<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, 2000
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 30, 2000:
Class of Stock Number of Shares
-------------- ----------------
COMMON STOCK-CLASS A, $0.001 PAR VALUE PER SHARE ............ 55,842,904
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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Part I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999........................................ 3
Consolidated Statements of Operations (unaudited) for the
Three and Nine Months Ended September 30, 2000
and 1999............................................................... 4
Consolidated Statement of Stockholders' Equity (unaudited)
for the Nine Months Ended September 30, 2000........................... 5
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2000 and 1999.......................... 6
Notes to Unaudited Consolidated Financial Statements...................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 10
Part II - Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................... 17
Signatures......................................................................... 18
</TABLE>
2
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 36,893 $ 125,189
Short-term investments ................................................. 80,818 124,987
Restricted cash and short-term investments ............................. 11,103 8,158
Accounts receivable, net of allowance for doubtful accounts
of $4,196 and $4,255, respectively................................... 34,040 40,069
Current portion of program rights ...................................... 82,096 79,686
Prepaid expenses and other current assets .............................. 2,748 2,777
----------- -----------
Total current assets ............................................. 247,698 380,866
Property and equipment, net .............................................. 179,934 189,908
Intangible assets, net ................................................... 951,011 916,145
Program rights, net of current portion ................................... 128,063 130,016
Investments in broadcast properties ...................................... 32,817 40,347
Other assets, net ........................................................ 13,171 32,805
----------- -----------
Total assets ...................................................... $ 1,552,694 $ 1,690,087
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities ............................... $ 15,683 $ 13,875
Accrued interest ....................................................... 3,325 7,862
Obligations for cable distribution rights .............................. 8,599 14,712
Obligation for satellite distribution rights ........................... 3,240 2,947
Obligations for program rights ......................................... 87,432 82,907
Income taxes payable ................................................... 799 2,010
Current portion of long-term debt ...................................... 31,288 18,698
----------- -----------
Total current liabilities ......................................... 150,366 143,011
Long-term liabilities:
Obligations for cable distribution rights, net of current portion ..... 7,994 6,672
Obligation for satellite distribution rights, net of current portion .. 11,250 12,000
Obligations for program rights, net of current portion ................ 97,106 112,153
Long-term debt ........................................................ 132,422 141,029
Senior subordinated notes, net ........................................ 229,023 228,694
----------- -----------
Total liabilities .................................................. 628,161 643,559
----------- -----------
Mandatorily redeemable preferred stock ................................... 1,048,660 949,807
----------- -----------
Commitments and contingencies ............................................ -- --
----------- -----------
Stockholders' equity (deficit):
Class A common stock, $0.001 par value; one vote per share; 215,000,000
shares authorized, 55,614,902 and 54,577,784 shares issued and
outstanding.......................................................... 56 55
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
Common stock warrants and call option ................................. 68,384 68,245
Stock subscription notes receivable ................................... (1,270) (1,270)
Additional paid-in capital ............................................ 422,506 417,652
Deferred option plan compensation ..................................... (9,324) (20,026)
Accumulated deficit ................................................... (604,487) (367,943)
----------- -----------
Total stockholders' equity (deficit) .............................. (124,127) 96,721
----------- -----------
Total liabilities, mandatorily redeemable preferred stock, and
stockholders' equity (deficit) ................................... $ 1,552,694 $ 1,690,087
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
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 For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues ............................................................. $ 73,443 $ 58,051 $ 230,050 $ 167,684
------------ ------------ ------------ ------------
Expenses:
Programming and broadcast operations ............................... 10,048 8,330 28,532 24,153
Program rights amortization ........................................ 26,702 24,332 78,633 66,924
Selling, general and administrative ................................ 47,105 41,435 134,876 123,249
Time brokerage and affiliation fees ................................ 961 4,425 4,331 13,057
Stock-based compensation ........................................... 3,090 9,419 10,840 13,712
Adjustment of programming to net realizable value .................. -- -- 24,400 70,499
Depreciation and amortization ...................................... 22,594 19,488 65,168 56,844
------------ ------------ ------------ ------------
Total expenses ................................................. 110,500 107,429 346,780 368,438
------------ ------------ ------------ ------------
Operating loss ....................................................... (37,057) (49,378) (116,730) (200,754)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense ................................................... (11,962) (10,997) (35,354) (32,714)
Interest income .................................................... 3,271 1,758 11,957 4,686
Other expenses, net ................................................ (2,227) (686) (4,668) (1,694)
Gain on restructuring of program rights obligations ................ 78 -- 9,988 --
Gain on sale of Travel Channel and television stations ............. 2,462 -- 662 59,453
Equity in loss of unconsolidated investment ........................ -- -- -- (2,260)
------------ ------------ ------------ ------------
Loss before income taxes ............................................. (45,435) (59,303) (134,145) (173,283)
Income tax benefit ................................................... -- 16,050 -- 57,291
------------ ------------ ------------ ------------
Net loss ............................................................. (45,435) (43,253) (134,145) (115,992)
Beneficial conversion feature on issuance of convertible
preferred stock .................................................... -- (65,467) -- (65,467)
Dividends and accretion on redeemable preferred stock ................ (34,638) (21,039) (102,399) (56,162)
------------ ------------ ------------ ------------
Net loss available to common stockholders ............................ $ (80,073) $ (129,759) $ (236,544) $ (237,621)
============ ============ ============ ============
Basic and diluted loss per share ..................................... $ (1.26) $ (2.10) $ (3.74) $ (3.87)
============ ============ ============ ============
Weighted average shares outstanding ................................... 63,705,076 61,887,000 63,296,286 61,424,064
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
4
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Common Total
Stock Stock Stock
Common Stock Warrants Subscirption Additional Deferred holders's
--------------- and Call Notes Paid-in Option Plan Accumulated Equity
Class A Class B Option Receivable Capital Compensation Deficit (Deficit)
------- ------- -------- ------------ ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 ....... $55 $ 8 $68,245 $ (1,270) $ 417,652 $ (20,026) $(367,943) $ 96,721
Stock issued for acquisition... -- -- -- -- 250 -- -- 250
Amortization of stock-based
compensation ................ -- -- -- -- -- 10,702 -- 10,702
Stock options exercised ....... 1 -- -- -- 4,604 -- -- 4,605
Repricing of common stock
warrants...................... -- -- 139 -- -- -- -- 139
Dividends on redeemable and
convertible preferred stock -- -- -- -- -- -- (82,546) (82,546)
Accretion on redeemable
preferred stock ............. -- -- -- -- -- -- (19,853) (19,853)
Net loss ...................... -- -- -- -- -- -- (134,145) (134,145)
--- ----- -------- --------- --------- --------- --------- ---------
Balance, September 30, 2000
(unaudited)..................... $ 56 $ 8 $68,384 $ (1,270) $ 422,506 $ (9,324) $(604,487) $(124,127)
==== ==== ======= ========= ========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
5
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PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $(134,145) $(115,992)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 65,168 56,844
Stock-based compensation ................................................ 10,840 13,712
Program rights amortization ............................................. 78,633 66,924
Adjustment of programming to net realizable value ....................... 24,400 70,499
Payments for cable distribution rights .................................. (6,113) (28,523)
Program rights payments and deposits .................................... (87,712) (96,228)
Provision for doubtful accounts ......................................... 2,450 5,119
Deferred income tax benefit ............................................. -- (59,084)
Loss on sale or disposal of assets ...................................... 1,489 (671)
Equity in loss of unconsolidated investment ............................. -- 2,260
Gain on restructuring of program rights obligations ..................... (9,988) --
Gain on sale of Travel Channel and television stations .................. (662) (59,453)
Changes in assets and liabilities:
(Increase) decrease in restricted cash and short-term investments ..... (2,945) 6,705
Decrease (increase) in accounts receivable ............................ 1,778 (8,875)
Decrease (increase) in prepaid expenses and other current assets ...... 29 (1,272)
Decrease in other assets .............................................. 2,693 4,237
Increase (decrease) in accounts payable and accrued liabilities ....... 1,807 (11,160)
Decrease (increase) in accrued interest ............................... (4,536) 6,825
(Decrease) increase in current income taxes payable ................... (1,211) 480
--------- ---------
Net cash used in operating activities................................ (58,025) (147,653)
--------- ---------
Cash flows from investing activities:
Redemption of short-term investments ..................................... 44,169 --
Acquisitions of broadcasting properties .................................. (83,832) (53,828)
Decrease in investments in broadcast properties .......................... 7,018 10,189
Collection of notes receivable from CAP Communications Inc. .............. -- 30,644
Decrease in deposits on broadcast properties ............................. 2,917 3,974
Purchases of property and equipment ...................................... (16,249) (22,604)
DP Media cash balance upon consolidation ................................ -- 4,310
Proceeds from sales of Travel Channel and television stations ............ 10,150 120,727
--------- ---------
Net cash (used in) provided by investing activities .................. (35,827) 93,412
--------- ---------
Cash flows from financing activities:
Proceeds from exchangeable and convertible preferred stock, net .......... -- 406,500
Proceeds from borrowings of long-term debt ............................... 6,815 10,858
Repayments of long-term debt ............................................. (2,007) (1,633)
Preferred Stock dividends paid ........................................... (3,546) --
Payment of loan origination costs ........................................ (310) --
Proceeds from exercise of common stock options, net ...................... 4,604 4,145
Repayments of stock subscription notes receivable ........................ -- 1,014
--------- ---------
Net cash provided by financing activities ........................... 5,556 420,884
--------- ---------
(Decrease) increase in cash and cash equivalents ............................ (88,296) 366,643
Cash and cash equivalents at beginning of period ............................ 125,189 49,440
--------- ---------
Cash and cash equivalents at end of period .................................. $ 36,893 $ 416,083
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
6
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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Paxson Communications Corporation's (the "Company") financial information
contained in the financial statements and notes thereto as of September 30, 2000
and for the three and nine month periods ended September 30, 2000 and 1999, 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 year ended December 31, 1999.
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries and those of DP Media, Inc. ("DP Media"), a
company acquired in June 2000 which, prior to such acquisition, was beneficially
owned by family members of Mr. Paxson (See Note 4). All significant intercompany
balances and transactions have been eliminated.
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 to the 2000 presentation. These
financial statements, footnotes and discussions should be read in conjunction
with the audited 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, 1999, the definitive proxy statement for the annual meeting of
stockholders held May 1, 2000, and the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2000 and June 30, 2000, all of which were filed
with the United States Securities and Exchange Commission.
2. GAIN ON FORGIVENESS AND ASSIGNMENT OF CERTAIN PROGRAM RIGHTS OBLIGATIONS
In March 2000, the Company gave up its rights to air certain syndicated
programming, in exchange for approximately $4.9 million in cash and forgiveness
of the remaining programming rights payments due under the original programming
agreement. In September 2000, the Company assigned certain other programming
rights to a third party who assumed the Company's remaining payment obligation.
In connection with this transaction, $2.8 million of deferred gain was recorded.
The deferred gain is being amortized over the term of the third party's assumed
payments as the Company remains liable should the third party default. In
connection with these transactions, the Company recorded a gain of approximately
$10 million during the nine months ended September 30, 2000.
3. ADJUSTMENT OF PROGRAMMING TO NET REALIZABLE VALUE
In addition to its existing inventory of program rights, the Company continues
to develop additional original programming and purchase additional syndicated
programs, as well as negotiate with the National Broadcasting Company, Inc.
("NBC") for the acquisition of programming. The Company has entered into certain
Joint Sales Agreements with NBC and NBC affiliated television station operators
whereby the Company expects to obtain rights to additional news or syndicated
programming. As a result of these factors, the Company adjusted its estimates of
the anticipated future usage of its existing programming assets and the related
advertising revenues to be generated by such programming, and recorded an
expense of approximately $24.4 million related to a reduction of the carrying
value of certain of its programming rights during the three months ended March
31, 2000.
4. DP MEDIA
In June 2000, the Company completed the acquisition of DP Media for aggregate
consideration of $113.5 million, $106 million of which had previously been
advanced by the Company during 1999. DP Media's assets included a 32% equity
interest in a limited liability company controlled by the former stockholders of
DP Media, which owns television station WWDP in Norwell, Massachusetts. The
Company is entitled to receive a 45% distribution of the proceeds upon sale of
the station.
As a result of the Company's significant operating relationships with DP Media
prior to its acquisition, the assets and liabilities of DP Media, together with
its results of operations, were included within the consolidated financial
statements of the Company as of September 30, 1999. The Company allocated the
aggregate purchase price of DP Media to the
7
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assets acquired and liabilities assumed based on their relative fair market
values. The assets, liabilities and results of operations of WWDP are no longer
consolidated within the financial statements of the Company. The Company
accounts for its equity interest in WWDP utilizing the equity method of
accounting and has recorded its equity investment in WWDP within investments in
broadcast properties as of September 30, 2000.
5. MANDATORILY REDEEMABLE PREFERRED STOCK
The following represents a summary of the changes in the Company's mandatorily
redeemable preferred stock during the nine month period ended September 30,
2000.
<TABLE>
<CAPTION>
Junior
Exchangeable Exchangeable Convertible Convertible
Junior Preferred Preferred Preferred Exchangeable
Preferred Stock Stock Stock Preferred
Stock 12% 12 1/2% 13 1/4% 9 3/4% Stock 8% Total
--------- ------------ ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999................... $ 56,141 $ 217,561 $ 236,226 $ 83,644 $ 356,235 $949,807
Accretion................ 536 507 877 367 17,566 19,853
Accrual of cumulative
dividends.............. 5,319 21,115 24,682 6,530 24,900 82,546
Cash dividends........... (3,546) -- -- -- -- (3,546)
--------- --------- ---------- ---------- ---------- ----------
Balance at September 30,
2000 (unaudited)....... $ 58,450 $ 239,183 $ 261,785 $ 90,541 $ 398,701 $1,048,660
========= ========== ========== ========== ========== ==========
Shares authorized........ 33,000 440,000 72,000 17,500 41,500
========= ========== ========== ========== ==========
Shares issued and
outstanding............ 33,000 231,253 25,636 9,366 41,500
========= ========== ========== ========== ==========
Accrued dividends........ $ 1,773 $ 12,044 $ 12,738 $ -- $ 34,583
========= ========== ========== ========== ===========
</TABLE>
6. AUTHORIZATION OF ADDITIONAL COMMON STOCK
In September 1999, affiliates of NBC acquired $415 million aggregate liquidation
preference of the Company's mandatorily redeemable Series B Convertible
Preferred Stock, which is convertible into 31,896,032 shares of Class A Common
Stock, and warrants to purchase 32,032,127 shares of Class A Common Stock. The
Company agreed that, should NBC determine that its affiliates are prevented
under the Communications Act of 1934 and the rules of the Federal Communications
Commission from holding shares of Class A Common Stock upon conversion of Series
B Convertible Preferred Stock or exercise of warrants, the Series B Convertible
Preferred Stock held by NBC's affiliate shall be convertible into, and the
warrants shall be exercisable for, an equal number of shares of non-voting
common stock of the Company.
In order to provide sufficient authorized but unissued shares of Class C
Non-Voting Common Stock (which is convertible on a share for share basis into
Class A Common Stock) for NBC to exercise its rights described above, on May 1,
2000, the Company's stockholders approved an amendment to the Company's
certificate of incorporation to increase the total number of authorized shares
of Common Stock from 197,500,000 shares to 327,500,000 shares, the number of
authorized shares of Class A Common Stock from 150,000,000 shares to 215,000,000
shares, and the number of authorized shares of Class C Non-Voting Common Stock
from 12,500,000 shares to 77,500,000 shares.
7. INCOME TAXES
For the nine months ended September 30, 2000, the Company recorded a valuation
allowance related to its net deferred tax asset resulting from tax losses
generated during the period. Management believes that it is more likely than not
that it will be unable to realize such assets.
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8. 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. The effect of stock options and warrants is
antidilutive. Accordingly, the Company's presentation of diluted earnings per
share is the same as that of basic earnings per share.
At September 30, 2000 and 1999, respectively, there were outstanding 10,916,936
and 12,248,139 stock options and 32,427,627 Class A common stock warrants at
both September 30, 2000 and 1999. As of September 30, 2000, 37,611,032 shares of
Class A common stock were reserved for possible future issuance in connection
with the Series A and B Convertible Preferred Stock issues outstanding. These
securities that could potentially dilute earnings per share in the future were
not included in the computation of diluted earnings per share because to do so
would have been antidilutive for the periods presented.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash investing and financing
activities are as follows (in thousands):
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------------
2000 1999
------- -------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest ................................. $36,472 $22,533
======= =======
Cash paid for income taxes ............................. $ 1,211 $ 1,312
======= =======
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes ..... $ 329 $ 286
======= =======
Issuance of common stock in connection with acquisition $ 250 $ --
======= =======
Beneficial conversion feature on issuance of convertible
preferred stock ..................................... $ -- $65,467
======= =======
Dividends accrued on redeemable preferred stock ........ $82,546 $52,570
======= =======
Discount accretion on redeemable securities ............ $19,853 $ 3,592
======= =======
Satellite distribution ................................. $ -- $15,000
======= =======
Sale of KWOK in exchange for WCPX ...................... $ -- $30,000
======= =======
</TABLE>
10. AMENDMENT TO SENIOR CREDIT FACILITY
In September 2000, the Company amended certain terms of its Senior Credit
Facility. The amended terms include 1) allowing the Company to sell its
communications towers and related equipment, 2) allowing the Company to sell its
accounts receivable, 3) adjustment to the timing and amounts of principal
amortization, and 4) the amendment of certain financial condition covenants.
Currently, and under certain circumstances, the Company is required to deposit
quarterly into escrow an amount equal to principal amortization due in the
following quarter and annualized interest as calculated under the terms of the
agreement. The amendment of terms related to principal amortization included
reducing principal amortization from $70.2 million to $30.5 million through
December 31, 2001. As amended, the Company will be required to make its two
final principal payments under the Senior Credit Facility of $45.8 million on
each of March 31, 2002 and June 30, 2002.
9
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Paxson Communications Corporation (the "Company") is a network television
broadcasting company whose principal business is the ownership and operation of
the largest broadcast television station group in the United States through
which it broadcasts PAX TV, the Company's network of family friendly
programming. The Company commenced its television operations in early 1994 in
anticipation of deregulation of the broadcast industry. In response to federal
regulatory changes increasing limits on broadcast television station ownership
and mandating cable carriage of local television stations, the Company has
expanded rapidly, through acquisitions and construction of television stations,
to establish the largest owned and operated broadcast television station group
in the United States. The PAX TV Network 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,
as of September 30, 2000, the PAX TV Network reached 81% of US primetime
television households through broadcast, cable and satellite distribution. Upon
completion of pending transactions, the PAX TV Network will include 119
broadcast television stations, consisting of 66 of the 69 stations which are
currently owned and operated by the Company, or in which the Company has an
economic interest, and 54 non-owned or operated PAX TV affiliates. The stations,
which the Company will own, operate or have an economic interest in, will reach
19 of the top 20 markets and 42 of the top 50 markets. The Company's
consolidated operating revenues and expenses include the operating results of
stations operated under time brokerage agreements.
In September 1999, the Company entered into a strategic and financial
relationship with NBC, pursuant to which NBC (subject to the Federal
Communications Commission's and Department of Justice's approval) has the
ability to acquire voting and operational control of the Company. The Company
and NBC have entered into a number of agreements affecting the Company's
business operations, including an agreement under which NBC provides network
sales, marketing and research services for the Company's PAX TV network, and
joint sales agreements between the Company's stations and the NBC stations
serving the same markets. Pursuant to the terms of the joint sales agreements,
the NBC stations sell all non-network spot advertising of the Company's stations
and receive commission compensation for such sales and the Company's stations
may agree to carry one hour per day of the NBC station's syndicated or news
programming. Certain Company station operations, including sales operations, are
integrated with the corresponding functions of the related NBC station and the
Company reimburses NBC for the cost of performing these operations. During the
nine months ended September 30, 2000, the Company paid NBC approximately $10.0
million for commission compensation and cost reimbursements incurred in
conjunction with these agreements.
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 internet
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.
This Report contains forward-looking statements that reflect the Company's
current views with respect to future events and financial performance. These
forward-looking statements are made pursuant to the "safe harbor" provisions of
the Securities Litigation Reform Act of 1995 and involve risks and
uncertainties, including those identified below, which could cause actual
results to differ materially from historical results or those anticipated.
Statements as to what the Company "believes", "intends", "expects", or
"anticipates", and other similarly anticipatory expressions are generally
forward-looking statements and are made only as of the date of this Report. All
statements herein, other than those consisting solely of historical facts, that
address activities, events or developments that the Company expects or
anticipates will or may occur in the future, including such things as business
strategy, measures to implement strategy, competitive strengths, goals,
projected revenues, costs and other financial results, references to future
success and other events may be forward-looking statements. Statements herein
are based on certain assumptions and analysis made by the Company in light of
its experience and its perception of historical trends, current conditions and
potential future developments, as well as other factors it believes are
appropriate in the circumstances. Whether actual results, events and
10
<PAGE> 11
developments will conform with the Company's expectations is subject to a number
of risks and uncertainties and important factors that could cause actual
results, events and developments to differ materially from those referenced in,
contemplated by or underlying any forward-looking statements herein, many of
which are beyond the control of the Company. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise. Readers are
cautioned not to place undue reliance on these forward-looking statements.
Factors to consider in evaluating any forward-looking statements and the other
information contained herein and which could cause actual results to differ from
those anticipated in the forward-looking statements or otherwise adversely
affect the Company's business include those set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, as filed with
the US Securities and Exchange Commission.
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 these estimates.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth certain operating data for comparison of the
three and nine months ended September 30, 2000 (in thousands):
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues ...................................................... $ 73,443 $ 58,051 $ 230,050 $ 167,684
--------- --------- --------- ---------
Expenses:
Programming and broadcast operations ........................ 10,048 8,330 28,532 24,153
Program rights amortization ................................. 26,702 24,332 78,633 66,924
Selling, general and administrative ......................... 47,105 41,435 134,876 123,249
Time brokerage and affiliation fees ......................... 961 4,425 4,331 13,057
Stock-based compensation .................................... 3,090 9,419 10,840 13,712
Adjustment of programming to net realizable value ........... -- -- 24,400 70,499
Depreciation and amortization ............................... 22,594 19,488 65,168 56,844
--------- --------- --------- ---------
Total expenses .......................................... 110,500 107,429 346,780 368,438
--------- --------- --------- ---------
Operating loss ................................................ (37,057) (49,378) (116,730) (200,754)
--------- --------- --------- ---------
Other income (expense):
Interest expense ............................................ (11,962) (10,997) (35,354) (32,714)
Interest income ............................................. 3,271 1,758 11,957 4,686
Other expenses, net ......................................... (2,227) (686) (4,668) (1,694)
Gain on restructuring of program rights obligations.......... 78 -- 9,988 --
(Loss) gain on sale of Travel Channel and television stations 2,462 -- 662 59,453
Equity in loss of unconsolidated investment ................. -- -- -- (2,260)
--------- --------- --------- ---------
Loss before income taxes ...................................... (45,435) (59,303) (134,145) (173,283)
Income tax benefit ............................................ -- 16,050 -- 57,291
--------- --------- --------- ---------
Net loss ...................................................... (45,435) (43,253) (134,145) (115,992)
Beneficial conversion feature on issuance of convertible
preferred stock ............................................... -- (65,467) -- (65,467)
Dividends and accretion on redeemable preferred stock ......... (34,638) (21,039) (102,399) (56,162)
--------- --------- --------- ---------
Net loss available to common stockholders ..................... $ (80,073) $(129,759) $(236,544) $(237,621)
========= ========= ========= =========
Other Data:
EBITDA (a) ................................................. $ (10,412) $ (16,046) $ (11,991) $ (46,642)
========= ========= ========= =========
Program rights payments and deposits ....................... $ 31,105 $ 38,741 $ 87,712 $ 96,228
========= ========= ========= =========
Payments for cable distribution rights ..................... $ 3,953 $ 7,931 $ 6,113 $ 28,523
========= ========= ========= =========
Capital expenditures ....................................... $ 7,383 $ 6,426 $ 16,249 $ 22,604
========= ========= ========= =========
Cash flows used in operating activities .................... $ (31,117) $ (45,047) $ (58,025) $(147,653)
========= ========= ========= =========
Cash flows (used in) provided by investing activities ...... $ (15,913) $ 22,540 $ (35,827) $ 93,412
========= ========= ========= =========
Cash flows provided by financing activities ................ $ 5,492 $ 409,152 $ 5,556 $ 420,884
========= ========= ========= =========
</TABLE>
-----------
(a) "EBITDA" is defined as operating loss plus depreciation, amortization,
stock-based compensation, programming net realizable value adjustments,
and time brokerage and affiliation fees and is a commonly used measure
of performance for broadcast companies. EBITDA does not purport to
represent cash provided by operating activities as reflected in our
consolidated statements of cash flows, is not a measure of financial
performance under generally accepted accounting principles, and should
not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. Management believes the presentation of EBITDA is relevant
and useful because EBITDA is a measurement industry analysts utilize
when determining our operating performance.
12
<PAGE> 13
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total revenues increased to $73.4 million for the three months ended September
30, 2000 from $58.1 million for the three months ended September 30, 1999, or
26.3%. Total revenues increased to $230.1 million for the nine months ended
September 30, 2000 from $167.7 million for the nine months ended September 30,
1999, or 37.2%. Revenues increased for the three and nine month periods ended
September 30, 2000 due to increases in revenues from the PAX TV Network and the
Company's television stations. The increase in network revenues resulted from
increases in ratings and distribution of the PAX TV Network combined with the
sales efforts associated with the Company's network sales agreement with NBC.
The increase in television station revenues resulted from an increase in ratings
and television station acquisitions. In addition, the Company's increasing
long-form programming rates continued to enhance both network and television
station revenue growth for the quarter.
Expenses increased to $110.5 million for the three months ended September 30,
2000 from $107.4 million for the three months ended September 30, 1999, or 2.9%.
Program rights amortization increased $2.4 million, reflecting the increased
cost of new programming as well as higher usage of certain shows this year
compared to last year. Selling, general and administrative costs increased $5.7
million which primarily reflects increased sales commissions which rise in
proportion to revenues. Time brokerage and affiliation fees decreased by $3.5
million due to the completion of related acquisitions. Stock-based compensation
decreased by $6.3 million due to the change in the vesting schedule of certain
options which accelerated a portion of the expense from future periods into the
second quarter of 2000 and the lower number of options granted in 2000 compared
to the same period in 1999. Depreciation and amortization increased $3.1 million
primarily related to assets acquired.
Expenses decreased to $346.8 million for the nine months ended September 30,
2000 from $368.4 million for the nine months ended September 30, 1999, or 5.9%.
The decrease in expense primarily relates to the programming rights adjustment
to net realizable value of $24.4 million in the current year period compared to
$70.5 million in the same period in 1999 and decreased time brokerage and
affiliation fees of $8.7 million due to the completion of related acquisitions.
These decreases in expenses were partially offset by other significant expense
increases including program rights amortization of $11.7 million, reflecting the
increased cost of new programming as well as higher usage of certain shows this
year compared to last year, increased selling, general and administrative costs
of $11.6 million which primarily reflects increased sales commissions which rise
in proportion to revenues, and higher depreciation and amortization of $8.3
million primarily related to asset acquisitions.
Interest expense for the three months ended September 30, 2000, increased 8.8%
to $12.0 million, and increased 8.1% for the nine months ended September 30,
2000 to $35.4 million over the same periods in 1999. These increases were
primarily due to a greater level of senior debt and higher rates on the
Company's floating rate debt throughout the period. At September 30, 2000, total
long-term debt and senior subordinated notes were $392.7 million compared with
the balance of $388.4 million as of December 31, 1999.
Interest income for the three months ended September 30, 2000 increased 86% to
$3.3 million, and increased 155.2% for the nine months ended September 30, 2000
to $11.9 million over the same periods in 1999. These increases were primarily
due to the investment of the cash proceeds from the September 1999 $415 million
Series B Convertible Preferred Stock sale to NBC.
The 2000 gain on the sale of television stations primarily reflects the
Company's sale of its Little Rock, Arkansas television station. The 1999 gain on
sale of Travel Channel and television stations reflects the Company's sale of
its interest in the Travel Channel and the transfer of the Company's interest in
KWOK during the first quarter of 1999 and the sale of four television stations
during the second quarter of 1999.
Gain on restructuring of program rights obligations primarily reflects the
Company's return of certain programming rights that it had written off during
1999, in exchange for cash of $4.9 million and the cancellation of the remaining
payment obligations.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
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 working
capital. The Company's primary sources of liquidity are its net working capital
and availability under the Equipment Facility for the funding of capital
expenditures. As of September 30, 2000, the Company has $117.7 million in cash
and short-term investments and working capital of approximately $97.3 million.
During the nine months ended September 30, 2000, the Company's working capital
decreased $140.5 million due to use of $83.8 million to complete the acquisition
of television stations, $36.5 million to pay interest due under certain of the
Company's debt instruments, $16.2 million to fund capital expenditures, and
$21.5 million to fund other operating activities offset by proceeds from the
exercise of stock options, additional borrowings under the Equipment Facility
and proceeds from the sale of certain of the Company's television stations.
The terms of certain of the Company's preferred securities and the indenture
relating to its Senior Subordinated Notes contain covenants which currently
preclude the Company from incurring additional indebtedness except for certain
indebtedness related to the funding of capital expenditures. The Company
believes that it will not be able to incur additional indebtedness as a result
of these covenants, other than to fund capital expenditures, until the second
half of 2002. In September of 2000, the Company amended certain terms of its
Senior Credit Facility. The amended terms included 1) permitting the Company to
sell its communications towers and related equipment, 2) permitting the Company
to sell its accounts receivable, 3) adjustment to the timing and amounts of
principal amortization and 4) the amendment of certain financial condition
covenants. Currently, and under certain circumstances, the Company is required
to deposit quarterly into escrow an amount equal to principal amortization due
in the following quarter and annualized interest as calculated under the terms
of the agreement. The amendment of terms related to principal amortization
included reducing principal amortization from $70.2 million to $30.5 million
through December 31, 2001. As amended, the Company will be required to make its
two final principal payments under the Senior Credit Facility of $45.8 million
on each of March 31, 2002 and June 30, 2002.
In August 1998, the Company entered into the $50 million Equipment Facility,
which matures the first business day of October 2003. In March 2000, the
Equipment Facility was amended to increase the maximum borrowings thereunder to
$65 million and extend the draw down period through December 31, 2000. In
addition, the commencement date of certain financial covenant compliance
obligations and initial scheduled principal payments has been extended to
December 31, 2001. In exchange for these amendments, the borrowing rates under
the Equipment Facility have been increased. All borrowings under this facility
are secured by the equipment purchased with the proceeds drawn. At September 30,
2000, the Company had borrowings of approximately $41.1 million outstanding
under the Equipment Facility. The Company intends to use the Equipment Facility
to fund the majority of its capital expenditure needs through December 31, 2000.
The Company intends to enter into agreements to sell certain of its assets and
anticipates the proceeds from these transactions to be approximately $50 to $100
million. These assets include the Company's television stations serving markets
in Puerto Rico, Honolulu, Boston/Merrimack/New Hampshire, Phoenix/Flagstaff, St.
Louis, and certain other LPTV stations. The Company expects to receive the
proceeds related to these asset sales during 2001 and 2002. The Company believes
that cash provided by future operations, net working capital, its availability
under the Equipment Facility and its current plan to sell certain non-strategic
assets will provide the liquidity necessary to meet its obligations and
financial commitments. The Company also anticipates that it will refinance all
or a portion of its outstanding indebtedness in or before the first quarter of
2002.
Cash used in operations of approximately $58.0 million and $147.7 million for
the nine months ended September 30, 2000 and 1999, respectively, primarily
reflects the operating costs incurred in connection with the operation of PAX TV
and the related cable distribution rights and programming rights payments. Cash
used in investing activities of approximately $35.8 million for the nine months
ended September 30, 2000 primarily reflects the acquisitions of, and investments
in, broadcast properties including stations in Boston, Massachusetts;
Sacramento, California; Providence, Rhode Island; and the DP Media stations
(which included stations serving markets in Raleigh, Grand Rapids,
Boston/Norwell, Hartford, Washington D.C., St. Louis, Indianapolis, and
Milwaukee), and purchases of equipment for acquired and existing properties, net
of short-term investments redeemed. This is in contrast to cash provided by
investing activities of approximately $93.4 million for the nine months ended
September 30, 1999, which primarily reflects the proceeds from the sale of the
Travel Channel and television stations, net of funds used for the acquisition of
broadcast properties. Cash provided by financing activities primarily reflects
the proceeds from long-term debt borrowings and the exercise of common stock
options net, of repayments of long-term debt and preferred stock dividends paid.
14
<PAGE> 15
The Company has generated operating losses since the launch of PAX TV. The
Company has outsourced its network sales operations to NBC and has entered into
joint sales agreements ("JSAs") in the eleven markets where NBC and PAX TV both
have owned and operated stations. The Company has also entered into twelve JSAs
with NBC affiliated stations and six JSAs with other broadcasters and plans to
enter into additional JSAs with NBC affiliates and others in additional markets
in an effort to increase revenues and reduce expenses. The Company is unable to
predict how quickly the additional JSAs may be implemented or the timing or
magnitude of their effects on the Company's operating results.
As of September 30, 2000, the Company had agreements to purchase significant
assets of, or to enter into time brokerage and financing arrangements with
respect to broadcast properties totaling approximately $69.0 million, net of
deposits and advances.
As of September 30, 2000, the Company's programming contracts require collective
payments by the Company of approximately $234.4 million as follows (in
thousands):
<TABLE>
<CAPTION>
Obligations Program
For Program Rights
Rights Commitments Total
---------- ----------- ---------
<C> <C> <C> <C>
2000 (October- December)................. $ 29,943 $ 12,399 $ 42,342
2001..................................... 74,974 8,284 83,258
2002..................................... 55,243 9,372 64,615
2003..................................... 18,272 8,692 26,964
2004..................................... 6,106 6,650 12,756
2005..................................... -- 4,433 4,433
---------- ---------- ---------
$ 184,538 $ 49,830 $ 234,368
========== ========== =========
</TABLE>
The Company has also committed to purchase at similar terms additional future
series episodes of its licensed programs should they be made available.
As of September 30, 2000, obligations for cable distribution rights require
collective payments by the Company of approximately $17.7 million over such
periods as follows (in thousands):
2000 (October - December)................................... $ 8,599
2001 ....................................................... 6,403
2002 ....................................................... 2,120
2003 ....................................................... 180
2004 ....................................................... 180
2005........................................................ 180
-------
$17,662
Less: Amount representing interest ......................... (1,069)
-------
Present value of cable rights payable ...................... $16,593
=======
The FCC has mandated that each licensee of a full power broadcast TV station,
which was allotted a second digital television channel in addition to the
current analog channel, complete the build-out of its digital broadcast service
by May 2002. Despite the current uncertainty that exists in the broadcasting
industry with respect to standards for digital broadcast services, planned
formats and usage, it is the Company's intention to comply with the FCC's timing
requirements for the broadcast of digital television. The Company has already
commenced migration to digital broadcasting in certain of its markets and will
continue to do so throughout its required time period. Due to such uncertainty
with respect to standards, formats and usage, however, the Company cannot
currently predict with reasonable certainty the amount it will likely have to
spend in aggregate to complete the digital conversion of its stations, but does
anticipate spending at least $70 million. It is likely that the capital
necessary to complete the digital conversion will come from cash on hand as well
as the monetization of certain non-core assets or other financing arrangements.
15
<PAGE> 16
SEASONALITY
Our results usually are subject to seasonal fluctuations, which result in fourth
quarter broadcast operating income being greater usually than first, second, and
third quarter broadcast operating income. This seasonality is primarily
attributable to increased expenditures by advertisers in anticipation of holiday
season spending and an increase in viewership during this period.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit
Number Description of Exhibits
------- ------------------------
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)
4.3.8 Second Amended and Restated Credit Agreement, dated as of April 28,
1998, among Paxson Communications Corporation, the lenders from time to
time parties thereto and Union Bank of California, N.A., as Agent.
4.3.9 Amendment, dated as of March 31, 2000, to the Second Amended and
Restated Credit Agreement, dated as of April 28, 1998, among Paxson
Communications Corporation, the lenders from time to time parties
thereto and Union Bank of California, N.A., as Agent.
4.3.10 Second Amendment, dated as of September 28, 2000, to the Second Amended
and Restated Credit Agreement, dated as of April 28, 1998, among Paxson
Communications Corporation, the lenders from time to time parties
thereto and Union Bank of California, N.A., as Agent.
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.
None.
17
<PAGE> 18
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 8, 2000 By: /s/ Jeffrey Sagansky
---------------------------------------
Jeffrey Sagansky
Chief Executive Officer, President
and Director (Principal Executive Officer)
Date: November 8, 2000 By: /s/ Thomas E. Severson, Jr.
---------------------------
Thomas E. Severson, Jr.
Senior Vice President and
Chief Financial Officer (Principal
Financial Officer)
18
