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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993;
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
.
COMMISSION FILE NUMBER: 1-10015
------------------------
HERITAGE MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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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)
</TABLE>
Registrant's telephone number, including area code:
(214) 702-7380
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 8, 1994 is $195,530,310.
The number of shares outstanding of each of the issuer's classes of common
stock, as of March 8, 1994:
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CLASS SHARES OUTSTANDING
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Class A, $.01 Par Value..... 12,634,596
Class C, $.01 Par Value..... 4,829,728
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List hereunder the following documents incorporated by reference:
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DOCUMENT PART OF FORM 10-K
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Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 26,
1994 (the "Proxy Statement"). III
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i
<PAGE>
HERITAGE MEDIA CORPORATION
1993 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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Page
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Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 16
Item 3. Legal Proceedings............................................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 16
Item 6. Selected Financial Data...................................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 18
Item 8. Financial Statements and Supplementary Data.................................................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 25
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 26
Item 11. Executive Compensation....................................................................... 26
Item 12. Security Ownership of Certain Benefical Owners and Management................................ 26
Item 13. Certain Relationships and Related Transactions............................................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 26
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PART I
ITEM 1. BUSINESS.
1.(A) GENERAL
Heritage Media Corporation (the "Company", "Heritage", or "HMC"), through
its ACTMEDIA, Inc. ("ACTMEDIA") subsidiary, is the world's largest independent
provider of in-store marketing products and services, primarily to consumer
packaged goods manufacturers with products in supermarkets and drug stores.
Heritage also owns and operates six network-affiliated television stations and
fourteen radio stations in seven major markets.
ACTMEDIA offers advertisers a broad assortment of in-store advertising and
promotional products which can be purchased separately or integrated to produce
a cohesive in-store marketing program for a given product. ACTMEDIA's products
and services include print advertisements on shopping carts, aisle directories
and shelf facings, promotional products such as cooperative coupon and sampling
programs, on-shelf electronic couponing, customized in-store demonstrations and
merchandising, and audio in-store advertising.
ACTMEDIA's in-store marketing business is part of the alternative media
industry, which has grown rapidly at a time when advertising expenditure growth
rates on traditional marketing have slowed. ACTMEDIA's revenues have grown from
$116 million in 1989 to $216 million in 1993, a compounded annual growth rate of
17%. ACTMEDIA is the only in-store marketing participant with a full-time field
management staff supervising its own national field service organization (up to
approximately 15,000 available part-time employees). ACTMEDIA delivers its
products and services in over 24,000 supermarkets and 12,000 drug stores.
Heritage's principal strategy and goal for its in-store marketing business
is to develop new in-store products or product enhancements, to pursue in-store
opportunities in additional markets outside the U.S., to expand in-store
marketing services to new classes of stores and to increase the utilization of
its existing in-store products particularly the Instant Coupon Machine and its
audio in-store product.
The Company's strategy for its television broadcasting business is to
emphasize obtaining local advertising revenues through market segmentation,
focusing on local news programming and tightly controlling operating expenses.
Heritage's strategy for its radio broadcasting business is to focus on the
acquisition of underperforming stations and to improve their operations.
1.(B) BUSINESS SEGMENT INFORMATION
The business segment information required by this item is set forth in Note
11 of Notes to Consolidated Financial Statements of Heritage, included herein.
1.(C) DESCRIPTION OF THE BUSINESS
IN-STORE MARKETING
Alternative media augments mass media advertising by reinforcing advertising
and promotional messages to consumers where they congregate and, in the case of
in-store marketing, where purchase decisions are made. The advent of the
alternative media industry was prompted by the realization that traditional mass
media vehicles (television, radio, and print advertisements) were becoming less
effective due to changes in the profile of a typical shopper and his or her
shopping patterns and to the proliferation of types of media used to communicate
to the shopping public. Changing shopping patterns have led to shorter
supermarket visits, usually without shopping lists, and declining brand loyalty.
Industry sources estimate that a significant percentage (ranging from 40% to
66%) of brand purchase decisions are made in the supermarket. Economic trends
also support the continued growth of in-store marketing because this medium is
inexpensive in comparison to other marketing alternatives such as television,
radio and traditional print advertisements. In-store marketing is based upon the
foundation that the store is the only place where the product, the
manufacturer's message and the
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consumer with an intent to buy all converge. In-store marketing products and
services thus allow advertisers to communicate with consumers at or near the
point-of-purchase before, or as, purchasing decisions are made.
PRODUCTS AND SERVICES
ACTMEDIA offers advertisers a broad assortment of in-store advertising and
promotional products which can be purchased separately or integrated under the
Company's "store domination" concept to produce a cohesive in-store marketing
presentation for a given product or brand. ACTMEDIA's products and services
include print advertising products, such as advertisements on shopping carts,
aisle directories and shelf facings; promotional products, such as cooperative
coupon and sampling programs; on-shelf electronic couponing; audio in-store
advertising; and customized in-store demonstrations and merchandising. By
linking sight, sound and one-on-one selling, ACTMEDIA provides its clients with
an effective means to reach the consumer at the point-of-purchase.
INSTANT COUPON MACHINE. The Instant Coupon Machine ("ICM"), which was
developed by ACTMEDIA, is an electronic coupon dispenser that is mounted on
shelf channels under or near featured products. Through independent market
research sponsored by the Company, the ICM was shown to increase brand switching
substantially and to encourage first-time purchases of featured products. In
market testing, coupons featured in ACTMEDIA's ICM achieved an average
redemption rate of 17%, versus reported redemption rates of approximately 2% for
coupons in free-standing inserts, approximately 4% for coupons sent to consumers
in direct mailings and less than 1% for run of press coupons. The Company's test
results also indicated that unit sales increased an average of 35% over four
weeks for products using the ICM.
In addition to its high redemption rate, test marketing indicated that the
ICM would generate significant unplanned purchases; approximately 56% of
purchases made with coupons from the ICM were unplanned in 1992. In 1993 this
rate had grown to 62%. The Company believes that the ICM is also effective in
reaching shoppers who do not normally use coupons; in market tests approximately
47% of consumers who redeemed a coupon from the ICM stated that they never use
or only occasionally use a coupon.
The ICM holds 500 coupons and is marketed to advertisers on a
category-exclusive basis at the shelf. The ICM is sold in four-week cycles.
National rollout of the ICM commenced in February 1992. By the end of 1993 the
ICM was available in approximately 8,700 grocery stores and 5,700 drug stores.
In January 1992, the Company was granted a patent with respect to certain design
features of the ICM.
RETAILERS' CHOICE. ACTMEDIA's Retailers' Choice program provides
cooperative in-store coupon and sampling programs for groups of advertisers,
generally five times per year. Under these programs, ACTMEDIA's representatives
distribute coupons, samples and premiums inside the entrance of approximately
12,500 stores nationwide. Up to 16.5 million co-op coupon booklets and up to
16.5 million solo coupons and samples are distributed directly to shopping
customers per event. In addition, product awareness is reinforced through the
placement of featured products on a free-standing Retailer's Choice display.
Market tests indicate that these events typically result in 40% of coupon
redeemers being new brand users or switchers. Of the Retailers' Choice coupons
redeemed, research by the Company indicates approximately 18% are generally
redeemed in the first day of an event, which contrasts positively to
free-standing insert coupon rates of redemption.
IMPACT. Impact is the nation's leading in-store supermarket demonstration
program, offering advertisers complete turnkey service for their in-store
events. Customized events, such as tastings, premiums, samplings and
demonstrations, are conducted in up to 24,000 stores nationwide. All
demonstrations are monitored every day by full-time and part-time supervisors at
an average ratio of
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one supervisor to 15 demonstrators. Impact's regular part-time staff of
demonstrators, who implement the programs, maintain a consistent professional
appearance (with matching aprons and materials). Special display units are
utilized in the programs and programs are sold on a store-day basis. Events are
generally conducted at the front of the store but can be located elsewhere.
Category exclusivity is offered by store chains on event days.
CARTS. ACTMEDIA's 8" by 10", four-color advertisements, mounted in plastic
frames on the inside and outside of shopping carts, offer advertisers continuous
storewide category-exclusive advertising delivery of a print advertisement.
Because the shopping cart ads circulate around the entire store with the
shopper, these advertisements are an effective tool for advertisers to reinforce
their messages. Shopping cart advertisements are available in approximately
8,000 supermarkets nationwide, offering coverage of approximately 80 areas of
dominant influence ("ADI"). Shopping cart advertisements are sold in four-week
cycles to a maximum of twelve advertisers per cycle and, according to a study by
Simmons Research, reach store locations visited by more than 90 million shoppers
per cycle. According to studies by Audits & Surveys, Inc. ("A&S") conducted from
1973 to 1993, the use of shopping cart advertisements increased average unit
sales for the products advertised by approximately 10% in stores where they were
utilized.
AISLEVISION. AisleVision features 28" by 18" four-color advertisement
posters inserted in stores' overhead aisle directory signs. The large size of
AisleVision draws attention to the supermarket aisle in which the product is
stocked and has the added benefit of being frequently used by shoppers during
their shopping trips. ACTMEDIA's AisleVision is sold in approximately 7,000
stores nationwide, offering category-exclusive coverage of approximately 170
ADI's. AisleVision is sold in four-week cycles to a maximum of 18 advertisers
per cycle. Studies conducted by A&S from 1985 to 1993 reported that the use of
AisleVision increased average unit sales for the products advertised by
approximately 8%. An enhancement, AisleAction, allows the manufacturer to
include motion on the directory sign, enhancing shopper awareness of the sign.
SHELFTALK/SHELFTAKE-ONE. ShelfTalk features advertisements placed in
plastic frames mounted on supermarket or drug store shelves near its featured
product. ShelfTake-One includes rebate offers or recipe ideas which consumers
may remove from the plastic frame at the site of the featured product. These
four-color, 5 1/4" by 4" ads placed perpendicular to the shelf and facing in
both directions are an effective means of bringing attention to a product at the
shelf level and reinforcing advertising messages at the point-of-purchase.
ShelfTalk and ShelfTake-One are sold in approximately 10,000 supermarkets,
offering coverage of approximately 180 ADI's, and in approximately 5,500 drug
stores, covering approximately 160 ADI's. ShelfTalk and ShelfTake-One are sold
in four week cycles on a category-exclusive basis at the shelf. Studies
conducted by A&S from 1985 to 1993 reported that ShelfTalk resulted in an
approximately 5% average unit sales gain for the products advertised in grocery
stores and an approximately 11% average unit sales gain for the products
advertised in drug stores.
ACTRADIO. ACTRADIO, formerly POP (Point of Purchase) Radio, is the nation's
largest advertiser-supported, in-store radio network. ACTRADIO delivers its
in-store audio advertising in conjunction with music entertainment services
provided by the nation's leading business music providers. Retailers
participating in the ACTRADIO network generally receive a share of revenues from
the sale of advertising time. At December 31, 1993 there were 7,555 chain
supermarkets, 7,395 chain drug stores and 770 Toys 'R' Us/Kids 'R' Us toy and
children clothing stores totaling 15,720 stores comprising the total network.
ACTRADIO delivers over 800 million advertising impressions over a four week
period reaching 68% of adults an average of 6.5 times according to recent
Simmons data. This massive reach and frequency makes ACTRADIO an attractive
alternative to traditional broadcast, published, or direct mail advertising.
Advertisers can extend their message at the point of sale at a fraction of the
CPM (cost per thousand) of traditional media. In addition to its advertising
value, A&S studies from 1987 through 1992 show that ACTRADIO delivers an average
sales gain of 9% with a brand sell ad, and over
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20% when a promotional tag or price tag is added. Research conducted in 1992
also indicated that 94% of all shoppers are attentive to the brand sell
commercials, and that over half of all shoppers claim it has a positive effect
in their purchase choices.
ACTRADIO sells advertising time to manufacturers in units of 15 second, 20
second, and 30 second commercials each hour with feature tagging available as an
option. ACTRADIO is sold in four week cycles comprising a minimum of 336
broadcasting hours and is available on a national, regional or chain specific
basis. Advertisers may run their existing broadcast advertisements or ACTRADIO
will produce commercials for them. Each hour of customized programming for
retailers includes 48 minutes of music (with a wide choice of formats), 10
minutes of advertising and two minutes of airtime provided to retailers for
their own promotional messages.
In 1993 ACTRADIO terminated its Joint Operating Agreement ("JOA") with MUZAK
and entered into new marketing alliances with leading in-store music providers
A.E.I., Muzak, and Broadcast International to create the largest in-store
satellite delivered radio network in the United States. The alliances designate
ACTRADIO as the music providers' exclusive national advertising agent for a
select group of retailers which includes most of the leading national
supermarket and drug chains. A similar arrangement with Digital Music Express
("DMX") is expected to be finalized in the near future in conjunction with the
launch of DMX/DBS satellite music service.
ACTRADIO and the music providers will jointly upgrade and expand the
in-store satellite delivery systems across the entire network. As of December
31, 1993, over 40% of the network was satellite delivered, with the balance of
the network being delivered via tape equipment. ACTRADIO anticipates the entire
satellite network to be completed by the end of 1994 targeting an expanded store
base of nearly 24,000 stores.
The new name, ACTRADIO Network, adopted in January 1994 more closely aligns
the in-store audio product with the wide array of other in-store marketing
products and services offered by ACTMEDIA.
FREEZERVISION. ACTMEDIA's FreezerVision offers advertisers a means to
reinforce its advertising messages at the upright freezercase. FreezerVision is
a triangle-shaped print advertisement, mounted in a plastic frame, on the
outside of the glass freezercase door. FreezerVision offers highly visible,
category-exclusive advertising coverage. FreezerVision is sold in four-week
cycles and national retail sales of FreezerVision began in the fourth quarter of
1992. FreezerVision was available in approximately 2,000 supermarkets by the end
of 1993.
SELECT. In 1991, the Company also offers Select, a service which utilizes
ACTMEDIA's part-time field force to perform in-store merchandising tasks for
manufacturers. These tasks have included on-pack couponing and stickering,
distribution checks and installation of point-of-purchase materials.
IN-STORE NETWORK
ACTMEDIA's in-store network delivers its products and services in over
24,000 supermarkets and 12,000 drug stores across the country, a network
substantially larger than that of any other in-store marketing company. By
contracting to purchase the Company's in-store advertising and promotional
products, advertisers gain access to up to approximately 200 of the nation's 214
ADI's covering over 70% of the households in the United States.
ACTMEDIA currently has contracts with approximately 300 store chains.
ACTMEDIA's store contracts generally grant it the exclusive right to provide its
customers with those in-store advertising services which are contractually
specified. The contracts are of various durations, generally extending from
three to five years and provide for a revenue-sharing arrangement with the
stores. ACTMEDIA's store contract renewals are staggered and many of its
relationships have been maintained for almost two decades.
ACTMEDIA's advertising and promotional programs are executed through one of
the nation's largest independent in-store distribution and service
organizations, although certain chains require
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the Company to utilize their own employees. ACTMEDIA believes the training,
supervision and size of its field service staff (approximately 300 full-time
managers and up to approximately 15,000 available part-time employees) provide
it with a significant competitive advantage as its competitors generally do not
have a comparable field service staff.
The Company is attempting to expand its in-store products to additional
classes of trade, such as club stores, discount stores, mass merchandisers and
convenience stores.
CUSTOMER BASE
ACTMEDIA's customer base includes approximately 250 companies and 700
brands. This customer base includes the 25 largest advertisers of consumer
packaged goods. In 1993, the Company's largest customers included the following:
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Campbell Soup McNeil
Chesebrough-Pond's Nestle Foods
General Mills Pillsbury
Hunt-Wesson Procter & Gamble
Johnson & Johnson Quaker Oats
Kelloggs Ralston Purina
Kraft/General Foods RJR Nabisco
Lever Brothers
</TABLE>
During 1993, Procter & Gamble was the Company's most significant customer.
The loss of this customer would materially and adversely affect the Company.
ACTMEDIA's sales organization markets its services to consumer packaged
goods brand managers, promotion managers and their advertising agencies.
ACTMEDIA's sales force consists of approximately 40 representatives, who are
compensated on a salary-plus-commission basis. In addition to its sales force
for its base products, ACTRADIO has established a separate sales force. Sales
representatives stress the benefits of in-store marketing services, including:
(i) the exclusivity afforded advertisers for a specific merchandise category, a
feature generally unavailable in television, radio, magazine or newspaper
advertising; (ii) increases in sales volume; (iii) the ability to reach
customers at the point-of-purchase where industry sources estimate that a
significant number (ranging from 40% to 66%) of all brand buying decisions are
made; and (iv) ACTMEDIA's ability to reach a significant number of consumers at
costs per thousand that are significantly less than comparable television or
print advertising.
INTERNATIONAL OPERATIONS AND INVESTMENTS
The Company has set the establishment of a significant business presence
outside of the United States as an important priority for ACTMEDIA. The majority
of the Company's advertisers are large, multinational companies for whom the use
of in-store marketing products in overseas markets is expected to be a logical
extension of their advertising and promotional budgets.
In November 1990, the Company acquired one of Canada's largest in-store
marketing companies (now renamed ACTMEDIA Canada), which primarily operated an
in-store cart advertising program. In August 1991, ACTMEDIA Canada acquired a
Canadian company whose services include in-store demonstrations, merchandising
and information collection. The combination of these two companies has enabled
ACTMEDIA to attain a significant market position in Canada comparable to
ACTMEDIA's U.S. market position. In January 1992, the Company formed a joint
venture named ACTMEDIA Europe in which it has a 65% interest and H. L. van Loon
(of Amsterdam, The Netherlands) has a 35% interest. ACTMEDIA Europe
simultaneously acquired Media Meervoud, N.V., a Dutch in-store marketing company
engaged in both cart advertising and promotions, of which Mr. van Loon was the
principal shareholder. During 1993, ACTMEDIA Asia was launched in a joint
venture with Omnilink of Singapore. In February 1994, ACTMEDIA acquired in-store
marketing companies in Australia and New Zealand.
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In addition to analyzing international acquisition opportunities in other
countries, ACTMEDIA has commenced a program to license its name and train
licensees in the methods of conducting in-store operations in countries where
the in-store industry is too small for a direct ACTMEDIA presence. Although
ACTMEDIA has presently entered into four such license agreements (covering
Israel, Turkey, South Africa and Venezuela), revenues from licensed operations
were not material in 1993.
International sales in 1993 accounted for $17.7 million (approximately 8%)
of the In-store revenues.
DEVELOPMENT
ACTMEDIA is actively pursuing, testing, and developing new product and new
business opportunities. Growth opportunities exist in several areas including
expanding ACTMEDIA's sampling and demonstration businesses outside the store as
well as in-store through the marketing of non-packaged goods. Introducing
ACTMEDIA's products into mass merchandisers and convenience store classes of
trade remains a key focus area. ACTMEDIA is also pursuing in-store merchandising
opportunities through leveraging its national field service organization.
International in-store acquisitions continue to be evaluated as vehicles to
introduce ACTMEDIA's products worldwide.
COMPETITION
The advertising and promotion industries are characterized by intense
competition. ACTMEDIA competes directly with other point-of-purchase advertisers
and coupon/sampling/distribution/demonstration companies and indirectly with all
other media in the supply of local and national advertising and promotion
services, including cable television, television, radio, magazines, outdoor
advertising and newspapers. Also, certain store chains offer limited advertising
and promotional products and services.
The Company believes that the principal competitive factors affecting its
in-store marketing business are the cost of its services and the ability to
demonstrate the cost effectiveness of its services as well as the comprehensive
scope, coverage and quality of the services provided. There are relatively few
barriers to entry particularly at the local level for suppliers of many
different types of marketing (including packaged goods manufacturers,
advertising agencies, retailers or other companies). However, the development of
a nationwide capacity to supply advertising or promotional programs would
require sufficient field service personnel to distribute and service comparable
advertising or promotional programs, and substantial time and effort could be
required to obtain the comprehensive store relationships, contracts and
execution systems developed by ACTMEDIA over the years.
Although the Company believes that ACTMEDIA is the largest provider of
in-store marketing services, other companies (some of which are affiliated with
large companies) offer similar services. Moreover, the in-store marketing
environment is characterized by rapid technological change, and future
technological developments (if and when cost effective) may affect competition.
BROADCASTING
Heritage owns and operates six network-affiliated television stations (plus
one affiliate licensed as a satellite station but operated as a partial
stand-alone station), three AM/FM combination radio stations, two stand-alone FM
radio stations, and two AM/FM/FM combination radio stations.
TELEVISION
The Television Group owns six network-affiliated television stations.
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The following table sets forth selected information relating to the
television stations owned by Heritage:
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STATION TV DMA OTHER COMMERCIAL
AND CHANNEL NETWORK HOMES MARKET STATIONS STATION MARKET
LOCATION NUMBER AFFILIATION IN DMA (1) RANK (1) IN DMA SHARE (2)
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KOKH-TV 25 FOX 572,300 43 4 7
(UHF)
Oklahoma City, OK
WCHS-TV 8 ABC 473,200 56 3 17
(VHF)
Charleston/
Huntington, WV
WEAR-TV 3 ABC 422,340 62 4 19
(VHF)
Mobile, AL/
Pensacola, FL
WPTZ-TV 5 NBC 282,740(4) 92(4) 2 17
(VHF)
Burlington, VT/
Plattsburgh, NY
WNNE-TV 31 NBC 282,740(4) 92(4) 3 4
(UHF)(5)
Hartford, VT/
Hanover, NH
KDLT-TV 5 NBC 219,700 107 3 11
(VHF)
Sioux Falls/
Mitchell, SD
KEVN-TV 7 NBC 84,520 173 2 22
(VHF)
Rapid City, SD
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STATION
AND STATION RANK IN
LOCATION MARKET (3)
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KOKH-TV 4
(UHF)
Oklahoma City, OK
WCHS-TV 2
(VHF)
Charleston/
Huntington, WV
WEAR-TV 2
(VHF)
Mobile, AL/
Pensacola, FL
WPTZ-TV 2
(VHF)
Burlington, VT/
Plattsburgh, NY
WNNE-TV 4
(UHF)(5)
Hartford, VT/
Hanover, NH
KDLT-TV 3
(VHF)
Sioux Falls/
Mitchell, SD
KEVN-TV 2
(VHF)
Rapid City, SD
<FN>
- ------------------------------
(1) Source: Nielsen Television Designated Market Area ("DMA") Market rankings
1993-1994.
(2) "Sign on-Sign off " market shares as reported in the November 1993 Nielsen
ratings. Ratings are often quoted on a "sign on-sign off" basis,
representing the average percentage of television households viewing the
station during normal program viewing periods (approximately 7:00 a.m. to
1:00 a.m. for Nielsen). As such, ratings are one common measure used by
advertisers and others to compare a station's overall ranking in a market
to its competitors.
(3) Rankings based on relative "sign on-sign off" market shares in the November
1993 ratings of Nielson.
(4) Does not reflect any homes in southern Quebec (including most of Montreal)
which received the WPTZ-TV signal off the air or by cable. WPTZ-TV's signal
is accessible to approximately 3.4 million people in the province of Quebec
including approximately 2.8 million people in the city of Montreal.
(5) Operated as a satellite of WPTZ-TV, but maintains some local programming
and sells advertising locally.
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Heritage operates its television stations in accordance with a cost-benefit
strategy that stresses primarily revenue and cash flow generation and
secondarily audience share and ratings. The objective of this strategy is to
deliver acceptable profit margins while maintaining a balance between the large
programming investment usually required to maintain a number one ranking (with
its resultant adverse effect on profit margins), and the unfavorable impact on
revenues that results from lower audience ratings.
Components of the Company's operating strategy include management's emphasis
on obtaining local advertising revenues by market segmentation, which provides a
competitive advertising advantage, focusing on local news programming and
tightly controlling operating expenses. By emphasizing advertising sales from
local businesses, the Company's stations produce a higher percentage of local
business (approximately 63% local and 37% national) than the national average.
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The following table sets forth certain historical net revenue and direct
expense information for Heritage's television stations. This information does
not reflect any corporate, television group, or nonrecurring expenses, interest
expense, or income taxes.
<TABLE>
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YEARS ENDED DECEMBER 31,
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1993 1992 1991
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(IN THOUSANDS)
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KOKH-TV (Oklahoma City, OK):(1)
Net revenue............................................................ $ 7,307 $ 6,257 $ 4,440
Expenses:
Cost of services..................................................... 1,538 1,454 1,176
Selling, general and administrative.................................. 1,446 1,334 1,084
Depreciation, amortization and writedowns............................ 881 1,280 739
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WCHS-TV (Charleston/Huntington, WV):
Net revenue............................................................ 7,502 7,569 7,608
Expenses:
Cost of services..................................................... 2,164 2,171 1,989
Selling, general and administrative.................................. 2,023 1,812 1,903
Depreciation, amortization and writedowns............................ 2,501 1,770 1,871
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WEAR-TV (Mobile, AL/Pensacola, FL):
Net revenue............................................................ 11,991 10,894 9,731
Expenses:
Cost of services..................................................... 2,436 2,272 2,062
Selling, general and administrative.................................. 2,854 2,403 2,189
Depreciation, amortization and writedowns............................ 2,961 2,076 2,247
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WPTZ-TV (Burlington, VT/Plattsburgh, NY);
and WNNE-TV (Hartford, VT/Hanover, NH):
Net revenue............................................................ 9,624 9,774 8,544
Expenses:
Cost of services..................................................... 2,300 2,251 2,128
Selling, general and administrative.................................. 2,650 2,596 2,414
Depreciation, amortization and writedowns............................ 1,959 1,921 1,767
--------- --------- ---------
KDLT-TV (Sioux Falls/Mitchell, SD):
Net revenue............................................................ 2,142 2,235 2,017
Expenses:
Cost of services..................................................... 900 865 844
Selling, general and administrative.................................. 891 894 872
Depreciation, amortization and writedowns............................ 550 555 561
--------- --------- ---------
KEVN-TV (Rapid City, SD):
Net revenue............................................................ 2,951 2,974 2,979
Expenses:
Cost of services..................................................... 828 819 799
Selling, general and administrative.................................. 764 710 704
Depreciation, amortization and writedowns............................ 607 671 716
--------- --------- ---------
<FN>
- ------------------------
(1) The information sets forth the historical results of the previously owned
KAUT-TV for periods through August 15, 1991 and for KOKH-TV thereafter.
</TABLE>
The primary costs involved in owning and operating stations are salaries,
programming, news expense, depreciation and amortization and commissions for
advertising. Television station revenues are primarily derived from
local/regional and national advertising and to a lesser extent network
8
<PAGE>
compensation, with a small percentage of revenue sometimes obtained from studio
rental and programming-related activities. The majority of national and
local/regional advertising contracts are short-term, generally running for only
a few weeks.
WEAR-TV, the ABC affiliate in Pensacola, is the only network affiliated
station in the Pensacola-Mobile market which is physically located in Florida
and benefits from the market's growth which comes primarily from Florida. In
1993, the station's newscast obtained the market's number one rating and the
station began constructing a new studio facility in Pensacola which is scheduled
for completion in March 1994.
The Television Group's station in Plattsburgh/Burlington, WPTZ-TV, an NBC
affiliate, also provides NBC programming to southern Quebec, including Montreal.
Additionally, WPTZ-TV operates WNNE-TV, a satellite station serving portions of
New Hampshire and Vermont, which allows advertisers to selectively air their
messages over WPTZ-TV's entire market or segments of the market.
WCHS-TV, an ABC affiliate, is the only network affiliate based in the
capital city of Charleston, within the Charleston and Huntington market.
The Company acquired KOKH-TV in Oklahoma City, Oklahoma on August 15, 1991
and sold its KAUT-TV station in the same market to a non-commercial licensee
(while transferring KAUT's FOX network affiliation to KOKH). The acquisition of
KOKH-TV has been very successful. The improved channel position, signal
strength, elimination of a commercial station in the market, and the emergence
of the Fox network have contributed to the significant revenue increase since
the acquisition.
In South Dakota, the Company operates two stations, KEVN-TV in Rapid City
and KDLT-TV in Sioux Falls, both NBC affiliates.
Three of the Company's stations, WEAR-TV, WPTZ-TV and WCHS-TV, which
represent 73% of the operating income from Heritage's television operations,
have developed specific market segmentation strategies based on their status as
the sole network affiliate in one geographic area of a hyphenated market. This
geographic advantage enables these stations to build strong local identities and
leading positions in local news programming in their portions of these
hyphenated markets. In addition, WPTZ-TV and KEVN-TV, both VHF stations, have a
transmission advantage in their market areas compared to certain other network
affiliates, but KDLT-TV suffers from a signal disadvantage because of the
location of its tower.
The Company has shaped its sales efforts around two central beliefs: (1)
that national advertising spots and a station's relations with its clients are
based on ratings, while the sales of local spots depends to a greater extent on
the station's local sales force and their relations with clients and (2) that
the local advertising segment is the fastest growing advertising segment. As a
result of these beliefs, Heritage's stations generally maintain a larger, more
experienced sales force but a smaller general staff than its competitors. The
strength of the stations' sales forces and their orientation toward generating
local advertising revenue have resulted in 63% of the stations' revenues being
derived from local sources, against an industry average estimated at
approximately 50%.
9
<PAGE>
RADIO
The Radio Group owns and operates five AM and nine FM radio stations
(including two FM "duopolies") in seven of the top 50 markets -- Seattle, WA;
St. Louis, MO; Cincinnati, OH; Portland, OR; Milwaukee, WI; Kansas City, MO; and
Rochester, NY. The following table sets forth certain information regarding
Heritage's radio stations:
<TABLE>
<CAPTION>
STATIONS FM STATION RANK IN
METRO IN FM STATION FORMAT TARGET
LOCATION RANK (1) CALL SIGN FORMAT MARKET RANK (2) AUDIENCE (3)
- ---------------------- --------------- --------------- ----------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Seattle, WA........... 13 KULL-AM Oldies 30
KRPM-FM Country 2 7
St. Louis, MO......... 18 WRTH-AM Standards 34
WIL-FM Country 1 1
Cincinnati, OH........ 25 WOFX-FM Classic Rock 24 1 5
Portland, OR.......... 26 KKSN-AM Standards 25
KKSN-FM Oldies 1 10
Milwaukee, WI......... 28 WEMP-AM Oldies 26
WMYX-FM Adult 1 6
WEZW-FM Contemporary 2 10
Kansas City, MO....... 30 KCFX-FM Classic Rock 25 1 1
Rochester, NY......... 45 WBBF-AM Standards 16
WBEE-FM Country 1 1
WKLX-FM........ Oldies 1 7
<FN>
- ------------------------
(1) Metropolitan areas as defined and ranked by Arbitron, Fall 1993.
(2) Heritage's FM station ranking against all radio stations in its market with
the same programming format, based on persons aged 25 to 54 listening
during the 6:00 a.m. to midnight time period. (Source: Fall 1993 Arbitron
ratings).
(3) The target ranking against all radio stations in the market, based on
listenership by adults aged 25 to 54 during the 6:00 a.m. to midnight time
period. (Source: Fall 1993 Arbitron ratings).
</TABLE>
The Company's strategy is to identify and acquire underperforming radio
stations or groups and effect management and operational changes to increase
their profitability. Implementation of this strategy typically involves the
following four-step process: (1) instituting operational improvements, usually
including a change in management personnel and additional capital investments
when appropriate; (2) creating increases in audience ratings through programming
and promotional changes; (3) improving revenue as a result of the turnaround
process; and (4) increasing cash flow. Heritage radio stations strive to be
top-rated in their programming formats, and universally program a mass appeal
music format directed at a target audience of 25-to-54 year-olds. Presently,
seven of the Company's nine FM stations are format leaders in their markets. In
addition, Heritage stations are number one ranked among all stations in three of
the Company's seven radio markets.
The Federal Communications Commission ("FCC") limits radio ownership both in
the number of stations commonly owned, operated, or controlled in any one
market, and in total. In late 1992, the FCC relaxed its rules to increase the
number of stations one entity can own in one market if certain requirements are
met. This new combination is commonly known as a "duopoly".
The Company acquired two FM stations in 1993 that created "duopolies". On
July 22, 1993 it acquired WKLX-FM in Rochester, New York. Effective January 1,
1994, the Company acquired WEZW-FM in the Milwaukee market. Before the Heritage
acquisition, the licensees of WKLX-FM and WEZW-FM maintained independent control
over and complete responsibility for programming and operations of their
respective stations. Heritage assumed management responsibilities (subject to
certain FCC restrictions) pursuant to "Local Marketing Agreements" ("LMA's")
approximately two
10
<PAGE>
months prior to the respective closing dates, and the financial results of the
stations were consolidated beginning May 19, 1993, for WKLX, and November 1,
1993, for WEZW. WKLX programs an "oldies" format, similar to the Company's FM
stations in Portland and Rochester. WEZW has a soft adult contemporary format
that is complementary to that of the Company's WMYX in that market.
Heritage announced on January 10, 1994 that it has agreed to acquire radio
station KRJY-FM in St. Louis, MO. Heritage currently owns and operates WRTH-AM
and WIL-FM in the St. Louis market. This acquisition, the Company's third
"duopoly", received approval by the FCC in early March.
The Company's acquisition and operating strategies have enabled its radio
group to increase earnings before interest, taxes, depreciation and amortization
("EBITDA") from $.1 million in 1987, its first full year, to $9.4 million in
1993.
The following table sets forth certain net revenue and direct expense
information for Heritage's radio stations including the stations acquired in
1992 and 1993 and excluding a Los Angeles station sold in March 1991. This
information does not reflect any corporate, radio group, or nonrecurring
expenses, interest expense or income taxes.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
(IN THOUSANDS)
KULL (AM), KRPM (FM) (Seattle, WA):
Net revenue............................................... $3,999 $3,551 $2,526
Expenses:
Cost of services........................................ 1,297 1,239 1,089
Selling, general and administrative..................... 1,794 1,686 1,268
Depreciation and amortization........................... 580 564 1,111
------ ------ ------
WRTH (AM), WIL (FM) (St. Louis, MO):
Net revenue............................................... 6,985 4,925 4,161
Expenses:
Cost of services........................................ 1,700 1,421 1,199
Selling, general and administrative..................... 2,282 1,968 1,733
Depreciation and amortization........................... 293 315 329
------ ------ ------
KKSN (AM/FM) (Portland, OR):
Net revenue............................................... 4,844 4,466 3,702
Expenses:
Cost of services........................................ 1,084 1,016 893
Selling, general and administrative..................... 2,112 1,880 1,633
Depreciation and amortization........................... 438 514 435
------ ------ ------
WEMP (AM), WMYX (FM) (Milwaukee, WI):
Net revenue............................................... 3,550 3,028 2,676
Expenses:
Cost of services........................................ 879 832 835
Selling, general and administrative..................... 1,740 1,546 1,230
Depreciation and amortization........................... 246 264 307
------ ------ ------
WBBF (AM), WBEE(FM), WKLX(FM) (Rochester, NY): (1)
Net revenue............................................... 4,898 3,101 2,840
Expenses:
Cost of services........................................ 842 581 546
Selling, general and administrative..................... 2,348 1,518 1,460
Depreciation and amortization........................... 686 170 187
------ ------ ------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1992 1991
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
KCFX (FM) (Kansas City, KS): (2)
Net revenue............................................... 4,937 3,704
Expenses:
Cost of services........................................ 2,665 2,102
Selling, general and administrative..................... 1,625 963
Depreciation and amortization........................... 631 455
------ ------
WOFX (FM) (Cincinnati, OH): (2)
Net revenue............................................... 3,737 1,968
Expenses:
Cost of services........................................ 928 490
Selling, general and administrative..................... 1,839 1,113
Depreciation and amortization........................... 502 357
------ ------
<FN>
- ------------------------
(1) The Company acquired WKLX-FM in July 1993. The historical information
includes the financial results from May 19, 1993 under the terms of the
applicable LMA.
(2) The Company acquired KCFX-FM and WOFX-FM in June 1992. The historical
information includes results beginning June 1, 1992.
</TABLE>
Also included in the 1993 financial results (but not included in the table
above) are revenues of $419,000 and EBITDA of $174,700, from November, 1993, for
WEZW-FM under the terms of an LMA Agreement.
Each of Heritage's FM facilities is of the highest class of service
permitted by the FCC (B or C) with comprehensive signal coverage of its markets.
The AM stations operate as full-time facilities on regional or clear channels.
COMPETITION
The Company's television and radio stations compete for advertising revenues
with other media companies in their respective markets, as well as with other
advertising media, such as newspapers, magazines, outdoor advertising, local
cable systems, direct mail and alternative media. Some competitors are part of
larger companies with substantially greater financial resources than Heritage.
Competition in the broadcasting industry occurs primarily in individual
markets. Generally, a television broadcasting station in one market does not
compete with stations in other market areas. Heritage's television stations are
located in highly competitive markets. While the pattern of competition in the
radio broadcasting industry is basically the same, it is not uncommon for radio
stations outside of the market area to place a signal of sufficient strength
within that area to gain a share of the audience.
In addition to the element of management experience, factors that are
material to competitive position include authorized power, assigned frequency,
network affiliation, audience characteristics and local program acceptance, as
well as strength of local competition. The broadcasting industry is continuously
faced with technological change and innovation, the possible rise of popularity
of competing entertainment and communications media, changes in labor conditions
and governmental restrictions or actions of federal regulatory bodies, including
the FCC and the Federal Trade Commission ("FTC"), any of which could possibly
have a material effect on Heritage's operations and results.
In recent years broadcast television stations have faced increasing
competition from the other sources of television service, primarily cable
television, and the ratings have reflected a decline in the viewing audience.
These other sources can increase competition for a broadcasting station by
bringing into its market distant broadcasting signals not otherwise available to
the station's audience and also
12
<PAGE>
serving as a distribution system for non-broadcast programming. Programming is
now being distributed to cable television systems by both terrestrial microwave
systems and by satellite. Other sources of competition include home
entertainment systems (including television game devices, video cassette
recorder and playback systems and video discs), multi-point distribution
systems, multichannel multi-point distribution systems and satellite master
antenna television systems. Heritage's television stations will face competition
from direct broadcast satellite services which transmit programming directly to
homes equipped with special receiving antennas or to cable television systems
for transmission to their subscribers. The likely entry of telephone companies
into the video programming distribution business could increase the competition
the Company's television stations face from other distributors of audio and
video programming.
The broadcasting industry is continuously faced with technological change
and innovations, which could possibly have a material effect on the Company's
broadcast operations and results. Commercial television broadcasting may face
future competition from interactive video and data services that may provide
two-way interaction with commercial video programming, along with information
and data services that may be delivered by commercial television stations, cable
television, direct broadcast satellites, multi-point distribution systems,
multichannel multi-point distribution systems, or other future video delivery
systems.
FEDERAL REGULATION OF BROADCASTING
Television and radio broadcasting are subject to the jurisdiction of the
FCC, which acts under authority granted by the Communications Act of 1934, as
amended (the "Communications Act"). The Communications Act prohibits radio or
television broadcasting except in accordance with a license issued by the FCC.
The Communications Act also empowers the FCC, among other things, to issue,
renew, modify or revoke broadcasting licenses, to determine the location of
stations, to regulate the equipment used by stations, to adopt such regulations
as may be necessary to carry out the provisions of the Communications Act and to
impose penalties for violation of such regulations. The following is a brief
summary of certain provisions of the Communications Act and specific FCC
regulations and policies.
RENEWAL. Broadcasting licenses are issued for a maximum term of up to five
years in the case of television stations and up to seven years in the case of
radio stations, and are renewable upon application. In determining whether to
renew a broadcast license, the FCC has authority to evaluate the licensee's
compliance with the provisions of the Communications Act and the FCC's rules and
policies. The FCC licenses for each of Heritage's radio and television stations
expire at different times between April 1, 1994 and June 1, 1998. Applications
to renew the licenses for stations WPTZ-TV, Plattsburgh, NY; and WNNE-TV,
Hartford, VT are presently pending before the FCC.
The Communications Act authorizes the filing of petitions to deny any
license renewal applications during certain periods of time following the filing
of renewal applications. Petitions to deny can be used by interested parties,
including members of the public, to raise issues concerning a renewal
applicant's qualifications. If a substantial and material question of fact
concerning a renewal application is raised by the interested party, the FCC will
hold an evidentiary hearing on the application. In recent years, there have been
a number of petitions to deny filed against broadcast renewal applications
challenging the licensee's compliance with the Commission's equal employment
opportunity requirements. At the time the application is made for renewal of a
broadcasting license, a person may file a competing application of authority to
operate the station and replace the incumbent licensee. If a competing
application is filed against a renewal application, the FCC is required to hold
an evidentiary hearing on the renewal application. In the evidentiary hearing,
the FCC recognizes a renewal expectancy for an incumbent licensee that has
provided meritorious or substantial service to the audience located in its
community of license during the preceding license term. In the vast majority of
cases, broadcast licenses are renewed by the FCC even where there are petitions
to deny or competing applications filed against broadcast license renewal
applications.
13
<PAGE>
ACQUISITIONS OR SALES. The Communications Act prohibits the assignment of a
license or the transfer of control of a licensee without the prior approval of
the FCC. Applications to the FCC for such assignments or transfers are subject
to petitions to deny by interested parties and are granted by the FCC only upon
a finding that such action will serve the public interest, convenience and
necessity. In determining whether to grant such applications, the FCC has
authority to evaluate the same types of matters that it considers in evaluating
a broadcast license renewal application. In the vast majority of cases where
petitions to deny are filed against assignment or transfer applications, the
applications are granted and the petitions are denied. On April 5, 1992, several
local branches of the NAACP ("NAACP") filed a petition to deny with the FCC
against Stations WRTH-AM and WIL-FM; Stations WBBF-AM and WBEE-FM; Stations
KULL-AM and KRPM-FM; Stations WEMP-AM and WMYX-FM; and Station WEAR-TV
(the"Licensees"), with respect to applications seeking FCC consent to permit
James M. Hoak, Chairman of the Board of the Company, to relinquish "control" of
the Company upon the conversion of all of Mr. Hoak's shares of Class B Common
Stock into Class A Common Stock. On July 16, 1993, the NAACP's petition to deny
was denied and the transfer of control applications for the Licensees were
granted. On July 21, 1993, the transfer of control of the Licensees was
consummated. On September 1, 1993, a petition for reconsideration
("Reconsideration Petition") was filed by the NAACP against the transfer of
control applications for the Licensees. In the Reconsideration Petition, the
NAACP alleges that the FCC erred in granting the transfer of control
applications for the Licensees by summarily rejecting the NAACP's statistical
evidence of discrimination without a rational explanation and failing to conduct
the type of investigation required. The Company is vigorously opposing the NAACP
allegations. While the Company cannot predict the outcome of this matter, the
Company believes that the FCC's prior action approving the transfer of control
for all of the Company's stations will be affirmed by the FCC without any
conditions that will have a material adverse effect on the Company.
OWNERSHIP RESTRICTIONS. Under the Communications Act, broadcast licenses
may not be held by or transferred or assigned to an alien, a foreign entity, or
any corporation of which any officer or director is an alien or of which more
than one-fifth of the capital stock of record is owned or voted by aliens. In
addition, the Communications Act provides that no broadcast license may be held
by any corporation directly or indirectly controlled by any other corporation of
which any officer or more than one-fourth of its directors are aliens, or of
which more than one-fourth of the capital stock of record is owned or voted by
aliens, if the FCC finds the public interest will be served by the refusal to
grant such license.
The FCC's local "multiple ownership" rules prohibit the grant of a license
for a television station to any party if such party owns or has an ownership
interest in another television station whose signal covers a portion of the same
market served by the station owned, operated or controlled by such party. These
rules prohibit the ownership of more than two AM and two FM stations in markets
with 15 or more stations (provided that the combined audience share does not
exceed 25 percent) and prohibit the ownership of more than three radio stations,
no more than two of which are in the same service area, in markets with 14 or
fewer stations (provided that the station owned in combination represents less
than 50 percent of the stations in that market). In addition, the FCC's local
multiple ownership rules prohibit station acquisitions that would result in the
ownership interests in a radio and a television station in the same market.
However, waivers can be obtained from the FCC for radio and television
combinations upon an appropriate showing of good cause or if the stations are
failing stations or are located in the top 25 markets where at least 30
separately owned or operated broadcast licensees remain after the proposed
combination. The FCC's national television multiple ownership rules generally
prohibit an individual or entity, that is not minority controlled, from having
an ownership interest in more than 12 television station licenses. The national
radio multiple ownership rules permit ownership of up to 18 AM and 18 FM radio
stations with an automatic increase to 20 AM and 20 FM stations beginning in
September 1994. The FCC's cross ownership rules prohibit radio and/or television
licensees from acquiring new ownership interests in daily newspapers published
in the same markets served by their broadcast stations; and television licensees
may not own cable television systems in communities within the service contours
of their television stations.
14
<PAGE>
In applying the FCC's multiple and cross ownership rules, the licensee will
also have attributed to it any media interests of officers, directors and
shareholders who own 5% or more of the licensee's voting stock, except that
certain institutional investors who exert no control or influence over a
licensee may own up to 10% of such outstanding voting stock before attribution
results. These FCC rules do not require any changes in Heritage's present
television and radio operations.
REGULATORY CHANGES. Legislation was enacted recently by Congress called the
Cable Television Consumer Protection and Competition Act of 1992 (the "Act")
which imposes certain regulatory requirements on the operation of cable
television systems. The Act provides television stations with the right to
control the use of their signals on cable television systems. Each television
station was required to elect prior to June 17, 1993 whether it wanted to avail
itself of must-carry rights or, alternatively, to assert retransmission rights.
If a television station elected to exercise its authority to grant
retransmission consent, cable systems are required to obtain consent of that
television station for the use of its signal and could be required to pay the
television station by October 6, 1993 for such use. The Company believed that
the preservation and continued cable carriage of the station's signal was more
important than any potential negotiated consideration, and prior to the October
6 deadline elected must-carry for all its stations except the Fox affiliate,
which successfully negotiated cable retransmission consents in association with
the Fox Television Network. These elections remain in effect until October 1,
1996 when the stations again elect. The Act further requires mandatory cable
carriage of all qualified local television stations not exercising their
retransmission rights. Several challenges to the constitutionality of these
requirements have been filed in Federal court including a challenge to the
constitutionality of the must carry rights which is pending before the Supreme
Court. The Company cannot predict the outcome of such challenges or the effect
that the Act will have on the business of the Company if the constitutionality
of the requirements is upheld.
Legislation has been introduced from time to time which would amend the
Communications Act in various respects and the FCC from time to time considers
new regulations or amendments to its existing regulations. In addition, a number
of proposals for regulatory changes are pending before the FCC and Congress.
Such matters include proposals pending before the FCC to relax the rules
governing the common ownership of television stations locally and nationally, to
authorize a new type of wireless cable system, to authorize digital audio
broadcasting and to authorize advanced (high definition) television systems.
Certain of these changes will increase operating costs and/or increase the
number of competing broadcast stations. Last year, the House and Senate passed
campaign reform bills which reduce the rates that a television station can
charge for advertising time sold to legally qualified candidates for public
office. Differences between the two bills must be reconciled by a joint House
and Senate Conference Committee before such legislation can be enacted. Adoption
of such legislation could have a negative impact on a television station's
revenues and cash flow during primary and general election periods. Heritage
cannot predict whether such changes will be adopted or, if adopted, the effect
that any such changes would have on the business of Heritage.
EMPLOYEES
Heritage and its subsidiaries employ approximately 1,300 full-time and up to
15,000 available part-time employees. Of this total, ACTMEDIA employs
approximately 600 full-time and up to approximately 15,000 available part-time
personnel. Substantially all of ACTMEDIA's part-time personnel are in field
service staff. None of the In-store Marketing Group's employees are represented
by a collective bargaining unit. Heritage's broadcast subsidiaries currently
employ approximately 700 persons of whom 33 employees are represented by unions.
The Company believes that it has a good relationship with its employees.
15
<PAGE>
ITEM 2. PROPERTIES.
Heritage's headquarters are located in Dallas, Texas. The lease agreement
for the 8,202 square feet of office space in Dallas expires October 31, 1996.
ACTMEDIA leases office facilities with an aggregate of approximately 65,000
square feet in Norwalk, Connecticut and 8,100 square feet in Des Plaines,
Illinois with leases expiring in 2000 and 1998, respectively, and 41 field
offices with an aggregate of approximately 84,000 square feet pursuant to leases
with terms of three years or less. ACTRADIO leases approximately 5,800 square
feet of space for its operations in New York City, New York pursuant to a lease
expiring in 1995.
The types of properties required to support each of Heritage's broadcast
stations include offices, studios, transmitter sites and antenna sites. A
station's studios are generally housed with its offices in downtown or business
districts. Heritage's television stations own approximately 88 total acres in 8
locations upon which buildings with approximately 93,600 square feet of office
and studio space are located. The stations own and lease approximately 148 and
11 acres, respectively, upon which the tower or transmitters are located.
Heritage's radio stations own three AM transmitter sites totaling 58 acres. The
stations lease approximately 50,000 square feet in seven locations upon which
office and studio space is located. The stations also lease tower space at six
locations totaling 31 acres.
ITEM 3. LEGAL PROCEEDINGS.
Heritage is subject to litigation in the ordinary course of business. It is
not subject to any such legal proceedings which management believes are likely
to result in any material losses being incurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of the Company's Class A Common Stock have been listed on the
American Stock Exchange ("AMEX") under the symbol "HTG" since 1988. No other
class of Heritage's common equity is currently publicly traded. The following
table sets forth the high and low closing prices of the Class A Common Stock for
each quarterly period within the two most recent fiscal years on the AMEX. All
share prices have been adjusted to give effect to a four-for-one reverse split
of the Company's Class A Common Stock on March 30, 1992.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1992
First Quarter......................... $15 1/2 $11 1/2
Second Quarter........................ 12 1/2 7 1/2
Third Quarter......................... 8 1/2 6 1/8
Fourth Quarter........................ 9 1/8 6
1993
First Quarter......................... $10 5/8 $ 8 3/8
Second Quarter........................ 12 1/2 9 3/4
Third Quarter......................... 15 3/8 10 3/4
Fourth Quarter........................ 19 7/8 14 1/2
</TABLE>
On March 8, 1994 the last reported sale price of the Company's Class A
Common Stock was $18.00 per share. At March 8, 1994 there were approximately
1,000 record holders of Class A Common Stock.
Heritage has never paid cash dividends on shares of any class of its common
stock. Heritage presently intends to retain its funds to support the growth of
its business or to repay indebtedness or for other general corporate purposes
and therefore does not anticipate paying cash dividends on
16
<PAGE>
shares of any class of its common stock in the foreseeable future. Additionally,
the various financing agreements to which either Heritage or one or more of its
subsidiaries is a party may effectively prohibit or sharply impact upon
Heritage's ability to pay dividends. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capitalization and
Liquidity."
ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per share data)
Set forth below is selected consolidated financial data with respect to the
Company for the years ended December 31, 1993, 1992, 1991, 1990, and 1989, which
were derived from the audited consolidated financial statements of the Company.
This data as of December 31, 1993 and 1992 and for each of the years in the
three year period ended December 31, 1993 should be read in conjunction with the
audited consolidated financial statements of the Company and its subsidiaries
and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (1)
---------------------------------------------------
1993 1992 1991 1990 1989
---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS; EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net Revenues.......................... $291,205 250,891 222,360 203,854 165,000
Operating Income...................... 35,495(2) 28,100 22,300 13,651(5) 15,101
Income (loss) before extraordinary
items................................ 77 (14,966) (19,278) (26,009) (27,190)
Net income (loss)..................... 512 (18,560) (14,958) (24,950) (30,025)
Loss per share before extraordinary
items (3)............................ (.32) (1.51) (2.39) (2.82) (3.64)
Net loss per share (3)................ (.29) (1.76) (1.97) (2.72) (4.13)
Equivalent shares (4)................. 16,314 14,449 10,369 10,279 7,478
BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net........... 57,422 55,832 48,659 52,144 50,134
Goodwill and other intangibles, net... 363,667 373,426 375,378 378,375 344,869
Total assets.......................... 492,849 496,296 481,147 497,358 463,194
Long-term debt (6).................... 312,913 318,425 341,044 351,686 282,216
Stockholders' equity.................. 86,642 91,213 62,022 66,339 92,052
<FN>
- ------------------------
(1) Information reflects acquisition and investment transactions described
under Note 2 of Notes to Consolidated Financial Statements. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
(2) Operating income for 1993 was reduced by a nonrecurring charge of $3
million relating to POP Radio (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
(3) See Note 1(k) of Notes to Consolidated Financial Statements.
(4) Excludes shares reserved for issuance upon exercise of stock options or
upon conversion of outstanding preferred stock, as the effect would be
antidilutive.
(5) Operating income for 1990 was reduced by nonrecurring expenses of $6.9
million relating to compensation expense attributable to purchase of
employee stock options in connection with the POP Radio acquisition and a
$1 million writedown of barter accounts.
(6) Excludes current installments. See Note 4 of Notes to Consolidated
Financial Statements.
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
The Company's net revenues increased from $222.4 million in 1991 to $291.2
million in 1993, and its operating income increased from $22.3 million to $35.5
million over the same period. This growth is primarily attributable to growth
from existing operations within the Company's in-store marketing and broadcast
businesses complemented by the acquisition of certain in-store and broadcast
properties. The Company reported net losses of $15.0 million and $18.6 million
and net earnings of $.5 million for the years ended December 31, 1991, 1992 and
1993, respectively. The operating results before extraordinary items improved
from a $19.3 million loss in 1991 to earnings of $77,000 in 1993.
In August 1991, the Company purchased KOKH-TV, an independent television
station serving Oklahoma City and simultaneously sold and donated its KAUT-TV
station assets in this market to a non-commercial educational licensee. The
Company retained its rights to broadcast programming provided by the FOX
Broadcasting Company network over KOKH-TV. Also in August 1991, ACTMEDIA Canada
acquired BLS Retail Resource Group, a Canadian in-store marketing company.
On January 2, 1992, the Company acquired 65% of Media Meervoud, a
Netherlands in-store marketing company ("MMV"). On June 1, 1992 the Company
completed the acquisition of the broadcast assets of radio stations KCFX-FM and
WOFX-FM. Also, during 1992, the Company wrote off its investment in Supermarket
Visions, Ltd., a U.K. marketing company ("SVL"), as SVL ceased operations.
On July 22, 1993 the Company completed the acquisition of the broadcast
assets of radio station WKLX-FM. Heritage programmed and marketed the station
under an LMA from May 19, 1993 to the completion of the acquisition. On October
25, 1993 the Company agreed to acquire radio station WEZW-FM. Heritage
programmed and marketed the station under an LMA with the current owner from
such date to the completion of the acquisition on January 1, 1994. The operating
results of these stations, effective with the LMAs, are included in the
consolidated financial statements.
Due to the numerous acquisitions and dispositions, the results of operations
from year to year are not comparable. See Note 2 of Notes to Consolidated
Financial Statements for additional information concerning the Company's
acquisitions, dispositions, and related transactions.
RESULTS OF OPERATIONS: 1993 COMPARED TO 1992
Consolidated net revenues of $291.2 million represented a 16% increase over
the 1992 revenues of $250.9 million. Cost of services of $151.1 million
increased 10% in 1993 compared to 1992 due primarily to the increase in net
revenues. Operating income of $35.5 million in 1993 exceeded the comparable 1992
period by 26%. The loss per share was $.29 versus $1.76 in 1992. The improvement
in the Company's operating results for the 1993 period primarily reflects
revenue growth from the Instant Coupon Machine by the In-store Marketing Group,
increased local Television and Radio Group advertising revenues and positive
contributions from the Radio acquisitions. The loss per share in 1993 was lower
than 1992 due principally to $7.4 million of additional operating income, $6
million lower interest expense and increased average shares outstanding. The
1993 period included a $3 million nonrecurring charge for POP Radio, a $1.7
million writedown of Television broadcast program rights and a $.4 million
extraordinary gain on the early extinguishment of debt. The 1992 period included
a $3.3 million writeoff of the SVL investment and $3.6 million of extraordinary
losses, net, recognized as a result of the Company's 1992 refinancing
activities. All comparisons, unless otherwise noted, are for the year ended
December 31, 1993 as compared to the comparable 1992 period.
IN-STORE MARKETING. The In-store Marketing Group contributed $216.3 million
of revenues in 1993, an increase of 16% compared to $186.4 million in 1992. The
success of the ICM was a major contributor to this growth. The ICM generated $63
million of revenues in 1993, its first full year of operation, which tripled the
$21 million level in 1992. Retailers' Choice (cooperative promotion program)
revenues increased by 16%, primarily as a result of management's decision to
increase the
18
<PAGE>
number of programs compared to 1992. Revenues generated per program registered a
small decrease from $3.6 million in 1992 to $3.5 million in 1993. The
International operations produced an additional $.5 million of revenues in 1993
to a total of $17.7 million. The International operations were impacted by the
world-wide recession, particularly in Canada. Advertising revenues in 1993
declined 10% compared to 1992 reflecting the continuing trend toward promotion
and the shift to ICM and away from the shelf-talk product. Total Impact revenues
declined by 16% to $53 million in 1993. The number of programs has continued to
decline from 141 in 1991 to 133 in 1992 and 108 in 1993. The demonstration
business has also seen increased competition which has adversely affected
pricing.
Net revenues of the POP Radio product increased to $6.6 million in 1993 from
$6.0 million in 1992. In 1993 the Company announced that POP Radio was
terminating the MUZAK Joint Operating Agreement, forming marketing alliances
with three large music network providers to accelerate the conversion to
satellite delivery and expanding its in-store audio network by approximately
9,000 stores. As a result of launching this new program, the Company recorded a
one-time nonrecurring charge of $3 million in the fourth quarter of 1993
reflecting the costs of closing a tape machine servicing center ($1.1 million),
the write-off of obsolete delivery equipment ($1.5 million), and provisions for
other costs ($.4 million). These actions will reduce the on-going operating
costs and long-term capital requirements for POP Radio, and increase the size
and quality of the in-store audio network.
In-store Marketing operating income of $22.4 million increased by 36% from
$16.4 million in the 1992 period due primarily to the increased 1993 revenues,
store operations efficiencies, and reduced POP Radio losses. The operating
margin increased to 12% in 1993, excluding the $3 million POP Radio charge,
compared to 9% in 1992.
The In-store Marketing Group contributed 74% of the Company's revenues and
63% of operating income in 1993, and it is expected that this group will
contribute a higher percentage of the Company's revenues and operating income in
1994.
TELEVISION. The Television Group generated $41.5 million of revenues in
1993, a 5% increase compared to $39.7 million in 1992. The Television Bureau of
Advertising Time Sales Survey reported that industry-wide gross local revenues
increased by 4.4% and national revenues were up 1% compared to 1992. The
Television Group's local revenues increased 13% and national revenues improved
9% compared to the 1992 period. This favorable performance was substantially
offset by the decline of political advertising from $2.3 million in 1992 to $.1
million in 1993. The revenue improvement was produced by the Oklahoma City and
Pensacola stations. Pensacola benefited from local revenue growth of 9% and
national revenue growth of 19%. The Oklahoma City station (KOKH-TV) generated
revenues of $7.3 million in 1993 compared to $6.3 million in 1992 primarily as a
result of a 21% increase in local revenues. The continuing emergence of the FOX
network and the success of targeting programming to the age 18-49 audience has
favorably impacted KOKH-TV's ratings. The group's 1993 results included a $1.7
million writedown of the carrying value of the rights to two television
broadcast programs at two stations.
Operating income of $12.4 million, excluding the writedown, increased by 9%
compared to 1992 primarily as a result of higher revenues. The operating margin
improved from 29% in 1992 to 30% in 1993 excluding the writedown.
RADIO. Net revenues of the Radio Group increased by 35% from $24.7 million
in 1992 to $33.4 million in 1993 as all of the Company's stations experienced
increased revenues. The radio stations acquired in June 1992 contributed $3
million of the increase and the 1993 acquisitions contributed $1.5 million of
revenues. Revenues for the stations owned for all of both periods increased 21%
primarily as a result of improved station ratings. The St. Louis stations
improved revenues from $4.9 million to $7 million in 1993 primarily due to the
achievement by the FM station of the number one ranking in the market.
19
<PAGE>
Operating income grew from $3.3 million in 1992 to $6 million in 1993
primarily as a result of the improved revenues by the stations owned for all of
both periods and an additional $.2 million contributed by the acquired stations.
CORPORATE EXPENSES. Corporate expenses in 1993 of $3.6 million increased
compared to $2.9 million in 1992 due primarily to increased investor relations
activities and performance related compensation payments.
OTHER OPERATING EXPENSES. As noted above, the 1993 period included a $1.7
million writedown of television program rights as a result of management's
assessment of their realizable value (based upon projected future utilization of
the programs) and the $3 million POP Radio nonrecurring expense. In-store new
product development expenses were approximately $.8 million in 1992 and $1.1
million in 1993.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $28.2
million in 1993 increased by 8% compared to $26.1 million in 1992. The majority
of the increase was due to higher depreciation associated with the capital
expenditures to support the growth of Instant Coupon Machine revenues.
INTEREST EXPENSE. Interest expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest accrued and paid currently.................................. $ 30,864 $ 32,862 $ 26,234
Deferred interest.................................................... -- 3,990 11,751
Amortization of deferred financing costs............................. 651 621 655
--------- --------- ---------
TOTAL.............................................................. $ 31,515 $ 37,473 $ 38,640
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred interest represents accretion of an 8% subordinated note and
13 1/2% subordinated debentures. The decrease in the deferred interest is
primarily a result of the retirement of these debt instruments in 1992. The
decrease in the current interest from 1992 to 1993 is due to lower debt levels
and interest rates.
OTHER EXPENSES. Included in the 1992 results of operations is a $3.3
million non-cash charge to reflect the net writeoff of the carrying value of
SVL.
NET INCOME (LOSS). Primarily as a result of an additional $12 million of
operating income (excluding writedowns and nonrecurring charges) and $6 million
lower interest expense, the Company improved its operating results from an $18.6
million loss in 1992 to $.5 million earnings in 1993. The loss per share in 1993
is due to the preferred dividend payments and settlement rights accretion.
RESULTS OF OPERATIONS: 1992 COMPARED TO 1991
Consolidated net revenues of $250.9 million represented a 13% increase over
the 1991 revenues of $222.4 million. Cost of services of $137.6 million
increased 10% in 1992 compared to 1991 due to the increase in net revenues.
Operating income of $28.1 million in 1992 exceeded the comparable 1991 period by
26%. The loss per share was $1.76 versus $1.97 in 1991. The year reflected a
strengthening of advertiser spending compared to 1991 and political advertising
revenues which were not material in 1991. The improvement in the Company's
operating results for the 1992 period primarily reflects increased revenues from
the successful launch of the Instant Coupon Machine by the In-store Marketing
Group, $2.8 million of political advertising revenues, and improved advertising
revenues. The loss per share in 1992 was lower than 1991 due principally to $5.8
million of additional operating income, $1.2 million lower interest expense and
increased average shares outstanding. However, the write-off of the SVL
investment and the extraordinary losses, net, recognized as a result of the
Company's 1992 refinancing activities moderated the improvement. All
comparisons, unless otherwise noted, are for the year ended December 31, 1992 as
compared to the comparable 1991 period.
20
<PAGE>
IN-STORE MARKETING. The In-store Marketing Group contributed $186.4 million
of revenues in 1992, an increase of 9%, compared to $171.1 million in 1991. The
success of the national launch of the ICM in 1992 generated approximately $21
million of additional revenues. The International operations produced an
additional $6.7 million of revenues in 1992 including $4.3 million of revenues
attributed to a full year of the BLS Retail Resource Group acquired in August
1991 and MMV which contributed $3.3 million of revenues in 1992. Advertising
revenues in 1992 were level with 1991 as a 53% increase in cart advertising
revenues was offset by the shift to ICM and away from the shelf-talk product.
Impact promotional services included 133 programs in 1992 versus 141 in 1991, a
decrease of 6%, which decreased the number of days serviced by 10%. Total Impact
revenues declined by 5%. Retailers' Choice (cooperative promotion program)
revenues declined by 23%, partly as a result of management's decision to reduce
the number of programs and also due to the packaged goods manufacturers' budget
cutbacks. The revenues generated per program decreased from $3.9 million in 1991
to $3.6 million in 1992, a 7% decline.
Net sales of the POP Radio product decreased to $6.0 million in 1992 from
$8.9 million in 1991 and $20.2 million in 1990. In 1992 the following actions
were taken to improve POP Radio: hiring a president to manage Pop Radio as a
separate organization, continuing the upgrading of the technology to satellite
delivery, improving the service, and negotiating with Muzak to take on the
servicing aspects of the network. POP Radio hired several dedicated sales
representatives and signed up regional representative firms to address markets
that have not been penetrated by ACTMEDIA sales people.
Operating income of $16.4 million increased by 11% from $14.8 million in the
1991 period due primarily to the increased 1992 revenues noted above. The
operating margins were relatively level with 1991 as they were impacted by lower
revenues from POP Radio and the lower margins generated by the emerging
International operations.
The In-store Marketing Group contributed 74% of the revenues and 58% of
operating income in 1992.
TELEVISION. The Television Group generated $39.7 million of revenues in
1992, a 12% increase compared to $35.3 million in 1991. The Television Bureau of
Advertising Time Sales Survey reported that industry-wide gross local revenues
and national revenues for 1992 increased by 6% compared to 1991. The Company's
television group local revenues increased 11% and national revenues improved 11%
compared to the 1991 period. Also, the Company's 1992 results included $2.3
million of political advertising versus $.3 million in 1991. The revenue
improvement was produced primarily at the Oklahoma City, Plattsburgh/Hanover and
Pensacola stations. Pensacola's 1991 results were impacted by the gulf war and
by the major cutback by automobile advertisers. Plattsburgh also was impacted by
the gulf war and the recession in New England and Canada. The Oklahoma City
station generated revenues of $6.3 million in 1992 compared to $5 million in
1991 primarily as a result of the acquisition/ disposition and consolidation of
the market in August 1991 and the emergence of the Fox network.
Operating income of $11.4 million increased by 28% compared to 1991
primarily as a result of higher revenues. The operating margin improved from 25%
in 1991 to 29% in 1992.
RADIO. Net revenues of the Radio Group increased by 56% from $15.9 million
in 1991 to $24.7 million in 1992. The radio stations acquired in June 1992
contributed $5.7 million of revenues. Revenues for the stations owned for all of
both periods increased 20% primarily as a result of improved station ratings.
Political revenues contributed $.5 million to the 1992 increase.
Operating income grew from $1.3 million in 1991 to $3.3 million in 1992
primarily as a result of the improved revenues and $.2 million contributed by
the acquired stations.
CORPORATE EXPENSES. Corporate expenses in 1992 of $2.9 million increased by
11% compared to 1991 due primarily to the executive search fees for the POP
Radio president and compensation consulting fees.
21
<PAGE>
OTHER OPERATING EXPENSES. Included in the 1991 period is a writedown of $.5
million of television program rights as a result of management's assessment of
their realizable value (based upon projected future utilization of the
programs). In-store new product development expenses were approximately $.8
million in 1992 and $.7 million in 1991.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $26.1
million in 1992 increased by 17% compared to $22.3 million in 1991. The majority
of the increase was due to higher depreciation associated with the capital
expenditures for the Instant Coupon Machine national launch and the Muzak
equipment purchased in early 1992.
INTEREST EXPENSE. Interest expense consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1992 1991 1990
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Interest accrued and paid currently.................................. $ 32,862 $ 26,234 $ 21,649
Deferred interest.................................................... 3,990 11,751 15,356
Amortization of deferred financing costs............................. 621 655 1,103
--------- --------- ---------
TOTAL.............................................................. $ 37,473 $ 38,640 $ 38,108
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred interest represents accretion of an 8% subordinated note and
13 1/2% subordinated debentures. The decrease in the deferred and increase in
current interest is primarily a result of the retirement of these debt
instruments in 1992.
OTHER EXPENSES. Included in the 1992 results of operations is a $3.3
million non-cash charge to reflect the net write off of the carrying value of
SVL. Included in the 1991 results is a $1.3 million non-cash charge for SVL
which was based upon the Company's assessment of the impairment in such carrying
value as a result of operating losses incurred by such company. Other expenses
in 1991 also included a loss of $4.1 million in connection with the August 1991
disposition of station KAUT and non-cash income of $3.75 million related to the
settlement of a pre-acquisition liability of ACTMEDIA.
NET LOSS. Primarily as a result of the substantial interest expense (both
current and deferred) of $37.5 million and $38.6 million in 1992 and 1991,
respectively, relating to debt incurred in connection with the Company's
acquisitions, the depreciation and amortization charges (relating primarily to
goodwill and other intangibles which had a balance of $373.4 million at December
31, 1992), and the extraordinary loss of $3.6 million in 1992 associated with
debt retirements, the Company reported net losses of $18.6 million and $15
million in 1992 and 1991, respectively.
SEASONALITY AND INFLATION
The advertising revenues of the Company vary over the calendar year, with
the fourth quarter reflecting the highest revenues for the year. Stronger fourth
quarter results are due in part to In-store having one extra 4-week cycle in the
fourth quarter, increased retail advertising in the fall in preparation for the
holiday season, and political advertising for broadcasting in election years.
The slowdown in retail sales following the holiday season accounts for the
relatively weaker results generally experienced in the first quarter. The
Company believes inflation generally has had little effect on its results.
CAPITALIZATION AND LIQUIDITY
At December 31, 1993, the Company, through its Heritage Media Services, Inc.
subsidiary ("HMSI"), had a $130 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 $50
22
<PAGE>
million reducing revolving credit facility which begins to decrease on December
31, 1994. At December 31, 1993, $80 million of the term loan facility and $30.5
million of the revolving credit facility were outstanding. At December 31, 1993,
$19.5 million of additional borrowings were available under the Credit
Agreement. Effective February 9, 1994, the revolving credit facility was
increased to $75 million, thereby providing an additional $25 million
availability 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 the Company and HMSI's domestic
subsidiaries and are secured by a pledge of capital stock of HMSI and its
domestic subsidiaries. The Senior Notes include a number of financial and other
covenants.
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%. At December 31, 1993,
the amount of ACTMEDIA's indebtedness (substantially all of which is
intercompany indebtedness) was approximately $160 million. 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. The initial put and call options become available in 1994. On
or after April 19, 1994 (but prior to May 19, 1994), the Company is required to
select an independent appraiser to determine the Net Equity. Upon completion of
the appraisal process, the holders of the Rights will be notified of the
appraised valuation of the Net Equity and the resultant valuation of the Rights.
For a period of 30 days following such notification, the holders of the
Rights may exercise a put option at such valuation. Also during that period, the
Company may 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. To the extent
that neither the put nor the call options are exercised prior to maturity date
of the Rights, the Company is required to exercise a call option on that date
under the terms set forth above, utilizing a valuation determined by an
independent appraiser. To the extent the options are paid in cash, the Company
will utilize cash provided by operations and/or borrowings against the Credit
Agreement.
23
<PAGE>
The Rights were initially recorded at their estimated fair value at the date
of issuance which approximated $7,550,000. From time to time the Company
estimates the Net Equity and the resultant estimate of the value of the Rights.
To the extent that such estimate of value exceeds the carrying value, such
excess is being accreted by the interest method to accumulated deficit over the
appropriate accounting period. At December 31, 1993, the carrying value was
$19,514,000. The Company intends to increase this carrying value through
additional accretion, to approximately $25,000,000 by June 30, 1994. The Company
will continue to accrete the carrying value of the Rights to their estimated
value until they are liquidated under one of the options discussed above.
If, as a result of the independent appraisal process described above, a
valuation is determined that is above or below the accreted carrying value, the
Company will reflect such value through adjustment to the carrying value and to
the accumulated deficit at June 30, 1994. Any such increase in the valuation
would reduce the Company's net income per share or increase the net loss per
share and any such decrease in the valuation would increase the Company's net
income per share or reduce the net loss per share for the six months ending June
30, 1994, and, if the puts or calls are exercised, would similarly affect the
amount of common stock to be issued (if the price were paid in common stock) or
the indebtedness to be incurred (if the price were paid in cash).
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 December 31, 1993, the Company
had indebtedness (long-term debt, including current installments and notes
payable) of approximately $315.0 million and stockholders' equity of
approximately $86.6 million, and accordingly, a consolidated debt-to-equity
ratio of 3.6 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 December 31, 1993, the
total amount of dividends that could be paid by HMSI to the Company was $22.6
million. As a result of an amendment to the credit agreement dated February 9,
the total amount of available dividends was increased to $50 million, if such
dividends are required for the purchase or redemption of settlement rights.
Under the Senior Note Indenture, at December 31, 1993, the total amount of
dividends that could be paid by HMSI to the Company was $43.3 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
$136.3 million at December 31, 1993 are 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 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 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 ongoing
expenditure requirements.
Cash flows provided by operating activities increased to $40.9 million in
1993 from $17.1 million in 1992. The improvement is primarily attributable to an
additional $14 million of EBITDA, a $4
24
<PAGE>
million decrease in interest payments in 1993 and improved receivables
collections. In 1992 cash flows provided by operating activities decreased by
$4.1 million compared to 1991 due to higher interest payments and receivable
levels.
In 1993 significant uses of cash in investing and financing activities
included the following: $9.1 million for the retirement of debt and other
liabilities, $2.8 million for purchase of settlement rights, $5.1 million for
acquisitions and investments, and $18.5 million for capital expenditures.
In 1992, cash flows from financing activities included $42.1 million of net
proceeds from the issuance of additional Class A common stock. These proceeds
were used primarily to fund the $30 million cash component of the Company's 8%
subordinated note retirement and to fund the $7.9 million acquisition of the
Kansas City and Cincinnati radio stations. Cash flows used for capital
expenditures in investing activities during 1992 were generated by cash flows
from operating activities. In 1991, cash flows from financing activities and
cash flows used in investing activities reflect increased bank borrowings and
proceeds from the issuance of the Series B and Series C Preferred Stock. The
preferred stock proceeds were utilized, along with the proceeds from the sale of
KDAY-AM, to purchase a portion of HMI's 13.5% debentures at a gain and to fund
the cash component of the KOKH-TV and BLS Retail Resource Group acquisitions.
Capital expenditures increased from $15.5 million in 1992 to $18.5 million
in 1993. This increase was due primarily to the purchase of additional Instant
Coupon Machines. Also, the Company completed two nonrecurring projects: the
upgrade of the management information systems of the In-store Group and the
construction of new broadcast facilities for the Pensacola television station.
Capital requirements related to acquisitions for 1994 are expected to
include approximately $2 million for the In-store Marketing Group's Australia
and New Zealand acquisitions (completed in February 1994), $5 million for the
Milwaukee radio station (completed in January 1994), and $7.2 million for the
St. Louis radio station scheduled to close in March 1994. As a part of the
commitment to the new marketing alliances, the Company made payments totaling
$.8 million in 1993 and is expecting to make payments of $4 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Company does not presently provide post-retirement or post-employment
benefits, as defined in FASB Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and No. 112, "Employers' Accounting
for Postemployment Benefits." Accordingly, these Statements will not impact the
Company's consolidated financial statements. In addition, adoption of FASB
Statement No. 114, "Accounting by Creditors for Impairment of a Loan", which is
effective for financial statements for fiscal years beginning after December 15,
1994, is not anticipated to have a material effect on the Company's consolidated
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Heritage Media Corporation and
Subsidiaries as of December 31, 1993 and 1992 and for the years ended December
31, 1993, 1992 and 1991 are included on pages F-1 through F-32 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information in response to this item is incorporated by reference to
the disclosure contained under the heading "Directors and Executive Officers" in
the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
Certain information in response to this item is incorporated by reference to
the disclosure contained under the heading "Directors and Executive Officers" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this item is incorporated by reference to the
disclosure contained under the headings "Principal Stockholders" and "Directors
and Executive Officers" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this item is incorporated by reference to the
disclosure contained under the heading "Directors and Executive Officers" in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
Financial Statements to this form are listed in the "Index to
Consolidated Financial Statements" at page F-1.
(2) Schedules:
Financial statement schedules to this form are listed in the "Index to
Consolidated Financial Statements" at page F-1 herein.
(3) Exhibits:
See "Exhibit Index" included herein.
Registrant agrees to furnish, upon the request of the Commission, a copy of
all constituent instruments defining the rights of holders of long-term debt of
Registrant and its consolidated subsidiaries.
(b) Reports on Form 8-K.
None.
26
<PAGE>
HERITAGE MEDIA CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------------
<C> <S>
3(a) Articles of incorporation (1)
3(b) Bylaws (2)
4(a) Indenture dated as of June 15, 1992 of Heritage Media Services, Inc. ("HMSI") to Bankers Trust
Company (3)
4(b) Form of Pledge Agreement among the Company, certain subsidiaries of the Company, Bankers Trust
Company and Citibank N.A. (3)
4(c) Indenture dated as of October 1, 1992 of the registrant to Bank of Montreal Trust Company (4)
4(d) Settlement Rights Agreement dated July 19, 1989 among the registrant, Actmedia, Inc., Citibank N.A.
and the purchasers listed on Schedule I thereto (5)
4(e) Master Equity Registration Rights Agreement dated July 19, 1989 between the registrant and various
subscribers (5)
4(f) Form of Equity Subscription Agreement dated July 19, 1989 between the registrant and various
subscribers (5)
10(a) Stock Subscription and Registration Rights Agreement dated as of February 21, 1989 by and among the
registrant and HC Crown Corp. (6)
10(b) Form of Credit Agreement among HMSI, the banks named therein, Citibank, N.A., as agent and
NationsBank of Texas, N.A., as co-agent (3)
10(c) Registrant's Amended and Restated Stock Option Plan (See Exhibit A of Exhibit 99)
10(d) Registrant's Employee Stock Ownership Plan, as amended (8)
10(e) Actmedia Stock Appreciation Rights Plan of 1990 (5)
10(f) Securities Exchange Agreement between the Company and Heritage Investments, Inc. (9)
10(h) Letter Agreement dated September 28, 1992 between the Company and Heritage Investments, Inc. (9)
23(a) Consent of KPMG Peat Marwick (7)
99 Proxy Statement for annual meeting to be held on May 26, 1994 (7)
<FN>
- ------------------------
(1) Filed as an Exhibit to the registrant's Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
(2) Filed as an Exhibit to the registrant's Form 10-K for the year ended
December 31, 1990 and incorporated herein by reference.
(3) Filed as an Exhibit to the registrant's Registration Statement No. 33-47953
on Form S-2 and incorporated herein by reference.
(4) Filed as an Exhibit to the registrant's Registration Statement No. 33-52062
on Form S-2 and incorporated herein by reference.
(5) Filed as an Exhibit to the registrant's Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
(6) Filed as an Exhibit to Amendment No. 4 to the Schedule 13D filed by HC
Crown Corp.
(7) Filed herewith.
(8) Filed as an Exhibit to Amendment No. 2 to the registrant's Registration
Statement on Form S-8 and incorporated herein by reference.
(9) Filed as an Exhibit to the registrant's Registration Statement No. 33-46107
on Form S-2 and incorporated herein by reference.
</TABLE>
27
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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 on March 8, 1994.
HERITAGE MEDIA CORPORATION
By _______/s/_DAVID N. WALTHALL_______
David N. Walthall
PRESIDENT AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/JAMES M. HOAK, JR Chairman of the Board and
James M. Hoak, Jr. Director March 8, 1994
President and Director
/s/DAVID N. WALTHALL (Principal Executive March 8, 1994
David N. Walthall Officer)
Executive Vice President and
/s/JOSEPH D. MAHAFFEY Director (Principal March 8, 1994
Joseph D. Mahaffey Financial Officer)
Vice President and Controller
/s/JAMES P. LEHR (Principal Accounting March 8, 1994
James P. Lehr Officer)
James S. Cownie Director
/s/JOSEPH M. GRANT
Joseph M. Grant Director March 8, 1994
Clark A. Johnson Director
/s/ALAN R. KAHN
Alan R. Kahn Director March 8, 1994
</TABLE>
28
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1993 and 1992............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1992 and 1991............... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991..... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991............... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Financial Statement Schedules:
III. Condensed Financial Information of Registrant as of December 31, 1993 and 1992 and for the years
ended December 31, 1993, 1992 and 1991............................................................. F-24
V. Property and Equipment for the years ended December 31, 1993, 1992 and 1991........................ F-29
VI. Accumulated Depreciation of Property and Equipment for the years ended December 31, 1993, 1992 and
1991................................................................................................ F-30
VIII. Allowance for Doubtful Accounts for the years ended December 31, 1993, 1992 and 1991............... F-31
X. Supplementary Income Statement Information for the years ended December 31, 1993, 1992 and 1991..... F-32
</TABLE>
All other schedules have been omitted because the required information is
inapplicable, immaterial or is presented in the financial statements or related
notes.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Heritage Media Corporation:
We have audited the consolidated financial statements of Heritage Media
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heritage
Media Corporation and subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK
Dallas, Texas
February 25, 1994
F-2
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 4,416 $ 1,218
Trade receivables, net of allowance for doubtful accounts of $2,778 in 1993 and $1,487
in 1992................................................................................ 47,911 47,566
Prepaid expenses and other.............................................................. 3,331 3,958
Inventory............................................................................... 4,435 4,348
Broadcast program rights................................................................ 1,465 1,989
Deferred income taxes (note 9) 3,304 --
---------- ----------
Total current assets.............................................................. 64,862 59,079
---------- ----------
Property and equipment:
In-store marketing equipment............................................................ 39,228 40,691
Broadcasting equipment.................................................................. 37,134 34,695
Buildings and improvements.............................................................. 9,206 6,908
Other equipment......................................................................... 7,600 6,287
Land.................................................................................... 2,490 2,490
---------- ----------
95,658 91,071
Less accumulated depreciation........................................................... 38,236 35,239
---------- ----------
Net property and equipment........................................................ 57,422 55,832
---------- ----------
Goodwill and other intangibles, net (note 1(b))........................................... 363,667 373,426
Noncurrent broadcast program rights....................................................... 1,859 3,117
Deferred finance costs, net............................................................... 3,849 4,498
Other assets.............................................................................. 1,190 344
---------- ----------
$ 492,849 $ 496,296
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 4)......................................... $ 2,076 $ 960
Accounts payable........................................................................ 14,299 11,814
Accrued expenses (note 3)............................................................... 32,592 29,649
Broadcast program rights payable (note 10).............................................. 2,188 2,751
Deferred advertising revenues........................................................... 17,338 14,009
---------- ----------
Total current liabilities......................................................... 68,493 59,183
Long-term debt, excluding current portion (note 4)........................................ 312,913 318,425
Broadcast program rights payable, excluding current portion (note 10)..................... 1,460 2,005
Other long-term liabilities............................................................... 523 6,649
Deferred income taxes (note 9)............................................................ 3,304 --
Settlement rights (note 5)................................................................ 19,514 18,821
Stockholders' equity (notes 4, 5, 6 and 7):
Preferred stock, no par value, authorized 60,000,000 shares
Issued, 22,117 shares of Series B and 139,828 shares of Series C in 1993 and 1992..... 16,195 16,195
Common stock, $.01 par value:
Class A -- 40,000,000 shares authorized. Issued, 12,236,856 shares in 1993 and
11,352,791 shares in 1992............................................................ 123 113
Class B -- Issued, 1,600,000 shares in 1992........................................... -- 16
Class C -- 10,000,000 shares authorized. Issued, 4,136,168 shares in 1993 and 1992.... 41 41
Additional paid-in capital.............................................................. 202,743 201,986
Accumulated deficit..................................................................... (130,862) (126,052)
Accumulated foreign currency translation adjustments.................................... (1,144) (632)
Class A common stock in treasury, at cost (32,828 shares in 1993 and 1992).............. (454) (454)
---------- ----------
Total stockholders' equity........................................................ 86,642 91,213
Commitments and contingencies (notes 2, 5, 8 and 10)
---------- ----------
$ 492,849 $ 496,296
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues:
In-store marketing................................................. $ 216,319 $ 186,445 $ 171,136
Television......................................................... 41,517 39,703 35,319
Radio.............................................................. 33,369 24,743 15,905
------------- ------------- -------------
291,205 250,891 222,360
------------- ------------- -------------
Costs and expenses:
Cost of services:
In-store marketing............................................... 131,449 120,105 111,064
Television....................................................... 10,166 9,833 8,996
Radio............................................................ 9,477 7,681 4,562
Selling, general and administrative................................ 70,669 58,219 51,954
Depreciation....................................................... 16,268 14,499 10,900
Amortization of goodwill and other assets.......................... 11,912 11,643 11,413
Writedown of program rights........................................ 1,678 -- 490
Product development costs.......................................... 1,091 811 681
Other nonrecurring costs (note 8).................................. 3,000 -- --
------------- ------------- -------------
255,710 222,791 200,060
------------- ------------- -------------
Operating income............................................... 35,495 28,100 22,300
------------- ------------- -------------
Other expense:
Interest (note 4).................................................. (31,515) (37,473) (38,640)
Other, net (note 2)................................................ (959) (4,013) (2,492)
------------- ------------- -------------
(32,474) (41,486) (41,132)
------------- ------------- -------------
Income (loss) before income taxes and extraordinary items...... 3,021 (13,386) (18,832)
Income taxes (note 9)................................................ (2,944) (1,580) (446)
------------- ------------- -------------
Income (loss) before extraordinary items....................... 77 (14,966) (19,278)
Extraordinary items -- gain (loss) on early extinguishment of debt
(note 4)............................................................ 435 (3,594) 4,320
------------- ------------- -------------
Net income (loss).............................................. $ 512 $ (18,560) $ (14,958)
------------- ------------- -------------
------------- ------------- -------------
Net loss applicable to common stock (note 1(k))...................... $ (4,810) $ (25,465) $ (20,435)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding.................................. 16,314,023 14,449,215 10,368,624
------------- ------------- -------------
------------- ------------- -------------
Loss per common share (note 1(k)):
Before extraordinary items......................................... $(.32) $(1.51) $(2.39)
Net loss........................................................... $(.29) $(1.76) $(1.97)
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------
PREFERRED STOCK CLASS A CLASS B
-------------------- ------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 -- $ -- 6,585,733 $ 66 2,000,000 $ 20
Private placement for cash and debentures...... 161,945 16,195 -- -- -- --
Acquisitions................................... -- -- 25,000 -- -- --
Exercise of employee stock options............. -- -- 11,025 -- -- --
Accretion of settlement rights................. -- -- -- -- -- --
Preferred stock dividends...................... -- -- -- -- -- --
Net loss....................................... -- -- -- -- -- --
--------- --------- ------------ ----- ----------- ---
Balance, December 31, 1991..................... 161,945 16,195 6,621,758 66 2,000,000 20
Issuance of shares to retirement savings
plan.......................................... -- -- 16,328 -- -- --
Public offering of Class A common stock........ -- -- 4,500,000 45 -- --
Private placement of Class C common stock for
subordinated note payable..................... -- -- -- -- -- --
Conversion of Class B common stock............. -- -- 200,000 2 (400,000) (4)
Exercise of employee stock options............. -- -- 14,705 -- -- --
Excess of purchase price over carrying amount
of settlement rights retired.................. -- -- -- -- -- --
Accretion of settlements rights................ -- -- -- -- -- --
Preferred stock dividends...................... -- -- -- -- -- --
Foreign currency translation adjustment........ -- -- -- -- -- --
Net loss....................................... -- -- -- -- -- --
--------- --------- ------------ ----- ----------- ---
Balance, December 31, 1992..................... 161,945 16,195 11,352,791 113 1,600,000 16
Issuance of shares to retirement savings
plan.......................................... -- -- 48,392 1 -- --
Conversion of Class B common stock............. -- -- 800,000 8 (1,600,000) (16)
Exercise of employee stock options............. -- -- 35,673 1 -- --
Excess of purchase price over carrying amount
of settlement rights retired.................. -- -- -- -- -- --
Accretion of settlement rights................. -- -- -- -- -- --
Preferred stock dividends...................... -- -- -- -- -- --
Foreign currency translation adjustment........ -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
--------- --------- ------------ ----- ----------- ---
Balance, December 31, 1993..................... 161,945 $ 16,195 12,236,856 $ 123 -- $ --
--------- --------- ------------ ----- ----------- ---
--------- --------- ------------ ----- ----------- ---
<CAPTION>
ACCUMULATED
FOREIGN TREASURY
CLASS C ADDITIONAL CURRENCY STOCK
----------------------- PAID-IN ACCUMULATED TRANSLATION ---------
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENTS SHARES
---------- ----------- ---------- ------------ ------------ ---------
<S> <C> <C>
Balance, December 31, 1990 2,800,447 $ 28 $ 146,831 $ (80,152) $ -- (32,828)
Private placement for cash and debentures...... -- -- (196) -- -- --
Acquisitions................................... -- -- (38) -- -- --
Exercise of employee stock options............. -- -- 157 -- -- --
Accretion of settlement rights................. -- -- -- (3,859) -- --
Preferred stock dividends...................... -- -- -- (1,618) -- --
Net loss....................................... -- -- -- (14,958) -- --
---------- --- ---------- ------------ ------------ ---------
Balance, December 31, 1991..................... 2,800,447 28 146,754 (100,587) -- (32,828)
Issuance of shares to retirement savings
plan.......................................... -- -- 227 -- -- --
Public offering of Class A common stock........ -- -- 41,847 -- -- --
Private placement of Class C common stock for
subordinated note payable..................... 1,335,721 13 13,010 -- -- --
Conversion of Class B common stock............. -- -- 2 -- -- --
Exercise of employee stock options............. -- -- 146 -- -- --
Excess of purchase price over carrying amount
of settlement rights retired.................. -- -- -- (382) -- --
Accretion of settlements rights................ -- -- -- (4,742) -- --
Preferred stock dividends...................... -- -- -- (1,781) -- --
Foreign currency translation adjustment........ -- -- -- -- (632) --
Net loss....................................... -- -- -- (18,560) -- --
---------- --- ---------- ------------ ------------ ---------
Balance, December 31, 1992..................... 4,136,168 41 201,986 (126,052) (632) (32,828)
Issuance of shares to retirement savings
plan.......................................... -- -- 471 -- -- --
Conversion of Class B common stock............. -- -- 8 -- -- --
Exercise of employee stock options............. -- -- 278 -- -- --
Excess of purchase price over carrying amount
of settlement rights retired.................. -- -- -- (16) -- --
Accretion of settlement rights................. -- -- -- (3,525) -- --
Preferred stock dividends...................... -- -- -- (1,781) -- --
Foreign currency translation adjustment........ -- -- -- -- (512) --
Net income..................................... -- -- -- 512 -- --
---------- --- ---------- ------------ ------------ ---------
Balance, December 31, 1993..................... 4,136,168 $ 41 $ 202,743 $ (130,862) $ (1,144) (32,828)
---------- --- ---------- ------------ ------------ ---------
---------- --- ---------- ------------ ------------ ---------
<CAPTION>
TOTAL
STOCKHOLDERS'
AMOUNT EQUITY
----------- ------------
Balance, December 31, 1990 $ (454) $ 66,339
Private placement for cash and debentures...... -- 15,999
Acquisitions................................... -- (38)
Exercise of employee stock options............. -- 157
Accretion of settlement rights................. -- (3,859)
Preferred stock dividends...................... -- (1,618)
Net loss....................................... -- (14,958)
----------- ------------
Balance, December 31, 1991..................... (454) 62,022
Issuance of shares to retirement savings
plan.......................................... -- 227
Public offering of Class A common stock........ -- 41,892
Private placement of Class C common stock for
subordinated note payable..................... -- 13,023
Conversion of Class B common stock............. -- --
Exercise of employee stock options............. -- 146
Excess of purchase price over carrying amount
of settlement rights retired.................. -- (382)
Accretion of settlements rights................ -- (4,742)
Preferred stock dividends...................... -- (1,781)
Foreign currency translation adjustment........ -- (632)
Net loss....................................... -- (18,560)
----------- ------------
Balance, December 31, 1992..................... (454) 91,213
Issuance of shares to retirement savings
plan.......................................... -- 472
Conversion of Class B common stock............. -- --
Exercise of employee stock options............. -- 279
Excess of purchase price over carrying amount
of settlement rights retired.................. -- (16)
Accretion of settlement rights................. -- (3,525)
Preferred stock dividends...................... -- (1,781)
Foreign currency translation adjustment........ -- (512)
Net income..................................... -- 512
----------- ------------
Balance, December 31, 1993..................... $ (454) $ 86,642
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 512 $ (18,560) $ (14,958)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Noncash interest and amortization of deferred finance costs............. 651 4,611 12,406
Depreciation............................................................ 16,268 14,499 10,900
Amortization:
Broadcast program rights.............................................. 2,188 2,118 1,974
Goodwill and other assets............................................. 11,912 11,643 11,413
Writedown of program rights............................................. 1,678 -- 490
Write-off of foreign investment......................................... -- 3,260 1,300
Write-off of fixed assets............................................... 1,685 -- --
(Gain) loss on retirement of debt....................................... (435) 3,594 (4,320)
Increase (decrease) in deferred revenue................................. 3,329 5,978 (415)
Other................................................................... 617 94 723
Changes in certain assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................................... (345) (11,463) 9,716
Other assets.......................................................... 597 (911) 2,104
Accounts payable and accrued expenses................................. 2,273 2,206 (10,133)
---------- ---------- ----------
Net cash provided by operating activities............................. 40,930 17,069 21,200
---------- ---------- ----------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................................ (5,106) (11,901) (4,447)
Capital expenditures...................................................... (18,534) (15,531) (11,421)
Proceeds from sale of property and equipment.............................. 152 107 5,679
Purchase of in-store marketing rights..................................... (834) -- --
---------- ---------- ----------
Net cash used in investing activities................................. (24,322) (27,325) (10,189)
---------- ---------- ----------
Cash flows from financing activities:
Long-term borrowings...................................................... 91,970 377,600 133,350
Retirements:
Long-term debt.......................................................... (96,795) (400,288) (150,456)
Broadcast program rights payable........................................ (3,229) (3,868) (4,110)
Other long-term liabilities............................................. (1,006) (295) (1,193)
Issuance of common stock.................................................. 279 42,140 122
Purchase of settlement rights............................................. (2,848) (1,300) --
Issuance of preferred stock............................................... -- -- 14,582
Dividends on preferred stock.............................................. (1,781) (1,781) (1,320)
Collections on notes receivable........................................... -- 1,222 --
Payment of deferred finance costs......................................... -- (4,800) (338)
---------- ---------- ----------
Net cash (used) provided by financing activities........................ (13,410) 8,630 (9,363)
---------- ---------- ----------
Net change during year...................................................... 3,198 (1,626) 1,648
Cash and cash equivalents at beginning of year.............................. 1,218 2,844 1,196
---------- ---------- ----------
Cash and cash equivalents at end of year.................................... $ 4,416 $ 1,218 $ 2,844
---------- ---------- ----------
---------- ---------- ----------
Cash paid for interest (note 4)............................................. $ 31,141 $ 65,258 $ 25,135
---------- ---------- ----------
---------- ---------- ----------
Cash paid for income taxes.................................................. $ 3,160 $ 662 $ 460
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heritage Media Corporation ("HMC" or "the Company") was incorporated on
August 7, 1987 and began operations on August 11, 1987. The Company, through
Heritage Media Services, Inc. ("HMSI"), a wholly-owned subsidiary, operates in
three segments -- in-store marketing and television and radio broadcasting. The
Company's in-store marketing operations are conducted in the United States,
Canada and The Netherlands. Broadcasting operations are conducted in the United
States. Aggregate assets and revenues of the Company's foreign operations
comprise less than 10% of the Company's total assets and revenues.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant itercompany transactions and
accounts have been eliminated in consolidation.
(B) ACQUISITIONS, GOODWILL AND OTHER INTANGIBLES
The cost of acquired companies is allocated first to identifiable assets and
liabilities based on estimated fair market values. The excess of cost over
identifiable assets and liabilities is recorded as goodwill and amortized over a
period of 40 years. Costs allocated to identifiable intangible assets are
amortized over the remaining life of the asset as determined by underlying
contract terms or independent appraisals. Useful lives of license agreements and
other intangibles are 25 and 4-10 years, respectively.
Goodwill and other intangibles at December 31, 1993 and 1992 are summarized
as follows (thousands of dollars):
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Goodwill, net of accumulated amortization of $43,798
and $33,434.................................................................. $ 354,733 $ 367,625
License agreements, net of accumulated amortization of $191 and $63........... 4,227 2,648
Other, net of accumulated amortization of $2,800 and $1,713................... 4,707 3,153
----------- -----------
$ 363,667 $ 373,426
----------- -----------
----------- -----------
</TABLE>
The Company continually reevaluates the propriety of the carrying amount of
goodwill and other intangibles as well as the related amortization period to
determine whether current events and circumstances warrant adjustments to the
carrying values and/or revised estimates of useful lives. This evaluation is
based on the Company's projection of the undiscounted operating income before
depreciation, amortization, nonrecurring charges and interest for each of the
Company's operating segments over the remaining lives of the amortization
periods of related goodwill and intangible assets. The projections are based on
the historical trend line of actual results since the commencement of operations
in the respective segment and adjusted for expected changes in operating
results. To the extent such projections indicate that the undiscounted operating
income (as defined above) is not expected to be adequate to recover the carrying
amounts of related intangibles, such carrying amounts are written down by
charges to expense. At this time, the Company believes that no significant
impairment of the goodwill and other intangibles has occurred and that no
reduction of the estimated useful lives is warranted.
(C) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
F-7
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) INVENTORY
Inventory consists of display devices used in the Company's in-store
marketing programs. Such amounts are stated at the lower of average cost or
market.
(E) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets. The useful
lives of the Company's property and equipment at December 31, 1993 are
summarized as follows:
<TABLE>
<CAPTION>
Useful Life
--------------
<S> <C>
In-store marketing equipment.................................................. 3-5 years
Broadcasting equipment........................................................ 5-25 years
Buildings and improvements.................................................... 12-30 years
Other equipment............................................................... 4-8 years
</TABLE>
The Company continually reevaluates the propriety of the carrying amount of
property and equipment and the estimated useful lives used for depreciation. As
a result, the Company prospectively changed its estimates of the useful lives of
certain in-store marketing and broadcasting equipment during 1992. These changes
resulted in additional depreciation expense and net loss per share of
approximately $1,100,000 and $.08, respectively, for the year ended December 31,
1992.
During the year ended December 31, 1993, the Company recorded a writedown of
in-store marketing equipment of $1,685,000 in connection with certain changes in
the Company's in-store radio marketing delivery system (see note 8).
(F) BROADCAST PROGRAM RIGHTS
Broadcast program rights are recorded as assets and liabilities when the
programs are available for telecasting. The assets are carried at the lower of
cost or estimated net realizable value and are classified as current or
noncurrent based upon the expected use of the programs in succeeding years. The
contract liabilities are classified as current or noncurrent in accordance with
contract payment terms. Costs are charged to operations by the straight-line
method over the contract period.
The Company continually reevaluates the propriety of the carrying amounts of
broadcast program rights assets to determine if circumstances warrant
adjustments to the carrying values. As a result, the Company recorded writedowns
of program rights of $1,678,000 and $490,000 during the years ended December 31,
1993 and 1991, respectively. The estimated fair value of broadcast program
rights liabilities do not differ significantly from their carrying amounts at
December 31, 1993 and 1992.
(G) DEFERRED FINANCE COSTS
Deferred finance costs are recorded at cost and are amortized using the
interest method over the period of the related debt agreement.
(H) DISCOUNTS ON LONG-TERM DEBT
The original discounts on certain notes payable are being accreted over the
term of the notes by charges to interest expense using the interest method.
(I) REVENUES
Revenues from in-store marketing are derived primarily from providing
advertising space, promotion and production services in retail stores and by
selling advertising time to national advertisers
F-8
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on an in-store music entertainment network. Revenues from in-store marketing are
recognized over the contract period of the related advertising program and those
from advertisements on the in-store music network are recognized when the
commercial is aired.
Television and radio broadcasting revenues are primarily derived from local,
regional and national advertising and network compensation. Advertising revenues
are recognized upon the airing of commercials, while network revenues are
recognized monthly as earned. Revenues are presented net of advertising agency
and national sales representatives' commissions.
(J) BARTER TRANSACTIONS
The Company exchanges unsold advertising time for products and services.
These transactions are reported at the estimated fair market value of the
product or service received. Barter revenues are recorded when the commercials
are broadcast and barter expenses are recorded when merchandise or services are
used. If merchandise or services are received prior to the broadcast of a
commercial, a liability is recorded. Likewise, a receivable is recorded if a
commercial is broadcast before the goods or services are received. Barter
amounts are not significant to the Company's consolidated financial statements.
(K) LOSS PER SHARE
The net loss per common share is computed by dividing net income (loss),
adjusted for accretion and premium or discount on retirement of the settlement
rights and dividends on preferred stock for applicable years, by the weighted
average number of Class A and Class C common shares, and one-half of the
weighted average number of Class B common shares, outstanding during each year,
after giving retroactive effect to a one-for-four reverse stock split in March
1992 (note 6). Common stock purchase options, preferred stock and settlement
rights have been excluded from the computation as their effect is antidilutive.
Following is a reconciliation of net loss to net loss applicable to common stock
for the years ended December 31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
1993 1992 1991
--------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
Net income (loss)................................................... $ 512 $ (18,560) $ (14,958)
Accretion of settlement rights...................................... (3,525) (4,742) (3,859)
Excess of purchase price over carrying amount of settlement rights
retired............................................................ (16) (382) --
Dividends on preferred stock........................................ (1,781) (1,781) (1,618)
--------- ---------- ----------
Net loss applicable to common stock............................... $ (4,810) $ (25,465) $ (20,435)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
Assuming the conversion of all outstanding preferred shares into Class A and
C common shares (see note 6) had occurred on January 1, 1993, pro forma loss per
common share before extraordinary item and pro forma net loss per common share
for the year ended December 31, 1993 would have been $.19 and $.17,
respectively.
(L) INCOME TAXES
During 1992 and 1991, deferred income taxes are provided for the effects of
items reported for tax purposes in periods different from those used for
financial reporting purposes in accordance with Accounting Principles Board
Opinion No. 11.
In February 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Application of SFAS 109, which is required for fiscal years beginning
after December 15, 1993, required the Company to change, effective January 1,
1993, from the deferred method to the asset and liability method of
F-9
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting for income taxes. Under the asset and liability method, deferred
income taxes are provided by applying enacted statutory rates in effect at the
balance sheet date to differences between the book and tax bases of assets and
liabilities. The resulting deferred tax liabilities, and assets in some cases,
are adjusted to reflect changes in tax laws or rates as they occur. The Company
implemented the provisions of SFAS 109 in the first quarter of 1993 without
restating prior years' financial statements. This change did not have a
significant effect on the Company's consolidated financial statements.
(M) FOREIGN CURRENCY TRANSLATION
For foreign operations, the balance sheet accounts are translated at the
current year-end exchange rate and income statement items are translated at the
average exchange rate for the year. Resulting translation adjustments are
presented as a separate component of stockholders' equity. Foreign transaction
exchange gains and losses are recognized as income or expense; such amounts were
not material in 1993, 1992 or 1991.
(N) RECLASSIFICATIONS
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the 1993 presentation.
(2) ACQUISITIONS AND DISPOSITIONS
In December 1990, the Company began investing in Supermarket Visions, Ltd.
("SVL"), an in-store marketing company operating in the United Kingdom. Cash
investments in SVL preferred stock and advances totaled $994,000 and $344,000
during 1992 and 1991, respectively. During 1992 and 1991, the Company recorded
$2,162,000 and $1,300,000 of writedowns of the carrying amount of the Company's
investment in SVL. Also during 1992, the Company recorded additional costs of
$1,098,000 incurred during the shutdown of SVL. SVL ceased operations in
September 1992 and was liquidated in the fourth quarter of 1992. All such
writedowns and shutdown costs are included in other expense, net for the
respective years.
On March 26, 1991, the Company sold a radio station for $5,066,000 cash. The
book value of the station was written down to approximately $5,000,000 at
December 31, 1990 based on estimated sale proceeds. A gain of approximately
$66,000 representing a partial recovery of previous writedowns is reflected in
other expense, net in the consolidated statement of operations for the year
ended December 31, 1991.
On August 15, 1991, the Company sold certain assets of a television station
for $1,485,000. The Company also donated certain assets of the station to a
charitable organization. The loss on sale and the charitable donation totaled
$4,071,000 and is reflected in other expense, net in the consolidated statement
of operations for the year ended December 31, 1991. Sale proceeds consisted of
$285,000 cash and a note receivable of $1,200,000. Concurrently, the Company
purchased a television station in the same market for $7,007,000. The purchase
was financed with cash from operations of $2,059,000, a $4,623,000 note payable
and 25,000 shares of the Company's Class A common stock with a fair market value
of $13 per share.
On August 15, 1991, the Company purchased a Canadian in-store marketing
company for $3,711,000 consisting of an initial cash payment of $2,252,000 and
an obligation for a minimum contingent payment, based on earnings through 1994,
of $1,459,000 payable over three years. If the acquired company attains certain
predetermined earnings goals, the Company may be obligated to make an additional
payment not to exceed $1,053,000 in July 1994. Such payment, to the extent made,
will be recognized as additional goodwill.
F-10
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
On October 18, 1991, the Company entered into a joint venture agreement to
purchase in-store marketing companies in Europe for an initial investment of
$511,000. In April 1992, the Company invested an additional $2.2 million in the
joint venture which concurrently acquired a 65% interest in an in-store
marketing company in The Netherlands.
On February 28, 1992, the Company amended its Joint Operating Agreement with
Muzak Limited Partnership whereby the Company purchased various in-store
marketing assets for a purchase price of $5,000,000. Consideration paid by the
Company consisted of $850,000 cash and a $4,150,000 note payable due in
fluctuating quarterly installments with the balance due on January 31, 1999.
On June 1, 1992, the Company purchased the assets of two radio stations for
cash of $7,895,000.
On July 22, 1993, the Company purchased the assets of a radio station for
cash of $4,918,000. The Company began operating the station on May 14, 1993
under a time brokerage agreement.
On January 6, 1994, the Company purchased the assets of a radio station for
cash of $5,600,000. As of December 31, 1993, the Company had made escrow
deposits of $560,000 relating to this acquisition, reducing its remaining
purchase commitment to $5,040,000. The Company began operating the station on
October 25, 1993 under a time brokerage agreement.
On January 10, 1994, the Company agreed to purchase the assets of a radio
station for $7,200,000. Completion of the purchase is pending the consent of the
Federal Communications Commission ("FCC").
During 1991, the Company recognized noncash income of $3,750,000 related to
the settlement of a preacquisition liability of Actmedia, Inc. ("Actmedia"), an
in-store marketing subsidiary of the Company. Such amount is included in other
expense, net in the accompanying consolidated statement of operations. During
1993, the Company reached a settlement with the Internal Revenue Service ("IRS")
in regards to certain preacquisition tax liabilities of Actmedia. The Company
had previously recorded federal tax liability purchase reserves of approximately
$3,900,000. As a result of the settlement, the Company paid approximately
$800,000 to the IRS and reversed the remaining reserves to goodwill.
The acquisitions discussed above were recognized in the consolidated
financial statements as follows (thousands of dollars):
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Working capital deficit................................................ $ (732) $ (375) $ (506)
Goodwill and other intangibles......................................... 4,972 9,311 7,849
Other noncurrent assets................................................ 866 7,280 6,699
Long-term debt......................................................... -- (4,150) (4,623)
Other long-term liabilities............................................ -- (165) (4,647)
Stockholders' equity................................................... -- -- (325)
--------- --------- ---------
Total cash paid, net of cash acquired................................ $ 5,106 $ 11,901 $ 4,447
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following summary presents unaudited pro forma consolidated results of
operations for the Company and its subsidiaries assuming (a) the acquisitions
and dispositions of (i) the radio stations acquired during 1993 and 1992, (ii)
The Netherlands in-store marketing company acquired during 1992, and (iii) the
United Kingdom in-store marketing company disposed of in 1992 and (b) the
F-11
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
refinancing transactions discussed in note 4, the 1993 and 1992 settlement
rights purchases discussed in note 5 and the conversion of preferred stock
discussed in note 6 had occurred at the beginning of the respective periods
(thousands of dollars, except per share information):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
Net revenues.................................................................. $ 293,417 $ 256,451
----------- -----------
----------- -----------
Loss before extraordinary items............................................... $ (769) $ (16,606)
----------- -----------
----------- -----------
Loss per common share before extraordinary items.............................. $ (.25) $ (1.19)
----------- -----------
----------- -----------
</TABLE>
The pro forma amounts assume that the financing requirements of the
acquisitions were met by the use of funds from the offering of common stock
completed in 1992 and the actual debt issuances incurred in connection with the
in-store marketing company and radio station acquisitions and the purchase of
settlement rights, assuming that all such financings were completed at the
beginning of the respective periods. The pro forma amounts are not necessarily
indicative of what the results would actually have been if the transactions had
been consummated earlier and are not intended to be an indication of operating
results expected to be achieved in the future.
(3) ACCRUED EXPENSES
Accrued expenses at December 31, 1993 and 1992 are summarized as follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
(Thousands of
dollars)
<S> <C> <C>
Store commissions................................................................ $ 9,630 $ 11,335
Interest......................................................................... 2,957 3,234
Payroll and employee benefits.................................................... 4,431 4,101
License fees..................................................................... 646 459
Other............................................................................ 14,928 10,520
--------- ---------
$ 32,592 $ 29,649
--------- ---------
--------- ---------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 is summarized as follows:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Senior Notes (a).............................................................. $ 150,000 $ 150,000
Credit agreement (b).......................................................... 110,500 111,000
Senior subordinated notes (c)................................................. 50,000 50,000
Other (d)..................................................................... 4,489 8,385
----------- -----------
314,989 319,385
Less current installments..................................................... 2,076 960
----------- -----------
$ 312,913 $ 318,425
----------- -----------
----------- -----------
</TABLE>
(a) On June 22, 1992, HMSI issued $150 million of 11% Senior Secured Notes ("the
Senior Notes") due June 15, 2002. The Senior Notes are redeemable, in whole
or in part, at HMSI's option at any time on or after June 15, 1997, at
amounts decreasing from 105.5% to 100% of par on June 15, 1999. The Senior
Notes rank on a parity with the obligations of HMSI under its credit
agreement, are guaranteed by HMC and HMSI's domestic subsidiaries and are
secured by a pledge of capital
F-12
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
stock of HMSI and its domestic subsidiaries. The fair market value of the
Senior Notes based on quoted market rates is $164,250,000 and $153,000,000
at December 31, 1993 and 1992, respectively.
(b) In conjunction with the issuance of the Senior Notes, HMSI entered into a
credit agreement with a group of banks providing for an $80 million term
loan and a reducing revolving credit facility of up to $50 million
(increased to $75 million effective February 9, 1994). Quarterly principal
payments under the credit agreement commence on December 31, 1994 and
continue until June 1999. At December 31, 1993, $19.5 million of additional
borrowings were available under the credit agreement. HMSI pays an annual
commitment fee equal to 0.5% of the unadvanced portion of the credit
agreement. Loans under the credit agreement bear interest at rates based on
the agent bank's base rate, a Eurodollar rate or a CD rate plus a margin
depending on HMSI's ratio of consolidated total debt to operating cash flow
(as defined). At December 31, 1993, the weighted average interest rate was
4.98% under the Eurodollar option. The loans under the credit agreement are
secured by the stock of substantially all subsidiaries of the Company and by
the assets of HMSI, Actmedia and certain other subsidiaries. The initial
borrowings under the credit agreement, together with proceeds obtained from
the issuance of the Senior Notes were used to prepay balances outstanding
under HMSI's previous credit agreement. HMSI recognized an extraordinary
loss of $2,242,000 on this refinancing. As the credit agreement bears
interest at current market rates, its carrying amount approximates its fair
market value at December 31, 1993 and 1992.
(c) On August 11, 1987, the Company issued a $75 million, 8% subordinated note
due July 31, 1994. Interest on this note was deferred and payable at
maturity. The note was discounted for financial statement purposes by $24.6
million using a 14% interest rate. On April 15, 1992, the Company retired
the 8% subordinated note with an accreted balance of $95,384,000 through the
payment of $30,000,000 of cash obtained from the issuance of Class A common
stock (note 6), the issuance of 1,335,721 shares of Class C common stock at
$9.75 per share and the issuance of a new $50 million, 12% subordinated note
("the New Note"). The $30,000,000 payment is included in the amounts
disclosed as cash paid for interest in the statement of cash flows for the
year ended December 31, 1992. As a result of this transaction, the Company
recognized an extraordinary gain of approximately $2,360,000.
On October 1, 1992, the Company retired the New Note through the issuance of
$50 million of 11% Senior Subordinated Notes ("the Notes") due October 1,
2002. The Notes are redeemable, in whole or in part, at the Company's option
at any time on or after October 1, 1997, at amounts decreasing from 105.5%
to 100% of par at October 1, 1999. The Notes are subordinated to the Senior
Notes, HMSI's credit agreement and all other indebtedness of the Company and
its subsidiaries. The Company recognized an extraordinary loss of $1,526,000
on this refinancing. The fair market value of the Notes based on quoted
market rates is $54,500,000 and $47,375,000 at December 31, 1993 and 1992,
respectively.
(d) Other debt bears interest at varying rates and consists primarily of notes
payable, capital lease obligations and industrial development revenue bonds
due in varying amounts through 1999.
On August 11, 1987, Heritage Media, Inc. ("HMI"), a wholly-owned subsidiary
of the Company, issued $74.1 million of subordinated original issue discount
debentures in a private placement. During 1992 and 1991, the Company
extinguished outstanding HMI debentures with face amounts of $37,183,000 and
$23,517,000, respectively, prior to scheduled maturity. These extinguishments
resulted in extraordinary losses of $2,186,000 in 1992 and extraordinary gains
of $4,320,000 in 1991.
F-13
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
On July 14, 1993, the Company retired a subordinated note payable prior to
the scheduled maturity with a face value of $3,235,000 by a cash payment of
$2,800,000. As a result of this transaction, the Company recognized an
extraordinary gain of approximately $435,000.
The loan agreements described above require the Company and/or its
subsidiaries to comply with various financial and other covenants, including the
maintenance of certain operating and financial ratios and they contain
substantial limitations on, or prohibitions of, dividends, additional
indebtedness, liens, capital expenditures, asset sales and certain other items.
The Company is currently highly leveraged, and it is expected to continue to
have a high level of debt for the foreseeable future. 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 to
declare and pay dividends to the Company.
Under the credit agreement, at December 31, 1993, the total amount of
dividends that could be paid by HMSI to the Company was $22,600,000. As a result
of an amendment to the credit agreement dated February 9, 1994, the total amount
of such dividends was increased to $50,000,000, if such dividends are required
for the purchase or redemption of settlement rights (note 5). Under the Senior
Note Indenture, at December 31, 1993, the total amount of dividends that could
be paid by HMSI to the Company was $43,300,000. 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 (note 12) totaling approximately
$136,300,000 at December 31, 1993 are not available to the Company to pay
dividends or repay debt.
Aggregate annual maturities of long-term debt for the years ending December
31, 1994 through 1998 are $2,076,000; $8,290,000; $14,668,000; $28,140,000; and
$32,544,000, respectively.
Interest expense for the years ended December 31, 1993, 1992 and 1991 is
summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
Interest accrued and paid currently.................................. $ 30,864 $ 32,862 $ 26,234
Deferred interest.................................................... -- 3,990 11,751
Amortization of deferred finance costs............................... 651 621 655
--------- --------- ---------
$ 31,515 $ 37,473 $ 38,640
--------- --------- ---------
--------- --------- ---------
</TABLE>
(5) SETTLEMENT RIGHTS
Approximately 7,553,000 settlement rights were originally issued in
connection with the Actmedia acquisition in 1989. These rights originally
entitled the holders to receive cash or Class A or Class C common stock having a
value equal to approximately 18% of the fair market value of the business,
properties and assets of Actmedia as a going concern ("Net Equity") at specified
future dates. At December 31, 1993, the amount of Actmedia's indebtedness
(substantially all of which is intercompany indebtedness) was approximately
$160,000,000. Through a series of private transactions, the Company has
purchased 1,631,000 settlement rights during the past four years for an
F-14
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SETTLEMENT RIGHTS (CONTINUED)
aggregate purchase price of $4,434,000 (at an average cost of $2.72 per right).
As a result of these purchases, at December 31, 1993, there were approximately
5,922,000 settlement rights outstanding representing approximately 14.1% of
Actmedia's Net Equity.
The settlement 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. The initial put and call options become exercisable
in 1994. On or after April 19, 1994 (but prior to May 19, 1994), the Company
will select an independent appraiser to determine the fair market value of the
Net Equity of Actmedia. Upon completion of the appraisal process, the holders of
the settlement rights will be notified of the appraised valuation of the Net
Equity and the resultant valuation of the settlement rights.
For a period of 30 days following such notification, the holders of the
settlement rights may exercise a put option, or the Company may 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 adverse financial consequences for the Company, in which event the
Company may utilize the same payment process as described for the put option. To
the extent that neither the put nor the call options are exercised prior to
maturity of the settlement rights, the Company is required to exercise a call
option on that date under the terms set forth above, utilizing a valuation
determined by an independent appraiser.
The settlement rights were initially recorded at their estimated fair value
at the date of issuance which approximated $7,553,000. From time to time the
Company estimates the value of Actmedia Net Equity and the resultant estimate of
the value of the settlement rights. To the extent that such estimate of value
exceeds the carrying value, such excess is being accreted by the interest method
to accumulated deficit over the appropriate accounting period. At December 31,
1993, the aggregate carrying value was $19,514,000. The Company intends to
increase this carrying value, through additional accretion, to approximately
$25,000,000 by June 30, 1994 and will continue to accrete the carrying value of
the settlement rights to their estimated value until they are liquidated under
one of the options discussed above.
If, as a result of the independent appraisal process described above, a
valuation is determined that is above or below the accreted carrying value, the
Company will reflect such value through adjustment to the carrying value and to
the accumulated deficit on June 30, 1994.
(6) STOCKHOLDERS' EQUITY
Each share of Class A common stock is entitled to one vote. Class C common
shares generally are nonvoting; however, Class A and Class C common shares each
may vote as a class on certain matters affecting their rights or preferences or
as otherwise provided under Iowa law. Any dividends which are declared on any
class of common stock must also be declared at an equivalent rate on the other
classes of common stock. Class C common stock can be converted, at the holder's
option, at any time, into Class A shares.
On March 30, 1992, the common shareholders approved a one-for-four reverse
split of the Company's common stock. All per share information and numbers of
shares in the accompanying consolidated financial statements and notes thereto
have been retroactively restated to reflect the results of this split.
Additionally, the shareholders approved the elimination of the Class B common
stock effective upon the conversion of each share of Class B common stock to
one-half share of Class A common stock. During 1992, 400,000 shares of Class B
common stock were converted to Class A
F-15
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
common stock and the 1,600,000 shares of Class B common stock outstanding at
December 31, 1992 were converted to Class A common stock upon approval by the
FCC on July 20, 1993. Thereafter, the authorization of Class B Common Stock was
eliminated from the Company's charter.
On April 23, 1992, the Company issued 4,500,000 shares of Class A common
stock in a public offering at $10 per share for net proceeds of $41,892,000. The
Company used $30,000,000 of the proceeds to retire the $75 million, 8%
subordinated note due July 31, 1994 (note 4). Remaining proceeds were used to
reduce outstanding borowings under the Company's credit agreement.
The Company has authorized 60,000,000 shares of preferred stock which can be
issued in series with varying preferences and conversion features as determined
by the Company's Board of Directors. In February 1992, the Company issued 22,117
shares of Series B preferred stock and 139,828 shares of Series C preferred
stock at $100 per share. The shares were issued in exchange for cash of
$14,778,000 and $1,416,900 of outstanding HMI debentures. The Company incurred
issuance costs of $196,000 on this transaction. Each share of preferred stock
accrues cumulative dividends at an annual rate of $11 per share, payable
quarterly. Unpaid dividends accrue an amount equal to 11% per annum. At December
31, 1993, there were no dividends in arrears on the preferred stock. Each share
of Series B preferred stock is convertible at the option of the holder into
6.9356 shares of Class A common stock. Each share of Series C preferred stock is
convertible at the option of the holder into 6.9356 shares of Class A or Class C
common stock. The liquidation preference is $100 per share plus accrued
dividends.
On February 1, 1994, the Company redeemed all outstanding shares of
preferred stock by the issuance of 429,609 shares of Class A and 693,560 shares
of Class C common stock.
Also, on February 1, 1994, the holder of approximately 2.2 million shares of
Class C common stock indicated its intention to convert the Class C shares into
Class A shares and exercise its rights to require the Company to register the
Class A shares in a secondary public offering. The offering is expected to occur
in the first half of 1994.
(7) EMPLOYEE BENEFIT PLANS
The Company has a nonqualified employee incentive stock option plan under
which options to purchase a total of 1,500,000 shares of the Company's Class A
common stock may be granted to key employees, officers and directors. The
purchase price may not be less than market value at the date of grant without
approval of the Board of Directors. The options granted under such plan are
exercisable beginning two years from date of grant and expire ten years from
date of grant.
On July 15, 1992, the Board of Directors approved, and the Company
implemented, an option exchange program whereby Company employees, officers and
directors were provided an opportunity to exchange existing options for new
options on a reduced number of shares. The exercise price of the new options was
$7.50 which represented the market price of the Company's Class A common stock
on July 14, 1992. Vesting positions were not affected by the exchange. Under
this program, 541,479 options issued prior to July 15, 1992 were exchanged for
288,136 new options.
F-16
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
Following is a summary of activity in the option plan and agreements
discussed above for the years ended December 31, 1991, 1992 and 1993:
<TABLE>
<CAPTION>
Shares Under Option Price
Option Per Share
------------- ----------------
<S> <C> <C>
Balance at December 31, 1990....................................... 666,972 $ 4.00-21.00
Granted.......................................................... 13,750 12.50-18.00
Exercised........................................................ (11,025) 4.00-17.00
Cancelled........................................................ (95,275) 4.00-20.50
-------------
Balance at December 31, 1991....................................... 574,422 11.00-21.00
Granted.......................................................... 376,750 4.00-10.00
Exercised........................................................ (14,705) 9.76-13.20
Cancelled under exchange program................................. (253,343) 9.75-21.00
Cancelled........................................................ (41,573) 7.50-20.50
-------------
Balance at December 31, 1992....................................... 641,551 4.00-20.50
Granted.......................................................... 238,100 11.00-19.88
Exercised........................................................ (35,673) 9.76-17.25
Cancelled........................................................ (27,044) 7.50-20.50
-------------
Balance at December 31, 1993....................................... 816,934 4.00-20.50
-------------
-------------
</TABLE>
At December 31, 1993, 238,143 options outstanding under the option plan and
agreements discussed above were exercisable and 582,103 shares were available
for grant.
The Company has a Retirement Savings Plan ("the Plan") whereby participants
may contribute portions of their annual compensation to the Plan and certain
contributions may be made at the discretion of the Company based on criteria set
forth in the Plan agreement. Participants are generally 100% vested in Company
contributions after five years of employment with the Company. For the years
ended December 31, 1993, 1992 and 1991, Company expenses under the Plan were
approximately $809,000, $501,000 and $250,000, respectively.
The Company has a Stock Appreciation Rights Plan ("the SAR Plan") under the
terms of which certain Actmedia employees may be granted a total of 250,000
stock appreciation units. The units entitle the holders, in the aggregate, to
receive an amount equal to 2.5% of the increase, as defined, in the net value of
Actmedia from the date of grant to December 31, 1994. At December 31, 1993,
approximately 224,000 stock appreciation units were outstanding. Participants
vest in such units over a five-year period and the cost of the SAR Plan is being
charged to expense over the vesting period. For the years ended December 31,
1993, 1992 and 1991, compensation expense accrued under the SAR Plan was
$500,000, $550,000 and $350,000, respectively.
The Company does not provide post-employment or post-retirement benefits.
(8) OTHER NONRECURRING COSTS
In 1993, the Company made the decision to upgrade its existing in-store
marketing radio network to a satellite-based delivery system. As a result,
certain personnel and facilities utilized by the former
F-17
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) OTHER NONRECURRING COSTS (CONTINUED)
tape-based system will no longer be needed in the Company's operations. During
the fourth quarter of 1993, the Company recorded a provision for the following
writedowns and costs in connection with the change (thousands of dollars):
<TABLE>
<S> <C>
Writedown of in-store marketing equipment and leasehold
improvements...................................................... $ 1,685
Accrued lease and contract obligations............................. 477
Accrued severance.................................................. 227
Other.............................................................. 611
---------
$ 3,000
---------
---------
</TABLE>
The system upgrades began in October 1993 and are expected to continue
through 1994. As of December 31, 1993, the Company had incurred or paid
approximately $2,000,000 of the costs set forth above. The Company is also
expected to incur capital costs of approximately $4,000,000 in 1994 in
connection with the system upgrades. Such costs will be amortized over the
five-year term of the related exclusive marketing rights agreements.
(9) INCOME TAXES
As discussed in note 1, the Company adopted SFAS 109 as of January 1, 1993.
As a result of this change in accounting for income taxes, the Company recorded
deferred tax assets (net of a valuation allowance of $26,908,000) and
corresponding deferred tax liabilities of $7,319,000 on January 1, 1993.
Total income tax expense for the years ended December 31, 1993, 1992 and
1991 of $2,944,000, $1,580,000 and $446,000, respectively, was allocated
entirely to continuing operations and consisted primarily of current state
income taxes.
Income tax expense (benefit) differed from the amounts computed by applying
the statutory U.S. federal income tax rates to income (loss) before income taxes
and extraordinary items as a result of the following (thousands of dollars):
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............................. $ 1,057 $ (4,551) $ (6,402)
Increase (reduction) in income taxes resulting from:
Addition to (use of) net operating loss carryforwards............... (2,627) 1,988 2,924
Amortization of goodwill............................................ 3,131 3,959 3,387
Other, net -- primarily state income taxes.......................... 1,383 184 537
--------- --------- ---------
Net income tax expense............................................ $ 2,944 $ 1,580 $ 446
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1993 are
presented below (thousands of dollars):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $ 19,700
Capital loss carryforwards...................................... 2,521
Other........................................................... 3,677
---------
Total gross deferred tax assets............................... 25,898
Less valuation allowance........................................ (17,936)
---------
Net deferred tax assets....................................... 7,962
---------
Deferred tax liabilities:
Property and equipment, primarily due to differences in
depreciation................................................... 7,397
Other........................................................... 565
---------
Total deferred tax liabilities................................ 7,962
---------
Net deferred tax liability.................................... $ --
---------
---------
</TABLE>
Deferred tax assets and liabilities are computed by applying the U.S.
federal income tax rates in effect to the gross amounts of temporary differences
and other tax attributes, such as net operating loss and capital loss
carryforwards. Deferred tax assets and liabilities relating to state income
taxes are not material.
The Company expects the net deferred tax assets at December 31, 1993 to be
realized as a result of the reversal during the carryforward period of existing
taxable temporary differences giving rise to deferred tax liabilities.
At December 31, 1993, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $56,300,000 which are available to
offset future taxable income, if any, through 2007. Additionally, the Company
has restricted net operating loss carryforwards of approximately $12,845,000
that can only be used to offset future taxable income, if any, of certain
subsidiaries of the Company, through 2005. The Company has capital loss
carryforwards of approximately $7,200,000 which are available to offset future
capital gains, if any, through 1997.
(10) COMMITMENTS AND CONTINGENCIES
(A) LEASES AND CONTRACTS
The Company and its subsidiaries lease certain real property, transportation
and other equipment under noncancellable operating leases expiring at various
dates through 1999. The Company also has long-term contractual obligations to
two major broadcast ratings firms that provide monthly ratings services. Minimum
commitments under all noncancellable leases and contracts for the years ending
December 31, 1994 through 1998 are approximately $7,668,000, $7,068,000,
$6,227,000, $3,664,000 and $2,913,000, respectively.
Lease, rental and contractual expense payments for the years ended December
31, 1993, 1992 and 1991 amounted to approximately $7,907,000, $5,423,000 and
$5,469,000, respectively.
(B) BROADCAST PROGRAM RIGHTS
The Company has entered into contracts for broadcast program rights that
expire at various dates during the next five years. Contracts totaling
approximately $1,966,000 relate to programs which are not currently available
for use and, therefore, are not reflected as assets or liabilities in the
F-19
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED)
accompanying consolidated balance sheet at December 31, 1993. The aggregate
minimum payments under contracts for programs currently available (those
included on the consolidated balance sheet at December 31, 1993) and programs
not currently available (those not included on the consolidated balance sheet at
December 31, 1993) are approximately $2,581,000, $1,542,000, $510,000, $540,000
and $441,000 for the years ending December 31, 1994 through 1998, respectively.
The Company entered into contracts for broadcast program rights of
approximately $2,084,000, $2,181,000 and $2,314,000 during the years ended
December 31, 1993, 1992 and 1991, respectively.
(C) GUARANTEED STORE COMMISSIONS
The Company has contractual obligations with certain supermarket chains for
terms of a year or more to pay minimum store commission guarantees to these
chains in connection with the chains' participation in one or more of the
Company's advertising programs. Revenues derived from the Company's advertising
programs are normally adequate to generate store commissions which exceed the
minimum guarantees and such commission amounts are charged to operations as
incurred. To the extent, however, that the store commissions generated by
advertising programs are not expected to be sufficient to cover the minimum
guarantees, a provision for the difference is charged to operations at the time
such determination is made. Future minimum store commission guarantees for the
years ending December 31, 1994 through 1998 are approximately $1,451,000,
$670,000, $158,000, $129,000, and $54,000, respectively.
(D) LITIGATION
The Company is a party to lawsuits which are generally incidental to its
business. Management of the Company does not believe the resolution of such
matters will have a significant effect on its financial position or results of
operations.
F-20
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) SEGMENT INFORMATION
Information relating to the Company's business segments as of and for the
years ended December 31, 1993, 1992 and 1991 is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Net revenues:
In-store marketing............................................. $ 216,319 $ 186,445 $ 171,136
Television..................................................... 41,517 39,703 35,319
Radio.......................................................... 33,369 24,743 15,905
----------- ----------- -----------
Total........................................................ $ 291,205 $ 250,891 $ 222,360
----------- ----------- -----------
----------- ----------- -----------
Operating income (loss):
In-store marketing............................................. $ 22,370(a) $ 16,427 $ 14,770
Television..................................................... 10,707(b) 11,357 8,900(b)
Radio.......................................................... 5,981 3,260 1,275
Corporate...................................................... (3,563) (2,944) (2,645)
----------- ----------- -----------
Total........................................................ $ 35,495 $ 28,100 $ 22,300
----------- ----------- -----------
----------- ----------- -----------
Selling, general and administrative expenses:
In-store marketing............................................. $ 41,559 $ 34,004 $ 32,186
Television..................................................... 11,183 10,233 9,522
Radio.......................................................... 14,473 11,160 7,699
Corporate...................................................... 3,454 2,822 2,547
----------- ----------- -----------
Total........................................................ $ 70,669 $ 58,219 $ 51,954
----------- ----------- -----------
----------- ----------- -----------
Depreciation, amortization and writedown of program rights:
In-store marketing............................................. $ 16,850 $ 15,098 $ 12,435
Television..................................................... 9,460(b) 8,280 7,901(b)
Radio.......................................................... 3,438 2,642 2,369
Corporate...................................................... 110 122 98
----------- ----------- -----------
Total........................................................ $ 29,858 $ 26,142 $ 22,803
----------- ----------- -----------
----------- ----------- -----------
Identifiable assets:
In-store marketing............................................. $ 269,437 $ 274,908 $ 261,690
Television..................................................... 162,183 167,158 174,328
Radio.......................................................... 51,336 47,289 38,125
Corporate...................................................... 9,893 6,941 7,004
----------- ----------- -----------
Total........................................................ $ 492,849 $ 496,296 $ 481,147
----------- ----------- -----------
----------- ----------- -----------
Capital expenditures:
In-store marketing............................................. $ 13,612 $ 18,186 $ 8,920
Television..................................................... 4,271 1,987 6,582
Radio.......................................................... 1,845 1,884 1,451
Corporate...................................................... 76 41 108
----------- ----------- -----------
Total (c).................................................... $ 19,804 $ 22,098 $ 17,061
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(a) Includes nonrecurring expenses of $3,000,000 relating to the shut-down of
certain in-store marketing facilities.
F-21
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) SEGMENT INFORMATION (CONTINUED)
(b) Includes writedowns of program rights of $1,678,000 and $490,000 in 1993 and
1991, respectively.
(c) Includes amounts relating to fixed assets obtained in acquisitions, fixed
asset additions from barter agreements, and translation adjustments of
$1,270,000, $6,567,000 and $5,640,000 in 1993, 1992 and 1991, respectively.
In 1993, one customer in the in-store marketing segment accounted for 10% of
the Company's net revenues for the year, and in 1992 and 1991 one customer in
each year accounted for 11% of the Company's net revenues.
(12) SUMMARIZED FINANCIAL DATA OF HMSI
Following is summarized financial information for HMSI, the issuer of the
Senior Notes and the obligor on credit agreement borrowings (note 4). The Senior
Notes and such borrowings are fully and unconditionally guaranteed by the
Company and the subsidiaries of HMSI, other than subsidiaries organized outside
the United States. Financial information of the guarantors is not presented as
the guarantors will be jointly and severally liable on the Senior Notes and the
aggregate net assets, earnings and equity of the guarantors are substantially
equivalent to the net assets, earnings and equity of the Company and its
subsidiaries.
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
----------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C>
Statement of Operations:
Net revenues................................................... $ 287,685 $ 247,615 $ 220,376
Depreciation................................................... 16,163 14,448 10,622
Amortization of goodwill and other assets...................... 11,748 11,496 11,254
Total costs and expenses....................................... 251,769 219,423 198,278
Operating income............................................... 35,916 28,192 22,098
Total interest expense......................................... 25,688 29,052 28,036
Income (loss) before extraordinary items....................... 6,738 (5,755) (5,794)
Net income (loss).............................................. 6,738 (7,639) 316
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------
1993 1992
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Balance Sheet:
Current assets.............................................................. $ 64,558 $ 58,150
Noncurrent assets........................................................... 425,020 430,882
Current liabilities......................................................... 65,676 56,522
Long-term debt.............................................................. 259,316 261,594
Other non-current liabilities............................................... 5,659 8,547
Stockholder's equity........................................................ 158,927 162,369
</TABLE>
F-22
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- -----------
(Thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
1993:
Net revenues........................................ $ 59,520 $ 67,924 $ 65,886 $ 97,875 $ 291,205
Gross profit........................................ 27,928 31,212 31,269 49,704 140,113
Operating income.................................... 6,503 8,637 6,259 14,096 35,495
Income (loss) before extraordinary items............ (2,522) (337) (1,918) 4,854 77
Net income (loss)................................... (2,522) (337) (1,483) 4,854 512
Income (loss) per share before extraordinary
items.............................................. (.22) (.08) (.22) .20 (.32)
Net income (loss) per share......................... (.22) (.08) (.19) .20 (.29)
1992:
Net revenues........................................ 52,422 55,183 55,479 87,807 250,891
Gross profit........................................ 21,563 25,480 25,854 42,035 114,932
Operating income.................................... 2,442 4,580 4,452 16,626 28,100
Income (loss) before extraordinary items............ (7,191) (4,893) (9,254) 6,372 (14,966)
Net income (loss)................................... (7,191) (6,974) (10,767) 6,372 (18,560)
Income (loss) per share before extraordinary
items.............................................. (.88) (.44) (.68) .29 (1.51)
Net income (loss) per share......................... (.88) (.58) (.77) .29 (1.76)
</TABLE>
Gross profit represents net revenues less cost of services.
Operating income is defined as net revenue less cost of services; selling,
general and administrative expenses; depreciation and amortization; writedown of
program rights; product development costs and other nonrecurring charges.
Actmedia reports its operations on a 13-cycle basis whereby the results of
operations of three, four-week periods are reported in each of the first three
quarters of the fiscal year and four, four-week periods are reported in the
fourth quarter of the fiscal year.
Extraordinary gains and losses during 1993 and 1992 relate to early
extinguishments of debt.
Results of the fourth quarter of 1993 include $3,000,000 of nonrecurring
charges relating to the upgrade of the Company's in-store marketing radio
network. Results for the third quarter of 1992 include $2,700,000 of writedowns
of the carrying amount of the Company's investment in SVL. Additional 1992
writedowns of such carrying amount totaling $560,000 did not have a significant
impact on the financial results of the quarter in which they were recognized.
F-23
<PAGE>
SCHEDULE III
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Cash.................................................................................... $ -- $ --
Other current assets.................................................................... -- 85
----------- -----------
Total current assets.............................................................. -- 85
Net property and equipment.............................................................. -- 3,519
Investment in and advances to subsidiaries, at equity................................... 159,074 159,496
Goodwill and other intangibles, net of amortization..................................... 2,496 2,562
Other assets, net....................................................................... 30 4
----------- -----------
$ 161,600 $ 165,666
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................................................................... $ 1,848 $ 1,888
Long-term debt, excluding current portion (notes 2 and 3)............................... 53,596 53,744
----------- -----------
Total liabilities................................................................. 55,444 55,632
----------- -----------
Settlement rights....................................................................... 19,514 18,821
Stockholders' equity:
Preferred stock....................................................................... 16,195 16,195
Common stock:
Class A............................................................................. 123 113
Class B............................................................................. -- 16
Class C............................................................................. 41 41
Additional paid-in capital............................................................ 202,743 201,986
Accumulated deficit................................................................... (130,862) (126,052)
Accumulated foreign currency translation adjustments.................................. (1,144) (632)
Treasury stock at cost................................................................ (454) (454)
----------- -----------
Total stockholders' equity........................................................ 86,642 91,213
----------- -----------
$ 161,600 $ 165,666
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed financial information.
F-24
<PAGE>
SCHEDULE III (CONTINUED)
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1992 1991
--------- ---------- ----------
<S> <C> <C> <C>
Net revenues.................................................................. $ 1,673 $ 1,559 $ 1,983
--------- ---------- ----------
Expenses:
Cost of services............................................................ -- -- 764
Selling, general and administrative......................................... -- -- 580
Depreciation and amortization............................................... 1,514 1,455 438
--------- ---------- ----------
1,514 1,455 1,782
--------- ---------- ----------
Operating income.......................................................... 159 104 201
--------- ---------- ----------
Other expense:
Interest.................................................................... (5,731) (7,995) (11,484)
Other, net.................................................................. (611) (4,971) (5,360)
--------- ---------- ----------
(6,342) (12,966) (16,844)
--------- ---------- ----------
Loss before equity in income (losses) of subsidiaries and extraordinary
items.................................................................... (6,183) (12,862) (16,643)
Equity in income (losses) of subsidiaries before extraordinary items.......... 6,260 (2,104) (2,635)
--------- ---------- ----------
Income (loss) before extraordinary items.................................. 77 (14,966) (19,278)
Extraordinary items:
Gain on early extinguishment of debt (note 3)............................... -- 834 --
Equity in extraordinary items of subsidiary -- gain (loss) on early
extinguishment of debt..................................................... 435 (4,428) 4,320
--------- ---------- ----------
Net income (loss)......................................................... $ 512 $ (18,560) $ (14,958)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes to condensed financial information.
F-25
<PAGE>
SCHEDULE III (CONTINUED)
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1992 1991
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ 512 $ (18,560) $ (14,958)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Equity in losses (undistributed earnings) of subsidiaries................ (6,695) 6,532 (1,685)
Noncash interest......................................................... -- 3,990 11,567
Depreciation and amortization............................................ 1,514 1,455 438
Other.................................................................... (95) 2,451 5,371
Change in assets and liabilities, net of acquisitions.................... 175 245 (5)
--------- ---------- ----------
Net cash provided (used) by operating activities....................... (4,589) (3,887) 728
--------- ---------- ----------
Cash flows from investing activities:
Investment in and advances to subsidiaries................................. (2,201) (19,937) (17,359)
Acquisitions, net of cash acquired......................................... -- (4,075) (855)
Dividends from subsidiaries................................................ 11,581 19,104 5,400
Proceeds from sale of property............................................. 13 101 285
--------- ---------- ----------
Net cash provided (used) by investing activities....................... 9,393 (4,807) (12,529)
--------- ---------- ----------
Cash flows from financing activities:
Retirements of long-term debt and broadcast program rights payable......... (175) (31,742) (1,424)
Issuance of common stock................................................... -- 42,140 122
Issuance of preferred stock................................................ -- -- 14,582
Collections on notes receivable............................................ -- 1,140 --
Dividends on preferred stock............................................... (1,781) (1,781) (1,320)
Purchase of settlement rights.............................................. (2,848) (1,300) --
--------- ---------- ----------
Net cash provided (used) by financing activities....................... (4,804) 8,457 11,960
--------- ---------- ----------
Net change during year....................................................... -- (237) 159
Cash and cash equivalents at beginning of year............................... -- 237 78
--------- ---------- ----------
Cash and cash equivalents at end of year..................................... $ -- $ -- $ 237
--------- ---------- ----------
--------- ---------- ----------
Cash paid for interest....................................................... $ 5,669 $ 32,292 $ --
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes to condensed financial information.
F-26
<PAGE>
HERITAGE MEDIA CORPORATION
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1993, 1992 AND 1991
(1) GENERAL
The accompanying condensed financial information of Heritage Media
Corporation ("Registrant" or the "Company") should be read in conjunction with
the consolidated financial statements of the Registrant included in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
Heritage Media Corporation is primarily a holding company; however, the
Company also owned one television station until August 1991 (see note 2).
(2) ACQUISITIONS AND DISPOSITIONS
In December 1990, the Company began investing in Supermarket Visions, Ltd.
("SVL"), an in-store marketing company operating in the United Kingdom. Cash
investments in SVL preferred stock and advances totaled $994,000 and $344,000
during 1992 and 1991, respectively. During 1991 and 1992, the Company recorded
$1,300,000 and $2,162,000 of writedowns of the carrying amount of the Company's
investment in SVL. Also during 1992, the Company recorded additional costs of
$1,098,000 incurred during the shutdown of SVL. SVL ceased operations in
September 1992 and was liquidated in the fourth quarter of 1992. All such
writedowns and shutdown costs are included in other expense, net for the
respective years.
On August 15, 1991, the Company sold certain assets of a television station
with a total book value of $5,556,000 for $1,485,000. The loss on sale of
$4,071,000 is reflected in other expense, net in the consolidated statement of
operations for the year ended December 31, 1991. Sale proceeds consisted of
$285,000 cash and a note receivable of $1,200,000. Concurrently, the Company
purchased a television station in the same market for $7,007,000. The purchase
was financed with cash from operations of $2,059,000, the $4,623,000 note
payable and 25,000 shares of the Company's Class A common stock at $13 per
share.
On October 18, 1991, the Company entered into a joint venture agreement to
purchase in-store marketing companies in Europe for an initial investment of
$511,000. In April 1992, the Company paid $2.2 million to acquire a 65% interest
in an in-store marketing company in The Netherlands.
On February 28, 1992, the Company amended its Joint Operating Agreement with
Muzak Limited Partnership whereby the Company purchased various in-store
marketing assets for a purchase price of $5,000,000. Consideration paid by the
Company consisted of $850,000 cash and a $4,150,000 note payable due in
fluctuating quarterly installments with the balance due on January 31, 1999.
(3) LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 is summarized as follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
(Thousands of
dollars)
<S> <C> <C>
Senior subordinated notes.............................................. $ 50,000 $ 50,000
Other.................................................................. 3,744 3,919
--------- ---------
53,744 53,919
Less current installments.............................................. 148 175
--------- ---------
$ 53,596 $ 53,744
--------- ---------
--------- ---------
</TABLE>
On August 11, 1987, the Company issued a $75 million, 8% subordinated note
due July 31, 1994. Interest on this note was deferred and payable at maturity.
The note was discounted for financial statement purposes by $24.6 million using
a 14% interest rate. On April 15, 1992, the Company retired the 8% subordinated
note with an accreted balance of $95,384,000 through the payment of
F-27
<PAGE>
HERITAGE MEDIA CORPORATION
NOTES TO CONDENSED FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(3) LONG-TERM DEBT (CONTINUED)
$30,000,000 of cash obtained from the issuance of Class A common stock (note 5),
the issuance of 1,335,721 shares of Class C common stock at $9.75 per share and
the issuance of a new $50 million, 12% subordinated note ("the New Note"). As a
result of this transaction, the Company recognized an extraordinary gain of
approximately $2,360,000.
On October 1, 1992, the Company retired the New Note through the issuance of
$50 million of 11% Senior Subordinated Notes ("the Notes") due October 1, 2002.
The Notes are redeemable, in whole or in part, at the Company's option at any
time on or after October 1, 1997, at amounts decreasing from 105.5% to 100% of
par at October 1, 1999. The Notes are subordinated to all other indebtedness of
the Company and its subsidiaries except that the Notes are senior to a
$4,623,000 note payable dated August 15, 1991 issued in connection with the
acquisition of a television station (note 2). The Company recognized an
extraordinary loss of $1,526,000 on this refinancing.
Debt agreements of the Company's subsidiaries prohibit or limit their
ability to pay dividends to the Company. However, these agreements permit the
payment of dividends sufficient to meet the Company's obligations under the
Notes.
F-28
<PAGE>
SCHEDULE V
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
PROPERTY AND EQUIPMENT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance
at Other Balance
Beginning Additions Changes Add at End of
Classification of Period at Cost Retirements (Deduct)(1) Period
- ---------------------------------------------------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
In-store marketing equipment...................... $ 40,691 $ 13,612 $ 15,075 $ -- $ 39,228
Broadcasting equipment............................ 34,695 1,819 -- 620 37,134
Buildings and improvements........................ 6,908 2,302 -- (4) 9,206
Other equipment................................... 6,287 801 142 654 7,600
Land.............................................. 2,490 -- -- -- 2,490
--------- --------- ----------- ----------- ---------
$ 91,071 $ 18,534 $ 15,217 $ 1,270 $ 95,658
--------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- ---------
Year ended December 31, 1992:
In-store marketing equipment...................... $ 32,934 $ 12,871 $ 10,429 $ 5,315 $ 40,691
Broadcasting equipment............................ 31,825 2,195 -- 675 34,695
Buildings and improvements........................ 6,743 114 -- 51 6,908
Other equipment................................... 5,410 351 -- 526 6,287
Land.............................................. 2,490 -- -- -- 2,490
--------- --------- ----------- ----------- ---------
$ 79,402 $ 15,531 $ 10,429 $ 6,567 $ 91,071
--------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- ---------
Year ended December 31, 1991:
In-store marketing equipment...................... $ 25,638 $ 8,646 $ 1,624 $ 274 $ 32,934
Broadcasting equipment............................ 30,889 1,881 4,157 3,212 31,825
Buildings and improvements........................ 6,890 393 1,858 1,318 6,743
Other equipment................................... 4,301 501 62 670 5,410
Land.............................................. 7,004 -- 4,680 166 2,490
--------- --------- ----------- ----------- ---------
$ 74,722 $ 11,421 $ 12,381 $ 5,640 $ 79,402
--------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- ---------
<FN>
- ------------------------
(1) Other changes represent the effects of the Company's acquisitions, asset
additions from barter agreements, foreign currency translation adjustments
and reclassifications between asset categories for the years ended December
31, 1993, 1992 and 1991.
</TABLE>
F-29
<PAGE>
SCHEDULE VI
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Balance Charged
at to Costs Balance
Beginning and Additions at End of
Classification of Period Expenses Retirements (Deductions)(1) Period
- ------------------------------------------------- --------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
In-store marketing equipment................... $ 16,296 $ 11,055 $ 13,137 $ -- $ 14,214
Broadcasting equipment......................... 14,630 4,005 -- -- 18,635
Buildings and improvements..................... 986 275 -- -- 1,261
Other equipment................................ 3,327 933 134 -- 4,126
--------- --------- ----------- --- ---------
$ 35,239 $ 16,268 $ 13,271 $ -- $ 38,236
--------- --------- ----------- --- ---------
--------- --------- ----------- --- ---------
Year ended December 31, 1992:
In-store marketing equipment................... $ 17,020 $ 9,282 $ 9,998 $ (8) $ 16,296
Broadcasting equipment......................... 10,764 3,903 -- (37) 14,630
Buildings and improvements..................... 722 270 -- (6) 986
Other equipment................................ 2,237 1,044 -- 46 3,327
--------- --------- ----------- --- ---------
$ 30,743 $ 14,499 $ 9,998 $ (5) $ 35,239
--------- --------- ----------- --- ---------
--------- --------- ----------- --- ---------
Year ended December 31, 1991:
In-store marketing equipment................... $ 11,210 $ 6,609 $ 825 $ 26 $ 17,020
Broadcasting equipment......................... 9,030 3,327 1,593 -- 10,764
Buildings and improvements..................... 724 247 249 -- 722
Other equipment................................ 1,614 717 94 -- 2,237
--------- --------- ----------- --- ---------
$ 22,578 $ 10,900 $ 2,761 $ 26 $ 30,743
--------- --------- ----------- --- ---------
--------- --------- ----------- --- ---------
<FN>
- ------------------------
(1) Other changes represent reclassifications between asset categories for the
years ended December 31, 1992 and 1991.
</TABLE>
F-30
<PAGE>
SCHEDULE VIII
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts(1) Writeoffs Period
- ------------------------------------------------------ ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993.......................... $ 1,487 $ 3,382 $ -- $ 2,091 $ 2,778
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
Year ended December 31, 1992.......................... $ 1,527 $ 1,590 $ -- $ 1,630 $ 1,487
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
Year ended December 31, 1991.......................... $ 1,062 $ 1,883 $ 274 $ 1,692 $ 1,527
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
<FN>
- ------------------------
(1) Includes amounts related to acquisitions.
</TABLE>
F-31
<PAGE>
SCHEDULE X
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Charged to Costs and Expenses
-------------------------------
Item 1993 1992 1991
- ----------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Maintenance and repairs............................................................ $ 1,000 $ 963 $ 688
--------- --------- ---------
--------- --------- ---------
Taxes, other than payroll and income taxes......................................... $ 741 $ 1,001 $ 709
--------- --------- ---------
--------- --------- ---------
Royalties.......................................................................... $ 631 $ 1,807 $ 2,771
--------- --------- ---------
--------- --------- ---------
Advertising........................................................................ $ 5,214 $ 4,723 $ 5,385
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
[EXHIBIT 23(A)]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Heritage Media Corporation:
We consent to incorporation by reference in the Registration Statement (No.
33-32200) on Form S-8 of Heritage Media Corporation of our report dated February
25, 1994 relating to the consolidated balance sheets of Heritage Media
Corporation and subsidiaries as of December 31, 1993 and 1992 and the related
consolidated statements of operations, stockholders' equity, and cash flows and
related schedules for each of the years in the three-year period ended December
31, 1993, which report appears in the December 31, 1993 Annual Report on Form
10-K of Heritage Media Corporation.
KPMG PEAT MARWICK
Dallas, Texas
March 8, 1994
<PAGE>
[EXHIBIT 99]
HERITAGE MEDIA CORPORATION
One Galleria Tower
13355 Noel Road, Suite 1500
Dallas, Texas 75240
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 26, 1994
To the stockholders of
Heritage Media Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Heritage
Media Corporation (the "Company"), will be held at The Westin Hotel Galleria,
13340 Dallas Parkway, Dallas, Texas, on May 26, 1994 at 9:00 A.M., local time,
for the following purposes:
(a) For holders of Class A Common Stock to elect seven directors of
the Company;
(b) For consideration of the adoption of the Company's Amended and
Restated Stock Option Plan; and
(c) For the transaction of such other business as may properly come
before the meeting or any adjournment thereof.
Only stockholders of record at the close of business on March 21, 1994, are
entitled to notice of, and to vote at, the meeting or any adjournment thereof.
Whether or not you plan to attend the Annual Meeting and regardless of the
number of shares you own, please date, sign and return the enclosed proxy card
in the enclosed envelope (which requires no postage if mailed in the United
States).
By Order of the Board of Directors
Wayne Kern,
Secretary
Dallas, Texas
April 15, 1994
<PAGE>
HERITAGE MEDIA CORPORATION
One Galleria Tower
13355 Noel Road, Suite 1500
Dallas, Texas 75240
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 26, 1994
This Proxy Statement is furnished to stockholders of Heritage Media
Corporation, an Iowa corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at the
annual meeting of stockholders to be held on May 26, 1994, and at any and all
adjournments or postponements thereof. Proxies in the form enclosed will be
voted at the meeting, if properly executed, returned to the Company prior to the
meeting and not revoked. The proxy may be revoked at any time before it is
voted by giving written notice to the Secretary of the Company.
ACTION TO BE TAKEN AT THE MEETING
At the Annual Meeting, holders of the Company's Class A Common Stock (the
"Class A Common Stock") will consider and vote for the election as directors of
the Company of Messrs. James S. Cownie, Joseph M. Grant, James M. Hoak, Clark A.
Johnson, Alan R. Kahn, Joseph D. Mahaffey and David N. Walthall. Such holders
will also consider and vote upon a proposal to adopt the Company's Amended and
Restated Stock Option Plan (the "Option Plan").
Only holders of record of Class A Common Stock at the close of business on
March 21, 1994 (the "Record Date") are entitled to notice of, and to vote at,
the Annual Meeting. At the close of business on the Record Date, the Company
had issued and outstanding, and entitled to vote at the Annual Meeting,
12,634,596 shares of Class A Common Stock. The Company also had issued and
outstanding on such date 4,829,728 shares of Class C Common Stock (the "Class C
Common Stock"). Holders of record of Class A Common Stock are entitled to one
vote per share on the matters to be considered at the Annual Meeting, as to
which such shares are entitled to vote as set forth above. The holders of Class
C Common Stock generally do not have voting rights and are not entitled to vote
with respect to the matters to be considered at the Annual Meeting.
The presence, either in person or by properly executed proxy, of the
holders of record of a majority of the Class A Common Stock is necessary to
constitute a quorum at the Annual Meeting.
<PAGE>
The election as a director of each nominee set forth above requires the
affirmative vote of the holders of record of a majority of the outstanding
voting power of the shares of Class A Common Stock represented, in person or by
proxy, at the Annual Meeting. The proposal to adopt the Option Plan requires
the affirmative vote of the holders of record of a majority of the outstanding
voting power of the shares of Class A Common Stock represented, in person or by
proxy, at the Annual Meeting.
The accompanying proxy, unless the stockholder otherwise specifies in the
proxy, will be voted (i) for the election as directors of the Company of the
seven nominees set forth above, (ii) for the adoption of the Option Plan and
(iii) at the discretion of the proxy holders on any other matter that may
properly come before the meeting or any adjournment thereof.
Where stockholders have appropriately specified how their proxies are to be
voted, they will be voted accordingly. If any other matter or business is
brought before the meeting, the proxy holders may vote the proxies in their
discretion. The directors do not know of any such other matter or business.
Should any nominee for the Board of Directors become unable or unwilling to
accept nomination or election, the proxy holders may vote the proxies for the
election in his stead of any other person the Board of Directors may recommend.
Each nominee has expressed his intention to serve the entire term for which
election is sought.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as to the beneficial
ownership of each class of Common Stock of the Company as of March 21, 1994 by
(i) each person who is known to beneficially own more than 5% of each such class
and (ii) all officers and directors as a group. Unless otherwise indicated,
each of the persons named below has sole voting and investment power with
respect to the shares of Common Stock beneficially owned by such person.
2
<PAGE>
<TABLE>
<CAPTION>
Percent
Ownership
Class A Class C Class A
Name and Address(1) Common(2) Percent Common Percent Equiv.(3)
- ------------------- --------- ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
James M. Hoak 1,030,876(4) 8.0% --- --- 5.8%
Chairman of the Board
13355 Noel Road,
Suite 1500
Dallas, TX 75240
James S. Cownie 321,013(5) 2.5% --- --- 1.8%
Director
2600 Grand Avenue
Des Moines, IA 50312
David N. Walthall 158,687(6) 1.2% --- --- .9%
President and CEO;
Director
13355 Noel Road,
Suite 1500
Dallas, TX 75240
HC Crown Corp.(7) 305,556 2.4% 2,430,645 50.5% 15.5%
Mellon Bank Cntr.
2nd Floor
10th & Market
Wilmington, DE 19801
The Equitable 986,275 7.7% --- --- 5.6%
Companies Inc.
787 Seventh Avenue
New York, NY 10009
Morgan Capital Corp. 55,556 .4% 512,987 10.6% 3.2%
902 Market Street
Wilmington, DE 19801
Goldman, Sachs & Co. 456,168 3.5% 550,375 11.4% 5.7%
85 Broad Street
New York, NY 10004
Janus Capital 846,100 6.6% --- --- 4.8%
Corporation
100 Fillmore St.
Suite 300
Denver, CO 80206
Tele-Communications, -- --- 1,335,721 27.7% 7.5%
Inc.(7)
5619 DTC Parkway
Englewood, CO 80111
All officers and
directors as a group
(13 persons) 1,771,801 13.8 ___ ___ 10.0%
<FN>
- -----------------------------
(1) Table includes presently exercisable portion of stock options.
(2) Excludes shares allocated to participants' accounts under the Company's
Retirement Savings Plan.
(3) Assumes conversion of each outstanding share of Class C Common Stock into
one share of Class A Common Stock.
(4) Includes 6,785 shares of Class A Common Stock held by Mr. Hoak's wife and
children. Mr. Hoak disclaims beneficial ownership of such shares.
(5) Includes 85,945 shares of Series A Common Stock held by Mr. Cownie's
family. Mr. Cownie disclaims beneficial ownership of such shares.
(6) Includes 17,339 shares held by Mr. Walthall's wife. Mr. Walthall disclaims
beneficial ownership of such shares.
(7) HC Crown Corp. and Tele-Communications, Inc. sold ________ of the shares
beneficially owned by them pursuant to an underwritten public offering
completed on ____________, 1994.
</TABLE>
3
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
GENERAL
A brief description of each director and executive officer of the Company
is provided below. Directors hold office until the next annual meeting of the
stockholders or until their successors are elected and qualified. All officers
serve at the discretion of the Board of Directors.
James M. Hoak, 50, has served as Chairman of the Board of the Company since
August 1987. Mr. Hoak has also served as Chairman and Chief Executive Officer
of Crown Media, Inc. (a cable television company unaffiliated with the Company)
since February 1991, and Chairman of Cypress Capital Corporation (a private
investment company) since September 1991. Until December 1990, Mr. Hoak had
been Chairman (since 1987), President (1971 to 1987) and Chief Executive Officer
and a director of Heritage Communications, Inc. ("HCI"), a diversified
communications company. Mr. Hoak is a director of Airgas, Inc., Midwest
Resources, Inc., Pier 1 Imports, Inc., and Sun Coast Industries, Inc. and a
member of the Board of Governors of the American Stock Exchange.
David N. Walthall, 48, has served as President, Chief Executive Officer and
a director of the Company since August 1987. From 1985 to April 1988, he was
Executive Vice President of HCI and President of its Communications Products
Group.
Joseph D. Mahaffey, 48, joined the Company in March 1992 as Executive Vice
President, Chief Financial Officer and a member of the Board of Directors. Mr.
Mahaffey served as President and Vice Chairman of United Meridian Corporation
(an oil and gas company) from 1987 to 1992.
Paul W. Fiddick, 44, has served as Executive Vice President and President,
Radio Group of the Company since August 1987.
Wayne W. LoCurto, 50, has served as an Executive Vice President of the
Company and as President, Actmedia since November 1989. He served as Vice
President of Glendinning Associates (a marketing consulting firm) from 1987 to
November 1989.
4
<PAGE>
James J. Robinette, 60, has served as Executive Vice President and
President, Television Group of the Company since August 1987.
Wayne Kern, 61, has served as Senior Vice President and Secretary of the
Company since 1987. Since July 1991, Mr. Kern has also served as Executive Vice
President of Crown Media, Inc. Until December 1990, Mr. Kern had been Executive
or Senior Vice President, General Counsel and Secretary of HCI at all times
since 1985.
James P. Lehr, 46, has served as Vice President - Administration,
Controller and Assistant Secretary of the Company since December 1987.
Douglas N. Woodrum, 36, has served as Vice President - Development and
Treasurer of the Company since August 1987.
James S. Cownie, 49, served as the President and a director of HCI from
August 1987 until December 1990. Since March 1991, Mr. Cownie has been the
Chairman of the corporate partner of New Heritage Associates (a cable television
firm unaffiliated with the Company). Mr. Cownie was elected as a director of
the Company in July 1989.
Joseph M. Grant, 55, has served as the Senior Vice President and Chief
Financial Officer of Electronic Data Systems, Inc. (an information technology
company) since December 1990. From 1989 to 1990, Mr. Grant served as the
Executive Vice President and Chief Systems Officer for American General
Corporation (a life insurance, real estate and consumer finance company). Prior
to 1989, Mr. Grant served as the Chairman of the Board and Chief Executive
Officer of Texas American Bancshares Inc. (a bank holding company). Mr. Grant
has been a director of the Company since June 1992.
Clark A. Johnson, 63, has served as the Chairman and Chief Executive
Officer of Pier 1 Imports, Inc. (a specialty retailer of home furnishings) since
1988 and was President of such company from 1985 to 1988. Mr. Johnson has been
a director of the Company since March 1990. He also serves as a director of
Actava, Inc., Albertson's, Inc., AnaComp, Inc., and Intertan, Inc.
Alan R. Kahn, 54, is a business consultant and private investor and was
President of Sun Country Industries, Inc. (a beverage distributor) from 1984 to
1988. Mr. Kahn has been a director of the Company since August 1987.
5
<PAGE>
The Board of Directors held ten meetings in 1993. No director attended
fewer than 75% of the meetings of the Board (and any committees thereof) which
they were required to attend.
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
The following table sets forth certain information as to beneficial
ownership of Class A Common Stock of the Company by the executive officers and
directors of the Company:
<TABLE>
<CAPTION>
Class A
Name(1) Common Percent
- ------- ---------- -------
<S> <C> <C>
James M. Hoak 1,030,876 8.0%
David N. Walthall 158,687 1.2%
Joseph D. Mahaffey 13,500 .1%
Paul W. Fiddick 66,006 .5%
Wayne W. LoCurto 15,456 .1%
James J. Robinette --- N/A
Wayne Kern 104,249 .8%
James P. Lehr 3,878 --(2)
Douglas N. Woodrum 40,895 .3%
James S. Cownie 321,013 2.5%
Joseph M. Grant 2,000 --(2)
Clark A. Johnson 3,784 --(2)
Alan R. Kahn 11,457 .1%
<FN>
- ----------------------
(1) Table includes presently exercisable options.
(2) Less than .1%
</TABLE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Executive Committee, comprised of Messrs. Hoak (Chairman), Kahn and
Walthall, is empowered to exercise all authority of the entire Board, subject to
certain exceptions (primarily statutory) relating generally to such matters as
mergers, sales of assets, sales of capital stock, bylaw amendments and changes
to the membership of the Board. The Executive Committee met one time during
1993.
The Compensation Committee, comprised of Messrs. Cownie, Grant, and Kahn
met one time during 1993. Reference is made to the separate report of the
Compensation Committee set forth elsewhere herein.
6
<PAGE>
The Audit Committee, comprised of Messrs. Cownie, Grant, Johnson and Kahn
(Chairman), is empowered to recommend to the Board the appointment of the
Company's independent public accountants and to periodically meet with such
accountants to discuss their fees, audit and non-audit services, and the
internal controls and audit results for the Company. The Audit Committee also
is empowered to meet with the Company's accounting personnel to review
accounting policies and reports. The Audit Committee met two times during 1993.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of the Company receives, in
addition to the basic annual fee of $12,000, $1,000 per Board meeting (or
committee meeting not in conjunction with a Board meeting) held in person or
$200 if the meeting is held by telephone. Any non-employee director may elect
to defer such fees for later payment with an interest equivalent or invest such
fees in shares of the Company's Class A Common Stock. When first elected,
directors who are not officers or employees of the Company are granted options
(vesting in full after two years of service and expiring ten years after the
date of grant) to acquire 2,000 shares of Class A Common Stock at the fair
market value of such stock on the date of grant. Thereafter, options to
purchase an additional 2,000 shares of Class A Common Stock are granted
annually.
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth information concerning cash compensation
paid or accrued by the Company during the three years ended December 31, 1993 to
or for the Company's chief executive officer and the four other highest
compensated executive officers of the Company.
7
<PAGE>
<TABLE>
<CAPTION>
Company
Other Company Contribution
Name and Annual Stock to Defined
Principal Compen- Options Contribution
Position Year Salary Bonus sation(1) Awarded(2) Plan
- -------- ---- ------ ----- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Walthall 1993 $300,171 $273,151 $11,887 50,000 $4,497
CEO and Pres. 1992 304,046 136,702 7,200 83,561 7,912
1991 241,608 24,895 7,200 -- 7,325
Mr. LoCurto 1993 258,889 160,500 9,780 20,000 4,497
Exec. V.P. 1992 250,732 60,500 13,135 41,823 -0-
1991 229,923 9,000 11,580 -- 783
Mr. Hoak 1993 240,923 125,794 -- 2,000 4,497
Chairman 1992 300,000 34,557 -- 75,920 -0-
1991 251,923 7,903 1,938 -- 1,212
Mr. Mahaffey 1993 222,127 144,263 11,143 16,000 4,497
Exec.V.P. 1992(4) 165,385 56,713 5,538 46,782 --
Mr. Robinette 1993 195,089 149,400 115,466 -- 4,497
Exec. V.P. 1992 178,346 110,968 7,477 9,207 7,912
1991 161,631 41,367 7,200 -- 6,929
<FN>
- ------------------
(1) Includes auto allowance, moving expenses and taxable fringe benefits.
(2) Reflects options exchanged pursuant to the 1992 Option Exchange Program.
(3) In 1991, Mr. LoCurto was granted 10,000 units under the Actmedia Stock
Appreciation Rights Plan of 1990. Pursuant to this plan, certain executive
officers of the Company's Actmedia, Inc. subsidiary are eligible to receive
grants of phantom equity units reflecting the fair market value of the
common share equity of Actmedia. Persons receiving grants of such units
will generally be entitled to receive in cash the difference between the
value per unit on December 31, 1994 and the base value on the date of grant
with respect to all vested units. Units vest under the plan in
installments between the grant date and December 31, 1994. The units
granted to Mr. LoCurto in 1991 had a base value of $9.70 per unit on the
date of grant.
(4) Mr. Mahaffey joined the Company in March 1992.
</TABLE>
STOCK OPTIONS
In 1987, the Company adopted the Option Plan, which was subsequently
amended in 1989 and 1993. Under the Option Plan, non-qualified stock options
for up to 1,500,000 shares of Class A Common Stock may be granted to officers,
directors and key employees of the Company and its subsidiaries at a price at
least equal to fair market value at the date of grant, unless waived by the
Board of Directors. An optionee may not receive a grant in excess of 100,000
shares of Class A Common Stock in any calendar year. Options granted under the
Option Plan vest in full after two years of employment and are exercisable for
not more than 10 years from the date of grant.
8
<PAGE>
The following table sets forth certain information with respect to the
options granted during the year ended December 31, 1993 to the executive
officers named in the above compensation table:
<TABLE>
<CAPTION>
Individual Grants
-----------------
Percent of
Total Potential Realizable
Options/ Value at Assumed
SARs Annual Rates of Stock
Options/ Granted to Exercise Price Appreciation for
SARs Employees or Base Option Term
Granted in Fiscal Price Expiration -----------------------------------
Name (#) Year ($/Sh) Date 5%($) 10%($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Walthall 50,000 21.0% $18.75 12-13-03 $681,214 $1,640,032
Mr. LoCurto 20,000 8.4 18.75 12-13-03 272,486 656,013
Mr. Hoak 2,000 .8 18.75 12-13-03 27,249 65,601
Mr. Mahaffey 16,000 6.7 18.75 12-13-03 217,988 524,810
Mr. Robinette ___ N/A N/A N/A N/A N/A
</TABLE>
The following table sets forth certain information with respect to the
options exercised by the executive officers named in the above compensation
table during the year ended December 31, 1993 or held by such persons at
December 31, 1993:
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options at Options at
on Value Dec. 31, 1993 Dec. 31, 1993(1)
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Walthall -- N/A 22,023 111,538 $263,721 $792,783
Mr. LoCurto -- N/A 14,131 47,692 170,170 355,189
Mr. Hoak -- N/A 20,920 57,000 250,071 477,250
Mr. Mahaffey -- N/A -- 62,782 N/A 623,190
Mr. Robinette 9,207 $89,768 -- -- N/A N/A
<FN>
- --------------------
(1) Based upon the closing price of the Class A Common Stock of the
Company on December 31, 1993, which price was $19.875 per share.
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
The Company's Compensation Committee is empowered to review, and to
recommend to the full Board of Directors, the annual compensation, long term
9
<PAGE>
incentive plans and compensation procedures for all executive officers of the
Company. In carrying out these responsibilities, the Committee evaluates
numerous factors including the Company's financial performance in relation to
the goals established by the Board, the individual contribution of each
executive officer, competitive compensation practices within the industry, and
general economic inflationary factors. The base salary component of executive
officer compensation is primarily determined by reference to the individual
contribution of each officer. The annual cash bonus component is based solely
upon the achievement of targeted cash flow levels by the Company or, where
applicable, by specific operating segments of the Company. All targeted cash
flow levels are reviewed and approved by the Compensation Committee at the
beginning of each fiscal year. The long-term incentive plan of the Company
consists of grants under the Company's stock option plan and (in the case of Mr.
LoCurto) participation in the Actmedia stock appreciation rights plan. The
level of stock option grants to executive officers is based upon their
performance relative position and responsibilities in the Company.
The base salary levels for executive officers of the Company were increased
6% in 1993 over 1992. During 1993, the Company achieved approximately 114% of
targeted cash flows, which represented a 26% increase over the cash flow
achieved in 1992. As a result, annual bonuses, which were based upon specific
formulae relating to cash flow levels, represented approximately 37% of cash
compensation received by the executive officers for 1993. In 1993 the Company
granted options to purchase 107,000 shares of the Company's common stock to the
executive officers of the Company. These stock option grants reflected the
improved financial performance of the Company and the achievement of several
operating and financial goals established by the Board.
In December 1993, the Committee recommended an increase in the base salary
of Mr. Walthall, chief executive officer of the Company, from $300,000 to
$337,000. The increase was intended to recognize Mr. Walthall's contribution
toward (i) the 26% increase in cash flow of the Company in 1993, (ii) the 130%
increase in the Company's common stock price during 1993 and (iii) the relative
position of the Company's three business groups in their industries. The
Committee was also cognizant of the generally higher level of base salaries paid
to chief executive officers of comparable companies. Mr. Walthall's bonus,
which represented approximately
10
<PAGE>
44% of his total cash compensation for 1993, was based entirely upon the
achievement by the Company of 114% of the targeted cash flow level.
Compensation Committee
James S. Cownie
Alan R. Kahn
Joseph M. Grant
CERTAIN FILINGS
Under the securities laws of the United States, the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates have been established
for these reports, and the Company is required to disclose in this proxy
statement any failure to file by these dates. All of these filing requirements
were satisfied during 1993.
11
<PAGE>
STOCK PRICE PERFORMANCE
Set forth below is a line graph indicating the stock price performance of
the Company's Common Stock for the five years ended December 31, 1993, as
contrasted with (i) the Standard & Poor's 500 Stock Index and (ii) a peer group
of publicly traded companies with operations in television and radio
broadcasting and in-store marketing with market capitalizations similar to the
Company's.
[graph to come]
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
-----------------------------------------------------------------------
1988 1989 1990 1991 1992 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HERITAGE MEDIA 100 69 78 78 48 110
-----------------------------------------------------------------------
S&P 500 100 127 119 150 157 168
-----------------------------------------------------------------------
PEER GROUP
INDEX(2) 100 108 64 63 86 159
-----------------------------------------------------------------------
-----------------------------------------------------------------------
<FN>
(1) Assumes $100 invested on December 31, 1988 in Heritage Media Class A Common
Stock, S&P 500 Index and a peer group Index.
(2) Companies comprising the peer group index: Catalina Marketing Corporation;
Clear Channel Communications, Inc.; Granite Broadcasting Corporation; Great
American Communications Company; Osborn Communications Corporation; and
Outlet Communications, Inc.
</TABLE>
12
<PAGE>
ADOPTION OF AMENDED AND RESTATED STOCK OPTION PLAN
During 1993, the Board of Directors approved various amendments to the
Option Plan to reflect certain changes in the classes of capital stock of the
Company, certain changes necessitated by amendments to the federal income tax
laws and certain changes to reflect the grant of options to outside directors of
the Company. In December 1993, the Board of Directors amended and restated the
Option Plan to incorporate these various amendments into one plan document. See
"Directors and Executive Officers-- Stock Options" and "-- Compensation of
Directors" for information regarding the Option Plan and the granting of stock
options thereunder. The complete text of the Option Plan is set forth as
Exhibit A hereto.
The Option Plan provides for officers and directors who are also Company
employees an exemption from the provisions of Section 16(b) for the grant of
options. Section 16(b) provides for recovery by the Company of profits made by
officers and directors on short-term trading in shares of Common Stock of the
Company. The Company requires the approval of the amendment to the Option Plan
by the stockholders at the Annual Meeting in order to continue the exemption
from Section 16(b) for the grant of options.
Stock options granted under the Option Plan are not currently entitled to
"incentive stock option" treatment for federal income tax purposes provided by
Section 422 of the Internal Revenue Code. An optionee, upon exercise of an
option under the Option Plan, will realize taxable income equal to the
difference between the exercise price and the fair market value at the time of
exercise, and the Company is entitled to a corresponding deduction. The
foregoing statements are based upon current federal income tax laws and
regulations and are subject to change if the tax laws and regulations, or
interpretations thereof, change.
The Board of Directors recommends that stockholders vote FOR the proposed
amendment to the Option Plan.
STOCKHOLDERS' PROPOSALS
Any proposals that stockholders of the Company desire to have presented at
the 1995 annual meeting of stockholders must be received by the Company at its
principal executive offices no later than March 15, 1995.
13
<PAGE>
MISCELLANEOUS
The accompanying proxy is being solicited on behalf of the Board of
Directors of the Company. The expense of preparing, printing and mailing the
form of proxy and the material used in the solicitation thereof will be borne by
the Company. In addition to the use of the mails, proxies may be solicited by
personal interview, telephone and telegram by directors and regular officers and
employees of the Company. Arrangements may also be made with brokerage houses
and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and the Company may reimburse them for reasonable out-of-pocket
expenses incurred by them in connection therewith.
Representatives of KPMG Peat Marwick, the Company's independent auditors,
are expected to be present at the Annual Meeting with the opportunity to make a
statement if they desire and to be available to respond to appropriate
questions.
By Order of the Board of Directors
Wayne Kern
Secretary
Dallas, Texas
April 15, 1994
14
<PAGE>
Exhibit A
AMENDED AND RESTATED
STOCK OPTION PLAN
OF
HERITAGE MEDIA CORPORATION
WHEREAS, the Board of Directors of the Corporation deems it in the best
interests of the Corporation that certain key employees, officers and directors
of the Corporation and its subsidiaries be given an opportunity to acquire a
stake in the operation and growth of the Corporation, as a means of assuring
their maximum effort and continued association with the Corporation; and
WHEREAS, the Board believes that the Corporation can best obtain these and
other benefits by granting stock options to key employees, officers and
directors designated from time to time, pursuant to this Plan; and
WHEREAS, the Board adopted this Stock Option Plan in 1987 and has made
various amendments since the date thereof; and
WHEREAS, the Board now desires to amend and restate this Stock Option Plan
in its entirety;
NOW, THEREFORE, the Board does hereby adopt this AMENDED AND RESTATED STOCK
OPTION PLAN and hereby directs the Corporation to obtain the ratification by the
shareholders of the Corporation of such adoption.
1. DEFINITIONS.
Wherever used herein, the following terms shall have the following
meanings, respectively:
(a) "Plan" shall mean this Amended and Restated Stock Option Plan, as the
same may be amended on and after the date hereof.
(b) "Corporation" shall mean Heritage Media Corporation, or any successor
thereof.
(c) "Parent" shall mean any Parent of the Corporation.
(d) "Subsidiary" shall mean any Subsidiary of the Corporation.
<PAGE>
(e) "Board" shall mean the Board of Directors of the Corporation.
(f) "Optionee" or "Participant" shall mean any individual designated by
the Board on recommendation by the Committee under Paragraph 4 hereof to be
Optionees under the Plan.
(g) "Transferee" means a person who has succeeded to the rights of an
Optionee under the Option as provided in Paragraphs 5(b) and 7(c) hereof.
(h) "Committee" shall mean the Compensation Committee of the Board, or
such future committee as may be appointed by the Board to administer the Plan.
(i) "Eligible Individuals" shall mean any employee, officer or director of
the Corporation or any Parent or Subsidiary, and shall constitute the class
eligible to receive options under the Plan.
2. AUTHORITY TO GRANT OPTIONS.
Under this Plan, the Corporation may, from time to time, but in no event
after September 1, 1997, grant to Eligible Individuals as herein provided, an
option or options to purchase from the Corporation specified amounts of the
authorized and unissued $.01 par value Class A Common Stock of the Corporation,
but not to exceed in the aggregate 1,500,000 Class A shares, subject to
adjustment as provided in Paragraph 8 below. Shares covered by options which
lapse or otherwise are not exercised may be the subject of additional options
granted under the Plan. The Corporation shall at all times while this Plan is
in force reserve as authorized but unissued stock such number of shares of said
Class A Common Stock as will be sufficient to satisfy the requirements of this
Plan with respect to stock subject to being optioned as well as stock subject to
options granted but not exercised.
3. ADMINISTRATION OF PLAN.
(a) The Plan will be administered by the Committee. No member of the
Board or of the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any option granted under the Plan.
(b) The Committee shall be appointed by the Board, and subject to removal
by the Board with or without cause. Vacancies on the Committee, howsoever
caused, shall be filled by the Board. The Committee shall establish its own
rules (not inconsistent with the provisions hereof), for its meetings and the
performance of its responsibilities, but it shall select any of its members as
Chairman and one as Secretary, and shall keep written minutes of its meetings
and actions, a copy of which shall be furnished to the Board not later than the
time of the first meeting of the Board
A-2
<PAGE>
subsequent to each such action by the Committee. Meetings shall be held at such
time and places as the Committee may determine. A majority of the Committee
shall constitute a quorum for the transaction of business. The Committee shall
act by majority vote of the quorum present, or by written consent of a majority
of its members.
(c) Subject to the provisions of the Plan, the Committee is authorized to
interpret the Plan, to make, promulgate, amend and rescind rules and regulations
relating to the Plan, and to make all other determinations necessary or
advisable for its administration, and for the accomplishment of the purposes of
the Plan. Interpretation and construction of any provision of the Plan by the
Committee shall be final and conclusive, unless otherwise determined by the
Board.
4. GRANT OF OPTIONS.
(a) The Committee shall, from time to time, but in any event not later
than September 1, 1997, recommend those Eligible Individuals whom the Committee
determines should be granted options under the Plan, and the number of shares to
be optioned under each grant. Such Eligible Individuals may be persons
previously recommended to receive options under the Plan, or may be persons not
previously so recommended.
(b) The Committee shall also determine the number of shares to be so
optioned (not to exceed the number of shares specified by the Committee for each
such person, respectively), and shall determine the option price at which the
shares are to be offered to the Eligible Individuals selected, provided that the
option price shall not be less than the market price of the Corporation's stock
at the time the option is granted.
(c) Effective January 1, 1994, no Eligible Individual may receive grants
of options in excess of 100,000 shares of Class A Common Stock in any calendar
year.
(d) Each non-employee director of the Company shall, on the date of the
Committee meeting each year during December (or the closest meeting date
thereto), shall be granted an option effective as of that date to purchase 2,000
shares of Class A Common Stock at an exercise price equal to the fair market
value of the Class A Common Stock on the date of grant.
5. OPTION AGREEMENT.
No option granted hereunder shall be effective for any purpose unless and
until the Optionee has executed a written agreement (the Stock Option
Agreement), with the Corporation with respect to the terms of the option and its
exercise. Such
A-3
<PAGE>
agreement shall be in form and content determined by the Committee and Board to
be necessary in order that the option and its exercise will be pursuant and
subject to this Plan. In this regard, but without limitation thereto, the Stock
Option Agreement shall in its terms include the following provisions, which are
hereby made a part of the Plan:
(a) The option is not exercisable after the expiration of ten years from
the date the option is granted; and
(b) The option is non-transferable by the Optionee otherwise than by will
or the laws of descent and/or distribution, and is exercisable, during his
lifetime, by him only.
6. EXERCISE OF OPTION.
(a) The Optionee shall have remained in the continuous employ or in the
capacity of director of the Corporation or a Parent or Subsidiary for two years
from and after the date on which the option is granted, or such other and
greater period as may be fixed by the Board before he can exercise any part of
the option. Additionally, the Optionee will be able to exercise only if the
Class A Common Stock to be acquired pursuant to the exercise of the option (1)
has been appropriately registered with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 and appropriately registered with the
necessary state "blue sky" laws, or (2) in the legal opinion of counsel for the
Corporation, does not require registration under the applicable federal and
state statutes.
(b) After the Optionee has remained in the continuous employ or in the
capacity of director of the Corporation for two years, and other requirements
for the exercise of the option have been met, the option may be exercised as to
all of the shares subject to the option. No option agreement entered into by
the Corporation shall be considered to impose upon the Corporation or Parent or
Subsidiary any obligation to retain the Optionee in its employment or in the
capacity of director for two years or any other period of time.
(c) The Committee shall, subject to other provisions of this Plan, fix the
manner of exercising the option, in whole or in part. The option shall be
exercised by means of written notice executed by the Optionee or Transferee and
delivered to the Company stating the number of shares to be purchased. Said
notice shall be accompanied by payment in cash, or by certified or cashier's
check payable to the order of the Corporation, of the full purchase price, in
United States dollars; provided, however, that in lieu of cash an Optionee may
exercise his option by tendering to the Corporation such shares of the Class A
Common Stock of the Corporation, owned by him, having a fair market value equal
to the cash exercise price applicable to his
A-4
<PAGE>
option, with the fair market value of such stock to be determined in such
appropriate manner as may be provided for by the Committee or as may be required
in order to comply with or conform to the requirements of any applicable or
relevant laws or regulations, or any combination of cash payments and stock
tenders as may be acceptable to the Committee. No shares shall be issued to any
Optionee or Transferee until full payment therefor has been made; nor shall any
Optionee or Transferee have any of the rights of a stockholder of the
Corporation under any such Option until the actual issuance thereunder of shares
to the person or person entitled thereto.
(d) The notice of exercise of the option shall also be accompanied by a
representation and agreement in writing, signed by the person entitled to
exercise the option, and/or receive the shares, stating (1) that the shares
being acquired are being acquired in good faith for investment, and not for sale
or distribution, and shall not be pledged or hypothecated, nor sold or
transferred, in the absence of an effective registration statement for the
shares under the Securities Act of 1933, and/or an effective registration
statement for the shares as required by state "blue sky" laws, or an opinion of
counsel of the Company that registration is not required under said Act and
"blue sky" laws, and (2) that the Company may attach to or imprint on the shares
a legend to that effect.
(e) Options may be exercised in whole or in part; however, no option shall
be exercised for less than 100 shares unless such exercise shall be for the full
number of shares then purchasable under the option.
7. EMPLOYMENT RELATIONSHIP.
(a) Except as provided in Paragraphs (b) and (c) below, and subject to the
provisions of Paragraph 8 below, options may be exercised only while the
Optionee is an employee or director of (1) the Corporation or a Parent or
Subsidiary, or (2) a corporation (or a parent or subsidiary of such corporation)
issuing or assuming a stock option granted hereunder in a transaction pursuant
to a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization, or liquidation, and has been such an employee or
director at all times during the period commencing with the date of granting the
option and ending on the date of exercise of the option. Nothing contained in
the Plan or in any option granted pursuant to the Plan, however, shall confer
upon any employee, director or Optionee any right with respect to continuation
of employment or position of director by the Corporation or a Parent or
Subsidiary, or any other employer, nor modify or interfere in any way with the
right of the Corporation or of such Parent or Subsidiary or other employer to
terminate his employment or position of director at any time.
A-5
<PAGE>
(b) In the event that an Optionee shall cease to be an employee or
director of the Corporation or Parent or Subsidiary by reason of his disability,
such Optionee shall have the right, subject to prior approval of the Board, to
exercise the option at any time within three months after such termination of
employment or position of director (but not after the expiration of ten years
from the date of option is granted, and only to the extent the Optionee could
have exercised such option on the date he ceased to be an employee).
(c) If the Optionee shall die while an employee or director of the
Corporation or a Parent or Subsidiary and shall not have fully exercised the
option, an option may be exercised, subject to the condition of ten years from
the date it is granted, to the extent that the Optionee's right to exercise such
option has accrued pursuant to Paragraph 6 of the Plan at the time of his death
and had not previously been exercised, at any time within 12 months after the
Optionee's death, by the executors or administrators of the Optionee or by any
person or persons who shall have acquired the option directly from the Optionee
by bequest or inheritance.
8. TRANSFERS AND CAPITAL CHANGES BY CORPORATION.
(a) The adoption and approval of this Plan, and the grant of an option
pursuant to the Plan, shall not affect in any way the right or power of the
Corporation to make adjustments, reclassifications, or reorganizations or
changes of its capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any part of its business or
assets. Except as in this Paragraph 8 otherwise provided, the Optionee shall
have no rights by reason of any subdivision or consolidation of shares of stock
of any class or the payment of any stock shares of stock of any class, or by
reason of any dissolution, liquidation, merger or consolidation or spinoff of
assets or stock of another corporation, and any issue by the corporation of
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Capital
Stock subject to the option. No provision in this Paragraph 8 shall be deemed
to authorize an extension of the period for the exercise of an option beyond the
period of ten years as provided in Paragraph 5(a) hereof.
(b) Subject to any required action by the stockholders, the number of
shares of Capital Stock covered by each outstanding option, and the price per
share thereof in each option granted under the Plan shall be proportionately
adjusted (but without providing an option for any fractional share) for any
increase or decrease in the number of issued shares of Capital Stock of the
Corporation resulting from a subdivision or consolidation of shares or the
payment of a stock dividend (but only on the Class A Common Stock) or any other
increase or decrease in the number of such shares effected without receipt of
consideration by the Corporation.
A-6
<PAGE>
(c) Subject to any required action by the stockholders, if the Corporation
shall be the surviving corporation in any merger or consolidation, each
outstanding option shall pertain to and apply to the securities to which a
holder of the number of shares of Class A Common Stock subject to the option
would have been entitled.
(d) A dissolution of liquidation of the Corporation or a merger or
consolidation in which the corporation is not the surviving corporation, shall
cause all options granted hereunder to terminate, subject to the right of the
Board of Directors of the Corporation to accelerate the time within which the
option may be exercised, and except to the extent that another corporation may,
and does, assume and continue the option or substitute its own options.
(e) In the event of a change in the Class A Common Stock of the
corporation as presently constituted, which is limited to a change of all of its
authorized share and par value into the same number of shares with a different
par value or without par value, the shares resulting from any such change shall
be deemed to be the Class A Common Stock within the meaning of the Plan.
9. AMENDMENT AND DISCONTINUANCE.
The Board may, insofar as permitted by law, change, alter, suspend, or
discontinue this Plan, and accept the surrender of outstanding and unexercised
options under the Plan; the Board may, without the consent of the option
holders, modify the terms of outstanding and unexercised options and may cancel
such options, if such modification or cancellation is deemed necessary by the
Board in connection with any future financing arrangements on behalf of the
Corporation; with the exception of the provisions found elsewhere in this
paragraph, no action may be taken or permitted which will alter or impair the
terms and conditions of any Stock Option Agreement under the Plan, without the
written consent of the holders of outstanding and unexercised options.
Any amendment to the Plan that would (a) materially increase the benefits
accruing to participants under the Plan, (b) materially increase the number of
securities that may be issued under the Plan, or (c) materially modify the
requirements of eligibility for participation in the Plan must be approved by
the stockholders of the Company. In addition, to the extent that an amendment
would affect options to non-employee directors, the Plan shall not be amended
more than once every six months, other than to comport with changes in the
Internal Revenue Code of 1986, as amended, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder.
A-7
<PAGE>
PROXY
HERITAGE MEDIA CORPORATION
The undersigned hereby (a) acknowledges receipt of the Notice of Special
Meeting of Stockholders of Heritage Media Corporation (the "Company") to be held
on May 26, 1994, at 9:00 a.m., local time, and the Proxy Statement in connection
therewith, and (b) appoints David N. Walthall and Joseph D. Mahaffey, or each of
them, his proxies, with full power of substitution and revocation, for and in
the name, place and stead of the undersigned, to vote upon and act with respect
to all of the shares of capital stock (of every class) of the Company standing
in the name of the undersigned or with respect to which the undersigned is
entitled to vote and act at said meeting or at any adjournment thereof, and the
undersigned directs that his proxy be voted as follows:
ELECTION OF DIRECTORS / / FOR nominees listed below except as marked to the
contrary below
/ / WITHHOLD AUTHORITY to vote for all nominees listed
below
James S. Cownie, Joseph M. Grant, James M. Hoak, Clark A. Johnson, Alan R. Kahn,
Joseph D. Mahaffey and David N. Walthall
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.
PROPOSAL TO ADOPT THE COMPANY'S AMENDED AND RESTATED STOCK OPTION PLAN:
_____FOR _____AGAINST _____ABSTAIN
<PAGE>
If more than one of the proxies listed on the reverse side shall be present
in person or by subsitute at the meeting or any adjournment thereof, the
majority of said proxies so present and voting, either in person or by
substitute, shall exercise all of the powers hereby given.
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR ALL NOMINEES FOR DIRECTORS
AND FOR THE NAMED PROPOSAL.
The undersigned hereby revokes any proxy or proxies heretofore given to
vote upon or act with respect to such stock and hereby ratifies and confirms all
that said proxies, their substitutes, or any of them, may lawfully do by virtue
hereof.
Dated:
----------------------------------
----------------------------------------
Signature
----------------------------------------
(Signature if held jointly)
Please date the proxy and sign your name
exactly as it appears hereon. Where
there is more than one owner, each
should sign. When signing as an
attorney, administrator, executor,
guardian or trustee, please add your
title as such. If executed by a
corporation, the proxy should be signed
by a duly authorized officer. Please
sign the proxy and return it promptly
whether or not you expect to attend the
meeting. You may nevertheless vote in
person if you do attend.