Filed pursuant to Rule 424(b)(3)
Registration No. 333-69192
DATED OCTOBER 29, 2001
PROSPECTUS
(PAXSON COMMUNICATION LOGO)
$200,000,000
PAXSON COMMUNICATIONS CORPORATION
EXCHANGE OFFER FOR
10 3/4% SENIOR SUBORDINATED NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME
ON NOVEMBER 27, 2001, UNLESS EXTENDED
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and the accompanying Letter of Transmittal, to exchange up to
$200,000,000 aggregate principal amount of our 10 3/4% Senior Subordinated Notes
due 2008 that have been registered under the Securities Act of 1933, which we
refer to as the new notes, for up to $200,000,000 aggregate principal amount of
our 10 3/4% Senior Subordinated Notes due 2008 that were sold pursuant to a
private offering consummated in July 2001, which notes we refer to as the
original notes. The new notes and the original notes are sometimes referred to
herein collectively as the notes.
The terms of the new notes are substantially identical in all respects
(including interest rate and maturity) to the terms of the original notes,
except that the new notes will be freely transferable by holders thereof and
free of any covenant restricting transfer absent registration, except in certain
circumstances relating to broker-dealers described in this prospectus. For a
complete description of the terms of the new notes, see "Description of the
Notes". There will be no cash proceeds to us from the exchange offer.
We will accept all original notes that noteholders properly tender and do
not withdraw before the expiration of the exchange offer. The exchange offer is
not subject to any condition other than that the exchange offer not violate
applicable law or any applicable interpretation of the staff of the SEC. You
will not recognize any income, gain or loss for U.S. federal income tax purposes
as a result of the exchange. The exchange offer is not conditioned on the tender
of any minimum principal amount of original notes.
The new notes are expected to trade in the Private Offerings, Resales, and
Trading through Automatic Linkages Market, commonly referred to as the PORTAL
Market.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
YOU SHOULD CONSIDER BEFORE MAKING ANY DECISION CONCERNING THIS EXCHANGE OFFER.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE
SECURITIES TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR HAVE ANY OF THESE
ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED, OR INCORPORATED BY
REFERENCE, IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT, AND THE INITIAL PURCHASERS ARE NOT, MAKING AN
OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFERING IS NOT PERMITTED. YOU
SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE
AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Summary..................................................... 1
Risk Factors................................................ 13
Ratios of Earnings to Fixed Charges......................... 24
Use of Proceeds............................................. 25
Capitalization.............................................. 26
Selected Consolidated Financial and Other Data.............. 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Business.................................................... 40
Management.................................................. 60
Executive Compensation...................................... 64
Principal Stockholders...................................... 67
Certain Relationships and Related Transactions.............. 69
Description of Material Indebtedness and Preferred Stock.... 72
The Exchange Offer.......................................... 83
Description of Notes........................................ 91
Important Federal Income Tax Considerations................. 131
Plan of Distribution........................................ 134
Legal Matters............................................... 135
Experts..................................................... 135
Where You Can Find Additional Information................... 135
Index of Financial Statements............................... F-1
</Table>
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this prospectus, including, without limitation, statements under the
captions "Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
and other statements located elsewhere in this prospectus, in each case
regarding the prospects of our industry and our prospects, plans, financial
position and business strategy, may constitute forward-looking statements. In
addition, forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or "continue" or the negatives of these
terms or variations of them or similar terminology. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we
cannot assure you that these expectations will prove to be correct. Important
factors that could cause actual results to differ materially from our
expectations are disclosed in this prospectus, including in conjunction with the
forward-looking statements included in this prospectus and under "Risk Factors."
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements included in this document. These forward-looking
statements speak only as of the date of this prospectus. We do not intend to
update these statements unless the securities laws require us to do so.
i
SUMMARY
This summary highlights selected information about us. In addition to
reading this summary, you should carefully review the entire prospectus,
especially the "Risk Factors" section beginning on page 13. Unless the context
otherwise requires, in this prospectus, the terms "we," "us" and "our" refer to
Paxson Communications Corporation and its subsidiaries.
We have obtained audience ratings and share, market rank and television
household data contained in this prospectus from the most recent information
available from Nielsen Media Research. We do not assume responsibility for the
accuracy or completeness of this data.
OUR COMPANY
We are a network television broadcasting company which owns and operates
the largest broadcast television station group in the U.S., as measured by the
number of television households in the markets our stations serve. We currently
own and operate 65 full power broadcast television stations (including three
stations we operate under time brokerage agreements), which reach all of the top
20 U.S. markets and 41 of the top 50 U.S. markets. We operate PAX TV, a
television network that provides family entertainment programming seven days per
week and reaches approximately 84% of prime time television households in the
U.S. through our broadcast television station group and pursuant to distribution
agreements with cable and satellite systems and independently owned broadcast
stations we refer to as "affiliates." PAX TV's programming consists of shows
originally developed by us and shows that have appeared previously on other
broadcast networks which we have purchased the right to air. PAX TV reaches
approximately 64% of U.S. television households through our broadcast television
station group. We have agreements with cable television system owners and
satellite television providers to carry PAX TV, through which we reach an
additional 15% of U.S. television households in markets not served by our owned
and operated stations. We reach an additional 5% of U.S. television households
through affiliation agreements with 60 independently owned PAX TV affiliated
stations.
As discussed in more detail below, in September 1999, National Broadcasting
Company, Inc. ("NBC"), invested $415.0 million in our company. In connection
with this investment, we have entered into a number of business arrangements
with NBC that are intended to strengthen our business.
We derive our revenues from the sale of network spot advertising time,
network long form paid programming and station advertising:
- Network Spot Advertising. 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 each PAX TV programming season. NBC serves as our
exclusive sales representative to sell most of our network advertising.
Our network advertising sales represented approximately 29% of our 2000
revenue.
- 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. Infomercials are shows produced by
others, at no cost to us, principally to promote and sell products or
services through viewer direct response. Our network long form paid
programming represented approximately 31% of our 2000 revenue.
- Station Advertising. We sell commercial air time to advertisers who want
to reach the viewing audience in specific geographic markets in which our
stations operate. These advertisers may be local businesses or regional
or national advertisers who want to target their advertising in these
markets. In markets in which our stations are operating under joint sales
agreements, or JSAs, our JSA partner serves as our exclusive sales
representative to sell this advertising. Our local sales forces sell this
advertising in markets without JSAs. Our station spot advertising sales
represented approximately 40%
1
of our 2000 revenue (including 18% of our 2000 revenue which was derived
from long form paid programming).
We believe that our business model benefits from many of the favorable
attributes of both traditional television networks and network-affiliated
television station groups. Similar to traditional television networks, we
provide advertisers with nationwide reach through our extensive television
distribution system. We own and operate most of our distribution system and,
therefore, we receive advertising revenue from the entire broadcast day
(consisting of both PAX TV and long form paid programming), unlike traditional
networks, which receive advertising revenue only from commercials aired during
network programming hours. In addition, due to the size and centralized
operations of our station group, we are able to achieve economies of scale with
respect to our programming, promotional, research, engineering, accounting and
administrative expenses which we believe enable us to have lower per station
expenses than those of a typical network-affiliated station.
We have made consistent progress in the development of our PAX TV network
since its launch on August 31, 1998. Before launching PAX TV, our stations aired
infomercials and other long form paid programming throughout the day. In our
2000-2001 season, we have improved our prime time audience ratings among total
viewing households by 23% over the previous year. We have also made significant
gains in advertising sales. We increased our upfront network advertising sales
for the 2000-2001 season by 36% over the previous year. Our revenues for the
year ended December 31, 2000 were $315.9 million, compared with $248.4 million
for the year ended December 31, 1999, our first full year of PAX TV operations.
In the fourth quarter of 2000, we generated $7.1 million of adjusted EBITDA (as
defined on page 12), and we believe we achieved positive quarterly adjusted
EBITDA faster than any other recently launched television broadcast network. We
generated adjusted EBITDA of negative $4.9 million for the year ended December
31, 2000 and negative $45.8 million for the year ended December 31, 1999.
Our principal programming on PAX TV consists of original programs and
syndicated programs.
- Original Programs. We produce original family entertainment programs to
air during our network's prime time hours. Our original shows, such as
Doc, Mysterious Ways, Miracle Pets, It's a Miracle and Encounters with
the Unexplained, achieved an average of 39% ratings improvements over
programs shown in their time slots the prior year. We currently have ten
hours of PAX TV original programs which we air during prime time hours.
We intend to continue increasing the number of hours of original
programming aired on PAX TV because this programming has generated
improved ratings and we are able to produce it in a cost efficient
manner.
- Syndicated Programs. We have purchased the rights to air on PAX TV a
variety of syndicated programs, which are programs that have previously
appeared on other broadcast networks. Our library of syndicated
programming includes shows that have had successful first runs on
television in terms of audience ratings, such as Touched by an Angel and
Diagnosis Murder. While most of our current PAX TV programming is
syndicated programming, we expect the amount of syndicated programming we
air to decrease as we increase our offerings of original programs on PAX
TV.
Our PAX TV programming also includes sports, movies and other content
provided to us by NBC from time to time, the amount of which varies and is
dependent upon mutual agreement as to the terms under which we have access to
this programming. During non-PAX TV programming hours, our owned and operated
stations and cable and satellite distribution carry infomercials and other forms
of long form paid programming. We believe that airing long form paid programming
provides us with a significant and stable source of revenue.
2
NBC RELATIONSHIP
In September 1999, NBC, a subsidiary of General Electric Company, invested
$415 million in our company. In connection with this investment, we entered into
a number of business arrangements with NBC that are intended to strengthen our
business. As part of these arrangements and our relationship with NBC:
- NBC provides network advertising sales, marketing and network research
services for PAX TV;
- NBC provides some of its programming, including movies and sporting
events, for broadcast on PAX TV; and
- We have entered into JSAs with NBC with respect to 13 of our stations
serving 11 markets also served by an NBC owned and operated station, and
with 35 independently owned NBC affiliated stations serving our markets.
In connection with NBC's investment in us, NBC also entered into an
agreement with Lowell W. "Bud" Paxson, our Chairman and controlling stockholder,
which gives NBC the right, exercisable on or after February 1, 2002, to purchase
all the shares of our Class B common stock owned by Mr. Paxson, and thereby
acquire control of our company. The acquisition of these shares by NBC is
subject to the satisfaction of various conditions, including compliance with
applicable provisions of the Communications Act of 1934 and the approval of the
Federal Communications Commission.
JOINT SALES AGREEMENTS
In order to improve our station operations, increase revenues and reduce
operating expenses, since the fourth quarter of 1999, we have entered into JSAs
with other stations operating in the markets we serve. To date, we have entered
into JSAs with respect to 55 of our stations, including JSAs between 48 of our
stations and NBC owned or affiliated stations. We generally expect all of those
stations to be operating under the terms of these JSAs by the end of this year.
Each JSA typically provides the following:
- The JSA partner serves as our exclusive sales representative to sell our
station advertising, enabling our station to benefit from the strength of
the JSA partner's sales organization and existing advertiser
relationships;
- We integrate and co-locate many of our station operations with those of
the JSA partner, reducing our costs through operating efficiencies and
economies of scale, including the elimination of redundant owned and
leased facilities and staffing; and
- The JSA partner may provide local news and syndicated programming,
supplementing and enhancing our station's programming lineup.
BUSINESS STRATEGY
The principal components of our strategy are:
- To build a nationally recognized brand by offering quality family
programming;
- To achieve operating efficiencies and cost savings by centralizing many
of the functions of our owned and operated stations, including
programming, promotions, advertising and research;
- To streamline our station operations and achieve both revenue gains and
cost savings through the implementation of JSAs;
3
- To enhance our operations by expanding our relationship with NBC,
especially in the areas of programming and advertising sales;
- To further expand and improve our television distribution system to reach
as many U.S. television households as possible in a cost efficient manner
and to thereby increase the attractiveness of PAX TV to network
advertisers; and
- To capitalize on opportunities in digital broadcasting through our
ownership of a significant portfolio of broadcast television stations.
OUR HISTORY
We were founded in 1991 by Mr. 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 which
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. Since
commencing our television operations in 1994, we have established the largest
owned and operated broadcast television station group in the U.S., as measured
by the number of television households in the markets our stations serve. We
launched PAX TV on August 31, 1998, and are now in our third network programming
season.
Our Class A common stock is listed on the American Stock Exchange under the
symbol "PAX." Our principal executive offices are located at 601 Clearwater Park
Road, West Palm Beach, Florida 33401 and our telephone number is (561) 659-4122.
THE REFINANCING
The issuance of the original notes was part of our July 2001 refinancing of
$415.0 million of outstanding indebtedness and $59.1 million of outstanding
preferred stock. We refer to this refinancing plan as the "Refinancing." In
addition to issuing the original notes, we concurrently entered into a new
$360.0 million senior secured credit facility. The new senior credit facility
consists of three facilities:
- a Term A facility in the aggregate principal amount of $50.0 million to
be used for capital expenditures;
- a Term B facility in the aggregate principal amount of $285.0 million
that was used to fund the repayment of indebtedness and the redemption of
preferred stock in connection with the Refinancing; and
- a revolving facility in the aggregate principal amount of $25.0 million
to be used for capital expenditures and working capital purposes,
including a portion of the fees and expenses relating to the Refinancing.
4
The following table summarizes the sources and uses of funds in the
Refinancing:
<Table>
<Caption>
(IN THOUSANDS)
--------------
SOURCES:
Original notes.............................................. $200,000
New senior secured credit facility -- Term B facility....... 285,000
New senior secured credit facility -- Revolving facility.... 2,000
--------
Total sources..................................... $487,000
========
USES:
Repay existing senior credit facility....................... $120,500
Repay existing equipment credit facility.................... 59,900
Redeem 11 5/8% senior subordinated notes due 2002(a)........ 234,600
Redeem 12% preferred stock.................................. 59,100
Pay transaction fees and expenses........................... 12,900
--------
Total uses........................................ $487,000
========
</Table>
---------------
(a) Includes redemption premium of $4.6 million.
PURPOSE OF THE EXCHANGE OFFER
On July 12, 2001, we sold, through a private placement exempt from the
registration requirements of the Securities Act of 1933, $200,000,000 of our
10 3/4% Senior Subordinated Notes due 2008. We used the net proceeds from the
sale of the original notes and the borrowings under the Term B facility and
Revolving facility portions of our new senior credit facility to effect the
Refinancing.
Simultaneously with the private placement, we entered into a registration
rights agreement with the initial purchasers of the original notes. Under the
registration rights agreement, we are required to use our reasonable best
efforts to cause a registration statement for substantially identical notes,
which will be issued in exchange for the original notes, to become effective on
or before November 15, 2001. You may exchange your original notes for new notes
in this exchange offer. You should read the discussion under the headings
"-- Summary of the Exchange Offer," "The Exchange Offer" and "Description of the
Notes" for further information regarding the new notes.
We did not register the original notes under the Securities Act or any
state securities laws, nor do we intend to after the exchange offer. As a
result, the original notes may only be transferred in limited circumstances
under the securities laws. If the holders of the original notes do not exchange
their original notes in the exchange offer, they lose their right to have the
original notes registered under the Securities Act, subject to certain
limitations. Anyone who still holds original notes after the exchange offer may
be unable to resell their original notes.
We believe, however, that holders of the new notes may resell the new notes
without complying with the registration and prospectus delivery provisions of
the Securities Act, if they meet certain conditions. You should read the
discussion under the headings "-- Summary of the Exchange Offer" and "The
Exchange Offer" for further information regarding the exchange offer and resales
of the new notes.
SUMMARY OF THE EXCHANGE OFFER
The Initial Offering of
Original Notes............. We sold the original notes on July 12, 2001 to
Salomon Smith Barney Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, CIBC World Markets
Corp. and Bear, Stearns & Co. Inc. We collectively
refer to these parties in this prospectus as the
"initial purchasers." The initial purchasers
subsequently resold the original notes (1) to
qualified institu-
5
tional buyers pursuant to Rule 144A under the
Securities Act and (2) outside the United States in
accordance with Regulation S under the Securities
Act.
Registration Rights
Agreement.................. We are making the exchange offer in reliance on the
position of the staff of the SEC as set forth in
certain no-action letters addressed to other
parties in other transactions. We have not,
however, sought our own no-action letter, and we
cannot assure you that the staff of the SEC would
make a similar determination with respect to the
exchange offer as in such other circumstances.
Based on these interpretations by the staff of the
SEC, we believe that the new notes issued under
this exchange offer in exchange for original notes
may be offered for resale, resold and otherwise
transferred by a holder thereof other than (i) a
broker-dealer who purchased such original notes
directly from us to resell under Rule 144A or any
other available exemption under the Securities Act
or (ii) a person that is our "affiliate" (as
defined in Rule 405 of the Securities Act), without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such original notes are acquired in the
ordinary course of the holder's business and that
the holder is not participating, and has no
arrangement or understanding with any persons to
participate, in the distribution of those original
notes. Holders of original notes accepting the
exchange offer will represent to us in the Letter
of Transmittal that these conditions have been met.
Resale..................... Any holder who participates in the exchange offer
for the purpose of participating in a distribution
of the new notes may not rely on the position of
the staff of the SEC as set forth in the no-action
letters referred to above and would have to comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any secondary resale transaction. This
prospectus may not be used by such holders for any
secondary resale. A secondary resale transaction in
the United States by a holder who is using the
exchange offer to participate in the distribution
of new notes must be covered by a registration
statement containing the selling securityholder
information required by Item 507 of Regulation S-K
of the Securities Act. Each broker-dealer (other
than an "affiliate" of us) that receives new notes
for its own account under the exchange offer in
exchange for original notes, where such original
notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities, must acknowledge that it acquired the
original notes as the result of market-making
activities or other trading activities and must
deliver a prospectus in connection with any resale
of such new notes. See "Plan of Distribution." The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of new notes received in exchange for original
notes where such original notes were acquired by
such broker-dealer as a result of market-making
activities or other trading activities. In
addition, under Section 4(3) under the Securities
Act, all dealers effecting transactions in the new
notes, whether or not participating in the exchange
offer, may be required to
6
deliver a prospectus. We have agreed that we will
make this prospectus available to any broker-dealer
for use in connection with any such resale. See
"Plan of Distribution." Any broker-dealer who is
our affiliate may not rely on the no-action letters
referred to above and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
secondary resale transaction. See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer"
and "Plan of Distribution."
The Exchange Offer......... We are offering to exchange pursuant to the
exchange offer up to $200,000,000 aggregate
principal amount of new notes for up to
$200,000,000 aggregate principal amount of original
notes. The terms of the new notes are substantially
identical in all respects (including interest rate
and maturity) to the terms of the original notes
for which they may be exchanged under the exchange
offer, except that the new notes are freely
transferable by holders thereof (other than as
provided herein), and are not subject to any
covenant restricting transfer absent registration
under the Securities Act. See "The Exchange
Offer -- Terms of the Exchange" and "The Exchange
Offer -- Procedures for Tendering."
The Exchange Offer is not conditioned upon any
minimum number of original notes being tendered for
exchange.
Record Date................ We mailed this prospectus and the related exchange
offer documents to registered holders of original
notes on October 29, 2001.
Expiration Date............ The exchange offer will expire at 5:00 p.m., New
York City time on November 27, 2001, unless
extended, which date we refer to in this prospectus
as the "expiration date."
Conditions of the Exchange
Offer...................... Our obligations to consummate the exchange offer
are subject to certain conditions. See "The
Exchange Offer -- Conditions to the Exchange
Offer." We reserve the right to terminate or amend
the exchange offer at any time before the
expiration date upon the occurrence of any such
conditions.
Withdrawal Rights.......... Tenders may be withdrawn at any time before the
expiration date; otherwise, all tenders will be
irrevocable.
Procedures for Tendering
Notes...................... See "The Exchange Offer -- Procedures for
Tendering."
Federal Income Tax
Consequences............. The exchange of original notes for new notes should
not be a taxable exchange for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Effect on Holders of the
Original Notes............. As a result of the making of this exchange offer,
and upon acceptance for exchange of all validly
tendered original notes under the terms of this
exchange offer, we will have fulfilled our
obligations related to the exchange offer that are
contained in the registration rights agreement and,
accordingly, there will be no increase in the
interest rate on the original notes pursuant to the
applicable terms of the registration rights
agreement or the indenture governing the notes
because of the exchange
7
offer. Holders of the original notes who do not
tender their original notes will be entitled to all
the rights and limitations applicable thereto under
the indenture except for any rights which by their
terms terminate or cease to have further effect as
a result of the making of, and the acceptance for
exchange of all validly tendered original notes
under, the exchange offer. All untendered original
notes will continue to be subject to the
restrictions on transfer provided for in the
indenture. To the extent that original notes are
tendered and accepted in the exchange offer, the
trading market for untendered original notes could
be adversely affected.
Exchange Agent............. The exchange agent with respect to the exchange
offer is The Bank of New York, which we refer to in
this prospectus as the "exchange agent". The
address and telephone number of the exchange agent
are set forth in "The Exchange Offer -- Exchange
Agent."
Use of Proceeds............ There will be no cash proceeds to us from the
exchange under the exchange offer.
Special Procedures for
Beneficial Owners.......... If you are the beneficial owner of book-entry
interests and your name does not appear on a
security position listing of DTC as the holder of
the book-entry interests or if you are a beneficial
owner of original notes that are registered in the
name of broker, dealer, commercial bank, trust
company or other nominee and you wish to tender the
book-entry interests or original notes in the
exchange offer, you should contact the person in
whose name the book-entry interests or original
notes are registered promptly and instruct that
person to tender on your behalf.
THE NEW NOTES
The form and terms of the new notes will be identical in all material
respects to the form and terms of the original notes, except that the new notes
will be registered under the Securities Act. As a result, the new notes will not
bear legends restricting their transfer and will not contain the registration
rights provisions that applied to the original notes. The new notes represent
the same debt as the original notes exchanged for the new notes. Both the
original notes and the new notes are governed by the same indenture. We use the
term notes in this prospectus to collectively refer to the original notes and
the new notes.
Issuer..................... Paxson Communications Corporation
Notes...................... $200.0 million aggregate principal amount of
10 3/4% Senior Subordinated Notes due 2008.
Maturity................... July 15, 2008.
Interest Payment Dates..... January 15 and July 15 of each year, beginning on
January 15, 2002.
Guarantees................. The notes are guaranteed, on a senior subordinated
unsecured basis, by all of our domestic
subsidiaries.
Ranking.................... The notes are:
-- our senior subordinated, unsecured
obligations;
-- subordinate in right of payment to all of our
existing and future senior debt and that of
the subsidiary guarantors;
-- pari passu in right of payment with all of
our existing and future senior subordinated
debt and that of the guarantors;
8
-- senior to all of our existing and future
subordinated obligations and those of the
subsidiary guarantors; and
-- senior to all of our preferred stock;
however, we have the option, subject to
various limitations, of exchanging
outstanding shares of our Series B preferred
stock, 13 1/4% preferred stock and 12 1/2%
preferred stock into exchange debentures,
which will rank pari passu with the notes.
As of June 30, 2001, after giving effect to the
Refinancing, we and the subsidiary guarantors would
have had approximately $287.6 million of senior
debt and approximately $200.0 million of senior
subordinated debt. In addition, as of that date, we
would have had $1,037.4 million of preferred stock
outstanding that is exchangeable, subject to
various restrictions, into an aggregate of $1,037.4
million of senior subordinated debt.
Optional Redemption........ Before July 15, 2005, we may redeem all or part of
the notes by paying a "make-whole" premium based on
U.S. Treasury rates as specified in this prospectus
under "Description of Notes -- Optional
Redemption."
At any time on or after July 15, 2005, we may
redeem all or a part of the notes at the redemption
prices specified in this prospectus under
"Description of Notes -- Optional Redemption."
At any time before July 15, 2004, we may redeem up
to 35% of the notes with the net proceeds of
certain equity offerings, at a price equal to
110.75% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the
redemption date, provided that at least 65% of the
aggregate principal amount of the notes remains
outstanding after the redemption.
Change of Control.......... Following a change of control, we will be required
to make an offer to purchase all of the notes at a
purchase price of 101% of their principal amount,
plus accrued and unpaid interest.
Certain Covenants.......... We issued the original notes under, and the new
notes will be issued under, an indenture between
us, the guarantors and The Bank of New York, as
trustee. The indenture limits our ability and the
ability of our restricted subsidiaries to:
-- incur more debt;
-- pay dividends or make other restricted
payments;
-- create or permit to exist certain liens;
-- issue stock of subsidiaries;
-- sell certain assets;
-- incur dividend or other payment restrictions
affecting our subsidiaries;
-- enter into transactions with affiliates; and
-- consolidate, merge or transfer all or
substantially all our assets.
These limitations are subject to a number of
important exceptions and qualifications.
9
Use of Proceeds............ We used the proceeds from the offering of the
original notes and a portion of the proceeds from
the new senior credit facility to:
-- repay all outstanding principal under our
existing senior credit facility;
-- repay all outstanding principal under our
existing equipment credit facility;
-- redeem all of our outstanding 11 5/8% senior
subordinated notes due 2002;
-- redeem all of our outstanding shares of 12%
preferred stock; and
-- pay fees and expenses related to the
Refinancing.
We will not receive any proceeds from the exchange
offer.
Risk Factors............... You should carefully consider the information set
forth in the section entitled "Risk Factors" and
the other information in this prospectus in
deciding whether to participate in the exchange
offer.
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth our summary consolidated financial data for
the years ended December 31, 1998, 1999 and 2000, for the six months ended June
30, 2000 and 2001, and at June 30, 2001. The data for the years ended December
31, 1998, 1999 and 2000 have been derived from our audited consolidated
financial statements and the data for the six months ended June 30, 2000 and
2001 and at June 30, 2001 have been derived from our unaudited consolidated
financial statements. In our opinion, our unaudited consolidated financial
statements include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of our results for the unaudited interim
periods. Our audited and unaudited consolidated financial statements are
included elsewhere in this prospectus. This summary financial data should be
read in conjunction with the information contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated audited and unaudited financial statements, including the notes
related thereto.
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1998 1999 2000 2000 2001
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 134,196 $ 248,362 $ 315,936 $ 156,607 $ 159,195
Less: agency commissions............... (16,908) (34,182) (44,044) (21,870) (22,148)
--------- --------- --------- --------- ---------
Net revenues........................... 117,288 214,180 271,892 134,737 137,047
Expenses:
Programming and broadcast
operations........................ 26,717 33,139 38,633 18,484 20,382
Program rights amortization.......... 31,422 91,799 100,324 51,931 45,863
Selling, general and
administrative.................... 118,559 135,063 137,804 65,901 62,245
Time brokerage and affiliation
fees.............................. 15,699 14,257 5,259 3,370 1,833
Stock-based compensation(1).......... 10,413 16,814 13,866 7,750 3,189
Adjustment of programming to net
realizable value.................. -- 70,499 24,400 24,400 --
Restructuring charge related to joint
sales agreements.................. -- -- 5,760 -- --
Depreciation and amortization........ 50,009 77,860 96,881 42,574 48,132
--------- --------- --------- --------- ---------
Total operating expenses..... 252,819 439,431 422,927 214,410 181,644
--------- --------- --------- --------- ---------
</Table>
10
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1998 1999 2000 2000 2001
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating loss......................... (135,531) (225,251) (151,035) (79,673) (44,597)
Other income (expense):
Interest expense..................... (41,906) (50,286) (47,973) (23,392) (24,138)
Interest income...................... 14,992 8,570 14,022 8,686 2,737
Other expenses, net.................. (2,744) (7,855) (4,426) (2,441) (1,607)
Gains on modification of program
rights obligations................ -- -- 10,221 9,910 466
Gains on sale of Travel Channel and
other broadcast assets............ 51,603 59,453 1,325 (1,800) 10,649
Equity in loss of unconsolidated
investment........................ (13,273) (2,260) (539) -- --
--------- --------- --------- --------- ---------
Loss from continuing operations before
income taxes......................... (126,859) (217,629) (178,405) (88,710) (56,490)
Income tax (provision) benefit......... 37,389 57,257 (120) -- (60)
--------- --------- --------- --------- ---------
Loss from continuing operations........ (89,470) (160,372) (178,525) (88,710) (56,550)
Gain on disposal of discontinued
operations, net of applicable income
taxes(2)............................. 1,182 -- -- -- --
--------- --------- --------- --------- ---------
Net loss............................... (88,288) (160,372) (178,525) (88,710) (56,550)
Dividends, accretion and beneficial
conversion feature on preferred
stock(3)............................. (49,667) (154,207) (212,804) (67,761) (73,009)
--------- --------- --------- --------- ---------
Net loss available to common
stockholders............... $(137,955) $(314,579) $(391,329) $(156,471) $(129,559)
========= ========= ========= ========= =========
Basic and diluted earnings (loss) per
share(4):
Continuing operations................ $ (2.31) $ (5.10) $ (6.16) $ (2.48) $ (2.01)
Discontinued operations.............. 0.02 -- -- -- --
Net loss............................. (2.29) (5.10) (6.16) (2.48) (2.01)
Weighted average shares
outstanding -- basic and
diluted........................... 60,360 61,738 63,515 63,090 64,386
OTHER DATA:
Cash flows used in operating
activities........................... $(150,580) $(181,808) $ (76,036) $ (26,908) $ (34,775)
Cash flows (used in) provided by
investing activities................. (168,486) (160,508) (12,784) (19,914) 3,716
Cash flows provided by financing
activities........................... 285,865 418,065 14,994 64 7,811
Adjusted EBITDA(5)..................... (59,410) (45,821) (4,869) (1,579) 8,557
Program rights payments and deposits... 62,076 125,916 128,288 56,607 58,710
Payments for cable distribution
rights............................... 19,905 30,713 10,727 2,160 8,425
Capital expenditures................... 82,922 34,609 25,110 8,866 13,688
Ratio of earnings to fixed
charges(7)........................... -- -- -- -- --
Deficiency in earnings to cover fixed
charges(7)........................... (113,586) (215,369) (177,866) (88,710) (56,454)
Ratio of earnings to combined fixed
charges and preferred stock
dividends(7)......................... -- -- -- -- --
Deficiency in earnings to cover
combined fixed charges and preferred
stock dividends(7)................... (163,253) (369,576) (390,670) (156,471) (129,463)
</Table>
11
<Table>
<Caption>
AT JUNE 30, 2001
------------------------
AS
ACTUAL ADJUSTED(6)
---------- -----------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital............................................. $ 47,365 $ 43,417
Total assets................................................ 1,431,250 1,435,679
Total debt.................................................. 414,369 487,648
Total redeemable preferred stock............................ 1,149,852 1,092,631
Total common stockholders' deficit.......................... (323,453) (335,082)
</Table>
---------------
(1) Stock-based compensation represents a non-cash charge associated with the
granting of stock options to employees. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Includes gain of $1.2 million, net of applicable income taxes, on the 1997
disposal of our former Network-Affiliated Television and Paxson Radio
segments.
(3) Dividends, accretion and beneficial conversion feature on preferred stock
include non-cash dividends, accretion and the beneficial conversion feature
on our mandatorily redeemable securities of $49.7 million in 1998, $154.0
million in 1999, $205.7 million in 2000, $64.2 million for the six months
ended June 30, 2000, and $69.5 million for the six months ended June 30,
2001.
(4) Because of losses from continuing operations, the effect of stock options
and warrants is antidilutive. Accordingly, our presentation of diluted
earnings per share is the same as that of basic earnings per share.
(5) "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 the 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 use when
evaluating our operating performance. We also believe adjusted EBITDA
enhances an investor's understanding of our results of operations because it
measures our operating performance, exclusive of interest and other
non-operating and non-recurring items as well as non-cash charges for
depreciation, amortization and stock compensation. In evaluating adjusted
EBITDA, investors should consider various factors including its relationship
to our reported operating losses and cash flows from operating activities.
We believe our adjusted EBITDA trends reflect year over year improvements in
our operating performance since launching the PAX TV network. Investors
should be aware that adjusted EBITDA may not be comparable to similarly
titled measures presented by other companies and could be misleading unless
all companies and analysts calculate such measures in the same manner. The
results depicted by adjusted EBITDA are not indicative of our cash flows
from operations and therefore are not available for our discretionary use.
(6) Adjusted to give effect to the Refinancing.
(7) For purposes of this calculation, earnings are defined as net income (loss)
from continuing operations before income taxes and fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing
costs and the component of operating lease expense which we believe
represents an appropriate interest factor.
12
RISK FACTORS
You should consider carefully the following risk factors in addition to the
other information in this prospectus before deciding whether to participate in
the exchange offer.
RISKS RELATING TO OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW AND WE MAY NOT
BECOME PROFITABLE IN THE FUTURE.
We have incurred losses from continuing operations in each fiscal year
since our inception. As a result of these net losses, for the years ended
December 31, 2000, 1999 and 1998, our earnings were insufficient to cover
combined fixed charges and preferred stock dividend requirements by
approximately $390.7 million, $369.6 million and $163.3 million, respectively.
These amounts include non-cash charges of $75.1 million and $65.5 million in
2000 and 1999, respectively, which resulted from our issuance of convertible
preferred stock to NBC with a conversion price per share of Class A common stock
that was less than the public trading price of the Class A common stock on the
closing date of the preferred stock sale. We expect to continue to experience
net losses in the foreseeable future, principally due to interest charges on
outstanding indebtedness (and the debentures into which our outstanding
preferred stock can be exchanged, if issued), dividends on outstanding preferred
stock, and non-cash charges for depreciation and amortization expense related to
fixed assets and intangible assets relating to acquisitions. Future net losses
could be greater than those we have experienced in the past.
Our adjusted EBITDA, has been insufficient to cover our operating expenses,
debt service requirements and other cash commitments in each of the years ended
December 31, 2000, 1999 and 1998. Our negative adjusted EBITDA for these periods
was $4.9 million, $45.8 million and $59.4 million, respectively. We have
financed our operating cash requirements, as well as our capital needs, during
these periods with the proceeds of financing activities, including the issuance
of preferred stock and additional borrowings. We cannot assure you that we will
generate sufficient operating cash flow in the future to pay our debt service
requirements on the notes or that we will be able to obtain sufficient
additional financing to meet our debt service requirements on terms acceptable
to us, or at all.
WE CANNOT PREDICT WHETHER PAX TV WILL BE SUCCESSFUL.
We launched PAX TV on August 31, 1998, and have a relatively limited
history of operating PAX TV. The experiences of other new television networks
during the past decade indicate that it requires a substantial period of time
and the commitment of significant financial, managerial and other resources to
gain market acceptance of a new television network by viewing audiences and
advertisers to a sufficient degree that the new network can attain
profitability. The network television industry has been dominated for many years
by ABC, NBC and CBS, and only recently have additional broadcast networks
entered the market. Although we believe that our approach is unique among
broadcast television networks, in that we own and operate the stations reaching
most of the television households reached by PAX TV, our business model is
unproven. We cannot assure you that PAX TV will gain sufficient market
acceptance to be profitable or otherwise be successful.
IF OUR TELEVISION PROGRAMMING DOES NOT ATTRACT SUFFICIENT NUMBERS OF VIEWERS IN
DESIRABLE DEMOGRAPHIC GROUPS, 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. While PAX TV audience ratings and our advertising revenues generally
have been increasing since the launch of PAX TV on August 31, 1998, 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 volatile factors beyond our control, such as viewer
preferences,
13
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 impact 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.
OUR JOINT SALES AGREEMENTS MAY NOT IMPROVE THE OPERATIONS OF OUR TELEVISION
STATIONS, AND THIS COULD MATERIALLY INCREASE OUR COSTS TO OPERATE THOSE STATIONS
OR MATERIALLY REDUCE THE REVENUES WE RECEIVE FROM THOSE STATIONS.
While we believe that each of our stations which operates under a JSA
should experience an improvement in overall operating performance through a
combination of improved revenues and operating cost reductions, we cannot assure
you that we will realize any operating improvements. The achievement of
operating improvements at our stations operating under JSAs depends to a
substantial degree on the performance of our JSA partners, over which we have no
control. In addition, if we elect to terminate a JSA in a particular market, we
may incur significant costs to transfer the JSA to another broadcast television
station operator or to resume operating the station ourselves.
IF ADVERTISERS HAVE TO PAY HIGHER RESIDUAL PAYMENTS TO THE MEMBERS OF THE ACTORS
GUILDS THAT THEY USE IN SPOT ADVERTISEMENTS ON OUR NETWORK, ADVERTISERS MAY
REDUCE OR DISCONTINUE THEIR ADVERTISING ON OUR NETWORK.
Approximately 29% of our 2000 revenues were derived from network commercial
spot advertisements aired on PAX TV. We believe substantially all of our network
spot advertisements were produced by advertisers or their advertising agencies
using performers who are members of the Screen Actors Guild and the American
Federation of Television and Radio Artists. When commercials are aired on
broadcast and cable television networks, the performers are entitled to residual
payments from the advertisers, which are determined under collective bargaining
agreements between the guilds and the advertising community. In the fall of
2000, after the expiration of the then effective guild agreements and a
prolonged strike by performers, the guilds and the advertising community entered
into new guild agreements. Under both the old guild agreements and the current
guild agreements, the residual payments required to be paid by advertisers in
connection with advertisements aired on cable networks are substantially lower
than the residuals required to be paid in connection with advertising aired on
broadcast networks. To date, we believe that a substantial portion of the
network spot advertising time on PAX TV was purchased by advertisers under the
assumption that the residual payment obligations the advertising community
incurred in connection with airing these spots were to be calculated under the
rates applicable to cable networks, not those applicable to other broadcast
networks. Although the old guild agreements did not specify how residual
payments were to be calculated for advertisements aired on PAX TV, the current
guild agreements include provisions establishing residual rates that are
applicable to network advertisements aired on PAX TV and that are substantially
lower than the rates applicable to broadcast networks but still higher, in most
circumstances, than the rates applicable to cable networks. As a result of this
development, some advertisers have informed us that our network advertising
spots are no longer as attractive as those of cable networks because of the
relatively higher residual payments applicable to PAX TV under the current guild
agreements. Because of these higher residual payments, some advertisers may be
unwilling to purchase advertising time on PAX TV unless we lower our rates or
otherwise provide financial compensation to them. We are unable to predict the
magnitude of the effect of this development on our network spot advertising
revenues.
14
NBC'S EXERCISE OF ITS RIGHTS TO EXERT SIGNIFICANT INFLUENCE UPON THE MANAGEMENT
OF OUR BUSINESS COULD ADVERSELY AFFECT OUR BUSINESS.
In September 1999, we entered into a series of agreements with NBC under
which it invested $415 million in our company. The agreements with NBC provided,
among things, that we must obtain NBC's consent for:
- approval of annual budgets;
- expenditures materially in excess of budgeted amounts;
- material acquisitions of programming;
- material amendments to our certificate of incorporation or bylaws;
- material asset sales or purchases, including, in some cases, sales of our
television stations;
- business combinations where we would not be the surviving corporation or
as a result of which we would experience a change of control;
- issuances or sales of any capital stock, with some exceptions;
- stock splits or recombinations;
- any increase in the size of our board of directors other than any
increase resulting from provisions of our outstanding preferred stock of
up to two additional directors; and
- joint sales, joint services, time brokerage, local marketing or similar
agreements as a result of which our stations with national household
coverage of 20% or more would be subject to those agreements.
As a result of our agreements with NBC, NBC is in a position to exert
significant influence over our management and policies and to prevent us from
taking actions which our management may otherwise desire to take. NBC may have
interests that differ from those of our other stockholders and debtholders.
In connection with its investment in us, NBC acquired rights to purchase
more of our securities from us and the right, on or after February 1, 2002, and
subject to various conditions, to purchase all of the shares of our Class B
common stock owned by Mr. Paxson. The exercise of these rights would result in
NBC acquiring control of our company.
WE MAY NOT BE ABLE TO REDEEM OUR SECURITIES HELD BY NBC IF AND WHEN REQUIRED AND
THIS COULD HAVE ADVERSE CONSEQUENCES FOR US.
NBC has the right, at any time that the Federal Communications Commission
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
require us to redeem, or arrange for a third party to acquire, any shares of our
Series B preferred stock then held by NBC. Our ability to effect any required
redemption is restricted by the terms of our debt and preferred stock and will
be restricted by the notes. NBC also has the right to require us to 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 required redemption, 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, NBC will also have the right to exercise in full its
existing warrant to purchase shares of our Class A common stock and its right to
acquire Mr. Paxson's Class B common stock without regard to the limitations on
exercisability before February 1, 2002 otherwise applicable and, to the extent
the minimum exercise price provisions of those instruments would otherwise be
applicable, at a reduced minimum exercise price. If NBC does not exercise these
rights, we will have another 30 day period to effect a redemption. If we then
fail to effect a redemption, NBC may require us to effect, 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.
15
Should NBC exercise any of its redemption rights, we may not have
sufficient funds to pay the redemption price for the securities to be redeemed
and may not be able to identify another party willing to purchase those
securities at the required redemption prices. If we are unable to complete a
required redemption, we will be unable to prevent NBC from transferring a
controlling interest in our company to a third party selected by NBC in its
discretion or 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 in a manner
that management believes will permit us to defer recognizing for income tax
purposes up to approximately $333 million of gain (before deferred taxes). The
IRS could, however, contest our position. Based on the advice of our legal
counsel, our management believes that, were the IRS to challenge our tax
position, it is more likely than not that we would prevail. Should the IRS
successfully challenge our position on these matters, we could be subject to a
material current tax liability.
WE ARE REQUIRED BY THE FCC TO ABANDON THE ANALOG BROADCAST SERVICE OF 24 OF OUR
FULL POWER STATIONS OCCUPYING THE 700 MHZ SPECTRUM AND MAY SUFFER ADVERSE
CONSEQUENCES IF WE ARE UNABLE TO SECURE ALTERNATIVE DISTRIBUTION ON REASONABLE
TERMS.
Twenty-four of our full power stations are licensed to broadcast by using
either an analog or digital signal on channels 52 - 69, a portion of the
frequency within the 700 MHz band of broadcast spectrum currently allocated to
television broadcasters by the FCC. As part of the nationwide transition from
analog to digital broadcasting, current FCC rules require that, after December
31, 2006, provided that 85% of television households in a television market are
capable of receiving digital services, broadcasters give up their analog signal
occupying the 700 MHz spectrum and broadcast only on their allotted digital
frequency. In some cases broadcasters, including our company, have been given a
digital channel allocation within the 700 MHz band of spectrum. We recently
lobbied Congress and the FCC to delay enforcement of these rules to allow us to
develop and implement strategies to vacate our 700 MHz spectrum and secure
alternative distribution. The FCC, by order released September 17, 2001,
authorized analog stations operating in the 700 MHz band to operate their analog
signal on the channel assigned for digital service and to delay the institution
of digital service until December 31, 2005, or later than December 31, 2005 if
it can be demonstrated that less than 70% of the television households in the
station's market area are capable of receiving digital broadcast signals.
Broadcasters given a digital channel allocation within the 700 MHz band may
forego the use of that channel for digital service until December 31, 2005, or
later than December 31, 2005 if it can be demonstrated that less than 70% of the
television households in the station's market are capable of receiving digital
broadcast signals. We cannot predict when we will abandon, by private agreement
or as required by law, the broadcast service of each of our 24 stations
occupying the 700 MHz spectrum. We could suffer adverse consequences if we are
unable to secure alternative simultaneous distribution of both the analog and
digital signals of those stations on reasonable terms and conditions. We cannot
now predict the impact, if any, on our business of the abandonment of our
broadcast television service in the 700 MHz spectrum.
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY DEVELOP OUR BROADCAST STATION
GROUP'S DIGITAL TELEVISION PLATFORM.
We have commenced construction of our digital broadcasting facilities and
intend to explore the most effective use of digital broadcast technology for
each of our stations. We cannot assure you, however, that we will derive
commercial benefits from the development of our digital broadcasting capacity.
Although we believe that proposed alternative and supplemental uses of our
analog and digital spectrum will continue to grow in number, the viability and
success of each proposed alternative or supplemental use of spectrum involves a
number of contingencies and uncertainties. We cannot predict what future actions
the FCC or Congress may take with respect to regulatory control of these
activities or what effect these actions would have on us.
16
WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT TEAM AND KEY PERSONNEL AND THE LOSS
OF ANY OF THEM COULD MATERIALLY AND ADVERSELY AFFECT US.
Our business depends upon the efforts, abilities and expertise of our
executive officers and other key employees, including Mr. Paxson and Jeffrey
Sagansky, our Chief Executive Officer. We cannot assure you that we will be able
to retain the services of any of our key executives. If any of these executive
officers were to leave us, our operating results could be adversely affected.
WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT.
We compete for audience share and advertising revenues with other providers
of television programming. Our PAX TV programming competes for audience share
and advertising revenues with the programming offered by other broadcast and
cable networks, and also competes for audience share and advertising revenues in
our stations' respective market areas with the programming offered by
non-network affiliated television stations. Our ability to compete successfully
for audience share and advertising revenues depends upon the popularity of our
programming with viewing audiences in demographic groups that advertisers desire
to reach. Our ability to provide popular programming depends upon many factors,
including our ability to correctly gauge audience tastes and accurately predict
which programs will appeal to viewing audiences, to produce original programs
and purchase the right to air syndicated programs at costs which are not
excessive in relation to the advertising revenue generated by the programming,
and to fund marketing and promotion of our programming to generate sufficient
viewer interest. Many of our competitors have greater financial and operational
resources than we do which may enable them to compete more effectively for
audience share and advertising revenues. All of the existing television
broadcast networks and most of the cable networks have been operating for a
longer period than we have been operating PAX TV, and therefore have more
experience in network television operations than we have which may enable them
to compete more effectively.
Our television stations also compete for audience share with other forms of
entertainment programming, including home entertainment systems and direct
broadcast satellite video distribution services which transmit programming
directly to homes equipped with special receiving antennas and tuners. Further
advances in technology may increase competition for household audiences. Our
stations also compete for advertising revenues with other television stations in
their respective markets, as well as with other advertising media, such as
newspapers, radio stations, magazines, outdoor advertising, transit advertising,
yellow page directories, direct mail and local cable systems. We cannot assure
you that our stations will be able to compete successfully for audience share or
that we will be able to obtain or maintain significant advertising revenue.
The television broadcasting industry faces continual technological change
and innovation, the possible rise in popularity of competing entertainment and
communications media, and governmental restrictions or actions of federal
regulatory bodies, including the FCC and the Federal Trade Commission, any of
which could have a material effect on our operations.
RISKS RELATING TO OUR INDUSTRY
OUR TELEVISION STATIONS COULD BE ADVERSELY AFFECTED BY CHANGES IN THE TELEVISION
BROADCASTING INDUSTRY OR A RECESSION IN THE BROADER U.S. ECONOMY.
The profitability of our television stations is subject to various factors
that influence the television broadcasting industry as a whole, including:
- changes in audience tastes;
- changes in priorities of advertisers;
- new laws and governmental regulations and policies;
- changes in broadcast technical requirements;
- technological changes;
17
- proposals to eliminate the tax deductibility of expenses incurred by
advertisers;
- changes in the law governing advertising by candidates for political
office; and
- changes in the willingness of financial institutions and other lenders to
finance television station acquisitions and operations.
We cannot predict which, if any, of these or other factors might have a
significant impact on the television broadcasting industry in the future, nor
can we predict what impact, if any, the occurrence of these or other events
might have on our operations. Generally, advertising expenditures tend to
decline during economic recession or downturn. Consequently, our revenues are
likely to be adversely affected by a recession or downturn in the U.S. economy
or other events or circumstances that adversely affect advertising activity. Our
operating results in individual geographic markets also could be adversely
affected by local regional economic downturns. Seasonal revenue fluctuations are
common in the television broadcasting industry and result primarily from
fluctuations in advertising expenditures by local retailers.
OUR BUSINESS IS SUBJECT TO EXTENSIVE AND CHANGING REGULATION THAT COULD INCREASE
OUR COSTS, EXPOSE US TO GREATER COMPETITION, OR OTHERWISE ADVERSELY AFFECT THE
OWNERSHIP AND OPERATION OF OUR STATIONS OR OUR BUSINESS STRATEGIES.
Our television operations are subject to significant regulation by the FCC
under the Communications Act of 1934. A television station may not operate
without the authorization of the FCC. Approval of the FCC is required for the
issuance, renewal and transfer of station operating licenses. In particular, our
business depends upon our ability to continue to hold television broadcasting
licenses from the FCC. FCC licenses generally have a term of eight years. Our
station licenses are subject to renewal at various times between 2004 and 2007.
Third parties may challenge our license renewal applications. Although we have
no reason to believe that our licenses will not be renewed in the ordinary
course, we cannot assure you that our licenses or the licenses owned by the
owner-operators of the stations with which we have JSAs will be renewed. The
non-renewal or revocation of one or more of our primary FCC licenses could have
a material adverse effect on our operations.
The Communications Act of 1934 empowers the FCC to regulate other aspects
of our business, in addition to imposing licensing requirements. For example,
the FCC has the authority to:
- determine the frequencies, location and power of our broadcast stations,
- regulate the equipment used by our stations,
- adopt and implement regulations and policies concerning the ownership and
operation of our television stations, and
- impose penalties on us for violations of the Communications Act of 1934
or FCC regulations.
Our failure to observe FCC or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures or the
revocation of a license.
Congress and the FCC currently have under consideration, and may in the
future adopt, new laws, regulations, and policies regarding a wide variety of
matters that could, directly or indirectly, affect the operation and ownership
of our broadcast properties. Relaxation and proposed relaxation of existing
cable ownership rules and broadcast multiple ownership and cross-ownership rules
and policies by the FCC and other changes in the FCC's rules following passage
of the Telecommunications Act of 1996 have affected and may continue to affect
the competitive landscape in ways that could increase the competition we face,
including competition from larger media, entertainment and telecommunications
companies, which may have greater access to capital and resources. We are unable
to predict the impact that any such laws, regulations or policies may have on
our operations.
18
WE BELIEVE THAT THE SUCCESS OF OUR TELEVISION OPERATIONS DEPENDS TO A
SIGNIFICANT EXTENT UPON ACCESS TO HOUSEHOLDS SERVED BY CABLE TELEVISION SYSTEMS.
IF THE LAW REQUIRING CABLE SYSTEM OPERATORS TO CARRY OUR SIGNAL WERE TO CHANGE,
WE MIGHT LOSE ACCESS TO CABLE TELEVISION HOUSEHOLDS, WHICH COULD ADVERSELY
AFFECT OUR OPERATIONS.
Under the 1992 Cable Act, each broadcast station is required to elect,
every three years, to exercise the right to either require cable television
system operators in their local market to carry their signals, which we refer to
as "must carry" rights, or to prohibit cable carriage or condition it upon
payment of a fee or other consideration. By electing the "must carry" rights, a
broadcaster can demand carriage on a specified channel on cable systems within
its market. These "must carry" rights are not absolute, and under some
circumstances, a cable system may decline to carry a given station. Our
television stations elected "must carry" on local cable systems for the three
year election period which commenced January 1, 2000. The required election date
for the next three year election period commencing January 1, 2003 will be
October 1, 2002. If the law were changed to eliminate or materially alter "must
carry" rights, our business could be adversely affected.
The FCC is developing rules to govern the obligations of cable television
systems to carry local television stations during and following the transition
from analog to digital television broadcasting. The FCC tentatively concluded
that a television broadcast station would not be entitled to mandatory carriage
of both the station's analog signal and its digital signal, and would not be
entitled to mandatory carriage of its digital signal unless it first gives up
its analog signal. Furthermore, the FCC tentatively concluded that a broadcaster
with multiple digital programming streams would be required to designate the
primary video stream eligible for mandatory carriage. If the FCC maintains its
current position, mandatory carriage rights for digital signals would be
accorded only to those television stations operating solely with a digital
signal. Broadcasters operating with both analog and digital signals nevertheless
could negotiate with cable television systems for carriage of their digital
signal. We cannot predict what final rules the FCC ultimately will adopt or what
effect those rules will have on our business.
IF A COURT WERE TO DETERMINE THAT RECENTLY ENACTED FEDERAL LEGISLATION REQUIRING
SATELLITE TELEVISION SERVICE PROVIDERS TO CARRY BROADCAST TELEVISION SIGNALS IS
UNCONSTITUTIONAL, OUR RIGHTS TO HAVE OUR TELEVISION BROADCAST SIGNALS CARRIED ON
SATELLITE SERVICE PROVIDERS COULD BE ADVERSELY AFFECTED.
Under recently enacted federal law, satellite television providers have an
obligation to deliver local broadcast signals to customers residing in a
broadcast television station's local market. Satellite carriers must obtain
consent from the broadcast television station before carrying its signal, and
television stations must negotiate for retransmission consent in good faith.
Beginning January 1, 2002, a satellite carrier delivering the signal of any
local television station will be required to carry all stations licensed in the
carried station's local market. To implement this law, the FCC recently adopted
rules similar to the "must carry" obligations that apply to cable television
systems. Under the new rules, stations may elect either mandatory carriage or
negotiate for retransmission consent. Two satellite television providers and a
satellite broadcasting trade association have instituted litigation challenging
the constitutionality of the statutory satellite "must carry" requirements. In
June 2001 a federal district court upheld the constitutionality of the federal
law. This decision is on appeal. Our PAX TV signal currently is carried on
satellite systems under agreements we negotiated with the satellite television
providers, which allow the satellite provider to sell and retain the advertising
revenues from a portion of the non-network advertising time during PAX TV
programming hours. We cannot predict the final outcome of the litigation
challenging the constitutionality of satellite "must carry" requirements or the
effect, if any, that the failure to implement satellite "must carry" would have
on our business.
19
RISKS RELATING TO THE NOTES
OUR SUBSTANTIAL INDEBTEDNESS AND PREFERRED STOCK COULD IMPAIR OUR FINANCIAL
CONDITION AND OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER OUR INDEBTEDNESS AND
PREFERRED STOCK.
We have substantial debt and redeemable preferred stock. After giving
effect to the Refinancing, as of June 30, 2001 we would have had total
indebtedness of $487.6 million and redeemable preferred stock with an aggregate
liquidation preference of approximately $1,138.0 million ($1,037.4 million of
which is exchangeable, subject to certain restrictions, into subordinated
indebtedness ranking equally with the notes). Our interest expense was $41.9
million for the year ended December 31, 1998, $50.3 million for the year ended
December 31, 1999, and $48.0 million for the year ended December 31, 2000. In
addition, we will be required to commence payment of cash dividends on our
12 1/2% exchangeable preferred stock with respect to the period commencing
October 15, 2002. Subject to the restrictions to be contained in the indenture
governing the notes and in the agreement governing the new senior credit
facility and the terms of our existing preferred stock and the indentures
governing the indebtedness for which the preferred stock may be exchanged, we
may incur additional indebtedness. The level of our indebtedness and redeemable
preferred stock could have important consequences to us and you.
For example, our substantial indebtedness and redeemable preferred stock
could:
- make it more difficult for us to satisfy our obligations with respect to
the notes;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt and preferred stock, thereby reducing
the availability of our cash flow to fund working capital, capital
expenditures and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have proportionately less debt and preferred stock;
- make it more difficult for us to borrow money for working capital,
capital expenditures, acquisitions or other purposes; and
- expose us to the risk of increased interest rates with respect to that
portion of our debt which has a variable rate of interest.
If we are unable to meet our indebtedness and preferred stock obligations,
we could be forced to restructure or refinance our indebtedness, seek additional
equity capital or sell assets. We may be unable to obtain financing or sell
assets on satisfactory terms, or at all.
THE TERMS OF OUR INDEBTEDNESS AND OUR PREFERRED STOCK IMPOSE SIGNIFICANT
RESTRICTIONS ON OUR BUSINESS.
The indenture governing the notes and the agreement governing the new
senior credit facility contain, and the terms of our existing preferred stock
and the indentures governing the indebtedness for which the preferred stock may
be exchanged contain, various covenants that limit our ability to:
- incur additional indebtedness;
- engage in transactions with affiliates;
- incur liens;
- make restricted payments, including dividends;
20
- enter into business combinations and asset sale transactions; and
- make investments.
These restrictions could limit our ability to obtain future financing, make
acquisitions or needed capital expenditures, withstand a future downturn in our
business or the economy in general, conduct operations or otherwise take
advantage of business opportunities that may arise. The new senior credit
facility also requires us to maintain specified financial ratios. Our ability to
meet future financial ratios can be affected by events beyond our control, such
as general economic conditions. Our failure to maintain any applicable financial
ratios would prevent us from borrowing additional amounts under the senior
credit facility and could result in a default under that facility, which could
cause the indebtedness outstanding under the facility, and by reason of
cross-default provisions, the notes and any other indebtedness we may then have,
to become immediately due and payable. If we were unable to repay those amounts,
the lenders under the new senior credit facility could initiate a bankruptcy
proceeding or liquidation proceeding or proceed against the collateral granted
to them to secure that indebtedness. If the lenders under the new senior credit
facility were to accelerate the repayment of outstanding borrowings, we might
not have sufficient assets to repay our indebtedness, including the notes.
WE DEPEND UPON OUR SUBSIDIARIES' CASH FLOW TO MEET OUR OBLIGATIONS, AND
THEREFORE OUR ABILITY TO PAY INTEREST AND PRINCIPAL ON THE NOTES MAY BE
ADVERSELY AFFECTED BY RESTRICTIONS THAT APPLY TO OUR SUBSIDIARIES UNDER THE
TERMS OF THEIR INDEBTEDNESS.
Our operations are conducted through our direct and indirect wholly-owned
subsidiaries, which will guarantee the notes, jointly and severally, on a senior
subordinated unsecured basis. We do not have significant assets other than our
equity in our subsidiaries, and we depend upon the cash flow of our subsidiaries
to meet our own obligations. Accordingly, our ability to make interest and
principal payments when due to holders of the notes and our ability to purchase
the notes upon a change of control depend upon the receipt of sufficient funds
from our subsidiaries, which may be restricted by the terms of their senior
indebtedness. As a result, the notes and the subsidiary guarantees effectively
are subordinated to all existing and future senior indebtedness and other
liabilities and commitments of the guarantors.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES AND UNDER THE SUBSIDIARY
GUARANTEES IS JUNIOR TO OUR SENIOR DEBT AND THAT OF THE SUBSIDIARY GUARANTORS.
The notes are junior in right of payment to all of our existing and future
senior debt, including obligations under our new senior credit facility. Each
guarantee of the notes is subordinate to all existing and future senior debt of
the respective guarantors, including the guarantors' obligations under the new
senior credit facility. In the event of our bankruptcy, liquidation or
reorganization, or the bankruptcy, liquidation or reorganization of a guarantor,
our assets, or the assets of the guarantor, will be available to pay obligations
on the notes or under the applicable guarantee only after all senior debt has
been paid in full, and we cannot assure you that we or the guarantors have
sufficient assets to pay amounts due on the notes. The lenders under our new
senior credit facility have a first priority security interest covering
substantially all of our assets and the assets of the guarantors. The
subordination provisions of the indenture governing the notes also provide that
we can make no payment to you during the continuance of payment defaults on our
senior debt, and payments to you may be suspended for a period of up to 179 days
if a nonpayment default exists under our senior debt. See "Description of
Notes -- Ranking" for additional information. As of June 30, 2001, after giving
effect to the Refinancing, we would have had senior debt in an aggregate
principal amount of approximately $287.6 million (excluding unused commitments
of $73.0 million under our new senior credit facility) and the guarantors would
have guarantees with respect to senior debt in an aggregate principal amount of
$227.9 million (excluding unused commitments of $73.0 million under our new
senior credit facility, and consisting entirely of guarantees of a portion of
our borrowings under our new senior credit facility). We may incur additional
debt from time to time, subject to certain restrictions, some or all of which
may be senior debt.
WE MAY BE UNABLE TO REPURCHASE THE NOTES IF WE EXPERIENCE A CHANGE OF
CONTROL.
If we were to experience a change of control, the indenture governing the
notes requires us to offer to purchase all of the outstanding notes at a price
equal to 101% of their principal amount, plus accrued interest. Our new senior
credit facility restricts our ability to repurchase notes, including the
repurchase of notes under
21
a change of control offer. Our failure to repay holders tendering notes upon a
change of control will result in an event of default under the notes. A change
of control, or an event of default under the notes, may also result in an event
of default under our new senior credit facility, which may result in the
acceleration of the indebtedness under that facility requiring us to repay that
indebtedness immediately. Further, the terms of our outstanding preferred stock
require us to offer to purchase all of the preferred shares then outstanding at
101% or 100% (as applicable) of the then effective liquidation preference of
those instruments, plus accumulated and unpaid dividends. The indentures
governing the debentures for which most of the preferred stock may be exchanged
have similar change of control provisions. If a change of control were to occur,
we cannot assure you that we would have sufficient funds to repay debt
outstanding under the new credit facility or to purchase the notes or any other
securities which we would be required to offer to purchase. We expect that we
would require additional financing from third parties to fund any such
purchases, and we cannot assure you that we would be able to obtain financing on
satisfactory terms or at all.
A COURT MAY VOID THE GUARANTEES OF THE NOTES OR SUBORDINATE THE GUARANTEES
TO OTHER OBLIGATIONS OF THE SUBSIDIARY GUARANTORS.
Although standards may vary depending on the applicable law, generally
under U.S. federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, if a court were to find that, among other things, at the time any
guarantor of the notes incurred the debt evidenced by its guarantee of the
notes, the guarantor:
either:
- was insolvent or rendered insolvent by reason of the incurrence of the
guarantee;
- was engaged or about to engage in a business or transaction for which
that guarantor's remaining assets constituted unreasonably small
capital;
- was a defendant in an action for money damages, or had a judgment for
money damages docketed against it, if in either case, after a final
judgment, the judgment were unsatisfied; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature;
and
- that guarantor received less than reasonable equivalent value or fair
consideration for the incurrence of its guarantee; or
- incurred the guarantee or made related distributions or payments with
the intent of hindering, delaying or defrauding creditors,
there is a risk that the guarantee of that guarantor could be voided by the
court, or claims by holders of the notes under the guarantee could be
subordinated to other debts of that guarantor. In addition, any payment by the
guarantor pursuant to its guarantee could be required to be returned to that
guarantor, or to a fund for the benefit of the creditors of that guarantor.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding. Generally, however,
a guarantor of the notes would be considered insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair value of all of its assets at a fair valuation; or
- the present fair value of its assets was less than the amount that would
be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature; or
- it could not pay its debts as they become due.
22
THERE IS NO PUBLIC TRADING MARKET FOR THE NOTES.
The notes are a new issue of securities for which there is currently no
established trading market. We do not intend to have the notes listed on a
national securities exchange, although we expect that they will be eligible for
trading in the PORTAL market. In addition, although the initial purchasers of
the notes have advised us that they currently intend to make a market in the
notes, they are not obligated to do so, and may discontinue market making
activities at any time without notice. If an active market does not develop or
is not maintained, the market price and liquidity of the notes may be adversely
affected. We cannot assure you as to the liquidity of the market for the notes
or the prices at which you may be able to sell the notes.
In addition, any holder of original notes who tenders in the exchange offer
for the purpose of participating in a distribution of the new notes may be
deemed to have received restricted securities, and if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
YOUR ORIGINAL NOTES WILL NOT BE ACCEPTED FOR EXCHANGE IF YOU FAIL TO FOLLOW
THE EXCHANGE OFFER PROCEDURES.
We will issue new notes under this exchange offer only after a timely
receipt of your original notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, if you want to tender
your original notes, please allow sufficient time to ensure timely delivery. If
we do not receive your original notes, Letter of Transmittal and other required
documents by the expiration date of the exchange offer, we will not accept your
original notes for exchange. We are under no duty to give notification of
defects or irregularities with respect to the tenders of original notes for
exchange. If there are defects or irregularities with respect to your tender of
original notes, we will not accept your original notes for exchange.
IF YOU DO NOT EXCHANGE YOUR ORIGINAL NOTES, YOUR ORIGINAL NOTES WILL
CONTINUE TO BE SUBJECT TO THE EXISTING TRANSFER RESTRICTIONS AND YOU MAY BE
UNABLE TO SELL YOUR ORIGINAL NOTES.
We did not register the original notes, nor do we intend to do so following
the exchange offer. Original notes that are not tendered will therefore continue
to be subject to the existing transfer restrictions and may be transferred only
in limited circumstances under the securities laws. If you do not exchange your
original notes, you will lose your right to have your original notes registered
under the federal securities laws. As a result, if you hold original notes after
the exchange offer, you may be unable to sell your original notes.
23
RATIOS OF EARNINGS TO FIXED CHARGES
The following are the unaudited consolidated ratios of earnings to fixed
charges for each of the years in the five-year period ended December 31, 2000
and for the six month period ended June 30, 2001.
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- --------- --------- --------- -------- --------
(IN THOUSANDS) (UNAUDITED)
Ratio of earnings to
fixed charges....... -- -- -- -- -- -- --
Deficiency in earnings
to cover fixed
charges............. $(30,436) $(57,953) $(113,586) $(215,369) $(177,866) $(88,710) $(56,454)
</Table>
For purposes of the ratios of earnings to fixed charges, earnings are
defined as net income (loss) from continuing operations before income taxes and
fixed charges. Fixed charges consist of interest expense, amortization of
deferred financing costs and the component of operating lease expense which we
believe represents an appropriate interest factor. A statement setting forth the
computation of the ratio of earnings to fixed charges is filed as an exhibit to
the Registration Statement of which this prospectus is a part.
24
USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations under
the registration rights agreement. We will not receive any cash proceeds from
the issuance of the new notes. In consideration for issuing the new notes
contemplated in this prospectus, we will receive original notes in like
principal amount, the form and terms of which are the same as the form and terms
of the new notes, except as otherwise described in this prospectus. The original
notes surrendered in exchange for new notes will be retired and canceled.
Accordingly, no additional debt will result from the exchange. We have agreed to
bear the expenses of the exchange offer.
The proceeds of the offering of the original notes were $200,000,000. We
used the proceeds from the original notes, the Term B facility and an initial
draw of approximately $2.0 million under the revolving credit facility to:
- repay in full our outstanding indebtedness of $120.5 million under our
then-existing senior credit facility;
- repay in full our outstanding indebtedness of $59.9 million under our
then-existing equipment credit facility;
- redeem our then-outstanding 11 5/8% senior subordinated notes due 2002,
in the outstanding principal amount of $230.0 million, and pay the $4.6
million redemption premium required in connection with this redemption;
- redeem our then-outstanding 12% preferred stock, which had an accrued
liquidation preference of $59.1 million, and
- pay the fees and expenses of the Refinancing.
The indebtedness under our senior credit facility that was repaid in
connection with the Refinancing would have matured on June 30, 2002, and bore
interest at a rate of 2.5% per annum over a base rate or 3.5% per annum over
LIBOR, as selected by us from time to time. The interest rate at repayment was
7.5%.
The indebtedness under our equipment credit facility that was repaid in
connection with the Refinancing would have matured on June 30, 2002, and bore
interest at a rate of 2.75% per annum over a specified index rate or 3.75% per
annum over LIBOR or a commercial paper rate, as selected by us from time to
time. The interest rate at repayment was 7.7%.
The indebtedness under our 11 5/8% senior subordinated notes that were
redeemed in connection with the Refinancing would have matured on October 1,
2002 and bore interest at a fixed rate of 11 5/8%.
25
CAPITALIZATION
The following table sets forth our unaudited capitalization as of June 30,
2001 (1) on an historical basis and (2) as adjusted to give effect to the
Refinancing as if it had occurred on June 30, 2001. This table should be read in
conjunction with the information contained in our consolidated financial
statements and the notes appearing elsewhere in this prospectus.
<Table>
<Caption>
AT JUNE 30, 2001
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Senior secured credit facility that was repaid in the
Refinancing............................................... $ 121,000 $ --
Equipment purchase credit facility that was repaid in the
Refinancing............................................... 63,342 --
11 5/8 senior subordinated notes due 2002 that were redeemed
in the Refinancing(1)..................................... 229,379 --
Revolving facility.......................................... -- 2,000
Term B facility............................................. -- 285,000
Notes offered under the original offering................... -- 200,000
Other long-term debt........................................ 648 648
---------- ----------
Total debt........................................ 414,369 487,648
---------- ----------
12% preferred stock that was redeemed in the Refinancing.... 57,221 --
12 1/2% exchangeable preferred stock........................ 262,895 262,895
13 3/4% exchangeable preferred stock........................ 289,851 289,851
Series A convertible preferred stock........................ 97,926 97,926
Series B convertible preferred stock........................ 441,959 441,959
---------- ----------
Total redeemable preferred stock.................. 1,149,852 1,092,631
---------- ----------
Total debt and redeemable preferred stock......... 1,564,221 1,580,279
---------- ----------
Class A common stock........................................ 56 56
Class B common stock........................................ 8 8
Class A and B common stock warrants......................... 68,384 68,384
Stock subscription notes receivable......................... (1,088) (1,088)
Additional paid-in capital.................................. 501,828 501,828
Deferred stock option compensation.......................... (3,810) (3,810)
Accumulated deficit......................................... (888,831) (900,460)
---------- ----------
Total common stockholders' deficit................ (323,453) (335,082)
---------- ----------
Total capitalization.............................. $1,240,768 $1,245,197
========== ==========
</Table>
---------------
(1) Net of unamortized discount of $621,000.
26
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth our consolidated financial data for the
years ended December 31, 1996, 1997, 1998, 1999 and 2000, for the six months
ended June 30, 2000 and 2001 and at June 30, 2001. The data for the years ended
December 31, 1996, 1997, 1998, 1999 and 2000 have been derived from our audited
consolidated financial statements and the data for the six months ended June 30,
2000 and 2001 and at June 30, 2001 have been derived from our unaudited
consolidated financial statements. In our opinion, our unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of our results for the unaudited
interim periods. The audited consolidated financial statements for the years
ended December 31, 1998, 1999 and 2000, and the unaudited consolidated financial
statements for the six months ended June 30, 2000 and 2001 and at June 30, 2001
are included elsewhere in this prospectus. This financial data should be read in
conjunction with the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
audited and unaudited financial statements, including the related notes.
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
--------- -------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 62,333 $ 88,421 $ 134,196 $ 248,362 $ 315,936 $ 156,607 $ 159,195
Less: agency commissions.................. (7,855) (10,537) (16,908) (34,182) (44,044) (21,870) (22,148)
--------- -------- --------- --------- --------- --------- ---------
Net revenues.............................. 54,478 77,884 117,288 214,180 271,892 134,737 137,047
Expenses:
Programming and broadcast operations.... 6,237 13,289 26,717 33,139 38,633 18,484 20,382
Program rights amortization............. 1,382 704 31,422 91,799 100,324 51,931 45,863
Selling, general and administrative..... 27,322 33,751 118,559 135,063 137,804 65,901 62,245
Time brokerage and affiliation fees..... 3,568 16,961 15,699 14,257 5,259 3,370 1,833
Stock-based compensation(1)............. 6,976 3,370 10,413 16,814 13,866 7,750 3,189
Compensation associated with Paxson
Radio asset sales(2).................. -- 9,700 -- -- -- -- --
Adjustment of programming to net
realizable value...................... -- -- -- 70,499 24,400 24,400 --
Restructuring charge related to joint
sales agreements...................... -- -- -- -- 5,760 -- --
Depreciation and amortization........... 12,888 22,044 50,009 77,860 96,881 42,574 48,132
--------- -------- --------- --------- --------- --------- ---------
Total operating expenses.......... 58,373 99,819 252,819 439,431 422,927 214,410 181,644
--------- -------- --------- --------- --------- --------- ---------
Operating loss............................ (3,895) (21,935) (135,531) (225,251) (151,035) (79,673) (44,597)
Other income (expense):
Interest expense........................ (31,526) (37,728) (41,906) (50,286) (47,973) (23,392) (24,138)
Interest income......................... 6,742 9,495 14,992 8,570 14,022 8,686 2,737
Other expenses, net..................... (1,757) (5,722) (2,744) (7,855) (4,426) (2,441) (1,607)
Gains on modification of program rights
obligations........................... -- -- -- -- 10,221 9,910 466
Gains on sale of Travel Channel and
other broadcast assets................ -- -- 51,603 59,453 1,325 (1,800) 10,649
Equity in loss of unconsolidated
investment............................ -- (2,493) (13,273) (2,260) (539) -- --
--------- -------- --------- --------- --------- --------- ---------
Loss from continuing operations before
income taxes............................ (30,436) (58,383) (126,859) (217,629) (178,405) (88,710) (56,490)
Income tax (provision) benefit............ -- 21,879 37,389 57,257 (120) -- (60)
--------- -------- --------- --------- --------- --------- ---------
Loss from continuing operations........... (30,436) (36,504) (89,470) (160,372) (178,525) (88,710) (56,550)
Gain on disposal of discontinued
operations, net of applicable income
taxes(3)................................ 4,217 251,193 1,182 -- -- -- --
--------- -------- --------- --------- --------- --------- ---------
Net income (loss)......................... (26,219) 214,689 (88,288) (160,372) (178,525) (88,710) (56,550)
Dividends, accretion and beneficial
conversion feature on preferred
stock(4)................................ (21,908) (26,277) (49,667) (154,207) (212,804) (67,761) (73,009)
--------- -------- --------- --------- --------- --------- ---------
Net income (loss) available to common
stockholders............................ $ (48,127) $188,412 $(137,955) $(314,579) $(391,329) $(156,471) $(129,559)
========= ======== ========= ========= ========= ========= =========
</Table>
27
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
--------- -------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic and diluted earnings (loss) per
share(5):
Continuing operations................... $ (1.20) $ (1.17) $ (2.31) $ (5.10) $ (6.16) $ (2.48) $ (2.01)
Discontinued operations................. .10 4.67 0.02 -- -- -- --
Net income (loss)....................... (1.10) 3.50 (2.29) (5.10) (6.16) (2.48) (2.01)
Weighted average shares
outstanding -- basic and diluted...... 43,837 53,808 60,360 61,738 63,515 63,090 64,386
OTHER DATA:
Cash flows used in operating activities... $ (2,551) $(76,041) $(150,580) $(181,808) $ (76,036) $ (26,908) $ (34,775)
Cash flows (used in) provided by investing
activities.............................. (258,530) (21,772) (168,486) (160,508) (12,784) (19,914) 3,716
Cash flows provided by financing
activities.............................. 254,761 118,705 285,865 418,065 14,994 64 7,811
Adjusted EBITDA(6)........................ 19,537 30,140 (59,410) (45,821) (4,869) (1,579) 8,557
Program rights payments and deposits...... 1,425 37,485 62,076 125,916 128,288 56,607 58,710
Payments for cable distribution rights.... -- -- 19,905 30,713 10,727 2,160 8,425
Capital expenditures...................... 36,709 44,474 82,922 34,609 25,110 8,866 13,688
Ratio of earnings to fixed charges(7)..... -- -- -- -- -- -- --
Deficiency in earnings to cover fixed
charges(7).............................. (30,436) (57,953) (113,586) (215,369) (177,866) (88,710) (56,454)
Ratio of earnings to combined fixed
charges and preferred stock
dividends(7)............................ -- -- -- -- -- -- --
Deficiency in earnings to cover combined
fixed charges and preferred stock
dividends(7)............................ (49,694) (84,230) (163,253) (369,576) (390,670) (156,471) (129,463)
</Table>
<Table>
<Caption>
AT DECEMBER 31, AT JUNE 30, 2001
------------------------------------------------------------ ---------------------------
1996 1997 1998 1999 2000 ACTUAL AS ADJUSTED(8)
-------- ---------- ---------- ---------- ---------- ---------- --------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital.................... $ 76,201 $ 86,944 $ 1,807 $ 237,855 $ 74,298 $ 47,365 $ 43,417
Total assets....................... 543,182 1,057,113 1,542,786 1,690,087 1,526,047 1,431,250 1,435,679
Total debt......................... 231,708 350,754 373,998 388,421 405,476 414,369 487,648
Total redeemable preferred stock... 184,710 210,987 521,401 949,807 1,080,389 1,149,852 1,092,631
Total common stockholders' equity
(deficit)........................ 106,775 367,744 247,673 96,721 (199,789) (323,453) (335,082)
</Table>
---------------
(1) Stock-based compensation represents a non-cash charge associated with the
granting of stock options to employees. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Bonuses paid to certain members of our management team in connection with
their efforts in assimilating, operating and arranging for the sale of our
radio stations and properties in 1997.
(3) Includes gains on the 1997 disposal of our former Network-Affiliated
Television and Paxson Radio segments of $254.7 million in 1997 and $1.2
million in 1998, net of applicable income taxes.
(4) Dividends, accretion and beneficial conversion feature on preferred stock
include non-cash dividends, accretion and the beneficial conversion feature
on our mandatorily redeemable securities of $49.7 million in 1998, $154.0
million in 1999, $205.7 million in 2000, $64.2 million for the six months
ended June 30, 2000 and $69.5 million for the six months ended June 30,
2001.
(5) Because of losses from continuing operations, the effect of stock options
and warrants is antidilutive. Accordingly, our presentation of diluted
earnings per share is the same as that of basic earnings per share.
(6) "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 the consolidated statements
of cash flows, is not a measure of financial performance under generally
accepted accounting principles, and should not be considered in isolation.
Management believes 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
28
believe adjusted EBITDA enhances an investor's understanding of our results
of operations because it measures our operating performance, exclusive of
interest and other non-operating and non-recurring items as well as non-cash
charges for depreciation, amortization and stock compensation. In evaluating
adjusted EBITDA, investors should consider various factors including its
relationship to our reported operating losses and cash flows from operating
activities. We believe our adjusted EBITDA trends reflect year over year
improvements in our operating performance since launching the PAX TV
network. Investors should be aware that adjusted EBITDA may not be
comparable to similarly titled measures presented by other companies and
could be misleading unless all companies and analysts calculate such
measures in the same manner. The results depicted by adjusted EBITDA are not
indicative of our cash flows from operations and therefore are not available
for our discretionary use.
(7) For purposes of this calculation, earnings are defined as net income (loss)
from continuing operations before income taxes and fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing
costs and the component of operating lease expense which we believe
represents an appropriate interest factor.
(8) As adjusted to give effect to the Refinancing.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are a network television broadcasting company which owns and operates
the largest broadcast television station group in the U.S., as measured by the
number of television households in the markets our stations serve. We currently
own and operate 65 broadcast television stations (including three stations we
operate under time brokerage agreements), which reach all of the top 20 U.S.
markets and 41 of the top 50 U.S. markets. We operate PAX TV, a network that
provides family entertainment programming seven days per week and reaches
approximately 84% of prime time television households in the U.S. through our
broadcast television station group, and pursuant to distribution arrangements
with cable and satellite distribution systems and our affiliates.
We were founded in 1991 by Mr. Paxson, who remains our Chairman and
controlling stockholder. We began by purchasing radio and television stations,
and grew to become Florida's largest radio station group, while also owning two
network-affiliated television stations and other television stations that
carried principally infomercials and other paid programming. In 1997, we sold
our radio station group and our network-affiliated television stations to
concentrate on building our owned and operated television station group. We used
the proceeds from the sale of our radio station group and network-affiliated
television stations to acquire television stations and build the PAX TV network.
Since commencing our television operations in 1994, we have established the
largest owned and operated broadcast television station group in the U.S., as
measured by the number of television households in the markets our stations
serve. We launched PAX TV on August 31, 1998, and are now in our third network
programming season.
In September 1999, NBC invested $415 million in our company. We have also
entered into a number of agreements with NBC that are intended to strengthen our
business. Under these agreements, NBC sells our network spot advertising and
performs our network research and sales marketing functions. We have also
entered into JSAs with NBC with respect to all of our stations serving markets
also served by an NBC owned and operated station, and with many independently
owned NBC affiliated stations serving markets also served by our stations.
During the six months ended June 30, 2001, we paid or accrued amounts due to NBC
totaling approximately $9.7 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:
- 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. We pay commissions of up to 15% of gross revenue to
advertising agencies for network advertising. Our network advertising
revenue represented approximately 34% of our revenue during the six
months ended June 30, 2001.
- 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. We pay commissions of up to 15% of
gross revenue to advertising agencies for long form paid programming.
Network long form paid programming represented approximately 33% of our
revenue during the six months ended June 30, 2001.
- Station Advertising Revenue. We also sell commercial air time 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
30
advertising in these markets. Station advertising rates are affected by
ratings and local market conditions. We pay commissions of up to 15% of
gross revenue to advertising agencies for station advertising sales. Our
station advertising sales represented approximately 33% of our revenue
during the six months ended June 30, 2001. Included in station
advertising revenue is long form paid programming sold locally or
nationally which represented approximately 16% of our revenue during the
six months ended June 30, 2001.
Our revenue mix has changed since we launched PAX TV in 1998. The
percentage mix of our long form paid programming has declined from more than 90%
in 1997 to 49% (combined network and station long form) in the six months ended
June 30, 2001 due to the increase in spot advertising sales following the launch
of PAX TV. Long-form paid programming, however, continues to represent a
significant portion of our revenues.
Starting in the fourth quarter of 1999, we began entering into JSAs with
owners of broadcast stations in markets served by our stations. After
implementation of a JSA, we no longer employ our own on-site station sales
staff. The JSA partner provides station spot advertising sales management and
representation for our stations and we integrate and co-locate our station
operations with those of our JSA partners. During the fourth quarter of 2000, we
approved a plan to restructure our television station operations by entering
into JSAs with owners of broadcast stations in markets in which our stations
were not already operating under JSAs. To date, we have entered into JSAs for 55
of our television stations. Our restructuring plan includes two major
components: (1) termination of 226 station sales and administrative employees
and (2) the closing of our leased studio and sales office facilities at each of
our stations. These restructuring activities resulted in a charge of
approximately $5.8 million in the fourth quarter of 2000, consisting of $2.7
million of termination benefits and $3.1 million of costs associated with the
closing of our studios and sales offices that will no longer be utilized upon
implementation of the JSAs. During the six months ended June 30, 2001, we paid
termination benefits to 39 employees totaling approximately $905,000 and paid
lease termination costs of approximately $342,000, which were charged against
the restructuring reserve. We expect to substantially complete the restructuring
plan by the end of 2001; however, certain lease obligations may continue through
mid-2002.
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 continue to produce original programming, we
expect our programming amortization expense to increase in the near term. As we
acquire a more complete library of lower cost original programming to replace
our syndicated programming, however, our programming amortization expense should
decline.
31
RESULTS OF CONTINUING OPERATIONS
The following table sets forth net revenues, the components of operating
expenses with percentages of net revenues, and other operating data for the
periods presented:
<Table>
<Caption>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------- -----------------------------------
1998 % 1999 % 2000 % 2000 % 2001 %
--------- ------ --------- ------ --------- ----- -------- ----- -------- -----
(UNAUDITED)
(IN THOUSANDS)
Revenues..................... $ 134,196 $ 248,362 $ 315,936 $156,607 $159,195
Less: agency commissions..... (16,908) (34,182) (44,044) (21,870) (22,148)
--------- --------- --------- -------- --------
Net revenues................. 117,288 100.0 214,180 100.0 271,892 100.0 134,737 100.0 137,047 100.0
Expenses:
Programming and broadcast
operations............... 26,717 22.8 33,139 15.5 38,633 14.2 18,484 13.7 20,382 14.9
Program rights
amortization............. 31,422 26.8 91,799 42.9 100,324 36.9 51,931 38.5 45,863 33.5
Selling, general and
administrative........... 118,559 101.1 135,063 63.1 137,804 50.7 65,901 48.9 62,245 45.4
Time brokerage and
affiliation fees......... 15,699 13.4 14,257 6.7 5,259 1.9 3,370 2.5 1,833 1.3
Stock-based compensation... 10,413 8.9 16,814 7.8 13,866 5.1 7,750 5.8 3,189 2.3
Adjustment of programming
to net realizable
value.................... -- -- 70,499 32.9 24,400 9.0 24,400 18.1 -- --
Restructuring charge
related to JSAs.......... -- -- -- -- 5,760 2.1 -- -- -- --
Depreciation and
amortization............. 50,009 42.6 77,860 36.3 96,881 35.6 42,574 31.6 48,132 35.1
--------- ------ --------- ------ --------- ----- -------- ----- -------- -----
Total operating
expenses........... 252,819 215.6 439,431 205.2 422,927 155.5 214,410 159.1 181,644 132.5
--------- ------ --------- ------ --------- ----- -------- ----- -------- -----
Operating loss............... $(135,531) (115.6) $(225,251) (105.2) $(151,035) (55.5) $(79,673) (59.1) $(44,597) (32.5)
========= ====== ========= ====== ========= ===== ======== ===== ======== =====
OTHER DATA:
Cash flows used in operating
activities................. $(150,580) $(181,808) $ (76,036) $(26,908) $(34,775)
Cash flows (used in) provided
by investing activities.... (168,486) (160,508) (12,784) (19,914) 3,716
Cash flows provided by
financing activities....... 285,865 418,065 14,994 64 7,811
Adjusted EBITDA(1)........... (59,410) (45,821) (4,869) (1,579) 8,557
Program rights payments and
deposits................... 62,076 125,916 128,288 56,607 58,710
Payments for cable
distribution rights........ 19,905 30,713 10,727 2,160 8,425
Capital expenditures......... 82,922 34,609 25,110 8,866 13,688
</Table>
---------------
(1) "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 the 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 use when
evaluating our operating performance. We also believe adjusted EBITDA
enhances an investor's understanding of our results of operations because it
measures our operating performance exclusive of interest and other
non-operating and non-recurring items as well as non-cash charges for
depreciation, amortization and stock compensation. In evaluating adjusted
EBITDA, investors should consider various factors including its relationship
to our reported operating losses and cash flows from operating activities.
We believe our adjusted EBITDA trends reflect year over year improvements in
our operating performance since launching the PAX TV network. 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
32
same manner. The results depicted by adjusted EBITDA are not indicative of
our cash flows from operations and therefore are not available for our
discretionary use.
Six Months Ended June 30, 2001 and 2000
Net revenues increased 1.7% to $137.0 million for the six months ended June
30, 2001 from $134.7 million for the six months ended June 30, 2000. This
increase is primarily attributable to higher advertising revenues from the PAX
TV network offset in part by a decrease in revenue from our television stations.
The increase in PAX TV network advertising revenues resulted from increases in
ratings and distribution of PAX TV, favorable results from our network sales
agreement with NBC and increases in long-form programming rates. The decrease in
television station revenues is primarily due to reduced television spot
advertising revenues in our local markets.
Programming and broadcast operations expenses were $20.4 million during the
six months ended June 30, 2001 compared with $18.5 million for the comparable
period last year. This increase is primarily due to higher programming costs
associated with original program development and expenses of implementing JSAs
and other JSA transition costs. Program rights amortization expense was $45.9
million during the six months ended June 30, 2001 compared with $51.9 million
for the comparable period last year. The decrease is due to changes in program
frequency and scheduling as well as a greater mix of lower cost original
programming versus the comparable period last year. Selling, general and
administrative expenses were $62.2 million during the six months ended June 30,
2001 compared with $65.9 million for the comparable period last year. The
decrease is primarily due to lower selling costs, including promotional
advertising, and other cost cutting measures. Time brokerage and affiliation
fees were $1.8 million during the six months ended June 30, 2001 compared with
$3.4 million for the comparable period last year. This decrease is due to the
completion of acquisitions of stations we previously operated under TBAs.
Stock-based compensation expense was $3.2 million during the six months ended
June 30, 2001 compared with $7.8 million for the comparable period last year.
This decrease is due to a reduction in options vesting in the first half of 2001
compared with the same period last year. During the first quarter of 2000, we
recorded a programming rights adjustment to net realizable value of $24.4
million resulting from a change in our estimated future usage of certain
programming. Depreciation and amortization expense was $48.1 million during the
six months ended June 30, 2001 compared with $42.6 million for the comparable
period last year. This increase is due to assets acquired as well as accelerated
depreciation on assets to be disposed of in connection with the JSA
restructuring plan described above.
Interest expense for the six months ended June 30, 2001, increased 3.1% to
$24.1 million from $23.4 million in the same period in 2000. The increase is
primarily due to a greater level of senior debt and higher interest rates on our
debt throughout the period. At June 30, 2001, total long-term debt and senior
subordinated notes were $414.4 million compared with $390.2 million as of June
30, 2000. Interest income for the six months ended June 30, 2001 decreased 68.5%
to $2.7 million from $8.7 million in the same period in 2000. The decrease is
primarily due to lower average cash and short-term investment balances in 2001.
Gain on modification of program rights obligations during 2000 primarily
reflects our return of certain programming rights that had been written off
during 1999, in exchange for cash of $4.9 million and the cancellation of the
remaining payment obligations.
Years Ended December 31, 2000 and 1999
Net revenues increased to $271.9 million for 2000 from $214.2 million for
1999, an increase of 26.9%. The increase in net revenues in 2000 is due to
increases in advertising revenues from PAX TV and our television stations. The
increase in PAX TV network advertising revenues resulted from increased ratings
and distribution of PAX TV as well as the favorable effect of our network sales
agreement with NBC. The increase in station advertising revenues resulted from
an increase in ratings and television station acquisitions. Our net revenues for
2000 were also favorably affected by increases in our long form programming
rates.
Programming and broadcast operations expenses were $38.6 million in 2000
compared with $33.1 million in 1999. The increase is primarily due to completion
of acquisitions of stations we previously operated under
33
TBAs. Program rights amortization expense was $100.3 million in 2000 compared
with $91.8 million in 1999. The increase reflects the increased cost of new
programming and greater usage of certain programs compared with last year.
Selling, general and administrative expenses were $137.8 million in 2000
compared with $135.1 million in 1999. The increase is primarily due to
commissions paid pursuant to JSAs entered into during 2000. Time brokerage and
affiliation fees were $5.3 million in 2000 compared with $14.3 million in 1999.
The decrease is due to the completion of acquisitions of stations we previously
operated under TBAs. In 2000, we recorded a programming rights adjustment to net
realizable value of $24.4 million compared with $70.5 million in 1999 resulting
from changes in our estimated future usage of certain programming. Depreciation
and amortization expense was $96.9 million in 2000 compared with $77.9 million
in 1999. The increase is due primarily to acquisitions and accelerated
depreciation on assets to be disposed of in connection with the JSA
restructuring plan described above.
Our JSA restructuring activities resulted in a charge of approximately $5.8
million in the fourth quarter of 2000, consisting of $2.7 million of termination
benefits and $3.1 million of costs associated with moving out of leased
properties that will no longer be used upon implementation of the JSAs. We
expect to substantially complete the implementation of the restructuring by the
end of 2001; however, certain lease obligations may continue through mid-2002.
Upon full implementation of JSAs, we expect to reduce our annual station
operating expenses by approximately $20 to $25 million consisting primarily of
salary and occupancy costs. These savings will be partially offset by
commissions paid to our JSA partners which, based on 2000 actual net revenues,
would total approximately $10 million. Actual commissions will vary based on
actual revenues realized.
We have issued options to purchase shares of Class A common stock to
certain members of management and employees under our stock compensation plans.
As of December 31, 2000, there were 7,774,286 options outstanding under these
plans. In addition to these options, we have granted options to purchase
3,200,000 shares of Class A common stock to members of senior management and
others. In connection with option and warrant grants, we recognized stock-based
compensation expense of approximately $13.9 million, $16.8 million and $10.4
million in 2000, 1999 and 1998, respectively, and expect that approximately $7.0
million of additional compensation expense will be recognized over the remaining
vesting period of the outstanding options.
In October 1999, we amended the terms of substantially all of our
outstanding employee stock options to provide for accelerated vesting of the
options in the event of termination of employment as a result of the
consolidation of our operations or functions with those of NBC or within six
months preceding or three years following a change in control of our company. If
any of these events occur, we could be required to recognize stock-based
compensation expense at earlier dates than currently expected.
Interest expense for 2000 decreased 4.6% to $48.0 million from $50.3
million in 1999. The decrease is due to repayment in the fourth quarter of 1999
of debt of DP Media, Inc., a corporation formerly owned by family members of Mr.
Paxson that we acquired in June 2000 and whose financial results were
consolidated with ours since September 30, 1999. At December 31, 2000, we had
total long term debt and senior subordinated notes of $405.5 million compared
with $388.4 million as of December 31, 1999. Interest income for 2000 increased
63.6% to $14.0 million from $8.6 million in 1999. The increase is due primarily
to the investment of the cash proceeds from the September 1999 $415 million
investment by NBC.
During 2000, we recognized a $10.2 million gain from the modification of
program rights obligations primarily resulting from our return of certain fully
amortized programming rights in exchange for cash of $4.9 million and the
cancellation of our remaining payment obligations. During 1999, we recognized an
approximately $59.5 million pre-tax gain on the sale of our 30% interest in the
Travel Channel LLC and television stations. This gain consists of a $17.0
million pre-tax gain on the sale of our interest in the Travel Channel, a $23.8
million pre-tax gain on the transfer of our interest in station KWOK serving the
San Francisco market during the first quarter of 1999 and pre-tax gains of $18.7
million on the sale of four television stations during the second quarter of
1999.
The Series B preferred stock issued in conjunction with the NBC transaction
was issued with a conversion price per share that was less than the closing
price of the Class A common stock on the date of
34
issuance. As a result, we recognized a beneficial conversion feature in
connection with the issuance of the stock equal to the amount of the discount
multiplied by the number of shares into which the Series B preferred stock is
convertible. The beneficial conversion feature calculated for 1999, totaling
approximately $65.5 million, was reflected in our statement of operations as a
preferred stock dividend during 1999 and was allocated to additional paid-in
capital because the preferred stock was immediately convertible. In November
2000, the Emerging Issues Task Force of the Financial Accounting Standards Board
reached a consensus regarding the accounting for beneficial conversion features
which required us to recalculate the beneficial conversion feature utilizing the
accounting conversion price rather than the stated conversion price used for
1999. This change resulted in a cumulative catch-up adjustment totaling
approximately $75.1 million, which was recorded as a preferred stock dividend in
the fourth quarter of 2000.
Years Ended December 31, 1999 and 1998
Net revenues for 1999 increased to $214.2 million from $117.3 million in
1998, an increase of 82.6%. This increase was primarily due to increased
advertising revenues as a result of greater distribution of our programming and
the first full year of PAX TV operations following its launch on August 31,
1998.
Programming and broadcast operations expenses were $33.1 million in 1999
compared with $26.7 million in 1998. This increase is due to completion of
acquisitions. Programming rights amortization was $91.8 million in 1999 compared
with $31.4 million in 1998. This increase is due to a full twelve months usage
of programming during 1999 compared with four months in 1998 following the
network launch. Selling, general and administrative expenses were $135.1 million
in 1999 compared with $118.6 million in 1998.
This increase is due to a full year of costs associated with the launch and
support of the PAX TV network. Stock-based compensation expense was $16.8
million in 1999 compared with $10.4 million in 1998. This increase is due to the
vesting of options granted in 1998 and prior. Depreciation and amortization
expense was $77.9 million in 1999 compared with $50.0 million in 1998. This
increase is due to equipment purchases and acquisitions. In the second quarter
of 1999, we recorded a programming rights adjustment to net realizable value of
$70.5 million, reflecting a decrease in programming value due to lower
anticipated future usage, ratings and related revenues for these programs.
Interest expense for 1999 increased 20% to $50.3 million from $41.9 million
in 1998, due to a higher level of senior debt and higher interest rates
throughout the period as well as the consolidation of DP Media's interest
expense for the fourth quarter. At December 31, 1999, we had total long term
debt of $388.4 million, compared with $374.0 million as of December 31, 1998.
Interest income for 1999 decreased 43% to $8.6 million from $15.0 million in
1998, primarily due to lower levels of cash and cash equivalents resulting from
the use of the proceeds of the radio segment sale in 1997 and the June 1998
preferred stock sales to fund acquisitions and operating expenses.
The $59.5 million gain on sale of the Travel Channel and television
stations in 1999 resulted from the sale of our interests in the Travel Channel,
the transfer of our interest in station KWOK serving the San Francisco market
and the sale of four television stations. The $51.6 million gain in 1998
resulted from the sale of three television stations. Included in other expense,
net for 1999, is a loss of $4.5 million, representing our estimate of advances
and costs related to the planned acquisition of a television station, which were
determined to be unrecoverable because of the termination of the acquisition
contract.
During 1998, we also recognized a $1.2 million gain on the 1997 sale of our
former radio segment, net of applicable income taxes of $2.2 million. This gain
reflects an adjustment of $2.7 million of estimated costs attributable to the
radio segment sale and the recovery of a $3 million loan related to the
billboard operations of our radio segment, which was charged off against the
gain in 1997. We recorded an additional $2.3 million of income taxes within
discontinued operations in 1998, as a result of certain adjustments by the IRS
reducing our net operating loss carry-forwards relating to the historical
results of the radio segment.
35
LIQUIDITY AND CAPITAL RESOURCES
On July 12, 2001, we completed a $560 million financing consisting of the
$360 million senior credit facility and a $200 million offering of the original
notes. Proceeds from the original notes offering and the initial funding under
the new senior credit facility were used to refinance all of our indebtedness
and obligations under our previously existing credit facilities which were
scheduled to mature in June 2002, our 11 5/8% Senior Subordinated Notes, and our
12% redeemable preferred stock, as well as to pay premiums, fees and expenses in
connection with the Refinancing. In the third quarter of 2001, we will recognize
an extraordinary loss totaling approximately $10.0 million which includes
unamortized debt costs related to the refinanced indebtedness and the $4.6
million redemption premium associated with the repayment of the 11 5/8% Senior
Subordinated Notes.
The $360 million senior credit facility consists of a $25 million revolving
credit facility maturing June 2006, all of which has been drawn, a $50 million
delayed draw Term A facility, maturing December 2005, $8 million of which is
currently drawn, and a $285 million fully drawn Term B facility, maturing June
2006. The revolving credit facility is available for general corporate purposes
and the Term A facility is available to fund capital expenditures. Interest
under the senior credit facility is at LIBOR plus 3.0%. The notes are due in
2008 and interest on the notes is payable on January 15 and July 15 of each
year, beginning on January 15, 2002.
Our primary capital requirements are to fund capital expenditures for our
television properties, syndicated programming rights payments, cable carriage,
promotion payments, debt service payments and working capital. Our primary
sources of liquidity are our net working capital and availability under the
delayed draw term facility and revolving facility portions of our new senior
credit facility.
As of June 30, 2001, we had $74.8 million in cash and short-term
investments and working capital of approximately $47.4 million. During the six
months ended June 30, 2001, our working capital decreased $26.9 million
primarily due to the use of $12.9 million to complete the acquisition of
television stations, $23.7 million to pay interest due under certain of our debt
instruments and $3.5 million to pay preferred stock dividends, offset by
proceeds from the sale of television stations of $15.1 million. During the year
ended December 31, 2000, our working capital decreased $163.6 million due to our
use of $74.2 million to complete the acquisition of television stations, $40.1
million to pay interest due under certain of our debt instruments, $25.1 million
to fund capital expenditures, $7.1 million to fund preferred stock dividend
payments and $17.1 million to fund other operating activities, offset by
proceeds from the exercise of stock options, additional borrowings under our
equipment credit facility and proceeds from the sale of certain of our
television stations.
On a pro forma basis, as if the Refinancing, including the offering of the
original notes, had occurred on June 30, 2001, we would have had $287.0 million
in outstanding indebtedness under the new senior credit facility. We currently
have $317.3 million in outstanding indebtedness under the new senior credit
facility. We intend to use the $50 million Term A portion of the new senior
credit facility to fund the majority of our capital expenditures through the end
of 2002. The terms of the new senior credit facility and the indenture governing
the 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 June 2001, we completed the sale of our Phoenix/Flagstaff and St. Louis
television stations and received approximately $15.1 million in proceeds. In
August 2001, we completed the sale of our three Puerto Rico television stations
and received $11 million in proceeds. Additionally, we have entered or intend to
enter into agreements to sell other specified assets and anticipate the proceeds
from these transactions to be approximately $75 million to $85 million. These
assets include our television stations serving markets in Honolulu and
Boston/Merrimack, certain low-powered television stations, accounts receivable
and certain tower assets. We expect to receive the proceeds related to these
remaining asset sales during 2001 and 2002. We believe that cash provided by
future operations, net working capital, available funding under the Term A
facility and revolving facility portions of the new senior credit facility and
the proceeds from the planned sales of assets will provide the liquidity
necessary to meet our obligations and financial commitments for at least the
next twelve months. If we are unable to sell the identified assets on acceptable
terms or our financial results are not as anticipated, we may be required to
seek to sell additional assets or raise additional funds through the
36
offering of equity securities in order to generate sufficient cash to meet our
liquidity needs. We cannot assure you that we would be successful in selling
assets or raising additional funds if this were to occur.
Cash used in operating activities was approximately $76.0 million, $181.8
million and $150.6 million for 2000, 1999 and 1998, respectively, and $34.8
million and $26.9 million for the six months ended June 30, 2001 and 2000,
respectively. These amounts primarily reflect the operating costs incurred in
connection with the operation of PAX TV and the related cable distribution
rights and programming rights payments.
Cash provided by (used in) investing activities was approximately $3.7
million and ($19.9) million for the six months ended June 30, 2001 and 2000,
respectively. These amounts include acquisitions of broadcast properties,
capital expenditures, short term investment transactions, proceeds from the sale
of television stations and other transactions. As of June 30, 2001, we had
agreements to purchase significant assets of, or to enter into time brokerage
and financing arrangements with respect to broadcast properties totaling
approximately $44.1 million, net of deposits and advances. We anticipate we will
spend approximately $2 million in the remainder of 2001 to satisfy certain of
these commitments. Cash used in investing activities of approximately $12.8
million, $160.5 million and $168.5 million for 2000, 1999 and 1998,
respectively, primarily reflects acquisitions of and investments in broadcast
properties, proceeds from the sale of television stations and the Travel
Channel, capital expenditures, short term investment transactions and other
transactions.
In June 2000, we completed the acquisition of DP Media, Inc. Before the
acquisition, DP Media was beneficially owned by family members of Mr. Paxson. We
acquired DP Media for aggregate consideration of $113.5 million, $106 million of
which we had previously advanced during 1999. DP Media's assets included a 32%
equity interest in a limited liability company that owns television station WWDP
in Norwell, Massachusetts and is controlled by the former stockholders of DP
Media. We allocated the aggregate purchase price of DP Media to the assets
acquired and liabilities assumed based on their relative fair market values.
During the third quarter of 1999, we advanced funds to DP Media to fund
operating cash flow needs. As a result of our significant operating
relationships with DP Media and our funding of DP Media's operating cash flow
needs, the assets and liabilities of DP Media, together with their results of
operations, have been included in our consolidated financial statements since
September 30, 1999. In consolidating the results of DP Media with ours, at
December 31, 1999 we recorded current assets of approximately $4.3 million,
current liabilities of approximately $1.3 million, property, plant and equipment
of approximately $22.2 million, intangible assets of approximately $72.2 million
and other assets of approximately $2.6 million.
During 2000, we acquired the assets of four television stations for total
consideration of approximately $68.7 million, of which $10.9 million was paid in
prior years, and we paid approximately $8.9 million of additional consideration
in respect of an acquisition completed in February 1999. During 1999, we
acquired the assets of five television stations for total consideration of
approximately $65.6 million. In February 1999, we also completed the acquisition
of WCPX in Chicago by transferring our interest in KWOK serving the San
Francisco market as partial consideration for WCPX. In connection with the
transfer of ownership of KWOK, we recognized a pre-tax gain of approximately
$23.8 million. During 1998, we acquired the assets of 26 television stations for
total consideration of approximately $591.4 million, financed primarily from
proceeds from the sale of our former Radio segment.
During 2000, we sold our interests in four stations for aggregate
consideration of approximately $14.5 million and realized pre-tax gains of
approximately $1.3 million on these sales. During 1999, we sold our interests in
four stations for aggregate consideration of approximately $61 million and
realized pre-tax gains of approximately $18.7 million on these sales. In
addition, in February 1999, we sold a 30% interest in the Travel Channel for
aggregate consideration of approximately $55 million and realized a pre-tax gain
of approximately $17 million. The results of operations of the Travel Channel
have been included in our 1999 and 1998 consolidated statement of operations
using the equity method of accounting through the date of sale. During 1998, we
sold our interests in three stations for aggregate consideration of $79.5
million and realized pre-tax gains of approximately $51.6 million.
Capital expenditures, which consist primarily of station construction costs
and purchases of broadcasting equipment for our station operations, were
approximately $25.1 million in 2000, $34.6 million in 1999, $82.9
37
million in 1998, and $13.7 million and $8.9 million for the six months ended
June 30, 2001 and 2000, respectively. Except for television stations presently
operating analog television service in the 700 MHz band and stations given a
digital channel allocation within that band, the FCC has mandated that each
licensee of a full power broadcast television station, that was allotted a
second digital television channel in addition to the current analog channel,
complete the build-out of its digital broadcast service by May 2002. For those
stations now operating in the 700 MHz band or allotted a digital channel within
that band, the institution of digital television service may be delayed until
December 31, 2005, or later than December 31, 2005 if it can be demonstrated
that less than 70% of the television households in the station's market are
capable of receiving digital television signals. Despite the current uncertainty
that exists in the broadcasting industry with respect to standards for digital
broadcast services, planned formats and usage, we intend to comply with the
FCC's timing requirements for the broadcast of digital television. We have
commenced migration to digital broadcasting in certain of our markets and will
continue to do so throughout the required time period. Because of the
uncertainty as to standards, formats and usage, however, we cannot currently
predict with reasonable certainty the amount or timing of the expenditures we
will likely have to make to complete the digital conversion of our stations, but
we currently anticipate spending at least $70 million. It is likely that we will
fund our digital conversion from the $50 million Term A facility entered into as
part of the Refinancing, as well as cash on hand, the monetization of certain
non-core assets, and from other financing arrangements.
Cash provided by financing activities primarily reflects the proceeds from
long-term debt borrowings to fund capital expenditures and the exercise of
common stock options, net of repayments of long-term debt and payments of
preferred stock dividends.
As of June 30, 2001, our programming contracts require aggregate payments
of approximately $192.7 million as follows (in thousands):
<Table>
<Caption>
OBLIGATION FOR PROGRAM RIGHTS
PROGRAM RIGHTS COMMITMENTS TOTAL
-------------- -------------- --------
2001 (July -- December)......................... $ 50,156 $27,029 $ 77,185
2002............................................ 55,343 15,974 71,317
2003............................................ 18,273 8,692 26,965
2004............................................ 6,106 6,650 12,756
2005............................................ -- 4,433 4,433
-------- ------- --------
$129,878 $62,778 $192,656
======== ======= ========
</Table>
We have also committed to purchase at similar terms additional future
series episodes of our licensed programs should they be made available.
As of June 30, 2001, obligations for cable distribution rights require
collective payments by us of approximately $14.9 million as follows (in
thousands):
<Table>
2001 (July -- December).......................................................... $ 12,967
2002............................................................................. 2,623
2003............................................................................. 260
2004............................................................................. 108
--------
$ 15,958
Less: Amount representing interest............................................... (1,081)
--------
Present value of cable rights payable............................................ $ 14,877
========
</Table>
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
addresses financial accounting and reporting for business combinations and
requires all business combinations to be accounted for using the purchase method
of accounting.
38
SFAS 141 is effective for all business combinations initiated after June 30,
2001. We do not believe adoption of SFAS 141 will have a material impact on our
financial position, results of operations or cash flows.
SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. Under SFAS 142, goodwill and intangible assets that
have indefinite lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Impairment losses for goodwill
and other indefinite-lived intangible assets that arise due to the initial
application of SFAS 142 are to be reported as resulting from a change in
accounting principle. We will adopt SFAS 142 on January 1, 2002. We do not
expect to recognize a material impairment loss, if any, resulting from the
adoption of SFAS 142. However, upon adoption of SFAS 142, we will no longer
amortize goodwill and FCC license intangibles (which we believe have indefinite
lives) which totaled approximately $869.4 million, net of accumulated
amortization of $121.8 million at June 30, 2001. Under existing accounting
standards, these assets are being amortized over 25 years. Amortization expense
related to goodwill and FCC licenses totaled approximately $19.7 million and
$17.8 million for the six months ended June 30, 2001 and 2000, respectively.
39
BUSINESS
GENERAL
We are a network television broadcasting company which owns and operates
the largest broadcast television station group in the United States, as measured
by the number of television households in the markets our stations serve. We
currently own and operate 65 full power broadcast television stations (including
three stations we operate under TBAs), 64 of which carry PAX TV, including
stations reaching 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 oriented
entertainment programming seven days per week between the hours of 1:00 p.m. and
midnight, Monday through Friday, and 4:00 p.m. and midnight Saturday and Sunday,
and reach approximately 84% of prime time television households in the U.S.
through our broadcast television station group, and pursuant to distribution
agreements with cable and satellite systems and affiliates. PAX TV's programming
consists of shows originally developed by us and shows that have appeared
previously on other broadcast networks which we have purchased the right to air.
PAX TV reaches approximately 64% of U.S. television households through our
broadcast television station group. We have agreements with cable television
system owners and satellite television providers to carry PAX TV, through which
we reach an additional 15% of U.S. television households in markets not served
by our owned and operated stations. We reach an additional 5% of U.S. television
households through affiliation agreements with 60 independently owned PAX TV
affiliated stations.
We derive our revenues from the sale of network spot advertising time,
network long form paid programming and station advertising:
- Network Spot Advertising. 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 each PAX TV programming season. NBC serves as our
exclusive sales representative to sell most of our network advertising.
Our network advertising sales represented approximately 29% of our 2000
revenue.
- 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. Infomercials are shows produced by
others, at no cost to us, principally to promote and sell products or
services through viewer direct response. Our network long form paid
programming represented approximately 31% of our 2000 revenue.
- Station Advertising. We sell commercial air time to advertisers who want
to reach the viewing audience in specific geographic markets in which our
stations operate. These advertisers may be local businesses or regional
or national advertisers who want to target their advertising in these
markets. In markets in which our stations are operating under joint sales
agreements, or JSAs, our JSA partner serves as our exclusive sales
representative to sell this advertising. Our local sales forces sell this
advertising in markets without JSAs. Our station spot advertising sales
represented approximately 40% of our 2000 revenue (including 18% of our
2000 revenue which was derived from long form paid programming).
We believe that our business model benefits from many of the favorable
attributes of both traditional television networks and network-affiliated
television station groups. Similar to traditional television networks, we
provide advertisers with nationwide reach through our extensive television
distribution system. We own and operate most of our distribution system and,
therefore, we receive advertising revenue from the entire broadcast day
(consisting of both PAX TV and long form paid programming), unlike traditional
networks, which receive advertising revenue only from commercials aired during
network programming hours. In addition, due to the size and centralized
operations of our station group, we are able to achieve economies of scale with
respect to our programming, promotional, research, engineering, accounting and
administrative expenses which we believe enable us to have lower per station
expenses than those of a typical network-affiliated station.
40
BUSINESS STRATEGY
The principal components of our strategy are set forth below:
- Provide Quality Family Programming. We believe there is significant
demand, including from adult demographic groups which are attractive to
advertisers, for quality family oriented programming which is free of
excessive violence, sexual themes and foul language. We are attracting
viewers and establishing a nationally recognized brand by offering
quality family programming. As our PAX TV brand recognition grows, we
believe that PAX TV will increasingly be a "destination channel" to which
viewers turn regularly for family programming, and that PAX TV will
continue to attract advertisers who want to reach the viewer demographics
attracted by our programming.
We are expanding the amount of original programming we air as we believe
this will further improve our viewer demographics and our positive
ratings trends by employing cost efficient development and production
techniques. We have developed original entertainment programming for PAX
TV at lower costs than those typically incurred by other broadcast
networks for original entertainment programming. As opportunities become
available, we also intend to co-develop and share programming with NBC in
order to strengthen our programming lineup.
- Benefit from a Centralized, Efficient Operating Structure. We centralize
many of the functions of our owned and operated stations, including
promotions, advertising, research, engineering, accounting and sales
traffic. Our stations average fewer than ten employees compared to an
average of 90 employees at network-affiliated stations, and an average of
60 employees at independent stations in markets of similar size to ours.
We promote PAX TV and each of our television stations by utilizing a
centralized advertising and promotional program. We also employ a
centralized programming strategy, which we believe enables us to keep our
programming costs per station significantly lower than those of
comparable stations. We provide programming for all of our stations and,
except for local news and syndicated programming provided by JSA
partners, each station offers substantially the same programming
schedule.
- Improve Local Television Station Operations by Implementing Joint Sales
Agreements. We believe we can further improve the operations of our
local stations by implementing JSAs primarily with NBC owned or
affiliated television stations operating in the same markets. To date, we
have entered into JSAs with respect to 55 of our stations, including JSAs
between 48 of our stations and NBC owned or affiliated stations. We
generally expect all of those stations to be operating under the terms of
these JSAs by the end of this year. Each JSA typically provides the
following:
- The JSA partner serves as our exclusive sales representative to sell our
station advertising, enabling our station to benefit from the strength
of the JSA partner's sales organization and existing advertiser
relationships;
- We integrate and co-locate many of our station operations with those of
the JSA partner, reducing our costs through operating efficiencies and
economies of scale, including the elimination of redundant owned and
leased facilities and staffing; and
- The JSA partner may provide local news and syndicated programming,
supplementing and enhancing our station's programming lineup.
- Expand Relationship with NBC. We continue to seek opportunities to
enhance our operations by expanding our relationship with NBC. During
2000, we integrated our network sales operations, research and
collections with those of NBC, which we expect to lead to increased
advertising revenues and improved operating efficiency. We also continue
to seek programming opportunities with NBC. We and NBC have shared the
premiere of the dramatic series Mysterious Ways and NBC's new hit
television show, The Weakest Link, and we have had special PAX TV runs of
original NBC TV movies and sports programs. Our relationship with NBC has
enabled us to access programming which would not be available to us
except by virtue of our relationship with NBC, generally at costs that
have been less than our existing syndicated programming costs. We believe
the selective airing of NBC
41
programming on PAX TV will further improve PAX TV's viewer demographics
and its positive ratings trend.
- Expand and Improve PAX TV Distribution. We intend to continue to expand
our television distribution system through the addition of affiliated
broadcast television stations and cable systems. We intend to expand our
distribution to reach as many U.S. television households as possible in a
cost efficient manner. We continue to improve the channel positioning of
our broadcast television stations on local cable systems across the
country, as we believe the ability to view our programming on one of the
lower numbered channel positions (generally below channel 30) on a cable
system improves the likelihood that viewers will watch our programming.
- Develop Our Broadcast Station Group's Digital Television Platform. Our
owned and operated station group gives us a significant platform for
digital broadcasting. We have commenced construction of our digital
broadcast facilities and intend to explore the most effective use of
digital broadcast technology for each of our stations. Upon completion of
the construction of our digital facilities, we believe that we will be
able to provide a significant broadband platform on which to broadcast
digital television, including multiple additional television networks.
While future applications of this technology and the time frame within
which digital broadcasting will commence are uncertain, we believe that
our existing broadcast stations make us well positioned to take advantage
of future digital broadcasting opportunities.
OUR HISTORY
We were founded in 1991 by Mr. 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 which
carried principally infomercial 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. Since
commencing our television operations in 1994, we have established the largest
owned and operated broadcast television station group in the U.S., as measured
by the number of television households in the markets our stations serve. We
launched PAX TV on August 31, 1998, and are now in our third network programming
season.
DISTRIBUTION
We distribute PAX TV through a television distribution system comprised of
our owned and operated broadcast television stations, cable television systems
in various markets not served by a PAX TV station, satellite television
providers and independently owned PAX TV affiliated broadcast stations.
According to Nielsen our programming currently reaches 84% of U.S. television
households.
We seek to reach as many U.S. television households as possible in a cost
efficient manner. In evaluating opportunities to increase our television
distribution, we consider factors such as the attractiveness of specific
geographic markets and their audience demographics to potential television
advertisers, the degree to which the increased distribution would improve our
nationwide audience reach or upgrade our distribution in a market in which we
already operate, and the effect of any changes in our distribution on our
national ownership position under the Communications Act and FCC rules
restricting the ownership of attributable interests in television stations. We
have increased the number of U.S. television households which can receive our
programming by entering into agreements with cable system operators and
satellite television providers under which they carry our programming on a
designated channel of their cable system or satellite service.
Our Owned and Operated Television Stations. We currently own and operate
65 full power broadcast television stations (including three stations we operate
under TBAs), 64 of which carry PAX TV, including stations reaching all of the
top 20 U.S. markets and 41 of the top 50 U.S. markets. Our owned and operated
station group reaches approximately 64% of U.S. prime time television
households, according to Nielsen. Our ownership of the stations providing most
of our television distribution enables us to receive advertising revenue from
each station's entire broadcast day and to achieve operating efficiencies
typically not enjoyed by network
42
affiliated television stations. As nearly all of our owned and operated stations
operate in the "ultra high frequency," or UHF, portion of the broadcast
spectrum, only half of the number of television households they reach are
counted against the national ownership cap under the Communications Act. By
exercising our rights under the Communications Act to require cable television
system operators to carry the broadcast signals of our owned and operated
stations, we reach many more television households in each station's designated
market area, or DMA, than we would if our stations were limited to transmitting
their broadcast signals over the airwaves.
We operate an additional three stations (WPXL, New Orleans; WPXX, Memphis;
and WBNA, Louisville) pursuant to time brokerage agreements, or TBAs, with the
station owners. Under these agreements, we provide the station with PAX TV
programming and retain the advertising revenues from the sale of advertising
time during PAX TV programming hours. We have agreements to acquire two of these
stations and a right of first refusal to acquire the third (WBNA). We may enter
into additional TBAs to operate stations that we intend to acquire or to enable
us to operate additional stations that we might not be able to own under the
current ownership restrictions of the Communications Act.
The table below provides information about our owned and operated stations,
stations we operate pursuant to TBAs, and stations subject to pending
acquisition and sales transactions. Upon completion of the pending acquisition
and sale transactions and construction projects noted in the table, we will own
66 stations, 65 of which will carry PAX TV, including stations reaching all of
the top 20 U.S. markets and 41 of the top 50 markets.
<Table>
<Caption>
TOTAL MARKET
MARKET STATION CALL BROADCAST TV
MARKET NAME RANK(1) LETTERS CHANNEL HOUSEHOLDS(2) JSA PARTNER(3)
----------- ------- ------------ --------- ------------- -------------------------------
New York...................... 1 WPXN 31 7,301,060 NBC
Los Angeles................... 2 KPXN 30 5,303,490 NBC
Chicago....................... 3 WCPX 38 3,360,770 NBC
Philadelphia.................. 4 WPPX 61 2,801,010 NBC
San Francisco................. 5 KKPX 65 2,426,010 Granite Broadcasting Corp.
Boston(4)..................... 6 WPXB 60 2,315,700 --
Boston (3 stations)........... 6 WBPX 68 2,315,700 --
Dallas........................ 7 KPXD 68 2,201,170 NBC
Washington D.C. .............. 8 WPXW 66 2,128,430 NBC
Washington D.C. .............. 8 WWPX 60 2,128,430 NBC
Atlanta....................... 9 WPXA 14 1,990,650 Gannett Co., Inc.
Detroit....................... 10 WPXD 31 1,878,670 Post-Newsweek Stations, Inc.
Houston....................... 11 KPXB 49 1,831,680 Post-Newsweek Stations, Inc.
Seattle....................... 12 KWPX 33 1,647,230 Belo Corp.
Minneapolis................... 13 KPXM 41 1,573,640 Gannett Co., Inc.
Tampa......................... 14 WXPX 66 1,568,180 Media General, Inc.
Miami......................... 15 WPXM 35 1,549,680 NBC
Phoenix....................... 16 KPPX 51 1,536,950 Gannett Co., Inc.
Cleveland..................... 17 WVPX 23 1,513,130 Gannett Co., Inc.
Denver........................ 18 KPXC 59 1,381,620 Gannett Co., Inc.
Sacramento.................... 19 KSPX 29 1,226,670 Hearst-Argyle Television, Inc.
Orlando....................... 20 WOPX 56 1,182,420 Hearst-Argyle Television, Inc.
Portland, OR.................. 23 KPXG 22 1,069,260 Belo Corp.
Indianapolis.................. 25 WIPX 63 1,013,290 Dispatch Broadcast Group
Hartford...................... 28 WHPX 26 953,130 NBC
Raleigh-Durham................ 29 WFPX 62 939,000 NBC
Raleigh-Durham................ 29 WRPX 47 939,000 NBC
Nashville..................... 30 WNPX 28 879,030 --
Kansas City................... 31 KPXE 50 849,730 Scripps Howard Broadcasting
Company
Milwaukee..................... 33 WPXE 55 832,330 Journal Broadcast Group, Inc.
Salt Lake City................ 35 KUPX 16 782,960 --
San Antonio................... 37 KPXL 26 710,030 United Television, Inc.
Grand Rapids.................. 38 WZPX 43 702,210 LIN Television Corp.
Birmingham.................... 39 WPXH 44 683,830 NBC
</Table>
43
<Table>
<Caption>
TOTAL MARKET
MARKET STATION CALL BROADCAST TV
MARKET NAME RANK(1) LETTERS CHANNEL HOUSEHOLDS(2) JSA PARTNER(3)
----------- ------- ------------ --------- ------------- -------------------------------
West Palm Beach............... 40 WPXP 67 681,100 Scripps Howard Broadcasting
Company
Memphis(5),(6)................ 41 WPXX 50 655,210 Raycom America, Inc.
Norfolk....................... 42 WPXV 49 654,150 LIN Television Corp.
New Orleans(5),(6)............ 43 WPXL 49 653,020 Hearst-Argyle Television, Inc.
Greensboro.................... 44 WGPX 16 634,130 Hearst-Argyle Television, Inc.
Oklahoma City................. 45 KOPX 62 623,760 The New York Times Company
Buffalo....................... 47 WPXJ 51 616,610 Gannett Co., Inc.
Albuquerque................... 48 KAPX 14 607,170 Hubbard Broadcasting, Inc.
Providence.................... 49 WPXQ 69 600,730 NBC
Louisville(5),(7)............. 50 WBNA 21 598,940 --
Wilkes Barre.................. 52 WQPX 64 567,810 The New York Times Company
Jacksonville-Brunswick........ 53 WBSG 21 563,510 Post-Newsweek Stations, Inc.
Fresno-Visalia................ 55 KPXF 61 524,970 Granite Broadcasting Corp.
Albany........................ 57 WYPX 55 514,770 Hubbard Broadcasting, Inc.
Tulsa......................... 59 KTPX 44 502,500 Scripps Howard Broadcasting
Company
Charleston, WV................ 61 WLPX 29 478,910 --
Knoxville..................... 62 WPXK 54 478,190 Raycom America, Inc.
Lexington..................... 66 WAOM 67 435,780 --
Roanoke 67 WPXR 38 422,760 Media General, Inc.
Des Moines.................... 70 KFPX 39 404,910 The New York Times Company
Honolulu...................... 72 KPXO 66 398,460 --
Spokane....................... 78 KGPX 34 380,480 KHQ, Incorporated
Shreveport.................... 79 KPXJ 21 372,490 KTBS, Inc.
Portland-Auburn, ME........... 80 WMPX 23 372,470 Gannett Co., Inc.
Syracuse...................... 81 WSPX 56 363,340 Raycom America, Inc.
Cedar Rapids.................. 89 KPXR 48 317,980 Second Generation of Iowa, Ltd.
Greenville-N. Bern............ 106 WEPX 38 250,780 GOCOM Television LLC
Greenville-N. Bern............ 106 WPXU 35 250,780 GOCOM Television LLC
Wausau(8)..................... 137 WTPX 46 168,510 --
St. Croix..................... NR WPXO 15 -- Alpha Broadcasting Corporation
</Table>
---------------
(1) Market rank is based on the number of television households in the
television market or Designated Market Area, or "DMA," as used by Nielsen,
effective as of September 2001.
(2) Refers to the number of television households in the DMA as estimated by
Nielsen, effective as of September 2001.
(3) Indicates the company with which we have entered into a JSA for the station.
(4) Currently carries the home shopping programming of ValueVision
International, Inc.
(5) Station is independently owned and is operated by us under a time brokerage
agreement.
(6) Our acquisition of the station is pending.
(7) We have a right of first refusal to acquire the station.
(8) We have applied for a construction permit for the station; it is not
currently operational.
Cable and Satellite Distribution. In order to increase the distribution of
our programming, we have entered into carriage agreements with the nation's
largest cable multiple system operators, as well as with other cable system
operators and satellite television providers. These cable and satellite system
operators carry our programming on a designated channel of their service. These
carriage agreements enable us to reach television households in markets not
served by our owned or affiliated stations. Our carriage agreements with cable
system operators generally require us to pay an amount based upon the number of
additional television households reached. Our carriage agreements with satellite
television providers allow the satellite provider to sell and retain the
advertising revenue from a portion of the non-network advertising time during
PAX TV programming hours. Some of our carriage agreements with cable operators
also provide this form of compensation to the cable operator. We do not pay
compensation for reaching households in DMAs already served by our broadcast
stations, even though the cable operator may provide our programming to these
households because we have exercised our "must carry" rights under the
Communications Act. We believe
44
that the ability to view our programming on one of the lower numbered channel
positions (generally below channel 30) on a cable system improves the likelihood
that viewers will watch our programming, and we have successfully negotiated
favorable channel positions with most of the cable system operators and
satellite television providers with whom we have carriage agreements. Through
cable and satellite distribution, we reach approximately 15% of U.S. prime time
television households in DMAs not already served by a PAX TV station.
Our PAX TV Affiliated Stations. To increase the distribution of PAX TV, we
have entered into affiliation agreements with stations in markets where we do
not otherwise own or operate a broadcast station. These stations include full
power and low power television stations. Each affiliation agreement gives the
particular station the right to broadcast PAX TV programming, or portions of it,
in the station's market. Although the majority of the affiliation agreements
provide for the distribution of PAX TV prime time programming, some affiliates
do not carry all of our PAX TV programming. In addition, some affiliates do not
air PAX TV programming in the exact time patterns that the programming is
broadcast on our network because of issues related to their specific markets.
Our affiliation agreements provide us with additional distribution of our PAX TV
programming without the expense of acquiring a station or paying compensation to
cable system operators in the markets reached. Under our affiliation agreements,
we are not required to pay cash compensation to the affiliate, and the affiliate
is entitled to sell and retain the revenue from all or a portion of the
non-network advertising time during the PAX TV programming hours. We have
affiliation agreements with respect to 60 television stations which reach
approximately 5% of U.S. prime time television households.
PROGRAMMING
During our PAX TV network hours, which are between 1:00 p.m. and midnight,
Monday through Friday, and 4:00 p.m. and midnight Saturday and Sunday, we offer
family entertainment programs that are free of excessive violence, sexual themes
and foul language. We produce original shows to air during PAX TV's prime time
hours. The balance of our PAX TV lineup consists of syndicated programs and, to
a lesser extent, entertainment and sports programming provided by NBC under
various cross programming agreements with us. We began PAX TV with a lineup of
syndicated programming that had experienced successful first runs in terms of
audience ratings, giving us the ability to offer a full programming schedule
immediately upon the launch of PAX TV. Since our launch, we have sought to
develop and increase our original PAX TV programming, as our operating
experience with PAX TV has shown that quality original programs can generate
higher ratings and deliver a greater return to us, in terms of advertising
revenues, than syndicated programs of comparable cost.
We have developed original entertainment programming for PAX TV at lower
costs than those typically incurred by other broadcast networks for original
entertainment programming. We have done this by employing cost efficient
development and production techniques, such as the development of program
concepts without the use of pilots, and by entering into production arrangements
with foreign production companies through which we are able to share production
costs, gain access to lower cost production labor and participate in tax
incentives. In addition, we generally pre-sell the foreign and other
distribution rights to our original PAX TV programming and thereby are able to
recover a significant portion of the program's production costs, while retaining
all of the domestic exploitation rights. Our agreements for syndicated
programming generally entitle us to exclusive nationwide distribution rights
over our entire television distribution system for a fixed cost, without regard
to the number of households that receive our programming. As our syndicated
programming licenses expire, we intend to replace that programming with less
costly original programming.
During non-network hours, our stations broadcast long form paid
programming, consisting primarily of infomercials, which are shows produced at
no cost to us to market and sell products and services through viewer direct
response, and paid religious programming. Pursuant to an agreement with The
Christian Network, Inc., or CNI, our broadcast stations carry CNI's programming
during the hours of 1:00 a.m. and 6:00 a.m., seven days per week. For additional
details on our relationship with CNI, see "Certain Relationships and Related
Transactions."
45
Original Prime Time Programming. Our current lineup of original
programming consists of one hour shows which we broadcast during prime time
hours on PAX TV. This lineup consists of:
<Table>
<Caption>
PROGRAM NAME PROGRAM DESCRIPTION
------------ -------------------
Doc Our series that captures the drama and
comedy of big city medicine as seen
through the eyes of Clint Cassidy (Billy
Ray Cyrus), a country doctor from Montana
who relocates to New York City.
Encounters with the Unexplained A reality series hosted by Jerry Orbach
(Law & Order) where scientists,
explorers, analysts and historians
discover answers to mysteries and riddles
that have baffled mankind for
generations.
It's a Miracle A reality series hosted by Richard Thomas
and devoted to exploring
"miracles" -- life-altering stories of
chance encounters, medical miracles,
rescues and interventions that defy
plausible explanation.
Miracle Pets A reality series hosted by Alan Thicke
featuring miraculous animal stories.
Mysterious Ways A drama series in which professor of
anthropology Declan Dunn (Adrian Pasdar)
and skeptical psychiatrist Peggy Fowler
(Rae Dawn Chong) join forces to uncover
uncanny and inexplicable phenomena people
call "miracles." destiny.
Candid Camera The updated version of the classic
television series "Candid Camera!" that
is hosted by Peter Funt, son of original
host Allen Funt, and Dina Eastwood.
Next Big Star A talent search program, hosted by Ed
McMahon and produced by George Schlatter
(Laugh-In), bringing together bright new
stars-to-be for their shot at stardom.
The Ponderosa Our newest series, a prequel to the
popular series Bonanza. This drama series
picks up the story of the Cartwrights in
1849 and follows the family through the
early years when they first settled on a
small piece of scrub land in the wilds of
the Nevada territory.
The Weakest Link A quiz show in which eight contestants
are quizzed on trivia and general
knowledge. At the end of each round, one
of the contestants is deemed "the weakest
link" and voted off the show
(co-developed by NBC and us).
</Table>
46
<Table>
<Caption>
PROGRAM NAME PROGRAM DESCRIPTION
------------ -------------------
Supermarket Sweep A game show where family members and
friends race against each other and the
clock to win supermarket goods.
Shop 'Til You Drop A game show which combines physical
stamina, pricing strategies and knowledge
of retail items for the opportunity to
win a mad-dash shopping spree.
</Table>
Syndicated Programming. We also broadcast syndicated programming during
prime time and other network hours. Our current lineup of syndicated programming
includes:
- Bonanza
- Diagnosis Murder
- Eight is Enough
- Promised Land
- Remington Steele
- Scarecrow & Mrs. King
- Touched by an Angel
NBC Shared Programming. Through our relationship with NBC, we are offered
opportunities from time to time to broadcast entertainment and sports programs
that have first appeared on NBC or to which NBC owns the broadcast rights and to
engage in other cross programming activities. For example, we recently agreed
with NBC to air its popular new prime time game show The Weakest Link. Under our
agreement with NBC, we are required, subject to our family programming content
standards, to broadcast NBC programming which has been preempted by NBC's
affiliate stations in the specific markets where the programming has been
preempted. We generally are entitled to sell all non-network advertising time
for this preempted programming and to be compensated by NBC if our advertising
revenues for this programming are less than the advertising revenues we normally
generate from our PAX TV programming.
47
The table below describes some of the NBC shared programming that we have
aired on PAX TV. In addition, NBC has aired, and has the option to air
additional runs and episodes of, Mysterious Ways, a PAX TV original dramatic
series.
<Table>
<Caption>
PROGRAM NAME PROGRAM DESCRIPTION
------------ -------------------
ENTERTAINMENT:
The Promise Made for TV movie in which a devoted
woman (Isabella Hoffman) seeks justice
for her late sister (Tracy Nelson) who
fell victim to domestic violence.
The Spring Made for TV movie in which a man (Kyle
MacLachlan) and his son stumble onto a
modern-day fountain of youth while
camping in the woods.
Touch of Hope Made for TV movie presenting the life
story of Dean Kraft (Anthony Michael
Hall), a young man who discovers his
abilities as a hands-on healer.
Twenty One Revival of a popular prime time game
show; hosted by television news and talk
show host Maury Povich.
Women of Camelot Original NBC mini-series looking at
America's "royal" family from the
perspective of the Kennedy women,
starring Lauren Holly (Ethel Kennedy),
Jill Hennessy (Jackie Kennedy), Leslie
Stefanson (Joan Kennedy) and Daniel Hugh
Kelly (John F. Kennedy).
SPORTS:
2000 U.S. Olympic Team Trials Thirty-eight hours of prime time
programming capturing the drama and
excitement of athletes qualifying to
represent the U.S. at the 2000 Olympic
Games in Sydney, Australia.
2000 Major League Baseball Playoffs Game One of the Yankees-Athletics
American League Playoff Series (broadcast
in 13 of our markets); Game Six of the
American League Championship Series
(broadcast in 24 of our markets).
Senior PGA Tour Early round coverage of 33 Senior PGA
Tour events.
Tucson Open Second round of the PGA Tour's
"Touchstone Energy Tucson Open."
</Table>
JSA Local Newscasts. Under many of our JSAs, the JSA partner provides our
station with early and late evening local news broadcasts, which we believe
enhances our station's appeal to viewers and advertisers. This news programming
may be a rebroadcast of the JSA partner's news in a different time slot or a
news broadcast produced for PAX TV.
RATINGS
The advertising revenues from our PAX TV operations are largely dependent
upon the popularity of our programming, in terms of audience ratings, and the
attractiveness of our PAX TV viewing audience to
48
advertisers. Higher ratings generally will enable us to charge higher rates to
advertisers. Nielsen, one of the leading providers of national audience
measuring services, has grouped all television stations in the country into
approximately 210 DMAs that are ranked in size according to the number of
television households, and periodically publishes data on estimated audiences
for the television stations in the various DMAs. The estimates are expressed in
terms of the percentage of the total potential audience in the market viewing a
station (the station's "Rating") and of the percentage of the audience actually
watching television (the station's "Share"). Nielsen provides this data on the
basis of total television households and selected demographic groupings in the
DMA.
The ratings for PAX TV's lineup of original and syndicated family
entertainment programming generally increased in the PAX TV 2000-2001 season
ended May 27, 2001 over the prior season in most time periods and for most
demographic groups which we target. Our prime time ratings increases primarily
were attributable to increases in the ratings for our original programming. For
the 2000-2001 season, ratings in the 8:00-9:00 p.m., Monday through Friday and
Sunday time slots, during which we aired our original programming, have
increased 39% in total viewing households over last season. Among adults from
ages 25-54, an audience segment which we believe many advertisers find
attractive, ratings for our original programs increased by 54% over the ratings
from last season in the same time slots. Among adults from ages 18-49, ratings
for our original programming increased 60% over the ratings from last season in
the 8:00-9:00 p.m. Monday through Friday and Sunday time periods. All of our
other original programs improved their time period's viewing audience among
adults from ages 18-49 as well. Prime time ratings for our syndicated
programming generally have increased as well, although at a slower rate than the
ratings growth of our original programming.
PAX TV's fourth season began September 9, 2001 with the series premiere of
The Ponderosa. This PAX TV original program delivered a 2.4 rating, making it
the highest rated PAX TV program to date. Nearly 4 million viewers watched the
premiere telecast resulting in record ratings in all key demographic groups
including adults 18-49 (1.5 million) and adults 25-54 (1.9 million). Season to
date, The Ponderosa has averaged nearly 2.5 million viewers, making it PAX TV's
highest rated primetime program in the 2001-2002 season, with ratings for The
Ponderosa more than doubling the year earlier time period delivery among target
demographic groups.
In its second season on PAX TV, Doc, starring Billy Ray Cyrus, has averaged
over 1.6 million homes and over 2.3 million viewers. Doc has improved ratings
among target demographics by more than 100%, year to year, and is PAX TV's
second highest rated program in the 2001-2002 season.
Overall, with an average 1.4 million viewers in primetime, PAX TV is up
over 17% in season to date audience delivery over the prior year period.
Additionally, PAX TV has registered increases in the targeted demographic groups
of adults 25-54 (+ 16%) and adults 18-49 (+ 14%).
Some viewer demographic groups are more attractive to advertisers than
others, such as adults of working age who typically have greater purchasing
power than other viewer demographic groups. Many products and services are
targeted to consumers with specific demographic characteristics, and a viewer
demographic group containing a concentration of these types of consumers
generally will be more attractive to advertisers. Based on our experiences with
PAX TV, advertisers often will pay higher rates to advertise during programming
that reaches demographic groups that are targeted by that advertiser. In
general, we believe that advertisers for many products and services, consider
adults from ages 25-54 to be one of the most desirable viewer demographic
groups. A significant component of our original programming strategy is to
develop and air programming that will increase PAX TV's ratings among the
demographic groups that are most attractive to advertisers.
49
The table below shows our PAX TV ratings over our first three broadcast
seasons during prime time and during other network broadcast hours, for both
total viewing households and adults from ages 25-54.
PAX TV AUDIENCE DELIVERY
<Table>
<Caption>
1998-1999 SEASON 1999-2000 SEASON 2000-2001 SEASON
------------------- ------------------- -------------------
RATING % INCREASE RATING % INCREASE RATING % INCREASE
------ ---------- ------ ---------- ------ ----------
PRIME TIME(1)
Total Households............................ 0.7 NA 0.8 14% 1.0 25%
Adults 25-54................................ 0.3 NA 0.4 33% 0.5 25%
OTHER PARTS OF DAY(2) Total Households...... 0.2 NA 0.4 100% 0.4 0%
Adults 25-54................................ 0.1 NA 0.2 100% 0.2 0%
</Table>
---------------
(1) 8:00-11:00 p.m., Monday through Saturday; and 7:00-11:00 p.m., Sunday.
(2) 1:00-8:00 p.m., Monday through Friday.
Source: Nielsen NTI 8/21/00 - 8/19/01; 8/23/99 - 8/20/00; 8/31/98 - 8/22/99
ADVERTISING
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. NBC serves as our exclusive sales representative to sell
most of our network advertising. Network advertising represented approximately
29% of our 2000 revenue. The central programming signal through which we supply
PAX TV and other programming to our stations and to cable and satellite viewers
includes advertising, generally of a direct response nature, which reaches our
cable and satellite viewers (during both PAX TV and other viewing hours) in
markets not served by our stations during time that is otherwise allocated to
station spot advertising, and which reaches viewers in local markets during
unsold station spot advertising time. We include the revenue from this
advertising in our network advertising revenues.
We also sell commercial air time to advertisers who want to reach the
viewing audience in specific geographic markets in which we operate. These
advertisers may be local businesses or regional or national advertisers who want
to target their advertising in these markets. In markets in which our stations
are operating under JSAs, our JSA partner handles the sale of this advertising.
Our local sales force sells this advertising in markets without JSAs. Our
station spot advertising represented approximately 40% of our 2000 revenue
(including 18% of our 2000 revenue which was derived from long form paid
programming).
We believe that the average rates paid for air time by advertisers seeking
to target viewers within specific markets are generally higher per viewer than
those for a single commercial aired across an entire network. For example, based
on industry data for the first quarter of 2001, advertisers paid weighted
average rates per viewer for air time in the markets served by our stations
which were approximately 67% higher per viewer than the rate per viewer for a
single network advertisement. Since networks and station affiliates usually are
owned by different entities, the allocation of commercial spots between network
and station advertisers is relatively fixed by an affiliation agreement. With
respect to our owned and operated station group, however, we retain the
flexibility to allocate air time among various categories of advertisers and we
seek to maximize our advertising revenue by optimizing the mix of advertising
time sold to network and station advertisers.
Our advertising rates are based upon:
- the size of the market in which a station operates;
- the ratings of the show during which the advertising will appear;
- the number of advertisers competing for a time slot; and
- the demographic composition of the market served by the station.
50
We offer advertisers the opportunity to reach PAX TV's nationwide viewing
audience with a single commercial and to target their advertising to the
demographic groups with which our programming is most popular.
We also sell long form paid programming, consisting primarily of
infomercials. This programming may appear on our entire television distribution
system or it may be aired only in specific markets. Network and regional paid
programming time is sold by our national long form sales team. Local paid
programming may be sold by our national sales team or by the local sales team at
each station.
NBC RELATIONSHIP
On September 15, 1999, we entered into an investment agreement with NBC
under which wholly-owned subsidiaries of NBC purchased shares of our Series B
preferred stock and warrants to purchase shares of our common stock for an
aggregate purchase price of $415 million. At the same time, a wholly-owned
subsidiary of NBC entered into an agreement with Mr. Paxson and entities
controlled by Mr. Paxson, under which the NBC subsidiary was granted the right
to purchase all, but not less than all, of the 8,311,639 shares of our Class B
common stock beneficially owned by Mr. Paxson. This right is exercisable on or
after February 1, 2002 through September 15, 2009. These shares of Class B
common stock are entitled to ten votes per share on all matters submitted to a
vote of our stockholders and are convertible into an equal number of shares of
Class A common stock. The purchase price per share of Class B common stock is
equal to the higher of:
- the average of the closing sale prices of the Class A common stock for
the 45 consecutive trading days ending on the trading day immediately
preceding the exercise of NBC's call right, provided that the average
price shall not be more than 17.5% higher or 17.5% lower than the six
month trailing average closing sale prices; and
- $22.50 per share for any shares purchased on or before September 15,
2002, and $20.00 per share for shares purchased after that date.
The owners of the shares that are subject to the call right have agreed not to
transfer those shares before September 15, 2005, and not to convert those shares
into any of our other securities, including shares of Class A common stock.
NBC's exercise of the call right is subject to compliance with applicable
provisions of the Communications Act and the rules and regulations of the FCC.
Under the investment agreement, a wholly-owned subsidiary of NBC acquired
$415 million aggregate liquidation preference of our Series B preferred stock,
which accrues cumulative dividends at an annual rate of 8% and is convertible,
subject to adjustment under the terms of the Series B preferred stock, into
31,896,032 shares of our Class A common stock at an initial conversion price of
$13.01 per share. The Series B preferred stock is exchangeable at the option of
the holder at any time, subject to various conditions, into our 8% exchange
debentures. A wholly-owned subsidiary of NBC also acquired a warrant ("Warrant
A") to purchase up to 13,065,507 shares of Class A common stock at an exercise
price of $12.60 per share, and a warrant ("Warrant B") to purchase up to
18,966,620 shares of Class A common stock at an exercise price equal to the
average of the closing sale prices of the Class A common stock for the 45
consecutive trading days ending on the trading day immediately preceding the
warrant exercise date, provided that the average price shall not be more than
17.5% higher or 17.5% lower than the six month trailing average closing sale
price, subject to a minimum exercise price during the three years ending
September 15, 2002, of $22.50 per share. The warrants are exercisable for ten
years subject to various conditions and limitations. In addition:
- Warrant B may not be exercised before the exercise in full of Warrant A;
- before February 1, 2002, Warrant B may not be exercised to the extent
that, after giving effect to the exercise, Mr. Paxson would no longer
constitute our "single majority stockholder" (as that term is defined
under applicable rules of the FCC); and
- after February 1, 2002, Warrant B may not be exercised to the extent
that, after giving effect to the exercise, Mr. Paxson would no longer
constitute our "single majority stockholder" unless Warrant B is
51
exercised in full and at the same time NBC exercises its right to
purchase all the shares of our Class B common stock held by Mr. Paxson.
NBC has the right to require us to redeem the Series B preferred stock if
the FCC renders a final decision that NBC's investment in us and the acquisition
of the other rights provided for in the transaction agreements 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, or in case of events of default under the transaction agreements,
subject in each case to conditions which include compliance by us with the
covenants contained in the terms of our outstanding indebtedness (including the
notes) and preferred stock. The investment agreement also provides that we must
obtain the consent of NBC for various actions, including:
- approval of annual budgets;
- expenditures materially in excess of budgeted amounts;
- material acquisitions of programming;
- material amendments to our certificate of incorporation or bylaws;
- material asset sales or purchases, including, in some cases, sales of our
television stations;
- business combinations where we would not be the surviving corporation or
as a result of which we would experience a change of control;
- issuances or sales of any capital stock, with some exceptions;
- stock splits or recombinations;
- any increase in the size of our board of directors other than any
increase resulting from provisions of our outstanding preferred stock of
up to two additional directors; and
- joint sales, joint services, time brokerage, local marketing or similar
agreements as a result of which our stations with national household
coverage of 20% or more would be subject to those agreements.
In connection with its investment in us, we also granted NBC various rights
with respect to our broadcast television operations, including:
- the right to require the conversion of our television stations to NBC
network affiliates, subject to various conditions;
- a right of first refusal on proposed sales of television stations; and
- the right to require our television stations to carry NBC network
programming that is preempted by NBC network affiliates.
We also entered into a stockholders agreement with NBC, Mr. Paxson and
entities controlled by Mr. Paxson under which we are permitted (but not
required) to nominate persons named by NBC for election to our board of
directors upon request by NBC if NBC determines that its nominees are permitted
under the Communications Act and FCC rules to serve on our board. Mr. Paxson and
his affiliates agreed to vote their shares of common stock in favor of the
election of those persons as our directors. The stockholders agreement further
provides that we will not, without the prior written consent of NBC, enter into
certain agreements or adopt certain plans which would be breached or violated
upon the acquisition of our securities by NBC or its affiliates or would
otherwise restrict or impede the ability of NBC or its affiliates to acquire
additional shares of our capital stock.
We also granted NBC demand and piggyback registration rights with respect
to the shares of Class A common stock issuable upon:
- conversion of the Series B preferred stock;
- conversion of the debentures for which the Series B preferred stock is
exchangeable;
52
- exercise of the warrants; or
- conversion of the Class B common stock.
Since the fourth quarter of 1999, we have entered into JSAs with respect to
13 of our television stations and 11 NBC owned and operated stations that serve
the same market areas. Under the JSAs, the NBC stations sell all non-network
advertising of our stations and receive commission compensation for those sales,
and each of our stations may carry one hour per day of NBC syndicated
programming, subject to compliance with our family programming content
standards. We have also entered into agreements with NBC whereby NBC serves as
our exclusive sales representative to sell our network advertising time and
handles our network research and sales marketing functions.
COMPETITION
We compete for audience and advertisers and our television stations are
located in highly competitive markets and face strong competition on all levels.
Audience. Stations compete for audience share principally on the basis of
program popularity, which has a direct effect on advertising rates. Our PAX TV
programming competes for audience share in all of our markets with the
programming offered by other broadcast networks, and competes for audience share
in our stations' respective market areas with the programming offered by
non-network affiliated television stations. Our other programming also competes
for audience share in our stations' respective market areas principally with the
non-network programming offered by other television stations. We believe our
stations also compete for audience share in their respective markets on the
basis of their channel positions on the cable systems which carry our
programming, and that the ability to view our programming on the lower numbered
channel positions (generally below channel 30) generally improves the likelihood
that viewers will watch our programming.
Our stations also compete for audience share with other forms of
entertainment programming, including home entertainment systems and direct
broadcasting satellite video distribution services which transmit programming
directly to homes equipped with special receiving antennas and tuners. Further
advances in technology may increase competition for household audiences.
Advertising. Advertising rates are based upon:
- the size of the market in which the station operates;
- a program's popularity among the viewers that an advertiser wishes to
attract;
- the number of advertisers competing for the available time;
- the demographic makeup of the market served by the station;
- the availability of alternative advertising media in the market area; and
- development of projects, features and programs that tie advertiser
messages to programming.
PAX TV competes for advertising revenues principally with other television
broadcast networks and to some degree with other nationally distributed
advertising media, such as print publications. During the annual "up front"
process, broadcast networks seek to obtain advance commitments from advertisers
to purchase network commercial air time, and competition occurs principally on
the basis of the advertisers' perception of the anticipated popularity (i.e.,
ratings) of a network's programming for the upcoming broadcast season and the
demographic groups to which the programming is expected to appeal.
Our television stations also compete for advertising revenues with other
television stations in their respective markets, as well as with other
advertising media, such as newspapers, radio stations, magazines, outdoor
advertising, transit advertising, yellow page directories, direct mail and local
cable systems. Competition for advertising dollars at the television station
level occurs primarily within individual markets. Generally, a television
station in one market does not compete with stations in other market areas.
53
FEDERAL REGULATION OF BROADCASTING
The FCC regulates television broadcast stations under the Communications
Act. The following is a brief summary of certain provisions of the
Communications Act and the rules of the FCC.
License Issuance and Renewal. The Communications Act provides that a
broadcast station license may be granted to an applicant if the public interest,
convenience and necessity will be served thereby, subject to certain
limitations. Television broadcast licenses generally are granted and renewed for
a period of eight years. Interested parties including members of the public may
file petitions to deny a license renewal application but competing applications
for the license will not be accepted unless the current licensee's renewal
application is denied. The FCC is required to grant a license renewal
application if it finds that the licensee (1) has served the public interest,
convenience and necessity; (2) has committed no serious violations of the
Communications Act or the FCC's rules; and (3) has committed no other violations
of the Communications Act or the FCC's rules which would constitute a pattern of
abuse. Our licenses are subject to renewal at various times between 2004 and
2007.
General Ownership Matters. The Communications Act requires the prior
approval of the FCC for the assignment of a broadcast license or the transfer of
control of a corporation or other entity holding a license. In determining
whether to approve such an assignment or transfer of control, the FCC considers,
among other things, the financial and legal qualifications of the prospective
assignee or transferee, including compliance with rules limiting the common
ownership of certain attributable interests in broadcast, cable and newspaper
properties.
The FCC's multiple ownership rules may limit the acquisitions and
investments that we may make or the investments that others may make in us. The
FCC generally applies its ownership limits to attributable interests held by an
individual, corporation, partnership or other association or entity. In the case
of corporations holding or controlling broadcast licenses, the interests of
officers, directors and those who, directly or indirectly, have the right to
vote five percent or more of the corporation's stock are generally attributable.
The FCC treats all partnership and limited liability company interests as
attributable, except for those interests that are insulated under FCC rules and
policies. For insurance companies, certain regulated investment companies and
bank trust departments that hold stock for investment purposes only, stock
interests become attributable with the ownership of 20% or more of the voting
stock of the corporation holding or controlling broadcast licenses.
In January 2001, the FCC eliminated its "single majority shareholder"
exception to its attribution rules prospectively. Under that exception, the FCC
generally did not treat any minority voting shareholder as attributable if one
person or entity (such as Mr. Paxson in the case of our company) held more than
50% of the combined voting power of the common stock of a company holding or
controlling broadcast licenses. Under the FCC's new rule, a person who acquired
a minority voting interest in a company holding or controlling broadcast
licenses before December 14, 2000, will not have that interest treated as
attributable for purposes of the FCC's ownership rules so long as a majority
shareholder of the corporation (such as Mr. Paxson in the case of our company)
continues to hold more than 50% of the combined voting power of the corporation.
This exception for a minority interest acquired before December 14, 2000, will
be permanent until the interest is transferred or assigned. The FCC's decision
eliminating the single majority shareholder attribution exception has not yet
taken effect. We have filed with the FCC a petition for reconsideration of the
decision, and in March 2001, the U.S. Court of Appeals for the D.C. Circuit
reversed and remanded a decision by the FCC to eliminate the single majority
shareholder exception as it applies to the ownership of cable systems. We cannot
predict at this time how the court's decision will affect the FCC's decision to
eliminate the exception as it applies to the ownership of broadcast stations.
The FCC treats as attributable debt and equity interests which combined
exceed 33% of a station licensee's total assets, defined as the total amount of
debt and equity capital, if the party holding the equity and debt interests (1)
supplies more than 15% of the station's total weekly programming or (2) has an
attributable interest in another media entity, whether television, radio, cable
or newspaper, in the same market. Non-voting equity, loans, and insulated
interests count toward the 33% equity/debt threshold. Non-conforming interests
54
acquired before November 7, 1996, are permanently grandfathered for purposes of
the equity/debt rules and thus do not constitute attributable ownership
interests.
Television National Ownership Rule. Under the Communications Act, no
individual or entity may have an attributable interest in television stations
reaching more than 35% of the national television viewing audience. The FCC
applies a 50% discount for purposes of calculating a UHF station's audience
reach. If a broadcast licensee has an attributable interest in a second
television station in any of its markets, the audience for that market will not
be counted twice for the purposes of determining compliance with the national
cap. A constitutional challenge to the television national ownership rule is now
pending before the United States Court of Appeals for the District of Columbia.
Television Duopoly Rule. The FCC's television duopoly rule permits a party
to own two television stations without regard to signal contour overlap if each
of the stations is located in a separate designated market area, or DMA. A party
may own two television stations in the same DMA so long as (1) at least eight
independently owned and operating full-power commercial and non-commercial
television stations remain in the market at the time of acquisition and (2) at
least one of the two stations is not among the four top-ranked stations in the
market based on audience share. Without regard to numbers of independently owned
television stations, the FCC permits television duopolies within the same DMA so
long as the stations' Grade B service contours do not overlap. Satellite
stations that are authorized to rebroadcast the programming of a "parent"
station located in the same DMA are also exempt from the duopoly rule.
Television Time Brokerage and Joint Sales Agreements. Over the past few
years, a number of television stations, including certain of our television
stations, have entered into agreements commonly referred to as time brokerage
agreements and joint sales agreements. Under these agreements, separately owned
and licensed stations agree to function cooperatively subject to the
requirements of antitrust laws and compliance with the FCC's rules and policies,
including the requirement that each party maintain independent control over the
programming and operations of its own station. The FCC's attribution and
television duopoly rules apply to time brokerage agreements in which one station
brokers more than 15% of the broadcast time per week of another station with an
overlapping Grade B contour. Time brokerage agreements that were in effect on
August 5, 1999, are exempt from the television duopoly rule for a limited period
of time of either two or five years, depending on the date of the time brokerage
agreement.
Alien Ownership. Under the Communications Act, no FCC broadcast license
may be held by a corporation of which more than one-fifth of its capital stock
is owned or voted by aliens or their representatives or by a foreign government
or its representative, or by any corporation organized under the laws of a
foreign country (collectively "Aliens"). Furthermore, the Communications Act
provides that no FCC broadcast license may be granted to any corporation
controlled by any other corporation of which more than one-fourth of its capital
stock is owned of record or voted by Aliens if the FCC should find that the
public interest would be served by the refusal of the license.
Cross-Ownership Rules. The FCC's rules prohibit a party from holding
attributable interests in (1) a television station and a cable television
system, or (2) a television or radio station and a daily newspaper, in each
case, in the same local market. The FCC rules also limit the number of commonly
owned radio and television stations in the same market depending upon the number
of independently owned media voices in that market. A suit challenging the FCC's
rules prohibiting television station and cable television system cross ownership
is on appeal to the United States Court of Appeals for the District of Columbia
Circuit. The FCC has issued a notice that it intends to consider proposing new
rules modifying the prohibition on broadcast station and daily newspaper cross
ownership. We are unable to predict the outcome of the foregoing or the effect,
if any, changes would have upon our business.
Dual Network Rule. FCC rules permit any of the four major networks (ABC,
CBS, Fox or NBC) to acquire the UPN or WB networks. Nothing in the rules
presently prohibits one of the four major networks from establishing a new
network or from purchasing a network ranking below the top six networks. The
dual network rule continues to prohibit a merger between any two or more of the
top four networks.
55
Biennial Review of Broadcast Ownership Rules. The Communications Act
requires the FCC to undertake a biennial review of its broadcast ownership
rules. In the review completed in June 2000, the FCC declined to amend the
national television ownership and the local television/cable cross ownership
rules, but stated it would begin rule making proceedings to relax the standards
for waiving the daily newspaper/broadcast cross ownership rule. The FCC's
refusal to amend the national television ownership and local television/cable
cross ownership rules is on appeal to the United States Court of Appeals for the
District of Columbia Circuit. The FCC has since issued a notice of proposed rule
making to determine whether and to what extent the broadcast/newspaper cross
ownership rules should be revised. We are unable to predict the outcome of the
foregoing or the effect, if any, changes would have upon our business. Our
expansion of our broadcast operations on both a local and national level and the
level of competition we face will continue to be subject to the FCC's ownership
rules and any changes that may be adopted. We cannot predict the ultimate
outcome of the FCC's ownership proceedings or their impact on our business
operations.
Programming and Operation. The Communications Act requires broadcasters to
present programming that responds to community problems, needs and interests and
to maintain certain records demonstrating its responsiveness. Stations also must
follow various rules that regulate, among other things, obscene and indecent
broadcasts, sponsorship identification, the advertising of contests and
lotteries and technical operations, including limits on radio frequency
radiation.
The FCC's rules limit the amount of advertising in television programming
designed for children 12 years of age and under and require that television
broadcast stations air specified amounts of programming during specified time
periods to serve the educational and informational needs of children 16 years of
age and under.
The Communications Act and FCC rules also regulate the broadcasting of
political advertisements by television stations. Stations must provide
"reasonable access" for the purchase of time by legally qualified candidates for
federal office and "equal opportunities" for the purchase of equivalent amounts
of comparable broadcast time by opposing candidates for the same elective
office. Before primary and general elections, legally qualified candidates for
elective office may be charged no more than the station's "lowest unit charge"
for the same class of advertisement, length of advertisement and daypart.
The U.S. Congress presently is considering amending the political
advertising law by changing the statutory definition of "lowest unit charge" in
a manner which would require television stations to sell time to federal
political candidates at lower rates. We are unable to predict whether changes to
the law will be enacted or the effect, if any, such changes would have upon our
business.
Equal Employment Opportunity Requirements. In early 2000, the FCC adopted
revised rules requiring broadcast licensees to develop and implement programs
designed to promote equal employment opportunities and submit reports on these
matters to the FCC. The United States Court of Appeals for the District of
Columbia Circuit has struck down the recruitment, outreach and reporting
portions of these rules as unconstitutional. On June 19, 2001, the court denied
the FCC's petition for rehearing. Intervening parties have filed with the
Supreme Court of the United States a writ of certiorari; however, the FCC has
decided not to ask the Supreme Court to review that decision. The FCC has
suspended the enforcement of the rules pending further developments. The general
prohibition against discrimination in employment remains in effect.
"Must Carry"/Retransmission Consent Regulations. Under the Communications
Act, every local commercial television broadcast stations must elect once every
three years to require a cable system to carry the station subject to certain
exceptions, or to negotiate for retransmission consent to carry the station.
Stations' "must carry" rights are not absolute, and their exercise depends on
variables such as the number of activated channels on a cable system, the
location and size of a cable system, the amount of duplicative programming on a
broadcast station and the signal quality of the station at the cable system's
headend. Alternatively, if a broadcaster chooses to exercise retransmission
consent rights, it can prohibit cable systems from carrying its signal or grant
the cable system consent to retransmit the broadcast signal for a fee or other
consideration. Our television stations have generally elected the "must carry"
alternative. Our elections of retransmission or "must carry" status will
continue until the next election period, which commences on January 1, 2003.
56
In an ongoing rulemaking proceeding, the FCC is considering rules to govern
the obligations of cable television systems to carry the analog and digital
television, or DTV, signals of local television stations or to obtain
retransmission consent to carry those signals during and following the
transition from analog to DTV broadcasting. In an initial order in the
proceeding, the FCC tentatively concluded that broadcasters would not be
entitled to mandatory carriage of both their analog and DTV signals and that
broadcasters with multiple DTV video programming streams would be required to
designate a single, primary video stream eligible for mandatory carriage.
Alternatively, television licensees may negotiate with cable television systems
for carriage of their DTV signal in addition to their analog signal under
retransmission consent.
Under retransmission consent agreements, our television stations are also
carried as distant signals on cable systems which are located outside of the
stations' markets. Cable systems must remit a compulsory license royalty fee to
the United States Copyright Office to carry our stations in these distant
markets. We have filed a request with the Copyright Office to change our
stations' status under the compulsory license from "independent" to "network"
signals. If the Copyright Office grants our request, certain cable systems may
transmit our stations at reduced royalty rates. We cannot determine when the
Copyright Office will act on this request, or whether we will receive a
favorable ruling.
Satellite Carriage of Television Broadcast Signals. Under the Satellite
Home Viewer Improvement Act, which we refer to as SHVIA, a satellite carrier
must obtain retransmission consent before carrying a television station, and
beginning January 1, 2002, a satellite carrier delivering the signal of any
local television station will be required to carry all stations licensed to the
carried station's local market. The FCC recently adopted rules implementing
SHVIA that are similar to the must-carry and retransmission consent rules that
apply to cable television systems. Under the new rules, stations may elect
either mandatory carriage or negotiation for retransmission consent. The first
election period is four years, with subsequent election periods set at three
years to coincide with the cable election period. We have elected, effective
January 1, 2002, mandatory carriage with respect to our stations. Two satellite
television providers and a satellite broadcasting trade association have
instituted litigation challenging the constitutionality of the statutory
satellite "must carry" requirements. In June 2001 a federal district court
upheld the constitutionality of the federal law. This decision is on appeal.
Several satellite providers and broadcasters have also appealed the FCC's orders
in federal court.
Digital Television Service. The FCC has adopted rules for the
implementation of DTV service, a technology which is intended to improve the
quality of television broadcast signals. Each existing television station was
allotted a second channel for its DTV operations. Each station must return one
of its two channels at the end of the DTV transition period currently scheduled
to end on December 31, 2006. The transition period could be extended in certain
areas depending generally on the level of DTV market penetration or if the FCC
or Congress changes the schedule. Except for stations operating analog
facilities in the 700 MHz spectrum band and those stations allotted a digital
channel in the 700 MHz spectrum band, the FCC has established a schedule by
which broadcasters must begin DTV service absent extenuating circumstances that
may affect individual stations. Each of our stations applied for a DTV
construction permit before November 1, 1999 and each must initiate DTV service
covering its community of license by May 1, 2002; however, to the extent a
station has not constructed DTV facilities replicating its analog coverage area
by December 31, 2003, it will lose interference protection in the area not
served. The FCC, by order released September 17, 2001, authorized analog
stations operating in the 700 MHz spectrum band to operate their analog signal
on the channel assigned for digital service and to delay the institution of
digital service until December 31, 2005, or later than December 31, 2005 if it
can be demonstrated that less than 70% of the television households in the
station's market are capable of receiving digital broadcast signals.
Broadcasters given a digital channel allocation within the 700 MHz band may
forego the use of that channel for digital service until December 31, 2005, or
later than December 31, 2005 if it can be demonstrated that less than 70% of the
television households in the station's market are capable of receiving digital
broadcast signals. Broadcasters left with a single-channel allotment as a result
of clearing the 700 MHz spectrum band will retain the interference protection
associated with their digital television channel allotment for a period of 31
months after beginning to transmit in digital.
57
The FCC has adopted rules permitting DTV licensees to offer "ancillary or
supplementary services" on their DTV channels, so long as such services are
consistent with the FCC's DTV standards, do not derogate required DTV services,
and are regulated in the same manner as similar non-DTV services. The FCC's
rules require that DTV licensees pay a fee (based on revenues) for any
subscription-based services that are provided.
The FCC also has commenced a proceeding to consider additional public
interest obligations for television stations as they transition to digital
broadcast television operation. The FCC is considering various proposals that
would require DTV stations to use digital technology to increase program
diversity, political discourse, access for disabled viewers and emergency
warnings and relief. If these proposals are adopted, our stations may be
required to increase their current level of public interest programming, which
generally does not generate as much revenue from commercial advertisers.
Class A Television. In November 1999, Congress passed the Community
Broadcasters Protection Act of 1999, which directs the FCC to offer a new Class
A status to qualifying low power television stations. The FCC's rules grant
Class A stations a measure of interference protection against full power and
other low power television stations. The protected status of Class A stations
could limit our ability to modify our television facilities in the future and
could affect any pending applications for new or modified facilities to the
extent that changes proposed by us would create interference to qualifying Class
A stations. Class A stations will not be protected from interference from DTV
stations proposing to maximize their DTV service, provided the DTV stations
notified the FCC of their intent to maximize facilities no later than December
31, 1999, and filed a maximization application by May 1, 2000.
Proposed Changes. Congress and the FCC have under consideration, and may
in the future adopt, new laws, regulations and policies regarding a wide variety
of matters that could, directly or indirectly, affect our operation, ownership
and profitability of our company and our television broadcast stations. We
cannot predict what other matters may be considered in the future, nor can we
judge in advance what impact, if any, the implementation of any of these
proposals or changes might have on our business.
EMPLOYEES
As of September 30, 2001, we had 605 full-time employees and 71 part-time
employees. The substantial majority of our employees are not represented by
labor unions. We consider our relations with our employees to be good.
SEASONALITY
Seasonal revenue fluctuations are common within the television broadcasting
industry and result primarily from fluctuations in advertising expenditures. We
believe that generally television advertisers spend relatively more for
commercial advertising time in the second and fourth calendar quarters and spend
relatively less during the first calendar quarter of each year.
TRADEMARKS AND SERVICE MARKS
We have 13 federally registered trademarks and service marks and pending
applications for registration of another 72 trademarks and service marks. We do
not own any patents or have any pending patent applications.
PROPERTIES AND FACILITIES
Our corporate headquarters is located in West Palm Beach, Florida. We have
a satellite up-link facility through which we supply our central programming
feed, including PAX TV, to satellite transmitters which relay the signal to our
stations. Our satellite up-link facility is located on leased property in
Clearwater, Florida.
Each of our stations has a facility in the market in which it operates at
which the central programming feed is received and retransmitted in its market.
Each of our stations broadcasts its signal from a transmission tower or antenna
situated on a transmitter site. Each station also has an office and studio and
related
58
broadcasting equipment. As we implement our JSAs and integrate our station
operations with those of our JSA partner at our JSA partner's facilities, we
expect to vacate the leased studio and office facilities of our stations. We
generally own our broadcast transmission towers and we own substantially all of
the equipment used in our broadcasting operations. We either own or lease our
transmitter and antenna sites. In several cases, we lease the land on which we
have constructed our own tower and transmitter building. We may also lease
broadcast tower space to third parties. Our transmitter and antenna site leases
have expiration dates that range generally from two to twenty years. We do not
anticipate any difficulties in renewing those leases that expire within the next
several years or in leasing other space, if required.
We believe our existing facilities are adequate for our current and
anticipated future needs. No single property is material to our overall
operations.
LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of its 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 October, November and December 1999, complaints were filed in the 15th
Judicial Circuit Court in Palm Beach County, Florida, in the Court of Chancery
of the State of Delaware and in Superior Court of the State of California
against certain of our officers and directors by alleged stockholders of our
company alleging breach of fiduciary duty by the directors in approving the
September 1999 transactions with NBC. The complaints assert nearly identical
purported class and derivative claims and generally allege that the directors
rejected a takeover offer and instead completed the NBC transactions, thereby
precluding the plaintiffs from obtaining a premium price for their shares. The
complaints seek to rescind the NBC transactions, to require us to pursue other
acquisition offers and to recover damages. While we believe the suits to be
wholly without merit and intend to vigorously defend our actions on these
matters, we cannot predict the timing or outcome of the pending portions of this
litigation. The four actions in Delaware were recently dismissed by the Delaware
court. The Florida and California cases have been stayed pending resolution of
the Delaware consolidated action.
59
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our directors and executive
officers.
<Table>
<Caption>
NAME AGE TITLE
---- --- -----
Lowell W. Paxson........................... 66 Chairman of the Board, Class I Director
Jeffrey Sagansky........................... 49 President, Chief Executive Officer, Class I
Director
Dean M. Goodman............................ 54 Executive Vice President and Chief
Operating Officer, President of PAX TV
network operations
Anthony L. Morrison........................ 40 Executive Vice President, Chief Legal
Officer
Seth A. Grossman........................... 36 Executive Vice President, Chief Strategic
Officer
Thomas E. Severson, Jr..................... 38 Senior Vice President, Chief Financial
Officer
Ronald L. Rubin............................ 35 Vice President, Chief Accounting Officer,
Corporate Controller
Henry J. Brandon........................... 44 Class I Director
Bruce L. Burnham........................... 67 Class II Director
James L. Greenwald......................... 74 Class II Director
John E. Oxendine........................... 58 Class II Director
R. Brandon Burgess......................... 33 Class III Director
Keith G. Turner............................ 47 Class III Director
Royce E. Wilson............................ 44 Class III Director
</Table>
Our board of directors is comprised of three classes, each consisting of
three directors. Each director is elected for a three year term. Terms of all
Class I directors expire at the annual meeting in 2004. Terms of all Class II
directors expire at the annual meeting in 2002. Terms of all Class III directors
expire at the annual meeting in 2003.
LOWELL W. PAXSON. Mr. Paxson has been our Chairman of the Board since 1991
and was our Chief Executive Officer from 1991 to 1998. Mr. Paxson was a
co-founder of Home Shopping Network, Inc. and served as its President from 1985
to 1990.
JEFFREY SAGANSKY. Mr. Sagansky has been our President, Chief Executive
Officer and a director since 1998. Mr. Sagansky was Co-President of Sony
Pictures Entertainment, a producer of film and video programming, from 1996 to
1997.
DEAN M. GOODMAN. Mr. Goodman became our Executive Vice President and Chief
Operating Officer in August 2001 and has been the President of our PAX TV
network television operations since 1998. Mr. Goodman was president of our inTV
and Network-Affiliated Television divisions from 1995 to 1997. From 1993 to
1995, Mr. Goodman was general manager of our Miami, Florida radio station group.
ANTHONY L. MORRISON. Mr. Morrison has served as our Executive Vice
President, Secretary and Chief Legal Officer since 1995. Before that time, Mr.
Morrison was an attorney in private practice with the O'Melveny & Myers law
firm, concentrating his practice on commercial financings.
SETH A. GROSSMAN. Mr. Grossman has been our Executive Vice President and
Chief Strategic Officer since August 2000. Mr. Grossman also served as our
Senior Vice President and Chief Financial Officer from December 1999 until
August 2000. From 1997 to December 1999, Mr. Grossman was our Senior Vice
President, Corporate Development and from 1995 to 1997, Mr. Grossman was our
Director of Finance.
THOMAS E. SEVERSON, JR. Mr. Severson has been our Senior Vice President
and Chief Financial Officer since August 2000. From 1995 until August 2000, Mr.
Severson was employed by Sinclair Broadcast Group, Inc., a television and radio
broadcasting company, in various finance and accounting positions, most recently
serving as its Vice President and Chief Accounting Officer.
60
RONALD L. RUBIN. Mr. Rubin has been our Vice President, Chief Accounting
Officer and Corporate Controller since January 2001. From 1996 until January
2001, Mr. Rubin was employed by AutoNation, Inc., an automotive retailer, in
various finance and accounting positions, most recently serving as its Vice
President and Corporate Controller and Principal Accounting Officer.
HENRY J. BRANDON. Mr. Brandon has been a director since 2001. Mr. Brandon
has been a Principal of William E. Simon & Sons, LLC, a private investment firm
and merchant bank, since 1995.
BRUCE L. BURNHAM. Mr. Burnham has been a Director since 1996. Mr. Burnham
has been President of The Burnham Group, a firm providing consulting and
marketing services to the retail industry, since 1993. Mr. Burnham is a director
of Forcenergy, Inc. and J. B. Rudolph, Inc.
JAMES L. GREENWALD. Mr. Greenwald has been a Director since 1996. Mr.
Greenwald was the Chairman and Chief Executive Officer of Katz Communications,
Inc., a broadcast advertising representative sales firm, from 1975 to 1994, and
has been Chairman Emeritus of that firm since 1994. Mr. Greenwald is a director
of Granite Broadcasting Company and Source Media, Inc.
JOHN E. OXENDINE. Mr. Oxendine has been a Director since 2000. Mr.
Oxendine has been President and Chief Executive Officer of Blackstar, Inc. since
1998, and Chairman and Chief Executive Officer of Broadcast Capital, Inc. since
1999. Mr. Oxendine was Chairman of Blackstar LLC from 1994 to 1998, and Chairman
and Chief Executive Officer of Blackstar Communications, Inc. from 1987 to 1998.
All of these entities are owners and operators of, or investors in, broadcast
television stations.
R. BRANDON BURGESS. Mr. Burgess has been a Director since 1999. Mr.
Burgess has been Vice President and Chief Financial Officer, Business
Development and New Media of NBC since 2000. Mr. Burgess was Vice President and
CFO, Television Network, of NBC from 1999 to 2000, and Director of Business
Development and International Business of NBC from 1998 to 1999. Mr. Burgess was
Manager of Corporate Strategy and Mergers and Acquisitions of Pepsico, Inc., a
beverage company, from 1995 to 1998.
KEITH G. TURNER. Mr. Turner has been a Director since 1999. Mr. Turner has
been President, Television Network Sales, of NBC since 1998. Mr. Turner was Vice
President, Sports Sales and Television Network Sales, of NBC from 1990 to 1998.
ROYCE E. WILSON. Mr. Wilson has been a Director since February 2001. Mr.
Wilson has been the President of NBC Enterprises and Syndication since September
2000. Mr. Wilson was President and Chief Operating Officer of CBS Enterprises
and its EYEMARK division from 1996 to September 2000.
EMPLOYMENT AGREEMENTS
Mr. Paxson is employed as our Chairman, and in that capacity he serves as
our senior executive officer, under an employment agreement for a three year
term commencing on October 16, 1999. The agreement is automatically renewable
after the initial term for successive one year periods so long as Mr. Paxson
remains our "Single Majority Shareholder," as that term is defined under the
rules of the FCC. Mr. Paxson's current base salary is $660,000, increasing 10%
per year. Mr. Paxson may receive an annual bonus of up to twice his base salary
if we attain revenue targets established by the compensation committee of our
Board of Directors. In connection with the employment agreement, we granted Mr.
Paxson nonqualified options to purchase 1,000,000 shares of Class A common
stock, which vest in equal installments over a three year period, and which
expire ten years from the date of grant. The exercise price for options which
vested in October 2000 is $10 per share, $12.03 per share for options vesting
October 2001, and the lower of $18 per share or the fair market value of the
common stock on the prior anniversary date for options vesting in October 2002.
Mr. Paxson is eligible to participate in all employee benefit plans and
arrangements that are generally available to our other senior executives. The
Board of Directors may terminate Mr. Paxson's employment agreement before
expiration for good cause, and Mr. Paxson may terminate the agreement for good
reason, each as defined in the agreement. If Mr. Paxson dies, becomes
permanently disabled, terminates his employment for good reason or is terminated
other than for good cause during the term of the agreement, we will pay Mr.
Paxson or his estate, as the case may be, his then existing salary for the
remaining term of the agreement,
61
in the case of disability, termination for good reason or termination other than
for good cause, or 18 months, in the case of death.
Mr. Sagansky is employed as our President and Chief Executive Officer under
an employment agreement entered into in September 1999 for a four year term
expiring September 15, 2003. Mr. Sagansky's current base salary under the
agreement is $660,000, increasing 10% per year. Mr. Sagansky may receive an
annual bonus of up to twice his base salary if we attain revenue targets
established by our compensation committee, which shall be the same revenue
targets established for purposes of Mr. Paxson's bonus compensation. In
connection with the employment agreement, we granted Mr. Sagansky nonqualified
options to purchase 2,000,000 shares of Class A common stock, vesting in four
equal annual installments commencing September 15, 2000, and expiring ten years
from the date of the grant. The vesting of these options will be accelerated if,
at any time after Mr. Paxson ceases to be our FCC Single Majority Shareholder,
Mr. Sagansky's employment is terminated other than by reason of his death or
disability and other than for good cause (as defined in the agreement). The
exercise price for options which vested in September 2000 is $10 per share,
$11.68 per share for options vesting in September 2001, and the lower of a range
between $18 and $21 per share or the fair market value of the common stock on
the prior anniversary date for options vesting on subsequent anniversaries. Mr.
Sagansky is eligible to participate in all employee benefit plans and
arrangements that are generally available to our other senior executives. The
Board of Directors may terminate Mr. Sagansky's employment agreement before
expiration for good cause, and Mr. Sagansky may terminate the agreement for good
reason, each as defined in the agreement. If Mr. Sagansky dies, becomes
permanently disabled, terminates his employment for good reason or is terminated
other than for good cause during the term of the agreement, we will pay Mr.
Sagansky or his estate, as the case may be, his then existing salary for the
remaining term of the agreement, in the case of disability, termination for good
reason or termination other than for good cause, or 18 months, in the case of
death.
Mr. Goodman is employed as our Executive Vice President and Chief Operating
Officer and as President of our PAX TV network operations under a four year
employment agreement commencing January 1, 2001. Mr. Goodman is eligible to
receive an annual bonus. Mr. Goodman is eligible to participate in all employee
benefit plans and arrangements that are generally available to our other senior
executives and to receive such other cash and non-cash bonus awards and
compensation, including awards under our stock incentive plans, as we may
determine. We may terminate Mr. Goodman's employment for cause, as defined in
the agreement. If Mr. Goodman's employment is terminated by reason of his
disability, or other than for cause, or if Mr. Goodman terminates his death or
employment for cause, as defined in the agreement, we will continue to pay Mr.
Goodman his base salary for the lesser of one year or the balance of the
employment term.
Mr. Morrison is employed as our Executive Vice President and Chief Legal
Officer under a four year employment agreement commencing January 1, 2001. Mr.
Morrison is eligible to receive an annual bonus. Mr. Morrison is eligible to
participate in all employee benefit plans and arrangements that are generally
available to our other senior executives and to receive such other cash and
non-cash bonus awards and compensation, including awards under our stock
incentive plans, as we may determine. We may terminate Mr. Morrison's employment
for cause, as defined in the agreement. If Mr. Morrison's employment is
terminated by reason of his disability or other than for cause, or if Mr.
Morrison terminates his employment for cause, as defined in the agreement, we
will continue to pay Mr. Morrison his base salary for the lesser of one year or
the balance of the employment term.
Mr. Grossman is employed as our Executive Vice President and Chief
Strategic Officer under a four year employment agreement commencing January 1,
2001. Mr. Grossman is eligible to receive an annual bonus. Mr. Grossman is
eligible to participate in all employee benefit plans and arrangements that are
generally available to our other senior executives and to receive such other
cash and non-cash bonus awards and compensation (including awards under our
stock incentive plans), as we may determine. We may terminate Mr. Grossman's
employment for cause, as defined in the agreement. If Mr. Grossman's employment
is terminated by reason of his death or disability or other than for cause, we
will continue to pay Mr. Grossman his base salary for the lesser of one year or
the balance of the employment term.
62
Mr. Severson is employed as our Senior Vice President and Chief Financial
Officer under a four year employment agreement which commenced January 1, 2001.
Mr. Severson is eligible to receive an annual bonus and participate in all
employee benefit plans and arrangements that are generally available to our
other senior executives and to receive such other cash and non-cash bonus awards
and compensation, including awards under our stock incentive plans, as we may
determine. We may terminate Mr. Severson's employment for cause, as defined in
the agreement. If Mr. Severson's employment is terminated by reason of his
disability, death or other than for cause, or if Mr. Severson terminates his
employment for cause, as defined in the agreement, we will continue to pay Mr.
Severson his base salary for a period equal to the lesser of one year or the
balance of the employment term.
63
EXECUTIVE COMPENSATION
The following table presents information concerning the compensation
received or accrued for services rendered during the fiscal years ended December
31, 2000, 1999 and 1998 for our Chief Executive Officer and our four most highly
compensated executive officers other than the Chief Executive Officer who were
serving as of December 31, 2000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION NUMBER OF
----------------------------------- SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION OPTIONS (2)(3)
--------------------------- ---- --------- -------- ------------ ------------ ------------
Jeffrey Sagansky.............. 2000 $610,000 $ -- $ -- 0 $61,000
Chief Executive Officer 1999 600,000 -- 140,070(4) 2,000,000 61,000
President 1998 379,615 -- 200,000(4) 1,200,000 --
Lowell W. Paxson.............. 2000 610,000 -- -- 0 --
Chairman of the Board 1999 493,798 -- -- 1,000,000 --
1998 465,850 75,000 -- 0 --
Dean M. Goodman............... 2000 412,997 -- 1,023,273(5) 0 42,300
Executive Vice President and 1999 315,000 -- 924,937(5) 0 13,600
Chief Operating Officer, 1998 315,000 100,000 -- 600,000 32,500
President -- PAX TV
Anthony L. Morrison........... 2000 275,000 -- -- 0 28,500
Executive Vice President, 1999 223,438 -- 432,781(5) 99,000 20,688
Chief Legal Officer 1998 196,875 75,000 -- 200,000 20,688
Seth A. Grossman.............. 2000 219,750 75,000 -- 0 1,000
Executive Vice President, 1999 177,292 -- -- 22,000 1,000
Chief Strategic Officer 1998 165,000 -- -- 100,000 1,000
</Table>
---------------
(1) Includes amounts Named Executive Officers elected to defer pursuant to our
Profit Sharing Plan.
(2) Includes contributions to supplemental retirement plans as follows: during
2000, Mr. Sagansky -- $60,000; Mr. Goodman -- $41,300; Mr.
Morrison -- $27,500; during 1999, Mr. Sagansky -- $60,000; Mr. Goodman
-- $12,600; Mr. Morrison -- $19,688; during 1998, Mr. Goodman -- $31,500;
Mr. Morrison -- $19,688.
(3) Includes $1,000 Company contributions to the Profit Sharing Plan during
1998, 1999 and 2000.
(4) Consists of relocation allowance in 1998 and related tax reimbursement in
1999.
(5) Represents the difference between the price paid by the Named Executive
Officer upon the exercise of stock options and the fair market value of the
underlying common stock at the time of exercise.
OPTION GRANTS IN LAST FISCAL YEAR
None of the Named Executive Officers was granted any options to purchase
shares of our Class A common stock during the year ended December 31, 2000.
64
2000 AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to stock options
exercised by the Named Executive Officers during the fiscal year ended December
31, 2000 and stock options held as of December 31, 2000 by each Named Executive
Officer.
<Table>
<Caption>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2000 DECEMBER 31, 2000(1)
SHARES --------------------------- ---------------------------
ACQUIRED ON VALUE EXERCISABLE UNEXERCISABLE
NAME EXERCISE REALIZED (2) UNEXERCISABLE EXERCISABLE (3)
---- ----------- ---------- ----------- ------------- ----------- -------------
Jeffrey Sagansky.......... -- $ -- 1,160,000 2,040,000 $8,484,500 $6,440,850
Lowell W. Paxson.......... -- -- 333,333 666,667 645,833 0
Dean M. Goodman........... 100,000 1,023,273 337,661 390,000 1,956,828 1,943,025
Anthony L. Morrison....... -- -- 284,600 209,400 2,004,313 1,058,163
Seth A. Grossman.......... -- -- 109,600 53,200 670,014 249,375
</Table>
---------------
(1) Based on the closing sale price of the Class A common stock of $11.9375 on
December 29, 2000.
(2) Excludes securities underlying options which vested January 1, 2001 as
follows: Mr. Goodman, 150,000 shares; Mr. Morrison, 79,800 shares; Mr.
Grossman, 24,400 shares.
(3) Certain options held by Mr. Sagansky and Mr. Paxson which are not currently
exercisable have variable exercise prices to be determined at future dates,
as described above under "Employment Agreements," and are therefore not
treated as "in the money" for purposes of the amounts shown in this column.
STOCK INCENTIVE PLANS
We established our Stock Incentive Plan, 1996 Stock Incentive Plan and 1998
Stock Incentive Plan (collectively, the "Stock Incentive Plans") to provide
incentives to officers, employees and others who perform services for us through
awards of options and shares of restricted stock. Awards are granted under the
Stock Incentive Plans at the discretion of our Compensation Committee and may be
in the form of either incentive or nonqualified stock options or awards of
restricted stock. Options granted under the Stock Incentive Plans generally vest
over a five year period and expire ten years after the date of grant. At
December 31, 2000, 276,861 shares of Class A common stock were available for
additional awards under the Stock Incentive Plans.
The exercise price per share of Class A common stock, vesting schedule and
expiration date of each stock option granted under the Stock Incentive Plans is
determined by our Compensation Committee at the date the option is granted and
as provided in the terms of the Plans. The Compensation Committee may, in its
sole discretion, accelerate the time at which any stock option may be exercised.
Holders of more than ten percent (10%) of the combined voting power of our
capital stock may be granted stock options, provided that if any of such options
are intended to be incentive stock options, the exercise price must be at least
110% of the fair market value of Class A common stock as of the date of the
grant and the term of the option may not exceed five years. Options granted
under the Stock Incentive Plans may be exercised by the participant to whom
granted or by his or her legal representative. If a participant's employment is
terminated for cause, each option which has not been exercised shall terminate.
The Compensation Committee also has the discretion to award restricted
stock, consisting of shares of Class A common stock which vest over a period
determined by the Committee and are subject to forfeiture in whole or in part if
the recipient's employment is terminated before the end of the restricted
period. Before vesting, the participant may transfer the restricted stock to a
trust for the benefit of the participant or an immediate family member, but may
not otherwise sell, assign, transfer, give or otherwise dispose of, mortgage,
pledge or encumber such restricted stock. The Compensation Committee may, in its
discretion, provide that a participant shall be vested in whole or with respect
to any portion of the participant's award not previously vested if the
participant's employment with us is terminated because of death, disability or
retirement. To date, we have not awarded any restricted stock under the Stock
Incentive Plans.
65
EXECUTIVE BONUS PLAN
Under our Executive Bonus Plan, members of our senior management approved
by the Compensation Committee may earn cash bonus compensation on an annual
basis in such amounts as are determined by the Committee, based upon the
achievement of operating and financial objectives and individual performance
criteria. The bonus calculation criteria are established on an annual basis by
the Committee, and generally consist of a set of operating and financial
performance objectives which we must meet for any participant to be entitled to
receive a bonus, and individualized performance criteria and bonus levels for
each participant (generally expressed as a percentage of the participant's base
salary). Bonuses awarded with respect to a fiscal year are to be paid during the
following year.
PROFIT SHARING PLAN
We have a profit sharing plan under Section 401(k) of the Internal Revenue
Code under which our employees must complete six months of service in order to
be eligible to defer salary and, if available, receive matching contributions
under the Section 401(k) portion of the plan. Participants may elect to
contribute a specified percentage of their compensation to the plan on a pre-tax
basis. We may, at our discretion, make matching contributions based on a
percentage of deferred salary contributions at a rate to be determined by
certain of our officers, which matching contributions may be paid in our stock.
In addition, we may make supplemental profit sharing contributions in such
amounts as certain of our officers may determine. Participants earn a vested
right to their profit sharing contribution in increasing amounts over a period
of five years. After five years of service, a participant's right to his or her
profit sharing contribution is fully vested. Thereafter the participant may
receive a distribution of the entire value of his or her account at age 55, 62
or 65 or upon termination of employment, death or disability.
COMPENSATION OF DIRECTORS
Directors who are not our employees or employees of NBC receive an annual
retainer of $24,000 and are paid fees of $1,500 for each board meeting attended,
$1,000 for each committee meeting attended and $500 for each meeting chaired.
All directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. In connection
with his commencement of service as a director, Mr. Oxendine received options to
purchase 50,000 shares of Class A common stock at an exercise price of $7.25 per
share, vesting ratably over a five year period commencing in March 2000. In
April 1999, Mr. Burnham and Mr. Greenwald each received a 50,000 share option
grant at the same exercise price, vesting ratably over five years. No other
directors receive separate compensation for services rendered as a director,
including directors who are employed by us.
66
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of our shares of common stock as of September 30, 2001 by:
- each of our directors and our five most highly compensated executive
officers in 2000;
- all of our directors and executive officers as a group; and
- any person who is known by us to be the beneficial owner of more than
five percent of any class of our common stock.
<Table>
<Caption>
AGGREGATE
CLASS OF NUMBER % OF VOTING POWER
STOCK NAME OF BENEFICIAL OWNER OF SHARES CLASS (%)
-------- ----------------------------------------------- ---------- ----- ------------
Class A National Broadcasting Company, Inc.(1)......... 63,928,159 53.2% 30.5%
Lowell W. Paxson(2)............................ 21,038,309 36.9 14.4
Mario J. Gabelli(3)............................ 6,151,997 10.9 4.2
Landmark Communications, Inc.(4)............... 4,007,297 7.1 2.8
Jeffrey Sagansky(6)............................ 1,960,000 3.4 1.3
Henry J. Brandon(5)............................ 1,026,559 1.8 *
Dean M. Goodman(6)............................. 534,136 * *
Anthony L. Morrison(6)......................... 374,950 * *
Seth A. Grossman(6)............................ 162,175 * *
Bruce L. Burnham(6)............................ 55,850 * *
James L. Greenwald(6).......................... 39,500 * *
Thomas E. Severson, Jr.(6)..................... 37,500 * *
John E. Oxendine(6)............................ 10,000 * *
R. Brandon Burgess............................. 0 * *
Keith G. Turner................................ 0 * *
R. Edward Wilson............................... 0 * *
All directors and executive officers as a group
(14 persons)(7)................................ 25,238,979 41.3
Class B Lowell W. Paxson............................... 8,311,639 100% 57.0%
All directors and executive officers as a group
(1 person)..................................... 8,311,639 100% 57.0%
</Table>
---------------
* Less than 1%
(1) Consists of 31,896,032 shares of Class A common stock issuable upon
conversion of shares of our Series B preferred stock held by NBC Palm Beach
Investment I, Inc., and 32,032,127 shares of Class A common stock issuable
upon exercise of outstanding warrants held by NBC Palm Beach Investment II,
Inc. The holders' rights to acquire shares of Class A common stock upon
conversion and exercise of those securities, although currently exercisable,
are subject to material conditions, including compliance with the rules of
the FCC. This amount does not include shares beneficially owned by Mr.
Paxson that NBC Palm Beach Investment II, Inc. has the right to acquire.
According to information contained in a Schedule 13D filed with the SEC,
dated September 15, 1999, NBC Palm Beach Investment I and NBC Palm Beach
Investment II are subsidiaries of NBC, and NBC and its parent entity,
General Electric Company, Inc., each disclaims beneficial ownership of these
securities.
(2) Includes 666,666 shares which may be acquired within 60 days through the
exercise of stock options; does not include 8,311,639 shares of Class B
common stock, each share of which is convertible into one share of Class A
common stock. Mr. Paxson is the beneficial owner of all reported shares,
other than 333,433 shares of Class A common stock, through his control of
Second Crystal Diamond, Limited Partnership and Paxson Enterprises, Inc.
(3) According to information contained in an amendment to Schedule 13D filed
with the SEC, dated September 5, 2001, various investment funds and other
entities controlled by or affiliated with Mario J.
67
Gabelli and Marc J. Gabelli acquired those shares for investment for one or
more accounts over which they have shared or sole investment and voting
power or for their own account.
(4) According to information contained in an amendment to Schedule 13D filed
with the SEC, dated January 25, 2001, Landmark Communications, Inc. acquired
those shares under an asset acquisition agreement, dated as of June 13,
1997, in connection with its sale to us of the assets related to the Travel
Channel, and holds those shares for investment purposes.
(5) Consists of shares which may be acquired upon the exercise of warrants and
conversion of shares of our Series A preferred stock held by an affiliate of
William E. Simon & Sons, LLC, a private investment firm with which Mr.
Brandon is employed as a Principal; Mr. Brandon disclaims beneficial
ownership of all such shares.
(6) Includes shares which may be acquired within 60 days through the exercise of
stock options granted under our stock incentive plans as follows: Jeffrey
Sagansky -- 960,000; Dean M. Goodman -- 487,661; Anthony L.
Morrison -- 344,400; Seth A. Grossman -- 134,000; Bruce L.
Burnham -- 43,750; James L. Greenwald -- 39,500; Thomas E.
Severson -- 37,500; and John E. Oxendine -- 10,000. Also includes 1,000,000
shares which may be acquired by Mr. Sagansky within 60 days through the
exercise of additional stock options.
(7) Includes 2,056,811 shares which may be acquired within 60 days through the
exercise of stock options granted under our stock incentive plans, 1,666,666
shares which may be acquired within 60 days through the exercise of
additional stock options granted to Mr. Paxson and Mr. Sagansky, and
1,026,559 shares which may be acquired upon the exercise of warrants and
conversion of shares of our Series A preferred stock held by an affiliate of
William E. Simon & Sons, LLC, a private investment firm with which Mr.
Brandon is employed.
68
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NBC Transactions. On September 15, 1999, NBC entered into an agreement
with us under which subsidiaries of NBC acquired $415 million liquidation
preference of Series B preferred stock, which is convertible into 31,896,032
shares of our Class A common stock, and common stock purchase warrants entitling
the holder to purchase 32,032,127 shares of Class A common stock. NBC also
entered into an agreement with Mr. Paxson and entities controlled by Mr. Paxson
under which NBC was granted the right to purchase all, but not less than all
8,311,639, shares of our Class B common stock beneficially owned by Mr. Paxson,
which shares are entitled to ten votes per share on all matters submitted to a
vote of our stockholders and are convertible into an equal number of shares of
Class A common stock. We have entered into other agreements with NBC under which
we pay amounts to NBC for commission compensation and cost reimbursements, as
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General." During December 1999 and March 2000, our
board of directors appointed Messrs. Burgess, Turner and Brook, employees of
NBC, to fill vacancies on the board of directors. Mr. Brook resigned as a member
of the board of directors on December 12, 2000. In February 2001, the board
elected R. Edward Wilson to fill the vacancy on the board left by Mr. Brook's
resignation. Apart from their service as employees of NBC, we are not aware of
any interest of Messrs. Burgess, Turner and Wilson in our transactions with NBC.
For more information regarding our relationship with NBC, see "Business -- NBC
Relationship."
DP Media. DP Media, Inc., CAP Communications, Inc. and RDP Communications,
Inc., which we refer to collectively as DP Media, are companies formerly
beneficially owned by family members of Mr. Paxson. During the past several
years, we have engaged in numerous transactions with DP Media involving
television station purchases and sales, time brokerage and affiliation
agreements and other matters. In April 1998, DP Media, Inc. entered into a
contract to acquire WHPX in Hartford, Connecticut, from Roberts Broadcasting
Company for $250,000 plus the assumption of a note payable to us for $15
million, and WHPX became a PAX TV affiliate. In February 1999, DP Media, Inc.
assigned its rights to acquire WHPX to CAP Communications, Inc., which completed
the acquisition.
During May 1998, we sold television station WPXE to DP Media, Inc. for $6
million. Upon its acquisition by DP Media, WPXE became a PAX TV affiliate. No
significant gain or loss was recorded in connection with this transaction.
During December 1997 and January 1998, we sold our interest in television
stations WPXS and WZPX, serving the St. Louis, Missouri and Grand Rapids,
Michigan markets, respectively, for $4.8 million and $7 million, respectively,
to DP Media.
During August 1998, DP Media entered into an asset purchase agreement to
acquire certain assets relating to the business and operations of television
station WIPX in Bloomington, Indiana. We joined in the execution of the asset
purchase agreement for the purpose of guaranteeing DP Media's performance under
this agreement. We advanced $1.75 million to DP Media in connection with this
acquisition, which subsequently was repaid.
In February 1999, DP Media acquired two television stations, which were PAX
TV affiliates, indirectly from us for consideration of approximately $30.5
million, including the assumption of notes payable to us. These notes were
repaid during August 1999. During 1998 and 1999, Mr. Paxson served as guarantor
on approximately $31.4 million in bank loans made to DP Media, which guaranty
was secured by a pledge of approximately 6.1 million shares of Class A common
stock owned by an affiliate of Mr. Paxson. Mr. Paxson's guaranties were
terminated in connection with DP Media's refinancing of its indebtedness during
August 1999. During 1999, we had affiliation agreements with DP Media under
which we provided the DP Media station affiliates with programming and paid a
fixed monthly affiliation fee, and the affiliates retained a portion of the
advertising airtime during our network programming. We also served as the
network, national and regional sales representative for the DP Media station
affiliates and received a commission of 15% for sales revenue generated. During
1999, we recorded $404,000 of commissions revenue under our services agreements
with DP Media. We recorded time brokerage and affiliation fees expenses related
to stations owned by DP Media of approximately $5.7 million in 1998 and $13.6
million in 1999.
On November 21, 1999, we agreed to purchase the television station assets
of DP Media and related corporations. These assets consisted of eight television
stations and a contractual right to acquire a ninth
69
television station, WBPX, and two full power satellite stations serving the
Boston, Massachusetts market. We advanced approximately $106 million to DP Media
in the transaction, under a secured loan agreement, which was used to repay DP
Media's outstanding indebtedness to third party lenders. On March 3, 2000, we
agreed with DP Media to convert the asset sale transaction into a purchase by us
of all of the capital stock of DP Media. In June 2000, we completed the
acquisition of DP Media for aggregate consideration of $113.5 million, including
the $106 million previously advanced. DP Media's assets include a 32% equity
interest in a limited liability company controlled by the former stockholders of
DP Media, which owns television station WWDP in Norwell, Massachusetts. We have
the right to require a sale of WWDP, which is not a PAX TV affiliate, if the
station is not sold within a specified period, and the right to receive 45% of
the net proceeds from the sale of the station.
The Christian Network, Inc. We have entered into several agreements with
The Christian Network, Inc., or CNI. CNI is a section 501(c)(3) not-for-profit
corporation to which Mr. Paxson has been a substantial contributor and of which
he was a member of the Board of Stewards through 1993.
On September 10, 1999, we entered into a master agreement with CNI for
overnight programming and use of a portion of our digital capacity in exchange
for CNI's providing public interest programming. The master agreement has a term
of 50 years and is automatically renewable for successive ten-year periods
unless CNI ceases to exist, commences action to liquidate, ceases family values
programming or the FCC revokes the licenses of a majority of our stations. Under
the master agreement, we broadcast CNI overnight programming on each of our
stations seven days a week from 1:00 a.m. to 6:00 a.m. We do not receive or pay
cash compensation for carrying this programming. If and when our stations begin
digital programming in multiple channels, we are required to make a digital
channel available for CNI's use. CNI will have the right to use the digital
channel for 24 hour CNI digital programming.
We entered into an agreement with CNI in May 1994 under which we agreed
that, if the tax exempt status of CNI were jeopardized by virtue of its
relationship with us, we would take certain actions to ensure that CNI's tax
exempt status would no longer be so jeopardized. These steps could include
additional payments by us or rescission of one or more transactions. We believe
that our agreements with CNI have been on terms as favorable to CNI as it would
obtain in arm's-length transactions, and we intend any future agreements with
CNI to be as favorable to CNI as CNI would obtain in arm's-length transactions.
Accordingly, if our activities with CNI are consistent with the terms governing
our relationship, we should not be required to take any actions under this
agreement. We cannot be sure, however, that we will not be required to take any
actions under this agreement which might have a material cost to us.
We have contracted with CNI to lease CNI's television production and
distribution facility, the Worship Channel Studio, in Clearwater, Florida. We
utilize this facility primarily as our network operations center and originate
our PAX TV network signal from this location. During 2000, we incurred rental
charges of $199,000 in connection with this agreement.
Blackstar LLC. In January 1998, we purchased substantially all of the
assets used in the operation of television station WBSX, Ann Arbor, Michigan,
and low power television station W48AV, Detroit, Michigan, including the FCC
station licenses, from subsidiaries of Blackstar LLC for $35 million. At the
time of the purchase, John Oxendine, who has been one of our directors since
March 2000, was Chairman of Blackstar LLC's Board of Managers and its Chief
Executive Officer and Secretary, controlled a 66% voting interest in Blackstar
and beneficially owned 25% of its equity securities. In connection with the
station purchases, Mr. Oxendine executed a five-year noncompetition agreement
with us, under which we paid him $335,000.
In June 1998, we purchased substantially all of the assets used in the
operation of television station KBSP, Salem, Oregon, including the FCC station
license, from subsidiaries of Blackstar LLC for $30 million. At the time of the
purchase, Mr. Oxendine served as Chairman of Blackstar LLC's Board of Managers
and its Chief Executive Officer and Secretary, controlled a 66% voting interest
in Blackstar and beneficially owned approximately 31% of its equity securities.
Aircraft Lease. During 1997, we entered into a three-year lease with a
company owned by Mr. Paxson for a Boeing 727 aircraft. The lease provided for
monthly payments of $63,600. We incurred rental costs under
70
the lease of approximately $759,000 during 2000. The lease expired in December
2000 without being renewed. At the lease expiration, we had leasehold
improvements of approximately $222,577 (net of accumulated depreciation).
Simon Interests. Henry Brandon, who has been one of our directors since
September 2001, is employed as a principal of William E. Simon & Sons, LLC, a
private investment firm and an affiliate of William E. Simon, Jr., who served as
Vice Chairman of our Board of Directors from May 1998 until September 2001. In
June 1998 we issued to an affiliate of Mr. Simon fully vested warrants to
purchase 155,500 shares of Class A common stock at an exercise price of $16 per
share. In connection with our June 1998 offering of Series A preferred stock and
warrants to purchase Class A common stock, we paid an affiliate of Mr. Simon a
consulting fee of $500,000 and an underwriting fee of $550,000 for services
rendered in connection with the placement of such securities. Also in June 1998,
the affiliate of Mr. Simon purchased $10 million aggregate liquidation
preference of our Series A preferred stock and warrants to purchase 32,000
shares of Class A common stock at an exercise price of $16 per share. In March
2000, we reduced the exercise price of the 187,500 warrants held by Mr. Simon's
affiliate from $16 per share to $12.60 per share. Mr. Simon resigned from our
Board of Directors in September 2001 and Mr. Brandon, who is employed as a
Principal of William E. Simon & Sons, LLC, a private investment firm and an
affiliate of Mr. Simon, was elected a director to serve the unexpired balance of
Mr. Simon's term.
Officer Loans. During December 1996, we approved a program to extend loans
to members of our senior management to finance their purchase of shares of Class
A common stock in the open market. The loans are full recourse promissory notes
bearing interest at 5.75% per annum and are collateralized by a pledge of the
shares of Class A common stock purchased with the loan proceeds. During 2000, we
did not receive any payments of principal or interest in respect of the loans
outstanding under this program. At June 30, 2001, the outstanding balances of
principal and accrued interest on such loans to those of our officers included
in our five most highly compensated executive officers during the year 2000 were
as follows: Mr. Goodman, $623,187; Mr. Morrison, $327,299; and Mr. Grossman,
$149,722.
71
DESCRIPTION OF MATERIAL INDEBTEDNESS AND PREFERRED STOCK
The following is a summary of the terms and conditions of some of our
material indebtedness and of the terms of our preferred stock, and is subject to
and qualified in its entirety by reference to the terms and conditions of the
agreement, indenture or certificate of designation, as applicable, governing the
indebtedness or preferred stock the terms and conditions of which are being
summarized.
NEW SENIOR CREDIT FACILITY
In connection with the Refinancing, we entered into an agreement for a new
$360.0 million senior secured credit facility with Citicorp USA, Inc. as
administrative agent and collateral agent, Union Bank of California, N.A. as
syndication agent, Canadian Imperial Bank of Commerce and General Electric
Capital Corporation as co-documentation agents, Salomon Smith Barney Inc. as
sole book manager and sole lead arranger, and the lenders named in the
agreement. The new senior credit facility comprises three facilities:
(1) a Term A facility in the aggregate principal amount of $50.0
million to be used for capital expenditures, maturing December 31, 2005.
Borrowing availability under the Term A facility will be reduced to $15
million on the second anniversary of the closing of the new senior credit
facility and no further borrowings under the Term A facility will be
permitted after the third anniversary of the closing of the new senior
credit facility;
(2) a Term B facility in the aggregate principal amount of $285.0
million used solely for the purpose of the Refinancing, maturing June 30,
2006; and
(3) a revolving facility in the aggregate principal amount of up to
$25.0 million partly for the Refinancing and to be used partly for capital
expenditures and general corporate purposes, maturing June 30, 2006.
We are required to begin making quarterly principal repayments under the
Term A facility on September 30, 2003. The first four installments shall each be
0.25% of the amount outstanding under the Term A facility on each such repayment
date, and the next four installments shall each be 0.25%, and the final two
installments shall each be 49.5%, of the amount outstanding under the Term A
facility on June 30, 2006. We are required to begin making quarterly principal
repayments under the Term B facility on September 30, 2001. The first 18
installments shall each be $712,500 and the final two installments shall each be
$136,087,500. The revolving facility is required to be permanently repaid at the
maturity date of the revolving facility. Before its maturity date, the revolving
facility may be repaid and then reborrowed; however, no amount repaid under the
Term A facility or the Term B facility may be reborrowed.
Borrowings under the Term A facility and the revolving facility bear
interest at a rate per annum equal to (1) before January 1, 2004, at our option,
either the alternate base rate (which is defined as the highest of - 1/2% plus
the federal funds rate, the prime rate most recently announced by the agent
under the new senior credit facility and - 1/2% plus the CD rate of the agent
under the new senior credit facility) plus 2.00%, or LIBOR plus 3.00%, and (2)
on and after January 1, 2004, at our option either:
- LIBOR plus
- if our leverage ratio is greater than 6 to 1, 3.00%;
- if our leverage ratio is less than or equal to 6 to 1 and greater than
4.5 to 1, 2.75%; or
- if our leverage ratio is less than or equal to 4.5 to 1, 2.50%; or
- the alternate base rate plus
- if our leverage ratio is greater than 6 to 1, 2.00%;
- if our leverage ratio is less than or equal to 6 to 1 and greater than
4.5 to 1, 1.75%; or
- if our leverage ratio is less than or equal to 4.5 to 1, 1.50%.
72
Borrowings under the Term B facility bear interest at a rate per annum
equal to, at our option, either the alternate base rate plus 2.00% or LIBOR plus
3.00%.
Our obligations under the new senior credit facility, other than $59.1
million of borrowings under the Term B facility that were used to redeem our 12%
preferred stock, are unconditionally guaranteed, jointly and severally, by all
of our material subsidiaries. Our obligations and those of our guarantors under
the new senior credit facility are secured primarily by a first priority lien on
all the assets of our company and those guarantors.
The new senior credit facility contains various covenants, representations,
warranties and indemnities, including 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 (including
the notes), create liens, make capital expenditures, make certain investments or
acquisitions and enter into transactions with affiliates and otherwise
restricting our activities. The new senior credit facility also contains the
following financial covenants: (1) minimum net revenue and minimum Consolidated
EBITDA (as such term is defined below under "Description of Notes") for each of
the fiscal quarters ended June 30, 2001 through December 31, 2003, and (2)
maximum ratio of total senior debt to Consolidated EBITDA, maximum ratio of
total debt to Consolidated EBITDA, minimum permitted interest coverage ratio and
minimum permitted fixed charge coverage ratio, each beginning for each of the
fiscal quarters ending on or after June 30, 2004.
The new senior credit facility also contains provisions requiring repayment
of the facilities (and permanent commitment reductions) from certain net
proceeds of asset sales, insurance, debt and equity issuances and excess cash
flow as well as to the extent necessary to ensure that outstanding amounts under
the new senior credit facility do not exceed a certain percentage of the value
of the broadcasting stations of our company and the subsidiary guarantors.
Events of defaults under the new senior credit facility include those usual
and customary for transactions of this type, including, among other things,
failure to pay principal, interest and other amounts payable under the new
senior credit facility; material breaches of representations or warranties under
the new credit facility; breach of negative or financial covenants under the new
credit facility; breach of any other covenant under the new senior credit
facility (subject to a 30 day cure period in most cases); failure to pay or
default under other material indebtedness; failure generally to pay debts or
bankruptcy; material judgments, unenforceability of any guaranty or security in
respect of the new senior credit facility or loss of protection or priority of
liens thereunder; change of control; material adverse change; loss of any
material FCC license or failure to comply with material FCC requirements in
respect of an acquisition; and material liabilities arising under breach of
environmental law or ERISA (each of the foregoing applying to the company and
our subsidiaries). Upon the occurrence and continuance of an event of default
under the new senior credit facility, the agent may declare the then outstanding
loans due and payable and exercise remedies, including foreclosure upon
collateral.
12 1/2% EXCHANGEABLE PREFERRED STOCK
General. We have designated 440,000 shares as our 12 1/2% Cumulative
Exchangeable Preferred Stock of which, as of June 30, 2001, there were 261,063
shares issued and outstanding.
Dividends. The holders of the 12 1/2% exchangeable preferred stock are
entitled to receive dividends out of legally available funds at a rate equal to
12 1/2% per year of the liquidation preference per share, payable semi-annually
and accumulating from the original issue date. We may, at our option, pay
dividends on any dividend payment date occurring on or before October 31, 2002
either in cash or by the issuance of additional shares of 12 1/2% exchangeable
preferred stock having an aggregate liquidation preference equal to the amount
of those dividends. To date, we have paid no cash dividends on the 12 1/2%
exchangeable preferred stock. During 2000, 1999 and 1998, we paid dividends of
approximately $28.1 million, $24.9 million, $22.0 million, respectively, by the
issuance of additional shares of 12 1/2% exchangeable preferred stock. Accrued
12 1/2% exchangeable preferred stock dividends since the last dividend payment
date aggregated approximately $5.4 million and $4.8 million at June 30, 2001 and
2000, respectively.
73
Voting Rights. The 12 1/2% exchangeable preferred stock is non-voting,
except as otherwise required by law and except in certain circumstances,
including with respect to (1) amending certain rights of the holders of the
12 1/2% exchangeable preferred stock and (2) issuing any class of equity
securities that ranks on a parity with or senior to the 12 1/2% exchangeable
preferred stock. In addition, if we:
- after October 31, 2002, fail to pay cash dividends in respect of three or
more semi-annual dividend periods in the aggregate;
- fail to make a mandatory redemption or a change of control offer (as
defined); or
- fail to comply with certain covenants or make certain payments on our
indebtedness,
then holders of a majority of the outstanding shares of 12 1/2% exchangeable
preferred stock, voting separately as one class, will be entitled to elect the
lesser of two directors or that number of directors constituting at least 25% of
the board of directors.
Liquidation Rights. The 12 1/2% exchangeable preferred stock, with respect
to dividend rights and rights on our liquidation, winding-up and dissolution,
ranks senior to all classes of common stock and all other series of our
preferred stock, and junior to all of our outstanding indebtedness.
Redemption; Priorities. We may redeem all or a portion of the 12 1/2%
exchangeable preferred stock, at our option, at any time on or after October 31,
2001 at the redemption prices set forth below (expressed as a percentage of
liquidation preference), plus, without duplication, accumulated and unpaid
dividends to the date of redemption, if redeemed during the 12 month period
commencing October 31 of the year set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
------ ----------
2001........................................................ 106.250%
2002........................................................ 104.167%
2003........................................................ 102.083%
2004 and thereafter......................................... 100.000%
</Table>
We are required to redeem all of the 12 1/2% exchangeable preferred stock
outstanding on October 31, 2006 at a redemption price equal to 100% of the
liquidation preference, plus, without duplication, accumulated and unpaid
dividends to the date of redemption. Upon a change of control (as defined in the
certificate of designation for the 12 1/2% exchangeable preferred stock), we are
required to offer to purchase the 12 1/2% exchangeable preferred stock at a
price equal to 101% of the liquidation preference, plus accumulated and unpaid
dividends.
Exchange Provisions. As described below under "12 1/2% Exchange
Debentures," the 12 1/2% exchangeable preferred stock is exchangeable into the
12 1/2% exchange debentures, at our option, subject to certain conditions, in
whole or in part, on a pro rata basis, on any scheduled dividend payment date;
provided that immediately after giving effect to any partial exchange, there
must be outstanding shares of 12 1/2% exchangeable preferred stock (whether
initially issued or issued in lieu of cash dividends) with an aggregate
liquidation preference of not less than $75.0 million and not less than $75.0
million of aggregate principal amount of 12 1/2% exchange debentures. Subject to
various conditions, we have agreed to exchange all outstanding 12 1/2%
exchangeable preferred stock for 12 1/2% exchange debentures when an exchange is
permitted under the terms of our then outstanding indebtedness and preferred
stock.
Restrictive Covenants. The certificate of designation for the 12 1/2%
exchangeable preferred stock contains covenants for the benefit of the holders
of the 12 1/2% exchangeable preferred stock that, among other things, and
subject to certain exceptions, restrict our ability and the ability of our
restricted subsidiaries to:
- incur additional indebtedness;
- pay dividends and make other restricted payments;
- issue certain stock of subsidiaries;
- enter into transactions with affiliates;
74
- merge or consolidate us or the guarantors; and
- transfer and sell assets.
13 1/4% EXCHANGEABLE PREFERRED STOCK
General. We have designated 72,000 shares as our 13 1/4% Cumulative Junior
Exchangeable Preferred Stock of which, as of June 30, 2001, there were 29,145
shares issued and outstanding.
Dividends. The holders of the 13 1/4% exchangeable preferred stock are
entitled to receive dividends at a rate equal to 13 1/4% per year of the
liquidation preference per share, payable semi-annually and accumulating from
the original issue date. We may, at our option, pay dividends on any dividend
payment date either in cash or by the issuance of additional shares of 13 1/4%
exchangeable preferred stock having an aggregate liquidation preference equal to
the amount of such dividends. If dividends for any period ending after May 15,
2003 are not paid in cash, the dividend rate will increase by 1% per year for
that dividend payment period. To date, we have paid no cash dividends on the
13 1/4% exchangeable preferred stock. During 2000, 1999 and 1998, we paid
dividends of approximately $32.9 million, $28.9 million and $11.5 million,
respectively, by the issuance of additional shares of 13 1/4% exchangeable
preferred stock. Accrued 13 1/4% exchangeable preferred stock dividends since
the last dividend payment date aggregated approximately $4.8 million and $4.2
million at June 30, 2001 and 2000, respectively.
Voting Rights. The 13 1/4% exchangeable preferred stock is non-voting,
except as otherwise required by law and in certain circumstances, including with
respect to:
- amending certain rights of the holders of the 13 1/4% exchangeable
preferred stock; and
- issuing any class of equity securities that ranks on a parity with or
senior to the 13 1/4% exchangeable preferred stock, other than the
issuance of additional shares of:
- 13 1/4% exchangeable preferred stock to pay dividends on the 13 1/4%
exchangeable preferred stock in accordance with its terms; or
- 12 1/2% exchangeable preferred stock to pay dividends on the 12 1/2%
exchangeable preferred stock in accordance with its terms.
In addition, if we fail to (1) make a mandatory redemption or a change of
control offer (as defined in the certificate of designation for the 13 1/4%
exchangeable preferred stock) or (2) comply with certain covenants or make
certain payments on our indebtedness, holders of a majority of the outstanding
shares of 13 1/4% exchangeable preferred stock, voting separately as one class,
will be entitled to elect the lesser of two directors or that number of
directors constituting at least 25% of the board of directors.
Liquidation Rights. The 13 1/4% exchangeable preferred stock, with respect
to dividend rights and rights on our liquidation, winding-up and dissolution,
ranks senior to all classes of our common stock and all other series of our
preferred stock other than the 12 1/2% exchangeable preferred stock, and junior
to all of our outstanding indebtedness and our 12 1/2% exchangeable preferred
stock.
Redemption; Priorities. We may redeem all or a portion of the 13 1/4%
exchangeable preferred stock, at our option, at any time on or after May 15,
2003 at the redemption prices set forth below, plus, without duplication,
accumulated and unpaid dividends to the date of redemption, if redeemed during
the 12 month period commencing May 15 of the year set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
------ ----------
2003........................................................ 106.625%
2004........................................................ 103.313%
2005 and thereafter......................................... 100.000%
</Table>
We are required to redeem all of the 13 1/4% exchangeable preferred stock
outstanding on November 15, 2006 at a redemption price equal to 100% of the
liquidation preference, plus, without duplication, accumulated
75
and unpaid dividends to the date of redemption. Upon a change of control (as
defined in the certificate of designation for the 13 1/4% exchangeable preferred
stock), we are required to offer to purchase the 13 1/4% exchangeable preferred
stock at a price equal to 101% of the liquidation preference, plus accumulated
and unpaid dividends.
Exchange Provisions. As described below under "13 1/4% Exchange
Debentures," the 13 1/4% exchangeable preferred stock is exchangeable into the
13 1/4% exchange debentures, at our option, subject to certain conditions in
whole or in part, on a pro rata basis, on any scheduled dividend payment date;
provided that immediately after giving effect to any partial exchange, there
must be outstanding shares of 13 1/4% exchangeable preferred stock (whether
initially issued or issued in lieu of cash dividends) with an aggregate
liquidation preference of not less than $75.0 million and not less than $75.0
million of aggregate principal amount of 13 1/4% exchange debentures.
Restrictive Covenants. The certificate of designation for the 13 1/4%
exchangeable preferred stock contains covenants for the benefit of the holders
of the 13 1/4% exchangeable preferred stock that, among other things, and
subject to certain exceptions, restrict our ability and the ability of our
restricted subsidiaries to:
- incur additional indebtedness;
- pay dividends and make other restricted payments;
- issue certain stock of subsidiaries;
- enter into transactions with affiliates;
- merge or consolidate us or the guarantors; and
- transfer and sell assets.
SERIES A PREFERRED STOCK
General. We have designated 17,500 shares as our 9 3/4% Series A
convertible preferred stock, of which, as of June 30, 2001, there were 10,069
shares issued and outstanding.
Dividends. The holders of the Series A preferred stock are entitled to
receive dividends at a rate equal to 9 3/4% per year of the liquidation
preference per share, payable quarterly and accumulating from the original issue
date. We may, at our option, pay dividends on any dividend payment date either
in cash or by the issuance of additional shares of Series A preferred stock
having an aggregate liquidation preference equal to the amount of such dividends
or shares of Class A common stock having a market value equal to the amount of
such dividends; provided that if we elect to pay dividends in shares of Class A
common stock and those shares are not freely tradeable without volume or manner
of sale limitations by any holder of Series A preferred stock which is not one
of our affiliates, the dividend rate per year for such payment will be increased
to 12 1/4%.
Voting Rights. Holders of the Series A preferred stock have voting rights
(voting as a class with the Class A common stock) on all matters equivalent to
one vote for each share of Class A common stock into which their Series A
preferred stock is convertible. In addition, if we fail to (1) make a mandatory
redemption or a change of control offer (as defined in the certificate of
designation for the Series A preferred stock) or (2) comply with certain
covenants or make certain payments on our indebtedness, holders of a majority of
the outstanding shares of Series A preferred stock, voting separately as one
class, will be entitled to elect the lesser of two directors or that number of
directors constituting at least 25% of the board of directors.
Liquidation Rights. The Series A preferred stock, with respect to dividend
rights and rights on our liquidation, winding-up and dissolution, ranks senior
to all classes of common stock and to our Series B preferred stock and junior to
all other series of our preferred stock.
76
Redemption. We may redeem all or a portion of the Series A preferred
stock, at our option, at any time on or after June 30, 2003 at the redemption
prices set forth below, plus, without duplication, accumulated and unpaid
dividends to the date of redemption, if redeemed during the 12 month period
commencing June 30 of the year set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
------ ----------
2003........................................................ 104.000%
2004........................................................ 102.000%
2005 and thereafter......................................... 100.000%
</Table>
We are required to redeem all of the Series A preferred stock outstanding
on December 31, 2006 at a redemption price equal to 100% of its liquidation
preference, plus, without duplication, accumulated and unpaid dividends to the
date of redemption.
Conversion Rights. The Series A preferred stock is convertible at any time
at the option of its holder into a number of shares of Class A common stock
equal to the aggregate liquidation preference of the shares of Series A
preferred stock surrendered for conversion divided by the conversion price. The
conversion price is an initial conversion rate of 625 shares of Class A common
stock for each share of Series A preferred stock (equivalent to a conversion
price of $16.00 per share of Class A common stock), and is subject to adjustment
in certain events.
Restrictive Covenants. The certificate of designation for the Series A
preferred stock contains covenants for the benefit of the holders of the Series
A preferred stock that, among other things, and subject to certain exceptions,
restrict our ability and the ability of our restricted subsidiaries to:
- pay dividends and make other restricted payments;
- enter into transactions with affiliates;
- merge or consolidate us or the guarantors; and
- transfer and sell assets.
SERIES B PREFERRED STOCK
General. We have designated 41,500 shares as our Series B preferred stock,
all of which are issued and outstanding.
Dividends. The holders of the Series B preferred stock are entitled to
receive dividends at a rate equal to 8% per year of its liquidation preference
per share, subject to adjustment under the terms of the Series B certificate of
designation, payable quarterly and accumulating from its original issue date.
Series B preferred stock dividends in arrears aggregated approximately $59.5
million and $26.3 million at June 30, 2001 and 2000, respectively.
Voting Rights. The Series B preferred stock is non-voting, except as
otherwise required by law and except in certain circumstances, including with
respect to:
- amending certain rights of the holders of the Series B preferred stock;
and
- issuing any class of equity securities that ranks on a parity with or
senior to the Series B preferred stock, other than the issuance of:
- a new class of senior securities at any time after the trading price of
our Class A common stock first exceeds 120% of the conversion price (as
then in effect) for 20 consecutive trading days;
- additional shares of existing preferred stock, parity securities or
senior securities, which senior securities rank equally with the
existing preferred stock, and which senior securities or parity
securities require cash dividends at a time and in an amount not in
excess of one percentage point greater than the dividend rate borne by
any series of the existing preferred stock (as existing on the
77
issue date of the Series B preferred stock) and which do not prevent
either the payment of cash dividends on the Series B preferred stock, or
the exchange of the Series B preferred stock for the 8% exchange
debentures, in an amount sufficient to acquire any series of the
existing preferred stock, in accordance with its terms on the original
issue date of the Series B preferred stock (including any premium
required to be paid), plus the amount of reasonable expenses incurred by
us in acquiring such series of existing preferred stock and issuing such
additional existing preferred stock, parity securities or senior
securities (as the case may be); with such shares being issued no sooner
than the date we repurchase, redeem or otherwise retire such series of
the existing preferred stock; and
- additional shares of existing preferred stock as dividends on the
existing preferred stock in accordance with the certificates of
designation of the existing preferred stock, as in existence on the
original issue date of the Series B preferred stock.
In addition, if we fail to (1) make a mandatory redemption or conversion or
a change of control offer or (2) comply with certain covenants or make certain
payments on our indebtedness, holders of a majority of the outstanding shares of
Series B preferred stock, voting separately as one class, will be entitled to
elect the lesser of two directors or that number of directors constituting at
least 25% of the board of directors.
Liquidation Rights. The Series B preferred stock, with respect to dividend
rights and rights on our liquidation, winding-up and dissolution, ranks senior
to all classes of common stock and junior to all of our outstanding indebtedness
and all other series of our preferred stock.
Redemption. We may redeem all or a portion of the Series B preferred
stock, at our option, at any time on or after the date that is five years after
its original issue date, at the redemption price set forth in the Series B
certificate of designation. The Series B preferred stock is also redeemable, at
the option of its holder, for a period of 60 days beginning on September 16,
2002, and on each September 16 after 2002, or in case of events of default under
the transaction agreements with NBC, which is the holder of the Series B
preferred stock, subject in each case to conditions which include compliance by
us with the covenants contained in the terms of our outstanding indebtedness and
preferred stock. NBC has the right to require us to redeem the Series B
preferred stock if the FCC renders a final decision that NBC's investment in us
and the acquisition of the other rights provided for in the transaction
agreements with NBC is "attributable" to NBC (as that term is defined under
applicable rules of the FCC). In the event of a change of control, we are
required to make an offer to purchase all then outstanding shares of Series B
preferred stock at a purchase price of 101% of the liquidation preference plus,
without duplication, an amount in cash equal to all of its accumulated and
unpaid dividends.
Conversion Rights. Shares of the Series B preferred stock will be
convertible at the option of the holder into (1) a number of shares of Class A
common stock or (2) in the case of NBC only, if NBC determines in its sole
discretion that it is prevented under applicable laws and regulations of the FCC
from holding shares of Class A common stock issuable upon conversion of its
shares of Series B preferred stock, into a number of shares of non-voting common
stock (which upon disposition by NBC will automatically be converted into shares
of Class A common stock), equal to the original issue price of the shares of
Series B preferred stock surrendered for conversion, plus, without duplication,
an amount in cash equal to accumulated and unpaid dividends, divided by the
conversion price then in effect. The conversion price of the Series B preferred
stock was initially $13.01 per share, and increases at a rate equal to the
dividend rate on the Series B preferred stock. We are required to cause the
shares of Class A common stock issuable upon conversion of the Series B
preferred stock (or in the case of NBC's election to convert into non-voting
common stock, upon conversion of such non-voting common stock) to be approved
for listing on the American Stock Exchange (or other principal securities
exchange on which the Class A common stock may at the time be listed for
trading), subject to official notification of issuance, before the date of
issuance.
Exchange Provisions. The shares of Series B preferred stock are
exchangeable, at the option of the holders, into convertible debentures ranking
on a parity with our other subordinated indebtedness subject, with respect to
any exchange before January 1, 2007, to the exchange being permitted under the
terms of our debt and preferred stock instruments.
78
Restrictive Covenants. The certificate of designation for the Series B
preferred stock contains covenants for the benefit of the holder of the Series B
preferred stock that, among other things, and subject to certain exceptions,
restrict our ability and the ability of our restricted subsidiaries to:
- incur additional indebtedness;
- pay dividends and make other restricted payments;
- issue certain stock of subsidiaries;
- enter into transactions with affiliates;
- merge or consolidate us or the guarantors; and
- transfer and sell assets.
Our rights and obligations in respect of the Series B preferred stock are
also subject to the terms of our agreements with NBC. See "Business -- NBC
Relationship."
12 1/2% EXCHANGE DEBENTURES
Our 12 1/2% exchange debentures due 2006 are issuable upon exchange of our
12 1/2% exchangeable preferred stock. Currently, no 12 1/2% exchange debentures
are outstanding. At our option, the 12 1/2% exchangeable preferred stock is
exchangeable into the 12 1/2% exchange debentures, in whole or in part, provided
that immediately after giving effect to any partial exchange, there must be
outstanding shares of 12 1/2% exchangeable preferred stock with an aggregate
liquidation preference of not less than $75.0 million and not less than $75.0
million of aggregate principal amount of 12 1/2% exchange debentures.
The 12 1/2% exchange debentures are limited in aggregate principal amount
to the aggregate liquidation preference of the 12 1/2% exchangeable preferred
stock. If issued, the 12 1/2% exchange debentures will be our general unsecured
obligations, subordinated in right of payment to our senior indebtedness, will
rank equally with the notes, our 13 1/4% exchange debentures and the 8% exchange
debentures, and will be senior in right of payment to all of our common and
preferred stock.
If issued, the 12 1/2% exchange debentures will be fully and
unconditionally guaranteed, on a senior subordinated basis, as to payment of
principal, premium, if any, and interest, jointly and severally, by all of our
direct and indirect subsidiaries. The 12 1/2% exchange debentures are
subordinated to all senior indebtedness of the respective guarantors.
If issued, the 12 1/2% exchange debentures will mature on October 31, 2006,
and bear interest at a rate of 12 1/2% per year from the date of original
issuance until maturity. Interest will be payable semi-annually in arrears on
April 30 and October 31.
If issued, we will be entitled, on or after October 31, 2001, to redeem all
or a portion of the 12 1/2% exchange debentures, at our option, at any time at
the redemption prices set forth below, expressed in percentages of principal
amount on the redemption date, if redeemed during the 12-month period commencing
on October 15 of the year set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
------ ----------
2001........................................................ 106.250%
2002........................................................ 104.167%
2003........................................................ 102.083%
2004 and thereafter......................................... 100.000%
</Table>
in each case together with accrued and unpaid interest to the redemption date.
In the event of a change of control (as defined in the 12 1/2% exchange
indenture), we will be required to make an offer to purchase all outstanding
12 1/2% exchange debentures at a price equal to 101% of the principal amount
plus accrued and unpaid interest to the date of repurchase.
79
The 12 1/2% exchange indenture contains covenants for the benefit of the
holders of the 12 1/2% exchange debentures that restrict our ability and the
ability of our restricted subsidiaries (as defined in the 12 1/2% exchange
indenture) to:
- incur additional indebtedness;
- pay dividends and make certain other restricted payments;
- issue certain stock of subsidiaries;
- enter into transactions with affiliates;
- merge or consolidate our company or the guarantors; and
- transfer and sell assets.
13 1/4% EXCHANGE DEBENTURES
Our 13 1/4% exchange debentures due 2006 are issuable upon exchange of our
13 1/4% exchangeable preferred stock. Currently, no 13 1/4% exchange debentures
are outstanding. At our option, the 13 1/4% exchangeable preferred stock is
exchangeable into the 13 1/4% exchange debentures, in whole or in part; provided
that immediately after giving effect to a partial exchange, there must be
outstanding shares of 13 1/4% exchangeable preferred stock with an aggregate
liquidation preference of not less than $75.0 million and not less than $75.0
million of aggregate principal amount of 13 1/4% exchange debentures.
The 13 1/4% exchange debentures are limited in aggregate principal amount
to the aggregate liquidation preference of the 13 1/4% exchangeable preferred
stock. If issued, the 13 1/4% exchange debentures will be our general unsecured
obligations, subordinated in right of payment to our senior indebtedness, will
rank equally with the notes, the 12 1/2% exchange debentures and the 8% exchange
debentures, and will be senior in right of payment to all of our common and
preferred stock.
If issued, the 13 1/4% exchange debentures will be fully and
unconditionally guaranteed, on a senior subordinated basis, as to payment of
principal, premium, if any, and interest, jointly and severally, by all of our
direct and indirect subsidiaries. The 13 1/4% exchange debentures are
subordinated to all senior indebtedness of the respective guarantors.
If issued, the 13 1/4% exchange debentures will mature on November 15,
2006, and bear interest at a rate of 13 1/4% per annum from the date of original
issuance until maturity. Interest will be payable semi-annually in arrears on
May 15 and November 15.
If issued, we will be entitled, on or after May 15, 2003, to redeem, at our
option, all or a portion of the 13 1/4% exchange debentures at any time at the
redemption prices set forth below, expressed in percentages of principal amount
on the redemption date, if redeemed during the 12-month period commencing on May
15 of the year set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
------ ----------
2003........................................................ 106.625%
2004........................................................ 103.313%
2005 and thereafter......................................... 100.000%
</Table>
in each case together with accrued and unpaid interest to the redemption date.
In the event of a change of control (as defined in the 13 1/4% exchange
indenture), we will be required to make an offer to purchase all outstanding
13 1/4% exchange debentures at a price equal to 101% of the principal amount,
plus accrued and unpaid interest to the date of repurchase.
80
The 13 1/4% exchange indenture contains covenants for the benefit of the
holders of the 13 1/4% exchange debentures that restrict our ability and the
ability of our restricted subsidiaries (as defined in the junior exchange
indenture) to:
- incur additional indebtedness;
- pay dividends and make other restricted payments;
- issue certain stock of subsidiaries;
- enter into transactions with affiliates;
- merge or consolidate our company or the guarantors; and
- transfer and sell assets.
8% EXCHANGE DEBENTURES
Our 8% exchange debentures due 2009 are issuable upon exchange of our
Series B preferred stock. Currently, no 8% exchange debentures are outstanding.
At the option of the holder of the Series B preferred stock, the Series B
preferred stock is exchangeable in whole or in part into the 8% exchange
debentures, subject to certain conditions, including that, with respect to any
exchange before January 1, 2007, the exchange be permitted under the terms of
our existing debt instruments (including the indenture governing the notes);
provided that any partial exchange must be with respect to outstanding shares of
Series B preferred stock with an aggregate liquidation preference of not less
than $50.0 million.
If issued, the 8% exchange debentures will be our general unsecured
obligations, subordinated in right of payment to our senior indebtedness (as
defined in the related indenture), will rank equally with the notes, the 12 1/2%
exchange debentures and the 13 1/4% exchange debentures, and will be senior in
right of payment to all of our common and preferred stock.
If issued, the 8% exchange debentures will be fully and unconditionally
guaranteed, on a senior subordinated basis, as to payment of principal, premium,
if any, and interest, jointly and severally, by all of our direct and indirect
subsidiaries. The 8% exchange debentures are subordinated to all senior
indebtedness of the respective guarantors.
If issued, the 8% exchange debentures will mature on December 31, 2009, and
bear interest at a rate of 8% per annum from the date of original issuance until
maturity, provided that if the 8% exchange debentures are issued before
September 15, 2004, then the dividend rate will be adjusted on September 15,
2004, to equal the dividend rate at which the 8% exchange debentures would trade
at par, as determined by a nationally recognized investment banking firm.
Interest will be payable semi-annually in arrears on June 30 and December 31. We
may, at our option, pay interest on any interest payment date either in cash or
by the issuance of additional 8% exchange debentures in an aggregate principal
amount equal to the amount of interest due.
We will be entitled, at any time on or after September 10, 2004, to redeem
all or a portion of any 8% exchange debentures that are issued at a redemption
price of 100% of the principal amount thereof plus accrued and unpaid interest.
In the event of a change of control (as defined in the related indenture), we
will be required to make an offer to purchase all outstanding 8% exchange
debentures at a price equal to 101% of the principal amount plus accrued and
unpaid interest to the date of repurchase.
The indenture for the 8% exchange debentures contains covenants for the
benefit of the holders of the 8% exchange debentures that restrict our ability
and the ability of our restricted subsidiaries (as defined in the related
indenture) to:
- incur additional indebtedness;
- pay dividends and make other restricted payments;
- issue certain stock of subsidiaries;
81
- enter into transactions with affiliates;
- merge or consolidate our company or the guarantors; and
- transfer and sell assets.
The 8% exchange debentures will be convertible into our common stock to the
same extent, in the same manner and subject to the same restrictions, as the
Series B preferred stock.
82
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The original notes were sold by us on July 12, 2001 to the initial
purchasers, who resold them to certain qualified institutional buyers in a
private offering. In connection with the private offering, we entered into the
registration rights agreement, which requires that within 60 days following the
issuance of the original notes, we file with the SEC a registration statement
under the Securities Act with respect to an issue of new notes of our company
identical in all material respects to the original notes, that we use our best
efforts to cause such registration statement to become effective under the
Securities Act within 120 days following the issuance of the original notes, and
that upon the effectiveness of that registration statement, we offer to the
holders of the original notes the opportunity to exchange their original notes
for a like principal amount of new notes, which will be issued without a
restrictive legend. The purpose of the exchange offer is to fulfill our
obligations under the registration rights agreement. The original notes were
initially represented by three global notes in registered form, registered in
the name of Cede & Co., a nominatee of The Depository Trust Company, New York,
New York ("DTC"), as depositary.
We are making the exchange offer in reliance on the position of the staff
of the SEC as set forth in Exxon Capital Holdings Corp., SEC No-Action Letter
(April 13, 1989), Morgan Stanley & Co. Inc., SEC No-Action Letter (June 5, 1991)
and Shearman & Sterling, SEC No-Action Letter (July 2, 1993). We have not,
however, sought our own no-action letter, and we cannot assure you that the
staff of the SEC would make a similar determination with respect to the exchange
offer as in such other circumstances. Based upon these interpretations by the
staff of the SEC, we believe that the new notes issued under the exchange offer
in exchange for original notes may be offered for resale, resold and otherwise
transferred by a holder thereof other than (i) a broker-dealer who purchased
such original notes directly from us to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a person that is our
"affiliate" (as defined in Rule 405 of the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such new notes are acquired in the ordinary course of such
holder's business and that such holder is not participating, and has no
arrangement or understanding with any person to participate, in the distribution
of such new notes. Holders of original notes accepting the exchange offer will
represent to us in the Letter of Transmittal that such conditions have been met.
Any holder who participates in the exchange offer for the purpose of
participating in a distribution of the new notes may not rely on the position of
the staff of the SEC as set forth in these no-action letters and would have to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. This
prospectus may not be used by such holders for any secondary resale. A secondary
resale transaction in the United States by a holder who is using the exchange
offer to participate in the distribution of new notes must be covered by a
registration statement containing the selling securityholder information
required by Item 507 of Regulation S-K of the Securities Act.
Each broker-dealer that receives new notes for its own account under the
exchange offer must acknowledge that it acquired the original notes as a result
of market-making activities or other trading activities and will deliver a
prospectus in connection with any resale of such new notes. This prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of new notes received in exchange for
original notes where such original notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities. The Letter of
Transmittal states that by acknowledging and delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. We have agreed that we will make this prospectus
available to broker-dealers for use in connection with any such resale. See
"Plan of Distribution."
Except as aforesaid, this prospectus may not be used for an offer to
resell, resale or other retransfer of new notes.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of original notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
83
As described above, the original notes were sold to the initial purchasers
and resold by the initial purchasers to certain qualified institutional buyers
on July 12, 2001, and there is currently a limited trading market for them. To
the extent original notes are tendered and accepted in the exchange offer, the
aggregate outstanding principal amount of original notes will decrease.
Following the consummation of the exchange offer, holders of original notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for the original notes could be adversely affected. See
"Risk Factors -- If you do not exchange your original notes, your original notes
will continue to be subject to the existing transfer restrictions and you may be
unable to sell your original notes."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the Letter of Transmittal (which together constitute the "exchange
offer"), we will accept any and all original notes validly tendered, and not
theretofore withdrawn, before 5:00 p.m., New York City time, on the expiration
date. We will issue $1,000 principal amount of new notes in exchange for each
$1,000 principal amount of original notes accepted in the exchange offer.
Holders may tender some or all of their original notes pursuant to the exchange
offer. The exchange offer is not conditioned upon any minimum number of original
notes being tendered for exchange.
The form and terms of the new notes are identical in all material respects
to the form and terms of the original notes except that the new notes will have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder.
For purposes of the exchange offer, we shall be deemed to have accepted for
exchange and exchanged original notes validly tendered for exchange when, as and
if we give oral or written notice to the exchange agent of acceptance of the
tenders of such original notes for exchange. Exchange of original notes accepted
for exchange pursuant to the exchange offer will be made by deposit of tendered
original notes with the exchange agent, which will act as agent for the
tendering holders for the purpose of receiving new notes from us and
transmitting such new notes to tendering holders. In all cases, any exchange of
new notes for original notes accepted for exchange pursuant to the exchange
offer will be made only after timely receipt by the exchange agent of such
original notes (or of a confirmation of a book-entry transfer of such original
notes in the exchange agent's account at the Book-Entry Transfer Facility (as
defined in "Procedures for Tendering" below)), a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) and any other required
documents. For a description of the procedures for tendering original notes
pursuant to the exchange offer, see "Procedures for Tendering."
If any tendered original notes are not accepted for exchange because of an
invalid tender, or because of the occurrence of certain other events set forth
herein or otherwise, any such unaccepted original notes will be returned without
expense to the tendering holders thereof (or in the case of original notes
tendered by book-entry transfer, such original notes will be credited to the
account of that holder maintained at the Book-Entry Transfer Facility), as
promptly as practicable after the expiration or termination of the exchange
offer.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders, by execution of a Letter of Transmittal (or facsimile
thereof), waive any right to receive notice of acceptance of their original
notes for exchange.
Holders who tender original notes in the exchange offer will not be
required to pay brokerage commission or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
original notes pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "Fees and Expenses."
This prospectus, together with the Letter of Transmittal, is being sent to
registered holders of original notes as of October 29, 2001.
84
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The expiration date will be 5:00 p.m. New York City time on November 27,
2001, unless we, in our sole discretion, extend the exchange offer, in which
case the expiration date will be the latest date and time to which the exchange
offer is extended.
In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral (promptly confirmed in writing) or written notice and will
make a public announcement thereof, each before 9:00 a.m. New York City time, on
the next business day after the previously scheduled expiration date of the
exchange offer.
We reserve the right, at any time and from time to time, in our sole
discretion (subject to our obligations under the registration rights agreement)
(i) to delay accepting any original notes or to delay the issuance and exchange
of new notes for original notes, (ii) to extend the exchange offer or, if any of
the conditions set forth below under "Conditions to the Exchange Offer" have not
been satisfied, to terminate the exchange offer by giving oral or written notice
of such delay, extension or termination to the exchange agent, or (iii) to amend
the terms of the exchange offer in any manner.
If we extend the period of time during which the exchange offer is open, or
if we are delayed in accepting for exchange, or in issuing and exchanging the
new notes for, any original notes, or are unable to accept for exchange, or
issue new notes for, any original notes pursuant to the exchange offer for any
reason, then, without prejudice to our rights under the exchange offer, the
exchange agent may, on our behalf, retain all original notes tendered, and such
original notes may not be withdrawn except as otherwise provided below in
"Withdrawal of Tenders." The exercise by us of the right to delay acceptance for
exchange of, or the issuance and the exchange of the new notes for, any original
notes is subject to applicable law, including Rule 14e-1(c) under the Exchange
Act, which requires that we pay the consideration offered or return the original
notes deposited by or on behalf of the holders thereof promptly after the
termination or withdrawal of the exchange offer.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by a public announcement thereof. If the
exchange offer is amended in a manner determined by us to constitute a material
change, we will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and we will
extend the exchange offer for a period of five to ten business days, depending
upon the significance of the amendment and the manner of disclosure to the
registered holders, if the exchange offer would otherwise expire during such
five to ten business day period. The term "business day" shall mean any day
other than Saturday, Sunday or a federal holiday and shall consist of the time
period from 12:01 a.m. through 12:00 midnight, New York City time.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, termination or amendment of the exchange
offer, we shall have no obligation to make public, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service. Any such announcement of an extension of the
exchange offer shall be issued no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date of the
exchange offer.
PROCEDURES FOR TENDERING
Only a holder of original notes may tender such original notes in the
exchange offer. To tender in the exchange offer, the holder must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal, or such facsimile, together with
any other required documents, to the exchange agent so that delivery is received
before 5:00 p.m., New York City time, on the expiration date. To be tendered
effectively, the Letter of Transmittal and other required documents must be
received by the exchange agent at the address set forth below under "Exchange
Agent" before 5:00 p.m., New York City time, on the expiration date. In
addition, either (i) the tendered original notes must be received by the
exchange agent along with the Letter of Transmittal, or such original notes must
be tendered pursuant to the procedures for book-entry
85
transfer described below and a confirmation of receipt of such tendered original
notes must be received by the exchange agent before 5:00 p.m., New York City
time, on the expiration date, or (ii) the tendering holder must comply with the
guaranteed delivery procedures described below.
NO LETTERS OF TRANSMITTAL, CERTIFICATES REPRESENTING ORIGINAL NOTES OR ANY
OTHER REQUIRED DOCUMENTATION SHOULD BE SENT TO US. SUCH DOCUMENTS SHOULD BE SENT
ONLY TO THE EXCHANGE AGENT.
The tender by a holder of original notes made pursuant to any method of
delivery set forth in the Letter of Transmittal will constitute a binding
agreement between such tendering holder and us in accordance with the terms and
subject to the conditions of the exchange offer.
The method of delivery of original notes and the Letter of Transmittal and
all other required documents to the exchange agent is at the election and risk
of the holder. Instead of delivery by mail, we recommend that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the exchange agent before the expiration date.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transaction for such holders or for
assistance concerning the exchange offer.
Any beneficial owner whose original notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
before completing and executing the Letter of Transmittal and delivering such
owner's original notes, either make appropriate arrangements to register
ownership of the original notes in such owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
If the Letter of Transmittal is signed by a person other than the
registered holder of any original notes (which term includes any participants in
DTC whose name appears on a security position listing as the owner of the
original notes) or if delivery of the original notes is to be made to a person
other than the registered holder, such original notes must be endorsed or
accompanied by a properly completed bond power, in either case signed by such
registered holder as such registered holder's name appears on such original
notes with the signature on the original notes or the bond power guaranteed by
an Eligible Institution (as defined herein).
If the Letter of Transmittal or any original notes or bond powers are
signed by trustees, executors, administrators, guardians, attorney-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by us,
must submit with the Letter of Transmittal evidence satisfactory to us of their
authority to so act.
Signature on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution unless the original notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Registration Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal, (ii) for the account of an
Eligible Institution, or (iii) for the account of DTC. See Instruction 4 in the
Letter of Transmittal. If signature on a Letter of Transmittal or a notice of
withdrawal, as the case may be, is required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(any of which is referred to in this prospectus as an "Eligible Institution").
The exchange agent will establish an account with respect to the original
notes at DTC (the "Book-Entry Transfer Facility") for the purpose of the
exchange offer promptly after the date of this prospectus, and any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make delivery of the original notes by causing the Book-Entry Transfer
Facility to transfer such original notes into the exchange agent's notes account
in accordance with the Book-Entry Transfer Facility's procedure for such
transfer. ALTHOUGH DELIVERY OF ORIGINAL NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY
TRANSFER IN THE EXCHANGE AGENT'S ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY,
THE LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) WITH ALL REQUIRED SIGNATURE
GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS MUST, IN ANY CASE, BE TRANSMITTED TO
AND
86
RECEIVED AND CONFIRMED BY THE EXCHANGE AGENT AT ITS ADDRESS SET FORTH BELOW
BEFORE 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE, EXCEPT AS
OTHERWISE PROVIDED BELOW UNDER THE CAPTION "GUARANTEED DELIVERY PROCEDURES."
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
All questions as to the validity, form (including time of receipt),
acceptance and withdrawal of tendered original notes will be determined by us in
our sole discretion, which determination will be final and binding. We reserve
the absolute right to reject any and all original notes determined by us not to
be validly tendered or any original notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the absolute right to waive
any defects, irregularities or conditions of tender as to particular original
notes. Our interpretation of the terms and conditions of the exchange offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived by us in our sole discretion, any defects
or irregularities in connection with tenders of original notes will render such
tenders invalid unless such defects or irregularities are cured within such time
as we shall determine. Although we intend to notify holders of defects or
irregularities with respect to tenders of original notes, neither we, the
exchange agent nor any other person shall incur any liability for failure to
give such notification. Any original notes received by the exchange agent that
are not properly tendered and as to which the defects or irregularities have not
been cured or waived, as provided for herein, will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the expiration date.
In addition, we reserve the right in our sole discretion to purchase or
make offers for any original notes that remain outstanding after the expiration
date, or, as set forth herein, to terminate the exchange offer and, to the
extent permitted by applicable law, purchase original notes in the open market,
privately negotiated transactions or otherwise. The terms of any such purchases
or offers could differ from the terms of the exchange offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their original notes and (i) whose original
notes are not immediately available, or (ii) who cannot deliver their original
notes (or complete the procedures for book-entry transfer), the Letter of
Transmittal or any other required documents to the exchange agent before the
expiration date, may nevertheless effect a tender of original notes if all of
the following conditions are met:
(a) the tender is made by or through an Eligible Institution;
(b) before the expiration date, the exchange agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail, hand delivery or
overnight courier) setting forth the name and address of the holder, any
certificate number(s) of such original notes and the principal amount of
original notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the expiration date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the original notes (or a
confirmation of a book-entry transfer of such original notes in the
exchange agent's account at the Book-Entry Transfer Facility) and any other
documents required by the Letter of Transmittal will be deposited into the
exchange agent's account at the Book-Entry Transfer Facility and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the exchange agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) as well as the certificate(s) representing all tendered
original notes in proper form for transfer (or a confirmation of book-entry
transfer of such original notes into the Exchange Agent's account at the
Book-Entry Transfer Facility) and all other documents required by the
Letter of Transmittal are received by the exchange agent within five New
York Stock Exchange trading days after the Expiration Date.
A Notice of Guaranteed Delivery is being sent to holders along with this
prospectus and the Letter of Transmittal.
87
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of original notes
may be withdrawn at any time before 5:00 p.m. New York City time, on the
expiration date, as such term is defined above under the caption "Expiration
Date; Extensions; Amendments; Termination." If we extend the period of time
during which the exchange offer is open, or if we are delayed in accepting for
exchange, or in issuing and exchanging the new notes for, any original notes or
are unable to accept for exchange, or issue and exchange the new notes for, any
original notes pursuant to the exchange offer for any reason, then without
prejudice to our rights under the exchange offer, the exchange agent may, on our
behalf, retain all original notes tendered, and such original notes may not be
withdrawn except as otherwise provided herein, subject to Rule 14e-1(c) under
the Exchange Act, which provides that the person making an issuer tender offer
shall either pay the consideration offered or return tendered securities,
promptly after the termination or withdrawal of the offer.
To withdraw a tender of original notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its offices as set forth herein before 5:00 p.m., New York City time,
on the expiration date. Any such notice of withdrawal must (i) specify the name
of the person having deposited the original notes to be withdrawn (the
"Depositor"), (ii) specify the serial numbers on the particular certificates
evidencing the original notes to be withdrawn and the name of the registered
holder thereof (if certificates have been delivered or otherwise identified to
the exchange agent) or the name and number of the account at DTC to be credited
with withdrawal of the original notes (if the original notes have been tendered
under the procedures for book-entry transfer), (iii) be signed by the holders in
the same manner as the original signature on the Letter of Transmittal by which
original notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the registrar (the
"Registrar") with respect to the original notes register the transfer of such
original notes into the name of the person withdrawing the tender and (iv)
specify the name in which any such original notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by us
in our sole discretion, which determination shall be final and binding on all
parties. Any original notes so withdrawn will be deemed not to have been validly
retendered for purposes of the exchange offer and no new notes will be issued
with respect thereto unless the original notes so withdrawn are validly
retendered. Properly withdrawn original notes may be retendered by following one
of the procedures described above under "Procedures for Tendering" at any time
before the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the exchange offer and without prejudice
to our other rights under the exchange offer, we will not be required to accept
for exchange, or exchange new notes for, any original notes, and may amend or
terminate the exchange offer as provided herein before the acceptance of such
original notes, if, among other things:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the exchange offer,
which might materially impair our ability to proceed with the exchange
offer or materially impair the contemplated benefits of the exchange offer
to us, or any material adverse development has occurred in any existing
action or proceeding with respect to us or any of our subsidiaries; or
(b) any change, or any development involving a prospective change, in
our business or financial affairs or those of any of our subsidiaries has
occurred, which might materially impair our ability to proceed with the
exchange offer or materially impair the contemplated benefits of the
exchange offer to us; or
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which might materially impair our ability to proceed with the
exchange offer or materially impair the contemplated benefits of the
exchange offer to us; or
88
(d) the new notes to be received by holders of original notes in the
exchange offer, upon receipt, will not be transferable by such holders
(other than our "affiliates") without restriction under the Securities Act
and Exchange Act and without material restriction under the blue sky laws
of substantially all of the states of the United States (subject, in the
case of Restricted Holders, to any requirements that such persons comply
with the prospectus delivery requirements applicable to Restricted
Holders).
If we determine in our reasonable judgment that any of the conditions are
not satisfied, we may, subject to our obligations under the registration rights
agreement to consummate the exchange offer, (i) terminate the exchange offer and
return all tendered original notes to tendering holders, (ii) extend the
exchange offer and, subject to withdrawal rights as set forth in "Withdrawal of
Tenders" above, retain all such original notes until the expiration of the
exchange offer as so extended, (iii) waive such condition and, subject to any
requirement to extend the period of time during which the exchange offer is
open, exchange all original notes validly tendered for exchange by the
expiration date and not withdrawn, or (iv) delay acceptance or exchange of, or
delay the issuance and exchange of new notes for, any original notes until
satisfaction or waiver of such conditions to the exchange offer even though the
exchange offer has expired. Our right to delay acceptance for exchange of, or
delay the issuance and exchange of new notes for, original notes tendered for
exchange pursuant to the exchange offer is subject to provisions of applicable
law, including, to the extent applicable, Rule 14e-1(c) promulgated under the
Exchange Act, which requires that we pay the consideration offered or return the
original notes deposited by or on behalf of holders of original notes promptly
after the termination or withdrawal of the exchange offer. For a description of
our right to extend the period of time during which the exchange offer is open
and to amend, delay or terminate the exchange offer, see "Expiration Date;
Extensions; Amendments; Termination" above. If such waiver constitutes a
material change to the exchange offer, we will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
holders, and we will extend the exchange offer for a period of five to ten
business days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the exchange offer would otherwise
expire during such five to ten business day period.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance, requests for additional copies of
this prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the exchange agent addressed as
follows:
By Registered or Certified Mail, Overnight Courier or Hand:
The Bank of New York
20 Broad Street
New York, NY 10286
Attention: Diane Amoroso
By Phone:
(914) 773-5056
By Facsimile:
(914) 773-5036
FEES AND EXPENSES
The expense of soliciting tenders will be borne by us. The principal
solicitation is being made by mail; additional solicitation, however, may be
made by telegraph, telephone or in person by officers and regular employees of
us and our affiliates.
We have not retained any dealer-manager or other soliciting agent in
connection with the exchange offer and will not make any payments to brokers,
dealers or other persons soliciting acceptance of the exchange
89
offer. We will, however, pay the exchange agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us and are estimated in the aggregate to be approximately $250,000.
Such expenses include fees and expenses of the exchange agent, Trustee, Paying
Agent and Registrar, accounting and legal fees and printing costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of
original notes pursuant to the exchange offer. If, however, certificates
representing new notes, or original notes not tendered or accepted for exchange,
are to be delivered to, or are to be issued in the name of, any person other
than the registered holders of the original notes tendered, or if tendered
original notes are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of original notes pursuant to the exchange offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the original
notes as reflected in our accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the exchange offer will be amortized over the term of the new notes.
90
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the words "our
company", "we", "us" and "our" refer only to Paxson Communications Corporation
and not to any of its subsidiaries.
We issued the original notes under, and the new notes will be issued under,
an indenture dated as of July 12, 2001 (the "Indenture"), among us, the
Subsidiary Guarantors and The Bank of New York, as trustee (the "Trustee").
We urge you to read the Indenture because it, and not this description,
defines your rights as a holder of these notes. A copy of the Indenture is
available upon request to us at the address indicated under "Where You Can Find
Additional Information." We will issue notes only in fully registered form
without coupons, in denominations of $1,000 and integral multiples of $1,000.
PRINCIPAL, MATURITY AND INTEREST
The notes will mature on July 15, 2008. We can issue a maximum of $200.0
million aggregate principal amount of notes.
The notes will bear interest at a rate of 10 3/4% per annum from the Issue
Date until maturity. Interest will be payable semi-annually in arrears on
January 15 and July 15, commencing on January 15, 2002. We will pay interest to
those persons who were holders of record on the January 1 or July 1 immediately
preceding each interest payment date.
The notes will bear interest from the Issue Date or, if interest has
already been paid, from the date it was most recently paid. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
RANKING
The notes will be:
- our senior subordinated, unsecured obligations;
- guaranteed on a senior subordinated, unsecured basis by the Subsidiary
Guarantors;
- subordinate in right of payment to all existing and future Senior Debt of
our company and the Subsidiary Guarantors;
- equal in ranking ("pari passu") in right of payment with all existing and
future Senior Subordinated Debt of our company and the Subsidiary
Guarantors; and
- senior to all existing and future Subordinated Obligations of our company
and the Subsidiary Guarantors.
In addition, the notes will be senior to all of our Preferred Stock;
however, we have the option to exchange outstanding shares of our 13 1/4%
Cumulative Junior Exchangeable Preferred Stock and 12 1/2% Cumulative
Exchangeable Preferred Stock, and the holder has the right to require us to
exchange outstanding shares of our 8% Cumulative Exchangeable Preferred Stock,
in each case, into the applicable series of Exchange Debentures, which will rank
pari passu with the notes; provided, however, that the 8% Cumulative
Exchangeable Preferred Stock, 13 1/4% Cumulative Junior Exchangeable Preferred
Stock and 12 1/2% Cumulative Exchangeable Preferred Stock may only be exchanged
for Exchange Debentures if, at the time of any such exchange, we are permitted
to incur the Debt represented by the Exchange Debentures under the covenant
described under "-- Limitation on Debt."
The payment of principal of, premium, if any, interest on, and Special
Interest, if any, on the notes, and payment under any Subsidiary Guarantee, will
be subordinated in right of payment to the prior payment in full in cash, cash
equivalents or, as acceptable to the holders of Senior Debt, in any other
manner, of all Senior Debt of our company or the relevant Subsidiary Guarantor,
as the case may be. As a result of this
91
subordination, holders of Senior Debt will be entitled, in any of the following
situations, to receive payment in full of all amounts owed to them in respect of
Senior Debt before any kind of payment in respect of the notes can be made to
holders of the notes:
- liquidation, dissolution or other winding up of our company or the
relevant Subsidiary Guarantor;
- bankruptcy, reorganization, receivership or similar proceedings of or
with respect to our company or the relevant Subsidiary Guarantor;
- assignments for the benefit of our or the relevant Subsidiary Guarantor's
creditors; or
- any marshaling of our or the relevant Subsidiary Guarantor's assets and
liabilities.
As of June 30, 2001, after giving effect to the Refinancing, the total
outstanding Senior Debt and Senior Subordinated Debt of our company and the
Subsidiary Guarantors, excluding unused commitments made by lenders, would have
been as follows:
<Table>
$287.6 Approximate Senior Debt of our company
million.....
$227.9 Approximate Senior Debt of the Subsidiary Guarantors
million..... (consisting entirely of guarantees of a portion of our
Borrowings under our new senior credit facility)
$200.0 Approximate Senior Subordinated Debt of our company and
million..... the Subsidiary Guarantors combined
</Table>
In addition, as of June 30, 2001, we had $1,037.4 million aggregate
liquidation preference of Preferred Stock outstanding that is exchangeable,
subject to the terms of the Preferred Stock and the restrictions contained in
the Indenture, into an aggregate principal amount of $1,037.4 million of
Exchange Debentures.
Holders of the notes will only be creditors of our company and of those
subsidiaries that are Subsidiary Guarantors. In the case of subsidiaries that
are not Subsidiary Guarantors, all the existing and future liabilities of those
subsidiaries, including any claims of trade creditors and preferred
stockholders, will be effectively senior to the notes.
A substantial portion of our operations is conducted through our
subsidiaries. Therefore, our ability to service our debt, including the notes,
is dependent upon the earnings of our subsidiaries, and their ability to
distribute those earnings as dividends, loans or other payments to us. Certain
laws may restrict our subsidiaries' ability to pay us dividends or to make loans
and advances to us. If these restrictions were applied to subsidiaries that are
not Subsidiary Guarantors, then we would not be able to use the earnings of
those subsidiaries to make payments on the notes. Furthermore, under certain
circumstances, bankruptcy "fraudulent conveyance" laws or other similar laws
could invalidate the Subsidiary Guarantees. If this were to occur, we would also
be unable to use the assets of the Subsidiary Guarantors to the extent they face
restrictions on distributing funds to us. Any of the situations described above
could make it more difficult for us to service our debt. See "Risk
Factors -- Risks Relating to the Notes -- A court may void the guarantees of the
notes or subordinate the guarantees to other obligations of the subsidiary
guarantors."
The Indenture contains limitations on the amount of additional Debt that we
and the Restricted Subsidiaries may incur. The amounts of such Debt could
nevertheless be substantial and may be incurred either by Subsidiary Guarantors
or by our other subsidiaries.
We may not pay principal of, premium, if any, interest on or Special
Interest, if any, on the notes, or make any deposit pursuant to the provisions
described under "-- Defeasance," and may not repurchase, redeem or otherwise
retire any notes (collectively, "pay the notes"), if any principal, including
amounts payable upon acceleration, premium, interest or other Obligation owing
in respect of any Designated Senior Debt has not been paid within any applicable
grace period (including at maturity), unless:
(1) the default has been cured or waived or has ceased to exist; or
(2) such Designated Senior Debt has been paid in full in cash;
92
provided, however, that we may pay the notes without regard to the foregoing if
we and the Trustee receive written notice approving such payment from the
Representative of such issue of Designated Senior Debt.
During the continuance of any default (other than a default described in
the preceding paragraph) with respect to any Designated Senior Debt pursuant to
which the maturity thereof may be accelerated, we may not pay the notes for a
period (a "Payment Blockage Period") commencing upon the receipt by the Trustee
of written notice of such default from the Representative of the holders of such
Designated Senior Debt specifying an election to effect a Payment Blockage
Period (a "Payment Blockage Notice") and ending 179 days thereafter, unless such
Payment Blockage Period is earlier terminated:
(a) by written notice to the Trustee or us from the Representative
that gave such Payment Blockage Notice or the holders of at least a
majority in principal amount of such issue of Designated Senior Debt;
(b) because such default is cured, waived or otherwise no longer
continuing; or
(c) because such Designated Senior Debt has been repaid in full in
cash.
Unless the holders of such Designated Senior Debt or the Representative of such
holders have accelerated the maturity of such Designated Senior Debt and not
rescinded such acceleration, we may (unless otherwise prohibited as described in
the first sentence of this paragraph) resume payments on the notes after the end
of such Payment Blockage Period.
Not more than one Payment Blockage Notice with respect to all issues of
Designated Senior Debt may be given in any consecutive 360-day period,
irrespective of the number of defaults with respect to one or more issues of
Designated Senior Debt during such period.
Upon any payment or distribution of our assets upon a total or partial
liquidation, dissolution or winding up of our company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to us or
our Property, an assignment for the benefit of creditors or any marshaling of
our assets and liabilities:
(a) the holders of Senior Debt will be entitled to receive payment in
full in cash or cash equivalents or, as acceptable to the holders of Senior
Debt, in any other manner, before the holders of the notes are entitled to
receive any payment of principal of, premium, if any, interest on or
Special Interest, if any, on the notes, except that holders of notes may
receive and retain Permitted Junior Securities; and
(b) until the Senior Debt is paid in full in cash, any distribution to
which holders of the notes would be entitled but for the subordination
provisions of the Indenture will be made to holders of the Senior Debt. If
a payment or distribution is made to holders of notes (or the trustee for
the benefit of such holders) that, because of the subordination provisions,
should not have been made to them (or it), the recipients are required to
hold the amount paid in trust for the holders of Senior Debt and pay it
over to them as their interests may appear.
If the maturity of the notes is accelerated when any amounts are
outstanding under instruments constituting Senior Debt, we may not pay the notes
until the first to occur of an acceleration under any of the instruments
constituting Senior Debt or five business days after receipt by us and the
Representative under any Senior Debt of notice of the acceleration of the notes
unless all Events of Default specified in such notice have been cured or waived.
The Subsidiary Guarantee of each Subsidiary Guarantor will be subordinated
to Senior Debt of such Subsidiary Guarantor to the same extent and in the same
manner as the notes are subordinated to our Senior Debt.
Because of the Indenture's subordination provisions, holders of Senior Debt
and other creditors (including trade creditors) of our company or the Subsidiary
Guarantors may recover disproportionately more than the holders of the notes
recover in a bankruptcy or similar proceeding relating to our company or a
Subsidiary Guarantor. This could apply even if the notes or the applicable
Subsidiary Guarantee ranked pari passu with the other creditors' claims. In such
a case, there may be insufficient assets, or no assets, remaining to pay the
principal of or interest on the notes.
93
Payment from the money or the proceeds of U.S. Government Obligations held
in any defeasance trust pursuant to the provisions described under " --
Defeasance" will not be subject to the subordination provisions described above.
See "Risk Factors -- Risks Relating to the Notes -- Our substantial
indebtedness and preferred stock could impair our financial condition and our
ability to fulfill our obligations under our indebtedness and preferred stock,"
" -- Risks Relating to the Notes -- Your right to receive payments on the notes
and under the subsidiary guarantees is junior to the senior debt and that of the
subsidiary guarantors" and "Description of Material Indebtedness and Preferred
Stock."
SUBSIDIARY GUARANTEES
Our obligations under the Indenture, including the repurchase obligation
resulting from a Change of Control, will be fully and unconditionally
guaranteed, jointly and severally, on a senior subordinated, unsecured basis, by
each Subsidiary Guarantor.
If
(1) our company and its Restricted Subsidiaries have sold their
ownership interest in a Subsidiary Guarantor or
(2) our company or a Subsidiary Guarantor has sold all or
substantially all the assets of a Subsidiary Guarantor,
such Subsidiary Guarantor will be released from all of its obligations under its
Subsidiary Guarantee. In addition, if we redesignate a Subsidiary Guarantor as
an Unrestricted Subsidiary, which we can do under certain circumstances, the
redesignated Subsidiary Guarantor will be released from all of its obligations
under its Subsidiary Guarantee. See " -- Certain Covenants -- Designation of
Restricted and Unrestricted Subsidiaries," " -- Limitation on Issuance or Sale
of Capital Stock of Restricted Subsidiaries" and " -- Merger, Consolidation and
Sale of Property."
If any Subsidiary Guarantor makes payments under its Subsidiary Guarantee,
each of our company and the other Subsidiary Guarantors must contribute their
share of such payments. Our company's and the other Subsidiary Guarantors'
shares of such payment will be computed based on the proportion that the net
worth of or the relevant Subsidiary Guarantor represents relative to the
aggregate net worth of our company and all the Subsidiary Guarantors combined.
OPTIONAL REDEMPTION
Except as set forth below, the notes will not be redeemable at our option
before July 15, 2005. Starting on that date, we may redeem all or any portion of
the notes, at once or over time, after giving the required notice under the
Indenture. We may redeem the notes at the redemption prices set forth below,
plus accrued and unpaid interest and Special Interest, if any, to the redemption
date (subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date). The following
prices are for notes redeemed during the 12-month period commencing on July 15
of the years set forth below, and are expressed as percentages of principal
amount:
<Table>
<Caption>
REDEMPTION YEAR PRICE
--------------- -------
2005........................................................ 105.375%
2006........................................................ 102.688%
2007 and thereafter......................................... 100.000%
</Table>
94
At any time before July 15, 2005, we may redeem all or any portion of the
notes, at once or over time, after giving the required notice under the
Indenture at a redemption price equal to the greater of:
(a) 100% of the principal amount of the notes to be redeemed, and
(b) the sum of the present values of the remaining scheduled payments
of principal and interest thereon discounted to the date of redemption on a
semiannual basis (assuming a 360-day year consisting of twelve 30-day
months) at the Treasury Rate plus 50 basis points,
plus, in either case, accrued and unpaid interest and Special Interest, if any,
to the redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date).
Any notice to holders of notes of any such redemption needs to include the
appropriate calculation of the redemption price, but does not need to include
the redemption price itself. The actual redemption price, calculated as
described above, must be set forth in an Officers' Certificate delivered to the
Trustee no later than two business days before the redemption date.
At any time and from time to time, before July 15, 2004, we may redeem up
to a maximum of 35% of the original aggregate principal amount of the notes with
the proceeds of one or more Public Equity Offerings, at a redemption price equal
to 110.75% of the principal amount thereof, plus accrued and unpaid interest and
Special Interest, if any, to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that after giving effect to
any such redemption, at least 65% of the original aggregate principal amount of
the notes remains outstanding.
Any such redemption shall be made within 90 days of such Public Equity
Offering upon not fewer than 30 nor more than 60 days' prior notice.
SINKING FUND
There will be no mandatory sinking fund payments for the notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of notes shall have
the right to require us to repurchase all or any part of such holder's notes
pursuant to the offer described below (the "Change of Control Offer") at a
purchase price (the "Change of Control Purchase Price") equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, and Special
Interest, if any, to the purchase date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date).
Within 30 days following any Change of Control, we shall:
(a) cause a notice of the Change of Control Offer to be sent at least
once to the Dow Jones News Service or similar business news service in the
United States; and
(b) send, by first-class mail, with a copy to the Trustee, to each
holder of notes, at such holder's address appearing in the Security
Register, a notice stating:
(1) that a Change of Control has occurred and a Change of Control
Offer is being made pursuant to the covenant entitled "Repurchase at the
Option of Holders Upon a Change of Control" and that all notes timely
tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date,
which shall be, subject to any contrary requirements of applicable law,
a business day no earlier than 30 days nor later than 60 days from the
date such notice is mailed;
95
(3) the circumstances and relevant facts regarding the Change of
Control (including information with respect to pro forma historical
income, cash flow and capitalization after giving effect to the Change
of Control); and
(4) the procedures that holders of notes must follow in order to
tender their notes (or portions thereof) for payment, and the procedures
that holders of notes must follow in order to withdraw an election to
tender notes (or portions thereof) for payment.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of notes pursuant to a Change of Control Offer.
To the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and will be deemed not to have
breached our obligations under the covenant described hereunder by virtue of
such compliance.
The Change of Control repurchase feature is a result of negotiations
between us and the initial purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that we would decide to do so in the future. In addition, our company and Mr.
Paxson currently are parties to agreements with NBC pursuant to which, subject
to the satisfaction of certain conditions, NBC may acquire control of us. As
discussed below, such acquisition would not constitute a Change of Control under
the notes, but would constitute a change of control under certain of our other
indebtedness and preferred stock. Subject to certain covenants described below,
we could, in the future, enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the Indenture, but that could increase the amount of
Debt outstanding at such time or otherwise affect our capital structure or
credit ratings.
A change of control (as defined in the Senior Credit Facility) would
constitute an event of default under that facility and would permit the lenders
to require us to repay all outstanding amounts thereunder. The terms of the
Exchange Indentures and the Existing Preferred Stock each require us to make an
offer to purchase the outstanding securities upon the occurrence of a change of
control (as such term is defined in the applicable Exchange Indenture or
Existing Preferred Stock). Other future debt of our company may contain
prohibitions of certain events which would constitute a change of control or
require such debt to be repurchased upon a change of control. The definitions of
change of control in the Exchange Indentures and Existing Preferred Stock differ
(and in future debt may differ) from the definition of Change of Control as used
in the notes in certain material respects. Consequently, certain events, such as
the acquisition by NBC of control of us, could trigger an obligation of our
company to offer to repurchase the Exchange Debentures, the Existing Preferred
Stock and any future debt we may have, but not the notes.
To the extent our other debt is both subject to similar repurchase
obligations in the event of a change of control and ranks senior in right of
payment to the notes, all available funds will first be expended for the
repurchase of such debt. Moreover, the exercise by holders of notes of their
right to require us to repurchase such notes could cause a default under our
existing or future debt, even if the Change of Control itself does not, because
of the financial effect of such repurchase on us. Finally, our ability to pay
cash to holders of notes in connection with a Change of Control Offer may be
limited by our then existing financial resources. We cannot assure you that
sufficient funds will be available when necessary to make any required
repurchases. Our failure to purchase notes tendered by holders accepting a
Change of Control Offer would result in a default under the Indenture. Such a
default would, in turn, constitute a default under our existing debt, and may
constitute a default under future debt as well. If such debt constitutes
Designated Senior Debt, the subordination provisions in the Indenture would
likely restrict payment to holders of notes. Our obligation to make a Change of
Control Offer may be waived or modified at any time before the occurrence of
such Change of Control with the written consent of the holders of a majority in
principal amount of the notes. See "--Amendments and Waivers."
96
CERTAIN COVENANTS
Limitation on Debt. We shall not, and shall not permit any Restricted
Subsidiary to, incur, directly or indirectly, any Debt (including Acquired Debt)
other than Permitted Debt unless:
(1) after giving effect to the incurrence of such Debt and the
application of the proceeds thereof, the ratio of total Debt to our
Consolidated EBITDA (determined on a pro forma basis for the last four full
fiscal quarters for which financial statements are available at the date of
determination) would be less than 7.0 to 1.0; provided that for purposes of
calculating the ratio, Debt shall not include the Existing Preferred Stock;
and, provided, further that if the Debt which is the subject of a
determination under this provision is Acquired Debt or Debt to be incurred
in connection with the simultaneous acquisition of any Person, business,
property or assets, then such ratio shall be determined by giving effect
(on a pro forma basis, as if the transaction had occurred at the beginning
of the four quarter period) to both the incurrence of the Acquired Debt or
other Debt by us and the inclusion in our Consolidated EBITDA of the
Consolidated EBITDA of the acquired Person, business, property or assets;
and
(2) no Default or Event of Default would occur as a consequence of
such incurrence or be continuing following such incurrence.
The term "Permitted Debt" is defined to include the following:
(a) Debt of our company evidenced by the notes and the Exchange Notes
and of Subsidiary Guarantors evidenced by Subsidiary Guarantees;
(b) Debt under the Credit Facilities, provided that the aggregate
principal amount of all such Debt under the Credit Facilities at any one
time outstanding shall not exceed $360.0 million;
(c) Debt in respect of Capital Lease Obligations and Purchase Money
Debt, provided that:
(1) the aggregate principal amount of such Debt does not exceed the
Fair Market Value (on the date of the incurrence thereof) of the
Property acquired, constructed or leased; and
(2) the aggregate principal amount of all Debt incurred and then
outstanding pursuant to this clause (c) (together with all Refinancing
Debt incurred and then outstanding in respect of Debt previously
incurred pursuant to this clause (c)) does not exceed 5% of our
consolidated total assets at the date of incurrence of Permitted Debt
pursuant to this clause (c);
(d) Debt of our company owing to and held by any Wholly Owned
Restricted Subsidiary and Debt of a Restricted Subsidiary owing to and held
by us or any Wholly Owned Restricted Subsidiary; provided, however, that
any subsequent issue or transfer of Capital Stock or other event that
results in any such Wholly Owned Restricted Subsidiary ceasing to be a
Wholly Owned Restricted Subsidiary or any subsequent transfer of any such
Debt (except to our company or a Wholly Owned Restricted Subsidiary) shall
be deemed, in each case, to constitute the incurrence of such Debt by the
issuer thereof;
(e) Debt under Interest Rate Agreements entered into by us or a
Restricted Subsidiary for the purpose of limiting interest rate risk in the
ordinary course of the financial management of our company or such
Restricted Subsidiary and not for speculative purposes, provided that the
obligations under such agreements are directly related to payment
obligations on Debt otherwise permitted by the terms of this covenant;
(f) Debt under Currency Exchange Protection Agreements entered into by
us or a Restricted Subsidiary for the purpose of limiting currency exchange
rate risks directly related to transactions entered into by us or such
Restricted Subsidiary in the ordinary course of business and not for
speculative purposes;
(g) Debt in connection with one or more standby letters of credit or
performance bonds issued by us or a Restricted Subsidiary in the ordinary
course of business or pursuant to self-insurance obligations and not in
connection with the borrowing of money or the obtaining of advances or
credit;
97
(h) Attributable Debt with respect to Sale and Leaseback Transactions;
provided, that the aggregate principal amount outstanding at any one time
(together with all Refinancing Debt incurred and then outstanding in
respect of Debt previously incurred pursuant to this clause (h)) does not
exceed $40.0 million;
(i) Debt outstanding on the Issue Date not otherwise described in
clauses (a) through (h) above;
(j) Debt in an aggregate principal amount outstanding at any one time
not to exceed $25.0 million;
(k) Debt under either clause (1) or (2) below (but not both):
(1) Debt under the 12 1/2% Exchange Debentures and the guarantees
related thereto issued upon exchange of the 12 1/2% Cumulative
Exchangeable Preferred Stock; provided, that:
(A) there are no principal payments in respect of such 12 1/2%
Exchange Debentures before the 91st day after the Stated Maturity of
the notes and no cash interest is payable on such 12 1/2% Exchange
Debentures before July 15, 2005; or
(B) the 12 1/2% Exchange Debentures are Refinanced substantially
concurrently with the issuance thereof and the Debt that Refinances
such 12 1/2% Exchange Debentures:
(I) is in an aggregate principal amount (or if incurred with
original issue discount, an aggregate issue price) not in excess
of the sum of:
(x) the aggregate principal amount then outstanding (or
if incurred with original issue discount, the aggregate
accreted value at the date of such Refinancing) of such
12 1/2% Exchange Debentures; and
(y) an amount necessary to pay any fees and expenses,
including premiums and defeasance costs, related to such
Refinancing;
(II) the Average Life of such Debt is equal to or greater
than the Average Life of such 12 1/2% Exchange Debentures; and
(III) there are no principal payments in respect of such
Debt before the 91st day after the Stated Maturity of the notes
and no cash interest is payable on such Debt before July 15,
2005; or
(2) Debt under the 13 1/4% Exchange Debentures and the guarantees
related thereto issued upon exchange of the 13 1/4% Cumulative Junior
Exchangeable Preferred Stock; provided, that:
(A) there are no principal payments in respect of such 13 1/4%
Exchange Debentures before the 91st day after the Stated Maturity of
the notes and no cash interest is payable on such 13 1/4% Exchange
Debentures before July 15, 2005; or
(B) the 13 1/4% Exchange Debentures are Refinanced substantially
concurrently with the issuance thereof and the Debt that Refinances
such 13 1/4% Exchange Debentures:
(I) is in an aggregate principal amount (or if incurred with
original issue discount, an aggregate issue price) not in excess
of the sum of:
(x) the aggregate principal amount then outstanding (or
if incurred with original issue discount, the aggregate
accreted value at the date of such Refinancing) of such
13 1/4% Exchange Debentures; and
(y) an amount necessary to pay any fees and expenses,
including premiums and defeasance costs, related to such
Refinancing;
(II) the Average Life of such Debt is equal to or greater
than the Average Life of such 13 1/4% Exchange Debentures; and
98
(III) there are no principal payments in respect of such
Debt before the 91st day after the Stated Maturity of the notes
and no cash interest is payable on such Debt before July 15,
2005;
(l) Refinancing Debt incurred in respect of Debt incurred pursuant to
clause (1) of the first paragraph of this covenant or clauses (a), (c),
(h), (i) or (k) above; and
(m) Debt of our company or any Restricted Subsidiary under any
Receivables Facility not to exceed $35.0 million at any one time
outstanding.
Notwithstanding anything to the contrary contained in this covenant,
(a) we shall not, and shall not permit any Subsidiary Guarantor to,
incur any Debt pursuant to this covenant (other than Debt incurred under
clause (1) of the first paragraph of this covenant or clause (k)(1)(A) or
(k)(2)(A), as applicable) if the proceeds thereof are used, directly or
indirectly, to Refinance
(1) any Subordinated Obligations unless such Debt shall be
subordinated to the notes or the applicable Subsidiary Guarantee, as the
case may be, to at least the same extent as such Subordinated
Obligations or
(2) any Senior Subordinated Debt unless such Debt shall be Senior
Subordinated Debt or shall be subordinated to the notes or the
applicable Subsidiary Guarantee, as the case may be;
(b) we shall not permit any Restricted Subsidiary that is not a
Subsidiary Guarantor to incur any Debt pursuant to this covenant (other
than Debt incurred under clause (1) of the first paragraph of this
covenant) if the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations or Senior Subordinated Debt of our
company or any Subsidiary Guarantor;
(c) accrual of interest, accretion or amortization of original issue
discount and the payment of interest or dividends in the form of additional
Debt, will be deemed not to be an incurrence of Debt for purposes of this
covenant; and
(d) for purposes of determining compliance with this covenant, if an
item of Debt (including Acquired Debt) meets the criteria of more than one
of the categories of Permitted Debt described in clauses (a) through (m)
above or is entitled to be incurred pursuant to clause (1) of the first
paragraph of this covenant, we will, in our sole discretion, classify (or
later reclassify in whole or in part, in our sole discretion) such item of
Debt in any manner that complies with this covenant.
Limitation on Restricted Payments. We shall not make, and shall not permit
any Restricted Subsidiary to make, directly or indirectly, any Restricted
Payment if at the time of, and after giving effect to, such proposed Restricted
Payment:
(a) a Default or Event of Default shall have occurred and be
continuing;
(b) we could not incur at least $1.00 of additional Debt pursuant to
clause (1) of the first paragraph of the covenant described under
"-- Limitation on Debt;" or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the amount of
any Restricted Payment, if made other than in cash, to be based upon Fair
Market Value) would exceed the sum of
(1) 100% of our Cumulative Consolidated EBITDA minus 1.4 times our
Cumulative Consolidated Interest Expense, plus
(2) 100% of the aggregate net proceeds (after deduction of fees,
expenses, discounts and commissions incurred in connection with issuance
and sale) and the Fair Market Value of securities or other Property
received by us from the issue or sale, after the Issue Date, of our
Capital Stock (other than our Disqualified Capital Stock or Capital
Stock of our company issued to any Restricted Subsidiary of our company)
or any of our Debt or other securities convertible into or exercisable
or
99
exchangeable for our Capital Stock (other than Disqualified Capital
Stock) which have been so converted or exercised or exchanged, as the
case may be, plus
(3) $10.0 million.
Notwithstanding the foregoing limitation, we may:
(a) pay dividends on our Capital Stock within 60 days of the
declaration thereof if, on said declaration date, such dividends could have
been paid in compliance with the Indenture; provided, however, that such
dividend shall be included in the calculation of the amount of Restricted
Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire
for value (x) our Capital Stock or Subordinated Obligations in exchange
for, or out of the proceeds of the substantially concurrent sale of, our
Capital Stock (other than Disqualified Capital Stock and other than Capital
Stock issued or sold to a Subsidiary of our company), and (y) our
Disqualified Capital Stock in exchange for, or out of the proceeds of the
substantially concurrent sale of (other than to a Subsidiary of our
company) our Disqualified Capital Stock that has a redemption date, and
requires the payment of current dividends in cash, no earlier than the
Disqualified Capital Stock being purchased, redeemed or otherwise acquired
or retired; provided, however, that
(1) such purchase, repurchase, redemption, legal defeasance,
acquisition or retirement shall be excluded in the calculation of the
amount of Restricted Payments and
(2) the Capital Stock Sale Proceeds from such exchange or sale
shall be excluded from the calculation pursuant to clause (c)(2) above;
(c) purchase, repurchase, redeem, legally defease, acquire or retire
for value any Subordinated Obligations in exchange for, or out of the proceeds
of the substantially concurrent sale of, Refinancing Debt or Debt permitted
under clause (k) of "-- Limitation on Debt;" provided, however, that such
purchase, repurchase, redemption, legal defeasance, acquisition or retirement
shall be excluded in the calculation of the amount of Restricted Payments;
(d) repurchase shares of, or options to purchase shares of, common
stock of our company or any of its Subsidiaries from current or former
officers, directors or employees of our company or any of its Subsidiaries
(or permitted transferees of such current or former officers, directors or
employees), pursuant to the terms of agreements (including employment
agreements) or plans (or amendments thereto) approved by the Board of
Directors under which such individuals purchase or sell, or are granted the
option to purchase or sell, shares of such common stock; provided, however,
that:
(1) the aggregate amount of such repurchases shall not exceed $1.0
million in any calendar year and
(2) at the time of such repurchase, no other Default or Event of
Default shall have occurred and be continuing (or result therefrom);
provided further, however, that such repurchases shall be included in the
calculation of the amount of Restricted Payments;
(e) as long as no Default or Event of Default has occurred and is
continuing, purchase, repurchase, redeem, legally defease, acquire or
retire for value outstanding Preferred Stock in exchange for, or out of,
consideration received by us or any Restricted Subsidiary from any Spectrum
Sale as permitted under "-- Limitation on Asset Sales and Spectrum Sales;"
provided, however, that such purchase, repurchase, redemption, legal
defeasance, acquisition or retirement shall be excluded in the calculation
of the amount of Restricted Payments;
(f) as long as no Default or Event of Default has occurred and is
continuing, pay cash dividends (not constituting a return on capital) on
the Existing Preferred Stock under the terms related to the payment of
dividends on the Existing Preferred Stock as in effect on the Issue Date
and described under "Description of Material Indebtedness and Preferred
Stock" in this prospectus; provided, however, that
100
any cash dividends paid with respect to the Existing Preferred Stock shall
reduce amounts otherwise available for Restricted Payments; and provided
further, however, in no event shall any such cash dividend be paid at any
time when we are permitted to pay a dividend on such stock otherwise than
in cash, unless we would be required to pay such non-cash dividends at a
rate higher than that applicable to cash dividends;
(g) pay dividends on Disqualified Capital Stock solely in additional
shares of Disqualified Capital Stock;
(h) make Restricted Payments in the aggregate of $15.0 million; and
(i) make distributions or payments of Receivables Fees.
Limitation on Liens. We shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, incur or suffer to exist any Lien (other
than Permitted Liens or Liens securing Obligations in respect of Senior Debt)
upon any of our Property (including Capital Stock of a Restricted Subsidiary),
whether owned at the Issue Date or thereafter acquired, or any interest therein
or any income or profits therefrom, unless:
(a) if such Lien secures Senior Subordinated Debt, the notes or the
applicable Subsidiary Guarantee are secured on an equal and ratable basis
with such Debt; and
(b) if such Lien secures Subordinated Obligations, such Lien shall be
subordinated to a Lien securing the notes or the applicable Subsidiary
Guarantee in the same Property as that subject to such Lien to the same
extent as such Subordinated Obligations are subordinated to the notes and
the Subsidiary Guarantees.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries.
We shall not:
(a) sell, pledge, hypothecate or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary; or
(b) permit any Restricted Subsidiary to, directly or indirectly, issue
or sell or otherwise dispose of any shares of its Capital Stock;
other than, in the case of either (a) or (b):
(1) directors' qualifying shares;
(2) to us or a Wholly Owned Restricted Subsidiary;
(3) Preferred Stock issued by a Restricted Subsidiary other than to
us or a Restricted Subsidiary if we or such Restricted Subsidiary would
be permitted to incur Debt under clause (1) of the first paragraph of
the covenant described under "-- Limitation on Debt" in the principal
amount of the aggregate liquidation value of the Preferred Stock to be
issued;
(4) to secure our or a Restricted Subsidiary's obligations under
any Senior Debt; or
(5) a disposition of the Capital Stock of a Restricted Subsidiary;
provided, however, that such disposition is effected in compliance with
the covenant described under "-- Limitation on Asset Sales and Spectrum
Sales."
Limitation on Asset Sales and Spectrum Sales.
(a) We shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Sale unless:
(1) we or such Restricted Subsidiary receive consideration at the
time of such Asset Sale at least equal to the Fair Market Value of the
Property subject to such Asset Sale;
(2) at least 75% of the consideration paid to us or such Restricted
Subsidiary in connection with such Asset Sale is in the form of cash or
cash equivalents (other than as set forth in clause (3)
101
below) or the assumption by the purchaser of liabilities of our company
or any Restricted Subsidiary (other than liabilities that are by their
terms subordinated to the notes or the applicable Subsidiary Guarantee)
as a result of which we and the Restricted Subsidiaries are no longer
obligated with respect to such liabilities; and
(3) notwithstanding clause (2) above, we may exchange all or
substantially all of the assets of one or more media properties operated
by us, including by way of the transfer of Capital Stock, for all or
substantially all of the assets, including by way of Capital Stock,
constituting one or more media properties operated by another Person,
provided that not less than 75% of the consideration received by us in
the exchange is in the form of cash or cash equivalents considering, for
this purpose only, the media properties, valued at their Fair Market
Value, as cash equivalents; and
(4) we deliver an Officers' Certificate to the Trustee certifying
that such Asset Sale complies with the foregoing clauses (1), (2) and,
if applicable, (3).
The Net Available Cash (or any portion thereof) from Asset Sales other than
from Excluded Asset Sales may be applied by us or a Restricted Subsidiary, to
the extent our company or such Restricted Subsidiary elects (or is required by
the terms of any Debt):
(1) to Repay Senior Debt of our company or any Subsidiary Guarantor or
Debt of any Restricted Subsidiary that is not a Subsidiary Guarantor
(excluding, in any such case, any Debt owed to us or an Affiliate of our
company);
(2) to reinvest in Additional Assets (including by means of an
Investment in Additional Assets by a Restricted Subsidiary with Net
Available Cash received by us or another Restricted Subsidiary); or
(3) to make any required offer in connection with Asset Sales to
holders of the Exchange Debentures in accordance with the terms of the
Exchange Indentures
Any Net Available Cash from an Asset Sale other than an Excluded Asset Sale
not applied in accordance with the preceding paragraph within 180 days from the
date of the receipt of such Net Available Cash or allocated for investment in
identified Additional Assets in respect of a project that shall have been
commenced, and for which binding contractual commitments have been entered into,
before the end of such 180-day period and that shall not have been completed or
abandoned shall constitute "Excess Proceeds;" provided, however, that the amount
of any Net Available Cash that ceases to be so allocated as contemplated above
and any Net Available Cash that is allocated in respect of a project that is
abandoned or completed shall also constitute "Excess Proceeds" at the time any
such Net Available Cash ceases to be so allocated or at the time the relevant
project is so abandoned or completed, as applicable; provided further, however,
that the amount of any Net Available Cash that continues to be allocated for
investment and that is not actually reinvested within 24 months from the date of
the receipt of such Net Available Cash shall also constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, we will
be required to make an offer to purchase (the "Prepayment Offer") the notes,
which offer shall be in the amount of the Allocable Excess Proceeds, on a pro
rata basis according to principal amount, at a purchase price equal to 100% of
the principal amount thereof, plus accrued and unpaid interest and Special
Interest, if any, to the purchase date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), in accordance with the procedures (including prorating
in the event of oversubscription) set forth in the Indenture. To the extent that
any portion of the amount of Excess Proceeds remains after compliance with the
preceding sentence and provided that all holders of notes have been given the
opportunity to tender their notes for purchase in accordance with the Indenture,
we or such Restricted Subsidiary may use such remaining amount for any purpose
permitted by the Indenture, and the amount of Excess Proceeds will be reset to
zero.
(b) We or any Restricted Subsidiary may use any Net Available Cash
from any Spectrum Sales (the "Spectrum Proceeds") in any manner permitted
by the Indenture, and may use any Spectrum Proceeds in excess of an
aggregate of $200 million (cumulative from the date of the Indenture)
("Excess
102
Spectrum Proceeds"), whether or not otherwise permitted by the Indenture,
to purchase, repurchase, redeem, legally defease, acquire or retire our
outstanding preferred stock, provided we have first made an offer in the
amount of the Allocable Spectrum Proceeds to purchase (the "Spectrum
Prepayment Offer") the notes on a pro rata basis according to principal
amount, at a price of 105% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the purchase date (subject to the right of
holders of record on the relevant record date to receive interest due on
the relevant interest payment date), in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture.
The terms "Allocable Excess Proceeds" and "Allocable Spectrum Proceeds," as
the case may be, shall mean the product of:
(1) the Excess Proceeds or Excess Spectrum Proceeds, as the case may
be; and
(2) a fraction,
(A) the numerator of which is the aggregate principal amount of the
notes outstanding on the date of the Prepayment Offer or Spectrum
Prepayment Offer, as the case may be, and
(B) the denominator of which is the sum of the aggregate principal
amount of the notes outstanding on the date of the Prepayment Offer or
Spectrum Prepayment Offer, as the case may be, and the aggregate
principal amount of our other Debt outstanding on the date of the
Prepayment Offer or Spectrum Prepayment Offer, as the case may be, that
is pari passu in right of payment with the notes and subject to terms
and conditions in respect of Asset Sales similar in all material
respects to the covenant described hereunder and requiring us to make an
offer to purchase such Debt at substantially the same time as the
Prepayment Offer or Spectrum Prepayment Offer, as the case may be.
Notwithstanding the foregoing, Debt under the Exchange Debentures shall
not be included in the denominator for purposes of this clause (B).
Promptly, and in any event within 30 days after we are obligated to make a
Prepayment Offer or Spectrum Prepayment Offer, as the case may be, as described
in the preceding paragraph, we shall send a written notice, by first-class mail,
to the holders of notes, accompanied by such information regarding us and our
Subsidiaries as we in good faith believe will enable such holders to make an
informed decision with respect to such Prepayment Offer or Spectrum Prepayment
Offer, as the case may be. Such notice shall state, among other things, the
purchase price and the purchase date, which shall be, subject to any contrary
requirements of applicable law, a business day no earlier than 30 days nor later
than 60 days from the date such notice is mailed.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the covenant described hereunder, we
will comply with the applicable securities laws and regulations and will be
deemed not to have breached our obligations under the covenant described
hereunder by virtue thereof.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. We shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist any
consensual restriction on the right of any Restricted Subsidiary to:
(a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock, or pay any Debt or
other obligation owed, to us or any other Restricted Subsidiary;
(b) make any loans or advances to us or any other Restricted
Subsidiary; or
(c) transfer any of its Property to us or any other Restricted
Subsidiary.
103
The foregoing limitations will not apply:
(1) with respect to clauses (a), (b) and (c), to restrictions
(A) in effect on the Issue Date,
(B) relating to Debt of a Restricted Subsidiary and existing at the
time it became a Restricted Subsidiary if such restriction was not
created in connection with or in anticipation of the transaction or
series of transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was acquired by us,
(C) relating to the Senior Credit Facility,
(D) created in connection with any Receivables Facility that, in
the good faith determination of our Board of Directors, are necessary or
advisable to effect such Receivables Facility, or
(E) that result from the Refinancing of Debt incurred pursuant to
an agreement referred to in clause (1)(A), (B) or (C) above or in clause
(2)(A) or (B) below, provided such restriction is no less favorable to
the holders of notes than those under the agreement evidencing the Debt
so Refinanced; and
(2) with respect to clause (c) only, to restrictions
(A) relating to Debt that is permitted to be incurred and secured
without also securing the notes or the applicable Subsidiary Guarantee
pursuant to the covenants described under "-- Limitation on Debt" and
"-- Limitation on Liens" that limit the right of the debtor to dispose
of the Property securing such Debt,
(B) encumbering Property at the time such Property was acquired by
us or any Restricted Subsidiary, so long as such restriction relates
solely to the Property so acquired and was not created in connection
with or in anticipation of such acquisition,
(C) resulting from customary provisions restricting subletting or
assignment of leases or customary provisions in other agreements that
restrict assignment of such agreements or rights thereunder or
(D) customarily contained in asset sale agreements limiting the
transfer of such Property pending the closing of such sale.
Limitation on Transactions with Affiliates. We shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with, or
for the benefit of, any Affiliate of our company (an "Affiliate Transaction"),
unless:
(a) the terms of such Affiliate Transaction are
(1) fair and reasonable to us or such Restricted Subsidiary, as the
case may be, and
(2) no less favorable to us or such Restricted Subsidiary, as the
case may be, than those that could be obtained in a comparable
arm's-length transaction with a Person that is not an Affiliate of our
company;
(b) if such Affiliate Transaction involves aggregate payments or value
in excess of $1.0 million, we obtain and promptly deliver to the Trustee a
resolution of our Board of Directors (including a majority of the
disinterested members of the Board of Directors) approving such Affiliate
Transaction and certifying that, in its good faith judgment, such Affiliate
Transaction complies with clauses (a)(1) and (2) of this paragraph; and
104
(c) if such Affiliate Transaction involves aggregate payments or value
in excess of $5.0 million, we obtain a written opinion from an Independent
Financial Advisor that the transaction is fair to us and the Restricted
Subsidiaries.
Without regard to the foregoing limitations, we or any Restricted
Subsidiary may enter into or suffer to exist the following:
(a) any transaction or series of transactions between us and one or
more Restricted Subsidiaries or between two or more Restricted Subsidiaries
in the ordinary course of business, provided that no more than 5% of the
total voting power of the Voting Stock (on a fully diluted basis) of any
such Restricted Subsidiary is owned by an Affiliate of our company (other
than a Restricted Subsidiary);
(b) any Restricted Payment permitted to be made pursuant to the
covenant described under "-- Limitation on Restricted Payments" or any
Permitted Investment;
(c) any transaction, including compensation and employee benefit
arrangements, with an officer or director of our company or any of the
Restricted Subsidiaries in his or her capacity as an officer or director,
so long as the Board of Directors in good faith shall have approved the
terms thereof;
(d) loans and advances to employees made in the ordinary course of
business and consistent with the past practices of our company or such
Restricted Subsidiary, as the case may be, provided that such loans and
advances do not exceed $1.0 million to any one employee and $5.0 million in
the aggregate at any one time outstanding;
(e) agreements in effect on the Issue Date and any modifications,
extensions or renewals thereto that are no less favorable to us or any
Restricted Subsidiary than such agreement as in effect on the Issue Date;
and
(f) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility.
Limitation on Layered Debt. We shall not, and shall not permit any
Subsidiary Guarantor to, incur, directly or indirectly, any Debt that is
subordinate or junior in right of payment to any Senior Debt unless such Debt is
Senior Subordinated Debt or is expressly subordinated in right of payment to
Senior Subordinated Debt. In addition, no Subsidiary Guarantor shall Guarantee,
directly or indirectly, any of our Debt that is subordinate or junior in right
of payment to any Senior Debt unless such Guarantee is expressly subordinate in
right of payment to, or ranks pari passu with, the Subsidiary Guarantee of such
Subsidiary Guarantor.
Designation of Restricted and Unrestricted Subsidiaries. The Board of
Directors may designate any Subsidiary of our company to be an Unrestricted
Subsidiary if:
(a) the Subsidiary to be so designated does not own any Capital Stock
or Debt of, or own or hold any Lien on any Property of, us or any other
Restricted Subsidiary; and
(b) either:
(1) the Subsidiary to be so designated has total assets of $1,000
or less or
(2) such designation is effective immediately upon such entity
becoming our Subsidiary.
Unless so designated as an Unrestricted Subsidiary, any Person that becomes our
Subsidiary will be classified as a Restricted Subsidiary; provided, however,
that such Subsidiary shall not be designated a Restricted Subsidiary and shall
be automatically classified as an Unrestricted Subsidiary if either of the
requirements set forth in clauses (x) and (y) of the second immediately
following paragraph will not be satisfied after giving pro forma effect to such
classification or if such Person is a Subsidiary of an Unrestricted Subsidiary.
Except as provided in the first sentence of the preceding paragraph, no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. In
addition, neither our company nor any Restricted Subsidiary shall at any time be
directly or indirectly liable for any Debt that provides that the holder thereof
may (with the passage of time or notice or both) declare a default thereon or
cause the payment thereof to be accelerated
105
or payable before its Stated Maturity upon the occurrence of a default with
respect to any Debt, Lien or other obligation of any Unrestricted Subsidiary
(including any right to take enforcement action against such Unrestricted
Subsidiary). Upon designation of a Restricted Subsidiary as an Unrestricted
Subsidiary in compliance with this covenant, such Restricted Subsidiary shall,
by execution and delivery of a supplemental indenture in form satisfactory to
the Trustee, be released from any Subsidiary Guarantee previously made by such
Restricted Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation,
(x) we could incur at least $1.00 of additional Debt pursuant to
clause (1) of the first paragraph of the covenant described under
"-- Limitation on Debt" and
(y) no Default or Event of Default shall have occurred and be
continuing or would result therefrom.
Any such designation or redesignation by the Board of Directors will be
evidenced to the Trustee by filing with the Trustee a Board Resolution giving
effect to such designation or redesignation and an Officers' Certificate that
(a) certifies that such designation or redesignation complies with the
foregoing provisions and
(b) gives the effective date of such designation or redesignation,
such filing with the Trustee to occur within 45 days after the end of the fiscal
quarter of our company in which such designation or redesignation is made (or,
in the case of a designation or redesignation made during the last fiscal
quarter of our fiscal year, within 90 days after the end of such fiscal year).
Future Subsidiary Guarantors. We shall cause each Person that becomes a
Domestic Restricted Subsidiary following the Issue Date and any other entity
that guarantees any Exchange Debentures to execute and deliver to the Trustee a
Subsidiary Guarantee at the time such Person becomes a Domestic Restricted
Subsidiary or guarantees any Exchange Debentures.
MERGER, CONSOLIDATION AND SALE OF PROPERTY
We shall not merge, consolidate or amalgamate with or into any other Person
(other than a merger of a Wholly Owned Restricted Subsidiary into us) or sell,
transfer, assign, lease, convey or otherwise dispose of all or substantially all
our Property in any one transaction or series of transactions unless:
(a) we shall be the surviving Person in such merger, consolidation or
amalgamation, or the surviving person (if other than us) formed by such
merger, consolidation or amalgamation or to which such sale, transfer,
assignment, lease, conveyance or disposition is made (the "Surviving
Person") shall be a corporation organized and existing under the laws of
the United States of America, any State thereof or the District of
Columbia;
(b) the Surviving Person expressly assumes, by supplemental indenture
in form satisfactory to the Trustee, executed and delivered to the Trustee
by such Surviving Person, the due and punctual payment of the principal of,
and premium, if any, and interest on, all the notes, according to their
tenor, and the due and punctual performance and observance of all the
covenants and conditions of the Indenture to be performed by us;
(c) in the case of a sale, transfer, assignment, lease, conveyance or
other disposition of all or substantially all our Property, such Property
shall have been transferred as an entirety or virtually as an entirety to
one Person;
(d) immediately before and after giving effect to such transaction or
series of transactions on a pro forma basis (and treating, for purposes of
this clause (d) and clauses (e) and (f) below, any Debt that becomes, or is
anticipated to become, an obligation of the Surviving Person or any
Restricted Subsidiary as a result of such transaction or series of
transactions as having been incurred by the Surviving Person or
106
such Restricted Subsidiary at the time of such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
continuing;
(e) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, we or the Surviving Person, as the case
may be, would be able to incur at least $1.00 of additional Debt under
clause (1) of the first paragraph of the covenant described under
"-- Certain Covenants -- Limitation on Debt;" and
(f) we shall deliver, or cause to be delivered, to the Trustee, in
form and substance reasonably satisfactory to the Trustee, an Officers'
Certificate and an Opinion of Counsel, each stating that such transaction
and the supplemental indenture, if any, in respect thereto comply with this
covenant and that all conditions precedent provided for in the Indenture
relating to such transaction have been satisfied.
We shall not permit any Subsidiary Guarantor to merge, consolidate or
amalgamate with or into any other Person (other than a merger of a Wholly Owned
Restricted Subsidiary into us or any such Subsidiary Guarantor) or sell,
transfer, assign, lease, convey or otherwise dispose of all or substantially all
its Property in any one transaction or series of transactions unless:
(a) the Surviving Person (if not such Subsidiary Guarantor) formed by
such merger, consolidation or amalgamation or to which such sale, transfer,
assignment, lease, conveyance or disposition is made shall be a corporation
organized and existing under the laws of the United States of America, any
State thereof or the District of Columbia;
(b) the Surviving Person (if other than such Subsidiary Guarantor)
expressly assumes, by Subsidiary Guarantee in form satisfactory to the
Trustee, executed and delivered to the Trustee by such Surviving Person,
the due and punctual performance and observance of all the obligations of
such Subsidiary Guarantor under its Subsidiary Guarantee;
(c) in the case of a sale, transfer, assignment, lease, conveyance or
other disposition of all or substantially all the Property of such
Subsidiary Guarantor, such Property shall have been transferred as an
entirety or virtually as an entirety to one Person;
(d) immediately before and after giving effect to such transaction or
series of transactions on a pro forma basis (and treating, for purposes of
this clause (d) and clauses (e) and (f) below, any Debt that becomes, or is
anticipated to become, an obligation of the Surviving Person, our company
or any Restricted Subsidiary as a result of such transaction or series of
transactions as having been incurred by the Surviving Person, our company
or such Restricted Subsidiary at the time of such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
continuing;
(e) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, we would be able to incur at least $1.00
of additional Debt under clause (1) of the first paragraph of the covenant
described under "-- Certain Covenants -- Limitation on Debt;" and
(f) we shall deliver, or cause to be delivered, to the Trustee, in
form and substance reasonably satisfactory to the Trustee, an Officers'
Certificate and an Opinion of Counsel, each stating that such transaction
and such Subsidiary Guarantee, if any, in respect thereto comply with this
covenant and that all conditions precedent provided for in the Indenture
relating to such transaction have been satisfied.
The foregoing provisions shall not apply to any transactions which
constitute an Asset Sale if we have complied with the covenant described under
"-- Certain Covenants -- Limitation on Asset Sales and Spectrum Sales."
The Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of our company under the Indenture (or of the
Subsidiary Guarantor under the Subsidiary Guarantee, as the case may be), but
the predecessor company in the case of
(a) a sale, transfer, assignment, conveyance or other disposition
(unless such sale, transfer, assignment, conveyance or other disposition is
of all our assets as an entirety or virtually as an entirety) or
107
(b) a lease,
shall not be released from any of the obligations or covenants under the
Indenture, including with respect to the payment of the notes.
SEC REPORTS
Notwithstanding that we may not be subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, for so long as the notes are
outstanding, we shall file with the Commission and provide the Trustee and
holders of notes with such annual reports and such information, documents and
other reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and reports to be so filed and provided at the times specified for the
filing of such information, documents and reports under such Sections; provided,
however, that we shall not be so obligated to file such information, documents
and reports with the Commission if the Commission does not permit such filings.
EVENTS OF DEFAULT
Events of Default in respect of the notes include:
(1) failure to pay any interest on, or Special Interest with respect
to, any note when the same becomes due and payable, and such failure
continues for a period of 30 days;
(2) failure to pay any principal of, or premium, if any, on, any of
the notes when the same becomes due and payable at its Stated Maturity,
upon acceleration, redemption, optional redemption, required repurchase or
otherwise;
(3) failure to comply with the covenant described under "-- Merger,
Consolidation and Sale of Property;"
(4) failure to comply with any other covenant or agreement in the
notes or in the Indenture (other than a failure that is the subject of the
foregoing clause (1), (2) or (3)) and such failure continues for 60 days
after written notice is given to us as provided below;
(5) a default under any Debt (other than the Existing Preferred Stock
and any Disqualified Capital Stock issued to refinance Existing Preferred
Stock, the terms of which provide for substantially the same remedies to
the holders thereof upon a failure to pay any amount due at maturity as the
terms of the Existing Preferred Stock so refinanced) by us or any
Restricted Subsidiary that results in acceleration of the maturity of such
Debt, or failure to pay any such Debt at maturity, in an aggregate amount
of Debt greater than $10.0 million or its foreign currency equivalent at
the time (the "cross acceleration provisions");
(6) any judgment or judgments for the payment of money in an aggregate
amount in excess of $10.0 million (or its foreign currency equivalent at
the time) shall be rendered against us or any Restricted Subsidiary and
shall not be waived, satisfied or discharged for any period of 60
consecutive days during which a stay of enforcement shall not be in effect
(the "judgment default provisions");
(7) certain events involving bankruptcy, insolvency or reorganization
of our company or any Significant Subsidiary (the "bankruptcy provisions");
and
(8) Subsidiary Guarantees provided by Subsidiary Guarantors that
individually or together would constitute a Significant Subsidiary cease to
be in full force and effect (other than in accordance with the terms of
such Subsidiary Guarantees) or any Subsidiary Guarantor denies or
disaffirms its obligations under its Subsidiary Guaranty (the "guarantee
provisions").
A Default under clause (4) is not an Event of Default until the Trustee or
the holders of not less than 25% in aggregate principal amount of the notes then
outstanding notify us of the Default and we do not cure such Default within the
time specified after receipt of such notice. Such notice must specify the
Default, demand that it be remedied and state that such notice is a "Notice of
Default."
108
We shall deliver to the Trustee, within 30 days after the occurrence
thereof, written notice in the form of an Officers' Certificate of any event
that with the giving of notice and the lapse of time would become an Event of
Default, its status and what action we are taking or propose to take with
respect thereto.
If an Event of Default with respect to the notes (other than an Event of
Default resulting from certain events involving bankruptcy, insolvency or
reorganization with respect to us) shall have occurred and be continuing, the
Trustee or the registered holders of not less than 25% in aggregate principal
amount of the notes then outstanding may declare to be immediately due and
payable the principal amount of all the notes then outstanding, plus accrued but
unpaid interest to the date of acceleration and (i) such amounts shall become
immediately due and payable or (ii) if there are any amounts outstanding under
any of the instruments constituting Senior Debt, such amounts shall become due
and payable upon the first to occur of an acceleration under any of the
instruments constituting Senior Debt or five business days after receipt by us
and the Representative under any Senior Debt of notice of the acceleration of
the notes unless all Events of Default specified in such notice have been cured
or waived. If an Event of Default resulting from certain events of bankruptcy,
insolvency or reorganization with respect to us shall occur, such amount with
respect to all the notes shall be due and payable immediately without any
declaration or other act on the part of the Trustee or the holders of the notes.
After any such acceleration, but before a judgment or decree based on
acceleration is obtained by the Trustee, the registered holders of a majority in
aggregate principal amount of the notes then outstanding may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, premium or interest, have
been cured or waived as provided in the Indenture.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders of the notes, unless
such holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the holders of a
majority in aggregate principal amount of the notes then outstanding will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee with respect to the notes.
No holder of notes will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or trustee, or
for any remedy thereunder, unless:
(a) such holder has previously given to the Trustee written notice of
a continuing Event of Default;
(b) the registered holders of at least 25% in aggregate principal
amount of the notes then outstanding have made written request and offered
reasonable indemnity to the Trustee to institute such proceeding as
trustee; and
(c) the Trustee shall not have received from the registered holders of
a majority in aggregate principal amount of the notes then outstanding a
direction inconsistent with such request and shall have failed to institute
such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of any
note for enforcement of payment of the principal of, and premium, if any, or
interest on, such note on or after the respective due dates expressed in such
Note.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, our company, the Trustee and the Subsidiary
Guarantors, with the consent of the registered holders of a majority in
aggregate principal amount of the notes then outstanding (including consents
obtained in connection with a tender offer or exchange offer for the notes) may
amend the Indenture and may waive any past default or compliance with any
provisions (except a default in the payment of principal, premium, interest or
Special Interest and certain covenants and provisions of the Indenture which
109
cannot be amended without the consent of each holder of an outstanding Note).
Without the consent of each holder of an outstanding Note, however, no amendment
may, among other things,
(1) reduce the amount of notes whose holders must consent to an
amendment or waiver,
(2) reduce the rate of or extend the time for payment of interest or
Special Interest on any Note,
(3) reduce the principal of or extend the Stated Maturity of any Note,
(4) make any Note payable in money other than that stated in the Note,
(5) impair the right of any holder of the notes to receive payment of
principal of and interest on such holder's notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's notes or any Subsidiary Guarantee,
(6) release any Guarantee or security interest that may have been
granted in favor of the holders of the notes other than pursuant to the
terms of the Indenture or such security interest,
(7) reduce the premium payable upon the redemption of any Note or
change the time at which any Note may be redeemed, as described under
"-- Optional Redemption,"
(8) reduce the premium payable in connection with a Change of Control
Offer or, at any time after a Change of Control has occurred, change the
time at which the Change of Control Offer relating thereto must be made or
at which the notes must be repurchased pursuant to such Change of Control
Offer,
(9) at any time after we are obligated to make a Prepayment Offer with
the Excess Proceeds from Asset Sales, change the time at which such
Prepayment Offer must be made or at which the notes must be repurchased
pursuant thereto,
(10) make any change to the subordination provisions of the Indenture
that would adversely affect the holders of the notes, or
(11) make any change in any Subsidiary Guarantee that would adversely
affect the holders of the notes.
Without the consent of any holder of the notes, our company, the Trustee
and the Subsidiary Guarantors may amend the Indenture to
(1) cure any ambiguity, omission, defect or inconsistency,
(2) provide for the assumption by a successor corporation of our
obligations under the Indenture,
(3) provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated notes are described in Section 163(f)(2)(B) of
the Code),
(4) add additional Guarantees with respect to the notes or release
Subsidiary Guarantors from Subsidiary Guarantees as provided by the terms
of the Indenture,
(5) secure the notes, add to our covenants for the benefit of the
holders of the notes or surrender any right or power conferred upon us,
(6) make any change that does not adversely affect the rights of any
holder of the notes,
(7) make any change to the subordination provisions of the Indenture
that would limit or terminate the benefits available to any holder of
Senior Debt under such provisions, or
(8) comply with any requirement of the Commission in connection with
the qualification of the Indenture under the Trust Indenture Act.
No amendment may be made to the subordination provisions of the Indenture
that adversely affects the rights of any holder of Designated Senior Debt then
outstanding unless the holders of such Designated Senior Debt (or their
Representative) consent to such change. The consent of the holders of the notes
is not
110
necessary to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment becomes effective, we are required to mail to each registered
holder of the notes at such holder's address appearing in the Security Register
a notice briefly describing such amendment. However, the failure to give such
notice to all holders of the notes, or any defect therein, will not impair or
affect the validity of the amendment.
DEFEASANCE
We at any time may terminate all of our obligations under the notes and the
Indenture ("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the notes, to replace mutilated, destroyed, lost or stolen notes and
to maintain a registrar and paying agent in respect of the notes. We at any time
may terminate:
(1) our obligations under the covenants described under "-- Repurchase
at the Option of Holders Upon a Change of Control" and "-- Certain
Covenants;"
(2) the operation of the cross acceleration provisions, the judgment
default provisions, and the bankruptcy provisions and the guarantee
provisions described under "-- Events of Default" above; and
(3) the limitations contained in clause (e) under each of the first
and second paragraphs of "-- Merger, Consolidation and Sale of Property"
above ("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior exercise
of our covenant defeasance option.
If we exercise our legal defeasance option, payment of the notes may not be
accelerated because of an Event of Default with respect thereto. If we exercise
our covenant defeasance option, payment of the notes may not be accelerated
because of an Event of Default specified in clause (4) (with respect to the
covenants described under "-- Certain Covenants"), (5), (6) or (7) (with respect
only to Significant Subsidiaries) or (8) under "-- Events of Default" above or
because of our failure to comply with clause (e) under either the first or
second paragraphs of "-- Merger, Consolidation and Sale of Property" above. If
we exercise our legal defeasance option or our covenant defeasance option, each
Subsidiary Guarantor will be released from all its obligations under its
Subsidiary Guarantee.
The legal defeasance option or the covenant defeasance option may be
exercised only if:
(a) we irrevocably deposit in trust with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest or
Special Interest, if any, on the notes to maturity or redemption, as the
case may be;
(b) we deliver to the Trustee a certificate from a nationally
recognized firm of independent certified public accountants expressing
their opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all the notes to maturity or redemption, as the case may be;
(c) 123 days pass after the deposit is made and during the 123-day
period no Default described in clause (7) under "-- Events of Default"
occurs with respect to us or any other Person making such deposit which is
continuing at the end of the period;
(d) no Default or Event of Default has occurred and is continuing on
the date of such deposit and after giving effect thereto;
(e) such deposit does not constitute a default under any other
agreement or instrument binding on us;
(f) we deliver to the Trustee an Opinion of Counsel to the effect that
the trust resulting from the deposit does not constitute, or is qualified
as, a regulated investment company under the Investment Company Act of
1940;
111
(g) in the case of the legal defeasance option, we deliver to the
Trustee an Opinion of Counsel stating that
(1) we have received from, or there has been published by, the
Internal Revenue Service a ruling or
(2) since the date of the Indenture there has been a change in the
applicable federal income tax law,
to the effect, in either case, that, and based thereon such Opinion of
Counsel shall confirm that, the holders of the notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same time as would have been the case if such
defeasance had not occurred;
(h) in the case of the covenant defeasance option, we deliver to the
Trustee an Opinion of Counsel to the effect that the holders of the notes
will not recognize income, gain or loss for federal income tax purposes as
a result of such covenant defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would
have been the case if such covenant defeasance had not occurred; and
(i) we deliver to the Trustee an Officers' Certificate and an Opinion
of Counsel, each stating that all conditions precedent to the defeasance
and discharge of the notes have been complied with as required by the
Indenture.
GOVERNING LAW
The Indenture and the notes are governed by the internal laws of the State
of New York without reference to principles of conflicts of law.
THE TRUSTEE
The Bank of New York is the Trustee under the Indenture. Except during the
continuance of an Event of Default, the Trustee will perform only such duties as
are specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such of the rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Bank of New York also serves as the trustee under the Exchange
Indentures.
CERTAIN DEFINITIONS
Set forth below is a summary of some of the defined terms used in the
Indenture. You should refer to the Indenture for the full definition of all such
terms as well as any other capitalized terms used herein for which no definition
is provided. Unless the context otherwise requires, an accounting term not
otherwise defined has the meaning assigned to it in accordance with GAAP.
"Acquired Debt" means Debt of a Person (including an Unrestricted
Subsidiary) outstanding on the date on which such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person.
"Additional Assets" means:
(a) any Property (other than cash, cash equivalents and securities) to
be owned by us or any Restricted Subsidiary and used in a Company Business;
or
(b) Capital Stock of a Person that becomes a Restricted Subsidiary as
a result of the acquisition of such Capital Stock by us or another
Restricted Subsidiary from any Person other than us or another Restricted
Subsidiary; provided, however, that, in the case of clause (b), such
Restricted Subsidiary is primarily engaged in a Company Business.
112
"Affiliate" of any specified Person means:
(a) any other Person directly or indirectly controlling or controlled
by or under direct or indirect common control with such specified Person;
or
(b) any other Person who is a director or officer of
(1) such specified Person,
(2) any Subsidiary of such specified Person or
(3) any Person described in clause (a) above.
For the purposes of this definition, "control" when used with respect to any
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. For purposes of the covenant described
under "-- Certain Covenants -- Limitation on Transactions with Affiliates" only,
"Affiliate" shall also mean any beneficial owner of shares representing 10% or
more of the total voting power of our Voting Stock (on a fully diluted basis) or
of rights or warrants to purchase such Voting Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"Asset Sale" means any sale, lease, transfer, issuance or other disposition
(or series of related sales, leases, transfers, issuances or dispositions) by us
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of
(a) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares) or
(b) any other assets of our company or any Restricted Subsidiary
outside of the ordinary course of business of our company or such
Restricted Subsidiary,
other than, in the case of clause (a) or (b) above,
(1) any disposition by a Restricted Subsidiary to us or by us or a
Restricted Subsidiary to a Wholly Owned Restricted Subsidiary,
(2) any disposition that constitutes a Permitted Investment or
Restricted Payment permitted by the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments,"
(3) any disposition effected in compliance with the covenant described
under "-- Merger, Consolidation and Sale of Property," and
(4) any disposition in a single transaction or a series of related
transactions of assets for aggregate consideration of less than $1.0
million.
Notwithstanding the foregoing, a Spectrum Sale shall not constitute an Asset
Sale.
"Attributable Debt" in respect of a Sale and Leaseback Transaction means,
at any date of determination,
(a) if such Sale and Leaseback Transaction is a Capital Lease
Obligation, the amount of Debt represented thereby according to the
definition of "Capital Lease Obligation" and
(b) in all other instances, the present value (discounted at the
interest rate borne by the notes, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of
the lease included in such Sale and Leaseback Transaction (including any
period for which such lease has been extended).
113
"Average Life" means, as of any date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing
(a) the sum of the product of the numbers of years (rounded to the
nearest one-twelfth of one year) from the date of determination to the
dates of each successive scheduled principal payment of such Debt or
redemption or similar payment with respect to such Preferred Stock
multiplied by the amount of such payment by
(b) the sum of all such payments.
"Capital Lease Obligations" means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP; and
the Stated Maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease before the first date upon which such lease
may be terminated by the lessee without payment of a penalty. For purposes of "
-- Certain Covenants -- Limitation on Liens," a Capital Lease Obligation shall
be deemed secured by a Lien on the Property being leased.
"Capital Stock" means, with respect to any Person, any shares or other
equivalents (however designated) of any class of corporate stock or partnership
interests or any other participations, rights, warrants, options or other
interests in the nature of an equity interest in such Person, including
Preferred Stock, but excluding any debt security convertible or exchangeable
into such equity interest.
"Capital Stock Sale Proceeds" means the aggregate cash proceeds received by
us from the issuance or sale (other than to a Subsidiary of our company) by us
of our Capital Stock (other than Disqualified Capital Stock) after the Issue
Date, net of attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and other fees
actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result thereof.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act or any successor provisions to either of the
foregoing), including any group acting for the purpose of acquiring,
holding, voting or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act, other than any one or more of the
Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act, except that a person will be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of 33 1/3% or more of the total
voting power of our Voting Stock; provided, however, that the Permitted
Holders are the "beneficial owners" (as defined in Rule 13d-3 under the
Exchange Act, except that a person will be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, in the aggregate of a lesser percentage of
the total voting power of our Voting Stock than such other person or group
(for purposes of this clause (a), such person or group shall be deemed to
beneficially own any Voting Stock of a corporation held by any other
corporation (the "parent corporation") so long as such person or group
beneficially owns, directly or indirectly, in the aggregate a majority of
the total voting power of the Voting Stock of such parent corporation); or
(b) we merge, consolidate or amalgamate with or into any other Person
or any other Person merges, consolidates or amalgamates with or into us, in
any such event pursuant to a transaction in which our outstanding Voting
Stock is reclassified into or exchanged for cash, securities or other
Property, other than any such transaction where
(1) our outstanding Voting Stock is reclassified into or exchanged
for other Voting Stock of our company or for Voting Stock of the
surviving corporation and
(2) the holders of our Voting Stock immediately before such
transaction own, directly or indirectly, not less than a majority of the
Voting Stock of our company or the surviving corporation
114
immediately after such transaction and in substantially the same
proportion as before the transaction; or
(c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election or appointment by such Board or whose
nomination for election by our stockholders was approved by a vote of not
less than a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a majority of the Board of Directors then in office; or
(d) our stockholders shall have approved any plan of liquidation or
dissolution of our company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Business" means any business in which our company or any
Restricted Subsidiary was engaged on the Issue Date, or any business related or
ancillary to any business or industry in which our company or any Restricted
Subsidiary was engaged on the Issue Date.
"Consolidated EBITDA" means, for any Person, for any period, an amount
equal to:
(a) the sum of Consolidated Net Income for such period, plus, to the
extent deducted in determining Consolidated Net Income,
(i) the provision for taxes for such period based on income or
profits and any provision for taxes utilized in computing a loss in
Consolidated Net Income above, plus
(ii) Consolidated Interest Expense, net of interest income earned
on cash or cash equivalents for such period, plus
(iii) depreciation for such period on a consolidated basis, plus
(iv) amortization of intangibles (excluding the amortization of
Film Contracts), plus
(v) any other non-cash items (other than any such non-cash item to
the extent that it represents an accrual of or reserve for cash
expenditures in any future period); minus
(b) all non-cash items increasing Consolidated Net Income for such
period (other than any such non-cash item to the extent that it will result
in the receipt of cash payments in any future period);
provided, however, that, for purposes of calculating Consolidated EBITDA during
any fiscal quarter, cash income from a particular Investment of such Person
shall be included only if cash income has been received by such Person as a
result of the operation of the business in which such Investment has been made
in the ordinary course without giving effect to any extraordinary unusual and
non-recurring gains.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and its Restricted Subsidiaries on a
consolidated basis, including, but not limited to:
(a) interest expense attributable or imputed to leases constituting
part of a Sale and Leaseback Transaction and to Capital Lease Obligations;
(b) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(c) the net costs associated with Hedging Obligations;
(d) amortization of other financing fees and expenses;
(e) the interest portion of any deferred payment obligation;
(f) amortization of discount or premium, if any, and all other
non-cash interest expense (other than interest amortized to cost of sales);
and
115
(g) without duplication,
(1) all net capitalized interest for such period and all interest
incurred or paid under any Guarantee of Debt (including a Guarantee of
principal, interest or any combination thereof) of any Person, and
(2) all time brokerage fees relating to financing of radio or
television stations which such Person has an agreement or option to
acquire.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the net income (or loss) of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided, however, that:
(a) the net income of any Person (the "other Person") in which the
Person in question or any of its Restricted Subsidiaries has less than a
100% interest (which interest does not cause the net income of such other
Person to be consolidated into the net income of the Person in question in
accordance with GAAP) shall be included only to the extent of the amount of
dividends or distributions paid to the Person in question or to the
Subsidiary;
(b) the net income of any Restricted Subsidiary of the Person in
question that is subject to any restriction or limitation on the payment of
dividends or the making of other distributions (other than, if applicable,
pursuant to the notes, the Indenture, the Exchange Debentures or the
Exchange Indentures) shall be excluded to the extent of such restriction or
limitation;
(c) (i) the net income of any Person acquired in a pooling of
interests transaction for any period before the date of such acquisition
and (ii) any net gain (but not loss) resulting from an Asset Sale by the
Person in question or any of its Subsidiaries other than in the ordinary
course of business shall be excluded;
(d) extraordinary, unusual and non-recurring gains and losses shall be
excluded;
(e) losses associated with discontinued and terminated operations in
an amount not to exceed $1.0 million per annum shall be excluded; and
(f) all non-cash items (including, without limitation, cumulative
effects of changes in GAAP and equity entitlements granted to employees of
such Person and its Restricted Subsidiaries) increasing and decreasing
Consolidated Net Income and not otherwise included in the definition of
Consolidated EBITDA shall be excluded.
"Credit Facilities" means, with respect to us or any Restricted Subsidiary,
one or more debt or commercial paper facilities with banks or other
institutional lenders (including the Senior Credit Facility) providing for
revolving credit loans, term loans, receivables or inventory financing
(including through the sale of receivables or inventory to such lenders or to
special purpose, bankruptcy remote entities formed to borrow from such lenders
against such receivables or inventory) or trade letters of credit, in each case
together with any amendments, amendments and restatements or modifications
thereof or extensions, revisions, refinancings or replacements thereof by one or
more lenders or a syndicate of lenders.
"Cumulative Consolidated EBITDA" means, with respect to any Person, as of
any date of determination, Consolidated EBITDA from the Issue Date to the end of
our most recently ended full fiscal quarter before such date, taken as a single
accounting period.
"Cumulative Consolidated Interest Expense" means, with respect to any
Person, as of any date of determination, Consolidated Interest Expense from the
Issue Date to the end of such Person's most recently ended full fiscal quarter
before such date, taken as a single accounting period.
"Currency Exchange Protection Agreement" means, in respect of a Person, any
foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
116
"Debt" means, with respect to any Person on any date of determination
(without duplication):
(a) the principal of and premium (if any) in respect of
(1) debt of such Person for money borrowed and
(2) debt evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is liable;
(b) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale and Leaseback Transactions entered into by such
Person;
(c) all obligations of such Person representing the deferred and
unpaid purchase price of Property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable and other accrued
liabilities arising in the ordinary course of business, including any
obligations in respect of Film Contracts);
(d) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (a) through (c)
above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the third
business day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit);
(e) the amount of all obligations of such Person with respect to the
Repayment of any Disqualified Capital Stock or, with respect to any
Subsidiary of such Person, any Preferred Stock (but excluding, in each
case, any accrued dividends);
(f) all obligations of the type referred to in clauses (a) through (e)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee;
(g) all obligations of the type referred to in clauses (a) through (f)
of other Persons secured by any Lien on any Property of such Person
(whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such Property
and the amount of the obligation so secured; and
(h) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Debt of any Person at any date shall be the outstanding
principal balance, or the accreted value of such Debt in the case of Debt issued
with original issue discount, at such date of all unconditional obligations as
described above and the maximum liability upon the occurrence of the contingency
giving rise to the obligation, of any contingent obligations at such date. Debt
shall not include contingent obligations arising out of customary
indemnification agreements with respect to the sale of assets or securities. The
amount of Debt represented by a Hedging Obligation shall be equal to:
(1) zero if such Hedging Obligation has been incurred pursuant to
clause (e) or (f) of the second paragraph of the covenant described under
"-- Certain Covenants -- Limitation on Debt;" or
(2) the notional amount of such Hedging Obligation if not incurred
pursuant to such clauses.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means:
(a) any Senior Debt which, at the time of determination, has an
aggregate principal amount outstanding of at least $25.0 million (or
accreted value in the case of Debt issued at a discount) that is
specifically designated in the instrument evidencing such Senior Debt as
"Designated Senior Debt"; and
(b) the Senior Credit Facility.
117
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable, in either case at the option of the
holder thereof) or otherwise
(a) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(b) is or may become redeemable or repurchaseable at the option of the
holder thereof, in whole or in part, or
(c) is convertible or exchangeable at the option of the holder thereof
for Debt or Disqualified Capital Stock,
on or before, in the case of clause (a), (b) or (c), the 91st day after the
Stated Maturity of the notes.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary other than
(a) a Foreign Restricted Subsidiary or (b) a Subsidiary of a Foreign Restricted
Subsidiary.
"Event of Default" has the meaning set forth under "-- Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Debentures" means the 8% Exchange Debentures due 2009, if issued,
the 13 1/4% Exchange Debentures due 2006, if issued, and the 12 1/2% Exchange
Debentures due 2006, if issued, each as issued under the Exchange Indentures, in
each case as they may be modified or amended from time to time.
"Exchange Indentures" means the indentures dated September 15, 1999, June
10, 1998 and October 4, 1996, between us, the guarantors parties thereto and The
Bank of New York, as trustee, which govern the Exchange Debentures, in each case
as they may be modified or amended from time to time.
"Excluded Asset Sales" means (1) the sale of our stations in each of Puerto
Rico (three full power stations), Honolulu, Hawaii (one full power station),
Boston (Merrimack, New Hampshire) (one full power station), New York (East
Orange, New Jersey & Long Island) (two low power stations), St. Croix, Virgin
Islands (one full power station), Houston, Texas (one low power station), West
Palm Beach, Florida (one low power station), Boston-Cape Cod, Massachusetts
(Dennis, Massachusetts) (one low power station), and Indianapolis, Indiana (one
low power station), (2) the sale of Tower Assets, and (3) any disposition of
accounts receivable in connection with a Receivables Facility.
"Existing Preferred Stock" means:
(a) the 12 1/2% Cumulative Exchangeable Preferred Stock, $.001 par
value, of which 261,063 shares are outstanding as of the Issue Date with a
liquidation preference of $1,000 per share, and any additional shares
issued as payment of dividends on such shares;
(b) the 13 1/4% Cumulative Junior Exchangeable Preferred Stock, $.001
par value, of which 29,145 shares are outstanding as of the Issue Date with
a liquidation preference of $10,000 per share, and any additional shares
issued as payment of dividends on such shares;
(c) the 8% Convertible Exchangeable Preferred Stock, $.001 par value,
of which 41,500 shares are outstanding as of the Issue Date with a
liquidation preference of $10,000 per share; and
(d) the 9 3/4% Series A Convertible Preferred Stock, $.001 par value,
of which 10,069 shares are outstanding as of the Issue Date with a
liquidation preference of $10,000 per share, and any additional shares
issued as payment of dividends on such shares;
in each case as they may be modified or amended from time to time.
"Fair Market Value" means, with respect to any Property, the sale price for
such Property that could be negotiated in an arm's-length transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction.
"Film Contract" means any contract with suppliers that conveys the right to
broadcast specified film, videotape, motion pictures, syndicated television
programs or sports or other programming.
118
"Foreign Restricted Subsidiary" means any Restricted Subsidiary which is
not organized under the laws of the United States of America or any State
thereof or the District of Columbia.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time, including those set forth in:
(a) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants;
(b) the statements and pronouncements of the Financial Accounting
Standards Board; and
(c) the rules and regulations of the Commission governing the
inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13
of the Exchange Act, including opinions and pronouncements in staff
accounting bulletins and similar written statements from the accounting
staff of the Commission.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(a) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise); or
(b) entered into for the purpose of assuring in any other manner the
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include:
(1) endorsements for collection or deposit in the ordinary course of
business; or
(2) a contractual commitment to invest in another Person for so long
as such Investment is reasonably expected to constitute a Permitted
Investment under clause (b) of the definition of "Permitted Investment."
The term "Guarantee" used as a verb has a corresponding meaning. The term
"Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligation" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement
or any other similar agreement or arrangement.
"incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise), extend,
assume, Guarantee or become liable in respect of such Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such Debt or
obligation on the balance sheet of such Person (and "incurrence" and "incurred"
shall have meanings correlative to the foregoing); provided, however, that a
change in GAAP that results in an obligation of such Person that exists at such
time, and is not theretofore classified as Debt, becoming Debt shall not be
deemed an incurrence of such Debt; and provided further, however, that any Debt
or other obligations of a Person existing at the time such Person becomes a
Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be
deemed to be incurred by such Subsidiary at the time it becomes a Subsidiary.
"Independent Financial Advisor" means an investment banking firm of
national standing, provided that such firm is not our Affiliate.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect against fluctuations in interest rates.
"Investment" by any Person means any direct or indirect loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of such Person),
119
advance or other extension of credit or capital contribution (by means of
transfers of cash or other Property to others or payments for Property or
services for the account or use of others, or otherwise) to, or incurrence of a
Guarantee of any obligation of, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person. For purposes of the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments," "-- Designation of Restricted
and Unrestricted Subsidiaries" and the definition of "Restricted Payment,"
"Investment" shall include the portion (proportionate to our equity interest in
such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of
our company at the time that such Subsidiary is designated an Unrestricted
Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, we shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary of an amount (if positive) equal to
(a) our "Investment" in such Subsidiary at the time of such
redesignation, less
(b) the portion (proportionate to our equity interest in such
Subsidiary) of the Fair Market Value of the net assets of such Subsidiary
at the time of such redesignation.
In determining the amount of any Investment made by transfer of any
Property other than cash, such Property shall be valued at its Fair Market Value
at the time of such Investment.
"Issue Date" means the date on which the original notes are initially
issued.
"Lien" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing or any Sale and
Leaseback Transaction).
"Moody's" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"Net Available Cash" from any Asset Sale or Spectrum Sale means cash
payments received therefrom (including any cash payments received by way of
deferred payment of principal pursuant to a note or installment receivable or
otherwise, but only as and when received, but excluding any other consideration
received in the form of assumption by the acquiring Person of Debt or other
obligations relating to the Property that is the subject of such Asset Sale or
Spectrum Sale or received in any other non-cash form), in each case net of:
(a) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Sale or Spectrum Sale;
(b) all payments made on or in respect of any Debt that is secured by
any Property subject to such Asset Sale or Spectrum Sale in accordance with
the terms of any Lien upon or other security agreement of any kind with
respect to such Property, or which must by its terms, or in order to obtain
a necessary consent to such Asset Sale or Spectrum Sale, or by applicable
law, be repaid out of the proceeds from such Asset Sale or Spectrum Sale;
(c) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of
such Asset Sale or Spectrum Sale; and
(d) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the Property disposed of in such Asset Sale or Spectrum Sale and retained
by us or any Restricted Subsidiary after such Asset Sale or Spectrum Sale.
"Obligations" means, with respect to any Debt, any principal, premium, if
any, interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization, at the rate specified in the
applicable documents governing such Debt, whether or not a claim for post-filing
interest is allowed in
120
such proceeding), penalties, fees, indemnification, guarantees, reimbursements,
damages and other liabilities payable under the documentation governing any
Debt.
"Officer" means the Chief Executive Officer, the President, the Chief
Financial Officer or any Executive Vice President of our company or a Subsidiary
Guarantor.
"Officers' Certificate" means with respect to any Person, a certificate
signed by two Officers, at least one of whom shall be the principal executive
officer or principal financial officer of such Person, and delivered to the
Trustee.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to us or
the Trustee.
"Permitted Holders" means:
(a) collectively Lowell W. Paxson, his spouse, children or other
lineal descendants (whether adoptive or biological), and any revocable or
irrevocable inter vivos or testamentary trust or the probate estate of any
such individual, so long as one or more of the foregoing individuals is the
principal beneficiary of such trust or probate estate; and
(b) National Broadcasting Company, Inc. and its Affiliates.
"Permitted Investment" means any Investment by us or a Restricted
Subsidiary in existence on the Issue Date, and any Investment after the Issue
Date in:
(a) our company or any Restricted Subsidiary or any Person that will,
upon the making of such Investment, become a Restricted Subsidiary,
provided that the primary business of such Restricted Subsidiary is a
Company Business;
(b) any Person if as a result of such Investment such Person is merged
or consolidated with or into, or transfers or conveys all or substantially
all its Property to, us or a Restricted Subsidiary, provided that such
Person's primary business is a Company Business;
(c) Temporary Cash Investments;
(d) receivables owing to us or a Restricted Subsidiary, if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that such trade
terms may include such concessionary trade terms as our company or such
Restricted Subsidiary deems reasonable under the circumstances;
(e) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(f) loans and advances to employees made in the ordinary course of
business consistent with past practices of us or such Restricted
Subsidiary, as the case may be, provided that such loans and advances do
not exceed $1.0 million to any one employee and $5.0 million in the
aggregate at any one time outstanding;
(g) stock, obligations or other securities received in settlement of
debts created in the ordinary course of business and owing to us or a
Restricted Subsidiary or in satisfaction of judgments;
(h) any Person to the extent such Investment represents the non-cash
portion of the consideration received in connection with an Asset Sale
consummated in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales and Spectrum Sales;"
(i) Investments in connection with time brokerage and other similar
agreements with independently owned broadcast properties, not to exceed an
aggregate of $25.0 million outstanding at any one time;
(j) Investments primarily for the purpose of acquiring programming,
not to exceed an aggregate of $25.0 million outstanding at any one time;
121
(k) any transaction where the consideration provided by us or any
Restricted Subsidiary in connection with such Investment consists solely or
principally of broadcast air time, not to exceed an aggregate of $5.0
million in any one year;
(l) other Investments that do not exceed $40.0 million outstanding at
any one time in the aggregate; provided, however, that such Investments are
related to a Company Business; and
(m) Investments relating to any special purpose wholly-owned
Subsidiary of our company organized in connection with a Receivables
Facility that, in the good faith determination of our Board of Directors,
are necessary or advisable to effect such Receivables Facility.
For purposes of determining the amount of an Investment under clauses (i)
through (l), the amount of the Investment shall be the fair market value thereof
as measured at the time made and without giving effect to subsequent changes in
value.
"Permitted Junior Securities" means:
(1) Capital Stock in us or any Subsidiary Guarantor of the notes; or
(2) debt securities that are subordinated to all Senior Debt and debt
securities that are issued in exchange for Senior Debt to substantially the
same extent as, or to a greater extent than, the notes and the Subsidiary
Guarantees are subordinated to Senior Debt under the Indenture and have a
stated maturity after (and do not provide for scheduled principal payments
before) the stated maturity of any Senior Debt and any debt securities
issued in exchange for Senior Debt;
provided, however, that, if such Capital Stock or debt securities are
distributed in a bankruptcy or insolvency proceeding, such Capital Stock or debt
securities are distributed pursuant to a plan of reorganization consented to by
each class of Designated Senior Debt.
"Permitted Liens" means:
(a) Liens to secure all Obligations in respect of Debt permitted to be
incurred under clause (c) of the second paragraph of the covenant described
under "-- Certain Covenants -- Limitation on Debt;" provided that any such
Lien may not extend to any Property of our company or any Restricted
Subsidiary other than the Property acquired, constructed or leased with the
proceeds of such Debt and any improvements or accessions to such Property;
(b) Liens for taxes, assessments or governmental charges or levies on
the Property of our company or any Restricted Subsidiary if the same shall
not at the time be delinquent or thereafter can be paid without penalty, or
are being contested in good faith and by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision that shall be required in conformity with GAAP shall
have been made therefor;
(c) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens and other similar Liens, on the Property of our company or
any Restricted Subsidiary arising in the ordinary course of business and
securing payment of obligations that are not more than 60 days past due or
are being contested in good faith and by appropriate proceedings;
(d) Liens on the Property of our company or any Restricted Subsidiary
incurred in the ordinary course of business to secure performance of
obligations with respect to statutory or regulatory requirements,
performance or return-of-money bonds, surety bonds or other obligations of
a like nature and incurred in a manner consistent with industry practice,
in each case which are not incurred in connection with the borrowing of
money, the obtaining of advances or credit or the payment of the deferred
purchase price of Property and which do not in the aggregate impair in any
material respect the use of Property in the operation of the business of
our company and the Restricted Subsidiaries taken as a whole;
(e) Liens on Property at the time we or any Restricted Subsidiary
acquired such Property, including any acquisition by means of a merger or
consolidation with or into us or any Restricted Subsidiary; provided,
however, that any such Lien may not extend to any other Property of our
company or any
122
Restricted Subsidiary; provided further, however, that such Liens shall not
have been incurred in anticipation of or in connection with the transaction
or series of transactions pursuant to which such Property was acquired by
us or any Restricted Subsidiary;
(f) Liens on the Property of a Person at the time such Person becomes
a Restricted Subsidiary; provided, however, that any such Lien may not
extend to any other Property of our company or any other Restricted
Subsidiary that is not a direct Subsidiary of such Person; provided
further, however, that any such Lien was not incurred in anticipation of or
in connection with the transaction or series of transactions pursuant to
which such Person became a Restricted Subsidiary;
(g) pledges or deposits by us or any Restricted Subsidiary under
workmen's compensation laws, unemployment insurance laws or similar
legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Debt) or leases to which our
company or any Restricted Subsidiary is party, or deposits to secure our
public or statutory obligations, or deposits for the payment of rent, in
each case incurred in the ordinary course of business;
(h) utility easements, building restrictions and such other
encumbrances or charges against real Property as are of a nature generally
existing with respect to properties of a similar character;
(i) Liens existing on the Issue Date not otherwise described in
clauses (a) through (h) above; and
(j) Liens on the Property of our company or any Restricted Subsidiary
to secure any Refinancing, in whole or in part, of any Debt secured by
Liens referred to in clause (a), (e), (f), or (i) above; provided, however,
that any such Lien shall be limited to all or part of the same Property
that secured the original Lien (together with improvements and accessions
to such Property) and the aggregate principal amount of Debt that is
secured by such Lien shall not be increased to an amount greater than the
sum of:
(1) the outstanding principal amount, or, if greater, the committed
amount, of the Debt secured by Liens described under clause (a), (e),
(f), or (i) above, as the case may be, at the time the original Lien
became a Permitted Lien under the Indenture; and
(2) an amount necessary to pay any fees and expenses, including
premiums and defeasance costs, incurred by us or such Restricted
Subsidiary in connection with such Refinancing.
"Person" means any individual, corporation, company (including any limited
liability company), association, partnership, joint venture, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to the payment of
dividends, or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of any other class of
Capital Stock issued by such Person.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the Indenture, the
value of any Property shall be its Fair Market Value.
"Public Equity Offering" means an underwritten public offering by us of our
common stock pursuant to an effective registration statement under the
Securities Act.
"Purchase Money Debt" means Debt:
(a) consisting of the deferred purchase price of property, conditional
sale obligations, obligations under any title retention agreement, other
purchase money obligations and obligations in respect of industrial revenue
bonds; and
(b) incurred to finance the acquisition, construction or lease by us
or a Restricted Subsidiary of such Property, including additions and
improvements thereto;
123
in each case including the reasonable fees and expenses incurred in connection
therewith; provided, however, that such Debt is incurred within 180 days after
the acquisition, construction or lease of such Property by us or such Restricted
Subsidiary.
"Receivables Facility" means one or more receivables financing facilities,
as amended from time to time, pursuant to which our company or any of its
Restricted Subsidiaries sells its accounts receivable to a Person that is not a
Restricted Subsidiary.
"Receivable Fees" means distributions or payments made directly or by means
of discounts with respect to any participation interests issued or sold, and
other fees paid to a Person that is not a Restricted Subsidiary, in connection
with any Receivables Facility.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, repurchase, redeem, defease or retire, or to issue other
Debt in exchange or replacement for, such Debt. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Debt" means any Debt that Refinances any other Debt, including
any successive Refinancings, so long as:
(a) such Debt is in an aggregate principal amount (or if incurred with
original issue discount, an aggregate issue price) not in excess of the sum
of
(1) the aggregate principal amount then outstanding (or if incurred
with original issue discount, the aggregate accreted value at the date
of such Refinancing) of the Debt being Refinanced and
(2) an amount necessary to pay any fees and expenses, including
premiums and defeasance costs, related to such Refinancing;
(b) the Average Life of such Debt is equal to or greater than the
Average Life of the Debt being Refinanced;
(c) the Stated Maturity of such Debt is no earlier than the Stated
Maturity of the Debt being Refinanced; and
(d) with respect to Debt that is being Refinanced that is subordinate
to the notes or the Subsidiary Guarantees, such Refinancing Debt shall be
subordinate to the notes or the Subsidiary Guarantees at least to the same
extent and in the same manner as the Debt being Refinanced;
provided, however, that in the case of a Refinancing of Debt referred to in
clause (k) of the second paragraph of "Limitation on Debt," no cash interest is
payable on such Refinanced Debt before July 15, 2005; and provided, further
however, that Refinancing Debt shall not include:
(x) Debt of a Subsidiary that is not a Subsidiary Guarantor that
Refinances Debt of our company or a Subsidiary Guarantor; or
(y) Debt of our company or a Restricted Subsidiary that Refinances
Debt of an Unrestricted Subsidiary.
"Repay" means, in respect of any Debt, to repay, prepay, repurchase,
redeem, legally defease or otherwise retire such Debt. "Repayment" and "Repaid"
shall have correlative meanings. For purposes of the covenant described under
"-- Certain Covenants -- Limitation on Asset Sales and Spectrum Sales," Debt
shall be considered to have been Repaid only to the extent the related loan
commitment, if any, shall have been permanently reduced in connection therewith.
"Representative" means the trustee, agent or representative expressly
authorized to act in such capacity, if any, for an issue of Designated Senior
Debt.
124
"Restricted Payment" means:
(a) any dividend or distribution (whether made in cash, securities or
other Property) declared or paid on or with respect to any shares of
Capital Stock of our company or any Restricted Subsidiary (including any
payment in connection with any merger or consolidation with or into us or
any Restricted Subsidiary), except for any dividend or distribution that is
made solely to us or a Restricted Subsidiary (and, if such Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, to the other
shareholders of such Restricted Subsidiary on a pro rata basis or on a
basis that results in the receipt by our company or a Restricted Subsidiary
of dividends or distributions of greater value than it would receive on a
pro rata basis) or any dividend or distribution payable solely in shares of
our Capital Stock (other than Disqualified Capital Stock);
(b) the purchase, repurchase, redemption, acquisition or retirement
for value of any Capital Stock of our company or any Restricted Subsidiary
(other than from us or a Restricted Subsidiary) or any securities
exchangeable for or convertible into any such Capital Stock, including the
exercise of any option to exchange any Capital Stock (other than for or
into Capital Stock of our company that is not Disqualified Capital Stock),
but excluding the conversion of any of our Capital Stock, Debt or other
securities into our Capital Stock (other than Disqualified Capital Stock);
(c) the purchase, repurchase, redemption, acquisition or retirement
for value, before the date for any scheduled maturity, sinking fund or
amortization or other installment payment, of any Subordinated Obligation
(other than the purchase, repurchase or other acquisition of any
Subordinated Obligation purchased in anticipation of satisfying a scheduled
maturity, sinking fund or amortization or other installment obligation, in
each case due within one year of the date of acquisition); or
(d) any Investment (other than Permitted Investments) in any Person.
"Restricted Subsidiary" means any Subsidiary of our company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Service or any successor to the
rating agency business thereof.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
relating to Property now owned or hereafter acquired whereby our company or a
Restricted Subsidiary transfers such Property to another Person and our company
or a Restricted Subsidiary leases it from such Person.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Credit Facility" means the credit agreement, dated as of the date
the notes are issued, by and among our company, Citicorp USA, Inc., as
Administrative Agent, and the several banks and other financial institutions or
entities from time to time parties thereto, including any related notes,
collateral documents, letters of credit and documentation and guarantees and any
appendices, exhibits or schedules to any of the foregoing, as any or all of such
agreements may be in effect from time to time, in each case, as any or all of
such agreements (or any other agreement that renews, refunds, refinances,
restructures, replaces, repays or extends any or all of such agreements) may be
amended, restated, modified or supplemented from time to time, or renewed,
refunded, refinanced, restructured, replaced, repaid or extended from time to
time, whether with the original agents and lenders or other agents and lenders
or otherwise, and whether provided under the original credit agreement or one or
more other credit agreements or otherwise.
"Senior Debt" of our company means:
(a) all Obligations consisting of the principal, premium, if any, and
accrued and unpaid interest (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to us
at the rate specified in the agreement or instrument evidencing such Debt,
whether or not such interest is allowed in such proceeding) and any other
Obligation in respect of
(1) the Credit Facilities,
(2) Debt of our company for borrowed money and
125
(3) Debt of our company evidenced by notes, debentures, bonds or
other similar instruments permitted under the Indenture for the payment
of which we are responsible or liable;
(b) all our Capital Lease Obligations and all Attributable Debt in
respect of Sale and Leaseback Transactions entered into by us;
(c) all our obligations
(1) for the reimbursement of any obligor on any letter of credit,
bankers' acceptance or similar credit transaction,
(2) under any Interest Rate Agreement or
(3) issued or assumed as the deferred purchase price of Property
and all our conditional sale obligations and all obligations under any
title retention agreement permitted under the Indenture; and
(d) all obligations of other Persons of the type referred to in
clauses (a), (b) and (c) for the payment of which we are responsible or
liable as Guarantor;
provided, however, that Senior Debt shall not include:
(A) Debt of our company that is by its terms subordinate or pari passu
in right of payment to the notes, including any Senior Subordinated Debt or
any Subordinated Obligations;
(B) any Debt incurred in violation of the provisions of the Indenture;
(C) accounts payable or any other obligations of our company to trade
creditors created or assumed by us in the ordinary course of business in
connection with the obtaining of materials or services (including
Guarantees thereof or instruments evidencing such liabilities and
obligations with respect to Film Contracts);
(D) any liability for federal, state, local or other taxes owed or
owing by us;
(E) any obligation of our company to any Subsidiary;
(F) any obligations with respect to any of our Capital Stock; or
(G) any Debt that does not constitute Senior Debt under the Exchange
Indentures, for so long as any Exchange Debentures are outstanding or
issuable thereunder (it being understood that, in any event, Obligations
under the Credit Facilities constitute Senior Debt).
"Senior Debt" of any Subsidiary Guarantor has a correlative meaning.
"Senior Subordinated Debt" of our company means the notes, the Exchange
Debentures (or any Debt ranking pari passu with the Exchange Debentures) and any
other subordinated Debt of our company that specifically provides that such Debt
is to rank pari passu with the notes and is not subordinated by its terms to any
other subordinated Debt or other obligation of our company which is not Senior
Debt. "Senior Subordinated Debt" of any Subsidiary Guarantor has a correlative
meaning and includes any Guarantee by such Subsidiary Guarantor of Exchange
Debentures (or any Guarantee by such Subsidiary Guarantor of Debt ranking pari
passu with the Exchange Debentures).
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of our company within the meaning of Rule 1-02 under Regulation S-X
promulgated by the Commission.
"Spectrum Sale" means any sale, lease, transfer, license or other
disposition (or series of related sales, leases, transfers, licenses or
dispositions), with or without the consent of our company or any Restricted
Subsidiary, of any broadcast license issued by the FCC pursuant to or in
connection with either: (a) the FCC's upper 700MHz (746-764 MHz and 776-794 MHz)
band auction or (b) the FCC's lower 700 MHz (698-746 MHz) band auction, provided
that, in each case, the expected use of such license shall not include the
transmission of a television signal.
126
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Debt of our company or any Subsidiary
Guarantor (whether outstanding on the Issue Date or thereafter incurred) that is
subordinate or junior in right of payment to the notes or the applicable
Subsidiary Guarantee pursuant to a written agreement to that effect or otherwise
pursuant to the terms of such Debt.
"Subsidiary" means, in respect of any Person, any corporation, company
(including any limited liability company), association, partnership, joint
venture or other business entity of which a majority of the total voting power
of the Voting Stock is at the time owned or controlled, directly or indirectly,
by:
(a) such Person;
(b) such Person and one or more Subsidiaries of such Person; or
(c) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means each Domestic Restricted Subsidiary and any
other Person that becomes a Subsidiary Guarantor pursuant to the covenant
described under "-- Certain Covenants -- Future Subsidiary Guarantors."
"Subsidiary Guarantee" means a Guarantee on the terms set forth in the
Indenture by a Subsidiary Guarantor of our obligations with respect to the
notes.
"Temporary Cash Investments" means any of the following:
(a) Investments in U.S. Government Obligations maturing within 365
days of the date of acquisition thereof;
(b) Investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 90 days of the date of acquisition
thereof issued by a bank or trust company organized under the laws of the
United States of America or any state thereof having capital, surplus and
undivided profits aggregating in excess of $500.0 million and whose
long-term debt is rated "A-3" or "A -- " or higher according to Moody's or
S&P (or such similar equivalent rating by at least one "nationally
recognized statistical rating organization" (as defined in Rule 436 under
the Securities Act));
(c) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (a) entered into
with
(1) a bank meeting the qualifications described in clause (b) above
or
(2) any primary government securities dealer reporting to the
Market Reports Division of the Federal Reserve Bank of New York;
(d) Investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of our company) organized and in existence under the laws of the
United States of America with a rating at the time as of which any
Investment therein is made of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P (or such similar equivalent rating by at
least one "nationally recognized statistical rating organization" (as
defined in Rule 436 under the Securities Act)); and
(e) direct obligations (or certificates representing an ownership
interest in such obligations) of any state of the United States of America
(including any agency or instrumentality thereof) for the payment
127
of which the full faith and credit of such state is pledged and which are
not callable or redeemable at the issuer's option, provided that
(1) the long-term debt of such state is rated "A-3" or "A -- " or
higher according to Moody's or S&P (or such similar equivalent rating by
at least one "nationally recognized statistical rating organization" (as
defined in Rule 436 under the Securities Act)) and
(2) such obligations mature within 180 days of the date of
acquisition thereof.
"Tower Assets" means the broadcast towers, transmitters and antennas and
related real property on which they are situated owned by us or any of our
Subsidiaries.
"Treasury Rate" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
business days before the redemption date (or, if such statistical release is no
longer published, any publicly available source of similar market data)) most
nearly equal to the period from the redemption date to July 15, 2005; provided,
however, that if the period from the redemption date to July 15, 2005 is less
than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"Unrestricted Subsidiary" means:
(a) any Subsidiary of our company that is designated after the Issue
Date as an Unrestricted Subsidiary as permitted or required pursuant to the
covenant described under " -- Certain Covenants -- Designation of
Restricted and Unrestricted Subsidiaries" and is not thereafter
redesignated as a Restricted Subsidiary as permitted pursuant thereto; and
(b) any Subsidiary of an Unrestricted Subsidiary.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of any Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Restricted Subsidiary" means, at any time, a Restricted
Subsidiary all of the Voting Stock of which (except directors' qualifying
shares) is at such time owned, directly or indirectly, by us or one or more
Wholly Owned Subsidiaries of our company.
BOOK-ENTRY SYSTEM
The new notes will be issued in the form of one or more Global Securities
registered in the name of The Depository Trust Company ("DTC") or its nominee.
Upon the issuance of each such Global Security, DTC or its nominee will
credit the accounts of Persons holding through it with the respective principal
amounts of the new notes represented by such Global Security acquired by such
Persons in the exchange offer. Such accounts were designated by the initial
purchasers. Ownership of beneficial interests in a Global Security is limited to
Persons that have accounts with DTC ("participants") or Persons that may hold
interests through participants. Any Person acquiring an interest in a Global
Security through an offshore transaction in reliance on Regulation S of the
Securities Act may hold such interest through Clearstream or Euroclear.
Ownership of beneficial interests in a Global Security is shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by DTC (with respect to participants' interests) and such
participants (with respect to the owners of beneficial interests in such Global
Security other than participants). The laws of some jurisdictions require that
certain
128
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and such laws may impair the ability to transfer beneficial
interests in a Global Security.
Payment of principal of and interest on notes represented by a Global
Security will be made in immediately available funds to DTC or its nominee, as
the case may be, as the sole registered owner and the sole holder of the notes
represented thereby for all purposes under the Indenture. We have been advised
by DTC that upon receipt of any payment of principal of or interest on any
Global Security, DTC will immediately credit, on its book-entry registration and
transfer system, the accounts of participants with payments in amounts
proportionate to their respective beneficial interests in the principal or face
amount of such Global Security as shown on the records of DTC. Payments by
participants to owners of beneficial interests in a Global Security held through
such participants will be governed by standing instructions and customary
practices as is now the case with securities held for customer accounts
registered in "street name" and will be the sole responsibility of such
participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated notes only if:
(a) DTC notifies us that it is unwilling or unable to continue as a
depositary for such Global Security or if at any time DTC ceases to be a
clearing agency registered under the Exchange Act;
(b) we in our discretion at any time determine not to have all the
notes represented by such Global Security; or
(c) there shall have occurred and be continuing a Default or an Event
of Default with respect to the notes represented by such Global Security.
Any Global Security that is exchangeable for certificated notes pursuant to
the preceding sentence will be exchanged for certificated notes in authorized
denominations and registered in such names as DTC or any successor depositary
holding such Global Security may direct. Subject to the foregoing, a Global
Security is not exchangeable, except for a Global Security of like denomination
to be registered in the name of DTC or any successor depositary or its nominee.
If a Global Security becomes exchangeable for certificated notes,
(a) certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples thereof,
(b) payment of principal of, and premium, if any, and interest on, the
certificated notes will be payable, and the transfer of the certificated
notes will be registerable, at our office or agency maintained for such
purposes, and
(c) no service charge will be made for any registration of transfer or
exchange of the certificated notes, although we may require payment of a
sum sufficient to cover any tax or governmental charge imposed in
connection therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by such Global Security for all purposes under
the Indenture and the notes. Except as set forth above, owners of beneficial
interests in a Global Security will not be entitled to have the notes
represented by such Global Security registered in their names, will not receive
or be entitled to receive physical delivery of certificated notes in definitive
form and will not be considered to be the owners or holders of any notes under
such Global Security. Accordingly, each Person owning a beneficial interest in a
Global Security must rely on the procedures of DTC or any successor depositary,
and, if such Person is not a participant, on the procedures of the participant
through which such Person owns its interest, to exercise any rights of a holder
under the Indenture. We understand that under existing industry practices, if we
request any action of holders or if an owner of a beneficial interest in a
Global Security desires to give or take any action which a holder is entitled to
give or take under the Indenture, DTC or any successor depositary would
authorize the participants holding the relevant beneficial interest to give or
take such action and such participants would authorize beneficial owners owning
through such participants to give or take such action or would otherwise act
upon the instructions of beneficial owners owning through them.
129
DTC has advised us that DTC is a limited-purpose trust company organized
under the Banking Law of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered under the Exchange Act. DTC
was created to hold the securities of its participants and to facilitate the
clearance and settlement of securities transactions among its participants in
such securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers (which
may include the Initial Purchasers), banks, trust companies, clearing
corporations and certain other organizations, some of which (or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies, that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of our company, the Trustee or
the initial purchasers will have any responsibility for the performance by DTC
or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
130
IMPORTANT FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Regulations promulgated and proposed thereunder, judicial authority and current
administrative rulings and practice, all of which are subject to change,
possibly with retroactive effect. Except as specifically provided below, the
following discussion is limited to the U.S. federal income tax consequences
relevant to a holder of a note who or which is (i) a citizen or resident of the
United States, (ii) a corporation (or other entity, other than a partnership,
estate or trust) created or organized under the laws of the United States, or
any political subdivision thereof, (iii) an estate the income of which is
subject to U.S. federal income taxation regardless of its source, or (iv) a
trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust (each a "U.S. Holder"). This
discussion does not purport to deal with all aspects of U.S. federal income
taxation that might be relevant to particular holders in light of their personal
investment circumstances or status, nor does it discuss the U.S. federal income
tax consequences to certain types of holders subject to special treatment under
the U.S. federal income tax laws (for example, financial institutions, insurance
companies, dealers in securities, tax-exempt organizations, or taxpayers holding
the notes through a partnership or similar pass-thru entity or as part of a
"straddle," "hedge" or "conversion transaction"). Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed.
Except as otherwise indicated below, this discussion assumes that the notes
are held as capital assets (as defined in Section 1221 of the Code) by the
holders thereof. This discussion is limited to the U.S. federal income tax
consequences to holders acquiring notes on original issue for cash. We will
treat the notes as indebtedness for U.S. federal income tax purposes, and the
balance of the discussion is based on the assumption that such treatment will be
respected.
PROSPECTIVE HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS OF THE ACQUISITION,
OWNERSHIP AND DISPOSITION OF THE NOTES.
EXCHANGE OFFER
The exchange of the original notes for the new notes pursuant to the
exchange offer should not constitute a significant modification of the terms of
the notes and, therefore, such exchange should not constitute an exchange for
U.S. federal income tax purposes. Accordingly, such exchange should have no U.S.
federal income tax consequences to U.S. Holders of notes.
U.S. HOLDERS
Stated Interest on the Notes. The stated interest on the notes will be
included in income by a U.S. Holder in accordance with such U.S. Holder's usual
method of tax accounting.
Tax Basis. A U.S. Holder's initial tax basis in a note will be equal to
the purchase price paid by such holder for such note.
Sale, Exchange, Redemption or Repayment. Unless a nonrecognition provision
applies, the sale, exchange, redemption or other disposition of notes will be a
taxable event for U.S. federal income tax purposes. In such event, a U.S. Holder
will recognize gain or loss equal to the difference between (i) the amount of
cash plus the fair market value of any property received (except to the extent
that amounts received are attributable to accrued interest not previously
included in income, which portion of the consideration would be taxed as
ordinary income) and (ii) the holder's adjusted tax basis therein. Such gain or
loss will be capital gain or loss and will be long-term capital gain or loss if
the notes have been held for more than one year at the time of disposition.
Noncorporate taxpayers are generally subject to a maximum regular U.S. federal
income tax rate of 20% on net long term capital gains. The deductibility of
capital losses is subject to certain limitations.
Backup Withholding and Information Reporting. Under the Code, U.S. Holders
of notes may be subject, under certain circumstances, to information reporting
and "backup withholding" at a 30.5% (30% after December 31, 2001 and subject to
periodic reductions through 2006) rate with respect to cash payments
131
in respect of principal (and premium, if any), interest, and the gross proceeds
from dispositions thereof. Backup withholding applies only if the U.S. Holder
(i) fails to furnish its social security or other taxpayer identification number
("TIN") within a reasonable time after a request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
fails, under certain circumstances, to provide a certified statement, signed
under penalty of perjury, that the TIN provided is its correct number and that
it is not subject to backup withholding. Any amount withheld from a payment to a
U.S. Holder under the backup withholding rules is allowable as a credit (and may
entitle such holder to a refund) against such U.S. Holder's U.S. federal income
tax liability, provided that the required information is furnished to the
Internal Revenue Service. Certain persons are exempt from backup withholding,
including corporations and financial institutions. U.S. Holders of notes should
consult their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such exemption.
We will furnish annually to the Internal Revenue Service and to record
holders of the notes (to whom it is required to furnish such information)
information relating to the amount of interest.
THE FOREGOING DISCUSSION IS BASED ON THE PROVISIONS OF THE CODE,
REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN EFFECT, ALL OF WHICH ARE
SUBJECT TO CHANGE. ANY SUCH CHANGES MAY BE APPLIED RETROACTIVELY IN A MANNER
THAT COULD ADVERSELY AFFECT U.S. HOLDERS OF NOTES. EACH PURCHASER OF ANY OF THE
NOTES SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO
IT, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS, OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a non-U.S. Holder of a note.
For purposes of the following discussion, interest and gain on the sale,
exchange or other disposition of a note will be considered to be "U.S. trade or
business income" if such income or gain is (i) effectively connected with the
conduct of a U.S. trade or business and (ii) in the case of a treaty resident,
attributable to a permanent establishment (or, in the case of an individual, a
fixed-base) in the United States.
Stated Interest on Notes. Generally any interest paid to a non-U.S. Holder
of a note that is not U.S. trade or business income will not be subject to U.S.
federal income tax if the interest qualifies as "portfolio interest." Generally
interest on the notes will qualify as portfolio interest if (i) the non-U.S.
Holder does not actually or constructively own 10% or more of our total voting
power of all voting stock (in the case of the notes) and (ii) such holder is not
a "controlled foreign corporation" with respect to which we are a "related
person" within the meaning of the Code, and (iii) either the beneficial owner,
under penalty of perjury, certifies that the beneficial owner is not a United
States person and such certificate provides the beneficial owner's name and
address, or a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business and holds the notes certifies under penalties of perjury, that such
statement has been received from the beneficial owner by it or by a financial
institution between it and the beneficial owner, and (iv) the non-U.S. Holder is
not a bank receiving interest on the extension of credit made pursuant to a loan
agreement made in the ordinary course of its trade or business.
The gross amount of payments to a non-U.S. Holder of interest that do not
qualify for the portfolio interest exception and that are not effectively
connected with the conduct of a U.S. trade or business will be subject to U.S.
federal income tax at the rate of 30%, unless a U.S. income tax treaty applies
to reduce or eliminate withholding. U.S. trade or business income will be taxed
on a net basis at regular U.S. rates rather than the 30% gross rate. In the case
of a non-U.S. Holder that is a corporation, such United States trade or business
income may also be subject to the branch profits tax (which is generally imposed
on a foreign corporation on the actual or deemed repatriation from the United
States of earnings and profits attributable to United States trade or business
income) at a 30% rate. The branch profits tax may not apply (or may apply at a
reduced rate) if a recipient is a qualified resident of certain countries with
which the United States has an income tax treaty. To claim the benefit of a tax
treaty or to claim exemption from withholding because the income is U.S. trade
or business income, the non-U.S. Holder must provide a properly executed Form
W-8BEN or W-8ECI (or such successor forms as the Internal Revenue Service
designates), as
132
applicable, before the payment of interest. These forms must be periodically
updated. Also under these regulations, a non-U.S. Holder who is claiming the
benefits of a treaty may be required in certain instances to obtain a U.S.
taxpayer identification number and to provide certain documentary evidence
issued by foreign governmental authorities to prove residence in the foreign
country.
Sales, Exchange or Redemption of Notes. A non-U.S. Holder will generally
not be subject to U.S. federal income tax on gain recognized on a sale,
redemption or other disposition of a note unless (i) the gain is effectively
connected with the conduct of a trade or business within the United States by
the non-U.S. Holder; (ii) in the case of a non-U.S. Holder who is a nonresident
alien individual and holds such note as a capital asset, such holder is present
in the United States for 183 or more days in the taxable year and certain other
requirements are met; or (iii) the non-U.S. Holder is subject to the special
rules applicable to former citizens and residents of the United States.
Federal Estate Tax. If interest on the notes is exempt from withholding of
U.S. federal income tax as portfolio interest described above, the notes will
not be included in the estate of a deceased non-U.S. Holder for U.S. federal
estate tax purposes.
Information Reporting and Backup Withholding. We must report annually to
the Internal Revenue Service and to each non-U.S. Holder any interest that is
subject to withholding, or that is exempt from U.S. withholding tax pursuant to
a tax treaty, or interest that is exempt from United States tax under the
portfolio interest exception. Copies of these information returns may also be
made available under the provisions of a specific treaty or agreement to the tax
authorities of the country in which the non-U.S. Holder resides.
In the case of payments of interest to non-U.S. Holders, Treasury
Regulations provide that information reporting and backup withholding at a rate
of 31% will not apply to such payments with respect to which either the
requisite certification has been received or an exemption has otherwise been
established (provided that neither the payor nor its paying agent has actual
knowledge that the holder is a U.S. person or the conditions of any other
exemption are not, in fact, satisfied).
The Treasury Regulations provide that backup withholding and information
reporting will not apply to payments of principal on the notes by us to a
non-U.S. Holder, if the Holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes an exemption (provided that
neither we nor our paying agents have actual knowledge that the holder is a
United States person or that the conditions of any other exemption are not, in
fact, satisfied).
The payment of the proceeds from the disposition of the notes to or through
the United States office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies
as to its non-U.S. status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a note
to or through a non-U.S. office of a non-U.S. broker that is not a U.S. related
person will not be subject to information reporting or backup withholding. For
this purpose a "U.S. related person" is (i) a "controlled foreign corporation"
for U.S. federal income tax purposes or (ii) a foreign person 50% or more of
whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment (or for such part of the period
that the broker has been in existence) is derived from activities that are
effectively connected with the conduct of a United States trade or business.
In the case of the payment of proceeds from the disposition of notes to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the Regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person (absent actual knowledge that
the payee is a U.S. person).
The Treasury Department recently promulgated final Treasury Regulations
regarding the withholding and information reporting rules discussed above. In
general, the final Regulations do not significantly alter the substantive
withholding and information reporting requirements but rather unify current
certification proce-
133
dures and forms and clarify reliance standards. Non-U.S. Holders should consult
their own tax advisors with respect to the impact, if any, of the new final
Treasury Regulations.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. Holder will be allowed as a refund or a credit against such non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY
PROPOSED CHANGES IN APPLICABLE LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer ("Restricted Holder") must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. This prospectus, as
it may be amended or supplemented from time to time, may be used by a Restricted
Holder in connection with resales of new notes received in exchange for original
notes where such original notes were acquired as a result of market-making
activities or other trading activities. We will make this prospectus available
to any Restricted Holder for use in connection with any such resale if such
Restricted Holder indicates in the Letter of Transmittal that it is a
broker-dealer. In addition, under Section 4(3) of the Securities Act, all
dealers effecting transactions in the new notes, whether or not participating in
the exchange offer, may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by Restricted
Holders. New notes received by Restricted Holders for their own account pursuant
to the exchange offer may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions, through the writing
of options on the new notes or through a combination of such methods of resale,
at market prices prevailing at the time of resale, or at prices related to such
prevailing market prices or at negotiated prices. Any such resale may be made
directly to purchasers or to or through Restricted Holders who may receive
compensation in the form of commissions or concessions from any such Restricted
Holder and/or the purchasers of any new notes. Any Restricted Holder that
resells new notes that were received by it for its own account pursuant to the
exchange offer and any person that participates in the distribution of such new
notes may be deemed to be an "underwriter" within the meaning of the Securities
Act, and any profit on any such resale of new notes and any commissions or
concessions received by any such Restricted Holder may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Restricted Holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year after the expiration of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. We have agreed to pay all expenses incident to the
exchange offer, including the reasonable fees and expenses of counsel to the
initial purchasers of the original notes, other than commissions or concessions
of any brokers or dealers, and will indemnify holders of the notes, including
any broker-dealers, against certain liabilities, including liabilities under the
Securities Act.
By acceptance of the exchange offer, each Restricted Holder that receives
new notes pursuant to the exchange offer agrees that, upon receipt of notice
from us of the happening of any event that makes any statement in this
prospectus untrue in any material respect or that requires the making of any
changes in this prospectus to make the statements herein not misleading (which
notice we agree to deliver promptly to such Restricted Holder), such Restricted
Holder will suspend use of the prospectus until we have amended or supplemented
the prospectus to correct such misstatement or omission and have furnished
copies of the amended or supplemented prospectus to such Restricted Holder.
134
LEGAL MATTERS
Legal matters in connection with the issuance of the new notes in exchange
for the original notes will be passed upon for us by Holland & Knight LLP (a
registered limited liability partnership).
EXPERTS
The financial statements as of December 31, 2000 and 1999 and for each of
the three years in the period ended December 31, 2000 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent certified public accountants, given on
the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act, and
in accordance with the requirements of the Exchange Act, we file reports and
other information with the SEC. You may read and, for a fee, copy any document
that we file with the SEC: (1) at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, or (2) at the regional office of the SEC located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
these documents may also be obtained at prescribed rates from the Public
Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. You may also obtain the documents that we file
electronically from the SEC's Web site at http://www.sec.gov. While any notes
remain outstanding, we will make available, upon request, to any beneficial
owner and any prospective purchaser of notes the information required pursuant
to Rule 144A(d)(4) under the Securities Act during any period in which we are
not subject to Section 13 or 15(d) of the Exchange Act. Any such request should
be directed to our Secretary at 601 Clearwater Park Road, West Palm Beach,
Florida 33401.
135
PAXSON COMMUNICATIONS CORPORATION
INDEX OF FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
PAXSON COMMUNICATIONS CORPORATION
Consolidated Financial Statements -- December 31, 2000, 1999
and 1998
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Changes in Common Stockholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
PAXSON COMMUNICATIONS CORPORATION
Unaudited Interim Consolidated Financial Statements -- June
30, 2001 and 2000 Consolidated Balance Sheets............. F-33
Consolidated Statements of Operations....................... F-34
Consolidated Statement of Stockholders' Deficit............. F-35
Consolidated Statements of Cash Flows....................... F-36
Notes to Unaudited Consolidated Financial Statements........ F-37
</Table>
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Paxson Communications Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in common
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Paxson Communications Corporation and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Miami, Florida
March 16, 2001
F-2
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS EXCEPT
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 51,363 $ 125,189
Short-term investments.................................... 50,001 124,987
Restricted cash and short-term investments................ 13,729 8,158
Accounts receivable, less allowance for doubtful accounts
of $4,167 and $4,255, respectively...................... 39,528 40,069
Program rights............................................ 79,160 79,686
Prepaid expenses and other current assets................. 2,065 2,777
---------- ----------
Total current assets............................... 235,846 380,866
Property and equipment, net................................. 174,649 189,908
Intangible assets, net...................................... 949,614 916,145
Program rights, net of current portion...................... 119,423 130,016
Investments in broadcast properties......................... 33,453 40,347
Other assets, net........................................... 13,062 32,805
---------- ----------
Total assets....................................... $1,526,047 $1,690,087
========== ==========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 21,828 $ 15,885
Accrued interest.......................................... 10,464 7,862
Obligations for cable distribution rights................. 19,840 14,712
Obligations for satellite distribution rights............. 5,114 2,947
Obligations for program rights............................ 88,336 82,907
Current portion of bank financing......................... 15,966 18,698
---------- ----------
Total current liabilities.......................... 161,548 143,011
Obligations for cable distribution rights, net of current
portion................................................... 972 6,672
Obligations for satellite distribution rights, net of
current portion........................................... 14,076 12,000
Obligations for program rights, net of current portion...... 79,341 112,153
Senior subordinated notes and bank financing................ 389,510 369,723
---------- ----------
Total liabilities.................................. 645,447 643,559
---------- ----------
Mandatorily redeemable preferred stock...................... 1,080,389 949,807
---------- ----------
Commitments and contingencies (Note 18)..................... -- --
---------- ----------
Stockholders' equity (deficit):
Class A common stock, $0.001 par value; one vote per
share; 215,000,000 shares authorized, 55,872,152 and
54,577,784 shares issued and outstanding................ 56 55
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 68,245
Stock subscription notes receivable....................... (1,270) (1,270)
Additional paid-in capital................................ 499,304 417,652
Deferred stock option compensation........................ (6,999) (20,026)
Accumulated deficit....................................... (759,272) (367,943)
---------- ----------
Total stockholders' equity (deficit)............... (199,789) 96,721
---------- ----------
Total liabilities, mandatorily redeemable preferred
stock and common stockholders' equity
(deficit)........................................ $1,526,047 $1,690,087
========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues................................................ $ 315,936 $ 248,362 $ 134,196
Less: agency commissions................................ (44,044) (34,182) (16,908)
----------- ----------- -----------
Net revenues............................................ 271,892 214,180 117,288
----------- ----------- -----------
Expenses:
Programming and broadcast operations (excluding
stock-based compensation of $351, $432 and $63,
respectively)...................................... 38,633 33,139 26,717
Program rights amortization........................... 100,324 91,799 31,422
Selling, general and administrative (excluding
stock-based compensation of $13,515, $16,382 and
$10,350, respectively)............................. 137,804 135,063 118,559
Time brokerage and affiliation fees................... 5,259 14,257 15,699
Stock-based compensation.............................. 13,866 16,814 10,413
Adjustment of programming to net realizable value..... 24,400 70,499 --
Restructuring charge related to Joint Sales
Agreements......................................... 5,760 -- --
Depreciation and amortization......................... 96,881 77,860 50,009
----------- ----------- -----------
Total operating expenses...................... 422,927 439,431 252,819
----------- ----------- -----------
Operating loss.......................................... (151,035) (225,251) (135,531)
Other income (expense):
Interest expense...................................... (47,973) (50,286) (41,906)
Interest income....................................... 14,022 8,570 14,992
Other expenses, net................................... (4,426) (7,855) (2,744)
Gain on modification of program rights obligations.... 10,221 -- --
Gain on sale of Travel Channel and other broadcast
assets............................................. 1,325 59,453 51,603
Equity in loss of unconsolidated investment........... (539) (2,260) (13,273)
----------- ----------- -----------
Loss from continuing operations before income taxes..... (178,405) (217,629) (126,859)
Income tax (provision) benefit.......................... (120) 57,257 37,389
----------- ----------- -----------
Loss from continuing operations......................... (178,525) (160,372) (89,470)
Gain on disposal of discontinued operations, net of
applicable income taxes............................... -- -- 1,182
----------- ----------- -----------
Net loss................................................ (178,525) (160,372) (88,288)
Dividends and accretion on redeemable preferred stock... (137,674) (88,740) (49,667)
Beneficial conversion feature on issuance of convertible
preferred stock....................................... (75,130) (65,467) --
----------- ----------- -----------
Net loss available to common stockholders............... $ (391,329) $ (314,579) $ (137,955)
=========== =========== ===========
Basic and diluted (loss) earnings per share:
Continuing operations................................... $ (6.16) $ (5.10) $ (2.31)
Discontinued operations................................. -- -- 0.02
----------- ----------- -----------
Net loss................................................ $ (6.16) $ (5.10) $ (2.29)
=========== =========== ===========
Weighted average shares outstanding..................... 63,515,340 61,737,576 60,360,384
=========== =========== ===========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<Table>
<Caption>
COMMON
STOCK STOCK DEFERRED RETAINED
COMMON STOCK WARRANTS SUBSCRIPTION ADDITIONAL OPTION EARNINGS
----------------- AND CALL NOTES PAID-IN PLAN (ACCUMULATED
CLASS A CLASS B OPTION RECEIVABLE CAPITAL COMPENSATION DEFICIT)
------- ------- -------- ------------ ---------- ------------ ------------
Balance at December 31, 1997... $51 $8 $ 2,316 $(2,813) $285,796 $ (2,205) $ 84,591
Stock issued for
acquisitions............... 1 5,249
Issuance of common stock
warrants................... 1,582
Exercise of common stock
warrants................... 1 (2,316) 2,315
Deferred option plan
compensation............... 24,314 (24,314)
Stock-based compensation..... 9,791
Stock options exercised...... 1,261
Dividends on redeemable and
convertible preferred
stock...................... (47,399)
Accretion on redeemable
preferred stock............ (2,268)
Net loss..................... (88,288)
--- -- ------- ------- -------- -------- ---------
Balance at December 31, 1998... 53 8 1,582 (2,813) 318,935 (16,728) (53,364)
Stock issued for cable
distribution rights........ 1 8,478
Stock issued for
acquisition................ 500
Issuance of common stock
warrants and Class B common
stock call option.......... 66,663
Deferred option plan
compensation............... 20,112 (20,112)
Repayment of stock
subscription receivable.... 1,543
Stock-based compensation..... 16,814
Stock options exercised...... 1 4,160
Beneficial conversion feature
on issuance of convertible
preferred stock............ 65,467 (65,467)
Dividends on redeemable and
convertible preferred
stock...................... (79,005)
Accretion on redeemable
preferred stock............ (9,735)
Net loss..................... (160,372)
--- -- ------- ------- -------- -------- ---------
Balance at December 31,
1999......................... 55 8 68,245 (1,270) 417,652 (20,026) (367,943)
Stock issued for
acquisition................ 251
Deferred option plan
compensation............... 700 (700)
Stock-based compensation..... 139 13,727
Stock options exercised...... 1 5,571
Cumulative effect adjustment
for beneficial conversion
feature.................... 75,130 (75,130)
Dividends on redeemable and
convertible preferred
stock...................... (111,203)
Accretion on redeemable
preferred stock............ (26,471)
Net loss..................... (178,525)
--- -- ------- ------- -------- -------- ---------
Balance at December 31,
2000......................... $56 $8 $68,384 $(1,270) $499,304 $ (6,999) $(759,272)
=== == ======= ======= ======== ======== =========
<Caption>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
Balance at December 31, 1997... $ 367,744
Stock issued for
acquisitions............... 5,250
Issuance of common stock
warrants................... 1,582
Exercise of common stock
warrants................... --
Deferred option plan
compensation............... --
Stock-based compensation..... 9,791
Stock options exercised...... 1,261
Dividends on redeemable and
convertible preferred
stock...................... (47,399)
Accretion on redeemable
preferred stock............ (2,268)
Net loss..................... (88,288)
---------
Balance at December 31, 1998... 247,673
Stock issued for cable
distribution rights........ 8,479
Stock issued for
acquisition................ 500
Issuance of common stock
warrants and Class B common
stock call option.......... 66,663
Deferred option plan
compensation............... --
Repayment of stock
subscription receivable.... 1,543
Stock-based compensation..... 16,814
Stock options exercised...... 4,161
Beneficial conversion feature
on issuance of convertible
preferred stock............ --
Dividends on redeemable and
convertible preferred
stock...................... (79,005)
Accretion on redeemable
preferred stock............ (9,735)
Net loss..................... (160,372)
---------
Balance at December 31,
1999......................... 96,721
Stock issued for
acquisition................ 251
Deferred option plan
compensation............... --
Stock-based compensation..... 13,866
Stock options exercised...... 5,572
Cumulative effect adjustment
for beneficial conversion
feature.................... --
Dividends on redeemable and
convertible preferred
stock...................... (111,203)
Accretion on redeemable
preferred stock............ (26,471)
Net loss..................... (178,525)
---------
Balance at December 31,
2000......................... $(199,789)
=========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $(178,525) $(160,372) $ (88,288)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 96,881 77,860 50,009
Stock-based compensation................................ 13,866 16,814 10,413
Non-cash restructuring charge........................... 5,677 -- --
Program rights amortization............................. 100,324 91,799 31,422
Adjustment of programming to net realizable value....... 24,400 70,499 --
Payments for cable distribution rights.................. (10,727) (30,713) (19,905)
Program rights payments and deposits.................... (128,288) (125,916) (62,076)
Provision for doubtful accounts......................... 3,277 6,164 4,214
Deferred income tax benefit............................. -- (58,109) (42,143)
Loss on sale or disposal of assets...................... 3,449 4,483 3,852
Gain on sale of Travel Channel and other broadcast
assets................................................ (1,325) (59,453) (51,603)
Equity in loss of unconsolidated investment............. 539 2,260 13,273
Gain on restructuring of program rights obligations..... (9,230) -- --
Gain on disposal of discontinued operations, net........ -- -- (1,182)
Changes in assets and liabilities:
(Increase) decrease in restricted cash and short-term
investments........................................ (5,571) 17,638 (1,096)
Increase in accounts receivable....................... (2,654) (21,036) (20,791)
Decrease (increase) in prepaid expenses and other
current assets..................................... 712 394 (188)
Decrease in other assets.............................. 8,291 1,425 2,050
Increase (decrease) in accounts payable and accrued
liabilities........................................ 266 (13,837) 21,544
Increase (decrease) in accrued interest............... 2,602 (1,708) (85)
--------- --------- ---------
Net cash used in operating activities.............. (76,036) (181,808) (150,580)
--------- --------- ---------
Cash flows from investing activities:
Decrease (increase) in short-term investments............. 74,987 (124,987) --
Acquisitions of broadcasting properties, including DP
Media, Inc.............................................. (74,180) (171,586) (591,368)
(Increase) decrease in investments in broadcast
properties.............................................. (2,957) 10,780 (15,659)
Decrease in deposits on broadcast properties.............. -- 4,214 29,399
Collection of notes receivable from CAP Communications,
Inc..................................................... -- 30,644 --
Cash held by qualified intermediary....................... -- -- 418,950
Purchases of property and equipment....................... (25,110) (34,609) (82,922)
Proceeds from sales of Travel Channel, broadcast assets
and discontinued operations............................. 14,476 120,726 69,944
Other..................................................... -- 4,310 3,170
--------- --------- ---------
Net cash used in investing activities.............. (12,784) (160,508) (168,486)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of exchangeable and convertible
preferred stock, net.................................... -- 406,500 261,706
Borrowings of long-term debt.............................. 19,452 15,812 23,411
Repayments of long-term debt.............................. (2,018) (9,780) (513)
Payment of loan origination costs......................... (920) -- --
Preferred stock dividends................................. (7,092) (171) --
Proceeds from exercise of common stock options, net....... 5,572 4,161 1,261
Repayment of stock subscription notes receivable.......... -- 1,543 --
--------- --------- ---------
Net cash provided by financing activities.......... 14,994 418,065 285,865
--------- --------- ---------
(Decrease) increase in cash and cash equivalents............ (73,826) 75,749 (33,201)
Cash and cash equivalents, beginning of year................ 125,189 49,440 82,641
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 51,363 $ 125,189 $ 49,440
========= ========= =========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Paxson Communications Corporation (the "Company"), a Delaware corporation,
was organized in December 1993. The Company owns and operates television
stations nationwide, and on August 31, 1998, launched PAX TV. PAX TV is the
brand name for the programming that the Company broadcasts through its owned,
operated and affiliated television stations, as well as certain cable and
satellite system affiliates.
The consolidated financial statements include the accounts of the Company
and its subsidiaries and those of DP Media, Inc. ("DP Media"), a company
acquired in June 2000. Prior to acquisition, DP Media was beneficially owned by
family members of Lowell W. Paxson ("Mr. Paxson"), the Company's Chairman and
principal shareholder. The financial position and results of operations of DP
Media have been included in the Company's consolidated financial statements
since September 1999 (see Note 3). All significant intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less.
Short-Term Investments
Short-term investments consist of marketable government securities with
original maturities of one year or less. All short-term investments are
classified as trading and are recorded at fair value.
Restricted Cash and Short-Term Investments
Restricted cash and short-term investments consist of cash and other liquid
securities held in an escrow account to be applied to the payment of principal
and interest due in connection with the Company's senior credit facility (see
Note 11).
Property and Equipment
Purchases of property and equipment, including additions and improvements
and expenditures for repairs and maintenance that significantly add to
productivity or extend the economic lives of assets, are capitalized at cost and
depreciated using the straight line method over their estimated useful lives as
follows (see Note 7):
<Table>
Broadcasting towers and equipment.......................... 6-13 years
Office furniture and equipment............................. 5-10 years
Buildings and building improvements........................ 15-40 years
Leasehold improvements..................................... Term of lease
Aircraft, vehicles and other............................... 5 years
</Table>
Maintenance, repairs, and minor replacements of these items are charged to
expense as incurred.
F-7
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Intangible assets are recorded at cost and amortized using the straight
line method over their estimated useful lives as follows (see Note 8):
<Table>
FCC licenses and goodwill............................... 25 years
Cable distribution rights............................... Generally 7 years
Covenants not to compete................................ Generally 3 years
Favorable lease and other contracts..................... Contract term
</Table>
Investments in Broadcast Properties
Investments in broadcast properties represent the Company's financing of
television station acquisitions by third party licensees, purchase options or
other investments in entities owning television broadcasting stations or
construction permits. In connection with a number of these agreements, the
Company has obtained the right to provide programming for the related stations
pursuant to time brokerage agreements ("TBAs") and has options to purchase
certain of the related station assets and Federal Communications Commission
("FCC") licenses at various amounts and terms (see Note 18). Included in other
expenses, net for 1999 is a loss of $4.5 million, reflecting the Company's
estimate of advances and costs related to the planned acquisition of a
television station which were determined to be unrecoverable due to the
termination of the acquisition contract.
Program Rights
Program rights are carried at the lower of unamortized cost or estimated
net realizable value. Program rights and the related liabilities are recorded at
the contractual amounts when the programming is available to air, and are
amortized over the licensing agreement term using the greater of the straight
line per run or straight line over the license term method. The estimated costs
of programming which will be amortized during the next year are included in
current assets; program rights obligations which become due within the next year
are included in current liabilities.
The Company periodically evaluates the net realizable value of its program
rights based on anticipated future usage of programming and the anticipated
future ratings and related advertising revenue to be generated. As further
described in Note 9, during the years ended December 31, 2000 and 1999, the
Company recorded charges of approximately $24.4 million and $70.5 million,
respectively, related to the write-down of program rights to net realizable
value.
Cable Distribution Rights
The Company has agreements under which it receives cable carriage of its
PAX TV programming on certain cable systems in markets not currently served by a
Company owned television station. The Company pays fees based on the number of
cable television subscribers reached and in certain instances provides local
advertising airtime during PAX TV programming. Cable distribution rights are
recorded at the present value of the Company's future obligation when the
Company receives affidavits of subscribers delivered. Cable distribution rights
are amortized over seven years using the straight line method. Obligations for
cable distribution rights which will be paid within the next year are included
in current liabilities.
Satellite Distribution Rights
The Company has entered into agreements with satellite television providers
for carriage on their systems in exchange for advertising credits. The Company
has recorded satellite distribution rights based on the estimated value of the
advertising credits at prevailing rates. Satellite distribution rights are
amortized over
F-8
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
five to seven years using the straight line method. Obligations for satellite
distribution rights are recognized as advertising revenue when advertising
credits are utilized. An estimate of the advertising credit that will be
utilized within the next year is included in current liabilities.
Long-Lived Assets
The Company reviews long-lived assets, identifiable intangibles and
goodwill and reserves for impairment whenever events or changes in circumstances
indicate that, based on estimated undiscounted future cash flows, the carrying
amount of the assets may not be fully recoverable. It is possible that the
estimated life of certain long-lived assets will be reduced significantly in the
near term due to the anticipated industry migration from analog to digital
broadcasting. If and when the Company becomes aware of such a reduction of
useful lives, depreciation expense will be adjusted prospectively to ensure
assets are fully depreciated upon migration.
Revenue Recognition
Revenue is recognized as commercial spots are aired and air time is
provided.
Time Brokerage Agreements
The Company operates certain stations under TBAs whereby the Company has
agreed to provide the station with programming and sells and retains all
advertising revenue during such programming. The broadcast station licensee
retains responsibility for ultimate control of the station in accordance with
FCC policies. The Company pays a fixed fee to the station owner as well as
certain expenses of the station and performs other functions. The financial
results of TBA operated stations are included in the Company's statements of
operations from the date of commencement of the TBA.
Stock-Based Compensation
The Company's employee stock option plans are accounted for using the
intrinsic value method. Stock-based compensation to non-employees is accounted
for using the fair value method. The Company also provides disclosure of certain
pro forma information as if the Company's employee stock option plans were
accounted for using the fair value method (see Note 13).
Income Taxes
The Company records deferred income taxes using the liability method. Under
the liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement and income tax bases of the Company's assets and liabilities. An
allowance is recorded, based upon currently available information, when it is
more likely than not that any or all of a deferred tax asset will not be
realized. The provision for income taxes includes taxes currently payable, if
any, plus the net change during the year in deferred tax assets and liabilities
recorded by the Company.
Per Share Data
Basic and diluted loss per share from continuing operations was computed by
dividing the loss from continuing operations less dividends and accretion and
the effect of beneficial conversion features on redeemable preferred stock by
the weighted average number of common shares outstanding during the period.
Because of losses from continuing operations, 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.
F-9
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following securities, which could potentially dilute earnings per share
in the future, were not included in the computation of diluted earnings per
share, because to do so would have been antidilutive for the periods presented
(in thousands):
<Table>
<Caption>
2000 1999 1998
------ ------ ------
Stock options outstanding................................... 10,974 11,991 9,342
Class A and B common stock warrants outstanding............. 32,428 32,428 396
Class A common stock reserved under convertible
securities................................................ 37,893 37,342 4,946
------ ------ ------
81,295 81,761 14,684
====== ====== ======
</Table>
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year's financial
statements to conform with the 2000 presentation. The primary change was the
reclassification of agency commissions from selling, general and administrative
expenses to a separate line item in presenting net revenues.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
as amended by SFAS No. 137 and SFAS No. 138, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The
Company will adopt SFAS 133 beginning January 1, 2001. The Company believes that
the adoption of SFAS 133 will not have a material impact on its consolidated
financial position or results of operations.
2. NBC TRANSACTION
Effective September 15, 1999 (the "Issue Date"), the Company entered into
an Investment Agreement (the "Investment Agreement") with National Broadcasting
Company, Inc. ("NBC"), pursuant to which NBC purchased shares of convertible
exchangeable preferred stock (the "Series B Convertible Preferred Stock"), and
common stock purchase warrants from the Company for an aggregate purchase price
of $415 million. Further, Mr. Paxson and certain entities controlled by Mr.
Paxson granted NBC the right (the "Call Right") to purchase all (but not less
than all) 8,311,639 shares of Class B Common Stock of the Company beneficially
owned by Mr. Paxson.
The common stock purchase warrants issued to NBC consist of a warrant to
purchase up to 13,065,507 shares of Class A Common Stock at an exercise price of
$12.60 per share ("Warrant A") and a warrant to purchase up to 18,966,620 shares
of Class A Common Stock ("Warrant B") at an exercise price equal to the average
of the closing sale prices of the Class A Common Stock for the 45 consecutive
trading days ending on the trading day immediately preceding the warrant
exercise date (provided that such price shall not be more than 17.5% higher or
17.5% lower than the six month trailing average closing sale price), subject to
a
F-10
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum exercise price during the first three years after the Issue Date of
$22.50 per share. The Warrants are exercisable for ten years from the Issue
Date, subject to certain conditions and limitations.
The Call Right has a per share exercise price equal to the higher of (i)
the average of the closing sale prices of the Class A Common Stock for the 45
consecutive trading days ending on the trading day immediately preceding the
exercise of the Call Right (provided that such price shall not be more than
17.5% higher or 17.5% lower than the six month trailing average closing sale
prices), and (ii) $22.50 for any exercise of the Call Right on or before the
third anniversary of the Issue Date and $20.00 for any exercise of the Call
Right thereafter. The owners of the shares which are subject to the Call Right
may not transfer such shares before the sixth anniversary of the Issue Date, and
may not convert such shares into any other securities of the Company (including
shares of Class A Common Stock). Exercise of the Call Right is subject to
compliance with applicable provisions of the Communications Act of 1934, as
amended (the "Communications Act"), and the rules and regulations of the FCC.
The Call Right may not be exercised until Warrant A and Warrant B have been
exercised in full. The Call Right expires on the tenth anniversary of the Issue
Date, or prior thereto under certain circumstances.
The Company valued the common stock purchase warrants issued to NBC and the
Call Right at $66.7 million. The Company recorded this value along with
transaction costs as a reduction of the face value of the Series B Convertible
Preferred Stock. Such discount is being accreted as preferred stock dividends
over three years using the interest method.
The Series B Convertible Preferred Stock was issued with a conversion price
per share that was less than the closing price of the Class A Common Stock at
the Issue Date. As a result, the Company recognized a beneficial conversion
feature in connection with the issuance of the stock equal to the difference
between the closing price and the conversion price multiplied by the number of
shares issuable upon conversion of the Series B Convertible Preferred Stock. The
amount of the beneficial conversion feature calculated for the 1999 fiscal year
totaling approximately $65.5 million was reflected in the accompanying statement
of operations as a preferred stock dividend during 1999 and allocated to
additional paid-in capital in the accompanying balance sheet because the
preferred stock was immediately convertible. In November 2000, the Emerging
Issues Task Force of the Financial Accounting Standards Board reached a
consensus regarding the accounting for beneficial conversion features which
required the Company to recalculate the beneficial conversion feature utilizing
the accounting conversion price as opposed to the stated conversion price used
for 1999. This change resulted in a cumulative catch-up adjustment totaling
approximately $75.1 million which was recorded as a preferred stock dividend in
the fourth quarter of 2000.
The Investment Agreement requires the Company to obtain the consent of NBC
or its permitted transferee with respect to certain corporate actions, as set
forth in the Investment Agreement, and grants NBC certain rights with respect to
the network operations of the Company. NBC was also granted certain demand and
piggyback registration rights with respect to the shares of Class A Common Stock
issuable upon conversion of the Series B Convertible Preferred Stock (or
conversion of any exchange debentures issued in exchange therefor), exercise of
the Warrants or conversion of the Class B Common Stock subject to the Call
Right.
NBC, the Company, Mr. Paxson and certain entities controlled by Mr. Paxson
also entered into a Stockholder Agreement, pursuant to which, if permitted by
the Communications Act and FCC rules and regulations, the Company may nominate
persons named by NBC for election to the Company's board of directors and Mr.
Paxson and his affiliates have agreed to vote their shares of common stock in
favor of the election of such persons as directors of the Company. Should no NBC
nominee be serving as a member of the Company's board of directors, then NBC may
appoint two observers to attend all board meetings. In December 1999 and March
2000, the Company's Board of Directors elected three NBC nominees to fill newly
created vacancies on the board. At the Company's Annual Meeting of Stockholders
in May 2000, all of the Company's directors, including the NBC nominees were
reelected for terms of one to three years. The
F-11
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stockholder Agreement further provides that the Company shall not, without the
prior written consent of NBC, enter into certain agreements or adopt certain
plans, as set forth in the Stockholder Agreement, which would be breached or
violated upon the acquisition of the Company securities by NBC or its affiliates
or would otherwise restrict or impede the ability of NBC or its affiliates to
acquire additional shares of capital stock of the Company.
The Company and NBC have entered into a number of agreements affecting the
Company's business operations, including an agreement under which NBC provides
network sales, marketing and research services for the Company's PAX TV Network,
and Joint Sales Agreements ("JSA") between the Company's stations and NBC's
owned and operated stations serving the same markets. Pursuant to the terms of
the JSAs, the NBC stations sell all non-network spot advertising of the
Company's stations and receive commission compensation for such sales and the
Company's stations may agree to carry one hour per day of the NBC station's
syndicated or news programming. Certain Company station operations, including
sales operations, are integrated with the corresponding functions of the related
NBC station and the Company reimburses NBC for the cost of performing these
operations. During the year ended December 31, 2000, the Company paid or accrued
amounts due to NBC totaling approximately $17.8 million for commission
compensation and cost reimbursements incurred in conjunction with these
agreements.
3. DP MEDIA
In June 2000, the Company completed the acquisition of DP Media for
aggregate consideration of $113.5 million, $106.0 million of which had
previously been advanced by the Company during 1999. DP Media's assets included
a 32% equity interest in a limited liability company controlled by the former
stockholders of DP Media, which owns television station WWDP in Norwell,
Massachusetts. The Company is entitled to receive a 45% distribution of the
proceeds upon sale of the station which, pursuant to the terms of the limited
liability agreement, must be sold by March 2003. The Company allocated the
aggregate purchase price of DP Media to the assets acquired and liabilities
assumed based on their relative fair market values. The assets, liabilities and
results of operations of WWDP are no longer consolidated within the financial
statements of the Company. The Company accounts for its equity interest in WWDP
utilizing the equity method of accounting and has recorded its equity investment
in WWDP within other assets as of December 31, 2000.
During the third quarter of 1999, the Company advanced funds to DP Media
which were utilized to fund operating cash flow needs. As a result of the
Company's significant operating relationships with DP Media and its funding of
DP Media's operating cash flow needs, the assets and liabilities of DP Media,
together with their results of operations were included in the Company's
consolidated financial statements since September 30, 1999. In consolidating DP
Media, at December 31, 1999, the Company recorded current assets of
approximately $4.3 million, current liabilities of approximately $1.3 million,
property, plant and equipment of approximately $22.2 million, intangible assets
of approximately $72.2 million and other assets of approximately $2.6 million.
In August 1999, a subsidiary of DP Media repaid notes receivable to the
Company of $15.5 million and $15.0 million in connection with its acquisition of
WBPX in Boston and WHPX in Hartford. Both WBPX and WHPX were indirectly acquired
from the Company by DP Media in prior years and have been reflected in the
accompanying consolidated balance sheet as of December 31, 1999 at the Company's
approximate historical cost.
During August 1998, the Company advanced $1.75 million to DP Media in
connection with its acquisition of WIPX in Bloomington, Indiana and was repaid
these amounts at the closing of the acquisition transaction.
During 1998, the Company sold two television stations to DP Media for
aggregate consideration of approximately $13 million. The stations, which serve
the Grand Rapids and Milwaukee markets, became
F-12
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PAX TV affiliates upon their acquisition by DP Media. No significant gain or
loss was recorded in connection with these transactions.
Before the acquisition of DP Media, the Company and DP Media had entered
into various operating agreements including affiliation, services and commercial
representation, and sales agreements. Subsequent to the consolidation of DP
Media in September 1999, all intercompany transactions with DP Media have been
eliminated. Prior to consolidation, the Company recorded time brokerage and
affiliation fees related to stations owned by DP Media totaling approximately
$13.6 million in 1999 and $5.7 million in 1998. Additionally, during 1999, the
Company recorded commission revenue of $404,000 under its services and
commercial representation agreements with DP Media.
4. JSA RESTRUCTURING
In connection with the NBC strategic relationship, the Company entered into
JSAs with certain of NBC's owned and operated stations in 1999 and 2000. During
the fourth quarter of 2000, the Company approved a plan to restructure its
television station operations by entering into JSAs primarily with NBC affiliate
stations in each of the Company's remaining non-JSA markets. To date, the
Company has entered into JSAs for 45 of its television stations, 19 of which
entered into JSAs before adoption of the formal JSA restructuring plan. Under
the JSA structure, the Company generally terminates its station sales staff. The
JSA partner then provides local and national spot advertising sales management
and representation to the Company station and integrates and co-locates the
Company station operations. The Company's restructuring plan includes two major
components: (1) termination of 226 station sales and administrative employees;
and (2) exiting Company studio and sales office leased properties. These
restructuring activities resulted in a charge of approximately $5.8 million in
the fourth quarter of 2000 consisting of $2.7 million of termination benefits
and $3.1 million of costs associated with exiting leased properties which will
no longer be utilized upon implementation of the JSAs. Through December 31,
2000, the Company paid termination benefits to five employees totaling
approximately $83,000 which were charged against the restructuring reserve. The
Company expects to be substantially complete with the restructuring plan by the
end of 2001; however, certain lease obligations may continue through mid-2002.
During 2000, the Company recognized severance and lease termination costs
related to JSAs entered into before management's approval of the restructuring
plan totaling approximately $942,000 which are included in selling, general and
administrative expenses.
5. CERTAIN TRANSACTIONS WITH RELATED PARTIES
In addition to the transactions with NBC described in Note 2, the Company
has entered into certain operating and financing transactions with related
parties as described below.
The Christian Network, Inc.
The Company has entered into several agreements with The Christian Network,
Inc. and certain of its for profit subsidiaries (individually and collectively
referred to herein as "CNI"). The Christian Network, Inc. is a section 501(c)(3)
not-for-profit corporation to which Mr. Paxson, the majority stockholder of the
Company, has been a substantial contributor and of which he was a member of the
Board of Stewards through 1993.
In connection with the NBC transactions described elsewhere herein, the
Company entered into a Master Agreement for Overnight Programming, Use of
Digital Capacity and Public Interest Programming with CNI, pursuant to which the
Company granted CNI, for a term of 50 years (with automatic ten year renewals,
subject to certain limited conditions), certain rights to continue broadcasting
CNI's programming on Company stations during the hours of 1:00 a.m. to 6:00 a.m.
When digital programming begins, the Company will make a digital channel
available for CNI's use for 24 hour CNI digital programming.
F-13
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in Broadcast Properties. In April 1998, DP Media contracted to
acquire WBPX in Boston, a PAX TV affiliate, for $18 million, including the
assumption of CNI's obligations to the Company totaling approximately $15.5
million. In February of 1999 DP Media's acquisition of WBPX was completed.
CNI Agreement. The Company and CNI entered into an agreement in May 1994
(the "CNI Agreement") under which the Company agreed that, if the tax exempt
status of CNI were jeopardized by virtue of its relationships with the Company
and its subsidiaries, the Company would take certain actions to ensure that
CNI's tax exempt status would no longer be so jeopardized. Such steps could
include, but not be limited to, rescission of one or more transactions or
payment of additional funds by the Company. If the Company's activities with CNI
are consistent with the terms governing their relationship, the Company believes
that it will not be required to take any actions under the CNI Agreement.
However, there can be no assurance that the Company will not be required to take
any actions under the CNI Agreement at a material cost to the Company.
Worship Channel Studio. CNI and the Company have contracted for the
Company to lease CNI's television production and distribution facility, the
Worship Channel Studio. The Company utilizes this facility primarily as its
network operations center and originates the PAX TV network signal from this
location. During the years ended December 31, 2000, 1999 and 1998, the Company
incurred rental charges in connection with this agreement of $199,000, $195,000
and $252,000, respectively.
AIRCRAFT LEASE
During 1997, the Company entered into a three year aircraft lease with a
company which is owned by Mr. Paxson. The lease is for a Boeing 727 aircraft
with monthly payments of approximately $64,000. The Company continued to lease
the Boeing 727 aircraft on a month to month basis through December 2000.
Effective, January 1, 2001 the Company no longer leases the aircraft. In
connection with such lease, the Company incurred rental costs of approximately
$759,000, $763,000 and $763,000 during the years ended December 31, 2000, 1999
and 1998, respectively.
BOARD OF DIRECTORS
The Company has entered into transactions with certain current and former
members of its Board of Directors.
Vice Chairman of the Board of Directors. In May 1998, the Board of
Directors of the Company elected a Vice Chairman of the Board. In connection
with this appointment, an affiliate of the Vice Chairman received fully vested
warrants to acquire 155,500 shares of Class A common stock at an exercise price
of $16 per share (see Note 15). The warrants were valued at approximately
$622,000, which was recorded as stock-based compensation at the time the
warrants were issued.
In June 1998, an affiliate of the Vice Chairman purchased $10 million of
the Company's mandatorily redeemable convertible preferred stock and warrants to
purchase 32,000 shares of Class A common stock at an exercise price of $16 per
share. In connection with the Company's offering of such stock, the affiliate of
the Vice Chairman received a consulting fee of $500,000 and an underwriting fee
of $550,000 for the placement of additional shares of mandatorily redeemable
convertible preferred stock. The Company recorded such fees as issuance costs in
connection with the sale of the preferred stock.
In March 2000, the Company reduced the exercise price of all of the
warrants held by the previously described affiliate of the Vice Chairman from
$16.00 per share to $12.60 per share resulting in a stock based compensation
charge of approximately $139,000.
Stockholders Agreement. Certain entities controlled by Mr. Paxson and
entities which are affiliates of a former director of the Company are parties to
a stockholders agreement whereby the parties to such
F-14
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement were granted registration rights with respect to certain shares of
common stock held by such parties and the right of first refusal to acquire a
pro rata share of any new securities the Company may issue. Additionally, the
stockholders agreement grants certain cosale rights if Mr. Paxson should sell
more than a predetermined percentage of his ownership interest in the Company.
6. ACQUISITIONS AND DIVESTITURES
In addition to the acquisition of DP Media described in Note 3, during
2000, the Company acquired the assets of four television stations (including
construction permits) for total consideration of approximately $68.7 million of
which $10.9 million was paid in prior years. Additionally, the Company paid
approximately $8.9 million of consideration for a prior year acquisition. During
1999, the Company acquired the assets of five television stations (including
construction permits), for total consideration of approximately $65.6 million.
In February 1999, the Company also completed its acquisition of WCPX in Chicago
by transferring its interest in KWOK in San Francisco as partial consideration
for WCPX. In connection with the transfer of ownership of KWOK, the Company
recognized a pre-tax gain of approximately $23.8 million. During 1998, the
Company acquired the assets of 26 television stations (including construction
permits), for total consideration of approximately $591.4 million.
During 2000, the Company sold interests in four stations for aggregate
consideration of approximately $14.5 million and realized pre-tax gains of
approximately $1.3 million on these sales. During 1999, the Company sold its
interests in four stations for aggregate consideration of approximately $61
million and realized pre-tax gains of approximately $18.7 million on these
sales. In addition, in February 1999, the Company sold its 30% interest in The
Travel Channel, L.L.C. ("The Travel Channel") for aggregate consideration of
approximately $55 million and realized a pre-tax gain of approximately $17
million. The results of operations of The Travel Channel have been included in
the Company's December 31, 1999 and 1998 consolidated statement of operations
using the equity method of accounting through the date of sale. During 1998, the
Company sold its interests in three stations for aggregate consideration of
$79.5 million and realized a gain of approximately $51.6 million.
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<Table>
<Caption>
2000 1999
--------- --------
Broadcasting towers and equipment........................... $ 229,414 $212,550
Office furniture and equipment.............................. 20,012 19,552
Buildings and leasehold improvements........................ 21,446 20,982
Land and land improvements.................................. 3,417 5,986
Aircraft, vehicles and other................................ 3,905 3,832
--------- --------
278,194 262,902
Accumulated depreciation.................................... (103,545) (72,994)
--------- --------
Property and equipment, net................................. $ 174,649 $189,908
========= ========
</Table>
Depreciation expense aggregated approximately $37.7 million, $28.4 million
and $20.7 million for the years ended December 31, 2000, 1999 and 1998,
respectively. In connection with restructuring activities described in Note 4,
the Company identified certain leasehold improvements and office furniture and
equipment which will no longer be used in its operations upon exiting certain
leased properties in 2001. The Company has prospectively shortened the estimated
remaining useful lives through the expected disposal date of these assets
resulting in approximately $2.1 million of additional depreciation expense in
2000.
F-15
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<Table>
<Caption>
2000 1999
---------- ----------
FCC licenses and goodwill................................... $ 969,052 $ 892,674
Cable distribution rights................................... 101,172 93,003
Satellite distribution rights............................... 20,345 15,004
Covenants not to compete.................................... 4,364 5,574
Favorable lease and other contracts......................... 2,003 511
---------- ----------
1,096,936 1,006,766
Accumulated amortization.................................... (147,322) (90,621)
---------- ----------
Intangible assets, net...................................... $ 949,614 $ 916,145
========== ==========
</Table>
Amortization expense related to intangible assets aggregated $59.2 million,
$49.5 million and $29.3 million for the years ended December 31, 2000, 1999 and
1998, respectively.
9. PROGRAM RIGHTS
Program rights consist of the following (in thousands):
<Table>
<Caption>
2000 1999
--------- ---------
Program rights.............................................. $ 512,804 $ 400,737
Accumulated amortization.................................... (314,221) (191,035)
--------- ---------
198,583 209,702
Less: current portion....................................... (79,160) (79,686)
--------- ---------
Program rights, net......................................... $ 119,423 $ 130,016
========= =========
</Table>
Program rights amortization expense aggregated $100.3 million, $91.8
million and $31.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
In addition to its existing inventory of program rights, the Company
continues to develop additional original programming and purchase additional
syndicated programs, as well as negotiate with NBC for the acquisition of
programming. The Company has entered into certain Joint Sales Agreements with
NBC and NBC affiliated television station operators whereby the Company expects
to obtain rights to additional news or syndicated programming. As a result of
these factors, the Company adjusted its estimates of the anticipated future
usage of its existing programming assets and the related advertising revenues to
be generated by such programming and recorded an expense of approximately $24.4
million related to reduction of the carrying value of certain of its programming
rights to net realizable value during 2000. In addition, in 1999 the Company
adjusted the carrying value of certain of its program rights to net realizable
value resulting in an expense of approximately $70.5 million.
In March 2000, the Company gave up its rights to air certain syndicated
programming, in exchange for approximately $4.9 million in cash and forgiveness
of the remaining programming rights payments due under the original programming
agreement. This transaction resulted in a gain of approximately $9.9 million. In
September 2000, the Company assigned certain other programming rights to a third
party who assumed the Company's remaining payment obligation. In connection with
this transaction, $2.8 million of deferred gain was recorded. The deferred gain
is being amortized over the term of the third party's assumed payments as the
Company remains liable should the third party default. Approximately $311,000 of
this deferred gain was recognized into income in 2000.
F-16
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2000, the Company's programming contracts require
collective payments by the Company of approximately $219.4 million as follows
(in thousands):
<Table>
<Caption>
OBLIGATIONS FOR PROGRAM
PROGRAM RIGHTS
RIGHTS COMMITMENTS TOTAL
--------------- ----------- --------
2001.............................................. $ 88,336 $19,158 $107,494
2002.............................................. 54,962 12,816 67,778
2003.............................................. 18,273 8,692 26,965
2004.............................................. 6,106 6,650 12,756
2005.............................................. -- 4,433 4,433
-------- ------- --------
$167,677 $51,749 $219,426
======== ======= ========
</Table>
The Company has also committed to purchase at similar terms additional
future episodes of certain of these programs should they be made available.
10. OBLIGATIONS FOR CABLE DISTRIBUTION RIGHTS
As of December 31, 2000, obligations for cable distribution rights require
collective payments by the Company of approximately $22.8 million as follows (in
thousands):
<Table>
<Caption>
2001........................................................ $19,840
2002........................................................ 2,624
2003........................................................ 260
2004........................................................ 108
-------
22,832
Less: Amount representing interest.......................... (2,020)
-------
Present value of obligations for cable distribution
rights.................................................... $20,812
=======
</Table>
11. SENIOR SUBORDINATED NOTES AND BANK FINANCING
Senior subordinated notes and bank financing consists of the following (in
thousands):
<Table>
<Caption>
2000 1999
-------- --------
11 5/8% Senior Subordinated Notes, due 2002................. $230,000 $230,000
Senior Bank Credit Facility, maturing June 30, 2002,
interest at LIBOR plus 3.50% or base rate plus 2.50%, at
the Company's option
(10.26% at December 31, 2000), quarterly principal
payments commencing January 2001.......................... 122,000 122,000
Equipment facility, as amended in March 2001, maturing June
30, 2002, interest at the Index Rate, as defined, plus
2.75% per annum, LIBOR plus 3.75% per annum or the
commercial paper rate plus 3.75% per annum, at the
Company's option (10.11% at December 31, 2000), secured by
purchased assets.......................................... 53,689 36,003
Other....................................................... 648 1,724
-------- --------
406,337 389,727
Less: discount on Senior Subordinated Notes................. (861) (1,306)
Less: current portion....................................... (15,966) (18,698)
-------- --------
$389,510 $369,723
======== ========
</Table>
F-17
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 28, 1995, the Company issued $230 million of senior
subordinated notes (the "Notes") at a discount, netting proceeds of
approximately $227.3 million to the Company. Interest on the Notes accrues at
11.625% to yield an effective rate per annum of 11.875%. Interest payments are
payable semiannually on each April 1 and October 1. The principal balance is due
at maturity on October 1, 2002.
The Notes contain certain covenants which, among other things, restrict
additional indebtedness, payment of dividends, stock issuance of subsidiaries,
certain investments and transfers or sales of assets, and provide for the
repurchase of the Notes in the event of a change in control of the Company. The
Notes are general unsecured obligations of the Company subordinate in right of
payment to all existing and future senior indebtedness of the Company and senior
in right to all future subordinated indebtedness of the Company.
The Notes are currently redeemable at the option of the Company through
September 30, 2001 at 102% of the face value plus accrued interest. Commencing
October 1, 2001 through maturity, the Notes are redeemable at the option of the
Company at 100% of the face value plus accrued interest.
In 2000, the Company entered into three amendments of its Senior Bank
Credit Facility. The amended terms include: (1) requiring the Company to make
certain escrow deposits if it does not meet certain quarterly financial ratios;
(2) allowing the Company to sell its communications towers and related
equipment; (3) allowing the Company to sell its accounts receivable; (4)
adjustment to the timing and amounts of principal payments; (5) amendment of
certain financial covenants. In connection with the amendments, the interest
rates under the agreement were increased to 2.50% over base rate or 3.50% over
LIBOR. At December 31, 2000, $13.7 million was deposited in escrow pursuant to
the amended terms of the facility. Under the current terms, the Company is
required to make principal payments of $2.5 million in 2001, $10 million on
March 31, 2002 and $109.5 million on June 30, 2002. Should the Company not meet
certain future quarterly financial ratios, the Company will be required to
deposit quarterly into escrow an amount equal to principal amortization due in
the following quarter and annualized interest as calculated under the terms of
the agreement. Unless the credit agreement is amended or refinanced, the Company
believes that, more likely than not, it will be required to make the future
escrow deposits previously described.
In March 2001, the Company and its lender amended its equipment credit
facility (the "Equipment Facility") as follows: (1) the maximum borrowing
capacity was increased from $65 million to $85 million with availability through
June 30, 2002; and (2) scheduled principal amortization was eliminated and
replaced with a requirement to repay in full amounts outstanding on June 30,
2002. In connection with the amendment, the interest rates were increased to
Index Rate, as defined, plus 2.75%, LIBOR plus 3.75% or commercial paper rate
plus 3.75%, at the Company's option. The Company paid a $200,000 origination fee
for the increased commitment.
Under the Senior Bank Credit Facility and the Equipment Facility, the
Company is required to maintain certain financial ratios commencing March 31,
2001 and December 31, 2001, respectively. In addition, these credit facilities
contain a number of covenants that restrict, among other things, the Company's
ability to incur additional indebtedness, incur liens, make investments, pay
dividends or make other restricted payments, consummate certain asset sales,
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the Company.
F-18
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities of senior subordinated notes and bank financing at
December 31, 2000 are as follows (in thousands):
<Table>
<Caption>
2001........................................................ $ 15,966
2002........................................................ 367,445
2003........................................................ 22,424
2004........................................................ 59
2005........................................................ 65
Thereafter.................................................. 378
--------
$406,337
========
</Table>
12. INCOME TAXES
Income tax (expense) benefit included in the consolidated statements of
operations follows (in thousands):
<Table>
<Caption>
2000 1999 1998
----- ------- -------
Continuing operations....................................... $(120) $57,257 $37,389
Discontinued operations..................................... -- -- (4,505)
----- ------- -------
$(120) $57,257 $32,884
===== ======= =======
</Table>
The (provision) benefit for federal and state income taxes for the three
years ended December 31, 2000, 1999 and 1998 is as follows (in thousands):
<Table>
<Caption>
2000 1999 1998
----- ------- -------
Current:
Federal................................................... $ -- $ 975 $ --
State..................................................... (120) (1,827) (4,754)
----- ------- -------
$(120) $ (852) $(4,754)
===== ======= =======
Deferred:
Federal................................................ $ -- $51,293 $33,676
State.................................................. -- 6,816 3,962
----- ------- -------
$ -- $58,109 $37,638
===== ======= =======
</Table>
F-19
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and deferred tax liabilities reflect the tax effect of
differences between financial statement carrying amounts and tax bases of assets
and liabilities as follows (in thousands):
<Table>
<Caption>
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards.......................... $190,365 $125,699
Programming rights........................................ 14,980 18,667
Deferred compensation..................................... 14,987 13,199
Other..................................................... 4,335 3,637
-------- --------
224,667 161,202
Deferred tax asset valuation allowance.................... (84,204) (27,429)
-------- --------
140,463 133,773
Deferred tax liabilities:
Basis difference on fixed and intangible assets........... (140,463) (133,773)
-------- --------
Net deferred tax liabilities........................... $ -- $ --
======== ========
</Table>
The reconciliation of income tax provision (benefit) attributable to
continuing operations, computed at the U.S. federal statutory tax rate, to the
provision for income taxes is as follows (in thousands):
<Table>
<Caption>
2000 1999 1998
-------- -------- --------
Tax benefit at U.S. federal statutory tax rate......... $(62,442) $(76,170) $(43,132)
State income tax benefit, net of federal tax........... (5,145) (6,426) (320)
Non deductible items................................... 1,548 1,198 2,364
Valuation allowance.................................... 63,498 24,358 --
Other.................................................. 2,661 (217) 3,699
-------- -------- --------
Provision (benefit) for income taxes................... $ 120 $(57,257) $(37,389)
======== ======== ========
</Table>
The Company has recorded a valuation allowance for its net deferred tax
assets at December 31, 2000, as it believes it is more likely than not that it
will be unable to utilize its deferred tax assets. During the year ended
December 31, 1999, the Company recognized a deferred tax benefit to the extent
that the Company had offsetting deferred tax liabilities.
The Company has net operating loss carryforwards for income tax purposes
subject to certain carryforward limitations of approximately $501 million at
December 31, 2000 expiring through 2020. A portion of the net operating losses,
amounting to approximately $7.9 million, are limited to annual utilization as a
result of a change in ownership occurring when the Company acquired the
subsidiary. The Company has recorded a valuation allowance in connection with
the deferred tax asset relating to the net operating losses subject to
limitation. Additionally, further limitations on the utilization of the
Company's net operating tax loss carryforwards could result in the event of
certain changes in the Company's ownership.
13. STOCK INCENTIVE PLANS
The Company has established various stock incentive plans to provide
incentives to officers, employees and others who perform services for the
Company through awards of options and shares of restricted stock. Awards granted
under the plans are at the discretion of the Company's Compensation Committee
and may be in the form of either incentive or nonqualified stock options or
awards of restricted stock. Options granted under the plans generally vest over
a five year period and expire ten years after the date of grant. At December 31,
2000, 276,861 shares of Class A common stock were available for additional
awards under the plans.
F-20
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
When options are granted to employees, a non-cash charge representing the
difference between the exercise price and the fair market value of the common
stock underlying the vested options on the date of grant is recorded as
stock-based compensation expense with the balance deferred and amortized over
the remaining vesting period. For the years ended December 31, 2000, 1999 and
1998, the Company recognized approximately $13.9 million, $16.8 million and
$10.4 million, respectively, of stock-based compensation expense related to
options and warrants and expects to recognize an additional expense of
approximately $7 million over the next five years as such outstanding options
vest. Stock-based compensation relates primarily to selling, general and
administrative expenses.
In May 2000, the Compensation Committee of the Board of Directors approved
certain amendments to the terms of the stock options previously granted under
the Company's stock option plans. The amendments were as follows: (1) to extend
the exercise period in the event of an involuntary termination other than for
cause to three years from the date of termination (or the original expiration,
if earlier); (2) to extend the exercise period in the event of a voluntary
termination to one year from the date of termination (or the original
expiration, if earlier); and (3) to retroactively revise the vesting schedule
for those options which included a deferred vesting schedule over a five year
period at the rates of 10%, 15%, 20%, 25% and 30% per year to a vesting schedule
at the rate of 20% per year over a five year period. These modifications
resulted in a new measurement date for purposes of measuring compensation
expense for stock options outstanding at the date of the modification. However,
no additional compensation expense was recognized as the intrinsic value at the
modification date did not exceed the intrinsic value at the original measurement
date.
During 1999, the Company modified the terms of certain stock options in
connection with the termination of employment of the holders. Included in
stock-based compensation expense is $2.1 million reflecting the additional
intrinsic value of those awards at the date of modification. Also in 1999, the
Compensation Committee of the Board of Directors reduced the per share exercise
price of 840,000 unvested stock options held by the Company's CEO to $.01 and
360,000 vested stock options held by the Company's CEO to $1.00. The Company
recognized stock based compensation of approximately $5.7 million and $8.2
million for the years ended December 31, 2000 and 1999, respectively, related to
these options.
In October 1999, the Company amended the terms of substantially all of its
outstanding employee stock options to provide for certain accelerated vesting of
the options in the event of termination of employment with the Company as a
result of the consolidation of Company operations or functions with those of NBC
or within six months preceding or three years following a change in control of
the Company. Were such events to occur, the Company could be required to
recognize stock-based compensation expense at earlier dates than currently
expected.
F-21
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's 1994, 1996 and 1998 stock option plans as of
December 31, 2000 and 1999 and changes during the three years ending December
31, 2000 is presented below:
<Table>
<Caption>
2000 1999 1998
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- --------- --------
Outstanding,
beginning of
year............... 8,891,061 $6.31 9,341,662 $5.86 3,605,461 $3.28
Granted.............. 515,000 7.25 2,364,000 7.25 6,279,500 7.23
Forfeited............ (366,925) 6.88 (1,612,500) 7.21 (228,000) 6.36
Exercised............ (1,264,850) 4.40 (1,202,101) 3.46 (315,299) 3.22
---------- ---------- ---------
Outstanding, end of
year............... 7,774,286 6.66 8,891,061 6.31 9,341,662 5.86
========== ========== =========
Weighted average fair
value of options
granted during the
year............... 6.88 6.90 9.14
</Table>
The majority of the Company's option grants have been at exercise prices of
$7.25 and $3.42, prices which have historically been below the fair market value
of the underlying common stock at the date of grant.
The following table summarizes information about employee and director
stock options outstanding and exercisable at December 31, 2000:
<Table>
<Caption>
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 2000 LIFE 2000
--------------- -------------- ------------ --------------
$0.01............................................ 840,000 7 300,000
$1.00............................................ 360,000 7 360,000
$3.42............................................ 1,188,850 4 1,067,961
$7.25............................................ 5,385,436 8 2,328,725
--------- ---------
7,774,286 4,056,686
========= =========
</Table>
Had compensation expense for the Company's option plans been determined
using the fair value method the Company's net loss and net loss per share would
have been as follows (in thousands except per share data):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Net loss available to common stockholders:
As reported....................................... $(391,329) $(314,579) $(137,955)
Pro forma......................................... (402,495) (319,919) (144,743)
Basic and diluted net loss per share:
As reported....................................... $ (6.16) $ (5.10) $ (2.29)
Pro forma......................................... (6.34) (5.18) (2.40)
</Table>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model assuming a dividend yield of 0.0%,
expected volatility range of 50% to 73%, and risk free interest rates of 4.83%
to 6.9% and weighted average expected option terms of .5 to 7.5 years.
F-22
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the options granted under its stock incentive plans, the
Company has granted nonqualified options to purchase 3,200,000 (3,100,000 in
1999) shares of Class A common stock to members of senior management and others.
These grants consist primarily of options granted in 1999 to purchase 1,000,000
shares of Class A common stock, which vest over three years and expire in ten
years, and options to purchase 2,000,000 shares which vest over four years and
expire in ten years. The exercise price for options vesting on the first
anniversary is $10. The exercise prices for options vesting on the second
anniversary are $12.03 (options to purchase 333,333 shares) and $11.68 (options
to purchase 500,000 shares). The exercise price for options vesting on
subsequent anniversaries will be the lower of a range between $18 and $21, or
the fair market value of the common stock on the prior anniversary date. The
Company recognized stock based compensation related to these grants of
approximately $2.3 million and $873,000 for the years ended December 2000 and
1999, respectively. The options granted which vest subsequent to the second year
are being accounted for as variable plans and the ultimate compensation expense
for such options cannot be determined until their vesting date.
14. REDEEMABLE PREFERRED STOCK
The following represents a summary of the changes in the Company's
mandatorily redeemable preferred stock during the three years ended December 31,
2000 and the aggregate liquidation preference as of December 31, 2000 (in
thousands):
<Table>
<Caption>
JUNIOR
EXCHANGEABLE SERIES B
JUNIOR EXCHANGEABLE PREFERRED CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED STOCK PREFERRED PREFERRED
STOCK 12% STOCK 12- 1/2% 13- 1/4% STOCK 9- 3/4% STOCK 8% TOTAL
--------- -------------- ------------ ------------- ----------- ----------
Balance at December 31,
1997................... $42,612 $168,375 $ -- $ -- $ -- $ 210,987
Issuances.............. -- -- 190,000 70,747 -- 260,747
Accretion.............. 681 670 646 271 -- 2,268
Accrual of cumulative
dividends........... 5,803 22,472 14,986 4,138 -- 47,399
------- -------- -------- ------- -------- ----------
Balance at December 31,
1998................... 49,096 191,517 205,632 75,156 -- 521,401
Issuances.............. -- -- -- -- 339,837 339,837
Accretion.............. 697 673 1,164 486 6,715 9,735
Accrual of cumulative
dividends........... 6,519 25,371 29,430 8,002 9,683 79,005
Cash dividends......... (171) -- -- -- -- (171)
------- -------- -------- ------- -------- ----------
Balance at December 31,
1999................... 56,141 217,561 236,226 83,644 356,235 949,807
Accretion.............. 714 676 1,170 489 23,422 26,471
Accrual of cumulative
dividends........... 7,092 28,641 33,458 8,812 33,200 111,203
Cash dividends......... (7,092) -- -- -- -- (7,092)
------- -------- -------- ------- -------- ----------
Balance at December 31,
2000................... $56,855 $246,878 $270,854 $92,945 $412,857 $1,080,389
======= ======== ======== ======= ======== ==========
Aggregate liquidation
preference at December
31, 2000............... $59,102 $250,833 $277,874 $95,952 $457,883 $1,141,644
======= ======== ======== ======= ======== ==========
</Table>
F-23
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Junior Preferred Stock 12%
At December 31, 2000 and 1999, the Company had 33,000 shares of $0.001 par
value Junior Preferred Stock authorized, issued and outstanding (the "Junior
Preferred Stock"). Holders of the Junior Preferred Stock are entitled to
cumulative dividends at an annual rate of 12% prior to December 22, 2001, 13%
from December 23, 2001 to December 22, 2002, and 14% per annum thereafter.
Semi-annual dividend payments commenced December 31, 1999.
The Junior Preferred Stock is currently redeemable, at the option of the
Company, at par plus unpaid, deferred, and accrued dividends. The shares are
subject to mandatory redemption on December 22, 2003. The Company paid cash
dividends of approximately $7.1 million and $171,000 in 2000 and 1999,
respectively.
Junior Preferred Stock dividends in arrears aggregated approximately $26.1
million at December 31, 2000 and 1999.
Cumulative Exchangeable Preferred Stock 12 1/2%
At December 31, 2000, the Company had authorized 440,000 shares of $0.001
par value Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred
Stock") of which 245,706 and 217,649 were issued and outstanding as of December
31, 2000 and 1999, respectively. Holders of Exchangeable Preferred Stock are
entitled to cumulative dividends at an annual rate of 12.5% of the liquidation
preference, payable semi-annually in cash or additional shares beginning April
30, 1997. The Company is required to make dividend payments in cash after
October 31, 2002.
The Company is required to redeem all of the then outstanding Exchangeable
Preferred Stock on October 31, 2006 at a price equal to the aggregate
liquidation preference thereof plus accumulated and unpaid dividends to the date
of redemption. The Exchangeable Preferred Stock is redeemable at the Company's
option on or after October 31, 2001 at the redemption prices set forth below
(expressed as a percentage of liquidation preference) plus accumulated and
unpaid dividends to the date of redemption:
<Table>
<Caption>
TWELVE MONTH PERIOD
BEGINNING OCTOBER 31,
---------------------
2001........................................................ 106.250%
2002........................................................ 104.167%
2003........................................................ 102.083%
2004 and thereafter......................................... 100.000%
</Table>
Upon a change of control, the Company is required to offer to purchase the
Exchangeable Preferred Stock at a price equal to 101% of the liquidation
preference thereof plus accumulated and unpaid dividends.
The Company may, provided it is not contractually prohibited from doing so,
exchange the outstanding Exchangeable Preferred Stock for 12.5% Exchange
Debentures due 2006. Additionally, the Company has agreed to exchange all
outstanding Exchangeable Preferred Stock for 12.5% Exchange Debentures within 60
days from the date on which the Company is no longer contractually prohibited
from effecting such exchange. The 12.5% Exchange Debentures have redemption
features similar to those of the Exchangeable Preferred Stock.
During 2000, 1999 and 1998, the Company paid dividends of approximately
$28.1 million, $24.9 million, $22.0 million, respectively, by the issuance of
additional shares of Exchangeable Preferred Stock. Accrued Exchangeable
Preferred Stock dividends since the last dividend payment date aggregated
approximately $5.1 million and $4.5 million at December 31, 2000 and 1999,
respectively.
F-24
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Junior Exchangeable Preferred Stock 13 1/4%
During 1998, the Company issued 20,000 shares of Cumulative Junior
Exchangeable Preferred Stock (the "Junior Exchangeable Preferred Stock") with an
aggregate $200 million liquidation preference for gross proceeds of an
equivalent amount. At December 31, 2000 and 1999, the Company had authorized
72,000 shares of $0.001 par value Junior Exchangeable Preferred Stock of which
27,335 and 24,043 were issued and outstanding, respectively. Holders of the
Junior Exchangeable Preferred Stock are entitled to cumulative dividends at an
annual rate of 13 1/4% of the liquidation preference, payable semi-annually in
cash or additional shares beginning November 15, 1998 and accumulating from the
issue date. If dividends for any period ending after May 15, 2003 are paid in
additional shares of Junior Exchangeable Preferred Stock, the dividend rate will
increase by 1% per annum for such dividend payment period.
The Company is required to redeem all of the then outstanding Junior
Exchangeable Preferred Stock on November 15, 2006, at a price equal to the
aggregate liquidation preference thereof plus accumulated and unpaid dividends
to the date of redemption. The Junior Exchangeable Preferred Stock is redeemable
at the Company's option at any time on or after May 15, 2003, at the redemption
prices set forth below (expressed as a percentage of liquidation preference)
plus accumulated and unpaid dividends to the date of redemption:
<Table>
<Caption>
TWELVE MONTH PERIOD
BEGINNING MAY 15,
-------------------
2003........................................................ 106.625%
2004........................................................ 103.313%
2005 and thereafter......................................... 100.000%
</Table>
Prior to May 15, 2001, the Company may use the proceeds of certain public
stock offerings or major asset sales to redeem up to an aggregate of 35% of the
shares of Junior Exchangeable Preferred Stock outstanding at 113.25% of the
aggregate liquidation preference of such shares, plus accumulated and unpaid
dividends. Upon a change of control, the Company is required to offer to
purchase the Junior Exchangeable Preferred Stock at a price equal to 101% of the
liquidation preference thereof plus accumulated and unpaid dividends.
The Company may, provided it is not contractually prohibited from doing so,
exchange the outstanding Junior Exchangeable Preferred Stock on any dividend
payment date for 13 1/4% Exchange Debentures due 2006. The Exchange Debentures
have redemption features similar to those of the Junior Exchangeable Preferred
Stock.
During 2000, 1999 and 1998, the Company paid dividends of approximately
$32.9 million, $28.9 million and $11.5 million, respectively, by the issuance of
additional shares of Junior Exchangeable Preferred Stock. Accrued Junior
Exchangeable Preferred Stock dividends since the last dividend payment date
aggregated approximately $4.5 million and $4.0 million at December 31, 2000 and
1999, respectively.
Convertible Preferred Stock 9 3/4%
During 1998, the Company issued 7,500 shares of Series A Convertible
Preferred Stock ("Convertible Preferred Stock") with an aggregate liquidation
preference of $75 million, and warrants to purchase 240,000 shares of Class A
common stock. At December 31, 2000 and 1999, the Company had authorized 17,500
shares of $0.001 par value Convertible Preferred Stock of which 9,595 and 8,714
were issued and outstanding, respectively. Of the gross proceeds of $75 million,
approximately $960,000 was allocated to the value of the warrants, which are
exercisable at a price of $16 per share through June 2003. Holders of the
Convertible Preferred Stock are entitled to receive cumulative dividends at an
annual rate of 9 3/4%, payable quarterly beginning September 30, 1998 and
accumulating from the issue date. The Company may pay dividends either in cash,
in additional shares of Convertible Preferred Stock, or (subject to an increased
dividend rate) by the issuance of shares of Class A common stock equal in value
to the amount of such dividends.
F-25
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 2000, 1999 and 1998, the Company paid dividends of approximately
$8.8 million, $8.0 million and $4.1 million, respectively, by the issuance of
additional shares of Convertible Preferred Stock. At December 31, 2000 and 1999,
there were no accrued and unpaid dividends on the Convertible Preferred Stock.
The Company is required to redeem the Convertible Preferred Stock on
December 31, 2006, at a price equal to the aggregate liquidation preference
thereof plus accumulated and unpaid dividends to the date of redemption. The
Convertible Preferred Stock is redeemable at the Company's option at any time on
or after June 30, 2003, at the redemption prices set forth below (expressed as a
percentage of liquidation preference) plus accumulated and unpaid dividends to
the date of redemption:
<Table>
<Caption>
TWELVE MONTH PERIOD
BEGINNING JUNE 30,
-------------------
2003........................................................ 104.000%
2004........................................................ 102.000%
2005 and thereafter......................................... 100.000%
</Table>
Upon a change of control, the Company is required to offer to purchase the
Convertible Preferred Stock at a price equal to the liquidation preference
thereof plus accumulated and unpaid dividends. The Convertible Preferred Stock
contains restrictions, primarily based on the trading price of the common stock,
on the issuance of additional preferred stock ranking senior to the Convertible
Preferred Stock.
Each share of Convertible Preferred Stock is convertible into shares of
Class A common stock at an initial conversion price of $16 per share. If the
Convertible Preferred Stock is called for redemption, the conversion right will
terminate at the close of business on the date fixed for redemption.
Holders of the Convertible Preferred Stock have voting rights on all
matters submitted for a vote to the Company's common stockholders and are
entitled to one vote for each share of Class A common stock into which their
Convertible Preferred Stock is convertible.
Series B Convertible Preferred Stock 8%
Pursuant to the Investment Agreement, NBC acquired $415 million aggregate
liquidation preference of a new series of the Company's convertible exchangeable
preferred stock which accrues cumulative dividends from the Issue Date at an
annual rate of 8% and is convertible (subject to adjustment under the terms of
the Certificate of Designation relating to the Series B Convertible Preferred
Stock) into 31,896,032 shares of the Company's Class A common stock at an
initial conversion price of $13.01 per share, which increases at a rate equal to
the dividend rate.
The Series B Convertible Preferred Stock is mandatorily redeemable at NBC's
option in September 2002 or annually thereafter through September 2009. The
Series B Convertible Preferred Stock also has redemption rights prior to
September 2002 under certain circumstances related to the attribution to NBC of
its investment in the Company under rules established by the FCC. The Company's
mandatory redemption obligation in respect of the Series B Convertible Preferred
Stock is subject to the Company's compliance with the terms of its existing debt
and preferred stock agreements as well as the existence of funds on hand to
consummate such redemption.
The Series B Convertible Preferred Stock is exchangeable, at the option of
the holder, subject to the Company's debt and preferred stock covenants limiting
additional indebtedness but in any event not later than January 1, 2007, into
convertible debentures of the Company ranking on a parity with the Company's
other subordinated indebtedness. Should NBC determine that the rules and
regulations of the FCC prohibit it from holding shares of Class A common stock,
NBC may convert the Series B Convertible Preferred Stock held by it into an
equal number of shares of non-voting common stock of the Company, which
non-voting common stock shall be immediately convertible into Class A common
stock upon transfer by NBC.
F-26
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Series B Convertible Preferred Stock dividends in arrears aggregated
approximately $42.9 million and $9.7 million at December 31, 2000 and 1999,
respectively.
Redemption Features of Preferred Stock
The following table presents the redemption value of the five classes of
preferred stock outstanding at December 31, 2000 should the Company elect to
redeem the preferred stock in the indicated year, assuming no dividends are paid
before redemption, unless required (in thousands):
<Table>
<Caption>
SERIES B
JUNIOR CONVERTIBLE CONVERTIBLE
JUNIOR EXCHANGEABLE EXCHANGEABLE PREFERRED PREFERRED
PREFERRED PREFERRED PREFERRED STOCK STOCK
STOCK 12%(1) STOCK 12 1/2%(2) STOCK 13 1/4%(3) 9 3/4%(4) 8%(5)
------------ ---------------- ---------------- ----------- -----------
2001.................... $59,102 $300,495 $ -- $ -- $ --
2002.................... 59,102 332,708 -- -- --
2003.................... 59,102 326,182 407,907 133,228 --
2004.................... -- 319,659 395,430 143,880 582,383
2005.................... -- 319,659 382,950 155,324 615,583
</Table>
---------------
(1) Mandatorily redeemable on December 22, 2003; redeemable by the Company prior
to that date.
(2) Mandatorily redeemable on October 31, 2006; redeemable by the Company on or
after October 31, 2001.
(3) Mandatorily redeemable on November 15, 2006; redeemable by the Company on or
after May 15, 2003. See previous discussion for earlier redemption features
on up to 35% of the shares.
(4) Mandatorily redeemable on December 31, 2006; redeemable by the Company on or
after June 30, 2003.
(5) Mandatorily redeemable in September 2002 and annually thereafter through
September 2009, and prior to such dates under certain circumstances related
to the attribution of NBC's investment in the Company under rules
established by the FCC. The Company has the right to redeem the Series B
Convertible Preferred Stock in whole or in part commencing in September 2004
at the redemption value of such shares plus accrued and unpaid dividends.
Covenants Under Preferred Stock Terms
The certificates of designation of the preferred stock contain certain
covenants which, among other things, restrict additional indebtedness, payment
of dividends, transactions with related parties, certain investments and
transfers or sales of assets.
15. COMMON STOCK WARRANTS
In connection with the NBC transaction discussed elsewhere herein, NBC
acquired a warrant to purchase up to 13,065,507 shares of Class A Common stock
at an exercise price of $12.60 per share ("Warrant A") and a warrant to purchase
up to 18,966,620 shares of Class A Common Stock ("Warrant B") at an exercise
price equal to the average of the closing sale prices of the Class A Common
Stock for the 45 consecutive trading days ending on the trading day immediately
preceding the warrant exercise date (provided that such price shall not be more
than 17.5% higher or 17.5% lower than the six month trailing average closing
sale price) subject to a minimum exercise price during the first three years
after the Issue Date of $22.50 per share. The Warrants are exercisable for ten
years from the Issue Date, subject to certain conditions and limitations.
In connection with the Series A Convertible Preferred Stock sale in June
1998, the Company issued warrants to purchase 240,000 shares of Class A common
stock at an exercise price of $16. The warrants were valued at $960,000.
F-27
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the Company issued to an affiliate of a newly appointed
member of its Board of Directors five year warrants entitling the holder to
purchase 155,500 shares of Class A common stock at an exercise price of $16.00
per share. The Company recorded $622,000 of stock-based compensation expense in
connection with this issuance. In March 2000, the Company reduced the exercise
price of warrants held by the affiliate from $16.00 per share to $12.60 per
share. See Note 5.
16. COMMON STOCK
On May 1, 2000, the Company's stockholders approved an amendment to the
Company's certificate of incorporation to increase the total number of
authorized shares of common stock from 197,500,000 shares to 327,500,000 shares,
the number of authorized shares of Class A common stock from 150,000,000 shares
to 215,000,000 shares and the number of authorized shares of Class C non-voting
common stock, par value $0.001 per share, from 12,500,000 shares to 77,500,000
shares. No shares of the Company's Class C common stock were issued or
outstanding at December 31, 2000 or 1999.
Class A common stock and Class B common stock will vote as a single class
on all matters submitted to a vote of the stockholders, with each share of Class
A common stock entitled to one vote and each share of Class B common stock
entitled to ten votes; Class C common stock is non-voting. Each share of Class B
common stock is convertible, at the option of its holder, into one share of
Class A common stock at any time. Under certain circumstances, Class C common
stock may be converted, at the option of the holder, into Class A common stock.
During December 1996, the Company approved a program under which it
extended loans to certain members of management for the purchase of Company
common stock in the open market by those individuals. The loans are full
recourse promissory notes bearing interest at 5.75% per annum and are
collateralized by the shares of stock purchased with the loan proceeds. The
Company extended the maturity of all outstanding loans under this program until
March 31, 2001. The outstanding principal balance on such loans was
approximately $1.3 million at December 31, 2000 and 1999 and is reflected as
stock subscription notes receivable in the accompanying balance sheets.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of December 31,
2000. Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date and current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate such value:
Cash and Cash Equivalents, Accounts Receivable, Cash Held by Qualified
Intermediary, Accounts Payable and Accrued Expenses. The fair values
approximate the carrying values due to their short term nature.
Investments in Broadcast Properties. The fair value of investments in
broadcast properties is estimated based on recent market sale prices for
comparable stations and/or markets. The fair value approximates the carrying
value.
Long-Term Debt and Senior Subordinated Notes. The fair value of the
Company's long-term debt is estimated based on current market rates and
instruments with the same risk and maturities. The fair value of
F-28
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's long-term debt approximates its carrying value. The fair market
value of the Company's senior subordinated notes is estimated based on year end
quoted market prices for such securities. At December 31, 2000, the estimated
fair market value of the Company's senior subordinated notes was approximately
$231.2 million.
Mandatorily Redeemable Securities. The fair market value of the Company's
mandatorily redeemable preferred stock is estimated based on quoted market
prices except for the Junior Preferred Stock and the Series B Convertible
Preferred Stock which are estimated at the December 31, 2000 aggregate
liquidation preference as no quoted market prices are available for these
securities. The estimated fair market value of the Company's mandatorily
redeemable preferred stock is as follows (in thousands):
<Table>
Junior Preferred 12%........................................ $ 59,102
Exchangeable Preferred 12 1/2%.............................. 240,792
Junior Exchangeable Preferred 13 1/4%....................... 252,868
Convertible Preferred 9 3/4%................................ 90,673
Series B Convertible Preferred 8%........................... 457,883
----------
$1,101,318
==========
</Table>
18. COMMITMENTS AND CONTINGENCIES
Future minimum annual payments under non-cancelable operating leases for
broadcasting facilities and equipment and employment agreements, as of December
31, 2000, are as follows (in thousands):
<Table>
2001........................................................ $14,639
2002........................................................ 13,506
2003........................................................ 9,985
2004........................................................ 6,791
2005........................................................ 6,063
Thereafter.................................................. 27,206
-------
$78,190
=======
</Table>
The Company incurred total operating expenses of approximately $17.7
million, $15.2 million and $10.8 million for the years ended December 31, 2000,
1999 and 1998, respectively, under these agreements.
At December 31, 2000, the Company had entered into certain affiliation and
time brokerage agreements which required certain minimum payments as follows (in
thousands):
<Table>
2001........................................................ $3,577
2002........................................................ 3,627
2003........................................................ 275
------
$7,479
======
</Table>
F-29
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT COMMITMENTS
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. 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.
<Table>
<Caption>
STATION MARKET SERVED PURCHASE PRICE
------- ------------- --------------
(IN THOUSANDS)
WPXX/WPXL..................................... Memphis, TN/New Orleans, LA(1) $ 40,000
KPPX.......................................... Phoenix, AZ(2) 15,303
WAOM.......................................... Lexington, KY 8,000
WBSG.......................................... Brunswick, GA(3) 7,100
Channel 61.................................... Mobile, AL 6,750
WBNA.......................................... Louisville, KY 3,000
Less: advances and escrow deposits............ (19,823)
--------
Total investment commitments.................. $ 60,330
========
</Table>
---------------
(1) The Company has a $4 million escrow deposit on these stations.
(2) The Company had acquired a 49% interest in this station as of December 31,
2000. The Company has acquired the remaining 51% interest in this station as
of January 2001.
(3) Acquisition completed during January 2001.
LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of management, the ultimate resolution of
these matters will not have a material effect on the Company's consolidated
financial position or results of operations and cash flows.
In October, November and December 1999, complaints were filed in the 15th
Judicial Circuit Court in Palm Beach County, Florida, in the Court of Chancery
of the State of Delaware and in Superior Court of the State of California
against certain of the Company's officers and directors by alleged stockholders
of the Company alleging breach of fiduciary duty by the directors in approving
the transactions with NBC which occurred in September 1999. The complaints
generally allege that the directors failed to pursue acquisition negotiations
with a party other than NBC, which transaction would have provided the Company's
stockholders with a substantial premium over the then market price of the
Company's common stock and instead completed the NBC Investment Agreement and
related transactions. All of these actions are at an early stage procedurally.
The Company believes the suits to be wholly without merit and intends to
vigorously defend its actions on these matters.
OTHER
See also Notes 9 and 10.
19. DISCONTINUED OPERATIONS
During 1998, the Company recognized an additional gain of $1.2 million on
the 1997 sale of its former radio segment, net of applicable income taxes of
$2.2 million. This gain reflects a reduction of $2.7 million of estimated costs
attributable to the segment disposal and the recovery of a $3 million loan by
the billboard operations of Radio, which was charged off against the gain in
1997.
F-30
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An additional $2.3 million of income taxes were recorded within
discontinued operations in 1998 as a result of certain adjustments by the
Internal Revenue Service reducing the Company's net operating loss carry
forwards relating to the historical results of the Radio segment.
20. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash operating, investing and
financing activities are as follows (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid for interest................................. $ 40,101 $44,076 $38,849
======== ======= =======
Cash paid for income taxes............................. $ 1,301 $ 1,346 $ 2,239
======== ======= =======
Non-cash operating, investing and financing activities:
Accretion of discount on Senior Subordinated Notes..... $ 445 $ 389 $ 346
======== ======= =======
Issuance of common stock in connection with
acquisitions........................................ $ 251 $ 500 $ 5,250
======== ======= =======
Beneficial conversion feature on issuance of
convertible preferred stock......................... $ 75,130 $65,467 $ --
======== ======= =======
Dividends accrued on redeemable preferred stock........ $104,111 $78,834 $47,399
======== ======= =======
Discount accretion on redeemable securities............ $ 26,471 $ 9,735 $ 2,268
======== ======= =======
Satellite distribution................................. $ 5,345 $15,000 $ --
======== ======= =======
Sale of KWOK in exchange for WCPX...................... $ -- $30,000 $ --
======== ======= =======
Issuance of common stock in payment of obligations for
cable distribution rights........................... $ -- $ 8,479 $ --
======== ======= =======
</Table>
F-31
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<Table>
<Caption>
FOR THE 2000 QUARTERS ENDED
------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ----------- -----------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Revenues.................................... $ 85,886 $ 73,443 $ 78,151 $ 78,456
Less: agency commissions.................... (11,830) (10,344) (10,886) (10,984)
----------- ----------- ----------- -----------
Net revenues................................ 74,056 63,099 67,265 67,472
Expenses, excluding depreciation,
amortization and stock based
compensation.............................. 73,622 74,472 67,675 96,411
Depreciation and amortization............... 31,713 22,594 21,394 21,180
Stock based compensation.................... 3,026 3,090 5,583 2,167
----------- ----------- ----------- -----------
Operating loss.............................. $ (34,305) $ (37,057) $ (27,387) $ (52,286)
=========== =========== =========== ===========
Net loss attributable to common
stockholders.............................. $ (154,785) $ (80,073) $ (68,835) $ (87,636)
=========== =========== =========== ===========
Basic and diluted loss per share............ $ (2.41) $ (1.26) $ (1.09) $ (1.39)
=========== =========== =========== ===========
Weighted average common shares
outstanding............................... 64,167,739 63,705,076 63,135,530 63,043,758
=========== =========== =========== ===========
Stock price(1)
High...................................... $ 11.938 $ 13.813 $ 8.875 $ 12.375
Low....................................... $ 8.750 $ 8.375 $ 6.125 $ 7.750
</Table>
---------------
(1) The Company's Class A common stock is listed on the American Stock Exchange
under the symbol PAX.
<Table>
<Caption>
FOR THE 1999 QUARTERS ENDED
------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ----------- -----------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Revenues.................................... $ 80,677 $ 58,051 $ 57,855 $ 51,779
Less: agency commission..................... (10,647) (8,089) (8,221) (7,225)
----------- ----------- ----------- -----------
Net revenues................................ 70,030 49,962 49,634 44,554
Expenses, excluding depreciation,
amortization and stock based
compensation.............................. 70,411 70,433 140,247 63,666
Depreciation and amortization............... 21,016 19,488 18,730 18,626
Stock based compensation.................... 3,101 9,419 2,147 2,147
----------- ----------- ----------- -----------
Operating loss.............................. $ (24,498) $ (49,378) $ (111,490) $ (39,885)
=========== =========== =========== ===========
Net loss attributable to common
stockholders.............................. $ (76,958) $ (129,759) $ (82,732) $ (25,130)
=========== =========== =========== ===========
Basic and diluted loss per share............ $ (1.23) $ (2.10) $ (1.35) $ (0.41)
=========== =========== =========== ===========
Weighted average common shares
outstanding............................... 62,668,330 61,887,000 61,420,661 60,954,281
=========== =========== =========== ===========
Stock price(1)
High...................................... $ 13.813 $ 17.438 $ 14.250 $ 10.063
Low....................................... $ 9.625 $ 10.500 $ 7.875 $ 7.625
</Table>
---------------
(1) The Company's Class A common stock is listed on the American Stock Exchange
under the symbol PAX.
F-32
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
------------ -------------
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 28,115 $ 51,363
Short-term investments.................................... 34,988 50,001
Restricted cash and short-term investments................ 11,731 13,729
Accounts receivable, net of allowance for doubtful
accounts of $4,858 and $4,167, respectively............. 32,727 39,528
Program rights............................................ 66,676 79,160
Prepaid expenses and other current assets................. 2,349 2,065
---------- ----------
Total current assets............................... 176,586 235,846
Property and equipment, net................................. 167,600 174,649
Intangible assets, net...................................... 944,478 949,614
Program rights, net of current portion...................... 109,892 119,423
Investments in broadcast properties......................... 17,373 33,453
Other assets, net........................................... 15,321 13,062
---------- ----------
Total assets....................................... $1,431,250 $1,526,047
========== ==========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.................. $ 18,779 $ 21,828
Accrued interest.......................................... 8,250 10,464
Obligations for cable distribution rights................. 12,967 19,840
Obligation for satellite distribution rights.............. 5,126 5,114
Obligations for program rights............................ 84,052 88,336
Current portion of bank financing......................... 47 15,966
---------- ----------
Total current liabilities.......................... 129,221 161,548
Obligations for cable distribution rights, net of current
portion................................................. 1,910 972
Obligation for satellite distribution rights, net of
current portion......................................... 13,572 14,076
Obligations for program rights, net of current portion.... 45,826 79,341
Senior subordinated notes and bank financing, net......... 414,322 389,510
---------- ----------
Total liabilities.................................. 604,851 645,447
---------- ----------
Mandatorily redeemable preferred stock...................... 1,149,852 1,080,389
---------- ----------
Commitments and contingencies............................... -- --
---------- ----------
Stockholders' deficit:
Class A common stock, $0.001 par value; one vote per
share; 215,000,000 shares authorized, 56,273,477 and
55,872,152 shares issued and outstanding................ 56 56
Class B common stock, $0.001 par value; ten votes per
share; 35,000,000 shares authorized and 8,311,639 shares
issued and outstanding.................................. 8 8
Common stock warrants and call option..................... 68,384 68,384
Stock subscription notes receivable....................... (1,088) (1,270)
Additional paid-in capital................................ 501,828 499,304
Deferred stock option compensation........................ (3,810) (6,999)
Accumulated deficit....................................... (888,831) (759,272)
---------- ----------
Total stockholders' deficit........................ (323,453) (199,789)
---------- ----------
Total liabilities, mandatorily redeemable preferred
stock, and stockholders' deficit................. $1,431,250 $1,526,047
========== ==========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-33
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------------
2001 2000
----------- -----------
(UNAUDITED)
REVENUES
Gross revenues.............................................. $ 159,195 $ 156,607
Less: agency commissions.................................... (22,148) (21,870)
----------- -----------
Net revenues................................................ 137,047 134,737
----------- -----------
EXPENSES:
Programming and broadcast operations (excluding stock-based
compensation of $320 and $175, respectively).............. 20,382 18,484
Program rights amortization................................. 45,863 51,931
Selling, general and administrative (excluding stock-based
compensation of $2,869 and $7,575, respectively).......... 62,245 65,901
Time brokerage and affiliation fees......................... 1,833 3,370
Stock-based compensation.................................... 3,189 7,750
Adjustment of programming to net realizable value........... -- 24,400
Depreciation and amortization............................... 48,132 42,574
----------- -----------
Total operating expenses.......................... 181,644 214,410
----------- -----------
Operating loss.............................................. (44,597) (79,673)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense............................................ (24,138) (23,392)
Interest income............................................. 2,737 8,686
Other expenses, net......................................... (1,607) (2,441)
Gain on modification of program rights obligations.......... 466 9,910
Gain (loss) on sale of television stations.................. 10,649 (1,800)
----------- -----------
Loss before income taxes.................................... (56,490) (88,710)
Income tax provision........................................ (60) --
----------- -----------
Net loss.................................................... (56,550) (88,710)
Dividends and accretion on redeemable preferred stock....... (73,009) (67,761)
----------- -----------
Net loss attributable to common stockholders................ $ (129,559) $ (156,471)
=========== ===========
Basic and diluted loss per common share..................... $ (2.01) $ (2.48)
=========== ===========
Weighted average shares outstanding......................... 64,385,930 63,089,644
=========== ===========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-34
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2001
<Table>
<Caption>
COMMON STOCK
COMMON STOCK STOCK SUB- TOTAL
----------------- WARRANTS SCRIPTION ADDITIONAL DEFERRED STOCK-
CLASS CLASS AND NOTES PAID-IN OPTION PLAN ACCUMULATED HOLDERS'
A B CALL OPTION RECEIVABLE CAPITAL COMPENSATION DEFICIT DEFICIT
------- ------- ------------ ---------- ---------- ------------ ----------- ---------
(IN THOUSANDS)
Balance, December 31,
2000...................... $56 $8 $68,384 $(1,270) $499,304 $(6,999) $(759,272) $(199,789)
Stock based
compensation............ -- -- -- -- -- 3,189 -- 3,189
Stock options exercised... -- -- -- -- 2,524 -- -- 2,524
Repayment of stock
subscription notes
receivable.............. -- -- -- 182 -- -- -- 182
Dividends on redeemable
preferred stock......... -- -- -- -- -- -- (58,967) (58,967)
Accretion on redeemable
preferred stock......... -- -- -- -- -- -- (14,042) (14,042)
Net loss.................. -- -- -- -- -- -- (56,550) (56,550)
--- -- ------- ------- -------- ------- --------- ---------
Balance, June 30, 2001
(unaudited)............... $56 $8 $68,384 $(1,088) $501,828 $(3,810) $(888,831) $(323,453)
=== == ======= ======= ======== ======= ========= =========
</Table>
The accompanying notes are an integral part of the consolidated Financial
Statements.
F-35
PAXSON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
2001 2000
-------- --------
(UNAUDITED)
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $(56,550) $(88,710)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 48,132 42,574
Stock-based compensation.................................. 3,189 7,750
Program rights amortization............................... 45,863 51,931
Payments for cable distribution rights.................... (8,425) (2,160)
Payments for program rights and deposits.................. (58,710) (56,607)
Provision for doubtful accounts........................... 1,831 1,724
Adjustment of programming to net realizable value......... -- 24,400
Loss on sale or disposal of assets........................ 1,669 839
(Gain) loss from sale of television stations.............. (10,649) 1,800
Gain on restructuring of program rights obligations....... (466) (9,910)
Changes in assets and liabilities:
Decrease (increase) in restricted cash and short-term
investments............................................ 1,998 (5,634)
Decrease in accounts receivable........................... 1,862 217
(Increase) decrease in prepaid expenses and other current
assets................................................. (1,923) 156
Decrease in other assets.................................. 2,617 3,567
(Decrease) increase in accounts payable and accrued
liabilities............................................ (2,999) 382
(Decrease) increase in accrued interest................... (2,214) 1,955
(Decrease) in current income taxes payable................ -- (1,182)
-------- --------
Net cash used in operating activities............. (34,775) (26,908)
-------- --------
Cash flows from investing activities:
Acquisitions of broadcasting properties................... (12,932) (77,757)
Decrease in deposits on broadcast properties.............. -- 3,008
Decrease in investments in broadcast properties........... -- 7,096
Decrease in short-term investments........................ 15,013 55,955
Purchases of property and equipment....................... (13,688) (8,866)
Proceeds from sales of television stations................ 15,121 650
Proceeds from sales of property and equipment............. 202 --
-------- --------
Net cash provided by (used in) investing
activities....................................... 3,716 (19,914)
-------- --------
Cash flows from financing activities:
Borrowings of long-term debt.............................. 9,766 4,371
Repayments of long-term debt.............................. (1,115) (1,978)
Preferred stock dividends paid............................ (3,546) (3,546)
Proceeds from exercise of common stock options, net....... 2,524 1,217
Repayments of stock subscription notes receivable......... 182 --
-------- --------
Net cash provided by financing activities......... 7,811 64
-------- --------
Decrease in cash and cash equivalents..................... (23,248) (46,758)
Cash and cash equivalents, beginning of period............ 51,363 125,189
-------- --------
Cash and cash equivalents at end of period................ $ 28,115 $ 78,431
======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
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 June 30, 2001 and
for the three and six month periods ended June 30, 2001 and 2000, is unaudited.
In the opinion of management, all adjustments necessary for the fair
presentation of such financial information have been included. These adjustments
are of a normal recurring nature. There have been no changes in accounting
policies since the year ended December 31, 2000.
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries and those of DP Media, Inc. ("DP Media"), a
company which was acquired in June 2000. Prior to acquisition, DP Media was
beneficially owned by family members of Lowell W. Paxson, the Company's Chairman
and principal stockholder. The financial position and results of operations of
DP Media have been included in the Company's consolidated financial statements
since September 1999. All significant intercompany balances and transactions
have been eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Certain reclassifications have been made to the
prior year's financial statements to conform to the 2001 presentation. These
financial statements, footnotes and discussions should be read in conjunction
with the financial statements and related footnotes and discussions contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000, and the definitive proxy statement for the annual meeting of stockholders
held May 1, 2001, and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001, all of which were filed with the United States
Securities and Exchange Commission.
2 JSA RESTRUCTURING
During the fourth quarter of 2000, the Company approved a plan to
restructure its television station operations by entering into Joint Sales
Agreements ("JSA") primarily with National Broadcasting Company, Inc. ("NBC")
affiliate stations in each of the Company's remaining non-JSA markets. Under the
JSA structure, the Company generally terminates its station sales staff. The JSA
partner then provides local and national spot advertising sales management and
representation to the Company station and integrates and co-locates the Company
station operations. These restructuring activities resulted in a charge of
approximately $5.8 million in the fourth quarter of 2000 consisting of $2.7
million of termination benefits and $3.1 million of costs associated with
exiting leased properties which will no longer be utilized upon implementation
of the JSAs. During the six months ended June 30, 2001, the Company paid
termination benefits to 39 employees totaling approximately $905,000 which were
charged against the restructuring reserve. The Company expects to substantially
complete the restructuring plan by the end of 2001. However, certain lease
obligations may continue through mid-2002.
The following summarizes the activity in the Company's restructuring
reserves for the six months ended June 30, 2001 (in thousands):
<Table>
<Caption>
BALANCE BALANCE
DECEMBER 31, 2000 CASH DEDUCTIONS JUNE 30, 2001
----------------- --------------- -------------
Accrued Liabilities:
Lease Costs.............................. $3,091 $ (342) $2,749
Severance................................ 2,586 (905) 1,681
------ ------- ------
$5,677 $(1,247) $4,430
====== ======= ======
</Table>
F-37
PAXSON COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MANDATORILY REDEEMABLE PREFERRED STOCK
The following represents a summary of the changes in the Company's
mandatorily redeemable preferred stock during the six month period ended June
30, 2001 (in thousands):
<Table>
<Caption>
JUNIOR SERIES B
JUNIOR EXCHANGEABLE EXCHANGEABLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED EXCHANGEABLE
STOCK STOCK STOCK STOCK PREFERRED
12% 12 1/2% 13 1/4% 9 3/4% STOCK 8% TOTAL
--------- ------------ ------------ ----------- ------------ ----------
Balance at December 31,
2000.................... $56,855 $246,878 $270,854 $ 92,945 $412,857 $1,080,389
Accretion................. 366 340 588 246 12,502 14,042
Accrual of cumulative
dividends............... 3,546 15,677 18,409 4,735 16,600 58,967
Cash dividends............ (3,546) -- -- -- -- (3,546)
------- -------- -------- -------- -------- ----------
Balance at June 30, 2001
(unaudited)............. $57,221 $262,895 $289,851 $ 97,926 $441,959 $1,149,852
======= ======== ======== ======== ======== ==========
Aggregate liquidation
preference at June 30,
2001.................... $59,102 $266,593 $296,282 $100,687 $474,483 $1,197,147
======= ======== ======== ======== ======== ==========
Shares authorized......... 33,000 440,000 72,000 17,500 41,500 604,000
======= ======== ======== ======== ======== ==========
Shares issued and
outstanding............. 33,000 261,063 29,145 10,069 41,500 374,777
======= ======== ======== ======== ======== ==========
Accrued dividends......... $26,102 $ 5,439 $ 4,827 $ -- $ 59,483 $ 95,851
======= ======== ======== ======== ======== ==========
</Table>
4. INCOME TAXES
The Company has recorded a provision for income taxes based on its
estimated annual income tax liability. For the six months ended June 30, 2001,
the Company recorded a valuation allowance related to its net deferred tax asset
resulting from tax losses generated during the period. Management believes that
it is more likely than not that the Company will be unable to realize such
assets.
5. 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 June 30, 2001 and 2000, the following securities, which could
potentially dilute earnings per share in the future, were not included in the
computation of earnings per share, because to do so would have been antidilutive
(in thousands):
<Table>
<Caption>
JUNE 30,
---------------
2001 2000
------ ------
Stock options outstanding................................... 12,506 11,726
Class A common stock warrants outstanding................... 32,428 32,428
Class A common stock reserved under convertible
securities................................................ 38,189 37,611
------ ------
83,123 81,765
====== ======
</Table>
F-38
PAXSON COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and non-cash investing and financing
activities are as follows (in thousands):
<Table>
<Caption>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
2001 2000
-------- --------
(UNAUDITED)
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $23,653 $19,177
======= =======
Cash paid for income taxes................................ $ 83 $ 1,224
======= =======
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes........ $ 240 $ 214
======= =======
Issuance of common stock in connection with acquisition... $ -- $ 251
======= =======
Dividends accrued on redeemable preferred stock........... $55,421 $50,979
======= =======
Discount accretion on redeemable securities............... $14,042 $13,236
======= =======
</Table>
7. DIVESTITURES
During the six months ended June 30, 2001, the Company sold interests in
three stations for aggregate consideration of approximately $18.9 million and
realized pre-tax gains of approximately $10.6 million on these sales.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
addresses financial accounting and reporting for business combinations and
requires all business combinations to be accounted for using the purchase method
of accounting. SFAS 141 is effective for all business combinations initiated
after June 30, 2001. The Company does not believe adoption of SFAS 141 will have
a material impact on its financial position, results of operations or cash
flows.
SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. Under SFAS 142, goodwill and intangible assets that
have indefinite lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Impairment losses for goodwill
and other indefinite-lived intangible assets that arise due to the initial
application of SFAS 142 are to be reported as resulting from a change in
accounting principle. The Company will adopt SFAS 142 on January 1, 2002. The
Company is currently assessing the impact of adopting SFAS 142 and has not yet
determined whether it will recognize an impairment loss, if any, resulting from
adoption. However, upon adoption of SFAS 142, the Company will no longer
amortize goodwill and FCC license intangibles (which the Company believes have
indefinite lives) which totaled approximately $869.4 million, net of accumulated
amortization of $121.8 million at June 30, 2001. Under existing accounting
standards, these assets are being amortized over 25 years. Amortization expense
related to goodwill and FCC licenses totaled approximately $19.7 million and
$17.8 million for the six months ended June 30, 2001 and 2000, respectively.
F-39
PAXSON COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENT
On July 12, 2001, the Company completed a $560 million financing consisting
of a $360 million bank credit facility and $200 million of 10 3/4% Senior
Subordinated Notes due 2008. Proceeds from the initial funding under the new
bank credit facility and the 10 3/4% Senior Subordinated Notes offering were
used to repay all of the Company's indebtedness and obligations under its
previously existing credit facilities, and its 11 5/8% Senior Subordinated
Notes, and to redeem the Company's 12% redeemable preferred stock, as well as to
pay premiums, fees and expenses in connection with the refinancing. In the third
quarter of 2001, the Company will recognize an extraordinary loss totaling
approximately $10.0 million resulting primarily from the write-off of
unamortized debt costs and the $4.6 million redemption premium associated with
the repayment of 11 5/8% Senior Subordinated Notes.
The $360 million bank credit facility consists of a $25 million revolving
credit facility of which $2.0 million is currently drawn, maturing June 2006, a
$50 million delayed draw Term A facility, maturing December 2005 and a $285
million fully drawn Term B facility, maturing June 2006. The revolving credit
facility is available for general corporate purposes and the Term A facility is
available to fund capital expenditures. The interest rate under the bank
facility is LIBOR plus 3.0%. The 10 3/4% Senior Subordinated Notes are due in
2008 and interest on the notes is payable on January 15 and July 15 of each
year, beginning on January 15, 2002. Indebtedness under the Company's previously
existing senior credit facility and equipment financing facility was scheduled
to mature in June 2002. Since such indebtedness was refinanced in July 2001 with
indebtedness maturing in 2005 and 2006, these obligations have been classified
as long-term debt in the accompanying consolidated balance sheet.
F-40
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNTIL JANUARY 27, 2002 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$200,000,000
(PAXSON COMMUNICATION LOGO)
PAXSON COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE 10 3/4%
SENIOR SUBORDINATED NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, FOR ANY
AND ALL OUTSTANDING 10 3/4% SENIOR
SUBORDINATED NOTES DUE 2008
-----------------
PROSPECTUS
-----------------
OCTOBER 29, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------