FORM 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2002
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 Identification No.)
incorporation or organization)
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 Exchange Act of 1934 during
the preceding 12 months (or for such 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 March 17, 2003:
Class of Stock Number of Shares
-------------- ----------------
Common stock-Class A, $0.001 par value per share................ 59,261,670
Common stock-Class B, $0.001 par value per share................ 8,311,639
RESTATEMENT OF PRIOR FINANCIAL INFORMATION
Paxson Communications Corporation (the "Company") is filing this Form 10-Q/A as
an amendment to the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 2002 that was filed with the Securities and Exchange Commission
on May 15, 2002 in order to restate its quarterly results to reflect deferred
tax adjustments resulting from the Company's adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). Upon further analysis completed by the Company in connection with the
preparation of its 2002 annual report on Form 10-K, the Company determined that
an adjustment was required to properly reflect its tax provisions reflected in
the Company's financial statements as presented in Form 10-Q as filed for the
quarterly periods of 2002. These non-cash tax adjustments result from the
Company's implementation of SFAS No. 142. Historically, the Company has netted
its deferred tax liability related to FCC licenses and goodwill against its
deferred tax asset. Following adoption of SFAS No. 142, the temporary
differences created by different treatment for book and tax of the Company's
indefinite lived intangibles can no longer be assumed to offset deductible
temporary differences which create deferred tax assets. Therefore, the Company
was required to record an additional tax expense to increase its deferred tax
asset valuation allowance in its financial statements totaling approximately
$125.9 million, $3.5 million and $3.5 million for the three month periods ending
March 31, 2002, June 30, 2002 and September 30, 2002, respectively. The Company
has not updated the information contained herein for events and transactions
occurring subsequent to the date of the original Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002. The Company therefore recommends that this
report be read in conjunction with the Company's reports filed subsequent to the
original filing date.
The Company hereby amends the following items, financial statements, exhibits or
other portions of its Quarterly Report on Form 10-Q for the quarter ended March
31, 2002, as set forth herein:
Part I - Financial Information
Item 1. Financial Statements.
The financial information is amended to read in its entirety as set forth on
pages 3 through 10 herein and incorporated herein by reference.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. The information set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" is
amended to add the paragraph under the heading "Income Taxes" on page 14 herein
and incorporated herein by reference.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
The list of exhibits set forth in, and incorporated by reference from, the
Exhibit Index to the original Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002, is amended to include the following additional exhibits,
filed herewith:
99.1 Certification by the Chairman and Chief Executive Officer of Paxson
Communications Corporation pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial Officer of Paxson Communications
Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certifications.
The information set forth under the caption "Certifications" is amended to
include the Certifications of the Company's Chairman and Chief Executive Officer
and Chief Financial Officer required pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as amended.
PAXSON COMMUNICATIONS CORPORATION
INDEX TO FORM 10Q/A
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and December 31, 2001..................... 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2002 and 2001 (unaudited)............................ 4
Consolidated Statement of Stockholders' Deficit for the
Three Months Ended March 31, 2002 (unaudited)........................ 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 (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 6. Exhibits and Reports on Form 8-K.....................................19
Signatures.....................................................................21
Certifications.................................................................22
2
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
March 31, December 31,
2002 2001
----------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents ....................................................... $ 52,114 $ 83,858
Short-term investments .......................................................... 24,284 12,150
Accounts receivable, net of allowance for doubtful accounts of $2,908 and $3,635,
respectively ................................................................ 25,416 29,728
Program rights .................................................................. 62,978 65,370
Prepaid expenses and other current assets ....................................... 5,074 5,667
----------- -----------
Total current assets ......................................................... 169,866 196,773
Property and equipment, net ......................................................... 151,962 147,641
Intangible assets, net .............................................................. 907,983 912,147
Program rights, net of current portion .............................................. 79,551 89,672
Investments in broadcast properties ................................................. 15,278 15,271
Other assets, net ................................................................... 30,192 22,171
----------- -----------
Total assets ................................................................. $ 1,354,832 $ 1,383,675
=========== ===========
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued liabilities ........................................ $ 21,444 $ 25,858
Accrued interest ................................................................ 9,329 15,220
Obligations for program rights .................................................. 63,047 76,169
Obligations for cable distribution rights ....................................... 10,220 12,325
Deferred revenue from satellite distribution rights ............................. 6,802 6,414
Current portion of bank financing ............................................... 3,613 2,899
----------- -----------
Total current liabilities .................................................... 114,455 138,885
Obligations for program rights, net of current portion .......................... 34,621 43,396
Obligations for cable distribution rights, net of current portion ............... 772 710
Deferred revenue from satellite distribution rights, net of current portion ..... 11,135 11,776
Deferred income taxes............................................................ 125,873 --
Senior subordinated notes and bank financing, net of current portion ............ 853,868 526,281
Other long-term liabilities ..................................................... 36,388 36,510
----------- -----------
Total liabilities ............................................................ 1,177,112 757,558
----------- -----------
Mandatorily redeemable preferred stock .............................................. 912,534 1,164,160
----------- -----------
Commitments and contingencies ....................................................... -- --
----------- -----------
Stockholders' deficit:
Class A common stock, $0.001 par value; one vote per share; 215,000,000
shares authorized, 56,547,377 and 56,380,177 shares issued and outstanding ... 57 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 ............................................. (1,588) (1,088)
Additional paid-in capital ...................................................... 513,276 512,194
Deferred stock option compensation .............................................. (5,204) (6,537)
Accumulated deficit ............................................................. (1,309,172) (1,109,710)
Accumulated other comprehensive loss ............................................ (575) (1,350)
----------- -----------
Total stockholders' deficit .................................................. (734,814) (538,043)
----------- -----------
Total liabilities, mandatorily redeemable preferred stock, and stockholders' deficit $ 1,354,832 $ 1,383,675
=========== ===========
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 Ended
March 31,
---------------------------------
2002 2001
------------ ------------
(Unaudited)
REVENUES:
Gross revenues ..................................................................... $ 80,781 $ 80,214
Less: agency commissions ........................................................... (11,706) (10,899)
------------ ------------
Net revenues ....................................................................... 69,075 69,315
------------ ------------
EXPENSES:
Programming and broadcast operations (excluding stock-based compensation of $145
and $48, respectively) ....................................................... 12,958 10,189
Program rights amortization ..................................................... 18,969 24,433
Selling, general and administrative (excluding stock-based compensation of $1,188
and $1,070, respectively) .................................................... 29,619 31,371
Time brokerage and affiliation fees ............................................. 935 939
Stock-based compensation ........................................................ 1,333 1,118
Restructuring charge related to Joint Sales Agreements .......................... (402) --
Depreciation and amortization ................................................... 12,638 23,996
------------ ------------
Total operating expenses .................................................... 76,050 92,046
------------ ------------
Operating loss ..................................................................... (6,975) (22,731)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ................................................................ (19,659) (12,283)
Interest income ................................................................. 496 1,484
Other expenses, net ............................................................. (571) (331)
Gain on modification of program rights obligations .............................. 233 233
------------ ------------
Loss before income taxes and extraordinary item .................................... (26,476) (33,628)
Income tax provision ............................................................... (125,903) (44)
------------ ------------
Loss before extraordinary item ..................................................... (152,379) (33,672)
Extraordinary charge related to early extinguishment of debt ....................... (17,552) --
------------ ------------
Net loss ........................................................................... (169,931) (33,672)
Dividends and accretion on redeemable preferred stock .............................. (29,531) (36,166)
------------ ------------
Net loss attributable to common stockholders ....................................... $ (199,462) $ (69,838)
============ ============
Basic and diluted loss per common share:
Loss before extraordinary item .................................................. $ (2.81) $ (1.09)
Extraordinary item .............................................................. (0.27) --
------------ ------------
Net loss ........................................................................ $ (3.08) $ (1.09)
============ ============
Weighted average shares outstanding ................................................ 64,758,512 64,288,943
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
4
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Three Months Ended March 31, 2002 (Unaudited)
(in thousands)
Common Accumu-
Stock Stock Deferred lated
Warrants Subscrip- Addi- Stock Other Total
and tion tional Option Compre- Stock-
Common Stock Call Notes Paid-In Compen- Accumulated hensive holders'
Class A Class B Option Receivable Capital sation Deficit Loss Deficit
------- -------- -------- ---------- ------- -------- ------------ ------- ---------
Balance, December 31, 2001... $ 56 $ 8 $ 68,384 $ (1,088) $512,194 $ (6,537) $(1,109,710) $(1,350) $(538,043)
Stock-based compensation.. -- -- -- -- -- 1,333 -- -- 1,333
Stock options exercised... 1 -- -- -- 1,082 -- -- -- 1,083
Interest on stock
subscription notes
receivable............... -- -- -- (500) -- -- -- -- (500)
Other comprehensive income -- -- -- -- -- -- -- 775 775
Dividends on redeemable
preferred stock.......... -- -- -- -- -- -- (22,413) -- (22,413)
Accretion on redeemable
preferred stock.......... -- -- -- -- -- -- (7,118) -- (7,118)
Net loss.................. -- -- -- -- -- -- (169,931) -- (169,931)
---- ---- -------- -------- -------- -------- ----------- ------- ---------
Balance, March 31, 2002...... $ 57 $ 8 $ 68,384 $ (1,588) $513,276 $ (5,204) $(1,309,172) $ (575) $(734,814)
==== ==== ======== ======== ======== ======== =========== ======= =========
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 Three Months Ended
March 31,
---------------------------
2002 2001
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net loss ....................................................... $(169,931) $ (33,672)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 12,638 23,996
Stock-based compensation ....................................... 1,333 1,118
Loss on extinguishment of debt ................................. 17,552 --
Non-cash restructuring charge .................................. (402) --
Program rights amortization .................................... 18,969 24,433
Payments for cable distribution rights ......................... (2,278) (2,349)
Barter revenue ................................................ (156) --
Payments for program rights and deposits ....................... (29,050) (27,878)
Deferred income tax provision................................... 125,873 --
Loss on sale or disposal of assets ............................. 713 293
Gain on modification of program rights obligations ............. (233) (233)
Accretion on senior subordinated discount notes ................ 7,974 105
Changes in assets and liabilities:
Increase in restricted cash and short-term investments ......... -- (193)
Decrease in accounts receivable ................................ 4,344 5,360
Decrease (increase) in prepaid expenses and other current assets 593 (171)
Decrease in other assets ....................................... 671 1,205
(Decrease) increase in accounts payable and accrued liabilities (3,357) 836
Decrease in accrued interest ................................... (5,891) (6,529)
--------- ---------
Net cash used in operating activities ..................... (20,638) (13,679)
--------- ---------
Cash flows from investing activities:
Acquisitions of broadcasting properties ........................ -- (9,551)
Increase in short-term investments ............................. (12,134) (2,655)
Purchases of property and equipment ............................ (12,048) (6,117)
Other .......................................................... (456) 191
--------- ---------
Net cash used in investing activities ..................... (24,638) (18,132)
--------- ---------
Cash flows from financing activities:
Borrowings of long-term debt ................................... 320,338 679
Repayments of long-term debt ................................... (12) (510)
Redemption of 12 1/2% exchange debentures ...................... (284,410) --
Payments of loan origination costs ............................. (9,164) --
Debt extinguishment premium and costs .......................... (14,302) --
Proceeds from exercise of common stock options, net ............ 1,082 1,079
--------- ---------
Net cash provided by financing activities ................. 13,532 1,248
--------- ---------
Decrease in cash and cash equivalents .......................... (31,744) (30,563)
Cash and cash equivalents, beginning of period ................. 83,858 51,363
--------- ---------
Cash and cash equivalents, end of period ....................... $ 52,114 $ 20,800
========= =========
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 March 31, 2002 and
for the three month periods ended March 31, 2002 and 2001, 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. Except for the adoption of Statement of Financial Accounting
Standards No. 142 described below, there have been no changes in accounting
policies since the year ended December 31, 2001. 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 2002 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,
2001, and the definitive proxy statement for the annual meeting of stockholders
held May 3, 2002, both of which were filed with the United States Securities and
Exchange Commission.
2. Adoption of SFAS 142
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") effective January 1, 2002.
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 are not amortized but rather are tested at least annually
for impairment. Intangible assets that have finite useful lives continue to be
amortized over their useful lives. No goodwill or FCC license intangible asset
impairment loss was recognized upon adoption. However, because of the effect of
SFAS 142 on the computation of deferred tax assets and liabilities, the Company
was required to increase its deferred tax asset valuation allowance during the
three months ended March 31, 2002. Under SFAS 142, the Company no longer
amortizes goodwill and FCC license intangibles (which the Company believes have
indefinite lives). Under previous accounting standards, these assets were being
amortized over 25 years. Had the Company not amortized its goodwill and
indefinite lived intangibles pursuant to SFAS 142 during 2001, the Company's
net loss attributable to common stockholders for the three months ended
March 31, 2001 would have been approximately $63.4 million, or $0.99 per share,
net of deferred taxes.
Intangible assets consist of the following (in thousands):
March 31, 2002 December 31, 2001
----------------------------------- ----------------------------------
Gross Accumulated Gross Accumulated
Carrying Amount Amortization Carrying Amount Amortization
--------------- ------------ --------------- ------------
Amortized intangible assets:
Cable and satellite distribution rights $ 127,498 $ (63,947) $ 127,301 $ (59,181)
Other ................................. 5,512 (4,194) 5,512 (4,152)
Non-amortized intangible assets:
FCC licenses .......................... 788,291 -- 787,844 --
Goodwill .............................. 54,823 -- 54,823 --
--------- --------- --------- ---------
$ 976,124 $ (68,141) $ 975,480 $ (63,333)
========= ========= ========= =========
Amortization expense for the three months ended March 31, 2002 and 2001 was
$4.8 million and $14.6 million, respectively. Estimated future amortization
expense is as follows for the periods indicated (in thousands):
2002 (April to December)........................... $ 13,538
2003............................................... 18,051
2004............................................... 17,955
2005............................................... 12,283
2006............................................... 864
7
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 ("JSAs") 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. Through March 31, 2002, the Company has paid termination benefits
to 83 employees totaling approximately $1.6 million and paid lease termination
costs of approximately $1.2 million, which were charged against the
restructuring reserve. The Company has made substantial progress in executing
its restructuring plan, however due to events outside the Company's control
including the events of September 11, 2001, the Company was unable to fully
complete the plan in 2001. The Company now expects to substantially complete the
JSA restructuring by the end of the third quarter of 2002, except for
contractual lease obligations for closed locations, which continue through 2008.
During the quarter, the Company was unable to enter into JSAs for two of
the three remaining stations included in its restructuring plan. Although the
Company intends to continue pursuing JSAs for these stations, the Company is
currently unable to determine the ultimate timing of these JSAs. Accordingly, in
the first quarter of 2002, the Company reversed approximately $0.4 million of
restructuring reserves primarily related to these two stations and certain other
reserves which were no longer required.
The following summarizes the activity in the Company's restructuring
reserves for the three months ended March 31, 2002 (in thousands):
Balance Amounts Credited to Balance
December 31, 2001 Cash Deductions Costs and Expenses March 31, 2002
----------------- --------------- ------------------ --------------
Accrued Liabilities:
Lease costs................. $ 1,717 $ (254) $ (129) $ 1,334
Severance................... 382 (109) (273) -
---------- ---------- ---------- ---------
$ 2,099 $ (363) $ (402) $ 1,334
========== ========== ========== =========
4. LONG-TERM DEBT
In January 2002, the Company completed an offering of senior subordinated
discount notes due in 2009. Gross proceeds of the offering totaled approximately
$308.3 million and were used to refinance the Company's 12 1/2% exchange
debentures due 2006, which were issued in exchange for the outstanding shares of
the Company 12 1/2% exchangeable preferred stock on January 14, 2002, and to pay
costs related to the offering. The notes were sold at a discounted price of
62.132% of the principal amount at maturity, which represents a yield to
maturity of 12 1/4%. Interest on the notes will be payable semi-annually
beginning on July 15, 2006. The senior subordinated discount notes are
guaranteed by the Company's subsidiaries. The Company recognized an
extraordinary loss due to early extinguishment of debt totaling approximately
$17.6 million in the first quarter of 2002 resulting primarily from the
redemption premium and the write-off of unamortized debt costs associated with
the repayment of the 12 1/2% exchange debentures.
The Company's senior credit facility contains various covenants restricting
the Company's ability and the ability of its subsidiaries to incur additional
indebtedness, dispose of assets, pay dividends, repurchase or redeem capital
stock and indebtedness, create liens, make capital expenditures, make certain
investments or acquisitions and enter into transactions with affiliates and
otherwise restricting its activities. The senior credit facility also contains
the following financial covenants: (1) twelve-month trailing minimum net revenue
and minimum EBITDA (as defined) for each of the fiscal quarters ended June 30,
2001 through December 31, 2003 and (2) maximum ratio of total senior debt to
EBITDA, maximum ratio of total debt to EBITDA, minimum permitted interest
coverage ratio and minimum permitted fixed charge coverage ratio, each beginning
for each of the fiscal quarters ending on or after June 30, 2004. At March 31,
2002, the Company was in compliance with these covenants, as applicable. The
Company believes that it will continue to be in compliance with its debt
covenants for the next twelve months. However, there can be no assurance that
the Company will continue to be in compliance. If the Company were to violate
any of these covenants, the Company
8
would be required to seek a waiver from its lenders under the senior credit
facility and possibly seek an amendment to the senior credit facility. Although
the Company believes, based on discussions with its lenders, that the Company
would be able to obtain waivers or amendments to its senior credit facility
relating to these covenants, there can be no assurance that the Company's
lenders under its senior credit facility would grant the Company any waiver or
amendment, which might become necessary. If the Company failed to meet any of
its financial covenants and the Company's lenders did not grant a waiver or
amend the facility, the lenders would have the right to declare an event of
default and seek remedies including acceleration of all outstanding amounts due
under the senior credit facility. Should an event of default be declared under
the senior credit facility, this would cause a cross default to occur under the
Company's senior subordinated note and senior subordinated discount note
indentures, thus giving each trustee the right to accelerate repayment. There
can be no assurance that the Company would be successful in obtaining
alternative sources of funding to repay these obligations should these events
occur.
5. MANDATORILY REDEEMABLE PREFERRED STOCK
The following represents a summary of the changes in the Company's
mandatorily redeemable preferred stock during the three month period ended March
31, 2002 (in thousands):
Series B
Junior Convertible
Exchangeable Exchangeable Convertible Exchangeable
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
12 1/2% 13 1/4% 9 3/4% 8% Total
------------ ------------ ----------- ----------- -----------
Balance at December 31, 2001 ..................... $ 279,890 $ 310,068 $ 103,140 $ 471,062 $ 1,164,160
Accretion ........................................ 23 297 124 6,674 7,118
Accrual of cumulative dividends .................. 1,244 10,294 2,575 8,300 22,413
Exchange into debentures (see Note 4) ........... (281,157) -- -- -- (281,157)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 2002 (unaudited) ............ $ -- $ 320,659 $ 105,839 $ 486,036 $ 912,534
=========== =========== =========== =========== ===========
Aggregate liquidation preference at March 31, 2002 $ -- $ 326,205 $ 108,231 $ 499,383 $ 933,819
Shares authorized ................................ -- 72,000 17,500 41,500 131,000
Shares issued and outstanding .................... -- 31,076 10,823 41,500 83,399
Accrued dividends ................................ $ -- $ 15,441 $ -- $ 84,383 $ 99,824
6. COMPREHENSIVE LOSS
The components of the comprehensive loss are as follows (in thousands):
Three Months Ended March 31,
-----------------------------
2002 2001
-------- --------
Net loss ................................. $(169,931) $(33,672)
Other comprehensive income:
Unrealized gain on interest rate swap 775 --
--------- --------
Comprehensive loss ....................... $(169,156) $(33,672)
========= ========
7. INCOME TAXES
The Company has recorded a provision for income taxes based on its
estimated annual income tax liability. For the three months ended March 31, 2002
and 2001, the Company has recorded a valuation allowance for its deferred tax
assets (resulting from tax losses generated during the periods) net of those
deferred tax liabilities which are expected to reverse in determinate future
periods, as it believes it is more likely than not that it will be unable to
utilize its remaining net deferred tax assets. As previously described, upon
adoption of SFAS 142 on January 1, 2002, the Company no longer amortizes its
goodwill and FCC license intangibles. Under previous accounting standards, these
assets were being amortized over 25 years. Although the provisions of SFAS 142
stipulate that indefinite-lived intangible assets and goodwill are not
amortized, the Company is required under FASB Statement No. 109, "Accounting for
Income Taxes" ("SFAS 109"), to recognize deferred tax liabilities and assets for
temporary differences related to goodwill and FCC license intangible assets and
the tax-deductible portion of these assets. Prior to adopting SFAS 142, the
Company considered its deferred tax liabilities related to these assets as a
source of future taxable income in assessing the realization of its deferred tax
assets. Because indefinite-lived intangible assets and goodwill are no longer
amortized for financial reporting purposes under SFAS 142, the related deferred
tax liabilities will not reverse until some indeterminate future period should
the assets become impaired or are disposed of. Therefore, the reversal of
deferred tax liabilities related to FCC license intangible assets and goodwill
are no longer considered a source of future taxable income in assessing the
realization of deferred tax assets. As a result of this accounting change, the
Company was required to record an increase in its deferred tax asset valuation
allowance totaling approximately $125.9 million during the three months ended
March 31, 2002. In addition, the Company will continue to record increases in
its valuation allowance in future periods based on increases in the deferred tax
liabilities and assets for temporary differences related to goodwill and FCC
license intangible 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
9
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 March 31, 2002 and 2001, 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):
March 31,
-----------------------
2002 2001
------ ------
Stock options outstanding................................................. 12,514 10,722
Class A common stock warrants outstanding................................. 32,428 32,428
Class A common stock reserved under convertible securities................ 38,660 38,039
------ ------
83,602 81,189
====== ======
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash investing and financing
activities are as follows (in thousands):
For the Three Months
Ended March 31,
----------------------
2002 2001
--------- -------
(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid for interest............................................... $ 16,520 $17,613
========= =======
Cash paid for income taxes........................................... $ 369 $ 113
========= =======
Non-cash operating and financing activities:
Dividends accrued on redeemable preferred stock...................... $ 22,413 $29,145
========= =======
Discount accretion on redeemable securities.......................... $ 7,118 $ 7,021
========= =======
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 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 86% 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 broadcast station
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 fourth 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
most 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 three months ended March 31,
2002, we paid or accrued amounts due to NBC totaling approximately $4.0 million
for commission compensation and cost reimbursements incurred under our
agreements with NBC.
In December 2001, we commenced a binding arbitration proceeding against NBC
in which we asserted that NBC has breached its agreements with us and has
breached its fiduciary duty to us and to our shareholders. Should the outcome of
our arbitration proceeding against NBC require the unwinding or termination of
some or all of these operating relationships, or should NBC or the NBC
affiliates elect not to renew the agreements under which these operating
relationships have been implemented, we could be required to incur significant
costs to resume performing the advertising sales and other operating functions
currently performed by NBC and our JSA partners or to transfer performance of
these functions to another broadcast television station operator, which could
have a material adverse effect upon us.
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 28% of our revenue during the three months
ended March 31, 2002.
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. Our network long form paid
programming represented approximately 38% of our revenue during the
three months ended March 31, 2002.
11
o STATION ADVERTISING REVENUE. We 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. Our station advertising
sales represented approximately 34% of our revenue during the three
months ended March 31, 2002. Included in station advertising revenue is
long form paid programming sold locally or nationally which represented
approximately 16% of our revenue during the three months ended March 31,
2002.
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
54% (combined network and television station long form) in the three months
ended March 31, 2002 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.
Commencing in 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. To date, we have entered
into JSAs for 55 of our 65 television stations.
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.
RESULTS OF OPERATIONS
The following table sets forth net revenues, the components of operating
expenses and other operating data for the three months ended March 31, 2002 and
2001 (in thousands):
Three Months Ended
March 31,
-----------------------------
2002 2001
----------- ----------
(unaudited)
Gross revenues....................................................... $ 80,781 $ 80,214
Less: agency commissions............................................. (11,706) (10,899)
----------- ----------
Net revenues 69,075 69,315
----------- ----------
Expenses:
Programming and broadcast operations............................ 12,958 10,189
Program rights amortization..................................... 18,969 24,433
Selling, general and administrative............................. 29,619 31,371
Time brokerage and affiliation fees............................. 935 939
Stock-based compensation........................................ 1,333 1,118
Restructuring charge related to JSAs............................ (402) --
Depreciation and amortization................................... 12,638 23,996
----------- ----------
Total operating expenses..................................... 76,050 92,046
----------- ----------
Operating loss....................................................... $ (6,975) $ (22,731)
============ ==========
Other Data:
Adjusted EBITDA (a)............................................. $ 7,529 $ 3,322
Program rights payments and deposits............................ 29,050 27,878
Payments for cable distribution rights.......................... 2,278 2,349
Capital expenditures............................................ 12,048 6,117
Cash flows used in operating activities......................... (20,638) (13,679)
Cash flows used in investing activities......................... (24,638) (18,132)
Cash flows provided by financing activities..................... 13,532 1,248
12
(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-based
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. Adjusted EBITDA is not indicative of our cash flows
from operations and therefore does not represent funds available for our
discretionary use.
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Gross revenues increased 0.7% to $80.8 million for the three months ended
March 31, 2002 from $80.2 million for the three months ended March 31, 2001.
This increase is primarily attributable to higher advertising revenues from our
television stations offset in part by a decrease in revenue from the PAX TV
network. The increase in television station revenues is primarily due to
improved television spot advertising revenues in our local markets. The decrease
in PAX TV network advertising revenues resulted from a weaker upfront market for
the 2001/2002 broadcast season and we expect this trend to continue through the
third quarter of 2002.
Our revenues during the three months ended March 31, 2002 were negatively
affected by the temporary loss of the broadcast signal of our New York
television station when our antenna, transmitter and other broadcast equipment
was destroyed upon the collapse of the World Trade Center on September 11, 2001.
We are currently broadcasting from towers outside of Manhattan at substantially
lower height and power. We are evaluating several alternatives to improve our
signal through transmission from other locations, however we expect it could
take several years to replace the signal we enjoyed at the World Trade Center
location with a comparable signal. We believe the loss of a significant portion
of our over-the-air viewership in the New York market has had a negative effect
on our revenues as a result of lower ratings for the PAX TV network and our
station serving the New York market. We have property and business interruption
insurance coverage to mitigate the losses sustained. Insurance recoveries will
be recognized in the period they become probable of collection and can be
reasonably estimated. Due to the preliminary stages of our insurance claim, no
insurance recoveries were recognized in the first quarter of 2002.
Programming and broadcast operations expenses were $13.0 million during the
three months ended March 31, 2002, compared with $10.2 million for the
comparable period last year. This increase is primarily due to tower rent
expense for previously owned towers that were sold in 2001 and higher music
licensing fees. Program rights amortization expense was $19.0 million during the
three months ended March 31, 2002 compared with $24.4 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 $29.6 million
during the three months ended March 31, 2002 compared with $31.4 million for the
comparable period last year. The decrease is primarily due to lower selling
costs and other cost cutting measures. Depreciation and amortization expense was
$12.6 million during the three months ended March 31, 2002 compared with $24.0
million for the comparable period last year. This decrease is due primarily to
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" which requires that goodwill and intangible assets
with indefinite lives, including FCC licenses, be tested for impairment annually
rather than amortized over time. As a result of the new accounting standard, our
amortization expense is now significantly lower as we no longer amortize
goodwill and FCC license intangible assets.
Interest expense for the three months ended March 31, 2002, increased to
$19.7 million from $12.3 million in the same period in 2001. The increase is
primarily due to a greater level of debt due to our refinancings in July 2001
and January 2002. At March 31, 2002, total long-term debt and senior
subordinated notes were $857.5 million compared with $405.8 million as of March
31, 2001. Although the July 2001 and January 2002 refinancings reduced our
overall cost of capital, the refinancings increased our debt and decreased our
redeemable preferred stock and as a result we expect our interest expense for
the remainder of 2002 to be higher than in the comparable periods in 2001.
Interest
13
income for the three months ended March 31, 2002 decreased to $0.5 million from
$1.5 million in the same period in 2001. The decrease is primarily due to lower
average cash and short-term investment balances in 2002.
RESTRUCTURING ACTIVITIES
During the fourth quarter of 2000, we approved a plan to restructure our
television station operations by entering into JSAs primarily with NBC affiliate
stations in each of our remaining non-JSA markets. 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. Through March
31, 2002, we have paid termination benefits to 83 employees totaling
approximately $1.6 million and paid lease termination costs of approximately
$1.2 million, which were charged against the restructuring reserve. We have made
substantial progress in executing our restructuring plan, however due to events
outside our control including the events of September 11, 2001, we were unable
to fully complete the plan in 2001. We now expect to substantially complete the
JSA restructuring by the end of the third quarter of 2002, except for
contractual lease obligations for closed locations, which continue through 2008.
During the first quarter of 2002, we were unable to enter into JSA
agreements for two of the three remaining stations included in our restructuring
plan. Although we intend to continue pursuing JSAs for these stations, we are
currently unable to determine the ultimate timing of these JSAs. Accordingly, in
the first quarter of 2002, we reversed approximately $0.4 million of
restructuring reserves primarily related to these two stations and certain other
reserves which were no longer required.
INCOME TAXES
As previously described, upon adoption of SFAS 142 on January 1, 2002, we
no longer amortize goodwill and FCC license intangibles. Under previous
accounting standards, these assets were being amortized over 25 years. Although
the provisions of SFAS 142 stipulate that indefinite-lived intangible assets and
goodwill are not amortized, we are required under FASB Statement No. 109,
"Accounting for Income Taxes" ("SFAS 109"), to recognize deferred tax
liabilities and assets for temporary differences related to goodwill and FCC
license intangible assets and the tax-deductible portion of these assets. Prior
to the adoption of SFAS 142, we considered our deferred tax liabilities related
to these assets as a source of future taxable income in assessing the
realization of our deferred tax assets. Because indefinite-lived intangible
assets and goodwill are no longer amortized for financial reporting purposes
under SFAS 142, the related deferred tax liabilities will not reverse until some
indeterminate future period should the assets become impaired or are disposed
of. Therefore, the reversal of deferred tax liabilities related to FCC license
intangible assets and goodwill are no longer considered a source of future
taxable income in assessing the realization of deferred tax assets. As a result
of this accounting change, we were required to record an increase in our
deferred tax asset valuation allowance totaling approximately $125.9 million
during the three months ended March 31, 2002. In addition, we will continue to
record increases in our valuation allowance in future periods based on increases
in the deferred tax liabilities and assets for temporary differences related to
goodwill and FCC license intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are to fund capital expenditures for our
television properties, programming rights payments and debt service payments.
Our primary sources of liquidity are our net working capital, availability under
the Term A portion of our senior credit facility and proceeds from the planned
sale of certain non-core assets. Proceeds from the sale of these assets are
expected to generate approximately $40 million to $50 million and may include
the securitization of our accounts receivable, the sale of our second television
station serving the Boston market or the sale of certain other non-core assets.
We expect to receive the proceeds related to these asset sales by the end of
2002 or early in 2003. We believe that cash provided by future operations, net
working capital, available funding under the Term A portion of our senior credit
facility and the proceeds from the planned asset sales 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 can provide no assurance that we would be successful in
selling assets or raising additional funds if this were to occur.
As of March 31, 2002, we had $76.4 million in cash and short-term
investments and working capital of approximately $55.4 million. During the three
months ended March 31, 2002, our cash and short-term investments decreased by
approximately $19.6 million due primarily to the use of $16.5 million to pay
interest as well as cash used to fund operations including programming and cable
payments.
Cash used in operating activities was approximately $20.6 million and $13.7
million for the three months ended March 31, 2002 and 2001, respectively. These
amounts primarily reflect the operating costs incurred in connection with the
operation of PAX TV and the related programming rights and cable distribution
rights payments and interest payments on our debt.
Cash used in investing activities was approximately $24.6 million and $18.1
million for the three months ended March 31, 2002 and 2001, respectively. These
amounts include capital expenditures, short term investment transactions and, in
2001, acquisitions of broadcast properties. As of March 31, 2002, we had
agreements to purchase significant assets of broadcast properties totaling
approximately $36.0 million, net of deposits and advances. We do not anticipate
spending any significant amounts to satisfy these commitments until 2003 or
thereafter.
Capital expenditures were approximately $12.0 million and $6.1 million for
the three months ended March 31, 2002 and 2001, respectively. Except for
television stations presently operating analog television service in the 700 MHz
band
14
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 construction of digital facilities capable of
serving its community of license with a signal of requisite strength by May
2002, and complete the build-out of the balance of its full authorized
facilities by a later date to be established by the FCC. 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 than December 31, 2005 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, of which we have spent
approximately $24 million to date. We will likely fund our digital conversion
from availability under the $50 million Term A portion of our senior credit
facility, as well as cash on hand, the sale of assets and from other financing
arrangements.
Cash provided by financing activities was $13.5 million and $1.2 million
during the three months ended March 31, 2002 and 2001, respectively. These
amounts include the proceeds from the January 2002 refinancing described below,
as well as the related principal repayments, redemption premium, and refinancing
costs. Also included are proceeds from borrowings to fund capital expenditures
and proceeds from stock option exercises, net of principal repayments.
In January 2002, we completed an offering of senior subordinated discount
notes due in 2009. Gross proceeds of the offering totaled approximately $308.3
million and were used to refinance our 12 1/2% exchange debentures due 2006,
which were issued in exchange for the outstanding shares of our 12 1/2%
exchangeable preferred stock on January 14, 2002, and to pay costs related to
the offering. The notes were sold at a discounted price of 62.132% of the
principal amount at maturity, which represents a yield to maturity of 12 1/4%.
Interest on the notes will be payable semi-annually beginning on July 15, 2006.
The senior subordinated discount notes are guaranteed by our subsidiaries. We
recognized an extraordinary loss due to early extinguishment of debt totaling
approximately $17.6 million in the first quarter of 2002 resulting primarily
from the redemption premium and the write-off of unamortized debt costs
associated with the repayment of the 12 1/2% exchange debentures.
The terms of the indentures governing our 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. In addition, our senior credit facility also contains
covenants restricting our ability and the ability of our subsidiaries to incur
additional indebtedness, dispose of assets, pay dividends, repurchase or redeem
capital stock and indebtedness, create liens, make capital expenditures, make
certain investments or acquisitions and enter into transactions with affiliates
and otherwise restricting our activities. Our senior credit facility also
contains the following financial covenants: (1) twelve-month trailing minimum
net revenue and minimum EBITDA (as defined in the senior credit facility) for
each of the fiscal quarters ended June 30, 2001 through December 31, 2003, and
(2) maximum ratio of total senior debt to EBITDA, maximum ratio of total debt to
EBITDA, minimum permitted interest coverage ratio and minimum permitted fixed
charge coverage ratio, each beginning for each of the fiscal quarters ending on
or after June 30, 2004. Our twelve-month trailing minimum net revenue and EBITDA
covenants for the next four quarters are as follows (in thousands):
Fiscal Quarter Ending Minimum Net Revenues Minimum EBITDA
--------------------- -------------------- --------------
June 30, 2002........................ $250,000 $24,000
September 30, 2002................... $260,000 $29,000
December 31, 2002.................... $270,000 $36,500
March 31, 2003....................... $280,000 $43,000
Our ability to meet these financial covenants is influenced by several
factors, the most significant of which include the effect on our revenues of
overall conditions in the television advertising marketplace, our network and
station ratings and the success of our JSA strategy. Although we currently
expect to meet these covenants over the next twelve months, adverse developments
with respect to these or other factors could result in our failing to meet one
or more of these covenants. If we were to violate any of these covenants, we
would be required to seek a waiver from our lenders under our
15
senior credit facility and possibly seek an amendment to our senior credit
facility. Although we believe, based on discussions with our lenders, that we
would be able to obtain waivers or amendments to our senior credit facility
relating to these covenants, we can provide no assurance that our lenders under
our senior credit facility would grant us any waiver or amendment which might
become necessary. If we failed to meet any of our financial covenants and our
lenders did not grant a waiver or amend our facility, they would have the right
to declare an event of default and seek remedies including acceleration of all
outstanding amounts due under the senior credit facility. Should an event of
default be declared under the senior credit facility, this would cause a cross
default to occur under the senior subordinated note and senior subordinated
discount note indentures, thus giving each trustee the right to accelerate
repayment. We can provide no assurance that we would be successful in obtaining
alternative sources of funding to repay these obligations should these events
occur.
As of March 31, 2002, our programming contracts require collective payments
of approximately $140.1 million as follows (in thousands):
Obligation for Program Rights
Program Rights Commitments Total
--------------- -------------- --------------
2002 (April--December)............................... $ 54,170 $ 10,309 $ 64,479
2003................................................ 26,712 10,170 36,882
2004................................................ 12,523 10,100 22,623
2005................................................ 4,263 9,419 13,682
2006................................................ -- 2,478 2,478
------------ ----------- ------------
$ 97,668 42,476 $ 140,144
============ =========== ============
We are also committed to purchase at similar terms additional future series
episodes of our licensed programs should they be made available.
As of March 31, 2002, obligations for cable distribution rights require
collective payments by us of approximately $11.1 million as follows (in
thousands):
2002 (April--December).............................. $ 10,375
2003................................................ 362
2004................................................ 190
2005................................................ 180
-----------
11,107
Less: Amount representing interest.................. (115)
-----------
Present value of cable rights payable............... $ 10,992
===========
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS AND UNCERTAINTIES
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, 2001, as filed with
the US Securities and Exchange Commission, along with the following updates to
our Form 10-K disclosures.
16
THE OUTCOME OF OUR ARBITRATION PROCEEDING AGAINST NBC COULD ADVERSELY AFFECT OUR
BUSINESS.
In December 2001, we commenced a binding arbitration proceeding against NBC
in which we asserted that NBC has breached its agreements with us and has
breached its fiduciary duty to us and to our shareholders. We asserted that
NBC's proposed acquisition of the Telemundo Group (which was completed in April
2002) violates the terms of the agreements governing the investment and
partnership between us and NBC.
We believe that NBC's acquisition of the Telemundo Group's television
stations creates serious additional regulatory obstacles to NBC's ability to
acquire control of us. It is highly unlikely that NBC would be able to obtain
regulatory approval of its acquisition of control of us without significant
changes in FCC rules and our agreement to divest some of our most significant
television station assets, which in turn could have a material adverse effect
upon the value of our company. These factors may substantially reduce the
likelihood of NBC acquiring more of our shares and control of our company. The
hearing in the arbitration proceeding is currently scheduled to resume in June
2002, and we expect the arbitrator to render a decision during August 2002. We
cannot provide assurance that the outcome of the proceeding will be favorable to
us nor can we predict the effect that the outcome of this proceeding will have
upon our business.
We have significant operating relationships with NBC which have been
developed since NBC's investment in us in September 1999. NBC serves as our
exclusive sales representative to sell most of our PAX TV network advertising
and is the exclusive national sales representative for most of our stations. We
have entered into JSAs with NBC owned or NBC affiliated stations with respect to
48 of our television stations. Each JSA typically provides for our JSA partner
to serve as our exclusive sales representative to sell our local station
advertising and for many of our station's operations to be integrated and
co-located with those of the JSA partner. Should the outcome of our arbitration
proceeding against NBC require the unwinding or termination of some or all of
these operating relationships, or should NBC or the NBC affiliates elect not to
renew the agreements under which these operating relationships have been
implemented, we could be required to incur significant costs to resume
performing the advertising sales and other operating functions currently
performed by NBC and our JSA partners, including the expense of re-establishing
office and studio facilities separate from those of the JSA partners, or to
transfer performance of these functions to another broadcast television station
operator. Our network and station revenues could also be adversely affected due
to the disruption of our advertising sales efforts that could result from the
unwinding of the JSAs. The unwinding or termination of some or all of our JSAs
could have a materially adverse effect upon us.
WE MAY NOT BE ABLE TO REDEEM OUR SECURITIES HELD BY NBC WERE NBC TO DEMAND THAT
WE DO SO AND THIS COULD HAVE ADVERSE CONSEQUENCES FOR US.
NBC has the right, at any time that the FCC renders a final decision that
NBC's investment in us is "attributable" to NBC (as that term is defined under
applicable rules of the FCC), or for a period of 60 days beginning on September
15, 2002 and on each September 15 after 2002, to demand that we redeem, or
arrange for a third party to acquire, any shares of our Series B preferred stock
then held by NBC. Our ability to affect any redemption is restricted by the
terms of our outstanding debt and preferred stock. NBC also has the right to
demand that we redeem any Series B preferred stock and Class A common stock
issued upon conversion of the Series B preferred stock then held by NBC upon the
occurrence of various events of default. Should we fail to effect a redemption
within prescribed time periods, NBC generally will be permitted to transfer,
without restriction, any of our securities acquired by it, its right to acquire
Mr. Paxson's Class B common stock, the contractual rights described above, and
its other rights under the related transaction agreements. Should we fail to
effect a redemption triggered by an event of default on our part within 180 days
after demand, NBC will have the right to exercise in full its existing warrants
to purchase shares of our Class A common stock and its right to acquire Mr.
Paxson's Class B common stock at reduced prices. If NBC does not exercise these
rights, we will have another 30 day period to effect a redemption. If we then
fail to effect a redemption, NBC may require us to conduct, at our option, a
public sale or liquidation of our assets, after which time NBC will not be
permitted to exercise its rights to acquire more of our securities.
Should NBC exercise any of its redemption rights, we may not have
sufficient funds to pay the redemption price for the securities to be redeemed
and may not be able to identify another party willing to purchase those
securities at the required redemption prices. If we are unable to complete a
redemption, we will be unable to prevent NBC from transferring a controlling
interest in our company to a third party selected by NBC in its discretion or,
in the case of a default by us, requiring us to effect a public sale or
liquidation of our assets. The occurrence of any of these events could have a
material adverse effect upon us.
17
IF A COURT WERE TO DETERMINE THAT FEDERAL LEGISLATION REQUIRING SATELLITE
TELEVISION SERVICE PROVIDERS TO CARRY BROADCAST TELEVISION SIGNALS IS
UNCONSTITUTIONAL, OUR RIGHTS TO HAVE OUR TELEVISION BROADCAST SIGNALS CARRIED ON
SATELLITE SERVICE PROVIDERS COULD BE ADVERSELY AFFECTED.
Under federal law, satellite television providers may deliver local
broadcast signals to customers residing in a broadcast television station's
local market. Satellite carriers must obtain consent from the broadcast
television station before carrying its signal, and television stations must
negotiate for retransmission consent in good faith. A satellite carrier
delivering the signal of any local television station is required to carry all
stations licensed in the carried station's local market. To implement this law,
the FCC recently adopted rules similar to the "must carry" obligations that
apply to cable television systems. Under the new rules, stations may elect
either mandatory carriage or negotiate for retransmission consent. Two satellite
television providers and a satellite broadcasting trade association have
instituted litigation challenging the constitutionality of the statutory
satellite "must carry" requirements. In June 2001 a federal district court
upheld the constitutionality of the federal law, and in December 2001 a federal
appellate court affirmed the district court's ruling. One of the satellite
television providers and a satellite broadcasting trade association have
petitioned the U.S. Supreme Court for review of this decision. Our PAX TV signal
currently is carried on satellite systems under agreements we negotiated with
the satellite television providers, which allow the satellite provider to sell
and retain the advertising revenues from a portion of the non-network
advertising time during PAX TV programming hours. We cannot predict the final
outcome of the litigation challenging the constitutionality of satellite "must
carry" requirements or the effect, if any, that the failure to implement
satellite "must carry" would have on our business.
18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
Exhibit
Number Description of Exhibits
------- -----------------------
3.1.1 Certificate of Incorporation of the Company (1)
3.1.6 Certificate of Designation of the Company's 9-3/4% Series A
Convertible Preferred Stock (2)
3.1.7 Certificate of Designation of the Company's 13-1/4% Cumulative
Junior Exchangeable Preferred Stock (2)
3.1.8 Certificate of Designation of the Company's 8% Series B Convertible
Exchangeable Preferred Stock (3)
3.2 Bylaws of the Company (4)
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 (5)
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 (5)
19
4.8 Indenture, dated as of January 14, 2002, among the Company, the
Subsidiary Guarantors party thereto, and The Bank of New York, as
Trustee, with respect to the Company's 12-1/4% Senior Subordinated
Discount Notes due 2009 (6)
10.221 Indenture, dated as of January 14, 2002, among the Company, the
Subsidiary Guarantors party thereto, and The Bank of New York, as
Trustee, with respect to the Company's 12-1/4% Senior Subordinated
Discount Notes due 2009 (incorporated by reference to Exhibit 4.8)
(6)
10.226 Amended and Restated Employment Agreement, dated March 12, 2002, by
and between the Company and Thomas E. Severson, Jr. (6)
99.1 Certification by the Chairman and Chief Executive Officer of Paxson
Communications Corporation pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial Officer of Paxson
Communications Corporation pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
----------------
(1) Filed with the Company's Annual Report on Form 10-K, dated December 31,
1995, and incorporated herein by reference.
(2) 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.
(3) Filed with the Company's Form 8-K, dated September 15, 1999, and
incorporated herein by reference.
(4) Filed with the Company's Quarterly Report on Form 10-Q, dated March 31,
2001, and incorporated herein by reference.
(5) Filed with the Company's Quarterly Report on Form 10-Q, dated June 30,
2001, and incorporated herein by reference.
(6) Filed with the Company's Annual Report on Form 10-K, dated December 31,
2001, and incorporated herein by reference.
(b) Reports on Form 8-K.
Form 8-K, dated January 2, 2002 (filed January 4, 2002), under Item 5.
"Other Events" reporting that on January 2, 2002, Paxson Communications
Corporation commenced an offering of senior subordinated discount notes
expected to generate proceeds of approximately $310 million. Proceeds
from the offering were used to refinance the Company's 12 1/2% exchange
debentures and pay offering fees and expenses.
Form 8-K, dated April 9, 2002, under Item 5. "Other Events" reporting
that the Federal Communications Commission granted approval of the
applications of National Broadcasting Company, Inc. ("NBC"), for
consent to the transfer to NBC of control of the television stations
owned by subsidiaries of Telemundo Communications Group, Inc.
20
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: March 28, 2003 By: /s/ Ronald L. Rubin
-------------------------------------
Ronald L. Rubin
Vice President
Chief Accounting Officer and
Corporate Controller
(Principal Accounting Officer)
21
CERTIFICATIONS
I, Lowell W. Paxson, Chairman and Chief Executive Officer of Paxson
Communications Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Paxson
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
/s/ LOWELL W. PAXSON
--------------------
Lowell W. Paxson
Chairman and Chief Executive Officer (Principal Executive Officer)
Dated: March 28, 2003
22
I, Thomas E. Severson, Jr., Senior Vice President and Chief Financial Officer of
Paxson Communications Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Paxson
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
/s/ THOMAS E. SEVERSON JR.
--------------------------
Thomas E. Severson, Jr.
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
Dated: March 28, 2003
23