<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1999
CLASS OF STOCK NUMBER OF SHARES
- -------------- ----------------
COMMON STOCK-CLASS A, $0.001 PAR VALUE PER SHARE ............ 53,668,889
COMMON STOCK-CLASS B, $0.001 PAR VALUE PER SHARE ............ 8,311,639
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PAXSON COMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited)
Three Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Operations (unaudited)
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statement of Changes in Common Stockholders'
Equity Year Ended December 31, 1998 and Nine Months
Ended September 30, 1999 (unaudited) 6
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II - Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 416,083 $ 49,440
Restricted cash and short-term investments .......................... 19,091 18,096
Accounts receivable, less allowance for doubtful accounts
of $4,342 and $3,953, respectively ............................... 28,952 21,391
Program rights ...................................................... 66,433 81,867
Prepaid expenses and other current assets ........................... 4,443 2,947
----------- -----------
Total current assets .......................................... 535,002 173,741
Property and equipment, net ........................................... 191,085 178,975
Intangible assets, net ................................................ 914,582 827,973
Investments in broadcast properties ................................... 40,938 74,683
Program rights, net ................................................... 164,866 214,331
Investment in cable network ........................................... -- 42,531
Other assets, net ..................................................... 39,560 30,552
----------- -----------
Total assets ................................................... $ 1,886,033 $ 1,542,786
=========== ===========
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............................ $ 17,021 $ 25,738
Accrued interest .................................................... 16,395 8,391
Obligations for cable distribution rights ........................... 34,439 50,914
Obligation for satellite distribution ............................... 2,625 --
Obligations for program rights ...................................... 95,057 84,820
Income taxes payable ................................................ 2,022 1,542
Current portion of long-term debt ................................... 397 529
----------- -----------
Total current liabilities ...................................... 167,956 171,934
Deferred income taxes ................................................. -- 58,109
Obligations for cable distribution rights, net of current portion ..... 5,329 15,400
Obligation for satellite distribution, net of current portion ......... 12,375 --
Obligations for program rights, net of current portion ................ 124,808 154,800
Long-term debt ........................................................ 154,521 145,164
DP Media long-term debt ............................................... 114,000 --
Senior subordinated notes, net ........................................ 228,591 228,305
Mandatorily redeemable preferred stock ................................ 884,063 521,401
Class A common stock, $0.001 par value; one vote per share; 150,000,000
shares authorized, 53,654,889 and 52,608,765 shares issued and
outstanding ........................................................ 54 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 common stock warrants and Class B common stock call option .... 101,582 1,582
Stock subscription notes receivable ................................... (1,799) (2,813)
Additional paid-in capital ............................................ 401,318 318,935
Deferred option plan compensation ..................................... (15,788) (16,728)
Accumulated deficit ................................................... (290,985) (53,364)
Commitments and contingencies ......................................... -- --
----------- -----------
Total liabilities, mandatorily redeemable preferred stock
and common stockholders' equity .............................. $ 1,886,033 $ 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 September 30,
-------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Advertising revenues ................................................ $ 58,051 $ 29,402
------------ ------------
Expenses:
Operating ......................................................... 32,662 14,785
Selling, general and administrative ............................... 41,435 45,566
Time brokerage and affiliation fees ............................... 4,425 2,831
Stock-based compensation .......................................... 9,419 2,902
Depreciation and amortization ..................................... 19,488 10,098
------------ ------------
107,429 76,182
------------ ------------
Operating loss ...................................................... (49,378) (46,780)
Other income (expense):
Interest expense .................................................. (10,997) (10,053)
Interest income ................................................... 1,758 4,694
Other expenses, net ............................................... (686) (318)
Equity in loss of unconsolidated investment ....................... -- (4,983)
------------ ------------
Loss before income taxes ............................................ (59,303) (57,440)
Income tax benefit .................................................. 16,050 20,869
------------ ------------
Net loss ............................................................ (43,253) (36,571)
Beneficial conversion feature on issuance of convertible
preferred stock ................................................... (65,467) --
Dividends and accretion on redeemable preferred stock ............... (21,039) (16,440)
------------ ------------
Net loss attributable to common stock ............................... $ (129,759) $ (53,011)
============ ============
Basic and diluted loss per share:
Loss from operations ................................................ $ (2.10) $ (0.87)
------------ ------------
Net loss ............................................................ $ (2.10) $ (0.87)
============ ============
Weighted average shares outstanding ................................. 61,887,000 60,740,230
============ ============
</TABLE>
The accompanying Notes are an integral part of the
consolidated financial statements.
4
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Advertising revenues ...................................................... $ 167,684 $ 91,443
------------ ------------
Expenses:
Operating ............................................................... 91,077 25,032
Selling, general and administrative ..................................... 123,249 87,228
Time brokerage and affiliation fees ..................................... 13,057 12,488
Stock-based compensation ................................................ 13,712 7,989
Adjustment of programming to net realizable value ....................... 70,499 --
Depreciation and amortization ........................................... 56,844 28,456
------------ ------------
368,438 161,193
------------ ------------
Operating loss ............................................................ (200,754) (69,750)
Other income (expense):
Interest expense ........................................................ (32,714) (30,939)
Interest income ......................................................... 4,686 13,334
Other expenses, net ..................................................... (1,694) (818)
Gain on sale of Travel Channel and television stations .................. 59,453 51,603
Equity in loss of unconsolidated investment ............................. (2,260) (8,179)
------------ ------------
Loss before income taxes .................................................. (173,283) (44,749)
Income tax benefit ........................................................ 57,291 16,046
------------ ------------
Net loss .................................................................. (115,992) (28,703)
Beneficial conversion feature on issuance of convertible preferred stock.. (65,467) --
Dividends and accretion on redeemable preferred stock .................... (56,162) (32,869)
------------ ------------
Net loss attributable to common stock ..................................... $ (237,621) $ (61,572)
============ ============
Basic and diluted loss per share:
Loss from operations ...................................................... $ (3.87) $ (1.02)
------------ ------------
Net loss .................................................................. $ (3.87) $ (1.02)
============ ============
Weighted average shares outstanding ....................................... 61,424,064 60,197,234
============ ============
</TABLE>
The accompanying Notes are an integral part of the
consolidated financial statements.
5
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A AND B
COMMON
STOCK STOCK RETAINED
COMMON STOCK WARRANTS SUBSCRIPTION ADDITIONAL DEFERRED EARNINGS
------------------- AND CALL NOTES PAID-IN OPTION PLAN (ACCUMULATED
CLASS A CLASS B OPTION 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)
Issuance of common stock warrants and
Class B common stock call option ...... 100,000
Deferred option plan compensation ....... 12,772 (12,772)
Stock-based compensation ................ 13,712
Stock options exercised ................. 1 4,144
Repayment of stock subscription
receivable ............................ 1,014
Beneficial conversion feature on
issuance of convertible preferred
stock ................................ 65,467 (65,467)
Dividends on redeemable and
convertible preferred stock .......... (52,570)
Accretion on redeemable preferred
stock ................................ (3,592)
Net loss ................................ (115,992)
--------- -------- -------- ------- -------- -------- ---------
Balance at September 30, 1999 (unaudited) $ 54 $ 8 $101,582 $(1,799) $401,318 $(15,788) $(290,985)
========= ======== ======== ======= ======== ======== =========
</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
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $(115,992) $ (28,703)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................................... 56,844 28,456
Stock-based compensation ................................................ 13,712 7,989
Program rights amortization ............................................. 66,924 7,650
Payments for cable distribution rights .................................. (16,474) (11,435)
Program rights payments and deposits .................................... (96,228) (37,747)
Provision for doubtful accounts ......................................... 5,119 1,777
Adjustment of programming to net realizable value ....................... 70,499 --
Deferred income tax benefit ............................................. (59,084) (19,256)
(Gain) loss on sale or disposal of assets ............................... (671) 353
Equity in loss of unconsolidated investment ............................. 2,260 8,179
Gain on sale of Travel Channel and television stations .................. (59,453) (51,603)
Changes in assets and liabilities:
Decrease (increase) in restricted cash ................................ 6,705 (3,083)
Increase in accounts receivable ....................................... (8,875) (7,972)
Increase in prepaid expenses and other current assets ................. (1,272) (2,780)
(Increase) decrease in other assets ................................... (7,812) 4,193
(Decrease) increase in accounts payable and accrued liabilities ....... (11,160) 19,782
Increase in accrued interest .......................................... 6,825 6,494
Decrease in current income taxes payable .............................. 480 1,925
--------- ---------
Net cash used in operating activities ............................... (147,653) (75,781)
--------- ---------
Cash flows from investing activities:
Acquisitions of broadcasting properties ................................. (53,828) (568,896)
Decrease (increase) in investments in broadcast properties .............. 10,189 (35,692)
Collection of notes receivable from CAP Communications, Inc. ............ 30,644 --
Decrease in deposits on broadcast properties ............................ 3,974 30,544
Decrease in cash held by qualified intermediary ......................... -- 418,950
Purchases of property and equipment ..................................... (22,604) (61,872)
Distribution received from unconsolidated investment .................... -- 3,163
DP Media cash balance upon consolidation ................................ 4,310 --
Proceeds from sales of Travel Channel and television stations ........... 120,727 66,619
--------- ---------
Net cash provided by (used in) investing activities ................. 93,412 (147,184)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of exchangeable and convertible
preferred stock, net .................................................... 406,500 261,500
Proceeds from issuance of long-term debt ................................. 10,858 2,313
Repayments of long-term debt ............................................. (1,633) (380)
Proceeds from exercise of common stock options, net ...................... 4,145 833
Repayments of stock subscription notes receivable ........................ 1,014 --
--------- ---------
Net cash provided by financing activities ........................... 420,884 264,266
--------- ---------
Increase in cash and cash equivalents ....................................... 366,643 41,301
Cash and cash equivalents at beginning of period ............................ 49,440 82,641
--------- ---------
Cash and cash equivalents at end of period .................................. $ 416,083 $ 123,942
========= =========
</TABLE>
The accompanying Notes are an integral part of the
consolidated financial statements.
7
<PAGE> 8
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1999 1998
--------- -------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest ................................. $22,533 $22,552
------- -------
Cash paid for income taxes ............................. $ 1,312 $ 1,615
------- -------
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes ... $ 286 $ 255
------- -------
Issuance of common stock for acquisition ............... $ -- $ 5,250
------- -------
Beneficial conversion feature on issuance of convertible
preferred stock ..................................... $65,467 $ --
------- -------
Dividends accrued on redeemable preferred stock ........ $52,570 $31,344
------- -------
Discount accretion on redeemable securities ............ $ 3,592 $ 1,526
------- -------
Satellite distribution ................................. $15,000 $ --
------- -------
Sale of KWOK in exchange for WCPX ...................... $30,000 $ --
======= =======
</TABLE>
The accompanying Notes are an integral part of the
consolidated financial statements.
8
<PAGE> 9
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Paxson Communications Corporation's (the "Company") financial information
contained in the financial statements and notes thereto as of September 30,
1999 and for the nine and three month periods ended September 30, 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.
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, the definitive proxy statement for the annual meeting of stockholders
held April 30, 1999, the quarterly reports on Form 10-Q for the quarters ended
June 30 and March 31, 1999, and the current report on Form 8-K dated September
15, 1999, all of which were filed with the United States Securities and
Exchange Commission.
2. Consolidation of DP Media
During the third quarter the Company advanced funds to a subsidiary of DP Media,
Inc., which, along with CAP Communications, Inc. ("CAP Communications"), and
RDP Communications, Inc. (collectively referred to herein as "DP Media") are
companies beneficially owned by family members of the Company's principal
shareholder, Mr. Lowell W. Paxson. The Company has significant operating
relationships with DP Media. The funds advanced to DP Media were utilized to
fund operating cash flow needs. As a result of the Company's significant
operating relationships with DP Media and its funding of DP Media's operating
cash flow needs, the assets and liabilities of DP Media, together with their
results of operations from the date of the advance, have been included in the
Company's consolidated financial statements for the third quarter.
In consolidating DP Media, the Company recorded current assets of approximately
$13.3 million, property plant and equipment of approximately $22.8 million,
intangible assets of approximately $72.3 million and other assets of
approximately $10.4 million. Further, the Company has recorded current
liabilities of approximately $4.8 million and long-term debt of $114 million.
All intercompany balances with DP Media have been eliminated at September 30,
1999.
DP Media long-term debt consists of the following (in thousands):
<TABLE>
<S> <C>
Credit facility, maturing December 31, 2001, interest at LIBOR plus 4%
or base rate plus 3% at DP Media's option (9.4375% at September 30, 1999),
quarterly interest payments commencing September 30, 1999, principal and
unpaid accrued interest due at maturity........................................ $ 84,000
Note payable, maturing April 15, 2001, interest at 8%, interest payments
commencing April 15, 1999. Principal together with unpaid accrued interest
due at maturity................................................................ 30,000
--------
$114,000
========
</TABLE>
The credit facility is secured by the assets of DP Media and the pledge of
6,100,000 shares of Paxson Communications Corporation common stock held by
Second Crystal Diamond Limited Partnership, a limited partnership controlled by
Mr. Lowell W. Paxson.
The note payable is secured by the assets of WIPX, an Indianapolis television
station owned by DP Media.
In August 1999, CAP Communications repaid notes receivable to the Company of
$15.5 million and $15 million for WBPX and WHPX, respectively. These note
amounts were recorded as investments in broadcast properties in the
9
<PAGE> 10
accompanying consolidated balance sheets prior to their repayment. Funds for the
repayment of the notes were obtained by DP Media under their long-term credit
facility. Amounts outstanding under this facility have been included within the
consolidated accounts of the Company at September 30, 1999.
On November 22, 1999 the Company entered into agreements to purchase the
television station assets of DP Media, including DP Media's contractual right to
acquire a television station in the Boston, Massachusetts market. The total
consideration paid to DP Media will not exceed $135 million, with the final
price to be determined through further negotiations and a possible arbitration
proceeding, and the Company will also expend an additional $38 million to
consummate the acquisition contract for the Boston, Massachusetts station. The
television stations, eight of which are presently PAX TV network affiliates, are
in the Battle Creek, Michigan, Raleigh, North Carolina, Hartford, Connecticut,
Boston, Massachusetts, St. Louis, Missouri, Washington, D.C. and Indianapolis,
Indiana markets. In conjunction with these asset purchase agreements on November
22, 1999 the Company advanced approximately $106 million to DP Media, pursuant
to a secured loan agreement, which was used to repay DP Media's outstanding
indebtedness to third party lenders. The Company believes that such repayment of
DP Media's debt "together with the agreement to acquire DP Media's television
station assets" resolves certain potential covenant compliance matters created
by the inclusion of the liabilities of DP Media in the consolidated financial
statements of the Company.
3. Income Taxes
During the nine months ended September 30, 1999, the Company recognized a
deferred tax benefit to the extent that the Company had offsetting deferred tax
liabilities. Due to the uncertainty surrounding the Company's utilization of
future tax benefits, the Company has recorded a valuation allowance for its net
deferred tax assets at September 30, 1999.
4. Stock Based Compensation
In conjunction with a new employment agreement entered into with the Company's
Chief Executive Officer, during September 1999 the Compensation Committee
of the Board of Directors reduced the per share exercise price of the CEO's
existing 840,000 unvested stock options to $.01 and 360,000 vested stock
options to $1.00. As a result of this option repricing, the Company recognized
stock based compensation of approximately $8 million for the quarter ended
September 30, 1999. In conjunction with the option repricing, the CEO's rights
under his prior employment agreement to receive royalties on all original PAX
TV television programming was cancelled. The CEO received options to purchase an
additional 2,000,000 shares of Class A common stock, which vest at the rate of
500,000 shares per year and expire in ten years. The exercise price for options
vesting on the first anniversary is $10. The exercise price for options vesting
on subsequent anniversaries will be the lower of a range between $14 and $21, or
the fair market value of the common stock on the prior anniversary date. The
Company recognized stock based compensation related to this new grant of
approximately $105,000 for the quarter ended September 30, 1999.
5. Redeemable Preferred Stock
NBC Transaction
Effective September 15, 1999 (the "Issue Date"), the Company entered into an
Investment Agreement (the "Investment Agreement") with National Broadcasting
Company, Inc. ("NBC"), pursuant to which NBC purchased shares of convertible
exchangeable preferred stock and common stock purchase warrants from the
Company for an aggregate purchase price of $415 million.
Concurrently with the Investment Agreement, NBC entered into an agreement with
Lowell W. Paxson, the Company's Chairman and controlling stockholder ("Mr.
Paxson") and certain entities controlled by Mr. Paxson, pursuant to which NBC
was granted the right (the "Call Right") to purchase all (but not less than
all) 8,311,639 shares of Class B Common Stock of the Company beneficially owned
by Mr. Paxson. Such shares are entitled to ten votes per share on all matters
submitted to a vote of the Company's stockholders and are convertible into an
equal number of shares of Class A Common Stock. The Call Right has a per share
exercise price equal to the higher of (i) the average of the closing sale
prices of the Class A Common Stock for the 45 consecutive trading days ending
on the trading day immediately preceding the exercise of the Call Right
(provided that such price shall not be more than 17.5% higher or 17.5% lower
than the six month trailing average closing sale prices), and (ii) $22.50 for
any exercise of the Call Right on or prior to the third anniversary of the
Issue Date and $20.00 for any exercise of the Call Right thereafter. The owners
of the shares which are subject to the Call Right may not transfer such shares
prior to the sixth anniversary of the Issue Date, and may not convert such
shares into any other securities of the Company (including shares of Class A
Common Stock). Exercise of the Call Right is subject to compliance with
applicable provisions of the Communications Act of 1934, as amended (the
"Communications Act"), and the rules and regulations of the Federal
Communications Commission (the "FCC"). The Call Right may not be exercised
until Warrant A and Warrant B (defined below) have been exercised in full. The
Call Right expires on the tenth anniversary of the Issue Date, or prior thereto
under certain circumstances.
10
<PAGE> 11
Pursuant to the Investment Agreement, NBC acquired $415 million aggregate
liquidation preference of a new series of the Company's convertible
exchangeable preferred stock (the "Series B Convertible Preferred Stock"),
which accrues cumulative dividends from the Issue Date at an annual rate of 8%
and is convertible (subject to adjustment under the terms of the Certificate of
Designation relating to the Series B Convertible Preferred Stock) into
31,896,032 shares of the Company's Class A Common Stock at an initial
conversion price of $13.01 per share, which increases at a rate equal to the
dividend rate.
The Series B Convertible Preferred Stock was issued with a conversion price per
share that was less than the closing price of the Class A Common Stock at the
Issue Date, and, in accordance with applicable accounting guidelines, the
Company recognized a beneficial conversion feature in connection with the
issuance of the stock equal to the difference between the closing price and the
conversion price multiplied by the number of shares issuable upon conversion of
the Series B Convertible Preferred Stock. The full amount of the beneficial
conversion feature, approximately $65.5 million, has been reflected in the
accompanying statement of operations as a preferred stock dividend during the
third quarter and has been allocated to additional paid-in capital in the
accompanying balance sheet. The Series B Convertible Preferred Stock is
exchangeable, at the option of the holder, subject to the Company's debt and
preferred stock covenants limiting additional indebtedness but in any event not
later than January 1, 2007, into convertible debentures of the Company ranking
on a parity with the Company's other subordinated indebtedness. Should NBC
determine that the rules and regulations of the FCC prohibit it from holding
shares of Class A Common Stock, NBC may convert the Series B Convertible
Preferred Stock held by it into an equal number of shares of non-voting common
stock of the Company, which non-voting common stock shall be immediately
convertible into Class A Common Stock upon transfer by NBC.
NBC also acquired a warrant to purchase up to 13,065,507 shares of Class A
Common Stock at an exercise price of $12.60 per share ("Warrant A") and a
warrant to purchase up to 18,966,620 shares of Class A Common Stock ("Warrant
B") at an exercise price equal to the average of the closing sale prices of the
Class A Common Stock for the 45 consecutive trading days ending on the trading
day immediately preceding the warrant exercise date (provided that such price
shall not be more than 17.5% higher or 17.5% lower than the six month trailing
average closing sale price), subject to a minimum exercise price during the
first three years after the Issue Date of $22.50 per share. The Warrants are
exercisable for ten years from the Issue Date, subject to certain conditions
and limitations.
The Company has preliminarily valued Warrant A, Warrant B and the Call Right at
$100 million. The Company recorded this value along with transaction costs as a
reduction of the face value of the Series B Convertible Preferred Stock and
will accrete such discount as preferred stock dividends over three years using
the interest method. The Company has recorded approximately $1.3 million of
accretion expense related to the Series B Convertible Preferred Stock through
September 30, 1999. The Company has engaged an independent appraisal firm to
value Warrant A, Warrant B, and the Call Right and will adjust the discount in
the fourth quarter based upon the valuation.
In addition to representations, warranties and covenants customary in similar
transactions, the Investment Agreement includes affirmative and negative
covenants of the Company, requires the Company to obtain the consent of NBC or
its permitted transferee with respect to certain corporate actions, as set
forth in the Investment Agreement, and grants NBC certain rights with respect
to the broadcast television operations of the Company. NBC also has the right
to require the Company (or an assignee) to redeem its investment in the Series
B Convertible Preferred Stock under certain circumstances, including at any
time that the FCC renders a final decision that NBC's investment in the Company
and the acquisition of the other rights provided for in the transaction
agreements is "attributable" to NBC (as such term is defined under applicable
rules of the FCC), or for a period of 60 days beginning with the third
anniversary of the Issue Date and on each anniversary of the Issue Date
thereafter, or in case of certain events of default under the transaction
agreements, subject in each case to certain conditions (including compliance by
the Company with the covenants contained in the terms of its outstanding
indebtedness and preferred stock).
NBC, the Company, Mr. Paxson and certain entities controlled by Mr. Paxson also
entered into a Stockholder Agreement (the "Stockholder Agreement") concurrently
with the Investment Agreement, pursuant to which, if permitted by the
Communications Act and FCC rules and regulations, the Company may nominate
persons named by NBC for election to the Company's board of directors and Mr.
Paxson and his affiliates agreed to vote their shares of Common Stock in favor
of the election of such persons as directors of the Company. Should no NBC
nominee be serving as a member of the Company's board of directors, then NBC
may appoint two observers to attend all board meetings. Mr. Paxson and his
affiliates have also agreed to vote their shares of Common Stock in favor of
11
<PAGE> 12
certain proposals expected to be submitted for a vote of the stockholders of
the Company at its next annual stockholders meeting prior to May 15, 2000.
These proposals will include amendments to the Company's certificate of
incorporation to provide for a classified board of directors serving three year
terms and the authorization of additional shares of non-voting common stock
sufficient to permit the Company to reserve such shares for issuance to NBC and
its assignees should they exercise their rights to convert shares of Series B
Convertible Preferred Stock and exercise the Warrants for such non-voting
shares of common stock in lieu of shares of Class A Common Stock. The
Stockholder Agreement further provides that the Company shall not, without the
prior written consent of NBC, enter into certain agreements or adopt certain
plans, as set forth in the Stockholder Agreement, which would be breached or
violated upon the acquisition of the Company securities by NBC or its
affiliates or would otherwise restrict or impede the ability of NBC or its
affiliates to acquire additional shares of capital stock of the Company.
NBC was also granted certain demand and piggyback registration rights with
respect to the shares of Class A Common Stock issuable upon conversion of the
Series B Convertible Preferred Stock (or conversion of any exchange debentures
issued in exchange therefor), exercise of the Warrants or conversion of the
Class B Common Stock subject to the Call Right.
Other Redeemable Preferred Stock
In each of March, June and September 1999, the Company paid dividends of
approximately $1.9 million, $1.9 million and $2.0 million respectively, by the
issuance of additional shares of Series A Convertible Preferred Stock. At
September 30, 1999, there were no accrued and unpaid dividends on the Series A
Convertible Preferred Stock. At September 30, 1999, there were 8,506 shares of
Series A Convertible Preferred Stock issued and outstanding.
During the nine months ended September 30, 1999, the Company accrued dividends
of approximately $4.8 million, $18.7 million and $21.7 million on,
respectively, the Junior Preferred Stock 12%, Exchangeable Preferred Stock 12
1/2% and Junior Exchangeable Preferred Stock 13 1/4%. During the nine months
ended September 30, 1999, the Company paid dividends of approximately $12
million by the issuance of 12,050 additional shares of Exchangeable Preferred
Stock 12 1/2% and dividends of approximately $14 million by the issuance of
1,401 additional shares of Junior Exchangeable Preferred Stock 13 1/4%. Accrued
and unpaid dividends since the last dividend payment date aggregated
approximately $24.6 million, $10.4 million and $10.8 million on, respectively,
the Junior Preferred Stock 12%, Exchangeable Preferred Stock 12 1/2% and Junior
Exchangeable Preferred Stock 13 1/4% at September 30, 1999. At September 30,
1999, the Company had 204,847 shares of Exchangeable Preferred Stock 12 1/2%
and 22,571 shares of Exchangeable Preferred Stock 13 1/4% issued and
outstanding. There were no changes to the shares authorized, issued and
outstanding on the Junior Preferred Stock 12% during the nine months ended
September 30, 1999.
6. Gain on Sale of Travel Channel and Television Stations
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 September 30, 1999 and 1998 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.
In May and June 1999, the Company completed its sale of four television
stations serving the Dayton, Ohio, Green Bay, Wisconsin, Champaign/Decatur,
Illinois, and New York City, New York markets for total consideration of
approximately $61 million. The Company recognized pre-tax gains of
approximately $18.7 million in connection with these sales.
7. 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 provided 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 that will be
utilized within the next year is included in current liabilities.
12
<PAGE> 13
8. 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. The Company extended the maturity of
all outstanding loans under this program until March 31, 2001. During the nine
months ended September 30, 1999, approximately $1,014,000 of principal and
interest was repaid to the Company under this program. The outstanding
principal balance on such loans was approximately $1.8 million at September
30, 1999 and is reflected as stock subscription notes receivable in the
accompanying balance sheet.
9. Adjustment of Programming to Net Realizable Value
During the second quarter of 1999, the Company wrote down certain of its
program rights by a total of approximately $70.5 million to its expected net
realizable value. The write down was a result of the Company's ongoing
evaluation of its anticipated future usage of its programming, and the
anticipated future ratings and related advertising revenues to be generated in
connection with the Company's programming, all relative to the carrying value
of the related program rights.
As part of its continuing process of obtaining information and revising its
estimates as to the recoverability of programming rights, the Company has
modified its program rights amortization policy for purchased syndicated
programming to the greater of straight line per run or straight line over the
life of the contract. The effect of this change in accounting estimate has been
accounted for prospectively.
10. Per Share Data
Basic and diluted loss per share from continuing operations was computed by
dividing the loss from continuing operations less dividends and accretion on
redeemable preferred stock by the weighted average number of common shares
outstanding during the period. Because of per share losses from continuing
operations, the Company's presentation of diluted earnings per share is the
same as that of basic earnings per share. At September 30,1999 and 1998,
respectively, there were outstanding 12,248,139 and 9,725,777 stock options,
32,427,627 and 395,500 Class A and B common stock warrants, 5,316,250 and
4,828,125 shares of Class A common stock reserved for possible future issuance
in connection with the Series A Convertible Preferred Stock and at September
30, 1999, 31,896,032 shares of Class A common stock reserved for possible
future issuance in connection with the Series B 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.
13
<PAGE> 14
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 launching PAX TV, the Company aired long form paid programming
consisting primarily of infomercials on its television distribution system. The
Company continues 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 or 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 has been included in the consolidated financial
statements using the equity method of accounting through the date of sale.
During the third quarter the Company advanced funds to a subsidiary of DP
Media, Inc., which, along with CAP Communications, Inc. ("CAP Communications"),
and RDP Communications, Inc. (collectively referred to herein as "DP Media") are
companies beneficially owned by family members of the Company's principal
shareholder, Mr. Lowell W. Paxson. The Company has significant operating
relationships with DP Media. The funds advanced to DP Media were utilized to
fund operating cash flow needs. As a result of the Company's significant
operating relationships with DP Media and its funding of DP Media's operating
cash flow needs, the assets and liabilities of DP Media, together with their
results of operations from the date of the advance, have been included in the
Company's consolidated financial statements for the third quarter.
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 September 1999, the PAX TV network reached 76%
of US television households through broadcast, cable and satellite
distribution. Upon completion of pending transactions, stations broadcasting
PAX TV will include 123 broadcast television stations consisting of 72 stations
which are owned and operated by the Company or in which the Company has an
economic interest and 51 non-owned or operated PAX TV affiliates, including
those owned by DP Media. These stations reach all of the top 20 markets and 43
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.
In connection with the NBC transaction described in Note 5 to the accompanying
financial statements, the Company and NBC entered into a Network Sales
Agreement, whereby NBC will provide network sales, sales marketing and research
services for the Pax TV network. The Company and NBC also agreed to negotiate in
good faith to conclude joint sales agreements ("JSA's") between the Company's
television stations serving the Washington, D.C. and Providence, Rhode Island
markets and NBC's stations serving the same markets, pursuant to which the NBC
stations
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<PAGE> 15
would sell all non-network advertising of the Company stations and receive
commission compensation for such sales, and each Company station would carry
one hour per day of NBC syndicated programming (subject to compliance with the
Company's family friendly programming content standards).
On September 10, 1999, the Company and The Christian Network, Inc. ("CNI")
entered into a 50-year Master Agreement for overnight programming, use of
digital capacity and public interest programming. The Master Agreement is
automatically renewable for successive ten year periods unless CNI ceases to
exist, commences action to liquidate, ceases family values programming or the
FCC revokes a majority of the Stations' licenses. Pursuant to the Master
Agreement, the Company has the obligation to broadcast CNI overnight
programming on each of its stations seven days a week from 1:00AM to 6:00AM.
When digital programming begins, the Company shall make a digital channel
available for CNI's use. CNI shall have the right to use the digital channel
for 24 hour CNI digital programming.
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 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, 1998.
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.
15
<PAGE> 16
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 For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ -----
<S> <C> <C> <C> <C>
Advertising revenues ................................. 100.0% 100.0% 100.0% 100.0%
------ ------ ------ -----
Operating ............................................ 56.3 50.3 54.3 27.4
Selling, general and administrative .................. 71.4 155.0 73.5 95.4
Time brokerage and affiliation fees .................. 7.6 9.6 7.8 13.7
Stock-based compensation ............................. 16.2 9.9 8.2 8.7
Adjustment of programming to net realizable value .... -- -- 42.0 --
Depreciation and amortization ........................ 33.6 34.3 33.9 31.1
------ ------ ------ -----
Total operating expenses ............................. 185.1 259.1 219.7 176.3
------ ------ ------ -----
Operating loss ....................................... (85.1) (159.1) (119.7) (76.3)
Other income (expense):
Interest expense ..................................... (18.9) (34.2) (19.5) (33.8)
Interest income ...................................... 3.0 16.0 2.8 14.6
Other expenses, net .................................. (1.2) (1.1) (1.0) (0.9)
Gain on sale of Travel Channel and television stations -- -- 35.5 56.4
Equity in loss of unconsolidated investment .......... -- (17.0) (1.4) (8.9)
------ ------ ------ -----
Loss before income taxes ............................. (102.2) (195.4) (103.3) (48.9)
Income tax benefit ................................... 27.7 71.0 34.1 17.5
------ ------ ------ -----
Net loss ............................................. (74.5) (124.4) (69.2) (31.4)
====== ====== ====== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Consolidated revenues for the three months ended September 30, 1999, increased
97% (or $28.6 million) to $58.1 million over the same period in 1998. This
increase was primarily due to the launch of PAX TV and increased distribution
via television, cable systems and satellite.
Expenses from operations for the three months ended September 30, 1999,
increased 41% (or $31.2 million) to $107.4 million over the same period in
1998. The majority of the expense increases were incurred as a result of the
launch of PAX TV and costs associated with operating new television stations.
These increases primarily included program rights amortization of $16.7
million, increased selling, general and administrative costs, such as
commissions and bad debt provisions of $4.0 million, increased time brokerage
and affiliation fees of $1.6 million associated with operating new television
stations, increased technical costs of $0.8 million, higher depreciation and
amortization of $9.4 million, primarily related to assets acquired and
increased stock based compensation of $6.5 million. These increases were
partially offset by lower promotion costs of $7.5 million, other selling,
general and administrative costs of $0.6 million, which were due to a reduction
in employees.
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<PAGE> 17
Interest expense for the three months ended September 30, 1999, increased to
$11 million or 9% over the same period in 1998 primarily due to a greater level
of senior debt throughout the period. At September 30, 1999, total long-term
debt and senior subordinated notes were $384 million, excluding DP Media debt
of $114 million which had no effect on the Company's interest expense for the
three months, compared with the balance of $353 million in the prior year.
Interest income for the three months ended September 30, 1999, decreased from
$4.7 million to $1.8 million or 63% over the same period in 1998 primarily due
to the reinvestment of cash held by qualified intermediary into television
station assets.
Because the Series B Convertible Preferred Stock was issued with a conversion
price per share that is less than the closing price of the Class A Common Stock
at the date of issuance, the Company recognized a beneficial conversion feature
in connection with the issuance of the stock equal to the amount of the discount
multiplied by the number of shares into which Series B Convertible Preferred
Stock is convertible. The full amount of the beneficial conversion feature,
approximately $65.5 million, has been reflected in the accompanying statement of
operations as a dividend during the third quarter and has been allocated to
additional paid-in capital in the accompanying balance sheet.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Consolidated revenues for the nine months ended September 30, 1999, increased
83% (or $76.2 million) to $167.7 million over the same period in 1998. This
increase was primarily due to the launch of PAX TV and increased distribution
via television, cable systems and satellite.
Expenses from operations for the nine months ended September 30, 1999,
increased 129% (or $207.2 million) to $368.4 million over the same period in
1998. The largest increase in expense relates to the programming rights
adjustment to net realizable value of $70.5 million, reflecting a decrease in
programming value due to lower anticipated future usage, ratings and related
revenues for these programs. The majority of the remaining expense increases
were incurred as a result of the launch of PAX TV and costs associated with
operating new television stations. These increases primarily included program
rights amortization of $59.3 million, increased selling, general and
administrative costs, such as commissions and bad debt provisions of $14.6
million, and other selling, general and administrative costs of $22.1 million,
which were higher primarily due to additional employees hired and regional
sales offices added, increased technical costs of $2.1 million, higher
depreciation and amortization of $28.4 million, primarily related to assets
acquired and increased stock based compensation expense of $5.7 million. These
increases were partially offset by promotion costs of $0.7 million.
Interest expense for the nine months ended September 30, 1999, increased to
$32.7 million or 6% over the same period in 1998 primarily due to a greater
level of senior debt throughout the period.
Interest income for the nine months ended September 30, 1999, decreased from
$13.3 million to $4.7 million or 65% over the same period in 1998 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, the transfer of the Company's
interest in KWOK and the sale of four television stations.
Because the Series B Convertible Preferred Stock was issued with a conversion
price per share that is less than the closing price of the Class A Common Stock
at the date of issuance, the Company recognized a beneficial conversion feature
in connection with the issuance of the stock equal to the amount of the discount
multiplied by the number of shares into which Series B Convertible Preferred
Stock is convertible. The full amount of the beneficial conversion feature,
approximately $65.5 million, has been reflected in the accompanying statement of
operations as a dividend during the third quarter and has been allocated to
additional paid-in capital in the accompanying balance sheet.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at September 30, 1999 and December 31, 1998,
respectively, was $367 million and $1.8 million and the ratio of current assets
to current liabilities was 3.18:1 and 1.01:1. The increase in working capital
is primarily due to the proceeds from the Series B Convertible Preferred Stock
sale in September 1999.
17
<PAGE> 18
Cash used in operations of approximately $(147.7) million and $(75.8) million
for the nine months ended September 30, 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 the convertible preferred stock
issuance, proceeds from long term debt borrowings 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 $11.4 million remaining in
an interest bearing escrow as of September 30, 1999. In connection with DP
Media's credit facility, in August 1999 DP Media placed approximately $7.7
million in an interest bearing escrow account as a deposit to secure future
interest payments.
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 was to expire in August 1999 but has been extended through
February 2000. All borrowings under this facility are secured by the equipment
purchased with the proceeds drawn. At September 30, 1999, the Company had
borrowings of approximately $31 million outstanding under the equipment
facility. Subsequent to September 30, 1999, the Company has borrowed an
additional $0.4 million. The Company is using the equipment facility to fund
the majority of its capital expenditure needs.
The Company has generated operating losses since the launch of PAX TV. While
the Company expected to incur operating losses during the startup phase of PAX
TV, it has revised its expectations as to the length of time such operating
losses will continue in order to better reflect the period of time required for
a new network such as PAX TV to build an effective sales and marketing
operation and gain acceptance among advertisers. While ratings for PAX TV and
network and long form advertising revenues have generally met the Company's
expectations, the Company has adjusted its sales and marketing strategies to
focus on agency rather than direct sales of advertising airtime in order to
increase non-network advertising revenue. The Company believes that as more
historical ratings data for PAX TV become available, and as the Company
continues to refine its sales and marketing efforts and begins to implement new
sales strategies in cooperation with NBC, advertisers will become more familiar
with PAX TV and are likely to increase PAX TV's participation in quarterly and
annual advertising expenditure cycles. The Company also intends to enter into
JSA's for stations in markets where NBC and PAX TV both have stations and to
enter into JSA's for stations in additional markets in order to increase
revenue and reduce expenses.
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, debt service payments and the
Company's working capital requirements.
As of September 30, 1999, the Company's programming contracts require
collective payments by the Company of approximately $289.2 million as follows
(in thousands):
<TABLE>
<CAPTION>
Obligations Program
for Program Rights
Rights Commitments Total
----------- ----------- --------
<S> <C> <C> <C>
1999 (October - December)................ $ 31,022 $ 3,072 $ 34,094
2000..................................... 84,670 6,040 90,710
2001..................................... 61,138 7,552 68,690
2002..................................... 38,298 11,512 49,810
2003..................................... 4,737 17,661 22,398
Thereafter through 2005.................. -- 23,547 23,547
-------- ------- --------
$219,865 $69,384 $289,249
======== ======= ========
</TABLE>
The Company has also committed to purchase at similar terms additional future
series episodes of its licensed programs should they be made available.
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<PAGE> 19
As of September 30, 1999, obligations for cable distribution rights require
collective payments by the Company of approximately $43.5 million over such
periods as follows (in thousands):
1999 (October - December).......................... $22,420
2000 .............................................. 12,019
2001 .............................................. 6,403
2002 .............................................. 2,121
2003 .............................................. 180
Thereafter ........................................ 358
-------
43,501
Less: Amount representing interest ................ (3,733)
-------
Present value of cable rights payable ............. $39,768
=======
The Company has taken steps to defer obligations on cable distribution rights
by offering cable system operators the option of taking their payments in
common stock of the Company or cash in the future when the obligations become
due. If the cable system operators elect to take their payments in Company
stock this year, the Company's cash payment obligations will be reduced by
approximately $18.4 million in exchange for the issuance of approximately
2,162,000 shares. In October 1999, one cable system operator elected to acquire
approximately 710,000 shares of common stock in lieu of cash of approximately
$5.5 million.
Currently, the Company has agreements to purchase significant assets of, or to
enter into time brokerage and financing arrangements with respect to, DP Media
and other broadcast properties:
Anticipated to close in 1999 (October - December)......... $187,535
Anticipated to close in 2000 and thereafter .............. 101,624
--------
$289,159
========
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.
The Company's liquidity is significantly affected by its operating performance
and capital commitments for programming, cable distribution and acquisitions as
described above, and by its current debt service and working capital
requirements. The Company is also subject to certain minimum liquidity
requirements under the terms of the equipment facility.
In September, 1999, the Company issued shares of Series B Convertible Preferred
Stock and common stock purchase warrants to NBC for gross proceeds of $415
million. The Company believes that its available cash balances will provide it
with sufficient liquidity to fund its capital requirements through the year 2000
and the foreseeable future.
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 operations.
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.), and 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;
19
<PAGE> 20
(3) External vendors and suppliers -- these include satellite transmission
operators, cable television operators, and other third parties whose
systems failures potentially could have a significant adverse impact on
the Company's operations; and
(4) Facilities -- these include fire alarm systems, phone systems and access
control systems.
The Company has completed its inventory of software systems and equipment and
has identified external vendors and suppliers whose systems failures could have
a significant impact on the Company's operations. The Company has 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 replaced the general ledger and accounts payable
sections of its financial system with a Year 2000 compliant system during the
second quarter of 1999. The Company is currently replacing the fixed assets
section of its financial system with a Year 2000 compliant system which is
expected to be operational by December 31, 1999. The implementation of these
new systems minimizes the possibility of Year 2000 issues significantly
interrupting normal operations.
The Company has completed its assessment, remediation, testing and
certification of third party software for all mission-critical systems and
components.
The Company is currently preparing contingency plans to identify and handle its
worst case scenarios. It expects to complete these plans by November 30, 1999.
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.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In October and November 1999, complaints were filed in the 15th Judicial Circuit
Court in Palm Beach County, Florida, and in the court of Chancery of the State
of Delaware against certain of the Company's officers and directors by purported
shareholders of the Company alleging breach of fiduciary duty by the directors
in approving the transactions with NBC which occurred in September 1999. The
complaints allege that the directors rejected an unsolicited takeover offer
which would have provided the Company's shareholders with a substantial premium
and instead completed the transactions with NBC with the intention of benefiting
Company directors. The Company believes the suits to be wholly without merit and
intends to vigorously defend its actions on these matters.
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. An agreement to settle
the suit has been reached. The suit settlement will not have a material effect
on the Company's financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
Exhibit No. Description
- ----------- -----------
3.1.1 Certificate of Incorporation of the Company (1)
3.1.2 Bylaws of the Company (2)
3.1.3 Certificate of Designation of the Company's Junior Cumulative
Compounding Redeemable Preferred Stock (1)
3.1.4 Certificate of Designation of the Company's 12 1/2% Cumulative
Exchangeable Preferred Stock (3)
3.1.5 Certificate of Designation of the Company's 9 3/4% Series A
Convertible Preferred Stock (4)
3.1.6 Certificate of Designation of the Company's 13 1/4% Cumulative
Junior Exchangeable Preferred Stock (4)
3.1.7 Certificate of Designation of the Company's 8% Series B
Convertible Exchangeable Preferred Stock (5)
10.207 Employment Agreement, dated September 15, 1999, between the
Company and Jeffrey Sagansky
27 Financial Data Schedule (for SEC use only)
- --------------------------
(1) Filed with the Company's Annual Report on Form 10-K, for the year ended
December 31, 1994 and incorporated herein by reference.
(2) Filed with the Company's Registration Statement on Form S-1, as amended,
filed January 26, 1996, Registration No. 333-473 and incorporated herein
by reference.
(3) Filed with the Company's Registration Statement on Form S-3, as amended,
filed August 15, 1996, Registration No. 333-10267 and incorporated herein
by reference.
(4) Filed with the Company's Registration Statement on Form S-4, as amended,
filed July 23, 1998, Registration No. 333-59641 and incorporated herein by
reference.
(5) Filed with the Company's Form 8-K dated September 15, 1999 and
incorporated herein by reference.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated September 15, 1999,
under Item 5. Other Events, in connection with National Broadcasting
Company, Inc.'s $415 million investment in the Company.
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PAXSON COMMUNICATIONS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAXSON COMMUNICATIONS CORPORATION
Date: November 22, 1999 By: /s/ Jeffrey Sagansky
-----------------------------------
Jeffrey Sagansky
Chief Executive Officer, President
and Director (Principal Executive
Officer)
Date: November 22, 1999 By: /s/ John F. DeLorenzo
------------------------------
John F. DeLorenzo
Executive Vice President,
Chief Financial Officer and Director
(Principal Financial Officer)
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Exhibit 10.207
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of this 15th day
of September, 1999 (the "Effective Date"), by and between Paxson Communications
Corporation, a Delaware corporation with its principal place of business at 601
Clearwater Park Road, West Palm Beach, Florida 33401-6233 (the "Company") and
Jeffrey Sagansky, an individual whose address is 53 East 80th Street, New York,
New York 10021 (the "Executive") (collectively, the "Parties").
The Company desires to employ the Executive as President and Chief
Executive Officer ("CEO"), and the Parties desire to enter into this agreement
to secure the Executive's employment during the term hereof, all on the terms
and conditions set forth herein.
NOW, THEREFORE, the Parties agree as follows:
1. TITLE. The Company hereby employs the Executive and the Executive
agrees to serve the Company as President and CEO, headquartered
principally in the Company's West Palm Beach, Florida offices, on the
terms and conditions hereinafter set forth.
2. EMPLOYMENT TERM AND LOCATION. The term of the Executive's employment by
the Company pursuant to this Agreement shall be four years, commencing
on the Effective Date and terminating on the anniversary of the
Effective Date in 2003, unless sooner terminated pursuant to Paragraph
8 hereof (the "Term of Employment"). The Executive may reside in the
New York, New York metropolitan area but shall commute to the Company's
West Palm Beach, Florida offices on a schedule mutually acceptable to
the Executive and the Chairman of the Company (the "Chairman").
3. DUTIES. The Executive shall report directly and solely to the Chairman.
The Executive shall have all of the power, authority and
responsibilities customarily attendant to the position of President and
CEO, including the supervision and responsibility for all operations
and management of the Company, its subsidiaries and any entity
controlled by the Company (the "Paxson Group"). All employees of the
Paxson Group, other than the Chairman, shall report to the Executive or
to such other managers as the Executive shall designate. Consistent
with the position of President and CEO, the Executive shall work under
the direction and control of the Chairman. The Company shall use
reasonable efforts to assure that the Executive is elected to the Board
of Directors of the Company and to the Executive Committee of the Board
of Directors, if and when the Board establishes such a committee.
The Executive shall render his services under this Agreement loyally
and faithfully, to the best of his abilities and in substantial
conformance with all laws and all written Company rules and policies
which apply to senior executives and of which the Executive has notice.
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Except as expressly modified herein, the Executive shall be subject to
all of the Company's written policies, including conflicts of interest,
as well as the following:
(a) The Executive will comply with all Company and professional
standards governing the Executive's objectivity in the
performance of the Executive's duties. The Executive will not,
without the prior approval of the Chairman or the Compensation
Committee of the Company's Board of Directors (the
"Compensation Committee"), accept any gift, compensation or
gratuity (which excludes business meals and entertainment
received by the Executive in the ordinary course of business)
from any person or entity with which the Paxson Group or any
of their broadcast properties is or may be in competition or
in any instance where there is a stated or implied expectation
of favorable treatment of that person or entity. The Executive
will not, without the prior written approval of the Chairman
or the Compensation Committee, take advantage of any business
opportunity or situation or engage in any enterprise or
venture in which the Paxson Group has an interest on his own
behalf, if said business opportunity or situation, enterprise
or venture is related in any material way to the business of
the Paxson Group.
(b) In performing his duties under this Agreement, the Executive
shall conduct himself with due regard to social conventions,
public morals and standards of decency, and will not cause or
permit any situation or occurrence which would tend to
degrade, scandalize, bring into public disrepute, or otherwise
lower the community standing of the Executive, or the
Company's public image.
4. (a) BASE SALARY. The Company shall pay the Executive a base salary
(the "Base Salary"), to be paid on the same payroll cycle as
other executive officers of the Company, at an initial annual
rate of $600,000. The Base Salary shall be increased annually
during the Term of Employment, effective on each anniversary
of the Effective Date, by an amount equal to 10% of the Base
Salary in effect for the most recently ended twelve months
(i.e., cumulatively).
(b) ANNUAL BONUS. In addition to the Base Salary, the Executive
shall be eligible to earn a bonus for each of the whole or
partial calendar years during the Term of Employment, subject
to (i) the satisfaction of annual performance benchmarks for
"minimum revenues," "target revenues" or "excess revenues,"
established by the Compensation Committee of the Board of
Directors, and (ii) the Executive being actively employed by
the Company on December 31 of such calendar year (except for
any bonus for the partial calendar year during which the Term
of Employment expires or is terminated), unless the
Executive's employment has terminated due to the Executive's
death, Good Reason, Disability or other than for Good Cause,
pursuant to subparagraphs (a), (c), (d) or (e) of Paragraph 8.
The bonus shall be equal to the following percentages of the
Base Salary paid to the Executive in the preceding calendar
year: (A) 50% of Base Salary upon the attainment of the
"minimum revenues" benchmark; (B) 100% of Base Salary upon the
attainment of the "target revenues" benchmark; or (C) 200% of
Base Salary upon the attainment of the "excess revenues"
benchmark. The benchmarks shall be established by the
Compensation
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<PAGE> 3
Committee and shall be the same benchmarks used for
determining the bonus compensation of the Chairman (so long as
the Chairman shall be Lowell W. Paxson). Any bonus
compensation earned shall be payable within the first six
months of the calendar year following the year to which the
bonus applies, and will be prorated for any partial calendar
year during the Term of Employment on the basis of the
Executive's period of service during such year. No employee of
the Company shall be entitled to a larger annual performance
bonus from the Company (except with respect to any partial
calendar years during the Term of Employment). If the
Compensation Committee fails to establish new benchmarks for
any calendar year during the Term of Employment, the
benchmarks for the Executive shall remain at those last set
for the Chairman.
(c) OPTIONS. The Company shall grant the Executive non-qualified
stock options (the "Options") to purchase an aggregate of
2,000,000 shares of Class A Common Stock of the Company, which
shall become exercisable (i.e., "vest") at a rate of 500,000
shares on each anniversary of the Effective Date during the
Term of Employment and expiring on the tenth anniversary of
the Effective Date. The option exercise prices shall be (i)
for Options vesting on the first anniversary of the Effective
Date, $10.00 per share, (ii) for Options vesting on the second
anniversary of the Effective Date, the lower of $14 per share
or the Fair Market Value of the Class A Common Stock as of the
anniversary of the Effective Date in 2000, (iii) for Options
vesting on the third anniversary of the Effective Date, the
lower of $18 per share or the Fair Market Value of the Class A
Common Stock on the anniversary of the Effective Date in 2001,
and (iv) for Options vesting on the fourth anniversary of the
Effective Date, the lower of $21 per share or the Fair Market
Value of the Class A Common Stock on the anniversary of the
Effective Date in 2002. The Options shall be governed by the
terms of a Stock Option Agreement, substantially in the form
attached hereto as Exhibit A, which the Executive agrees to
execute upon grant of the Options. Notwithstanding any other
provision of this Agreement, if, at any time after Lowell W.
Paxson ceases to be the FCC Single Majority Shareholder of the
Company (as such term is defined under applicable laws and the
rules and regulations of the Federal Communications Commission
(the "FCC")), the Executive's employment under this Agreement
is terminated other than by reason of Executive's death or
Disability and other than for Good Cause (each as defined
below), then, (x) if termination occurs prior to the
anniversary of the Effective Date in 2001, 75% of the Options
to be granted pursuant to this paragraph shall immediately
vest and the balance of such Options shall be forfeited, and
(y) if termination occurs on or after the anniversary of the
Effective Date in 2001, all of the Options shall fully and
immediately vest. The exercise price of all Options which
become vested by reason of the acceleration of vesting
pursuant to the preceding sentence shall be determined in
accordance with clauses (i)-(iv) above, except that if any
Effective Date anniversary stated in such clauses is a date
subsequent to the date of termination of employment, then the
relevant Effective Date anniversary for purposes of
determining
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<PAGE> 4
the exercise price of such options shall be the Effective Date
anniversary immediately preceding the date of termination of
employment. For purposes of the Options, the "Fair Market
Value" of the Class A Common Stock on any date shall be equal
to the arithmetic average of the closing sale prices of the
Class A Common Stock for the 45 consecutive trading days
ending on the trading day immediately preceding the date of
determination on the principal securities exchange on which
the Class A Common Stock is listed for trading.
(d) WITHHOLDING. The Company will have the right to withhold from
payments otherwise due and owing to the Executive, an amount
sufficient to satisfy any required federal, state, and/or
local income and payroll taxes and any other amounts required
by law to be withheld.
5. EMPLOYEE BENEFITS. During the Term of Employment, the Executive shall
be eligible to participate, on the same basis as other members of the
Company's senior executive group, in all employee benefit plans and
arrangements sponsored or maintained by the Company for the benefit of
its employees generally and for its senior executive group (which for
this purpose means any one or more senior executives, excluding the
Chairman), including, without limitation, the Supplemental Executive
Retirement Plan, all group insurance plans (term life, medical and
disability) and retirement plans, as long as any such plan or
arrangement remains generally applicable to its senior executive group.
The Executive shall be entitled to four weeks of paid vacation for each
twelve month period of employment; the Executive may take vacation in
accordance with Company policy, consistent with the best interests of
the Company.
6. BUSINESS EXPENSES. The Executive shall be reimbursed for all reasonable
expenses incurred by him in the discharge of his duties, including, but
not limited to, expenses for entertainment and travel, provided the
Executive shall account for and substantiate all such expenses in
accordance with the Company's written policies for its senior executive
group (which for this purpose means any one or more senior executives,
excluding the Chairman). The Executive shall be entitled to the use of
Company aircraft for business travel in accordance with past practices,
and to first class commercial air transportation and hotel
accommodations.
7. FREEDOM TO CONTRACT. The Executive represents and warrants that he has
the right to enter into this Agreement, is eligible for employment by
the Company and that no other written or verbal agreements exist which
would be in conflict with or prevent performance of any portion of this
Agreement. The Executive further agrees to hold the Company harmless
from any and all liability arising out of any prior contractual
obligations entered into by the Executive. The Executive represents and
warrants that he has not made and will not make any contractual or
other commitments that would conflict with or prevent his performance
of any portion of this Agreement or conflict with the full enjoyment by
the Company of the rights herein granted. The Parties agree that, from
and after the Effective Date, the Employment Agreement between the
parties, dated as of June 10, 1998 (the "1998 Agreement"), shall be
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<PAGE> 5
terminated and of no further force or effect, except that the Executive
shall be entitled to receive all compensation and benefits accrued but
unpaid thereunder as of the Effective Date. Vesting and other terms of
existing stock options granted to the Executive shall be unaffected by
the termination of the 1998 Agreement.
8. TERMINATION. Notwithstanding the provisions of Paragraph 2 of this
Agreement, the Executive's employment under this Agreement and the Term
of Employment hereunder shall terminate on the earliest of the
following dates:
(a) DEATH. Upon the date of the Executive's death. In such event,
the Company shall pay to the Executive's legal representatives
or named beneficiaries (as the Executive may designate from
time to time in a writing delivered to the Company), (x) the
Executive's Base Salary in effect on the date of death for an
18 month period following the date of the Executive's death
(payable in accordance with the Company's normal payroll
practices during such period), (y) any bonus earned but not
paid as of the date of death, and (z) a pro rata bonus for the
calendar year in which the Executive died equal to the bonus
the Executive would have earned for such year if he had
remained actively employed with the Company through the end of
such calendar year and had continued to receive his Base
Salary through the end of such period multiplied by a
fraction, the numerator of which shall be the total number of
days of the calendar year which have lapsed as of the date of
his death and the denominator of which is 365. The Executive's
estate and legal representatives, beneficiaries and assigns
shall retain all Options which shall fully and immediately
vest as of the date of the Executive's death.
(b) GOOD CAUSE. Subject to the notice and cure provisions set
forth below, upon the date specified in a written notice from
the Board of Directors terminating the Executive's employment
for "Good Cause," consistent with the provisions of this
subparagraph (b). The term "Good Cause" as used in this
Agreement shall mean the occurrence of any of the following
events:
(i) the Executive's conviction of the commission of (A) a
felony, (B) any criminal act with respect to the Executive's
employment (including any criminal act involving a violation
of the Communications Act of 1934, as amended, or regulations
promulgated by the FCC), or (C) any act contrary to law that
materially threatens to result in suspension, revocation, or
adverse modification of any FCC license of any broadcast
station owned by the Paxson Group or that would subject any
such broadcast station to a material fine or forfeiture;
(ii) the Executive's demonstrable gross negligence in taking
any action, or omitting to take any action, which act or
omission would cause any member of the Paxson Group to be in
default under any material contract, lease or other agreement;
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<PAGE> 6
(iii) the Executive's dependence on alcohol or illegal drugs;
(iv) the Executive's willful failure or refusal to perform
according to or follow the lawful written policies and
directives of the Board of Directors or the Chairman (which
shall be consistent with Paragraph 3);
(v) the Executive's misappropriation, conversion or
embezzlement of any material assets of any member of the
Paxson Group;
(vi) the Executive's willful material breach of this
Agreement, including engaging in action in violation of
Paragraph 10;
(vii) the Executive making any representation in this
Agreement which is false in any material respect when made; or
(viii) the Executive's voluntary termination of his employment
without Good Reason (as defined below).
Except in the event of Executive's voluntary termination of
his employment, should the Company propose to terminate the
Executive's employment for Good Cause under this subparagraph
(b), the Company shall notify the Executive in writing of its
intention to terminate his employment and the specific
reason(s) therefor, and the Executive, on at least ten
business days' notice, shall have an opportunity to respond
thereto in writing; and if the basis for such termination is
susceptible of being cured by the Executive, the Company shall
afford the Executive a period of at least ten additional
business days to effect such cure, and the Executive's
employment may not be terminated until such period has expired
and the Executive has failed to effect such cure.
In the event of termination for Good Cause, the Company will
be released from all further obligation to the Executive,
except for (i) the payment of such Base Salary as may have
been earned but not paid prior to termination, (ii)
Executive's right to exercise any vested stock Options,
pursuant to his Stock Option Agreement, and (iii) any accrued
benefits under the Company's employee benefit plans in
accordance with the terms of those plans.
(c) GOOD REASON. Upon the date specified in a written notice from
the Executive terminating his employment for "Good Reason",
consistent with the provisions of this subparagraph (c). For
purposes of this subparagraph (c), "Good Reason" shall mean
that the Company has breached any of the material terms,
conditions and provisions of this Agreement. In such case, the
Executive shall notify the Company in writing of his intention
to terminate his employment and the specific reason(s)
therefor, and the Company, on at least ten business days'
notice, shall have an opportunity to
6
<PAGE> 7
respond thereto in writing; and if the basis for such
termination is susceptible of being cured by the Company, the
Executive shall afford the Company a period of at least ten
additional business days to effect such cure, and the
Executive may not terminate his employment until such period
has expired and the Company has failed to effect such cure. In
the event of such termination for Good Reason, the Company
shall (w) continue to pay the Executive the Base Salary,
including annual increases therein, for the remainder of the
original Term of Employment, or the remainder of any one year
renewal thereof, if termination occurs during such renewal
period, payable in accordance with the Company's normal
payroll practices during such period, (x) pay the Executive
any bonus earned but not paid as of the date of termination,
(y) pay the Executive any other bonus the Executive would have
earned under subparagraph 4(b) had he remained actively
employed through the original Term of Employment or the
balance of any one year renewal thereof, if termination occurs
during such renewal period (subject to the Company's
satisfaction of the benchmarks for the relevant calendar
years), and (z) provide continued coverage under any Company
employee benefit plans in which the Executive participates as
of the date of termination (on the same terms and conditions
then in effect) through the original Term of Employment or the
balance of any one year renewal thereof, if termination occurs
during such renewal period, and, except as expressly provided
in Paragraph 4(c) above, the Options shall vest as provided in
Paragraph 4(c) as though Executive's employment had not been
terminated.
(d) OTHER THAN GOOD CAUSE. Upon the date specified in a written
notice from the Board of Directors terminating the Executive's
employment for any reason other than Good Cause, death or
Disability (as defined in Paragraph 8(e) below), or in the
event no date is specified in the notice, upon the date on
which the notice is delivered to the Executive. In the event
of the termination of the Executive's employment pursuant to
this subsection (d), the Company shall (w) continue to pay the
Executive the Base Salary, including annual increases therein,
for the remainder of the original Term of Employment, or the
remainder of any one year renewal thereof, if termination
occurs during such renewal period (payable in accordance with
the Company's normal payroll practices during such period),
(x) pay the Executive any bonus earned but not paid as of the
date of termination, (y) pay the Executive any other bonus the
Executive would have earned under subparagraph 4(b) had he
remained actively employed through the original Term of
Employment or the remainder of any one year renewal thereof,
if termination occurs during such renewal period (subject to
the Company's satisfaction of the benchmarks for the relevant
calendar years), and (z) provide continued coverage under any
Company employee benefit plans in which the Executive
participates as of such date of termination (on the same terms
and conditions then in effect) through the original Term of
Employment or the remainder of any one year renewal thereof,
if termination occurs during such renewal period, and, except
as expressly provided in Paragraph 4(c) above, the Options
shall vest as
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<PAGE> 8
provided in Paragraph 4(c) as though Executive's employment
had not been terminated.
(e) DISABILITY. Upon the date specified in a written notice from
the Board of Directors terminating the Executive's employment
for "Disability." For purposes of this Agreement, the term
"Disability" shall mean that, due to illness or injury, the
Executive is unable to perform and exercise the essential
functions required of him under this Agreement, for either (i)
four consecutive months or longer, or (ii) a total of four
months or longer in any twelve month period. The Compensation
Committee shall determine whether the Executive has a
Disability based on written physician reports provided to the
Compensation Committee under the following procedures. The
Compensation Committee and the Executive shall each choose a
physician to supply a report regarding whether the Executive
should be deemed to have a Disability under the terms of this
subparagraph 8(e). If the reports of these two physicians
reach contrary conclusions regarding whether the Executive
should be deemed to have a Disability, the two physicians
shall select a third physician to prepare and provide to the
Compensation Committee another report regarding whether the
Executive should be deemed to have Disability under the terms
of this subparagraph 8(e). The Executive shall cooperate fully
with each such physician preparing a report to the
Compensation Committee under the terms of this subparagraph
8(e) by, among other things, executing any necessary releases
to grant such physician access to any and all of Executive's
medical records reasonably deemed by such physician to be
relevant to such determination, authorizing or requiring
physicians and any other health care professionals who have
treated or dealt with Executive to consult with such physician
regarding any matter reasonably deemed by such physician to be
relevant to such determination and submitting to such physical
or mental examinations or testing as may be reasonably deemed
by such physician to be relevant to such determination. The
Parties acknowledge and agree that any determination by the
Compensation Committee that the Executive has a Disability,
which is used as a basis for termination of the Executive's
employment pursuant to this Paragraph 8(e), shall be subject
to the arbitration provisions of Paragraph 12 below. In the
event of the termination of the Executive's employment by
reason of Executive's Disability, the Company shall (x)
continue to pay the Executive the Base Salary, including
annual increases therein, for the remainder of the original
Term of Employment, or the remainder of any one year renewal
thereof, if termination occurs during such renewal period
(payable in accordance with the Company's normal payroll
practices during such period), (y) pay the Executive any bonus
earned but not paid as of the date of termination, and (z)
provide continued coverage under any Company employee benefit
plans in which the Executive participates as of such date of
termination (on the same terms and conditions then in effect)
through the remainder of the original Term of Employment or of
any one year renewal thereof, if termination occurs during
such renewal period, and the Options
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<PAGE> 9
shall vest as provided in Paragraph 4(c) above as though
Executive's employment had not been terminated.
(f) TERM. Upon the expiration of the Term of Employment on the
anniversary of the Effective Date in 2003. In the event of the
termination of the Executive's employment upon the expiration
of the Term of Employment, the Company shall be obligated to
pay the Executive a prorated portion of any bonus the
Executive would have earned under subparagraph 4(b) had he
remained actively employed through the calendar year in which
the Term of Employment expires, equal to the bonus otherwise
payable multiplied by a fraction, the numerator of which is
the number of days in the relevant calendar year included in
the Term of Employment and the denominator of which is 365
(subject to the Company's satisfaction of the benchmarks for
such calendar year which are relevant to the bonus
calculation), and will be released from all further obligation
to the Executive pursuant to this Agreement, except for such
compensation as may have been earned but not paid prior to
termination.
Following the termination of the Term of Employment and the Executive's
employment under this Agreement, the Company will have no further
liability to the Executive hereunder and no further payments will be
made to him, except (i) as provided in subparagraphs (a) through (f)
above, (ii) to the extent that the Executive qualifies for benefits
under any employee benefit plan available to the Executive as provided
in Paragraph 5, and (iii) for the Executive's rights under the Stock
Option Agreement. In the event the Executive's employment is terminated
for Good Reason, other than for Good Cause or for Disability, pursuant
to subparagraphs 8(c),(d) or (e), respectively, the Executive's right
to continue to participate in any Company employee benefit plan shall
not be affected by the Executive's termination of employment, except
(i) the Company may substitute for its contribution to any
tax-qualified retirement plan on behalf of the Executive, an equivalent
contribution to a non-qualified retirement plan, and (ii) the Company
may terminate any welfare plan coverage to the extent the applicable
insurance carrier refuses to continue to provide such coverage under
the group insurance policy, in which event the Company shall have the
option of providing the Executive with comparable coverage under
individual insurance policies, to the extent such policies are
available, provided that if the Executive's employment is terminated by
the Company for other than Good Cause pursuant to Paragraph 8(d) or the
Executive terminates his employment with the Company for Good Reason,
the Company shall be obligated to continue to provide benefits
comparable to such welfare plan coverage regardless of whether or not
insurance policies are available to provide such benefits. The Company
shall not have the right to reduce any payments the Executive is
entitled to hereunder by any payments the Executive receives from any
other source of employment (whether before, during or after the Term of
Employment), and the Executive shall not have any duty to mitigate the
damages the Company will incur in making any payments hereunder to the
Executive following his termination of employment with the Company.
Upon the date of the termination of the Executive's employment pursuant
to subparagraph (c), (d) or (e) above, in consideration of
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(i) the payments to be made to the Executive pursuant to such
subparagraph and as a condition to the payment thereof, and (ii) the
Company's undertaking to make no derogatory or disparaging statement
about the Executive to any unrelated (to the Paxson Group) third party,
the Executive acknowledges that all such payments, if made in
accordance with this Agreement, shall constitute complete satisfaction
of all obligations owed by the Company to the Executive under this
Agreement (other than any benefits Executive has accrued under the
Company's employee benefit plans) and shall further constitute the
Executive's sole remedy against the Company; the Executive agrees that
if this provision becomes applicable he will execute a general release
to reflect these terms.
In the event that the Term of Employment has expired, no successor
agreement has been executed by the Executive and the Company, and the
Executive continues to provide his services to the Company at the
Company's request, such employment shall be at will on such terms and
conditions as may be established by the Company and may be terminated
for any reason or no reason at any time by either Party with or without
notice.
9. INSURANCE. If the Company desires at any time or from time to time
during the Term of Employment to apply in its own name or otherwise,
but at its own expense, for life, health, accident or other insurance
covering the Executive, the Company may do so and may take out such
insurance for any sum which the Company may deem necessary to protect
its interests hereunder. The Executive will have no right, title or
interest in or to such insurance, but will, nevertheless, assist the
Company in procuring and maintaining the same by submitting from time
to time to customary medical, physical and other examinations and
signing such applications, statements and other instruments as may
reasonably be required by the insurance company or companies issuing
such policies. The Company acknowledges that the Executive has made no
representation that he is insurable for these purposes.
10. RESTRICTIVE COVENANTS.
(a) FCC COMPLIANCE. The Executive represents that he does not
currently have, and warrants that during the Term of
Employment he will not have, or be involved with any
investment ownership interest or outside activity (such as a
board membership) which would result in either he or the
Company being in violation of the rules and regulations of the
FCC or the Communications Act of 1934, as amended.
(b) EXCLUSIVE SERVICES. The Executive shall during the Term of
Employment, except during vacation periods, periods of illness
and the like, devote his full and undivided business time and
attention to his duties and responsibilities for the Company.
During the Executive's employment with the Company, the
Executive shall not: (i) engage in any other business activity
that would interfere with his responsibilities or the
performance of his duties under this Agreement; (ii) have any
interest or involvement, directly or indirectly, in any
capacity (including as employee, director, consultant, owner,
lessor, manager, or lender), in any business enterprise that
10
<PAGE> 11
competes with the Paxson Group or that otherwise has interests
in conflict with the Paxson Group, including without
limitation, any television broadcast, cable television
network, or television programming service, provided however,
that (x) the Executive may own up to one percent (1%) of the
issued and outstanding common stock of any entity whose common
stock is traded on a nationally recognized stock exchange, and
(y) the Executive may sit on the boards of directors of other
entities, with the prior written approval of the Chairman,
which approval shall not be unreasonably withheld. The
Executive will not, during the Term of Employment, solicit
offers for the Executive's services, negotiate with potential
employers, enter into any oral or written agreement for the
Executive's services, give or accept any option for the
Executive's services, enter into the employment of, perform
services for, or grant or receive future rights of any kind
relating to the Executive's services to or from any person or
entity whatsoever other than the Company.
(c) NONINTERFERENCE. The Executive agrees that from the date of
this Agreement through the first anniversary of the date the
Executive's employment with the Company terminates, the
Executive will not, directly or indirectly, whether as sole
proprietor, partner, lessor, venturer, stockholder, director,
officer, employee, consultant or in any other capacity as
principal or agent or through any person, subsidiary,
affiliate or employee acting as nominee or agent, engage or
participate in any of the following actions:
(i) Influencing or attempting to influence any person or
entity who is a contracting party with any member of
the Paxson Group to terminate any written or oral
agreement with such member of the Paxson Group; or
(ii) Hiring or attempting to hire for employment or as an
independent contractor any person who is actively
employed (or in the preceding six months was actively
employed) by any member of the Paxson Group or
attempting to influence any such person to terminate
employment with any member of the Paxson Group.
(d) CONFIDENTIALITY. The Executive covenants and agrees that both
during the Term of Employment and thereafter he will not
disclose to any third party or use in any way (other than in
connection with the performance of his duties under this
Agreement) any confidential information, business secrets, or
business opportunity of the Company or its affiliates,
including, without limitation, advertiser lists, rate cards,
programming information, programming plans, marketing,
advertising and promotional ideas and strategies, marketing
surveys and analyses, ratings reports, budgets, research, or
financial, purchasing, planning, employment or personnel data
and information. Immediately upon termination of the
Executive's employment with the Company for any reason, or at
any other time upon the Company's request, the
11
<PAGE> 12
Executive will return to the Company or destroy all memoranda,
notes, records or other documents compiled by the Executive or
made available to the Executive during the Term of Employment
concerning the business of the Company or its affiliates, all
other confidential information and all personal property of
the Company or its affiliates, including, without limitation,
all files, audio or video tapes, recordings, records,
documents, drawings, specifications, lists, equipment,
supplies, promotional material, scripts, keys, phone or credit
cards and similar items and all copies thereof or extracts
therefrom.
(e) ENFORCEMENT. The Executive agrees that the restrictive
covenants contained in this Paragraph 10 are a material part
of the Executive's obligations under this Agreement for which
the Company has agreed to compensate the Executive as provided
in this Agreement. The Executive agrees that the injury the
Company will suffer in the event of the breach by the
Executive of any clause of this Paragraph 10 will cause the
Company irreparable injury that cannot be adequately
compensated by monetary damages alone. Therefore, the
Executive agrees that the Company, without limiting any other
legal or equitable remedies available to it, shall be entitled
to obtain equitable relief by injunction or otherwise from any
court of competent jurisdiction, including, without
limitation, injunctive relief to prevent the Executive's
failure to comply with the terms and conditions of Paragraph
10.
11. INTANGIBLE PROPERTY. The Executive will not at any time during or after
the Term of Employment have or claim any right, title or interest in
any trade name, trademark, or copyright belonging to or used by any
entity in the Paxson Group and shall not have or claim any right, title
or interest in any material or matter of any sort prepared for or used
in connection with the programming, advertising, broadcasting, or
promotion of any entity of the Paxson Group, whatever the Executives'
involvement with such matters may have been, and whether procured,
produced, prepared, published or broadcast in whole or in part by the
Executive, it being the intention of the Parties that the Executive
shall, and hereby does, recognize that the Paxson Group now has and
shall hereafter have and retain the sole and exclusive rights in any
and all such trade names, trademarks, copyrights (all the Executive's
work in this regard being a work for hire for the Company under the
copyright laws of the United States), character names, material and
matter as described above. The Executive shall cooperate fully with the
Company during his employment and thereafter in the securing of trade
name, patent, trademark or copyright protection or other similar rights
in the United States and in foreign countries and shall give evidence
and testimony and execute and deliver to the Company all papers
reasonably requested by it in connection therewith, provided however
that the Company shall reimburse the Executive for reasonable expenses
related thereto.
12. ARBITRATION. Any dispute regarding this Agreement shall be decided by
arbitration in West Palm Beach, Florida, in accordance with the
Expedited Arbitration Rules of the American Arbitration Association
then obtaining unless the Parties mutually agree otherwise; and,
12
<PAGE> 13
provided further, that both Parties will be entitled to all rights of
discovery in connection with such arbitration, including, without
limitation, all discovery rights described in the Florida Rules of
Civil Procedure. Any such arbitration shall be submitted to three
arbitrators from the Panel of Arbitrators of the American Arbitration
Association. The three arbitrators shall be selected in the following
fashion: (i) the Executive and the Company each shall select an
arbitrator from the Panel of Arbitrators of the American Arbitration
Association; and (ii) such two arbitrators by mutual agreement shall
select a third arbitrator from such Panel of Arbitrators. This
undertaking to arbitrate shall be specifically enforceable. The
decision rendered by the arbitrator will be final and judgment may be
entered upon it in accordance with appropriate laws in any court having
jurisdiction thereof. Notwithstanding the foregoing, the Company may
seek injunctive relief in accordance with Paragraph 10 of this
Agreement.
13. INDEMNIFICATION. The Company shall indemnify and hold the Executive
harmless, to the maximum extent permitted by law, against claims,
judgments, fines, amounts paid in settlement of and reasonable expenses
(including reasonable attorneys fees) incurred by the Executive in
connection with the defense of any claim, action or proceeding in which
he is a party by reason of his position with the Company, provided such
liability does not arise as a result of the Executive's gross
negligence. The Executive shall notify the Company promptly upon
learning of any claim, action or proceeding for which the Executive
intends to assert his right to indemnification under this Paragraph,
and the Company shall have the right to control the defense of any such
claim, action or proceeding on behalf of the Executive, including any
decision regarding the terms (if any) of settlement of such claim,
action or proceeding, provided that unless otherwise agreed to by the
Executive, any such settlement shall include statements that the
Executive does not admit any wrongdoing and the Company does not admit
any wrongdoing on the part of the Executive. The Company shall not
agree to any settlement of a claim, action or proceeding for which it
is indemnifying the Executive until it first has informed and consulted
with the Executive regarding the terms of such settlement, but the
Company shall not need the consent of the Executive to such settlement
(so long as the settlement complies with the immediately preceding
sentence). The Company's indemnification of the Executive under this
Paragraph shall indefinitely survive the termination or expiration of
this Agreement.
14. MISCELLANEOUS.
(a) WAIVER OR MODIFICATION. Any waiver by either Party of a breach
of any provision of this Agreement shall not operate as, or to
be, construed to be a waiver of any other breach of such
provision of this Agreement. The failure of a Party to insist
upon strict adherence to any term of this Agreement on one or
more occasions shall not be considered a waiver or deprive
that Party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement.
Neither this Agreement nor any part of it may be waived,
changed or terminated orally, and any waiver, amendment or
modification must be in writing and signed by each of the
Parties. Any
13
<PAGE> 14
waiver of any right of the Company hereunder or any amendment
hereof shall require the approval of the Chairman or the
Compensation Committee of the Board of Directors. Until such
approval or waiver has been obtained, no such waiver or
amendment shall be effective.
(b) SUCCESSORS AND ASSIGNS. The rights and obligations of the
Company under this Agreement shall be binding on and inure to
the benefit of the Company, its successors and permitted
assigns. The rights and obligations of the Executive under
this Agreement shall be binding on and inure to the benefit of
the heirs and legal representatives of the Executive. Neither
Party may assign this Agreement without the prior written
consent of the other.
(c) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall, when executed, be deemed to
be an original and all of which shall be deemed to be one and
the same instrument.
(d) GOVERNING LAW. This Agreement will be governed and construed
and enforced in accordance with the laws of the State of
Florida, without regard to its conflicts of law rules.
(e) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the Parties relating to the subject matter of
this Agreement and supersedes all other prior written or oral
agreements, understandings or arrangements. The Executive and
the Company each acknowledges that, in entering into this
Agreement, he/it does not rely on any statements or
representations not contained in this Agreement.
(f) SEVERABILITY. Any term or provision of this Agreement which is
determined to be invalid or unenforceable by any court of
competent jurisdiction in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity
or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms
or provisions of this Agreement in any other jurisdiction and
such invalid or unenforceable provision shall be modified by
such court so that it is enforceable to the extent permitted
by applicable law.
(g) NOTICES. Except as otherwise specifically provided in this
Agreement, all notices and other communications required or
permitted to be given under this Agreement shall be in writing
and delivery thereof shall be deemed to have been made (i)
three business days following the date when such notice shall
have been deposited in first class mail, postage prepaid,
return receipt requested, to any comparable or superior postal
or air courier service then in effect, or (ii) transmitted by
hand delivery to, or (iii) transmitted by telegram, telex,
telecopier or facsimile transmission (with receipt confirmed
by telephone), to the party entitled to receive the same, at
the address
14
<PAGE> 15
indicated below or at such other address as such party shall
have specified by written notice to the other party hereto
given in accordance herewith:
if to the Company: Lowell W. Paxson, Chairman
Paxson Communications Corporation
601 Clearwater Park Road
West Palm Beach, Florida 33401-6233
(tel) (561) 659-4122
(fax) (561) 655-9424
with a copy to: Paxson Communications Corporation
601 Clearwater Park Road
West Palm Beach, Florida 33401
Attn: General Counsel
(tel) (561) 659-4122
(fax) (561) 655-9424
if to the Executive: Jeffrey Sagansky
53 East 80th Street
New York, New York 10021
(tel) (212) 833-4921
(fax) (212) 833-5545
with a copy to: Jeffrey Mandell, Esq.
Gang, Tyre, Ramer & Brown, Inc.
132 South Rodeo Drive
Beverly Hills, California 90212-2425
(tel) (310) 777-4800
(fax) (310) 777-4801
(h) TITLES. The titles and headings of any paragraphs in this
Agreement are for reference only and shall not be used in
construing the terms of this Agreement.
(i) NO THIRD PARTY BENEFICIARIES. This Agreement does not create,
and shall not be construed as creating, any rights enforceable
by any person not a party to this Agreement.
(j) SURVIVAL. The covenants, agreements, representations and
warranties contained in this Agreement shall survive the
termination of the Term of Employment and the Executive's
termination of employment with the Company for any reason.
15
<PAGE> 16
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties as of the first date written above.
JEFFREY SAGANSKY
/s/ Jeffrey Sagansky
--------------------------------
PAXSON COMMUNICATIONS CORPORATION
By: /s/ Lowell W. Paxson
-----------------------------
Lowell W. Paxson
Chairman
16
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