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, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 2003:
CLASS OF STOCK NUMBER OF SHARES
-------------- ----------------
Common stock-Class A, $0.001 par value per share........... 59,425,051
Common stock-Class B, $0.001 par value per share........... 8,311,639
PAXSON COMMUNICATIONS CORPORATION
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002...................... 3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003
and 2002 (unaudited) ...................................................................................... 4
Consolidated Statement of Stockholders' Deficit for the Nine Months Ended September 30, 2003 (unaudited).... 5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (unaudited)..... 6
Notes to Unaudited Consolidated Financial Statements........................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 15
Item 4. Controls and Procedures .......................................................................... 29
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................................................. 30
Signatures.................................................................................................. 32
2
ITEM 1. FINANCIAL STATEMENTS
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents ................................................................ $ 98,103 $ 25,765
Short-term investments ................................................................... 1,997 17,073
Accounts receivable, net of allowance for doubtful accounts of $1,185 and $2,100,
respectively ......................................................................... 18,197 28,810
Program rights ........................................................................... 30,175 33,998
Amounts due from Crown Media ............................................................. 13,541 11,239
Prepaid expenses and other current assets ................................................ 6,362 5,011
----------- -----------
Total current assets .................................................................. 168,375 121,896
Property and equipment, net ................................................................. 120,801 127,061
Intangible assets, net ...................................................................... 877,672 877,204
Program rights, net of current portion ...................................................... 24,251 35,972
Amounts due from Crown Media, net of current portion ........................................ 15,142 18,769
Investments in broadcast properties ......................................................... 3,647 8,777
Assets held for sale ........................................................................ 12,799 33,582
Other assets, net ........................................................................... 26,600 27,748
----------- -----------
Total assets .......................................................................... $ 1,249,287 $ 1,251,009
=========== ===========
Liabilities, Mandatorily Redeemable and Convertible Preferred Stock and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued liabilities ................................................. $ 30,837 $ 34,720
Accrued interest ......................................................................... 10,183 14,621
Current portion of obligations for program rights ........................................ 15,357 21,475
Current portion of obligations to CBS .................................................... 19,423 15,664
Current portion of obligations for cable distribution rights ............................. 4,210 5,246
Deferred revenue from cable and satellite distribution rights ............................ 10,900 7,839
Current portion of bank financing ........................................................ 3,406 3,144
----------- -----------
Total current liabilities ............................................................. 94,316 102,709
Obligations for program rights, net of current portion ................................... 3,729 6,800
Obligations to CBS, net of current portion ............................................... 33,610 30,025
Obligations for cable distribution rights, net of current portion ........................ 283 733
Deferred revenue from cable and satellite distribution rights, net of current portion .... 6,982 9,210
Deferred income taxes .................................................................... 144,564 136,286
Senior subordinated notes and bank financing, net of current portion ..................... 915,763 896,957
Mandatorily redeemable preferred stock ................................................... 396,620 --
Other long-term liabilities .............................................................. 12,963 23,653
----------- -----------
Total liabilities ..................................................................... 1,608,830 1,206,373
----------- -----------
Mandatorily redeemable and convertible preferred stock ...................................... 672,594 993,101
----------- -----------
Commitments and contingencies
Stockholders' deficit:
Class A common stock, $0.001 par value; one vote per share; 215,000,000
shares authorized, 59,420,826 and 56,568,827 shares issued and outstanding ............ 59 57
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 .................................................... 66,663 68,384
Stock subscription notes receivable, net ................................................. -- (747)
Additional paid-in capital ............................................................... 521,591 513,109
Deferred stock option compensation ....................................................... (1,372) (2,460)
Accumulated deficit ...................................................................... (1,618,154) (1,523,670)
Accumulated other comprehensive loss ..................................................... (932) (3,146)
----------- -----------
Total stockholders' deficit ........................................................... (1,032,137) (948,465)
----------- -----------
Total liabilities, mandatorily redeemable and convertible preferred stock, and
stockholders' deficit ..................................................................... $ 1,249,287 $ 1,251,009
=========== ===========
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 For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
REVENUES:
Gross revenues ................................................ $ 75,028 $ 77,130 $ 234,578 $ 236,522
Less: agency commissions ...................................... (10,833) (10,874) (33,921) (32,859)
------------ ------------ ------------ ------------
Net revenues .................................................. 64,195 66,256 200,657 203,663
------------ ------------ ------------ ------------
EXPENSES:
Programming and broadcast operations (excluding stock-based
compensation of $281, $145, $1,234 and $434, respectively) 13,158 12,342 38,832 37,509
Program rights amortization ................................ 11,359 19,973 35,856 58,388
Selling, general and administrative (excluding stock-based
compensation of $942, $1,071, $8,500 and $2,657,
respectively) ............................................ 26,765 35,310 80,654 99,127
Business interruption insurance proceeds ................... -- -- -- (1,007)
Time brokerage and affiliation fees ........................ 1,100 1,088 3,302 2,990
Stock-based compensation ................................... 1,223 1,216 9,734 3,091
Adjustment of programming to net realizable value .......... -- -- 1,066 2,900
Restructuring charges (credits) ............................ 18 (65) 29 (467)
Reserve for state taxes .................................... 2,915 -- 2,915 --
Depreciation and amortization .............................. 10,018 14,472 31,928 41,338
------------ ------------ ------------ ------------
Total operating expenses ............................... 66,556 84,336 204,316 243,869
(Loss) gain on sale or disposal of broadcast and other assets . (671) (50) 54,678 650
------------ ------------ ------------ ------------
Operating (loss) income ....................................... (3,032) (18,130) 51,019 (39,556)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ........................................... (24,454) (21,988) (69,147) (63,021)
Dividends on mandatorily redeemable preferred stock ........ (13,420) -- (13,420) --
Interest income ............................................ 900 778 2,573 1,652
Other income (expenses), net ............................... 477 (1,027) 312 (919)
Loss on extinguishment of debt ............................. -- -- -- (17,552)
Gain on modification of program rights obligations ......... 525 480 1,732 917
------------ ------------ ------------ ------------
Loss before income taxes ...................................... (39,004) (39,887) (26,931) (118,479)
Income tax provision .......................................... (3,619) (3,501) (8,922) (132,905)
------------ ------------ ------------ ------------
Net loss ...................................................... (42,623) (43,388) (35,853) (251,384)
Dividends and accretion on redeemable and convertible
preferred stock ............................................... (11,401) (29,073) (58,631) (87,271)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders .................. $ (54,024) $ (72,461) $ (94,484) $ (338,655)
============ ============ ============ ============
Basic and diluted loss per common share ....................... $ (0.80) $ (1.12) $ (1.40) $ (5.22)
============ ============ ============ ============
Weighted average shares outstanding ........................... 67,752,309 64,880,466 67,406,838 64,838,487
============ ============ ============ ============
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,
2003 (Unaudited)
(in thousands)
Common Accumu-
Stock Stock Deferred lated
Warrants Subscription Addi- Stock Other Total
and Notes tional Option Compre- Stock-
Common Stock Call Receivable, Paid-In Compen- Accumulated hensive holders'
Class A Class B Option Net Capital sation Deficit Loss Deficit
------- ------- ------ --------- ------- ------ ------- ------- ----------
Balance, December 31, 2002 ... $57 $8 $ 68,384 $(747) $ 513,109 $(2,460) $(1,523,670) $(3,146) $ (948,465)
Stock-based compensation .. -- - -- -- -- 9,632 -- -- 9,632
Deferred stock option
compensation .............. -- - -- -- 8,544 (8,544) -- -- --
Stock options exercised ... 2 - -- -- 552 -- -- -- 554
Expiration of common stock
warrants .................. -- - (1,721) -- 1,721 -- -- -- --
Payment of employee
withholding taxes on
exercise of common stock
options ................... -- - -- -- (2,335) -- -- -- (2,335)
Repayment of stock
subscription notes
receivable ................ -- - -- 747 -- -- -- -- 747
Other comprehensive income -- - -- -- -- -- -- 2,214 2,214
Dividends on redeemable and
convertible preferred stock -- - -- -- -- -- (57,660) -- (57,660)
Accretion on redeemable and
convertible preferred stock -- - -- -- -- -- (971) -- (971)
Net loss .................. -- - -- -- -- -- (35,853) -- (35,853)
--- -- -------- ----- --------- ------- ----------- ------- -----------
Balance, September 30, 2003 .. $59 $8 $ 66,663 $ -- $ 521,591 $(1,372) $(1,618,154) $ (932) $(1,032,137)
=== == ======== ===== ========= ======= =========== ======= ===========
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,
-------------------------
2003 2002
--------- -----------
(Unaudited)
Cash flows from operating activities:
Net loss ............................................................. $(35,853) $(251,384)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................ 31,928 41,338
Stock-based compensation ............................................. 9,734 3,091
Loss on extinguishment of debt ....................................... -- 17,552
Non-cash restructuring charges (credits) ............................. 29 (467)
Program rights amortization .......................................... 35,856 58,388
Adjustment of programming to net realizable value .................... 1,066 2,900
Payments for cable distribution rights ............................... (2,813) (3,392)
Payments for program rights and deposits ............................. (27,234) (91,931)
Deferred income tax provision ........................................ 8,278 132,815
Loss on sale or disposal of assets ................................... 1,579 1,887
Gain on sale of broadcast assets ..................................... (56,257) (650)
Gain on modification of program rights obligations ................... (1,732) (917)
Dividends and accretion on 14 1/4% Preferred Stock ................... 13,420 --
Accretion on senior subordinated discount notes ...................... 32,370 27,456
Changes in assets and liabilities:
Decrease in accounts receivable, net ................................. 9,963 3,558
Decrease in amounts due from Crown Media ............................. 1,144 --
Increase in prepaid expenses and other current assets ................ (1,109) (190)
Decrease in other assets ............................................. 1,631 4,240
(Decrease) increase in accounts payable and accrued liabilities ...... (2,264) 10,531
Decrease in accrued interest ......................................... (4,438) (5,952)
Decrease in obligations to CBS ....................................... (2,245) --
-------- ---------
Net cash provided by (used in) operating activities ............. 13,053 (51,127)
-------- ---------
Cash flows from investing activities:
Acquisitions of broadcasting properties .............................. -- (265)
Decrease (increase) in short-term investments ........................ 15,076 (6,047)
Purchases of property and equipment .................................. (16,374) (26,026)
Proceeds from sale of broadcast assets ............................... 77,465 650
Proceeds from sale of property and equipment ......................... 317 71
Proceeds from insurance recoveries ................................... -- 1,493
Other ................................................................ (100) (571)
-------- ---------
Net cash provided by (used in) investing activities ............. 76,384 (30,695)
-------- ---------
Cash flows from financing activities:
Borrowings of long-term debt ......................................... 2,000 331,338
Repayments of long-term debt ......................................... (15,302) (2,173)
Redemption of 12 1/2% exchange debentures ............................ -- (284,410)
Payments of loan origination costs ................................... (1,692) (10,304)
Debt extinguishment premium and costs ................................ -- (14,302)
Payments of employee withholding taxes on exercise of
common stock options ............................................... (2,335) --
Proceeds from exercise of common stock options, net .................. 86 1,182
Proceeds from stock subscription notes receivable .................... 144 --
-------- ---------
Net cash (used in) provided by financing activities ............. (17,099) 21,331
-------- ---------
Increase (decrease) in cash and cash equivalents ..................... 72,338 (60,491)
Cash and cash equivalents, beginning of period ....................... 25,765 83,858
-------- ---------
Cash and cash equivalents, end of period ............................. $ 98,103 $ 23,367
======== =========
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, 2003
and for the three and nine month periods ended September 30, 2003 and 2002 is
unaudited. In the opinion of management, all adjustments necessary for the fair
presentation of such financial information have been included. These
adjustments, other than as described below, are of a normal recurring nature.
There have been no changes in accounting policies since the year ended December
31, 2002. The consolidated financial statements include the accounts of the
Company and its wholly 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 2003 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,
2002, and the definitive proxy statement for the annual meeting of stockholders
held May 16, 2003, both of which were filed with the United States Securities
and Exchange Commission.
In 1998, the Company began entering into cable distribution agreements for
periods generally up to ten years in markets where the Company does not own a
television station. Certain of these cable distribution agreements also provided
the Company with some level of promotional advertising to be run at the
discretion of the cable operator, primarily during the first few years to
support the launch of the Company's PAX TV network on the cable systems. The
Company has been amortizing these assets on an accelerated basis which gave
effect to the advertising component included in these agreements. In the second
quarter of 2003, the Company determined that it had over amortized certain of
these assets and recorded a $4 million reduction of its amortization expense,
resulting in a corresponding increase in intangible assets. The remaining
unamortized costs, which were being amortized over seven years, will be
amortized over the remaining contractual life of the agreements. In the third
quarter of 2003, the Company identified that it had also been over amortizing
certain satellite distribution agreements and certain other cable distribution
agreements and recorded a $4.5 million reduction of its amortization expense,
resulting in a corresponding increase in intangible assets. Additionally, in the
third quarter of 2003, the Company recorded a reserve for state taxes in the
amount of $2.9 million, resulting in a corresponding increase in accounts
payable and accrued liabilities, in connection with a tax liability related to
certain states in which the Company has operations. Included in depreciation and
amortization is a $3.7 million impairment charge recorded in the third quarter
of 2003 in connection with a purchase option on a television station, resulting
in a corresponding decrease in investments in broadcast properties.
2. RESTRUCTURING PLANS
During the fourth quarter of 2002, the Company adopted a plan to consolidate
certain of its operations, reduce personnel and modify its programming schedule
in order to significantly reduce the Company's cash operating expenditures. In
connection with this plan, the Company recorded a restructuring charge of
approximately $2.6 million in the fourth quarter of 2002 consisting of $2.2
million in termination benefits for 95 employees and $0.4 million in costs
associated with exiting leased properties and the consolidation of certain
operations. Through September 30, 2003, the Company has paid $2.1 million in
termination benefits to 94 employees and paid $0.4 million of lease termination
and other costs. The Company has accounted for these costs pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, as opposed to when there is a
commitment to a restructuring plan as set forth under EITF 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity", which has been nullified under SFAS No. 146. As such, the Company
will recognize additional restructuring costs as they are incurred.
The Company has substantially completed its Joint Sales Agreement ("JSA")
restructuring plan entered into in the fourth quarter of 2000, except for
contractual lease obligations for closed locations, the majority of which expire
in 2004.
7
The following summarizes the activity in the Company's restructuring
reserves for the nine months ended September 30, 2003 (in thousands):
AMOUNTS CHARGED
BALANCE (CREDITED) TO CASH BALANCE
CORPORATE RESTRUCTURING DECEMBER 31, 2002 COSTS AND EXPENSES DEDUCTIONS SEPTEMBER 30, 2003
----------------------- ------------------ ------------------ ---------- ------------------
Accrued liabilities:
Lease and other costs............ $ 262 $ 96 $ (286) $ 72
Severance........................ 732 (67) (660) 5
-------- ---------- -------------- --------
$ 994 $ 29 $ (946) $ 77
======== ========= ============== ========
JSA RESTRUCTURING
-----------------
Accrued liabilities:
Lease costs...................... $ 528 $ -- $ (401) $ 127
======== ========= ============== ========
The following summarizes the activity in the Company's JSA restructuring
reserves for the nine months ended September 30, 2002 (in thousands):
AMOUNTS
BALANCE CREDITED TO BALANCE
DECEMBER 31, COSTS AND CASH SEPTEMBER 30,
2001 EXPENSES DEDUCTIONS 2002
----------- ------------ ---------- -------------
Accrued Liabilities:
Lease costs................. $ 1,717 $ (194) $ (769) $ 754
Severance................... 382 (273) (109) --
---------- --------- ---------- ---------
$ 2,099 $ (467) $ (878) $ 754
========== ========= ========== =========
3. ASSET SALES
The results of operations and the gain or (loss) on sale of assets held for
sale are included in the determination of the Company's operating income (loss)
from its continuing operations in accordance with SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") since these assets do
not constitute a component of the Company under SFAS 144. The Company generally
maintains a geographic presence in the markets where assets have been sold by
airing the PAX TV network through cable distribution agreements or the Company's
other owned or operated stations in the designated market areas.
Assets held for sale consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Intangible assets, net...................... $ 3,499 $ 17,281
Property and equipment, net................. 9,300 16,065
Other assets................................ -- 236
------------ ------------
$ 12,799 $ 33,582
============ ============
In September 2003, an agreement, which the Company entered into in June
2003, to sell the assets of its television station KPXJ, serving the Shreveport,
Louisiana market, was terminated. At the same time, the Company entered into a
subsequent agreement with a new purchaser to sell the assets of its Shreveport
television station for a cash purchase price of $10.0 million. The subsequent
sale, subject to receipt of regulatory approvals, is expected to close in the
first quarter of 2004.
In May 2003, the Company completed the sale of the assets of its television
station KAPX, serving the Albuquerque, New Mexico market, for a cash purchase
price of $20.0 million resulting in a pre-tax gain of approximately $14.8
million.
In April 2003, the Company completed the sale of the assets of its
television stations WMPX, serving the Portland-Auburn, Maine market, and WPXO,
serving the St. Croix, U.S. Virgin Islands market, for an aggregate cash
purchase price of $10 million resulting in a pre-tax gain of approximately $4.9
million.
8
In April 2003, the Company completed the sale of its limited partnership
interest in television station WWDP, serving the Boston, Massachusetts market,
for approximately $13.8 million resulting in a pre-tax gain of approximately
$9.9 million.
In February 2003, the Company completed the sale of the assets of its
television station KPXF, serving the Fresno, California market, for a cash
purchase price of $35 million resulting in a pre-tax gain of approximately $26.6
million.
Included in assets held for sale are certain broadcast towers with a
carrying value of $8.2 million for which the Company is in the process of
transferring title and assigning the leases to the buyer.
4. LONG-TERM DEBT
Senior subordinated notes and bank financing consists of the following (in
thousands):
September 30, December 31,
2003 2002
------------ -------------
12 1/4% Senior Subordinated Discount Notes due 2009................................ $ 496,263 $ 496,263
10 3/4% Senior Subordinated Notes due 2008......................................... 200,000 200,000
Senior Bank Credit Facility........................................................ 340,463 353,725
Other debt......................................................................... 518 558
----------- ------------
1,037,244 1,050,546
Less: discount on 12 1/4% Senior Subordinated Discount Notes....................... (118,075) (150,445)
Less: current portion of bank financing............................................ (3,406) (3,144)
----------- ------------
$ 915,763 $ 896,957
=========== ============
The Company amended and restated the senior bank credit facility on May 5,
2003 to consolidate previous amendments and allow for the issuance of letters of
credit, subject to availability, under a $25 million revolving credit facility.
At September 30, 2003, there was $12.0 million in borrowings outstanding under
the revolving credit facility and $12.4 million of outstanding letters of
credit. The Company paid a fee of $0.1 million in connection with the May 5,
2003 amendment and restatement. On September 19, 2003, the Company further
amended the senior bank credit facility to reduce its trailing twelve month
minimum net revenue and EBITDA covenants, eliminate a revenue fee connected with
a waiver obtained in March 2003 (for which the waiver provisions were
subsequently incorporated into the May 5, 2003 amendment and restatement) and
eliminate the requirement to comply with certain other financial covenants as of
March 31, 2005. The Company paid a fee of $1.0 million in connection with the
September 19, 2003 amendment.
As amended, the Company's senior bank credit facility contains various
financial covenants and restricts the ability of the Company and any 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 bank credit facility contains the following financial covenants: (1)
twelve-month trailing minimum net revenue and minimum EBITDA (as defined under
our senior bank credit facility) for each of the fiscal quarters ended June 30,
2001 through March 31, 2005, (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, 2005, (3) maximum annual capital
expenditures for 2001 through 2006, and (4) maximum annual programming payments
for 2002 through 2006. The Company's amended twelve-month minimum net revenue
and EBITDA covenants are $250 million and $50 million, respectively, for each of
the next four quarters.
At September 30, 2003, the Company was in compliance with its amended
covenants and expects that it will continue to be in compliance with these
amended covenants in 2004. If the Company failed to meet any of its debt
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 bank credit facility. Should an event of default be declared under the
senior bank 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, and
would give the holders of each of the Company's three outstanding series of
preferred stock the right to elect two directors per series to the Company's
Board of Directors. 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.
9
5. MANDATORILY REDEEMABLE AND CONVERTIBLE PREFERRED STOCK
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). This statement establishes standards for classifying and measuring
as liabilities certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity. SFAS 150
requires liability classification for mandatorily redeemable equity instruments
not convertible into common stock such as the Company's 14 1/4% Junior
Exchangeable Preferred Stock. SFAS 150 is effective immediately with respect to
instruments entered into or modified after May 31, 2003 and as to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company adopted SFAS 150
effective July 1, 2003. Upon adoption, the Company recorded a deferred asset for
the unamortized issuance costs and recorded a liability for the mandatorily
redeemable preferred stock balance related to its 14 1/4% Junior Exchangeable
Preferred Stock. In addition, the amortization of the issuance costs and the
dividends related to the 14 1/4% Junior Exchangeable Preferred Stock are being
recorded as interest expense beginning July 1, 2003 versus the recording of
these costs as dividends and accretion on redeemable preferred stock in prior
periods. Restatement of prior periods is not permitted upon adoption of SFAS
150. The Company's 9 3/4% Series A Convertible Preferred Stock and 8% Series B
Convertible Exchangeable Preferred Stock are not affected by the provisions of
SFAS 150 because of their equity conversion features.
The following represents a summary of the changes in the Company's
mandatorily redeemable and convertible preferred stock during the nine month
period ended September 30, 2003 (in thousands):
9 3/4%
14 1/4% SERIES A 8% SERIES B
JUNIOR CONVERTIBLE CONVERTIBLE
EXCHANGEABLE PREFERRED EXCHANGEABLE
PREFERRED STOCK STOCK PREFERRED STOCK TOTAL
--------------- ----------- ---------------- -------------
MANDATORILY REDEEMABLE AND CONVERTIBLE PREFERRED STOCK
Balance at December 31, 2002................................. $ 354,498 $ 114,320 $ 524,283 $ 993,101
Accretion.................................................... 596 375 -- 971
Accrual of cumulative dividends.............................. 24,044 8,716 24,900 57,660
Reclassification as a liability on July 1, 2003.............. (379,138) -- -- (379,138)
--------- --------- --------- -------------
Balance at September 30, 2003................................ $ -- $ 123,411 $ 549,183 $ 672,594
========= ========= ========= =============
MANDATORILY REDEEMABLE PREFERRED STOCK
Balance at July 1, 2003...................................... $ 379,138
Reclassification of unamortized issuance costs............... 4,062
Accrual of cumulative dividends.............................. 13,420
---------
Balance at September 30, 2003 ............................... $ 396,620
=========
Aggregate liquidation preference at September 30, 2003....... $ 396,620 $ 125,056 $ 549,183 $ 1,070,859
Shares authorized............................................ 72,000 17,500 41,500 131,000
Shares issued and outstanding................................ 37,671 12,505 41,500 91,676
Accrued dividends............................................ $ 20,135 $ -- $ 134,183 $ 154,318
Holders of the Junior Exchangeable Preferred Stock were initially entitled
to cumulative dividends at an annual rate of 13 1/4% of the liquidation
preference, payable semi-annually in cash or additional shares beginning
November 15, 1998 and accumulating from the issue date. If dividends for any
period ending after May 15, 2003 are paid in additional shares of Junior
Exchangeable Preferred Stock, the dividend rate will increase to 14 1/4% per
annum for each such dividend payment period. The Company has elected to continue
to pay dividends in additional shares, therefore the dividend rate increased to
14 1/4% after May 15, 2003 in accordance with the terms of the security.
10
6. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- ---------
Net loss ............................... $(42,623) $(43,388) $(35,853) $(251,384)
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate 855 (1,026) 2,214 (2,215)
swap
-------- -------- -------- ---------
Comprehensive loss ..................... $(41,768) $(44,414) $(33,639) $(253,599)
======== ======== ======== =========
7. INCOME TAXES
The Company has recorded a provision for income taxes based on its estimated
annual effective income tax rate. For the three and nine months ended September
30, 2003 and 2002, 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. Upon adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") on January 1, 2002, the
Company no longer amortizes its goodwill and FCC license intangible assets.
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" 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 when they are
disposed of. Therefore, the reversal of deferred tax liabilities related to FCC
license intangible assets and goodwill is 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 first quarter of 2002. In addition, the Company continues to
record increases in its valuation allowance based on increases in the deferred
tax liabilities and assets for temporary differences related to goodwill and FCC
license intangible assets.
The Company structured the disposition of its radio division in 1997 and its
acquisition of television stations during the period following this disposition
in a manner that the Company believed would qualify these transactions as a
"like kind" exchange under Section 1031 of the Internal Revenue Code and would
permit the Company to defer recognizing for income tax purposes up to
approximately $333 million of gain. The IRS has examined the Company's 1997 tax
return and has issued the Company a "30-day letter" proposing to disallow all of
the Company's gain deferral. The Company filed its protest to this determination
with the IRS appeals division, but cannot predict the outcome of this matter at
this time, and may not prevail. In addition, the "30-day letter" offered the
Company an alternative position that, in the event the IRS is unsuccessful in
disallowing all of the gain deferral, approximately $62 million of the $333
million gain deferral will be disallowed. The Company filed a protest to this
alternative determination as well. The Company may not prevail with respect to
this alternative determination. Should the IRS successfully challenge the
Company's position and disallow all or part of its gain deferral, because the
Company had net operating losses in the years subsequent to 1997 in excess of
the amount of the deferred gain, the Company would not be liable for any tax
deficiency, but could be liable for interest on the tax liability for the period
prior to the carryback of its net operating losses. The Company has estimated
the amount of interest for which it could be held liable to be approximately
$16.3 million should the IRS succeed in disallowing all of the deferred gain. If
the IRS were successful in disallowing only part of the gain under its
alternative position, the Company estimates it would be liable for only a
nominal amount of interest.
8. PER SHARE DATA
Basic and diluted loss per common share was computed by dividing net loss
less dividends and accretion on redeemable and convertible preferred stock by
the weighted average number of common shares outstanding during the period. The
effect of stock options and warrants is antidilutive. Accordingly, basic and
diluted loss per share is the same for all periods presented.
11
As of September 30, 2003 and 2002, 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,
----------------
2003 2002
------- -------
Stock options outstanding..................................... 3,185 12,615
Class A common stock warrants outstanding..................... 32,032 32,428
Class A common stock reserved under convertible securities.... 39,712 38,994
------- -------
74,929 84,037
======= =======
In June 2003, warrants to purchase 240,000 shares of Class A common stock
that were issued in connection with the issuance of the 9 3/4% Series A
Convertible Preferred Stock in June 1998 and warrants to purchase 155,500 shares
of Class A common stock issued to an affiliate of a former member of the
Company's board of directors, which were valued upon issuance at approximately
$1.7 million, expired unexercised.
9. STOCK-BASED COMPENSATION
Employee stock options are accounted for using the intrinsic value method.
Stock-based compensation to non-employees is accounted for using the fair value
method. When options are granted to employees, a non-cash charge representing
the difference between the exercise price and the quoted market price of the
common stock underlying the vested options on the date of grant is recorded as
stock-based compensation expense with the balance deferred and amortized over
the remaining vesting period.
In January 2003, the Company consummated a stock option exchange offer under
which the Company granted to holders who tendered their eligible options in the
exchange offer new options under the Company's 1998 Stock Incentive Plan, as
amended (the "Plan"), to purchase one share of the Company's Class A common
stock for each two shares of Class A common stock issuable upon the exercise of
tendered options, at an exercise price of $0.01 per share. Because the terms of
the new options provided for a one business day exercise period, all holders who
tendered their eligible options in the exchange offer exercised their new
options promptly after the issuance of those new options. Approximately 7.3
million options were tendered in the exchange offer and approximately 2.6
million new shares of Class A common stock were issued upon exercise of the new
options, net of approximately 1.0 million shares of Class A common stock
withheld, in accordance with the Plan's provisions, at the holders' elections to
cover withholding taxes and the option exercise price totaling approximately
$2.4 million. The stock option exchange resulted in a fixed non-cash stock-based
compensation expense of approximately $8.5 million, of which approximately $0.5
million and $7.9 million related to vested and unvested shares issued upon
exercise of the new options was recognized in the three and nine months ended
September 30, 2003, respectively. The remaining amount of $0.6 million at
September 30, 2003 is being recognized on a straight-line basis over the
remaining vesting period of the modified award. In addition, the remaining
deferred stock compensation expense totaling approximately $2.5 million at
December 31, 2002 associated with the tendered options is being recognized on a
straight-line basis over the remaining vesting period of the modified award
($0.6 million and $1.7 million recognized in the three and nine months ended
September 30, 2003, respectively).
Had compensation expense for the Company's option plans been determined
using the fair value method the Company's net loss and net loss per share would
have been as follows (in thousands except per share data):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------- -------- -------- ---------
Net loss available to common stockholders:
As reported ..................................... $(54,024) $(72,461) $(94,484) $(338,655)
Add: Stock-based compensation expense
included in reported net loss ................... 1,223 1,216 9,734 3,091
Deduct: Total stock-based compensation
expense determined under the fair value method .. (1,775) (1,830) (11,042) (5,488)
-------- -------- -------- ---------
Pro forma net loss available to common stockholders $(54,576) $(73,075) $(95,792) $(341,052)
======== ======== ======== =========
Basic and diluted net loss per share:
As reported ..................................... $ (0.80) $ (1.12) $ (1.40) $ (5.22)
Pro forma ....................................... (0.81) (1.13) (1.42) (5.26)
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model assuming a dividend yield of 0.0%,
expected volatility range of 50% to 73%, risk free interest rates of 2.8% to
6.9% and weighted average expected option terms of 1 day to 7.5 years.
12
10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash operating and financing
activities are as follows (in thousands):
For the Nine Months
Ended September 30,
-----------------------
2003 2002
------- -------
(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid for interest ......................................... $36,867 $38,052
======= =======
Cash paid for income taxes ..................................... $ 320 $ 568
======= =======
Non-cash operating and financing activities:
Programming received in a settlement ........................... $ 1,000 $ --
======= =======
Dividends accrued on redeemable and convertible preferred stock $57,660 $65,965
======= =======
Discount accretion on redeemable and convertible securities .... $ 971 $21,306
======= =======
Stock option exercise proceeds and withholding taxes remitted
through withholding of shares received upon exercise ......... $ 2,359 $ --
======= =======
Stock options granted and exercised for consulting services .... $ 465 $ --
======= =======
Repayment of stock subscription notes receivable
through offset of deferred compensation ...................... $ 615 $ --
======= =======
11. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). This statement establishes standards for classifying and measuring
as liabilities certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity. SFAS 150
requires liability classification for mandatorily redeemable equity instruments
not convertible into common stock such as the Company's 14 1/4% Junior
Exchangeable Preferred Stock. SFAS 150 is effective immediately with respect to
instruments entered into or modified after May 31, 2003 and as to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company adopted SFAS 150
effective July 1, 2003. Upon adoption, the Company recorded a deferred asset for
the unamortized issuance costs and recorded a liability for the mandatorily
redeemable preferred stock balance related to its 14 1/4% Junior Exchangeable
Preferred Stock. In addition, the amortization of the issuance costs and the
dividends related to the 14 1/4% Junior ExchangeabLE Preferred Stock are being
recorded as interest expense beginning July 1, 2003 versus the recording of
these costs as dividends and accretion on redeemable preferred stock in prior
periods. Restatement of prior periods is not permitted upon adoption of SFAS
150. The Company's 9 3/4% Series A Convertible Preferred Stock and 8% Series B
Convertible Exchangeable Preferred Stock are not affected by the provisions of
SFAS 150 because of their equity conversion features.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities, an Interpretation of APB No. 50" ("FIN 46"). FIN
46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. In
October 2003, the FASB issued FASB Staff Position FIN 46-6, "Effective Date of
FASB Interpretation No. 46" ("FIN 46-6"). FIN 46-6 deferred the implementation
of FIN 46 for all public entities to the first reporting period ending after
December 15, 2003 for a variable interest entity created before February 1,
2003. The Company is evaluating whether the television stations currently
operating under time brokerage agreements serving the Memphis, TN and New
Orleans, LA markets and for which the Company holds call options to acquire (and
for which the other party holds put options to sell) certain of their assets at
any time after January 1, 2005 through December 31, 2006 for an aggregate
purchase price of $40 million (of which $4 million was paid for the option to
purchase these stations), are variable interest entities ("VIEs"). If these
stations are determined to be VIEs and the Company is determined to be the
primary beneficiary, then the Company will be required to consolidate these
stations at December 31, 2003. The Company has not completed its assessment of
whether the adoption of FIN 46 will have a material effect, if any, on its
consolidated financial position, results of operations or cash flows.
In the first quarter of 2003, the Company adopted SFAS No. 145 "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). Among other matters, SFAS 145 rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt" which
required gains and losses from extinguishments of debt to be classified as
extraordinary items, net of related income taxes. As a result, debt
13
extinguishments used as part of an entity's risk management strategy no longer
meet the criteria for classification as extraordinary items. In connection with
the Company's January 2002 refinancing, the Company recognized a loss due to
early extinguishment of debt totaling approximately $17.6 million resulting
primarily from the redemption premium and the write-off of unamortized debt
costs associated with the repayment of the Company's 12 1/2% exchange
debentures. This loss was classified as an extraordinary item in the Company's
previously issued financial statements. Because of the adoption of SFAS 145 in
2003, the Company has reclassified this loss to other income (expense) in the
Company's consolidated statements of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for companies that voluntarily change to a
fair value-based method of accounting for stock-based employee compensation.
SFAS 148 also amends the disclosure provisions of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Currently, the Company accounts for stock option plans
under the intrinsic value method of APB Opinion No. 25. The provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002. The Company
has adopted the disclosure provisions of SFAS 148 in its 2002 annual financial
statements and its 2003 interim financial statements. The Company does not
intend to change its accounting policy with regard to stock based compensation
and there was no impact on the Company's financial position, results of
operations or cash flows upon adoption of SFAS 148.
12. SUBSEQUENT EVENTS
In October 2003, the Company granted 3,598,750 options under the Company's
1998 Stock Incentive Plan, as amended, to purchase one share of the Company's
Class A common stock at an exercise price of $0.01 per share to certain
employees and directors. The new options provided for a one business day
exercise period. All holders of the new options exercised their options and
received Class A common stock subject to vesting restrictions. The new options
included retention grants totalling 2,278,000 shares which will vest at the end
of a five year period. Of the remaining options, 1,000,750 will vest ratably
over a three year period and 320,000 will vest ratably over a five year period.
The new stock options will result in non-cash stock based compensation expense
of approximately $18.3 million, which will be recognized on a straight-line
basis over the vesting period of the awards. Approximately $1.5 million will be
recognized in the fourth quarter of 2003; approximately $5.7 million will be
recognized in 2004; and the remaining $11.1 million will be recognized between
2005 and 2008.
On November 13, 2003 the Company received notice from National Broadcasting
Company, Inc. ("NBC"), a wholly owned subsidiary of General Electric Company,
that NBC has exercised its right under its investment agreement with the Company
to request that the Company redeem or arrange for a third party to acquire (the
"Redemption"), by payment in cash, all 41,500 outstanding shares of the
Company's Series B Convertible Exchangeable Preferred Stock held by NBC. The
aggregate redemption price payable in respect of the 41,500 preferred shares,
including accrued dividends thereon, was approximately $549.2 million as of
September 30, 2003.
The Company will have up to one year after November 13, 2003 to consummate
the Redemption. If at any time during the one year Redemption period, the terms
of the Company's outstanding debt and preferred stock do not prohibit the
Redemption and the Company has sufficient funds on hand to consummate the
Redemption, the Company must consummate the Redemption at that time. NBC may not
exercise its Warrant A and Warrant B (which represent the right to purchase an
aggregate of 32,032,127 shares of the Company's Class A common stock) or its
right to purchase shares of Class B common stock beneficially owned by Lowell W.
Paxson, the Chairman of the Board and Chief Executive Officer of the Company,
during the one year Redemption period.
If the Company does not effect the Redemption within one year after
November 13, 2003, NBC will again be permitted to exercise Warrant A and Warrant
B and its right to acquire Mr. Paxson's Class B common stock, and generally will
be permitted to transfer, without restriction, any of the Company's securities
acquired by it, its right to acquire Mr. Paxson's Class B common stock, the
contractual rights described with respect to the NBC investment agreement in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002 under
"Business - NBC Relationship," and its other rights under the related
transaction agreements, provided that Warrant A, Warrant B and the right to
acquire Mr. Paxson's Class B common stock will expire, to the extent
unexercised, 30 days after any such transfer. If NBC transfers any of the
Company's securities or its right to acquire Mr. Paxson's Class B common stock,
the transferee will remain subject to the terms and conditions of such
securities, including those limitations on exercise described above.
The Company's ability to effect any redemption is restricted by the terms
of the Company's outstanding debt and preferred stock. To effect the Redemption,
the Company would need not only to raise sufficient cash to fund payment of the
Redemption price, but also to obtain the consents of the holders of the
Company's outstanding debt and preferred stock or repay, redeem or refinance
these securities in a manner that obviated the need to obtain the consents of
the holders. Alternatively, the Company would need to identify a third party
willing to purchase NBC's Series B preferred stock directly from NBC or enter
into a merger, acquisition or other transaction with the Company as a result of
which NBC's Series B preferred stock would be redeemed or acquired at the stated
Redemption price.
14
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 61 broadcast television stations (including three stations we
operate under time brokerage agreements), which reach all of the top 20 U.S.
markets and 40 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 88% of prime time television households in the U.S. (approximately
95 million homes) 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
Chief Executive Officer 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 sixth
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. Under these agreements, NBC sells our network spot advertising and performs
our network research and sales marketing functions. We have also entered into
Joint Sales Agreements ("JSA") 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 nine months ended September 30, 2003, we paid or accrued
amounts due to NBC totaling approximately $16 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 spot
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 22% of our revenue during the nine months
ended September 30, 2003.
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 40% of our revenue during the nine
months ended September 30, 2003.
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 38% of our revenue during the nine
months ended September 30, 2003. Included in station advertising revenue
is long form paid programming sold locally or nationally which
represented approximately 21% of our revenue during the nine months
ended September 30, 2003.
Beginning in January 2003, we modified our programming schedule by replacing
network programming during the hours of 1 p.m. to 5 p.m. and 11:30 p.m. to
midnight, Monday through Friday, and 5 p.m. to 6 p.m. and 11 p.m. to midnight,
Saturday and Sunday, with long form paid programming. As a result, the
15
percentage of our revenues derived from long form paid programming has increased
from 47% in the year ended December 31, 2002, to 61% in the nine months ended
September 30, 2003. We expect to continue to derive more than half of our
revenues from long form paid programming for the remainder of 2003.
Commencing in the fourth quarter of 1999, we began entering into JSAs 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, in about half of our stations subject to
JSAs, we integrate and co-locate our station operations with those of our JSA
partners. To date, we have entered into JSAs for 47 of our 61 owned and operated
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.
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, 2003 and 2002 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2003 2002 2003 2002
-------- -------- --------- ---------
(unaudited) (unaudited)
Gross revenues ...................................... $ 75,028 $ 77,130 $ 234,578 $ 236,522
Less: agency commissions ............................ (10,833) (10,874) (33,921) (32,859)
-------- -------- --------- ---------
Net revenues ........................................ 64,195 66,256 200,657 203,663
-------- -------- --------- ---------
Expenses:
Programming and broadcast operations ................ 13,158 12,342 38,832 37,509
Program rights amortization ......................... 11,359 19,973 35,856 58,388
Selling, general and administrative ................. 26,765 35,310 80,654 99,127
Business interruption insurance proceeds ............ -- -- -- (1,007)
Time brokerage and affiliation fees ................. 1,100 1,088 3,302 2,990
Stock-based compensation ............................ 1,223 1,216 9,734 3,091
Adjustment of programming to net realizable value ... -- -- 1,066 2,900
Restructuring charges (credits) ..................... 18 (65) 29 (467)
Reserve for state taxes ............................. 2,915 -- 2,915 --
Depreciation and amortization ....................... 10,018 14,472 31,928 41,338
-------- -------- --------- ---------
Total operating expenses ............................ 66,556 84,336 204,316 243,869
(Loss) gain on sale or disposal of broadcast and
other assets ...................................... (671) (50) 54,678 650
-------- -------- --------- ---------
Operating (loss) income ............................. $ (3,032) $(18,130) $ 51,019 $ (39,556)
======== ======== ========= =========
Other Data:
Program rights payments and deposits ................ $ 6,759 $ 32,966 $ 27,234 $ 91,931
Payments for cable distribution rights .............. 1,313 135 2,813 3,392
Capital expenditures ................................ 5,200 6,891 16,374 26,026
Cash flows (used in) provided by operating activities (6,265) (20,092) 13,053 (51,127)
Cash flows (used in) provided by investing activities (7,111) (5,166) 76,384 (30,695)
Cash flows (used in) provided by financing activities (12,897) 4,518 (17,099) 21,331
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Gross revenues decreased 3% to $75.0 million for the three months ended
September 30, 2003 from $77.1 million for the three months ended September 30,
2002. This decrease is primarily attributable to the sale of certain television
stations and lower network spot advertising revenues resulting from the
modification of our programming schedule in January 2003 whereby we replaced
daytime entertainment programming and related spot advertising with long form
paid programming.
Programming and broadcast operations expenses were $13.2 million during the
three months ended September 30, 2003, compared with $12.3 million for the
comparable period last year. This increase is primarily due to higher tower
16
rent, music license fees and personnel costs. Program rights amortization
expense was $11.4 million during the three months ended September 30, 2003
compared with $20.0 million for the comparable period last year. The decrease is
primarily due to the modification of our programming schedule in January 2003
whereby we replaced daytime entertainment programming with long form paid
programming for which we have no programming cost and due to the sub-licensing
of TOUCHED BY AN ANGEL to Crown Media described below. Selling, general and
administrative expenses were $26.8 million during the three months ended
September 30, 2003 compared with $35.3 million for the comparable period last
year. The decrease is primarily a result of cost cutting measures including
headcount reductions in connection with the fourth quarter 2002 restructuring
activities described below as well as reductions in third party promotional
expenses. In the third quarter of 2003, we recorded a reserve for state taxes in
the amount of $2.9 million in connection with a tax liability related to certain
states in which we have operations. Depreciation and amortization expense was
$10.0 million during the three months ended September 30, 2003 compared with
$14.5 million for the comparable period last year. This decrease is due to the
sale of broadcast assets, the reduction of our cable and satellite distribution
rights amortization as described below, partially offset by an impairment charge
in the amount of $3.7 million taken on a purchase option on a television
station.
Interest expense for the three months ended September 30, 2003 increased to
$24.5 million from $22.0 million in the same period in 2002. The increase is
primarily due to higher accretion on our 12 1/4% senior subordinated discount
notes. Dividends on mandatorily redeemable preferred stock resulted from the
classification of our 14 1/4% Junior Exchangeable Preferred Stock as debt in
accordance with SFAS 150. See Note 11, New Accounting Pronouncements for
additional discussion of SFAS 150 and its effect on the classification of our
mandatorily redeemable preferred stock. At September 30, 2003, the total balance
of amounts owed under senior subordinated notes and bank financing amounted to
$919.2 million compared with $900.1 million as of December 31, 2002. Interest
income for the three months ended September 30, 2003 increased to $0.9 million
from $0.8 million in the same period in 2002. The increase is primarily due to
higher average cash and short-term investment balances in 2003 resulting from
asset sales proceeds.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Gross revenues decreased 1% to $234.6 million for the nine months ended
September 30, 2003 versus $236.5 million for the nine months ended September 30,
2002. This decrease is primarily attributable to the sale of certain television
stations.
Programming and broadcast operations expenses were $38.8 million during the
nine months ended September 30, 2003, compared with $37.5 million for the
comparable period last year. This increase is primarily due to higher tower rent
and utilities expense in connection with our digital television buildout.
Program rights amortization expense was $35.9 million during the nine months
ended September 30, 2003 compared with $58.4 million for the comparable period
last year. The decrease is primarily due to the modification of our programming
schedule in January 2003 whereby we replaced daytime entertainment programming
with long form paid programming for which we have no programming cost and due to
the sub-licensing of TOUCHED BY AN ANGEL to Crown Media described below.
Selling, general and administrative expenses were $80.7 million during the nine
months ended September 30, 2003 compared with $99.1 million for the comparable
period last year. The decrease is primarily a result of cost cutting measures
including headcount reductions in connection with the fourth quarter 2002
restructuring activities described below, lower third party promotional
expenses, lower legal expenses primarily resulting from the 2002 completion of
the NBC arbitration matter and a charge recorded in 2002 in connection with the
postponement of the 700 MHz spectrum auction. In addition, during the first
quarter of 2003, we received approximately $2.2 million from NBC to settle a
pending dispute regarding digital television signal interference at our
television station WPXM, serving the Miami-Fort Lauderdale, Florida market. This
settlement was recorded as a reduction of our selling, general and
administrative expenses. Additionally, we reduced our bad debt reserve by
approximately $1.5 million because of the decrease in our receivables that
resulted from our shift in 2003 to more prepaid long form advertising. During
the nine months ended September 30, 2003, we recognized an adjustment of
programming to net realizable value totaling $1.1 million resulting from our
decision to no longer air an original game show production. In the third quarter
of 2003, we recorded a reserve for state taxes in the amount of $2.9 million in
connection with a tax liability related to certain states in which we have
operations. Depreciation and amortization expense was $31.9 million during the
nine months ended September 30, 2003 compared with $41.3 million for the
comparable period last year. This decrease is due to the sale of broadcast
assets and our determination to amortize our remaining cable distribution rights
over the remaining term of the underlying agreements. In 1998, we began entering
into cable distribution agreements for periods generally up to ten years in
markets where we do not own a television station. Certain of these cable
distribution agreements also provided us with some level of promotional
advertising to be run at the discretion of the cable operator, primarily during
the first few years to support the launch of the PAX TV network on the cable
systems. We had been amortizing these assets on an accelerated basis, which gave
effect to the advertising component included in these agreements. The remaining
unamortized cost, which was being amortized over seven years, will be amortized
over the remaining contractual life of the agreements. In the second quarter of
2003, we determined that we had over amortized certain of these assets and
recorded a $4 million reduction of amortization expense. In the third quarter of
2003, we determined that we had also been over amortizing certain satellite
distribution agreements and certain other cable distribution agreements and
recorded a $4.5 million reduction of our amortization expense. The decrease in
depreciation and amortization expense was offset, in part, by an impairment
charge in the amount of $3.7 million taken in the third quarter of 2003 in
connection with a purchase option on a television station.
17
In May 2003, we completed the sale of our television station KAPX, serving
the Albuquerque, New Mexico market, for $20.0 million resulting in a pre-tax
gain of approximately $14.8 million. In April 2003, we completed the sale of our
television stations WMPX, serving the Portland-Auburn, Maine market, and WPXO,
serving the St. Croix, U.S. Virgin Islands market, for an aggregate of $10.0
million resulting in a pre-tax gain of approximately $4.9 million. In February
2003, we completed the sale of our television station KPXF, serving the Fresno,
California market, for $35 million resulting in a gain of approximately $26.6
million. In April 2003, we completed the sale of our limited partnership
interest in television station WWDP, serving the Boston, Massachusetts market,
for approximately $13.8 million resulting in a pre-tax gain of approximately
$9.9 million.
In January 2003, we consummated a stock option exchange offer under which we
granted to holders who tendered their eligible options in the exchange offer new
options under our 1998 Stock Incentive Plan, as amended (the "Plan"), to
purchase one share of our Class A common stock for each two shares of our Class
A common stock issuable upon the exercise of tendered options, at an exercise
price of $0.01 per share. Because the terms of the new options provided for a
one business day exercise period, all holders who tendered their eligible
options in the exchange offer exercised their new options promptly after the
issuance of those new options. Approximately 7.3 million options were tendered
in the exchange offer and approximately 2.6 million new shares of Class A common
stock were issued upon exercise of the new options, net of approximately 1.0
million shares of Class A common stock withheld, in accordance with the Plan's
provisions, at the holders' elections to cover withholding taxes and the option
exercise price totaling approximately $2.4 million. The stock option exchange
resulted in a non-cash stock-based compensation expense of approximately $8.5
million, of which approximately $7.9 million related to vested and unvested
shares issued upon exercise of the new options was recognized in the nine months
ended September 30, 2003 and the remaining $0.6 million will be recognized on a
straight-line basis over the remaining vesting period of the modified awards. In
addition, the remaining deferred stock compensation expense associated with the
original stock option awards totaling approximately $2.5 million at December 31,
2002 associated with tendered options is being recognized on a straight-line
basis over the remaining vesting period of the modified awards ($1.7 million
recognized in the nine months ended September 30, 2003).
Interest expense for the nine months ended September 30, 2003 increased to
$69.1 million from $63.0 million in the same period in 2002. The increase is
primarily due to higher accretion on our 12 1/4% senior subordinated discount
notes. Dividends on mandatorily redeemable preferred stock resulted from the
classification of our 14 1/4% Junior Exchangeable Preferred Stock as debt in
accordance with SFAS 150. See Note 11, New Accounting Pronouncements for
additional discussion of SFAS 150 and its effect on the classification of our
mandatorily redeemable preferred stock. Interest income for the nine months
ended September 30, 2003 increased to $2.6 million from $1.7 million in the same
period in 2002. The increase is primarily due to higher average cash and
short-term investment balances in 2003 resulting from proceeds from asset sales.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). This statement establishes standards for classifying and measuring
as liabilities certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity. SFAS 150
requires liability classification for mandatorily redeemable equity instruments
not convertible into common stock such as our 14 1/4% Junior Exchangeable
Preferred Stock. SFAS 150 is effective immediately with respect to instruments
entered into or modified after May 31, 2003 and as to all other instruments that
exist as of the beginning of the first interim financial reporting period
beginning after June 15, 2003. We adopted SFAS 150 effective July 1, 2003. Upon
adoption, we recorded a deferred asset for the unamortized issuance costs and
recorded a liability for the mandatorily redeemable preferred stock balance
related to our 14 1/4% Junior Exchangeable Preferred Stock. In addition, the
amortization of the issuance costs and the dividends related to the 14 1/4%
Junior Exchangeable Preferred Stock are being recorded as interest expense
beginning July 1, 2003 versus the recording of these costs as dividends and
accretion on redeemable preferred stock in prior periods. Restatement of prior
periods is not permitted upon adoption of SFAS 150. Our 9 3/4% Series A
Convertible Preferred Stock and 8% Series B Convertible Exchangeable Preferred
Stock are not affected by the provisions of SFAS 150 because of their equity
conversion features.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities, an Interpretation of APB No. 50" ("FIN 46"). FIN
46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. In
18
October 2003, the FASB issued FASB Staff Position FIN 46-6, "Effective Date of
FASB Interpretation No. 46" ("FIN 46-6"). FIN 46-6 deferred the implementation
of FIN 46 for all public entities to the first reporting period ending after
December 15, 2003 for a variable interest entity created before February 1,
2003. We are evaluating whether the television stations we currently operate
under time brokerage agreements serving the Memphis, TN and New Orleans, LA
markets and for which we hold call options to buy (and for which the other party
holds put options to sell) certain of their assets at any time after January 1,
2005 through December 31, 2006 for an aggregate purchase price of $40 million
(of which $4 million was paid for the option to purchase these stations), are
variable interest entities ("VIEs"). If these stations are determined to be VIEs
and we are determined to be the primary beneficiary, then we will be
required to consolidate these stations at December 31, 2003. We have not
completed our assessment of whether the adoption of FIN 46 will have a material
effect, if any, on our consolidated financial position, results of operations or
cash flows.
In the first quarter of 2003, we adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). Among other matters, SFAS 145 rescinds FASB Statement
No. 4, "Reporting Gains and Losses from Extinguishment of Debt", which required
gains and losses from extinguishments of debt to be classified as an
extraordinary item, net of related income taxes. As a result, debt
extinguishments used as part of an entity's risk management strategy no longer
meet the criteria for classification as extraordinary items. As described below,
in connection with our January 2002 refinancing, we recognized a loss due to
early extinguishment of debt totaling approximately $17.6 million 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. This
loss was classified as an extraordinary item in our previously issued financial
statements. Because of the adoption of SFAS 145 in 2003, we have reclassified
this loss to other income (expense) in our consolidated statements of
operations.
RESTRUCTURING ACTIVITIES
During the fourth quarter of 2002, we adopted a plan to consolidate certain
of our operations, reduce personnel and modify our programming schedule in order
to significantly reduce our cash operating expenditures. In connection with this
plan, we recorded a restructuring charge of approximately $2.6 million in the
fourth quarter of 2002 consisting of $2.2 million in termination benefits for 95
employees and $0.4 million in costs associated with exiting leased properties
and the consolidation of certain operations. Through September 30, 2003, we have
paid $2.1 million in termination benefits to 94 employees and paid $0.4 million
of lease termination and other costs. We have accounted for these costs pursuant
to SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146") which we early adopted in the fourth quarter of 2002. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to when there
is a commitment to a restructuring plan as set forth under EITF 94-3,"Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity" which has been nullified under SFAS No. 146. As such, we will
recognize additional restructuring costs as they are incurred.
We have substantially completed the JSA restructuring plan entered into in
the fourth quarter of 2000, except for contractual lease obligations for closed
locations, the majority of which expire in 2004.
INCOME TAXES
We have recorded a provision for income taxes based on our estimated annual
effective income tax rate. For the three and nine months ended September 30,
2003 and 2002, we have recorded a valuation allowance for our 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 we believe it is more likely than not that we will be unable to
utilize our remaining net deferred tax assets. Upon adoption of SFAS No. 142,
Goodwill and Other Intangible Assets ("SFAS 142") on January 1, 2002, we no
longer amortize goodwill and FCC license intangible assets. 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 when they are
disposed of. Therefore, the reversal of deferred tax liabilities related to FCC
license intangible assets and goodwill is 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 first quarter of 2002. In addition, we continue to record increases
in our valuation allowance based on increases in the deferred tax liabilities
and assets for temporary differences related to goodwill and FCC license
intangible assets.
19
We structured the disposition of our radio division in 1997 and our
acquisition of television stations during the period following this disposition
in a manner that we believed would qualify these transactions as a "like kind"
exchange under Section 1031 of the Internal Revenue Code and would permit us to
defer recognizing for income tax purposes up to approximately $333 million of
gain. The IRS has examined our 1997 tax return and has issued us a "30-day
letter" proposing to disallow all of our gain deferral. We have filed our
protest to this determination with the IRS appeals division, but we cannot
predict the outcome of this matter at this time, and we may not prevail. In
addition, the "30-day letter" offered an alternative position that, in the event
the IRS is unsuccessful in disallowing all of the gain deferral, approximately
$62 million of the $333 million gain deferral will be disallowed. We have filed
a protest to this alternative determination as well. We may not prevail with
respect to this alternative determination. Should the IRS successfully challenge
our position and disallow all or part of our gain deferral, because we had net
operating losses in the years subsequent to 1997 in excess of the amount of the
deferred gain, we would not be liable for any tax deficiency, but could be
liable for interest on the tax liability for the period prior to the carryback
of our net operating losses. We have estimated the amount of interest for which
we could be held liable to be approximately $16.3 million should the IRS succeed
in disallowing all of the deferred gain. If the IRS were successful in
disallowing only part of the gain under its alternative position, we estimate we
would be liable for only a nominal amount of interest.
20
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 cash on hand and our net working
capital. As of September 30, 2003, we had $100.1 million in cash and cash
equivalents and short-term investments and working capital of approximately
$74.1 million. During the nine months ended September 30, 2003, our cash and
cash equivalents and short-term investments increased by approximately $57.3
million due primarily to proceeds from the asset sales described below. We
believe that our cash on hand as well as cash provided by future operations, net
working capital and the proceeds from the remaining planned asset sale will
provide the liquidity necessary to meet our obligations and financial
commitments for at least the next twelve months. If we are unable to complete
the identified asset sale 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.
Cash provided by (used in) operating activities was approximately $13.1
million and ($51.1) million for the nine months ended September 30, 2003 and
2002, respectively. These amounts reflect cash generated or used in connection
with the operation of PAX TV, including the related programming rights and cable
distribution rights payments and interest payments on our debt. The increase is
due to improved operating results from the modification of our programming
schedule and other restructuring activities as well as reduced programming
payments in the period. In addition, our accounts receivable have declined
significantly as a result of our increased revenue contribution from long form
advertising, which is generally paid in advance.
Cash provided by (used in) investing activities was approximately $76.4
million and ($30.7) million for the nine months ended September 30, 2003 and
2002, respectively. These amounts include proceeds from the sale of broadcast
assets, capital expenditures and short term investment transactions. During the
nine months ended September 30, 2003, we raised $77.5 million in proceeds from
the sale of broadcast assets in completion of our liquidity plan to raise $100
million. These asset sales included the sale of our television station KPXF,
serving the Fresno, California market, to Univision Communications, Inc. for $35
million, which we completed in February 2003; the sale of our television
stations WMPX, serving the Portland-Auburn, Maine market, and WPXO, serving the
St. Croix, U.S. Virgin Islands market for an aggregate purchase price of $10
million, which we completed in April 2003; the sale of our limited partnership
interest in television station WWDP, serving the Boston, Massachusetts market,
for approximately $13.8 million, which we completed in April 2003; and the sale
of our television station KAPX, serving the Albuquerque, New Mexico market, for
approximately $20 million, which we completed in May 2003. In addition, we have
signed a definitive agreement to sell the assets of our television station KPXJ,
serving the Shreveport, Louisiana market, for $10 million. The sale of KPXJ is
expected to close in the first quarter of 2004. As of September 30, 2003, we had
agreements to purchase 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 2005 or thereafter.
Capital expenditures were approximately $16.4 million and $26.0 million for
the nine months ended September 30, 2003 and 2002, respectively. 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. Those digital stations that were not operating by the May 2002 date
requested extensions of time from the FCC which have been granted with limited
exceptions. All of our extension requests have been granted without condition.
Despite the current uncertainty that exists in the broadcasting industry with
respect to standards for digital broadcast services, planned formats and usage,
we have complied and intend to continue to comply with the FCC's timing
requirements for the construction of digital television facilities and the
broadcast of digital television services. We have commenced our migration to
digital broadcasting in certain of our markets and will continue to do so
throughout the required time period. We currently own or operate 34 stations
broadcasting in digital (in addition to broadcasting in analog) and expect to
have 10 more stations commence their digital broadcast services by December 31,
2003. With respect to our remaining stations, we have received construction
permits from the FCC and will be completing the buildout on five stations during
2004, we are awaiting construction permits from the FCC with respect to six of
our television stations and six of our television stations have not received a
digital channel allocation and therefore will not be converted until the end of
the digital transition. Because of the uncertainty as to standards, formats and
usage, 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. We currently anticipate, however, that we will spend
at least an additional $17 million over the next two to three years to complete
the conversion. We will likely fund these expenditures from cash on hand and
proceeds from our remaining planned asset sale.
Cash (used in) provided by financing activities was ($17.1) million and
$21.3 million during the nine months ended September 30, 2003 and 2002,
respectively. These amounts include the proceeds from borrowings to fund capital
21
expenditures and proceeds from stock option exercises, net of principal
repayments. Also included are payments of employee withholding taxes on option
exercises in connection with the January 2003 stock option exchange offer and
proceeds from the January 2002 refinancing described below, as well as the
related principal repayments, redemption premium and refinancing costs.
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 in cash semi-annually beginning on July
15, 2006. The senior subordinated discount notes are guaranteed by our
subsidiaries. As described above, we recognized a 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.
On June 28, 2002, we and our lenders amended our senior bank credit facility
to, among other things, reduce the minimum required levels of net revenues and
EBITDA (as defined in the senior bank credit facility and summarized below) for
certain periods under the facility's financial covenants and allow us to retain
the proceeds from certain planned asset sales for general corporate purposes. In
connection with the amendment, the interest rates were increased to LIBOR plus
3.25% or Base Rate (as defined) plus 2.25% and we paid an amendment fee of $0.9
million. On November 4, 2002, we and our lenders amended our senior bank credit
facility to, among other things, exclude from the definition of EBITDA certain
costs resulting from our plan to consolidate certain of our operations, reduce
personnel and modify our programming schedule. In connection with this
amendment, we incurred costs of approximately $0.6 million. On May 5, 2003, the
Company amended and restated the senior bank credit facility to consolidate
previous amendments and allow for the issuance of letters of credit, subject to
availability, under a $25 million revolving credit facility. At September 30,
2003, there was $12.0 million in borrowings outstanding under the revolving
credit facility and $12.4 million of outstanding letters of credit. The Company
paid a fee of $0.1 million in connection with the May 5, 2003 amendment and
restatement. On September 19, 2003, the Company further amended the amended and
restated senior bank credit facility to reduce its trailing twelve month minimum
net revenue and EBITDA covenants, eliminate a revenue fee connected with a
waiver obtained in March 2003 (for which the waiver provisions were subsequently
incorporated into the May 5, 2003 amendment and restatement) and eliminate the
requirement to comply with certain other financial covenants as of March 31,
2005. The Company paid a fee of $1.0 million in connection with the September
19, 2003 amendment.
As amended, the Company's amended and restated senior bank credit facility
contains various financial covenants and restricts the ability of the Company
any 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
amended and restated senior bank credit facility contains the following
financial covenants: (1) twelve-month trailing minimum net revenue and minimum
EBITDA (as defined under our senior bank credit facility) for each of the fiscal
quarters ended June 30, 2001 through March 31, 2005, (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, 2005, (3)
maximum annual capital expenditures for 2001 through 2006, and (4) maximum
annual programming payments for 2002 through 2006. EBITDA, as defined under our
amended and restated senior bank credit facility, is equal to our consolidated
net income or loss plus the sum of interest expense (net of interest income),
depreciation, amortization (excluding programming amortization), stock-based
compensation, permitted programming net realizable value adjustments, permitted
restructuring and other charges, time brokerage and affiliation fees, losses on
the sale of assets and other non-cash expenses minus the sum of gains on the
sale of assets and other non-cash income. In addition, EBITDA, as defined under
our senior bank credit facility, is adjusted to give effect to acquisitions or
dispositions of television stations as if they occurred at the beginning of the
EBITDA measurement period during which they were consummated. Our amended
twelve-month minimum net revenue and EBITDA covenants are $250 million and $50
million, respectively, for each of the next four quarters.
Our ability to meet these financial covenants is influenced by several
factors, the most significant of which is our ability to generate revenues,
which in turn is affected by overall conditions in the television advertising
marketplace, our long form advertising rates, our network and station ratings
and the success of our JSA and other operating strategies and cost cutting
22
initiatives. Adverse developments with respect to these or other factors could
result in our failing to meet one or more of these covenants. At September 30,
2003, we were in compliance with these amended covenants. We currently expect we
will continue to be in compliance with these amended covenants in 2004. If we
failed to meet any of our debt covenants and our lenders did not grant a waiver
or amendment, they would have the right to declare an event of default and seek
remedies including acceleration of all outstanding amounts due under the senior
bank credit facility. Should an event of default be declared under the senior
bank 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, and would give the holders of
each of our three outstanding series of preferred stock the right to elect two
directors per series to our board of directors. We can provide no assurance that
we would be successful in obtaining alternative sources of funding to repay
these obligations should these events occur.
The Company structured the disposition of its radio division in 1997 and its
acquisition of television stations during the period following this disposition
in a manner that the Company believed would qualify these transactions as a
"like kind" exchange under Section 1031 of the Internal Revenue Code and would
permit the Company to defer recognizing for income tax purposes up to
approximately $333 million of gain. The IRS has examined the Company's 1997 tax
return and has issued the Company a "30-day letter" proposing to disallow all of
the Company's gain deferral. The Company filed its protest to this determination
with the IRS appeals division, but cannot predict the outcome of this matter at
this time, and may not prevail. In addition, the "30-day letter" offered the
Company an alternative position that, in the event the IRS is unsuccessful in
disallowing all of the gain deferral, approximately $62 million of the $333
million gain deferral will be disallowed. The Company filed a protest to this
alternative determination as well. The Company may not prevail with respect to
this alternative determination. Should the IRS successfully challenge the
Company's position and disallow all or part of its gain deferral, because the
Company had net operating losses in the years subsequent to 1997 in excess of
the amount of the deferred gain, the Company would not be liable for any tax
deficiency, but could be liable for interest on the tax liability for the period
prior to the carryback of its net operating losses. The Company has estimated
the amount of interest for which it could be held liable to be approximately
$16.3 million should the IRS succeed in disallowing all of the deferred gain. If
the IRS were successful in disallowing only part of the gain under its
alternative position, the Company estimates it would be liable for only a
nominal amount of interest.
23
As of September 30, 2003, our programming contracts require collective
payments of approximately $61.0 million as follows (in thousands):
Obligation for Program Rights
Program Rights Commitments Total
--------------- ---------------- -----------
2003 (October--December)................ $ 7,674 $ 3,043 $ 10,717
2004.................................... 8,562 33,967 42,529
2005.................................... 2,200 4,866 7,066
2006.................................... 650 -- 650
--------- ---------- -----------
$ 19,086 $ 41,876 $ 60,962
========= ========== ===========
On August 1, 2002, we entered into agreements with a subsidiary of CBS
Broadcasting, Inc. ("CBS") and Crown Media United States, LLC ("Crown Media") to
sublicense our rights to broadcast the television series TOUCHED BY AN ANGEL
("Touched") to Crown Media for exclusive exhibition on the Hallmark Channel,
commencing September 9, 2002. Under the terms of the agreement with Crown Media,
we are to receive approximately $47.4 million from Crown Media, $38.6 million of
which is to be paid over a three-year period that commenced August 2002 and the
remaining $8.8 million of which is to be paid over a three-year period
commencing August 2003.
Under the terms of our agreement with CBS, we remain obligated to CBS for
amounts due under our pre-existing license agreement, less estimated programming
cost savings of approximately $15 million. As of September 30, 2003, our
obligations to CBS totaled approximately $53.0 million. The transaction resulted
in a gain of approximately $4 million, which is being deferred over the term of
the Crown Media agreement.
We have a significant concentration of credit risk with respect to the
amounts due from Crown Media under the sublicense agreement. As of September 30,
2003, the maximum amount of loss due to credit risk that we would sustain if
Crown Media failed to perform under the agreement totaled approximately $28.7
million, representing the present value of amounts due from Crown Media. Under
the terms of the sublicense agreement, we have the right to terminate Crown
Media's rights to broadcast Touched if Crown Media fails to make timely payments
under the agreement. Therefore, should Crown Media fail to perform under the
agreement, we could regain our exclusive rights to broadcast Touched on PAX TV
pursuant to our existing licensing agreement with CBS.
Our obligations to CBS for Touched will be partially funded through the
sub-license fees from Crown Media. As of September 30, 2003, our obligation to
CBS and our receivable from Crown Media related to Touched are as follows (in
thousands):
Obligations Amounts Due from
to CBS Crown Media Total
------------- -------------------- ----------
2003 (October--December)........... $ 1,709 $ (3,950) $ (2,241)
2004............................... 23,620 (15,800) 7,820
2005............................... 18,513 (10,439) 8,074
2006............................... 9,191 (1,711) 7,480
------- ------------ --------
53,033 (31,900) 21,133
Amount representing interest -- 3,217 3,217
-------- ------------ --------
$ 53,033 $ (28,683) $ 24,350
======== ============ ========
As of September 30, 2003, obligations for cable distribution rights require
collective payments by us of approximately $4.5 million as follows (in
thousands):
2003 (October--December)................................... $ 4,210
2004....................................................... 103
2005....................................................... 180
--------
$ 4,493
========
24
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, 2002, as filed with
the US Securities and Exchange Commission, along with the following updates to
our Form 10-K disclosures.
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND WE MAY NOT
BECOME PROFITABLE IN THE FUTURE.
We have incurred losses from continuing operations in each fiscal year
since our inception. As a result of these net losses, for the years ended
December 31, 2002, 2001 and 2000 and the nine months ended September 30, 2003,
our earnings were insufficient to cover our combined fixed charges and preferred
stock dividend requirements by approximately $259.9 million, $340.4 million,
$390.7 million and $85.6 million, respectively. We expect to continue to
experience net losses in the foreseeable future, principally due to interest
charges on outstanding debt (and the debentures into which our outstanding
preferred stock can be exchanged, if issued), dividends on outstanding preferred
stock, and non-cash charges for depreciation and amortization expense related to
fixed assets and amortizable intangible assets. Future net losses could be
greater than those we have experienced in the past.
Our cash flow from operations has been insufficient to cover our operating
expenses, debt service requirements and other cash commitments in each of the
years ended December 31, 2002, 2001 and 2000 and the nine months ended September
30, 2003. We have financed our operating cash requirements, as well as our
capital needs, during these periods with the proceeds of asset sales and
financing activities, including the issuance of preferred stock and additional
borrowings. We may not be able to generate sufficient operating cash flow in the
future to pay our debt service and preferred stock dividend requirements and may
not be able to obtain sufficient additional financing to meet such requirements
on terms acceptable to us, or at all.
We believe that absent significant improvement in our ratings and revenues,
our business operations are unlikely to provide sufficient cash flow to support
our future debt service and preferred stock dividend requirements. We have
engaged the firms of Bear Stearns & Co. Inc. and Citigroup Global Markets Inc.
to act as our financial advisors to assess our business plan, capital structure
and future capital needs, and to explore strategic alternatives for our company.
These strategic alternatives may include the sale of material amounts of our
assets, locating a strategic partner for our company who would provide the
financial resources to enable us to redeem, restructure or refinance our debt
and preferred stock, or finding a third party to acquire our company through a
merger or acquisition of our equity securities.
PAX TV MAY NOT BE SUCCESSFUL.
We launched PAX TV on August 31, 1998, and are now in our sixth network
broadcasting season. The experiences of other new broadcast television networks
during the past decade indicate that it requires a substantial period of time
and the commitment of significant financial, managerial and other resources to
gain market acceptance of a new television network by viewing audiences and
advertisers to a sufficient degree that the new network can attain
profitability. Although we believe that our approach is unique among broadcast
television networks, in that we own and operate the stations reaching most of
the television households that can receive PAX TV, our business model is
unproven and to date has not been successful. In January 2003, we reduced the
amount of entertainment programming on the PAX TV network by 26.5 hours per week
and began airing long form paid programming during these hours. PAX TV may not
gain sufficient market acceptance to be profitable or otherwise be successful.
IF OUR TELEVISION PROGRAMMING DOES NOT ATTRACT SUFFICIENT NUMBERS OF VIEWERS IN
DESIRABLE DEMOGRAPHIC GROUPS, OR OUR REVENUES FROM THE SALE OF LONG FORM PAID
PROGRAMMING WERE TO DECLINE, OUR ADVERTISING REVENUE COULD DECREASE.
Advertising revenues constitute substantially all of our operating
revenues. Our ability to generate advertising revenues depends upon our ability
to sell our inventory of air time for long form paid programming at acceptable
rates and, with respect to entertainment programming, to provide programming
which attracts sufficient numbers of viewers in desirable demographic groups to
25
generate audience ratings that advertisers will find attractive. Long form paid
programming rates are dependent upon a number of factors, including our
available inventory of air time, the viewing public's interest in the products
and services being marketed through long form paid programming, and economic
conditions generally. Our revenues from the sale of air time for long form paid
programming may decline. Our entertainment programming may not attract
sufficient targeted viewership or achieve sufficiently favorable ratings to
enable us to generate enough advertising revenues to be profitable. Our ratings
depend partly upon unpredictable factors beyond our control and may decline,
which would adversely affect that portion of our advertising revenues derived
from the sale of commercial spots during our entertainment programming. We incur
production, talent and other ancillary costs to produce original programs for
PAX TV. Our original programming may not generate advertising revenues in excess
of our programming and other costs.
WE RECENTLY CHANGED OUR REVENUE MIX.
In January 2003, we reduced the number of PAX TV network hours by 26.5
hours per week and began airing long form paid programming during these hours.
While we believe that our operating performance during the first three quarters
of 2003 has improved, partly as a result of this change in our programming
strategy, we have experienced a modest decrease in the advertising rates for
long form paid programming, which we attribute in part to the significant
increase in our inventory of available time for long form paid programming. The
percentage of our revenues derived from long form paid programming has increased
from 47% in the year ended December 31, 2002, to 61% in the nine months ended
September 30, 2003, and we expect to continue to derive more than half of our
revenues from long form paid programming for the remainder of 2003. While we
intend to maintain a flexible programming strategy and may from time to time
again adjust our mix of entertainment and long form paid programming as we seek
to enhance our operating performance, we may not be able to maintain or increase
our advertising revenues or improve our operating performance through changes in
our programming strategy.
WE HAVE REDUCED OUR SPENDING FOR NEW PROGRAMMING.
We have reduced our spending in 2003 for new original programming and
expect to maintain our level of spending in 2004 for new programs at the current
reduced level. As we have reduced the number of new original programs broadcast
on PAX TV, our audience ratings have declined. We would expect that continued
declines in our ratings would adversely affect that portion of our advertising
revenues derived from commercial spots, which for the nine months ended
September 30, 2003 comprised approximately 39% of our revenue. We are unable to
predict the magnitude of the effect of this reduced level of spending for
programming on our ratings or advertising revenues.
WE MAY NOT BE ABLE TO REDEEM OUR SECURITIES HELD BY NBC THAT NBC HAS DEMANDED
THAT WE REDEEM AND THIS COULD HAVE ADVERSE CONSEQUENCES FOR US.
On November 13, 2003, NBC exercised its right to demand that we redeem, or
arrange for a third party to acquire, all of the shares of our Series B
preferred stock held by NBC, at a price equal to the aggregate liquidation
preference thereof plus accrued and unpaid dividends, which as of September 30,
2003, totaled $549.2 million. Should we fail to effect a redemption within one
year after November 13, 2003, NBC 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, its contractual rights with respect to our
business, and its other rights under the related transaction agreements. Our
ability to effect any redemption is restricted by the terms of our outstanding
debt and preferred stock. Further, we do not currently have sufficient funds to
pay the redemption price for these securities. In order to comply with NBC's
redemption demand, we expect that we will need to repay, refinance or otherwise
restructure the majority of our outstanding indebtedness and preferred stock and
raise sufficient liquidity to enable us to pay the required redemption price, or
find a third party willing to purchase those securities at the required
redemption price. Should we be unable to do so, we may not have sufficient funds
to pay the redemption price for the securities to be redeemed. If we were unable
to complete a redemption, we would be unable to prevent NBC from transferring
its interest in our company to a third party selected by NBC in its discretion,
which could have a material adverse effect upon us.
NBC'S DEMAND FOR REDEMPTION MAY HAVE AN ADVERSE EFFECT UPON OUR OPERATING
RELATIONSHIPS WITH NBC.
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
42 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. If NBC ceases to hold an investment in
our securities, NBC and the NBC affiliates will have the ability to elect to
terminate the agreements under which these operating relationships have been
implemented. Should NBC or the NBC affiliates elect to terminate these
agreements, 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 by 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 are unable to predict the effect, if any, that NBC's
demand that we redeem our securities held by it may have upon our current
operating relationships with NBC. We would expect, however, that NBC would seek
to terminate these relationships if it were to cease holding an investment in
our securities.
26
WE COULD BE SUBJECT TO A MATERIAL TAX LIABILITY IF THE IRS SUCCESSFULLY
CHALLENGES OUR POSITION REGARDING THE 1997 DISPOSITION OF OUR RADIO DIVISION.
We structured the disposition of our radio division in 1997 and our
acquisition of television stations during the period following this disposition
in a manner that we believed would qualify these transactions as a "like kind"
exchange under Section 1031 of the Internal Revenue Code and would permit us to
defer recognizing for income tax purposes up to approximately $333 million of
gain. The IRS has examined our 1997 tax return and has issued us a "30-day
letter" proposing to disallow all of our gain deferral. We have filed our
protest to this determination with the IRS appeals division, but we cannot
predict the outcome of this matter at this time, and we may not prevail. In
addition, the "30-day letter" offered an alternative position that, in the event
the IRS is unsuccessful in disallowing all of the gain deferral, approximately
$62 million of the $333 million gain deferral will be disallowed. We have filed
a protest to this alternative determination as well. We may not prevail with
respect to this alternative determination. Should the IRS successfully challenge
our position and disallow all or part of our gain deferral, because we had net
operating losses in the years subsequent to 1997 in excess of the amount of the
deferred gain, we would not be liable for any tax deficiency, but could be
liable for interest on the tax liability for the period prior to the carryback
of our net operating losses. We have estimated the amount of interest for which
we could be held liable to be approximately $16.3 million should the IRS succeed
in disallowing all of the deferred gain. If the IRS were successful only in
disallowing part of the gain under its alternative position, we estimate we
would be liable for only a nominal amount of interest.
THE OUTCOME OF OUR EXPLORATION OF STRATEGIC ALTERNATIVES IS UNCERTAIN.
We have engaged Bear Stearns & Co. Inc. and Citigroup Global Markets, Inc. to
act as our financial advisors and explore strategic alternatives for our
company. These strategic alternatives may include the sale of all or part of our
assets, finding a strategic partner for our company who would provide the
financial resources to enable us to redeem, restructure or refinance our debt
and preferred stock, or finding a third party to acquire our company through a
merger or other business combination or acquisition of our equity securities.
Our ability to pursue strategic alternatives is subject to various limitations
and issues which we may be unable to control. A strategic transaction will, in
most circumstances, require that we seek the consent of, or refinance, NBC and
the other holders of our preferred stock, as well as the holders of our senior
and subordinated debt. FCC regulations may limit the type of strategic
alternatives we may pursue and the parties with whom we may pursue strategic
alternatives. In addition, our ability to pursue a strategic alternative will be
27
dependent upon the attractiveness of our assets and business plan to potential
new transaction parties. Among other things, certain potential transaction
parties may find unattractive our capital structure and high level of
indebtedness, our carriage of the PAX TV programming and the overnight
programming provided by The Christian Network, Inc. and certain of our
television stations serving major television markets. Our relatively low tax
basis in our television station assets (resulting in part from the Section 1031
like kind exchange we structured upon the sale of our radio group in 1997) is a
significant factor to be considered in structuring any potential transactions
involving sales of a material portion of our television station assets, and may
make certain types of transactions less attractive or not viable. Potential
transaction parties may believe our stations and other assets to be less
valuable than as shown in prior appraisals we have obtained. We may be prevented
from consummating a strategic transaction due to any of these and other factors,
or we may incur significant costs to terminate obligations and commitments with
respect to, or receive less consideration in a strategic transaction as a result
of, these and other factors. We may not be successful in our efforts to find or
effectuate strategic alternatives for our company.
WE COULD BE ADVERSELY AFFECTED BY ACTIONS OF THE FCC, THE CONGRESS AND THE
COURTS THAT COULD ALTER BROADCAST TELEVISION OWNERSHIP RULES IN A WAY THAT WOULD
MATERIALLY AFFECT OUR PRESENT OPERATIONS OR FUTURE BUSINESS ALTERNATIVES.
On June 2, 2003, the FCC adopted new rules governing, among other things,
national and local ownership of television broadcast stations and
cross-ownership of television broadcast stations with radio broadcast stations
and newspapers serving the same market. The new rules would change the
regulatory framework within which television broadcasters hold, acquire and
transfer broadcast stations. Numerous parties have asked the FCC to reconsider
portions of its decision and other parties have sought judicial review. On
September 3, 2003, the U. S. Court of Appeals for the Third Circuit issued an
order staying the effectiveness of the new media ownership rules pending its
review of the FCC's action.
Among other things, the FCC's new rules would increase the percentage of
the nation's television households that may be served by television broadcast
stations in which the same person or entity has an attributable interest from
35% to 45% of national television households. The new rules also relax FCC
restrictions on local television ownership and on cross-ownership of television
stations with radio stations or newspapers in the same market. In general, these
new rules would reduce the regulatory barriers to the acquisition of an interest
in our television stations by various industry participants who already own
television stations, radio stations, or newspapers.
In assessing compliance with both the old 35% cap and the new 45% cap, the
FCC counts each UHF station as serving only half of the television households in
its market. This "UHF Discount" is intended to take into account that UHF
stations historically have provided less effective coverage of their markets
than VHF stations. All of our television stations are UHF stations and, without
the UHF Discount, we would not meet either the old 35% national coverage cap or
the new 45% cap. In its June 2, 2003 decision, the FCC concluded that the future
transition to digital television may eliminate the need for a UHF Discount. For
that reason, the FCC provided that the UHF Discount will "sunset" - i.e., expire
- for the top four broadcast networks (ABC, NBC, CBS, and Fox) on a
market-by-market basis as the digital transition is completed, unless otherwise
extended by the FCC. The FCC also announced, however, that it will examine in a
future biennial review whether to include in this sunset provision the UHF
television stations owned by other networks and group owners, which would
include our television stations.
Since the FCC's adoption of the new rules, legislation has been introduced
in Congress to roll back the national ownership cap to 35%, prohibit the
application of the UHF Discount to UHF stations sold after June 2, 2003, sunset
the UHF Discount in 2008 for all UHF stations, prohibit the cross ownership of
newspapers and television stations in the same market and nullify in their
entirety the rule changes adopted by the FCC. We cannot predict whether any
pending legislation ultimately will be adopted or whether any petitions for
reconsideration or judicial review of the FCC's decision of June 2, 2003 will
result in significant changes to the ownership rules. A rollback of the
nationwide television ownership cap, the setting of a 35% cap, and the
prohibition of newspaper and television cross ownership by Congress, or action
by the FCC or Congress affecting the availability of the UHF Discount, may
adversely affect the opportunities we might have for sale of our television
broadcast stations to those television group owners and major television
broadcast networks that otherwise would be the most likely purchasers.
Also, in its June 2, 2003 decision, the FCC stated that it intends in the
future to begin a rule making proceeding to consider whether to treat a
television licensee's joint sales agreement to sell the advertising time of
another television station in the same market as the equivalent of ownership of
that station for purposes of the FCC's local television ownership rules. A joint
sales agreement, or "JSA," is an arrangement by which a brokering station
provides advertising sales services, but not programming, for another station in
the market. We have entered into JSAs for 47 of our television stations, 42 of
which are with NBC or NBC-affiliated stations in our markets. The FCC may adopt
rules affecting these arrangements that could adversely affect our current
operations under existing JSAs. If a rule adopted by the FCC effectively
precludes the continuation of our current arrangements, it may be necessary for
us to renegotiate aspects of our current relationships. Also, if a new FCC rule
were to require that we terminate a JSA in a particular market, we may incur
significant costs to transfer the JSA to another broker or to resume operation
of the station without the sales and other services of a JSA broker. We cannot
predict what rules the FCC will adopt or what effect any new rules are likely to
have upon our operations and our present relationship with NBC and NBC's
affiliates.
28
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
the end of the quarterly period ended September 30, 2003, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic SEC reports. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote. In addition, we reviewed our
internal controls, and there have been no significant changes in our internal
controls or in other factors which would significantly affect internal controls
subsequent to the date we carried out this evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure.
29
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 14-1/4% Cumulative
Junior Exchangeable Preferred Stock (2)
3.1.8 Certificate of Designation of the Company's 8% Series B
Convertible Exchangeable Preferred Stock (3)
3.1.9 Certificate of Amendment to the Certificate of Incorporation of
the Company (7)
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 Amended and Restated Credit Agreement, dated as of May 5, 2003,
among the Company, the Lenders party thereto, the Issuers party
thereto, Citicorp USA, Inc., as administrative agent for the
Lenders and the Issuers and as collateral agent for the Secured
Parties, Union Bank of California, N.A., as syndication agent
for the Lenders and the Issuers, and General Electric Capital
Corporation, as documentation agent for the Lenders and the
Issuers (7)
4.7.1 Amendment No. 1, dated as of September 19, 2003, between the
Company and Citicorp USA, Inc., as administrative agent for the
Lenders and the Issuers and as collateral agent for the Secured
Parties
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)
10.83.1 Facility Lease Agreement, dated as of July 1, 2003, by and
between the Company and The Christian Network, Inc.
31.1 Certification by the Chief Executive Officer of Paxson
Communications Corporation pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended
31.2 Certification by the Chief Financial Officer of Paxson
Communications Corporation pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934, as amended
32.1 Certification by the 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
32.2 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 March 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.
30
(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.
(7) Filed with the Company's Quarterly Report on Form 10-Q, dated March 31,
2003, and incorporated herein by reference.
(b) Reports on Form 8-K.
Form 8-K, dated July 30, 2003, under Item 9. "Regulation FD Disclosure"
disclosing that the Company's financial results for the second quarter
ended June 30, 2003.
Form 8-K, dated August 18, 2003, under Item 5. "Other Events" reporting
that Jeff Sagansky resigned from his position as Vice-Chairman and a member
of the Board of Directors of the Company.
31
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, 2003 By: /s/ THOMAS E. SEVERSON, JR.
---------------------------------------------
Thomas E. Severson, Jr.
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
By: /s/ RICHARD GARCIA
---------------------------------------------
Richard Garcia
Vice President, Chief Accounting Officer and
Corporate Controller
(Principal Accounting Officer)
32