SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT FOR THE QUARTER ENDED JUNE 30, 1996.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 FOR THE TRANSACTION PERIOD FROM __________ TO _________.
Commission file number: 1-100155
________________________
HERITAGE MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 42-1299303
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
13355 Noel Road, Suite 1500
Dallas, Texas 75240
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code:
(214) 702-7380
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 2, 1996
Class A, $.01 Par Value 35,556,140
reflecting the August 12, 1996 stock split
PART I. SUMMARIZED FINANCIAL INFORMATION
Item 1. Financial Statements
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION> June 30, December 31,
1996 1995
ASSETS ____________ _____________
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 625 2,383
Trade receivables, net 107,231 77,068
Prepaid expenses and other 7,605 6,605
Inventory 11,538 5,008
Deferred income taxes 5,919 5,151
_________ _______
Total current assets 132,918 96,215
Assets held for sale (note 4) 8,695 -
Property and equipment, net 97,269 56,155
Goodwill and other intangibles, net 637,643 383,848
Other assets 12,844 14,793
_________ _______
$889,369 551,011
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ - 5,000
Current installments of long-term debt 14,618 5,026
Accounts payable and accrued expenses 83,482 52,069
Deferred advertising revenues 18,792 25,219
Other current liabilities 1,273 1,911
_________ _______
Total current liabilities 118,165 89,225
Long-term debt, excluding current portion 607,507 334,839
Other long-term liabilities 22,857 2,531
Deferred income taxes 13,300 4,016
Stockholders' equity (note 5):
Common stock, $.01 par value:
Class A - 100,000,000 shares authorized.
Issued, 35,620,796 shares in 1996 and
35,486,718 shares in 1995 356 355
Additional paid-in capital 224,636 223,230
Accumulated deficit (96,194) (101,643)
Accumulated foreign currency translation (804) (1,088)
Common stock in treasury, at cost (454) (454)
(65,656 shares in 1996 and 1995) _________ _______
Total stockholders' equity 127,540 120,400
Commitments and contingencies (note 4) _________ _______
$ 889,369 551,011
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
ended June 30, ended June 30,
_________________ _________________
<S> 1996 1995 1996 1995
Net revenues: ------ -------- ------- --------
<C> <C> <C> <C>
Marketing Services $119,348 84,201 218,656 148,525
Broadcasting 25,494 22,893 45,217 41,832
Net revenues: -------- -------- ------- --------
144,842 107,094 263,873 190,357
-------- -------- ------- --------
Costs and expenses:
Cost of services:
Marketing Services 71,269 56,086 134,961 97,498
Broadcasting 5,851 5,157 10,437 9,540
Selling, general and
administrative 32,126 21,463 58,193 41,047
Depreciation 5,340 3,606 9,746 7,291
Amortization of goodwill
and other assets 6,191 3,485 11,130 6,822
------ -------- ------- --------
120,777 89,797 224,467 162,198
------ -------- ------- --------
Operating income 24,065 17,297 39,406 28,159
------ -------- ------- --------
Other expense:
Interest, net (13,915) (8,842) (25,290) (17,476)
Other, net (141) (406) 4,499 (590)
------ -------- ------- --------
(14,056) (9,248) (20,791) (18,066)
Income before income taxes
and extraordinary item 10,009 8,049 18,615 10,093
Income taxes (5,461) (2,314) (10,775) (2,866)
------ -------- ------- --------
Income before extraordinary
item 4,548 5,735 7,840 7,227
Extraordinary item-loss on
extinguishment (842) - (2,391) -
------ -------- ------- --------
Net income $ 3,706 5,735 5,449 7,227
======== ======== ======== =========
Average number of common and
common equivalent shares
outstanding (note 5 ) 36,604 35,356 36,456 35,302
Income/(loss) per common
and common equivalent share:
Before extraordinary item $ 0.12 0.16 0.22 0.20
Extraordinary item (0.02) - (0.07) -
------ -------- ------- --------
Net income $ $0.10 $0.16 $0.15 $0.20
======= ========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION> 1996 1995
_______ _______
<S>
Cash flows from operating activities: <C> <C>
Net income $ 5,449 7,227
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 9,746 7,291
Amortization:
Broadcast program rights 995 1,030
Goodwill and other assets 11,130 6,822
Debt issuance costs 586 373
Write-off of fixed assets 1,111 318
Gain on sale of assets (6,031) -
Loss on early extinguishment of debt 2,391 -
Other 399 (223)
Changes in certain assets and liabilities
net of effects of acquisitions:
Trade receivables 2,800 (4,484)
Other assets 3,028 (2,651)
Accounts payable and accrued
expenses (16,172) (5,344)
Deferred advertising revenue (6,427) 4,133
_________ ________
Net cash provided by
operating activities 9,005 14,492
_________ ________
Cash flows from investing activities:
Acquisitions, net of cash acquired
(note 4) (218,175) (16,114)
Capital expenditures (12,418) (7,248)
Proceeds from sale of assets (note 4) 13,759 -
Purchase of in-store marketing rights (85) (422)
_________ ________
Net cash used by investing activities (216,919) (23,784)
_________ ________
Cash flows from financing activities:
Long-term borrowings 402,910 75,035
Retirements:
Long-term debt (190,615) (62,682)
Other long-term liabilities (1,113) (1,194)
Issuance of common stock 917 483
Retirement of stock appreciation rights - (3,800)
Payment of debt issuance costs (5,943) (227)
_________ ________
Net cash provided by financing
activities 206,156 7,615
_________ ________
Net change during period (1,758) (1,677)
Cash and cash equivalents at beginning of 2,383 4,270
year _________ ________
Cash and cash equivalents at end of period $ 625 2,593
========= ========
Cash paid for interest $17,370 16,610
========= ========
Cash paid for income taxes $ 5,752 1,657
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
Note 1. Results of Operations.
The results of operations for the 1996 interim period reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments (none of which were other than normal
recurring items) which are, in the opinion of management, necessary to
present a fair statement of the results for the interim periods. It is
suggested that this interim period financial information be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
Note 2. Organization.
Heritage Media Corporation ("HMC" or "the Company"), operates in two
segments - Marketing Services and Broadcasting. The Company's Marketing
Services operations are conducted in the United States, Canada, New Zealand
and Australia. Broadcasting operations are conducted in the United States.
Note 3. Long-term Debt.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION> (Dollars in thousands)
June 30, December 31,
1996 1995
____________ ______________
<S> <C> <C>
8.75 % Senior Subordinated Notes $ 175,000 --
11 % Senior Notes 129,620 150,000
HMSI credit agreements 171,800 113,400
DIMAC credit agreement 95,600 --
11 % Senior Subordinated Notes 27,600 50,000
Canadian credit agreement 15,177 15,674
Other 7,328 10,791
____________ ______________
622,125 339,865
Less current installments 14,618 5,026
____________ ______________
$ 607,507 334,839
============ ===============
</TABLE>
Long-term debt increased by $282.3 million during the six month period
ended June 30, 1996. The increase was primarily due to credit agreement
borrowings and the issuance of 8.75% Senior Subordinated Notes related
to the DIMAC Marketing Corporation ("DIMAC") merger completed during the
first quarter of 1996. Credit agreement borrowings were also utilized
for the extinguishment of a portion of the 11% Senior and Senior Subordinated
Notes and for the completion of the WMYU-FM and WWST-FM acquisitions in
Knoxville, Tennessee and the acquisition of Wilcox & Associates, Inc. and
MBS/Multimode by the Company's direct marketing subsidiary, DIMAC
(see Note 4 for a further discussion of the acquisitions).
The Company issued $175 million of 8.75% Senior Subordinated Notes due
February 15, 2006 to assist in the funding of the Company's merger with DIMAC.
The 8.75% Notes are redeemable, in whole or in part, at the option of the
Company at any time on or after February 15, 2001, at amounts decreasing from
104.375% to 100% of par on February 15, 2004. The 8.75% Notes are subordinated
to all existing and future Senior indebtedness and are unsecured.
The Company, through DIMAC, entered into a $175 million bank credit facility
(the "DIMAC Credit Agreement") with a group of banks primarily to refinance
the long-term obligations the Company acquired through the DIMAC merger and
finance the balance of the transaction. The DIMAC Credit Agreement provides
for a $50 million term loan and a reducing revolving credit facility of up
to $125 million. The revolving credit commitment will reduce quarterly
beginning March 31, 1998 and the term loan's quarterly payments commence
on September 30, 1997 and continue until June 30, 2003. DIMAC pays a
commitment fee on the unadvanced portion of the credit agreement at a rate
ranging from .25% to .375% determined by DIMAC's leverage ratio. Loans
under the DIMAC Credit Agreement bear interest at rates based on the agent
bank's base rate or a Eurodollar rate plus a margin depending on DIMAC's
total leverage ratio (as defined). The loans under the DIMAC Credit Agreement
are secured by the stock of DIMAC and all of its subsidiaries.
During the second quarter of 1996, Heritage Media Services, Inc. ("HMSI"),
a wholly-owned subsidiary, repurchased the Company's outstanding 11% Senior
Subordinated Notes with a face amount of $12.4 million prior to scheduled
maturity resulting in an extraordinary loss of $.6 million, net of taxes.
Combined with the 11% Senior Subordinated Notes repurchased in the first
quarter of 1996, HMSI has repurchased a cumulative face amount totaling
$22.4 million prior to scheduled maturity and recognized a year-to-date
extraordinary loss of $1.2 million, net of taxes.
Also during the second quarter of 1996, HMSI repurchased outstanding
HMSI 11% Senior Notes with a face amount of $3.8 million prior to scheduled
maturity resulting in an extraordinary loss of $.2 million, net of taxes,
which includes the write-off of $.1 million of debt issuance costs. On a
cumulative basis in 1996, HMSI has repurchased HMSI 11% Senior Notes with
a face amount totaling $20.4 million prior to scheduled maturity and
recognized a year-to-date extraordinary loss of $1.2 million, net of taxes,
which includes the write-off of $.3 million of debt issuance costs.
On May 31, 1996 the Company, through HMSI, entered into a $50 million bank
credit facility ("1996 HMSI Credit Agreement") for the sole purpose of
refinancing a portion of its 11% Senior Notes. The 1996 HMSI Credit Agreement
provides for a $50 million revolving credit facility due December 31, 1997.
HMSI pays a commitment fee on the unadvanced portion of the credit agreement
at a rate ranging from .25% to .375% determined by HMSI's leverage ratio.
Loans under the credit agreement bear interest at rates based on the agent
bank's base rate or a Eurodollar rate plus a margin depending on HMSI's total
leverage ratio (as defined). The loans under the 1996 HMSI Credit Agreement
are guaranteed by the Company and HMSI's domestic subsidiaries and are
secured by the stock of HMSI and its domestic subsidiaries.
Notes to Consolidated Financial Statements, (continued)
An additional $10 million of the HMSI credit agreement term facility was
reclassified to current installments at June 30, 1996 per the credit
agreement based on scheduled maturities.
Note 4. Acquisitions.
In February 1996, the Company completed its merger with DIMAC Marketing
Corporation, the largest full service, vertically integrated direct marketing
services company in the United States. The Company acquired DIMAC for cash in
a transaction valued at approximately $260 million. Under the terms of the
merger agreement, each of the approximately 6.5 million shares of DIMAC common
stock were exchanged for merger consideration of $28. The merger was accounted
for by the Company as a purchase. The Company included the financial results
of DIMAC beginning February 1, 1996. Revenues of $76.5 million and operating
income of $7.8 million were recognized during the six month period ending
June 30, 1996. The purchase price allocation is preliminary (see Note 3 for
financings related to this acquisition).
In February 1996, the Company completed the acquisition of radio stations
WMYU-FM and WWST-FM both serving Knoxville, Tennessee for cash consideration
of $6.5 million. The Company included the financial results of the Knoxville
stations from February 17, 1996. Revenues of $1 million and operating income
of $.2 million were recognized during the six month period ending
June 30, 1996.
In March 1996, the Company agreed to exchange its Seattle, Washington radio
stations KCIN-FM and KRPM-AM for EZ Communications, Inc. radio stations
WRNO-FM, WEZB-FM and WBYU-AM serving New Orleans, Louisiana plus $7.3
million in cash. The Company included the financial results of the
New Orleans stations from March 18, 1996 under the terms of a Local Marketing
Agreement ("LMA"). Revenues of $1.8 million and operating income of
$.4 million were recognized during the six month period ended June 30, 1996.
Completion of the exchange is subject to approval of the Federal Communications
Commission and is expected in late 1996 to early 1997. Assets held for sale of
$8.7 million represent the net assets of the Seattle stations.
In March 1996, the Company entered into an LMA with Television Fit for Life,
Inc. to operate Channel 35, WFGX-TV in Fort Walton Beach, Florida. The Company
began operating WFGX-TV in July 1996 as a commercial television station with
primary focus on local news service and popular entertainment programming.
This station combined with WEAR-TV, the Company's ABC affiliate in Pensacola,
Florida, allows the Company to increase its broadcasting capacity on the
Florida side of the Mobile, Alabama/ Pensacola, Florida market. Under the
agreement the Company has an option to purchase the station, along with its
FCC license.
In March 1996, DIMAC acquired Wilcox & Associates, Inc. ("Wilcox"), a
New York City based direct response advertising agency for $3 million in cash.
Wilcox will continue to operate under its own name as a subsidiary of DIMAC.
Revenues of $3.9 million and operating income of $.6 million were recognized
during the six month period ending June 30, 1996.
Notes to Consolidated Financial Statements, (continued)
In May 1996, DIMAC acquired MBS/Multimode, Inc. ("MBS"), a database marketing
firm based in Huntington station, New York for $23.1 million, plus a working
capital adjustment of $1.4 million, in cash. MBS will continue to operate
under its own name as a subsidiary of DIMAC. Revenues of $2.5 million and
operating income of $.3 million were recognized during the six month period
ending June 30, 1996.
The purchase prices of the DIMAC, Knoxville stations, Wilcox and MBS
acquisitions discussed above were allocated as follows:
<TABLE>
(Dollars in thousands)
<S> <C>
Working capital, net $ (8,493)
Goodwill and other intangibles 276,601
Noncurrent assets 21,276
Long-term liabilities and debt (71,209)
__________
Total cash paid, net of cash acquired $218,175
</TABLE>
Assuming the acquisitions discussed above were consummated at the beginning of
the respective period, consolidated revenues and net income on a proforma
basis for the six months ended June 30, 1995 would have been $276.3 million
and $1.9 million, respectively. Net income per share on a proforma basis
for the same period would have been $.05. Proforma revenues and net income
for the six month period ended June 30, 1996 would have been $282.1 million
and $3.8 million, respectively. Net income per share on a proforma basis for
the same period would have been $.11. Income per share before extraordinary
item would have been $.18.
In February 1996, the Company completed the sale of its smallest television
station, KEVN-TV, located in Rapid City, South Dakota, to Blackstar of
South Dakota, L.L.C. As a result of this sale, the Company recognized a
gain of approximately $6 million in the first quarter of 1996.
Note 5. Authorized Shares.
On May 16, 1996 the shareholders approved the authorization of the Corporation
to issue up to 100,000,000 shares of Common Stock with a par value of $.01 per
share.
Note 6. Subsequent Events.
On July 15, 1996, the Company transferred its listing to the New York Stock
Exchange. The Company's stock retained the ticker symbol "HTG".
On July 25, 1996, the Company declared a two-for-one stock split effected as
a stock dividend payable to all holders of record on August 5, 1996 with the
payment date of August 12, 1996. The consolidated financial statements,
including all references to the number of shares of common stock and all
per share information have been adjusted to reflect the stock dividend on a
retroactive basis.
In July and August 1996, HMSI repurchased the Company's outstanding 11%
Senior Subordinated Notes with a face amount of $1.75 million and repurchased
outstanding 11% Senior Notes with a face amount of $2 million prior to
scheduled maturity and will recognize a $.2 million extraordinary loss, net of
taxes.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations: Second Quarter 1996 compared to 1995
Consolidated net revenues of $144.8 million increased 35% over the 1995
revenues of $107.1 million. Operating income of $24.1 million in 1996
exceeded the comparable 1995 period by 39%. Pretax income of $10 million in
1996, before extraordinary item, exceeded $8 million in 1995. Earnings per
share, reflecting the stock split and excluding extraordinary item, was
$.12 in 1996 versus $.16 per share in 1995. The improved operating results
reflect the inclusion of DIMAC Marketing Corporation and increases in
operating income from the Marketing Services and Broadcasting segments.
Consolidated net revenues decreased 3% and operating income increased 6%
in 1996 versus the 1995 period, on a pro forma basis including all
acquisitions and dispositions, due to lower Marketing Services revenues
with higher margins attributed to a favorable revenue mix. The 1996 period
included a $.8 million extraordinary loss on the extinguishment of debt.
Marketing Services. The Marketing Services segment contributed $119.3 million
of revenues in 1996, an increase of 42%, compared to $84.2 million in 1995.
The inclusion of DIMAC Marketing results added $47.1 million in revenues.
Marketing Services revenues decreased 5% in 1996 versus comparable 1995
including DIMAC Marketing in both periods. Increases in revenues from the
Instant Coupon Machine and advertising products were more than offset by
the promotion and merchandising revenue shortfall. The decline was due to
softness in the promotion and merchandising programs and the absence of
specific programs executed in 1995. DIMAC Marketing generated proforma
revenue improvement of 14% over prior year, reflecting growth from all
operations and services including direct mail, database services, fulfillment,
creative, telemarketing, and research.
Operating income for the Marketing Services segment of $17.1 million in 1996
increased versus $10.3 million in 1995. The inclusion of DIMAC Marketing's
results in 1996 added $4.6 million and ACTMEDIA generated $2.2 million of
operating income growth despite lower revenues due primarily to the favorable
revenue mix. Marketing Services operating income improved 6% in 1996 versus
the comparable 1995 including DIMAC Marketing in both periods. The improvement
in Marketing Services operating income on a proforma basis including DIMAC
Marketing in both periods was due primarily to increased revenues as the
operating margin was 14% in 1996 versus 13% in the comparable 1995 period.
Broadcasting. The Broadcasting segment generated $25.5 million of revenues
in 1996, an 11% increase compared to 1995. The Television Group, excluding
the South Dakota station sold in 1996, grew revenues by 7% to $11.6 million
primarily due to an 8% growth in local revenues and $.5 million of additional
political revenues. National spot revenues declined 7%. The Pensacola, FL
television station's 20% revenue growth was partially offset by lower results
from, KOKH-TV, the Oklahoma City station. The Company is currently investing
in a start up local news operation at KOKH-TV which began broadcasting in the
second quarter of 1996. The Radio Group contributed $13.9 million of revenues,
a 9% increase over 1995 on a same station basis, due to positive contributions
from the Portland, Kansas City, and New Orleans duopolies and the Cincinnati
station.
Operating income of $8.1 million in 1996 increased by 10% versus 1995 including
the radio acquisitions and excluding the television station sold in 1996. The
Television Group's operating income declined 5% despite a 7% increase in
revenue due primarily to the additional operating expenses associated with
the establishment of a news bureau at the Oklahoma City station. The 35%
growth in operating income from the Radio Group was primarily from the
improvement of the Portland and Kansas City duopolies and the New Orleans
acquisitions.
The Television industry had revenue growth of 7% and the Radio industry grew
6% in the second quarter 1996 versus the comparable 1995 period.
Corporate Expenses. Corporate expenses of $1.2 million in 1996 increased
versus $.9 million in 1995, but remained less than 1% of consolidated net
revenues.
Depreciation and Amortization. Depreciation and amortization of
$11.5 million in 1996 increased by 63% compared to $7.1 million in 1995.
This increase resulted primarily from the inclusion of DIMAC Marketing, which
added $3.8 million, and a $.3 million increase in Radio amortization
associated with acquisitions.
Interest Expense. Interest expense increased from $8.8 million in 1995 to
$13.9 million in the 1996 period due to both higher interest rates and higher
debt levels associated with the DIMAC Marketing acquisition.
Income Taxes. Income tax expense for 1995 related primarily to Federal
income taxes of $1.7 million and state income tax of $.6 million. Income
tax expense for 1996 was comprised of Federal income tax of $4.2 million and
state, local and foreign taxes of $1.3 million. Income tax expense in 1995
was reduced by the recognition of the Company's remaining net operating loss
carryforwards in 1995.
Net Income. The Company improved its income before income taxes and
extraordinary item from $8 million in 1995 to $10 million in 1996 primarily
as a result of an additional $6.8 million of operating income reduced by
increased interest expense. Net income of $3.7 million in 1996 decreased
versus $5.7 million in 1995 due primarily to the significant increase in
Federal income tax expense (discussed above) and the $.8 million extraordinary
loss in 1996.
Results of Operations: Six Months 1996 compared to 1995
Consolidated net revenues of $263.9 million increased 39% over the 1995
revenues of $190.4 million. Operating income of $39.4 million in 1996 exceeded
the comparable 1995 period by 40%. Pretax income of $18.6 million in 1996,
before extraordinary item, significantly exceeded $10.1 million in 1995.
Earnings per share, reflecting the stock split and before extraordinary item,
was $.22 in 1996 versus $.20 per share in 1995. The improved results reflect
the inclusion of DIMAC Marketing Corporation, effective February 1, 1996,
and increases in operating income from the Marketing Services and Broadcasting
segments. Consolidated net revenues and operating income increased 2% and 9%,
respectively, in 1996 versus the 1995 period on a proforma basis including all
acquisitions and dispositions. The 1996 period included a $6 million gain on
the sale of the South Dakota television station, a $1.1 million loss on the
write-off of obsolete fixed assets, and a $2.4 million extraordinary loss on
the extinguishment of debt.
Marketing Services. The Marketing Services segment contributed $218.7 million
of revenues in 1996, an increase of 47%, compared to $148.5 million in 1995.
The inclusion of DIMAC Marketing results added $76.5 million in revenues as
ACTMEDIA's revenues declined 4%. Marketing Services revenues increased 2% in
1996 versus comparable 1995 including DIMAC Marketing in both periods.
ACTMEDIA's decrease was due to unfavorable promotion and merchandising revenues
which more than exceeded the growth of ICM and advertising revenues. DIMAC
Marketing generated proforma revenue improvement of 14% over prior year,
reflecting growth from all operations.
Operating income for the Marketing Services segment of $27.9 million in 1996
significantly increased versus $16.3 million in 1995. The inclusion of DIMAC
Marketing's results in 1996 added $7.8 million and ACTMEDIA generated $3.8
million of operating income growth. Marketing Services operating income
improved 9% in 1996 versus the comparable 1995 including DIMAC Marketing
in both periods. The improvement in Marketing Services operating income,
on a proforma basis including DIMAC Marketing in both periods, was due
primarily to increased revenues as the operating margin was 13% in 1996
versus 12% in the comparable 1995 period.
It is anticipated that the Marketing Services segment will generate
approximately 80% of HMC's consolidated revenues in 1996. The Company also
anticipates the trend of lower promotion and merchandising revenues and
higher ICM and advertising revenues to continue into the third quarter.
Broadcasting. The Broadcasting segment generated $45.2 million of revenues
in 1996, an 8% increase compared to 1995. The Television Group, excluding
the South Dakota station sold in 1996, grew revenues by 6% to $21.8 million
primarily due to a 5% growth of local revenues and $.8 million additional
political revenues. National spot revenues decreased 4% in 1996 versus 1995.
The Pensacola, FL television station grew revenues by 15% in 1996 versus 1995.
The Radio Group contributed $23.4 million of revenues, an 18% increase over
1995, due primarily to the acquisitions and the continuing improvement of
the Portland and Kansas City duopolies.
Operating income of $13.7 million in 1996 increased by 11% versus 1995
including the radio acquisitions and excluding the television station sold
in 1996. The improvement reflects a 1% decrease from the Television Group
exceeded by a 34% improvement from the Radio Group primarily from the
improvement of the Portland and Kansas City duopolies and a positive
contribution from the New Orleans LMA.
The Television industry had revenue growth of 6% and the Radio industry grew
6% in the six months of 1996 versus the comparable 1995 period. National spot
revenues for the Television and Radio industries continue to be soft entering
into the third quarter of 1996.
Corporate Expenses. Corporate expenses of $2.1 million in 1996 increased
versus $1.6 million in 1995, but remained less than 1% of consolidated net
revenues.
Depreciation and Amortization. Depreciation and amortization of $20.9
million in 1996 increased by 48% compared to $14.1 million in 1995. This
increase resulted primarily from the inclusion of DIMAC Marketing, which
added $6 million.
Interest Expense. Interest expense increased from $17.5 million in 1995 to
$25.3 million in the 1996 period due to both higher interest rates and
higher debt levels associated with the DIMAC Marketing acquisition.
Other Expense. Other expense in 1996 included the $6 million gain on the
sale of the South Dakota television station and a $1.1 million loss on the
write-off of obsolete ACTRADIO fixed assets.
Income Taxes. Income tax expense for 1995 relates primarily to Federal
income taxes of $1.9 million and state income tax of $.9 million. Income tax
expense for 1996 is comprised of Federal income tax of $8.8 million and state,
local and foreign taxes of $2 million. Income tax expense in 1995 was reduced
by the recognition of the Company's remaining net operating loss carryforwards
in 1995. The Company expects that its 1996 effective income tax rate for
financial statement purposes will be approximately 53%, up from 26% in 1995,
as a result of the Company's utilization of its net operating loss
carryforwards for financial statement purposes in 1995.
Net Income. The Company improved its pretax income, before extraordinary item,
from $10.1 million in 1995 to $18.6 million in 1996 primarily as a result of
an additional $11.2 million of operating income and $4.9 million of net non-
recurring other income, reduced by increased interest expense. Net income of
$5.4 million in 1996 decreased versus $7.2 million in 1995 due to the
significant increase in Federal income tax expense (discussed above) and the
$2.4 million extraordinary loss.
Balance Sheet: 1996 Compared to 1995
The balance sheet changes from December 31, 1995 to June 30, 1996 were
primarily due to the DIMAC Marketing, Wilcox, MBS Multimode and radio station
acquisitions and respective financings. See Note 4 to the Consolidated
Financial Statements for purchase price allocation and Note 3 for long-term
debt discussion.
Liquidity and Capital Resources
Cash flows provided by operating activities totaling $9 million in 1996
decreased by $5.5 million versus 1995 due primarily to higher working capital
requirements. In 1996 the $9 million of cash provided by operating activities,
$206.2 million from financing activities, and $13.8 million from sales
proceeds, was utilized primarily for acquisitions, net ($218.2 million) and
capital expenditures ($12.4 million).
Cash flows provided by operating activities totaled approximately $14.5
million in 1995. These funds plus funds provided by financing activities were
principally utilized for net capital expenditures ($7.2 million),
acquisitions ($16.1 million), and retirement of stock appreciation rights
($3.8 million).
At December 31, 1995, the Company, through its Heritage Media Services, Inc.
subsidiary ("HMSI"), had a $151.4 million bank credit facility
(the "HMSI Credit Agreement"). HMSI is the Company's subsidiary which owns
ACTMEDIA and the Company's broadcasting properties. The HMSI Credit Agreement
was comprised of an $76.4 million term loan and a $75 million reducing
revolving credit facility. At June 30, 1996, $76.4 million of the term loan
facility and $75.0 million of the revolving credit facility were outstanding
and no additional borrowings were available under the HMSI Credit Agreement.
The HMSI 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 HMSI
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 HMSI 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 "1992 Senior Subordinated Notes") due October 1, 2002. Interest
on the 1992 Senior Subordinated Notes is payable semi-annually. The 1992
Senior Subordinated Notes are subordinate in right of payment to the prior
payment in full of the HMSI and DIMAC Credit Agreements and the Senior Notes.
In August 1995, the Company entered into several two-year interest rate swap
agreements with a combined notional principal amount of $50 million to more
proportionately balance the mix of floating and fixed rate debt. Of the total,
$40 million matures on June 15, 1997 and the remaining $10 million matures on
August 1, 1997. Under these arrangements, the Company will receive an average
rate of 6.13% during the term of these agreements and will pay the respective
six month LIBOR rate at each of the three reset periods (every six months).
The six month LIBOR rate on the day these agreements were executed was 5.90%.
The impact of the swap agreements on interest expense for the six months ended
June 30, 1996 was not material.
On February 20, 1996 the Company issued $175 million of 8.75% Senior
Subordinated Notes (the "1996 Senior Subordinated Notes") due February 15, 2006,
to assist in funding the Company's merger with DIMAC. Interest on the 1996
Senior Subordinated Notes is payable semi-annually commencing August 15, 1996.
The 1996 Senior Subordinated Notes are subordinate in right of payment to the
prior payment in full of the HMSI and DIMAC Credit Agreements and the Senior
Notes.
On February 21, 1996, the Company, through its DIMAC Corporation subsidiary,
entered into a $175 million bank credit facility (the "DIMAC Credit Agreement")
to assist in funding the Company's merger with DIMAC. The DIMAC Credit
Agreement is comprised of a $50 million term loan which begins to amortize
September 30, 1997, continuing until June 30, 2003 and a $125 million reducing
revolving credit facility. At June 30, 1996, $50 million of the term loan and
$45.6 million of the revolver were outstanding and $54.3 million of additional
borrowings were available under the DIMAC Credit Agreement. The remaining $31.6
million of the credit facility was unavailable due to certain financial
covenants. As DIMAC's trailing twelve month operating cash flow (as defined)
increases, the unavailable portion of the credit facility will gradually
decrease, eventually resulting in the availability of the full $175 million.
The DIMAC Credit Agreement includes a number of financial and other convenants,
including the maintenance of certain operating and financial ratios and
limitations on or prohibitions of dividends, indebtedness, liens, asset sales,
and certain other items. Loans under the DIMAC Credit Agreement are guaranteed
by the Company and DIMAC's subsidiaries and are secured by a pledge of the
capital stock of DIMAC and its subsidiaries.
On May 31, 1996, the Company through its Heritage Media Services Inc.
subsidiary, entered into a $50 million bank credit facility (the "1996 HMSI
Credit Facility") to refinance a portion of its existing 11% Senior
Secured Notes due June 15, 1997. The 1996 HMSI Credit Facility consists
of a $50 million revolving credit facility which matures December 31, 1997.
At June 30, 1996, $20.4 million of the facility was outstanding and $29.6
million of additional borrowings were available. The 1996 HMSI 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 HMSI 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.
The Company expects the major requirements for cash for the remainder of
1996 to include $3.9 million for early extinguishment of debt which was
completed in July and August, approximately $27 million for interest payments,
approximately $11 million for tax payments, and approximately $13 million
for capital expenditures and approximately $7 million for the expansion of
DIMAC's businesses. 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 Agreements.
Net cash provided by operations and available for the reduction of debt is
anticipated to be approximately $30 million.
Heritage will continue to expand and explore value-creating investments
and acquisitions. The Company will review all expenditures to maximize
financial returns and maintain financial flexibility while continuing its
long-term goal to de-leverage its capital structure.
Some statements contained in this document are forward looking and actual
results may differ materially. Statements not based on historical facts
involve risks and uncertainties, including, but not limited to, the effect of
economic conditions, capacity and supply constraints or difficulties, actual
purchases under agreements, particularly by certain of the Company's largest
clients, and the ability of the Company to maintain favorable client
relationships and competitive factors.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE MEDIA CORPORATION
Dated: August 9, 1996 by /s/ David N. Walthall
David N. Walthall
President and Chief Executive Officer
Dated: August 9, 1996 by /s/ James P. Lehr
James P. Lehr
Sr. Vice President and
Principal Accounting Officer
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