<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 31, 2000:
Class of Stock Number of Shares
-------------- ----------------
Common stock-class a, $0.001 par value per share............ 54,987,652
Common stock-class b, $0.001 par value per share............ 8,311,639
<PAGE> 2
PAXSON COMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Part I - Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and December 31, 1999............ 3
Consolidated Statements of Operations (unaudited) for the
Three Months Ended June 30, 2000 and 1999, and Six Months
Ended June 30, 2000 and 1999............................... 4
Consolidated Statement of Stockholders' Equity
(unaudited) for the Six Months Ended June 30, 2000......... 5
Consolidated Statements of Cash Flows (unaudited) for the Six
Months Ended June 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 17
Signatures.............................................................. 18
</TABLE>
2
<PAGE> 3
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 78,431 $ 125,189
Short-term investments ................................................. 69,032 124,987
Restricted cash and short-term investments ............................. 13,792 8,158
Accounts receivable, net of allowance for doubtful accounts
of $3,821 and $4,255, respectively ................................... 36,328 40,069
Current portion of program rights ...................................... 74,017 79,686
Prepaid expenses and other current assets .............................. 2,621 2,777
----------- -----------
Total current assets ............................................. 274,221 380,866
Property and equipment, net .............................................. 185,109 189,908
Intangible assets, net ................................................... 962,661 916,145
Program rights, net of current portion ................................... 125,535 130,016
Investments in broadcast properties ...................................... 33,251 40,347
Other assets, net ........................................................ 11,929 32,805
----------- -----------
Total assets ...................................................... $ 1,592,706 $ 1,690,087
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities ............................... $ 14,258 $ 13,875
Accrued interest ....................................................... 9,817 7,862
Obligations for cable distribution rights .............................. 12,553 14,712
Obligation for satellite distribution rights ........................... 3,240 2,947
Obligations for program rights ......................................... 81,573 82,907
Income taxes payable ................................................... 828 2,010
Current portion of long-term debt ...................................... 47,486 18,698
----------- -----------
Total current liabilities ......................................... 169,755 143,011
Long-term liabilities:
Obligations for cable distribution rights, net of current portion ..... 7,552 6,672
Obligation for satellite distribution rights, net of current portion .. 11,250 12,000
Obligations for program rights, net of current portion ................ 97,961 112,153
Long-term debt ........................................................ 113,790 141,029
Senior subordinated notes, net ........................................ 228,908 228,694
----------- -----------
Total liabilities ................................................. 629,216 643,559
----------- -----------
Mandatorily redeemable preferred stock ................................... 1,014,022 949,807
----------- -----------
Commitments and contingencies ............................................ -- --
Stockholders' equity (deficit):
Class A common stock, $0.001 par value; one vote per share; 215,000,000
shares authorized, 54,872,852 and 54,577,784 shares issued and
outstanding ......................................................... 55 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 ............................................ 419,120 417,652
Deferred option plan compensation ..................................... (12,415) (20,026)
Accumulated deficit ................................................... (524,414) (367,943)
----------- -----------
Total stockholders' equity (deficit) .............................. (50,532) 96,721
----------- -----------
Total liabilities, mandatorily redeemable preferred stock,
and stockholders' equity (deficit) ............................. $ 1,592,706 $ 1,690,087
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---------------------------- ----------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues ...................................................... $ 78,151 $ 57,855 $ 156,607 $ 109,634
------------ ------------ ------------ ------------
Expenses:
Programming and broadcast operations ........................ 9,510 8,493 18,484 15,822
Program rights amortization ................................. 24,170 19,457 51,931 42,593
Selling, general and administrative ......................... 43,389 44,945 87,771 81,814
Time brokerage and affiliation fees ......................... 1,492 5,074 3,370 8,631
Stock-based compensation .................................... 5,583 2,147 7,750 4,294
Adjustment of programming to net realizable value ........... -- 70,499 24,400 70,499
Depreciation and amortization ............................... 21,394 18,730 42,574 37,356
------------ ------------ ------------ ------------
Total expenses .......................................... 105,538 169,345 236,280 261,009
------------ ------------ ------------ ------------
Operating loss ................................................ (27,387) (111,490) (79,673) (151,375)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense ............................................ (11,812) (10,699) (23,392) (21,717)
Interest income ............................................. 5,649 1,794 8,686 2,928
Other expenses, net ......................................... (106) (670) (2,441) (1,009)
Gain on restructuring of program rights obligations ......... -- -- 9,910 --
(Loss) gain on sale of Travel Channel and television stations (1,000) 18,661 (1,800) 59,453
Equity in loss of unconsolidated investment ................. -- -- -- (2,260)
------------ ------------ ------------ ------------
Loss before income taxes ...................................... (34,656) (102,404) (88,710) (113,980)
Income tax benefit ............................................ -- 37,499 -- 41,242
------------ ------------ ------------ ------------
Net loss ...................................................... (34,656) (64,905) (88,710) (72,738)
Dividends and accretion on redeemable preferred stock ......... (34,179) (17,827) (67,761) (35,124)
------------ ------------ ------------ ------------
Net loss available to common stockholders ..................... $ (68,835) $ (82,732) $ (156,471) $ (107,862)
============ ============ ============ ============
Basic and diluted loss per share .............................. $ (1.09) $ (1.35) $ (2.48) $ (1.76)
============ ============ ============ ============
Weighted average shares outstanding ........................... 63,135,530 61,420,661 63,089,644 61,188,760
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Deferred Total
Stock Subscrip- Option Stock-
Common Stock Warrants tion Additional Plan Accumu- holders'
-------------------- and Call Notes Paid-In Compen- lated Equity
Class A Class B Option Receivable Capital sation 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 ....................... -- -- -- -- -- 7,611 -- 7,611
Stock options exercised ............. -- -- -- -- 1,218 -- -- 1,218
Repricing of common stock
warrants .......................... -- -- 139 -- -- -- -- 139
Dividends on redeemable and
convertible preferred stock........ -- -- -- -- -- -- (54,525) (54,525)
Accretion on redeemable
preferred stock ................... -- -- -- -- -- -- (13,236) (13,236)
Net loss ............................ -- -- -- -- -- -- (88,710) (88,710)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 2000 (unaudited) ..... $ 55 $ 8 $ 68,384 $ (1,270) $ 419,120 $ (12,415) $(524,414) $ (50,532)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------------
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $ (88,710) $ (72,738)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................................... 42,574 37,356
Stock-based compensation ......................................... 7,750 4,294
Program rights amortization ...................................... 51,931 42,593
Adjustment of programming to net realizable value ................ 24,400 70,499
Payments for cable distribution rights ........................... (2,160) (20,592)
Program rights payments and deposits ............................. (56,607) (57,487)
Provision for doubtful accounts .................................. 1,724 4,554
Deferred income tax benefit ...................................... -- (43,028)
Loss on sale or disposal of assets ............................... 839 194
Equity in loss of unconsolidated investment ...................... -- 2,260
Gain on restructuring of program rights obligations .............. (9,910) --
Loss (gain) on sale of Travel Channel and television stations .... 1,800 (59,453)
Changes in assets and liabilities:
(Increase) decrease in restricted cash and short-term
investments................................................... (5,634) 4,446
Decrease (increase) in accounts receivable ..................... 217 (12,428)
Decrease (increase) in prepaid expenses and other current assets 156 (739)
Decrease in other assets ....................................... 3,567 2,438
Increase (Decrease) in accounts payable and accrued liabilities 382 (5,302)
Increase in accrued interest ................................... 1,955 47
(Decrease) increase in current income taxes payable ............ (1,182) 480
--------- ---------
Net cash used in operating activities ........................ (26,908) (102,606)
--------- ---------
Cash flows from investing activities:
Redemption of short-term investments ............................. 55,955 --
Acquisitions of broadcasting properties .......................... (77,757) (38,756)
Decrease in investments in broadcast properties .................. 7,096 8,724
Decrease in deposits on broadcast properties ..................... 3,008 3,681
Purchases of property and equipment .............................. (8,866) (16,178)
Proceeds from sales of Travel Channel and television stations .... 650 113,401
--------- ---------
Net cash (used in) provided by investing activities .......... (19,914) 70,872
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings of long-term debt ........................ 4,371 9,729
Repayments of long-term debt ...................................... (1,978) (1,492)
Preferred Stock dividends paid .................................... (3,546) --
Proceeds from exercise of common stock options, net ............... 1,217 2,655
Repayments of stock subscription notes receivable ................. -- 840
--------- ---------
Net cash provided by financing activities .................... 64 11,732
--------- ---------
Decrease in cash and cash equivalents ................................ (46,758) (20,002)
Cash and cash equivalents at beginning of period ..................... 125,189 49,440
--------- ---------
Cash and cash equivalents at end of period ........................... $ 78,431 $ 29,438
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Paxson Communications Corporation's (the "Company") financial information
contained in the financial statements and notes thereto as of June 30, 2000 and
for the three and six month periods ended June 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 which was acquired in June 2000 and was, prior to such acquisition,
beneficially owned by family menbers 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 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 Report on Form 10-Q for the quarter
ended March 31, 2000, all of which were filed with the United States Securities
and Exchange Commission.
2. GAIN ON RESTRUCTURING OF PROGRAM RIGHTS OBLIGATIONS
In March 2000, the Company negotiated the return of programming rights to
certain syndicated shows that it had written off during 1999, in exchange for
approximately $4.9 million in cash and forgiveness of the remaining programming
rights payments due under the original programming agreement. In connection with
the return of the programming rights, the Company recorded a pre-tax gain of
approximately $9.9 million.
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. In
addition, 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 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 June 30, 2000.
7
<PAGE> 8
5. MANDATORILY REDEEMABLE PREFERRED STOCK
The following represents a summary of the changes in the Company's mandatorily
redeemable preferred stock during the six month period ended June 30, 2000.
<TABLE>
<CAPTION>
Junior
Junior Exchangeable Exchangeable Convertible Convertible
Preferred Preferred Preferred Preferred Exchangeable
Stock Stock Stock Stock Preferred
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................ 357 338 585 245 11,711 13,236
Accrual of cumulative
Dividends.............. 3,546 13,887 16,192 4,300 16,600 54,525
Cash Dividends........... (3,546) -- -- -- -- (3,546)
------- -------- -------- ------- -------- ----------
Balance at June 30,
2000 (unaudited)....... $56,498 $231,786 $253,003 $88,189 $384,546 $1,014,022
======= ======== ======== ======= ======== ==========
Shares authorized........ 33,000 440,000 72,000 17,500 41,500
======= ======== ======== ======= ========
Shares issued and
outstanding............ 33,000 231,253 25,636 9,144 41,500
======= ======== ======== ======= ========
Accrued dividends........ $ -- $ 4,818 $ 4,246 $ -- $ 26,283
======= ======== ======== ======= ========
</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
At June 30, 2000, the Company has recorded a valuation allowance for its net
deferred tax asset, as it believes that it is more likely than not that it will
be unable to realize such asset.
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. Because of losses from continuing operations, the
effect of stock options and warrants is antidilutive. Accordingly, the Company's
presentation of diluted earnings per share is the same as that of basic earnings
per share.
At June 30, 2000 and 1999, respectively, there were outstanding 11,725,511 and
9,559,780 stock options and 32,427,627 and 395,500 Class A common stock
warrants; and at June 30, 2000 and 1999, 37,611,032 and 5,189,375 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.
8
<PAGE> 9
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 Six Months
Ended June 30,
-----------------------
2000 1999
-------- ---------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest............................................ $ 19,177 $ 19,200
======== ========
Cash paid for income taxes........................................ $ 1,224 $ 1,306
======== ========
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes................ $ 214 $ 190
======== ========
Issuance of common stock in connection with acquisition........... $ 251 $ --
======== ========
Dividends accrued on redeemable preferred stock................... $ 54,525 $ 33,614
======== ========
Discount accretion on redeemable securities....................... $ 13,236 $ 1,510
======== ========
Satellite distribution............................................ $ -- $ 15,000
======== ========
Sale of KWOK in exchange for WCPX................................. $ -- $ 30,000
======== ========
</TABLE>
9
<PAGE> 10
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 July 31, 2000, the PAX TV Network reached 80% of US primetime television
households through broadcast, cable and satellite distribution. Upon completion
of pending transactions, the PAX TV Network will include 115 broadcast
television stations, consisting of 65 of the 66 stations which are currently
owned and operated by the Company, or in which the Company has an economic
interest, and 50 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 is expected to play an important
role in the Company's future and, subject to various conditions, including
approval of the Federal Communications Commission, 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, 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 NBC syndicated or news programming. Certain Company
station 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 six months ended June 30, 2000, the Company paid
NBC approximately $3.4 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 below.
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 six months ended June 30, 2000 (IN THOUSANDS):
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
----------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues ...................................................... $ 78,151 $ 57,855 $ 156,607 $ 109,634
--------- --------- --------- ---------
Expenses:
Programming and broadcast operations ........................ 9,510 8,493 18,484 15,822
Program rights amortization ................................. 24,170 19,457 51,931 42,593
Selling, general and administrative ......................... 43,389 44,945 87,771 81,814
Time brokerage and affiliation fees ......................... 1,492 5,074 3,370 8,631
Stock-based compensation .................................... 5,583 2,147 7,750 4,294
Adjustment of programming to net realizable value ........... -- 70,499 24,400 70,499
Depreciation and amortization ............................... 21,394 18,730 42,574 37,356
--------- --------- --------- ---------
Total expenses .......................................... 105,538 169,345 236,280 261,009
--------- --------- --------- ---------
Operating loss ................................................ (27,387) (111,490) (79,673) (151,375)
--------- --------- --------- ---------
Other income (expense):
Interest expense ............................................ (11,812) (10,699) (23,392) (21,717)
Interest income ............................................. 5,649 1,794 8,686 2,928
Other expenses, net ......................................... (106) (670) (2,441) (1,009)
Gain on restructuring of program rights ..................... -- -- 9,910 --
(Loss) gain on sale of Travel Channel and television stations (1,000) 18,661 (1,800) 59,453
Equity in loss of unconsolidated investment ................. -- -- -- (2,260)
--------- --------- --------- ---------
Loss before income taxes ...................................... (34,656) (102,404) (88,710) (113,980)
Income tax benefit ............................................ -- 37,499 -- 41,242
--------- --------- --------- ---------
Net loss ...................................................... (34,656) (64,905) (88,710) (72,738)
Dividends and accretion on redeemable preferred stock ......... (34,179) (17,827) (67,761) (35,124)
--------- --------- --------- ---------
Net loss available to common stockholders ..................... $ (68,835) $ (82,732) $(156,471) $(107,862)
========= ========= ========= =========
Other Data:
EBITDA (a) ................................................. $ 1,082 $ (15,040) $ (1,579) $ (30,595)
========= ========= ========= =========
Program rights payments and deposits ....................... $ 28,763 $ 39,327 $ 56,607 $ 57,487
========= ========= ========= =========
Payments for cable distribution rights ..................... $ 1,626 $ 240 $ 2,160 $ 20,592
========= ========= ========= =========
Capital expenditures ....................................... $ 3,323 $ 8,762 $ 8,866 $ 16,178
========= ========= ========= =========
Cash flows used in operating activities .................... $ (2,202) $ (52,277) $ (26,908) $(102,606)
========= ========= ========= =========
Cash flows (used in) provided by investing activities ...... $ (42,965) $ 32,376 $ (19,914) $ 70,872
========= ========= ========= =========
Cash flows (used in) provided by financing activities ...... $ (3,405) $ 3,945 $ 64 $ 11,732
========= ========= ========= =========
</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 MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues for the three months ended June 30, 2000, increased 35.1% (or $20.3
million) to $78.2 million over the same period in 1999. This increase was
primarily due to station acquisitions, greater distribution, the Company's
network sales agreement with NBC, and improved sales management.
Expenses for the three months ended June 30, 2000, decreased 37.7% (or $63.8
million) to $105.5 million over the same period in 1999. The decrease in expense
primarily relates to the programming rights adjustment to net realizable value
of $70.5 million recorded in the second quarter of 1999. Program rights
amortization increased $4.7 million, reflecting the increased cost of new
programming as well as higher usage of certain shows this year compared to last
year and was partially offset by decreased selling, general and administrative
costs of $1.6 million which primarily reflects reduced promotion costs and
reduction in the number of employees over the same period in 1999. Time
brokerage and affiliation fees decreased by $3.6 million due to the completion
of related acquisitions. Stock-based compensation increased by $3.4 million due
to the change in the vesting schedule of certain options and the effect of
additional options granted late in 1999. Depreciation and amortization increased
$2.7 million primarily related to assets acquired.
Interest expense for the three months ended June 30, 2000, increased 10.3% to
$11.8 million over the same period in 1999 primarily due to a greater level of
senior debt and higher rates throughout the period. At June 30, 2000, total
long-term debt and senior subordinated notes were $390.2 million compared with
the balance of $388.4 million in the prior year.
Interest income for the three months ended June 30, 2000, increased 215% to $5.6
million over the same period in 1999 primarily due to the investment of the cash
proceeds from the September 1999 $415 million Series B Convertible Preferred
Stock sale to NBC.
The 1999 gain on sale of television stations reflects the Company's sale of its
interest in four television stations during the second quarter of 1999.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues for the six months ended June 30, 2000, increased 42.8% (or $47
million) to $156.6 million over the same period in 1999. This increase was
primarily due to station acquisitions, greater distribution, the Company's
network sales agreement with NBC, and improved sales management.
Expenses for the six months ended June 30, 2000, decreased 9.5% (or $24.7
million) to $236.3 million over the same period in 1999. 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. Other significant expenses which increased include program
rights amortization of $9.3 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 $6.0 million which
primarily reflects increased sales commissions which rise in proportion to
revenues; stock-based compensation increased by $3.5 million due to the change
in the vesting schedule of certain options and the effect of additional options
granted late in 1999; and higher depreciation and amortization of $5.2 million
primarily related to asset acquisitions; all of which were partially offset by
decreased time brokerage and affiliation fees of $5.3 million due to the
completion of related acquisitions.
Interest expense for the six months ended June 30, 2000, increased 7.7% to $23.4
million over the same period in 1999 primarily due to a greater level of senior
debt and higher rates throughout the period.
Interest income for the six months ended June 30, 2000, increased 197% to $8.7
million over the same period in 1999 primarily due to the investment of the cash
proceeds from the September 1999 Series B Convertible Preferred Stock sale to
NBC.
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 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 working capital at June 30, 2000 and December 31, 1999,
respectively, was $104.5 million and $237.9 million, and the ratio of current
assets to current liabilities was 1.62:1 and 2.66:1. The decrease in working
capital is primarily due to the payment of approximately $13.4 million of
interest due on the Senior Subordinated Notes in March 2000, the
reclassification to current liabilities of approximately $25.9 million of the
Senior Credit Facility and $3.2 million of the Equipment Facility, and the use
of $77.8 million to consummate acquisitions during the six months ended June 30,
2000.
Cash used in operations of approximately $26.9 million and $102.6 million for
the six months ended June 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 $19.9 million for the six months ended
June 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 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 $70.9 million for the six months ended June 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.
Under the Company's amended and restated $122 million Senior Credit Facility
which matures June 2002, the Company had approximately $13.8 million in escrow
as of June 30, 2000 to fund future interest payments. In March 2000, the Senior
Credit Facility was amended to extend the commencement date of certain financial
covenant compliance obligations to March 31, 2001 with additional extensions
through December 31, 2001 under certain conditions. In exchange for this
extension, the borrowing rates under the Senior Credit Facility have been
increased and the Company deposited one year of interest in an escrow account
and will deposit in escrow its December 31, 2000 principal payment on September
30, 2000, and its March 31, 2001 principal payment on December 31, 2000. Amounts
placed in such escrow account will be applied by the lenders against scheduled
interest and principal payments when due.
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 June 30,
2000, the Company had borrowings of approximately $38.6 million outstanding
under the Equipment Facility. Subsequent to June 30, 2000, the Company has
borrowed an additional $467,000. The Company intends to use the Equipment
Facility to fund the majority of its capital expenditure needs through December
31, 2000.
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 three JSAs
with NBC affiliated stations and four 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.
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.
14
<PAGE> 15
As of June 30, 2000, the Company's programming contracts require collective
payments by the Company of approximately $237.5 million as follows (in
thousands):
<TABLE>
<CAPTION>
Obligations Program
For Program Rights
Rights Commitments Total
----------- ----------- ---------
<C> <C> <C> <C>
2000 (July- December).................... $ 49,974 $19,839 $ 69,813
2001..................................... 65,308 18,267 83,575
2002..................................... 51,184 12,118 63,302
2003..................................... 11,195 7,785 18,980
2004..................................... 1,873 - 1,873
--------- ------- ---------
$ 179,534 $58,009 $237,543
========= ======= ========
</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 June 30, 2000, obligations for cable distribution rights require
collective payments by the Company of approximately $21.6 million over such
periods as follows (in thousands):
2000 (July-December)..................................... $12,553
2001 .................................................... 6,403
2002 .................................................... 2,120
2003 .................................................... 180
2004 .................................................... 180
2005..................................................... 180
-------
$21,616
Less: Amount representing interest ...................... (1,511)
-------
Present value of cable rights payable ................... $20,105
=======
As of June 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 $63.9 million, net of deposits and
advances.
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.
The Company believes that its available cash balances and available borrowings
under the Equipment Facility will provide it with sufficient liquidity to fund
its capital requirements through the second quarter of 2001.
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
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on May 1, 2000. At the
meeting all nine of the Company's existing directors were reelected for terms of
one to three years and the appointment of PricewaterhouseCoopers, LLP as the
Company's independent certified public accountants for 2000 was also ratified.
In addition, the stockholders approved the following three proposals: (i) an
amendment to the Company's Certificate of Incorporation to adopt a classified
board of directors so that only one-third of the directors would be elected
annually ("Proposal 1"); (ii) approval of the issuance of shares of Class A
Common Stock of the Company upon conversion of shares of 8% Series B Convertible
Exchangeable Preferred Stock and certain warrants issued to subsidiaries of
National Broadcasting Company, Inc., pursuant to the terms of such instruments
("Proposal 2"); and (iii) 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 ("Proposal 3").
The number of votes cast for, against, withheld and abstentions, as applicable,
with respect to each of the matters submitted for a vote at the meeting, are set
forth below:
For Withheld
----------- ----------
Election of Directors
Lowell W. Paxson 124,111,159 2,451,813
William E. Simon, Jr. 124,368,766 2,194,206
Jeffrey Sagansky 123,771,957 2,791,015
Bruce L. Burnham 124,367,801 2,195,171
James L. Greenwald 124,365,801 2,197,171
John E. Oxendine 124,364,751 2,198,150
R. Brandon Burgess 124,364,651 2,198,321
Keith G. Turner 124,362,261 2,200,711
Harold N. Brook 124,362,411 2,200,561
For Against Abstain
----------- --------- -------
Proposal 1 111,383,491 4,774,153 78,429
Proposal 2 113,885,746 2,274,751 75,576
Proposal 3 114,621,124 1,536,547 78,402
Appointment of Accountants 126,462,164 81,163 19,545
There were 10,326,899 broker non-votes with respect to the matters submitted for
a vote at the meeting.
16
<PAGE> 17
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 93/4% Series A Convertible
Preferred Stock (4)
3.1.6 Certificate of Designation of the Company's 131/4% Cumulative Junior
Exchangeable Preferred Stock (4)
3.1.7 Certificate of Designation of the Company's 8% Series B Convertible
Exchangeable Preferred Stock (5)
10.216 Employment Agreement dated June 30, 2000 by and between the Company and
Thomas E. Severson, Jr.
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: August 9, 2000 By: /s/ Jeffrey Sagansky
-------------------------------------------
Jeffrey Sagansky
Chief Executive Officer, President
and Director (Principal Executive Officer)
Date: August 9, 2000 By: /s/ Thomas E. Severson, Jr.
-------------------------------------------
Thomas E. Severson, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
18
