<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---- SECURITIES EXCHANGE ACT FOR THE QUARTER ENDED
JUNE 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 AUGUST 5, 1994
----- -----------------------------
Class A, $.01 Par Value 16,403,533
Class C, $.01 Par Value 1,063,362
<PAGE>
PART I. SUMMARIZED FINANCIAL INFORMATION
Item 1. Financial Statements
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
ASSETS
------
<TABLE>
<CAPTION> (unaudited)
June 30, December 31,
1994 1993
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,611 4,416
Trade receivables, net 46,104 47,911
Prepaid expenses and other 3,184 3,331
Inventory 4,703 4,435
Broadcast program rights 1,829 1,465
Deferred income taxes 4,275 3,304
--------- ---------
Total current assets 61,706 64,862
--------- ---------
Assets held for sale (note 5) 4,000 --
Property and equipment:
In-store marketing equipment 43,428 39,228
Broadcasting equipment 33,936 37,134
Buildings and improvements 7,561 9,206
Other equipment 7,778 7,600
Land 2,460 2,490
--------- ---------
95,163 95,658
Less accumulated depreciation 41,469 38,236
--------- ---------
Net property and equipment 53,694 57,422
--------- ---------
Goodwill and other intangibles, net 368,467 363,667
Noncurrent broadcast program rights 1,555 1,859
Deferred finance costs, net 3,699 3,849
Other assets 1,801 1,190
--------- ---------
$ 494,922 492,849
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION> (unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
------------------------------------ ----------- ------------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt (note 2) $ 6,209 2,076
Accounts payable 12,548 14,299
Accrued expenses 29,608 32,592
Broadcast program rights payable 1,972 2,188
Deferred advertising revenues 13,718 17,338
-------- --------
Total current liabilities 64,055 68,493
-------- --------
Long-term debt (note 2) 317,467 312,913
Broadcast program rights payable 1,311 1,460
Other long-term liabilities 557 523
Deferred income taxes 4,275 3,304
Settlement rights (note 4) 38,788 19,514
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, 16,434,975 shares in 1994 and
12,236,856 shares in 1993 164 123
Class C - 10,000,000 shares authorized.
Issued, 1,063,362 shares in 1994 and
4,136,168 shares in 1993. 11 41
Additional paid-in capital 218,669 202,743
Accumulated deficit (148,359) (130,862)
Accumulated foreign currency translation
adjustments (1,562) (1,144)
Class A common stock in treasury, at cost
(32,828 shares in 1994 and 1993) (454) (454)
-------- --------
Total stockholders' equity 68,469 86,642
Commitments and contingencies (note 5)
--------- --------
$ 494,922 492,849
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
ended June 30, ended June 30,
----------------------- ----------------------
1994 1993 1994 1993
-------- ------ ------- -------
<S> <C> <C> <C> <C>
Net revenues:
In-store
marketing $ 48,371 49,228 96,281 93,878
Television 11,674 10,514 21,253 19,450
Radio 9,980 8,182 17,804 14,116
-------- ------ ------- -------
70,025 67,924 135,338 127,444
-------- ------ ------- -------
Costs and expenses:
Cost of services:
In-store marketing 26,505 32,329 56,261 59,956
Television 2,556 2,517 4,980 4,908
Radio 2,439 1,866 4,529 3,440
Selling, general
and administrative 17,279 16,070 33,494 31,240
Depreciation 3,667 3,657 7,637 7,143
Amortization of
goodwill and other
assets 3,357 2,848 6,308 5,617
-------- ------ ------- -------
55,803 59,287 113,209 112,304
-------- ------ ------- -------
Operating income 14,222 8,637 22,129 15,140
-------- ------ ------- -------
Other expense:
Interest (7,353) (8,340) (14,458) (16,919)
Loss on sale of
assets (1,600) -- (1,600) --
Other, net (1,597) (78) (2,232) (105)
-------- ------ ------- -------
(10,550) (8,418) (18,290) (17,024)
-------- ------ ------- -------
Income (loss) before
income taxes 3,672 219 3,839 (1,884)
Income taxes (913) (556) (1,684) (975)
-------- ------ ------- -------
Net income (loss) $ 2,759 (337) 2,155 (2,859)
======== ====== ======= =======
Net loss applicable
to common stock $(14,002) (1,379) (17,497) (4,891)
======== ====== ======= =======
Weighted average
shares outstanding 17,465 16,314 17,272 16,303
======== ====== ======= =======
Net loss per common
share $ (0.80) (0.08) (1.01) (0.30)
======== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1994 and 1993
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
1994 1993
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,155 (2,859)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Noncash interest and amortization of deferred
finance costs 377 338
Depreciation 7,637 7,143
Amortization:
Broadcast program rights 1,002 1,054
Goodwill and other assets 6,308 5,617
Write-off of fixed assets 570 117
Loss on assets held for sale 1,600 --
Decrease in deferred revenue (3,688) (2,318)
Other 1,603 40
Changes in certain assets and liabilities
net of effects of acquisitions:
Accounts receivable 1,951 5,819
Other assets (221) (961)
Accounts payable and accrued expenses (6,983) (502)
-------- -------
Net cash provided by operating activities 12,311 13,488
-------- -------
Cash flows from investing activities:
Acquisitions net of cash acquired (7,726) (430)
Capital expenditures (5,921) (6,340)
Purchase of in-store marketing right (830) --
-------- -------
Net cash used by investing activites (14,477) (6,770)
-------- -------
Cash flows from financing activities:
Long-term borrowings 44,072 45,566
Retirements:
Long-term debt (42,116) (43,784)
Broadcast program rights payable (1,441) (1,584)
Other long-term liabilities -- (821)
Issuance of common stock 18 105
Dividends on preferred stock (445) (890)
Purchase and related costs of settlement rights (229) (2,843)
Payment of offering costs (276) --
Payment of deferred finance costs (222) --
-------- -------
Net cash used by financing activities (639) (4,251)
-------- -------
Net change during period (2,805) 2,467
Cash and cash equivalents at beginning of period 4,416 1,218
-------- -------
Cash and cash equivalents at end of period $ 1,611 3,685
======== =======
Cash paid for interest $ 13,904 16,433
======== =======
Cash paid for income taxes $ 3,058 2,694
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 1994 and December 31, 1993 is summarized
as follows:
(Dollars in thousands)
<TABLE>
<CAPTION> June 30, 1994 December 31,1993
------------- ----------------
<S> <C> <C>
HMSI senior notes $150,000 150,000
HMSI credit agreement 112,500 110,500
HMC senior subordinated notes 50,000 50,000
Other 11,176 4,489
-------- -------
323,676 314,989
Less current installments 6,209 2,076
-------- -------
$317,467 312,913
======== =======
</TABLE>
Long-term debt increased by approximately $8.7 million during the six month
period ended June 30, 1994. The increase was primarily due to $6.8 million
of debt 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 $4 million of the term loan facility was
reclassified to current installments at June 30, 1994 per the HMSI credit
agreement.
NOTE 3. STOCKHOLDERS' EQUITY.
On February 1, 1994, the holders of approximately 3.7 million shares of
Class C common stock indicated their intention to convert the Class C shares
into Class A shares and exercise their rights to require the Company to
register the Class A shares in a secondary public offering. On April 8, 1994,
the underwriters completed the public offering of the 3.7 million shares of
Class A common stock at $17.00 per share in simultaneous United States and
international offerings. The selling shareholders granted the underwriters
of the offerings an option to purchase up to an additional .4 million shares
of their Class A shares to cover over-allotments. The underwriters did not
exercise the over-allotment option due to the market conditions.
Consequently, these two shareholders held their respective portions of the
over-allotment shares. The Company did not receive any of the proceeds
from this sale and did not issue any
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
new common shares in this offering. The two shareholders agreed to a ninety
day standstill period which expired July 8. The two shareholders sold their
remaining shares.
NOTE 4. SETTLEMENT RIGHTS.
The Settlement Rights (the "Rights") were initially recorded at their
estimated fair value at the date of issuance in 1989 which approximated
$7.55 million. From time to time the Company has estimated the value of
the business, properties and assets of ACTMEDIA as a going concern
("Net Equity") and the resultant estimate of the value of the Rights.
To the extent that such estimate of value exceeded the carrying value,
such excess has been accreted by the interest method to accumulated
deficit over the appropriate accounting periods.
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. The appraisal was due no later than seventy five days
from the engagement date. On June 27, 1994 the Rights were independently
appraised at $6.55 per Right. This appraisal placed a total value on the
5.9 million currently outstanding Rights at $38.8 million. The Company
increased its Settlement Rights balance by $16.5 million (a $13.8 million
increase from the planned $2.7 million accretion) 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. The increase in the valuation resulted in a $.96 per share
charge in the second quarter. See Capitalization and Liquidity for
further discussion of the Rights.
NOTE 5. SALE OF TELEVISION STATION.
On July 1, 1994 the Company announced the sale of KDLT-TV, its smallest
television station, located in Sioux Falls, South Dakota to Red River
Broadcasting Corp. The loss attributable to this pending sale will be
approximately $1.6 million ($.09 per share) and the provision was
recorded in the second quarter of 1994. The sale is pending approval
by the Federal Communications Commission and is expected to close in
the fourth quarter of 1994.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS: SECOND QUARTER 1994 COMPARED TO 1993
Consolidated net revenues of $70.0 million represented a 3% increase
over the 1993 revenues of $67.9 million. Cost of services of $31.5
million decreased 14% in 1994 compared to 1993 due primarily to favorable
revenue mix with lower costs and cost reductions. Operating income of
$14.2 million in 1994 exceeded the comparable 1993 period by 65%.
Net income of $2.8 million improved substantially versus a $.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 ("ICM") 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 $.80 increased
in 1994 versus 1993 due principally to the $.96 per share impact of the
settlement rights adjustment and $.09 per share effect of the television
station sale. Income per share (excluding settlement rights,
dividends, and loss on sale) from operations of $.25 per share improved
from a $.02 per share loss in 1993. All comparisons, unless otherwise
noted, are for the period ended June 30, 1994 as compared to the comparable
1993 period.
IN-STORE MARKETING. The In-store Marketing Group contributed $48.4 million
of revenues in 1994, a decrease of 2%, compared to $49.2 million in 1993.
The growth of ICM revenues was more than offset by the decline in promotion
revenues. The ICM generated $17.7 million of revenues in 1994, an increase
of 54% compared to 1993. Total Impact revenues decreased by 22% to $8.7
million in 1994 primarily due to customer requested rescheduling and
competitive pricing pressures. ActNow had one program approximating
$3.4 million in 1994 compared to two programs totaling $7.2 million in the
1993 period. Advertising revenues in 1994 declined 6% compared to 1993
principally due to the shift to ICM and away from the print products.
Net revenues of the ACTRADIO product decreased to $.8 million in 1994
from $1.0 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 $316,000 and depreciation was decreased by
$586,000 for the 1994 period versus 1993. These actions have reduced
the on-going operating costs and long-term capital requirements and
will increase the size and quality of the in-store audio network.
In-store Marketing operating income of $8.4 million increased by 109%,
from $4.0 million in the 1993 period, due primarily to favorable revenue
mix with higher margins and reduced ACTRADIO losses. The operating margin
was 17% in 1994 compared to 8% in 1993.
TELEVISION. The Television Group generated $11.7 million of revenues in
1994, an 11% increase compared to $10.5 million in 1993. The Television
Bureau of Advertising Time Sales Survey reported that industry-wide gross
local revenues increased by 6% and national revenues were up 7% compared
to 1993. The Television Group's local revenues increased 5% and national
revenues improved 11% compared to the 1993 period. The Television Group
also received political revenues of $.6 million versus minimal political
revenues in 1993. All of the Television Group's stations generated
improved revenues and operating income in 1994 compared to the 1993 period.
Operating income of $4.3 million increased by 25% compared to 1993
primarily as a result of the higher revenues while operating expenses were
held to a 4% increase. The operating margin improved from 33% in 1993 to 37%
in 1994.
<PAGE>
RADIO. The Radio Advertising Bureau reported that combined national and
local spot revenues improved 10% in the second quarter of 1994 over the
same period in 1993 for the radio industry. Net revenues of the Radio Group
increased by 22% from $8.2 million in 1993 to $10 million in 1994. The
radio stations acquired in 1993 and 1994 contributed $.9 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 $2.1 million in 1993 to $2.3 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 $.4 million. The operating margin improved from 26% in 1993
to 30% in 1994 for the stations owned for all of both periods.
CORPORATE EXPENSES. Corporate expenses of $.7 million in 1994
were $.2 million favorable to 1993 due to the timing of shareholder
and investor relations expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
$7.0 million in 1994 increased by 8% compared to $6.5 million in 1993.
The majority of the increase was due to higher amortization of intangibles
associated with the three radio duopoly acquisitions and the ACTRADIO
marketing rights.
INTEREST EXPENSE. Interest expense consists of the following:
<TABLE>
<CAPTION> (in thousands)
THREE MONTHS
ENDED JUNE 30,
---------------
1994 1993
---- ----
<S> <C> <C>
Interest accrued and paid currently $7,156 8,171
Amortization of deferred financing costs 197 169
------ -----
TOTAL $7,353 8,340
====== =====
</TABLE>
The decrease in current interest from 1993 to 1994 is due to the expiration
of interest rate swaps in June, 1993 and lower interest rates.
OTHER EXPENSE. Other expense included $1 million of noncash expense for
accrued stock appreciation rights and $.6 million for the write-off of
the remaining book balance of the retired WEAR-TV facility in Pensacola, FL
which was replaced by a new facility in the first quarter.
NET INCOME (LOSS). Primarily as a result of an additional $5.6 million
of operating income and $1 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 $.3 million loss in 1993 to a $2.8
million net income in 1994.
RESULTS OF OPERATIONS: SIX MONTHS 1994 COMPARED TO 1993
Consolidated net revenues of $135.3 million represented a 6% increase
over the 1993 revenues of $127.4 million. Cost of services of $65.8
million decreased 4% in 1994 compared to 1993 due primarily to favorable
revenue mix and cost reductions. Operating income of $22.1 million in
1994 exceeded the comparable 1993 period by 46%. Net income of $2.2
million in 1994 improved compared to a $2.9 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 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 $1.01 in 1994 increased
compared to the $.30 in 1993 due principally to the $.97 per share
impact of the Settlement Rights adjustment and $.09 per share effect
of the loss on the television station sale. Income per share
(excluding these items and dividends) from operations of $.22
<PAGE>
improved from an $.18 loss in 1993. All comparisons, unless
otherwise noted, are for the six month period ended June 30, 1994
as compared to the comparable 1993 period.
IN-STORE MARKETING. The In-store Marketing Group contributed
$96.3 million of revenues in 1994, an increase of 3%, compared
to $93.9 million in 1993. The growth of ICM revenues was the
major contributor to the improved results. The ICM generated
$35.2 million of revenues in 1994, an increase of 39% compared
to 1993. Also, International revenues grew by 16% to $8.8 million
in 1994 primarily due to improvement from the Canadian business and
the inclusion of $.7 million revenues from the recent Australia/New Zealand
acquisitions. Advertising revenues in 1994 declined 9% compared to 1993
reflecting the shift to ICM and away from the print products. Total Impact
revenues declined by 11% to $18.7 million in 1994 due to competitive pricing
pressures and customer requested rescheduling of programs. ActNow had three
smaller programs totaling approximately $8.5 million in 1994 yielding a lower
margin than the comparable three programs totaling $12.4 million in the 1993
period.
Net revenues of the ACTRADIO product decreased to $1.9 million in 1994
from $2.3 million in 1993. As a result of the Company's actions noted above,
the on-going operating costs in 1994 were reduced by approximately $.9 million
and depreciation was decreased by $1.2 million.
In-store Marketing operating income of $12.9 million increased by 58%,
from $8.2 million in the 1993 period, due primarily to the increased 1994
revenues, favorable revenue mix with higher margins, and reduced ACTRADIO
losses. The operating margin was 13% in 1994 compared to 9% in 1993.
The In-store Marketing Group contributed 71% of the Company's revenues
and 58% 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 full year 1994. The Company anticipates that
the third and fourth quarter operating results for the In-store Group
will exceed that of the comparable 1993 periods.
TELEVISION. The Television Group generated $21.3 million of revenues
in 1994, a 9% increase compared to $19.5 million in 1993. The Television
Bureau of Advertising Time Sales Survey reported that industry-wide gross
local revenues increased by 9% and national revenues were up 12% compared
to 1993 aided by the Winter Olympics in the first quarter and political
revenues. The Television Group's local revenues increased 6% and national
revenues improved 9% compared to the 1993 period. The Television Group
did not benefit from the Olympics as the group has no CBS affiliates,
but did receive $.6 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 10% primarily on the strength of automobile
industry sales and $.4 million of political revenues.
Operating income of $7.1 million increased by 21% compared to 1993
primarily as a result of the higher revenues as expenses were held
to a 4% increase. The operating margin improved from 30% in 1993
to 33% in 1994.
RADIO. The Radio Advertising Bureau reported that combined national
and local spot revenues improved 11% in the six months of 1994 over
the same period in 1993 for the radio industry. Net revenues of the
Radio Group increased by 26% from $14.1 million in 1993 to $17.8 million
in 1994. The radio stations acquired in 1993 and 1994 contributed
$1.8 million of the increase. Revenues for the stations owned for all
of both periods increased 14% primarily as a result of stronger industry
revenues noted above and improved station ratings.
Operating income grew from $2.7 million in 1993 to $3.6 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 $.4
<PAGE>
million loss. The operating margin improved from 19% in 1993 to 25% in 1994
for the stations owned in all of both periods.
CORPORATE EXPENSES. Corporate expenses of $1.5 million in 1994 were
$.1 million favorable to 1993.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
$13.9 million in 1994 increased by 9% compared to $12.8 million in 1993.
The majority of the increase was due to higher depreciation associated
with the capital expenditures to support the growth of Instant Coupon
Machine revenues and increased amortization associated with radio station
acquisitions and ACTRADIO marketing rights.
INTEREST EXPENSE. Interest expense consists of the following:
<TABLE>
<CAPTION>
(in thousands)
SIX MONTHS
ENDED JUNE 30,
-----------------
1994 1993
---- ----
<S> <C> <C>
Interest accrued and
paid currently ......... $14,081 16,581
Amortization of
deferred financing costs 377 338
------- ------
TOTAL $14,458 16,919
======= ======
</TABLE>
The decrease in current interest from 1993 to 1994 is due to the
expiration of interest rate swaps in June, 1993 and lower interest rates.
OTHER EXPENSE. Other expense included $1.6 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 noted above.
NET INCOME (LOSS). Primarily as a result of an additional
$7 million of operating income and $2.5 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 $2.9 million loss in 1993 to $2.2 million of net income in 1994.
CAPITALIZATION AND LIQUIDITY
At June 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
facility 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 June 30, 1994, $80 million of the
term loan facility and $32.5 million of the revolving credit facility
were outstanding. At June 30, 1994, $42.5 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
<PAGE>
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.
In mid-1989, the Company issued approximately $7.55 million in equity
settlement rights (the "Rights") (7.55 million Rights) in connection
with the financing of the ACTMEDIA acquisition. At the time of issuance,
these Rights entitled the holders to approximately 18% of the fair market
value of the business, properties and assets of ACTMEDIA as a going concern
("Net Equity") as determined in 1994 or 1996 in accordance with put/call
features of the Rights purchase agreement. Depending on the circumstances
under which the Rights are retired, the Company can pay this value in common
stock or cash or subordinated notes convertible into common stock. To the
extent such amount is paid in common stock, the valuation is required to be
increased by 4%. During the past four years the Company acquired 1.6 million
of the Rights at an average price of approximately $2.72 per Right in
privately negotiated transactions, thereby reducing the outstanding Rights
to 5.9 million or 14.1% of the Net Equity.
The Rights mature seven years from the date of issuance (March 19, 1996),
but they may be redeemed at the option of the holder ("put options") or
the Company ("call options") at certain specified times during the period
that they are outstanding. On or after April 19, 1994
(but prior to May 19, 1994), the Company was required to select an
independent appraiser to determine the fair market value of the Net Equity
of ACTMEDIA. The Company received proposals from eight independent
appraiser firms. The Company recommended and a special committee of
the Board of Directors approved Bear Stearns & Co. as the appraiser.
The Company formally engaged Bear Stearns & Co. on May 4, 1994 and the
appraisal was provided on June 27. On June 28, Heritage announced that
the Rights had been independently appraised at $6.55 per Right. This
appraisal placed a total value on the 5.9 million currently outstanding
Rights of $38.8 million.
For a period of 30 days commencing June 29, 1994, the holders had the
right to exercise a put option at such valuation. Also during that period,
the Company had the right to exercise a call option at such valuation.
The put options may be paid in cash or, at the option of the Company,
in Class A or Class C common stock, a combination of cash and common
stock or, in certain circumstances, in subordinated notes convertible
into common stock. The call options are to be paid in cash unless
such payment would create an "adverse contractual effect" (defined
generally as default under, or conflict with, agreements relating
to the Company's indebtedness) for the Company, in which event,
the Company may utilize the same payment process as described for
the put option. The Company announced, on July 28, 1994, that
it had exercised its call option to retire 100% of the outstanding
Rights for a cash price of $6.55 per Right or an aggregate purchase
price of $38.8 million. The Company will utilize cash flow from
operations and borrowings under the Credit Agreement to fund the
purchase price. The Company expects that the transaction will
be completed on August 26, 1994.
Based upon the foregoing debt and settlement right obligations,
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 June 30, 1994, the Company had indebtedness (long-term debt,
including current installments and notes payable) of
approximately $323.7 million and stockholders' equity of
approximately $68.5 million, and accordingly, a consolidated
debt-to-equity ratio of 4.7 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
<PAGE>
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 June 30, 1994, the total amount of
dividends that could be paid by HMSI to the Company was $55.7 million.
Under the Senior Note Indenture, at June 30, 1994, the total amount of
dividends that could be paid by HMSI to the Company was $57.3 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 $104.3 million at June 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.
The Company has focused its growth strategy on acquiring media, in-store,
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 $12.3 million
in 1994 from $13.5 million in 1993. The $10 million improvement in
net income (adjusted for noncash items) was more than offset by a
$1.4 million reduction in deferred revenue and a $9.6 million variance
in working capital items due primarily to the timing of in-store
demonstration programs.
In 1994 the $4 million beginning cash balance, $12.3 million of cash
provided by operations, and $2 million of net bank borrowings were
primarily utilized for the cash portion of the acquisitions ($7.7 million),
capital expenditures ($5.9 million) and in-store marketing rights payments
($.8 million). In 1993, cash flows from operating activities and net
borrowings were utilized for capital expenditures, to purchase settlement
rights, and to reduce other long-term liabilities.
Capital expenditures decreased from $6.3 million in 1993 to $5.9 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 $.8 million in the six months ended
June 30, 1994 and is expecting to make payments totaling approximately
$3 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.
<PAGE>
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: August 11, 1994 by /s/ David N. Walthall
--------------- -------------------------------
David N. Walthall
President and
Chief Executive Officer
Dated: August 11, 1994 by /s/ James P. Lehr
--------------- -------------------------------
James P. Lehr
Vice President and Controller
Principal Accounting Officer
