<PAGE>
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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 MARCH 31, 1997.
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:
(972) 702-7380
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 2, 1997
----- --------------------------
Common Stock, $.01 Par Value 34,830,652
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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>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ - 1,716
Trade receivables, net 117,047 110,667
Prepaid expenses and other 20,670 10,688
Inventories 10,946 10,004
Deferred income taxes 7,488 7,487
-------- -------
Total current assets 156,151 140,562
Property and equipment, net 112,746 109,408
Goodwill and other intangibles, net 645,064 639,159
Other assets 12,508 12,607
-------- -------
$926,469 901,736
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 2) $ 89,730 69,775
Accounts payable and accrued expenses 113,304 114,788
Deferred advertising revenues 22,471 12,349
Other current liabilities 1,808 2,079
-------- -------
Total current liabilities 227,313 198,991
Long-term debt, excluding current portion (note 2) 530,042 530,394
Other long-term liabilities 24,917 24,753
Deferred income taxes 11,711 11,711
Stockholders' equity (note 4):
Common stock, $.01 par value; authorized 100,000,000 shares,
issued 35,739,998 shares in 1997 and 35,725,644 shares in 1996 357 357
Additional paid-in capital 225,849 225,685
Accumulated deficit (82,510) (82,544)
Accumulated foreign currency translation adjustments (810) (748)
Common stock in treasury, at cost (956,656 shares in 1997 and
633,056 shares in 1996) (10,400) (6,863)
-------- -------
Total stockholders' equity 132,486 135,887
-------- -------
Commitments and contingencies (notes 3 and 5)
$926,469 901,736
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-----------------------
1997 1996
---------- ----------
Net revenues:
Marketing Services $ 133,279 99,308
Broadcasting 21,490 19,723
---------- ----------
154,769 119,031
---------- ----------
Costs and expenses:
Cost of services:
Marketing Services 87,482 63,692
Broadcasting 5,058 4,586
Selling, general and administrative 35,755 26,067
Depreciation 5,775 4,406
Amortization of goodwill and other assets 6,412 4,939
---------- ----------
140,482 103,690
---------- ----------
Operating income 14,287 15,341
---------- ----------
Other expense:
Interest, net (13,851) (11,375)
Other, net 89 4,640
---------- ----------
(13,762) (6,735)
---------- ----------
Income before income taxes and extraordinary item 525 8,606
Income taxes (491) (5,314)
---------- ----------
Income before extraordinary item 34 3,292
Extraordinary item-loss on extinguishment of debt - (1,549)
---------- ----------
Net income $ 34 1,743
---------- ----------
---------- ----------
Average number of common and common equivalent
shares outstanding 35,922 36,308
Income/(loss) per common and common equivalent share:
Before extraordinary item $ 0.00 0.09
Extraordinary item 0.00 (0.04)
---------- ----------
Net income $ 0.00 $ 0.05
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
3
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 34 1,743
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,775 4,406
Amortization:
Broadcast program rights 384 492
Goodwill and other assets 6,412 4,939
Debt issuance costs 372 287
Write-off of fixed assets - 1,111
Gain on sale of assets - (6,031)
Loss on extinguishments of debt - 1,549
Other (802) 11
Changes in certain assets and liabilities,
net of effects of acquisitions:
Accounts receivable (6,380) 19,787
Other assets (11,822) 369
Accounts payable and accrued expenses (970) (13,624)
Deferred advertising revenues 10,122 (5,946)
----------- -----------
Net cash provided by operating activities 3,125 9,093
----------- -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired (note 3) (12,472) (202,803)
Capital expenditures (7,493) (5,412)
Proceeds from sale of property and equipment - 13,759
Purchase of in-store marketing rights (111) (39)
----------- -----------
Net cash used in investing activities (20,076) (194,495)
----------- -----------
Cash flows from financing activities:
Long-term borrowings 34,870 327,719
Retirements:
Long-term debt (15,267) (136,127)
Other long-term liabilities (731) (549)
Issuance of common stock 155 494
Purchase of treasury stock (3,537) -
Payment of debt issuance costs (255) (5,684)
----------- -----------
Net cash provided by financing activities 15,235 185,853
----------- -----------
Net change during period (1,716) 451
Cash and cash equivalents at beginning of year 1,716 2,383
----------- -----------
Cash and cash equivalents at end of period $ - 2,834
----------- -----------
----------- -----------
Cash paid for interest $ 12,889 3,782
----------- -----------
----------- -----------
Cash paid for income taxes $ 2,059 847
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
4
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1. RESULTS OF OPERATIONS.
The results of operations for the 1997 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, 1996.
NOTE 2. LONG-TERM DEBT.
Long-term debt is summarized as follows:
(Dollars in thousands)
MARCH 31, DECEMBER 31,
1997 1996
-------- ------------
11% Senior Notes $122,845 122,845
Credit agreements 277,313 257,500
1992 11% Senior Subordinated Notes 24,520 24,520
1996 8.75% Senior Subordinated Notes 175,000 175,000
Canadian credit agreement 13,297 13,317
Other 6,797 6,987
-------- -------
619,772 600,169
Less current installments 89,730 69,775
-------- -------
$530,042 530,394
-------- -------
-------- -------
Long-term debt increased by $19.6 million during the three month period
ended March 31, 1997. The increase was primarily due to credit agreement
borrowings utilized for Radio acquisitions and the purchase of treasury stock.
See Note 3 for a further discussion of the acquisitions, Note 4 for further
discussion of treasury stock, and "Management's Discussion and
Analysis-Liquidity and Capital Resources" for further discussion of debt.
An additional $20 million of the HMSI credit agreement was reclassified to
current installments at March 31, 1997 based on scheduled maturities per the
credit agreement.
NOTE 3. ACQUISITIONS/DISPOSITIONS.
In January 1997, the Company completed the purchase of the assets of
WHRR-FM serving Rochester, New York for $1.9 million. The Company began
operating the station under a Local Marketing Agreement ("LMA") on September
1, 1996.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
Also in January 1997, the Company completed the purchase of the assets of
KXTR-FM and KCAZ-AM serving Kansas City, Missouri for $9.7 million. Revenues
and operating income for the period ended March 31, 1997 were immaterial.
The Company began operating WGH-FM, WVCL-FM and WGH-AM serving Norfolk,
Virginia under a LMA on March 31, 1997 while awaiting approval from the FCC on
exchange of its Cincinnati station, WVAE-FM, for the Norfolk stations. No
revenues or operating income were reported for the period ended March 31, 1997.
The acquisitions discussed above were accounted for as purchases and recognized
in the consolidated financial statements as follows (thousands of dollars):
Working capital, net $ (624)
Goodwill and other intangibles 12,187
Fixed and other noncurrent assets 909
-------
Total cash paid, net of cash acquired $12,472
-------
-------
In April 1997, the Company completed the exchange of its Seattle,
Washington stations, KCIN-FM and KRPM-AM for WRNO-FM, WEZB-FM and WBYU-AM
serving New Orleans, Louisiana plus $7.3 million in cash. The company began
operating the New Orleans stations under a LMA on March 18, 1996. A gain of
approximately $5 million will be recognized on the transaction in the second
quarter of 1997.
The Company has agreed to exchange its Knoxville, Tennessee stations,
WMYU-FM and WWST-FM for KQRC-FM serving Kansas City in a like-kind exchange
that is pending approval by the FCC.
Proforma results for the three-month periods ended March 31, 1996 and 1997
are not materially different from historical results reported, assuming the
acquisitions discussed above were consummated at the beginning of the respective
period.
NOTE 4. STOCKHOLDERS' EQUITY.
During the first quarter of 1997, the Company purchased 323,600 shares of
its common stock at a total cost of $3,537,079 and an average price of $10.93
per share.
NOTE 5. NEWS CORPORATION MERGER.
On March 17, 1997, The News Corporation Limited ("News Corporation")
reached an agreement to acquire Heritage Media Corporation ("Heritage Media") in
a non-taxable merger transaction. News Corporation will pay the equivalent of
$20.50 for each of Heritage Media's approximately 38.6 million shares on a fully
diluted basis through the issuance of News Corporation's preferred limited
voting ordinary ADR's, which trade under the symbol "NWSp" on the New York
Stock Exchange.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
The transaction is subject to, among other things, approvals of
Heritage Media shareholders and governmental regulatory agencies. The
Hart-Scott-Rodino Notification Form and Proxy Statement/Prospectus filings
have been made, and the Company has received a second request for information
related to the Hart-Scott-Rodino filing. Presently, the filings are under
review by each respective governmental agency. The Company expects to file
its application with the Federal Communications Commission within the next
few days. Although specific dates are not yet determinable, the Company
expects to receive governmental approval for each filing mentioned above.
NOTE 6. RECENTLY ISSUED ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
per Share," which supersedes APB Opinion No. 15, "Earnings per Share," was
issued in February, 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share (EPS) for complex capital structures on the face of
the statement of operations. Basic EPS is computed by dividing income by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options. SFAS 128 is required to be
adopted for year-end 1997; earlier application is not permitted. After
adoption, all prior period EPS data presented will be restated to conform with
SFAS 128. The Company does not expect that basic and diluted EPS measured under
SFAS 128 will be materially different from the current presentation of primary
and fully-diluted income per common share measured under APB No. 15. The
Company will present both EPS measures on the face of the statement of
operations.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," was issued in February, 1997. The Company
does not expect the statement to result in any substantive change in its
disclosure.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 changing market for
advertising, promotional and direct marketing activities, the effect of economic
conditions, capacity and supply constraints or difficulties, actual purchases
under agreements by certain of the Company's largest clients, and the ability of
the Company to maintain favorable client relationships and competitive factors.
RESULTS OF OPERATIONS: FIRST QUARTER 1997 COMPARED TO 1996
Consolidated net revenues of $154.8 million increased 30% over the 1996
revenues of $119.0 million. Operating income of $14.3 million in 1997 declined
versus the comparable 1996 period by 7%. Earnings before interest, taxes,
depreciation, and amortization of intangibles ("EBITDA") increased by 7% to
$26.5 million in the 1997 period. Pretax income of $.5 million in 1997 was $2.6
million lower than comparable 1996 period, excluding a $6 million gain on sale
in 1996. Earnings per share was zero in 1997 versus $.05 per share in 1996. The
improved EBITDA reflects growth from the Marketing Services and Broadcasting
segments. However, increased depreciation and amortization resulted in a
decrease in operating income. The 1996 period also included a $1.5 million
extraordinary loss on the extinguishment of debt.
MARKETING SERVICES. The Marketing Services segment contributed $133.3
million of revenues in 1997, an increase of 34%, compared to $99.3 million in
1996. Marketing Services revenues increased 16% in 1997 versus comparable 1996
including DIMAC Marketing's acquisitions in both periods. This increase
reflects growth from ACTMEDIA's Instant Coupon Machine, advertising products and
its Canadian operation and from DIMAC Marketing's database, fulfillment,
creative, telemarketing and research services.
Operating income for the Marketing Services segment of $9.5 million in 1997
decreased 12% versus $10.7 million in 1996. In-store Marketing's operating
income growth was more than offset by DIMAC Marketing's higher depreciation and
amortization expenses.
BROADCASTING. The Broadcasting segment generated $21.5 million of revenues
in 1997, a 9% increase compared to 1996. The Television Group, excluding the
South Dakota station sold in 1996, had revenues of $10 million which were level
with 1996. Increases of 1% in local revenues and 4% in national revenues were
offset by additional political revenues of $.4 million in 1996. The Pensacola,
FL television station's 6% revenue growth was partially offset by lower revenues
from the remainder of the group. The Radio Group contributed $11.5 million of
revenues, a 13% increase over 1996 on a same station basis, due to revenue
growth from all of the stations. Local revenues and national revenues grew 15%
and 9%, respectively, on a same station basis in 1997 versus the comparable 1996
period.
Operating income of $5.8 million in 1997 increased by 7% versus 1996
including the acquisitions and excluding the television station sold in 1996.
The Television Group's operating income declined 19% due primarily to the
additional operating expenses associated with the establishment of the news
bureau at the Oklahoma City station and the additional expenses of the Ft.
Walton Beach station acquired in 1996. The 68% growth in operating income, on
a same station basis, from the Radio Group resulted primarily from the
improvement of all of the stations except Rochester.
CORPORATE EXPENSES. Corporate expenses of $1 million in 1997 increased
versus $.9 million in 1996, but decreased as a percentage of consolidated net
revenues.
8
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $12.2
million in 1997 increased by 30% compared to $9.3 million in 1996. This
increase resulted primarily from an additional $2 million associated with DIMAC
Marketing and its acquisitions and increased depreciation associated with higher
capital expenditures.
INTEREST EXPENSE. Interest expense increased from $11.4 million in 1996 to
$13.9 million in the 1997 period due to both higher interest rates and higher
debt levels associated with the DIMAC Marketing acquisition.
INCOME TAXES. Income tax expense for 1996 related primarily to Federal
income tax of $4.5 million and state, local and foreign income tax of $.8
million. Income tax expense for 1997 was comprised of state, local and foreign
taxes of $.5 million.
NET INCOME. The Company's income before income taxes and extraordinary
item declined from $8.6 million in 1996 to $.5 million in 1997 primarily as a
result of an additional $2.8 million of depreciation and amortization, $2.5
million of higher interest expense and the 1996 period included a $6 million
gain on sale of assets.
BALANCE SHEET
The balance sheet changes from December 31, 1996 to March 31, 1997 were
primarily due to the Rochester and Kansas City radio station acquisitions. See
Note 3 to the Consolidated Financial Statements for purchase price allocation
and Note 2 for long-term debt discussion.
CASH FLOW INFORMATION
Cash flows provided by operating activities totaling approximately $3
million in 1997 decreased by $6.1 million versus 1996 due primarily to increased
working capital requirements. In 1997 the $3 million of cash provided by
operating activities and $15.2 million from financing activities, were utilized
primarily for acquisitions, net ($12.5 million) and capital expenditures ($7.5
million).
In 1996, the $9.1 million of cash provided by operating activities, $185.9
million from financing activities, and $13.8 million from sales proceeds, was
utilized primarily for acquisitions, net ($202.8 million) and capital
expenditures ($5.4 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company expects the major operating requirements for cash for the
remainder of 1997 to include approximately $8 million for earnout payments
related to certain DIMAC acquisitions, approximately $22 million for leases and
other contractual obligations, and approximately $30 million for capital
expenditures. Capital expenditures are expected to increase in 1997 to higher
levels due to the construction and expansion of DIMAC facilities on Long Island,
NY ($11 million) and Palm Coast, FL ($2 million) and the construction of the
television station in Burlington, VT ($2 million). Heritage also has debt
maturities totaling $69.8 million during 1997.
On January 14, 1997, the Company entered into a $50 million bank credit
facility (the "1997 HMC Credit Facility") for general corporate purposes. The
1997 HMC Credit Facility consists of a $50 million revolving credit facility
which matures January 12, 1998. The credit agreement includes a number of
financial and other convenants, and loans under this agreement are unsecured.
At March 31, 1997, there were no outstanding borrowings under this facility.
The Company expects to fund its anticipated cash requirements with
internally generated funds and from various external sources, which may include
the Company's existing credit agreements and additional financings. Heritage
maintains significant borrowing capacity to take advantage of growth
9
<PAGE>
and investment opportunities. At March 31, 1997 the Company had committed
bank lines of credit totaling $327.2 million and available liquidity totaling
$77.3 million for general corporate purposes.
During 1996, HMSI entered into a $50 million bank credit facility to
refinance a portion of the 11% Senior Secured Notes. At March 31, 1997 $29.6
million of the facility was outstanding and $20.4 million of additional
borrowings were available to refinance the senior debt. The HMSI 11% Senior
Notes are redeemable in whole or in part, at HMSI's option at any time on or
after June 15, 1997. The 11% HMC Senior Subordinated Notes are redeemable, in
whole or in part, at the Company's option at any time on or after October 1,
1997. The Company had expected to redeem such notes in 1997, replace the
existing bank credit facilities and provide additional liquidity through the use
of new replacement indebtedness, but has placed these plans on hold pending the
merger.
The Company was in compliance with all debt covenants and had satisfied
all financial ratios and tests as of March 31, 1997. See Note 4 Long-term
Debt of Notes to Consolidated Financial Statements for December 31, 1996 for
further discussion and details.
10
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================================================================================
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: May 9, 1997 by /s/ David N. Walthall
---------------------------------------
David N. Walthall
President and Chief Executive Officer
Dated: May 9, 1997 by /s/ James P. Lehr
---------------------------------------
James P. Lehr
Sr. Vice President and
Principal Accounting Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 122,207
<ALLOWANCES> 5,160
<INVENTORY> 10,946
<CURRENT-ASSETS> 156,151
<PP&E> 178,050
<DEPRECIATION> 65,304
<TOTAL-ASSETS> 926,469
<CURRENT-LIABILITIES> 227,313
<BONDS> 530,042
0
0
<COMMON> 357
<OTHER-SE> 132,129
<TOTAL-LIABILITY-AND-EQUITY> 926,469
<SALES> 0
<TOTAL-REVENUES> 154,769
<CGS> 0
<TOTAL-COSTS> 92,540
<OTHER-EXPENSES> 47,506
<LOSS-PROVISION> 436
<INTEREST-EXPENSE> 13,851
<INCOME-PRETAX> 525
<INCOME-TAX> (491)
<INCOME-CONTINUING> 34
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
