<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 MARCH 31, 1999
---------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________
Commission File Number 1-13452
PAXSON COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-3212788
------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
601 CLEARWATER PARK ROAD
WEST PALM BEACH, FLORIDA 33401
---------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 659-4122
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
proceeding 12 months (or for shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 1999:
CLASS OF STOCK NUMBER OF SHARES
-------------- ----------------
COMMON STOCK-CLASS A, $0.001 PAR VALUE PER SHARE 52,867,715
COMMON STOCK-CLASS B, $0.001 PAR VALUE PER SHARE 8,311,639
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PAXSON COMMUNICATIONS CORPORATION
INDEX
<TABLE>
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PAGE
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Part I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statement of Changes in
Common Stockholders' Equity 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Signatures 17
</TABLE>
2
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 45,394 $ 49,440
Restricted cash and short-term investments ...................................... 15,840 18,096
Accounts receivable, less allowance for doubtful accounts
of $4,892 and $3,953 respectively ............................................ 26,242 21,391
Program rights .................................................................. 75,582 81,867
Prepaid expenses and other current assets ....................................... 3,504 2,947
----------- -----------
Total current assets ...................................................... 166,562 173,741
Property and equipment, net ....................................................... 178,069 178,975
Intangible assets, net ............................................................ 879,269 827,973
Investments in broadcast properties ............................................... 65,054 74,683
Program rights, net ............................................................... 195,312 214,331
Investment in cable network ....................................................... -- 42,531
Other assets, net ................................................................. 27,851 30,552
----------- -----------
Total assets ............................................................... $ 1,512,117 $ 1,542,786
=========== ===========
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........................................ $ 15,109 $ 25,738
Accrued interest ................................................................ 15,087 8,391
Obligations of cable distribution rights ........................................ 30,562 50,914
Obligation for satellite distribution ........................................... 1,500 --
Obligations for program rights .................................................. 82,146 84,820
Income taxes payable ............................................................ 1,256 1,542
Current portion of long-term debt ............................................... 547 529
----------- -----------
Total current liabilities .................................................. 146,207 171,934
Deferred income taxes ........................................................... 54,731 58,109
Obligations for cable distribution rights, net of current portion ............... 15,815 15,400
Obligation for satellite distribution, net of current portion ................... 13,500 --
Obligations for program rights, net of current portion .......................... 137,146 154,800
Long-term debt .................................................................. 152,382 145,164
Senior subordinated notes, net .................................................. 228,399 228,305
Mandatorily redeemable preferred stock .......................................... 538,697 521,401
Class A common stock, $0.001 par value; one vote per share; 150,000,000 shares
authorized, 52,667,715 and 52,608,765 shares issued and outstanding ............ 53 53
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 8
Class A & B common stock warrants ............................................... 1,582 1,582
Stock subscription notes receivable ............................................. (2,493) (2,813)
Additional paid-in capital ...................................................... 320,635 318,935
Deferred option plan compensation ............................................... (16,051) (16,728)
Accumulated deficit ............................................................. (78,494) (53,364)
Commitments and contingencies ................................................... -- --
----------- -----------
Total liabilities, mandatorily redeemable preferred stock and
common stockholders' equity ............................................... $ 1,512,117 $ 1,542,786
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Advertising revenues .................................................... $ 51,779 $ 31,665
------------ ------------
Expenses:
Operating ............................................................. 30,465 4,516
Selling, general and administrative ................................... 36,869 16,574
Time brokerage and affiliation fees ................................... 3,557 6,588
Stock-based compensation .............................................. 2,147 307
Depreciation and amortization ......................................... 18,626 7,950
------------ ------------
91,664 35,935
------------ ------------
Operating loss .......................................................... (39,885) (4,270)
Other income (expense):
Interest expense ...................................................... (11,019) (10,506)
Interest income ....................................................... 1,134 6,180
Other expenses, net ................................................... (339) (247)
Gain on sale of Travel Channel and television stations ................ 40,792 14,331
Equity in loss of unconsolidated investment ........................... (2,260) (1,290)
------------ ------------
(Loss) income before income taxes ....................................... (11,577) 4,198
Income tax benefit (provision) .......................................... 3,744 (1,556)
------------ ------------
Net (loss) income ....................................................... (7,833) 2,642
Dividends and accretion on redeemable preferred stock ................... (17,297) (7,082)
------------ ------------
Net loss attributable to common stock ................................... $ (25,130) $ (4,440)
============ ============
Basic and diluted loss per share:
Loss from operations .................................................. $ (0.41) $ (0.07)
------------ ------------
Net loss .............................................................. $ (0.41) $ (0.07)
============ ============
Weighted average shares outstanding ................................... 60,954,281 59,588,768
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCK RETAINED
COMMON STOCK CLASS A & B SUBSCRIPTION ADDITIONAL DEFERRED EARNINGS
------------------ COMMON STOCK NOTES PAID-IN OPTION PLAN (ACCUMULATED
CLASS A CLASS B WARRANTS RECEIVABLE CAPITAL COMPENSATION DEFICIT)
-------- -------- ------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997.............. $51 $ 8 $ 2,316 $ (2,813) $ 285,796 $ (2,205) $ 84,591
Stock issued for acquisitions............. 1 5,249
Issuance of common stock warrants......... 1,582
Exercise of Class A and B common
stock warrants.......................... 1 (2,316) 2,315
Deferred option plan compensation......... 24,314 (24,314)
Stock based compensation.................. 9,791
Stock options exercised................... 1,261
Dividends on redeemable and convertible
preferred stock........................ (47,399)
Accretion on redeemable preferred stock... (2,268)
Net loss.................................. (88,288)
------ ------ ----------- --------- --------- ----------- ----------
Balance at December 31, 1998.............. 53 8 1,582 (2,813) 318,935 (16,728) (53,364)
Deferred option plan compensation......... 1,470 (1,470)
Stock-based compensation.................. 2,147
Stock options exercised................... 230
Repayment of stock subscription receivable
320
Dividends on redeemable and convertible
preferred stock........................ (16,542)
Accretion on redeemable preferred stock.. (755)
Net loss.................................. (7,833)
------ ------ ----------- --------- --------- ----------- ----------
Balance at March 31, 1999 (unaudited).... $ $53 $ 8 $ 1,582 $ (2,493) $ 320,635 $ (16,051) $ (78,494)
====== ====== =========== ========= ========= =========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ........................................................... $ (7,833) $ 2,642
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization ............................................. 18,626 7,950
Stock-based compensation .................................................. 2,147 307
Program rights amortization ............................................... 23,136 --
Payments for cable distribution rights .................................... (20,352) --
Program rights payments and deposits ...................................... (18,160) (7,014)
Provision for doubtful accounts ........................................... 524 576
Deferred income tax (benefit) provision ................................... (4,353) 1,556
Loss on sale or disposal of assets ........................................ 148 82
Equity in loss of unconsolidated investment ............................... 2,260 1,290
Gain on sale of Travel Channel and television stations .................... (40,792) (14,330)
Changes in assets and liabilities:
Decrease in restricted cash ............................................. 2,256 --
Increase in accounts receivable ......................................... (5,376) (687)
Increase in prepaid expenses and other current assets ................... (557) (576)
Decrease in other assets ................................................ 2,242 374
(Decrease) increase in accounts payable and accrued liabilities ......... (10,655) 2,053
Increase in accrued interest ............................................ 6,696 5,397
Decrease in current income taxes payable ................................ (286) --
--------- ---------
Net cash used in operating activities ................................. (50,329) (380)
--------- ---------
Cash flows from investing activities:
Acquisitions of broadcasting properties ................................... (17,730) (358,670)
Decrease (increase) in investments in broadcast properties ................ 4,466 (34,553)
Decrease in deposits on broadcast properties .............................. 1,942 22,854
Decrease in cash held by qualified intermediary ........................... -- 418,950
Purchases of property and equipment ....................................... (7,416) (14,147)
Distribution received from unconsolidated investment ...................... -- 2,133
Proceeds from sales of Travel Channel and television stations ............. 57,234 18,263
--------- ---------
Net cash provided by investing activities ............................. 38,496 54,830
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ................................... 7,369 --
Repayments of long-term debt ............................................... (132) (125)
Proceeds from exercise of common stock options, net......................... 230 320
Repayments of stock subscription notes receivable .......................... 320 --
--------- ---------
Net cash provided by financing activities ............................. 7,787 195
--------- ---------
Increase (decrease) in cash and cash equivalents .............................. (4,046) 54,645
Cash and cash equivalents at beginning of period .............................. 49,440 82,641
--------- ---------
Cash and cash equivalents at end of period .................................... $ 45,394 $ 137,286
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
6
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------- ------
1999 1998
--------- ------
(Unaudited)
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Supplemental disclosures of cash flow information:
Cash paid for interest ................................... $ 2,976 $4,599
========= ======
Cash paid for income taxes ............................... $ 896 $ --
========= ======
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes ....... $ 94 $ 83
========= ======
Issuance of common stock for acquisition ................. $ -- $5,250
========= ======
Dividends accrued on redeemable preferred stock .......... $ 16,542 $6,745
========= ======
Discount accretion on redeemable securities .............. $ 755 $ 338
========= ======
Satellite distribution.................................... $ 15,000 $ --
========= ======
Sale of KWOK.............................................. $ 30,000 $ --
========= ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
7
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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, 1999 and
for the three month periods ended March 31, 1999 and 1998, 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, 1998. The composition of accounts has not changed
significantly since December 31, 1998.
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 1999 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,
1998, and the definitive proxy statement for the annual meeting of stockholders
held April 30, 1999, all of which were filed with the United States Securities
and Exchange Commission.
2. GAIN ON SALE OF TRAVEL CHANNEL AND TELEVISION STATION
In February 1999, the Company sold its 30% interest in The Travel Channel,
L.L.C., a joint venture with Discovery Communications, Inc., for aggregate
consideration of approximately $55 million and realized a pre-tax gain of
approximately $17 million. Of the consideration received, approximately $20.1
million was utilized to pay current obligations for cable distribution rights.
The results of operations of The Travel Channel, L.L.C. have been included in
the Company's March 31, 1999 consolidated statement of operations using the
equity method of accounting through the date of sale.
In February 1999, the Company completed its acquisition of WCPX in Chicago by
transferring its interest in KWOK in San Francisco as partial consideration for
WCPX. In connection with the transfer of ownership of KWOK, the Company
recognized a pre-tax gain of approximately $23.8 million.
3. SATELLITE DISTRIBUTION RIGHTS
During January 1999, the Company entered into an agreement with a satellite
television provider for carriage on its system in exchange for advertising
credits on PAX TV equaling $15 million. The advertising credit is on an
available time basis at the then prevailing rates not to exceed $7.5 million per
year. Satellite distribution rights are amortized over seven years using the
straight line method. An estimate of the advertising credit which will be
utilized within the next year is included in current liabilities.
4. REDEEMABLE PREFERRED STOCK
In March 1999, the Company paid dividends of approximately $1.9 million by the
issuance of 193 additional shares of Convertible Preferred Stock 9 3/4%. At
March 31, 1999, there were no accrued dividends on the Convertible Preferred
Stock. At March 31, 1999, the Company had authorized 17,500 shares of $0.001 par
value Convertible Preferred Stock of which 8,106 shares were issued and
outstanding.
During the three months ended March 31, 1999, the Company accrued dividends of
approximately $1.6 million, $6.0 million and $7.0 million on, respectively, the
Junior Preferred Stock 12%, Exchangeable Preferred Stock 12 1/2% anD Junior
Exchangeable Preferred Stock 13 1/4%. Accrued preferred stock dividends as of
March 31, 1999 aggregated approximately $21.4 million, $10.0 million and $10.3
million on, respectively, the Junior Preferred Stock 12%, Exchangeable Preferred
Stock 12 1/2% and Junior Exchangeable Preferred Stock 13 1/4%. There were no
changes to The shares authorized, issued and outstanding on the Junior Preferred
Stock 12%, Exchangeable Preferred Stock 12 1/2% and Junior Exchangeable
Preferred Stock 13 1/4% during the three months ended March 31, 1999.
8
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In April 1999, the Company paid dividends of approximately $12 million by the
issuance of 12,050 additional shares of Exchangeable Preferred Stock 12 1/2%,
subsequent to which there were 204,847 shares issued and outstanding.
5. NOTES RECEIVABLE FROM THE SALE OF STOCK
During December 1996, the Company approved a program under which it extended
loans to certain members of management for the purchase of Company common stock
in the open market by those individuals. The loans are full recourse promissory
notes bearing interest at 5.75% per annum and are collateralized by the shares
of stock purchased with the loan proceeds. All of these loans matured in March
1999. The Company is extending the maturity of certain loans under this program
until March 31, 2001. During March 1999, approximately $362,000 of principal and
interest was repaid to the Company under this program. The outstanding principal
balance on such loans was approximately $2.5 million at March 31, 1999 and is
reflected as stock subscription notes receivable in the accompanying balance
sheet. During April 1999, approximately $148,000 of principal and interest
was repaid to the Company under this program.
6. PER SHARE DATA
Basic and diluted loss per share from continuing operations was computed by
dividing the loss from continuing operations less dividends and accretion on
redeemable preferred stock by the weighted average number of common shares
outstanding during the period. Because of per share losses from continuing
operations, the Company's presentation of diluted earnings per share is the same
as that of basic earnings per share. At March 31,1999 and 1998, respectively,
there were outstanding 10,244,152 and 3,586,911 stock options, 395,500 and
457,238 Class A and B common stock warrants, and at March 31, 1999, 5,066,250
shares of Class A common stock reserved for possible future issuance in
connection with the Series A Convertible Preferred Stock. These securities that
could potentially dilute earnings per share in the future were not included in
the computation of diluted earnings per share because to do so would have been
antidilutive for the periods presented.
9
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's principal business is the ownership and operation of the largest
broadcast television station group in the United States. On August 31, 1998, the
Company launched PAX TV, the programming that the Company provides to its owned,
operated and affiliated television stations and to certain cable system
affiliates and satellite providers. PAX TV programming consists of
family-friendly traditional entertainment television programs that have had or
are having successful first runs on television, as well as original programs.
Prior to the launch of PAX TV, the Company aired long form paid programming
consisting primarily of infomercials on its television distribution system. The
Company's television stations continue to carry infomercials at significantly
reduced inventory levels. Certain of the Company's stations broadcasting PAX TV
were and continue to be operated pursuant to time brokerage and affiliation
agreements. The Company's consolidated operating revenues and expenses include
the operating results of time brokered stations. In February 1999, the Company
sold its 30% interest in the Travel Channel, L.L.C., a cable television joint
venture with Discovery Communications, Inc. The Company's interest in the
operating results of the Travel Channel have been included in the consolidated
financial statements using the equity method of accounting through the date of
sale.
The Company's operating data throughout the periods discussed have been affected
significantly by the timing and mix of television station acquisitions
throughout such periods and the costs incurred to launch and support PAX TV. The
Company's costs have decreased from 1998 post-launch levels but will remain
significantly higher than prior to the launch of PAX TV. The Company's primary
operating costs include commissions on revenues, employee salaries,
administrative expenses and payments with respect to syndicated program rights,
cable distribution, ratings services and promotional advertising.
The Company's business is subject to various risks and uncertainties which may
significantly reduce revenues and increase operating expenses. For example, a
reduction in expenditures by television advertisers in the Company's markets may
result in lower revenues. The Company may be unable to reduce expenses,
including syndicated program rights fees and certain variable expenses, in an
amount sufficient in the short term to offset lost revenues caused by poor
market conditions. The broadcasting industry continues to undergo rapid
technological change which may increase competition within the Company's markets
as new delivery systems, such as direct broadcast satellite and computer
networks, attract customers. The changing nature of audience tastes and viewing
habits may affect the continued attractiveness of the Company's broadcasting
stations to advertisers upon whom the Company is dependent for its revenue.
The Company believes that its group of television stations comprises a valuable
national broadcasting distribution infrastructure. PAX TV reaches US television
households through a distribution system comprised of broadcast television
stations, cable television systems in markets not served by a PAX TV station and
nationwide through satellite television providers. According to Nielsen
Television Index ("NTI"), as of February 1999, the PAX TV network reached 74% of
US television households through such broadcast, cable and satellite
distribution. Upon completion of pending transactions, stations broadcasting PAX
TV will include 116 broadcast television stations consisting of 71 stations
which are owned and operated by the Company or in which the Company has an
economic interest and 45 non-owned or operated PAX TV affiliates. The stations
and PAX TV affiliates which the Company will own, operate or have an economic
interest in will reach all of the top 20 markets and 42 of the top 50 markets.
Additionally, the Company has entered into agreements with multiple cable system
operators whereby the Company receives carriage of its PAX TV programming in
markets not currently served by the Company's broadcast television station group
and has entered into nationwide distribution agreements with two satellite
television providers who carry PAX TV to their subscribers.
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",
"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
10
<PAGE> 11
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, 1998. The Company's launch of PAX TV entails certain additional
risks and uncertainties including those risks associated with the launch of a
new programming service, the ability to obtain desirable programming at a
financially feasible cost and the ability to profitably sell advertising spots
during such programming.
Preparation of financial statements 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. Actual results could
differ from those estimates.
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 THREE MONTHS
ENDED MARCH 31,
------- -------
1999 1998
------- -------
<S> <C> <C>
Advertising revenues ..................................................... 100.0% 100.0%
------- -------
Operating ................................................................ 58.8 14.3
Selling, general and administrative ...................................... 71.2 52.3
Time brokerage and affiliation fees ...................................... 6.9 20.8
Stock-based compensation ................................................. 4.1 1.0
Depreciation and amortization ............................................ 36.0 25.1
------- -------
Total operating expenses ................................................. 177.0 113.5
------- -------
Operating loss ........................................................... (77.0) (13.5)
Other income (expense):
Interest expense ......................................................... (21.3) (33.2)
Interest income .......................................................... 2.2 19.5
Other expenses, net ...................................................... (0.7) (0.8)
Gain on sale of Travel Channel and television stations ................... 78.8 45.3
Equity in loss of unconsolidated investment .............................. (4.3) (4.1)
------- -------
(Loss) income from operations before income tax benefit (provision)....... (22.3) 13.2
Income tax benefit (provision) ........................................... 7.2 (4.9)
------- -------
(Loss) income from operations ............................................ (15.1) 8.3
======= =======
</TABLE>
11
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THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Consolidated revenues for the three months ended March 31, 1999, increased 63%
(or $20.1 million) to $51.8 million. This increase was primarily due to the
launch of PAX TV.
Expenses from operations for the three months ended March 31, 1999, increased
155% (or $55.7 million) to $91.7 million. The increase was primarily due to
higher operating expenses, such as technical costs of $2.8 million and program
rights amortization of $23.1 million, increased selling, general and
administrative costs, such as commissions and bad debt provisions, of $2.7
million, increased promotion costs of $3.7 million related to the advertising of
PAX TV, other selling, general and administrative costs of $13.9 million, which
were higher primarily due to additional employees hired and regional sales
offices added, increased stock based compensation of $1.8 million and higher
depreciation and amortization of $10.7 million, primarily related to assets
acquired. The majority of these expense increases were incurred in connection
with the launch of PAX TV and costs associated with operating new television
stations.
Interest expense for the three months ended March 31, 1999, increased to $11.0
million or 4.9% primarily due to a greater level of senior debt throughout the
period. At March 31, 1999, total long-term debt and senior subordinated notes
were $381.3 million compared with the balance of $350.7 million in the prior
year.
Interest income for the three months ended March 31, 1999, decreased from $6.2
million to $1.1 million or 82% primarily due to the reinvestment of cash held by
qualified intermediary into television station assets.
Gain on sale of Travel Channel and television stations reflects the Company's
sale of its interest in the Travel Channel for aggregate consideration of
approximately $55 million and the transfer of the Company's interest in KWOK
which had a fair market value of approximately $30 million, during February
1999. The Company realized a pre-tax gain of approximately $17 million on the
sale of the Travel Channel and a pre-tax gain of approximately $23.8 million on
the KWOK interest transfer.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at March 31, 1999 and December 31, 1998 was $20.4
million and $1.8 million, respectively, and the ratio of current assets to
current liabilities was 1.14:1 and 1.01:1 on such dates, respectively. Working
capital increased primarily due to the proceeds from the Travel Channel sale in
February 1999.
Cash used in operations of approximately $50.3 million and $.4 million for the
three months ended March 31, 1999 and 1998, respectively, primarily reflects the
increase in operating costs incurred in connection with the operation of PAX TV
and the increase in related cable distribution rights and programming rights
payments. Cash provided by investing activities primarily reflects the proceeds
from the sale of the Travel Channel and television stations, use of the cash
held by qualified intermediary in the prior year, the acquisitions of and
investments in broadcast properties and purchases of equipment for acquired and
existing properties. Cash provided by financing activities primarily reflects
the proceeds from long term debt net of repayments, the exercise of common stock
options and repayments of stock subscription notes receivable.
In connection with the amendment and restatement of the Company's $122 million
senior Credit Facility, in April 1998 the Company placed approximately $22.4
million in an interest bearing escrow in order to pre-fund interest payments
under this facility. The Company had approximately $15.8 million remaining in
escrow as of March 31, 1999.
In August 1998, the Company entered into a $50 million Equipment Facility which
matures the first business day of October 2003. The draw-down period of the
Equipment Facility expires in August 1999. All borrowings under this facility
are secured by the equipment purchased with the proceeds drawn. At March 31,
1999, the Company had borrowings of approximately $28.8 million outstanding
under the Equipment Facility. Subsequent to March 31, 1999, the Company has
borrowed an additional $1 million and in conjunction with the sale of WDPX, WPXG
and WPXU repaid approximately $1.2 million. The Company intends to use the
Equipment Facility to fund the majority of its capital expenditure needs through
August 1999.
Ratings for PAX TV since its launch on August 31, 1998, have generally equaled
or exceeded the Company's expectations. As can be expected with a startup
network, he Company's advertising revenues have been lower than
12
<PAGE> 13
expenses and the Company has experienced an operating loss for this period. The
Company has implemented improvements to its sales and marketing strategies and
procedures in order to address what management believes to be initial reluctance
of certain advertisers to purchase advertising time on PAX TV. The Company
believes the initial sales performance reflected, in part, unfamiliarity with
PAX TV and a lack of historical ratings and demographic data for PAX TV
programming which many advertisers utilize in making their advertising
purchases. Furthermore, a significant number of advertisers make commitments for
their advertising expenditures on quarterly and calendar year cycles. The
Company believes as more historical ratings data for PAX TV are increasingly
available, advertisers are becoming more familiar with PAX TV and PAX TV is more
fully participating in quarterly and annual cyclical advertising expenditure
cycles. The Company has also implemented improvements to its newly developed
proprietary sales and billing software system to address certain initial
software system difficulties experienced since the launch of PAX TV which has
improved the Company's ability to more effectively manage its advertising sales
efforts. These factors are reflected in the Company's improved operating results
during the first quarter of 1999, when revenues were 21% higher than revenues
for the fourth quarter of 1998.
The Company's primary capital requirements are for the funds required to
complete announced acquisitions of broadcasting properties, capital expenditures
on existing and acquired properties, syndicated programming rights payments,
cable carriage and promotion payments, interest and debt service payments on
indebtedness and the Company's working capital requirements.
As of March 31, 1999, the Company's programming contracts require collective
payments by the Company of approximately $357.2 million as follows (in
thousands):
OBLIGATIONS PROGRAM
FOR PROGRAM RIGHTS
RIGHTS COMMITMENTS TOTAL
-------- -------- --------
1999 (April - December) .... $ 65,463 $ 49,499 $114,962
2000 ....................... 68,206 20,130 88,336
2001 ....................... 52,149 13,357 65,506
2002 ....................... 31,127 15,255 46,382
2003 ....................... 2,347 17,509 19,856
Thereafter through 2005 .... -- 22,147 22,147
-------- -------- --------
$219,292 $137,897 $357,189
======== ======== ========
The Company has also committed to purchase at similar terms additional future
series episodes of its licensed programs should they be made available. The
Company continues to evaluate additional programming purchases. The Company has
taken steps to defer obligations on programming which it does not anticipate
airing in the near term and is in discussion with certain programming
distributors regarding measures which will reduce the Company's current
programming obligations.
The Company negotiated a reduction of $5.4 million in its obligations for
program rights in exchange for the return of one series which it had no current
plans to use.
As of March 31, 1999, obligations for cable distribution rights require
collective payments by the Company of approximately $50.9 million over such
periods as follows (in thousands):
1999 (April - December) ..................... $ 30,562
2000 ........................................ 11,785
2001 ........................................ 6,169
2002 ........................................ 1,886
2003 ........................................ 180
Thereafter .................................. 358
--------
$ 50,940
Less: Amount representing interest .......... (4,563)
--------
Present value of cable rights payable ....... $ 46,377
========
13
<PAGE> 14
As of March 31, 1999, the Company had agreements to purchase significant assets
of, or to enter into time brokerage and financing arrangements with respect to,
broadcast properties:
Anticipated to close in 1999 (April - December) ..... $ 65,390
Anticipated to close in 2000 and thereafter ......... 66,411
--------
$131,801
========
The completion of such acquisitions or investments in broadcast properties is
subject to a variety of factors and the satisfaction of various conditions
including the receipt of regulatory approvals. There can be no assurance that
any of such investments will be completed.
In January 1999, the Company acquired a 51% interest in WLPX (previously
acquired 49%) serving the Charleston, West Virginia market for approximately $9
million.
In February 1999, the Company completed the acquisition of KAPX serving the
Albuquerque, New Mexico market for approximately $ 4.7 million. The Company
exercised its option to acquire KWOK serving the San Francisco, California
market for approximately $500,000 and, in conjunction with its 1998 acquisition
of WCPX serving the Chicago, Illinois market, the Company transferred its
interest in KWOK to the previous owners of WCPX.
In March 1999, the Company amended an existing agreement to purchase Channel 40
serving the Pittsburgh, Pennsylvania market for consideration of $35 million.
In April 1999, the Company made a $10 million payment in connection with the
purchase of KWPX, Seattle, Washington. The payment was cash consideration which
was to be paid subsequent to the closing upon the activation of the station's
new transmission facilities.
In February 1999, the Company entered into an agreement to sell its interest in
WBPT serving the Bridgeport, Connecticut market for approximately $21 million.
In April 1999, the buyers of WBPT began operating the station pursuant to a time
brokerage agreement with the Company pending close of the sale.
In April 1999, the Company entered into an agreement to sell its interest in
WDPX serving the Dayton, Ohio market, WPXG serving the Green Bay, Wisconsin
market and WPXU serving the Champaign/Decatur, Illinois market for approximately
$40 million. Upon entering into the agreement to sell WDPX, WPXG and WPXU, the
Company received approximately $32 million for the fixed assets of these
stations. The remaining $8 million is due upon FCC approval of the license
sales. The buyer of WDPX, WPXG and WPXU will operate the stations pursuant to
time brokerage agreements commencing June 1999, pending FCC approval of the
license transfers.
In addition to operating performance, the Company's liquidity position is
affected by its commitments to increase distribution through television station
acquisitions and cable carriage agreements as well as the Company's ability to
liquidate certain investments in broadcast properties and dispose of certain
non-core assets. The Company continues to pursue measures to improve its
liquidity position during the next twelve months in order to continue to pursue
its business strategy and to fund its operations and debt service. The measures
the Company is pursuing include the sale of additional non-essential
broadcasting stations, deferring or abandoning non-essential capital
expenditures for improvements of existing properties, deferring or restructuring
payments under cable carriage agreements and continuing its efforts to reduce
operating expenses. The Company also believes it will liquidate certain
investments in broadcast properties during 1999. The Company believes these
measures should enable it to preserve sufficient liquidity to address its
working capital needs during the next twelve months. Should the Company's
revenues during such period fall short of its current expectations or should the
Company fail to successfully implement one or more of the measures discussed
above, the Company would likely be required to take other measures to address
its liquidity position including additional asset sales and operating expense
reductions. In addition, the Company continually evaluates opportunities for
raising additional capital through offerings of debt, equity and preferred
stock. The Company cannot be sure that it will be able to successfully implement
any such measures or that it will have sufficient liquidity to meet its needs
during the next twelve months in the event its advertising revenues fall
significantly short of its current expectations.
The Company will likely require additional financing to pursue its business
strategy and fund its capital requirements in the year 2000 and thereafter. The
amount of additional financing needed could be increased to the extent that the
Company pursues additional acquisitions or requires additional working capital
as a result of higher than expected operating costs, lower than expected
advertising revenues, additional programming rights obligations and payments
under additional cable carriage agreements. The Company cannot be sure that it
will be able to obtain additional financing on terms acceptable to it. If the
Company fails to maintain sufficient liquidity to finance its future cash
14
<PAGE> 15
requirements, the Company's ability to pursue its business strategy during the
year 2000 and thereafter could be adversely affected.
YEAR 2000 CONSIDERATIONS
The "Year 2000 issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If the Company's
computer programs with date-sensitive functions are not Year 2000 compliant,
they may recognize a date using "00" as the year 1900 rather than the Year 2000.
This could result in a system failure or miscalculations causing disruptions to
operation.
STATE OF READINESS
The Company has identified four major categories of Year 2000 risk:
(1) Software systems -- these include the Company's revenue system ("Traffic
System"), financial system (e.g. general ledger, accounts payable, fixed assets,
etc.), digital cable transmission and automation systems (for video servers);
(2) Equipment with embedded chip technology -- these include "on-air" equipment
(e.g., video servers, compression gear, transmitters, etc.), computer hardware
and generators;
(3) External vendors and suppliers -- these include satellite transmission
operators, cable television operators, and other third parties whose system
failures potentially could have a significant impact on the Company's
operations; and
(4) Facilities -- these include fire alarm systems, phone systems and access
control systems.
The Company has substantially completed its inventory of software systems and
equipment and has identified external vendors and suppliers whose system
failures could have a significant impact on the Company's operations. The
Company has substantially completed its assessment and is in the process of
completing the remediation of all mission-critical systems and equipment.
In 1998, the Company replaced its Traffic System with a system that is Year 2000
compliant. The Company is currently replacing its financial system with a Year
2000 compliant system which is expected to be operational by June 30, 1999. The
implementation of these new systems minimizes the possibility of Year 2000
issues significantly interrupting normal operations.
The Company has already received assurances as to Year 2000 compliance from
identified external vendors and suppliers and is currently evaluating their
compliance programs.
The objective of the Company is complete assessment, remediation, testing and
certification of third party software for all mission-critical systems and
components by June 30, 1999. Over the next few months as the Company receives
more information on the extent of Year 2000 compliance by external vendors and
third party suppliers, the nature of any contingency plans that may be needed
will evolve.
The Company is currently preparing contingency plans to identify and handle its
worst case scenarios. It expects to complete these plans by June 30, 1999, in
conjunction with the completion of its assessment, remediation, testing and
certification phases.
RISKS AND COSTS
Based on its current efforts, the Company does not believe that Year 2000 issues
will have a material adverse effect on the results of its operations, liquidity
or financial condition. However, this assessment is dependent on the ability of
third-party suppliers and others whose systems failures potentially could have
an impact on the Company's operations to be Year 2000 compliant. Although the
Company cannot control the conduct of external vendors and suppliers, the
Company expects to reduce the Company's level of uncertainty and the adverse
effect that any such failures may have.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1.1 Certificate of Incorporation of the Company (1)
3.1.2 Bylaws of the Company (2)
3.1.3 Certificate of Designation of the Company's Junior Cumulative Compounding Redeemable Preferred Stock (1)
3.1.4 Certificate of Designations of the Company's 12 1/2% Cumulative Exchangeable Preferred Stock (3)
3.1.6 Certificate of Designations of the Company's 9 3/4% Series A Convertible Preferred Stock (4)
3.1.7 Certificate of Designations of the Company's 13 1/4% Cumulative Junior Exchangeable Preferred Stock (4)
27 Financial Data Schedule (for SEC use only)
</TABLE>
- ----------
(1) Filed with the Company's Annual Report on Form 10-K, for the year ended
December 31, 1994 and incorporated herein by reference.
(2) Filed with the Company's Registration Statement on Form S-1, as amended,
filed January 26, 1996, Registration No. 333-473 and incorporated herein
by reference.
(3) Filed with the Company's Registration Statement on Form S-3, as amended,
filed August 15, 1996, Registration No. 333-10267 and incorporated herein
by reference.
(4) Filed with the Company's Registration Statement on Form S-4, as amended,
filed July 23, 1998, Registration No. 333-59641 and incorporated herein by
reference.
(b) Reports on Form 8-K.
None.
16
<PAGE> 17
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: May 11, 1999 By: /s/ Jeffrey Sagansky
--------------------------
Jeffrey Sagansky
Chief Executive Officer, President
and Director (Principal Executive Officer)
Date: May 11, 1999 By: /s/ John F. Delorenzo
--------------------------
John F. DeLorenzo
Executive Vice President, Chief Financial Officer
and Director (Principal Financial Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 61,234
<SECURITIES> 0
<RECEIVABLES> 31,134
<ALLOWANCES> 4,892
<INVENTORY> 0
<CURRENT-ASSETS> 166,562
<PP&E> 228,478
<DEPRECIATION> 50,409
<TOTAL-ASSETS> 1,512,117
<CURRENT-LIABILITIES> 146,207
<BONDS> 228,399
538,697
0
<COMMON> 61
<OTHER-SE> 225,179
<TOTAL-LIABILITY-AND-EQUITY> 1,512,117
<SALES> 51,779
<TOTAL-REVENUES> 51,779
<CGS> 0
<TOTAL-COSTS> 91,664
<OTHER-EXPENSES> 39,327
<LOSS-PROVISION> 524
<INTEREST-EXPENSE> 11,019
<INCOME-PRETAX> (11,577)
<INCOME-TAX> 3,744
<INCOME-CONTINUING> (7,833)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,130)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
