<PAGE> 1
Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-----------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File Number 1-13452
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PAXSON COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-3212788
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
601 Clearwater Park Road
West Palm Beach, Florida 33401
------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 659-4122
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
proceeding 12 months (or for shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1998:
Class of Stock Number of Shares
- ---------------------------------- ------------------------------
Common Stock-Class A, $0.001
par value per share 52,457,895
---------------------
Common Stock-Class B, $0.001
par value per share 8,311,639
-----------------------
<PAGE> 2
PAXSON COMMUNICATIONS CORPORATION
INDEX
Page
----
Part I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Operations
Three Months Ended June 30, 1998 and 1997 5
Consolidated Statement of Changes in
Common Stockholders' Equity 6
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
Part II - Other Information
Item 1. LEGAL PROCEEDINGS 20
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 20
Signatures 22
2
<PAGE> 3
PAXSON COMMUNICATIONS CORPORATION
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 315,747,989 $ 82,641,444
Restricted cash 22,400,000 17,000,000
Accounts receivable, less allowance for doubtful
accounts of $1,529,459 and $911,941 respectively 6,748,545 4,813,524
Prepaid expenses and other current assets 4,179,052 2,765,984
--------------- ---------------
Total current assets 349,075,586 107,220,952
Cash held by qualified intermediary -- 418,949,550
Property and equipment, net 153,470,773 105,896,873
Intangible assets, net 579,127,836 205,400,029
Investments in broadcast properties 138,085,314 72,762,195
Investment in cable network 52,831,322 58,974,491
Other assets, net 78,483,846 87,908,884
--------------- ---------------
Total assets $ 1,351,074,677 $ 1,057,112,974
=============== ===============
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 18,405,527 $ 11,305,782
Accrued interest 8,229,863 8,475,686
Current income taxes payable 3,100,000 --
Current portion of long-term debt 514,924 496,378
--------------- ---------------
Total current liabilities 30,250,314 20,277,846
Deferred gain 12,100,000 12,100,000
Deferred income taxes 97,470,156 95,747,156
Long-term debt 124,049,030 122,299,025
Senior subordinated notes, net 228,125,971 227,958,736
Redeemable Cumulative Compounding Junior preferred stock, $0.001 par value; 12%
dividend rate per annum, 33,000 shares authorized, issued and
outstanding 45,768,322 42,610,662
Redeemable Exchangeable preferred stock, $0.001 par value;
12.5% dividend rate per annum, 440,000 shares authorized,
181,456 and 170,782 shares issued and outstanding 179,605,934 168,375,990
Redeemable Cumulative Junior Exchangeable preferred stock, $0.001 par value; 13
1/4% dividend rate per annum, 72,000 shares authorized,
20,000 shares issued and outstanding 191,591,340 --
Redeemable Convertible preferred stock, $0.001 par value; 9 3/4% dividend
rate per annum, Series A, 17,500 shares authorized, 7,500 shares issued
and outstanding 70,989,889 --
Class A common stock, $0.001 par value; one vote per share; 150,000,000 shares
authorized, 51,966,534 and 50,701,600 shares issued and
outstanding 51,966 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 2,735,987 2,316,225
Stock subscription notes receivable (2,813,250) (2,813,250)
Additional paid-in capital 318,251,220 285,795,787
Deferred option plan compensation (23,140,635) (2,205,240)
Retained earnings 76,030,121 84,591,023
Commitments and contingencies -- --
--------------- ---------------
Total liabilities, redeemable securities and common
stockholders' equity $ 1,351,074,677 $ 1,057,112,974
=============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
3
<PAGE> 4
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Revenue:
Local and national advertising $ 61,809,364 $ 36,720,691
Other 97,519 702,733
Trade and barter 133,900 50,915
------------ ------------
Total revenues 62,040,783 37,474,339
Operating expenses:
Direct 9,981,827 6,716,577
Programming 3,987,820 1,962,192
Sales 7,129,524 1,242,830
Promotion 3,834,020 353,076
Technical 6,259,739 4,065,445
General and administrative 20,586,971 11,970,586
Trade and barter 129,801 51,743
Time brokerage and affiliation agreement fees 9,656,301 2,400,695
Option and warrant compensation 5,086,971 1,431,837
Depreciation and amortization 18,358,008 8,933,749
------------ ------------
Total operating expenses 85,010,982 39,128,730
------------ ------------
Operating loss (22,970,199) (1,654,391)
Other income (expense):
Interest expense (20,885,975) (17,931,024)
Interest income 8,639,614 2,693,274
Other expenses, net (499,422) (621,827)
Gain on sale of television stations 51,602,972 --
Equity in loss of unconsolidated investment (3,196,060) --
------------ ------------
Income (loss) from continuing operations before income tax
provision 12,690,930 (17,513,968)
Income tax provision (4,823,000) --
------------ ------------
Income (loss) from continuing operations 7,867,930 (17,513,968)
------------ ------------
Discontinued operations:
Loss from discontinued operations, net of applicable income taxes -- (631,186)
Gain on sale, net of applicable income taxes -- 52,204,780
------------ ------------
-- 51,573,594
------------ ------------
Net income 7,867,930 34,059,626
Dividends and accretion on preferred stock (16,428,832) (12,697,623)
------------ ------------
Net (loss) income attributable to common stock $ (8,560,902) $ 21,362,003
============ ============
Basic and diluted loss per common share:
Loss from continuing operations $ (0.14) $ (0.61)
Income from discontinued operations -- 1.04
------------ ------------
Net (loss) income $ (0.14) $ 0.43
============ ============
Weighted average shares outstanding 60,250,050 49,641,437
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
4
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PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
-------------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Revenue:
Local and national advertising $ 30,227,790 $ 18,101,444
Other 70,793 410,480
Trade and barter 77,316 25,075
------------ ------------
Total revenues 30,375,899 18,536,999
Operating expenses:
Direct 4,835,459 3,378,818
Programming 2,445,306 980,312
Sales 5,661,980 519,317
Promotion 2,844,345 231,244
Technical 3,286,600 2,029,279
General and administrative 11,673,026 5,616,193
Trade and barter 73,217 39,583
Time brokerage and affiliation agreement fees 3,068,161 1,375,191
Option and warrant compensation 4,780,350 717,832
Depreciation and amortization 10,408,030 4,854,019
------------ ------------
Total operating expenses 49,076,474 19,741,788
------------ ------------
Operating loss (18,700,575) (1,204,789)
Other income (expense):
Interest expense (10,380,333) (9,195,582)
Interest income 2,459,354 1,377,392
Other expenses, net (252,882) (767,569)
Gain on sale of television stations 37,272,566 --
Equity in loss of unconsolidated investment (1,906,060) --
------------ ------------
Income (loss)from continuing operations before income tax provision 8,492,070 (9,790,548)
Income tax provision (3,266,600) --
------------ ------------
Income (loss) from continuing operations 5,225,470 (9,790,548)
------------ ------------
Discontinued operations:
Income from discontinued operations, net of applicable income taxes -- 104,390
Gain on sale, net of applicable income taxes -- 52,204,780
------------ ------------
-- 52,309,170
------------ ------------
Net income 5,255,470 42,518,622
Dividends and accretion on preferred stock (9,346,513) (6,425,984)
------------ ------------
Net (loss) income attributable to common stock $ (4,121,043) $ 36,092,638
============ ============
Basic and diluted loss per common share:
Loss from continuing operations $ (0.07) $ (0.33)
Income from discontinued operations -- 1.04
------------ ------------
Net (loss) income $ (0.07) $ 0.71
============ ============
Weighted average shares outstanding 59,921,236 50,495,490
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
5
<PAGE> 6
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statement of Changes in Common Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A&B Stock Deferred Retained
Common Stock Common Class C Subscription Additional Option Earnings
---------------- Stock Common Stock Notes Paid-in Plan (Accumulated
Class A Class B Warrants Warrants Receivable Capital Compensation Deficit)
-------------------------------------------------------------------------------------------------
<S> <C> <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) $(103,821,878)
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 (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 50,702 8,312 2,316,225 -- (2,813,250) 285,795,787 (2,205,240) 84,591,023
Stock issued for acquisitions
(unaudited) 600 5,249,400
Issuance of common stock warrants 1,582,000
Exercise of Class A and B common
stock warrants (unaudited) 460 (1,162,238) 1,161,778
Deferred option plan compensation
(unaudited) 25,400,366 (25,400,366)
Option plan compensation (unaudited) 4,464,971
Stock options exercised (unaudited) 204 643,889
Dividends on redeemable and
convertible preferred stock
(unaudited) (15,657,439)
Accretion on cumulative Junior
preferred stock (unaudited) (340,680)
Accretion on Redeemable Exchangeable
preferred stock (unaudited) (334,861)
Accretion on Junior Exchangeable
preferred stock (audited) (66,682)
Accretion on Convertible preferred
stock (unaudited) (29,170)
Net income (unaudited) 7,867,930
------- ------ ----------- ----------- ----------- ------------ ------------ ------------
Balance at June 30, 1998
(unaudited) $51,966 $8,312 $ 2,735,987 $ -- $(2,813,250) $318,251,220 $(23,140,635) $76,030,121
======= ====== =========== =========== =========== ============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
6
<PAGE> 7
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,867,930 $ 34,059,626
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 18,358,008 18,090,587
Option and warrant compensation 5,086,971 2,073,849
Program rights amortization -- 603,277
Provision for doubtful accounts 1,353,734 789,636
Income tax provision 4,823,000 --
Loss (gain) on sale or disposal of assets 231,675 1,342,012
Equity in loss of unconsolidated investment 3,196,060 --
Gain on sale of television stations (51,602,972) --
Gain on disposal of discontinued operations, net -- (52,204,780)
Changes in assets and liabilities:
(Increase) in restricted cash (5,400,000) --
(Increase) decrease in accounts receivable (3,288,755) 1,301,692
Increase in prepaid expenses and other current assets (1,420,383) (1,391,823)
Increase in programming deposits (23,064,590) --
Decrease (increase) in other assets 3,567,359 (3,999,847)
Increase in accounts payable and accrued liabilities 6,980,606 310,833
(Decrease) increase in accrued interest (245,823) 1,392,954
Payments for program rights -- (707,198)
------------- -------------
Net cash (used in) provided by operating
activities (33,557,180) 1,660,818
------------- -------------
Cash flows from investing activities:
Acquisitions of broadcasting properties (408,611,667) (130,364,496)
Increase in investments in broadcast properties (66,961,876) (25,263,534)
Decrease (increase) in deposits on broadcast properties 32,170,853 (27,661,027)
Decrease in cash held by qualified intermediary 418,949,550 --
Purchases of property and equipment (41,360,923) (24,664,492)
Distribution received from unconsolidated investment 2,947,109 --
Proceeds from sales of discontinued operations -- 75,000,000
Proceeds from sales of broadcast properties 65,618,035 911,644
------------- -------------
Net cash provided by (used in) investing
activities 2,751,081 (132,041,905)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of exchangeable and convertible
preferred stock, net 261,500,000 --
Proceeds from issuance of long-term debt 2,000,000 105,000,000
Payments of long-term debt (231,449) (348,466)
Proceeds from exercise of common stock options 644,093 191,862
Increase in stock subscription notes receivable -- (940,111)
------------- -------------
Net cash provided by financing activities 263,912,644 103,903,285
------------- -------------
Increase (decrease) in cash and cash equivalents 233,106,545 (26,477,802)
Cash and cash equivalents at beginning of period 82,641,444 61,748,788
------------- -------------
Cash and cash equivalents at end of period $ 315,747,989 $ 35,270,986
============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
7
<PAGE> 8
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
---------------------------
1998 1997
------------- -----------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 19,916,595 $15,498,665
============= ===========
Cash paid for income taxes $ 230,105 $ --
============= ===========
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes $ 167,235 $ 144,807
============= ===========
Issuance of common stock for acquisition $ 5,250,000 $ --
============= ===========
Dividends accrued on redeemable preferred stock $ 15,657,439 $12,029,325
============= ===========
Accretion on redeemable securities $ 771,393 $ 668,298
============= ===========
Trade and barter revenue $ 133,900 $ 2,301,511
============= ===========
Trade and barter expense $ 129,801 $ 2,257,659
============= ===========
Sale of broadcast property for note receivable $ -- $15,000,000
============= ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
8
<PAGE> 9
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Paxson Communications Corporation's (the "Company") financial information
contained in the financial statements and notes thereto as of June 30, 1998 and
for the six and three month periods ended June 30, 1998 and 1997, is unaudited.
In the opinion of management, all adjustments necessary for the fair
presentation of such financial information have been included. These adjustments
are of a normal recurring nature. There have been no changes in accounting
policies since the period ended December 31, 1997. The composition of accounts
has changed since December 31, 1997 to reflect the operations of acquisitions,
operations sold and the Company's sale of Cumulative Junior Exchangeable
preferred stock and Convertible preferred stock all of which are discussed
elsewhere herein.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Certain reclassifications have been made to the
prior year's financial statements to conform with the 1998 presentation. These
financial statements, footnotes, and discussions should be read in conjunction
with the financial statements and related footnotes and discussions contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, the
definitive proxy statement for the annual meeting of stockholders held April 17,
1998, and the 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 six and three months ended June 30, 1997, net
of applicable income taxes, have been presented as discontinued operations in
the accompanying Consolidated Statements of Operations. The Paxson Network
Affiliated Television operations generated revenues of approximately $10,779,000
and $5,495,000 for the six and three month periods ended June 30, 1997,
respectively. The Paxson Radio operations generated revenues of approximately
$51,212,000 and $27,074,000 for the six and three month periods ended June 30,
1997, respectively.
The net assets of discontinued operations, totaling approximately $3 million at
June 30, 1998 and December 31, 1997, consist of the assets of two remaining
radio stations which are under contract or subject to an option agreement to be
sold for aggregate consideration of $3 million. In July 1998, the Company sold
its interest in radio station WHNZ-AM, serving the Tampa, Florida market, for
approximately $1 million.
3. CASH HELD BY QUALIFIED INTERMEDIARY
At December 31, 1997, the Company had placed a portion of the proceeds received
from the Paxson Radio segment sale with a qualified intermediary in order to
reinvest such proceeds and, to the extent reinvested, qualify for tax deferred
exchange treatment in connection with such sale. All but approximately $66
million of these funds were reinvested in broadcast 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.
Current taxes payable of $3.1 million at June 30, 1998 relates to state income
taxes resulting from the gain on sale of the Company's interest in WNGM-TV and
WOAC-TV.
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 June 30, 1998 consolidated statement of operations using the equity
method of accounting.
5. LONG-TERM DEBT
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 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% (8.45% at June 30,
1998), 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. In conjunction with
this facility, the Company has placed $22.4 million
9
<PAGE> 10
as of June 30, 1998 in escrow ($17 million at December 31, 1997) in order to
prefund approximately eighteen months of interest.
6. REDEEMABLE PREFERRED STOCK
On June 10, 1998, the Company issued 20,000 shares ($200 million aggregate
liquidation preference) of Cumulative Junior Exchangeable Preferred Stock
("Junior Preferred Stock") and 7,500 shares ($75 million aggregate liquidation
preference) of Series A Convertible Preferred Stock ("Convertible Preferred
Stock") and Warrants ("Warrants") to purchase 240,000 shares of Class A Common
Stock for gross proceeds of $275 million. Holders of the Junior Preferred Stock
are entitled to cumulative dividends at an annual rate of 13 1/4%, payable
semi-annually beginning November 15, 1998 and accumulating from the issue date.
The Company may, at its option, pay dividends either in cash or by the issuance
of additional shares of Junior Preferred Stock. 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 Company is required to redeem all of the then outstanding Junior Preferred
Stock on November 15, 2006, at a price equal to the aggregate liquidation
preference thereof plus accumulated and unpaid dividends to the date of
redemption. The Junior 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 below (expressed as a percentage of liquidation preference) plus
accumulated and unpaid dividends to the date of redemption:
Twelve month period beginning May 15,
2003................ 106.625%
2004................ 103.313%
2005 and thereafter 100.000%
In addition, prior to May 15, 2001, the Company may, at its option, use the
proceeds of one or more Public Equity Offerings or Major Asset Sales to redeem
up to an aggregate of 35% of the shares of Junior Preferred Stock outstanding
(whether initially issued or issued in lieu of cash dividends) at 113.25% of the
aggregate liquidation preference of such shares plus accumulated and unpaid
dividends. Upon a change of control, the Company is required to offer to
purchase the Junior Preferred Stock at a price equal to 101% of the liquidation
preference thereof plus accumulated and unpaid dividends. Subject to certain
limitations, the Company may at its option, provided it is not contractually
prohibited from doing so, exchange the outstanding Junior Preferred Stock for
13 1/4% Exchange Debentures due 2006 on any dividend date. The Exchange
Debentures have redemption features similar to those of the Junior Preferred
Stock.
Holders of the Convertible Preferred Stock are entitled to receive cumulative
dividends at an annual rate of 9 3/4%, payable quarterly in arrears beginning
September 30, 1998 and accumulating from the issue date. The Company may, at its
option, pay dividends either in cash, by the issuance of additional shares of
Convertible Preferred Stock, or (subject to an increased dividend rate under
certain circumstances) by the issuance of a number of shares of Class A Common
Stock equal to the amount of such dividends divided by the average of the Common
Stock trading price for the five consecutive trading days immediately preceding
the dividend payment record date.
The Company is required to redeem all of the then outstanding Convertible
Preferred Stock on December 31, 2006, at a price equal to the aggregate
liquidation preference thereof plus accumulated and unpaid dividends to the date
of redemption. The Convertible Preferred Stock is redeemable, at the Company's
option, in whole or in part, at any time on or after June 30, 2003, at the
redemption prices set forth below (expressed as a percentage of liquidation
preference) plus accumulated and unpaid dividends to the date of redemption:
Twelve month period beginning June 30,
2003................ 104.00%
2004................ 102.00%
2005 and thereafter 100.00%
Upon a change of control each holder of the Convertible Preferred Stock has the
right to require the Company to redeem all or any part of its Convertible
Preferred Stock at a price equal to the liquidation preference thereof plus
accumulated and unpaid dividends to the date of purchase. The Convertible
Preferred Stock ranks junior to all other existing classes of preferred stock
(including the Junior Preferred Stock) and senior to the Common Stock. Subject
to certain exceptions, until such date as the average of the Common Stock
trading price for twenty consecutive trading days equals or exceeds 120% of the
Conversion Price the Company is prohibited from issuing more than $75,000,000
aggregate liquidation preference of additional preferred stock ranking senior to
the Convertible Preferred Stock without the consent of holders of at least a
majority of the outstanding shares of Convertible Preferred Stock.
Subject to certain conditions, each share of Convertible Preferred Stock is
convertible at
10
<PAGE> 11
the option of the holder thereof, at any time on or after June 30, 1999, or
immediately in the event of a change in control or major asset sale or at any
time after the date as of which the average of the Common Stock trading price
for five consecutive trading days equals or exceeds $25.00, into a number of
shares of Class A Common Stock equal to the liquidation preference amount
thereof divided by the Conversion Price, except if shares of Convertible
Preferred Stock are called for redemption, the conversion right will terminate
at the close of business on the date fixed for redemption. The Conversion Price
is initially $16.00, subject to adjustment under certain circumstances
("Conversion Price").
Holders of Warrants are entitled to purchase shares of Class A Common Stock at
an exercise price equal to the Conversion Price. The Warrants are exercisable
from the issue date until expiration on June 30, 2003.
7. COMMON STOCK WARRANTS
In March and July 1998, the holders of the Company's Class A and B common stock
warrants exercised 33.1253 warrants for 916,861 shares of Class A common stock.
Currently, no Class A and B warrants issued in connection with the 1993
Redeemable Senior preferred stock issuance remain outstanding. See Note 6 above
for a discussion of the Class A common stock warrants issued in connection with
the preferred stock sales in June 1998.
8. PER SHARE DATA
Basic and diluted loss per share from continuing operations was computed by
dividing the income (loss) from continuing operations less dividends and
accretion on redeemable preferred stock by the weighted average number of common
shares outstanding during the period. Because of per share losses from
continuing operations, the effect of stock options and warrants is antidilutive.
Potentially dilutive common shares in the amount of 7,143,707, and 7,452,885 and
10,243,265, and 6,472,662, for the six and three month periods ended June 30,
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.
11
<PAGE> 12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the six and three month
periods ended June 30, 1997 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 network, which currently
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. Pursuant to the time brokerage
agreements, these stations' operating revenues and expenses are included in the
Company's 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. PAX TV is the
brand name for the programming that the Company will provide to its owned, and
non-owned affiliated television stations, as well as certain cable systems
commencing August 31, 1998. PAX TV programming will generally consist of
family-friendly traditional entertainment television programs that have had or
are having successful first runs on television, as well as original programs.
The Company also owns a 30% interest in The Travel Channel, L.L.C., a cable
television network joint venture with Discovery Communications, Inc. ("DCI").
The Company's interest in the operating results of The Travel Channel, L.L.C.
has been included in the consolidated financial statements using the equity
method of accounting.
The Company's operating data throughout the periods discussed have been impacted
significantly by the timing and mix of television acquisitions throughout such
periods and the costs being incurred to launch PAX TV. Operating revenues are
derived from the sale of advertising to local, national and network advertisers.
The Company's primary operating expenses include commissions on revenues,
employee salaries and administrative expenses. Upon launch of PAX TV, the
Company will also incur significant expenses for syndicated program rights fees,
ratings services and promotion. Presently, 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 June 30, 1998. The fair values of the Company's existing long-term debt
and the senior subordinated notes (the "Notes") were estimated based on market
rates of instruments with similar risks and maturities, and approximates the
carrying value as of June 30, 1998. As a result of the foregoing, the estimates
presented in the Company's financial statements are not necessarily indicative
of the amounts that the Company could realize in a current market exchange and
have not been comprehensively revalued for purposes of the Company's financial
statements.
The Company believes that its group of television stations comprises a valuable
national broadcasting distribution infrastructure. Including all pending station
acquisitions, construction projects, divestitures and other transactions, the
Company will broadcast via a total of 88 owned, operated or affiliated stations
in markets reaching more than 74
12
<PAGE> 13
million U.S. television households, including stations in each of the nation's
top 20 markets as well as 43 of the nation's top 50 markets. Additionally, the
Company has entered into agreements with cable multiple system operators
("MSO's"), whereby the Company will receive cable carriage of its PAX TV
programming on certain cable systems in markets not currently served by the
Company's broadcast television station group, additional cable carriage in
certain existing markets, advance carriage in certain markets where the Company
will acquire and/or construct a television station pursuant to a construction
permit, and significant cross-advertising airtime on other cable channels. The
Company will pay certain fees based on the number of cable television
subscribers actually reached and will provide the MSO's certain amounts of local
advertising airtime during PAX TV programming. This additional cable
distribution will provide PAX TV with incremental coverage to achieve a presence
in every one of the top 50 U.S. Television markets. The Company estimates that
these agreements will require payments by the Company of between $50 and $60
million. These payments will be made over five years with approximately 34% in
1998, 30% in 1999, 23% in 2000, 11% in 2001 and 2% in 2002.
This report contains forward-looking statements which are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995.
Statements as to what the Company "believes", "intends", "expects" or
"anticipates", and other similarly anticipatory expressions, are generally
forward-looking and are made only as of the date of this Report. Readers of this
Report are cautioned not to place undue reliance on such forward-looking
statements, as they are subject to risks and uncertainties which could cause
actual results to differ materially from those discussed in the forward-looking
statements and from historical results of operations. Among the risks and
uncertainties which could cause such a difference are those relating to the
Company's high level of indebtedness and the restrictions placed on the
Company's business and operations by the terms of its indebtedness and its
outstanding preferred stock, the risks relating to the comprehensive
governmental regulation of the Company's businesses, including the restrictions
on multiple broadcast property ownership, the broadcast licensing renewal
requirements, the risks of industry and economic conditions which could
adversely affect the Company's business operations, and the other factors
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. In addition, the Company's launch of PAX TV entails certain
additional risks and uncertainties, including, those risks associated with the
launch of a new programming service, the ability to obtain desirable programming
at a financially feasible cost and the ability to successfully and profitably
sell advertising spots during such programming.
The following table lists those television properties that the Company owns,
operates or is affiliated with, and those properties which the Company has
agreements to acquire or operate and stations currently under construction. The
Company does not expect that all stations will be completed or will air PAX TV
programming by the announced date of PAX TV's launch. See footnotes to the table
for additional information.
PAX TV TELEVISION DISTRIBUTION
(TELEVISION AND CABLE HOUSEHOLDS IN THOUSANDS)
<TABLE>
<CAPTION>
Total
Market Total
Cable Market TV Market
Market Households Households Population
Rank Market (1) Station Ch (2) (2) (2)
---- ---------- ------- -- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
1 New York, NY WPXN 31 4,825 6,756 19,014
1 New York, NY WIPX (3) 43 - - -
2 Los Angeles, CA KPXN 30 3,133 5,009 15,714
3 Chicago, IL WCFC (4) 38 1,950 3,140 8,883
4 Philadelphia, PA WPPX 61 2,033 2,659 7,280
5 San Francisco, CA KKPX 65 1,640 2,298 6,495
5 San Francisco, CA KWOK (3) 68 - - -
6 Boston, MA WPXB 60 1,694 2,174 5,863
6 Boston, MA* WBPX (5) 46 - - -
7 Washington, D.C. WPXW 66 1,331 1,928 5,265
7 Washington, D.C. WWPX (6) 60 - - -
8 Dallas, TX KPXD (7) 68 989 1,899 5,197
9 Detroit, MI WPXD 31 1,191 1,782 4,823
10 Atlanta, GA WPXA 14 1,144 1,675 4,567
11 Houston, TX KPXB 49 918 1,624 4,663
12 Seattle, WA KWPX 33 1,104 1,514 4,022
13 Cleveland, OH WVPX 23 1,026 1,469 3,883
14 Minneapolis, MN KPXM 41 746 1,448 3,918
15 Tampa, FL WXPX 66 1,043 1,436 3,499
16 Miami, FL WPXM 35 993 1,386 3,697
17 Phoenix, AZ* KPPX (8) (9) 51 755 1,289 3,522
17 Phoenix, AZ KBPX 13 - - -
18 Denver, CO KPXC 59 741 1,199 3,091
19 Pittsburgh, PA Channel 40 (4) 40 899 1,140 2,906
20 Sacramento, CA* KSPX 29 726 1,127 3,276
21 St. Louis, MO WPXS (6) 13 585 1,109 2,980
22 Orlando, FL WOPX 56 796 1,041 2,701
24 Portland, OR KPXG 22 611 976 2,612
25 Indianapolis, IN WIPX-LP (10) 51 618 957 2,522
25 Indianapolis, IN WIIB (16) 63 - - -
27 Hartford, CT* WHPX (5) 26 792 916 2,445
29 Raleigh/Durham, NC WFPX 62 512 826 2,207
29 Raleigh/Durham, NC WRPX (6) 47 - - -
31 Kansas City, MO KPXE 50 518 792 2,088
32 Milwaukee, WI WPXE (6) 55 477 791 2,143
33 Nashville, TN WNPX 28 496 789 2,102
34 Columbus, OH WCPX-LP (10) 62 473 739 1,982
36 Salt Lake City, UT KUWB (11) 30 387 690 2,237
36 Salt Lake City, UT KCSG (12) 4 - - -
37 Grand Rapids, MI WZPX (6) 43 412 659 1,839
38 San Antonio, TX* KPXL (8) (9) 26 422 649 1,931
39 Norfolk, VA WPXV 49 474 636 1,776
40 Buffalo, NY WAQF (4) (8) 51 475 630 1,663
41 New Orleans, LA* WPXL 49 455 623 1,734
42 Memphis, TN* WPXX 50 390 614 1,711
43 West Palm Beach, FL WPXP (13) 67 496 593 1,457
44 Oklahoma City, OK KOPX 62 374 593 1,573
46 Greensboro, NC WGPX 16 367 577 1,474
47 Wilkes-Barre, PA* WQPX (8) (9) 64 452 566 1,502
48 Albuquerque, NM Channel 14 (4) (8) 14 332 560 1,623
49 Providence, RI WPXQ (8) (14) 69 433 559 1,503
51 Birmingham, AL WPXH 44 363 547 1,448
52 Albany, NY WYPX 55 376 509 1,342
53 Dayton, OH WDPX 26 351 503 1,339
54 Jacksonville, FL WPXJ-LP (10) 54 376 502 1,374
55 Fresno, CA KPXF 61 263 496 1,610
56 Little Rock, AR* KYPX (8) (9) 42 301 481 1,288
57 Charleston, WV* WKRP (8) (9) 29 353 480 1,283
58 Tulsa, OK KTPX 44 299 468 1,232
61 Las Vegas, NV KVPX-LP (10) 59 302 450 1,190
62 Mobile, AL Channel 61 (4) (8) 61 324 450 1,251
64 Knoxville, TN* WPXK 54 299 441 1,149
66 Toledo, OH WLMB (12) 40 274 408 1,110
67 Lexington, KY WAOM (4) (8) 67 277 403 1,097
68 Roanoke, VA WPXR 38 263 402 1,049
69 Des Moines, IA Channel 39 (4) (8) 39 233 383 987
70 Green Bay, WI WPXG (8) 14 226 381 1,025
71 Honolulu, HI* KPXO (8) 66 333 380 1,192
72 Syracuse, NY* WAUP (8) (9) 56 279 378 1,049
73 Spokane, WA Channel 34 (8) 34 233 375 1,008
75 Rochester, NY WAQF (4) (8) (15) 51 267 367 981
76 Shreveport, LA Channel 21 (8) 21 217 366 1,002
80 Portland, ME WBDJ (8) (9) 23 266 350 912
81 Champaign, IL WPXU 23 249 331 875
83 Ft. Myers, FL W57CJ-LP (10) 57 253 320 800
86 Chattanooga, TN W55CD-LP (10) 55 217 310 821
87 Cedar Rapids, IA KPXR 48 198 308 824
89 Davenport, IA Channel 67 (4) (8) 67 202 302 785
90 Jackson, MS Channel 51 (4) (8) 51 177 297 850
95 Evansville, IN WTSN-LP (10)(12) 63 168 274 716
105 Lansing, MI WZPX (6) (15) 43 157 236 653
106 Greenville, NC WEPX (4) (8) 38 152 234 673
120 Eugene, OR KROZ (12) 36 138 210 557
121 Monterey/Salinas, CA KKPX (15) 65 160 206 654
131 Bakersfield, CA KPXF (15) 61 129 176 556
136 Wausau-Rhinelander, WI WAZW (4) (8) 46 86 163 439
150 Odessa, TX KPXK (8) (9) 30 98 134 386
156 Anchorage, AK KDMD (12) 33 72 122 355
159 Palm Springs, CA KVCC-LP (10)(12) 58 102 112 349
187 Tuscaloosa, AL WJRD-LP (10)(12) 49 48 59 162
NR Juneau, AK KUBD (12) 4 5 5 NA
NR San Sebastian, PR WJWN (15) - - -
NR Ponce, PR WKPV (16) - - -
NR San Juan, PR WJPX (17) 24 367 1,140 3,829
NR Christiansted, V.I. Channel 15 (4) (8) 15 18 36 110
----------------------------------------
Total | 49,701 74,334 205,691 |
----------------------------------------
----------------------------------------
TOTAL PAX TV MARKETS | 49,334 73,194 201,863 |
----------------------------------------
</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.
2 Sources: A.C. Nielsen. Cable households in Puerto Rico per our
station's General Manager and total market television and population
numbers are per Strategic Research. Figures represent total cable and
television households and total population 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 where the Company has more than one
station.
3 The Company intends to sell its interest in this station; it is not
scheduled to air PAX TV.
4 Pending acquisition.
5 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.
6 Affiliate station; the Company has an option to acquire, or first
right of refusal upon a proposed sale of, the station.
7 80% ownership interest.
8 Station is currently under construction or not operating
commercially.
9 49% ownership interest with an option for the remaining 51%.
10 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.
11 The Company has a contract to exchange this station for station KUPX,
channel 16, in Salt Lake City.
12 A PAX TV affiliate.
13 90% ownership interest.
14 50% ownership interest.
15 Additional markets served by an out-of-market station.
16 A Company affiliate, not scheduled to air PAX TV.
17 Company stations not scheduled to air PAX TV.
13
<PAGE> 14
PURCHASES OF BROADCAST PROPERTIES:
During April 1998, the Company contracted with Roberts Broadcasting of Salt Lake
City to exchange its interest in Channel 30 serving the Salt Lake City, Utah
market for Channel 16 also serving the Salt Lake City, Utah market. The Company
intends to account for this like kind exchange of television stations at book
value with no gain or loss being recognized on the transaction. This transaction
is pending regulatory approval.
During May 1998, the Company completed the acquisition of WPXU-TV (formerly
WFHL-TV) serving the Champaign, Illinois market for $9,250,000.
During June 1998, the Company completed the purchase of KPXG-TV (formerly
KBSP-TV) serving the Portland, Oregon market for $30,000,000. The Company also
completed the purchase of a 90% interest in WPXP-TV serving the West Palm Beach,
Florida market for approximately $16,635,000.
SALES OF BROADCAST PROPERTIES:
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, during May 1998, the Company
sold WPXE-TV to DP Media, Inc. for $6,000,000 and, in connection therewith,
entered into a long-term affiliation agreement pursuant to which WPXE-TV will
continue to air the Company's programming. The Company includes revenues from
the sale of WPXE-TV airtime, sales related expenses and affiliate fees in its
consolidated financial statements. The Company realized a pre-tax gain of
approximately $680,000 on this sale.
During June 1998, the Company sold its interest in television station WNGM-TV
serving the Atlanta, GA market for $50,000,000. Approximately $11,000,000 of the
consideration was paid to Whitehead Media, Inc. for exercise of the Company's
option to acquire WNGM-TV. The Company realized a pre-tax gain of approximately
$37 million on this sale.
14
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected financial
information as a percentage of revenues.
Statements of Operations
<TABLE>
<CAPTION>
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
1998 1997 1998 1997
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Direct 16.1 17.9 15.9 18.2
Programming 6.4 5.2 8.1 5.3
Sales 11.5 3.3 18.7 2.8
Promotion 6.2 1.0 9.4 1.3
Technical 10.1 10.9 10.8 10.9
General and administrative 33.2 31.9 38.4 30.3
Trade and barter 0.2 0.1 0.2 0.2
Time brokerage and affiliation agreement fees 15.5 6.4 10.1 7.4
Option and warrant plans compensation 8.2 3.8 15.7 3.9
Depreciation and amortization 29.6 23.9 34.3 26.2
------- ------ ------- -------
Total operating expenses 137.0 104.4 161.6 106.5
------- ------ ------- -------
Operating loss (37.0) (4.4) (61.6) (6.5)
Other income (expense):
Interest expense (33.7) (47.8) (34.2) (49.6)
Interest income 13.9 7.2 8.1 7.4
Other expense, net (0.8) (1.7) (0.8) (4.1)
Gain on sale of television station 83.2 -- 122.7 --
Equity in loss of unconsolidated investment (5.1) -- (6.3) --
------- ------ ------- -------
Income (loss) from continuing operations before
income tax provision 20.5 (46.7) 27.9 (52.8)
Income tax provision (7.8) -- (10.8) --
------- ------ ------- -------
Income (loss) from continuing operations before
extraordinary item 12.7 (46.7) 17.2 (52.8)
======= ====== ======= =======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Consolidated revenues for the six months ended June 30, 1998 increased 66% (or
$24.6 million) to $62.0 million. This increase was primarily due to television
station acquisitions and new time brokerage operations. WPXN-TV in New York has
been operated by the Company since June 30, 1997 (acquired in February 1998) and
accounted for $13.7 million of the increase. Same station television revenues
increased $4.4 million or 13%.
Operating expenses for the six months ended June 30, 1998 increased 117% (or
$45.9 million) to $85.0 million. The increase was primarily due to higher direct
expenses such as commissions which rise in proportion to revenues ($3.3
million), other non-direct costs, which were primarily due to operating new
television stations and for costs incurred in connection with the launch of PAX
TV ($22.0 million), higher depreciation and amortization, primarily related to
assets acquired ($9.4 million), increased time brokerage and affiliation
agreement fees, primarily related to new time brokerage operations ($7.3
million), of which $3.6 million is attributable to WPXN-TV and increased option
and warrant plans compensation ($3.7 million).
Operating cash flow for the six months ended June 30, 1998 decreased 9% (or $1.0
million) to $10.1 million. The decrease in operating cash flow was primarily a
result of costs incurred in connection with the launch of PAX TV.
For purposes of this report, "operating cash flow" is defined as net income
excluding non-cash items, non-recurring items including terminated operations,
discontinued operations, 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 reflected in
the Consolidated Financial Statements as it is not a measure of financial
performance under generally accepted accounting principles.
Interest expense for the six months ended June 30, 1998 increased to $20.9
million or 16%, primarily due to a greater level of senior debt throughout the
period and higher interest rates. At June 30, 1998, total long-term debt and
senior subordinated notes were $352.7 million, compared with the balance of
$336.5 million outstanding a year prior.
15
<PAGE> 16
Interest income for the six months ended June 30, 1998 increased to $8.7 million
or 221%, primarily due to higher levels of cash and cash equivalents and cash
held resulting from segment asset sales and the preferred stock sales, invested
throughout the period.
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Consolidated revenues for the three months ended June 30, 1998 increased 64% (or
$11.8 million) to $30.4 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
$6.8 million of the increase. Same station television revenues increased $2.1
million or 12%.
Operating expenses for the three months ended June 30, 1998 increased 149% (or
$29.3 million) to $49.1 million. The increase was primarily due to higher direct
expenses such as commissions which rise in proportion to revenues ($1.5
million), other non-direct costs, which were primarily due to operating new
television stations and for costs incurred in connection with the launch of PAX
TV ($16.5 million), higher depreciation and amortization, primarily related to
assets acquired ($5.6 million), increased time brokerage and affiliation
agreement fees, primarily related to new time brokerage operations ($1.7
million) and increased option and warrant plans compensation ($4.1 million).
Operating cash flow for the three months ended June 30, 1998 decreased 108% (or
$6.2 million) to a deficit of $448,000. The decrease in operating cash flow was
primarily a result of costs incurred in connection with the launch of PAX TV.
Interest expense for the three months ended June 30, 1998 increased to $10.4
million or 13%, primarily due to a greater level of senior debt throughout the
period and higher interest rates. At June 30, 1998, total long-term debt and
senior subordinated notes were $352.7 million, compared with the balance of
$336.5 million outstanding a year prior.
Interest income for the three months ended June 30, 1998 increased to $2.5
million or 79%, primarily due to higher levels of cash and cash equivalents
resulting from the preferred stock sales invested throughout the period.
DISCONTINUED OPERATIONS
During 1997, the Company sold its interest in its Paxson Network-Affiliated
Television and Paxson Radio segments. Income and (losses) from these segments in
the six and three month periods ended June 30, 1997, net of tax, were $(631,000)
and $104,000, respectively. Paxson Network-Affiliated Television incurred net
losses of approximately $(411,000) and $(421,000) and Paxson Radio generated net
income (losses) of approximately $(220,000) and $525,000 in the six and three
month periods ended June 30, 1997, respectively. Paxson Network-Affiliated
Television and Paxson Radio generally experienced their lowest revenue in the
first and second quarters of the year.
Income (loss) from operations of these segments in the six and three month
periods ended June 30, 1997 was approximately $(71,000) and $172,000,
respectively. Paxson Network-Affiliated Television incurred loss from operations
of approximately $(385,000) and $(534,000) and Paxson Radio generated income
from operations of $456,000 and $362,000 in the six and three month periods
ended June 30, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
In June 1998, the Company sold $200 million of 13 1/4% Cumulative Junior
Exchangeable Preferred Stock and $75 million of 9 3/4% Series A Convertible
Preferred Stock, together with five year warrants to purchase 240,000 shares of
Class A Common Stock at an exercise price of $16 per share. Net proceeds to the
Company after transaction costs were approximately $261 million.
The Company's working capital at June 30, 1998 and December 31, 1997 was $318.8
million and $86.9 million, respectively, and the ratio of current assets to
current liabilities was 11.5:1 and 5.29:1 on such dates, respectively. Working
capital increased primarily due to the preferred stock sales previously
discussed elsewhere herein.
Cash (used in) provided by operations of approximately $(33.6) and $1.7 million
for the six months ended June 30, 1998 and 1997, respectively, primarily
reflects the increase in operating costs incurred in connection with the launch
of PAX TV and the increase in related 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, the use of cash in
investing activities for the acquisitions and investments discussed above, and
purchases of equipment for these and existing properties. Cash provided by
financing activities primarily reflects the proceeds from the preferred stock
sales, the refinancing of the Company's senior credit facility and the exercise
of common stock options net of debt repayments. Non-cash activity relates to
option plan compensation, stock issued for the acquisition of KPXR-TV,
reciprocal trade and barter advertising revenue and expense and accretion of
discount on senior subordinated notes, as well as dividends and accretion on the
redeemable preferred stock.
16
<PAGE> 17
The Company's primary capital requirements are for the acquisition of
broadcasting properties and related capital expenditures, syndicated programming
rights payments, cable carriage payments, interest payments on indebtedness and
working capital. The Notes require semi-annual interest payments at a fixed
rate.
In May 1998 the Company refinanced 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% (8.45% at June 30, 1998), 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. In conjunction with this
facility, the Company has placed $22.4 million in escrow as of June 30, 1998
($17 million at December 31, 1997) in order to prefund approximately eighteen
months of interest.
The Company believes that 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 announced acquisitions, capital
expenditures on existing and acquired properties, cable carriage and promotion
payments, syndicated program rights fees, debt service obligations and the
Company's working capital requirements. To the extent that the Company pursues
future acquisitions or requires additional working capital as a result of higher
than expected network operating costs and/or lower than expected advertising
revenues, 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, its
liquidity could become insufficient on a short term basis, and it could have
insufficient resources to repay indebtedness under the Senior Credit Facility,
the Notes or other credit instruments when due or to make required dividend
payments on its preferred stock.
PROGRAMMING COMMITMENTS
In connection with the launch of PAX TV, the Company has entered into
programming contracts to air syndicated television shows as well as theatrical
and made-for-television movies from 1998 to 2005 that are not currently
available for broadcast and therefore not included in the consolidated financial
statements. As of June 30, 1998, such programming contracts require collective
payments by the Company of approximately $341.7 million over such periods as
follows:
1998 (July - December) $ 33,528,140
1999 89,100,997
2000 80,599,465
2001 66,684,239
2002 32,352,952
Thereafter 39,418,667
------------
$341,684,460
============
The Company had $59,747,090 and $36,682,500 of prepaid broadcast rights recorded
in Other Assets as of June 30, 1998 and December 31, 1997, respectively. The
Company has also committed to purchase at similar terms additional future
episodes of these programs should they be made available. The Company continues
to evaluate additional programming purchases.
CABLE MULTIPLE SYSTEM OPERATORS COMMITMENTS
The Company has entered into agreements with MSO's whereby the Company will
receive cable carriage of its PAX TV programming on certain cable systems in
markets not currently served by the Company's broadcast television station
group, additional cable carriage in certain existing markets, advance carriage
in certain markets where the Company will acquire and/or construct a television
station pursuant to a construction permit, and significant cross-advertising
airtime on other cable channels. The Company will pay certain fees based on the
number of cable television subscribers actually reached and will provide the
MSO's certain amounts of local advertising airtime during PAX TV programming.
This additional cable distribution will provide PAX TV with incremental coverage
to achieve a presence in every one of the top 50 U.S. Television markets. The
Company estimates that these agreements will require payments by the Company of
between $50 and $60 million. These payments will be made over five years with
approximately 34% in 1998, 30% in 1999, 23% in 2000, 11% in 2001 and 2% in 2002.
17
<PAGE> 18
INVESTMENT COMMITMENTS
The Company has agreements to purchase significant assets of, or to enter into
time brokerage and financing arrangements with respect to, the following
properties, which are subject to various conditions, including the receipt of
regulatory approvals. The completion of each of the investments discussed below
is subject to a variety of factors and to the satisfaction of various
conditions, and there can be no assurance that any of such investments will be
completed.
<TABLE>
<CAPTION>
Station Market Served * Purchase Price
- -------------------------------------------------------------------------------------
<S> <C> <C>
WCPX-TV Chicago, IL (1) $135,000,000
WPXX/WPXL Memphis, TN/New Orleans, LA (2) 50,000,000
WKPX-TV Pittsburgh, PA 35,000,000
KSPX-TV Sacramento, CA (3) 17,000,000
KPXL-TV San Antonio, TX 13,500,000
KPPX-TV Phoenix, AZ (4) 12,000,000
WKRP-TV Charleston, WV (4) 8,070,000
WAOM-TV Lexington, KY 8,000,000
WAUP-TV Syracuse. MY (4) 6,750,000
Channel 61 Mobile, AL (5) 6,750,000
WQPX-TV Wilkes-Barre, Scranton, PA (4) 6,160,000
KGPX-TV Spokane, WA (5) 5,677,000
KPXO-TV Honolulu, HI 5,000,000
WPXK-TV Knoxville, TN 5,000,000
Channel 14 Albuquerque, NM (5) 4,650,000
WPXO-TV Shreveport, LA (5) 3,938,000
Channel 67 Davenport, IA (5) 3,900,000
Channel 39 Des Moines, IA (5) 3,750,000
KXGR-TV Tucson, AZ 3,700,000
WBDJ-TV Portland, ME (4)(5) 3,550,000
Channel 38 Greenville, NC 3,550,000
WAQF-TV Buffalo, NY (6) 3,000,000
KYPX-TV Little Rock, AR (4) 2,850,000
Channel 51 Jackson, MS (5) 2,250,000
KWOK-TV San Francisco, CA (1) 2,215,000
WAZW-TV Wausau, WI 2,000,000
KPXK-TV Odessa, TX (4)(5) 1,306,000
Channel 15 Christiansted, Virgin Islands (5) 300,000
------------
Total Station Acquisitions 354,866,000
Expected station capital expenditures 61,069,000
Less: advances and escrow deposits (85,175,000)
------------
Net investments and related capital $330,760,000
============
</TABLE>
- ---------
* Each station is licensed by the FCC to serve a specific community,
which is included in the listed market.
(1) 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.
(2) The Company has a $4 million escrow deposit and has paid $10 million of
the purchase price attributable to the buyout of the existing
affiliation agreement. The remaining $36 million of the purchase price
will be paid no sooner than the year 2000.
(3) The Company has loaned an aggregate of $8,500,000 to the station owner
and began operating the station pursuant to a time brokerage agreement
on October 1, 1996, pending completion of the acquisition of the
station. The loan will be applied to the purchase price at the date of
closing.
(4) The Company has acquired a 49% interest in this property.
(5) The Company participated in FCC settlements and thereby acquired a
construction permit for this property.
(6) Includes the purchase of two low power television stations, W69CS and
W63BM.
18
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In May 1998, a complaint was filed against certain of the Company's officers by
a purported shareholder of the Company alleging breach of fiduciary duty by the
directors in approving payment of certain bonuses to members of the Company's
management in connection with the 1997 sale of the Company's Paxson Radio
Segment and seeking damages on behalf of the Company. The Company believes the
suit to be without merit and believes that the suit will not have a material
adverse effect on the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 10, 1998, the Company issued and sold to CIBC Oppenheimer Corp. 20,000
shares ($200 million aggregate liquidation preference) of 13 1/4% Cumulative
Junior Exchangeable Preferred Stock, 6,500 shares ($65 million aggregate
liquidation preference) of 9 3/4% Series A Convertible Preferred Stock and five
year warrants entitling the holders to purchase 208,000 shares of Class A Common
Stock at an exercise price of $16 per share for gross proceeds of $265 million.
The Series A Convertible Preferred Stock is convertible into shares of Class A
Common Stock at a price of $16.00 per share. The Securities were issued without
registration under the Securities Act of 1933 pursuant to Rule 144A thereunder.
On June 10, 1998, the Company issued and sold to an affiliate of William E.
Simon, Jr., Vice Chairman of the board of directors of the Company, 1,000 shares
($10 million aggregate liquidation preference) of 9 3/4% Series A Convertible
Preferred Stock and five year warrants to purchase 32,000 shares of Class A
Common Stock at an exercise price of $16.00 per share, for gross proceeds of $10
million. The Series A Convertible Preferred Stock is convertible into shares of
Class A Common Stock at a price of $16.00 per share. The securities were issued
without registration under the Securities Act of 1933 in reliance upon the
exemption from registration provided in Section 4(2) of the Act for transactions
not involving a public offering.
On June 10, 1998, in connection with Mr. Simon's election as Vice Chairman of
the board of directors of the Company and in consideration of services rendered
and to be rendered, the Company issued to an affiliate of Mr. Simon five year
warrants entitling the holder to purchase 155,500 shares of Class A Common Stock
at an exercise price of $16.00 per share. 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, at such time as the trading price of the Class A
Common Stock averages $30 or more over any ten consecutive trading days. The
Company has recorded $622,000 of warrant expense in connection with this
issuance. The warrants were issued without registration under the Securities Act
of 1933 in reliance upon the exemption from registration provided in Section
4(2) of the Act for transactions not involving a public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on April 17, 1998. At the
meeting, all five of the Company's Existing directors were re-elected for one
year terms. The appointment of PricewaterhouseCoopers LLP as the Company's
independent certified public accountants for 1998 was also ratified.
The number of votes cast for, cast against and withheld, as applicable, with
respect to each of the matters submitted for a vote at the meeting, were set
forth below:
Election of Director For Withheld
Lowell W. Paxson 128,655,141 67,086
James B. Bocock 128,651,451 70,776
Arthur D. Tek 128,645,364 76,863
Bruce L. Burnham 128,645,364 76,863
James L. Greenwald 128,554,681 167,546
For Against Withheld
Appointment of Accountants 128,646,110 24,867 51,270
There were no broker non-votes with respect to any of the matters submitted for
a vote at the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1.1 Certificate of Incorporation of the Company (2)
3.1.2 Bylaws of the Company (3)
19
<PAGE> 20
3.1.3 Certificate of Designation of the Company's Junior Cumulative
Compounding Redeemable Preferred Stock (2)
3.1.4 Certificate of Designations of the Company's 12 1/2%
Cumulative Exchangeable Preferred Stock (4)
3.1.5 Certificate Designation of the Company's original 13 1/4%
Cumulative Junior Exchangeable Preferred Stock (5)
3.1.6 Certificate of Designation of the Company's 9 3/4% Series A
Convertible Preferred Stock (5)
3.1.7 Certificate of Designation of the Company's new 13 1/4%
Cumulative Junior Exchangeable Preferred Stock (5)
4.1 Form of Stock Certificate of Class A Common Stock (1)
10.197 Employment Agreement, dated as of June 11, 1998, by and
between the Company and Jeffrey Sagansky (5)
10.198 Employment Agreement, dated as of June 11, 1998, by and
between the Company and James B. Bocock (5)
10.199 Employment Agreement, dated as of June 11, 1998, by and
between the Company and Dean M. Goodman (5)
10.200 Employment Agreement, dated as of June 11, 1998, by and
between the Company and J. Jay Hoker (5)
10.201 Employment Agreement, dated as of June 11, 1998, by and
between the Company and Arthur D. Tek (5)
10.202 Paxson Communications Corporation 1998 Stock Incentive
Plan (5)
27 Financial Data Schedule (for SEC use only)
- ---------------
(1) Filed with the Company's Registration Statement on Form S-4, filed
September 26, 1994, Registration No. 33-84416 and incorporated herein
by reference.
(2) Filed with the Company's Annual Report on Form 10-K, for the year ended
December 31, 1994 and incorporated herein by reference.
(3) Filed with the Company's Registration Statement on Form S-1, as
amended, filed January 26, 1996, Registration No. 333-473 and
incorporated herein by reference.
(4) Filed with the Company's Registration Statement on Form S-3, as
amended, filed August 15, 1996, Registration No. 333-10267 and
incorporated herein by reference.
(5) Filed with the Company's Registration Statement on Form S-4, as
amended, filed July 23, 1998, Registration No. 333-59641 and
incorporated herein by reference.
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated June 5, 1998, under Item 5. Other Events in
connection with the Company's offering of $275 million of preferred stock.
20
<PAGE> 21
PAXSON COMMUNICATIONS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAXSON COMMUNICATIONS CORPORATION
Date: August 5, 1998 By: /s/ Jeffrey Sagansky
-------------------------------------------
Jeffrey Sagansky
Chief Executive Officer, President
and Director (Principal Executive Officer)
Date: August 5, 1998 By: /s/ Arthur D. Tek
-------------------------------------------
Arthur D. Tek
Vice President, Chief Financial Officer
and Director (Principal Financial Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 338,147,989
<SECURITIES> 0
<RECEIVABLES> 8,278,004
<ALLOWANCES> 1,529,459
<INVENTORY> 0
<CURRENT-ASSETS> 349,075,586
<PP&E> 187,279,560
<DEPRECIATION> 33,808,787
<TOTAL-ASSETS> 1,351,074,677
<CURRENT-LIABILITIES> 30,250,314
<BONDS> 228,125,971
487,955,485
0
<COMMON> 60,278
<OTHER-SE> 371,063,443
<TOTAL-LIABILITY-AND-EQUITY> 1,351,074,677
<SALES> 62,040,783
<TOTAL-REVENUES> 62,040,783
<CGS> 0
<TOTAL-COSTS> 85,010,982
<OTHER-EXPENSES> 56,547,104
<LOSS-PROVISION> 1,353,734
<INTEREST-EXPENSE> 20,885,975
<INCOME-PRETAX> 12,690,930
<INCOME-TAX> 4,823,000
<INCOME-CONTINUING> 7,867,930
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,560,902)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
