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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ___________
Commission File Number 1-13452
PAXSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-3212788
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
601 Clearwater Park Road
West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (561) 659-4122
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
proceeding 12 months (or for shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 2001:
Class of Stock Number of Shares
-------------- ----------------
Common stock-Class A, $0.001 par value per share............ 56,338,177
Common stock-Class B, $0.001 par value per share............ 8,311,639
PAXSON COMMUNICATIONS CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2001 (unaudited) and December 31, 2000......................... 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2001 and 2000 (unaudited)................................ 4
Consolidated Statement of Stockholders' Deficit
for the Nine Months Ended September 30, 2001 (unaudited)..................... 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000 (unaudited)......................... 6
Notes to Unaudited Consolidated Financial Statements......................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 19
Item 6. Exhibits and Reports on Form 8-K............................................. 19
Signatures.............................................................................. 20
2
PAXSON COMMUNICATIONS CORPORATION
Consolidated Balance Sheets
(in thousands except share data)
September 30, December 31,
2001 2000
------------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents ....................................................................... $ 25,849 $ 51,363
Short-term investments .......................................................................... 34,146 50,001
Restricted cash and short-term investments ...................................................... -- 13,729
Accounts receivable, net of allowance for doubtful accounts of $4,686 and $4,167,
respectively ................................................................................ 28,841 39,528
Program rights .................................................................................. 57,756 79,160
Prepaid expenses and other current assets ....................................................... 2,275 2,065
----------- -----------
Total current assets ......................................................................... 148,867 235,846
Property and equipment, net ......................................................................... 164,990 174,649
Intangible assets, net .............................................................................. 923,657 949,614
Program rights, net of current portion .............................................................. 100,792 119,423
Investments in broadcast properties ................................................................. 15,750 33,453
Other assets, net ................................................................................... 25,709 13,062
----------- -----------
Total assets ................................................................................. $ 1,379,765 $ 1,526,047
=========== ===========
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued liabilities ........................................................ $ 22,913 $ 21,828
Accrued interest ................................................................................ 9,480 10,464
Obligations for cable distribution rights ....................................................... 9,287 19,840
Deferred revenue from satellite distribution rights ............................................. 5,126 5,114
Obligations for program rights .................................................................. 89,238 88,336
Current portion of bank financing ............................................................... 3,611 15,966
----------- -----------
Total current liabilities .................................................................... 139,655 161,548
Obligations for cable distribution rights, net of current portion ............................... 2,382 972
Deferred revenue from satellite distribution rights, net of current portion ..................... 13,318 14,076
Obligations for program rights, net of current portion .......................................... 53,311 79,341
Accrued loss on future programming commitments .................................................. 22,200 --
Senior subordinated notes and bank financing, net of current portion ............................ 492,006 389,510
----------- -----------
Total liabilities ............................................................................ 722,872 645,447
----------- -----------
Mandatorily redeemable preferred stock .............................................................. 1,128,035 1,080,389
----------- -----------
Commitments and contingencies ....................................................................... -- --
----------- -----------
Stockholders' deficit:
Class A common stock, $0.001 par value; one vote per share; 215,000,000
shares authorized, 56,298,677 and 55,872,152 shares issued and outstanding ................... 56 56
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 68,384
Stock subscription notes receivable ............................................................. (1,088) (1,270)
Additional paid-in capital ...................................................................... 511,474 499,304
Deferred stock option compensation .............................................................. (10,762) (6,999)
Accumulated comprehensive loss .................................................................. (841) --
Accumulated deficit ............................................................................. (1,038,373) (759,272)
----------- -----------
Total stockholders' deficit .................................................................. (471,142) (199,789)
----------- -----------
Total liabilities, mandatorily redeemable preferred stock, and stockholders' deficit ................ $ 1,379,765 $ 1,526,047
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
3
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Operations
(in thousands except share and per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
REVENUES:
Gross revenues ............................................... $ 72,462 $ 73,443 $ 231,657 $ 230,050
Less: agency commissions ..................................... (10,507) (10,345) (32,655) (32,214)
------------ ------------ ------------ ------------
Net revenues ................................................. 61,955 63,098 199,002 197,836
------------ ------------ ------------ ------------
EXPENSES:
Programming and broadcast operations (excluding stock-based
compensation of $308, $74, $628 and $222, respectively). 9,788 10,048 30,170 28,532
Program rights amortization ............................... 20,378 26,702 66,241 78,633
Selling, general and administrative (excluding stock-based
compensation of $2,238, $3,016, $5,107 and
$10,618, respectively) ................................. 29,314 36,760 91,559 102,662
Time brokerage and affiliation fees ....................... 894 961 2,727 4,331
Stock-based compensation .................................. 2,546 3,090 5,735 10,840
Adjustment of programming to net realizable value ......... 66,992 -- 66,992 24,400
Depreciation and amortization ............................. 24,213 22,594 72,345 65,168
------------ ------------ ------------ ------------
Total operating expenses .............................. 154,125 100,155 335,769 314,566
------------ ------------ ------------ ------------
Operating loss ............................................... (92,170) (37,057) (136,767) (116,730)
OTHER INCOME (EXPENSE):
Interest expense .......................................... (13,088) (11,962) (37,226) (35,354)
Interest income ........................................... 1,286 3,271 4,023 11,957
Other income (expenses), net .............................. (759) (2,227) (2,365) (4,668)
Gain on modification of program rights obligations ........ 233 78 699 9,988
Gain on sale of television stations ....................... 2,410 2,462 13,059 662
------------ ------------ ------------ ------------
Loss before income taxes and extraordinary charge ............ (102,088) (45,435) (158,577) (134,145)
Income tax provision ......................................... (30) -- (90) --
------------ ------------ ------------ ------------
Loss before extraordinary charge ............................. (102,118) (45,435) (158,667) (134,145)
Extraordinary charge related to early extinguishment of debt . (9,903) -- (9,903) --
------------ ------------ ------------ ------------
Net loss ..................................................... (112,021) (45,435) (168,570) (134,145)
Dividends and accretion on redeemable preferred stock ........ (37,522) (34,638) (110,531) (102,399)
Net loss attributable to common stockholders ................. $ (149,543) $ (80,073) $ (279,101) $ (236,544)
------------ ------------ ------------ ------------
Basic and diluted loss per common share:
Loss before extraordinary charge .......................... $ (2.16) $ (1.26) $ (4.18) $ (3.74)
Extraordinary charge ...................................... (0.15) -- (0.15) --
------------ ------------ ------------ ------------
Net loss .................................................. $ (2.31) $ (1.26) $ (4.33) $ (3.74)
============ ============ ============ ============
Weighted average shares outstanding .......................... 64,602,832 63,705,076 64,458,933 63,296,286
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statement of Stockholders' Deficit
For the Nine Months Ended September 30, 2001 (Unaudited)
(in thousands)
Common
Stock Stock Deferred Accumu-
Warrants Subscrip- Stock lated
Common Stock and tion Additional Option Compre- Total
---------------- Call Notes Paid-In Compen- hensive Accumulated Stockholders'
Class A Class B Option Receivable Capital sation Loss Deficit Deficit
----- ----- ------- ---------- ---------- -------- ------- ----------- -------------
Balance, December 31, 2000.... $ 56 $ 8 $68,384 $(1,270) $499,304 $ (6,999) $ -- $ (759,272) $(199,789)
Stock based compensation... -- -- -- -- -- 5,735 -- -- 5,735
Deferred stock option
compensation.............. -- -- -- -- 9,498 (9,498) -- -- --
Stock options exercised.... -- -- -- -- 2,672 -- -- -- 2,672
Repayment of stock
subscription notes
receivable................ -- -- -- 182 -- -- -- -- 182
Other comprehensive loss... -- -- -- -- -- -- (841) -- (841)
Dividends on redeemable
preferred stock.......... -- -- -- -- -- -- -- (87,770) (87,770)
Accretion on redeemable
preferred stock.......... -- -- -- -- -- -- -- (22,761) (22,761)
Net loss................... -- -- -- -- -- -- -- (168,570) (168,570)
----- ----- ------- ------- -------- -------- ----- ----------- ---------
Balance, September 30, 2001... $ 56 $ 8 $68,384 $(1,088) $511,474 $(10,762) $(841) $(1,038,373) $(471,142)
===== ===== ======= ======= ======== ======== ===== =========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
5
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
For the Nine Months
Ended September 30,
---------------------------
2001 2000
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net loss ........................................................ $(168,570) $(134,145)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 72,345 65,168
Stock-based compensation ........................................ 5,735 10,840
Loss on extinguishment of debt .................................. 9,903 --
Program rights amortization ..................................... 66,241 78,633
Payments for cable distribution rights .......................... (12,469) (6,113)
Barter revenue .................................................. (1,896) --
Payments for program rights and deposits ........................ (94,573) (87,712)
Provision for doubtful accounts ................................. 2,384 2,450
Adjustment of programming to net realizable value ............... 66,992 24,400
Loss on sale or disposal of assets .............................. 2,547 1,489
Gain from sale of television stations ........................... (13,059) (662)
Gain on modification of program rights obligations .............. (699) (9,988)
Changes in assets and liabilities:
Decrease (increase) in restricted cash and short-term investments 13,729 (2,945)
Decrease in accounts receivable ................................. 6,418 1,778
(Increase) decrease in prepaid expenses and other current assets (460) 29
Decrease in other assets ........................................ 4,282 2,693
Increase in accounts payable and accrued liabilities ............ 301 596
Decrease in accrued interest .................................... (984) (4,536)
--------- ---------
Net cash used in operating activities ...................... (41,833) (58,025)
--------- ---------
Cash flows from investing activities:
Acquisitions of broadcasting properties ......................... (15,337) (83,832)
Decrease in deposits on broadcast properties .................... -- 2,917
Decrease in investments in broadcast properties ................. -- 7,018
Decrease in short-term investments .............................. 15,855 44,169
Purchases of property and equipment ............................. (22,654) (16,249)
Proceeds from sales of broadcast properties ..................... 27,122 10,150
Proceeds from sales of property and equipment ................... 458 --
--------- ---------
Net cash provided by (used in) investing activities ........ 5,444 (35,827)
--------- ---------
Cash flows from financing activities:
Borrowings of long-term debt .................................... 504,767 6,815
Repayments of long-term debt .................................... (415,488) (2,007)
Redemption of preferred stock ................................... (59,102) --
Preferred stock dividends paid .................................. (3,783) (3,546)
Payments of loan origination costs .............................. (13,619) (310)
Debt extinguishment premium and costs ........................... (4,754) --
Proceeds from exercise of common stock options, net ............. 2,672 4,604
Repayments of stock subscription notes receivable ............... 182 --
--------- ---------
Net cash provided by financing activities .................. 10,875 5,556
--------- ---------
Decrease in cash and cash equivalents ........................... (25,514) (88,296)
Cash and cash equivalents, beginning of period .................. 51,363 125,189
--------- ---------
Cash and cash equivalents, end of period ........................ $ 25,849 $ 36,893
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
6
PAXSON COMMUNICATIONS CORPORATION
Notes to Unaudited 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, 2001
and for the three and nine month periods ended September 30, 2001 and 2000, 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, 2000. The consolidated financial
statements include the accounts of the Company and its majority owned
subsidiaries. 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 2001 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,
2000, and the definitive proxy statement for the annual meeting of stockholders
held May 1, 2001, and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2001 and June 30, 2001, all of which were filed with
the United States Securities and Exchange Commission.
2. PROGRAMMING NET REALIZABLE VALUE ADJUSTMENT
In furtherance of the Company's strategy to increase its audience ratings
through the development of PAX TV original programming, in the third quarter of
2001, the Company decided to gradually phase the syndicated program "Touched By
An Angel" ("Touched") out of primetime and into the daytime period. Touched will
be replaced in primetime with original programming. Based on this change, the
Company adjusted its estimate of the anticipated future usage of Touched and
certain other syndicated programs and the related advertising revenues expected
to be generated and recognized a charge of approximately $67.0 million related
to the net realizable value of these programming assets and related programming
commitments. The charge includes a $22.2 million accrued loss related to
programming commitments for the 2001/2002 season of Touched currently airing on
CBS. The Company is contractually obligated to license future seasons of Touched
if the series is renewed by CBS. Additional programming losses, if any, will be
recorded at the time the Company becomes committed to license future seasons of
Touched.
3. JSA RESTRUCTURING
During the fourth quarter of 2000, the Company approved a plan to
restructure its television station operations by entering into Joint Sales
Agreements ("JSA") primarily with National Broadcasting Company, Inc. ("NBC")
affiliate stations in each of the Company's remaining non-JSA markets. Under the
JSA structure, the Company generally terminates its station sales staff. The JSA
partner then provides local and national spot advertising sales management and
representation to the Company station and integrates and co-locates the Company
station operations. These restructuring activities resulted in a charge of
approximately $5.8 million in the fourth quarter of 2000 consisting of $2.7
million of termination benefits and $3.1 million of costs associated with
exiting leased properties which will no longer be utilized upon implementation
of the JSAs. During the nine months ended September 30, 2001, the Company paid
termination benefits to 72 employees totaling approximately $1.4 million which
were charged against the restructuring reserve. The Company expects to
substantially complete the restructuring plan by the end of 2001. However,
certain lease obligations may continue through mid-2002.
7
The following summarizes the activity in the Company's restructuring
reserves for the nine months ended September 30, 2001 (in thousands):
Balance Balance
December 31, 2000 Cash Deductions September 30, 2001
----------------- --------------- ------------------
Accrued Liabilities:
Lease costs................. $ 3,091 $ (639) $ 2,452
Severance................... 2,586 (1,361) 1,225
--------- --------- ---------
$ 5,677 $ (2,000) $ 3,677
========= ========= =========
4. REFINANCING
On July 12, 2001, the Company completed a $560 million financing consisting
of a $360 million bank credit facility and $200 million of 10 3/4% Senior
Subordinated Notes due 2008. Proceeds from the initial funding under the new
bank credit facility and the 10 3/4% Senior Subordinated Notes offering were
used to repay all of the Company's indebtedness and obligations under its
previously existing credit facilities, and to redeem its 11 5/8% Senior
Subordinated Notes and 12% redeemable preferred stock, as well as to pay
premiums, fees and expenses in connection with the refinancing. In the third
quarter of 2001, the Company recognized an extraordinary loss totaling $9.9
million resulting primarily from the write-off of unamortized debt costs and the
$4.6 million redemption premium associated with the repayment of the 11 5/8%
Senior Subordinated Notes. In connection with the redemption of the Company's
12% preferred stock, the Company recognized the remaining unamortized discount
for these securities of $1.9 million as additional accretion during the quarter.
The $360 million bank credit facility consists of a $25 million revolving
credit facility maturing June 2006, of which $2.0 million was outstanding at
September 30, 2001, a $50 million delayed draw Term A facility maturing December
2005, of which $8.0 million was outstanding at September 30, 2001 and a $285
million fully drawn Term B facility maturing June 2006. The revolving credit
facility is available for general corporate purposes and the Term A facility is
available to fund capital expenditures. The interest rate under the bank
facility is LIBOR plus 3.0%. The 10 3/4% Senior Subordinated Notes are due in
2008 and interest on the notes is payable on January 15 and July 15 of each
year, beginning on January 15, 2002.
In September 2001, the Company entered into a variable to fixed interest
rate swap agreement in the notional amount of $144.0 million to hedge the impact
of interest rate changes on a portion of the Company's variable rate
indebtedness. The fixed rate under the swap is 3.64% and variable rates are
indexed to LIBOR. The Company has accounted for the swap as a cash flow hedge
pursuant to SFAS No. 133, as amended with changes in the fair value included as
a component of other comprehensive loss. At September 30, 2001, the fair value
of the swap was a liability of $841,000.
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, 2001 (in thousands):
Junior Series B
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
--------- ---------- --------- --------- ---------- -----------
Balance at December 31, 2000......... $ 56,855 $ 246,878 $ 270,854 $ 92,945 $ 412,857 $ 1,080,389
Accretion............................ 2,247 509 882 370 18,753 22,761
Accrual of cumulative dividends...... 3,783 23,835 28,063 7,189 24,900 87,770
Cash dividends....................... (3,783) -- -- -- -- (3,783)
Redemption........................... (59,102) -- -- -- -- (59,102)
--------- ---------- --------- --------- ---------- -----------
Balance at September 30, 2001
(unaudited)......................... $ -- $ 271,222 $ 299,799 $ 100,504 $ 456,510 $ 1,128,035
========= =========== ========== ========= =========== ===========
Aggregate liquidation preference at
September 30, 2001.................. $ -- $ 274,660 $ 305,937 $ 103,141 $ 482,783 $ 1,166,521
========= =========== ========== ========= =========== ===========
Shares authorized.................... -- 440,000 72,000 17,500 41,500 571,000
========= =========== ========== ========= =========== ===========
Shares issued and outstanding........ -- 261,063 29,145 10,314 41,500 342,022
========= =========== ========== ========= =========== ===========
Accrued dividends.................... $ -- $ 13,597 $ 14,481 $ -- $ 67,783 $ 95,861
========= =========== ========== ========= =========== ===========
8
6. COMPREHENSIVE LOSS
The components of the comprehensive loss are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net loss ................................. $(112,021) $ (45,435) $(168,570) $(134,145)
Other comprehensive loss:
Unrealized loss on interest rate
swap................................ (841) -- (841) --
--------- --------- --------- ---------
Comprehensive loss ....................... $(112,862) $ (45,435) $(169,411) $(134,145)
========= ========= ========= =========
7. INCOME TAXES
The Company has recorded a provision for income taxes based on its
estimated annual income tax liability. For the nine months ended September 30,
2001, 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 the Company will be unable to realize such
assets.
8. PER SHARE DATA
Basic and diluted loss per common share was computed by dividing net loss
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.
As of September 30, 2001 and 2000, the following securities, which could
potentially dilute earnings per share in the future, were not included in the
computation of earnings per share, because to do so would have been antidilutive
(in thousands):
September 30,
--------------------
2001 2000
------ ------
Stock options outstanding ................................ 12,411 10,917
Class A common stock warrants outstanding ................ 32,428 32,428
Class A common stock reserved under convertible
securities.............................................. 38,342 37,611
------ ------
83,181 80,956
====== ======
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash investing and financing
activities are as follows (in thousands):
For the Nine Months
Ended September 30,
-------------------------
2001 2000
---------- -------
(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid for interest ................................ $ 34,721 $36,472
========== =======
Cash paid for income taxes ............................ $ 287 $ 1,211
========== =======
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes .... $ 240 $ 329
========== =======
Issuance of common stock in connection with acquisition $ -- $ 250
========== =======
Dividends accrued on redeemable preferred stock ....... $ 83,987 $82,546
========== =======
Discount accretion on redeemable securities ........... $ 22,761 $19,853
========== =======
Notes receivable from sales of broadcast properties ... $ 4,792 $ --
========== =======
9
10. DIVESTITURES
During the nine months ended September 30, 2001, the Company sold interests
in five stations for aggregate consideration of approximately $31.9 million and
realized pre-tax gains of approximately $13.1 million on these sales.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 addresses financial accounting and reporting for business combinations
and requires all business combinations to be accounted for using the purchase
method of accounting. SFAS 141 is effective for all business combinations
initiated after June 30, 2001. The Company does not believe adoption of SFAS 141
will have a material impact on its financial position, results of operations or
cash flows.
SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. Under SFAS 142, goodwill and intangible assets that
have indefinite lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Impairment losses for goodwill
and other indefinite-lived intangible assets that arise due to the initial
application of SFAS 142 are to be reported as resulting from a change in
accounting principle. The Company will adopt SFAS 142 on January 1, 2002. The
Company is currently assessing the impact of adopting SFAS 142 and has not yet
determined whether it will recognize an impairment loss, if any, resulting from
adoption. However, upon adoption of SFAS 142, the Company will no longer
amortize goodwill and FCC license intangibles (which the Company believes have
indefinite lives) which totaled approximately $852.2 million, net of accumulated
amortization of $130.3 million at September 30, 2001. Under existing accounting
standards, these assets are being amortized over 25 years. Amortization expense
related to goodwill and FCC licenses totaled approximately $29.5 million and
$27.1 million for the nine months ended September 30, 2001 and 2000,
respectively.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" and
Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of
Operations - Reporting the Effects of the Disposal of a Segment Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes a single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS No.144 retains the
provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity. SFAS 144 is effective for fiscal years beginning after December 15,
2001. The Company does not believe that the adoption of SFAS 144 will have a
material impact on its financial position or results of operations.
10
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
We are a network television broadcasting company which owns and operates the
largest broadcast television station group in the U.S., as measured by the
number of television households in the markets our stations serve. We currently
own and operate 65 broadcast television stations (including three stations we
operate under time brokerage agreements), which reach all of the top 20 U.S.
markets except Pittsburgh and 41 of the top 50 U.S. markets. We operate PAX TV,
a network that provides family entertainment programming seven days per week and
reaches approximately 84% of prime time television households in the U.S.
through our broadcast television station group, and pursuant to distribution
arrangements with cable and satellite distribution systems and our affiliates.
We were founded in 1991 by Lowell W. Paxson, who remains our Chairman and
controlling stockholder. We began by purchasing radio and television stations,
and grew to become Florida's largest radio station group, while also owning two
network-affiliated television stations and other television stations that
carried principally infomercials and other paid programming. In 1997, we sold
our radio station group and our network-affiliated television stations to
concentrate on building our owned and operated television station group. We used
the proceeds from the sale of our radio station group and network-affiliated
television stations to acquire television stations and build the PAX TV network.
Since commencing our television operations in 1994, we have established the
largest owned and operated broadcast television station group in the U.S., as
measured by the number of television households in the markets our stations
serve. We launched PAX TV on August 31, 1998, and are now in our third network
programming season.
In September 1999, National Broadcasting Company, Inc. ("NBC") invested $415
million in our company. We have also entered into a number of agreements with
NBC that are intended to strengthen our business. Under these agreements, NBC
sells our network spot advertising and performs our network research and sales
marketing functions. We have also entered into JSAs with NBC with respect to all
of our stations serving markets also served by an NBC owned and operated
station, and with many independently owned NBC affiliated stations serving
markets also served by our stations. During the nine months ended September 30,
2001, we paid or accrued amounts due to NBC totaling approximately $14.4 million
for commission compensation and cost reimbursements incurred under our
agreements with NBC.
We derive our revenues from the sale of network spot advertising time,
network long form paid programming and station advertising:
o NETWORK SPOT ADVERTISING REVENUE. We sell commercial air time to
advertisers who want to reach the entire nationwide PAX TV viewing
audience with a single advertisement. Most of our network advertising is
sold under advance, or "upfront," commitments to purchase advertising
time, which are obtained before the beginning of our PAX TV programming
season. Network advertising rates are significantly affected by audience
ratings and our ability to reach audience demographics that are
desirable to advertisers. Higher ratings generally will enable us to
charge higher rates to advertisers. Our network advertising revenue
represented approximately 33% of our revenue during the nine months
ended September 30, 2001.
o NETWORK LONG FORM PAID PROGRAMMING. We sell air time for long form paid
programming, consisting primarily of infomercials, during broadcasting
hours when we are not airing PAX TV. Network long form paid programming
represented approximately 33% of our revenue during the nine months
ended September 30, 2001.
o STATION ADVERTISING REVENUE. We also sell commercial airtime to
advertisers who want to reach the viewing audience in specific
geographic markets in which we own and operate our television stations.
These advertisers may be local businesses or regional or national
advertisers who want to target their advertising in these markets.
Station advertising rates are affected by ratings and local market
conditions.
11
Our station advertising sales represented approximately 34% of our
revenue during the nine months ended September 30, 2001. Included in
station advertising revenue is long form paid programming sold locally
or nationally which represented approximately 16% of our revenue during
the nine months ended September 30, 2001.
Our revenue mix has changed since we launched PAX TV in 1998. The percentage
mix of our long form paid programming has declined from more than 90% in 1997 to
49% (combined network and television station long form) in the nine months ended
September 30, 2001 due to the increase in spot advertising sales following the
launch of PAX TV. Long-form paid programming, however, continues to represent a
significant portion of our revenues.
During the fourth quarter of 1999, we began entering into Joint Sales
Agreements ("JSA") with owners of broadcast stations in markets served by our
stations. After implementation of a JSA, we no longer employ our own on-site
station sales staff. The JSA partner provides station spot advertising sales
management and representation for our stations and we integrate and co-locate
our station operations with those of our JSA partners. During the fourth quarter
of 2000, we approved a plan to restructure our television station operations by
entering into JSAs with owners of broadcast stations in markets in which our
stations were not already operating under JSAs. To date, we have entered into
JSAs for 55 of our television stations. Our restructuring plan includes two
major components: (1) termination of 226 station sales and administrative
employees and (2) the closing of our leased studio and sales office facilities
at each of our stations. These restructuring activities resulted in a charge of
approximately $5.8 million in the fourth quarter of 2000, consisting of $2.7
million of termination benefits and $3.1 million of costs associated with the
closing of our studios and sales offices that will no longer be utilized upon
implementation of the JSAs. During the nine months ended September 30, 2001, we
paid termination benefits to 72 employees totaling approximately $1.4 million
and paid lease termination costs of approximately $0.6 million, which were
charged against the restructuring reserve. We expect to substantially complete
the restructuring plan by the end of 2001; however, certain lease obligations
may continue through mid-2002. Upon full implementation of JSAs, we expect to
reduce our annual station operating expenses by approximately $20 to $25 million
consisting primarily of salary and occupancy costs. These savings will be
partially offset by commissions paid to our JSA partners which, based on 2000
actual net revenues, would total approximately $10 million. Actual commissions
will vary based on actual revenues realized.
Our primary operating expenses include selling, general and administrative
expenses, depreciation and amortization expenses, programming expenses, employee
compensation and costs associated with cable and satellite distribution, ratings
services and promotional advertising. Programming amortization is a significant
expense and is affected significantly by several factors, including the mix of
syndicated versus lower cost original programming as well as the frequency with
which programs are aired. As we acquire a more complete library of lower cost
original programming to replace our syndicated programming, our programming
amortization expense should decline.
This Report contains forward-looking statements that reflect our current
views with respect to future events. All statements in this Report other than
those that are statements of historical facts are generally forward-looking
statements. These statements are based on our current assumptions and analysis,
which we believe to be reasonable, but are subject to numerous risks and
uncertainties that could cause actual results to differ materially from our
expectations. All forward-looking statements in this Report are made only as of
the date of this Report, and we do not undertake any obligation to update these
forward-looking statements, even though circumstances may change in the future.
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 our forward-looking statements or could otherwise adversely
affect our business or financial condition include those set forth in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, as filed with
the US Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth net revenues, the components of operating
expenses and other operating data for the three and nine months ended September
30, 2001 and 2000 (in thousands):
12
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(unaudited) (unaudited)
Revenues ................................................. $ 72,462 $ 73,443 $ 231,657 $ 230,050
Less: agency commissions ................................. (10,507) (10,345) (32,655) (32,214)
--------- --------- --------- ---------
Net revenues ............................................. 61,955 63,098 199,002 197,836
--------- --------- --------- ---------
Expenses:
Programming and broadcast operations ................ 9,788 10,048 30,170 28,532
Program rights amortization ......................... 20,378 26,702 66,241 78,633
Selling, general and administrative ................. 29,314 36,760 91,559 102,662
Time brokerage and affiliation fees ................. 894 961 2,727 4,331
Stock-based compensation ............................ 2,546 3,090 5,735 10,840
Adjustment of programming to net realizable value ... 66,992 -- 66,992 24,400
Depreciation and amortization ....................... 24,213 22,594 72,345 65,168
--------- --------- --------- ---------
Total operating expenses ......................... 154,125 100,155 335,769 314,566
--------- --------- --------- ---------
Operating loss ........................................... $ (92,170) $ (37,057) $(136,767) $(116,730)
========= ========= ========= =========
Other Data:
Adjusted EBITDA (a) ................................. $ 2,475 $ (10,412) $ 11,032 $ (11,991)
Program rights payments and deposits ................ 35,863 31,105 94,573 87,712
Payments for cable distribution rights .............. 4,044 3,953 12,469 6,113
Capital expenditures ................................ 8,966 7,383 22,654 16,249
Cash flows used in operating activities ............. (7,058) (31,117) (41,833) (58,025)
Cash flows provided by (used in) investing activities 1,728 (15,913) 5,444 (35,827)
Cash flows provided by financing activities ......... 3,064 5,492 10,875 5,556
-----------------
(a) "Adjusted EBITDA" is defined as operating loss plus depreciation,
amortization, stock-based compensation, programming net realizable value
adjustments, restructuring and other one-time charges, and time brokerage
and affiliation fees. Adjusted 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. We believe the presentation of adjusted EBITDA is relevant and
useful because adjusted EBITDA is a measurement industry analysts utilize
when evaluating our operating performance. We also believe adjusted EBITDA
enhances an investor's understanding of our results of operations because
it measures our operating performance exclusive of interest and other
non-operating and non-recurring items as well as non-cash charges for
depreciation, amortization and stock compensation. In evaluating adjusted
EBITDA, investors should consider various factors including its
relationship to our reported operating losses and cash flows from
operating activities. Investors should be aware that adjusted EBITDA may
not be comparable to similarly titled measures presented by other
companies and could be misleading unless all companies and analysts
calculate such measures in the same manner. The results depicted by
adjusted EBITDA are not indicative of our cash flows from operations and
therefore are not available for our discretionary use.
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net revenues decreased 1.8% to $62.0 million for the three months ended
September 30, 2001 from $63.1 million for the three months ended September 30,
2000. Increases in network revenues were offset by declining station revenues.
The increase in PAX TV network advertising revenues resulted primarily from
increases in ratings and distribution of PAX TV and favorable results from our
network sales agreement with NBC. The decrease in television station revenues is
primarily due to reduced advertising revenues in our local markets due to a
weaker advertising environment and lost revenues due to the events of September
11, 2001.
Programming and broadcast operations expenses were $9.8 million during the
three months ended September 30, 2001 compared with $10.0 million for the
comparable period last year. This decrease is primarily due to lower programming
costs and JSA related savings. Program rights amortization expense was $20.4
million during the three months ended September 30, 2001 compared with $26.7
million for the comparable period last year. The decrease is due to syndicated
programming changes as well as a greater mix of lower cost original programming
versus the
13
comparable period last year. Selling, general and administrative expenses were
$29.3 million during the three months ended September 30, 2001 compared with
$36.8 million for the comparable period last year. The decrease is due to lower
selling costs and other cost cutting measures. Time brokerage and affiliation
fees were $0.9 million during the three months ended September 30, 2001 compared
with $1.0 million for the comparable period last year. Stock-based compensation
expense was $2.5 million during the three months ended September 30, 2001
compared with $3.1 million for the comparable period last year. This decrease is
due to a reduction in options vesting in the third quarter of 2001 compared with
the same period last year. The programming rights adjustment to net realizable
value was $67.0 million during the three months ended September 30, 2001 and is
further described below. Depreciation and amortization expense was $24.2 million
during the three months ended September 30, 2001 compared with $22.6 million for
the comparable period last year. This increase is due to assets acquired as well
as accelerated depreciation on assets to be disposed of in connection with the
JSA restructuring plan described above.
In furtherance of our strategy to increase audience ratings through the
development of PAX TV original programming, in the third quarter of 2001, we
decided to gradually phase the syndicated program "Touched By An Angel", which
we refer to as "Touched", out of primetime and into the daytime period. Touched
will be replaced in primetime with original programming. Based on this change,
we adjusted our estimate of the anticipated future usage of Touched and certain
other syndicated programs and the related advertising revenues expected to be
generated and recognized a charge of approximately $67.0 million related to the
net realizable value of these programming assets and related programming
commitments. The charge includes a $22.2 million accrued loss related to
programming commitments for the 2001/2002 season of Touched currently airing on
CBS. We are contractually obligated to license future seasons of Touched if the
series is renewed by CBS. Additional programming losses, if any, will be
recorded at the time we become committed to license future seasons of Touched.
Interest expense for the three months ended September 30, 2001, increased
9.4% to $13.1 million from $12.0 million in the same period in 2000 due to
higher debt balances. At September 30, 2001, total long-term debt and senior
subordinated notes were $495.6 million compared with $392.7 million as of
September 30, 2000. As described below, in July 2001, we completed the
refinancing of substantially all of our indebtedness. Interest income for the
three months ended September 30, 2001 decreased 60.7% to $1.3 million from $3.3
million in the same period in 2000. These decreases were primarily due to lower
average cash and short-term investment balances in 2001.
During the three months ended September 30, 2001, we sold three television
stations for aggregate consideration of approximately $13.0 million and realized
pre-tax gains of approximately $2.4 million on these sales.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Net revenues increased 0.6% to $199.0 million for the nine months ended
September 30, 2001 from $197.8 million for the nine months ended September 30,
2000. This increase is primarily attributable to higher advertising revenues
from the PAX TV network offset in part by a decrease in revenue from our
television stations. The increase in PAX TV network advertising revenues
resulted from increases in ratings and distribution of PAX TV and favorable
results from our network sales agreement with NBC. The decrease in television
station revenues is primarily due to reduced television spot advertising
revenues in our local markets.
Programming and broadcast operations expenses were $30.2 million during the
nine months ended September 30, 2001 compared with $28.5 million for the
comparable period last year. This increase is primarily due to higher
programming costs associated with original program development and expenses of
implementing JSAs and other JSA transition costs. Program rights amortization
expense was $66.2 million during the nine months ended September 30, 2001
compared with $78.6 million for the comparable period last year. The decrease is
due to syndicated programming changes as well as a greater mix of lower cost
original programming versus the comparable period last year. Selling, general
and administrative expenses were $91.6 million during the nine months ended
September 30, 2001 compared with $102.7 million for the comparable period last
year. The decrease is primarily due to lower selling costs and other cost
cutting measures. Time brokerage and affiliation fees were $2.7 million during
the nine months ended September 30, 2001 compared with $4.3 million for the
comparable period last year. This decrease is due to the completion of
acquisitions of stations we previously operated under time brokerage agreements.
Stock-based
14
compensation expense was $5.7 million during the nine months ended September 30,
2001 compared with $10.8 million for the comparable period last year. This
decrease is due to a reduction in options vesting in the nine months ended
September 30, 2001 compared with the same period last year. The programming
rights adjustment to net realizable value previously described was $67.0 million
during the nine months ended September 30, 2001 compared with $24.4 million for
the comparable period last year. Depreciation and amortization expense was $72.3
million during the nine months ended September 30, 2001 compared with $65.2
million for the comparable period last year. This increase is due to assets
acquired as well as accelerated depreciation on assets to be disposed of in
connection with the JSA restructuring plan described above.
Interest expense for the nine months ended September 30, 2001, increased
5.3% to $37.2 million from $35.4 million in the same period in 2000. The
increase is primarily due to a greater level of debt throughout the period. At
September 30, 2001, total long-term debt and senior subordinated notes were
$495.6 million compared with $392.7 million as of September 30, 2000. Interest
income for the nine months ended September 30, 2001 decreased 66.4% to $4.0
million from $12.0 million in the same period in 2000. The decrease is primarily
due to lower average cash and short-term investment balances in 2001.
Gain on modification of program rights obligations during 2000 primarily
reflects our return of certain programming rights that had been written off
during 1999, in exchange for cash of $4.9 million and the cancellation of the
remaining payment obligations.
During the nine months ended September 30, 2001, we sold five television
stations for aggregate consideration of $31.9 million and realized pre-tax gains
of approximately $13.1 million on these sales.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are to fund capital expenditures for our
television properties, programming rights payments, cable carriage, promotion
payments, debt service payments and working capital. Our primary sources of
liquidity are our net working capital and availability under the delayed draw
term and revolving portions of our new senior credit facility.
As of September 30, 2001, we had $60.0 million in cash and short-term
investments and working capital of approximately $9.2 million. During the nine
months ended September 30, 2001, our cash and short-term investments
15
decreased by approximately $55.1 million due primarily to the use of $38.5
million to pay interest and preferred stock dividends as well as cash used to
fund operations including programming and cable payments.
Cash used in operating activities was approximately $41.8 million and $58.0
million for the nine months ended September 30, 2001 and 2000, respectively.
These amounts primarily reflect the operating costs incurred in connection with
the operation of PAX TV and the related cable distribution rights and
programming rights payments and interest payments under our debt facilities.
Cash provided by (used in) investing activities was approximately $5.4
million and ($35.8) million for the nine months ended September 2001 and 2000,
respectively. These amounts include acquisitions of broadcast properties,
capital expenditures, short term investment transactions, proceeds from the sale
of television stations and other transactions. As of September 30, 2001, we had
agreements to purchase significant assets of broadcast properties totaling
approximately $38.1 million, net of deposits and advances. We do not anticipate
spending any significant amounts to satisfy these commitments until 2004.
In June 2001, we completed the sale of our Phoenix/Flagstaff and St. Louis
television stations and received approximately $15.1 million in cash proceeds.
In August 2001, we completed the sale of our three Puerto Rico television
stations and received $11.0 million in cash proceeds. Additionally, we have
entered or intend to enter into agreements to sell other specified assets and
anticipate the proceeds from these transactions to be approximately $75 million
to $85 million. These assets include our television stations serving markets in
Honolulu and Boston/Merrimack, certain low-powered television stations, accounts
receivable and certain broadcasting tower assets. As part of this strategy, in
November 2001, we agreed to sell certain of our tower assets for $34 million,
$17 million of which was received in November with the remainder due at closing.
In conjunction with this transaction, we will enter into operating leases
related to both our analog and digital antennas at the facilities to be sold for
terms of up to 20 years. The transaction is expected to close in mid-December
2001. We expect to receive the proceeds related to the tower and other asset
sales during 2001 and 2002. We believe that cash provided by future operations,
net working capital, available funding under the Term A and revolving portions
of the new senior credit facility and the proceeds from the planned sales of
assets will provide the liquidity necessary to meet our obligations and
financial commitments for at least the next twelve months. If we are unable to
sell the identified assets on acceptable terms or our financial results are not
as anticipated, we may be required to seek to sell additional assets or raise
additional funds through the offering of equity securities in order to generate
sufficient cash to meet our liquidity needs. We cannot assure you that we would
be successful in selling assets or raising additional funds if this were to
occur.
Capital expenditures were approximately $22.7 million and $16.2 million for
the nine months ended September 30, 2001 and 2000, respectively. Except for
television stations presently operating analog television service in the 700 MHz
band and stations given a digital channel allocation within that band, the FCC
has mandated that each licensee of a full power broadcast television station
that 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. For those stations now operating in the 700 MHz band or allotted a digital
channel within that band, the institution of digital television service may be
delayed until December 31, 2005, or later if it can be demonstrated that less
than 70% of the television households in the station's market are capable of
receiving digital television signals. Despite the current uncertainty that
exists in the broadcasting industry with respect to standards for digital
broadcast services, planned formats and usage, we intend to comply with the
FCC's timing requirements for the broadcast of digital television. We have
commenced migration to digital broadcasting in certain of our markets and will
continue to do so throughout the required time period. Because of the
uncertainty as to standards, formats and usage, however, we cannot currently
predict with reasonable certainty the amount or timing of the expenditures we
will likely have to make to complete the digital conversion of our stations, but
we currently anticipate spending at least $70 million, approximately $10 million
of which has been spent to date. It is likely that we will fund our digital
conversion from the $50 million Term A facility entered
16
into as part of the July 2001 refinancing described below, as well as cash on
hand, the monetization of certain non-core assets, and other financing
arrangements.
Cash provided by financing activities was $10.9 million and $5.6 million
during the nine months ended September 30, 2001 and 2000, respectively. These
amounts include the proceeds from the July 2001 refinancing described below, as
well as the related principal repayments, redemption premium, preferred stock
redemption and refinancing costs. Also included are proceeds from borrowings to
fund capital expenditures and proceeds from stock option exercises, net of
principal repayments and preferred stock dividends.
On July 12, 2001, we completed a $560 million financing consisting of a $360
million bank credit facility and $200 million of 10 3/4% Senior Subordinated
Notes due 2008. Proceeds from the initial funding under the new bank credit
facility and the 10 3/4% Senior Subordinated Notes offering were used to repay
all of our indebtedness and obligations under our previously existing credit
facilities which were scheduled to mature in June 2002, to redeem our 11 5/8%
Senior Subordinated Notes and our 12% redeemable preferred stock, as well as to
pay redemption premiums, fees and expenses in connection with the refinancing.
In the third quarter of 2001, we recognized an extraordinary loss related to
early extinguishment of debt totaling approximately $9.9 million resulting
primarily from the write-off of unamortized debt costs related to the refinanced
indebtedness and the redemption premium and costs associated with the repayment
of the 11 5/8% Senior Subordinated Notes.
The $360 million bank credit facility consists of a $25 million revolving
credit facility maturing June 2006, of which $2.0 million was outstanding at
September 30, 2001, a $50 million delayed draw Term A facility maturing
December 2005, of which $8 million was outstanding at September 30, 2001, and a
$285 million fully drawn Term B facility maturing June 2006. The revolving
credit facility is available for general corporate purposes and the Term A
facility is available to fund capital expenditures. We intend to use the $50
million Term A portion of the facility to fund the majority of our capital
expenditures through the end of 2002. The interest rate under the bank facility
is LIBOR plus 3.0%. The 10 3/4% Senior Subordinated Notes are due in 2008 and
interest on the notes is payable on January 15 and July 15 of each year,
beginning on January 15, 2002. In September 2001, we entered into a variable to
fixed interest rate swap in the notional amount of $144.0 million to hedge the
impact of interest rate changes on a portion of our variable rate indebtedness.
The fixed rate under the swap is 3.64% and variable rates are indexed to LIBOR.
Including the impact of the swap, the weighted average interest rate of our
indebtedness at September 30, 2001 was 8.35%.
The terms of the new senior credit facility and the indenture governing
the senior subordinated notes contain covenants limiting our ability to incur
additional indebtedness except for specified indebtedness related to the funding
of capital expenditures and refinancing indebtedness.
As of September 30, 2001, our programming contracts require collective
payments of approximately $197.0 million as follows (in thousands):
Obligation for Program Rights
Program Rights Commitments Total
-------------- ----------- -----
2001 (October--December) $ 34,605 $ 10,606 $ 45,211
2002 ................... 64,532 11,535 76,067
2003 ................... 26,649 9,218 35,867
2004 ................... 12,500 10,085 22,585
2005 ................... 4,263 9,635 13,898
Thereafter ............. -- 3,345 3,345
-------- -------- --------
$142,549 $ 54,424 $196,973
======== ======== ========
We are also committed to purchase at similar terms additional future series
episodes of our licensed programs should they be made available.
As of September 30, 2001, obligations for cable distribution rights require
collective payments by us of approximately $12.3 million as follows (in
thousands):
2001 (October--December)............................ $ 9,287
2002................................................ 2,623
2003................................................ 260
2004................................................ 108
--------
$ 12,278
Less: Amount representing interest.................. (609)
--------
Present value of cable rights payable............... $ 11,669
========
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
addresses financial accounting and reporting for business combinations and
requires all business combinations to be accounted for using the purchase method
of accounting. SFAS 141 is effective for all business combinations initiated
after June 30, 2001. We do not believe adoption of SFAS 141 will have a material
impact on our financial position, results of operations or cash flows.
SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. Under SFAS 142, goodwill and intangible assets that
have indefinite lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Impairment losses for goodwill
and other indefinite-lived intangible assets that arise due to the initial
application of SFAS 142 are to be reported as resulting from a change in
accounting principle. We will adopt SFAS 142 on January 1, 2002. We are
currently assessing the impact of adopting SFAS 142 and have not yet determined
whether we will recognize an impairment loss, if any, resulting from adoption.
However, upon adoption of SFAS 142, we will no longer amortize goodwill and FCC
license intangibles (which we believe have indefinite lives) which totaled
approximately $852.2 million, net of accumulated amortization of $130.3 million
at September 30, 2001. Under existing accounting standards, these assets are
being
17
amortized over 25 years. Amortization expense related to goodwill and FCC
licenses totaled approximately $29.5 million and $27.1 million for the nine
months ended September 30, 2001 and 2000, respectively.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" and
Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of
Operations - Reporting the Effects of the Disposal of a Segment Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes a single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS No.144 retains the
provisions of APB No. 30 for presentation of discontinued operations in the
income statement, but broadens the presentation to include a component of an
entity. SFAS 144 is effective for fiscal years beginning after December 15,
2001. We do not believe that the adoption of SFAS 144 will have a material
impact on our financial position or results of operations.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In October, November and December 1999, complaints were filed in the 15th
Judicial Circuit Court in Palm Beach County, Florida in the Court of Chancery
of the State of Delaware and in Superior Court of the State of California
against certain of our officers and directors by alleged stockholders of our
company alleging breach of fiduciary duty by the directors in approving the
September 1999 transactions with NBC. The complaints asserted nearly identical
purported class and derivative claims and generally alleged that the directors
rejected a takeover offer and instead completed the NBC transactions, thereby
precluding the plaintiffs from obtaining a premium price for their shares. The
complaints sought to rescind the NBC transactions, to require us to pursue
other acquisition offers and to recover damages. In July, 2001, the four
actions in Delaware were dismissed by the court. In August, 2001, the Florida
action was voluntarily dismissed. The California action remains pending.
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)
3.1.4 Certificate of Designation of the Company's 12 1/2% Cumulative
Exchangeable Preferred Stock (2)
3.1.6 Certificate of Designation of the Company's 9 3/4% Series A Convertible
Preferred Stock (3)
3.1.7 Certificate of Designation of the Company's 13 1/4% Cumulative Junior
Exchangeable Preferred Stock (3)
3.1.8 Certificate of Designation of the Company's 8% Series B Convertible
Exchangeable Preferred Stock (4)
3.2 Bylaws of the Company (5)
4.6 Indenture, dated as of July 12, 2001, among the Company, the Subsidiary
Guarantors party thereto, and The Bank of New York, as Trustee, with
respect to the Company's 10-3/4% Senior Subordinated Notes due 2008 (6)
4.7 Credit Agreement dated as of July 12, 2001 among the Company, the
Lenders party thereto, Citicorp USA, Inc., as Administrative Agent for
the Lenders and as Collateral Agent for the Secured Parties, Union Bank
of California, N.A., as Syndication Agent for the Lenders, and CIBC
Inc. and General Electric Capital Corporation, as Co-Documentation
Agents for the Lenders (6)
10.217 Indenture, dated as of July 12, 2001, among the Company, the Subsidiary
Guarantors party thereto, and the Bank of New York, as Trustee, with
respect to the Company's 10 3/4% Senior Subordinated Notes due 2008
(incorporated by reference to Exhibit 4.6) (6)
------------
(1) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.
(2) 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.
(3) 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.
(4) Filed with the Company's Form 8-K dated September 15, 1999, and
incorporated herein by reference.
(5) Filed with the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2001, and incorporated herein by
reference.
(6) Filed with the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001, and incorporated herein by
reference.
(b) Reports on Form 8-K.
Form 8-K, dated July 12, 2001 (filed July 18, 2001), Item 5, reporting
that on July 12, 2001, Paxson Communications Corporation completed a
$560 million financing consisting of a $360 million bank credit
facility and a $200 million offering of 10 3/4% Senior Subordinated
Notes due 2008.
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PAXSON COMMUNICATIONS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAXSON COMMUNICATIONS CORPORATION
Date: November 14, 2001 By: /s/ Ronald L. Rubin
-------------------------------------
Ronald L. Rubin
Vice President
Chief Accounting Officer and
Corporate Controller
(Principal Accounting Officer)
20