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Ion Media Networks Inc. – ‘10-Q’ for 9/30/97

As of:  Friday, 11/14/97   ·   For:  9/30/97   ·   Accession #:  950144-97-12414   ·   File #:  1-13452

Previous ‘10-Q’:  ‘10-Q’ on 8/14/97 for 6/30/97   ·   Next:  ‘10-Q’ on 5/11/98 for 3/31/98   ·   Latest:  ‘10-Q’ on 11/13/07 for 9/30/07

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/14/97  Ion Media Networks Inc.           10-Q        9/30/97    9:1.8M                                   Bowne of Atlanta Inc/FA

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Paxson Communications Corporation Form 10-Q           23    151K 
 2: EX-4.2      Fourth Amend. to Amended & Restated Credit Agrmt.      9     29K 
 3: EX-4.3      Credit Agreement                                     343   1.08M 
 4: EX-10.181   Asset Purchase Agreement                              42    168K 
 5: EX-10.182   Stock Purchase Agreement                             127    410K 
 6: EX-10.183   Stock Purchase Agreement                             139    439K 
 7: EX-10.184   Asset Purchase Agreement                              42    173K 
 8: EX-10.185   Asset Purchase Agreement                             103    442K 
 9: EX-27       Financial Data Schedule                                1      7K 


10-Q   —   Paxson Communications Corporation Form 10-Q
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Financial Statements
"Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20
"Item 6. Exhibits and Reports on Form 8-K 21-22
15Announced TV Acquisitions
19Programming Commitments
21Item 1. Legal Proceedings
"Item 6. Exhibits and Reports on Form 8-K
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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, 1997 ------------------------------ OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ----------- Commission File Number 1-13452 ------- PAXSON COMMUNICATIONS CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 59-3212788 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 601 CLEARWATER PARK ROAD WEST PALM BEACH, FLORIDA 33401 ------------------------ ------------------- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 659-4122 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the proceeding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 1997: CLASS OF STOCK NUMBER OF SHARES ---------------------------- ---------------------- COMMON STOCK-CLASS A, $0.001 PAR VALUE PER SHARE ----------------------- 50,651,000 COMMON STOCK-CLASS B, $0.001 PAR VALUE PER SHARE ----------------------- 8,311,639
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PAXSON COMMUNICATIONS CORPORATION INDEX [Download Table] Page ---- Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets September 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations Nine Months Ended September 30, 1997 and 1996 4 Consolidated Statements of Operations Three Months Ended September 30, 1997 and 1996 5 Consolidated Statement of Changes in Common Stockholders' Equity 6 Consolidated Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996 7-8 Notes to Consolidated Financial Statements 9-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 Part II - Other Information Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 21-22 Signatures 23 2
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PAXSON COMMUNICATIONS CORPORATION Consolidated Balance Sheets [Enlarge/Download Table] September 30, December 31, 1997 1996 ------------- ------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 23,716,665 $ 61,748,788 Accounts receivable, less allowance for doubtful accounts of $1,654,697 and $1,576,593 respectively 22,958,176 29,860,998 Prepaid expenses and other current assets 3,638,350 2,713,565 Current program rights -- 1,512,019 ------------- ------------- Total current assets 50,313,191 95,835,370 Property and equipment, net 150,845,360 144,415,412 Intangible assets, net 386,572,723 220,409,421 Investments in broadcast properties 83,392,463 53,297,022 Investment in cable network 57,587,882 -- Program rights, net -- 1,075,536 Other assets, net 54,525,470 28,149,699 ------------- ------------- Total assets $ 783,237,089 $ 543,182,460 ============= ============= LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 10,686,896 $ 10,676,692 Accrued interest 14,950,695 6,684,373 Current portion of program rights payable -- 1,628,959 Current portion of long-term debt 635,067 644,509 ------------- ------------- Total current liabilities 26,272,658 19,634,533 Program rights payable -- 1,000,260 Deferred gain 12,100,000 -- Long-term debt 122,722,666 3,407,688 Senior subordinated notes, net 227,877,914 227,655,096 Redeemable Cumulative Compounding Junior preferred stock, $0.001 par value; 12% dividend rate per annum, 33,000 shares authorized, issued and outstanding 41,115,514 36,780,496 Redeemable Exchangeable Preferred stock, $0.001 par value; 12.5% dividend rate per annum, 440,000 shares authorized, 150,000 shares issued and outstanding 162,968,468 147,929,150 Class A common stock, $0.001 par value; one vote per share; 150,000,000 shares authorized, 50,638,000 shares issued and outstanding 50,638 40,442 Class B common stock, $0.001 par value; ten votes per share, 35,000,000 shares authorized, 8,311,639 shares issued and outstanding 8,312 8,312 Class C common stock, $0.001 par value; non-voting; 12,500,000 shares authorized, 0 shares issued and outstanding -- -- Class A & B common stock warrants 2,316,225 6,862,647 Class C common stock warrants -- 2,335,528 Stock subscription notes receivable (2,813,250) (1,873,139) Additional paid-in capital 284,261,419 209,621,241 Deferred option plan compensation (4,200,970) (6,397,916) Accumulated deficit (89,442,505) (103,821,878) Commitments and contingencies ------------- ------------- Total liabilities, redeemable securities and common stockholders' equity $ 783,237,089 $ 543,182,460 ============= ============= The accompanying Notes to Consolidated Financial Statements are an integral part of the consolidated financial statements. 3
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PAXSON COMMUNICATIONS CORPORATION Consolidated Statements of Operations [Enlarge/Download Table] For the Nine Months Ended September 30, ---------------------------- 1997 1996 ------------ ------------ (Unaudited) Revenue: Local and national advertising $ 60,134,884 $ 41,799,175 Other 1,003,364 1,079,003 Trade and barter 114,935 119,380 ------------ ------------ Total revenue 61,253,183 42,997,558 Operating expenses: Direct 10,184,929 7,328,668 Programming 2,860,906 1,724,135 Sales and promotion 3,209,806 2,515,029 Technical 6,475,845 3,000,227 General and administrative 17,902,283 13,682,638 Trade and barter 214,719 1,849 Time brokerage agreement fees 8,279,699 2,035,859 Option plan compensation 2,154,003 2,345,866 Depreciation and amortization 14,787,998 8,548,508 ------------ ------------ Total operating expenses 66,070,188 41,182,779 ------------ ------------ Operating (loss) income (4,817,005) 1,814,779 Other income (expense): Interest expense (27,695,908) (22,287,251) Interest income 3,316,238 5,323,929 Other expense, net (3,127,364) (689,189) ------------ ------------ Loss from continuing operations (32,324,039) (15,837,732) Discontinued operations: Income (loss) from discontinued operations, net of applicable income taxes (63,224) 2,128,786 Gain on sale, net of applicable income taxes 66,190,291 -- ------------ ------------ Income from discontinued operations 66,127,067 2,128,786 ------------ ------------ Net income (loss) 33,803,028 (13,708,946) Dividends and accretion on preferred stock and common stock warrants (19,423,655) (9,877,126) ------------ ------------ Net income (loss) attributable to common stock and common stock equivalents $ 14,379,373 $(23,586,072) ============ ============ Income (loss) per common share: Loss from continuing operations $ (0.56) $ (0.37) Income from discontinued operations 1.14 0.05 ------------ ------------ Net income (loss) 0.58 (0.32) Dividends and accretion on preferred stock and common stock warrants (0.33) (0.23) ------------ ------------ Net income (loss) attributable to common stock and common stock equivalents $ 0.25 $ (0.55) ============ ============ Weighted average common stock and common stock equivalents outstanding 57,896,733 42,721,280 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of the consolidated financial statements. 4
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PAXSON COMMUNICATIONS CORPORATION Consolidated Statements of Operations [Download Table] For the Three Months Ended September 30, ---------------------------- 1997 1996 ------------ ------------ (Unaudited) Revenue: Local and national advertising $ 23,499,947 $ 14,571,696 Other 214,877 358,992 Trade and barter 64,020 19,819 ------------ ------------ Total revenue 23,778,844 14,950,507 Operating expenses: Direct 3,468,352 2,755,982 Programming 898,714 675,526 Sales and promotion 1,613,900 1,033,208 Technical 2,410,400 1,225,979 General and administrative 5,931,697 5,254,563 Trade and barter 162,976 -- Time brokerage agreement fees 5,879,004 794,948 Option plan compensation 722,166 308,200 Depreciation and amortization 5,854,249 3,576,510 ------------ ------------ Total operating expenses 26,941,458 15,624,916 ------------ ------------ Operating loss (3,162,614) (674,409) Other income (expense): Interest expense (9,764,884) (7,240,166) Interest income 622,964 1,290,465 Other expense, net (2,505,537) (74,626) ------------ ------------ Loss from continuing operations (14,810,071) (6,698,736) Discontinued operations: Income from discontinued operations, net of applicable income taxes 567,962 995,119 Gain on sale, net of applicable income taxes 13,985,511 -- ------------ ------------ Income from discontinued operations 14,553,473 995,119 ------------ ------------ Net loss (256,598) (5,703,617) Dividends and accretion on preferred stock and common stock warrants (6,726,032) (2,463,092) ------------ ------------ Net loss attributable to common stock and common stock equivalents $ (6,982,630) $ (8,166,709) ============ ============ Income (loss) per common share: Loss from continuing operations $ (0.24) $ (0.14) Income from discontinued operations 0.24 0.02 ------------ ------------ Net income (loss) 0.00 (0.12) Dividends and accretion on preferred stock and common stock warrants (0.11) (0.05) ------------ ------------ Net income (loss) attributable to common stock and common stock equivalents $ (0.11) $ (0.17) ============ ============ Weighted average common stock and common stock equivalents outstanding 61,546,251 46,983,274 ============ ============ The accompanying Notes to Consolidated Financial Statements are an integral part of the consolidated financial statements. 5
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PAXSON COMMUNICATIONS CORPORATION Consolidated Statement of Changes in Common Stockholders' Equity [Enlarge/Download Table] Common Stock Class A&B Stock ------ ----- Common Class C Subscription Class Class Class Stock Common Stock Notes A B C Warrants Warrants Receivable ------------------------------------------------------------------------- Balance at December 31, 1995 $26,227 $8,312 $ -- $ -- $ 5,338,952 $ (115,714) Release of Put option on Class A&B common stock warrants 9,116,399 Issuance of common stock, net of issuance costs 10,300 Exercise of Class A,B&C common stock warrants 3,623 (2,253,752) (3,003,424) Stock issued for Todd Communications acquisition 139 Deferred option plan compensation Option plan compensation Increase in stock subscription notes receivable (1,873,139) Stock options exercised 153 Repayment of stock subscription note receivable 115,714 Dividends on redeemable preferred stock Accretion on Senior redeemable preferred stock Accretion on Series B preferred stock Accretion on Junior preferred stock Accretion on Redeemable Exchangeable preferred stock Accretion on Class A & B common stock warrants Net loss ------- ------ ----- ----------- ---------- ----------- Balance at December 31, 1996 40,442 8,312 -- 6,862,647 2,335,528 (1,873,139) Deferred option plan compensation (unaudited) Option plan compensation (unaudited) Exercise of Class A, B & C common stock warrants (unaudited) 3,923 (4,546,422) (2,335,528) Stock issued for acquisitions (unaudited) 6,069 Stock options exercised (unaudited) 204 Increase in stock subscription receivable (unaudited) (940,111) Dividends on redeemable preferred stock (unaudited) Accretion on Junior preferred stock (unaudited) Accretion on Redeemable Exchangeable preferred stock (unaudited) Net income (unaudited) ------- ------ ----- ----------- ----------- ----------- Balance at September 30, 1997 (unaudited) $50,638 $8,312 $ -- $ 2,316,225 $ -- $(2,813,250) ======= ====== ===== =========== =========== =========== Deferred Additional Option Paid-in Plan Accumulated Capital Compensation Deficit ----------------------------------------------- Balance at December 31, 1995 $ 34,342,086 $ (1,384,267) $ (55,694,393) Release of Put option on Class A&B common stock warrants Issuance of common stock, net of issuance costs 154,789,700 Exercise of Class A,B&C common stock warrants 5,253,548 Stock issued for Todd Communications acquisition 1,534,967 Deferred option plan compensation 12,932,506 (12,932,506) Option plan compensation 7,918,857 Increase in stock subscription notes receivable Stock options exercised 768,434 Repayment of stock subscription note receivable Dividends on redeemable preferred stock (13,223,227) Accretion on Senior redeemable preferred stock (1,805,599) Accretion on Series B preferred stock (3,418,615) Accretion on Junior preferred stock (650,084) Accretion on Redeemable Exchangeable preferred stock (159,977) Accretion on Class A & B common stock warrants (2,651,082) Net loss (26,218,901) ------------ ------------ ------------- Balance at December 31, 1996 209,621,241 (6,397,916) (103,821,878) Deferred option plan compensation (unaudited) 946,247 (946,247) Option plan compensation (unaudited) 3,143,193 Exercise of Class A, B & C common stock warrants (unaudited) 6,878,027 Stock issued for acquisitions (unaudited) 66,118,931 Stock options exercised (unaudited) 696,973 Increase in stock subscription receivable (unaudited) Dividends on redeemable preferred stock (unaudited) (18,422,373) Accretion on Junior preferred stock (unaudited) (499,155) Accretion on Redeemable Exchangeable preferred stock (unaudited) (502,127) Net income (unaudited) 33,803,028 ------------ ------------ ------------- Balance at September 30, 1997 (unaudited) $284,261,419 $ (4,200,970) $ (89,442,505) ============ ============ ============= The accompanying Notes to Consolidated Financial Statements are an integral part of the consolidated financial statements. 6
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PAXSON COMMUNICATIONS CORPORATION Consolidated Statements of Cash Flows [Enlarge/Download Table] For the Nine Months Ended September 30, ---------------------------------- 1997 1996 ------------ ------------ (Unaudited) Cash flows from operating activities: Net income (loss) $ 33,803,028 $ (13,708,946) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 28,237,081 18,378,035 Option plan compensation 3,143,193 2,727,223 Program rights amortization 703,789 1,080,430 Provision for doubtful accounts 1,272,526 799,753 Loss on sale or disposal of assets 1,296,768 61,392 Gain on sales of discontinued operations, net (66,190,291) - Changes in assets and liabilities: Decrease (increase) in accounts receivable 4,793,385 (5,622,924) Increase in prepaid expenses and other current assets (1,079,112) (1,859,823) (Increase) decrease in other assets (8,692,047) 6,727,610 (Decrease) increase in accounts payable and accrued liabilities (1,453,020) 7,362,422 Increase in accrued interest 8,266,322 6,436,406 ------------- ------------- Net cash provided by operating activities 4,101,622 22,381,578 ------------- ------------- Cash flows from investing activities: Acquisitions of broadcast properties (196,936,733) (146,040,428) Increase in deposits on broadcast properties (23,940,000) (8,427,000) Increase in investments in broadcast properties (14,696,441) (22,773,992) Purchases of property and equipment (35,820,084) (22,931,929) Increase in investment in cable network (1,462,882) - Deposits made on buildings and equipment (276,000) - Proceeds from sales of discontinued operations, net 100,504,687 - Proceeds from sales of assets 12,233,790 228,279 ------------- ------------- Net cash used in investing activities (160,393,663) (199,945,070) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock, net - 154,800,000 Proceeds from long-term debt 120,000,000 17,700,000 Payments of long-term debt (694,464) (28,071,481) Proceeds from exercise of common stock options, net 697,177 489,149 Increase in stock subscription notes receivable (940,111) - Repayments of stock subscription notes receivable - 98,214 Payments for program rights (802,684) (1,150,659) ------------- ------------- Net cash provided by financing activities 118,259,918 143,865,223 ------------- ------------- Decrease in cash and cash equivalents (38,032,123) (33,698,269) ------------- ------------- Cash and cash equivalents at beginning of period 61,748,788 68,070,990 ------------- ------------- Cash and cash equivalents at end of period $ 23,716,665 $ 34,372,721 ============= ============= The accompanying Notes to Consolidated Financial Statements are an integral part of the consolidated financial statements. 7
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PAXSON COMMUNICATIONS CORPORATION Consolidated Statements of Cash Flows (continued) [Enlarge/Download Table] For the Nine Months Ended September 30, -------------------------------- 1997 1996 ----------- ----------- (Unaudited) Supplemental disclosures of cash flow information: Cash paid for interest $17,909,952 $14,694,387 =========== =========== Cash paid for income taxes $ - $ - =========== =========== Non-cash operating and financing activities: Accretion of discount on senior subordinated notes $ 222,818 $ 202,209 =========== =========== Issuance of common stock for Travel Channel and WVVI- TV acquisitions $66,125,000 $ - =========== =========== Issuance of common stock for Todd Communications acquisition $ - $ 1,535,106 =========== =========== Note payable incurred for WOCD-TV acquisition $ - $ 1,650,000 =========== =========== Dividends accreted on redeemable preferred stock $18,422,373 $ 6,175,339 =========== =========== Accretion on redeemable securities $ 1,001,282 $ 3,701,787 =========== =========== Trade and barter revenue $ 3,549,877 $ 2,728,554 =========== =========== Trade and barter expense $ 3,680,232 $ 2,048,538 =========== =========== The accompanying Notes to Consolidated Financial Statements are an integral part of the consolidated financial statements. 8
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PAXSON COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation Paxson Communications Corporation's (the "Company") financial information contained in the financial statements and notes thereto as of September 30, 1997 and for the nine and three month periods ended September 30, 1997 and 1996, are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of such financial information have been included. These adjustments are of a normal recurring nature. There have been no changes in accounting policies since the period ended December 31, 1996. The composition of accounts has significantly changed since December 31, 1996 to reflect the operations of acquisitions discussed elsewhere herein and as a result of operations sold or to be sold as discussed below. 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 with the 1997 presentation. These financial statements, footnotes, and discussions should be read in conjunction with the December 31, 1996 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, 1996, Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997, and the definitive proxy statement for the annual meeting of stockholders held May 16, 1997, and Forms 8-K dated January 10, 1997, April 29, 1997 and October 1, 1997, all of which were filed with the United States Securities and Exchange Commission. 2. Discontinued Operations On June 23, 1997, the Company announced that it entered into a letter of intent to sell its radio segment, including radio stations currently under acquisition contracts, to Clear Channel Metroplex, Inc. and Clear Channel Metroplex Licenses, Inc. (collectively "Clear Channel"). On August 25, 1997, the Company entered into Asset Purchase Agreements ("Asset Purchase Agreements") with Clear Channel and L.Paxson, Inc. ("LPI") pursuant to which the Company agreed to sell substantially all of its radio segment assets, in five groups, and stations under acquisition contracts for approximatley $629 million. LPI is controlled by Lowell W. Paxson ("Mr. Paxson"), the Chairman of the Board, Chief Executive Officer and controlling shareholder of the Company. The sale of certain of the assets was structured as a tax free exchange, potentially permitting the Company to defer the gain on the sale of those assets for tax purposes. The Company does not anticipate an operating loss during the phase-out period of this segment. Because of the decision to sell substantially all of the radio segment, the results of operations for Paxson Radio, net of applicable income tax, have been presented as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented. Pursuant to certain of the Asset Purchase Agreements, on October 1, 1997, the Company sold its interests in its radio networks and Orlando, Florida billboard operations to Clear Channel for $25.7 million and sold its interests in 23 of its 42 radio stations to LPI for approximately $369.4 million in cash and a note issued by LPI in the amount of $58.9 million. The note bears interest at 7% and is payable upon the earlier of (i) eighteen months from the date of issuance or (ii) the closing of the sale of the LPI owned radio stations to Clear Channel under the Asset Purchase Agreements. The Company will receive $6.3 million in interest on the note if the note is outstanding for the eighteen months or in the form of a prepayment penalty if the note is paid before maturity. Also, on October 1, 1997, Clear Channel began operating the Company's remaining 19 radio stations and all of LPI's radio stations pursuant to Time Brokerage or Time Sales Agreements. The Company's and LPI's radio station assets are expected to be sold to Clear Channel in the fourth quarter of 1997 upon receipt of regulatory approvals. In addition to payment of the aforementioned LPI note, the Company expects to receive additional consideration of approximately $140.2 million upon the sale of the remaining radio station assets. The Company previously contracted to purchase three radio stations in West Palm Beach, Florida. The Company's rights pursuant to these agreements and its obligations to sell these stations to Clear Channel under the Asset Purchase Agreements were assigned to LWP Radio, Inc. ("LWP"). LWP is also controlled by Mr. Paxson. LWP purchased the assets of these radio stations for approximately $28.6 million using funds loaned by Clear Channel for the acquisitions and Clear Channel began operating these radio stations pursuant to Time Brokerage Agreements on October 3, 1997. These station assets are expected to be sold to Clear Channel by LWP at their cost of approximately $28.6 million in the fourth quarter of 1997 upon receipt of regulatory approvals. LPI and LWP are not expected to realize any direct financial benefit from these transactions with the Company. During October 1997, the Company sold the remainder of its billboard assets located in Tampa, Florida to Universal Outdoor, Inc. for total consideration of approximately $4.5 million. 9
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The Company intends to use the proceeds of the previously described transactions primarily to complete announced television station acquisitions and for programming payments as discussed elsewhere herein. The following table sets forth the actual and pro forma selected balance sheet amounts of the Company as of September 30, 1997. Pro forma amounts give effect to the sale of the radio segment. [Download Table] As of September 30, 1997 ------------------------ Actual Pro forma -------- --------- Assets (in thousands) Cash and cash equivalents $ 23,717 $ 194,111 Other current assets 26,596 7,283 -------- ---------- Total current assets 50,313 201,394 -------- ---------- Property and equipment, net 150,845 96,996 Intangible assets, net 386,573 178,755 Cash held by qualified intermediary - 434,606 Investments and Other assets 195,506 189,557 -------- ---------- Total assets $783,237 $1,101,308 ======== ========== Total current liabilities $ 26,273 $ 41,302 Deferred income taxes - 115,260 (Accumulated deficit) Retained earnings (89,443) 98,614 Other liabilities and equity 846,407 846,132 -------- ---------- Total liabilities and equity $783,237 $1,101,308 ======== ========== For additional discussion and explanation of significant pro forma adjustments, see the Company's Form 8-K dated October 1, 1997 filed with the United States Securities and Exchange Commission. The Paxson Radio operations generated revenues of approximately $78,190,000 and $52,481,000, and $26,978,000 and $20,854,000, for the nine and three month periods ended September 30, 1997 and 1996, respectively. During the third quarter the Company completed the sale of its Network Affiliated Television operations. Aggregate consideration of $119 million was received in conjunction with these sales during the second and third quarters of 1997. The Paxson Network Affiliated Television operations generated revenues of approximately $12,319,000 and $14,023,000, and $1,540,000 and $4,326,000 for the nine and three month periods ended September 30, 1997 and 1996, respectively. The components of net assets of discontinued operations (both Radio and Network Affiliated Television) included in the consolidated balance sheets at September 30, 1997 and December 31, 1996, are as follows: [Download Table] 1997 1996 ---- ---- Current assets $ 19,313,796 $ 23,017,001 Noncurrent assets 266,853,825 180,194,830 ------------ ------------ Total assets $286,167,621 $203,211,831 ============ ============ Current liabilities 4,971,783 8,344,163 Noncurrent liabilities 274,995 1,576,467 ------------ ------------ Total liabilities 5,246,778 9,920,630 ------------ ------------ Total net assets $280,920,843 $193,291,201 ============ ============ Net assets of discontinued operations at September 30, 1997 and December 31, 1996 excludes cash and cash equivalents and accounts receivable of Paxson Network Affiliated Television which were retained by the Company. Additionally, Senior Subordinated Notes, the related deferred loan origination costs and accrued interest payable have been excluded from the net assets of the discontinued operations as the Senior Subordinated Notes will not be assumed by the buyers of the discontinued operations. 3. Investment in Cable Network On July 11, 1997, the Company through a wholly-owned unconsolidated subsidiary acquired the assets of The Travel Channel from Landmark Communications, Inc. for aggregate consideration of $75,000,000, including $55,000,000 of the Company's class A common stock (4,773,097 shares issued at closing) and $20,000,000 in cash. The Company also issued 97,632 shares ($1,125,000) of its class A common stock to Communications Equity Associates, Inc. in connection with their role as financial advisor in the Travel Channel transaction. The $20,000,000 in cash was obtained by the Company's unconsolidated subsidiary through a loan secured by its investment in the Travel Channel ("Acquisition Loan"). The unconsolidated subsidiary has borrowed an additional $1,000,000 under this 10
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loan facility for working capital requirements. The results of operations of the Travel Channel have been included in the Company's consolidated statements of operations for the nine and three months ended September 30, 1997 using the equity method of accounting and as such, the $21,000,000 in outstanding loans obtained by the Company's unconsolidated subsidiary have not been included in the Company's consolidated balance sheets at September 30, 1997. The investment in cable network balance on the Company's September 30, 1997 consolidated balance sheet reflects the Company's issuance of common stock in connection with the acquisition as discussed above and advances made to date to the Travel Channel. During September 1997, the Company announced that it had entered into a letter of intent with Discovery Communications, Inc. ("DCI") under which DCI will acquire a 70% controlling interest in a new cable television service partnership formed by the Company and DCI. The Company will contribute its cable television network, The Travel Channel, to this new partnership. The Company's unconsolidated subsidiary will receive $20 million in cash, a 30% ownership interest in the new partnership and an annual consulting fee of $300,000. The Company's unconsolidated subsidiary will receive a priority credit of $55,000,000 to its capital account and DCI will receive a $20,000,000 priority credit. The Company's unconsolidated subsidiary intends to use the $20,000,000 that it will receive from this transaction to repay the Acquisition Loan. DCI will serve as the managing partner with its Discovery Networks US unit overseeing all operations of the cable television service partnership including administration, programming, affiliate sales, advertising sales and marketing. The following unaudited information of The Travel Channel is presented for the three month period ended September 30, 1997: [Download Table] Current assets $ 4,347,000 Noncurrent assets 76,170,000 ----------- Total assets $80,517,000 =========== Current liabilities 22,757,000 =========== Common stockholders equity 57,760,000 ----------- Total liabilities and common stockholders equity $80,517,000 =========== Net revenues $ 4,584,000 =========== Operating income $ 612,000 =========== Net income $ 172,000 =========== 4. Common Stock Warrants In July 1997, the holders of the Company's Class A and B common stock warrants exercised 32.5083 warrants for 900,000 shares of Class A common stock. In September 1997, the holders of the Company's Class A and B common stock warrants exercised 32.5121 warrants for 900,000 shares of Class A common stock. The Company has 33.1252 redeemable common stock warrants still outstanding which entitle the holders to purchase 688,312 Class A common shares and 229,437 Class B common shares. 5. Income (Loss) Per Share Data Computations of the weighted average common stock and common stock equivalents outstanding are as follows: [Download Table] For the Nine Months For the Three Months ended September 30, ended September 30, ----------------------- ----------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Weighted average Class A and Class B common stock outstanding 52,065,681 42,721,280 56,835,119 46,983,274 ---------- ---------- ---------- ---------- Weighted average of options outstanding assumed exercised 2,489,928 * 2,670,034 * ---------- ---------- ---------- ---------- Weighted average of common stock warrants outstanding assumed exercised 3,341,124 * 2,041,098 * ---------- ---------- ---------- ---------- Weighted average common stock and common stock equivalents outstanding 57,896,733 42,721,280 61,546,251 46,983,274 ========== ========== ========== ========== * In accordance with Accounting Principles Board Opinion No.15, because the effect of the Company's common stock equivalents was anti-dilutive, they have been excluded from the Company's per share calculations. Additionally, the Company does not present fully diluted EPS in the Consolidated Statements of Operations because the effect of the Company's common stock equivalents resulted in a less than 3% dilution for the periods presented. In February 1997, the Financial Accounting Standards Board adopted Statement of Financial 11
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Standards ("SFAS") No. 128, "Earnings per Share". The Statement establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The Statement is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is not permitted. The adoption of SFAS No. 128 is not expected to have a material effect on the Company's earnings per share computation. 12
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Since its inception in 1991, the Company has grown primarily through the acquisition and management of radio and television broadcast stations and radio networks, as well as the subsequent improvement of these properties' operations. Certain of the Company's television stations were and continue to be operated pursuant to time brokerage agreements for various periods. Under time brokerage agreements, the stations' operating revenues and expenses are controlled by the Company and are included in the consolidated statements of operations. The Company currently operates Paxson Television, a nationwide network of owned, operated or affiliated television stations carrying its proprietary network, which presently broadcasts long form paid programming consisting primarily of infomercials. The Company also operates through an unconsolidated subsidiary The Travel Channel, a 24 hour per day cable television network dedicated to travel related programming acquired by the Company on July 11, 1997. During September 1997, the Company entered into a letter of intent to contribute its investment in The Travel Channel to a new joint venture partnership with Discovery Communications, Inc. ("DCI") which will be managed by DCI. See the cable television network joint venture discussion elsewhere herein. The operations of The Travel Channel have been included in the consolidated statements of operations using the equity method of accounting. Two other business segments, Paxson Radio and Paxson Network-Affiliated Television, have been classified as discontinued operations for financial reporting purposes as a result of the Company's decisions made during 1997 to sell these segments. See Note 2 of the Notes to Consolidated Financial Statements. The Company's operating results throughout the periods discussed have been affected significantly by the timing of television acquisitions and sales. Operating revenues are derived from the sale of advertising to local and national advertisers. The operation of these stations involves low operating expenses relative to traditional television station operation and does not vary significantly with revenue, with the exception of costs associated with sales commissions and agency fees. As such, upon obtaining a certain level of revenue sufficient to cover fixed costs, additional revenue levels have a significant impact on the operating results of an individual station. The Company's past results are not necessarily indicative of future performance due to various risks and uncertainties which may significantly reduce revenues and increase operating expenses. For example, a reduction in expenditures by national or local television advertisers in the Company's markets may result in lower revenues. The Company may be unable to reduce expenses, including certain variable expenses, in an amount sufficient in the short term to offset lost revenues caused by poor market conditions. The broadcasting industry continues to undergo rapid technological change which may increase competition within the Company's markets as new delivery systems, such as direct broadcast satellite and computer networks, attract customers. The changing nature of audience tastes and viewing habits may affect the continued attractiveness of the Company's broadcasting stations to advertisers, upon whom the Company is dependent for its revenue. The concentration of the Company's assets in its television station operations increases the Company's exposure to the above risks and uncertainties. The Company currently expects to continue acquiring additional television stations and to review programming opportunities for broadcast on its television stations which may have similar effects on the comparability of revenues, operating expenses, interest expense and operating cash flow as those described above. Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount (contingent or otherwise) of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The fair values of the Company's long-term debt and the senior subordinated notes were estimated based on market rates and instruments with similar risks and maturities. The fair value estimates presented are based on pertinent information available to management as of September 30, 1997. As a result of the foregoing, the estimates presented in the Company's financial statements are not necessarily indicative of the amounts that the Company could realize in a current market exchange and have not been comprehensively revalued for purposes of the Company's financial statements. The Company believes that its network of television stations comprise a valuable national television broadcasting distribution infrastructure, the value of which could potentially be greater if employed to air programming other than, or in addition to, the long form paid programming which is currently being aired. The Company engaged in discussions with a variety of television and cable networks, studios, programmers and others concerning various alternative methods of utilizing its television broadcasting distribution assets. The Company considered many alternatives, including selling large blocks of air time to third parties that would select programming to be aired during such blocks of time and sell the spot advertising for such blocks. The Company recently made a determination to evaluate and obtain programming and sell spot advertising during such programming on its own. The Company believes that this strategy will provide an opportunity to achieve greater long term shareholder value than other alternative uses of its broadcasting distribution infrastructure that it considered. In October and November, 1997, the Company entered into programming contracts to air syndicated television shows 13
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"Touched By An Angel", "Dave's World", "Promised Land", "Sisters", "Life Goes On", "I'll Fly Away", "The New Land", "Medical Center", "Dr. Quinn, Medicine Woman", "Christy" and "Neon Rider" from 1998 to 2004. The Company has also entered into programming contracts to air feature films from 1998 to 2001. Such programming contracts require collective payments by the Company of $243.9 million over such period. See "Programming Commitments" elsewhere herein. The Company continues to evaluate additional programming and currently plans to start airing its programming nationwide over its television stations in the fall of 1998. The Company expects that under the new format the selling expenses willremain proportionate to revenues and that revenues as well as promotional and programming expenses will increase significantly. The Company currently expects that programming amortization costs will average less than $1,000,000 annually per market served by its new network, an amount it believes is substantially less than such costs incurred on average by other commercial television stations. This report contains forward-looking statements which are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Statements as to what the Company "believes", "intends", "expects" or "anticipates", and other similarly anticipatory expressions, are generally forward-looking and are made only as of the date of this Report. Readers of this Report are cautioned not to place undue reliance on such forward-looking statements, as they are subject to risks and uncertainties which could cause actual results to differ materially from those discussed in the forward-looking statements and from historical results of operations. Among the risks and uncertainties which could cause such a difference are those relating to the Company's high level of indebtedness and the restrictions placed on the Company's business and operations by the terms of its indebtedness and its outstanding preferred stock, the risks relating to the comprehensive governmental regulation of the Company's businesses, including the restrictions on multiple broadcast property ownership, the broadcast licensing renewal requirements, the risks of industry and economic conditions which could adversely affect the Company's business operations, the risk that the remaining portion of the radio sale is not consummated and the other factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. In addition, the Company's recent decision to obtain on its own and air more conventional programming during certain portions of the day on its nationwide network of television stations entails certain additional risks and uncertainties, including, those risks associated with the launch of a new television network, the ability to obtain desirable programming at a financially-feasible cost, the ability to successfully and profitably sell advertising spots during such programming. The following table lists those television properties that the Company owns, operates or is affiliated with, and those properties which the Company has agreements to acquire or operate, as identified under "Announced TV Acquisitions" below. (Television and cable households in thousands.) [Enlarge/Download Table] ------------------------------------------------------------------------------------------------------------------------------- NATIONAL CURRENT TOTAL CURRENT TV COMMENCEMENT STATION CABLE STATION MARKET STATION TOTAL MARKET OF CARRIAGE AT CABLE CABLE CABLE MARKET TV MARKET(1) RANK STATION CH OPERATIONS COMMENCEMENT(2) CARRIAGE(3) HOUSEHOLDS CARRIAGE %(3) HOUSEHOLDS ------ ---- ------- -- ---------- ------------ -------- ---------- --------- ---------- OWNED OR OPERATED New York, NY* 1 WPXN TV 31 7/97 4,141 4,449 4,825 92.2% 6,756 New York, NY 1 WHAI TV 43 3/96 626 761 4,825 15.8% 6,756 Los Angeles, CA 2 KZKI TV 30 5/95 1,453 2,598 3,133 82.9% 5,009 Philadelphia, PA 4 WTGI TV 61 2/95 1,225 1,702 2,033 83.7% 2,659 San Francisco, CA 5 KLXV TV 65 6/95 650 1,308 1,640 79.8% 2,298 Boston, MA 6 WGOT TV 60 5/95 604 1,051 1,694 62.0% 2,174 Boston, MA* 6 WHRC TV(5) 46 4/97 0 272 1,694 16.0% 2,174 Washington, D.C. 7 WVVI TV 66 8/97 940 993 1,331 74.6% 1,928 Dallas, TX 8 KINZ TV 68 12/96 0 683 989 69.1% 1,899 Atlanta, GA 10 WTLK TV 14 4/94 300 998 1,144 87.3% 1,675 Atlanta, GA* 10 WNGM TV 34 4/96 182 312 1,144 27.2% 1,675 Houston, TX 11 KTFH TV 49 3/95 647 846 918 92.2% 1,624 Cleveland, OH 13 WAKC TV 23 3/96 560 817 1,026 79.6% 1,469 Cleveland, OH* 13 WOAC TV 67 10/95 332 370 1,026 36.0% 1,469 Minneapolis, MN 14 KXLI TV 41 10/96 605 664 746 89.0% 1,448 Tampa, FL* 15 WFCT TV 66 8/94 0 968 1,043 92.8% 1,436 Miami, FL* 16 WCTD TV 35 4/94 396 1,019 1,019 100.0% 1,386 Phoenix, AZ 17 KWBF TV 13 3/96 23 28 755 3.7% 1,289 Phoenix, AZ 17 KAJW TV(4)(8) 51 12/97 0 0 755 0.0% 1,289 Denver, CO 18 KUBD TV 59 8/95 430 463 741 62.4% 1,199 Sacramento, CA* 20 KCMY TV 29 7/95 624 640 726 88.0% 1,127 St. Louis, MO 21 WCEE TV(6)(10) 13 1/96 23 65 585 11.2% 1,109 Orlando, FL* 22 WIRB TV 56 12/94 468 777 796 97.6% 1,041 Hartford, CT* 27 WTWS TV(5) 26 3/95 661 854 792 107.9% 916 Kansas City, MO 31 KINB TV 50 5/97 397 433 518 83.5% 792 Milwaukee, WI 32 WHKE TV 55 7/96 257 345 477 72.4% 791 Salt Lake City, UT 36 KOOG TV 30 7/97 200 200 387 51.6% 690 Grand Rapids, MI 37 WILV TV(6)(10) 43 9/96 0 383 412 93.1% 659 14
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[Enlarge/Download Table] Norfolk, VA* 39 WJCB TV 49 8/95 343 404 474 85.3% 636 Oklahoma City, OK 44 KMNZ TV 62 10/96 0 230 374 61.5% 593 Greensboro, NC 46 WAAP TV 16 7/96 323 337 367 92.1% 577 Wilkes Barre, PA* 47 WSWB TV(4)(8) 64 12/97 0 0 452 0.0% 566 Providence, RI 49 WOST TV(4)(7) 69 12/97 0 0 433 0.0% 559 Birmingham, AL 51 WNAL TV 44 10/96 31 88 363 24.2% 547 Albany, NY 52 WOCD TV 55 5/96 251 274 376 72.8% 509 Dayton, OH 53 WTJC TV 26 10/95 298 306 351 87.3% 503 Fresno, CA* 55 KKAG TV 61 6/97 195 222 263 84.5% 496 Little Rock, AR* 56 KVUT TV(4)(8) 42 8/97 0 0 301 0.0% 481 Tulsa, OK 58 KGLB TV 44 7/97 0 1 299 0.2% 468 Roanoke, VA 68 WEFC TV 38 12/97 182 182 263 69.3% 402 Green Bay, WI 70 WSCO TV 14 12/97 0 226 226 100.0% 381 Cedar Rapids, IA* 87 KTVC TV 48 5/97 0 11 198 5.7% 308 San Sebastian, PR NR WJWN TV 38 2/96 0 0 0 0.0% 0 Ponce, PR NR WKPV TV 20 2/96 0 0 0 0.0% 0 San Juan, PR NR WSJN TV(11) 24 2/96 285 285 298 95.6% 1,064 ---- ---- ---- ----- ----- ------------------------------------------------------------------------------------------------------------------------------- TOTAL OWNED OR OPERATED(9) 17,653 26,567 32,769 81.1% 49,463 ------------------------------------------------------------------------------------------------------------------------------- AFFILIATES Philadelphia, PA 4 WTVE TV 51 10/96 414 700 2,033 34.4% 2,659 Washington, D.C. 7 WSHE TV 60 10/96 0 124 1,331 9.3% 1,928 Indianapolis, IN 25 WIIB TV 63 1/96 401 424 618 68.6% 957 Hartford, CT 27 WHCT TV 18 7/97 0 70 792 8.9% 916 Raleigh, NC 29 WRMY TV 47 6/96 0 317 512 61.8% 826 Fresno, CA 55 KGMC TV 43 1/96 179 164 263 62.3% 496 ---- ---- ---- ----- ----- ------------------------------------------------------------------------------------------------------------------------------- TOTAL OWNED, OPERATED AND AFFILIATES(9) 18,646 28,365 33,899 83.7% 51,246 ------------------------------------------------------------------------------------------------------------------------------- ANNOUNCED TV ACQUISITIONS San Fransisco, CA 5 KWOK TV(4)(6) 68 1,640 2,298 Detroit, MI 9 WBSX TV 31 1,191 1,782 Seattle, WA 12 KBCB TV(4) 24 1,104 1,514 Pittsburgh, PA 19 Channel 40 40 899 1,140 Raleigh, NC 29 WFAY TV 62 512 826 Nashville, TN 33 WKZX TV 28 496 789 Buffalo, NY 40 WAQF TV(4) 51 475 630 West Palm Beach, FL 43 WHBI TV(4)(6) 67 496 593 Charleston, WV* 57 WKRP TV(4) 29 353 480 Honolulu, HI* 71 KAPA TV(4) 66 333 380 Tucson, AZ* 78 KXGR TV(4) 46 215 356 --- --- ------------------------------------------------------------------------------------------------------------------------------- TOTAL ANNOUNCED TV STATIONS(9) 5,563 7,665 ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- TOTAL TV NETWORK(9) 39,462 58,911 ------------------------------------------------------------------------------------------------------------------------------- * Operated pursuant to a time brokerage agreement; except as noted, the Company has an agreement and/or option to acquire a 100% ownership interest. (1) Each station is licensed by the FCC to serve a specific community, which is included in the listed market. (2) Cable households reached at commencement of station's operations. (3) Cable households reached at 10/97, to be billed in 11/97, and as a percentage of the total market cable households. (4) Station is currently under construction or not operating commercially. (5) No option to acquire. (6) Pending affiliate. (7) 50% ownership interest. (8) 49% ownership interest with remaining 51% to be acquired. (9) Market Household totals do not double count markets where the Company has more than one station. (10) Under contract to sell. (11) Includes the household numbers for the three markets in Puerto Rico. 15
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Purchases of Broadcast Properties: During August 1997, the Company entered into an agreement to purchase television station WFAY-TV serving the Raleigh, North Carolina market for $4,500,000. During September 1997, the Company entered into agreements to purchase television stations WKRP-TV 29 and KXGR-TV 46 serving, respectively, the Charleston, West Virginia and Tucson, Arizona markets for, $8,250,000 and $4,000,000, respectively. The Company intends to initially operate both WKRP-TV and KXGR-TV pursuant to time brokerage agreements before exercising options to acquire both stations. During October 1997, the Company entered into an agreement to purchase television station WJCB-TV serving the Norfolk, Virginia market for $14,750,000. During October 1997, the Company completed its previously announced acquisitions of WSCO-TV in Green Bay, Wisconsin for approximately $4,750,000, WNAL-TV in Birmingham, Alabama for approximately $10,000,000 and WEFC-TV in Roanoke, Virginia for approximately $5,500,000. During November 1997, the Company completed the purchase of the remaining 51% of KGLB-TV serving the Tulsa, Oklahoma market not already owned. Sales of Broadcast Properties: During July 1997, the Company entered into contracts to sell its interests in television stations WCEE-TV and WILV-TV, serving the St. Louis, Missouri and Grand Rapids, Michigan markets, for $4,800,000 and $7,000,000 respectively, to DP Media, Inc., a company beneficially owned by members of Mr. Paxson's family. The Company plans to continue including these stations in its nationwide broadcast TV network pursuant to affiliation agreements. The Company has received approximately $3,600,000 and $5,250,000 of the purchase price for WCEE-TV and WILV-TV, respectively. The final funds are due upon regulatory approval and transfer of the station licenses. The Company believes that the terms of such transactions were at least as favorable as they would have been if obtained in an arm's length transactions with an unaffiliated third party. Cable Television Network Joint Venture: During September 1997, the Company announced that it had entered into a letter of intent with DCI under which DCI will acquire a 70% controlling interest in a new cable television service partnership formed by the Company and DCI. The Company will contribute its cable television network, The Travel Channel, to this new partnership. The Company's unconsolidated subsidiary will receive $20 million cash, a 30% ownership interest in the new partnership and an annual consulting fee of $300,000. The Company's unconsolidated subsidiary will receive a priority credit of $55 million to its capital account and DCI will receive a $20 million priority credit. The Company's unconsolidated subsidiary intends to use the $20 million that it will receive from this transaction to repay the acquisition loan outstanding. See Note 3 of the Notes to Consolidated Financial Statements. DCI will serve as the managing partner with its Discovery Networks US unit overseeing all operations of the cable television service partnership including administration, programming, affiliate sales, advertising sales and marketing. 16
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RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected financial information as a percentage of revenues. Statements of Operations [Download Table] For the nine months For the three months ended September 30, ended September 30, --------------------- -------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues 100.0% 100.0% 100.0% 100.0% Operating Expenses: Direct 16.6 17.0 14.6 18.4 Programming 4.7 4.0 3.8 4.5 Sales and promotion 5.2 5.9 6.8 6.9 Technical 10.6 7.0 10.1 8.2 General and administrative 29.2 31.8 25.0 35.2 Trade and barter 0.4 - 0.7 - Time brokerage agreement fees 13.5 4.7 24.7 5.3 Option plan compensation 3.5 5.5 3.0 2.1 Depreciation and amortization 24.1 19.9 24.6 23.9 ----- ----- ----- ----- Total operating expenses 107.8 95.8 113.3 104.5 ----- ----- ----- ----- Operating (loss) income (7.8) 4.2 (13.3) (4.5) Other income (expense): Interest expense (45.2) (51.8) (41.1) (48.4) Interest income 5.4 12.4 2.6 8.6 Other expense, net (5.1) (1.6) (10.5) (0.5) ----- ----- ----- ----- Loss from continuing operations (52.7) (36.8) (62.3) (44.8) ===== ===== ===== ===== NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Consolidated revenues for the nine months ended September 30, 1997 increased 43% (or $18.3 million) to $61.3 million from $43.0 million for the nine months ended September 30, 1996. This increase was primarily due to television station acquisitions and new time brokerage operations. Operating expenses for the nine months ended September 30, 1997 increased 60.4% (or $24.9 million) to $66.1 million from $41.2 million for the nine months ended September 30, 1996. The increase was primarily due to higher direct expenses such as commissions which rise in proportion to revenues ($2.9 million), other non-direct costs, which are primarily due to operating new television stations ($9.5 million), higher depreciation and amortization, primarily related to assets acquired ($6.2 million), and increased time brokerage agreement fees, primarily related to new time brokerage operations ($6.2 million). Operating cash flow for the nine months ended September 30, 1997 increased 40.2% (or $5.9 million) to $20.5 million, from $14.6 million for the nine months ended September 30, 1996. The increase in operating cash flow was primarily a result of television station acquisitions and new time brokerage operations. "Operating cash flow" is defined as net income excluding non-cash items, non-recurring items including terminated operations, interest, other income, income taxes and time brokerage fees, less scheduled program rights payments. The Company has included operating cash flow data because the financial performance of broadcast companies is frequently evaluated based on some measure of cash flow from operations. Operating cash flow is not, and should not be used as an indicator of or alternative to operating income, net income or cash flow as reflected in the Consolidated Financial Statements as it is not a measure of financial performance under generally accepted accounting principles. Interest expense for the nine months ended September 30, 1997 increased to $27.7 million from $22.3 million for the nine months ended September 30, 1996, an increase of 24.3% primarily due to a greater level of senior debt throughout the period. As a result of acquisitions, at September 30, 1997, total long-term debt and senior subordinated notes were $351.2 million, compared with the balance of $231.8 million outstanding a year prior. Interest income for the nine months ended September 30, 1997 decreased to $3.3 million from $5.3 million, primarily due to lower levels of cash and cash equivalents invested throughout the period. THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Consolidated revenues for the three months ended September 30, 1997 increased 59% (or $8.9 million) to $23.8 million from $14.9 million for the three months ended September 30, 1996. This increase was primarily due to television station acquisitions and new time brokerage operations. 17
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Operating expenses for the three months ended September 30, 1997 increased 72.4% (or $11.3 million) to $26.9 million from $15.6 million for the three months ended September 30, 1996. The increase was primarily due to higher direct expenses such as commissions which rise in proportion to revenues ($0.7 million), other non-direct costs, which are primarily due to operating new television stations ($2.7 million), higher depreciation and amortization, primarily related to assets acquired ($2.3 million), increased time brokerage agreement fees, primarily related to new time brokerage operations ($5.1 million), and increased option plan compensation costs ($.4 million). Operating cash flow for the three months ended September 30, 1997 increased 135.7% (or $5.4 million) to $9.4 million, from $4.0 million for the three months ended September 30, 1996. The increase in operating cash flow was primarily a result of television station acquisitions and new time brokerage operations. Interest expense for the three months ended September 30, 1997 increased to $9.8 million from $7.2 million for the three months ended September 30, 1996, an increase of 34.9% primarily due to a greater level of senior debt throughout the period. As a result of acquisitions, at September 30, 1997, total long-term debt and senior subordinated notes were $351.2 million, compared with the balance of $231.8 million outstanding a year prior. Interest income for the three months ended September 30, 1997 decreased to $0.6 million from $1.3 million, primarily due to lower levels of cash and cash equivalents invested throughout the period. LIQUIDITY AND CAPITAL RESOURCES On October 1, 1997, the Company completed the first phase of its radio segment sale resulting in gross proceeds of approximately $395.1 million. Additional consideration to be received by the Company upon the sale of the remaining radio station assets is approximately $205.4 million including the LPI note and interest. Also during October 1997, the Company sold its Tampa billboard operations for approximately $4.5 million and assigned its rights to purchase three radio stations in West Palm Beach, Florida to LWP Radio, Inc., which completed these purchases. See Note 2 of the Notes to Consolidated Financial Statements for a discussion of the above transactions. The Company anticipates that the proceeds from the radio segment sales will be primarily utilized to fund the television station acquisitions and programming payments discussed below along with related capital requirements. The completion of each of the acquisitions discussed below is subject to a variety of factors and to the satisfaction of various conditions, and there can be no assurance that any of such acquisitions will be completed. The Company's working capital at September 30, 1997 and December 31, 1996 was $24 million and $76.2 million, respectively, and the ratio of current assets to current liabilities was 1.92:1 and 4.88:1 on such dates, respectively. Working capital decreased primarily due to the acquisitions previously discussed. Cash provided by operations of $4.1 million and $22.4 million for the nine months ended September 30, 1997 and 1996, respectively, reflects the improvement in operating results of existing properties, acquisitions and time brokerage properties net of increased interest expense and increases in other assets. Cash used for investing activities primarily reflects the acquisitions and investments discussed above, and purchases of equipment for these and existing properties net of the proceeds from the sale of network affiliated television. Cash provided by financing activities primarily reflects the proceeds from the long term debt borrowings net of debt repayments. In addition, the Company has advanced $1,530,000 to The Christian Network, Inc. ("CNI") during the nine months ended September 30, 1997 under a demand note bearing interest at the prime rate (currently 8.50%). At September 30, 1997 the Company had total advances to CNI outstanding of approximately $4,523,000 million, which has been included in investments in broadcast properties. Non-cash activity relates to option plan compensation, reciprocal trade and barter advertising revenue and expense and accretion of discount on senior subordinated notes, as well as dividends and accretion on the redeemable preferred stock. The sale of WTWS-TV during the first quarter of 1997 was a non cash transaction and accordingly is not reflected in the statement of cash flows. The Company's primary capital requirements are for the acquisition of broadcasting properties and related capital expenditures, programming payments and interest and principal payments on indebtedness. The Company's outstanding Senior subordinated notes require semi-annual interest payments at a fixed rate. The Company presently has $120 million of outstanding borrowings under its $200 million senior secured revolving credit facility ("Senior Facility"). Borrowings under the Senior Facility bear interest at floating rates and require interest payments on varying dates, but at least quarterly, depending on the interest rate option selected by the Company. The Company believes that the cash on hand and net proceeds from the radio segment sales will be sufficient to complete the investments and programming payments discussed below (including the expected capital expenditures associated therewith and net of deposits and advances made to date), and to meet its anticipated short term and long term working capital requirements for its existing properties. However, should the Company suffer a 18
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significant impairment to its cash flow from operations due to the occurrence of one or more adverse events, the Company could have insufficient resources to repay indebtedness under the Senior Facility or the senior subordinated notes when due or to make required payments on its preferred stock. PROGRAMMING COMMITMENTS The Company has entered into commitments for broadcast rights related to programs that are not currently available for broadcast and therefore not included in the consolidated financial statements. Future minimum annual payments under these agreements as of September 30, 1997 are as follows: [Download Table] 1997 $ 37,622,500 1998 21,983,701 1999 57,061,934 2000 54,642,766 2001 48,814,099 2002 17,933,333 2003 3,520,000 2004 2,346,667 ------------ $243,925,000 The Company has also committed to purchase additional future episodes of these programs should they be made available. INVESTMENT COMMITMENTS The completion of each of the investments discussed below is subject to a variety of factors and to the satisfaction of various conditions, and there can be no assurance that any of such investments will be completed. The Company has agreements to purchase significant assets of, or to enter into time brokerage and financing arrangements with respect to, the following properties, which are subject to various conditions, including the receipt of regulatory approvals: [Download Table] Property Market Served * Purchase Price ------------------------------------------------------------------------------ Television: WPXN-TV New York City, NY (1) $257,500,000 WBSX-TV Detroit, MI $ 35,000,000 Channel 40 Pittsburgh, PA $ 35,000,000 KCMY-TV Sacramento, CA (2) $ 17,000,000 WJCB-TV Norfolk, VA $ 14,750,000 WIRB-TV Orlando, FL (3) $ 13,162,000 WNAL-TV Birmingham, AL (4) $ 10,000,000 WKRP-TV Charleston, WV $ 8,250,000 KBCB-TV Seattle, WA $ 8,000,000 KKAG-TV Fresno, CA (5) $ 7,960,000 WHBI-TV West Palm Beach, FL (6) $ 7,000,000 KAJW-TV Phoenix, AZ (7) $ 6,600,000 WSWB-TV Wilkes-Barre, Scranton, PA (7) $ 6,160,000 WEFC-TV Roanoke, VA (11) $ 5,500,000 KAPA-TV Honolulu, HI $ 5,000,000 KTVC-TV Cedar Rapids, IA (8) $ 5,000,000 WSCO-TV Green Bay, WI (11) $ 4,750,000 KWOK-TV San Francisco, CA (6) $ 4,500,000 WFAY-TV Raleigh, NC $ 4,500,000 WKZX-TV Nashville, TN $ 4,200,000 KXGR-TV Tucson, AZ $ 4,000,000 WAQF-TV Buffalo, NY (9) $ 3,000,000 WHCT-TV Hartford, CT $ 3,000,000 KVUT-TV Little Rock, AR (7) $ 1,250,000 WFCT-TV, WCTD-TV Tampa and Miami, FL $ 801,000 KGLB-TV Tulsa, OK (10) $ 421,000 Paxson Radio: WKGR-FM, WOLL-FM West Palm Beach, FL (12) $ 28,400,000 WBZT-AM * Each station is licensed by the FCC to serve a specific community, which is included in the listed market. (1) $7,500,000 of the purchase price is payable at the Company's option by issuance of Class A Common Stock of the Company. (2) The Company has loaned an aggregate of $8,500,000 to KCMY-TV and began operating the station pursuant to a time brokerage agreement on October 1, 1996, pending completion of the acquisition of the station. The loan will be applied to the purchase price at the date of closing. 19
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(3) The Company has outstanding loans at September 30, 1997 aggregating approximately $4,065,000 which will be applied against the purchase price at the date of closing. The Company is currently operating this station pursuant to a time brokerage agreement. (4) In September 1996, the Company loaned $8,000,000 to WNAL-TV and began operating the station pursuant to a time brokerage agreement pending completion of the acquisition of the station. The loan was repaid upon closing during October 1997. (5) The Company began operating the station pursuant to a time brokerage agreement on June 1, 1997 pending completion of the acquisition of the station. (6) The Company has committed to loan up to $7,000,000, and $4,500,000 to Cocola Broadcasting ("Cocola") to finance the construction and acquisition of stations WHBI-TV and KWOK-TV, respectively. At September 30, 1997, the Company had advanced approximately $9,164,000 to Cocola. The Company plans to provide programming for the stations pursuant to affiliation agreements upon Cocola's acquisitions and commencement of operations. (7) The Company has acquired a 49% interest in this property; commitment represents purchase price for the remaining 51%. (8) On May 3, 1997, the Company began operating the station pursuant to a time brokerage agreement. The purchase price reflects the cash portion only and does not include additional consideration of 600,000 shares of Class A Common Stock of the Company. (9) Includes the purchase of two low power television stations, W69CS and W63BM. (10) The Company completed the purchase of the remaining 51% interest in this station during November 1997. (11) The Company completed the purchase in October 1997. (12) The Company assigned its rights to purchase these stations to LWP Radio as discussed elsewhere herein. LWP Radio completed the purchase in October 1997. 20
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PART II OTHER INFORMATION Item 1. Legal Proceedings No material legal proceedings are pending to which the Company or any of its property is subject. To the knowledge of the Company, no such legal proceedings are contemplated by any governmental authority. Item 6. Exhibits and Reports on Form 8-K. (a) List of Exhibits: [Download Table] Exhibit No. Description 3.1.1 Certificate of Incorporation of the Company** 3.1.2 The Company's Certificate of Designations of the Company's Junior Cumulative Compounding Redeemable Preferred Stock** 3.1.3 The Company's Certificate of Designations of the Company's 12 1/2% Cumulative Exchangeable Preferred Stock **** 3.1.4 Bylaws of the Company*** 4.1 Form of Stock Certificate of Class A Common Stock* 4.2 Fourth Amendment, dated September 25, 1997, to the Amended and Restated Credit Agreement, dated as of November 19, 1996, among Paxson Communications Corporation, the Lenders from time to time party thereto and Union Bank of California, N.A., as Agent 4.3 Credit Amendment, dated July 11, 1997, among Travel Channel Acquisition Corporation, the Several Lenders from Time to Time Parties Hereto and Union Bank of California, N.A., as the Agent 10.179 Asset Purchase Agreement, dated August 25, 1997, by and among Paxson Communications Corporation, Clear Channel Metroplex, Inc., Clear Channel Metroplex Licenses, Inc. and Clear Channel Communications, Inc. (filed as exhibit 2.1 with the Company's Form 8-K, dated October 1, 1997 and incorporated herein by reference) 10.180 Asset Purchase Agreement, dated August 25, 1997, by and among Paxson Communications Corporation, L. Paxson, Inc., Clear Channel Metroplex, Inc., Clear Channel Metroplex Licenses, Inc. and Clear Channel Communications, Inc. (filed as exhibit 2.2 with the Company's Form 8-K, dated October 1, 1997 and incorporated herein by reference) 10.181 Asset Purchase Agreement, dated August 29, 1997, by and among Paxson Communications of Fayetteville-62, Inc., Fayetteville-Cumberland Telecasters, Inc., Fayetteville-Cumberland Telecasters Inc., Debtor-in-Possession, and Poplar Apartments Limited Partnership for Television station WFAY, Fayetteville, North Carolina 10.182 Stock Purchase Agreement, dated September 2, 1997, by and among Channel 29 of Charleston, Inc., Paxson Communications of Charleston-29, Inc. and Mountaineer Broadcasting Corporation and William L. Kepper 10.183 Stock Purchase Agreement, dated September 9, 1997, by and among Channel 46 of Tucson, Inc., Paxson Communications of Tucson-46, Inc. and Sungilt Corporation, Inc. 10.184 Asset Purchase Agreement, dated October 16, 1997, by and between Paxson Communications Corporation and Channel 49 Acquisition Corporation for television station WJCB-TV, Norfolk, Virginia 10.185 Asset Purchase Agreement, dated October 24, 1997, between Universal Outdoor, Inc. and Paxson Communications Corporation 27 Financial Data Schedule (for SEC use only) 21
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------------------- * Filed with the Company's Registration Statement on Form S-4, filed September 26, 1994, Registration No. 33-84416 and incorporated herein by reference. ** Filed with the Company's Annual Report on Form 10-K, dated March 31, 1995 and incorporated herein by reference. *** Filed with the Company's Registration Statement on Form S-1, as amended, filed January 26, 1996, Registration No. 333-473 and incorporated herein by reference. **** Filed with the Company's Registration Statement on Form S-3, as amended, filed August 15, 1996, Registration No. 333-10267 and incorporated herein by reference. (b) Reports on Form 8-K. None. 22
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PAXSON COMMUNICATIONS CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAXSON COMMUNICATIONS CORPORATION Date: November 14, 1997 By: /s/ James B. Bocock ----------------------------- James B. Bocock President, Chief Operating Officer, Director Date: November 14, 1997 By: /s/ Arthur D. Tek ----------------------------- Arthur D. Tek Vice President, Chief Financial Officer, Director 23

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