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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT FOR THE QUARTER ENDED SEPTEMBER 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
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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 NOVEMBER 4, 1996
----- -------------------------------
Common Stock, $.01 Par Value 35,640,448
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PART I. SUMMARIZED FINANCIAL INFORMATION
Item 1. Financial Statements
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,088 2,383
Trade receivables, net 115,536 77,068
Prepaid expenses and other 9,270 6,605
Inventory 9,688 5,008
Deferred income taxes 5,980 5,151
---------- ---------
Total current assets 143,562 96,215
Assets held for sale (note 4) 8,695 --
Property and equipment, net 100,227 56,155
Goodwill and other intangibles, net 632,387 383,848
Other assets 14,172 14,793
---------- ---------
$ 899,043 551,011
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ -- 5,000
Current installments of long-term debt (note 3) 20,383 5,026
Accounts payable and accrued expenses 89,641 52,069
Deferred advertising revenues 19,755 25,219
Other current liabilities 2,367 1,911
---------- ---------
Total current liabilities 132,146 89,225
Long-term debt, excluding current portion (note 3) 597,243 334,839
Other long-term liabilities 22,188 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, 35,706,105 shares in 1996 and 35,486,718
shares in 1995 357 355
Additional paid-in capital 225,545 223,230
Accumulated deficit (90,471) (101,643)
Accumulated foreign currency translation adjustments (811) (1,088)
Common stock in treasury, at cost (65,656 shares
in 1996 and 1995) (454) (454)
---------- ---------
Total stockholders' equity 134,166 120,400
Commitments and contingencies (note 4)
---------- ---------
$ 899,043 551,011
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
-------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Marketing Services $ 130,145 86,601 348,801 235,126
Broadcasting 24,996 22,107 70,213 63,939
---------- ---------- ---------- ----------
155,141 108,708 419,014 299,065
---------- ---------- ---------- ----------
Costs and expenses:
Cost of services:
Marketing Services 78,504 54,989 213,465 152,487
Broadcasting 7,018 6,077 17,455 15,617
Selling, general and administrative 32,471 21,235 90,664 62,282
Depreciation 5,618 3,790 15,364 11,081
Amortization of goodwill and other assets 6,244 3,303 17,374 10,125
---------- ---------- ---------- ----------
129,855 89,394 354,322 251,592
---------- ---------- ---------- ----------
Operating income 25,286 19,314 64,692 47,473
---------- ---------- ---------- ----------
Other expense:
Interest, net (13,861) (8,714) (39,151) (26,190)
Other, net (37) 513 4,462 (77)
---------- ---------- ---------- ----------
(13,898) (8,201) (34,689) (26,267)
---------- ---------- ---------- ----------
Income before income taxes and extraordinary item 11,388 11,113 30,003 21,206
Income taxes (5,319) (2,736) (16,094) (5,602)
---------- ---------- ---------- ----------
Income before extraordinary item 6,069 8,377 13,909 15,604
Extraordinary item-loss on extinguishment of debt (note 3) (346) -- (2,737) --
---------- ---------- ---------- ----------
Net income $ 5,723 8,377 11,172 15,604
========== ========== ========== ==========
Average number of common and common equivalent
shares outstanding 36,623 35,389 36,512 35,332
Income/(loss) per common and common equivalent share:
Before extraordinary item $ 0.17 0.24 0.38 0.44
Extraordinary item (0.01) -- (0.07) --
---------- ---------- ---------- ----------
Net income $ 0.16 $ 0.24 $ 0.31 $ 0.44
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,172 15,604
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 15,364 11,081
Amortization:
Broadcast program rights 1,531 1,534
Goodwill and other assets 17,374 10,125
Debt issuance costs 925 561
Write-off of fixed assets 1,111 348
Gain on sale of assets (6,031) (757)
Loss on extinguishment of debt 2,737 -
Other 276 (257)
Changes in certain assets and liabilities
net of effects of acquisitions:
Trade receivables (5,505) (10,552)
Other assets 5,120 (2,956)
Accounts payable and accrued expenses (12,071) 4,668
Deferred advertising revenues (5,464) 6,944
---------- ---------
Net cash provided by operating activities 26,539 36,343
---------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (note 4) (219,045) (20,270)
Capital expenditures (21,088) (13,073)
Proceeds from sale of assets (note 4) 13,759 1,500
Purchase of in-store marketing rights (140) (596)
---------- ---------
Net cash used in investing activities (226,514) (32,439)
---------- ---------
Cash flows from financing activities:
Long-term borrowings 466,666 96,647
Retirements:
Long-term debt (259,546) (97,945)
Other long-term liabilities (1,853) (1,689)
Issuance of common stock 1,407 628
Retirement of stock appreciation rights - (3,800)
Payment of debt issuance costs (5,994) (227)
---------- ---------
Net cash provided by/(used) in financing activities 200,680 (6,386)
---------- ---------
Net change during period 705 (2,482)
Cash and cash equivalents at beginning of year 2,383 4,270
---------- ---------
Cash and cash equivalents at end of period $ 3,088 1,788
========== =========
Cash paid for interest $ 30,029 20,553
========== =========
Cash paid for income taxes $ 6,436 2,232
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
8.75% Senior Subordinated Notes $ 175,000 ---
11% Senior Notes 125,370 150,000
HMSI credit agreements 178,300 113,400
DIMAC credit agreement 92,500 ----
11% Senior Subordinated Notes 24,750 50,000
Canadian credit agreement 14,596 15,674
Other 7,110 10,791
--------- ---------
617,626 339,865
Less current installments 20,383 5,026
--------- ---------
$ 597,243 334,839
========= =========
</TABLE>
Long-term debt increased by $277.8 million during the nine month
period ended September 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 Radio Group and DIMAC acquisitions. See
Note 4 for a further discussion of the acquisitions and "Management's
Discussion and Analysis-Liquidity and Capital Resources" for further discussion
of debt.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
During the third 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 $2.9 million prior to scheduled
maturity resulting in an extraordinary loss of $.1 million, net of taxes. HMSI
has repurchased a cumulative face amount totaling $25.3 million prior to
scheduled maturity and recognized a year-to-date extraordinary loss of $1.3
million, net of taxes, during 1996.
Also during the third quarter of 1996, HMSI repurchased outstanding
11% Senior Notes with a face amount of $4.25 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 11% Senior Notes with a face amount totaling $24.6
million prior to scheduled maturity and recognized a year-to-date extraordinary
loss of $1.4 million, net of taxes, which includes the write-off of $.3 million
of debt issuance costs.
An additional $15 million of the HMSI credit agreement term facility
was reclassified to current installments at September 30, 1996 per the credit
agreement based on scheduled maturities.
NOTE 4. ACQUISITIONS/DISPOSITIONS.
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 $126.1 million and
operating income of $12.8 million were recognized during the nine month period
ending September 30, 1996.
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 $1.7 million and an
operating loss of $.2 million were recognized during the nine month period
ending September 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 $3.2 million and operating income of $.6 million were recognized
during the nine month period ended September 30, 1996. Completion of the
exchange is subject to approval of the Federal Communications Commission (the
"FCC") 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
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. Revenues and operating income were immaterial for the nine month
period ending September 30, 1996.
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.
The Company included the financial results of Wilcox from March 1996. Revenues
of $8 million and operating income of $.9 million were recognized during the
nine month period ending September 30, 1996.
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. The Company included the
financial results of MBS from May 1996. Revenues of $6.9 million and operating
income of $1.3 million were recognized during the nine month period ending
September 30, 1996.
In August 1996, the Company agreed to acquire an additional Rochester,
New York, radio station, WHRR-FM. The acquisition is subject to approval by
the FCC. The Company began operating the station under a LMA on September 1,
1996 and revenues and operating income for the third quarter were immaterial.
In September 1996, DIMAC formed a marketing services joint venture
with KCET Communications, a division of KCET-TV Los Angeles, CA public
television station. DIMAC will retain majority ownership of the joint venture.
Revenues and operating income for the period were immaterial.
In September 1996, the Company agreed to purchase two additional radio
stations in Kansas City, Missouri, KXTR-FM and KCAZ-AM to create the first
"triopoly" in Kansas City. The acquisition is subject to approval by the FCC.
Included in this transaction is a small monthly business magazine. No revenue
or operating income was reported for the third quarter. The purchase is
expected to be completed in early 1997.
The purchase prices of the DIMAC, Knoxville stations, Wilcox and MBS
acquisitions discussed above were allocated as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Working capital, net $ (11,427)
Goodwill and other intangibles 277,466
Noncurrent assets 21,739
Long-term liabilities and debt (68,733)
-----------
Total cash paid, net of cash acquired $ 219,045
===========
</TABLE>
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
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 nine months ended September 30, 1995 would have been
$432.7 million and $9.1 million, respectively. Net income per share on a
proforma basis for the same period would have been $.26. Proforma revenues and
net income for the nine month period ended September 30, 1996 would have been
$437.2 million and $9.5 million, respectively. Net income per share on a
proforma basis for the same period would have been $.26. Income per share
before extraordinary item would have been $.34.
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. EQUITY.
On October 14, 1996 the Board of Directors authorized the purchase of
up to 5,000,000 shares of the Company's Common Stock, from time to time,
through open market and private purchases. To date the Company has purchased
50,000 shares.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS: THIRD QUARTER 1996 COMPARED TO 1995
Consolidated net revenues of $155.1 million increased 43% over the
1995 revenues of $108.7 million. Operating income of $25.3 million in 1996
exceeded the comparable 1995 period by 31%. Pretax income of $11.4 million in
1996, before extraordinary item, exceeded $11.1 million in 1995. Earnings per
share, excluding extraordinary item, was $.17 in 1996 versus $.24 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 1% and operating
income in 1996 was level with the 1995 period, on a pro forma basis
including all acquisitions and dispositions, due primarily to lower Marketing
Services revenues. The 1996 period included a $.3 million extraordinary loss on
the extinguishment of debt.
MARKETING SERVICES. The Marketing Services segment contributed $130.1
million of revenues in 1996, an increase of 50%, compared to $86.6 million in
1995. The inclusion of DIMAC Marketing results added $49.6 million in revenues.
Marketing Services revenues decreased 2% 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
promotion and merchandising product revenue shortfalls. 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 6% 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 $20.1 million
in 1996 increased 40% versus $14.3 million in 1995. The inclusion of DIMAC
Marketing's results in 1996 added $5.1 million and ACTMEDIA generated $1
million of operating income growth despite lower revenues due primarily to the
favorable revenue mix. Marketing Services operating income decreased 2% in 1996
versus the comparable 1995 including DIMAC Marketing in both periods. This
decline was due primarily to increased DIMAC costs associated with the United
States Postal Service postal reclassifications reform which was implemented on
July 1, 1996 and which forced outsourcing, retraining and new bundling methods.
In the Third Quarter of 1996 the Company became aware of another
company's effort to develop and introduce to the marketplace an at-shelf coupon
dispensing machine similar in make-up, design and function as ACTMEDIA'S
Instant Coupon Machine. The full effects of this effort are not yet
determinable.
BROADCASTING. The Broadcasting segment generated $25 million of
revenues in 1996, a 13% increase compared to 1995. The Television Group,
excluding the South Dakota station sold in 1996, grew revenues by 8% to $10.7
million primarily due to a 10% growth in local revenues and $.5 million of
additional political revenues. National spot revenues declined 7%. The
Pensacola, FL television station's 18% revenue growth and the Plattsburgh, NY
station's 9% increase was partially offset by lower revenues 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 $14.2 million of revenues, a 12% increase
over 1995 on a same station basis, due to positive contributions from the
Portland, Kansas City, and St. Louis duopolies and the Cincinnati station.
Operating income of $6.5 million in 1996 increased by 13% versus 1995
including the radio acquisitions and excluding the television station sold in
1996. The Television Group's operating income
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declined 8% despite an 8% increase in revenue due primarily to the additional
operating expenses associated with the establishment of the news bureau at the
Oklahoma City station. The 48% growth in operating income from the Radio Group
resulted primarily from the improvement of the Portland, Kansas City, and St.
Louis duopolies and the New Orleans acquisitions.
CORPORATE EXPENSES. Corporate expenses of $1.3 million in 1996
increased versus $1.0 million in 1995, but remained less than 1% of
consolidated net revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $11.9
million in 1996 increased by 67% 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 Group amortization
associated with acquisitions.
INTEREST EXPENSE. Interest expense increased from $8.7 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 tax of $1.6 million and state income tax of $1.1 million. Income
tax expense for 1996 was comprised of Federal income tax of $3.8 million and
state, local and foreign taxes of $1.5 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 $11.1 million in 1995 to $11.4 million in 1996
primarily as a result of an additional $6 million of operating income reduced
by higher interest expense. Net income of $5.7 million in 1996 decreased versus
$8.4 million in 1995 due primarily to the significant increase in Federal
income tax expense (discussed above) and the $.3 million extraordinary loss in
1996.
RESULTS OF OPERATIONS: NINE MONTHS 1996 COMPARED TO 1995
Consolidated net revenues of $419.0 million increased 40% over the
1995 revenues of $299.1 million. Operating income of $64.7 million in 1996
exceeded the comparable 1995 period by 36%. Pretax income of $30 million in
1996, before extraordinary item, significantly exceeded $21.2 million in 1995.
Earnings per share, before extraordinary item, was $.38 in 1996 versus $.44 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 1% and 5%, respectively, in 1996 versus the 1995
period on a proforma basis including all acquisitions and dispositions, due to
level Marketing Services revenues with higher margins as a result of a
favorable revenue mix. 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 $2.7 million extraordinary loss on the
extinguishment of debt.
MARKETING SERVICES. The Marketing Services segment contributed $348.8
million of revenues in 1996, an increase of 48%, compared to $235.1 million in
1995. The inclusion of DIMAC Marketing results added $126.1 million in revenues
as ACTMEDIA's revenues declined 5%. Marketing Services revenues in 1996 were
level 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 11% over prior year,
reflecting growth from all operations.
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Operating income for the Marketing Services segment of $47.9 million
in 1996 significantly increased versus $30.6 million in 1995. The inclusion of
DIMAC Marketing's results in 1996 added $12.8 million and ACTMEDIA generated
$4.1 million of operating income growth. Marketing Services operating income
improved 4% 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, primarily resulted
from ACTMEDIA as DIMAC's operating income was lower due to $4.8 million of
increased amortization of intangibles associated with the merger and $.9
million of additional depreciation.
It is anticipated that the Marketing Services segment will generate
approximately 80% of HMC's consolidated revenues in 1996. The Company
anticipates continued growth of Marketing Services revenue in the fourth
quarter of 1996.
BROADCASTING. The Broadcasting segment generated $70.2 million of
revenues in 1996, a 10% increase compared to 1995. The Television Group,
excluding the South Dakota station sold in 1996, grew revenues by 7% to $32.5
million primarily due to a 6% growth of local revenues and $1.4 million
additional political revenues. National spot revenues decreased 5% in 1996
versus 1995. The Pensacola, FL television station grew revenues by 16% in 1996
versus 1995. The Radio Group contributed $37.7 million of revenues, an 8%
increase over 1995, due primarily to acquisitions and the continuing
improvement of the Portland and Kansas City duopolies and the Cincinnati
station.
Operating income of $20.2 million in 1996 increased by 11% versus 1995
including the radio acquisitions and excluding the television station sold in
1996. The improvement reflects a 3% decrease from the Television Group, due to
the Oklahoma news operation expense, which was more than exceeded by a 39%
increase from the Radio Group primarily from the improvement of the Portland
and Kansas City duopolies and a positive contribution from the New Orleans LMA.
National spot revenues for the television industry continue to be soft
and political revenues were pacing ahead of expectations entering the fourth
quarter of 1996.
CORPORATE EXPENSES. Corporate expenses of $3.4 million in 1996
increased versus $2.7 million in 1995, but remained less than 1% of
consolidated net revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $32.7
million in 1996 increased by 54% compared to $21.2 million in 1995. This
increase resulted primarily from the inclusion of DIMAC Marketing, which added
$9.7 million and a $.7 million increase in Radio Group amortization associated
with acquisitions.
INTEREST EXPENSE. Interest expense increased from $26.2 million in
1995 to $39.2 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 fixed assets.
INCOME TAXES. Income tax expense for 1995 relates primarily to
Federal income tax of $3.5 million and state and foreign income taxes of $2.1
million. Income tax expense for 1996 is comprised of Federal income tax of
$12.6 million and state, local and foreign taxes of $3.5 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
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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 $21.2 million in 1995 to $30.0 million in 1996
primarily as a result of an additional $17.2 million of operating income and
$4.9 million of net non-recurring other income, reduced by increased interest
expense. Net income of $11.2 million in 1996 decreased versus $15.6 million in
1995 due to the significant increase in Federal income tax expense (discussed
above) and the $2.7 million extraordinary loss.
BALANCE SHEET: 1996 COMPARED TO 1995
The balance sheet changes from December 31, 1995 to September 30, 1996
were primarily due to the DIMAC Marketing, Wilcox, MBS 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 $26.5 million in
1996 decreased by $9.8 million versus 1995 due primarily to higher working
capital requirements associated with the Marketing Services revenue mix. In
1996 the $26.5 million of cash provided by operating activities, $200.7
million from financing activities, and $13.8 million of asset sale proceeds,
were utilized primarily for acquisitions, net ($219.0 million) and capital
expenditures ($21.1 million).
Cash flows provided by operating activities totaled approximately
$36.3 million in 1995. These funds were principally utilized for net capital
expenditures ($13.1 million), acquisitions ($20.3 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 September 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
12
<PAGE> 13
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 nine months
ended September 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. 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") with a group of banks to refinance the long-term obligations
acquired through the DIMAC merger and to assist in funding the balance of the
transaction. 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. The revolving credit
commitment will reduce quarterly beginning March 31, 1998. 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). At September 30, 1996, $50 million of the term loan and
$42.5 million of the revolver were outstanding and $60.8 million of additional
borrowings were available under the DIMAC Credit Agreement. The remaining $21.7
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 covenants,
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. 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). At September 30, 1996, $26.9 million of the facility was outstanding
and $23.1 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 approximately $14 million for interest payments,
approximately $3 million for tax payments, approximately $5 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 for the period ending December 31, 1996.
13
<PAGE> 14
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.
14
<PAGE> 15
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: November 8, 1996 by /s/ DAVID N. WALTHALL
-------------------------------------
David N. Walthall
President and Chief Executive Officer
Dated: November 8, 1996 by /s/ JAMES P. LEHR
-------------------------------------
James P. Lehr
Sr. Vice President and
Principal Accounting Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Index Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,088
<SECURITIES> 0
<RECEIVABLES> 120,065
<ALLOWANCES> 4,529
<INVENTORY> 9,688
<CURRENT-ASSETS> 143,562
<PP&E> 159,389
<DEPRECIATION> 59,162
<TOTAL-ASSETS> 899,043
<CURRENT-LIABILITIES> 132,146
<BONDS> 597,243
0
0
<COMMON> 357
<OTHER-SE> 133,809
<TOTAL-LIABILITY-AND-EQUITY> 899,043
<SALES> 0
<TOTAL-REVENUES> 419,014
<CGS> 0
<TOTAL-COSTS> 230,920
<OTHER-EXPENSES> 122,769
<LOSS-PROVISION> 633
<INTEREST-EXPENSE> 39,151
<INCOME-PRETAX> 30,003
<INCOME-TAX> 16,094
<INCOME-CONTINUING> 13,909
<DISCONTINUED> 0
<EXTRAORDINARY> 2,737
<CHANGES> 0
<NET-INCOME> 11,172
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.31
</TABLE>
