HERITAGE MEDIA CORPORATION
ONE GALLERIA TOWER
13355 NOEL ROAD, SUITE 1500
DALLAS, TEXAS 75240
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
Pursuant to the requirements of the Securities and Exchange Commission,
we are submitting our first quarter 1994 10-Q. A hard copy has also
been filed prior to this submission.
Sincerely,
Miachelle M Rymer
MIS MANAGER
HERITAGE MEDIA CORPORATION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT FOR THE QUARTER ENDED MARCH 31, 1994.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934 FOR THE TRANSACTION PERIOD FROM __________ TO _________.
Commission file number: 1-100155
________________________
HERITAGE MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
IOWA 42-1299303
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
13355 Noel Road, Suite 1500
Dallas, Texas 75240
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code:
(214) 702-7380
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 6, 1994
Class A, $.01 Par Value 16,400,963
Class C, $.01 Par Value 1,063,362
PART I. SUMMARIZED FINANCIAL INFORMATION
Item 1. Financial Statements
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
<S> March 31, December 31,
ASSETS 1994 1993
------------- --------- ---------
Current assets: <C> <C>
Cash and cash equivalents $ 247 4,416
Trade receivables, net 47,146 47,911
Prepaid expenses and other 2,528 3,331
Inventory 4,492 4,435
Broadcast program rights 1,690 1,465
Deferred income taxes 3,691 3,304
--------- ---------
Total current assets 59,794 64,862
--------- ---------
Property and equipment:
In-store marketing equipment 41,339 39,228
Broadcasting equipment 38,711 37,134
Buildings and improvements 9,206 9,206
Other equipment 7,808 7,600
Land 2,490 2,490
--------- ---------
99,554 95,658
Less accumulated depreciation 41,764 38,236
--------- ---------
Net property and equipment 57,790 57,422
--------- ---------
Goodwill and other intangibles, net 374,438 363,667
Noncurrent broadcast program rights 1,842 1,859
Deferred finance costs, net 3,891 3,849
Other assets 1,602 1,190
--------- ---------
$ 499,357 492,849
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
<S> March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
------------------------------------ --------- ---------
<C> <C>
Current liabilities:
Current installments of long-term debt (note 2) $ 4,308 2,076
Accounts payable 13,390 14,299
Accrued expenses 31,759 32,592
Broadcast program rights payable 1,874 2,188
Deferred advertising revenues 15,458 17,338
--------- ---------
Total current liabilities 66,789 68,493
--------- ---------
Long-term debt (note 2) 321,396 312,913
Broadcast program rights payable 1,654 1,460
Other long-term liabilities 512 523
Deferred income taxes 3,691 3,304
Settlement rights (note 4) 22,257 19,514
Stockholders' equity (note 3):
Preferred stock, no par value,
authorized 60,000,000 shares; Issued 161,945
in 1993. - 16,195
Common stock, $.01 par value:
Class A - 40,000,000 shares authorized. Issued,
12,667,425 shares in 1994 and 12,236,856 shares
in 1993 127 123
Class C - 10,000,000 shares authorized. Issued,
4,829,728 shares in 1994 and 4,136,168 shares
in 1993. 48 41
Additional paid-in capital 218,934 202,743
Accumulated deficit -134,357 -130,862
Accumulated foreign currency translation
adjustments -1,240 -1,144
Class A common stock in treasury, at cost
(32,828 shares in 1994 and 1993) -454 -454
--------- ---------
Total stockholders' equity 83,058 86,642
Commitments and contingencies (note 5) --------- ---------
$ 499,357 492,849
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except share information)
(unaudited)
<TABLE>
<CAPTION> Three Months
Ended March 31,
<S> ---------------------------
1994 1993
Net revenues: --------- ---------
<C> <C>
In-store marketing $ 47,910 44,650
Television 9,579 8,936
Radio 7,824 5,934
--------- ---------
65,313 59,520
--------- ---------
Costs and expenses:
Cost of services:
In-store marketing 29,756 27,627
Television 2,424 2,381
Radio 2,090 1,574
Selling, general and administrative 15,970 14,940
Depreciation 3,970 3,486
Amortization of goodwill and other assets 2,951 2,769
Product development costs 245 240
--------- ---------
57,406 53,017
--------- ---------
Operating income 7,907 6,503
--------- ---------
Other expense:
Interest -7,105 -8,579
Other, net -635 -27
--------- ---------
-7,740 -8,606
--------- ---------
Income (loss) before income taxes 167 -2,103
Income taxes -771 -419
--------- ---------
Net loss $ -604 -2,522
========= =========
Net loss applicable to common stock $ -3,495 -3,512
========= =========
Weighted average shares outstanding 17,077,135 16,291,384
=========== ===========
Net loss per common share $ -0.20 -0.22
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1994 and 1993
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION> 1994 1993
<S> --------- ---------
Cash flows from operating activities: <C> <C>
Net loss $ -604 -2,522 provided by operating activities:
Adjustments to reconcile net loss to net cash
provided by operating activities:
Noncash interest and amortization of
deferred finance costs 180 169
Depreciation 3,970 3,486
Amortization:
Broadcast program rights 492 519
Goodwill and other assets 2,951 2,769
(Decrease) increase in deferred revenue -1,948 5,293
Other 583 527
net of effects of acquisitions:
Accounts receivable 909 1,391
Other assets 646 629
Accounts payable and accrued expenses -2,388 -883
--------- ---------
Net cash provided by operating activities 4,791 11,378
--------- ---------
Cash flows from investing activities:
Acquisitions net of cash acquired -7,522 -
Capital expenditures -2,890 -3,960
Purchase of in-store marketing rights -539 -
Proceeds from the sale of assets - 77
--------- ---------
Net cash used by investing activities -10,951 -3,883
-------- ---------
Cash flows from financing activities:
Long-term borrowings 19,246 19,500
Retirements:
Long-term debt -15,834 -24,088
Broadcast program rights payable -761 -793
Issuance of common stock 7 46
Dividends on preferred stock -445 -445
Purchase of settlement rights - -2,848
Payment of deferred finance costs -222 -
--------- ---------
Net cash provided (used) by financing activities 1,991 -8,628
--------- ---------
Net change during period -4,169 -1,133
Cash and cash equivalents at beginning of period 4,416 1,218
--------- ---------
Cash and cash equivalents at end of period $ 247 85
========= =========
Cash paid for interest $ 1,382 2,680
========= =========
Cash paid for income taxes $ 1,936 295
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994
(unaudited)
Note 1. Results of Operations.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year.
The information reflects all adjustments (none of which were other
than normal recurring items) which are, in the opinion of management,
necessary to present a fair statement of the results for the interim
periods. It is suggested that this interim period financial
information be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
Note 2. Long-term Debt.
Long-term debt at March 31, 1994 and December 31, 1993 is summarized
as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1994
<S> --------- ------------
<C> <C>
HMSI senior notes $ 150,000 150,000
HMSI credit agreement 114,000 110,500
HMC senior subordinated notes 50,000 50,000
Other 11,704 4,489
---------- ---------
325,704 314,989
Less current installments 4,308 2,076
---------- --------
$ 321,396 312,913
======= ========
</TABLE>
Long-term debt increased by approximately $10.7 million during the
period ended March 31, 1994 primarily due to the acquisitions
discussed below. An additional $2 million of the term loan facility
was reclassified to current installments at March 31, 1994 per the HMSI
credit agreement.
Notes to Consolidated Financial Statements
Note 3. Stockholders' Equity.
On December 28, 1993 the Company notified the holders of its Series B
and Series C Convertible Preferred Stock that it would redeem the preferred
shares at $105 per share per the Preferred Share Agreement. On February 1,
1994, the Company redeemed all outstanding shares of its 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 holders of approximately 3.7 million
shares of Class C common stock indicated their intention to convert the Class
C shares into Class A shares and exercise their rights to require the Company
to register the Class A shares in a secondary public offering. On April 8,
1994, the underwriters completed the public offering of the 3.7 million
shares of Class A common stock at $17.00 per share in simultaneous United
States and international offerings. The selling shareholders have granted
the underwriters of the offerings an option to purchase up to an additional
.4 million shares of their Class A shares to cover over-allotments. Due to
the current market conditions, the underwriters will not exercise the
over-allotment option. Consequently, these two shareholders continue to
own their respective portions of the over-allotment shares. The Company will
not receive any of the proceeds from this sale and did not issue any new common
shares in this offering.
Note 4. Settlement Rights.
The Settlement Rights (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 value of the business, properties
and assets of ACTMEDIA as a going concern ("Net Equity") and the resultant
estimate of the value of the Rights. To the extent that such estimate of value
exceeds the carrying value, such excess is being accreted by the interest
method to accumulated deficit over the appropriate accounting period. At
March 31, 1994, the carrying value was $22,257,000. 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 below.
If, as a result of the independent appraisal process described below,
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). See Capitalization and Liquidity for further discussion of
the Rights.
Notes to Consolidated Financial Statements
Note 5. Acquisitions.
On January 1, 1994 the Company completed the acquisition of WEZW-FM
in the Milwaukee market for $5.6 million cash (including a $.6 million escrow
deposit paid in October, 1993) to form a duopoly with the previously owned and
operated WEMP-AM/WMYX-FM in the same market.
On February 15, 1994 Heritage completed the acquisition of in-store
marketing companies located in Australia and New Zealand for approximately
$2.4 million including $.3 million in cash and $2.1 million in local Australian
bank debt. These acquisitions represent a continuation of the Company's
efforts to expand its in-store marketing business worldwide.
On March 15, 1994 Heritage completed the acquisition of KRJY-FM in the
St. Louis market for approximately $7.3 million including $2.2 million in cash
and $5.1 million in notes payable and other obligations to the seller. This
acquisition formed a duopoly with the Company's previously owned and operated
WRTH-AM/WIL-FM in the same market. Effective April 19, 1994 the FCC approved
the change of the station call letters to KIHT-FM.
The acquisitions discussed above were recognized in the consolidated
financial statements as follows (thousands of dollars):
<TABLE>
<S> <C>
Working capital, net $ (92)
Property and equipment 1,411
Goodwill and other intangibles 13,628
Long-term debt and other liabilities (7,425)
-------
Total cash paid $ 7,522
========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations: First Quarter 1994 compared to 1993
Consolidated net revenues of $65.3 million represented a 10% increase
over the 1993 revenues of $59.5 million. Cost of services of $34.3 million
increased 8.5% in 1994 compared to 1993 due primarily to the increase in net
revenues. Operating income of $7.9 million in 1994 exceeded the comparable
1993 period by 22%. The loss per share was $.20 versus $.22 in 1993. The
improvement in the Company's operating results for the 1994 period primarily
reflects revenue growth from the Instant Coupon Machine ("ICM") and lower
ACTRADIO operating expenses by the In-store Marketing Group and increased
local and national advertising revenues by the Television and Radio Groups .
The loss per share in 1994 was lower than 1993 due principally to $1.4 million
of additional operating income, $1.5 million lower interest expense and
increased average shares outstanding. The 1994 period included $2.7 million
of settlement rights accretion versus $.5 million in 1993 impacting loss per
share by $.16 per share and $.03 per share, respectively. All comparisons,
unless otherwise noted, are for the period ended March 31, 1994 as compared
to the comparable 1993 period.
In-store Marketing. The In-store Marketing Group contributed $47.9
million of revenues in 1994, an increase of 7%, compared to $44.7 million
in 1993. The growth of ICM revenues was the major contributor to the
improved results. The ICM generated $17.5 million of revenues in 1994,
an increase of 26% compared to 1993. International revenues grew by 36%
to $3.7 million in 1994 primarily due to improvement from the Canadian
business and the inclusion of $.3 million revenues from the recent Australia/
New Zealand acquisitions. Advertising revenues in 1994 declined 12% compared
to 1993 reflecting the continuing trend toward promotion and the shift to ICM
and away from the print products. Total Impact revenues improved by 3% to
$10 million in 1994; however, competitive pricing pressures continue in the
demonstration business. ActNow had two smaller programs totaling
approximately $5 million in 1994 yielding a lower margin than the one large
$5 million program in the 1993 period.
Net revenues of the ACTRADIO product decreased to $1.1 million in 1994
from $1.2 million in 1993. As a result of the Company's actions taken in the
fourth quarter of 1993 (see Annual Report on Form 10-K for fiscal year ended
December 31, 1993), on-going operating costs in 1994 were reduced by
approximately $550,000 and depreciation was decreased by $610,000 resulting
in a $1.1 million improvement in operating income for the 1994 period versus
1993. These actions will reduce the on-going operating costs and long-term
capital requirements, and increase the size and quality of the in-store audio
network.
In-store Marketing operating income of $4.6 million increased by 9%,
from $4.2 million in the 1993 period, due primarily to the increased 1994
revenues and reduced ACTRADIO losses. The operating margin was 10% in 1994
compared to 9% in 1993.
The In-store Marketing Group contributed 73% of the Company's revenues
and 58% of operating income in the 1994 period, and it is expected that this
group will contribute a higher percentage of the Company's revenues and
operating income for full year 1994.
As previously discussed, the In-store Group receives large orders from
major package goods manufacturers, the timing of which can significantly affect
a given quarter. Recently, large Impact orders totaling approximately $3.5
million, which were orginally scheduled for the second quarter, were
rescheduled to the third and fourth quarters. As a result, second quarter
revenues will be adversely affected by these rescheduled Impact orders. The
Company, however, does anticipate that the second quarter operating income for
the In-store Group will exceed that of the 1993 period due to higher margins
and the lower ACTRADIO costs.
Television. The Television Group generated $9.6 million of revenues in
1994, a 7% increase compared to $8.9 million in 1993. The Television Bureau
of Advertising Time Sales Survey reported that industry-wide gross local
revenues increased by 13% and national revenues were up 16% compared to 1993
primarily due to the Winter Olympics and political revenues. The Television
Group's local revenues increased 8% and national revenues improved 7% compared
to the 1993 period. The Television Group did not benefit from the Olympics as
the group has no CBS affiliates and received minimal political revenues. The
revenue improvement was produced primarily by the Pensacola, FL and
Plattsburgh, NY stations. The Pensacola station benefited from local revenue
growth of 16% and national revenue growth of 4% primarily on the strength of
automobile industry sales. The Plattsburgh station generated local and
national increases of 8% and 9% respectively. The Plattsburgh station has
seen a gradual strengthening of the New England economy which has been weak
for the past several years.
Operating income of $2.7 million increased by 15% compared to 1993
primarily as a result of higher revenues and expenses, which were held to a 4%
increase. The operating margin improved from 26% in 1993 to 28% in 1994.
Radio. The Radio Advertising Bureau reported that combined national
and local spot revenues improved 13% in the first quarter of 1994 over the
same period in 1993 for the radio industry. Net revenues of the Radio Group
increased by 32% from $5.9 million in 1993 to $7.8 million in 1994. The radio
stations acquired in 1993 and 1994 contributed $.8 million of the increase.
Revenues for the stations owned for all of both periods increased 18%
primarily as a result of stronger industry revenues noted above and improved
station ratings from the St. Louis, MO station. The St. Louis station
improved revenues from $1.4 million to $1.6 million in 1994 primarily due to
the achievment of the number one ranking in the market. Also, the Kansas City
station received an incremental $.3 million of sports revenues associated with
the Kansas City Chiefs playoff games.
Operating income grew from $.6 million in 1993 to $1.4 million in 1994
primarily as a result of the improved revenues by the stations owned for all of
both periods as the contribution from the acquired stations was immaterial.
The margin improved from 11% in 1993 to 17% in 1994.
Corporate Expenses. Corporate expenses of $.7 million in 1994 were
level with 1993.
Other Operating Expenses. In-store new product development expenses
were approximately $.2 million in both periods.
Depreciation and Amortization. Depreciation and amortization of
$6.9 million in 1994 increased by 11% compared to $6.3 million in 1993.
The majority of the increase was due to higher depreciation associated
with the capital expenditures to support the growth of Instant Coupon
Machine revenues.
Interest Expense. Interest expense consists of the following:
<TABLE>
<CAPTION>
Three months
Ended March 31,
---------------------
1994 1993
<S> <C> <C>
(in thousands)
Interest accrued and paid currently $ 6,925 8,410
Amortization of deferred financing costs 180 169
------ -----
TOTAL $ 7,105 $8,579
===== =====
</TABLE>
The decrease in the current interest from 1993 to 1994 is due to the
expiration of interest rate swaps in June, 1993 and lower interest rates.
Net Income (Loss). Primarily as a result of an additional $1.4
million of operating income and $1.5 million lower interest expense reduced
by higher taxes and noncash expenses, the Company improved its operating
results from a $2.5 million loss in 1993 to a $.6 million loss in 1994.
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 March 31, 1994, the Company, through its Heritage Media Services,
Inc. subsidiary ("HMSI"), had a $155 million bank credit facility
(the "Credit Agreement"). HMSI is the Company's subsidiary which owns
ACTMEDIA and the Company's broadcasting properties. The credit facility was
comprised of an $80 million term loan which begins to amortize on
December 31, 1994, and a $75 million reducing revolving credit facility
which begins to decrease on December 31, 1994. Effective February 9, 1994
the revolving credit facility was increased from $50 million to $75 million.
At March 31, 1994, $80 million of the term loan facility and $34 million of
the revolving credit facility were outstanding. At March 31, 1994, $41
million of additional borrowings were available under the Credit Agreement.
The Credit Agreement includes a number of financial and other covenants,
including the maintenance of certain operating and financial ratios and
limitations on or prohibitions of dividends, indebtedness, liens, capital
expenditures, asset sales and certain other items. Loans under the Credit
Agreement are guaranteed by the Company and HMSI's domestic subsidiaries
and are secured by a pledge of the capital stock of HMSI and its domestic
subsidiaries.
On June 22, 1992, HMSI issued $150 million of 11% senior secured
notes (the "Senior Notes") due June 15, 2002. Interest on the Senior Notes is
payable semi-annually. The Senior Notes rank on a parity with the obligations
under HMSI's Credit Agreement, are guaranteed by HMC, and HMSI's domestic
subsidiaries and are secured by a pledge of capital stock of HMSI and its
domestic subsidiaries.
On October 1, 1992 the Company issued $50 million of 11% senior
subordinated notes (the"Subordinated Notes") due October 1, 2002. Interest
on the Subordinated Notes is payable semi-annually. The Subordinated Notes
are subordinate in right of payment to the prior payment in full of the
Credit Agreement and the Senior Notes.
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 March 31, 1994, the amount of ACTMEDIA's indebtedness
(substantially all of which is intercompany indebtedness) was approximately
$180 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 of 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 fair market value of the Net Equity of ACTMEDIA. The
Company has begun the process of meeting its 1994 obligations outlined in
the Settlement Rights Agreement. The Company received proposals from eight
independent appraiser firms. The Company recommended and a special committee
of directors approved Bear Stearns as the appraiser. The Company formally
engaged Bear Stearns on May 4, 1994 and the appraisal is due no later than
seventy five days from the engagement date. 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.
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 March 31, 1994, the
Company had indebtedness (long-term debt, including current installments and
notes payable) of approximately $325.7 million and stockholders' equity of
approximately $83.1 million, and accordingly, a consolidated debt-to-equity
ratio of 3.9 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 March 31, 1994, the total amount of dividends that
could be paid by HMSI to the Company was $19.5 million; however, the total
amount of available dividends for the purchase or redemption of settlement
rights is $50 million. Under the Senior Note Indenture, at March 31, 1994,
the total amount of dividends that could be paid by HMSI to the Company was
$47.0 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 $135.0 million at March 31, 1994
are not available to the Company to pay dividends or repay debt.
As noted above, 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,
in-store, and other communications-related properties it believes have the
potential for long-term appreciation and aggressively managing the operations
of these properties to improve their operating results. The Company has
historically used cash flows from financing activities to fund its
acquisitions and investments while the operations are expected to generate
cash flow sufficient to fund their on-going expenditure requirements.
Cash flows provided by operating activities decreased to $4.8 million
in 1994 from $11.4 million in 1993. The $1.9 million improvement in net loss
was more than offset by a $7.2 million difference in deferred revenue and a
$1.5 million variance in accounts payable and accrued expenses due primarily
to the timing of in-store demonstration programs.
In 1994 the $4 million beginning cash balance, $4.8 million of cash
provided by operations, and $3.5 million of bank borrowings were primarily
utilized for the cash portion of the acquisitions ($7.5 million), capital
expenditures ($2.9 million) and in-store marketing rights payments
($.5 million). In 1993, cash flows from operating activities were utilized
for capital expenditures, to purchase settlement rights, and to reduce
long-term debt.
Capital expenditures decreased from $4.0 million in 1993 to $2.9
million in 1994. This decrease was due primarily to the higher purchase
requirements of additional Instant Coupon Machines in 1993 versus 1994.
Capital requirements related to acquisitions for 1994 were $7.5
million as detailed in Note 5 of Notes to Consolidated Financial Statements.
As a part of ACTRADIO's commitment to the new marketing alliances, the Company
made payments totaling $.5 million in the first quarter ended March 31, 1994
and is expecting to make payments totaling $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.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE MEDIA CORPORATION
Dated: by /s/ David N. Walthall
David N. Walthall
President and Chief Executive Officer
Dated: by /s/ James P. Lehr
James P. Lehr
Vice President and Controller
Principal Accounting Officer
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE MEDIA CORPORATION
Dated: by
David N. Walthall
President and Chief Executive Officer
Dated: by
James P. Lehr
Vice President and Controller
Principal Accounting Officer
