Exchange Indenture will provide that, prior to the mailing of the
notice referred to above, but in any event within 30 days following the date on
which a Change of Control occurs, the Company covenants that if the purchase of
the New Exchange Debentures would violate or constitute a default under the
Credit Facility or any other then outstanding Senior Debt, then the Company
will, to the extent needed to permit such purchase of New Exchange Debentures,
either (i) repay in full all Indebtedness on the basis required by the Credit
Facility and such Senior Debt (and terminate all commitments thereunder) or (ii)
obtain the
92
<PAGE> 98
requisite consents under the Credit Facility and the instrument governing such
Senior Debt to permit the repurchase of the New Exchange Debentures as provided
below. The Company will first comply with the covenant in the preceding sentence
before it will be required to repurchase New Exchange Debentures pursuant to the
provisions described below; provided that the Company's failure to comply with
the covenant described in the preceding sentence will constitute an Event of
Default described in clause (iii) under "Events of Default" below.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the purchase
of New Exchange Debentures pursuant to a Change of Control Offer.
This "Change of Control" covenant will not apply in the event of (a)
changes in a majority of the Board of Directors of the Company in certain
instances as contemplated by the definition of "Change of Control" and (b)
certain transactions with Permitted Holders. In addition, this covenant is not
intended to afford holders of New Exchange Debentures protection in the event of
certain highly leveraged transactions, reorganizations, restructurings, mergers
and other similar transactions that might adversely affect the holders of New
Exchange Debentures, but would not constitute a Change of Control. The Company
could, in the future, enter into certain transactions, including certain
recapitalizations of the Company, that would not constitute a Change of Control,
but would increase the amount of Indebtedness outstanding at such time. If a
Change of Control were to occur, there can be no assurance that the Company
would have sufficient funds to pay the purchase price for all New Exchange
Debentures, Existing Notes and Existing Exchange Debentures that the Company
might be required to purchase. Moreover, as of the date of this Memorandum,
after giving effect to the sale of the Junior Preferred Stock and the
application of the proceeds therefrom, the Company would not have sufficient
funds available to purchase all the New Exchange Debentures, assuming they had
been issued, pursuant to a Change of Control Offer. In the event that the
Company were required to purchase New Exchange Debentures pursuant to a Change
of Control Offer, the Company expects that it would need to seek third-party
financing to the extent it does not have available funds to meet its purchase
obligations. However, there can no assurance that the Company would be able to
obtain such financing on favorable terms, if at all. In addition, the Credit
Facility restricts and any Credit Agreement the Company enters into is likely to
restrict the Company's ability to repurchase the New Exchange Debentures,
including pursuant to a Change of Control Offer. See "Description of
Indebtedness."
None of the provisions in the New Exchange Indenture relating to a
repurchase upon a Change of Control is waivable by the Board of Directors of the
Company. In addition, the Trustee may not waive the right of any holder of the
New Exchange Debentures to redeem its New Exchange Debentures upon a Change of
Control, except to the extent the Trustee is acting at the direction of the
holders of the New Exchange Debentures then outstanding.
SUBORDINATION
The Obligations represented by the New Exchange Debentures are, to the
extent and in the manner provided in the New Exchange Indenture, subordinated in
right of payment to the prior indefeasible payment and satisfaction in full of
all existing and future Senior Debt of the Company.
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, arrangement, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, whether voluntary or involuntary, or any liquidation,
dissolution or other winding-up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or any general assignment
for the benefit of creditors or other marshaling of assets or liabilities of the
Company (except in connection with the merger or consolidation of the Company or
its liquidation or dissolution following the transfer of substantially all of
its assets, upon the terms and conditions permitted under the circumstances
described under "-- Merger, Consolidation and Sale of Assets") (all of the
foregoing referred to herein individually as a "Bankruptcy Proceeding" and
collectively as "Bankruptcy Proceedings"), the holders of Senior Debt of the
Company will be entitled to receive payment and satisfaction in full of all
amounts due on or in respect of all Senior Debt of the Company before the
93
<PAGE> 99
holders of the New Exchange Debentures are entitled to receive or retain any
payment or distribution of any kind on account of the New Exchange Debentures.
In the event that, notwithstanding the foregoing, the Trustee or any holder of
New Exchange Debentures receives any payment or distribution of assets of the
Company of any kind, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of the New Exchange
Debentures before all Senior Debt of the Company is paid and satisfied in full,
then such payment or distribution will be held by the recipient in trust for the
benefit of holders of Senior Debt and will be immediately paid over or delivered
to the holders of Senior Debt or their representative or representatives to the
extent necessary to make payment in full of all Senior Debt remaining unpaid,
after giving effect to any concurrent payment or distribution, or provision
therefor, to or for the holders of Senior Debt. By reason of such subordination,
in the event of liquidation or insolvency, creditors of the Company who are
holders of Senior Debt may recover more, ratably, than other creditors of the
Company, and creditors of the Company who are not holders of Senior Debt or of
the New Exchange Debentures may recover more, ratably, than the holders of the
New Exchange Debentures.
No payment or distribution of any assets or securities of the Company or
any Restricted Subsidiary of any kind or character (including, without
limitation, cash, property and any payment or distribution which may be payable
or deliverable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the New Exchange Debentures by the Company)
may be made by or on behalf of the Company or any Restricted Subsidiary,
including, without limitation, by way of set-off or otherwise, for or on account
of the New Exchange Debentures, or for or on account of the purchase, redemption
or other acquisition of the New Exchange Debentures, and neither the Trustee nor
any holder or owner of any New Exchange Debentures shall take or receive from
the Company or any Restricted Subsidiary, directly or indirectly in any manner,
payment in respect of all or any portion of New Exchange Debentures following
the delivery by the representative of the holders of Designated Senior Debt (the
"Representative") to the Trustee of written notice of the occurrence of a
Payment Default, and in any such event, such prohibition shall continue until
such Payment Default is cured, waived in writing or ceases to exist. At such
time as the prohibition set forth in the preceding sentence shall no longer be
in effect, subject to the provisions of the following paragraph, the Company
shall resume making any and all required payments in respect of the New Exchange
Debentures, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Debt, no payment or distribution of any assets of the Company of any kind may be
made by the Company, including, without limitation, by way of set-off or
otherwise, on account of the New Exchange Debentures, or on account of the
purchase or redemption or other acquisition of New Exchange Debentures, for a
period (a "Payment Blockage Period") commencing on the date of receipt by the
Trustee of written notice from the Representative of such Non-Payment Event of
Default unless and until (subject to any blockage of payments that may then be
in effect under the preceding paragraph) the earliest of (w) more than 179 days
shall have elapsed since receipt of such written notice by the Trustee, (x) such
Non-Payment Event of Default shall have been cured or waived in writing or shall
have ceased to exist, (y) such Designated Senior Debt shall have been paid in
full or (z) such Payment Blockage Period shall have been terminated by written
notice to the Company or the Trustee from such Representative, after which, in
the case of clause (w), (x), (y) or (z), the Company shall resume making any and
all required payments in respect of the New Exchange Debentures, including any
missed payments. Notwithstanding any other provision of the New Exchange
Indenture, in no event shall a Payment Blockage Period commenced in accordance
with the provisions of the New Exchange Indenture described in this paragraph
extend beyond 179 days from the date of the receipt by the Trustee of the notice
referred to above (such period, an "Initial Blockage Period"). Any number of
additional Payment Blockage Periods may be commenced during the Initial Blockage
Period; provided, however, that no such additional Payment Blockage Period shall
extend beyond the Initial Blockage Period. After the expiration of the Initial
Blockage Period, no Payment Blockage Period may be commenced until at least 180
consecutive days have elapsed from the last day of the Initial Blockage Period.
Notwithstanding any other provision of the New Exchange Indenture, no
Non-Payment Event of Default with respect to Designated Senior Debt which
existed or was continuing on the date of the commencement of any Payment
Blockage Period initiated by the Representative shall be, or be made, the basis
for the commencement of a second Payment Blockage Period
94
<PAGE> 100
initiated by the Representative, whether or not within the Initial Blockage
Period, unless such Non-Payment Event of Default shall have been waived for a
period of not less than 90 consecutive days.
Each Guarantee will, to the extent set forth in the New Exchange Indenture,
be subordinated in right of payment to the prior payment in full of all Senior
Debt of the respective Guarantor, including obligations of such Guarantor with
respect to the Credit Facility (including any guarantee thereof) to the extent
then existing, and will be subject to the rights of holders of Designated Senior
Debt of such Guarantor to initiate blockage periods, upon terms substantially
comparable to the subordination of the New Exchange Debentures to all Senior
Debt of the Company.
If the Company or any Guarantor fails to make any payment on the New
Exchange Debentures or any Guarantee, as the case may be, when due or within any
applicable grace period, whether or not on account of payment blockage
provisions, such failure would constitute an Event of Default under the New
Exchange Indenture and would enable the holders of the New Exchange Debentures
to accelerate the maturity thereof. See "-- Events of Default."
A holder of New Exchange Debentures by his acceptance of New Exchange
Debentures agrees to be bound by such provisions and authorizes and expressly
directs the Trustee, on his behalf, to take such action as may be necessary or
appropriate to effectuate the subordination provided for in the Indenture and
appoints the Trustee his attorney-in-fact for such purpose.
GUARANTEES
The New Exchange Debentures are guaranteed on a senior subordinated basis
by the Guarantors. All payments pursuant to the Guarantees by the Guarantors are
subordinated in right of payment to the prior payment in full of all Senior Debt
of the Guarantor, to the same extent and in the same manner that all payments
pursuant to the New Exchange Debentures are subordinated in right of payment to
the prior payment in full of all Senior Debt of the Company.
The obligations of each Guarantor are limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor (including, without limitation, any guarantees of Senior Debt) and
after giving effect to any collections from or payments made by or on behalf of
any other Guarantor in respect of the obligations of such other Guarantor under
its Guarantee or pursuant to its contribution obligations under the New Exchange
Indenture, result in the obligations of such Guarantor under the Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to contribution from each other Guarantor in a pro rata amount
based on the Adjusted Net Assets of each Guarantor.
A Guarantor shall be released from all of its obligations under its
Guarantee if all or substantially all of its assets are sold or all of its
Capital Stock is sold, in each case in a transaction in compliance with the
covenant described under "-- Limitation on Certain Asset Sales," or the
Guarantor merges with or into or consolidates with, or transfers all or
substantially all of its assets to, the Company or another Guarantor in a
transaction in compliance with "-- Merger, Consolidation and Sale of Assets,"
and such Guarantor has delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent herein provided
for relating to such transaction have been complied with.
CERTAIN COVENANTS
The New Exchange Indenture will contain, among others, the following
covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any Restricted Subsidiary of the Company to, directly or
indirectly incur any Indebtedness (including Acquired Indebtedness) other than
Permitted Indebtedness. Notwithstanding the foregoing limitations, the Company
and its Restricted Subsidiaries may incur Indebtedness if (a) after giving
effect to the incurrence of such Indebtedness and the receipt and application of
the proceeds thereof, the ratio of the Company's total Indebtedness to the
Company's Adjusted EBITDA (determined on a pro forma basis for the last four
full fiscal quarters of the Company for which financial statements are available
at the date of determination) is less
95
<PAGE> 101
than 7.0 to 1; provided, however, that if the Indebtedness which is the subject
of a determination under this provision is Acquired Indebtedness, or
Indebtedness incurred in connection with the simultaneous acquisition of any
Person, business, property or assets, then such ratio shall be determined by
giving effect (on a pro forma basis, as if the transaction had occurred at the
beginning of the four quarter period) to both the incurrence or assumption of
such Acquired Indebtedness or such other Indebtedness by the Company and the
inclusion in the Company's Adjusted EBITDA of the Consolidated EBITDA of the
acquired Person, business, property or assets; and provided, further, that in
the event that the Consolidated EBITDA of the acquired Person, business,
property or assets reflects an operating loss, no amounts shall be deducted from
the Company's Adjusted EBITDA in making the determinations described above and
(b) no Default or Event of Default shall have occurred and be continuing at the
time or as a consequence of the incurrence of such Indebtedness.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, make any
Restricted Payment if at the time of such Restricted Payment and immediately
after giving effect thereto:
(i) any Default or Event of Default shall have occurred and be
continuing; or
(ii) the Company could not incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant; or
(iii) the aggregate amount of Restricted Payments declared or made
after the Issue Date (the amount expended for such purposes, if other than
in cash, being the fair market value of such property as determined by the
Board of Directors of the Company in good faith) exceeds the sum of (a)
100% of the Company's Cumulative Consolidated EBITDA minus 1.4 times the
Company's Cumulative Consolidated Interest Expense, plus (b) 100% of the
aggregate Net Proceeds and the fair market value of securities or other
property received by the Company from the issue or sale, after the Issue
Date, of Capital Stock (other than Disqualified Capital Stock of the
Company or Capital Stock of the Company issued to any Restricted Subsidiary
of the Company) of the Company or any Indebtedness or other securities of
the Company convertible into or exercisable or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company which have been so
converted or exercised or exchanged, as the case may be, plus (c)
$10,000,000.
(b) Notwithstanding the foregoing, these provisions will not prohibit: (1)
the payment of any dividend or the making of any distribution within 60 days
after the date of its declaration if such dividend or distribution would have
been permitted on the date of declaration; (2) the purchase, redemption or other
acquisition or retirement of any Capital Stock of the Company or any warrants,
options or other rights to acquire shares of any class of such Capital Stock
either (x) solely in exchange for shares of Qualified Capital Stock or other
rights to acquire Qualified Capital Stock or (y) through the application of the
Net Proceeds of a substantially concurrent sale for cash (other than to a
Restricted Subsidiary of the Company) of shares of Qualified Capital Stock or
warrants, options or other rights to acquire Qualified Capital Stock; (3) the
acquisition of Indebtedness of the Company that is subordinate or junior in
right of payment to the New Exchange Debentures either (x) solely in exchange
for shares of Qualified Capital Stock (or warrants, options or other rights to
acquire Qualified Capital Stock) or for Indebtedness of the Company that is
subordinate or junior in right of payment to the New Exchange Debentures, at
least to the extent that the Indebtedness being acquired is subordinated to the
New Exchange Debentures and has a Weighted Average Life to Maturity no less than
that of the Indebtedness being acquired or (y) through the application of the
Net Proceeds of a substantially concurrent sale for cash (other than to a
Restricted Subsidiary of the Company) of shares of Qualified Capital Stock (or
warrants, options or other rights to acquire Qualified Capital Stock) or
Indebtedness of the Company which is subordinate or junior in right of payment
to the New Exchange Debentures, at least to the extent that the Indebtedness
being acquired is subordinated to the New Exchange Debentures and has a Weighted
Average Life to Maturity no less than that of the Indebtedness being refinanced;
(4) the retirement of the Junior Preferred Stock in accordance with the optional
and mandatory redemption and put provisions as in effect on the Issue Date and
the payment of cash dividends on the Junior Preferred Stock; or (5) as long as
no Default or Event of Default shall have occurred and be continuing, the
payment of cash dividends on the Existing Preferred Stock or the redemption at
times and in amounts no less favorable to holders of the New
96
<PAGE> 102
Exchange Debentures than such provisions as are in effect in the related
certificate of designations on the Issue Date; provided, however, that any cash
dividends or cash redemptions or premiums in respect thereof paid with respect
to the Existing Preferred Stock shall reduce amounts otherwise available for
Restricted Payments.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Limitation on Restricted Payments" were computed,
which calculations may be based upon the Company's latest available financial
statements, and that no Default or Event of Default exists and is continuing and
no Default or Event of Default will occur immediately after giving effect to any
Restricted Payments.
Limitations on Transactions with Affiliates. The Company will not, and
will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into or suffer to exist any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate or holder of 10% or
more of the Company's Common Stock (an "Affiliate Transaction") or extend,
renew, waive or otherwise modify the terms of any Affiliate Transaction entered
into prior to the Issue Date unless (i) such Affiliate Transaction is between or
among the Company and its Wholly-Owned Subsidiaries; or (ii) the terms of such
Affiliate Transaction are fair and reasonable to the Company or such Restricted
Subsidiaries, as the case may be, and the terms of such Affiliate Transaction
are at least as favorable as the terms which could be obtained by the Company or
such Restricted Subsidiary, as the case may be, in a comparable transaction made
on an arm's-length basis between unaffiliated parties. In any Affiliate
Transaction involving an amount or having a value in excess of $1,000,000 which
is not permitted under clause (i) above, the Company must obtain a resolution of
the board of directors certifying that such Affiliate Transaction complies with
clause (ii) above. In transactions with a value in excess of $5,000,000, which
are not permitted under clause (i) above, unless such transaction is with a
Subsidiary in which no Affiliate has a minority interest therein, the Company
must obtain a valuation of the assets subject to such transaction by an
Independent Appraiser or a written opinion as to the fairness of such a
transaction from an independent investment banking firm or an Independent
Appraiser.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "-- Limitation on Restricted
Payments" contained herein, (ii) any transaction, approved by the board of
directors of the Company, with an officer or director of the Company or of any
Subsidiary in his or her capacity as officer or director entered into in the
ordinary course of business, including compensation and employee benefit
arrangements with any officer or director of the Company or of any Subsidiary
that are customary for public companies in the broadcasting industry or (iii)
modifications of the Existing Preferred Stock.
Limitation on Certain Asset Sales. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, consummate an Asset Sale
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at least equal to the fair market value thereof on the
date the Company or Restricted Subsidiary (as applicable) entered into the
agreement to consummate such Asset Sale (as determined in good faith by the
Company's Board of Directors, and evidenced by a Board Resolution); (ii) not
less than 75% of the consideration received by the Company or its Subsidiaries,
as the case may be, is in the form of cash or Cash Equivalents other than in the
case where the Company is exchanging all or substantially all of the assets of
one or more media properties operated by the Company (including by way of the
transfer of capital stock) for all or substantially all of the assets (including
by way of the transfer of capital stock) constituting one or more media
properties operated by another Person, provided that not less than 75% of the
consideration received by the Company in such exchange is in the form of cash or
Cash Equivalents considering, for this purpose only, the media properties,
valued at their fair market value, as Cash Equivalents; and (iii) the Asset Sale
Proceeds received by the Company or such Restricted Subsidiary are applied (a)
first, to the extent the Company elects, or is required, to prepay, repay or
purchase Indebtedness under any then existing Senior Debt of the Company or any
Restricted Subsidiary within 180 days following the receipt of the Asset Sale
Proceeds from any Asset Sale; (b) second, to the extent of the balance of Asset
Sale Proceeds after application as described above, to the extent the Company
elects, to make an Investment in assets (including
97
<PAGE> 103
Capital Stock or other securities purchased in connection with the acquisition
of Capital Stock or property of another Person) used or useful in businesses
similar or ancillary to the business of the Company or Restricted Subsidiary as
conducted at the time of such Asset Sale, provided that such Investment occurs
or the Company or a Restricted Subsidiary enters into contractual commitments to
make such investment, subject only to customary conditions (other than the
obtaining of financing), on or prior to the 181st day following receipt of such
Asset Sale Proceeds (the "Reinvestment Date") and Asset Sale Proceeds
contractually committed are so applied within 360 days following the receipt of
such Asset Sale Proceeds; (c) third, to make any required Excess Proceeds Offer
(as defined in the Existing Debt Indentures) to holders of the Existing Notes
and Existing Exchange Debentures in accordance with the terms of the Indenture;
and (d) fourth, to make an offer for the New Exchange Debentures as described
under "-- Optional Redemption" above following a Major Asset Sale or, if on the
Reinvestment Date with respect to any Asset Sale, the Available Asset Sale
Proceeds exceed $10,000,000, the Company shall apply an amount equal to such
Available Asset Sale Proceeds to an offer to repurchase the New Exchange
Debentures, at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of repurchase (an
"Excess Proceeds Offer"). If an Excess Proceeds Offer is not fully subscribed,
the Company may retain the portion of the Available Asset Sale Proceeds not
required to repurchase New Exchange Debentures.
If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the
registered holders stating, among other things: (1) that such holders have the
right to require the Company to apply the Available Asset Sale Proceeds to
repurchase such New Exchange Debentures at a purchase price in cash equal to
100% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of purchase; (2) the purchase date, which shall be no earlier than
30 days and not later than 60 days from the date such notice is mailed; (3) the
instructions, determined by the Company, that each holder must follow in order
to have such New Exchange Debentures repurchased; and (4) the calculations used
in determining the amount of Available Asset Sale Proceeds to be applied to the
repurchase of such New Exchange Debentures.
Limitation on Other Senior Subordinated Debt. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
incur, contingently or otherwise, any Indebtedness that is both (i) subordinate
in right of payment to any Senior Debt of the Company or its Restricted
Subsidiaries, as the case may be, and (ii) senior in right of payment to the New
Exchange Debentures and the Guarantees, as the case may be. For purposes of this
covenant, Indebtedness is deemed to be senior in right of payment to the New
Exchange Debentures and the Guarantees, as the case may be, if it is not
explicitly subordinate in right of payment to Senior Debt at least to the same
extent as the New Exchange Debentures and the Guarantees, as the case may be,
are subordinate to Senior Debt.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any Restricted Subsidiary to issue any Preferred Stock (except to the
Company or to a Restricted Subsidiary) or permit any Person (other than the
Company or a Restricted Subsidiary) to hold any such Preferred Stock unless the
Company or such Restricted Subsidiary would be entitled to incur or assume
Indebtedness in compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant in an aggregate principal amount equal to the aggregate
liquidation value of the Preferred Stock to be issued.
Limitation on Creation of Subsidiaries. The Company shall not create or
acquire, nor permit any of its Restricted Subsidiaries to create or acquire, any
Subsidiary other than (i) a Restricted Subsidiary existing as of the date of the
New Exchange Indenture, (ii) a Restricted Subsidiary that is acquired or created
after the date hereof, or (iii) an Unrestricted Subsidiary; provided, however,
that each Restricted Subsidiary acquired or created pursuant to clause (ii)
shall at the time it has either assets or stockholder's equity in excess of
$5,000 execute a guarantee, satisfactory in form and substance to the Trustee
(and with such documentation relating thereto as the Trustee shall require,
including, without limitation a supplement or amendment to the New Exchange
Indenture and opinions of counsel as to the enforceability of such guarantee),
pursuant to which such Restricted Subsidiary shall become a Guarantor. As of the
Issue Date, the Company will have no Subsidiaries other than the Guarantors.
98
<PAGE> 104
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate with or merge
with or into, or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its assets to, another Person or adopt a plan of
liquidation unless (i) either (a) the Company, is the survivor of such merger or
consolidation or (b) the surviving or transferee Person is a corporation,
partnership or trust organized and existing under the laws of the United States,
any state thereof or the District of Columbia and such surviving or transferee
Person expressly assumes by supplemental indenture all the obligations of the
Company, under the New Exchange Debentures and the New Exchange Indenture; (ii)
immediately after giving effect to such transaction and the use of proceeds
therefrom (on a pro forma basis, including any Indebtedness incurred or
anticipated to be incurred in connection with such transaction), the Company or
the surviving or transferee Person is able to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately after giving effect to such transaction (including any Indebtedness
incurred or anticipated to be incurred in connection with the transaction) no
Default or Event of Default has occurred and is continuing; and (iv) the Company
has delivered to the Trustee an officers' certificate and opinion of counsel,
each stating that such consolidation, merger or transfer complies with the New
Exchange Indenture, that the surviving Person agrees by supplemental indenture
to be bound thereby, and that all conditions precedent in the New Exchange
Indenture relating to such transaction have been satisfied. For purposes of the
foregoing, the transfer (by lease, assignment, sale or otherwise, in a single
transaction or series of related transactions) of all or substantially all of
the properties and assets of one or more Subsidiaries the Capital Stock of which
constitutes all or substantially all of the properties and assets of the Company
will be deemed to be the transfer of all or substantially all of the properties
and assets of the Company.
The Company will not permit any Guarantor to consolidate with, merge with
or into, or transfer all or substantially all of its assets (as an entirety or
substantially as an entirety in one transaction or series of related
transactions) to, any Person unless: (i) the transaction will comply with
"-- Limitation on Certain Asset Sales," or (ii)(A) the Person into which such
Guarantor consolidates or merges or to which it transfers its assets is (x) the
Company or a Guarantor or (y) a corporation organized and existing under the
laws of the United States or any State thereof or the District of Columbia that
shall expressly assume, by supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all of the obligations of such
Guarantor under its Guarantee and the Exchange Debenture Indenture, (B)
immediately before and immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and continuing; and (C) except
when the Person into which such Guarantor consolidates or merges or to which it
transfers its assets is the Company or a Wholly Owned Subsidiary that is a
Guarantor, immediately after giving effect to such transaction, on a pro forma
basis the Company or such Person could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the covenant set forth
under "-- Limitation on Additional Indebtedness."
EVENTS OF DEFAULT
The following events are defined in the New Exchange Indenture as "Events
of Default": (i) the failure to pay interest on any New Exchange Debentures when
the same becomes due and payable and the Default continues for a period of 30
days (whether or not such payment is prohibited by the subordination provisions
of the New Exchange Indenture); (ii) the failure to pay the principal, or
premium, if any, on any New Exchange Debentures, when such principal becomes due
and payable, at maturity, upon redemption or otherwise (whether or not such
payment is prohibited by the subordination provisions of the New Exchange
Indenture); (iii) a default in the observance or performance of any other
covenant or agreement contained in the New Exchange Debentures or the New
Exchange Indenture which default continues for a period of 60 days after the
Company receives written notice thereof specifying the default from the Trustee
or holders of at least 25% in aggregate principal amount of outstanding New
Exchange Debentures; (iv) default in the payment at final maturity of principal
in an aggregate amount of $10,000,000 or more with respect to any Indebtedness
of the Company or any Restricted Subsidiary thereof which default shall not be
cured, waived or postponed pursuant to an agreement with the holders of such
Indebtedness within 60 days after written notice, or the acceleration of any
such Indebtedness aggregating $10,000,000 or more which acceleration shall not
be
99
<PAGE> 105
rescinded or annulled within 20 days after written notice as provided in the New
Exchange Indenture; (v) any final judgment or judgments which can no longer be
appealed for the payment of money in excess of $10,000,000 shall be rendered
against the Company or any Restricted Subsidiary thereof, and shall not be
discharged for any period of 60 consecutive days during which a stay of
enforcement shall not be in effect; and (vi) certain events of bankruptcy,
insolvency or reorganization affecting the Company or any of its Restricted
Subsidiaries.
Upon the happening of any Event of Default specified in the New Exchange
Indenture, the Trustee may, and the Trustee upon the request of 25% in principal
amount of the New Exchange Debentures shall or the holders of at least 25% in
aggregate principal amount of outstanding New Exchange Debentures may, declare
the principal of and accrued but unpaid interest, if any, on all the New
Exchange Debentures to be due and payable by notice in writing to the Company
and the Trustee specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice"), and the same (i) shall
become immediately due and payable or (ii) if there are any amounts outstanding
under any of the instruments constituting the Senior Debt, will become due and
payable upon the first to occur of an acceleration under any of the instruments
constituting the Senior Debt or five Business Days after receipt by the Company
and the Representative under any of the Senior Debt of such Acceleration Notice
(unless all Events of Default specified in such Acceleration Notice have been
cured or waived). If an Event of Default with respect to bankruptcy proceedings
occurs and is continuing, then such amount will ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of New Exchange Debentures.
The New Exchange Indenture will provide that, at any time after a
declaration of acceleration with respect to the New Exchange Debentures as
described in the preceding paragraph, the holders of a majority in principal
amount of the New Exchange Debentures then outstanding (by notice to the
Trustee) may rescind and cancel such declaration and its consequences if (i) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction, (ii) all existing Events of Default have been cured or
waived except nonpayment of principal or interest on the New Exchange Debentures
that has become due solely by such declaration of acceleration, (iii) to the
extent the payment of such interest is lawful, interest (at the same rate
specified in the New Exchange Debentures) on overdue installments of interest
and overdue principal which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of a
Default or Event of Default of the type described in clause (vi) of the
description above of Events of Default, the Trustee has received an officers'
certificate and an opinion of counsel that such Default or Event of Default has
been cured or waived. The holders of a majority in principal amount of the New
Exchange Debentures may waive any existing Default or Event of Default under the
New Exchange Indenture, and its consequences, except a default in the payment of
the principal of or interest on any New Exchange Debentures.
The Company will deliver to the Trustee, on or before 100 days after the
end of the Company's fiscal year and on or before 50 days after the end of the
first, second and third fiscal quarters of such years, a certificate indicating
whether the signing officers know of any Default or Event of Default that
occurred during the previous year or quarter, as the case may be, and whether
the Company has complied with its obligations under the New Exchange Indenture.
In addition, the Company will be required to notify the Trustee of the
occurrence and continuation of any Default or Event of Default within five
business days after the Company becomes aware of the same.
Subject to the provisions of the New Exchange Indenture relating to the
duties of the Trustee in case an Event of Default thereunder should occur and be
continuing, the Trustee will be under no obligation to exercise any of the
rights or powers under the New Exchange Indenture at the request or direction of
any of the holders of the New Exchange Debentures unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Subject to such provision for security or indemnification
and certain limitations contained in the New Exchange Indenture, the holders of
a majority in principal amount of the outstanding New Exchange Debentures have
the right to direct the time, method and
100
<PAGE> 106
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee.
SATISFACTION AND DISCHARGE OF NEW EXCHANGE INDENTURE; DEFEASANCE
The New Exchange Indenture provides the Company may elect either (a) to
defease and be discharged from any and all obligations with respect to the New
Exchange Debentures (except for the obligations to register the transfer or
exchange of such New Exchange Debentures, to replace temporary or mutilated,
destroyed, lost or stolen New Exchange Debentures, to maintain an office or
agency in respect of the New Exchange Debentures and to hold monies for payment
in trust) ("defeasance") or (b) to be released from their obligations with
respect to the New Exchange Debentures under certain covenants contained in the
New Exchange Indenture and described above under "-- Certain Covenants"
("covenant defeasance"), upon the deposit with the Trustee (or other qualifying
trustee), in trust for such purpose, of money and/or U.S. Government Obligations
which through the payment of principal and interest in accordance with their
terms will provide money, in an amount sufficient to pay the principal of,
premium, if any, and interest on the New Exchange Debentures on the scheduled
due dates therefor or on a selected date of redemption in accordance with the
terms of the New Exchange Indenture. Such a trust may only be established if,
among other things, the Company had delivered to the Trustee an opinion of
counsel (as specified in the New Exchange Indenture) (i) to the effect that
neither the trust nor the Trustee will be required to register as an investment
company under the Investment Company Act of 1940, as amended, and (ii) to the
effect that holders of the New Exchange Debentures or persons in their positions
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to federal
income tax on the same amount and in the same amount and in the same manner and
at the same times, as would have been the case if such deposit, defeasance and
discharge had not occurred which, in the case of a defeasance only, must be
based upon a private ruling concerning the New Exchange Debentures, a published
ruling of the Internal Revenue Service or a change in applicable federal income
tax law.
REPORTS TO HOLDERS
The Company will file with the Trustee and provide to the holders of New
Exchange Debentures, within 15 days after it would have been required to file
with the Commission pursuant to Sections 13 and 15(d) of the Exchange Act had it
been so subject, copies of the annual reports and of the information, documents
and other financial reports (or copies of such portions of any of the
foregoing).
MODIFICATION OF THE NEW EXCHANGE INDENTURE
From time to time, the Company, the Guarantors and the Trustee may, without
the consent of the holders of the New Exchange Debentures, amend the New
Exchange Indenture or the New Exchange Debentures or supplement the New Exchange
Indenture for certain specified purposes, including curing any ambiguity, defect
or inconsistency or making any change that does not materially and adversely
affect the rights of any of the holders. The New Exchange Indenture contains
provisions permitting the Company, the Guarantors and the Trustee, with the
consent of the holders of a majority in principal amount of the outstanding New
Exchange Debentures, to modify or supplement the New Exchange Indenture and the
New Exchange Debentures except that, without the consent of each holder of the
New Exchange Debentures affected thereby, no such modification shall: (i) reduce
the amount of New Exchange Debentures whose holders must consent to an
amendment, supplement or waiver to the New Exchange Indenture or the New
Exchange Debentures; (ii) reduce the rate of or change the time for payment of,
interest on any New Exchange Debentures; (iii) reduce the principal of or
premium on or change the stated maturity of any Exchange Debenture; (iv) make
any New Exchange Debentures payable in money other than that stated in the New
Exchange Debentures or change the place of payment from New York, New York; (v)
change the amount or time of any payment required by the New Exchange Debentures
or reduce the premium payable upon any redemption of New Exchange Debentures or
change the time before which no redemption may be made; (vi) waive a default in
the payment of principal or interest on, or redemption payment with respect to
any New Exchange Debentures; or (vii) take any other action otherwise prohibited
by the New Exchange
101
<PAGE> 107
Indenture to be taken without the consent of each holder affected thereby. In
addition, as long as any Shares of Junior Preferred Stock remain outstanding,
the holders of Junior Preferred Stock will have the right to vote together with
the holders of New Exchange Debentures with respect to amendments and
modifications of the New Exchange Indenture.
The consent of holders is not necessary to approve the particular form of
any proposed amendment. It is sufficient if such consent approves the substance
of the proposed amendment.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Certificate of Designation and the New Exchange Indenture. Reference is made to
the Certificate of Designation and the New Exchange Indenture for the full
definition of all such terms, as well as any other terms used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person.
"Adjusted EBITDA" means, for any Person, prior to the date specified by the
Company in a written notice delivered to the Trustee of the Company's election
of its one time right to change the calculation of Adjusted EBITDA (the
"Calculation Change Notice"), the sum of (a) Consolidated EBITDA of such Person
and its Restricted Subsidiaries for the four most recent fiscal quarters for
which internal financial statements are available, minus inTV EBITDA for the
most recent four fiscal quarter period and (b) inTV EBITDA for the most recent
quarterly period, multiplied by four and, subsequent to the effective date
specified by the Company in its Calculation Change Notice, the Consolidated
EBITDA of such Person and its Restricted Subsidiaries for the four most recent
fiscal quarters for which internal financial statements are available.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor exceeds
the total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities),
but excluding liabilities under the Guarantee, of such Guarantor at such date
and (y) the present fair ratable value of the assets of such Guarantor at such
date exceeds the amount that will be required to pay the probable liability of
such Guarantor on its debts (after giving effect to all other fixed and
contingent liabilities and after giving effect to any collection from any
Subsidiary of such Guarantor in respect of the obligations of such Subsidiary
under the Guarantee), excluding Indebtedness in respect of the Guarantee, as
they become absolute and matured.
"Affiliate" means, for any Person, a Person who, directly or indirectly,
through one or more intermediaries controls, or is controlled by, or is under
common control with, such other Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise. With respect to the Company, Affiliate
will also include any Permitted Holders or Persons controlled by the Permitted
Holders.
"Asset Sale" means the sale, transfer or other disposition (other than to
the Company or any of its Restricted Subsidiaries) in any single transaction or
series of related transactions involving assets with a fair market value in
excess of $2,000,000 of (a) any Capital Stock of or other equity interest in any
Restricted Subsidiary of the Company other than in a transaction where the
Company or a Restricted Subsidiary receives therefor one or more media
properties with a fair market value equal to the fair market value of the
Capital Stock issued, transferred or disposed of by the Company or the
Restricted Subsidiary (with such fair market values being determined by the
board of directors of the Company), (b) all or substantially all of the assets
of the Company or of any Restricted Subsidiary thereof, (c) real property or (d)
all or substantially all of the assets of any media property, or part thereof,
owned by the Company or any Restricted Subsidiary thereof, or a division, line
of business or comparable business segment of the Company or any Restricted
Subsidiary
102
<PAGE> 108
thereof; provided that Asset Sales shall not include sales, leases, conveyances,
transfers or other dispositions to the Company or to a Restricted Subsidiary or
to any other Person if after giving effect to such sale, lease, conveyance,
transfer or other disposition such other Person becomes a Restricted Subsidiary,
or the sale of all or substantially all of the assets of the Company or a
Restricted Subsidiary in a transaction complying with the "Merger Consolidation
and Sale of Assets" covenant, in which case only the assets not so sold shall be
deemed an Asset Sale.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Company or any Restricted Subsidiary from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such Asset
Sale, (b) payment of all brokerage commissions, underwriting, accounting, legal
and other fees and expenses related to such Asset Sale, (c) provision for
minority interest holders in any Restricted Subsidiary as a result of such Asset
Sale and (d) deduction of appropriate amounts to be provided by the Company or a
Restricted Subsidiary as a reserve, in accordance with GAAP, against any
liabilities associated with the assets sold or disposed of in such Asset Sale
and retained by the Company or a Restricted Subsidiary after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities and liabilities related to environmental matters or against any
indemnification obligations associated with the assets sold or disposed of in
such Asset Sale, and (ii) promissory notes and other non-cash consideration
received by the Company or any Restricted Subsidiary from such Asset Sale or
other disposition upon the liquidation or conversion of such notes or non-cash
consideration into cash.
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sales that have not been applied
in accordance with clause (iii)(a), (b) or (c) and which has not yet been the
subject of an Excess Proceeds Offer in accordance with clause (iii)(d) of the
first paragraph of "-- New Exchange Debentures -- Certain
Covenants -- Limitation on Certain Asset Sales."
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated) of capital stock, including each class of common stock and preferred
stock of such Person and (ii) with respect to any Person that is not a
corporation, any and all partnership or other equity interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligation of
such Person to pay rent or other amounts under a lease to which such Person is a
party that is required to be classified and accounted for as capital lease
obligations under GAAP and, for purposes of this definition, the amount of such
obligations at any date shall be the capitalized amount of such obligations at
such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any commercial bank organized under
the laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (v)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (iv) above; and (vi) investments
in money market funds which invest substantially all their assets in securities
of the types described in clauses (i) through (v) above.
103
<PAGE> 109
A "Change of Control" of the Company will be deemed to have occurred at
such time as (i) any Person (including a Person's Affiliates), other than a
Permitted Holder, becomes the beneficial owner (as defined under Rule 13d-3 or
any successor rule or regulation promulgated under the Exchange Act) of 50% or
more of the total voting power of the Company's Common Stock, (ii) any Person
(including a Person's Affiliates), other than a Permitted Holder, becomes the
beneficial owner of more than 33 1/3% of the total voting power of the Company's
Common Stock, and the Permitted Holders beneficially own, in the aggregate, a
lesser percentage of the total voting power of the Common Stock of the Company
than such other Person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the Board
of Directors of the Company, (iii) there shall be consummated any consolidation
or merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which the Common Stock of the Company would be
converted into cash, securities or other property, other than a merger or
consolidation of the Company in which the holders of the Common Stock of the
Company outstanding immediately prior to the consolidation or merger hold,
directly or indirectly, at least a majority of the voting power of the Common
Stock of the surviving corporation immediately after such consolidation or
merger, (iv) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company has been
approved by a majority of the directors then still in office who either were
directors at the beginning of such period or whose election or recommendation
for election was previously so approved) cease to constitute a majority of the
Board of Directors of the Company or (v) any "change in control" occurs (as
defined at such time) with respect to the Existing Preferred Stock or any issue
of Disqualified Capital Stock.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of, such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, for any Person, for any period, an amount
equal to (a) the sum of Consolidated Net Income for such period, plus, to the
extent deducted from the revenues of such Person in determining Consolidated Net
Income, (i) the provision for taxes for such period based on income or profits
and any provision for taxes utilized in computing a loss in Consolidated Net
Income above, plus (ii) Consolidated Interest Expense, net of interest income
earned on cash or cash equivalents for such period (including, for this purpose,
dividends on the Existing Preferred Stock and the Junior Preferred Stock and the
Convertible Preferred Stock and any Redeemable Dividends in each case only to
the extent that such dividends were deducted in determining Consolidated Net
Income), plus (iii) depreciation for such period on a consolidated basis, plus
(iv) amortization of intangibles and broadcast program licenses for such period
on a consolidated basis, minus (b) scheduled payments relating to broadcast
program license liabilities, except that with respect to the Company each of the
foregoing items shall be determined on a consolidated basis with respect to the
Company and its Restricted Subsidiaries only; provided, however, that, for
purposes of calculating Consolidated EBITDA during any fiscal quarter, cash
income from a particular Investment of such Person shall be included only if
cash income has been received by such Person as a result of the operation of the
business in which such Investment has been made in the ordinary course without
giving effect to any extraordinary unusual and non-recurring gains.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and its Subsidiaries on a consolidated basis,
including, but not limited to, Redeemable Dividends, whether paid or accrued, on
Subsidiary Preferred Stock, imputed interest included in Capitalized Lease
Obligations, all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, the net costs
associated with hedging obligations, amortization of other financing fees and
expenses, the interest portion of any deferred payment obligation, amortization
of discount or premium, if any, and all other non-cash interest expense (other
than interest amortized to cost of sales) plus, without duplication, all net
capitalized interest for such period and all interest incurred or paid under any
guarantee of Indebtedness (including a guarantee of principal, interest or
104
<PAGE> 110
any combination thereof) of any Person, all time brokerage fees relating to
financing of radio or television stations which the Company has an agreement or
option to acquire, plus the amount of all dividends or distributions paid on
Disqualified Capital Stock (other than dividends paid or payable in shares of
Capital Stock of the Company).
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the net income (or loss) of such Person and its
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided, however, that (a) the net income of any Person (the "other
Person") in which the Person in question or any of its Subsidiaries has less
than a 100% interest (which interest does not cause the net income of such other
Person to be consolidated into the net income of the Person in question in
accordance with GAAP) shall be included only to the extent of the amount of
dividends or distributions paid to the Person in question or to the Subsidiary,
(b) the net income of any Subsidiary of the Person in question that is subject
to any restriction or limitation on the payment of dividends or the making of
other distributions (other than pursuant to the New Exchange Debentures, the
Existing Exchange Debentures or the Existing Notes) shall be excluded to the
extent of such restriction or limitation, (c) (i) the net income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition and (ii) any net gain (but not loss) resulting from an Asset
Sale by the Person in question or any of its Subsidiaries other than in the
ordinary course of business shall be excluded, (d) extraordinary, unusual and
non-recurring gains and losses shall be excluded, (e) losses associated with
discontinued and terminated operations in an amount not to exceed $1,000,000 per
annum shall be excluded and (f) all non-cash items (including, without
limitation, cumulative effects of changes in GAAP and equity entitlements
granted to employees of the Company and its Restricted Subsidiaries) increasing
and decreasing Consolidated Net Income and not otherwise included in the
definition of Consolidated EBITDA shall be excluded.
"Credit Facility" means the Credit Agreement dated as of December 19, 1995,
and amended and restated as of April 30, 1998, among the Company, the financial
institutions party thereto in their capacities as lenders thereunder and Union
Bank, as agent, as the same may be amended from time to time, and any one or
more agreements evidencing the refinancing, modification, replacement, renewal,
restatement, refunding, deferral, extension, substitution, supplement,
reissuance or resale thereof.
"Cumulative Consolidated EBITDA" means, with respect to any Person, as of
any date of determination, Consolidated EBITDA from June 10, 1998 to the end of
the Company's most recently ended full fiscal quarter prior to such date, taken
as a single accounting period.
"Cumulative Consolidated Interest Expense" means, with respect to any
Person, as of any date of determination, Consolidated Interest Expense plus, for
purposes of the Certificate of Designation, any cash dividends paid on Senior
Securities or Parity Securities not already reflected in Consolidated Interest
Expense that do not require the approval of the holders of a majority of the
shares of Junior Preferred Stock outstanding to be issued, in each case from
June 10, 1998 to the end of such Person's most recently ended full fiscal
quarter prior to such date, taken as a single accounting period.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Facility and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least
$25,000,000 (or accreted value in the case of Indebtedness issued at a discount)
and is specifically designated in the instrument evidencing such Senior Debt as
"Designated Senior Debt" by the Company.
"Disqualified Capital Stock" means any Capital Stock which, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof, in whole or in part, on
or prior to (i) the mandatory redemption date of the Junior Preferred Stock, in
the case of the Junior Preferred Stock or (ii) the final maturity date of the
New Exchange Debentures, in the case of the New Exchange Debentures. Without
limitation of the foregoing, Disqualified Capital Stock shall be deemed to
include (i) any Preferred Stock of a Restricted Subsidiary, (ii) any
105
<PAGE> 111
Preferred Stock of the Company, with respect to either of which, under the terms
of such Preferred Stock, by agreement or otherwise, such Restricted Subsidiary
or the Company is obligated to pay current dividends or distributions in cash
during the period prior to the redemption date of the Junior Preferred Stock or
the maturity date of the New Exchange Debentures; and (iii) as long as the
Junior Preferred Stock remains outstanding, Senior Securities and Parity
Securities; provided, however, that (i) Preferred Stock of the Company or any
Restricted Subsidiary that is issued with the benefit of provisions requiring a
change of control offer to be made for such Preferred Stock in the event of a
change of control of the Company or Restricted Subsidiary, which provisions have
substantially the same effect as the provisions of the Certificates of
Designation, Existing Debt Indentures and the New Exchange Indenture described
under "Change of Control," shall not be deemed to be Disqualified Capital Stock
solely by virtue of such provisions; (ii) the Junior Preferred Stock, the
Existing Preferred Stock and the Convertible Preferred Stock, as in effect on
the Issue Date, shall not be considered Disqualified Capital Stock; (iii)
Disqualified Capital Stock paid as dividends on Preferred Stock existing on the
date hereof or subsequently issued, in each case in accordance with the terms of
such Preferred Stock at the time it was issued, shall not be considered
Disqualified Capital Stock; and (iv) issuances of Junior Preferred Stock, Senior
Securities and Parity Securities that the Company is permitted to issue, as
described under "-- Ranking", without the approval of the holders of at least a
majority of the shares of Junior Preferred Stock then outstanding.
"Exchange Date" means the date of original issuance of the New Exchange
Debentures.
"Existing Exchange Indenture" means the indenture dated October 4, 1996
between the Company, the guarantors thereto and The Bank of New York, as
trustee, which governs the Existing Exchange Debentures.
"Existing Exchange Debentures" means the 12 1/2% Exchange Debentures due
2006 (if issued) issued under the Existing Exchange Indenture.
"Existing Indenture" means the indenture dated as of September 28, 1995
among the Company and The Bank of New York, as trustee which governs the
Existing Notes.
"Existing Debt Indentures" means the Existing Indenture and the Existing
Exchange Indenture.
"Existing Notes" means the 11 5/8% Senior Subordinated Notes due 2002
issued under the Existing Indenture.
"Existing Preferred Stock" means the Private Preferred Stock and the Public
Preferred Stock, collectively.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"Guarantor" means (i) each of the Company's Subsidiaries in existence on
the Issue Date and (ii) each of the Company's Restricted Subsidiaries that in
the future executes a supplemental indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the New Exchange Indenture as a Guarantor;
provided that any Person constituting a Guarantor as described above shall cease
to constitute a Guarantor when its respective Guarantee is released in
accordance with the terms of the New Exchange Indenture.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable" and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof) or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables and other accrued liabilities arising in the ordinary
course of business, including, without limitation, any and all programming
broadcast obligations) if and to the extent any of the foregoing
106
<PAGE> 112
indebtedness would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, and shall also include, to the extent not
otherwise included, (i) any Capitalized Lease Obligations, (ii) obligations
secured by a Lien to which the property or assets owned or held by such Person
are subject, whether or not the obligation or obligations secured thereby shall
have been assumed (provided, however, that if such obligation or obligations
shall not have been assumed, the amount of such Indebtedness shall be deemed to
be the lesser of the principal amount of the obligation or the fair market value
of the pledged property or assets), (iii) guarantees of items of other Persons
which would be included within this definition for such other Persons (whether
or not such items would appear upon the balance sheet of the guarantor), (iv)
all obligations for the reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction, (v) in the case of the
Company, Disqualified Capital Stock of the Company or any Restricted Subsidiary
thereof and (vi) obligations of any such Person under any Interest Rate
Agreement applicable to any of the foregoing (if and to the extent such Interest
Rate Agreement obligations would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP). The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency giving
rise to the obligation, provided that (i) the amount outstanding at any time of
any Indebtedness issued with original issue discount is the principal amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (ii) Indebtedness shall not include any liability for federal, state, local
or other taxes. Notwithstanding any other provision of the foregoing definition,
any trade payable arising from the purchase of goods or materials or for
services obtained in the ordinary course of business or contingent obligations
arising out of customary indemnification agreements with respect to the sale of
assets or securities shall not be deemed to be "Indebtedness" of the Company or
any Restricted Subsidiaries for purposes of this definition. Furthermore,
guarantees of (or obligations with respect to letters of credit supporting)
Indebtedness otherwise included in the determination of such amount shall not
also be included.
"Independent Appraiser" means an appraiser of national reputation in the
United States (i) which does not, and whose directors, executive officers and
Affiliates do not, have a direct or indirect financial interest in excess of 5%
of fully diluted outstanding voting securities of the Company at the time of
determination and (ii) which, in the judgment of the Company, is independent
from the Company as evidenced by an Officer's Certificate.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"inTV EBITDA" means Consolidated EBITDA for the Infomall TV Network
determined on a basis consistent with the Company's internal financial
statements, generated by stations declared by the Board of Directors as inTV
properties.
"Investment" means, directly or indirectly, any advance, account receivable
(other than an account receivable arising in the ordinary course of business),
loan or capital contribution to (by means of transfers of property to others,
payments for property or services for the account or use of others or
otherwise), the purchase of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities of, the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any Person or the making of any
investment in any Person. Investments shall exclude extensions of trade credit
on commercially reasonable terms in accordance with normal trade practices and
repurchases or redemptions of the Existing Notes, the New Exchange Debentures,
the Existing Exchange Debentures, the Existing Preferred Stock, the Junior
Preferred Stock or the Convertible Preferred Stock by the Company.
"Issue Date" means the date of original issuance of the Junior Preferred
Stock or the New Exchange Debentures, as the case may be.
"Junior Preferred Stock" means the 13 1/4% Cumulative Junior Exchangeable
Preferred Stock, par value $.001 per share.
107
<PAGE> 113
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Major Asset Sale" means an Asset Sale or series of related Asset Sales
involving assets with a fair market value in excess of $25,000,000.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Company, an Asset Sale or a Major Asset Sale, the aggregate net proceeds
received by the Company, after payment of expenses, commissions and the like
incurred in connection therewith, whether such proceeds are in cash or in
property (valued at the fair market value thereof, as determined in good faith
by the board of directors, at the time of receipt) and (b) in the case of any
exchange, exercise, conversion or surrender of outstanding securities of any
kind for or into shares of Capital Stock of the Company which is not
Disqualified Capital Stock, the net book value of such outstanding securities on
the date of such exchange, exercise, conversion or surrender (plus any
additional amount required to be paid by the holder to the Company upon such
exchange, exercise, conversion or surrender, less any and all payments made to
the holders, e.g., on account of fractional shares and less all expenses
incurred by the Company in connection therewith).
"New Exchange Debentures" shall mean the 13 1/4% Exchange Debentures due
2006, issuable pursuant to an indenture dated as of June 10, 1998 among the
Company and The Bank of New York, as trustee.
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate the
maturity of any Designated Senior Debt.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing, or otherwise relating to, any
Indebtedness.
"Payment Default" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of (or premium, if any) or interest on or any other amount payable in connection
with Designated Senior Debt.
"Permitted Holders" means collectively Lowell W. Paxson, his spouse,
children or other lineal descendants (whether adoptive or biological) and any
revocable or irrevocable inter vivos or testamentary trust or the probate estate
of any such individual, so long as one or more of the foregoing individuals is
the principal beneficiary of such trust or probate estate.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the New Exchange Debentures and the Guarantees,
including any New Exchange Debentures issued in accordance with the New
Exchange Indenture as payment of interest on the New Exchange Debentures;
(ii) Indebtedness under the Existing Exchange Debentures, and the
Guarantees related thereto, including any Existing Exchange Debentures
issued in accordance with the Existing Exchange Indenture as payment of
interest on the Existing Exchange Debentures;
(iii) Indebtedness incurred pursuant to any Credit Facility in an
aggregate principal amount at any time outstanding not to exceed
$25,000,000;
(iv) all other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date, including, without limitation,
the Existing Notes, reduced by the amount of any scheduled amortization
payments or mandatory prepayments when actually paid or permanent
reductions thereon;
(v) Obligations under Interest Rate Agreements of the Company covering
Indebtedness of the Company or any of its Restricted Subsidiaries;
provided, however, that such Interest Rate Agreements are entered into to
protect the Company and its Restricted Subsidiaries from fluctuations in
interest rates on Indebtedness incurred in accordance with the Certificate
of Designations or the New Exchange
108
<PAGE> 114
Indenture to the extent the notional principal amount of such Interest Rate
Agreement does not exceed the principal amount of the Indebtedness to which
such Interest Rate Agreement relates;
(vi) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Restricted Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Restricted Subsidiary of the
Company, in each case subject to no Lien held by a Person other than the
Company or a Restricted Subsidiary of the Company; provided that if as of
any date any Person other than the Company or a Restricted Subsidiary of
the Company owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of such
Indebtedness;
(vii) Indebtedness of the Company to a Restricted Subsidiary of the
Company for so long as such Indebtedness is held by a Restricted Subsidiary
of the Company, in each case subject to no Lien; provided that (a) any
Indebtedness of the Company to any Restricted Subsidiary of the Company is
unsecured and subordinated, pursuant to a written agreement, to the
Company's Obligations under the New Exchange Indenture and the New Exchange
Debentures and (b) if as of any date any Person other than a Restricted
Subsidiary of the Company owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
Company;
(viii) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire property in the ordinary course of business which
Indebtedness and Capitalized Lease Obligations do not in the aggregate
exceed 5% of the Company's consolidated total assets at any one time;
(ix) Refinancing Indebtedness; and
(x) additional Indebtedness of the Company in an aggregate principal
amount not to exceed $10,000,000 at any one time outstanding.
"Permitted Investments" means, for any Person, Investments made on or after
the Issue Date consisting of:
(i) Investments by the Company, or by a Restricted Subsidiary thereof,
in the Company or a Restricted Subsidiary;
(ii) Cash Equivalents;
(iii) Investments by the Company, or by a Restricted Subsidiary
thereof, in a Person (or in all or substantially all of the business or
assets of a Person) if as a result of such Investment (a) such Person
becomes a Restricted Subsidiary of the Company, (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary thereof or (c) such business or assets are owned by
the Company or a Restricted Subsidiary;
(iv) reasonable and customary loans made to employees not to exceed
$5,000,000 in the aggregate at any one time outstanding;
(v) an Investment that is made by the Company or a Restricted
Subsidiary thereof in the form of any stock, bonds, notes, debentures,
partnership or joint venture interests or other securities that are issued
by a third party to the Company or a Restricted Subsidiary solely as
partial consideration for the consummation of an Asset Sale that is
otherwise permitted under the covenant described under "-- Limitation on
Certain Asset Sales";
(vi) time brokerage and other similar agreements under which
separately owned and licensed broadcast properties enter into cooperative
arrangements and which may include an option to acquire the broadcast
property at a future date;
(vii) accounts receivable of the Company and its Restricted
Subsidiaries generated in the ordinary course of business;
109
<PAGE> 115
(viii) loans and guarantees of loans by third-party lenders to third
parties in connection with the acquisition of media properties, secured by
substantially all of such Person's assets (to the extent permitted by FCC
rules), which are made in conjunction with the execution of a time
brokerage agreement;
(ix) options on media properties having an exercise price of an amount
not in excess of $100,000 plus the forgiveness of any loan referred to in
clause (viii) above entered into in connection with the execution of time
brokerage agreements; and
(x) additional Investments of the Company and its Restricted
Subsidiaries from time to time of an amount not to exceed $75,000,000.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemption or upon liquidation.
"Private Preferred Stock" means the Junior Cumulative Compounding
Redeemable Preferred Stock, $.001 par value, 12% dividend rate per annum, of
which 33,000 shares are outstanding with a liquidation preference of $1,000 per
share.
"Public Equity Offering" means a public offering by the Company of shares
of its Common Stock (however designated and whether voting or non-voting) and
any and all rights, warrants or options to acquire such Common Stock.
"Public Preferred Stock" means the Cumulative Exchangeable Preferred Stock,
$.001 par value, 12 1/2% dividend rate per annum, of which 170,782 shares are
currently outstanding with a liquidation preference of $1,000 per share.
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Redeemable Dividend" means, for any dividend or distribution with regard
to Disqualified Capital Stock, the quotient of the dividend or distribution
divided by the difference between one and the maximum statutory federal income
tax rate (expressed as a decimal number between 1 and 0) then applicable to the
issuer of such Disqualified Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant, in each case
that does not (i) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company in connection with such Refinancing) or (ii) create Indebtedness
with (A) a Weighted Average Life to Maturity that is less than the Weighted
Average Life to Maturity of the Indebtedness being Refinanced or (B) a final
maturity earlier than the final maturity of the Indebtedness being Refinanced;
provided that (x) if such Indebtedness being Refinanced is Indebtedness of the
Company, then such Refinancing Indebtedness shall be Indebtedness solely of the
Company and (y) if such Indebtedness being Refinanced is subordinate or junior
to the New Exchange Debentures, then such Refinancing Indebtedness shall be
subordinate to the New Exchange Debentures at least to the same extent and in
the same manner as the Indebtedness being Refinanced.
110
<PAGE> 116
"Restricted Payment" means the following:
(A) For purposes of the New Exchange Indenture, (i) the declaration or
payment of any dividend or the making of any other distribution (other than
dividends or distributions payable in Qualified Capital Stock) on shares of the
Company's Capital Stock other than the Existing Preferred Stock, the Junior
Preferred Stock and the Convertible Preferred Stock, (ii) the purchase,
redemption, retirement or other acquisition for value of any Capital Stock of
the Company, or any warrants, rights or options to acquire shares of Capital
Stock of the Company, other than the exchange of shares of Public Preferred
Stock for the Existing Exchange Debentures or the exchange of shares of Junior
Preferred Stock for the New Exchange Debentures or through the exchange of such
Capital Stock or any warrants, rights or options to acquire shares of any class
of such Capital Stock for Qualified Capital Stock or warrants, rights or options
to acquire Qualified Capital Stock, (iii) the making of any principal payment
on, or the purchase, defeasance, redemption, prepayment, decrease or other
acquisition or retirement for value, prior to any scheduled final maturity,
scheduled repayment or scheduled sinking fund payment, of, any Indebtedness of
the Company or its Subsidiaries that is subordinated or junior in right of
payment to the New Exchange Debentures, (iv) the making of any Investment (other
than a Permitted Investment), (v) any designation of a Restricted Subsidiary as
an Unrestricted Subsidiary on the basis of the fair market value of such
Subsidiary utilizing standard valuation methodologies and approved by the Board
of Directors, excluding any such Subsidiary with a fair market value equal to or
less than $500 or (vi) forgiveness of any Indebtedness of an Affiliate of the
Company to the Company or a Restricted Subsidiary.
(B) For purposes of the Certificate of Designation, (i) the declaration or
payment of any dividend or the making of any other distribution (other than
dividends or distributions payable in Qualified Capital Stock) on shares of
Parity Securities or Junior Securities, (ii) any purchase, redemption,
retirement or other acquisition for value of any Parity Securities or Junior
Securities, or any warrants, rights or options to acquire shares of Parity
Securities or Junior Securities, other than through the exchange of such Parity
Securities or Junior Securities or any warrants, rights or options to acquire
shares of any class of such Parity Securities or Junior Securities for Qualified
Capital Stock or warrants, rights or options to acquire Qualified Capital Stock,
(iii) the making of any Investment (other than a Permitted Investment), (iv) any
designation of a Restricted Subsidiary as an Unrestricted Subsidiary on the
basis of the fair market value of such Subsidiary utilizing standard valuation
methodologies and approved by the Board of Directors, excluding any such
Subsidiary with a fair market value equal to or less than $500, or (v)
forgiveness of any Indebtedness of an Affiliate of the Company to the Company or
a Restricted Subsidiary.
"Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date. The Board of Directors of the Company may
designate any Unrestricted Subsidiary or any Person that is to become a
Subsidiary as a Restricted Subsidiary if immediately after giving effect to such
action (and treating any Acquired Indebtedness as having been incurred at the
time of such action), the Company could have incurred at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Additional Indebtedness" covenant.
"Senior Debt" means, the principal of and premium, if any, and interest
(including, without limitation, interest accruing or that would have accrued but
for the filing of a bankruptcy, reorganization or other insolvency proceeding
whether or not such interest constitutes an allowed claim in such proceeding)
on, and any and all other fees, expense reimbursement obligations, indemnities
and other amounts due pursuant to their terms of all agreements, documents and
instruments providing for, creating, securing or evidencing or otherwise entered
into in connection with (a) all Indebtedness of the Company owed under the
Credit Facility, (b) all obligations of the Company with respect to any Interest
Rate Agreement, (c) all obligations of the Company to reimburse any bank or
other person in respect of amounts paid under letters of credit, acceptances or
other similar instruments, (d) all other Indebtedness of the Company which does
not provide that it is to rank pari passu with or subordinate to the New
Exchange Debentures and (e) all deferrals, renewals, extensions and refundings
of, and amendments, modifications and supplements to, any of the Senior Debt
described above. Notwithstanding anything to the contrary in the foregoing,
Senior Debt will not include (i) Indebtedness of the Company to any of its
Subsidiaries, (ii) Indebtedness represented by the New
111
<PAGE> 117
Exchange Debentures, (iii) any Indebtedness which by the express terms of the
agreement or instrument creating, evidencing or governing the same is junior or
subordinate in right of payment to any item of Senior Debt, (iv) any trade
payable arising from the purchase of goods or materials or for services obtained
in the ordinary course of business or (v) Indebtedness incurred in violation of
the New Exchange Indenture.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the Company which is classified after the
Issue Date as an Unrestricted Subsidiary by a resolution adopted by the Board of
Directors; provided that a Subsidiary organized or acquired after the Issue Date
may be so classified as an Unrestricted Subsidiary only if such classification
is not in violation of the covenant set forth under "Limitation on Restricted
Payments." The Trustee shall be given prompt notice by the Company of each
resolution adopted by the Board of Directors under this provision, together with
a copy of each such resolution adopted.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly-Owned Subsidiary" means any Restricted Subsidiary all of the
outstanding voting securities (other than directors' qualifying shares) of which
are owned, directly or indirectly, by the Company.
112
<PAGE> 118
DESCRIPTION OF CONVERTIBLE PREFERRED STOCK
Concurrently with the Private Offering, the Company issued and sold 7,500
shares ($75,000,000 aggregate liquidation preference) of 9 3/4% Series A
Convertible Preferred Stock, par value $.001 per share. The summary contained
herein of certain provisions of the Convertible Preferred Stock does not purport
to be complete and is qualified in its entirety by reference to the provisions
of the certificate of designation relating thereto. Capitalized terms used
herein and not otherwise defined below are defined in the certificate of
designation relating thereto.
Dividends. The holders of the Convertible Preferred Stock are entitled to
receive dividends at a rate equal to 9 3/4% per annum of the liquidation
preference thereof per share, payable quarterly beginning September 30, 1998 and
accumulating from the Issue Date. The Company, at its option, may pay dividends
on any dividend payment date either in cash or by the issuance of additional
shares of Convertible Preferred Stock having an aggregate liquidation preference
equal to the amount of such dividends or shares of Class A Common Stock having a
market value equal to the amount of such dividends; provided that if the Company
elects to pay such dividends in shares of Class A Common Stock and such shares
are not freely tradeable without volume or manner of sale limitations by any
holder of Convertible Preferred Stock which is not an Affiliate of the Company,
the dividend rate per annum for such payment shall be increased to 12 1/4%.
Voting Rights. Holders of the Convertible Preferred Stock will have voting
rights (voting as a class with the Class A Common Stock) on all matters
equivalent to one vote for each share of Class A Common Stock into which their
Convertible Preferred Stock is convertible. In addition, if the Company (i)
fails to make a mandatory redemption or a Change of Control Offer (as defined),
(ii) fails to comply with certain covenants or make certain payments on its
indebtedness or (iii) any event occurs or condition exists which results in an
increase in the dividend rate on the Private Preferred Stock, holders of a
majority of the outstanding shares of Convertible Preferred Stock, voting as a
class, will be entitled to elect the lesser of two directors or that number of
directors constituting at least 25% of the Board of Directors.
Liquidation Rights. The Convertible Preferred Stock, with respect to
dividend rights and rights on liquidation, winding-up and dissolution of the
Company, ranks senior to all classes of common stock and junior to all other
classes of preferred stock of the Company outstanding on the Issue Date,
including the Junior Preferred Stock.
Redemption. The Convertible Preferred Stock is redeemable, at the option
of the Company, in whole or in part, at any time on or after June 30, 2003 at
the redemption prices set forth in the certificate of designation relating
thereto, plus, without duplication, accumulated and unpaid dividends to the date
of redemption. The Company is required, subject to certain conditions, to redeem
all of the Convertible Preferred Stock outstanding on December 31, 2006 at a
redemption price equal to 100% of the liquidation preference thereof, plus,
without duplication, accumulated and unpaid dividends to the date of redemption.
Conversion Rights. The Convertible Preferred Stock will be convertible at
any time, on or after June 30, 1999, or immediately in the event of a Change of
Control or a Major Asset Sale, or at any time after the trading price of the
Class A Common Stock averages $25.00 or more above for five consecutive trading
days, at the option of the holder thereof. The Convertible Preferred Stock is
convertible into a number of shares of Class A Common Stock equal to the
aggregate liquidation preference of the shares of Convertible Preferred Stock
surrendered for conversion divided by the Conversion Price. The Conversion Price
will be an initial conversion rate of 625 shares of Common Stock for each share
of Convertible Preferred Stock (equivalent to a conversion price of $16.00 per
share of Class A Common Stock, representing a 45.5% conversion premium per share
of Class A Common Stock over the closing sale price of the Class A Common Stock
on June 4, 1998), subject to adjustment in certain events.
Warrants. In conjunction with the Convertible Preferred Offering, the
Company issued warrants to purchase 240,000 shares of Class A Common Stock of
the Company at an exercise price equivalent to the Conversion Price, which
warrants are exercisable until June 30, 2003.
113
<PAGE> 119
DESCRIPTION OF INDEBTEDNESS
CREDIT FACILITY
In May 1998, the Company refinanced its outstanding indebtedness under its
prior revolving credit facility with a $122.0 million senior credit facility
maturing June 2002 (the "Credit Facility"). The following summary of the Credit
Facility is based upon the terms of the credit agreement and related documents
("Credit Facility Loan Documents"), and is subject to and qualified in its
entirety by reference to the terms and conditions of the Credit Facility Loan
Documents.
The Company is required to begin making quarterly principal payments under
the Credit Facility beginning December 31, 2000. The Credit Facility matures on
June 30, 2002, unless previously terminated. The Company is required to be in
compliance with certain financial ratios subsequent to March 2000.
Borrowings under the Credit Facility bear interest at a rate equal to, at
the option of the Company, either (i) the Base Rate (which is defined as the
higher of 1/2% plus the Federal Funds Rate or the prime rate most recently
announced by the agent under the Credit Facility) plus 1.75%, or (ii) LIBOR plus
2.75%.
The obligations of the Company under the Credit Facility are
unconditionally guaranteed, jointly and severally, by all material subsidiaries
of the Company. The obligations of the Company and such guarantors under the
Credit Facility are secured primarily by a first priority lien on all the assets
of the Company and such guarantors.
The Credit Facility contains customary representations, warranties and
indemnities, and contains, among other things, covenants restricting the ability
of the Company and its subsidiaries to dispose of assets, pay dividends,
repurchase or redeem capital stock and indebtedness, create liens, make capital
expenditures, make certain investments or acquisitions, enter into transactions
with affiliates and otherwise restrict corporate activities. The Credit Facility
also contains the following financial covenants: maximum ratio of total debt to
operating cash flow, minimum permitted interest coverage and a minimum permitted
fixed charge coverage ratio, beginning March 31, 2000.
Events of defaults under the Credit Facility include those usual and
customary for transactions of this type, including, among other things, default
in the payment of principal or interest in respect of material amounts of
indebtedness of the Company or its subsidiaries, any non-payment default on such
indebtedness and a change of control, any material breach of the covenants or
representations and warranties included in the Credit Facility and related
documents, the institution of any bankruptcy proceedings and the failure of any
security agreement related to the Credit Facility or lien granted thereunder to
be valid and enforceable. Upon the occurrence and continuance of an event of
default under the Credit Facility, the lenders may declare the then outstanding
loans due and payable.
SENIOR SUBORDINATED NOTES MATURING OCTOBER 1, 2002 (THE "EXISTING NOTES")
The following summary is based upon the terms of the Existing Notes and the
Existing Indenture. This summary does not purport to be a complete description
of the Existing Notes or the Existing Indenture and is subject to and qualified
in its entirety by reference to the terms of the Existing Notes and the Existing
Indenture (including the definitions contained therein), copies of which are
available from the Company upon request.
The Existing Notes are limited in aggregate principal amount to $230.0
million. The Existing Notes are general unsecured obligations of the Company,
subordinated in right of payment to Senior Indebtedness (as defined in the
Existing Indenture) of the Company and senior in right of payment to any current
or future indebtedness of the Company subordinated thereto.
The Existing Notes are fully and unconditionally guaranteed, on a senior
subordinated basis, as to payment of principal, premium, if any, and interest,
jointly and severally (the "Existing Guarantees"), by all of the direct and
indirect subsidiaries of the Company (the "Guarantors"). The Existing Guarantees
are subordinated to all Senior Indebtedness of the respective Guarantors.
114
<PAGE> 120
The Existing Notes will mature on October 1, 2002. The Existing Notes bear
interest at a rate of 11 5/8% per annum from the date of original issuance until
maturity. Interest is payable semi-annually in arrears on April 1 and October 1,
commencing April 1, 1996.
The Existing Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after October 1, 1999 at a redemption price equal to
104% of the principal amount thereof during the twelve-month period beginning on
October 1, 1999, 102% of the principal amount thereof during the twelve-month
period beginning on October 1, 2000, and 100% of the principal amount thereof on
or after October 1, 2001, together with accrued and unpaid interest to the
redemption date. In addition, the Company, at its option, may redeem in the
aggregate up to 25% of the original principal amount of the Existing Notes at
any time prior to October 1, 1998, at a redemption price equal to 110% of the
principal amount thereof plus accrued interest to the redemption date with the
Net Proceeds of one or more Public Equity Offerings or Major Asset Sales (each
as defined in the Existing Indenture); provided, however, that at least $172.5
million aggregate principal amount of Existing Notes remains outstanding and
that such redemption occurs within 90 days following the closing of any such
Public Equity Offering or Major Asset Sale.
In the event of a Change of Control (as defined in the Existing Indenture)
of the Company, the Company will be required to make an offer to purchase all
outstanding Existing Notes at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of repurchase.
The Existing Indenture contains covenants for the benefit of the holders of
the Existing Notes that, among other things, and subject to certain exceptions,
restrict the ability of the Company and its Restricted Subsidiaries (as defined
in the Existing Indenture) to: (i) incur additional indebtedness; (ii) pay
dividends and make distributions; (iii) issue stock of subsidiaries; (iv) make
certain investments; (v) repurchase stock; (vi) create liens; (vii) enter into
transactions with affiliates; (viii) enter into sale and leaseback transactions;
(ix) merge or consolidate the Company or the Guarantors; and (x) transfer and
sell assets.
EXISTING EXCHANGE DEBENTURES
The following summary is based on the terms of the Existing Exchange
Debentures and the indenture relating to the Existing Exchange Debentures (the
"Existing Exchange Indenture"). This summary does not purport to be a complete
description of the Existing Exchange Debentures and the Existing Exchange
Indenture and is qualified in its entirety by reference to the terms of the
Existing Exchange Debentures and the Existing Exchange Indenture (including the
definitions contained therein), copies of which are available from the Company
upon request.
Currently, no Existing Exchange Debentures are outstanding. At the
Company's option, the Public Preferred Stock is exchangeable into the Existing
Exchange Debentures, subject to certain conditions, in whole or in part;
provided that immediately after giving effect to any such partial exchange,
there shall be outstanding shares of Public Preferred Stock (whether initially
issued or issued in lieu of cash dividends) with an aggregate liquidation
preference of not less than $75.0 million and not less than $75.0 million of
aggregate principal amount of Existing Exchange Debentures. Subject to certain
conditions, the Company has agreed to exchange all outstanding Public Preferred
Stock for Existing Exchange Debentures when such an exchange is permitted under
the terms of certain indebtedness and capital stock of the Company.
The Existing Exchange Debentures are limited in aggregate principal amount
to $440.0 million, which amount approximates the maximum amount of Existing
Exchange Debentures that could be outstanding if the Company immediately
exchanged all of the outstanding Public Preferred Stock into Existing Exchange
Debentures and paid all interest accruing on the Existing Exchange Debentures,
prior to October 31, 2001, by issuing additional Existing Exchange Debentures in
lieu of cash interest payments. If issued, the Existing Exchange Debentures will
be general unsecured obligations of the Company, subordinated in right of
payment to Senior Indebtedness (as defined in the Existing Exchange Indenture)
of the Company and senior in right of payment to any current or future
indebtedness of the Company subordinated thereto.
If issued, the Existing Exchange Debentures will be fully and
unconditionally guaranteed, on a senior subordinated basis, as to payment of
principal, premium, if any, and interest, jointly and severally (the
115
<PAGE> 121
"Existing Exchange Guarantees"), by all of the direct and indirect Guarantors.
The Existing Exchange Debentures are subordinated to all Senior Indebtedness of
the respective Guarantors.
If issued, the Existing Exchange Debentures will mature on October 31,
2006, and bear interest at a rate of 12 1/2% per annum from the date of original
issuance until maturity. Interest would be payable semi-annually in arrears on
April 30 and October 31.
If issued, the Existing Exchange Debentures will be redeemable at the
option of the Company, in whole or in part, at any time on or after October 31,
2001, at a redemption price equal to 106.25% of the principal amount thereof
during the twelve-month period beginning on October 31, 2001, 104.167% of the
principal amount thereof during the twelve-month period beginning on October 31,
2002, 102.083% of the principal amount thereof during the twelve-month period
beginning on October 31, 2003, and 100% of the principal amount thereof on or
after October 1, 2004, together with accrued and unpaid interest to the
redemption date. In addition, the Company, at its option, may redeem in the
aggregate up to 35% of the original principal amount of the Existing Exchange
Debentures at any time prior to October 31, 1999, at a redemption price equal to
112.50% of the principal amount thereof plus accrued interest to the redemption
date with the Net Proceeds of one or more Public Equity Offerings or Major Asset
Sales (each as defined in the Existing Exchange Indenture); provided, however,
that at least $75.0 million aggregate principal amount of Existing Exchange
Debentures remains outstanding and that such redemption occurs within 90 days
following the closing of any such Public Equity Offering or Major Asset Sale.
In the event of a Change of Control (as defined in the Existing Exchange
Indenture) of the Company, the Company will be required to make an offer to
purchase all outstanding Existing Exchange Debentures at a price equal to 101%
of the principal amount thereof plus accrued and unpaid interest to the date of
repurchase.
The Existing Exchange Indenture contains covenants for the benefit of the
holders of the Existing Exchange Debentures that, among other things, and
subject to certain exceptions, restrict the ability of the Company and its
Restricted Subsidiaries (as defined in the Existing Exchange Indenture) to: (i)
incur additional indebtedness; (ii) pay dividends and make certain other
restricted payments; (iii) issue certain stock of subsidiaries; (iv) enter into
transactions with affiliates; (v) merge or consolidate the Company or the
Guarantors; and (vi) transfer and sell assets.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 197,500,000 shares of
common stock with a par value of $.001 per share, and 1,000,000 shares of
preferred stock with a par value of $.001 per share. Of the 197,500,000 shares
of common stock that the Company is authorized to issue: (a) 150,000,000 shares
are designated as Class A Common Stock (the "Class A Common Stock"), (b)
35,000,000 shares are designated as Class B common stock (the "Class B Common
Stock"), and (c) 12,500,000 shares are designated as Class C non-voting common
stock (the "Class C Common Stock" and with the Class A Common Stock and Class B
Common Stock, collectively, the "Common Stock"). Of the 1,000,000 shares of
preferred stock that the Company is authorized to issue: (a) 33,000 shares have
been designated as Junior Cumulative Compounding Redeemable Preferred Stock (the
"Private Preferred Stock,"), (b) 440,000 shares have been designated as 12 1/2%
Cumulative Exchangeable Preferred Stock (the "Public Preferred Stock"), with
150,000 of such shares originally issued by the Company and the remaining shares
reserved to be available from time to time to be issued as dividends on the then
outstanding shares of Public Preferred Stock, in lieu of the payment of cash
dividends thereon, (c) 72,000 shares have been designated as Original Junior
Preferred Stock, (d) 17,500 shares have been designated as 9 3/4% Series A
Convertible Preferred Stock (collectively with the Junior Preferred Stock and
the Existing Preferred Stock, the "Preferred Stock"), and (e) effective upon
consummation of the Exchange Offer, 72,000 shares have been designated as New
Junior Preferred Stock. As of March 31, 1998, 51,868,800 shares of Class A
Common Stock, 8,311,639 shares of Class B Common Stock, no shares of Class C
Common Stock, 33,000 shares of Private Preferred Stock and 170,782 shares of
Public Preferred Stock were outstanding. In addition, 12,267,138 shares of Class
A Common Stock
116
<PAGE> 122
are reserved for issuance with respect to: (a) the conversion of shares of Class
B Common Stock to Class A Common Stock, (b) the exercise of warrants issued in
connection with the Private Preferred Stock, and (c) the exercise of outstanding
options under the Company's Stock Incentive Plans.
COMMON STOCK
Dividends. Subject to the Preferred Stock's prior right to dividends,
holders of record of shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock on the record date are entitled to receive such dividends
as may be declared by the Company's Board of Directors out of funds legally
available for such purpose. No dividends may be declared or paid in cash or
property on any share of any class of the Common Stock, however, unless
simultaneously the same dividend is declared or paid on each share of the other
classes of Common Stock. In the case of any stock dividend, holders of Class A
Common Stock are entitled to receive the same percentage dividend (payable in
shares of Class A Common Stock) as holders of Class B Common Stock receive
(payable in shares of Class B Common Stock) and holders of Class C Common Stock
receive (payable in shares of Class C Common Stock). So long as any Existing
Preferred Stock is outstanding, the Company cannot declare dividends on its
Common Stock, except under certain limited circumstances.
Voting Rights. Holders of shares of 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 of the Company, with each share of Class A Common Stock
entitled to one vote and each share of Class B Common Stock entitled to ten
votes, except as otherwise provided by law. Holders of Class C Common Stock have
no right to vote on any matter voted on by the stockholders of the Company,
except as may be provided by law or as provided in limited circumstances in the
Company's certificate of incorporation.
Liquidation Rights. Upon liquidation, dissolution, or winding-up of the
Company, the holders of the Common Stock are entitled to share pro rata in all
assets available for distribution after payment in full to creditors and payment
in full to any holders of Preferred Stock then outstanding of any amount
required to be paid under the terms of such Preferred Stock.
Other Provisions. Each share of Class B Common Stock and Class C Common
Stock is generally convertible or exchangeable at the option of its holder into
one share of Class A Common Stock at any time, subject to certain restrictions
in the case of the conversion or exchange of Class C Common Stock. Holders of
Common Stock do not have preemptive rights, although holders of Private
Preferred Stock have limited preemptive rights under the Stockholders Agreement.
PRIVATE PREFERRED STOCK
Dividends. The holders of the Private Preferred Stock are entitled under
the Company's certificate of incorporation to cumulative dividends on a basis
preferential to the holders of Common Stock and all other Preferred Stock. The
Company may not declare or pay any dividends, whether in cash, property or
otherwise or make any distributions in respect of any other Preferred Stock
until all accrued and unpaid dividends on the Private Preferred Stock have been
declared and paid and, in the event the Company is required to redeem the
Private Preferred Stock, monies sufficient for such purpose have been set aside.
Until December 22, 2001, the holders of Private Preferred Stock are entitled to
receive cumulative dividends from the Company on each share of Private Preferred
Stock at the per annum rate of 12% of the liquidation price of such share
($1,000) plus all accrued and unpaid dividends with respect to such share,
including any deferred dividends as described below and any dividends thereon.
For each year thereafter, the per annum rate shall increase by 1%. The dividend
rate on the Private Preferred Stock will increase to an annual rate of 30% (i)
upon the occurrence of certain bankruptcy events, (ii) upon a change of control
(as defined in the Stockholders Agreement) of the Company, (iii) upon the
failure to choose a successor to Mr. Paxson in the event of his death or
incapacity as provided in the Stockholders Agreement, (iv) if the Company incurs
indebtedness in excess of that permitted by certain financial leverage ratios,
(v) upon the failure to pay dividends on or after December 22, 2000 equal to the
amount of dividends payable in any twelve month period or (vi) if the Private
Preferred Stock remains outstanding after December 22, 2003. Such increased
dividend rate shall remain in effect for so long as any
117
<PAGE> 123
such event continues and will increase by 5% on each anniversary of such event
or, in the case of a bankruptcy event, upon the failure of the Company to redeem
the Private Preferred Stock at the request of the holders thereof.
Accrued dividends on the Private Preferred Stock are payable semi-annually
to the holders of record of the Private Preferred Stock as of the close of
business on the applicable record date. Until December 22, 1999, the Company may
at its option defer the payment of accrued dividends until the earlier of the
date the Private Preferred Stock is redeemed or the liquidation, dissolution or
winding up of the Company. On January 1 and July 1 of each year, all dividends
that have accrued on each share of Private Preferred Stock and that have not
theretofore been accumulated shall, to the extent not paid for any reason, be
accumulated, and dividends will accrue on such accumulation until such
accumulated dividends are paid. As of December 31, 1997, the Company has not
paid any cash dividends on the Private Preferred Stock, and there were
$13,949,641 in accrued and unpaid dividends on the Private Preferred Stock.
Voting Rights. The affirmative vote or written consent of the holders of a
majority of the outstanding shares of Private Preferred Stock is required in
order for the Company to take the following actions: amend, alter or repeal any
of the provisions of the certificate of incorporation or any resolution of the
Company's Board of Directors or any other instrument establishing and
designating the Private Preferred Stock or any other capital stock of the
Company so as to adversely affect the rights, privileges, preferences or powers
of the Private Preferred Stock; create or designate any stock on a parity with
or senior to the Private Preferred Stock; enter into an agreement that would
prevent the Company from performing its obligations with respect to the Private
Preferred Stock; or pay dividends to the holders of, or redeem, securities of
the Company or its subsidiaries junior to the Private Preferred Stock, except as
specifically provided therein.
Liquidation Rights. Upon liquidation, dissolution or winding-up of the
Company, the holders of Private Preferred Stock are entitled to a preference of
$1,000 per share, plus accrued and unpaid dividends, over all classes and series
of junior stock, including the Common Stock, with respect to the assets
available for distribution after payment in full of creditors.
Redemption Rights; Priorities. So long as any shares of Private Preferred
Stock remain outstanding, the Company may not directly or indirectly purchase,
redeem, exchange or otherwise acquire any other Preferred Stock or any Common
Stock. All the shares of Private Preferred Stock are redeemable, at the option
of the Company, in whole at any time, at a redemption price equal to the
liquidation price for such shares, plus the amount of all accrued and unpaid
dividends thereon, as of the redemption date, payable in cash. The Company is
obligated to redeem on December 22, 2003, out of unrestricted funds legally
available therefor, all the shares of the Private Preferred Stock then
outstanding, at a redemption price equal to the liquidation price for such
shares, as of the redemption date (plus a 2% premium if redeemed between
December 23, 1997, and December 22, 1998), plus the amount of all accrued and
unpaid dividends thereon, payable in cash. Holders of shares of the Private
Preferred Stock are entitled to require the Company to redeem their shares of
Private Preferred Stock upon the occurrence of a bankruptcy or similar event
relating to the Company or the default by the Company under the terms of the
Stockholders Agreement.
PUBLIC PREFERRED STOCK
Dividends. The holders of the Public Preferred Stock are entitled to
receive dividends at a rate equal to 12 1/2% per annum of the liquidation
preference per share, payable semi-annually beginning April 30, 1997 and
accumulating from the Issue Date. The Company, at its option, may pay dividends
on any dividend payment date occurring on or before October 31, 2002 either in
cash or by the issuance of additional shares of Public Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends. To date
the Company has paid no cash dividends on the Public Preferred Stock, but has
issued approximately additional shares of Public Preferred Stock in
lieu of cash dividends.
Voting Rights. The Public Preferred Stock is non-voting, except as
otherwise required by law and except in certain circumstances, including (i)
amending certain rights of the holders of the Public Preferred Stock and (ii)
the issuance of any class of equity securities that ranks on a parity with or
senior to the Public Preferred Stock, other than certain additional shares of
Public Preferred Stock or parity securities issued to
118
<PAGE> 124
finance the redemption by the Company of the Private Preferred Stock. In
addition, if the Company (i) after October 31, 2002, fails to pay cash dividends
in respect of three or more semi-annual dividend periods in the aggregate, (ii)
fails to make a mandatory redemption or a Change of Control Offer (as defined)
or (iii) fails to comply with certain covenants or make certain payments on its
indebtedness, holders of a majority of the outstanding shares of Public
Preferred Stock, voting as a class, will be entitled to elect the lesser of two
directors or that number of directors constituting at least 25% of the Board of
Directors.
Liquidation Rights. The Public Preferred Stock, with respect to dividend
rights and rights on liquidation, winding-up and dissolution of the Company,
ranks senior to all classes of common stock and junior to all other classes of
preferred stock of the Company outstanding on October 1, 1996.
Redemption; Priorities. The Public Preferred Stock is redeemable, at the
option of the Company, in whole or in part, at any time on or after October 31,
2001 at the redemption prices set forth herein, plus, without duplication,
accumulated and unpaid dividends to the date of redemption. In addition, prior
to October 31, 1999, the Company may, at its option, use the net proceeds of one
or more Public Equity Offerings or Major Asset Sales to redeem up to an
aggregate of 35% of the shares of Public Preferred Stock (whether initially
issued or issued in lieu of cash dividends) at the redemption prices set forth
herein, plus, without duplication, accumulated and unpaid dividends to the date
of redemption; provided, however, that after any such redemption, there is at
least $75.0 million aggregate liquidation preference of the Public Preferred
Stock outstanding and that such redemption occurs within 90 days following the
closing of such Public Equity Offering or Major Asset Sale. The Company is
required, subject to certain conditions, to redeem all of the Public Preferred
Stock outstanding on October 31, 2006 at a redemption price equal to 100% of the
liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends to the date of redemption.
Exchange Provisions. The Public Preferred Stock is exchangeable into the
Existing Exchange Debentures, at the Company's option, subject to certain
conditions in whole or in part, on a pro rata basis, on any scheduled dividend
payment date; provided that immediately after giving effect to any such partial
exchange, there shall be outstanding shares of Public Preferred Stock (whether
initially issued or issued in lieu of cash dividends) with an aggregate
liquidation preference of not less than $75.0 million and not less than $75.0
million of aggregate principal amount of Existing Exchange Debentures.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Limitation of Liability and Indemnification. As permitted by the Delaware
General Corporation Law, the Company's Certificate of Incorporation provides
that directors of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derives an improper personal benefit. In
addition, the Company's Bylaws provide that the Company shall, to the fullest
extent authorized by Section 145 of the Delaware General Corporation Law, as
amended from time to time, indemnify all directors and officers and all persons
serving at the request of the company as director, trustee, officer, employee or
agent of another corporation or of a partnership, trust or other enterprise.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that, in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Securities Act and, therefore, is unenforceable.
Delaware Business Combination Statute. Section 203 of the Delaware General
Corporation Law (Section 203) provides that, subject to certain exceptions
specified therein, an interested stockholder of a Delaware corporation shall not
engage in any business combination with the corporation for a three-year period
following the date that such stockholder becomes an interested stockholder
unless (i) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) upon consummation of
the
119
<PAGE> 125
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
certain shares) or (iii) on or subsequent to such date, the business combination
is approved by the Board of Directors of the corporation and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Except as otherwise specified in Section 203, an interested
stockholder is defined to include (x) any person that is the owner of 15% or
more of the outstanding voting stock of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the relevant date and (y) the affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The certificate of incorporation does not exclude the Company from
the restrictions imposed under Section 203. The provisions of Section 203 may
encourage companies interested in acquiring the Company to negotiate in advance
with the Company's Board of Directors because the stockholder approval
requirement would be avoided if a majority of the directors then in office
approve either the business combination or the transaction which results in the
stockholder becoming an interested stockholder. Such provisions also may have
the effect of preventing changes in the management of the Company. It is
possible that such provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations relating to the Exchange Offer which may be applicable to holders
of shares of Original Junior Preferred Stock. This discussion is a summary for
general information only and does not consider all aspects of U.S. federal
income tax that may be relevant to a holder of shares of Original Junior
Preferred Stock. The discussion is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), Treasury Regulations, IRS rulings and pronouncements
and judicial decisions now in effect, all of which are subject to change at any
time by legislative, judicial or administrative action (possibly on a
retroactive basis). The Company has not sought and will not seek any rulings or
opinions from the IRS or counsel with respect to the matters discussed below.
There can be no assurance that the IRS will not take positions concerning the
tax consequences of the Exchange Offer which are different from those discussed
herein.
HOLDERS OF SHARES OF ORIGINAL JUNIOR PREFERRED STOCK SHOULD CONSULT THEIR
OWN ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL
AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THE EXCHANGE
OFFER IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
The exchange of shares of Original Junior Preferred Stock for shares of New
Junior Preferred Stock pursuant to the Exchange Offer should not constitute a
taxable exchange. As a result, (i) a holder should not recognize taxable gain or
loss as a result of exchanging shares of Original Junior Preferred Stock for
shares of New Junior Preferred Stock pursuant to the Exchange Offer; (ii) the
holding period of the shares of New Junior Preferred Stock should include the
holding period of the shares of Original Junior Preferred Stock exchanged
therefor; and (iii) the adjusted tax basis of the shares of New Junior Preferred
Stock should be the same as the adjusted tax basis of the shares of Original
Junior Preferred Stock exchanged therefor immediately before the exchange.
120
<PAGE> 126
PLAN OF DISTRIBUTION
Each broker-dealer that received shares of New Junior Preferred Stock for
its own account pursuant to the Exchange Offer ("Restricted Holder") must
acknowledge that it will deliver a prospectus in connection with any resale of
such shares of New Junior Preferred Stock. This Prospectus, as it may be amended
or supplemented from time to time may be used by a Restricted Holder in
connection with resales of shares of New Junior Preferred Stock received in
exchange for shares of Original Junior Preferred Stock where such shares of
Original Junior Preferred Stock were acquired as a result of market-making
activities or other trading activities. For a period of 180 days after the
Expiration Date, the Company will use reasonable efforts to make this Prospectus
available to any Restricted Holder for use in connection with any such resale,
provided that such Restricted Holder indicates in the Letter of Transmittal that
it is a broker-dealer. In addition, pursuant to Section 4(3) of the Securities
Act, all dealers effecting transactions in the shares of New Junior Preferred
Stock, whether or not participating in the Exchange Offer, may be required to
deliver a Prospectus.
The Company will not receive any proceeds from any sale of shares of New
Junior Preferred Stock by Restricted Holders. Shares of New Junior Preferred
Stock received by Restricted Holders for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Junior Preferred Stock or a combination of such methods of
resale, at market prices prevailing at the time of resale, or at prices related
to such prevailing market prices on negotiated prices. Any such resale may be
made directly to purchasers or to or through Restricted Holders who may receive
compensation in the form of commissions or concessions from any such Restricted
Holder and/or the purchasers of any New Junior Preferred Stock. Any Restricted
Holder that resells shares of New Junior Preferred Stock that were received by
it for its own account pursuant to the Exchange Offer and any person that
participates in the distribution of such New Junior Preferred Stock may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of shares of New Junior Preferred Stock and any
commissions or concessions received by any such Restricted Holders may be deemed
to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a Restricted Holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment of
supplement to this Prospectus to any Restricted Holder that requires such
documents in the Letter of Transmittal.
By acceptance of the Exchange Offer, each Restricted Holder that receives
shares of New Junior Preferred Stock pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requires the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such Restricted Holder), such Restricted Holder will suspend use of
the Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Restricted Holder. If the Company gives any such
notice to suspend the use of the Prospectus, it shall extend the 180-day period
referred to above by the number of days during the period from and including the
date of the giving of such notice up to and including when Restricted Holders
shall have received copies of the supplemental or amended Prospectus necessary
to permit resales of shares of New Junior Preferred Stock.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the New Junior
Preferred Stock will be passed upon for the Company by Holland & Knight LLP (a
registered limited liability partnership).
121
<PAGE> 127
EXPERTS
The financial statements of Paxson Communications Corporation as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 included in this Prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent certified public
accountants, given on the authority of said firm as experts in auditing and
accounting.
122
<PAGE> 128
PAXSON COMMUNICATIONS CORPORATION
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PAXSON COMMUNICATIONS CORPORATION
Consolidated Financial Statements -- December 31, 1997,
1996, and 1995
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Changes in Common Stockholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
PAXSON COMMUNICATIONS CORPORATION
Unaudited Interim Consolidated Financial Statements -- March
31, 1997 and 1998
Consolidated Balance Sheets March 31, 1998 and December 31,
1997...................................................... F-33
Consolidated Statements of Operations....................... F-34
Consolidated Statement of Changes in Common Stockholders'
Equity.................................................... F-35
Consolidated Statements of Cash Flows....................... F-36
Notes to Consolidated Financial Statements.................. F-37
</TABLE>
F-1
<PAGE> 129
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
of Paxson Communications Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in common
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Paxson Communications Corporation and its subsidiaries
at December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 the opinion expressed
above.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
March 13, 1998
F-2
<PAGE> 130
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 82,641,444 $ 61,748,788
Restricted cash........................................... 17,000,000 --
Accounts receivable, less allowance for doubtful accounts
of $911,941 and $1,576,593, respectively................ 4,813,524 29,860,998
Prepaid expenses and other current assets................. 2,765,984 2,713,565
Current program rights.................................... -- 1,512,019
-------------- ------------
Total current assets............................... 107,220,952 95,835,370
Cash held by qualified intermediary......................... 418,949,550 --
Property and equipment, net................................. 105,896,873 144,415,412
Intangible assets, net...................................... 205,400,029 220,409,421
Investments in broadcast properties......................... 72,762,195 53,297,022
Investment in cable network................................. 58,974,491 --
Other assets, net........................................... 87,908,884 28,149,699
Program rights, net......................................... -- 1,075,536
-------------- ------------
Total assets....................................... $1,057,112,974 $543,182,460
============== ============
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 11,305,782 $ 10,676,692
Accrued interest.......................................... 8,475,686 6,684,373
Current portion of program rights payable................. -- 1,628,959
Current portion of long-term debt......................... 496,378 644,509
-------------- ------------
Total current liabilities.......................... 20,277,846 19,634,533
Program rights payable...................................... -- 1,000,260
Deferred gain............................................... 12,100,000 --
Deferred income taxes....................................... 95,747,156 --
Long-term debt.............................................. 122,299,025 3,407,688
Senior subordinated notes, net.............................. 227,958,736 227,655,096
Redeemable Cumulative Compounding Junior preferred stock,
$0.001 par value; 12% dividend rate per annum, 33,000
shares authorized, issued and outstanding................. 42,610,662 36,780,496
Redeemable Exchangeable preferred stock, $0.001 par value;
12.5% dividend rate per annum, 440,000 shares authorized,
170,782 and 150,000 shares issued and outstanding......... 168,375,990 147,929,150
Class A common stock, $0.001 par value; one vote per share;
150,000,000 shares authorized, 50,701,600 and 40,442,482
shares issued and outstanding............................. 50,702 40,442
Class B common stock, $0.001 par value; ten votes per share;
35,000,000 shares authorized and 8,311,639 shares issued
and outstanding........................................... 8,312 8,312
Class A and B common stock warrants......................... 2,316,225 6,862,647
Class C common stock warrants............................... -- 2,335,528
Stock subscription notes receivable......................... (2,813,250) (1,873,139)
Additional paid-in capital.................................. 285,795,787 209,621,241
Deferred option plan compensation........................... (2,205,240) (6,397,916)
Retained earnings (accumulated deficit)..................... 84,591,023 (103,821,878)
Commitments and contingencies (Note 18)..................... -- --
-------------- ------------
Total liabilities, redeemable securities and common
stockholders' equity............................. $1,057,112,974 $543,182,460
============== ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the consolidated financial statements.
F-3
<PAGE> 131
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Local and national advertising..................... $ 87,654,004 $ 60,772,499 $ 29,464,515
Other.............................................. 545,344 1,400,169 2,131,037
Trade and barter................................... 222,105 159,950 188,763
------------ ------------ ------------
Total revenues....................................... 88,421,453 62,332,618 31,784,315
------------ ------------ ------------
Operating expenses:
Direct............................................. 14,648,173 10,609,812 6,771,051
Programming........................................ 5,010,635 2,607,796 1,349,787
Sales and promotion................................ 5,809,864 3,642,038 2,424,629
Technical.......................................... 8,982,149 5,011,353 2,259,341
General and administrative......................... 23,562,985 20,814,808 12,259,416
Trade and barter................................... 266,674 110,449 118,339
Time brokerage and affiliation agreement fees ..... 16,961,427 3,568,192 898,643
Option plan compensation........................... 3,369,812 6,975,830 9,052,003
Compensation associated with Paxson Radio asset
sales........................................... 9,700,000 -- --
Depreciation and amortization...................... 22,044,109 12,887,776 4,647,942
------------ ------------ ------------
Total operating expenses............................. 110,355,828 66,228,054 39,781,151
------------ ------------ ------------
Operating loss....................................... (21,934,375) (3,895,436) (7,996,836)
Other income (expense):
Interest expense................................... (37,728,307) (31,525,927) (17,151,099)
Interest income.................................... 9,494,894 6,741,552 1,651,193
Other expenses, net................................ (5,721,743) (1,755,660) (488,725)
Equity in loss of unconsolidated investment........ (2,492,691) -- --
------------ ------------ ------------
Loss from continuing operations before income tax
benefit and extraordinary item..................... (58,382,222) (30,435,471) (23,985,467)
Income tax benefit................................... 21,879,260 -- 1,280,000
------------ ------------ ------------
Loss from continuing operations before extraordinary
item............................................... (36,502,962) (30,435,471) (22,705,467)
------------ ------------ ------------
Discontinued operations:
Income (loss) from discontinued operations, net of
applicable income taxes......................... (3,555,186) 4,216,570 (142,096)
Gain on disposal of discontinued operations, net of
applicable income taxes......................... 254,748,055 -- --
------------ ------------ ------------
251,192,869 4,216,570 (142,096)
------------ ------------ ------------
Income (loss) before extraordinary item.............. 214,689,907 (26,218,901) (22,847,563)
Extraordinary item................................... -- -- (10,625,727)
------------ ------------ ------------
Net income (loss).................................... 214,689,907 (26,218,901) (33,473,290)
Dividends and accretion on redeemable preferred stock
and redeemable common stock warrants............... (26,277,006) (21,908,584) (13,297,206)
------------ ------------ ------------
Net income (loss) attributable to common stock....... $188,412,901 $(48,127,485) $(46,770,496)
============ ============ ============
Basic and diluted (loss) earnings per share:
Loss from continuing operations before extraordinary
item............................................... $ (1.17) $ (1.20) $ (1.05)
Discontinued operations.............................. 4.67 0.10 --
Extraordinary item................................... -- -- (0.31)
------------ ------------ ------------
Net income (loss).................................... $ 3.50 $ (1.10) $ (1.36)
============ ============ ============
Weighted average shares outstanding.................. 53,808,472 43,836,526 34,429,517
============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial statements are an integral part
of the consolidated financial statements.
F-4
<PAGE> 132
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS CLASS C STOCK DEFERRED
COMMON STOCK A AND B COMMON SUBSCRIPTION ADDITIONAL OPTION
----------------- STOCK STOCK NOTES PAID-IN PLAN
CLASS A CLASS B WARRANTS WARRANTS RECEIVABLE CAPITAL COMPENSATION
------- ------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... $26,042 $8,312 $ 5,338,952 $ (77,666) $ 20,647,647
Stock issued for Cookeville
acquisition.......................... 95 1,199,905
Deferred option plan compensation...... 90 12,187,508 $(12,187,508)
Option plan compensation............... 10,803,241
Stock options exercised................ 307,026
Increase in stock subscription
receivable........................... (48,029)
Repayments of stock subscription notes
receivable........................... 9,981
Dividends on redeemable preferred
stock................................
Accretion on Senior redeemable
preferred stock......................
Accretion on Series B preferred
stock................................
Accretion on Junior preferred stock....
Accretion on Class A and B common stock
warrants.............................
Net loss...............................
------- ------ ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1995........... 26,227 8,312 5,338,952 (115,714) 34,342,086 (1,384,267)
Release of put option on Class A and B
common stock warrants................ $ 9,116,399
Issuance of common stock, net of
issuance costs of $10,000,000........ 10,300 154,789,700
Exercise of Class A, B and C common
stock warrants....................... 3,623 (2,253,752) (3,003,424) 5,253,548
Stock issued for Todd Communications
acquisition.......................... 139 1,534,967
Deferred option plan compensation...... 12,932,506 (12,932,506)
Option plan compensation............... 7,918,857
Stock options exercised................ 153 768,434
Increase in stock subscription
receivable........................... (1,873,139)
Repayment of stock subscription notes
receivable........................... 115,714
Dividends on redeemable preferred
stock................................
Accretion on Senior redeemable
preferred stock......................
Accretion on Series B preferred
stock................................
Accretion on Junior preferred stock....
Accretion on Redeemable Exchangeable
preferred stock......................
Accretion on Class A and B common stock
warrants.............................
Net loss...............................
------- ------ ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1996........... 40,442 8,312 6,862,647 2,335,528 (1,873,139) 209,621,241 (6,397,916)
Stock issued for acquisitions.......... 6,069 66,118,931
Exercise of Class A, B and C common
stock warrants....................... 3,923 (4,546,422) (2,335,528) 6,878,028
Deferred option plan compensation...... 2,263,167 (2,263,167)
Option plan compensation............... 6,455,843
Stock options exercised................ 268 914,420
Increase in stock subscription notes
receivable........................... (940,111)
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 $ -- $(2,813,250) $285,795,787 $ (2,205,240)
======= ====== =========== =========== =========== ============ ============
<CAPTION>
RETAINED
EARNINGS
(ACCUMULATED
DEFICIT)
-------------
<S> <C>
Balance at December 31, 1994........... $ (8,923,897)
Stock issued for Cookeville
acquisition..........................
Deferred option plan compensation......
Option plan compensation...............
Stock options exercised................
Increase in stock subscription
receivable...........................
Repayments of stock subscription notes
receivable...........................
Dividends on redeemable preferred
stock................................ (7,275,516)
Accretion on Senior redeemable
preferred stock...................... (332,156)
Accretion on Series B preferred
stock................................ (325,208)
Accretion on Junior preferred stock.... (634,988)
Accretion on Class A and B common stock
warrants............................. (4,729,338)
Net loss............................... (33,473,290)
-------------
Balance at December 31, 1995........... (55,694,393)
Release of put option on Class A and B
common stock warrants................
Issuance of common stock, net of
issuance costs of $10,000,000........
Exercise of Class A, B and C common
stock warrants.......................
Stock issued for Todd Communications
acquisition..........................
Deferred option plan compensation......
Option plan compensation...............
Stock options exercised................
Increase in stock subscription
receivable...........................
Repayment of stock subscription notes
receivable...........................
Dividends on redeemable preferred
stock................................ (13,223,227)
Accretion on Senior redeemable
preferred stock...................... (1,805,599)
Accretion on Series B preferred
stock................................ (3,418,615)
Accretion on Junior preferred stock.... (650,084)
Accretion on Redeemable Exchangeable
preferred stock...................... (159,977)
Accretion on Class A and B common stock
warrants............................. (2,651,082)
Net loss............................... (26,218,901)
-------------
Balance at December 31, 1996........... (103,821,878)
Stock issued for acquisitions..........
Exercise of Class A, B and C common
stock warrants.......................
Deferred option plan compensation......
Option plan compensation...............
Stock options exercised................
Increase in stock subscription notes
receivable...........................
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........... $ 84,591,023
=============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the consolidated financial statements.
F-5
<PAGE> 133
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 214,689,907 $ (26,218,901) $ (33,473,290)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization........................... 35,511,000 25,974,909 17,771,109
Option plan compensation................................ 6,455,843 7,918,857 10,803,241
Program rights amortization............................. 703,789 1,381,582 1,765,942
Provision for doubtful accounts......................... 2,011,337 1,287,819 1,098,181
Deferred income tax benefit............................. (21,879,260) -- (1,280,000)
Loss on sale or disposal of assets...................... 3,794,027 181,586 145,857
Loss on extinguishment of long-term debt................ -- -- 10,625,727
Equity in loss of unconsolidated investment............. 2,492,691 -- --
Gain on disposal of discontinued operations, net........ (254,748,055) -- --
Changes in assets and liabilities:
Increase in restricted cash........................... (17,000,000) -- --
Decrease (increase) in accounts receivable............ 5,172,545 (13,422,402) (5,255,398)
(Increase) decrease in prepaid expenses and other
current assets..................................... (1,631,864) (1,742,202) 608,591
Increase in intangible assets......................... -- -- (1,200,000)
(Increase) decrease in other assets................... (5,352,711) (1,886,853) 2,578,733
(Decrease) increase in accounts payable and accrued
liabilities........................................ (10,590,638) 5,646,000 131,529
Increase (decrease) in accrued interest............... 1,815,673 (247,969) 6,707,814
------------- ------------- -------------
Net cash (used in) provided by operating
activities....................................... (38,555,716) (1,127,574) 11,028,036
------------- ------------- -------------
Cash flows from investing activities:
Acquisitions of broadcasting and billboard properties..... (253,804,699) (186,662,299) (58,510,509)
Increase in investments in broadcast properties........... (8,026,173) (32,104,992) (19,442,030)
Deposits on broadcasting properties....................... (26,597,000) (3,837,000) (2,381,619)
Increase in programming deposits.......................... (36,682,500) -- --
Cash held by qualified intermediary....................... (418,949,550) -- --
Purchases of property and equipment....................... (44,473,918) (36,709,477) (25,016,816)
Investment in cable network............................... (5,342,182) -- --
Deposits (made) refunded on buildings and equipment....... (320,000) 555,341 (735,074)
Proceeds from sales of discontinued operations............ 721,978,459 -- --
Proceeds from sale of assets.............................. 13,764,020 228,279 466,820
------------- ------------- -------------
Net cash used in investing activities.............. (58,453,543) (258,530,148) (105,619,228)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net............... -- 154,800,000 --
Proceeds from issuance of long-term debt.................. 120,000,000 17,700,000 327,539,000
Repayments of long-term debt.............................. (1,269,978) (28,230,464) (169,722,340)
Payment of loan origination costs......................... -- (2,985,742) (15,896,473)
Payments for program rights............................... (802,684) (1,424,912) (1,098,731)
Proceeds from issuance of redeemable preferred stock,
net..................................................... -- 143,197,254 --
Redemption of Senior and Series B preferred stock......... -- (28,455,758) --
Proceeds from exercise of common stock options, net....... 914,688 492,567 307,116
Increase in stock subscription notes receivable........... (940,111) (1,873,139) (48,029)
Repayment of stock subscription notes receivable.......... -- 115,714 9,981
------------- ------------- -------------
Net cash provided by financing activities.......... 117,901,915 253,335,520 141,090,524
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents............ 20,892,656 (6,322,202) 46,499,332
Cash and cash equivalents, beginning of year................ 61,748,788 68,070,990 21,571,658
------------- ------------- -------------
Cash and cash equivalents, end of year...................... $ 82,641,444 $ 61,748,788 $ 68,070,990
============= ============= =============
</TABLE>
F-6
<PAGE> 134
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 33,895,837 $ 28,342,148 $ 8,292,274
============= ============= =============
Cash paid for income taxes................................ $ 975,000 $ -- $ --
============= ============= =============
Non-cash operating, investing and financing activities:
Accretion of discount on Senior Subordinated Notes........ $ 303,640 $ 280,185 $ 65,911
============= ============= =============
Issuance of common stock in connection with
acquisitions............................................ $ 66,125,000 $ 1,535,106 $ 1,200,000
============= ============= =============
Note payable incurred for WYPX-TV acquisition............. $ -- $ 1,650,000 $ --
============= ============= =============
Dividends accreted on redeemable preferred stock.......... $ 24,942,740 $ 12,273,227 $ 7,275,516
============= ============= =============
Discount accretion on redeemable securities............... $ 1,334,266 $ 9,635,357 $ 6,021,690
============= ============= =============
Trade and barter revenue.................................. $ 3,656,597 $ 4,154,986 $ 3,068,354
============= ============= =============
Trade and barter expense.................................. $ 3,732,765 $ 4,166,918 $ 2,604,950
============= ============= =============
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.
F-7
<PAGE> 135
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Paxson Communications Corporation (the "Company"), a Delaware corporation,
was organized in December 1993 for the purpose of owning and operating radio and
television broadcasting stations and networks.
OPERATIONS
The Company currently operates a nationwide network of owned, operated or
affiliated television stations carrying programming from its proprietary
network, which presently broadcasts long form paid programming consisting
primarily of infomercials. At December 31, 1997, the Company operates 33 owned,
11 time brokered and 7 affiliated television stations. The Company announced in
November 1997 its intention to launch a new broadcast television network of
family values oriented programming ("PAX NET") effective August 31, 1998. 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").
(See Note 3.)
During January 1998, the Company adopted new call letters for 39 of its
television stations in an effort to more closely align the station call letters
with PAX NET. These new call letters have been utilized in the notes to the
financial statements.
Two other business segments, Paxson Radio and Paxson Network-Affiliated
Television, have been classified as discontinued operations in the accompanying
consolidated statements of operations for all periods presented as a result of
the Company's sale of these operations during 1997 (see Note 2).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The Company accounts for its investment in
The Travel Channel L.L.C. under the equity method of accounting. All
intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less. At December 31, 1997 and 1996, approximately
$96 million and $45 million, respectively, of debt securities, all classified as
available for sale and consisting of money market accounts, commercial paper and
overnight repurchase agreements, were included in cash and cash equivalents.
RESTRICTED CASH
Restricted cash consists of cash held in an escrow account to be applied to
the payment of interest due pursuant to an amendment to the Company's revolving
credit facility executed in March 1998 (see Note 10).
CASH HELD BY QUALIFIED INTERMEDIARY
The Company 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. In order to qualify for deferral, these funds must be
used to fund broadcast properties acquisitions prior to March 27, 1998.
Accordingly, they have been classified as long term in the accompanying
Consolidated Balance Sheet at December 31, 1997.
F-8
<PAGE> 136
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the assets, are capitalized at cost
and depreciated using the straight line method over their estimated useful lives
as follows (see Note 6):
<TABLE>
<S> <C>
Broadcasting towers and equipment........................... 6-13 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
</TABLE>
Maintenance, repairs, and minor replacements of these items are charged to
expense as incurred.
INTANGIBLE ASSETS
The excess of cost over the fair value of acquired net assets has been
recorded as goodwill. Intangible assets are being amortized using the straight
line method over their estimated useful lives as follows (see Note 7):
<TABLE>
<S> <C>
FCC licenses................................................ 25 years
Goodwill.................................................... 25 years
Covenants not to compete.................................... Generally 3 years
Favorable lease and other contracts......................... Contract term
</TABLE>
INVESTMENTS IN BROADCAST PROPERTIES
Investments in broadcast properties primarily represent the Company's
financing of television and radio station acquisitions by third parties, and
purchase options or equity investments in entities owning broadcasting stations
or television construction permits. In connection with the financing of
acquisitions by third parties, the Company has entered into time brokerage
agreements ("TBAs") with such parties for the broadcast operations and has
written options to purchase certain of the related station assets and Federal
Communications Commission ("FCC") licenses at various amounts and terms (see
Notes 9 and 18).
PROGRAM RIGHTS
The Company obtains licenses for program rights which allow the Company to
broadcast program material in accordance with contractual agreements. Pursuant
to a licensing agreement, 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 programming is available to air. Program rights are amortized
on a method that approximates the straight line method per the number of
available runs. Program rights which will not be aired are charged to expense.
Current program rights represent programs which will be amortized during the
next year; current liabilities represent program rights which will be paid
within the next year under contractual arrangements (see Note 18).
OTHER ASSETS
Other assets consist primarily of escrow funds, programming deposits and
loan origination costs. Escrow funds represent funds held in escrow on
acquisitions pending FCC approval. Programming deposits represent deposits for
broadcast rights contracts available for airing beginning in August 1998. Loan
origination costs are stated at cost and are amortized to interest expense over
the life of the loan or agreement using the effective interest method. Other
assets are stated at cost (see Note 8).
F-9
<PAGE> 137
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS
The Company reviews long-lived assets, identifiable intangibles and
goodwill and reserves for impairment whenever events or changes in circumstances
indicate, based on estimated undiscounted future cash flows, the carrying amount
of the assets may not be fully recoverable.
REVENUE RECOGNITION
Revenue is recognized as advertising air time is broadcast.
TRADE AND BARTER AGREEMENTS
The Company enters into trade and barter agreements which give rise to
sales of advertising air time in exchange for products, services and
programming. Sales from trade and barter agreements are recognized at the fair
market value of products, services or programs received as the related
advertising air time is broadcast. Products, services and programs received are
expensed when used or when programs are broadcast. If the Company uses trade
products or services before advertising air time is provided, a trade liability
is recognized. At times, the Company trades air time for property and equipment.
TIME BROKERAGE AGREEMENTS
The Company operates certain stations under TBAs whereby the Company has
agreed to purchase from the broadcast station licensee certain broadcast time on
the station and to provide programming to and sell advertising on the station
during the purchased time.
Accordingly, the Company receives all the revenue derived from the
advertising sold during the purchased time, pays certain expenses of the station
and performs other functions. The broadcast station licensee retains
responsibility for ultimate control of the station in accordance with FCC
policies. The Company currently operates 11 stations under TBAs which expire
from May 1998 through October 2005. The financial results of TBA operated
stations have been included in the Company's statements of operations since the
respective date of commencement of the TBA.
STOCK-BASED COMPENSATION
The Company's employee stock option plans are accounted for using the
intrinsic value method. The Company also provides disclosure of certain pro
forma information as if the Company's employee stock option plans 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 provision for income taxes includes taxes currently payable, if
any, plus the net change during the year in deferred tax assets and liabilities
recorded by the Company.
PER SHARE DATA
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), which require the
retroactive restatement of previously reported earnings per share data. SFAS 128
requires the presentation of basic and diluted earnings per share. Because
F-10
<PAGE> 138
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of losses from continuing operations, 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.
Basic and diluted loss per share from continuing operations was computed by
dividing the loss from continuing operations before extraordinary item less
dividends and accretion on redeemable preferred stock and redeemable common
stock warrants by the weighted average number of common shares outstanding
during the period.
Potentially dilutive common shares in the amount of 4,523,210, 8,433,108,
and 10,218,205 for the years ended December 31, 1997, 1996 and 1995,
respectively, have been excluded from the computation of diluted earnings per
share as the effect of their inclusion is antidilutive.
USE OF ESTIMATES
The preparation of financial statements 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 the prior years' financial
statements to conform with the 1997 presentation.
2. DISCONTINUED OPERATIONS
During 1997, the Company sold its interests in WTVX-TV and WPBF-TV and thus
discontinued the operations of the Paxson Network-Affiliated Television segment.
The results of operations for the Paxson Network-Affiliated Television segment
through the date of disposition, net of applicable income taxes, have been
reclassified and presented as discontinued operations in the accompanying
Consolidated Statements of Operations for all periods presented. Aggregate
consideration of approximately $119 million was received in conjunction with the
disposition of these operations during the second and third quarters of 1997. Of
the consideration received, approximately $19 million was used to exercise the
Company's option to acquire WTVX-TV from Whitehead Media, Inc. The Company
realized a gain of approximately $69 million from these sales which is net of
brokerage fees and other estimated costs in connection with such sale.
The Paxson Network Affiliated Television operations generated revenues of
approximately $12,319,000, $20,517,000 and $16,537,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
During 1997, the Company also sold substantially all of its Paxson Radio
segment assets for approximately $602 million. The results of operations for
Paxson Radio, net of applicable income taxes, have been presented as
discontinued operations in the accompanying Consolidated Statements of
Operations for all periods presented. The Company realized a gain of
approximately $186 million from the sale of these assets which is net of
applicable income taxes, closing costs and other estimated costs attributable to
the segment disposal. The sale of certain assets was structured as a tax
deferred exchange, permitting the Company to defer a substantial portion of the
gain for tax purposes to the extent the sales proceeds are reinvested in like
kind broadcasting properties during the first quarter of 1998. It is anticipated
that the Company will not pay current taxes on the remaining non-deferred gain
as it has sufficient net operating losses to offset such gain.
Included in operating expenses are approximately $9.7 million of cash
bonuses paid to certain members of the Company's management in connection with
their efforts in assimilating, operating and arranging for the sale of the radio
stations and related properties. Although the payment of such bonuses was
contingent upon the
F-11
<PAGE> 139
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
successful disposition of the segment and directly associated with such
disposition, the Company has recorded these amounts as operating expenses
because the actual amount of such payments was discretionary in nature.
In order to accelerate the payment of the proceeds from the sales of the
Paxson Network-Affiliated Television segment and the Paxson Radio segment, the
Company entered into certain bridge agreements with its principal shareholder
under similar terms and conditions to those with the ultimate buyers. As of
December 31, 1997, all Network-Affiliated Television and Radio properties under
these bridge agreements had been sold to the ultimate third party. The principal
shareholder did not realize any direct financial benefit from the transactions
with the Company and, in accordance with the terms of the Company's senior
subordinated notes and preferred stock, the Company obtained a written opinion
as to the fairness of such transactions from an independent investment banking
firm.
The Paxson Radio operations generated revenues of approximately
$78,190,000, $82,165,000 and $54,752,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
The net assets of discontinued operations at December 31, 1997 consist of
the assets of two remaining radio stations which are under contract to be sold
for $3,000,000. The components of net assets of discontinued operations included
in the consolidated balance sheets at December 31, 1997 and December 31, 1996,
are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Current assets.............................................. $ 23,017,001
Noncurrent assets........................................... $2,956,042 180,194,830
---------- ------------
Total assets...................................... 2,956,042 203,211,831
---------- ------------
Current liabilities......................................... -- 8,344,163
Noncurrent liabilities...................................... -- 1,576,467
---------- ------------
Total liabilities................................. -- 9,920,630
---------- ------------
Total net assets............................................ $2,956,042 $193,291,201
========== ============
</TABLE>
3. INVESTMENT IN CABLE NETWORK
On July 11, 1997, the Company, through a wholly-owned unconsolidated
subsidiary, acquired the assets of The Travel Channel ("Travel") from Landmark
Communications, Inc. for aggregate consideration of $75,000,000, including
$55,000,000 of the Company's Class A common stock (4,773,097 shares issued at
closing) and $20,000,000 in cash. The Company also issued 97,632 shares
($1,125,000) of its Class A common stock to Communications Equity Associates,
Inc. in connection with their role as financial advisor in the Travel Channel
transaction (see Note 5).
In November 1997, the Company completed transactions with Discovery
Communications, Inc. ("DCI") whereby the Company received a 30% ownership
interest in a newly formed entity, The Travel Channel, L.L.C. ("Travel L.L.C.")
in exchange for the assets of Travel. DCI effectively contributed $20,000,000
along with certain programming and intangible assets, including operating
services such as sales, affiliations, marketing, promotion and accounting, for a
70% ownership interest in Travel L.L.C. DCI will serve as the managing partner
of Travel L.L.C., overseeing all operations. The Company will receive an annual
consulting fee of $300,000.
The results of operations of Travel and Travel L.L.C. have been included in
the Company's December 31, 1997 consolidated statement of operations using the
equity method of accounting. The investment in cable network balance on the
Company's December 31, 1997 consolidated balance sheet reflects the Company's
issuance of common stock in connection with the Travel acquisition from Landmark
Communications, Inc. discussed above along with closing costs and advances to
Travel prior to the formation of Travel
F-12
<PAGE> 140
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L.L.C. Goodwill of approximately $32.5 million included in the investment in
cable network amount is being amortized over 25 years. For the year ended
December 31, 1997 approximately $130,000 was amortized related to this goodwill.
4. ACQUISITIONS
Acquisitions
During 1997, the Company acquired the assets of seventeen television
stations, for total consideration of approximately $120,290,000, one
network-affiliated television station for total consideration of approximately
$19,001,000 (see Note 2), seven radio stations for total consideration of
approximately $123,014,000 and easements for three billboard locations for total
consideration of approximately $1,500,000.
During 1996, the Company acquired the assets of ten television stations and
eighteen radio stations for total consideration of approximately $165,700,000
and three billboard companies for total consideration of approximately
$21,000,000.
All of the previously described acquisitions have been accounted for using
the purchase method of accounting. Goodwill recorded in connection with the
television acquisitions (approximately $11,388,000 and $2,567,000 in 1997 and
1996, respectively) will be amortized over a period of 25 years.
Pro Forma (unaudited)
The Company's results of operations for the years ended December 31, 1997
and 1996 include the results of operations for acquisitions and investments in
television stations from their respective dates of commencement. The following
unaudited pro forma statement of operations data gives effect to the 1997 and
1996 television acquisitions as if they had occurred on January 1, 1996.
Depreciation and amortization has been increased each period to reflect the
initial purchase price allocation on all acquisitions and investments (whether
businesses or assets), and interest expense on associated debt financing as if
such transactions and debt issuance had occurred on January 1, 1996. Pro forma
results of operations for the years ended December 31, 1997 and 1996 exclude the
results of operations of the Company's Network-Affiliated Television and Radio
segment operations sold in 1997 (see Note 2).
<TABLE>
<CAPTION>
PRO FORMA
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
FOR SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $ 88,421 $ 63,738
---------- ----------
Operating loss.............................................. $ (26,602) $ (13,928)
---------- ----------
Loss from continuing operations............................. $ (43,339) $ (51,357)
---------- ----------
Basic and diluted loss per share from continuing operations,
before extraordinary item................................. $ (1.18) $ (1.36)
---------- ----------
Pro forma weighted average shares outstanding............... 58,850,806 58,710,426
---------- ----------
</TABLE>
5. CERTAIN TRANSACTIONS
The Company has entered into certain operating and financing transactions
with related parties as described below.
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
F-13
<PAGE> 141
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a section 501(c)(3) not-for-profit corporation to which Mr. Lowell W. 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.
Investment in Broadcast Properties. At December 31, 1997 and 1996 the
Company had approximately $15.4 million and $12.8 million of advances to CNI
relating to television stations recorded as investments in broadcast properties.
(See Note 9.)
During 1997 and 1996, the Company acquired television stations from CNI in
Miami, Orlando, Tampa, Denver, Milwaukee and Dayton, for total consideration of
approximately $14,000,000 and $17,200,000, 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. The Company believes that all of its
agreements with CNI have been on terms as favorable to CNI as it would obtain in
arm's length transactions. The Company intends any future agreements with CNI to
be as favorable to CNI as CNI would obtain in arm's length transactions.
Accordingly, 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.
Demand Note. On December 30, 1997, the Company's advances to CNI totaling
$5,485,000 under a demand note bearing interest at the prime rate were repaid
out of the proceeds of television stations sold by CNI to the Company. At
December 31, 1996, amounts outstanding under the demand note to CNI totaled
approximately $2,993,000 and were included in investment in broadcast
properties.
Worship Channel Studio. CNI and the Company have contracted for the
Company to lease CNI's television production and distribution facility for the
purpose of producing television programming for the Company's television
network. During the years ended December 31, 1997, 1996 and 1995, the Company
incurred rental charges in connection with this agreement of $231,000, $193,000
and $174,000, respectively.
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 and
calls for monthly payments of $63,600. In connection with such lease, the
Company incurred rental costs of approximately $382,000 during 1997.
Additionally, the Company has recorded at December 31, 1997 leasehold
improvements of approximately $107,000 in connection with the lease.
SPORTS VENTURES
During 1996, the Company invested in various ventures which would own and
operate interests in two Arena Football League teams located in West Palm Beach
and Miami, Florida, an inactive American Hockey League franchise for Palm Beach
County, Florida and a proposed sports arena in West Palm Beach, Florida. During
1996, the Company included in other expenses, net the write-off of approximately
$1,200,000 relating to its investments in the West Palm Beach Arena Football
League team and the proposed sports arena and in connection with its acquisition
of the Arena Football League team in Miami, Florida. During 1997, in conjunction
with the decision to dispose of the Paxson Radio segment, the Company wrote-off
its investments in the remaining sports ventures, resulting in a 1997 charge to
other expenses, net of approximately $2,900,000, which is net of anticipated
proceeds on the sale of the hockey franchise which the Company has contracted to
sell for $2,000,000.
F-14
<PAGE> 142
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HOME SHOPPING NETWORK, INC.
On August 25, 1995, the Company and Mr. Paxson agreed with Home Shopping
Network, Inc. ("HSN") to, among other things, terminate HSN's rights under a
consulting agreement between Mr. Paxson and HSN in consideration of a payment to
HSN by the Company of $1,200,000. Mr. Paxson has agreed with the Company that he
will not compete with the Company for a period ending on December 31, 1999 (the
date that the HSN consulting agreement would have otherwise terminated) or the
date of a change in control (as defined with respect thereto) of the Company. In
connection with its payment to HSN, the Company recorded an intangible asset of
$1,200,000 which is being amortized through December 1999.
TODD COMMUNICATIONS, INC.
During June 1996, the Company acquired Todd Communications, Inc. ("Todd
Communications"), a company which owned WFSJ-FM (St. Augustine, Florida) and was
beneficially owned by members of Mr. Paxson's family. The Company gave aggregate
consideration of $5,000,000, consisting of the cancellation of a note receivable
held by the Company from Todd Communications in the principal amount of
$1,822,000, the assumption and immediate repayment by the Company of a note
payable to Mr. Paxson by Todd Communications in the amount of $1,643,000 and the
issuance of shares of Class A Common Stock valued at approximately $1,535,000 to
the shareholders of Todd Communications. During 1996, the Company recognized
approximately $71,000 of interest income on its note receivable from Todd
Communications. The Todd Communications assets were sold as part of the disposal
of the Paxson Radio segment.
DP MEDIA, INC.
In connection with the acquisition by DP Media, Inc. (DP Media) of WEBZ-FM,
during September 1996, the Company agreed to loan up to $750,000 to DP Media, a
company beneficially owned by members of Mr. Paxson's family. The loan bore
interest at the rate of 10% and required monthly principal and interest
payments.
During May 1997, the Company sold WWPX-TV to DP Media in exchange for a
$2,470,000 promissory note. Upon its sale to DP Media the station became a
Company network affiliate.
During June 1997, the Company financed DP Media's purchase of WRPX-TV from
Roberts Broadcasting through a loan of approximately $10,000,000 (of which
approximately $7,500,000, which was assumed by DP Media, had been advanced to
Roberts Broadcasting through the date of closing). Upon its sale to DP Media the
station became a Company network affiliate.
During July 1997, the Company entered into contracts to sell its interest
in television stations WPXS-TV and WZPX-TV, serving the St. Louis, Missouri and
Grand Rapids, Michigan markets for $4,800,000 and $7,000,000, respectively, to
DP Media. The sale of WPXS-TV to DP Media was consummated in December 1997. The
sale of the tangible assets of WZPX-TV was transacted separately from the sale
of the FCC license. As of December 31, 1997, the Company had received
approximately $5,250,000 for the sale of the tangible assets, and received
$1,750,000 in January 1998 for the sale of the station license upon receipt of
regulatory approval to transfer the station license.
The DP Media loans for WEBZ-FM, WWPX-TV, and WRPX-TV were repaid to the
Company on July 30, 1997, using proceeds of third party financing obtained by DP
Media from Banque Paribas, an affiliate of a holder of the Company's Junior
preferred stock.
During February 1998, the Company contracted to sell WPXE-TV to DP Media
for $6,000,000. Upon its sale to DP Media the station will become a Company
network affiliate.
F-15
<PAGE> 143
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, the Company granted 33,000 fully vested non-qualified stock
options with a fair value of approximately $299,000 to the President and Vice
President of DP Media, members of Mr. Paxson's family, as consideration for past
services as former employees of the Company.
CONSULTING AGREEMENT
During 1996, the Company entered into a one year consulting arrangement
with the former Chairman of American Network Group to provide review,
implementation and development consulting services to the Company with respect
to its general and medical insurance programs and policies and executive
insurance, deferred compensation and benefit planning as well as general
financial consulting services. Consulting expense in 1997 and 1996 related to
this agreement totaled $600,000 for each year. This agreement expired in June
1997. The consultant was also granted 75,000 nonqualified stock options with a
fair value of $930,000 during February 1996.
BOARD OF DIRECTORS
The Company has entered into transactions with certain members of its Board
of Directors.
Communications Equity Associates, Inc. ("CEA"). The Chairman of the Board
and Chief Executive Officer of CEA had been a director of the Company since
February 1995, resigning in August 1997. The Company engaged CEA as a financial
advisor in connection with private debt and equity placements and various other
lending, acquisition and divestiture services. Fees paid to CEA for these
services totaled approximately $2,365,000, $250,000 and $1,300,000 for the years
ended December 31, 1997, 1996 and 1995, respectively, including $1,125,000 of
the Company's Class A common stock during 1997 in conjunction with The Travel
Channel acquisition.
Stockholders Agreement. Certain entities controlled by Mr. Paxson and
entities which are affiliates of a former director of the Company are parties to
a stockholders agreement whereby the parties to such agreement were granted
registration rights with respect to certain shares of common stock held by such
parties and the right of first refusal to acquire a pro rata share of any new
securities the Company may issue. Additionally, the stockholders agreement
grants certain cosale rights in the event that Mr. Paxson should sell more than
a predetermined percentage of his ownership interest in the Company.
S. William Scott. S. William Scott, a director of the Company since
February 1995, had an arrangement with the Company to provide consulting
services to the Company with respect to the development of its news programming
for its radio and television broadcast business and its radio network business.
Mr. Scott was paid approximately $10,000, $81,000 and $80,000 for such services
during the years ended December 31, 1997, 1996 and 1995, respectively.
Additionally, Mr. Scott received benefits under the Company's health and
benefits plan and was granted options to purchase 20,000 shares of stock under
the Company's stock incentive plan. During 1997 the Company hired Mr. Scott and
subsequently named him President of Network Programming, on January 1, 1998. Mr.
Scott resigned as a director of the Company on February 23, 1998.
F-16
<PAGE> 144
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Broadcasting towers and equipment......................... $105,585,397 $122,771,345
Office furniture and equipment............................ 6,619,896 12,833,246
Buildings, billboards and leasehold improvements.......... 7,594,594 21,354,005
Land and land improvements................................ 5,840,840 13,830,692
Aircraft, vehicles and other.............................. 6,910,458 9,422,324
------------ ------------
132,551,185 180,211,612
Accumulated depreciation.................................. (26,654,312) (35,796,200)
------------ ------------
Property and equipment, net............................... $105,896,873 $144,415,412
============ ============
</TABLE>
Depreciation expense aggregated $19,148,793, $15,197,945 and $10,083,135
for the years ended December 31, 1997, 1996 and 1995, respectively.
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
FCC licenses.............................................. $196,268,719 $191,624,748
Goodwill.................................................. 18,359,013 36,467,957
Covenants not to compete.................................. 3,777,770 17,425,145
Favorable lease and other contracts....................... 437,407 8,598,155
------------ ------------
218,842,909 254,116,005
Accumulated amortization.................................. (13,442,880) (33,706,584)
------------ ------------
Intangible assets, net.................................... $205,400,029 $220,409,421
============ ============
</TABLE>
Amortization expense related to intangible assets aggregated $15,208,244,
$10,669,065 and $7,621,848 for the years ended December 31, 1997, 1996 and 1995,
respectively.
8. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Escrow funds for station acquisitions..................... $ 37,107,000 $ 10,510,000
Programming deposits...................................... 36,682,500 --
Loan origination costs.................................... 12,333,649 11,958,684
Other..................................................... 5,303,271 7,630,717
------------ ------------
91,426,420 30,099,401
Accumulated amortization.................................. (3,517,536) (1,949,702)
------------ ------------
$ 87,908,884 $ 28,149,699
============ ============
</TABLE>
Amortization expense related to organization costs and other assets
aggregated $1,153,963, $107,899 and $66,126 for the years ended December 31,
1997, 1996 and 1995, respectively. Additionally, during the years ended December
31, 1997, 1996 and 1995, the Company recorded amortization of loan origination
costs of $1,782,000, $1,643,000 and $948,000, respectively, and classified such
amortization as interest expense.
F-17
<PAGE> 145
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loan origination costs of $10,625,727 associated with debt extinguished
through proceeds from the senior subordinated notes are reflected in the 1995
statement of operations as an extraordinary item.
9. INVESTMENTS IN BROADCAST PROPERTIES
Investments in broadcast properties represent primarily the Company's
financing of broadcasting asset acquisitions by third party licensees, purchase
options and equity investments in entities owning broadcasting stations or
television construction permits. Interest rates on financing arrangements range
from 7% to 11.875% with loans maturing in five to seven years. In connection
with the financing of acquisitions by third parties, the Company has obtained
the right to provide programming for the related stations pursuant to TBAs and
has obtained options to purchase certain stations. Unpaid principal balances
will be applied toward the acquisition cost upon exercise of purchase options.
The Company records interest on certain investments as received. Investments in
broadcast properties consist of:
<TABLE>
<CAPTION>
ENTITY 1997 1996
- ------ ----------- -----------
<S> <C> <C>
Roberts Broadcasting........................................ $17,260,394 $ 6,459,163
CNI......................................................... 15,483,364 12,810,087
Cocola Broadcasting......................................... 12,240,934 3,213,122
Ponce-Nicasio Broadcasting.................................. 8,630,655 8,549,583
America 51, L.P............................................. 5,480,713 --
Flinn Investments........................................... 4,025,000 --
Kaleidoscope Investments.................................... 3,081,000 --
United Broadcast Group...................................... -- 3,771,672
Southern Land Investors..................................... -- 4,460,000
Fant Broadcasting........................................... -- 8,068,500
Others...................................................... 6,560,135 5,964,895
----------- -----------
$72,762,195 $53,297,022
=========== ===========
</TABLE>
During February 1997, the Company sold WHPX-TV to Roberts Broadcasting in
exchange for a $15,000,000 note receivable and entered into a five year time
brokerage agreement to operate the station. The note bears interest at LIBOR
plus 3.5% and has been included by the Company in investments in broadcast
properties. Interest is payable monthly with principal payments commencing
February 1998 and payable monthly in 84 equal installments. The Company
recognized a deferred gain on the sale of approximately $12,100,000 which will
be accreted to income using the installment method.
10. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Revolving credit facility, interest at LIBOR plus 3.00%
(8.75% to 8.91% at December 31, 1997), maturing June 30,
2002...................................................... $120,000,000
Mortgage note payable, interest at 10%, repaid in September
1997...................................................... -- $ 167,778
Mortgage note payable, interest at 8.83%, principal and
interest payment of $8,284 due monthly from June 1995 to
May 2010.................................................. 754,071 784,463
Notes payable, interest at 8.25% to 9.325%, aggregate
principal and interest payments of $53,129 due monthly,
maturing at varying dates through June 2003, secured by
purchased assets.......................................... 2,041,332 3,099,956
------------ ----------
122,795,403 4,052,197
Less current portion........................................ (496,378) (644,509)
------------ ----------
$122,299,025 $3,407,688
============ ==========
</TABLE>
F-18
<PAGE> 146
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of its revolving credit facility (the "Credit Facility"),
the Company was required to obtain approval from the lenders under such facility
for the sale of the Paxson Radio segment. Approval of the sale was obtained
under an amendment to the revolving Credit Facility in September 1997. As a
result of the sale of the Paxson Radio assets and the related loss of cash flows
from such assets, borrowings under the revolving Credit Facility were
effectively frozen due to noncompliance with certain leverage ratio covenants.
Under the amended terms of the revolving Credit Facility, amounts
outstanding under the facility at December 31, 1997 bear interest at LIBOR or a
base rate (as defined) plus a margin of 3.5% and 2.25%, respectively. Until the
revised business plan required under the revolving Credit Facility is ratified
by the lenders, the interest rate margins will increase by .5% per quarter
through December 31, 1998. The Company is also required to pay quarterly a
commitment fee of .5% per year on the unborrowed commitment ($75,000,000 at
December 31, 1997). The revolving Credit Facility is secured by substantially
all of the Company's assets.
At December 31, 1997, the Company was not in compliance with certain of the
financial covenants under the amended terms of the revolving Credit Facility. In
March 1998, the Company obtained a waiver of such noncompliance from its lenders
and executed an amendment to the terms of the revolving Credit Facility. The
amended terms adjust the covenants of the revolving Credit Facility for the sale
of the Company's Network-Affiliated Television and Paxson Radio segments in 1997
and address the Company's business plan related to the PAX NET launch. In
addition, certain financial covenants were temporarily modified to allow for
anticipated compliance by the Company throughout the remainder of 1998. The
waiver and amendment agreement also requires the Company to use its best efforts
to raise an additional $150 million of equity prior to May 31, 1998 and apply
the net proceeds therefrom to repay the revolving credit facility and requires
the Company to fund $17 million of interest into a cash collateral account for
the benefit of the lenders.
On March 11, 1998, the Company obtained a fully underwritten commitment
(the "Commitment Letter") for a $122 million senior term credit facility
maturing June 2002 (the "Senior Credit Facility") to be used to refinance the
amounts outstanding under its revolving credit facility. Under the terms of the
Commitment Letter, the outstanding debt will be secured by substantially all of
the Company's assets and bear interest at a base rate plus 1.75% or LIBOR plus
2.75%, at the Company's option. The Senior Credit Facility will require the
Company to maintain compliance with certain financial ratios subsequent to March
2000 and will contain other restrictions. Management expects to execute a Senior
Credit Facility pursuant to the terms of the Commitment Letter before May 31,
1998.
The revolving Credit Facility contains a number of covenants that restrict,
among other things, the Company's ability to incur additional indebtedness,
incur liens, make investments, pay dividends or make other restricted payments,
consummate certain asset sales, consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of the
assets of the Company.
Aggregate maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998....................................................... $ 496,378
1999....................................................... 578,748
2000....................................................... 35,396,461
2001....................................................... 42,808,332
2002....................................................... 42,835,083
Thereafter................................................. 680,401
------------
$122,795,403
============
</TABLE>
F-19
<PAGE> 147
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SENIOR SUBORDINATED NOTES
On September 28, 1995, the Company issued $230,000,000 of senior
subordinated notes (the "Notes") at a discount, netting proceeds of $227,309,000
to the Company. The Company accretes the original issue discount over the term
of the Notes using the effective interest method. At December 31, 1997, the
unamortized discount was $2,041,264 ($2,344,904 in 1996). Interest on the Notes
accrues at 11.625% to yield an effective rate per annum of 11.875%. Interest
payments are payable semiannually on each April 1 and October 1. The principal
balance is due at maturity on October 1, 2002.
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 option of the Company on October 1, 1999,
2000 and 2001 at a redemption price of 104%, 102% and 100%, respectively, of the
outstanding principal amount, plus accrued interest. Additionally, the Company
may redeem up to 25% of the original principal amount of the Notes with proceeds
from certain sales of Company stock or assets at any time prior to October 1,
1998 at a redemption price of 110% of the outstanding principal amount, plus
accrued interest. There are no mandatory redemption requirements.
12. INCOME TAXES
As a result of tax losses incurred by the Company during previous years,
and net operating loss carryforwards available to offset taxable income in 1997,
no current tax provision has been recorded by the Company for the years 1995 to
1997. The deferred benefit (provision) for federal and state income taxes for
the three years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
CONTINUING OPERATIONS
Federal................................... $ 19,576,180 $ -- $1,152,000
State..................................... 2,303,080 -- 128,000
------------- ---------- ----------
$ 21,879,260 $ -- $1,280,000
============= ========== ==========
DISCONTINUED OPERATIONS
Federal................................... $ 1,196,191 $ -- $ --
State..................................... 140,728 -- --
------------- ---------- ----------
$ 1,336,919 $ -- $ --
============= ========== ==========
FROM DISPOSAL OF DISCONTINUED OPERATIONS
Federal................................... $(106,440,879) $ -- $ --
State..................................... (12,522,456) -- --
------------- ---------- ----------
$(118,963,335) $ -- $ --
============= ========== ==========
</TABLE>
F-20
<PAGE> 148
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:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 17,505,309 $ 24,338,000
Deferred compensation................................. 7,231,812 6,359,000
Allowance for doubtful accounts....................... 346,538 599,000
Alternative minimum tax payments...................... 975,000 --
------------- -------------
26,058,659 31,296,000
Deferred tax asset valuation allowance................ (3,070,754) (23,615,000)
------------- -------------
22,987,905 7,681,000
Deferred tax liabilities:
Tax over book depreciation and amortization........... (13,904,824) (7,681,000)
Deferred gain on disposal of discontinued
operations......................................... (104,830,237) --
------------- -------------
Net deferred tax liabilities.................. $ (95,747,156) $ --
============= =============
</TABLE>
The Company and its subsidiaries have filed consolidated tax returns for
all periods subsequent to December 15, 1993.
The reconciliation of income tax benefit attributable to continuing
operations, computed at the U.S. federal statutory tax rate, to the provision
for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Tax benefit at U.S. federal statutory tax
rate........................................ $(19,849,954) $(8,914,000) $(11,417,000)
State income tax benefit, net of federal
tax......................................... (2,335,289) (1,038,000) (1,343,000)
Non deductible items.......................... 305,983 1,346,000 597,000
Valuation allowance........................... -- 8,606,000 10,883,000
------------ ----------- ------------
Benefit for income taxes...................... $(21,879,260) $ -- $ (1,280,000)
============ =========== ============
</TABLE>
During 1997, the Company reversed approximately $20,544,000 of its deferred
tax asset valuation allowance in connection with the disposition of discontinued
operations. Accordingly, the benefit of the reversal of this allowance has been
included within the gain on disposal of discontinued operations.
As a result of the deferred tax liability created by the tax deferred treatment
of the gain on the sale of the Paxson Radio assets during the fourth quarter of
1997, management believes it is more likely than not that the Company's deferred
tax assets created by such losses will be realized. Accordingly, the Company
recognized a deferred tax benefit from continuing operations in the amount of
approximately $21,879,260 during the fourth quarter of 1997.
The Company has net operating loss carryforwards for income tax purposes
subject to certain carryforward limitations of approximately $46,067,000 at
December 31, 1997 expiring through 2012. A portion of the net operating losses,
amounting to approximately $7,900,000, are limited to annual utilization as a
result of a change in ownership. 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.
The tax deferral of the gain upon the sale of Paxson Radio, of
approximately $305 million before deferred taxes of approximately $119 million,
could be contested by the Internal Revenue Service ("IRS"). Based on the advise
of counsel, management believes that, in the event of a challenge by the IRS of
these tax positions, it is more likely than not that the Company would prevail.
Should the IRS successfully challenge the Company on these matters, the Company
could be subject to a material current tax liability.
F-21
<PAGE> 149
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EMPLOYEE BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
SAVINGS AND PROFIT SHARING PLAN
The Company has retirement savings and cafeteria plans pursuant to Sections
401(k) and 125 of the Internal Revenue Code which cover substantially all of the
Company's employees. Employer contributions to the retirement savings plan are
discretionary. For the plan years ended December 31, 1997, 1996 and 1995, the
Company made retirement savings contributions of approximately $68,000, $175,000
and $0, respectively. Under the cafeteria plan, employees may elect to
participate in health, dental, life and disability insurance benefit plans
funded through employee payroll deductions.
DEFERRED COMPENSATION PLAN
During 1996, the Company established a supplemental deferred compensation
plan for certain key executives. Under this program, participants may defer
certain amounts of their base compensation and receive a corresponding match by
the Company. Participants vest 100% in the company match after five years of
service. Upon retirement, participants shall be eligible to receive from the
Company certain amounts based on the initial deferral and the Company match.
Certain amounts are also due if a participant terminates employment (other than
by his voluntary action or discharge for cause) before attaining retirement age.
The participants in this plan are general creditors of the Company with respect
to the benefits under the plan. The expense associated with this program was
approximately $131,200 and $66,000 for 1997 and 1996, respectively. The cash
surrender value of the insurance policies under this program at December 31,
1997 is approximately $366,000 and the total liability under this program at
December 31, 1997 is approximately $370,000.
LIFE INSURANCE
The Company maintains a life insurance agreement for the benefit of Mr.
Paxson and his spouse (the "Insureds") whereby the Company contributes to the
payment of premiums on the policy. Upon the death of the survivor of the
Insureds, the Company will be repaid its premium advance. The policy owner will
retain all remaining proceeds. Premiums paid with respect to this policy were
approximately $176,000 and $220,000 for 1997 and 1996, respectively.
STOCK INCENTIVE PLANS
In November 1994 and October 1996, the Company established the Stock
Incentive Plan (the "1994 Plan") and the 1996 Stock Incentive Plan (the "1996
Plan"), respectively, 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 each plan 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. At December 31, 1997,
27,936 options for shares of Class A common stock were available for additional
awards under the plans.
When options are granted, 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 option plan
compensation expense with the balance deferred and amortized over the remaining
vesting period. For the years ended December 31, 1997, 1996 and 1995, the
Company recognized approximately $6,500,000, $7,900,000 and $10,800,000,
respectively, of option plan compensation expense and expects to recognize
additional expense of approximately $2,200,000 over the next five years as such
options vest. To date, no awards of shares of restricted stock have been made
under the plans.
Options granted under the 1994 Plan are pursuant to a five year vesting
cycle commencing retroactively to the participant's date of employment or are
exercisable in full at the date of grant. Options granted under the 1996 Plan
are pursuant to a five year vesting cycle commencing January 1, 1996, if the
participant was
F-22
<PAGE> 150
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employed by the Company at January 1, 1996 and January 1, 1997, if the
participant commenced employment with the Company subsequent to January 1, 1996,
or, in certain instances, are exercisable in full at the date of grant. All
options granted expire ten years after the date of grant.
A summary of the Company's 1994 and 1996 stock option plans as of December
31, 1997 and 1996 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............. 3,590,693 $3.41 1,752,405 $3.42 -- $ --
Granted.................................... 348,018 2.07 2,030,216 3.38 1,847,005 3.42
Forfeited.................................. (65,800) 3.42 (39,000) 3.42 (4,800) 3.42
Exercised.................................. (267,450) 3.42 (152,928) 3.22 (89,800) 3.42
--------- ----- --------- ----- --------- -----
Outstanding, end of year................... 3,605,461 $3.28 3,590,693 $3.41 1,752,405 $3.42
========= ===== ========= ===== ========= =====
Weighted average fair value of options
granted during the year.................. $8.39 $8.23 $8.66
===== ===== =====
</TABLE>
The majority of the Company's option grants have been at exercise prices of
$3.42, a price which has historically been below the fair market value of the
underlying common stock at the date of grant.
FAIR VALUE DISCLOSURES
Had compensation expense for the Company's option plans been determined
using the fair value method the Company's net income (loss) and net income
(loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss):
As reported............................ $188,412,901 $(48,127,485) $(46,770,496)
Pro forma.............................. 187,297,693 (50,444,441) (49,974,777)
Basic and diluted net income (loss) per
share:
As reported............................ $ 3.50 $ (1.10) $ (1.36)
Pro forma.............................. 3.48 (1.15) (1.45)
</TABLE>
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 54% to 73%, and risk free interest rates of 6% to
6.9% and weighted average expected option terms of 7.5 years for both periods.
The following tables summarize information about employee and director
stock options at December 31, 1997:
OPTIONS OUTSTANDING AND EXERCISABLE
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1997 LIFE 1997
- --------------- -------------- ----------- --------------
<S> <C> <C> <C>
$0.01...................................... 151,071 2 151,071
$3.42...................................... 3,454,390 6 2,591,390
</TABLE>
F-23
<PAGE> 151
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYMENT AGREEMENTS
Mr. Paxson is employed under an employment agreement for a term expiring
December 31, 1999, unless sooner terminated. The agreement provides that Mr.
Paxson's base salary will be $465,850 in 1998 and $500,000 in 1999. In addition
to his base salary, Mr. Paxson may receive an annual bonus at the discretion of,
and in an amount set by, those members of the Compensation Committee who are not
employees of the Company.
NOTES RECEIVABLE FROM THE SALE OF STOCK
During December 1996, the Company approved a program under which it would
extend loans to certain members of management for the purchase, in the open
market, of Company common stock by those individuals. The notes are full
recourse promissory notes bearing interest at 5.75% per annum and are
collateralized by the stock purchased with the loan proceeds. Principal and
interest is payable at maturity, March 31, 1999. The outstanding balance on such
loans aggregated $2,813,250 and $1,873,139 at December 31, 1997 and 1996,
respectively, and is reflected as stock subscription notes receivable in the
accompanying balance sheet.
14. REDEEMABLE PREFERRED STOCK
The following represents a summary of the changes in the Company's
preferred stock during the three years ended December 31, 1997:
<TABLE>
<CAPTION>
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
EXCHANGEABLE JUNIOR SENIOR SERIES B
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994...... $ -- $26,808,053 $ 14,060,054 $ 1,274,671
Issuance of shares................ -- -- -- --
Accretion......................... -- 634,988 332,156 325,208
Accrual of cumulative dividends... -- 4,090,869 2,431,872 752,775
------------ ----------- ------------ -----------
Balance at December 31, 1995...... -- 31,533,910 16,824,082 2,352,654
Issuances......................... 143,197,254 -- -- --
Accretion......................... 159,977 650,084 1,805,599 3,418,615
Accrual of cumulative dividends... 4,571,919 4,596,502 2,374,740 730,066
Redemption premium................ -- -- 700,000 250,000
Redemptions....................... -- -- (21,704,421) (6,751,335)
------------ ----------- ------------ -----------
Balance at December 31, 1996...... 147,929,150 36,780,496 -- --
Accretion......................... 668,726 665,540 -- --
Accrual of cumulative dividends... 19,778,114 5,164,626 -- --
------------ ----------- ------------ -----------
Balance at December 31, 1997...... $168,375,990 $42,610,662 $ -- $ --
============ =========== ============ ===========
</TABLE>
REDEEMABLE EXCHANGEABLE PREFERRED STOCK
The Company issued the Redeemable Exchangeable preferred stock on October
4, 1996 for gross proceeds of $150,000,000. Holders of Redeemable Exchangeable
preferred stock are entitled to cumulative dividends at an annual rate of 12.5%
of the liquidation price, per annum, payable semi-annually beginning April 30,
1997. The Company, at its option, may pay dividends on or before October 31,
2002 either in cash or by the issuance of additional shares of Redeemable
Exchangeable preferred stock.
F-24
<PAGE> 152
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is required, subject to certain conditions, to redeem all of
the Redeemable Exchangeable preferred stock outstanding on October 31, 2006 plus
accumulated and unpaid dividends to the date of redemption. Additionally, the
Redeemable Exchangeable preferred stock is redeemable, subject to certain
restrictions, at the option of the Company on or after October 31, 2001 at the
redemption prices set forth below (expressed as a percentage of liquidation
price):
<TABLE>
<CAPTION>
TWELVE MONTH PERIOD
BEGINNING OCTOBER 31,
- ---------------------
<S> <C>
2001........................................................ 106.250%
2002........................................................ 104.167%
2003........................................................ 102.083%
2004 and thereafter......................................... 100.000%
</TABLE>
The Redeemable Exchangeable preferred stock requires the Company to offer
to purchase all outstanding shares of such stock in the event of certain changes
in ownership control of the Company.
On or before October 31, 1999, subject to certain restrictions, the Company
may use the proceeds of a Public Equity Offering or a Major Asset Sale, as
defined, to redeem for cash up to an aggregate of 35% of the shares of
Redeemable Exchangeable preferred stock at a redemption price of 112.500% of the
liquidation price of such shares plus accumulated and unpaid dividends.
Subject to certain limitations, the Company may, at its option and provided
it is not contractually prohibited from doing so, exchange the outstanding
Redeemable Exchangeable preferred stock for Exchange Debentures as defined.
Additionally, the Company has agreed to exchange all outstanding Redeemable
Exchangeable preferred stock for Exchange Debentures within 60 days from the
date on which the Company is no longer contractually prohibited from effecting
such exchange.
The Exchange Debentures bear interest at 12.5% per annum and are due
October 31, 2006. The Exchange Debentures have redemption features similar to
those of the Redeemable Exchangeable preferred stock.
During 1997, the Company paid dividends of $20,782,320 by the issuance of
additional shares of Redeemable Exchangeable preferred stock. Cumulative
Redeemable Exchangeable preferred stock dividends in arrears aggregated
$3,567,713 and $4,571,919 at December 31, 1997 and 1996, respectively.
REDEEMABLE JUNIOR PREFERRED STOCK
The Company issued the Redeemable Junior preferred stock with 4,853,628
detachable Class C common stock warrants (after giving effect to the stock
dividend during January 1995) on December 22, 1994 for gross proceeds of
$33,000,000. Holders of Redeemable Junior preferred stock are entitled to
cumulative dividends at an annual rate of 12% prior to the seventh anniversary
of the issue date (December 22, 2001), 13% per annum from the seventh through
the eighth anniversary of the issue date (December 22, 2002), and 14% per annum
thereafter. Semi-annual dividend payments are required commencing December 31,
1999.
The Redeemable Junior preferred shares are redeemable, at the option of the
Company, at a 2% premium over the liquidation price thereof, plus unpaid,
deferred, and accrued dividends after the third and prior to the fourth
anniversary of the issue date (December 22, 1998), and at par plus unpaid,
deferred, and accrued dividends on or after the fourth anniversary of the issue
date. The shares are subject to mandatory redemption on the ninth anniversary of
the issue date (December 22, 2003).
Cumulative Redeemable Junior preferred stock dividends in arrears
aggregated $13,949,641 and $8,785,015 at December 31, 1997 and 1996,
respectively.
F-25
<PAGE> 153
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REDEEMABLE SENIOR PREFERRED STOCK
On October 4, 1996, the Company redeemed all of the outstanding shares of
Redeemable Senior preferred stock for an aggregate of $21,704,421. Of this
amount, $700,000 was considered a redemption premium over book value and
accounted for as a preferred stock dividend.
REDEEMABLE SERIES B PREFERRED STOCK
On October 4, 1996, the Company redeemed all of the outstanding shares of
Redeemable Series B preferred stock for an aggregate of $6,751,335. Of this
amount, $250,000 was considered a redemption premium over book value and
accounted for as a preferred stock dividend.
REDEMPTION FEATURES OF PREFERRED STOCK
The following table presents the redemption value of the two classes of
preferred stock outstanding at December 31, 1997 should each be redeemed in the
indicated year, assuming no cash dividends are paid prior to redemption, unless
required:
<TABLE>
<CAPTION>
JUNIOR EXCHANGEABLE
PREFERRED(1) PREFERRED(2)
------------ ------------
<S> <C> <C>
1998........................................................ $53,412,616 --
1999........................................................ 59,102,420 --
2000........................................................ 59,102,420 --
2001........................................................ 59,102,420 300,494,498
2002........................................................ 59,102,420 332,707,505
</TABLE>
- ---------------
(1) Mandatorily redeemable on December 22, 2003; redeemable by the Company prior
to that date.
(2) Redeemable at the option of the Company on or after October 31, 2001. See
previous discussion for earlier redemption features on up to 35% of the
shares.
15. COMMON STOCK WARRANTS
CLASS A AND B COMMON STOCK WARRANTS
In connection with the 1993 Redeemable Senior preferred stock issuance, the
Company issued 225 detachable redeemable common stock purchase warrants. During
April 1996, in connection with the Company's offering of 10.3 million previously
unissued shares of Class A common stock, the holders of the then outstanding
Class A and B warrants surrendered their put provision requiring the Company to
repurchase the warrants. The holders of the warrants are entitled to demand
registration rights and piggyback registration rights following certain
offerings of shares to the public. Additionally, the holders of the warrants
have rights to convert shares of Class B common stock acquired in connection
with the exercise of the warrants to shares of Class A common stock. On April 3,
1996, 32.2319 warrants were exercised for 893,000 shares of Class A common
stock. In July 1997, the holders of the Company's Class A and B common stock
warrants exercised 32.5083 warrants for 900,000 shares of Class A common stock
and in September 1997, exercised 32.5121 warrants for 900,000 shares of Class A
common stock. At December 31, 1997, the Company had 33.1252 Class A and B common
stock warrants still outstanding which entitle the holders to purchase 688,312
Class A common shares and 229,437 Class B common shares.
CLASS C COMMON STOCK WARRANTS
In connection with the Redeemable Junior preferred stock issuance on
December 22, 1994, the Company issued 4,853,628 detachable Class C common stock
purchase warrants, entitling the holder to purchase one Class C common share per
warrant at an exercise price of $0.001 per share. Certain holders of these
purchase
F-26
<PAGE> 154
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
warrants are entitled to demand registration rights subsequent to the third
anniversary of the issuance date and piggyback registration rights six months
following certain offerings of shares to the public. During 1996, the terms of
the Class C common stock purchase warrants were modified to allow the issuance
of Class A common stock upon exercise of the warrants. Subsequent to such
modification, 2,730,385 Class C common stock warrants were exercised for
2,730,173 shares of Class A common stock. During the quarter ended June 30,
1997, 2,123,243 Class C common stock warrants were exercised for approximately
2,123,047 shares of Class A common stock. At December 31, 1997, no class C
common stock warrants were outstanding.
16. COMMON STOCK
The Company has authorized 12,500,000 shares of Class C common stock with a
par value of $0.001 per share. No shares of the Company's Class C common stock
were issued or outstanding at December 31, 1997 or 1996.
On April 3, 1996, the Company sold 10,300,000 previously unissued shares of
its Class A common stock for net proceeds of approximately $154,800,000.
Class A common stock and Class B common stock will vote as a single class
in 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.
17. 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,
1997. 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, cash held by qualified
intermediary, 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 and Senior subordinated notes. The fair values of long-term
debt and senior subordinated notes are estimated based on current market rates
and instruments with the same risk and maturities. The fair values approximate
the carrying value.
Mandatorily redeemable securities. Redeemable preferred stock (Junior and
Exchangeable) is being accreted to its respective redemption values.
F-27
<PAGE> 155
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. COMMITMENTS AND CONTINGENCIES
The Company incurred total operating expenses of approximately $4,689,000,
$2,876,000 and $1,531,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, under operating leases for broadcasting facilities and equipment,
employment agreements and on-air talent agreements. Future minimum annual
payments under these non-cancelable operating leases and agreements, as of
December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 6,236,000
1999........................................................ 5,062,000
2000........................................................ 3,501,000
2001........................................................ 2,962,000
2002........................................................ 2,815,000
Thereafter.................................................. 10,585,000
-----------
$31,161,000
-----------
</TABLE>
As of December 31, 1997 the Company had entered into TBAs with 11 licensees
which require monthly TBA payments ranging from $2,500 to $1,250,000 and have
effective terms ranging from one to ten years. The Company expects to acquire
four of these TBA stations during the first quarter of 1998, including WPXN-TV
which currently requires a monthly payment of $1,250,000.
PROGRAMMING COMMITMENTS
In conjunction with its announced launch of a new broadcast television
network the Company has entered into commitments for broadcast rights related to
programs that are not currently available for broadcast and therefore not
included in the consolidated financial statements. Future minimum annual
payments (including deposits) under these agreements are as follows.
<TABLE>
<S> <C>
1998....................................................... $ 46,114,015
1999....................................................... 75,202,626
2000....................................................... 71,015,115
2001....................................................... 62,155,787
2002....................................................... 31,723,792
Thereafter................................................. 39,418,667
------------
$325,630,002
============
</TABLE>
As of December 31, 1997, the Company had $36,682,500 of broadcast rights
deposits recorded in Other Assets.
The Company has also committed to purchase at similar terms additional
future episodes of these programs should they be made available.
F-28
<PAGE> 156
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT COMMITMENTS
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 such investments will be completed. 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:
<TABLE>
<CAPTION>
STATION MARKET SERVED(*) COMMITMENT AMOUNT
- ------- ---------------- -----------------
<S> <C> <C>
WPXN-TV............................ New York, NY(1) $257,500,000
WCFC-TV............................ Chicago, IL(2) 135,000,000
WFBI/WCCL.......................... Memphis, TN/New Orleans, LA 40,000,000
WPXD-TV............................ Detroit, MI(10) 35,000,000
Channel 40......................... Pittsburgh, PA 35,000,000
KWPX-TV............................ Seattle, WA(3)(11) 35,000,000
KBSP-TV............................ Portland, OR(13) 30,000,000
KSPX-TV............................ Sacramento, CA(4) 17,000,000
WPXP-TV............................ West Palm Beach, FL(6) 16,635,000
WPXV-TV............................ Norfolk, VA(11) 14,750,000
WFHL-TV............................ Champaign, IL 9,250,000
WKRP-TV............................ Charleston, WV(7) 8,070,000
KPXF-TV............................ Fresno, CA(5)(10) 7,960,000
WAUP-TV............................ Syracuse, NY(7) 6,750,000
KAJW-TV............................ Phoenix, AZ(7) 6,600,000
WQPX-TV............................ Wilkes-Barre, PA 6,160,000
Channel 34......................... Spokane, WA(12) 5,676,667
Channel 61......................... Mobile, AL(12) 5,150,000
KAPA-TV............................ Honolulu, HI 5,000,000
KPXR-TV............................ Cedar Rapids, IA(8)(10) 5,000,000
WPXK-TV............................ Knoxville, TN 5,000,000
Channel 14......................... Albuquerque, NM(12) 4,650,000
WFPX-TV............................ Raleigh, NC(10) 4,500,000
WNPX-TV............................ Nashville, TN(10) 4,200,000
Channel 21......................... Shreveport, LA(12) 3,939,000
Channel 67......................... Davenport, IA(12) 3,800,000
Channel 39......................... Des Moines, IA(12) 3,750,000
Channel 23......................... Portland, ME(12) 3,550,000
Channel 38......................... Greenville, NC 3,550,000
WAQF-TV............................ Buffalo, NY(9) 3,000,000
WLWG-LP............................ Columbus, OH 2,500,000
Channel 51......................... Jackson, MS(12) 2,250,000
KWOK-TV............................ San Francisco, CA(2)(6) 2,215,000
Channel 30......................... Odessa, TX(12) 1,306,000
KVUT-TV............................ Little Rock, AR(7) 1,250,000
WDVL-LP............................ Jacksonville, FL 600,000
K59ER-LP........................... Las Vegas, NV(11) 500,000
Channel 15......................... Christiansted, Virgin Islands(12) 200,000
</TABLE>
- ---------------
In connection with the above commitments, the Company has made deposits or
advances totaling approximately $74 million at December 31, 1997, recorded
as escrow deposits or investments in broadcast properties. The Company has
additional commitments of approximately $13.9 million in connection with a
pending television station acquisition. The commitment amounts do not
include capital expenditures required to upgrade or construct the above
properties.
* Each station is licensed by the FCC to serve a specific community, which is
included in the listed market.
(1) The Company began operating the station pursuant to a time brokerage
agreement on June 30, 1997. The Company completed the purchase of this
station in March 1998.
F-29
<PAGE> 157
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) The Company is acquiring the station for consideration of $120 million
cash, 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.
(3) The station purchase price of $35 million includes $10 million of
consideration which is contingent upon the subsequent improvement of the
station's broadcast signal, if feasible.
(4) The Company has loaned an aggregate of $8,500,000 to KCMY-TV 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 began operating the station pursuant to a time brokerage
agreement on June 1, 1997 pending completion of the acquisition of the
station.
(6) The Company has entered into various agreements with Cocola Broadcasting,
its subsidiaries and other parties, whereby, the Company will acquire 100%
and 90% of the ownership of KWOK-TV and WHBI-TV, respectively.
(7) The Company has acquired a 49% interest in this property.
(8) On May 3, 1997, the Company began operating the station pursuant to a time
brokerage agreement. The purchase price reflects the cash portion only and
does not include additional consideration of 600,000 shares of Class A
common stock of the Company.
(9) Includes the purchase of two low power television stations, W69CS and
W63BM.
(10) The Company completed the purchase of this station in January 1998.
(11) The Company completed the purchase of this station in February 1998.
(12) The Company participated in FCC settlements and thereby acquired a
construction permit for this property.
(13) Presently under a letter of intent.
GUTHY-RENKER
During 1997, the Company entered into an agreement with Guthy-Renker
Corporation to create transactional, entertainment and direct response
programming. The Company has committed to provide the venture with funding of at
least $3,000,000, of which $600,000 had been advanced as of December 31, 1997.
The parties will share in the revenues generated by this programming.
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.
F-30
<PAGE> 158
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE 1997 QUARTERS ENDED
-----------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Total revenue...................... $ 27,168,270 $ 23,778,844 $18,536,999 $ 18,937,340
Operating expenses, less
depreciation, amortization,
compensation associated with
Paxson Radio asset sales and
option plan compensation......... 26,113,720 20,365,043 14,169,937 14,593,207
Compensation associated with Paxson
Radio asset sales................ 9,700,000 -- -- --
Depreciation and amortization...... 7,256,111 5,854,249 4,854,019 4,079,730
Option plan compensation........... 1,215,809 722,166 717,832 714,005
------------ ------------ ----------- ------------
Operating loss..................... $(17,117,370) $ (3,162,614) $(1,204,789) $ (449,602)
============ ============ =========== ============
Loss from continuing operations.... $ (4,178,923) $(14,810,071) $(9,790,548) $ (7,723,420)
Discontinued operations............ 185,065,802 14,553,473 52,309,170 (735,576)
------------ ------------ ----------- ------------
Net income (loss).................. $180,886,879 $ (256,598) $42,518,622 $ (8,458,996)
============ ============ =========== ============
Net income (loss) attributable to
common stock..................... $174,033,528 $ (6,982,630) $36,092,638 (14,730,635)
============ ============ =========== ============
Basic and diluted earnings per
share:
Loss from continuing
operations.................... $ (0.19) $ (0.38) $ (0.33) $ (0.28)
Discontinued operations.......... $ 3.14 $ 0.26 $ 1.04 $ (0.02)
Net income (loss)................ $ 2.95 $ (0.12) $ 0.71 $ (0.30)
Weighted average common shares
outstanding...................... 58,980,015 56,835,119 50,495,490 48,777,893
============ ============ =========== ============
Stock price(1)
High.......................... $ 12 1/16 $ 14 3/8 $ 13 1/8 $ 10 1/4
Low........................... $ 7 3/16 $ 10 15/16 $ 9 3/4 $ 7 15/16
</TABLE>
- ---------------
(1) The Company's Class A common stock is listed on the American Stock Exchange
under the symbol PAX.
F-31
<PAGE> 159
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE 1996 QUARTERS ENDED
-----------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Total revenue....................... $ 19,335,060 $14,950,507 $14,994,642 $ 13,052,409
Operating expenses, less
depreciation, amortization and
option plan compensation.......... 16,076,043 11,740,206 10,061,577 8,486,622
Depreciation and amortization....... 4,339,268 3,576,510 2,636,273 2,335,725
Option plan compensation............ 4,629,964 308,200 312,702 1,724,964
------------ ----------- ----------- ------------
Operating income (loss)............. $ (5,710,215) $ (674,409) $ 1,984,090 $ 505,098
============ =========== =========== ============
Loss from continuing operations..... $(14,597,739) $(6,698,736) $(2,769,195) $ (6,369,801)
Discontinued operations............. 2,087,784 995,119 1,382,526 (248,859)
------------ ----------- ----------- ------------
Net (loss).......................... $(12,509,955) $(5,703,617) $(1,386,669) $ (6,618,660)
============ =========== =========== ============
Net (loss) attributable to common
stock............................. $(24,541,413) $(8,166,709) $(3,852,754) $(11,566,609)
============ =========== =========== ============
Basic and diluted earnings per
share:
Loss from continuing operations... $ (0.56) $ (0.19) $ (0.11) $ (0.32)
Discontinued operations........... $ 0.04 $ 0.02 $ 0.03 $ (0.01)
Net loss.......................... $ (0.52) $ (0.17) $ (0.08) $ (0.33)
Weighted average common shares
outstanding....................... 47,158,019 46,983,274 46,570,794 34,556,861
============ =========== =========== ============
Stock price(1)
High........................... $ 11 1/8 $ 13 $ 15 3/8 $ 21 1/4
Low............................ $ 6 5/8 $ 9 11/16 $ 10 5/8 $ 13 7/8
</TABLE>
- ---------------
(1) The Company's Class A common stock is listed on the American Stock Exchange
under the symbol PAX.
F-32
<PAGE> 160
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 137,286,453 $ 82,641,444
Restricted cash........................................... 17,000,000 17,000,000
Accounts receivable, less allowance for doubtful accounts
of $823,254 and $911,941 respectively................... 4,924,414 4,813,524
Prepaid expenses and other current assets................. 3,342,301 2,765,984
-------------- --------------
Total current assets............................... 162,553,168 107,220,952
Cash held by qualified intermediary......................... -- 418,949,550
Property and equipment, net................................. 141,143,502 105,896,873
Intangible assets, net...................................... 536,789,337 205,400,029
Investments in broadcast properties......................... 106,848,464 72,762,195
Investment in cable network................................. 55,551,260 58,974,491
Other assets, net........................................... 71,711,490 87,908,884
-------------- --------------
Total assets....................................... $1,074,597,221 $1,057,112,974
============== ==============
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 13,358,699 $ 11,305,782
Accrued interest.......................................... 13,873,176 8,475,686
Current portion of long-term debt......................... 504,029 496,378
-------------- --------------
Total current liabilities.......................... 27,735,904 20,277,846
Deferred gain............................................... 12,100,000 12,100,000
Deferred income taxes....................................... 97,303,556 95,747,156
Long-term debt.............................................. 122,166,752 122,299,025
Senior subordinated notes, net.............................. 228,041,639 227,958,736
Redeemable Cumulative Compounding Junior preferred stock,
$0.001 par value; 12% dividend rate per annum, 33,000
shares authorized, issued and outstanding................. 44,189,493 42,610,662
Redeemable Exchangeable Preferred stock, $0.001 par value;
12.5% dividend rate per annum, 440,000 shares authorized,
170,782 shares issued and outstanding..................... 173,879,479 168,375,990
Class A common stock, $0.001 par value; one vote per share;
150,000,000 shares authorized, 51,868,800 and 50,701,600
shares issued and outstanding............................. 51,869 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........................... 1,153,987 2,316,225
Stock subscription notes receivable......................... (2,813,250) (2,813,250)
Additional paid-in capital.................................. 292,526,935 285,795,787
Deferred option plan compensation........................... (1,898,619) (2,205,240)
Retained earnings........................................... 80,151,164 84,591,023
Commitments and contingencies............................... -- --
-------------- --------------
Total liabilities, redeemable securities and common
stockholders' equity............................. $1,074,597,221 $1,057,112,974
============== ==============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the consolidated financial statements.
F-33
<PAGE> 161
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Local and national advertising............................ $ 31,401,579 $ 18,498,815
Other..................................................... 206,721 412,685
Trade and barter.......................................... 56,584 25,840
------------ ------------
Total revenues.............................................. 31,664,884 18,937,340
Operating expenses:
Direct.................................................... 5,146,368 3,337,759
Programming............................................... 1,542,514 981,880
Sales..................................................... 1,467,544 723,513
Promotion................................................. 989,675 121,832
Technical................................................. 2,973,139 2,036,166
General and administrative................................ 8,913,945 6,354,393
Trade and barter.......................................... 56,584 12,160
Time brokerage and affiliation agreement fees............. 6,588,140 1,025,504
Option plan compensation.................................. 306,621 714,005
Depreciation and amortization............................. 7,949,978 4,079,730
------------ ------------
Total operating expenses.................................... 35,934,508 19,386,942
------------ ------------
Operating loss.............................................. (4,269,624) (449,602)
Other income (expense):
Interest expense.......................................... (10,505,642) (8,735,442)
Interest income........................................... 6,180,260 1,315,882
Other expenses, net....................................... (246,540) 145,742
Gain on sale of television station........................ 14,330,406 --
Equity in loss of unconsolidated investment............... (1,290,000) --
------------ ------------
Income (loss) from continuing operations before income tax
provision................................................. 4,198,860 (7,723,420)
Income tax provision........................................ (1,556,400) --
------------ ------------
Income (loss) from continuing operations before
extraordinary item........................................ 2,642,460 (7,723,420)
------------ ------------
Loss from discontinued operations, net of applicable income
taxes..................................................... -- (735,576)
------------ ------------
Net income (loss)........................................... 2,642,460 (8,458,996)
Dividends and accretion on redeemable preferred stock....... (7,082,319) (6,271,639)
------------ ------------
Net loss attributable to common stock....................... $ (4,439,859) $(14,730,635)
============ ============
Basic and diluted loss per common share:
Loss from continuing operations............................. $ (0.07) $ (0.28)
Loss from discontinued operations........................... -- (0.02)
------------ ------------
Net loss.................................................... $ (0.07) $ (0.30)
============ ============
Weighted average shares outstanding......................... 59,588,768 48,777,893
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
F-34
<PAGE> 162
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CLASS A&B CLASS C STOCK
---------------- COMMON COMMON SUBSCRIPTION ADDITIONAL DEFERRED OPTION
CLASS CLASS STOCK STOCK NOTES PAID-IN PLAN
A B WARRANTS WARRANTS RECEIVABLE CAPITAL COMPENSATION
------- ------ ----------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... $40,442 $8,312 $ 6,862,647 $ 2,335,528 $(1,873,139) $209,621,241 $(6,397,916)
Stock issued for acquisition... 6,069 66,118,931
Exercise of Class A, B and C
common stock warrants......... 3,923 (4,546,422) (2,335,528) 6,878,028
Deferred option plan
compensation.................. 2,263,167 (2,263,167)
Option plan compensation....... 6,455,843
Stock options exercised........ 268 914,420
Increase in stock subscription
notes receivable.............. (940,111)
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 -- (2,813,250) 285,795,787 (2,205,240)
Stock issued for acquisitions
(unaudited)................... 600 5,249,400
Exercise of Class A and B
common stock warrants
(unaudited)................... 460 (1,162,238) 1,161,778
Option plan compensation
(unaudited)................... 306,621
Stock options exercised
(unaudited)................... 107 319,970
Dividends on redeemable
preferred stock (unaudited)...
Accretion on Junior preferred
stock (unaudited).............
Accretion on Redeemable
Exchangeable preferred stock
(unaudited)...................
Net income (unaudited).........
------- ------ ----------- ----------- ----------- ------------ -----------
Balance at March 31, 1998
(unaudited)................... $51,869 $8,312 $ 1,153,987 $ -- $(2,813,250) $292,526,935 $(1,898,619)
======= ====== =========== =========== =========== ============ ===========
<CAPTION>
RETAINED EARNINGS
(ACCUMULATED
DEFICIT)
-----------------
<S> <C>
Balance at December 31, 1996... $(103,821,878)
Stock issued for acquisition...
Exercise of Class A, B and C
common stock warrants.........
Deferred option plan
compensation..................
Option plan compensation.......
Stock options exercised........
Increase in stock subscription
notes receivable..............
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... 84,591,023
Stock issued for acquisitions
(unaudited)...................
Exercise of Class A and B
common stock warrants
(unaudited)...................
Option plan compensation
(unaudited)...................
Stock options exercised
(unaudited)...................
Dividends on redeemable
preferred stock (unaudited)... (6,744,549)
Accretion on Junior preferred
stock (unaudited)............. (170,340)
Accretion on Redeemable
Exchangeable preferred stock
(unaudited)................... (167,430)
Net income (unaudited)......... 2,642,460
-------------
Balance at March 31, 1998
(unaudited)................... $ 80,151,164
=============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
F-35
<PAGE> 163
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 2,642,460 $ (8,458,996)
Adjustments to reconcile net income (loss) to net cash
(used in)
provided by operating activities:
Depreciation and amortization........................... 7,949,978 8,738,098
Option plan compensation................................ 306,621 1,036,231
Program rights amortization............................. -- 302,825
Provision for doubtful accounts......................... 575,660 356,485
Deferred income tax provision........................... 1,556,400 --
Loss (gain) on sale or disposal of assets............... 82,027 (153,577)
Equity in loss of unconsolidated investment............. 1,290,000 --
Gain on sale of television station...................... (14,330,406) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............ (686,550) 3,005,161
Increase in prepaid expenses and other current
assets............................................... (576,317) (1,450,604)
Increase in programming deposits...................... (7,013,750) --
Decrease (increase) in other assets................... 373,829 (2,399,573)
Increase (decrease) in accounts payable and accrued
liabilities.......................................... 2,052,917 (373,334)
Increase in accrued interest.......................... 5,397,490 8,008,697
Payments for program rights........................... -- (338,898)
------------- -------------
Net cash (used in) provided by operating
activities....................................... (379,641) 8,272,515
------------- -------------
Cash flows from investing activities:
Acquisitions of broadcasting properties................... (358,669,960) (94,184,131)
Increase in investments in broadcast properties........... (34,552,839) (4,862,838)
Refunds of deposits on broadcast properties............... 22,853,732 4,200,000
Refund of cash held by qualified intermediary............. 418,949,550 --
Purchases of property and equipment....................... (14,147,177) (12,106,406)
Distribution received from unconsolidated investment...... 2,133,231 --
Proceeds from sales of broadcast properties............... 18,262,658 751,050
------------- -------------
Net cash provided by (used in) investing
activities....................................... 54,829,195 (106,202,325)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. -- 80,000,000
Repayments of long-term debt.............................. (124,622) (193,915)
Proceeds from exercise of common stock options, net....... 320,077 129,960
Increase in stock subscription notes receivable........... -- (840,111)
------------- -------------
Net cash provided by financing activities.......... 195,455 79,095,934
------------- -------------
Increase (decrease) in cash and cash equivalents............ 54,645,009 (18,833,876)
Cash and cash equivalents at beginning of period............ 82,641,444 61,748,788
------------- -------------
Cash and cash equivalents at end of period.................. $ 137,286,453 $ 42,914,912
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 4,599,246 $ 245,082
============= =============
Cash paid for income taxes................................ $ -- $ --
============= =============
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes........ $ 82,903 $ 73,103
============= =============
Issuance of common stock for acquisition.................. $ 5,250,000 $ --
============= =============
Dividends accrued on redeemable preferred stock........... $ 6,744,549 $ 5,941,050
============= =============
Accretion on redeemable securities........................ $ 337,770 $ 330,589
============= =============
Trade and barter revenue.................................. $ 56,584 $ 1,012,528
============= =============
Trade and barter expense.................................. $ 56,584 $ 983,841
============= =============
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.
F-36
<PAGE> 164
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 March 31, 1998 and
for the three month periods ended March 31, 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 the operations of acquisitions 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 December 31, 1997 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, and the definitive proxy statement for the annual
meeting of stockholders held April 17, 1998, and Form 8-K dated March 6, 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 three months ended March 31, 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 $5,284,000
for the three months ended March 31, 1997. The Paxson Radio operations generated
revenues of approximately $24,139,000 for the three months ended March 31, 1997.
The net assets of discontinued operations, totaling approximately $3
million at March 31, 1998 and December 31, 1997 consist of the assets of two
remaining radio stations which are under contract to be sold for aggregate
consideration of $3 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 properties 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.
4. 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 March 31, 1998 consolidated statement of operations using the equity
method of accounting.
F-37
<PAGE> 165
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
In order to address the Company's business plan related to the PAX NET
launch, the Company refinanced, in May 1998, substantially all of its long-term
debt with a $122 million senior credit facility maturing June 2002 (the "Senior
Credit Facility"). Under the terms of the Senior Credit Facility, the
outstanding debt will be secured by substantially all of the Company's assets
and bear interest at a base rate plus 1.75% or LIBOR plus 2.75%, at the
Company's option. The Senior Credit Facility requires the Company to maintain
compliance with certain financial ratios subsequent to March 2000 and also
contains other restrictions. The Senior Credit Facility requires quarterly
principal payments commencing December 31, 2000.
6. COMMON STOCK WARRANTS
In March 1998, the holders of the Company's Class A and B common stock
warrants exercised 16.6217 warrants for 460,000 shares of Class A common stock.
The Company has 16.5036 common stock warrants outstanding which entitle the
holders to purchase 342,929 Class A common shares and 114,309 Class B common
shares.
7. PER SHARE DATA
Basic and diluted loss per share from continuing operations was computed by
dividing the loss from continuing operations before extraordinary item less
dividends and accretion on redeemable preferred stock by the weighted average
number of common shares outstanding during the period. Because of losses from
continuing operations, the effect of stock options and warrants is antidilutive.
Potentially dilutive common shares in the amount of 4,044,149 and 8,433,108 for
the three months ended March 31, 1998 and 1997, respectively, have been excluded
from the computation of diluted earnings per share as the effect of their
inclusion is antidilutive. Accordingly, the Company's presentation of diluted
earnings per share is the same as that of basic earnings per share.
F-38
<PAGE> 166
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITY OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 1
Risk Factors............................... 18
The Exchange Offer......................... 28
The Transactions........................... 37
Use of Proceeds............................ 39
Capitalization............................. 40
Unaudited Pro Forma Balance Sheet Data..... 41
Selected Historical and Pro Forma Financial
Data..................................... 44
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 47
Business................................... 53
Management................................. 68
Ownership of Common Stock.................. 74
Certain Relationships and Related
Transactions............................. 74
Description of New Junior Preferred Stock
and New Exchange Debentures.............. 79
Description of Convertible Preferred
Stock.................................... 113
Description of Indebtedness................ 114
Description of Capital Stock............... 116
Certain Federal Income Tax
Considerations........................... 120
Plan of Distribution....................... 121
Legal Matters.............................. 121
Experts.................................... 122
Index of Financial Statements.............. F-1
</TABLE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
$200,000,000
PAXSON LOGO
PAXSON
COMMUNICATIONS
CORPORATION
OFFER TO EXCHANGE SHARES OF ITS 13 1/4% CUMULATIVE JUNIOR EXCHANGEABLE PREFERRED
STOCK, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING SHARES OF ITS 13 1/4% CUMULATIVE JUNIOR EXCHANGEABLE
PREFERRED STOCK
------------------
PROSPECTUS
------------------
AUGUST 3, 1998
- ------------------------------------------------------------
- ------------------------------------------------------------
