<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EX
CHANGE ACT FOR THE QUARTER ENDED SEPTEMBER 30, 1994.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934 FOR THE TRANSACTION PERIOD FROM __________ TO _________.
Commission file number: 1-100155
________________________
HERITAGE MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
IOWA 42-1299303
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
13355 Noel Road, Suite 1500
Dallas, Texas 75240
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code:
(214) 702-7380
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 4, 1994
Class A, $.01 Par Value 16,961,887
Class C, $.01 Par Value 550,375
PART I. SUMMARIZED FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
<CAPTION>
September 30, December 31,
Assets 1994 1993
------ --------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $5,335 4,416
Trade receivables, net 41,038 47,911
Prepaid expenses and other 4,480 3,331
Inventory 4,775 4,435
Broadcast Program Rights 2,003 1,465
Deferred income taxes 3,847 3,304
------ ------
Total Current Assets 61,478 64,862
------ ------
Assets held for sale (note 5) 4,000 -
Property and equipment:
In-store marketing equipment 45,237 39,228
Broadcasting equipment 34,590 37,134
Buildings and improvements 7,884 9,206
Other equipment 8,213 7,600
Land 2,460 2,490
------ ------
98,384 95,658
Less accumulated depreciation 44,857 38,236
--------- ---------
Net property and equipment 53,527 57,422
--------- ---------
Goodwill and other intangibles, net 365,969 363,667
Noncurrent broadcast program rights 1,746 1,859
Deferred finance costs, net 3,507 3,849
Other assets 2,240 1,190
--------- ---------
$ 492,467 492,849
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
September 30,
Liabilities and Stockholders' Equity 1994 1993
- - - ------------------------------------ --------- ---------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt
(notes 2 and 4) $ 8,124 2,076
Accounts payable 11,584 14,299
Accrued expenses 35,269 32,592
Broadcast program rights payable 1,884 2,188
Deferred advertising revenues 14,812 17,338
--------- ---------
Total current liabilities 71,673 68,493
--------- ---------
Long-term debt (notes 2 and 4) 339,884 332,427
Broadcast program rights payable 1,588 1,460
Other long-term liabilities 586 523
Deferred income taxes 3,847 3,304
Stockholders' equity (note 3):
Preferred stock, no par value,
authorized 60,000,000
shares; Issued 161,945 in 1993. - 16,195
Common stock, $.01 par value:
Class A - 40,000,000 shares authorized. Issued,
16,963,969 shares in 1994 and 12,236,856
shares in 1993 170 123
Class C - 10,000,000 shares authorized.
Issued, 550,375 shares in 1994 and 4,136,168
shares in 1993. 5 41
Additional paid-in capital 218,788 202,743
Accumulated deficit -142,045 -130,862
Accumulated foreign currency translation
adjustments -1,575 -1,144
Class A common stock in treasury, at cost
(32,828 shares in 1994 and 1993) -454 -454
--------- ---------
Total stockholders' equity 74,889 86,642
Commitments and contingencies (notes 5 and 6)
--------- ---------
$ 492,467 492,849
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except share information)
(unaudited)
Three Months Nine Months
ended September 30, ended September 30,
-------------------------- --------------------------
<S> 1994 1993 1994 1993
Net revenues: --------- --------- --------- ---------
<C> <C> <C> <C>
In-store marketing $ 53,371 46,801 149,652 140,679
Television 11,163 10,100 32,416 29,550
Radio 10,954 8,985 28,758 23,101
--------- --------- --------- ---------
75,488 65,886 210,826 193,330
Costs and expenses: --------- --------- --------- ---------
Cost of services:
In-store marketing 28,342 29,506 84,603 89,462
Television 2,683 2,538 7,663 7,446
Radio 3,272 2,534 7,801 5,974
Selling, general
and administrative 18,630 16,431 52,124 47,671
Depreciation 3,222 4,062 10,859 11,205
Amortization of goodwill
and other assets 3,036 2,878 9,344 8,495
Writedown of television
program rights - 1,678 - 1,678
--------- --------- --------- ---------
59,185 59,627 172,394 171,931
--------- --------- --------- ---------
Operating income 16,303 6,259 38,432 21,399
--------- --------- --------- ---------
Other expense:
Interest, net -7,738 -7,391 -22,196 -24,310
Loss on sale of asset - - -1,600 -
Other, net -1,552 -180 -3,784 -285
--------- --------- --------- ---------
-9,290 -7,571 -27,580 -24,595
--------- --------- --------- ---------
Income (loss) before
income taxes
and extraordinary item 7,013 -1,312 10,852 -3,196
Income taxes -700 -606 -2,384 -1,581
--------- --------- --------- ---------
Income (loss) before
extraordinary item 6,313 -1,918 8,468 -4,777
Extraordinary item -
gain on early extinguishment
of debt - 435 - 435
--------- --------- --------- ---------
Net income (loss) $ 6,313 -1,483 8,468 -4,342
========= ========= ========= =========
Net income (loss)
applicable to
common stock $ 6,313 -3,128 -11,183 -8,019
========= ========= ========= =========
Weighted average shares
outstanding 17,472 16,319 17,339 16,308
=========== =========== =========== ===========
Net income (loss) per
common share:
Before extraordinary
item $ 0.36 -0.22 -0.64 -0.52
========= ========= ========= =========
Net income (loss) $ 0.36 -0.19 -0.64 -0.49
========= ========= ========= =========
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1994 and 1993
(Dollars in thousands)
(unaudited) 1994 1993
<S> --------- ---------
Cash flows from operating activities: <C> <C>
Net income (loss) $ 8,468 -4,342
Adjustments to reconcile net loss to net cash
provided by operating activities:
Noncash interest and amortization of
deferred finance costs 574 517
Depreciation 10,859 11,205
Amortization:
Broadcast program rights 1,532 1,610
Goodwill and other assets 9,344 8,495
Write-off of fixed assets 570 115
Loss on assets held for sale 1,600 -
Writedown of television program rights - 1,678
Gain on debt retirement - -435
(Decrease)/increase in deferred
revenue -2,594 7,534
Other 2,563 1,130
Changes in certain assets and liabilities
net of effects of acquisitions:
Accounts receivable 7,017 7,944
Other assets -1,589 -985
Accounts payable and accrued expenses -3,622 3,870
--------- ---------
Net cash provided by operating
activities 34,722 38,336
--------- ---------
Cash flows from investing activities:
Acquisitions net of cash acquired -7,767 -4,944
Capital expenditures -8,804 -10,578
Purchase of in-store marketing rights -1,048 -
--------- ---------
Net cash used by investing activities -17,619 -15,522
--------- ---------
Cash flows from financing activities:
Long-term borrowings 94,607 62,066
Retirements: Long-term debt -69,318 -74,032
Broadcast program rights payable -2,126 -2,315
Other long-term liabilities - -1,006
Issuance of common stock 137 128
Dividends on preferred stock -445 -1,336
Purchase and related costs of settlement
rights -38,541 -2,848
Payment of offering costs -276 -
Payment of deferred finance costs -222 -25
--------- ---------
Net cash used by financing
activities -16,184 -19,368
--------- ---------
Net change during period 919 3,446
Cash and cash equivalents at beginning of
period 4,416 1,218
--------- ---------
Cash and cash equivalents at end of
period $ 5,335 4,664
========= =========
Cash paid for interest $ 15,988 19,642
========= =========
Cash paid for taxes $ 3,382 2,830
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
(Unaudited)
Note 1. Results of Operations.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year.
The information reflects all adjustments (none of which were other than
normal recurring items) which are, in the opinion of management,
necessary to present a fair statement of the results for the interim
periods. It is suggested that this interim period financial information
be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993.
Note 2. Long-term Debt.
Long-term debt at September 30, 1994 and December 31, 1993 is summarized
as follows:
<TABLE>
(Dollars in thousands)
<S> September 30,1994 December 31,1993
<C> <C>
HMSI senior notes $ 150,000 150,000
HMSI credit agreement 136,500 110,500
HMC senior subordinated notes 50,000 50,000
Settlement rights 476 19,514
Other 11,032 4,489
------ ------
348,008 334,503
Less current installments 8,124 2,076
-------- -------
$ 339,884 332,427
======== ========
</TABLE>
Long-term debt increased by $13.5 million during the nine month period ended
September 30, 1994. The increase was primarily due to $38.3 million of
credit agreement borrowings used to retire the settlement rights in the
third quarter, (see note 4) less approximately $12 million of net cash
flows from operations that were utilized for payments against the credit
agreement balance. Also $6.8 million of incremental other debt is
associated with the first quarter acquisitions of the St. Louis radio
station and the in-store marketing companies located in Australia and
New Zealand. An additional $6 million of the term loan facility was
reclassified to current installments at September 30, 1994 per the HMSI
credit agreement.
Notes to Consolidated Financial Statements
Note 3. Stockholders' Equity.
The Board of Directors of Heritage adopted a plan which provides for
a distribution of one Preferred Share Purchase Right for each outstanding
share of the Company's Class A and Class C Common Stock. The purchase
rights were distributed August 29, 1994 to shareholders of record as of
that date pursuant to the rights agreement dated as of August 15, 1994
between the Company and The Bank of New York, as rights agent.
Each purchase right entitles a shareholder to buy one one-hundredth
of a share of a new series of preferred stock at an exercise price of
$70. The purchase rights will be exercisable only if a person or
group (other than the Company and certain related entities) acquires
15% or more of the Company's common stock or announces a tender offer,
the consummation of which would result in ownership by such person or
group of 15% or more of the common stock.
Note 4. Settlement Rights.
The Company formally engaged Bear Stearns & Co. on May 4, 1994
to conduct an independent appraisal of Actmedia, Inc. pursuant
to the Settlement Rights Agreement. On June 27, 1994, the Settlement
Rights (the "Rights") were independently appraised at $6.55 per Right.
This appraisal placed a total value on the 5.9 million then outstanding
Rights at $38.8 million. The Company increased its Rights balance by
$16.5 million to reflect the balance of $38.8 million as of June 30, 1994
and increased accumulated deficit by a corresponding amount plus expenses
incurred of approximately $.3 million
On July 28, 1994, the Company exercised its call option to retire 100%
of the outstanding Rights for cash. As of September 30, 1994,
the Company had retired $38.3 million of the Rights leaving an outstanding
balance of $.5 million. The remaining Rights were retired in October 1994.
Note 5. Sale of Television Station.
On July 1, 1994 the Company announced the sale of the assets of KDLT-TV,
its smallest television station, located in Sioux Falls, South Dakota to
Red River Broadcasting Corp. The loss attributable to the sale approximated
$1.6 million and was recorded in the second quarter of 1994. The sale was
completed on October 21, 1994 and the Company received cash proceeds of
approximately $4 million.
Note 6. Canadian In-Store Acquisition.
On August 23, 1994, Actmedia Canada, Inc. (a wholly-owned subsidiary)
signed an agreement to acquire the stock of Strategium Media, Inc.
(a privately owned company based in Toronto, Canada) for $14.1 million
plus the retirement of debt ($4.2 million). Infonet Media, Ltd.
(its primary subsidiary, "Infonet") is a leading supplier of shelf-based
advertising and promotion services to Canada's food and drug store industry.
The transaction closed October 26, 1994. The purchase was financed by
bank credit agreements with The Bank of Montreal and National Westminster
Bank.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations: Third Quarter 1994 compared to 1993
Consolidated net revenues of $75.5 million represented a 15% increase over
the 1993 revenues of $65.9 million. Cost of services of $34.3 million in
1994 were level to 1993 due primarily to favorable in-store revenue mix
with lower costs and expense reductions. Operating income of $16.3 million
in 1994 exceeded the comparable 1993 period by 160%. Net income of $6.3
million improved significantly versus a $1.5 million loss in 1993. The
improvement in the Company's operating results for the 1994 period primarily
reflects revenue growth from the Instant Coupon Machine ("ICM"), favorable
revenue mix, and lower ACTRADIO operating expenses by the In-store Marketing
Group and increased local and national advertising revenues by the Television
and Radio Groups. The income per share of $.36 increased in 1994 versus a
$.19 per share loss in 1993 due to the improved results from operations
and the $.10 per share impact of settlement rights accretion and dividends
in 1993. Income per share (excluding settlement rights charges, dividends,
and nonrecurring items) of $.36 per share improved from a $.01 per share
loss in 1993. All comparisons, unless otherwise noted, are for the
three-month period ended September 30, 1994 as compared to the comparable
1993 period.
In-store Marketing. The In-store Marketing Group contributed $53.4 million
of revenues in 1994, an increase of 14%, compared to $46.8 million in 1993.
The growth of ICM revenues and increased advertising and International
revenues were reduced by the decline in promotion revenues. The ICM
generated $20.6 million of revenues in 1994, an increase of 46% compared
to 1993. International revenues of $5.3 million grew by 19% versus 1993
and advertising revenues increased by 19% to $13.1 million. ActNow had one
program approximating $2.6 million in 1994 compared to a program totaling
$1.9 million in the 1993 period. Total Impact revenues decreased by 27%
to $10.1 million in 1994 primarily due to customer requested rescheduling,
competitive pricing pressures, and the absence of programs that were run in
1993.
Net revenues of the ACTRADIO product increased to $1.7 million in 1994
from $1.5 million in 1993. As a result of the Company's actions taken
in the fourth quarter of 1993 (see Annual Report on Form 10-K for fiscal
year ended December 31, 1993), on-going operating costs in 1994 were reduced
by approximately $1 million and depreciation was decreased by $.6 million
for the 1994 period versus 1993. These actions have reduced the on-going
operating costs and long-term capital requirements and increased the size
and quality of the in-store audio network.
In-store Marketing operating income of $10.8 million increased by 178%,
from $3.9 million in the 1993 period, due primarily to increased revenues,
favorable revenue mix with higher margins, reduced field expenses and
reduced ACTRADIO losses. The operating margin was 20% in 1994 compared
to 8% in 1993.
Television. The Television Group generated $11.2 million of revenues
in 1994, an 11% increase compared to $10.1 million in 1993.
The Television Bureau of Advertising Time Sales Survey reported that
industry-wide gross local revenues increased by 12% and national
revenues were up 17% compared to 1993 aided by significant political
revenues. The Television Group's local revenues increased 8% and
national revenues improved 11% compared to the 1993 period including
political revenues of $.5 million versus minimal political revenues
in 1993. All of the Television Group's stations, excluding the
station held for sale, generated improved revenues and operating income
in 1994 compared to the 1993 period.
Operating income of $3.7 million increased by 197% compared to 1993
primarily as a result of the higher revenues while operating expenses
were held to a 6% increase. The 1993 period included a nonrecurring
$1.7 million writedown of program rights. The operating margin improved
from 29% in 1993 to 33% in 1994 (excluding the nonrecurring item).
Radio. The Radio Advertising Bureau reported that combined national
and local spot revenues improved 11% in the third quarter of 1994 over
the same period in 1993 for the radio industry. Net revenues of the
Radio Group increased by 22% from $9 million in 1993 to $11 million in 1994.
The radio stations acquired in 1993 and 1994 contributed $1.1 million of the
increase. Revenues for the stations owned for all of both periods increased
11% primarily as a result of stronger industry revenues noted above and
improved station ratings.
Operating income grew from $2.0 million in 1993 to $2.7 million in 1994
primarily as a result of the improved revenues by the stations owned
for all of both periods as the acquired stations combined for an operating
loss of $.1 million. The operating margin improved from 24% in 1993 to
30% in 1994 for the stations owned for all of both periods.
Corporate Expenses. Corporate expenses of $1 million in 1994 were
$.1 million unfavorable to 1993 due to increased shareholder related
expenses.
Depreciation and Amortization. Depreciation and amortization of
$6.3 million in 1994 decreased by 10% compared to $6.9 million in 1993.
The majority of the decrease was due to lower depreciation associated
with ACTRADIO, lower levels of capital expenditures, and assets that
have been fully depreciated.
Interest Expense. Interest expense consists of the following:
(in thousands)
<TABLE>
Three months
Ended September 30,
<S> 1994 1993
<C> <C>
Interest accrued and paid currently...........$ 7,541 7,212
Deferred interest............................ 197 179
----- -----
TOTAL.........................................$ 7,738 7,391
======= ======
</TABLE>
The increase in current interest from 1993 to 1994 is primarily due to
the higher debt levels. Other Expense. Other expense included $1.5
million of noncash expense for accrued stock appreciation rights.
Net Income (Loss). Primarily as a result of an additional $10 million
of operating income reduced by the higher taxes and noncash expenses,
the Company improved its operating results from a $1.5 million loss
in 1993 to $6.3 million of net income in 1994.
Results of Operations: Nine Months 1994 compared to 1993
Consolidated net revenues of $210.8 million represented a 9%
increase over the 1993 revenues of $193.3 million. Cost of
services of $100.1 million decreased 3% in 1994 compared to
1993 due primarily to favorable in-store revenue mix and cost
reductions. Operating income of $38.4 million in 1994 exceeded
the comparable 1993 period by 80%. Net income of $8.5 million
in 1994 improved compared to a $4.3 million loss in 1993. The
improvement in the Company's operating results for the 1994 period
primarily reflects revenue growth from the Instant Coupon Machine,
favorable revenue mix, and lower ACTRADIO operating expenses by the
In-store Marketing Group and increased local and national advertising
revenues by the Television and Radio Groups. The loss per share of
$.64 in 1994 increased compared to the $.49 in 1993 due principally
to the $.95 per share impact of the second quarter Settlement Rights
adjustment and $.09 per share effect of the loss on the television
station sale. Income per share (excluding settlement rights charges,
dividends, and nonrecurring items) of $.58 improved from a $.19 loss
in 1993. All comparisons, unless otherwise noted, are for the nine
month period ended September 30, 1994 as compared to the comparable
1993 period.
In-store Marketing. The In-store Marketing Group contributed $150
million of revenues in 1994, an increase of 6%, compared to $140.7
million in 1993. The growth of ICM revenues was the major contributor
to the improved results. The ICM generated $55.8 million of revenues
in 1994, an increase of 42% compared to 1993. Also, International
revenues grew by 17% to $14 million in 1994 primarily due to improvement
from the Canadian business and the inclusion of $1.5 million revenues
from the Australia/New Zealand acquisitions. Advertising revenues
in 1994 were level with 1993. Total Impact revenues declined by
17% to $28.9 million in 1994 due to competitive pricing pressures,
customer requested rescheduling of programs, and two major customers
that did not run programs in 1994. ActNow had four smaller programs
totaling approximately $11 million in 1994 versus the comparable four
programs totaling $14.3 million in the 1993 period.
Net revenues of the ACTRADIO product of $3.7 million in 1994 were level
with 1993. As a result of the Company's actions noted above, the on-going
operating costs in 1994 were reduced by approximately $2 million and
depreciation was decreased by $1.8 million.
In-store Marketing operating income of $23.8 million increased by 97%,
from $12.1 million in the 1993 period, due primarily to the increased
1994 revenues, favorable revenue mix with higher margins, reduced field
expenses, and reduced ACTRADIO losses. The operating margin was 16%
in 1994 compared to 9% in 1993.
The In-store Marketing Group contributed 71% of the Company's revenues
and 62% of operating income in the 1994 period, and it is expected that
this group will contribute a higher percentage of the Company's revenues
and operating income for fiscal 1994.
Television. The Television Group generated $32.4 million of revenues
in 1994, a 10% increase compared to $29.6 million in 1993. The
Television Bureau of Advertising Time Sales Survey reported that
industry-wide gross local revenues increased by 11% and national
revenues were up 14% compared to 1993 aided by the Winter Olympics
in the first quarter and political revenues. The Television Group's
local revenues increased 7% and national revenues improved 14% compared
to the 1993 period. The Television Group did not benefit from the Olympics
as the group has no CBS affiliates, but did receive $1.1 million political
revenues which were minimal in 1993. All of the stations' operating results
reflected improved revenues and operating income in 1994 versus the 1993
period. The Pensacola station, which generated 41% of the group's revenue
improvement, benefited from local revenue growth of 17% primarily on the
strength of automobile industry sales and $.7 million of political revenues.
Operating income of $10.8 million increased by 52% compared to 1993 primarily
as a result of the higher revenues as expenses were held to a 5% increase
and the 1993 period included the $1.7 million nonrecurring item. The
operating margin improved from 30% in 1993 to 33% in 1994 (excluding the
nonrecurring item).
Radio. The Radio Advertising Bureau reported that combined national and
local spot revenues improved 12% in the nine months of 1994 over the same
period in 1993 for the radio industry. Net revenues of the Radio Group
increased by 24% from $23.1 million in 1993 to $28.8 million in 1994.
The radio stations acquired in 1993 and 1994 contributed $2.8 million of
the increase. Revenues for the stations owned for all of both periods
increased 13% primarily as a result of stronger industry revenues noted
above and improved station ratings.
Operating income grew from $4.7 million in 1993 to $6.4 million in 1994
primarily as a result of the improved revenues by the stations owned for
all of both periods as the acquired stations had a $.5 million loss.
The operating margin improved from 21% in 1993 to 27% in 1994 for the
stations owned for all of both periods.
Corporate Expenses. Corporate expenses of $2.5 million in 1994 increased
by 4% versus 1993.
Depreciation and Amortization. Depreciation and amortization of $20.2
million in 1994 increased by 3% compared to $19.7 million in 1993.
The increase was due to additional amortization associated with radio
station acquisitions and ACTRADIO marketing rights.
Interest Expense. Interest expense consists of the following:
(in thousands)
<TABLE>
Nine months
Ended September 30,
1994 1993
<S> <C> <C>
Interest accrued and paid currently...$ 21,622 23,793
Deferred interest.................. 574 517
------ ------
TOTAL.................................$ 22,196 24,310
====== =======
</TABLE>
The decrease in current interest from 1993 to 1994 is due primarily to
the expiration of interest rate swaps in June, 1993.
Other Expense. Other expense included $3.1 million in noncash expense
for the accrual of stock appreciation rights and $.6 million for the
write-off of the remaining book balance of the retired WEAR-TV facility.
Net Income (Loss). Primarily as a result of an additional $17 million of
operating income and $2 million lower interest expense reduced by the loss
on sale of assets, higher taxes and noncash expenses, the Company improved
its operating results from a $4.3 million loss in 1993 to $8.5 million of
net income in 1994.
Capitalization and Liquidity
At September 30, 1994, the Company, through its Heritage Media Services, Inc.
subsidiary ("HMSI"), had a $155 million bank credit facility (the "Credit
Agreement"). HMSI is the Company's subsidiary which owns ACTMEDIA and the
Company's broadcasting properties. The Credit Agreement was comprised of
an $80 million term loan which begins to amortize on December 31, 1994,
and a $75 million reducing revolving credit facility which begins to
decrease on December 31, 1994. Effective February 9, 1994 the revolving
credit facility was increased from $50 million to $75 million. At
September 30, 1994, $80 million of the term loan facility and $56.5
million of the revolving credit facility were outstanding. At
September 30, 1994, $18.5 million of additional borrowings were
available under the Credit Agreement. The Credit Agreement includes
a number of financial and other covenants, including the maintenance
of certain operating and financial ratios and limitations on or prohibitions
of dividends, indebtedness, liens, capital expenditures, asset sales
and certain other items. Loans under the Credit Agreement are guaranteed
by the Company and HMSI's domestic subsidiaries and are secured by a
pledge of the capital stock of HMSI and its domestic subsidiaries.
On June 22, 1992, HMSI issued $150 million of 11% senior secured notes
(the "Senior Notes") due June 15, 2002. Interest on the Senior Notes
is payable semi-annually. The Senior Notes rank on a parity with
the obligations under HMSI's Credit Agreement, are guaranteed by HMC,
and HMSI's domestic subsidiaries and are secured by a pledge of capital
stock of HMSI and its domestic subsidiaries.
On October 1, 1992 the Company issued $50 million of 11% senior
subordinated notes (the "Subordinated Notes") due October 1, 2002.
Interest on the Subordinated Notes is payable semi-annually.
The Subordinated Notes are subordinate in right of payment to the
prior payment in full of the Credit Agreement and the Senior Notes.
Based upon the foregoing debt, the Company is currently highly
leveraged, and it is expected to continue to have a high level of debt
for the foreseeable future. As of September 30, 1994, the Company had
indebtedness (long-term debt, including current installments and notes
payable) of approximately $348 million and stockholders' equity of
approximately $75 million, and accordingly, a consolidated debt-to-equity
ratio of 4.6 to 1. As a result of its leverage and in order to repay
existing indebtedness, the Company will be required to generate substantial
operating cash flow, refinance its indebtedness, make asset sales or effect
some combination of the foregoing. The ability of the Company to meet these
requirements will depend on, among other things, prevailing economic
conditions and financial, business and other factors, some of which are
beyond the control of the Company. Further, being primarily a holding
company of operating companies through HMSI, the Company's ability to repay
its indebtedness incurred at the parent company level will be limited by
restrictions on the ability of HMSI under the Credit Agreement and the
Senior Notes to declare and pay dividends to the Company. Under the
Credit Agreement, at September 30, 1994, the total amount of dividends
that could be paid by HMSI to the Company was $14.7 million. Under the
Senior Note Indenture, at September 30, 1994, the total amount of dividends
that could be paid by HMSI to the Company was $32.6 million. Such
dividends are not permitted if, as a result of such payments, a default would
occur under either the Credit Agreement or the Senior Note Indenture.
As a result of the foregoing restrictions, consolidated net assets of HMSI
totaling $114.7 million at September 30, 1994 were not available to the
Company to pay dividends or repay debt.
On February 1, 1994, the holders of all of the Company's Series B and Series
C Convertible Preferred Stock converted their 161,945 preferred shares into
429,609 Class A common shares and 693,560 Class C common shares at the
rate of 6.94 common shares for each preferred share thereby increasing
the Company's common shares outstanding to approximately 17.5 million
and eliminating the Company's annual preferred dividend obligation of
$1.8 million. On April 15, 1994, the Company completed a secondary
public offering of 3.7 million Class A common shares at $17 per share
in simultaneous United States and international offerings for the two holders
of 3.7 million Class C common shares. On August 17, 1994, the holder of
512,987 Class C common shares converted the shares to an equal number of
Class A common shares.
The Company has focused its growth strategy on acquiring in-store companies
(both domestically and internationally), radio stations and creating radio
duopolies in top forty markets, televisions stations in larger markets,
and other communications-related properties it believes have the potential
for long-term appreciation and aggressively managing the operations of
these properties to improve their operating results. The Company has
historically used cash flows from financing activities to fund its
acquisitions and investments while the operations are expected to
generate cash flow sufficient to fund their on-going expenditure
requirements.
Cash flows provided by operating activities decreased to $34.7 million in
1994 from $38.3 million in 1993. The $14 million improvement in net
income (adjusted for noncash items) was more than offset by a $10 million
reduction in deferred revenue and a $9 million unfavorable variance in
working capital items due primarily to the timing of in-store demonstration
programs.
In 1994, the $35 million of cash provided by operations, and $25 million of
net bank borrowings were primarily utilized for the retirement of settlement
rights ($38.5 million), the cash portion of the acquisitions ($7.8 million),
capital expenditures ($8.8 million) and in-store marketing rights payments
($1 million). In 1993, cash flows from operating activities were utilized
for acquisitions, capital expenditures, to retire settlement rights, and
to reduce other long-term liabilities.
Capital expenditures decreased from $10.6 million in 1993 to $8.8 million
in 1994. This decrease was due primarily to the higher purchase requirements
of additional Instant Coupon Machines in 1993 versus 1994.
As a part of ACTRADIO's commitment to new marketing alliances, the Company
made payments totaling $1 million in the nine months ended September 30, 1994
and is expecting to make payments totaling approximately $2.5 million in 1994
representing the Company's share of the cost of the network upgrade. These
payments are for exclusive marketing rights which are amortized over the term
of the retail chain agreements (five years). These requirements will be
provided by funds generated from operations.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HERITAGE MEDIA CORPORATION
Dated: by /s/ David N. Walthall
David N. Walthall
President and Chief Executive Officer
Dated: by /s/ James P. Lehr
James P. Lehr
Vice President and Controller
Principal Accounting Officer
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HERITAGE MEDIA CORPORATION
Dated: by
David N. Walthall
President and Chief Executive Officer
Dated: by
James P. Lehr
Vice President and Controller
Principal Accounting Officer
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