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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, 1994;
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)
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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.
PREFERRED STOCK PURCHASE RIGHTS.
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 6, 1995 is $406,984,875.
The number of shares outstanding of each of the issuer's classes of common
stock, as of March 6, 1995:
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CLASS SHARES OUTSTANDING
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Class A, $.01 Par Value..... 17,641,658
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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 25,
1995 (the "Proxy Statement"). III
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HERITAGE MEDIA CORPORATION
1994 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................................................................................... 13
Item 3. Legal Proceedings............................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 14
Item 6. Selected Financial Data...................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 16
Item 8. Financial Statements and Supplementary Data.................................................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 21
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 22
Item 11. Executive Compensation....................................................................... 22
Item 12. Security Ownership of Certain Benefical Owners and Management................................ 22
Item 13. Certain Relationships and Related Transactions............................................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 22
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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 provider of
in-store marketing products and services, primarily to consumer packaged goods
manufacturers with products in supermarkets and drug stores. Heritage also
operates five network-affiliated television stations and fifteen radio stations
in seven major markets.
ACTMEDIA offers advertisers a broad assortment of in-store advertising,
promotional and merchandising products which can be purchased separately or
integrated to produce a cohesive in-store marketing program for a given product.
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 $230 million in 1994, a compounded annual growth rate of
15%. Including the recently acquired Powerforce Services, 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
23,000 available part-time employees). ACTMEDIA delivers its products and
services in over 24,000 supermarkets and 12,000 drug stores.
Television is still the most effective mass media. Heritage's Television
Group contributes substantial cash flow from operations with a local sales and
news emphasis that yields industry leading operating margins. Heritage's fastest
growing operating group is Radio. The Radio Group has been very successful in
acquiring under-performing stations and improving their operations. The group
also acquired stations to form duopolies in three of its markets and has two
other recent duoploly acquisitions pending.
1.(B) BUSINESS SEGMENT INFORMATION
The business segment information required by this item is set forth in Note
12 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 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.
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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 has been shown to increase brand
switching substantially and to encourage first-time purchases of featured
products. Coupons featured in ACTMEDIA's ICM achieve 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 research also
indicates that unit sales increase an average of 35% over four weeks for
products using the ICM.
In addition to its high redemption rate, research shows that the ICM
generates significant unplanned purchases; approximately 62% of purchases made
with coupons from the ICM are unplanned. 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 1994 the
ICM was available in approximately 9,700 grocery stores and 7,700 drug stores.
In January 1992, the Company was granted a patent with respect to certain design
features of the ICM.
ACTNOW. The ACTNOW 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 10,900 stores nationwide. Up to 15
million co-op coupon booklets and up to 15 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 ACTNOW display.
Market tests indicate that these events typically result in 40% of coupon
redeemers being new brand users or switchers. Of the ACTNOW 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.
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 110 Designated
Marketing Areas ("DMA"). Shopping cart advertisements are sold in four-week
cycles to a maximum of twelve advertisers per cycle and,
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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 6,000
stores nationwide, offering category-exclusive coverage of approximately 160
DMA'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 9,000 supermarkets,
offering coverage of approximately 160 DMA's, and in approximately 7,000 drug
stores, covering approximately 150 DMA'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 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,
1994 there were approximately 8,000 chain supermarkets, 8,300 chain drug stores
and 800 Toys 'R' Us / Kids 'R' Us toy and children clothing stores totaling
17,100 stores comprising the total network.
ACTRADIO delivers over 800 million advertising impressions over a four week
period reaching 69% of adults an average of 6.3 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 1993 show that ACTRADIO delivers an average
sales gain of 8% with a brand sell ad, and over 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 mintues of music (with a wide choice of formats), 10
mintues 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, Music Technologies, Inc., and Broadcast International to create
the largest in-store satellite delivered radio
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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.
ACTRADIO and the music providers will jointly upgrade and expand the
in-store satellite delivery systems across the entire network. As of December
31, 1994, over 80% of the network was satellite delivered, with the balance of
the network being delivered via tape equipment. ACTRADIO anticipates that all
stores to which it is possible to deliver a satellite signal will be converted
to satellite delivery by the end of 1995.
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 1,900 supermarkets by the end
of 1994.
POWERFORCE. In January, 1995, the Company acquired Powerforce Services, a
leading national provider of in-store merchandising services. Powerforce
conducts merchandising and promotional activities such as shelf and store
resets, special events, display building and store level sales for packaged
goods manufacturers. Sales merchandising is a rapidly-growing $350 million
industry due to the growing trend of manufacturers to down-size their full-time
sales forces and outsource in-store activities to third parties such as
Powerforce. Powerforce has 8,000 part-time merchandisers available across all
major U.S. markets.
IN-STORE NETWORK
ACTMEDIA's in-store network delivers its products and services in over
24,000 supermarkets and 13,000 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 205 of the nation's 209
DMA'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 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
23,000 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 mass merchandisers, convenience stores, club stores,
and discount stores.
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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 1994, the Company's largest customers included the following:
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Andrew Jergens Kraft Foods
Chesebrough-Pond's Lever Brothers
Coca-Cola McNeil
General Mills Procter & Gamble
Heinz Quaker Oats
Hunt-Wesson Ralston Purina
James River RJR Nabisco
Kelloggs
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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. In October, 1994, ACTMEDIA Canada acquired
Strategium Media, Inc. whose Infonet Media, Ltd. ("Infonet") subsidiary is a
leading supplier of shelf-based advertising, couponing and promotional programs.
The combination of these three companies now offers program coverage in 4,300
supermarkets and 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 ACTMEDIA Europe which simultaneously
acquired Media Meervoud, N.V., a Dutch in-store marketing company engaged in
both cart advertising and promotions. During 1993, ACTMEDIA Asia was launched in
a joint venture with Omnilink of Singapore. In October 1994 ACTMEDIA-Hellas, a
joint venture in Greece, was formed and in December 1994 ACTMEDIA Senshu of
Japan was also formed. In February 1994, ACTMEDIA acquired in-store marketing
companies in Australia and New Zealand.
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 such license agreements (covering Israel,
Puerto Rico, Turkey, South Africa, Venezuela, Costa Rica, Greece, Japan and
Ireland), revenues from licensed operations were not material in 1994.
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International sales in 1994 accounted for $23.2 million (approximately 10%)
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. 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 advertising and promotion services, including
national, local and cable 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 would 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
larger 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.
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BROADCASTING
Heritage owns and operates five network-affiliated television stations (plus
one affiliate licensed as a satellite station but operated as a partial
stand-alone station), two AM/FM combination radio stations, two stand-alone FM
radio stations, and three AM/FM/FM combination radio stations.
TELEVISION
The Television Group owns five network-affiliated television stations. 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 8
(UHF)
Oklahoma City, OK
WCHS-TV 8 ABC 473,200 56 3 15
(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 13
(VHF)
Burlington, VT/
Plattsburgh, NY
WNNE-TV 31 NBC 282,740(4) 92(4) 3 4
(UHF)(5)
Hartford, VT/
Hanover, NH
KEVN-TV 7 NBC 84,520 173 2 14
(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
KEVN-TV 2
(VHF)
Rapid City, SD
<FN>
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(1) Source: Nielsen Television Designated Market Area ("DMA") Market rankings
1994-1995.
(2) "Sign on-Sign off " market shares as reported in the November 1994 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 6:00 a.m. to
2:00 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
1994 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.
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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.
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
1994, the station's newscast maintained the market's number one rating and the
station completed construction and moved into a new studio facility in
Pensacola. In 1994 the station extended its affiliation agreement with ABC for
five years.
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. WPTZ-TV and
WNNE-TV recently entered into a new ten year affiliation agreement with NBC.
WCHS-TV, an ABC affiliate, is the only network affiliate based in the
capital city of Charleston, WV, within the Charleston and Huntington market. In
1994 the station extended its affiliation agreement with ABC for five years.
The acquisition of KOKH-TV has been very successful. The improved channel
position, signal strength, elimination of a commercial station in the Oklahoma
City market, and the emergence of the Fox network have contributed to the
significant revenue increase since the acquisition.
In South Dakota, the Company operates KEVN-TV, the NBC affiliate in Rapid
City.
Three of the Company's stations, WEAR-TV, WPTZ-TV and WCHS-TV, which
represent 72% 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.
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 more than 63% of the stations'
revenues being derived from local sources, against an industry average estimated
at approximately 50%.
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RADIO
The Radio Group owns and operates five AM and ten FM radio stations
(including three FM "duopolies") in seven of the top 50 markets -- Seattle, St.
Louis, Portland, Cincinnati, Milwaukee, Kansas City, and Rochester. The
following table sets forth certain information regarding the Company's radio
stations:
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<CAPTION>
STATIONS IN FM STATION
LOCATION METRO RANK (1) CALL SIGN FORMAT MARKET FORMAT RANK (2)
- ------------------------- --------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Seattle-Tacoma, WA....... 13 KRPM-AM Country 31
KRPM-FM Country 2
St. Louis, MO............ 17 WRTH-AM Standards 32
WIL-FM Country 1
KIHT-FM Rock Oldies 1
Portland, OR............. 24 KKSN-AM Standards 28
KKSN-FM Oldies 1
Cincinnati, OH........... 25 WOFX-FM Classic Rock 25 1
Milwaukee, WI............ 26 WEMP-AM Oldies 26
Adult
WMYX-FM Contemporary 1
Adult
WEZW-FM Contemporary 3
Kansas City, MO-KS....... 27 KCFX-FM Rock Oldies 25 1
Rochester, NY............ 44 WBBF-AM Standards 17
WBEE-FM Country 1
WKLX-FM Oldies 1
<CAPTION>
FM STATION RANK IN
LOCATION TARGET AUDIENCE (3)
- ------------------------- -------------------
<S> <C>
Seattle-Tacoma, WA.......
14
St. Louis, MO............
4
7
Portland, OR.............
3
Cincinnati, OH........... 6
Milwaukee, WI............
8
12
Kansas City, MO-KS....... 1
Rochester, NY............
1
5
<FN>
- ------------------------
(1) Metropolitan areas as defined and ranked by Arbitron, Fall 1994.
(2) Heritage's FM station ranking against all radio stations in its market with
the same programming format, based on persons age 25 to 54 listening during
the 6:00 a.m. to midnight time period. (Source: Fall 1994 Arbitron
ratings).
(3) The target ranking against all radio stations in the market, based on
listenership by adults age 25 to 54 during the 6:00 a.m. to midnight time
period. (Source: Fall 1994 Arbitron ratings).
</TABLE>
The Company's strategy is to identify and acquire under-performing 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 generally program mass appeal music
formats directed at a target audience of 25-to-54 year-olds. Presently, eight of
the Company's ten FM stations are format leaders in their markets. In addition,
Heritage stations are number one ranked among all stations in two of the
Company's seven radio markets.
The Federal Communications Commission ("FCC") has authority to limit radio
ownership both in the number of stations owned, operated, or controlled in any
one market, and in total. In late 1992, the FCC relaxed its rules to double the
number of stations (up to two AM's and two FM's) one entity can own in one
market. This new combination is commonly known as a "duopoly".
The Company acquired one FM station in 1994 that created a duopoly, and is
currently in the process of acquiring stations that will create two others. On
March 15, 1994, the Company purchased
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KRJY-FM in St. Louis, and subsequently changed its call letters to KIHT-FM and
its programming to rock oldies primarily from the 1970's. The financial results
of this station were consolidated beginning March 15, 1994.
On February 22, 1995, the Company entered into separate agreements to
acquire two additional FM stations and one AM station -- KKCJ-FM in the Kansas
City market and KXYQ-AM/FM in the Portland market. When these transactions
(which are subject to FCC approval) are consummated, the Company will have FM
duopolies in five of its seven radio markets.
The Company's acquisition and operating strategies have enabled its radio
group to increase earnings before interest, taxes, depreciation and amortization
("EBITDA") from break-even in 1987, its first full year, to $12.6 million in
1994. The Radio Group has increased revenues from $16 million in 1991 to $41
million in 1994, an average annual growth rate of 37%.
Each of Heritage's FM facilities is of the highest class of service
permitted by the FCC (Class 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 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 in 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 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
also 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 cable television 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.
10
<PAGE>
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. Commercial radio
broadcasting may face further competition from satellite delivered digital audio
radio services.
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 October 1, 1996 and April 1, 1999. An
application to renew the license for station WPTZ-TV, Plattsburgh, NY presently
is 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 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.
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 filed a petition to deny with the FCC against
Stations WRTH-AM and WIL-FM; Stations WBBF-AM and WBEE-FM; Stations KRPM-AM and
KRPM-FM; Stations WEMP-AM and WMYX-FM; and Station WEAR-TV, collectively (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
11
<PAGE>
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 fewer
than 15 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 20 AM and 20 FM radio
stations. 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.
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 enacted by Congress called the Cable
Television Consumer Protection and Competition Act of 1992 (the "Act") 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
12
<PAGE>
consent, cable systems were 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. 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 not 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
relax the rule governing the common ownership of television and radio station in
the same market, to authorize a new type of wireless cable system, and to
authorize advanced (high definition) television systems. Certain of these
changes have the potential to increase operating costs and/or increase the
number of competing broadcast stations. 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 1,500 full-time and up to
23,000 available part-time employees. Of this total, ACTMEDIA employs
approximately 725 full-time and up to approximately 23,000 available part-time
personnel, including Powerforce Services. Substantially all of ACTMEDIA's
part-time personnel are 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 775 persons of whom 38
employees are represented by unions. The Company believes that it has a good
relationship with its employees.
ITEM 2. PROPERTIES.
Heritage's headquarters are located in Dallas, Texas. The lease agreement
for the 13,350 square feet of office space in Dallas expires April 30, 2000.
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 44 field
offices with an aggregate of approximately 86,000 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, New York pursuant to a lease
expiring in May 1995. Effective June 1, 1995 ACTRADIO will move its operations
into 10,666 square feet in Norwalk. Powerforce leases office facilities in
Chicago totaling 15,616 sq. ft under an agreement that expires June 30, 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 86 total acres in 7
locations upon which buildings with approximately 75,600 square feet of office
and studio space are located. The television stations own and lease
approximately 92 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 radio stations lease approximately 50,000 square
feet in seven locations upon which office and studio space is located. The radio
stations also lease tower space at six locations totaling 31 acres.
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<PAGE>
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:
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1994
First Quarter............................................................. $ 21 5/8 $ 17 1/2
Second Quarter............................................................ 20 1/8 16 1/8
Third Quarter............................................................. 22 3/8 17 1/4
Fourth Quarter............................................................ 27 1/4 21 1/2
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 6, 1995 the last reported sale price of the Company's Class A
Common Stock was $25 1/8 per share. At March 6, 1995 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 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 Heritage's ability to pay
dividends. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capitalization and Liquidity."
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<PAGE>
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, 1994, 1993, 1992, 1991, and 1990 which
were derived from the audited consolidated financial statements of the Company.
The data as of December 31, 1994 and 1993 and for each of the years in the three
year period ended December 31, 1994 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)
------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------- -------------- ----------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ 317,628 $ 291,205 $ 250,891 $ 222,360 $ 203,854
Operating income......................... 57,838(2) 34,995(3) 27,550 21,950 13,451(6)
Income (loss) before extraordinary
item.................................... 22,299 77 (14,966) (19,278) (26,009)
Net income (loss)........................ 22,299 512 (18,560) (14,958) (24,950)
Earnings (loss) per share before
extraordinary item (4).................. .15 (.32) (1.51) (2.39) (2.82)
Earnings (loss) per share (4)............ .15 (.29) (1.76) (1.97) (2.72)
Equivalent shares (5).................... 17,381 16,314 14,449 10,369 10,279
BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net.............. 54,799 57,422 55,832 48,659 52,144
Goodwill and other intangibles, net...... 382,288 363,667 373,426 375,378 378,375
Total assets............................. 514,147 492,849 496,296 481,147 497,358
Long-term debt (7)....................... 351,525 314,989 319,385 345,916 352,791
Stockholders' equity..................... 89,246 86,642 91,213 62,022 66,339
<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 1994 was reduced for a nonrecurring charge of $4.9
million relating to stock appreciation rights (see Note 8 of Notes to
Consolidated Financial Statements).
(3) Operating income for 1993 was reduced for a nonrecurring charge of $3
million relating to ACTRADIO (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations")
(4) See Note 1(J) of Notes to Consolidated Financial Statements.
(5) Excludes shares reserved for issuance upon exercise of stock options or
upon conversion of outstanding preferred stock, as the effect would be
antidilutive or immaterial.
(6) Operating income for 1990 was reduced for 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 for
a $1 million writedown of barter accounts.
(7) Includes current installments. See Note 4 of Notes to Consolidated
Financial Statements.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Heritage Media has focused its growth strategy on acquiring in-store, 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.
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,
Kansas City and WOFX-FM, Cincinnati. 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, Rochester. Heritage programmed and marketed the
station under an LMA from May 19, 1993 to the completion of the acquisition in
July 1993. On October 25, 1993 the Company agreed to acquire radio station
WEZW-FM, Milwaukee and began programming and marketing the station under an LMA.
This acquisition was completed in January 1994.
On February 14, 1994 Heritage completed the acquisition of in-store
marketing companies located in Australia and New Zealand. On March 14, 1994
Heritage completed the acquisition of KIHT-FM in the St. Louis market. On
October 21, 1994 the Company completed the sale of the assets of KDLT-TV, its
smallest television station, located in Sioux Falls. The loss attributable to
the sale was approximately $1.4 million. On October 26, 1994, ACTMEDIA Canada,
Inc. acquired Infonet. The purchase was financed by a bank credit agreement with
Canadian banks.
Some of the major financing activities in 1994 that simplified the Company's
capitalization structure included conversion of the Preferred shares,
eliminating related dividends; early retirement of the settlement rights; and
the secondary public offering and conversion of Class C shares.
Due to the numerous acquisitions, dispositions, and financing activities,
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: 1994 COMPARED TO 1993
Consolidated net revenues of $317.6 million represented a 9% increase over
the 1993 revenues of $291.2 million. Cost of services of $151 million in 1994
were level with 1993. Operating income of $57.8 million in 1994 exceeded the
comparable 1993 period by 65%. The earnings per share was $.15 versus a loss per
share of $.29 in 1993. The improvement in the Company's operating results for
the 1994 period primarily reflects strong revenue growth from the Instant Coupon
Machine by the In-store Marketing Group, higher revenues from the In-store
international operations, increased Television and Radio Group advertising
revenues and positive contributions from the Radio acquisitions. The earnings
per share improvement in 1994 versus 1993 was due principally to $22.8 million
of additional operating income and $1.1 million lower interest expense. The 1994
period included a $4.9 million nonrecurring expense for stock appreciation
rights and 1993 included a $3 million nonrecurring charge for ACTRADIO, a $1.7
million writedown of television broadcast program rights, and a $.4 million
extraordinary gain on the early extinguishment of debt. All comparisons, unless
otherwise noted, are for the year ended December 31, 1994 versus the comparable
1993 period.
IN-STORE MARKETING. The In-store Marketing Group contributed $230.1 million
of revenues in 1994, an increase of 6%, compared to $216.3 million in 1993. The
continued growth of the Instant Coupon Machine was a major contributor to the
revenue increase. The ICM generated approximately $82 million of revenues in its
second full year which exceeded the $63 million level in 1993 by 31%.
International revenues grew from $17.7 million in 1993 to $23.2 million in 1994
due primarily to the Infonet and Australia/New Zealand acquisitions. ACTNOW
revenues declined from $21.1 million in 1993 to $18 million in 1994 principally
due to the loss of one customer program and a product switch by another.
Revenues generated per program decreased from $3.5 million in 1993 to $3 million
in
16
<PAGE>
1994. Advertising revenues in 1994 declined 5% compared to 1993 reflecting the
continuing trend of some clients directing a portion of their spending to ICM
and away from the shelf-talk product. Impact revenues declined by 11% to $47
million in 1994. The demonstration business has seen increased competition which
has adversely affected pricing and the free-standing insert coupon pricing war
has had a negative effect.
Net revenues of ACTRADIO increased to $6.9 million in 1994 from $6.6 million
in 1993. In 1993 the Company terminated 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
reduced operating costs by approximately $4.9 million in 1994, reduced the
long-term capital requirements, and increased the size and quality of the
in-store audio network.
In-store Marketing operating income of $37.2 million increased by 70% from
$21.9 million in the 1993 period due primarily to the increased 1994 revenues,
favorable revenue mix with higher margins, store operations efficiencies and
economies, and the elimination of the ACTRADIO losses. The operating margin
increased to 16% in 1994 compared to 12% in 1993 (excluding the $3 million
ACTRADIO charge).
The In-store Marketing Group contributed 72% of the Company's revenues and
64% of operating income in 1994, and it is expected that this group will
contribute a higher percentage of the Company's revenues and operating income in
1995.
TELEVISION. The Television Group generated $46.7 million of revenues in
1994, a 13% increase compared to $41.5 million in 1993. The Television Bureau of
Advertising Time Sales Survey reported that industry-wide gross local revenues
increased by 4% and national revenues were up 23%, including additional
political revenues, compared to 1993. The Television Group's local revenues
increased 9% and national revenues improved 22% compared to the 1993 period
including additional political advertising revenues of $3.3 million in 1994. All
of the Group's stations generated increased revenues in 1994 with 78% of the
improvement produced by the Pensacola, Oklahoma City and Plattsburgh stations.
Pensacola benefited from local revenue growth of 10% and national revenue growth
of 39% including $1.8 million political revenues. The Oklahoma City station
generated revenues of $8.3 million in 1994 compared to $7.3 million in 1993
primarily as a result of a 15% increase in local revenues. The continuing
increase in popularity of the FOX network programming, the success of targeting
programming to the age 18-49 audience, and National Football League telecasts
have favorably impacted KOKH-TV's ratings. The Plattsburgh/Hanover stations'
local and national revenues improved 5% and 25%, respectively, including $.6
million of political revenues.
Operating income of $15.7 million increased by 27% compared to 1993,
excluding the 1993 writedown of program rights, primarily as a result of higher
revenues. The operating margin improved from 30% in 1993 to 34% in 1994.
RADIO. Net revenues of the Radio Group increased by 22% from $33.4 million
in 1993 to $40.8 million in 1994. The Radio Advertising Bureau reported that
revenues grew by 11% in the industry in the comparable period. The radio
stations acquired in 1993 and 1994 contributed $3.9 million of the increase.
Revenues for the stations owned for all of both periods increased 11% primarily
as a result of improved station ratings and the inclusion of $.5 million of
political revenues. The three duopolies combined, contributed 75% of the revenue
increase from 1993 to 1994. The Cincinnati station incurred direct format
competition in the spring of 1994 which substantially impacted the operating
results of the station.
Operating income grew from $6 million in 1993 to $8.7 million in 1994
primarily as a result of the improved revenues by the stations owned for all of
both periods as a $.2 million operating loss was incurred by the acquired
stations. The operating margin improved from 18% in 1993 to 21% in 1994.
17
<PAGE>
CORPORATE EXPENSES. Corporate expenses in 1994 of $3.7 million increased 5%
compared to $3.6 million in 1993 due primarily to increased shareholder related
activities and performance related compensation expenses.
OTHER OPERATING EXPENSES. The 1994 period included a $4.9 million
nonrecurring expense for stock appreciation rights (see Note 8 of Notes to
Consolidated Financial Statements). 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 ACTRADIO nonrecurring expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $27.3
million in 1994 decreased by 3% compared to $28.2 million in 1993. The majority
of the decrease was due to the write-off of the obsolete ACTRADIO delivery
equipment in 1993.
INTEREST EXPENSE. Interest expense declined from $31.5 million in 1993 to
$30.4 million in 1994 due primarily to the expiration of interest rate swaps in
June 1993.
OTHER EXPENSES. Included in the 1994 results of operations is a $1.4
million non-cash charge to reflect the loss on the sale of television station
KDLT-TV.
INCOME TAXES. Income tax expense for 1994 and 1993 relates primarily to
state income taxes. As of December 31, 1994 the Company has net operating loss
carryforwards of $76.7 million available to offset future taxable income for
Federal income tax purposes. Only a portion of this amount, however, will reduce
the Company's income tax provision for financial statement purposes and the
remainder will be applied against goodwill and stockholders' equity upon
realization. The Company expects that its 1995 effective income tax rate for
financial statement purposes will be approximately 27%.
NET INCOME. Primarily as a result of an additional $22.8 million of
operating income, the Company improved its net income from $.5 million in 1993
to $22.3 million in 1994. Net income applicable to shareholders reflects
settlement rights accretion of $19.5 million in 1994 versus $3.5 million in 1993
and preferred dividends of $.1 million in 1994 compared to $1.8 million in 1993.
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 million in 1993 exceeded the comparable 1992
period by 27%. 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 ACTRADIO, 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 versus 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 the growth. The ICM generated $63
million of revenues in its first full year which tripled the $21 million level
in 1992. ACTNOW revenues increased by 16%, primarily as a result of management's
decision to increase the 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
18
<PAGE>
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
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 ACTRADIO terminated the MUZAK Joint Operating
Agreement, forming marketing alliances with three large music network providers
to accelerate the conversion to satellite delivery and expand 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, and
increase the size and quality of the in-store audio network.
In-store Marketing operating income of $21.9 million increased by 38% from
$15.9 million in the 1992 period due primarily to the increased 1993 revenues,
store operations efficiencies, and reduced ACTRADIO losses. The operating margin
increased to 12% in 1993, excluding the $3 million ACTRADIO charge, compared to
9% in 1992.
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 station
improved revenues from $4.9 million to $7 million in 1993 primarily due to the
achievement of the number one ranking in the market.
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 ACTRADIO nonrecurring expense.
19
<PAGE>
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 consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1993 1992
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Interest accrued and paid currently.............................................. $ 30,864 $ 32,862
Deferred interest................................................................ -- 3,990
Amortization of deferred financing costs......................................... 651 621
--------- ---------
TOTAL.......................................................................... $ 31,515 $ 37,473
--------- ---------
--------- ---------
</TABLE>
Deferred interest represents accretion of an 8% subordinated note and
13 1/2% subordinated debentures. The decrease in the deferred interest is 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 write-off of the carrying value of
SVL.
NET INCOME (LOSS). Primarily as a result of an additional $12.1 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.
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 the In-store Marketing Group 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities totaling approximately $50
million in 1994 increased compared to approximately $41 million in 1993 due
primarily to the improved operating results reduced by additional working
capital requirements. In 1994, cash flows from operations of $50 million and net
long-term borrowings of $11 million were principally utilized for the retirement
of settlement rights ($39 million), net capital expenditures and investments
($10.9 million), acquisitions ($6.9 million), and other debt reduction ($2.8
million).
Cash flows provided by operating activities increased to approximately $41
million in 1993 from $17 million in 1992. This improvement was primarily
attributed to improved operating results, a $4 million decrease in interest
payments in 1993 and improved receivable collections. In 1993 significant uses
of cash for investing and financing activities included the following: $9
million for the retirement of debt and other liabilities, $2.8 million for
retirement of settlement rights, $5.1 million for acquisitions, and $19.2
million for net capital expenditures and investments. 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.
20
<PAGE>
At December 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 began to amortize on December 31, 1994, and continues
until June 1999 and a $75 million reducing revolving credit facility which
decreased on December 31, 1994 to $73.5 million. At December 31, 1994, $80
million of the term loan facility and $41 million of the revolving credit
facility were outstanding and $32.5 million of additional borrowings were
available under the Credit Agreement. The Credit Agreement includes a number of
financial and other covenants, including the maintenance of certain operating
and financial ratios and limitations on or prohibitions of dividends,
indebtedness, liens, capital expenditures, asset sales and certain other items.
Loans under the Credit Agreement are guaranteed by the Company and HMSI's
domestic subsidiaries and are secured by a pledge of the capital stock of HMSI
and its domestic subsidiaries.
On June 22, 1992, HMSI issued $150 million of 11% Senior Secured Notes (the
"Senior Notes") due June 15, 2002. Interest on the Senior Notes is payable
semi-annually. The Senior Notes rank on a parity with the obligations under the
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.
The Company has reduced its debt to EBITDA ratio from 8.3 in 1990 to 3.9 in
1994. The EBITDA to interest coverage ratio has increased from 1 in 1989 to 3 in
1994. However, the Company is still highly leveraged and is expected to continue
to have a high level of debt for the foreseeable future. See Note 4 of Notes to
Consolidated Financial Statements for further discussion and details.
The Company expects the major requirements for cash in 1995 to include $6.3
million to acquire Powerforce Services, $14 million to acquire the Portland and
Kansas City radio stations, $3.8 million for the cash payment of stock
appreciation rights, $11.3 million for debt principal payments, lease and
contractual obligations of $10.1 million, and approximately $14 million for
capital expenditures. The Company has various financial options to meet these
cash requirements including cash on hand, projected cash provided from
operations, and available liquidity under the Credit Agreement.
Heritage will continue to expand and explore value-creating investments and
acquisitions. The Company will continue to review all expenditures to maximize
financial returns and maintain financial flexibility while continuing to
de-leverage its capital structure.
FOREIGN EXCHANGE
The Company has foreign operations, primarily in Canada, Europe, and
Australia/New Zealand. Exchange rate fluctuations between the currencies of
these countries and the U.S. Dollar result in the translation and reporting of
carrying amounts of foreign investments which vary from year to year in the
Company's consolidated financial statements. Based on the current scope of its
foreign operations, the Company believes that any such fluctuations would not
have a material adverse effect on the Company's consolidated financial condition
or results of operations as reported in U.S. Dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and financial statement schedules of
Heritage Media Corporation and Subsidiaries as of December 31, 1994 and 1993 and
for the years ended December 31, 1994, 1993 and 1992 are included on pages F-1
through F-30 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
<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.
Heritage Media Corporation filed a Form 8-K relating to the adoption of the
Series A Junior Participating Preferred Stock Plan on August 29, 1994 under the
Securities Exchange Act of 1934.
22
<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) Registrant's Series A Junior Participating Preferred Plan (6)
10(b) Form of Credit Agreement among HMSI, the banks named therein, Citibank, N.A., as agent and Nations
Bank of Texas, N.A., as co-agent (3)
10(c) Registrant's Amended and Restated Stock Option Plan (10)
10(d) Registrant's Employee Stock Ownership Plan, as amended (8)
10(e) Actmedia Stock Appreciation Rights Plan of 1990 (5)
11 Computation of Earnings per share (7)
21 Subsidiaries of the registrant (7)
23(a) Consent of KPMG Peat Marwick (7)
27 Financial Data Schedule (7)
99 Proxy statement for annual meeting to be held on May 25, 1995 (9)
<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 the registrant's Form 8-K filed August 29, 1994.
(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) To be filed on or before April 30, 1995.
(10) Filed as an Exhibit to the registrant's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
</TABLE>
23
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
OF HERITAGE MEDIA CORPORATION
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION
-------------------------------------------------------------------------------------- --------------------
<C> <S> <C>
1. Heritage Media, Inc. Delaware
2. Heritage Media Services, Inc. Iowa
3. Heritage Broadcasting Group, Inc. Iowa
4. Rollins Telecasting, Inc. Delaware
5. KEVN, Inc. Iowa
6. WCHS, Ltd. Iowa
7. WEAR-TV, Ltd. Iowa
8. Heritage-Wisconsin Broadcasting Corporation Iowa
9. WIL Music, Inc. Iowa
10. WBBF, Inc. New York
11. KKSN, Inc. Delaware
12. Supermarket Radio Network, Inc. Georgia
13. POP Radio Corporation New York
14. ACTMEDIA, Inc. Delaware
15. Channel 25 Acquisition Corporation Delaware
16. Media Meervoud Belgium
17. Heritage Media Management, Inc. Iowa
18. WNNE-TV Vermont
19. KOKH, Inc. Delaware
20. KCFX-FM, Inc. Iowa
21. WOFX-FM, Inc. Iowa
22. ACTMEDIA Canada Canada
23. BLS Retail Resource Group Canada
24. Evergreen Trading Company, Inc. Connecticut
25. Actmedia New Zealand New Zealand
26. Actmedia Australia Australia
</TABLE>
24
<PAGE>
Pursuant to the requirement 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 14, 1995.
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
- ----------------------------------------- Director March 14, 1995
James M. Hoak, Jr.
/s/DAVID N. WALTHALL President and Director March 14, 1995
- ----------------------------------------- (Principal Execitive
David N. Walthall Officer)
/s/JAMES P. LEHR Vice President and Controller March 14, 1995
- ----------------------------------------- (Principal Accounting
James P. Lehr Officer)
/s/JAMES S. COWNIE
- ----------------------------------------- Director March 7, 1995
James S. Cownie
/s/JOSEPH M. GRANT
- ----------------------------------------- Director March 14, 1995
Joseph M. Grant
/s/CLARK A. JOHNSON
- ----------------------------------------- Director March 9, 1995
Clark A. Johnson
/s/ALAN R. KAHN
- ----------------------------------------- Director March 14, 1995
Alan R. Kahn
</TABLE>
25
<PAGE>
HERITAGE MEDIA CORPORATION
Consolidated Financial Statements
"Form 10-K"
December 31, 1994 and 1993
(With Independent Auditors' Report Thereon)
<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, 1994 and 1993............................................ F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1993 and 1992.............. F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992.... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992.............. F-7
Notes to Consolidated Financial Statements.............................................................. F-9
Financial Statement Schedules:
III. Condensed Financial Information of Registrant as of December 31, 1994 and 1993 and for the years
ended December 31, 1994, 1993 and 1992............................................................ F-26
VIII. Allowance for Doubtful Accounts for the years ended December 31, 1994, 1993 and 1992.............. F-30
</TABLE>
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, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, 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 LLP
February 17, 1995
Dallas, Texas
F-2
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 4,270 $ 4,416
Trade receivables, net of allowance for doubtful accounts of $3,079 in 1994 and $2,778
in 1993................................................................................ 51,096 47,911
Prepaid expenses and other.............................................................. 2,936 3,331
Inventory............................................................................... 5,711 4,435
Broadcast program rights................................................................ 1,518 1,465
Deferred income taxes (note 9).......................................................... 3,369 3,304
---------- ----------
Total current assets.............................................................. 68,900 64,862
Property and equipment:
In-store marketing equipment............................................................ 46,206 39,228
Broadcasting equipment.................................................................. 35,166 37,134
Buildings and improvements.............................................................. 8,440 9,206
Other equipment......................................................................... 8,586 7,600
Land.................................................................................... 2,460 2,490
---------- ----------
100,858 95,658
Less accumulated depreciation........................................................... 46,059 38,236
---------- ----------
Net property and equipment........................................................ 54,799 57,422
Goodwill and other intangibles, net (note 1(b))........................................... 382,288 363,667
Noncurrent broadcast program rights....................................................... 1,429 1,859
Debt issuance costs, net.................................................................. 3,870 3,849
Other assets.............................................................................. 2,861 1,190
---------- ----------
$ 514,147 $ 492,849
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 4)......................................... $ 11,823 $ 2,076
Accounts payable........................................................................ 16,906 14,299
Accrued expenses (note 3)............................................................... 35,826 32,592
Broadcast program rights payable (note 10).............................................. 1,842 2,188
Deferred advertising revenues........................................................... 13,864 17,338
---------- ----------
Total current liabilities......................................................... 80,261 68,493
Long-term debt, excluding current portion (note 4)........................................ 339,702 312,913
Broadcast program rights payable, excluding current portion (note 10)..................... 918 1,460
Other long-term liabilities............................................................... 651 523
Deferred income taxes (note 9)............................................................ 3,369 3,304
Settlement rights (note 5)................................................................ -- 19,514
Stockholders' equity (notes 4, 5, 6 and 7):
Preferred stock, no par value, authorized 60,000,000 shares.
Issued and outstanding, 22,117 shares of Series B and 139,828 shares of Series C in
1993................................................................................. -- 16,195
Common stock, $.01 par value:
Class A -- 40,000,000 shares authorized. Issued, 17,548,716 shares in 1994 and
12,236,856 shares in 1993............................................................ 175 123
Class C -- 10,000,000 shares authorized. Issued and outstanding, 4,136,168 shares in
1993................................................................................. -- 41
Additional paid-in capital.............................................................. 219,092 202,743
Accumulated deficit..................................................................... (128,214) (130,862)
Accumulated foreign currency translation adjustments.................................... (1,353) (1,144)
Class A common stock in treasury, at cost (32,828 shares in 1994 and 1993).............. (454) (454)
---------- ----------
Total stockholders' equity........................................................ 89,246 86,642
Commitments and contingencies (notes 2, 8 and 10)
---------- ----------
$ 514,147 $ 492,849
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues:
In-store marketing..................................................... $ 230,111 $ 216,319 $ 186,445
Television............................................................. 46,732 41,517 39,703
Radio.................................................................. 40,785 33,369 24,743
----------- ----------- -----------
317,628 291,205 250,891
----------- ----------- -----------
Costs and expenses:
Cost of services:
In-store marketing................................................... 128,176 131,449 120,105
Television........................................................... 10,836 10,166 9,833
Radio................................................................ 11,958 9,477 7,681
Selling, general and administrative.................................... 76,600 71,760 59,030
Depreciation........................................................... 14,676 16,268 14,499
Amortization of goodwill and other assets.............................. 12,622 11,912 11,643
Other nonrecurring costs (notes 1(f) and 8)............................ 4,922 5,178 550
----------- ----------- -----------
259,790 256,210 223,341
----------- ----------- -----------
Operating income................................................... 57,838 34,995 27,550
----------- ----------- -----------
Other expense:
Interest, net (note 4)................................................. (30,373) (31,515) (37,473)
Other, net (note 2).................................................... (2,424) (459) (3,463)
----------- ----------- -----------
(32,797) (31,974) (40,936)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary items.......... 25,041 3,021 (13,386)
Income taxes (note 9).................................................... 2,742 2,944 1,580
----------- ----------- -----------
Income (loss) before extraordinary items........................... 22,299 77 (14,966)
Extraordinary items -- gain (loss) on early extinguishment of debt (note
4)...................................................................... -- 435 (3,594)
----------- ----------- -----------
Net income (loss).................................................. $ 22,299 $ 512 $ (18,560)
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) applicable to common stock (note 1(j))................. $ 2,648 $ (4,810) $ (25,465)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding............................... 17,380,901 16,314,023 14,449,215
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per common share (note 1(j)):
Before extraordinary items............................................. $.15 $(.32) $(1.51)
==== ===== ======
Net loss............................................................... $.15 $(.29) $(1.76)
==== ===== ======
</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, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED ------------------------------------- PAID-IN
STOCK CLASS A CLASS B CLASS C CAPITAL
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991..................................... $ 16,195 $ 66 $ 20 $ 28 $ 146,754
Issuance of shares to retirement savings plan.................. -- -- -- -- 227
Public offering of Class A common stock........................ -- 45 -- -- 41,847
Private placement of Class C common stock for subordinated note
payable....................................................... -- -- -- 13 13,010
Conversion of Class B common stock............................. -- 2 (4) -- 2
Exercise of employee stock options............................. -- -- -- -- 146
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..................................... $ 16,195 $ 113 $ 16 $ 41 $ 201,986
Issuance of shares to retirement savings plan.................. -- 1 -- -- 471
Conversion of Class B common stock............................. -- 8 (16) -- 8
Exercise of employee stock options............................. -- 1 -- -- 278
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..................................... $ 16,195 $ 123 $ -- $ 41 $ 202,743
Conversion of preferred stock.................................. (16,195) 4 -- 7 16,184
Conversion of Class C common stock, net of expenses............ -- 48 -- (48) (276)
Exercise of employee stock options............................. -- -- -- -- 441
Accretion of settlement rights................................. -- -- -- -- --
Preferred stock dividends...................................... -- -- -- -- --
Foreign currency translation adjustment........................ -- -- -- -- --
Net income..................................................... -- -- -- -- --
--------- ----- ----- ----- -----------
Balance, December 31, 1994..................................... $ -- $ 175 $ -- $ -- $ 219,092
--------- ----- ----- ----- -----------
--------- ----- ----- ----- -----------
<CAPTION>
ACCUMULATED
FOREIGN
CURRENCY TOTAL
ACCUMULATED TRANSLATION TREASURY STOCKHOLDERS'
DEFICIT ADJUSTMENTS STOCK EQUITY
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1991..................................... $ (100,587) $ -- $ (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) -- -- (382)
Accretion of settlements rights................................ (4,742) -- -- (4,742)
Preferred stock dividends...................................... (1,781) -- -- (1,781)
Foreign currency translation adjustment........................ -- (632) -- (632)
Net loss....................................................... (18,560) -- -- (18,560)
------------ ------------- ----------- ------------
Balance, December 31, 1992..................................... $ (126,052) $ (632) $ (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) -- -- (16)
Accretion of settlement rights................................. (3,525) -- -- (3,525)
Preferred stock dividends...................................... (1,781) -- -- (1,781)
Foreign currency translation adjustment........................ -- (512) -- (512)
Net income..................................................... 512 -- -- 512
------------ ------------- ----------- ------------
Balance, December 31, 1993..................................... $ (130,862) $ (1,144) (454) $ 86,642
Conversion of preferred stock.................................. -- -- -- --
Conversion of Class C common stock, net of expenses............ -- -- -- (276)
Exercise of employee stock options............................. -- -- -- 441
Accretion of settlement rights................................. (19,503) (19,503)
Preferred stock dividends...................................... (148) -- -- (148)
Foreign currency translation adjustment........................ -- (209) -- (209)
Net income..................................................... 22,299 -- -- 22,299
------------ ------------- ----------- ------------
Balance, December 31, 1994..................................... $ (128,214) $ (1,353) $ (454) $ 89,246
------------ ------------- ----------- ------------
------------ ------------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 22,299 $ 512 $ (18,560)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Noncash interest and amortization of debt issuance costs.............. 717 651 4,611
Stock appreciation rights............................................. 4,922 500 550
Depreciation.......................................................... 14,676 16,268 14,499
Amortization:
Broadcast program rights............................................ 2,300 2,188 2,118
Goodwill and other assets........................................... 12,622 11,912 11,643
Writedown of program rights........................................... -- 1,678 --
Write-off of foreign investment....................................... -- -- 3,260
Write-off of fixed assets............................................. 570 1,685 --
Loss on sale of assets................................................ 1,439 -- --
(Gain) loss on retirement of debt..................................... -- (435) 3,594
Other................................................................. (444) 117 (456)
Changes in certain assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................................. (1,123) (345) (11,463)
Other assets........................................................ (385) 597 (911)
Accounts payable and accrued expenses............................... (3,459) 2,273 2,206
Deferred revenue.................................................... (4,501) 3,329 5,978
----------- ---------- -----------
Net cash provided by operating activities......................... 49,633 40,930 17,069
----------- ---------- -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired...................................... (6,926) (5,106) (11,901)
Capital expenditures.................................................... (13,271) (18,534) (15,531)
Proceeds from sale of property and equipment............................ 3,999 152 107
Purchase of in-store marketing rights................................... (1,662) (834) --
----------- ---------- -----------
Net cash used in investing activities............................. (17,860) (24,322) (27,325)
----------- ---------- -----------
Cash flows from financing activities:
Long-term borrowings.................................................... 114,626 91,970 377,600
Retirements:
Long-term debt........................................................ (103,676) (96,795) (400,288)
Broadcast program rights payable...................................... (2,834) (3,229) (3,868)
Other long-term liabilities........................................... -- (1,006) (295)
Issuance of common stock................................................ 441 279 42,140
Retirement of settlement rights......................................... (39,017) (2,848) (1,300)
Dividends on preferred stock............................................ (445) (1,781) (1,781)
Collections on notes receivable......................................... -- -- 1,222
Payment of offering costs............................................... (276) -- --
Payment of debt issuance costs.......................................... (738) -- (4,800)
----------- ---------- -----------
Net cash (used) provided by financing activities.................. (31,919) (13,410) 8,630
----------- ---------- -----------
Net change during year.................................................... (146) 3,198 (1,626)
Cash and cash equivalents at beginning of year............................ 4,416 1,218 2,844
----------- ---------- -----------
Cash and cash equivalents at end of year.................................. $ 4,270 $ 4,416 $ 1,218
----------- ---------- -----------
----------- ---------- -----------
Cash paid for interest.................................................... $ 29,906 $ 31,141 $ 65,258
----------- ---------- -----------
----------- ---------- -----------
Cash paid for income taxes................................................ $ 4,575 $ 3,160 $ 662
----------- ---------- -----------
----------- ---------- -----------
</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"), 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, The
Netherlands, New Zealand and Australia. 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 intercompany 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 estimated useful lives of the assets 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, 1994 and 1993 are summarized
as follows (thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Goodwill, net of accumulated amortization of $53,625 and
$43,798...................................................................... $ 363,696 $ 354,733
License agreements, net of accumulated amortization of $678 and $191.......... 12,742 4,227
Other, net of accumulated amortization of $2,861 and $2,800................... 5,850 4,707
----------- -----------
$ 382,288 $ 363,667
----------- -----------
----------- -----------
</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 and interest 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 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. At December 31, 1994, cash equivalents
were comprised of overnight repurchase agreements that totaled $2,998,000.
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 are 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.
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 to determine if circumstances warrant adjustments to
the carrying values. As a result, the Company recorded writedowns of program
rights of $1,678,000 during the year ended December 31, 1993.
(G) DEBT ISSUANCE COSTS
Debt issuance costs are recorded at cost and are amortized using the
interest method over the period of the related debt agreement.
(H) REVENUES
Revenues from in-store marketing are derived primarily from providing
advertising, promotion and production services in retail stores and by selling
advertising time to national advertisers on an in-store music entertainment
network. Revenues from in-store marketing are recognized over the contract
period of the related advertising program as the services are performed 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.
(I) 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
F-8
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(J) EARNINGS (LOSS) PER SHARE
The earnings (loss) per common share is computed by dividing net income
(loss), adjusted for accretion and premium 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
or immaterial. Following is a reconciliation of net income (loss) to net income
(loss) applicable to common stock for the years ended December 31, 1994, 1993
and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net income (loss)................................................... $ 22,299 $ 512 $ (18,560)
Accretion and premium on retirement of settlement rights............ (19,503) (3,541) (5,124)
Dividends on preferred stock........................................ (148) (1,781) (1,781)
---------- --------- ----------
Net loss applicable to common stock............................. $ 2,648 $ (4,810) $ (25,465)
---------- --------- ----------
---------- --------- ----------
</TABLE>
(K) INCOME TAXES
Prior to 1993, deferred income taxes were 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 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 required the Company to change, effective January 1, 1993, from
the deferred method to the asset and liability method of accounting for deferred
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.
(L) 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 any of the years presented.
(2) ACQUISITIONS AND DISPOSITIONS
(A) IN-STORE MARKETING
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
F-9
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
and advances totaled $994,000 during 1992. During 1992, the Company recorded
$2,162,000 of writedowns 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 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 due in fluctuating
quarterly installments with the balance due January 31, 1999.
During 1993, the Company reached a settlement with the Internal Revenue
Service ("IRS") in regards to certain preacquisition tax liabilities of
Actmedia, Inc. ("Actmedia"), an in-store marketing subsidiary of the Company.
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 reduced goodwill for the remaining
reserves.
On February 1, 1994, the Company acquired for $2,000,000 the assets of two
in-store marketing companies operating in New Zealand and Australia.
On October 26, 1994, the Company acquired the stock of Strategium Media,
Inc., a Canadian in-store marketing company, for $17,811,000. The acquisition
was financed with proceeds of a bank credit agreement with two Canadian banks
(note 4).
(B) TELEVISION AND RADIO
During the years ended December 31, 1994, 1993 and 1992, the Company
acquired the following radio stations (thousands of dollars):
<TABLE>
<CAPTION>
STATION/MARKET DATE COST
- ------------------------------------------------------------- --------------------- ---------
<S> <C> <C>
KCFX/Kansas City, KS......................................... June 1, 1992 $ 3,884
WOFX/Cincinnati, OH.......................................... June 1, 1992 4,011
WKLX/Rochester, NY........................................... July 22, 1993 4,918
WEZW/Milwaukee, WI........................................... January 6, 1994 6,021
KIHT/St. Louis, MO........................................... March 15, 1994 7,754
</TABLE>
On October 11, 1994, the Company sold television station KDLT in Sioux
Falls, South Dakota, for $3,999,000, and recognized a loss on the sale of
$1,439,000.
F-10
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The acquisitions discussed above were recognized in the consolidated
financial statements as follows (thousands of dollars):
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ---------
<S> <C> <C> <C>
Working capital deficit.............................................. $ (2,765) $ (732) $ (375)
Goodwill and other intangibles....................................... 33,319 4,972 9,311
Other noncurrent assets.............................................. 1,574 866 7,280
Long-term debt....................................................... (25,025) -- (4,150)
Other long-term liabilities.......................................... (177) -- (165)
---------- --------- ---------
Total cash paid, net of cash acquired.............................. $ 6,926 $ 5,106 $ 11,901
---------- --------- ---------
---------- --------- ---------
</TABLE>
(C) PRO FORMA INFORMATION (UNAUDITED)
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 and television stations acquired and sold
during 1994 and 1993 and (ii) the in-store marketing companies acquired during
1994 and (b) the 1994 and 1993 settlement rights retirements discussed in note 5
and the conversion of preferred stock discussed in note 6 had occurred on
January 1, 1993 (thousands of dollars, except per share information):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Net revenues.................................................................. $ 325,845 $ 302,223
----------- -----------
----------- -----------
Income (loss) before extraordinary items...................................... $ 20,248 $ (888)
----------- -----------
----------- -----------
Income (loss) per common share before extraordinary items..................... $ 1.16 $ (.05)
----------- -----------
----------- -----------
</TABLE>
The pro forma amounts assume that the financing requirements of the
acquisitions were met by actual debt issuances, assuming that all such
financings were completed on January 1, 1993. 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.
(D) SUBSEQUENT EVENTS
In January 1995, the Company acquired Powerforce Services, an in-store
merchandise services company, for $6,300,000 and contingent payments of up to
$1,000,000 if certain operating results are achieved.
In February 1995, the Company agreed to purchase KXYQ-AM/FM in Portland,
Oregon and KKCJ-FM in Kansas City, Missouri in two separate transactions for
cash and other consideration aggregating $14,000,000. Completion of these
acquisitions is subject to approval of the Federal Communications Commission.
F-11
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACCRUED EXPENSES
Accrued expenses at December 31, 1994 and 1993 are summarized as follows
(thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Payroll and employee benefits.............................................. $ 12,636 $ 4,431
Store commissions.......................................................... 9,109 9,630
Interest................................................................... 2,871 2,957
License fees............................................................... 677 646
Other...................................................................... 10,533 14,928
--------- ---------
$ 35,826 $ 32,592
--------- ---------
--------- ---------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993 is summarized as follows
(thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Senior Notes (a).............................................................. $ 150,000 $ 150,000
Credit agreement (b).......................................................... 121,000 110,500
Senior subordinated notes (c)................................................. 50,000 50,000
Canadian credit agreement (d)................................................. 19,165 --
Other (e)..................................................................... 11,360 4,489
----------- -----------
351,525 314,989
----------- -----------
Less current installments..................................................... 11,823 2,076
----------- -----------
$ 339,702 $ 312,913
----------- -----------
----------- -----------
</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 stock of HMSI and its domestic subsidiaries.
(b) In conjunction with the issuance of the Senior Notes, HMSI entered into a
credit agreement ("the 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 commenced on
December 31, 1994 and continue until June 1999. At December 31, 1994,
$32,500,000 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, 1994, the
weighted average interest rate was 6.31% under the Eurodollar option. The
loans under the Credit Agreement are secured by the stock of substantially
all subsidiaries of the Company. 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 in 1992.
(c) On October 1, 1992, the Company retired certain outstanding indebtedness
through the issuance of $50 million of 11% Senior Subordinated Notes ("the
Notes") due October 1, 2002. The Notes
F-12
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
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 a net extraordinary gain of $834,000 on
this refinancing.
(d) In connection with the acquisition of Strategium Media, Inc., the Company's
Canadian subsidiary entered into a credit agreement with two Canadian banks
providing for a Cdn $27 million (US $19 million) term loan and a Cdn $2
million (US $1.4 million) revolving credit facility. At December 31, 1994,
approximately Cdn $1,740,000 (US $1,235,000) of additional borrowings were
available under this credit agreement. Repayments under the term loan are
made quarterly, commencing September 30, 1995, and continue through December
1999. Borrowings under the revolving credit facility must be repaid on
October 25, 1995. Borrowings under this credit agreement bear interest at
the lender's prime rate plus the applicable margin. At December 31, 1994,
the interest rate was 9.5%. Borrowings under this credit agreement are
guaranteed by HMC and secured by the assets of Strategium Media, Inc.
(e) Other debt bears interest at varying rates ranging from 6% to 11% at
December 31, 1994 and consists primarily of notes payable, capital lease
obligations and industrial development revenue bonds due in varying amounts
through 2004. During 1992 and 1993, the Company extinguished certain
outstanding indebtedness with face amounts of $37,183,000 and $3,235,000,
respectively, prior to scheduled maturity, resulting in an extraordinary
loss of $2,186,000 in 1992 and an extraordinary gain of $435,000 in 1993.
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 and
Senior Note Indenture to declare and pay dividends to the Company. Under the
Credit Agreement, which is the most restrictive of the loan agreements at
December 31, 1994, the total amount of dividends that could be paid by HMSI to
the Company was $13,694,000. Such dividends are not permitted if, as a result of
such payments, a default would occur under the Credit Agreement. As a result of
the foregoing restrictions, consolidated net assets of HMSI totaling
approximately $127,192,000 at December 31, 1994 are not available to the Company
to pay dividends or repay debt.
Aggregate annual maturities of long-term debt for each of the years in the
five year period ending December 31, 1999 are $11,823,000; $19,350,000;
$30,464,000; $42,566,000; and $43,433,000, respectively.
F-13
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SETTLEMENT RIGHTS
In connection with the Actmedia acquisition in 1989, the Company issued
approximately 7,553,000 settlement rights. 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 at specified future dates. 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 estimated
the value of the settlement rights and, to the extent that such estimate of
value exceeded the carrying value, such excess was accreted by the interest
method to accumulated deficit over the appropriate accounting period.
During the year ended December 31, 1992 and 1993, the Company purchased
certain settlement rights for cash of $1,300,000 and $2,848,000, respectively.
During the year ended December 31, 1994, all remaining outstanding settlement
rights were retired by the Company for cash of $39,017,000, which resulted in
the recognition of settlement rights accretion of $19,503,000, or $1.12 per
share.
(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 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 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.
Proceeds were used to reduce certain indebtedness.
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. Each share of preferred stock accrued cumulative
dividends at an annual rate of $11 per share, payable quarterly, and unpaid
dividends accrued an amount equal to 11% per annum. 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.
In August 1994, the Company adopted a rights plan which provided for the
distribution of one right for each outstanding share of the Company's Class A or
Class C common stock. The rights, which were distributed on August 29, 1994,
entitle the holder to buy one one-hundredth of a share of Series A Junior
Participating Preferred Stock ("Series A preferred stock") for $70 per share.
Each share of Series A preferred stock entitles the holder to, among other
things, 100 votes on all matters submitted to a vote of the Company's
shareholders. The rights are exercisable only if a person or group, other
F-14
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY (CONTINUED)
than the Company and certain related entities, acquires 15% or more of the
Company's common stock or announces a tender offer, the consummation of which
would result in ownership by such person or group of 15% or more of the
Company's common stock.
During 1994, the holders of all outstanding shares of Class C common stock
converted such shares into an equal number of shares of Class A common stock.
(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.
Following is a summary of activity in the option plan and agreements
discussed above for the years ended December 31, 1992, 1993 and 1994:
<TABLE>
<CAPTION>
SHARES UNDER OPTION PRICE
OPTION PER SHARE
------------- ---------------
<S> <C> <C>
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
Granted.............................................................. 315,500 19.75-24.25
Exercised............................................................ (52,521) 4.00-20.50
Cancelled............................................................ (92,500) 4.00-24.25
-------------
Balance at December 31, 1994......................................... 987,413 6.25-24.25
-------------
-------------
</TABLE>
At December 31, 1994, 467,063 options outstanding under the option plan and
agreements discussed above were exercisable and 359,103 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
F-15
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
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, 1994, 1993 and
1992, Company expenses under the Plan were approximately $854,000, $809,000 and
$501,000, 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 tape-based system were
no longer 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 continued into 1994. As of
December 31, 1994, the Company had paid all costs accrued in 1993 together with
$450,000 of additional costs which were charged to expense in 1994.
The Company has a Stock Appreciation Rights Plan ("the SAR Plan") under the
terms of which certain Actmedia employees could be granted a total of 250,000
stock appreciation units. Upon termination of the Plan in January 1995, unit
holders received payments aggregating $6,522,000 which consisted of cash of
$3,800,000 and 105,900 shares of the Company's Class A common stock with a total
fair value of $2,722,000. The shares issued upon termination of the SAR Plan
cannot be sold by the unit holders until January 1996. For the years ended
December 31, 1994, 1993 and 1992, compensation expense accrued under the SAR
Plan was $4,922,000, $500,000 and $550,000, respectively.
(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, 1994, 1993 and
1992 of $2,742,000, $2,944,000 and $1,580,000, respectively, was allocated
entirely to operations and consisted primarily of current state income taxes.
F-16
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
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
--------------------------------
1994 1993 1992
---------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............................ $ 8,764 $ 1,057 $ (4,551)
Increase (reduction) in income taxes resulting from:
Addition to (use of) net operating loss carryforwards.............. (10,645) (2,627) 1,988
Amortization of goodwill........................................... 3,966 3,131 3,959
Other, net -- primarily state income taxes......................... 657 1,383 184
---------- --------- ---------
Net income tax expense........................................... $ 2,742 $ 2,944 $ 1,580
---------- --------- ---------
---------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1994 and
1993 are presented below (thousands of dollars):
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................................. $ 26,848 $ 19,700
Capital loss carryforwards................................................... 2,417 2,521
Other........................................................................ 3,226 3,677
---------- ----------
Total gross deferred tax assets............................................ 32,491 25,898
Less valuation allowance..................................................... (26,105) (17,936)
---------- ----------
Net deferred tax assets.................................................... 6,386 7,962
---------- ----------
Deferred tax liabilities:
Property and equipment, primarily due to differences in depreciation......... 6,067 7,397
Other........................................................................ 319 565
---------- ----------
Total deferred tax liabilities............................................. 6,386 7,962
---------- ----------
Net deferred tax liability................................................. $ -- $ --
---------- ----------
---------- ----------
</TABLE>
During 1994 and 1993, the valuation allowance related to the Company's
deferred tax assets was increased by $8,169,000 and decreased by $8,972,000,
respectively.
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, 1994 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, 1994, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $63,863,000 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. To the extent that such net operating
loss carryforwards are used,
F-17
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBISIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS (Continued)
(9) INCOME TAXES (CONTINUED)
$12,845,000 will be credited to goodwill, $36,893,000 will be credited to
stockholders' equity and the remainder will be credited to income tax expense.
The Company also has capital loss carryforwards of approximately $6,900,000
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 2010. 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, 1995 through 1999 were $10,084,000, $7,189,000, $4,722,000,
$2,796,000 and $2,740,000, respectively.
Lease, rental and contractual expense for the years ended December 31, 1994,
1993 and 1992 amounted to approximately $8,139,000, $7,907,000 and $5,423,000,
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 $1,653,000 relate to programs which are not currently available
for use and, therefore, are not reflected as assets or liabilities in the
accompanying consolidated balance sheet at December 31, 1994. The aggregate
minimum payments under contracts for programs currently available (those
included on the consolidated balance sheet at December 31, 1994) and programs
not currently available (those not included on the consolidated balance sheet at
December 31, 1994) are approximately $2,054,000, $1,151,000, $601,000, $398,000
and $209,000 for the years ending December 31, 1995 through 1999, respectively.
The Company entered into contracts for broadcast program rights of
approximately $2,129,000, $2,084,000 and $2,181,000 during the years ended
December 31, 1994, 1993 and 1992, respectively.
(C) 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.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table (thousands of dollars) presents the carrying amounts and
estimated fair values of the Company's financial instruments for which the
estimated fair value of the instrument differs significantly from its carrying
amounts at December 31, 1994 and 1993. FASB Statement No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties.
<TABLE>
<CAPTION>
1994 1993
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Long-term debt -- Senior Notes.................. $ (150,000) $ (152,250) $ (150,000) $ (164,250)
Long-term debt -- Senior Subordinated Notes..... (50,000) (49,000) (50,000) (54,500)
</TABLE>
F-18
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBISIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and cash equivalents, accounts receivable and accounts payable: The
carrying amount of these assets and liabilities approximates fair value
because of the short maturity of these instruments.
Long-term debt: The fair values of the Company's Senior Notes and Senior
Subordinated Notes are based on market quotes obtained from dealers. As
amounts outstanding under the Company's credit agreements bear interest
at current market rates, their carrying amounts approximate fair market
value.
(12) SEGMENT INFORMATION
Information relating to the Company's business segments as of and for the
years ended December 31, 1994, 1993 and 1992 is as follows (thousands of
dollars):
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- -----------
<S> <C> <C> <C>
Net revenues:
In-store marketing....................................... $ 230,111 $ 216,319 $ 186,445
Television............................................... 46,732 41,517 39,703
Radio.................................................... 40,785 33,369 24,743
-------------- -------------- -----------
Total.................................................. $ 317,628 $ 291,205 $ 250,891
-------------- -------------- -----------
-------------- -------------- -----------
Operating income (loss):
In-store marketing....................................... $ 37,163(a) $ 21,870(a) $ 15,877
Television............................................... 15,737 10,707(b) 11,357
Radio.................................................... 8,681 5,981 3,260
Corporate................................................ (3,743) (3,563) (2,944)
-------------- -------------- -----------
Total.................................................. $ 57,838 $ 34,995 $ 27,550
-------------- -------------- -----------
-------------- -------------- -----------
Selling, general and administrative expenses:
In-store marketing....................................... $ 44,422 $ 42,650 $ 34,815
Television............................................... 12,296 11,183 10,233
Radio.................................................... 16,226 14,473 11,160
Corporate................................................ 3,656 3,454 2,822
-------------- -------------- -----------
Total.................................................. $ 76,600 $ 71,760 $ 59,030
-------------- -------------- -----------
-------------- -------------- -----------
Depreciation, amortization and writedown of program rights:
In-store marketing....................................... $ 15,428 $ 16,850 $ 15,098
Television............................................... 7,863 9,460(b) 8,280
Radio.................................................... 3,920 3,438 2,642
Corporate................................................ 87 110 122
-------------- -------------- -----------
Total.................................................. $ 27,298 $ 29,858 $ 26,142
-------------- -------------- -----------
-------------- -------------- -----------
</TABLE>
F-19
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBISIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- -----------
<S> <C> <C> <C>
Identifiable assets:
In-store marketing....................................... $ 289,559 $ 269,437 $ 274,908
Television............................................... 151,127 162,183 167,158
Radio.................................................... 64,439 51,336 47,289
Corporate................................................ 7,619 9,893 6,941
-------------- -------------- -----------
Total.................................................. $ 512,744 $ 492,849 $ 496,296
-------------- -------------- -----------
-------------- -------------- -----------
Capital expenditures:
In-store marketing....................................... $ 10,153 $ 13,612 $ 18,186
Television............................................... 2,332 4,271 1,987
Radio.................................................... 2,809 1,845 1,884
Corporate................................................ 97 76 41
-------------- -------------- -----------
Total (c).............................................. $ 15,391 $ 19,804 $ 22,098
-------------- -------------- -----------
-------------- -------------- -----------
</TABLE>
(a) Includes nonrecurring expenses of $4,922,000 in 1994 relating to stock
appreciation rights and $3,000,000 in 1993 relating to the shut-down of
certain in-store marketing facilities.
(b) Includes writedowns of program rights of $1,678,000.
(c) Includes amounts relating to fixed assets obtained in acquisitions, fixed
asset additions from barter agreements, and translation adjustments of
$2,120,000, $1,270,000 and $6,567,000 in 1994, 1993 and 1992, 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, one customer accounted
for 11% of the Company's net revenues.
During 1994, the in-store marketing segment reversed certain commission
accruals of $1,700,000 which were made in prior years.
F-20
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBISIDIARIES
NOTES TO CONSOIDATED 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>
1994:
Net revenues...................................... $ 65,313 $ 70,025 $ 75,488 $ 106,802 $ 317,628
Gross profit...................................... 31,043 38,525 41,191 55,899 166,658
Operating income.................................. 7,307 13,222 14,803 22,506 57,838
Income (loss) before extraordinary items.......... (604) 2,759 6,313 13,831 22,299
Net income (loss)................................. (604) 2,759 6,313 13,831 22,299
Income (loss) per share before extraordinary
items............................................ (.20) (.80) .36 .79 .15
Net income (loss) per share....................... (.20) (.80) .36 .79 .15
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 13,596 34,995
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)
</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; 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 in 1993 relate to early extinguishment 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 (note 8).
F-21
<PAGE>
SCHEDULE III
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Current assets........................................................................ $ 875 $ --
Property and equipment, net of depreciation........................................... 1,181 --
Goodwill and other intangibles, net of amortization................................... 6,712 2,496
Investment in and advances to subsidiaries, at equity................................. 141,064 159,074
Other assets, net..................................................................... -- 30
------------ ------------
$ 149,832 $ 161,600
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities................................................................... $ 2,325 $ 1,848
Long-term debt, excluding current portion............................................. 58,261 53,596
------------ ------------
Total liabilities............................................................... 60,586 55,444
------------ ------------
Settlement rights..................................................................... -- 19,514
Stockholders' equity:
Preferred stock..................................................................... -- 16,195
Common stock:
Class A........................................................................... 175 123
Class C........................................................................... -- 41
Additional paid-in capital.......................................................... 219,092 202,743
Accumulated deficit................................................................. (128,214) (130,862)
Accumulated foreign currency translation adjustments................................ (1,353) (1,144)
Treasury stock at cost.............................................................. (454) (454)
------------ ------------
Total stockholders' equity...................................................... 89,246 86,642
------------ ------------
$ 149,832 $ 161,600
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed financial information.
F-22
<PAGE>
SCHEDULE III (CONTINUED)
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ 22,299 $ 512 $ (18,560)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Equity in losses (undistributed earnings) of subsidiaries................ (28,999) (6,695) 6,532
Noncash interest......................................................... -- -- 3,990
Depreciation and amortization............................................ 421 1,514 1,455
Other.................................................................... -- (95) 2,451
Change in assets and liabilities, net of acquisitions.................... (1,044) 175 245
---------- --------- ----------
Net cash used by operating activities.................................. (7,323) (4,589) (3,887)
---------- --------- ----------
Cash flows from investing activities:
Investment in and advances to subsidiaries................................. 1,831 (2,201) (19,937)
Acquisitions, net of cash acquired......................................... (2,457) -- (4,075)
Dividends from subsidiaries................................................ 47,922 11,581 19,104
Capital expenditures....................................................... (563) -- --
Proceeds from sale of property............................................. -- 13 101
---------- --------- ----------
Net cash provided (used) by investing activities....................... 46,733 9,393 (4,807)
---------- --------- ----------
Cash flows from financing activities:
Retirements of long-term debt and broadcast program rights payable......... (245) (175) (31,742)
Issuance of common stock................................................... -- -- 42,140
Collections on notes receivable............................................ -- -- 1,140
Dividends on preferred stock............................................... (148) (1,781) (1,781)
Payment of settlement rights............................................... (39,017) -- --
Purchase of settlement rights.............................................. -- (2,848) (1,300)
---------- --------- ----------
Net cash provided (used) by financing activities....................... (39,410) (4,804) 8,457
---------- --------- ----------
Net change during year....................................................... -- -- (237)
Cash and cash equivalents at beginning of year............................... -- -- 237
---------- --------- ----------
Cash and cash equivalents at end of year..................................... $ -- $ -- $ --
---------- --------- ----------
---------- --------- ----------
Cash paid for interest....................................................... $ 5,725 $ 5,669 $ 32,292
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying notes to condensed financial information.
F-23
<PAGE>
SCHEDULE III (CONTINUED)
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ----------
<S> <C> <C> <C>
Net revenues.................................................................. $ 1,761 $ 1,673 $ 1,559
--------- --------- ----------
Expenses:
Cost of services............................................................ 681 -- --
Selling, general and administrative......................................... 726 -- --
Depreciation and amortization............................................... 421 1,514 1,455
--------- --------- ----------
1,828 1,514 1,455
--------- --------- ----------
Operating income (loss)................................................... (67) 159 104
--------- --------- ----------
Other expense:
Interest.................................................................... (6,070) (5,731) (7,995)
Other, net.................................................................. (563) (611) (4,971)
--------- --------- ----------
(6,633) (6,342) (12,966)
--------- --------- ----------
Loss before equity in income (losses) of subsidiaries and extraordinary
items.................................................................... (6,700) (6,183) (12,862)
Equity in income (losses) of subsidiaries before extraordinary items.......... 28,999 6,260 (2,104)
--------- --------- ----------
Income (loss) before extraordinary items.................................. 22,299 77 (14,966)
Extraordinary items:
Gain on early extinguishment of debt........................................ -- -- 834
Equity in extraordinary items of subsidiary -- gain (loss) on early
extinguishment of debt..................................................... -- 435 (4,428)
--------- --------- ----------
Net income (loss)......................................................... $ 22,299 $ 512 $ (18,560)
--------- --------- ----------
--------- --------- ----------
</TABLE>
See accompanying notes to condensed financial information.
F-24
<PAGE>
SCHEDULE III (CONTINUED)
HERITAGE MEDIA CORPORATION
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1994, 1993 AND 1992
(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, 1994.
Heritage Media Corporation is primarily a holding company.
(2) ACQUISITION
On March 15, 1994, the Company acquired KIHT-FM in St. Louis, Missouri for
cash and other consideration aggregating $7,750,000. This acquisition was
recognized in the condensed financial statements as follows (thousands of
dollars):
<TABLE>
<S> <C>
Working capital deficit............................................ $ (177)
Property and equipment............................................. 715
Goodwill and other intangibles..................................... 7,035
Long-term debt..................................................... (5,116)
---------
Total cash paid................................................ $ 2,457
---------
---------
</TABLE>
(3) OTHER
See note 6 to consolidated financial statements for a description of the
common stock of the Company.
F-25
<PAGE>
SCHEDULE VIII
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS ADDITIONS
AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITEOFFS PERIOD
- -------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994............................ $ 2,778 $ 2,186 $ -- $ 1,885 $ 3,079
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
F-26
<PAGE>
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
17, 1995 relating to the consolidated balance sheets of Heritage Media
Corporation and subsidiaries as of December 31, 1994 and 1993 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, 1994, which report appears in the December 31, 1994 Annual Report on Form
10-K of Heritage Media Corporation.
KPMG PEAT MARWICK LLP
Dallas, Texas
March 15, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 4,270
<SECURITIES> 0
<RECEIVABLES> 54,175
<ALLOWANCES> 3,079
<INVENTORY> 5,711
<CURRENT-ASSETS> 68,900
<PP&E> 100,858
<DEPRECIATION> 46,059
<TOTAL-ASSETS> 514,147
<CURRENT-LIABILITIES> 80,261
<BONDS> 339,702
<COMMON> 175
0
0
<OTHER-SE> 89,071
<TOTAL-LIABILITY-AND-EQUITY> 514,147
<SALES> 0
<TOTAL-REVENUES> 317,628
<CGS> 0
<TOTAL-COSTS> 150,970
<OTHER-EXPENSES> 106,634
<LOSS-PROVISION> 2,186
<INTEREST-EXPENSE> 30,373
<INCOME-PRETAX> 25,041
<INCOME-TAX> 2,742
<INCOME-CONTINUING> 22,299
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,299
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0
</TABLE>
