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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ___________
Commission File Number 1-13452
PAXSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 59-3212788
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
601 Clearwater Park Road
West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (561) 659-4122
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 2002:
CLASS OF STOCK NUMBER OF SHARES
-------------- ----------------
Common stock-Class A, $0.001 par value per share.......... 56,568,827
Common stock-Class B, $0.001 par value per share.......... 8,311,639
PAXSON COMMUNICATIONS CORPORATION
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2002 (unaudited) and December 31, 2001..................................... 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2002 and 2001 (unaudited)............................................ 4
Consolidated Statement of Stockholders' Deficit for the
Nine Months Ended September 30, 2002 (unaudited)......................................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001 (unaudited)............................................ 6
Notes to Unaudited Consolidated Financial Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 12
Item 4. Controls and Procedures................................................................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 22
Item 6. Exhibits and Reports on Form 8-K......................................................... 23
Signatures.......................................................................................... 25
Certifications...................................................................................... 26
2
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
September 30, December 31,
2002 2001
----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents .................................................................... $ 23,367 $ 83,858
Short-term investments ....................................................................... 18,197 12,150
Accounts receivable, less allowance for doubtful accounts of $2,861 and $3,635, respectively . 24,703 29,728
Program rights ............................................................................... 56,491 65,370
Current portion of amounts due from Crown Media .............................................. 9,275 --
Prepaid expenses and other current assets .................................................... 5,839 5,650
----------- -----------
Total current assets ...................................................................... 137,872 196,756
Property and equipment, net ...................................................................... 145,594 144,591
Intangible assets, net ........................................................................... 891,127 905,379
Program rights, net of current portion ........................................................... 56,257 89,672
Amounts due from Crown Media, net of current portion ............................................. 22,357 --
Investments in broadcast properties .............................................................. 12,216 15,271
Assets held for sale ............................................................................. 9,476 9,852
Other assets, net ................................................................................ 28,123 22,154
----------- -----------
Total assets .............................................................................. $ 1,303,022 $ 1,383,675
=========== ===========
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued liabilities ..................................................... $ 38,500 $ 25,858
Accrued interest ............................................................................. 9,269 15,220
Obligations for program rights ............................................................... 52,816 76,169
Obligations for cable distribution rights .................................................... 9,236 12,325
Deferred revenue from satellite distribution rights .......................................... 7,556 6,414
Current portion of bank financing ............................................................ 3,011 2,899
----------- -----------
Total current liabilities ................................................................. 120,388 138,885
Obligations for program rights, net of current portion ....................................... 36,526 43,396
Obligations for cable distribution rights, net of current portion ............................ 732 710
Deferred revenue from satellite distribution rights, net of current portion .................. 9,851 11,776
Senior subordinated notes and bank financing, net ............................................ 882,790 526,281
Other long-term liabilities .................................................................. 24,785 36,510
----------- -----------
Total liabilities ......................................................................... 1,075,072 757,558
----------- -----------
Mandatorily redeemable preferred stock ........................................................... 970,274 1,164,160
----------- -----------
Commitments and contingencies .................................................................... -- --
----------- -----------
Stockholders' deficit:
Class A common stock, $0.001 par value; one vote per share; 215,000,000
shares authorized, 56,568,827 and 56,380,177 shares issued and outstanding ................ 57 56
Class B common stock, $0.001 par value; ten votes per share; 35,000,000
shares authorized and 8,311,639 shares issued and outstanding ............................. 8 8
Common stock warrants and call option ........................................................ 68,384 68,384
Stock subscription notes receivable .......................................................... (1,588) (1,088)
Additional paid-in capital ................................................................... 513,775 512,194
Deferred stock option compensation ........................................................... (3,845) (6,537)
Accumulated deficit .......................................................................... (1,315,550) (1,109,710)
Accumulated other comprehensive loss ......................................................... (3,565) (1,350)
----------- -----------
Total stockholders' deficit ............................................................... (742,324) (538,043)
----------- -----------
Total liabilities, mandatorily redeemable preferred stock, and stockholders' deficit ............. $ 1,303,022 $ 1,383,675
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
3
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
REVENUES:
Gross revenues ............................................... $ 77,130 $ 72,462 $ 236,522 $ 231,657
Less: agency commissions ..................................... (10,874) (10,507) (32,859) (32,655)
------------ ------------ ------------ ------------
Net revenues ................................................. 66,256 61,955 203,663 199,002
------------ ------------ ------------ ------------
EXPENSES:
Programming and broadcast operations (excluding stock-based
compensation of $145, $308, $434 and $628) .............. 12,342 10,012 37,509 30,870
Program rights amortization ............................... 19,973 20,378 58,388 66,241
Selling, general and administrative (excluding stock-based
compensation of $1,071, $2,238, $2,657 and $5,107) ...... 35,310 29,090 99,127 90,859
Business interruption insurance proceeds .................. -- -- (1,007) --
Time brokerage and affiliation fees ....................... 1,088 894 2,990 2,727
Stock-based compensation .................................. 1,216 2,546 3,091 5,735
Adjustment of programming to net realizable value ......... -- 66,992 2,900 66,992
Restructuring charge related to Joint Sales Agreements .... (65) -- (467) --
Depreciation and amortization ............................. 14,472 24,213 41,338 72,345
------------ ------------ ------------ ------------
Total operating expenses .............................. 84,336 154,125 243,869 335,769
------------ ------------ ------------ ------------
Operating loss ............................................... (18,080) (92,170) (40,206) (136,767)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense .......................................... (21,988) (13,088) (63,021) (37,226)
Interest income ........................................... 778 1,286 1,652 4,023
Other income (expense), net ............................... (1,027) (759) (919) (2,365)
Gain on modification of program rights obligations ........ 480 233 917 699
Gain (loss) on sale of television stations ................ (50) 2,410 650 13,059
------------ ------------ ------------ ------------
Loss before income taxes and extraordinary item .............. (39,887) (102,088) (100,927) (158,577)
Income tax provision ......................................... (30) (30) (90) (90)
------------ ------------ ------------ ------------
Loss before extraordinary item ............................... (39,917) (102,118) (101,017) (158,667)
Extraordinary charge related to early extinguishment of debt . -- (9,903) (17,552) (9,903)
------------ ------------ ------------ ------------
Net loss ..................................................... (39,917) (112,021) (118,569) (168,570)
Dividends and accretion on redeemable preferred stock ........ (29,073) (37,522) (87,271) (110,531)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders ................. $ (68,990) $ (149,543) $ (205,840) $ (279,101)
============ ============ ============ ============
Basic and diluted loss per share:
Loss before extraordinary item ............................ $ (1.06) $ (2.16) $ (2.90) $ (4.18)
Extraordinary item ........................................ -- (0.15) (0.27) (0.15)
------------ ------------ ------------ ------------
Net loss .................................................. $ (1.06) $ (2.31) $ (3.17) $ (4.33)
============ ============ ============ ============
Weighted average shares outstanding .......................... 64,880,466 64,602,832 64,838,487 64,458,933
============ ============ ============ ============
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, 2002 (UNAUDITED)
(in thousands)
COMMON
STOCK STOCK
COMMON STOCK WARRANTS SUBSCRIPTION
----------------- AND CALL NOTES
CLASS A CLASS B OPTION RECEIVABLE
------- -------- ------ ----------
BALANCE AT DECEMBER 31, 2001 ..................... $ 56 $ 8 $68,384 $(1,088)
Deferred option plan compensation ............. -- -- -- --
Stock-based compensation ...................... -- -- -- --
Stock options exercised ....................... 1 -- -- --
Interest on stock subscription notes receivable -- -- -- (500)
Other comprehensive loss ...................... -- -- -- --
Dividends on redeemable preferred stock ....... -- -- -- --
Accretion on redeemable preferred stock ....... -- -- -- --
Net loss ...................................... -- -- -- --
------ ------ ------- -------
BALANCE AT SEPTEMBER 30, 2002 .................... $ 57 $ 8 $68,384 $(1,588)
====== ====== ======= =======
ACCUMULATED
ADDITIONAL DEFERRED OTHER TOTAL
PAID-IN STOCK OPTION ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
CAPITAL COMPENSATION DEFICIT LOSS DEFICIT
------- ------------ -------------- ---------------- ---------------
BALANCE AT DECEMBER 31, 2001 ..................... $512,194 $(6,537) $(1,109,710) $(1,350) $(538,043)
Deferred option plan compensation ............. 399 (399) -- -- --
Stock-based compensation ...................... -- 3,091 -- -- 3,091
Stock options exercised ....................... 1,182 -- -- -- 1,183
Interest on stock subscription notes receivable -- -- -- -- (500)
Other comprehensive loss ...................... -- -- -- (2,215) (2,215)
Dividends on redeemable preferred stock ....... -- -- (65,965) -- (65,965)
Accretion on redeemable preferred stock ....... -- -- (21,306) -- (21,306)
Net loss ...................................... -- -- (118,569) -- (118,569)
-------- ------- ----------- ------- ---------
BALANCE AT SEPTEMBER 30, 2002 .................... $513,775 $(3,845) $(1,315,550) $(3,565) $(742,324)
======== ======= =========== ======= =========
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,
------------------------
2002 2001
--------- ---------
(Unaudited)
Cash flows from operating activities:
Net loss .............................................................. $(118,569) $(168,570)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 41,338 72,345
Stock-based compensation .............................................. 3,091 5,735
Loss on extinguishment of debt ........................................ 17,552 9,903
Adjustment of programming to net realizable value ..................... 2,900 66,992
Non-cash restructuring charge ......................................... (467) --
Program rights amortization ........................................... 58,388 66,241
Payments for cable distribution rights ................................ (3,392) (12,469)
Payments for program rights and deposits .............................. (91,931) (94,573)
Provision for doubtful accounts ....................................... -- 2,384
(Gain) loss from sale or disposal of assets and broadcast properties .. 1,237 (10,512)
Accretion on senior subordinated discount notes ....................... 27,456 --
Changes in assets and liabilities:
Decrease in restricted cash and short-term investments ................ -- 13,729
Decrease in accounts receivable ....................................... 3,558 6,418
Increase in prepaid expenses and other current assets ................. (190) (460)
Decrease in other assets .............................................. 3,323 1,687
Increase in accounts payable and accrued liabilities .................. 10,531 301
Decrease in accrued interest .......................................... (5,952) (984)
--------- ---------
Net cash used in operating activities ............................ (51,127) (41,833)
--------- ---------
Cash flows from investing activities:
Acquisitions of broadcasting properties ............................... (265) (14,904)
(Increase) decrease in short-term investments ......................... (6,047) 15,855
Purchases of property and equipment ................................... (26,026) (22,654)
Proceeds from sales of broadcast properties ........................... 650 27,122
Proceeds from sales of property and equipment ......................... 71 458
Proceeds from insurance recoveries .................................... 1,493 --
Other ................................................................. (571) (433)
--------- ---------
Net cash (used in) provided by investing activities .............. (30,695) 5,444
--------- ---------
Cash flows from financing activities:
Borrowings of long-term debt .......................................... 331,338 504,767
Repayments of long-term debt .......................................... (2,173) (415,488)
Preferred stock dividends paid ........................................ -- (3,783)
Redemption of preferred stock ......................................... -- (59,102)
Redemption of 12 1/4% exchange debentures ............................. (284,410) --
Payments of loan origination costs .................................... (10,304) (13,619)
Debt extinguishment premium and costs ................................. (14,302) (4,754)
Proceeds from exercise of common stock options, net ................... 1,182 2,672
Repayment of stock subscription notes receivable ...................... -- 182
--------- ---------
Net cash provided by financing activities ........................ 21,331 10,875
--------- ---------
Decrease in cash and cash equivalents ................................. (60,491) (25,514)
Cash and cash equivalents, beginning of period ........................ 83,858 51,363
--------- ---------
Cash and cash equivalents, end of period .............................. $ 23,367 $ 25,849
========= =========
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, 2002
and for the three and nine month periods ended September 30, 2002 and 2001, is
unaudited. In the opinion of management, all adjustments necessary for the fair
presentation of such financial information have been included. These adjustments
are of a normal recurring nature. Except for the adoption of Statement of
Financial Accounting Standards No. 142 described below, there have been no
changes in accounting policies since the year ended December 31, 2001. The
consolidated financial statements include the accounts of the Company and its
majority owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Certain reclassifications have been made to the
prior year's financial statements to conform to the 2002 presentation. These
financial statements, footnotes and discussions should be read in conjunction
with the financial statements and related footnotes and discussions contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001, and the definitive proxy statement for the annual meeting of stockholders
held May 3, 2002, both of which were filed with the United States Securities and
Exchange Commission.
2. ADOPTION OF SFAS 142
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") effective January 1, 2002.
SFAS 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets. Under SFAS 142, goodwill and intangible assets that
have indefinite lives are not amortized but rather are tested at least annually
for impairment. Intangible assets that have finite useful lives continue to be
amortized over their useful lives. No impairment loss was recognized upon
adoption. Under SFAS 142, the Company no longer amortizes goodwill and FCC
license intangibles (which the Company believes have indefinite lives). Under
previous accounting standards, these assets were being amortized over 25 years.
Assuming the adoption of SFAS 142 had occurred at the beginning of 2001, the
Company's net loss attributable to common stockholders for the three and nine
months ended September 30, 2001 would have been approximately $139.7 million, or
$2.16 per share, and $249.6 million, or $3.87 per share, respectively.
3. PROGRAMMING SUB-LICENSE AGREEMENT
On August 1, 2002, the Company entered into agreements with a subsidiary of
CBS Broadcasting, Inc. ("CBS") and Crown Media United States, LLC ("Crown
Media") to sublicense the Company's 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, the Company will receive approximately $47.4 million from
Crown Media, $38.6 million of which will be paid over a three-year period
commencing August 2002 and the remaining $8.8 million, for the 2002/2003 season,
will be paid over a three-year period commencing August 2003. In addition, Crown
Media is obligated to sublicense future seasons of Touched from the Company
should CBS renew the series.
Under the terms of the Company's agreement with CBS, the Company remains
obligated to CBS for amounts due under its pre-existing license agreement, less
estimated programming cost savings of approximately $15 million. As of September
30, 2002, amounts due or committed to CBS totaled approximately $70.1 million
(including commitments of approximately $18.3 million for the 2002/2003 season
to be made available in the future). The transaction resulted in a gain of
approximately $4 million, which is being deferred over the term of the Crown
Media agreement.
The Company has a significant concentration of credit risk with respect to
the amounts due from Crown Media under the sublicense agreement. As of September
30, 2002, the maximum amount of loss due to credit risk that the Company would
7
sustain if Crown Media failed to perform under the agreement totaled
approximately $31.6 million, representing the present value of amounts due from
Crown Media. Under the terms of the sublicense agreement, the Company has the
right to terminate Crown Media's rights to broadcast Touched if Crown Media
fails to make timely payments. Therefore, should Crown Media fail to perform
under the agreement, the Company could regain its exclusive rights to broadcast
Touched on PAX TV pursuant to its existing licensing agreement with CBS.
Under its agreement with CBS, the Company is required to license future
seasons of Touched from CBS if the series is renewed by CBS. Under its
sublicense agreement with Crown Media, Crown Media is obligated to sublicense
such future seasons from the Company. The Company's financial obligation to CBS
for such seasons will exceed the sublicense fees to be received from Crown
Media, resulting in accrued programming losses to the extent the series is
renewed in future seasons. During the second quarter of 2002, upon the decision
by CBS to renew Touched for the 2002/2003 season, the Company became obligated
to license the 2002/2003 season, resulting in an accrued programming loss of
approximately $10.7 million. This amount was offset in part by a reduction in
the Company's estimated loss on the 2001/2002 season of approximately $7.8
million, resulting in a net accrued programming loss of $2.9 million in the
second quarter. The change in estimate for the 2001/2002 season was due to the
sublicensing agreement with Crown Media and a lower number of episodes produced
than previously estimated.
4. ASSETS HELD FOR SALE
As described in Note 12, Subsequent Events, in October 2002, the Company
completed the sale of its television station WPXB, serving Merrimack, New
Hampshire, to NBC. The Company received cash proceeds of $26 million from the
sale. In addition, in July 2002, the Company entered into an agreement to sell
the assets of its television station KPXF, serving Fresno, California, to
Univision Communications, Inc. for a cash purchase price of $35 million. The
station sale, subject to regulatory approvals, is expected to close by December
31, 2002.
Assets held for sale consist of the following (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Intangible assets, net .... $6,705 $6,768
Property and equipment, net 2,737 3,050
Other assets .............. 34 34
------ ------
$9,476 $9,852
====== ======
Net revenues related to assets held for sale were $0.9 million and $2.7
million for the three and nine months ended September 30, 2002 and $0.7 million
and $2.0 million for the three and nine months ended September 30, 2001. Net
income (loss) related to assets held for sale were $0.2 million and $0.4 million
for the three and nine months ended September 30, 2002 and $0.0 million and
$(0.5) million for the three and nine months ended September 30, 2001.
5. JSA RESTRUCTURING
The Company has 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.
The following summarizes the activity in the Company's restructuring
reserves for the nine months ended September 30, 2002 (in thousands):
BALANCE AMOUNTS CREDITED TO BALANCE
DECEMBER 31, 2001 CASH DEDUCTIONS COSTS AND EXPENSES SEPTEMBER 30, 2002
----------------- --------------- ------------------ ------------------
Accrued Liabilities:
Lease costs............... $ 1,717 $ (769) $ (194) $ 754
Severance................. 382 (109) (273) -
---------- ---------- ---------- ---------
$ 2,099 $ (878) $ (467) $ 754
========== ========== ========== =========
8
6. SENIOR SUBORDINATED NOTES AND BANK FINANCING
Senior subordinated notes and bank financing consists of the following (in
thousands):
September 30, December 31,
2002 2001
------------- ------------
12 1/4% Senior Subordinated Discount Notes due 2009 ........ $ 496,263 $ --
10 3/4% Senior Subordinated Notes due 2008 ................. 200,000 200,000
Senior Bank Credit Facility ................................ 349,437 328,575
Other debt ................................................. 570 605
----------- ---------
1,046,270 529,180
Less: discount on 12 1/4% Senior Subordinated Discount Notes (160,469) --
Less: current portion of bank financing .................... (3,011) (2,899)
----------- ---------
$ 882,790 $ 526,281
=========== =========
In January 2002, the Company completed an offering of senior subordinated
discount notes due in 2009 (the "2002 Discount Notes"). Gross proceeds of the
offering totaled approximately $308.3 million and were used to refinance the
Company's 12 1/2% exchange debentures due 2006, which were issued in exchange
for the outstanding shares of the Company's 12 1/2% exchangeable preferred stock
on January 14, 2002, and to pay costs related to the offering. The 2002 Discount
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%. Cash interest on the
notes will be payable semi-annually beginning on July 15, 2006. The 2002
Discount Notes are guaranteed by the Company's subsidiaries. The Company
recognized an extraordinary loss due to early extinguishment of debt totaling
approximately $17.6 million in the first quarter of 2002 resulting primarily
from the redemption premium and the write-off of unamortized debt costs
associated with the repayment of the 12 1/2% exchange debentures.
The Company's senior credit facility contains various covenants restricting
the Company's ability and the ability of its subsidiaries to incur additional
indebtedness, dispose of assets, pay dividends, repurchase or redeem capital
stock and indebtedness, create liens, make capital expenditures, make certain
investments or acquisitions and enter into transactions with affiliates and
otherwise restricting its activities. On June 28, 2002, the Company and its
lenders amended the senior credit facility to, among other things, reduce the
minimum required levels of net revenues and EBITDA for certain periods under the
facility's financial covenants and allow the Company 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%, at the Company's option, and the Company paid an
amendment fee of $0.9 million. The senior credit facility was also amended in
November 2002 as described in Note 12. The senior credit facility, as amended,
contains the following financial covenants: (1) twelve-month trailing minimum
net revenue and minimum EBITDA (as defined) for each of the fiscal quarters
ended June 30, 2001 through December 31, 2004, (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 March 31, 2005, (3)
maximum annual capital expenditures for 2001 through 2006 and (4) maximum annual
programming payments for 2002 through 2006.
At September 30, 2002, the Company was in compliance with these amended
covenants. There can be no assurance that the Company will continue to be in
compliance with these covenants in future periods. If the Company were to
violate any of these covenants, the Company would be required to seek a waiver
from its lenders under the senior credit facility and possibly seek another
amendment to the senior credit facility. There can be no assurance that the
Company's lenders under its senior credit facility would grant the Company any
waiver or amendment which might become necessary. If the Company failed to meet
any of its 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 credit facility. Should an event of default be declared under
the senior credit facility, this would cause a cross default to occur under the
Company's senior subordinated notes and 2002 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
7. MANDATORILY REDEEMABLE PREFERRED STOCK
The following represents a summary of the changes in the Company's
mandatorily redeemable preferred stock during the nine month period ended
September 30, 2002 (in thousands):
SERIES B
JUNIOR SERIES A CONVERTIBLE
EXCHANGEABLE EXCHANGEABLE CONVERTIBLE EXCHANGEABLE
PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK
12 1/2% 13 1/4% 9 3/4% 8% TOTAL
--------- -------- ----------- ----------- -----------
Balance at December 31, 2001 ............ $ 279,890 $310,068 $103,140 $471,062 $ 1,164,160
Accretion ............................... 23 890 372 20,021 21,306
Accrual of cumulative dividends ......... 1,244 31,905 7,916 24,900 65,965
Exchange into debentures (see Note 6) .. (281,157) -- -- -- (281,157)
--------- -------- -------- -------- -----------
Balance at September 30, 2002 (unaudited) $ -- $342,863 $111,428 $515,983 $ 970,274
========= ======== ======== ======== ===========
Aggregate liquidation preference at
September 30, 2002 .................. $ -- $347,816 $113,571 $515,983 $ 977,370
Shares authorized ....................... -- 72,000 17,500 41,500 131,000
Shares issued and outstanding ........... -- 33,135 11,357 41,500 85,992
Accrued dividends ....................... $ -- $ 16,464 $ -- $100,983 $ 117,447
8. COMPREHENSIVE LOSS
The components of the comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
Net loss ................................. $(39,917) $(112,021) $(118,569) $(168,570)
Other comprehensive loss:
Unrealized loss on interest rate swap (1,026) (841) (2,215) (841)
-------- --------- --------- ---------
Comprehensive loss ....................... $(40,943) $(112,862) $(120,784) $(169,411)
======== ========= ========= =========
9. INCOME TAXES
The Company has recorded a provision for income taxes based on its
estimated annual income tax liability. For the three and nine months ended
September 30, 2002 and 2001, the Company recorded a valuation allowance related
to its net deferred tax asset resulting from tax losses generated during the
period. Management believes that it is more likely than not that the Company
will be unable to realize such assets.
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 (before deferred taxes). The
IRS is examining the Company's 1997 tax return and has preliminarily indicated
that it intends to propose to disallow all or part of the Company's gain
deferral. Should the IRS determine to disallow all or part of the Company's gain
deferral, the Company intends to contest such a determination and, based upon
the advice of its legal counsel, the Company believes that it is likely that it
would prevail. The Company can provide no assurance, however, that it will
prevail. Should the IRS successfully challenge the Company's position and
disallow all or part of the Company's 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 a maximum of approximately $12
million to $14 million.
10. PER SHARE DATA
Basic and diluted loss per common share was computed by dividing net loss
less dividends and accretion on redeemable preferred stock by the weighted
average number of common shares outstanding during the period. The effect of
stock options and warrants is antidilutive. Accordingly, the Company's
presentation of diluted earnings per share is the same as that of basic earnings
per share. As of September 30, 2002 and 2001, the following securities, which
could potentially dilute earnings per share in the future, were not included in
the computation of earnings per share, because to do so would have been
antidilutive (in thousands):
SEPTEMBER 30,
---------------------
2002 2001
------ ------
Stock options outstanding ................................ 12,615 12,411
Class A common stock warrants outstanding ................ 32,428 32,428
Class A common stock reserved under convertible securities 38,994 38,342
------ ------
84,037 83,181
====== ======
10
11. 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,
----------------------------
2002 2001
------------ -------
(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid for interest ........................... $ 38,052 $34,721
============ =======
Cash paid for income taxes ....................... $ 568 $ 287
============ =======
Non-cash operating and financing activities:
Barter revenue ................................... $ 377 $ 2,903
============ =======
Dividends accrued on redeemable preferred stock .. $ 65,965 $83,987
============ =======
Discount accretion on redeemable securities ...... $ 21,306 $22,761
============ =======
Notes receivable from sale of broadcast properties $ -- $ 4,792
============ =======
12. SUBSEQUENT EVENTS
On October 29 2002, the Company completed the sale of its television
station WPXB TV-60, serving Merrimack, New Hampshire, to NBC. The Company
received cash proceeds of $26.0 million from the sale.
On November 4, 2002, the Company and its lenders amended the Company's
senior credit facility to, among other things, exclude from the definition of
EBITDA certain costs which may result from the Company's 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 the amendment, the Company incurred costs of approximately
$600,000. The amendment allows the Company to exclude from EBITDA, as defined,
up to $10 million of restructuring costs the Company may incur through June 30,
2003 related to these restructuring activities. The Company intends to account
for these costs pursuant to Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"),
which the Company will early adopt in the fourth quarter of 2002. SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The Company currently
estimates it will record restructuring charges of $2.5 million to $3.0 million
in the fourth quarter of 2002. Additional costs will be recognized in 2003 as
they are incurred. In addition, the amendment allows the Company to record up to
$40 million of non-cash programming cost write downs to net realizable value
through June 30, 2003 which may be required if the Company chooses to implement
changes to its programming schedule.
On November 8, 2002, the Company entered into an agreement to sell the
assets of its television stations WMPX, serving Portland-Auburn, Maine, and
WPXO, serving St. Croix USVI, for an aggregate cash purchase price of $10
million to Corporate Media Consultants Group LLC. The station sales are subject
to regulatory approvals.
11
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 64 broadcast television stations (including three stations we
operate under time brokerage agreements) serving 59 U.S. markets. These
television stations which we own and operate reach all of the top 20 U.S.
markets and 41 of the top 50 U.S. markets. We operate PAX TV, a network that
provides family entertainment programming seven days per week and reaches
approximately 87% of prime time television households in the U.S. through our
broadcast television station group, and pursuant to distribution arrangements
with cable and satellite distribution systems and our broadcast station
affiliates.
We were founded in 1991 by Lowell W. Paxson, who remains our Chairman and
controlling stockholder. We began by purchasing radio and television stations,
and grew to become Florida's largest radio station group, while also owning two
network-affiliated television stations and other television stations that
carried principally infomercials and other paid programming. In 1997, we sold
our radio station group and our network-affiliated television stations to
concentrate on building our owned and operated television station group. We used
the proceeds from the sale of our radio station group and network-affiliated
television stations to acquire television stations and build the PAX TV network.
Since commencing our television operations in 1994, we have established the
largest owned and operated broadcast television station group in the U.S., as
measured by the number of television households in the markets our stations
serve. We launched PAX TV on August 31, 1998, and are now in our fourth network
programming season.
In September 1999, National Broadcasting Company, Inc. ("NBC") invested $415
million in our company. We have also entered into a number of agreements with
NBC that are intended to strengthen our business. Under these agreements, NBC
sells our network spot advertising and performs our network research and sales
marketing functions. We have also entered into JSAs with NBC with respect to
most of our stations serving markets also served by an NBC owned and operated
station, and with many independently owned NBC affiliated stations serving
markets also served by our stations. During the nine months ended September 30,
2002, we paid or accrued amounts due to NBC totaling approximately $14.7 million
for commission compensation and cost reimbursements incurred under our
agreements with NBC.
We derive our revenues from the sale of network spot advertising time,
network long form paid programming and station advertising:
o NETWORK SPOT ADVERTISING REVENUE. We sell commercial air time to
advertisers who want to reach the entire nationwide PAX TV viewing
audience with a single advertisement. Most of our network advertising is
sold under advance, or "upfront," commitments to purchase advertising
time, which are obtained before the beginning of our PAX TV programming
season. Network advertising rates are significantly affected by audience
ratings and our ability to reach audience demographics that are
desirable to advertisers. Higher ratings generally will enable us to
charge higher rates to advertisers. Our network advertising revenue
represented approximately 32% of our revenue during the nine months
ended September 30, 2002.
o NETWORK LONG FORM PAID PROGRAMMING. We sell air time for long form paid
programming, consisting primarily of infomercials, during broadcasting
hours when we are not airing PAX TV. Our network long form paid
programming represented approximately 32% of our revenue during the nine
months ended September 30, 2002.
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 36% of our revenue during the nine
months ended September 30, 2002. Included in station advertising revenue
is long form paid programming sold locally or nationally which
represented approximately 15% of our revenue during the nine months
ended September 30, 2002.
12
Our revenue mix has changed since we launched PAX TV in 1998. The percentage
of our revenues derived from long form paid programming has declined from more
than 90% in 1997 to 47% (combined network and television station long form) in
the nine months ended September, 2002, because of the increase in spot
advertising sales following the launch of PAX TV.
Commencing in the fourth quarter of 1999, we began entering into Joint Sales
Agreements ("JSA") with owners of broadcast stations in markets served by our
stations. After implementation of a JSA, we no longer employ our own on-site
station sales staff. The JSA partner provides station spot advertising sales
management and representation for our stations and we integrate and co-locate
our station operations with those of our JSA partners. To date, we have entered
into JSAs for 53 of our television stations which serve 50 U.S. markets.
Our primary operating expenses include selling, general and administrative
expenses, depreciation and amortization expenses, programming expenses, employee
compensation and costs associated with cable and satellite distribution, ratings
services and promotional advertising. Programming amortization is a significant
expense and is affected significantly by several factors, including the mix of
syndicated versus lower cost original programming as well as the frequency with
which programs are aired. As we acquire a more complete library of lower cost
original programming to replace our syndicated programming, our programming
amortization expense should decline.
RESULTS OF OPERATIONS
The following table sets forth net revenues, the components of operating
expenses and other operating data for the three and nine months ended September
30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------- -------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
(unaudited) (unaudited)
Gross revenues ............................................ $ 77,130 $ 72,462 $ 236,522 $ 231,657
Less: agency commissions .................................. (10,874) (10,507) (32,859) (32,655)
-------- --------- --------- ---------
Net revenues .............................................. 66,256 61,955 203,663 199,002
-------- --------- --------- ---------
Expenses:
Programming and broadcast operations ................. 12,342 10,012 37,509 30,870
Program rights amortization .......................... 19,973 20,378 58,388 66,241
Selling, general and administrative .................. 35,310 29,090 99,127 90,859
Business interruption insurance proceeds ............. -- -- (1,007) --
Time brokerage and affiliation fees .................. 1,088 894 2,990 2,727
Stock-based compensation ............................. 1,216 2,546 3,091 5,735
Adjustment of programming to net realizable value .... -- 66,992 2,900 66,992
Restructuring charge related to Joint Sales Agreements (65) -- (467) --
Depreciation and amortization ........................ 14,472 24,213 41,338 72,345
-------- --------- --------- ---------
Total operating expenses .......................... 84,336 154,125 243,869 335,769
-------- --------- --------- ---------
Operating loss ............................................ $(18,080) $ (92,170) $ (40,206) $(136,767)
======== ========= ========= =========
Other Data:
Adjusted EBITDA (a) .................................. $ (1,369) $ 2,475 $ 9,646 $ 11,032
Program rights payments and deposits ................. 32,966 35,863 91,931 94,573
Payments for cable distribution rights ............... 135 4,044 3,392 12,469
Capital expenditures ................................. 6,891 8,966 26,026 22,654
Cash flows used in operating activities .............. (20,092) (7,058) (51,127) (41,833)
Cash flows (used in) provided by investing activities (5,166) 1,728 (30,695) 5,444
Cash flows provided by financing activities .......... 4,518 3,064 21,331 10,875
(a) "Adjusted EBITDA" is defined as operating loss plus depreciation,
amortization, stock-based compensation, programming net realizable value
adjustments, restructuring and other one-time charges, and time brokerage and
affiliation fees. Adjusted EBITDA does not purport to represent cash provided by
operating activities as reflected in our consolidated statements of cash flows,
is not a measure of financial performance under generally accepted accounting
principles, and should not be considered in isolation. We believe the
presentation of adjusted EBITDA is relevant and useful because adjusted EBITDA
is a measurement industry analysts utilize when evaluating our operating
performance. We also believe adjusted EBITDA enhances an investor's
understanding of our results of operations because it measures our operating
performance exclusive of interest and other non-operating and non-recurring
13
items as well as non-cash charges for depreciation, amortization and stock-based
compensation. In evaluating adjusted EBITDA, investors should consider various
factors including its relationship to our reported operating losses and cash
flows from operating activities. Investors should be aware that adjusted EBITDA
may not be comparable to similarly titled measures presented by other companies
and could be misleading unless all companies and analysts calculate such
measures in the same manner. Adjusted EBITDA is not indicative of our cash flows
from operations and therefore does not represent funds available for our
discretionary use.
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Gross revenues increased 6.4% to $77.1 million for the three months ended
September 30, 2002 from $72.5 million for the three months ended September 30,
2001. This increase is attributable to increases in advertising revenues from
our television stations and from the PAX TV network. The increase in television
station revenues is primarily due to improved television spot advertising
revenues in our local markets partially offset by decreases in television
station long-form revenues. The increase in PAX TV network advertising revenues
resulted from overall strengthening in the network spot advertising marketplace.
Our revenues during the three months ended September 30, 2002 and 2001 were
negatively affected by the temporary loss of the broadcast signal of our New
York television station when our antenna, transmitter and other broadcast
equipment was destroyed upon the collapse of the World Trade Center on September
11, 2001. We are currently broadcasting from towers outside of Manhattan at
substantially lower height and power. We are evaluating several alternatives to
improve our signal through transmission from other locations, however we expect
it could take up to three years to replace the signal we enjoyed at the World
Trade Center location with a comparable signal. We believe the loss of a
significant portion of our over-the-air viewership in the New York market has
had a negative effect on our revenues as a result of lower ratings for the PAX
TV network and our station serving the New York market. We have property and
business interruption insurance coverage to partially mitigate the losses
sustained. Insurance recoveries are recognized in the period they become
probable of collection and can be reasonably estimated. To date we have
submitted claims for property and extra expenses of $2.7 million and estimated
business interruption losses of approximately $7.9 million and have received
$2.5 million of insurance proceeds, $1.5 million of which related to
property/extra expense and $1.0 million of which related to business
interruption. We are continuing to work with our insurance company to receive
additional insurance proceeds related to these claims, however, there can be no
assurance we will be successful in these efforts.
Programming and broadcast operations expenses were $12.3 million during the
three months ended September 30, 2002, compared with $10.0 million for the
comparable period last year. This increase is primarily due to tower rent
expense for previously owned towers that we sold in 2001, increased programming
residual costs and higher music licensing fees. Program rights amortization
expense was $20.0 million during the three months ended September 30, 2002
compared with $20.4 million for the comparable period last year. Selling,
general and administrative expenses were $35.3 million during the three months
ended September 30, 2002 compared with $29.1 million for the comparable period
last year. The increase is primarily due to higher advertising expenses
associated with the launch of our new broadcast season, legal costs related to
the NBC arbitration and higher variable selling costs related to station revenue
increases. Stock-based compensation expense was $1.2 million during the three
months ended September 30, 2002 compared with $2.5 million for the comparable
period last year. The decrease is primarily due to a reduction in options
vesting in the third quarter of 2002 compared with the same period last year.
Depreciation and amortization expense was $14.5 million during the three months
ended September 30, 2002 compared with $24.2 million for the comparable period
last year. This decrease is due primarily to the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
which requires that goodwill and intangible assets with indefinite lives,
including FCC licenses, be tested for impairment annually rather than amortized
over time. As a result of the new accounting standard, our amortization expense
is now significantly lower as we no longer amortize goodwill and FCC license
intangible assets.
Interest expense for the three months ended September 30, 2002, increased
to $22.0 million from $13.1 million in the same period in 2002. The increase is
primarily due to a greater level of debt due to our refinancing in January 2002.
At September 30, 2002, total bank financing and senior subordinated notes were
$885.8 million compared with $495.6 million as of September 30, 2001. Although
the January 2002 refinancing reduced our overall cost of capital, the
refinancing increased our debt and decreased our redeemable preferred stock and
as a result we expect our interest expense for the remainder of 2002 to be
higher than in the comparable periods in 2001. Interest income for the three
months ended September 30, 2002 decreased to $0.8 million from $1.3 million in
the same period in 2002. The decrease is primarily due to lower average cash and
short-term investment balances in 2002.
14
During the three months ended September 30, 2001, we sold three television
stations for aggregate consideration of approximately $13.0 million and realized
pre-tax gains of approximately $2.4 million on these sales.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Gross revenues increased 2.1% to $236.5 million for the nine months ended
September 30, 2002 from $231.7 million for the nine months ended September 30,
2001. This increase is primarily attributable to higher advertising revenues
from our television stations. The increase in television station revenues is
primarily due to improved television spot advertising revenues in our local
markets. Revenues from the PAX TV network for the period were relatively flat
due to a weaker upfront market for the 2001/2002 broadcast season which ended in
the third quarter of 2002. The network advertising market strengthened in the
third quarter of 2002.
As previously described, our revenues during the nine months ended September
30, 2002 were negatively affected by the temporary loss of the broadcast signal
of our New York television station when our antenna, transmitter and other
broadcast equipment was destroyed upon the collapse of the World Trade Center on
September 11, 2001. We have property and business interruption insurance
coverage to partially mitigate the losses sustained. Insurance recoveries are
recognized in the period they become probable of collection and can be
reasonably estimated. During the second quarter, we received insurance proceeds
of $2.5 million, $1.5 million of which related to property losses and $1.0
million of which related to business interruption. Insurance proceeds related to
property losses are recorded in the statement of operations as a component of
other income (expense), net of the historical cost of the assets destroyed.
Business interruption proceeds have been recorded in the accompanying statement
of operations as a reduction of our operating expenses.
Programming and broadcast operations expenses were $37.5 million during the
nine months ended September 30, 2002 compared with $30.9 million for the
comparable period last year. This increase is primarily due to tower rent
expense for previously owned towers that we sold in 2001, increased programming
residual costs and higher music licensing fees. Program rights amortization
expense was $58.4 million during the nine months ended September 30, 2002
compared with $66.2 million for the comparable period last year. The decrease is
primarily due to a greater mix of lower cost original programming versus the
comparable period last year. Selling, general and administrative expenses were
$99.1 million during the nine months ended September 30, 2002 compared with
$90.9 million for the comparable period last year. The increase is primarily due
to $3.9 million in legal fees associated with the NBC arbitration and $2.1
million of spectrum related costs as well as increased advertising expenses and
insurance costs. Stock-based compensation expense was $3.1 million during the
nine months ended September 30, 2002 compared with $5.7 million for the
comparable period last year. This decrease is due to a reduction in options
vesting during the nine months ended September 30, 2002 compared with the same
period last year. Depreciation and amortization expense was $41.3 million during
the nine months ended September 30, 2002 compared with $72.3 million for the
comparable period last year. This decrease is due primarily to the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," which requires that goodwill and intangible assets with
indefinite lives, including FCC licenses, be tested for impairment annually
rather than amortized over time. As a result of the new accounting standard, our
amortization expense is now significantly lower as we no longer amortize
goodwill and FCC license intangible assets.
Interest expense for the nine months ended September 30, 2002 increased to
$63.0 million from $37.2 million in the same period in 2001. The increase is
primarily due to a greater level of senior debt due to our refinancings in July
2001 and January 2002. Interest income for the nine months ended September 30,
2002 decreased to $1.7 million from $4.0 million in the same period in 2001. The
decrease is primarily due to lower average cash and short-term investment
balances in 2002.
15
During the nine months ended September 30, 2001, we sold five television
stations for aggregate consideration of approximately $31.9 million and realized
pre-tax gains of approximately $13.1 million on these sales.
RESTRUCTURING ACTIVITIES
During the fourth quarter of 2000, we approved a plan to restructure our
television station operations by entering into JSAs primarily with NBC affiliate
stations in each of our remaining non-JSA markets. Through September 30, 2002,
we have paid termination benefits to 83 employees totaling approximately $1.6
million and paid lease termination costs of approximately $1.7 million, which
were charged against the restructuring reserve. We have substantially completed
the JSA restructuring except for contractual lease obligations for closed
locations, the majority of which expire in 2004.
As described below, on November 4, 2002, we and our lenders amended our
senior credit facility to, among other things, exclude from the definition of
EBITDA certain costs which may result from our plan to consolidate certain of
our operations, reduce personnel and modify our programming schedule in order to
significantly reduce our cash operating expenditures. The amendment allows us to
exclude from EBITDA, as defined, up to $10 million of restructuring costs we may
incur through June 30, 2003 related to these restructuring activities. We intend
to account for these costs pursuant to Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"), which we will early adopt in the fourth quarter of
2002. SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. We currently
estimate we will record restructuring charges of $2.5 million to $3.0 million in
the fourth quarter of 2002. Additional costs will be recognized in 2003 as they
are incurred. In addition, the amendment allows us to record up to $40 million
of non-cash programming cost write downs to net realizable value through June
30, 2003 which may be required if we choose to implement changes to our
programming schedule.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are to fund capital expenditures for our
television properties, programming rights payments and debt service payments.
Our primary sources of liquidity are our net working capital, availability under
the Term A portion of our senior credit facility and proceeds from the planned
sale of certain non-core assets which are expected to generate approximately
$100 million in proceeds. To date, we have either completed or signed definitive
agreements with respect to the sale of $71 million of these assets which include
the sale of our television station serving the Merrimack, New Hampshire market
to NBC for $26 million, which we completed on October 29, 2002 and, as described
below, the pending sale of our television station serving the Fresno, California
market for $35 million and the pending sale of our television stations serving
the Portland-Auburn, Maine and St. Croix, USVI markets for $10 million. In
addition, we are currently in discussions with third parties related to the sale
of $35 million of additional non-core broadcast assets. On July 16, 2002, we
entered into an agreement to sell the assets of our television station KPXF,
serving Fresno, California, to Univision Communications, Inc. for a cash
purchase price of $35 million. The station sale, subject to regulatory
approvals, is expected to close by December 31, 2002. On November 8, 2002, we
entered into an agreement to sell the assets of our television station WMPX,
serving Portland-Auburn, Maine, and WPXO, serving St. Croix, USVI, for an
aggregate purchase price of $10 million to Corporate Media Consultants Group
LLC. These station sales are subject to regulatory approvals. We expect to
receive the proceeds related to the WMPX and WPXO sales and the remaining asset
sales in 2003. We believe that cash provided by future operations, net working
capital, available funding under the Term A portion of our senior credit
facility and the proceeds from the planned asset sales will provide the
liquidity necessary to meet our obligations and financial commitments for at
least the next twelve months. If we are unable to sell the identified assets on
acceptable terms or our financial results are not as anticipated, we may be
required to seek to sell additional assets or raise additional funds through the
offering of equity securities in order to generate sufficient cash to meet our
liquidity needs. We can provide no assurance that we would be successful in
selling assets or raising additional funds if this were to occur.
As of September 30, 2002, we had $41.6 million in cash and short-term
investments and working capital of approximately $17.5 million. During the nine
months ended September 30, 2002, our cash and short-term investments decreased
by approximately $54.4 million due primarily to the use of $38.1 million to pay
interest as well as the use of cash to fund operations including programming and
cable payments.
16
Cash used in operating activities was approximately $51.1 million and $41.8
million for the nine months ended September 30, 2002 and 2001, respectively.
These amounts primarily reflect the operating costs incurred in connection with
the operation of PAX TV and the related programming rights and cable
distribution rights payments and interest payments on our debt.
Cash (used in) provided by investing activities was approximately ($30.7)
million and $5.4 million for the nine months ended September 30, 2002 and 2001,
respectively. These amounts primarily include capital expenditures, short-term
investment transactions, and acquisitions of broadcast properties offset by
proceeds from station sales and property insurance proceeds. As of September 30,
2002, we had agreements to purchase significant assets of broadcast properties
totaling approximately $36.0 million, net of deposits and advances. We do not
anticipate spending any significant amounts to satisfy these commitments until
2005 or thereafter.
Capital expenditures were approximately $26.0 million and $22.7 million for
the nine months ended September 30, 2002 and 2001, 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, and complete the build-out of the balance of its full authorized
facilities by a later date to be established by the FCC. 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. We have commenced migration to digital broadcasting in certain of
our markets and will continue to do so throughout the required time period. We
currently have 27 stations broadcasting in digital and expect to have three more
stations broadcasting in digital by December 31, 2002. We have requested
extensions or modifications with respect to 15 of our television stations and
are awaiting construction permits from the FCC with respect to 10 of our
television stations. Nine 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, however, we cannot currently predict with reasonable certainty the amount
or timing of the expenditures we will likely have to make to complete the
digital conversion of our stations, but we currently anticipate spending at
least an additional $28 million over the next several years to complete the
conversion. We will likely fund our digital conversion from the remaining $7
million of availability under the Term A portion of our senior credit facility,
as well as cash on hand and proceeds from the sale of assets.
Cash provided by financing activities was $21.3 million and $10.9 million
during the nine months ended September 30, 2002 and 2001, respectively. These
amounts include the proceeds from the January 2002 refinancing described below,
as well as the related principal repayments, redemption premium, and refinancing
costs. Also included are proceeds from borrowings to fund capital expenditures
and proceeds from stock option exercises, net of principal repayments.
In January 2002, we completed an offering of senior subordinated discount
notes due in 2009. Gross proceeds of the offering totaled approximately $308.3
million and were used to refinance our 12 1/2% exchange debentures due 2006,
which were issued in exchange for the outstanding shares of our 12 1/2%
exchangeable preferred stock on January 14, 2002, and to pay costs related to
the offering. The notes were sold at a discounted price of 62.132% of the
principal amount at maturity, which represents a yield to maturity of 12 1/4%.
Cash interest on the notes will be payable semi-annually beginning on July 15,
2006. The senior subordinated discount notes are guaranteed by our subsidiaries.
We recognized an extraordinary loss due to early extinguishment of debt totaling
approximately $17.6 million in the first quarter of 2002 resulting primarily
from the redemption premium and the write-off of unamortized debt costs
associated with the repayment of the 12 1/2% exchange debentures.
The terms of the indentures governing our senior subordinated notes contain
covenants limiting our ability to incur additional indebtedness except for
specified indebtedness related to the funding of capital expenditures and
refinancing indebtedness. In addition, our senior credit facility also contains
covenants restricting our ability and the ability of our subsidiaries to incur
additional indebtedness, dispose of assets, pay dividends, repurchase or redeem
capital stock and indebtedness, create liens, make capital expenditures, make
17
certain investments or acquisitions and enter into transactions with affiliates
and otherwise restricting our activities. On June 28, 2002, we and our lenders
amended our senior credit facility to, among other things, reduce the minimum
required levels of net revenues and EBITDA 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%, at our option, and we paid an amendment fee of $0.9
million. Our senior credit facility, as amended, contains the following
financial covenants: (1) twelve-month trailing minimum net revenue and minimum
EBITDA (as defined in the senior credit facility) for each of the fiscal
quarters ended June 30, 2001 through December 31, 2004, (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 March
31, 2005, (3) maximum annual capital expenditures for 2001 through 2006 and (4)
maximum annual programming payments for 2002 through 2006. Our twelve-month
trailing minimum net revenue and EBITDA covenants, as amended, for the next four
quarters are as follows (in thousands):
FISCAL QUARTER ENDING MINIMUM NET REVENUES MINIMUM EBITDA
--------------------- -------------------- --------------
December 31, 2002.................... $250,000 $14,000
March 31, 2003....................... $260,000 $20,000
June 30, 2003........................ $270,000 $34,000
September 30, 2003................... $280,000 $45,000
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 network and station ratings and the success of our JSA strategy
and cost cutting 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, 2002, we were in compliance with these covenants.
There can be no assurance that we will continue to be in compliance with these
covenants in future periods. If we were to violate any of these covenants, we
would be required to seek a waiver from our lenders under our senior credit
facility and possibly seek another amendment to our senior credit facility. We
can provide no assurance that the lenders under our senior credit facility would
grant us any waiver or amendment which might become necessary. If we failed to
meet any of our debt covenants and our lenders did not grant a waiver or amend
our facility, they would have the right to declare an event of default and seek
remedies including acceleration of all outstanding amounts due under the senior
credit facility. Should an event of default be declared under the senior credit
facility, this would cause a cross default to occur under the senior
subordinated note and senior subordinated discount note indentures, thus giving
each trustee the right to accelerate repayment, 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.
As described above, on November 4, 2002, we and our lenders amended our
senior credit facility to, among other things, exclude from the definition of
EBITDA certain costs which may result from our plan to consolidate certain of
our operations, reduce personnel and modify our programming schedule. In
connection with the amendment, we incurred costs of approximately $600,000.
Obligations for program rights represent liabilities for programs available
to air as of September 30, 2002. Program rights commitments represents amounts
we are committed to pay for programs which will become available to air at
future dates. As of September 30, 2002, our programming contracts require
collective payments of approximately $100.5 million, net of amounts due from
Crown Media pursuant to our sublicensing agreement described below, as follows
(in thousands):
OBLIGATION FOR PROGRAM RIGHTS AMOUNTS DUE FROM
PROGRAM RIGHTS COMMITMENTS CROWN MEDIA TOTAL
-------------- -------------- ----------------- -----------
2002 (October--December).................... $ 23,423 $ 10,034 $ (3,217) $ 30,240
2003....................................... 35,577 11,582 (12,867) 34,292
2004....................................... 18,314 8,147 (12,867) 13,594
2005....................................... 9,964 7,574 (7,505) 10,033
2006....................................... 2,064 5,483 -- 7,547
------------ ----------- ------------ ----------
89,342 42,820 (36,456) 95,706
Amount representing interest............... -- -- 4,824 4,824
------------ ----------- ------------ ----------
$ 89,342 $ 42,820 $ (31,632) $ 100,530
============ =========== ============= ==========
18
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 televisions 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 will receive approximately $47.4 million from Crown Media, $38.6 million of
which will be paid over a three-year period commencing August 2002 and the
remaining $8.8 million of which will be paid over a three-year period commencing
August 2003. In addition, Crown Media is obligated to sub-license future seasons
from us should CBS renew the series.
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, 2002, amounts due
or committed to CBS totaled approximately $70.1 million (including commitments
of approximately $18.3 million for the 2002/2003 season to be made available in
the future). 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,
2002, the maximum amount of loss due to credit risk that we would sustain if
Crown Media failed to perform under the agreement totaled approximately $31.6
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.
Under our agreement with CBS, we are required to license future seasons of
Touched from CBS if the series is renewed by CBS. Under our sublicense agreement
with Crown Media, Crown Media is obligated to sublicense such future seasons
from us. Our financial obligation to CBS for future seasons will exceed the
sublicense fees to be received from Crown Media, resulting in accrued
programming losses to the extent the series is renewed in future seasons. During
the second quarter of 2002, upon the decision by CBS to renew Touched for the
2002/2003 season, we became obligated to license the 2002/2003 season, resulting
in an accrued programming loss of approximately $10.7 million. This amount was
offset in part by a decrease in our estimated loss on the 2001/2002 season of
approximately $7.8 million, resulting in a net accrued programming loss of $2.9
million in the second quarter. The change in estimate for the 2001/2002 season
was due to the sublicensing agreement with Crown Media and a lower number of
episodes produced than previously estimated.
As of September 30, 2002, obligations for cable distribution rights require
collective payments by us of approximately $10.0 million as follows (in
thousands):
2002 (October--December)........................... $ 9,275
2003............................................... 362
2004............................................... 191
2005............................................... 180
-----------
10,008
Less: Amount representing interest................. (40)
-----------
Present value of cable rights payable.............. $ 9,968
===========
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
19
information contained herein and which could cause actual results to differ from
those anticipated in our forward-looking statements or could otherwise adversely
affect our business or financial condition include those set forth in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2001, as filed with
the U.S. Securities and Exchange Commission, along with the following updates to
our Form 10-K disclosures.
IF OUR TELEVISION PROGRAMMING DOES NOT ATTRACT SUFFICIENT NUMBERS OF VIEWERS IN
DESIRABLE DEMOGRAPHIC GROUPS, OUR ADVERTISING REVENUE COULD DECREASE.
Our success depends upon our ability to generate advertising revenues,
which constitute substantially all of our operating revenues. Our ability to
generate advertising revenues in turn largely depends upon our ability to
provide programming which attracts sufficient numbers of viewers in desirable
demographic groups to generate audience ratings that advertisers will find
attractive. We cannot assure you that our programming will attract sufficient
targeted viewership or that, whether or not it achieves favorable ratings, we
will be able to generate enough advertising revenues to achieve profitability.
Our ratings depend partly upon unpredictable and volatile factors beyond our
control, such as viewer preferences, competing programming and the availability
of other entertainment activities. A shift in viewer preferences could cause our
programming not to gain popularity or to decline in popularity, which could
adversely affect our advertising revenues. We may not be able to anticipate and
react effectively to shifts in viewer tastes and interests in our markets or to
generate sufficient demand and market acceptance for our programming. Further,
we acquire rights to our syndicated programming under multi-year commitments,
and it is difficult to accurately predict how a program will perform in relation
to its cost. In some instances, we must replace programs before their costs have
been fully amortized, resulting in write-offs that increase our operating costs.
We cannot assure you that our programming costs will not increase to a degree
which may materially adversely affect our operating results. In addition, we
incur production, talent and other ancillary costs to produce original programs
for PAX TV. We cannot assure you that our original programming will generate
advertising revenues in excess of our programming costs.
WE BELIEVE THAT NBC'S ACQUISITION OF THE TELEMUNDO GROUP CREATES REGULATORY
OBSTACLES WHICH MAKE IT UNLIKELY THAT NBC WOULD BE ABLE TO ACQUIRE OUR COMPANY
ABSENT SIGNIFICANT REGULATORY CHANGES.
We believe that NBC's acquisition of the Telemundo Group's television
stations creates serious additional regulatory obstacles to NBC's ability to
acquire control of us. It is highly unlikely that NBC would be able to obtain
the regulatory approvals necessary to enable it to acquire control of us without
significant changes in FCC rules and our agreement to divest some of our most
significant television station assets, which in turn could have a material
adverse effect upon the value of our company. We believe these factors
substantially reduce the likelihood of NBC acquiring more of our shares and
control of our company. In December 2001, we commenced a binding arbitration
proceeding against NBC in which we asserted that NBC had breached its agreements
with us and breached its fiduciary duty to us and to our shareholders. In
September 2002, the arbitrator ruled against us on all of our claims, denying us
any of the relief we had sought with respect to what we believed to be NBC's
wrongful actions. Accordingly, the provisions of our agreements with NBC remain
in effect without change.
We have significant operating relationships with NBC which have been
developed since NBC's investment in us in September 1999. NBC serves as our
exclusive sales representative to sell most of our PAX TV network advertising
and is the exclusive national sales representative for most of our stations. We
have entered into JSAs with NBC owned or NBC affiliated stations with respect to
48 of our television stations. Each JSA typically provides for our JSA partner
to serve as our exclusive sales representative to sell our local station
advertising and for many of our station's operations to be integrated and
co-located with those of the JSA partner. Should NBC or the NBC affiliates elect
not to renew the agreements under which these operating relationships have been
implemented, we could be required to incur significant costs to resume
performing the advertising sales and other operating functions currently
performed by NBC and our JSA partners, including the expense of re-establishing
office and studio facilities separate from those of the JSA partners, or to
transfer performance of these functions to another broadcast television station
operator. Our network and station revenues could also be adversely affected 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.
20
WE MAY NOT BE ABLE TO REDEEM OUR SECURITIES HELD BY NBC WERE NBC TO DEMAND THAT
WE DO SO AND THIS COULD HAVE ADVERSE CONSEQUENCES FOR US.
NBC has the right, at any time that the FCC renders a final decision that
NBC's investment in us is "attributable" to NBC (as that term is defined under
applicable rules of the FCC), or for a period of 60 days beginning on September
15, 2002 and on each September 15 after 2002, to demand that we redeem, or
arrange for a third party to acquire, any shares of our Series B preferred stock
then held by NBC. With respect to the period that began on September 15, 2002,
we have agreed with NBC to extend the duration of this period for an additional
30 days, expiring on December 13, 2002. Our ability to affect any redemption is
restricted by the terms of our outstanding debt and preferred stock. NBC also
has the right to demand that we redeem any Series B preferred stock and Class A
common stock issued upon conversion of the Series B preferred stock then held by
NBC upon the occurrence of various events of default. Should we fail to effect a
redemption within prescribed time periods, NBC generally will be permitted to
transfer, without restriction, any of our securities acquired by it, its right
to acquire Mr. Paxson's Class B common stock, the contractual rights described
above, and its other rights under the related transaction agreements. Should we
fail to effect a redemption triggered by an event of default on our part within
180 days after demand, NBC will have the right to exercise in full its existing
warrants to purchase shares of our Class A common stock and its right to acquire
Mr. Paxson's Class B common stock at reduced prices. If NBC does not exercise
these rights, we will have another 30 day period to affect a redemption. If we
then fail to effect a redemption, NBC may require us to conduct, at our option,
a public sale or liquidation of our assets, after which time NBC will not be
permitted to exercise its rights to acquire more of our securities.
Should NBC exercise any of its redemption rights, we may not have
sufficient funds to pay the redemption price for the securities to be redeemed
and may not be able to identify another party willing to purchase those
securities at the required redemption prices. If we 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 or, in the case
of a default by us, requiring us to effect a public sale or liquidation of our
assets. The occurrence of any of these events could have a material adverse
effect upon us.
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 (before deferred taxes). The IRS is examining our 1997 tax return and has
preliminarily indicated that it intends to propose to disallow all or part of
our gain deferral. Should the IRS determine to disallow all or part of our gain
deferral, we intend to contest such a determination and, based upon the advice
of our legal counsel, we believe that it is likely that we would prevail. We can
provide no assurance, however, that we will prevail. 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 a maximum of approximately $12 million
to $14 million.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the filing date of this report, 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 rule 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 decision regarding required
disclosure.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in litigation from time to time in the ordinary course of
our business. We believe the ultimate resolution of these matters will not have
a material effect on our financial position or results of operations or cash
flows.
In December 2001, we commenced a binding arbitration proceeding against NBC
in which we asserted that NBC has breached its agreements with us and has
breached its fiduciary duty to us and to our shareholders. We have asserted that
NBC's proposed acquisition of Telemundo Group (which was completed in April
2002) violates the terms of the agreements governing the investment and
partnership between us and NBC. In September 2002, the arbitrator ruled against
us on all of our claims, denying us any of the relief we had sought with respect
to what we believed to be NBC's wrongful actions. Accordingly, the provisions of
our agreements with NBC remain in effect without change.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1.1 Certificate of Incorporation of the Company (1)
3.1.6 Certificate of Designation of the Company's 9-3/4% Series A Convertible
Preferred Stock (2)
3.1.7 Certificate of Designation of the Company's 13-1/4% Cumulative Junior
Exchangeable Preferred Stock (2)
3.1.8 Certificate of Designation of the Company's 8% Series B Convertible
Exchangeable Preferred Stock (3)
3.2 Bylaws of the Company (4)
4.6 Indenture, dated as of July 12, 2001, among the Company, the Subsidiary
Guarantors party thereto, and The Bank of New York, as Trustee, with
respect to the Company's 10-3/4% Senior Subordinated Notes due 2008 (5)
4.7 Credit Agreement, dated as of July 12, 2001, among the Company, the
Lenders party thereto, Citicorp USA, Inc., as Administrative Agent for
the Lenders and as Collateral Agent for the Secured Parties, Union Bank
of California, N.A., as Syndication Agent for the Lenders, and CIBC
Inc. and General Electric Capital Corporation, as Co-Documentation
Agents for the Lenders (5)
4.7.1 Amendment No. 1, dated as of January 7, 2002, to the Credit Agreement,
dated as of July 12, 2001, amount the Company, the Lenders party
thereto, and Citicorp USA, Inc., as Administrative Agent for the
Lenders (6)
4.7.2 Amendment No. 2, dated as of June 28, 2002, to the Credit Agreement,
dated as of July 12, 2001, among the Company, the Lenders party
thereto, and Citicorp USA, Inc., as Administrative Agent for the
Lenders (7)
4.7.3 Amendment No. 3, dated as of November 4, 2002, to the Credit Agreement,
dated as of July 12, 2001, among the Company, the Lenders party
thereto, and Citicorp USA, Inc., as Administrative Agent for the
Lenders
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 (8)
99.1 Certification by the Chief Executive Officer of Paxson Communications
Corporation submitted to the Securities and Exchange Commission
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial Officer of Paxson Communications
Corporation submitted to the Securities and Exchange Commission
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- ----------------
(1) Filed with the Company's Annual Report on Form 10-K, dated December 31,
1995, and incorporated herein by reference.
(2) Filed with the Company's Registration Statement on Form S-4, as amended,
filed July 23, 1998, Registration No. 333-59641, and incorporated herein
by reference.
(3) Filed with the Company's Form 8-K, dated September 15, 1999, and
incorporated herein by reference.
(4) Filed with the Company's Quarterly Report on Form 10-Q, dated March 31,
2001, and incorporated herein by reference.
23
(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 Quarterly Report on Form 10-Q, dated June 30,
2002, and incorporated herein by reference.
(7) Filed with the Company's Form 8-K, dated June 28, 2002, and incorporated
herein by reference.
(8) Filed with the Company's Annual Report on Form 10-K, dated December 31,
2001, and incorporated herein by reference.
(b) Reports on Form 8-K. During the quarter ended September 30, 2002, the
Company filed the following reports on Form 8-K
Form 8-K, dated July 18, 2002, under Item 5. "Other Events" reporting that
Univision Communications, Inc. agreed to acquire the Company's television
station KPXF (TV), serving the Fresno-Visalia, California market, for a
cash purchase price of $35 million.
Form 8-K, dated August 14, 2002, under Item 9. "Regulation FD Disclosure"
disclosing certifications by the Chief Executive Officer and the Chief
Financial Officer of the Company required pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, in conjunction with the filing of the Company's Report on Form 10-Q
for the quarter ended June 30, 2002.
Form 8-K, dated September 23, 2002, under Item 5. "Other Events" reporting
that the arbitrator denied the Company's claims under the binding
arbitration proceeding commenced by the Company against National
Broadcasting Company, Inc. in December 2001.
24
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, 2002
By: /s/ Ronald L. Rubin
----------------------------------------
Ronald L. Rubin
Vice President
Chief Accounting Officer and Corporate
Controller
(Principal Accounting Officer)
25
CERTIFICATIONS
I, Jeffrey Sagansky, President and Chief Executive Officer of Paxson
Communications Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Paxson
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ JEFFREY SAGANSKY
- --------------------
Jeffrey Sagansky
President and Chief Executive Officer (Principal Executive Officer)
Dated: November 14, 2002
26
I, Thomas E. Severson, Jr., Senior Vice President and Chief Financial Officer of
Paxson Communications Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Paxson
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ THOMAS E. SEVERSON JR.
- --------------------------
Thomas E. Severson, Jr.
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
Dated: November 14, 2002
27