<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): August 29, 1997
HEARST-ARGYLE TELEVISION, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-27000 74-2717523
(State or Other Jurisdiction of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
888 Seventh Avenue
New York, New York 10106
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 649-2000
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquire
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARGYLE TELEVISION, INC.
Annual Financial Statements
Report of Independent Auditors.......................................................... 3
Consolidated Balance Sheets as of December 31, 1995 and 1996............................ 4-5
Consolidated Statements of Operations for the Period From Inception (August 5, 1994)
through December 31, 1994 and for the Years Ended December 31, 1995 and 1996........... 6
Consolidated Statements of Stockholders' Equity for the Period from Inception (August 5,
1994) through December 31, 1994 and for the Years Ended December 31, 1995 and 1996..... 7
Consolidated Statements of Cash Flows for the Period from Inception (August 5, 1994)
through December 31, 1994 and for the Years Ended December 31, 1995 and 1996........... 8
Notes to Consolidated Financial Statements.............................................. 9
Interim Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1997 (Unaudited).................... 21-22
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 1996 and 1997 (Unaudited)..................................................... 23
Condensed Consolidated Statement of Stockholders' Equity for the Six Months
Ended June 30, 1997 (Unaudited)........................................................ 24
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1997 (Unaudited)..................................................... 25
Notes to Condensed Consolidated Financial Statements (Unaudited)........................ 26
HEARST BROADCAST GROUP
Annual Financial Statements
Independent Auditors' Report.............................................................. 30
Combined Balance Sheets as of December 31, 1995 and 1996.................................. 31
Combined Statements of Operations for the Three Years Ended December 31, 1994, 1995
and 1996................................................................................. 32
Combined Statements of Cash Flows for the Three Years Ended December 31, 1994, 1995
and 1996................................................................................. 33
Notes to Combined Financial Statements.................................................... 34
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interim Financial Statements
Condensed Combined Balance Sheet as of June 30, 1997 (Unaudited).......................... 40
Condensed Combined Statements of Operations for the Six Months Ended June
30, 1996 and 1997 (Unaudited)............................................................ 41
Condensed Combined Statements of Cash Flows for the Six Months Ended June
30, 1996 and 1997 (Unaudited)............................................................ 42
Notes to Condensed Combined Financial Statements (Unaudited).............................. 43
(b) Pro Forma Financial Information.
INDEX TO PRO FORMA FINANCIAL STATEMENTS
HEARST-ARGYLE TELEVISION, INC.
Introduction to Pro Forma Financial Statements............................................ 44
Unaudited Pro Forma Combined Condensed Balance Sheet as of June 30, 1997.................. 45
Unaudited Pro Forma Condensed Combined Statements of Operations for the
year ended December 31, 1996 and the six months ended June 30, 1996 and
1997...................................................................................... 48-51
Argyle Television, Inc.
Introduction to Pro Forma Financial Statements............................................ 52
Unaudited Pro Forma Combined Condensed Statements of Operations for the six
months ended June 30, 1996 and 1997....................................................... 53-55
(c) Exhibits.
2.1 Amended and Restated Agreement and Plan of Merger, dated as of March
26, 1997, by and among The Hearst Corporation, HAT Merger Sub, Inc.,
HAT Contribution Sub, Inc. and Argyle Television, Inc. (incorporated
by reference to Exhibit 2.1 of the Company's Registration Statement on
Form S-4 (File No. 333-32487)).
4.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Appendix C of the Company's Registration
Statement on Form S-4 (File No. 333-32487)).
4.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 4.2 of the Company's Registration Statement on Form S-3
(File No. 333-35051)).
4.3 Form of specimen certificate representing shares of Series A Common
Stock (incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-3 (File No. 333-35051)).
4.4 Form of Registration Rights Agreement among the Company and certain
Holders (incorporated by reference to Exhibit B to Exhibit 2.1 of the
Company's Registration Statement on Form S-4 (File No. 333-32487)).
</TABLE>
-2-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Argyle Television, Inc.
We have audited the accompanying consolidated balance sheets of Argyle
Television, Inc. as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from inception (August 5, 1994) through December 31, 1994 and for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Argyle Television, Inc. at December 31, 1995 and 1996, and the consolidated
results of their operations and their cash flows for the period from inception
(August 5, 1994) through December 31, 1994 and for each of the two years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, in 1995, the Company
changed its method of accounting for stock-based compensation.
Ernst & Young LLP
February 12, 1997,
except for the second
paragraph of Note 11, as
to which the date is
March 26, 1997
San Antonio, Texas
3
<PAGE>
ARGYLE TELEVISION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1995 1996
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 2,205,538 $ 948,942
Accounts receivable, net of allowance for
doubtful accounts of $133,202 and $169,302 in
1995 and 1996, respectively..................... 11,362,007 14,936,522
Barter program rights............................ 5,102,072 5,911,936
Program rights................................... 4,611,266 3,933,777
Other............................................ 1,139,357 1,894,607
------------ ------------
Total current assets........................... 24,420,240 27,625,784
Property, plant and equipment:
Land, building and improvements.................. 11,183,900 17,135,311
Broadcasting equipment........................... 18,065,680 21,126,534
Office furniture, equipment and other............ 4,900,490 5,523,611
Construction in progress......................... 817,426 2,357,016
------------ ------------
34,967,496 46,142,472
Less accumulated depreciation.................... (2,333,494) (6,929,110)
------------ ------------
32,634,002 39,213,362
Intangible assets:
FCC licenses..................................... 112,634,500 126,008,807
Network affiliation agreements................... 107,125,714 121,272,207
Other............................................ 10,494,789 12,763,936
------------ ------------
230,255,003 260,044,950
Less accumulated amortization.................... (9,880,092) (28,189,527)
------------ ------------
220,374,911 231,855,423
Other assets:
Deferred acquisition and financing costs, net of
accumulated amortization of $839,049 and
$1,050,748 in 1995 and 1996, respectively....... 6,250,335 5,788,169
Barter program rights, noncurrent................ 2,249,230 5,333,383
Program rights, noncurrent....................... 3,299,284 3,580,012
Other............................................ 1,912,576 15,212,015
------------ ------------
13,711,425 29,913,579
------------ ------------
Total assets................................... $291,140,578 $328,608,148
============ ============
</TABLE>
4
<PAGE>
ARGYLE TELEVISION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
------------------------------------ ------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable................................. $ 1,792,291 $ 1,001,479
Accrued liabilities.............................. 5,226,933 5,611,662
Barter program rights payable.................... 5,270,081 6,775,940
Program rights payable........................... 3,658,425 4,251,491
Other............................................ 646,919 867,530
------------ ------------
Total current liabilities...................... 16,594,649 18,508,102
Barter program rights payable...................... 2,249,230 5,333,383
Program rights payable............................. 3,649,559 3,609,897
Long-term debt..................................... 150,000,000 171,500,000
Other liabilities.................................. 2,354,290 504,742
Stockholders' equity:
Series A preferred stock, 10,938 shares issued
and outstanding in 1996........................ -- 109
Series B preferred stock, 10,938 shares issued
and outstanding in 1996........................ -- 109
Series A common stock, par value $.01 per share,
35,000,000 shares authorized, 3,619,260 and
3,846,914 shares issued and outstanding in 1995
and 1996, respectively......................... 36,193 38,469
Series B common stock, par value $.01 per share,
200,000 shares authorized, 200,000 shares
issued and outstanding......................... 2,000 2,000
Series C common stock, par value $.01 per share,
14,800,000 shares authorized, 7,300,000 shares
issued and outstanding......................... 73,000 73,000
Additional paid-in capital....................... 132,038,544 159,455,134
Retained earnings (deficit)...................... (15,856,887) (30,416,797)
------------ ------------
Total stockholders' equity..................... 116,292,850 129,152,024
------------ ------------
Total liabilities and stockholders' equity..... $291,140,578 $328,608,148
============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
ARGYLE TELEVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 5, 1994) YEAR ENDED YEAR ENDED
THROUGH DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1994 1995 1996
----------------- ------------ ------------
<S> <C> <C> <C>
Total revenues.................. $ -- $ 46,944,342 $ 73,293,966
Station operating expenses...... -- 23,603,454 37,638,657
Amortization of program rights.. -- 3,961,262 4,724,621
Depreciation and amortization... -- 12,294,317 23,964,988
-------- ------------ ------------
Station operating income........ -- 7,085,309 6,965,700
Corporate general and
administrative expenses........ 49,624 2,323,673 4,285,347
Non-cash compensation expense... -- 674,569 674,569
-------- ------------ ------------
Operating income (loss)......... (49,624) 4,087,067 2,005,784
Interest expense, net........... -- 12,052,509 16,565,694
-------- ------------ ------------
Loss before extraordinary item.. (49,624) (7,965,442) (14,559,910)
Extraordinary item, loss on
early retirements of debt...... -- (7,841,821) --
-------- ------------ ------------
Net loss........................ $(49,624) (15,807,263) (14,559,910)
========
Less preferred stock dividends.. -- (829,465)
------------ ------------
Loss applicable to common
stock.......................... $(15,807,263) $(15,389,375)
============ ============
Loss per common share:
Loss before extraordinary
item......................... $ (1.25) $ (1.37)
Extraordinary item............ (1.22) --
------------ ------------
Loss per common share......... $ (2.47) $ (1.37)
============ ============
Weighted average number of
common shares outstanding...... 6,388,101 11,246,149
============ ============
</TABLE>
See accompanying notes.
6
<PAGE>
ARGYLE TELEVISION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PREFERRED PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
-------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES AT INCEPTION
(AUGUST 5, 1994)....... $ -- $ -- $ -- $ -- $ --
Issuance of 100 shares
of voting common stock
for cash*.............. 1 -- 999 -- 1,000
Net loss................ -- -- -- (49,624) (49,624)
-------- ---- ------------ ------------ ------------
BALANCES AT DECEMBER 31,
1994................... 1 -- 999 (49,624) (48,624)
Issuance of 199,900
shares of voting common
stock for cash*........ 1,999 -- 1,997,001 -- 1,999,000
Issuance of 7,300,000
shares of Series C
common stock for cash.. 73,000 -- 72,927,000 -- 73,000,000
Issuance of 3,619,260
shares of Series A
common stock for cash.. 36,193 -- 56,280,977 -- 56,317,170
Capital contribution of
equipment.............. -- -- 157,998 -- 157,998
Compensation element of
stock options.......... -- -- 674,569 -- 674,569
Net loss................ -- -- -- (15,807,263) (15,807,263)
-------- ---- ------------ ------------ ------------
BALANCES AT DECEMBER 31,
1995................... 111,193 -- 132,038,544 (15,856,887) 116,292,850
Issuance of stock in
connection with the
acquisition of the
Arkansas Stations:
Series A common stock--
227,654 shares; Series
A preferred stock--
10,938 shares; Series B
preferred
stock--10,938 shares... 2,276 218 27,571,486 -- 27,571,486
Compensation element of
stock options.......... -- -- 674,569 -- 674,569
Dividends paid on
preferred stock........ -- -- (829,465) -- (829,465)
Net loss................ -- -- -- (14,559,910) (14,559,910)
-------- ---- ------------ ------------ ------------
BALANCES AT DECEMBER 31,
1996................... $113,469 $218 $159,455,134 $(30,416,797) $129,152,024
======== ==== ============ ============ ============
</TABLE>
- --------
* Converted into Series B Common Stock during 1995
See accompanying notes.
7
<PAGE>
ARGYLE TELEVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 5, 1994) YEAR ENDED DECEMBER 31
THROUGH --------------------------
DECEMBER 31, 1994 1995 1996
----------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss......................... $(49,624) $(15,807,263) $(14,559,910)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Extraordinary item, loss on
early retirement of debt...... -- 7,841,821 --
Depreciation................... 202 2,333,292 4,672,093
Amortization of intangible
assets........................ -- 9,961,025 19,292,895
Amortization of deferred
financing costs............... -- 839,049 899,241
Amortization of program
rights........................ -- 3,961,262 4,724,621
Program rights payments........ -- (2,901,208) (3,765,683)
Provision for doubtful
accounts...................... -- 69,914 234,963
Compensation element of stock
options....................... -- 674,569 674,569
Fair value adjustments of
interest rate protection
agreements.................... -- 1,038,764 (1,150,616)
Changes in operating assets and
liabilities:
Accounts receivable.......... -- (3,192,612) (1,900,070)
Other assets................. -- 237,630 66,769
Accounts payable and accrued
liabilities................. -- 3,376,808 (1,179,587)
Other liabilities............ 50,072 (1,573,972) (1,066,245)
-------- ------------ ------------
Net cash provided by operating
activities...................... 650 6,859,079 6,943,040
INVESTING ACTIVITIES
Payments made on Clear Channel
Venture Agreement............... -- -- (13,526,887)
Acquisition of stations.......... -- (233,738,747) (5,889,477)
Purchases of property, plant and
equipment, net.................. -- (3,762,465) (6,633,156)
Partial payment on relocation of
studio.......................... -- -- (1,855,455)
Acquisition costs................ -- -- (839,539)
-------- ------------ ------------
Net cash used in investing
activities...................... -- (237,501,212) (28,744,504)
FINANCING ACTIVITIES
Financing costs.................. -- (13,923,589) (125,667)
Issuance of common stock......... 1,000 131,316,170 --
Proceeds from issuance of senior
subordinated debt............... -- 150,000,000 --
Proceeds from issuance of long-
term debt....................... -- 170,250,000 31,500,000
Payment of long-term debt........ -- (204,796,560) (10,000,000)
Preferred dividends paid......... -- -- (829,465)
-------- ------------ ------------
Net cash provided by financing
activities...................... 1,000 232,846,021 20,544,868
-------- ------------ ------------
Increase (decrease) in cash and
cash equivalents................ 1,650 2,203,888 (1,256,596)
Cash and cash equivalents at
beginning of period............. -- 1,650 2,205,538
-------- ------------ ------------
Cash and cash equivalents at end
of period....................... $ 1,650 $ 2,205,538 $ 948,942
======== ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Capital contribution of
equipment....................... $ -- $ 157,998 $ --
Businesses acquired in purchase
transaction:
Fair market value of assets
acquired...................... -- 282,928,893 38,259,261
Liabilities assumed............ -- (14,643,586) (4,772,840)
Note payable issued to seller.. -- (34,546,560) --
Issuance of preferred stock.... -- -- (21,876,000)
Issuance of common stock....... -- -- (5,720,944)
-------- ------------ ------------
Net cash paid for acquisitions... $ -- $233,738,747 $ 5,889,477
======== ============ ============
</TABLE>
See accompanying notes.
8
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. NATURE OF OPERATIONS
Argyle Television, Inc. (the Company) owns and operates six network-
affiliated television stations in geographically diverse markets in the United
States. Four of the stations are affiliates of the American Broadcasting
Companies (ABC), one station is an affiliate of the National Broadcasting
Company, Inc. (NBC), and one station is an affiliate of the Fox Broadcasting
Company (Fox). The Company operates in one business segment, commercial
television broadcasting. See Note 3 for information regarding an exchange of
stations effected subsequent to December 31, 1996.
2. SUMMARY OF ACCOUNTING POLICIES AND USE OF ESTIMATES
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts have
been eliminated in consolidation.
Cash Equivalents
All highly liquid investments with maturities of three months or less when
purchased are considered to be cash equivalents.
Accounts Receivable
Concentration of credit risk with respect to accounts receivable is limited
due to the large number of geographically diverse customers, individually
small balances and short payment terms.
Program Rights
Program rights and the corresponding contractual obligations are recorded on
an undiscounted basis when the license period begins and the programs are
available for use. Costs are amortized using the straight-line method based on
the number of showings, which approximates an accelerated method of
amortization. Program rights and the corresponding contractual obligations are
classified as current or long-term based on estimated usage and payment terms,
respectively.
Program rights are reviewed periodically for impairment and, if necessary,
adjusted to estimated net realizable value. No significant adjustments have
been recorded in the accompanying consolidated statements of operations.
Barter and Trade Transactions
Barter transactions represent the exchange of commercial air time for
programming. Trade transactions represent the exchange of commercial air time
for merchandise or services. Barter transactions are generally recorded at the
fair market value of the commercial air time relinquished. Trade transactions
are generally recorded at the fair market value of the merchandise or services
received. Barter program rights and payables are recorded for barter
transactions based upon the availability of the programming for broadcast.
Revenue is recognized on barter and trade transactions when the commercials
are broadcast; expenses are recorded when the program, merchandise or service
received is utilized. Barter and trade revenues for the years ended December
31, 1995 and 1996 were $5,483,965 and $6,922,726, respectively, and are
included in total revenues. Barter and trade expenses for the years ended
December 31, 1995 and 1996 were $5,419,832 and $7,011,319, respectively, and
are included in station operating expenses.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives as
follows: buildings--25 to 39 years; broadcasting equipment--five to seven
years; office furniture, equipment and other--five years. Leasehold
improvements are amortized on the straight-line method over the shorter of the
lease term or the estimated useful life of the asset.
9
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
Intangible Assets
Intangible assets are recorded at cost. Amortization is calculated on the
straight-line method over the estimated lives as follows: FCC licenses and
network affiliation agreements--15 years; other intangible assets--two to five
years.
Income Taxes
Income taxes are provided using the liability method in accordance with FASB
Statement No. 109.
Earnings Per Share
Earnings per common share is computed using the weighted average number of
shares of common stock outstanding. Common stock equivalents are excluded as
they are anti-dilutive.
Stock-Based Compensation
During the fourth quarter of 1995, the Company adopted FAS Statement No.
123, "Accounting for Stock-Based Compensation" (FAS 123), in accounting for
its employee stock options and elected to use the fair value method in
accounting for its stock-based compensation plan. Previously, the Company had
followed the provisions of APB No. 25. The effect of adopting FAS 123 was to
increase the 1995 net loss by $474,569.
Interest Rate Agreements
The Company enters into interest-rate swap agreements to modify the interest
characteristics of its outstanding debt. Each interest-rate swap agreement is
designated with all or a portion of the principal balance and term of a
specific debt obligation. These agreements involve the exchange of amounts
based on a fixed interest rate for amounts based on variable interest rates
over the life of the agreement without an exchange of the notional amount upon
which the payments are based. The differential to be paid or received as
interest rates change is accrued and recognized as an adjustment to interest
expense related to the debt. The related amount payable to or receivable from
counterparties is included in other liabilities or assets. Gains and losses on
terminations of interest-rate swap agreements are deferred as an adjustment to
the carrying amount of the outstanding debt and amortized as an adjustment to
interest expense related to the debt over the remaining term of the original
contract life of the terminated swap agreement. In the event of the early
extinguishment of a designated debt obligation, any realized or unrealized
gain or loss from the swap would be recognized in income coincident with the
extinguishment. Any swap agreements that are not designated with outstanding
debt or notional amounts of interest-rate swap agreements in excess of the
principal amounts of the underlying debt obligations are recorded as an asset
or liability at fair value, with changes in fair value recorded as an
adjustment to interest expense.
Written options to enter into interest rate swap agreements are recorded as
an other asset or other liability with changes in fair value recorded as an
adjustment to interest expense.
The Company purchases interest-rate cap agreements that are designed to
limit its exposure to increasing interest rates. The interest-rate cap of
these agreements exceeds the current market levels at the time they are
entered into. The interest rate indices specified by the agreements have been
and are expected to be highly correlated with the interest rates the Company
incurs on its borrowings. Payments to be received as a result of the specified
interest rate index exceeding the cap rate are accrued in other assets and are
recognized as a reduction to interest expense. The cost of these agreements is
included in other assets and amortized to interest
10
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
expense ratably during the life of the agreement. Upon termination of an
interest-rate cap agreement, any gain is deferred in other liabilities and
amortized over the remaining term of the original contractual life of the
agreement as a reduction to interest expense. Any notional amounts of
agreements in excess of borrowings expected to be outstanding during their
terms would be marked to market, with changes in market value recorded as an
adjustment to interest expense.
Deferred Acquisition and Financing Costs
Acquisition costs are capitalized and included in the purchase price of the
acquired stations. Financing costs are deferred and are amortized using the
interest method over the term of the related debt when funded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
3. ACQUISITIONS
In August 1994, the Company entered into an acquisition agreement with NTG,
Inc. relating to the acquisition of WZZM, Grand Rapids, Michigan; WNAC,
Providence, Rhode Island; and, WAPT, Jackson, Mississippi (the Northstar
Stations).
On January 4, 1995, the Company acquired the Northstar Stations for
approximately $108 million in cash. In addition, the Company agreed to certain
working capital adjustments and to assume certain state income tax liabilities
of $1.7 million. Fees and expenses associated with the acquisition
approximated $2.5 million.
During January 1995, the Company entered into an asset purchase agreement
with Tak Communications, Inc., debtor in possession, relating to the
acquisition of WGRZ, Buffalo, New York (the Buffalo Station); and KITV,
Honolulu; KMAU, Wailuku; KHVO, Hilo; and, TV Translator K51BB, Lihue, Hawaii
(the Hawaii Stations) in two closings for an aggregate consideration of $146
million.
On June 13, 1995, the Company acquired the Hawaii Stations for approximately
$16.5 million in cash and a note issued to the seller for $34.5 million, which
was paid in December 1995. Fees and expenses associated with this acquisition
were approximately $800,000.
On December 5, 1995, the Company acquired the Buffalo Station for $91
million in cash. Under the terms of the acquisition agreement, the Company
also made a supplemental payment to the seller of $4 million in cash as a
result of the closing of both the Hawaii Stations and the Buffalo Station.
Such additional consideration has been allocated to the assets acquired in the
purchases of the Hawaii Stations and the Buffalo Station. Fees and expenses
associated with the Buffalo acquisition were approximately $3.0 million.
During 1996, there was a change in the Buffalo Station purchase price
valuation, which affected equipment and FCC license by approximately $1.3
million.
11
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
On June 11, 1996, the Company acquired KHBS, Fort Smith, Arkansas, and its
S-2 satellite KHOG, Fayetteville, Arkansas, (the Arkansas Stations). As
consideration, the Company issued 227,654 shares of the Company's Series A
Common Stock, 10,938 shares of the Company's Series A Preferred Stock and
10,938 shares of the Company's Series B Preferred Stock valued at
approximately $27.6 million. The Company also paid approximately $5.9 million
in cash for certain real estate, a non-competition convenant and affiliated
debt associated with this acquisition. During the last part of 1996, there was
a change in the Arkansas Stations purchase price valuation, which affected
intangibles and other liabilities by approximately $2.3 million.
These acquisitions have been accounted for as purchases and, accordingly,
the purchase price and related acquisition costs have been allocated to the
acquired assets and liabilities based upon their fair market values. The
excess of the purchase price over the net fair market value of the tangible
assets acquired and liabilities assumed has been allocated to identifiable
intangible assets including FCC licenses and network affiliation agreements.
The consolidated financial statements include the results of operations of the
acquired stations since the date of the respective acquisitions.
Effective July 1, 1996, the Company entered into a Joint Marketing and
Programming Agreement (the Clear Channel Venture) with Clear Channel
Communications, Inc. (Clear Channel) involving WNAC and WPRI, the CBS
affiliate in Providence, Rhode Island, owned by Clear Channel. Under the
agreement, Clear Channel will program certain air time, including news
programming, on WNAC and will manage the sale of commercial air time on both
stations for an initial period of 10 years. The Company and Clear Channel each
will receive 50% of the broadcast cash flows generated by the two stations
subject to certain adjustments. The Company's share of the Clear Channel
Venture broadcast cash flows is included in total revenues. In connection with
this agreement, the Company paid Clear Channel approximately $13 million,
which is included in other non-current assets and is being amortized using the
straight line method over the initial term of the contract.
In November 1996, the Company entered into a definitive agreement (the
Gannett Swap) with Gannett Co., Inc. (Gannett) to swap the Company's WZZM and
WGRZ for Gannett's WLWT, the NBC affiliate in Cincinnati, Ohio, and KOCO, the
ABC affiliate in Oklahoma City, Oklahoma. In connection with this transaction,
the Company agreed to pay Gannett $20 million in additional consideration,
funded by borrowings under the Company's credit agreement. This transaction
closed on January 31, 1997.
Unaudited pro forma results of operations, reflecting combined historical
results for WZZM, WAPT, KITV, WGRZ, the Arkansas Stations and the Company's
share of the combined broadcast cash flows from the Clear Channel Venture as
if all transactions had occurred at the beginning of the respective periods
presented are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Total revenues.................................... $ 72,315,000 $ 75,646,000
Loss from continuing operations applicable to com-
mon stock........................................ $(14,587,000) $(15,163,000)
Loss from continuing operations per share applica-
ble to common stock.............................. $ (1.29) $ (1.34)
Pro forma weighted average number of shares used
in calculations.................................. 11,346,914 11,346,914
</TABLE>
12
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
Giving effect to the Gannett Swap discussed above, unaudited pro forma
results of operations reflecting combined historical results for WAPT, KITV,
WLWT, KOCO, the Arkansas Stations and the Company's share of the combined
broadcast cash flows from the Clear Channel Venture; as if all transactions
had occurred at the beginning of the respective periods presented are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Total revenues.................................... $ 79,683,000 $ 84,243,000
Loss from continuing operations applicable to com-
mon stock........................................ $(19,346,000) $(13,330,000)
Loss from continuing operations per share applica-
ble to common stock.............................. $ (1.70) $ (1.17)
Pro forma weighted average number of shares used
in calculations.................................. 11,346,914 11,346,914
</TABLE>
The above pro forma results are presented in response to applicable
accounting rules relating to business acquisitions and are not necessarily
indicative of the actual results that would be achieved had each of the
stations been acquired at the beginning of the periods presented, nor are they
indicative of future results of operations.
4. LONG-TERM DEBT
Long-term debt at December 31, consists of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Bank Credit Agreement dated October 27, 1995:
Revolving credit facility.......................... $ -- $ 21,500,000
Senior Subordinated Notes............................ 150,000,000 150,000,000
Less current maturities.............................. -- --
------------ ------------
$150,000,000 $171,500,000
============ ============
</TABLE>
Bank Credit Agreement
In June 1995, the Company amended and restated an existing credit agreement.
In October 1995, the agreement was again amended. The unamortized deferred
financing costs related to these agreements were written off and are reflected
as an extraordinary loss in 1995. Under the terms of the October 1995 amended
and restated Bank Credit Agreement (the October 1995 Credit Agreement), the
Company was able to borrow up to $215.0 million under a Senior Secured
Reducing Revolving Credit Facility that on December 31, 1999 converted in part
to a term loan facility. Borrowings under the revolving credit facility bear
interest at a floating rate. During August 1996, in accordance with provisions
established by the October 1995 Credit Agreement, the Company reduced the
committed amount of the facility to $50 million. (See Note 11. Subsequent
Events.) The final maturity of the term loan is December 31, 2002.
Substantially all of the assets of the Company and its subsidiaries are
pledged or mortgaged as collateral under the October 1995 Credit Agreement.
The October 1995 Credit Agreement imposes various conditions, restrictions and
limitations on the Company and its subsidiaries, including those that
substantially restrict the payment of dividends and transactions with
affiliates. To the extent the Company generates free cash flow in excess of
fixed charges (or "excess cash flow"), the Company is required to make an
annual prepayment on its outstanding debt in an amount equal to 66.7% of such
excess cash flow from the preceding fiscal year.
13
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
Senior Subordinated Notes
In October 1995, the Company issued $150,000,000 of senior subordinated
notes (the Notes). The Notes are due in 2005 and bear interest at 9 3/4%
payable semi-annually. The Notes are general unsecured obligations of the
Company. In addition, the indenture governing the Notes imposes various
conditions, restrictions and limitations on the Company and its subsidiaries.
At December 31, 1996, the fair value of the Notes approximated their carrying
value.
Interest Rate Risk Management
Under terms of the December 1994 Credit Agreement (or Old Credit Agreement)
and its subsequent amendments and restatements, the Company is required to
enter into interest rate protection agreements to modify the interest
characteristics of a portion (approximately 50%) of its outstanding borrowings
thereunder from a floating rate to a fixed rate.
Accordingly, the Company, in compliance with its covenant obligations,
entered into two interest rate swap agreements in February 1995 with two
different counterparties that effectively fixed the interest rate at
approximately 7.9% on $35 million of its borrowings then outstanding until
January 1997.
With a portion of the proceeds of the Company's initial public offering in
October 1995, the Company paid off its borrowings under the October 1995
Credit Agreement. As a result and in anticipation of future borrowings under
the October 1995 Credit Agreement, in recognition of the continuing obligation
to maintain interest rate risk protection agreements, and in order to defer
the benefit of existing agreements and to minimize current cash outlays, the
Company modified its interest rate management strategy accordingly. During
1995, the Company terminated one of its two existing interest rate swap
agreements for a fee of $439,722 and entered into an additional interest rate
swap agreement with another counterparty that, in substance, offset the
existing agreement.
The fee for this additional interest rate swap agreement was $560,755. In
addition, the Company wrote two options that gave the option holder the right
to enter into two interest rate swap agreements with the Company during May
and June 1996. Option premiums for these two options were $1,000,477. The
option holder exercised these options in May and June 1996, effectively fixing
the Company's interest rate at approximately 7% on $35 million of its
borrowings until June 1999.
Additional information regarding these interest rate protection agreements
in effect at December 31, 1996 follows:
<TABLE>
<CAPTION>
ESTIMATED
NOTIONAL AVERAGE AVERAGE FAIR
AMOUNT RECEIVE RATE PAY RATE VALUE
----------- ------------ -------- ---------
<S> <C> <C> <C> <C>
Interest rate swap agreements:
Fixed rate agreement............ $20,000,000 LIBOR 7.01% $(488,064)
Fixed rate agreement............ $15,000,000 LIBOR 6.98% $(361,159)
</TABLE>
The fair value of the non-hedged portion of these agreements, $327,800, is
included in other liabilities at December 31, 1996.
The Company is exposed to credit loss in the event the other parties on the
above agreements do not perform, but the Company does not anticipate non-
performance by any of these counter parties, all of which are major financial
institutions.
14
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
At the closing of the acquisition of the Hawaii Stations, the Company issued
a $34.5 million note to the seller (Hawaii note) as part of the purchase price.
The Company paid this note in full, plus accrued interest, on December 5, 1995,
in connection with the closing of the Buffalo Station acquisition.
Interest expense net, for the years ended December 31, 1995 and 1996 consists
of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Interest on borrowings:
Bank credit agreements.............................. $ 6,571,398 $ 2,230,709
Senior subordinated notes........................... 2,644,521 14,580,478
Hawaii note......................................... 1,544,268 --
Amortization of deferred financing costs and other.. 839,049 988,311
----------- -----------
11,599,236 17,799,498
Interest rate swap agreements:
Changes in fair value for agreements with notional
amounts in excess of outstanding borrowings........ 452,545 436,080
Termination fee..................................... 439,722 --
Options related to interest rate swap agreements:
Changes in fair value............................... 586,219 (1,586,696)
----------- -----------
Total interest expense............................ 13,077,722 16,648,882
Interest income....................................... 1,025,213 83,197
----------- -----------
Total interest expense, net....................... $12,052,059 $16,565,695
=========== ===========
</TABLE>
15
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
5. INCOME TAXES
As a result of the losses incurred by the Company in the period from
inception (August 5, 1994) to December 31, 1994, and for the years ended
December 31, 1995 and 1996, no federal income tax expense has been recorded.
Deferred tax liabilities and assets at December 31, consist of the
following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation........................... $ 79,321 $ 1,624,477
Allowance for doubtful accounts.................... 18,239 4,883
Amortization of organizational and start-up costs.. 454,548 604,366
Prepaid expenses................................... 44,112 140,848
Amortization of intangibles........................ -- 8,465,586
----------- -----------
Total deferred tax liabilities................... 596,220 10,840,160
Deferred tax assets:
Charitable contributions carryover................. -- 3,470
Amortization of intangibles........................ 435,410 --
Deferred compensation.............................. 65,383 65,383
Compensation element of stock options.............. 180,221 499,181
Fair value adjustments of interest rate protection
agreements........................................ 363,567 121,316
Net operating loss................................. 5,192,880 11,070,531
----------- -----------
Total deferred tax assets........................ 6,237,461 11,759,881
Valuation allowance for deferred tax assets.......... (5,641,241) (919,721)
----------- -----------
Net deferred tax assets.............................. 596,220 10,840,160
----------- -----------
Net deferred tax assets/liabilities.................. $ -- $ --
=========== ===========
</TABLE>
At December 31, 1996, the Company has available net operating loss
carryforwards for federal income tax purposes of approximately $29,920,000, of
which $13,351,000 expires in 2010 and $16,569,000 expires in 2011. The change
in the valuation allowance in 1996 of $4,721,798 resulted primarily from the
effect of recording the deferred tax liabilities resulting from the Arkansas
Stations acquisition.
6. COMMON STOCK AND PREFERRED STOCK
In October 1995, the Company amended its Certificate of Incorporation to
increase the number of shares of common stock authorized to 50,000,000 at $.01
par value per share. Of this amount, 35,000,000 shares were designated as
Series A common stock, 200,000 shares were designated as Series B common stock
and 14,800,000 shares were designated as Series C common stock. Series A and
Series B common stock are voting while Series C common stock is non-voting.
Under certain conditions, Series C Common Stock can be converted into Series A
Common Stock on a one-for-one basis. Under the amendment, each share of
previously outstanding voting common stock was converted into one share of the
Company's Series B common stock, and each share of previously outstanding non-
voting stock was redesignated as one share of the Company's Series C common
stock.
In addition, the Company is authorized to issue 1,000,000 shares of
preferred stock, designated either as Series A Preferred Stock or Series B
Preferred Stock. This preferred stock has a par value of $.01 per share. In
16
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
June 1996, the Company issued 227,654 shares of Company's Series A Common
Stock, 10,938 shares of the Company's Series A Preferred Stock and 10,938
shares of the Company's Series B Preferred Stock in connection with the
acquisition of the Arkansas Stations.
The preferred stock pays a cash dividend at 6.5% annually. Series A
Preferred Stock is convertible at the option of the holders into Series A
Common Stock of the Company at a conversion price of $35 per share of Series A
Common Stock. In the event the holders do not convert the Series A Preferred
Stock into shares of Series A Common Stock by June 11, 2001, the Company may
redeem such Series A Preferred Stock at its stated value. Series B Preferred
Stock is redeemable by the Company at its stated value at any time after June
11, 2001. In the event the Company does not redeem the Series B Preferred
Stock by July 11, 2001, then from and after that date, the holders may convert
the Series B Preferred Stock into shares of Series A Common Stock at a
conversion price equal to the then fair market value of the Series A Common
Stock.
During 1995, the Company issued in a private placement 199,900 additional
shares of voting common stock and 7,300,000 shares of non-voting common stock
for total consideration of $74.999 million in cash.
During October and November 1995, the Company sold, in an underwritten
offering, 3,619,260 shares of Series A Common Stock at $17 per share for total
consideration, net of expenses, of $56.3 million.
7. STOCK OPTIONS
The Company has a stock based compensation plan under which options to
purchase Series C common stock up to a maximum of 12% of the Company's fully
diluted, as defined, common stock may be granted to directors and key
employees. Options are granted at a price not less than the fair market value
of the stock at the date of grant; vest either with the passage of time or
upon the attainment of performance goals; and expire 10 years from the date of
grant.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
dividends-none; forfeitures-time vesting none, performance vesting 30%;
expected volatility--33%, zero prior to the Company's initial public offering;
risk free interest rate--5.25%; and expected life--5 years. The resulting fair
value is charged to expense over the service period with a corresponding
increase in additional paid in capital. During 1995 and 1996, the Company
charged to expense $674,569 related to stock based compensation.
A summary of the Company's stock option plan and changes during the years
ended December 31, 1995 and 1996 follows:
<TABLE>
<CAPTION>
TIME PERFORMANCE
VESTING VESTING
------- -----------
<S> <C> <C>
Balance at December 31, 1994......................... -- --
Options granted...................................... 573,432 747,583
Options exercised Options forfeited or expired....... (3,125) (3,125)
------- -------
Balance at December 31, 1995......................... 570,307 744,458
Options granted...................................... 40,353 34,179
Options exercised.................................... -- --
Options forfeited or expired......................... -- (51,125)
------- -------
Balance at December 31, 1996......................... 610,660 727,512
======= =======
</TABLE>
17
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
Exercise prices range from $10 to $28 per share. The weighted average
exercise price of options outstanding at December 31, 1995 and 1996 is $12.15
and $12.74 per share, respectively. The weighted average grant date fair value
of options granted during 1995 and 1996 was $3.97 and $3.54, respectively. At
December 31, 1996, 469,813 options are exercisable.
8. RELATED PARTY TRANSACTIONS
The Company has entered into separate agreements with one of its
shareholders, Argyle Television Investors, L.P., and the shareholder's general
partner, ATI General Partner, L.P. (the Partnerships), under which the Company
provides to the Partnerships personnel, office, property, services, expertise,
systems and other assets and amenities. In consideration for such, the
partnerships are required to reimburse the Company for expenses and costs
allocated to providing these services to the Partnerships. During the year
ended December 31, 1995 and 1996, the Company recognized total reimbursements
of $839,695 and $893,205, respectively, under these agreements. Such
reimbursements are offset against corporate general and administrative
expenses in the accompanying statements of operations.
During 1995, a related party contributed to the Company equipment with a
value of $157,998. The related party did not receive any consideration for the
contributed equipment.
In connection with the acquisition of the Northstar Stations, the Hawaii
Stations and the Buffalo Station, the Company incurred approximately $13.9
million in financing costs in 1995, a substantial portion of which were fees
paid under the Company's credit agreements. Affiliates of certain of the banks
in the credit agreement bank group are partners in a partnership that owns
shares of the Company's non-voting common stock.
In June 1995, the Company entered into an agreement (the Buffalo Management
Agreement) to provide interim management services to the Buffalo Station
pending closing of the acquisition of the Buffalo Station. Subject to the
seller's supervision, control and approval, the Company provided to the
Buffalo Station, pursuant to the Buffalo Management Agreement, a number of
management services, including recruitment and training of personnel,
direction of advertising sales efforts, implementation of billing and
collection practices, maintenance of accounting practices, negotiation of
contracts and maintenance and acquisition of equipment. In consideration for
the Company's services, the seller paid the Company $450,000 per month (half
of which was paid into escrow pending the closing of the acquisition of the
Buffalo Station). At the closing of the acquisition of the Buffalo Station on
December 5, 1995, the Buffalo Management Agreement was terminated and that
portion of the management fee placed in escrow was released to the Company.
The Company recognized $2.7 million in management fees in 1995, which are
included in total revenues in the accompanying statement of operations
(associated expenses are included in station operating expenses).
9. COMMITMENTS
The Company has obligations to various program syndicators and distributors
in accordance with current contracts for the rights to broadcast programs.
Future payments as of December 31, 1996 scheduled under contracts for programs
available are as follows:
<TABLE>
<S> <C>
1997........................................................... $4,566,421
1998........................................................... 2,845,209
1999........................................................... 1,227,172
2000........................................................... 191,286
----------
$8,830,088
==========
</TABLE>
18
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
The Company has various agreements relating to non-cancelable operating
leases with an initial term of one year or more (some of which contain renewal
options), future program rights not available for broadcast at December 31,
1996, and employment contracts for key employees. Future minimum payments
under terms of these agreements as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
EMPLOYMENT
OPERATING PROGRAM AND TALENT
LEASES RIGHTS CONTRACTS
---------- ---------- ----------
<S> <C> <C> <C>
1997..................................... $ 584,847 $ 883,029 $4,597,321
1998..................................... 568,534 2,539,045 2,410,760
1999..................................... 119,074 2,092,544 1,522,338
2000..................................... 36,070 1,739,956 510,188
2001 and thereafter...................... 87,240 31,046 273,875
---------- ---------- ----------
$1,395,765 $7,285,620 $9,314,482
========== ========== ==========
</TABLE>
Rent expense for operating leases was $307,628 and $532,139 for the years
ended December 31, 1995 and 1996, respectively.
During the fourth quarter of 1997, the Company will make its final payment
for KITV's new all-digital studio totaling $9.3 million, which includes $1.8
million currently in escrow.
In the normal course of business, the Company is subject to various claims
and lawsuits. In the opinion of the Company's management, liabilities, if any,
arising from these matters will not have a significant effect on the Company's
financial statements.
During 1996, the Company entered into a "change in control" agreement with
certain members of senior management (excluding Management Stockholders).
Under terms of this agreement, if a change in control of the Company occurs
(as defined by the agreement) and the employee is terminated without cause or
the employee's duties are materially diminished (as described in the
agreement), each individual would be entitled to a lump-sum payment of twice
the sum of the individual's base salary plus the individual's target bonus for
the calendar year in which the change in control occurs, less cash
compensation received by the individual subsequent to the change in control.
10. BENEFIT PLAN
In April 1995, the Company adopted a 401(k) Savings Plan. Qualified
employees may contribute from 1% to 12% of their compensation up to certain
dollar limits. The Company matches one-quarter of the employee contribution up
to 6% of the employee's compensation. The Company's contributions to this plan
for the years ended December 31, 1995 and 1996 were $67,788 and $186,101,
respectively. During February 1997, the Company's compensation committee
approved an increase in the Company's match. The match will increase from one-
quarter to one-half of employee contributions up to 6% of each employee's
compensation, effective July 1, 1997.
19
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
11. SUBSEQUENT EVENTS
Upon completion of the Gannett Swap, as described in Note 3, "Acquisitions,"
the Company amended and restated its October 1995 Credit Agreement in order to
provide up to $65.0 million of borrowing capacity under the revolving credit
facility.
On March 26, 1997, the Company entered into an agreement with The Hearst
Corporation (Hearst) to combine the broadcasting divisions of Hearst with and
into the Company. The agreement has been approved by the boards of directors
of both companies and is expected to be submitted to shareholders of the
Company for approval in August 1997.
20
<PAGE>
ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, 1996 (UNAUDITED)
-----------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 949 $ 2,160
Accounts receivable, net 14,936 17,413
Barter program rights 5,912 4,577
Program rights 3,934 2,476
Other 1,895 1,372
-----------------------------------
Total current assets 27,626 27,998
Property, plant and equipment, net 39,213 51,264
Intangible assets:
FCC licenses 126,009 201,037
Network affiliation agreements 121,272 43,961
Other 12,764 8,221
-----------------------------------
260,045 253,219
Less accumulated amortization (28,190) (19,147)
-----------------------------------
231,855 234,072
Other assets:
Deferred acquisition and financing 5,788 6,096
costs, net
Barter program rights, noncurrent 5,334 2,983
Program rights, noncurrent 3,580 1,657
Other 15,212 14,398
-----------------------------------
Total assets $328,608 $338,468
===================================
</TABLE>
21
<PAGE>
ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, 1996 (UNAUDITED)
-----------------------------------
(In thousands)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,001 $ 1,780
Accrued liabilities 5,612 4,656
Barter program payable 6,776 4,865
Program rights payable 4,251 1,724
Other 868 140
-----------------------------------
Total current liabilities 18,508 13,165
Barter program rights payable 5,333 2,983
Program rights payable 3,610 2,585
Long-term debt 171,500 199,000
Other liabilities 505 85
Stockholders' equity:
Series A preferred stock, 10,938
shares issued and outstanding 1 1
Series B preferred stock,
10,938 shares issued and
outstanding 1 1
Series A common stock, par
value $.01 per share,
35,000,000 shares
authorized and 3,846,914
and 4,010,914 shares issued
and outstanding in 1996 and
1997, respectively 38 39
Series B common stock, par
value $.01 per share,
200,000 shares authorized,
200,000 and 36,000 shares
issued and outstanding in
1996 and 1997, respectively 2 1
Series C common stock, par
value $.01 per share,
14,800,000 shares
authorized, 7,300,000
shares issued and
outstanding 73 73
Additional paid-in capital 159,454 159,247
Retained deficit (30,417) (38,712)
-----------------------------------
Total stockholders' equity 129,152 120,650
Total liabilities and stockholders'
equity $328,608 $338,468
===================================
</TABLE>
See accompanying notes.
22
<PAGE>
ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30
-------------------------------------------
1996 1997 1996 1997
-------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues $18,562 $21,886 $34,057 $39,765
Station operating expenses 9,474 10,586 18,372 21,367
Amortization of program rights 1,282 1,062 2,571 2,119
Depreciation and amortization 5,738 6,202 10,724 12,760
-------------------------------------------
Station operating income 2,068 4,036 2,390 3,519
Corporate general and administrative
expenses 884 896 1,867 1,904
Non-cash compensation expense 168 244 337 503
-------------------------------------------
Operating income 1,016 2,896 186 1,112
Interest expense, net 3,804 4,989 7,304 9,407
-------------------------------------------
Net loss $(2,788) $(2,093) $(7,118) $(8,295)
Less preferred stock dividends (118) (355) (118) (711)
Loss applicable to common stock $(2,906) $(2,448) $(7,236) $(9,006)
===========================================
Loss per common share $(0.26) $(0.22) $(0.65) $(0.79)
===========================================
Weighted average number of common
shares outstanding 11,169 11,347 11,144 11,347
===========================================
</TABLE>
See accompanying notes.
23
<PAGE>
ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
AND PREFERRED PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
---------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balances at December 31, 1996 $115 $159,454 $(30,417) $129,152
Compensation element of stock options - 504 - 504
Dividends paid on preferred stock - (711) - (711)
Net loss - - (8,295) (8,295)
---------------------------------------------------
Balances at June 30, 1997 $115 $159,247 $(38,712) $120,650
===================================================
</TABLE>
See accompanying notes.
24
<PAGE>
ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------
1996 1997
--------------------
OPERATING ACTIVITIES (In thousands)
<S> <C> <C>
Net loss $ (7,118) $ (8,295)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation 2,117 2,798
Amortization of intangible assets 8,607 9,962
Amortization of deferred financing
costs 372 325
Amortization of program rights 2,571 2,119
Program payments (1,909) (2,338)
Compensation element of stock options 337 504
Fair value adjustments of interest
rate protection agreements 1,021 (328)
Changes in operating assets and
liabilities, net (6,258) (3,146)
-------------------
Net cash provided by (used in)
operating activities (260) 1,601
INVESTING ACTIVITIES
Acquisition of stations (5,933) (23,088)
Purchases of property, plant and
equipment, net (3,590) (4,091)
Partial payment on relocation of studio (927) -
-------------------
Net cash used in investing activities (10,450) (27,179)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 15,500 33,000
Payment of long-term debt (4,000) (5,500)
Dividends paid on preferred stock (118) (711)
-------------------
Net cash provided by financing activities 11,382 26,789
Increase in cash and cash equivalents 672 1,211
Cash and cash equivalents at beginning of period 2,206 949
-------------------
Cash and cash equivalents at end of
period $ 2,878 2,160
===================
Businesses acquired in purchase
transaction:
Fair market value of assets acquired $ 38,303 $ 23,102
Liabilities assumed (4,773) 14
Issuance of preferred stock (21,876) -
Issuance of common stock (5,721) -
-------------------
Net cash paid for acquisitions $ 5,933 $ 23,088
===================
Supplemental Cash Flow Information:
Purchase price valuation adjustment
affecting equipment and FCC licenses $ 1,277 $ -
</TABLE>
See accompanying notes.
25
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. SUMMARY OF ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of
Argyle Television, Inc. (the "Company") and its wholly owned subsidiaries. All
significant intercompany accounts have been eliminated in consolidation.
References herein to the Company include its subsidiaries, unless the context
requires otherwise.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
2. ACQUISITIONS
In November 1996, the Company entered into a definitive agreement (the
Gannett Swap) with Gannett Co., Inc. (Gannett) to swap the Company's WZZM and
WGRZ for Gannett's WLWT, the NBC affiliate in Cincinnati, Ohio, and KOCO, the
ABC affiliate in Oklahoma City, Oklahoma. In connection with this transaction,
the Company agreed to pay Gannett $20 million in additional consideration,
funded by borrowings under the Company's credit agreement. This transaction
closed on January 31, 1997.
This acquisition was accounted for as a purchase and, accordingly, the
purchase price and related acquisition costs have been allocated to the acquired
assets and liabilities based upon their fair market values. The excess of the
purchase price over the net fair market value of the tangible assets acquired
and the liabilities assumed was allocated to identifiable intangible assets
including FCC licenses. The condensed consolidated financial statements include
the results of operations of the acquired stations since the date of the
acquisition.
On March 26, 1997, the Company entered into an agreement with The Hearst
Corporation (Hearst) to combine the television broadcast group of Hearst with
and into the Company, with the Company to be renamed "Hearst-Argyle Television,
Inc." upon completion of the transaction (the Hearst Transaction). The Hearst
Transaction has been approved by the boards of directors of both Hearst and the
Company and is being submitted to stockholders of the Company for approval at
the annual meeting to be held August 28, 1997. For more information about the
Hearst Transaction, including its anticipated effect on the Company, its
stockholders, directors, financial position, operations and management, and
other matters, reference is hereby made to the
26
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1997
Company's Proxy Statement/Prospectus dated July 31, 1997 (the Proxy Statement)
mailed to stockholders and filed with the Securities and Exchange Commission.
The following unaudited pro forma results of operations reflect combined
historical results for the Company's (i) WAPT, KITV, WLWT, KOCO and the Arkansas
Stations and the Company's share of the combined broadcast cash flows from the
Clear Channel Venture; (ii) the Hearst Stations, to be combined initially with
the Company's stations, which include WCVB, WTAE, WBAL, WISN, KMBC and WDTN; and
(iii) fees associated with Hearst-Argyle's management of certain properties
owned by Hearst, as if all acquisitions and transactions occurred at the
beginning of the respective periods. (See Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations.) In connection with
the Hearst Transaction and under FCC regulations, Hearst-Argyle will be required
to divest the Company's interest in the Clear Channel Venture and WDTN.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1997
-------------------------------------
(In thousands, except per share data)
<S> <C> <C>
Total revenues $181,571 $185,332
Earnings from continuing operations
attributable to common stock $ 16,579 $ 19,975
Earnings from continuing operations per
share attributable to common stock $ 0.37 $ 0.45
Pro forma weighted average number of
shares used in calculations* 44,636 44,636
</TABLE>
* Gives effect to the issuance of shares in the Hearst Transaction assuming
Company stockholders elect to receive the maximum cash offered.
The above pro forma results are presented in response to applicable
accounting rules relating to business acquisitions and are not necessarily
indicative of the actual results that would be achieved had each of the stations
been acquired at the beginning of the periods presented, nor are they indicative
of future results of operations.
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
--------------------------------
<S> <C> <C>
Bank Credit Agreement:
Revolving credit facility $ 21,500,000 $ 49,000,000
Senior Subordinated Notes 150,000,000 150,000,000
Less current maturities - -
--------------------------------
$171,500,000 $199,000,000
================================
</TABLE>
27
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1997
Under the terms of the Company's Bank Credit Agreement, the Company is
required to enter into interest rate protection agreements to modify the
interest characteristics of a portion (approximately 50%) of its outstanding
borrowings thereunder from a floating rate to a fixed rate.
The Company wrote two options that gave the option holder the right to enter
into two interest rate swap agreements with the Company during May and June
1996. Option premiums for these two options were $1,000,477. The option holder
exercised these options in May and June 1996, effectively fixing the Company's
base interest rate at approximately 7% on $35 million of its borrowings until
June 1999.
Additional information regarding these interest rate protection agreements in
effect at June 30, 1997 follows:
<TABLE>
<CAPTION>
AVERAGE AVERAGE ESTIMATED
NOTIONAL AMOUNT RECEIVE RATE PAY RATE FAIR VALUE
------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swap agreements:
Fixed rate agreement $20,000,000 LIBOR 7.01% $(307,320)
Fixed rate agreement $15,000,000 LIBOR 6.98% $(231,338)
</TABLE>
The Company is exposed to credit loss in the event the other parties on the
above agreements do not perform, but the Company does not anticipate non-
performance by any of these counter parties, all of which are major financial
institutions.
The Company has received a financing commitment from Chase Manhattan Bank
to provide a $1.0 billion credit facility. (See Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
4. INCOME TAXES
As a result of the losses incurred by the Company for the periods through
June 30, 1997, no federal income tax expense has been recorded.
At June 30, 1997, the Company has available net operating loss (NOL)
carryforwards for federal income tax purposes of approximately $13.3 million,
$16.5 million, and $6.4 million, which will expire in 2010, 2011, and 2012,
respectively. The Hearst Transaction will cause the Company to experience an
"ownership change" within the meaning of the Internal Revenue Code and
accordingly, such NOL carryforwards will be limited after and assuming such
transaction is consummated.
28
<PAGE>
ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1997
5. RELATED PARTY TRANSACTIONS
The Company has entered into separate agreements with one of its
shareholders, Argyle Television Investors, L.P., and the shareholder's general
partner, ATI General Partner, L.P. (the Partnerships), under which the Company
provides to the Partnerships personnel, office, property, services, expertise,
systems and other assets and amenities. In consideration for such, the
Partnerships are required to reimburse the Company for expenses and costs
allocated to providing these services to the Partnerships. During the three and
six months ended June 30, 1997, the Company recognized total reimbursements of
approximately $224,000 and $420,000, respectively, under these agreements. Such
reimbursements are offset against corporate general and administrative expenses
in the accompanying statements of operations.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Hearst Corporation
We have audited the accompanying combined balance sheets of the Hearst
Broadcast Group of The Hearst Corporation (referred to as the "Group") as of
December 31, 1995 and 1996, and the related combined statements of operations
and cash flows for each of the three years in the period ended December 31,
1996. These combined financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of the Group at December
31, 1995 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
May 1, 1997
30
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................... $ 2,989,553 $ 2,881,884
Accounts receivable, net of allowance for
doubtful accounts of $1,626,120 and $1,693,744
in 1995 and 1996, respectively................ 70,126,126 64,216,484
Program rights................................. 28,043,437 25,611,365
Deferred income tax benefits................... 3,475,311 3,012,810
Other.......................................... 3,544,844 3,824,436
------------- -------------
Total current assets....................... 108,179,271 99,546,979
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements............... 16,278,849 17,301,354
Broadcasting equipment......................... 106,511,154 108,250,614
Office furniture, equipment and other.......... 11,265,008 12,298,439
Construction in progress....................... 1,177,629 768,552
Less accumulated depreciation and
amortization.................................. (104,216,576) (106,515,373)
------------- -------------
31,016,064 32,103,586
------------- -------------
GOODWILL AND OTHER INTANGIBLES, Net.............. 243,704,325 233,410,571
------------- -------------
OTHER ASSETS:
Program rights................................. 738,368 483,173
Other.......................................... 1,767,826 1,411,353
------------- -------------
2,506,194 1,894,526
------------- -------------
TOTAL...................................... $ 385,405,854 $ 366,955,662
============= =============
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................... $ 3,775,278 $ 4,096,996
Accrued liabilities............................ 14,290,552 17,165,646
Program rights................................. 32,449,075 25,718,650
Other.......................................... 852,336 1,414,814
------------- -------------
Total current liabilities.................. 51,367,241 48,396,106
DEFERRED INCOME TAXES............................ 55,082,097 54,991,592
PROGRAM RIGHTS................................... 1,360,051 1,507,840
OTHER LIABILITIES................................ 4,834,242 3,040,386
COMMITMENTS AND CONTINGENCIES....................
DUE TO PARENT COMPANY AND AFFILIATES............. 272,762,223 259,019,738
------------- -------------
TOTAL...................................... $ 385,405,854 $ 366,955,662
============= =============
</TABLE>
See notes to combined financial statements.
31
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
TOTAL REVENUES......................... $259,459,248 $279,340,044 $283,970,855
STATION OPERATING EXPENSES............. 106,281,026 117,534,578 121,500,863
AMORTIZATION OF PROGRAM RIGHTS......... 40,266,120 38,619,342 40,296,566
DEPRECIATION AND AMORTIZATION.......... 23,071,349 22,134,202 16,970,594
------------ ------------ ------------
STATION OPERATING INCOME............... 89,840,753 101,051,922 105,202,832
CORPORATE GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 8,006,766 7,857,597 7,658,427
INTEREST EXPENSE, NET.................. 22,677,737 22,217,475 21,234,985
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES................................. 59,156,250 70,976,850 76,309,420
PROVISION FOR INCOME TAXES............. 25,265,470 30,182,357 31,906,940
------------ ------------ ------------
NET INCOME............................. $ 33,890,780 $ 40,794,493 $ 44,402,480
============ ============ ============
</TABLE>
See notes to combined financial statements.
32
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.......................... $ 33,890,780 $ 40,794,493 $ 44,402,480
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization of
property, plant and equipment.... 6,291,259 6,271,016 6,676,840
Amortization of intangible
assets........................... 16,780,090 15,863,186 10,293,754
Amortization of program rights.... 40,266,120 38,619,342 40,296,566
Program rights payments........... (39,179,171) (38,766,873) (44,522,933)
Other............................. 71,535 372,613 330,998
Provision for doubtful accounts... 793,707 1,130,264 989,298
Deferred income taxes............. (1,586,544) (111,451) 371,995
Changes in operating assets and
liabilities:
Accounts receivable............. (14,595,435) (4,485,003) 4,920,344
Other assets.................... 897,602 (418,054) 76,882
Accounts payable and accrued
liabilities.................... (636,900) 1,985,128 3,196,812
Other liabilities............... 1,466,766 (69,867) (1,231,378)
------------ ------------ ------------
Net cash provided by operating
activities................... 44,459,809 61,184,794 65,801,658
INVESTING ACTIVITIES--Purchases of
property, plant and equipment,
net................................ (8,429,697) (8,621,082) (7,764,362)
FINANCING ACTIVITIES--Due to parent
company and affiliates............. (33,584,343) (52,019,928) (58,144,965)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................ 2,445,769 543,784 (107,669)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................ -- 2,445,769 2,989,553
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
YEAR............................... $ 2,445,769 $ 2,989,553 $ 2,881,884
============ ============ ============
</TABLE>
See notes to combined financial statements.
33
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
1. ORGANIZATION AND NATURE OF OPERATIONS
The accompanying combined financial statements of the Hearst Broadcast Group
(the "Group") of The Hearst Corporation (the "Corporation") include the
combined operating results of the WCVB-TV Division (including Hearst
Broadcasting Productions), WTAE-TV Division, WBAL-TV Division, KMBC-TV
Division, WISN-TV Division and the WDTN-TV Division of the Corporation.
The Group owns and operates six network-affiliated television stations in
geographically diverse markets in the United States. Five of the stations are
affiliates of the American Broadcasting Companies ("ABC") and one station is
an affiliate of the National Broadcasting Company, Inc. ("NBC"). The Group
operates in one business segment, commercial television broadcasting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES
Basis of Presentation--All significant interdivisional accounts and
transactions have been eliminated in the combination.
Cash Equivalents--All highly liquid investments with original maturities of
three months or less when purchased are considered to be cash equivalents.
Accounts Receivable--Concentration of credit risk with respect to accounts
receivable is limited due to the large number of geographically diverse
customers, individually small balances and short payment terms.
Program Rights--Program rights and the corresponding contractual obligations
are recorded when the license period begins and the programs are available for
use. Program rights are carried at the lower of unamortized cost or estimated
net realizable value on a program by program basis and such amounts are not
discounted. Any reduction in unamortized costs to net realizable value is
included in amortization of program rights in the accompanying combined
statements of operations. Such reductions in unamortized costs for the years
ended 1994, 1995 and 1996 were not material except for a writedown of
$3,600,000 in 1994. Costs of off network syndicated product, first run
programming, features films and cartoons are amortized on the future number of
showings on an accelerated basis contemplating the estimated revenue to be
earned per showing, but generally not exceeding five years. Program rights and
the corresponding contractual obligations are classified as current or long-
term based on estimated usage and payment terms, respectively.
Barter and Trade Transactions--Barter transactions represent the exchange of
commercial air time for programming. Trade transactions represent the exchange
of commercial air time for merchandise or services. Barter transactions are
generally recorded at the fair market value of the commercial air time
relinquished. Trade transactions are generally recorded at the fair market
value of the merchandise or services received. Barter program rights and
payables are recorded for barter transactions based upon the availability of
the programming for broadcast. Revenue is recognized on barter and trade
transactions when the commercials are broadcast; expenses are recorded when
the program, merchandise or service received is utilized. Barter and trade
revenues were approximately, $2,054,000, $3,871,000 and $4,185,000 for the
years ended December 31, 1994, 1995 and 1996, respectively. Barter and trade
expenses were approximately $1,948,000, $3,852,000 and $4,143,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
Property, Plant and Equipment--Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are generally calculated on the straight-line method over the
estimated useful lives (or lease terms, if shorter) of the assets ranging from
3 to 40 years. Improvements are capitalized, while maintenance and repairs are
charged to expense as incurred.
Goodwill and Other Intangibles--Goodwill and other intangibles are recorded
at cost. In management's opinion, none of the goodwill acquired prior to
November 1, 1970 (the date after which goodwill resulting from subsequent
acquisitions required amortization) has declined in value. Accordingly, such
assets are not being
34
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
amortized. Goodwill and other intangible assets acquired subsequent to October
31, 1970 are being amortized on the straight-line method over varying lives
not exceeding forty years (Note 3).
Income Taxes--The Group is included in the Corporation's consolidated
Federal, state and local income tax returns. The Group's pro rata share of the
Corporation's consolidated income tax liabilities is allocated to the Group on
a separate return basis. In accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," deferred income tax assets
and liabilities are measured based upon the difference between the financial
accounting and tax bases of assets and liabilities.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant accounting estimates used in the preparation of
the Group's combined financial statements include estimates of the allowance
for uncollectible accounts and realizability of program rights. In
management's opinion, actual results are not expected to vary materially from
the estimates and assumptions used in preparing these combined financial
statements.
3. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible assets at December 31, 1995 and 1996 consist
of the following:
<TABLE>
<CAPTION>
RANGE
OF
LIVES
(YEARS) 1995 1996
------- ------------ ------------
<S> <C> <C> <C>
Goodwill.................................... 40 $149,211,887 $149,211,887
Advertiser client base asset................ 35 122,828,300 122,828,300
Favorable studio and office space lease..... 40 23,637,936 23,637,936
Accelerated market growth asset............. 17-24 20,186,300 20,186,300
Underdeveloped market competition asset..... 5-7 28,430,600 28,430,600
Premium for early delivery of physical
plant...................................... 10 63,588,300 63,588,300
ABC network affiliation agreement........... 40 18,154,333 18,154,333
Management employment contracts............. 3 26,765,600 26,765,600
Other....................................... various 43,926,306 43,926,306
------------ ------------
496,729,562 496,729,562
Accumulated amortization.................... 253,025,237 263,318,991
------------ ------------
$243,704,325 $233,410,571
============ ============
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1995 and 1996 consist of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Payroll and related costs......................... $ 9,385,112 $11,305,557
Other............................................. 4,905,440 5,860,089
----------- -----------
$14,290,552 $17,165,646
=========== ===========
</TABLE>
35
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
5. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995,
and 1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current:
State and local................... $ 4,956,786 $ 5,592,128 $ 5,821,238
Federal........................... 21,895,228 24,701,680 25,713,707
----------- ----------- -----------
26,852,014 30,293,808 31,534,945
----------- ----------- -----------
Deferred:
State and local................... (292,871) (20,573) 68,669
Federal........................... (1,293,673) (90,878) 303,326
----------- ----------- -----------
(1,586,544) (111,451) 371,995
----------- ----------- -----------
Provision for income taxes.......... $25,265,470 $30,182,357 $31,906,940
=========== =========== ===========
</TABLE>
The effective income tax rate for the years ended December 31, 1994, 1995
and 1996 varies from the statutory U.S. Federal income tax rate due to the
following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate................... 35.0% 35.0% 35.0%
State income taxes, net of Federal tax benefit........... 5.1 5.1 5.0
Other non-deductible business expenses................... 2.6 2.4 1.8
---- ---- ----
Effective income tax rate................................ 42.7% 42.5% 41.8%
==== ==== ====
</TABLE>
Deferred income tax liabilities and assets at December 31, 1995 and 1996
consist of the following:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred income tax liabilities:
Accelerated depreciation.............................. $ 5,299,504 $ 5,150,583
Amortization of intangibles........................... 50,063,903 49,982,237
----------- -----------
Total deferred income tax liabilities................... 55,363,407 55,132,820
----------- -----------
Deferred income tax assets:
Allowance for doubtful accounts and others............ 3,475,311 3,012,810
Other................................................. 281,310 141,228
----------- -----------
Total deferred income tax assets........................ 3,756,621 3,154,038
----------- -----------
Net deferred income tax assets/liabilities.............. $51,606,786 $51,978,782
=========== ===========
</TABLE>
6. RELATED PARTY TRANSACTIONS
Certain management services are provided to the Group by the Corporation.
Such services include data processing, legal, tax, treasury, internal audit,
risk management, and other support services. The Group was allocated expenses
for the years ended December 31, 1994, 1995 and 1996 of $1,644,012, $1,614,464
and $1,875,073, respectively, related to these services. In addition, the
Corporation allocated interest expense to the Group which was based on the
average balance of the Due to Parent Company and Affiliates account at an
interest rate of 8% per annum. Allocated expenses are based on the
Corporation's estimate of expenses related to
36
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
the services provided to the Group in relation to those provided to other
divisions or subsidiaries of the Corporation. Management believes that these
allocations were made on a reasonable basis. However, the allocations are not
necessarily indicative of the level of expenses that might have been incurred
had the Group contracted directly with third parties. The fees and expenses to
be paid by the Group to the Corporation are subject to change. In addition,
certain costs (principally salaries, fringe benefits and incentive
compensation) were incurred by the Group, paid by the Corporation and charged
to the Group for the years ended December 31, 1994, 1995 and 1996 in the
amounts of $6,885,629, $6,710,447 and $6,203,320, respectively (also see Note
9).
Payment of trade payables and other disbursements are processed through a
cash concentration account maintained by the Corporation. Subsequent to the
collection of trade receivables by the Group, all cash is transferred to the
Corporation.
The activity in the Due to Parent Company and Affiliates account for the
years ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year.......... $283,681,221 $283,987,658 $272,762,223
Net income.......................... 33,890,780 40,794,493 44,402,480
Transfers to the Corporation and
affiliated companies, net.......... (33,584,343) (52,019,928) (58,144,965)
------------ ------------ ------------
Balance, end of year................ $283,987,658 $272,762,223 $259,019,738
============ ============ ============
</TABLE>
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Group believes that it is not practicable
to estimate the current fair value of the amounts due to the Corporation
because of the related party nature of the transactions.
7.COMMITMENTS
The Group has obligations to various program syndicators and distributors in
accordance with current contracts for the rights to broadcast programs. Future
payments as of December 31, 1996 scheduled under contracts for programs
available are as follows:
<TABLE>
<S> <C>
1997.......................................................... $25,718,650
1998.......................................................... 555,880
1999.......................................................... 451,960
2000.......................................................... 300,000
2001.......................................................... 200,000
-----------
$27,226,490
===========
</TABLE>
37
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
The Group has various agreements relating to noncancelable operating leases
with an initial term of one year or more (some of which contain renewal
options), future program rights not available for broadcast at December 31,
1996, and employment contracts with key employees. Future minimum payments
under terms of these agreements at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
EMPLOYMENT
OPERATING PROGRAM AND TALENT
LEASES RIGHTS CONTRACTS
---------- ----------- -----------
<S> <C> <C> <C>
1997.................................... $1,216,944 $11,990,403 $16,140,697
1998.................................... 1,111,741 34,092,390 10,445,656
1999.................................... 949,463 24,000,384 4,433,464
2000.................................... 923,628 15,707,734 1,750,189
2001 and thereafter..................... 4,501,521 310,390 563,705
---------- ----------- -----------
$8,703,297 $86,101,301 $33,333,711
========== =========== ===========
</TABLE>
Rent expense for operating leases was $2,285,925, $2,755,425 and $2,975,308
for the years ended December 31, 1994, 1995 and 1996, respectively.
In the normal course of business, the Group is subject to various claims and
lawsuits. In the opinion of the Group's management, liabilities, if any,
arising from these matters will not have a significant effect on the Group's
financial statements.
8.INCENTIVE COMPENSATION PLANS
The Corporation has a long-term incentive compensation plan that covers 13
employees of the Group who are considered by management to be making
substantial contributions to the growth and profitability of the Group and the
Corporation. Grants awarded under this plan cover three-year operating cycles,
with cash payouts made after the close of each three-year cycle based upon
growth in operating performance. The annual amount charged to expense, which
amounted to $3,414,538 in 1994, $3,732,016 in 1995 and $2,965,311 in 1996, is
determined by estimating the aggregate expense for each open three-year cycle;
actual cash payouts related to the 1992--1994 cycle (paid in 1995), to the
1993--1995 cycle (paid in 1996) and to the 1994--1996 cycle (paid in 1997)
resulted in disbursements (pretax) of $1,825,579, $3,796,530 and $4,621,437
respectively.
The Corporation also has a short-term incentive compensation plan that
covers the most senior key executives of the Group who have the most impact on
overall corporate policy, and are therefore those executives largely
responsible for the growth and profitability of the Group and the Corporation.
Payouts under this plan are made annually, and are based upon the Group and
the Corporation's achieving specified financial performance objectives. Annual
expense for the Group amounted to $389,000 in 1994, 1995 and 1996.
38
<PAGE>
THE HEARST BROADCAST GROUP OF THE HEARST CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
9.PENSIONS AND EMPLOYEE SAVINGS PLANS
The Group contributes to a multiemployer union pension plan, for which no
benefit information for each contributing employer is available. The cost for
the plan was approximately $477,954 in 1994, $441,309 in 1995, and $648,759 in
1996.
In addition, the Group has certain non-union employees that are eligible for
participation in the Corporation's noncontributory defined benefit plan, and
the Corporation's nonqualified retirement plan. The Corporation also has a
defined benefit plan for eligible employees covered by collective bargaining
agreements; costs of these plans generally are accrued and paid in accordance
with the related agreements. The Group's pension costs for these plans are
allocated to the Group through the Due to Parent Company and Affiliates
account on the accompanying combined balance sheets. The cost for such plans
was approximately $1,616,938 in 1994, $1,237,888 in 1995, and $1,830,413 in
1996.
Substantially all of the Group's employees are eligible to participate in
defined contribution plans. The Group's expense recognized for all of these
plans was $623,977 in 1994, $635,906 in 1995 and $647,953 in 1996.
10.SUBSEQUENT EVENTS
On March 26, 1997, the Corporation announced that it had entered into an
agreement to combine the Group with the six television stations of Argyle
Television, Inc. ("Argyle"), and to rename the new venture Hearst-Argyle
Television, Inc. ("Hearst-Argyle"). Argyle shareholders will receive a choice
of either $26.50 per share in cash, one share of Series A common stock of
Hearst-Argyle, or a mixed consideration of $13.25 in cash and one-half share
of the Series A common stock of Hearst-Argyle. Assuming a full cash election
by existing Argyle shareholders, up to $160 million of the aggregate purchase
price of approximately $320 million would be paid in cash.
After the combination, the Corporation will hold approximately 86% of the
common shares of Hearst-Argyle. The total capitalization of the new company
will exceed $1.8 billion and will have approximately $640 million of debt
outstanding. For the year ended December 31, 1996, the unaudited pro forma
combined revenues were $370 million ($284 million from the Group) and pro
forma broadcast cash flow was $158 million ($118 million from the Group). The
proposed combination has been approved by the Boards of Directors of both
companies, and is subject to further approval by Argyle shareholders and the
usual regulatory authorities.
******
39
<PAGE>
THE HEARST BROADCAST GROUP OF
THE HEARST CORPORATION
CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 5,050
Accounts receivable, net 70,607
Program rights 6,844
Deferred income tax benefits 2,964
Other 3,834
--------
Total current assets 89,299
--------
PROPERTY, PLANT AND EQUIPMENT, Net 30,208
--------
GOODWILL AND OTHER INTANGIBLES, Net 228,813
--------
OTHER ASSETS:
Program rights 419
Other 1,097
--------
1,516
--------
TOTAL $349,836
========
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 3,460
Accrued liabilities 11,258
Program rights 7,180
Other 4,331
--------
Total current liabilities 26,229
DEFERRED INCOME TAXES 54,170
PROGRAM RIGHTS 1,167
OTHER LIABILITIES 4,799
DUE TO PARENT COMPANY AND AFFILIATES 263,471
--------
TOTAL $349,836
========
See notes to condensed combined financial statements.
</TABLE>
40
<PAGE>
THE HEARST BROADCAST GROUP OF
THE HEARST CORPORATION
CONDENSED COMBINED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1996 1997
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
TOTAL REVENUES $139,616 $143,566
STATION OPERATING EXPENSES 58,594 60,596
AMORTIZATION OF PROGRAM RIGHTS 21,476 19,052
DEPRECIATION AND AMORTIZATION 8,584 8,190
-------- --------
STATION OPERATING INCOME 50,962 55,728
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES 3,965 4,467
INTEREST EXPENSE-NET 12,823 12,485
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 34,174 38,776
PROVISION FOR INCOME TAXES 14,244 16,054
-------- --------
NET INCOME $ 19,930 $ 22,722
======== ========
</TABLE>
See notes to condensed combined financial statements.
41
<PAGE>
THE HEARST BROADCAST GROUP OF
THE HEARST CORPORATION
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1996 1997
(IN THOUSANDS)
(UNAUDITED)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 19,930 $ 22,722
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of property, plant and equipment 3,416 3,578
Amortization of intangible assets 5,168 4,612
Amortization of program rights 21,476 19,052
Program rights payments (23,911) (19,108)
Other (1,550) (1,699)
Provision for doubtful accounts 524 522
Deferred income taxes (966) (773)
Changes in operating assets and liabilities, net 5,029 (6,784)
-------- --------
Net cash provided by operating activities 29,116 22,122
INVESTING ACTIVITIES -Purchases of property, plant and
equipment, net (3,185) (1,683)
FINANCING ACTIVITIES - Due to parent company and affiliates (24,991) (18,271)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 940 2,168
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,990 2,882
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,930 $ 5,050
======== ========
</TABLE>
See notes to condensed combined financial statements.
42
<PAGE>
THE HEARST BROADCAST GROUP OF
THE HEARST CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed combined financial statements include the accounts of the
Hearst Broadcast Group (the "Group") of The Hearst Corporation (the
"Corporation").
The accompanying unaudited condensed combined financial statements do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
All significant interdivisional transactions have been eliminated in the
combination. The operating results for the six-month periods ended June 30
are not necessarily indicative of the results that may be expected for a
full year.
2. SALE OF GROUP
On March 26, 1997, the Corporation announced that it had entered into an
agreement to combine the Group with the six television stations of Argyle
Television, Inc. ("Argyle"), and to rename the new venture Hearst-Argyle
Television, Inc. ("Hearst-Argyle"). Argyle shareholders will receive a
choice of either $26.50 per share in cash, one share of Series A common
stock of Hearst-Argyle, or a mixed consideration of $13.25 in cash and
one-half share of the Series A common stock of Hearst-Argyle. Assuming a
full cash election by existing Argyle shareholders, up to $160 million of
the aggregate purchase price of approximately $320 million would be paid
in cash.
After the combination, the Corporation will hold approximately 86% of the
common shares of Hearst-Argyle. The total capitalization of the new
company will exceed $1.8 billion and will have approximately $640 million
of debt outstanding. For the year ended December 31, 1996, the pro forma
combined revenues were $370 million ($284 million for the Group) and pro
forma broadcast cash flow was $158 million ($118 million from the Group).
The proposed combination has been approved by the Boards of Directors of
both companies, and is subject to further approval by Argyle shareholders.
* * * * *
43
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
(the "Pro Forma Statements") give effect to the Hearst Transaction. Upon
consummation of the Hearst Transaction, at the election of each Argyle
stockholder, Argyle stockholders will receive (i) the Cash Consideration; (ii)
the Stock Consideration; or, (iii) the Mixed Consideration. The following Pro
Forma Statements assume that the Argyle stockholders in the aggregate receive
$100 million, which reflects the actual elections received from stockholders.
For accounting purposes, Hearst has been deemed to be the acquiror of
Argyle. Accordingly, the assets and liabilities of Argyle have been adjusted to
the extent acquired by Hearst to their estimated fair values based upon
preliminary purchase price allocation. The net assets of the Hearst Broadcast
Group have been reflected at their historical cost basis.
The unaudited pro forma combined condensed statements of operations for the
six months ended June 30, 1996 and 1997 give effect to the Hearst Transaction as
if it had occurred at the beginning of each period presented. The unaudited pro
forma combined condensed statements of operations were prepared based upon the
historical combined statements of operations of the Hearst Broadcast Group and
the unaudited pro forma combined condensed statements of operations of Argyle.
The unaudited pro forma combined condensed statements of operations of Argyle
for 1996 give effect to the acquisition of the Arkansas Stations, the Clear
Channel Venture and the Gannett Swap as if all such transactions had occurred at
the beginning of 1996; and for 1997 give effect to the Gannett Swap as if such
transaction had occurred at the beginning of 1997.
The unaudited pro forma combined condensed balance sheet at June 30, 1997
gives effect to the Hearst Transaction as if it had occurred on June 30, 1997
and is based upon the historical balance sheets of the Hearst Broadcast Group
and Argyle.
The Pro Forma Statements should be read in conjunction with the Hearst
Broadcast Group and Argyle historical and pro forma financial statements
included in this Form 8-K.
Economies of scale or synergies which may be available to the Hearst-Argyle
stations as a result of the Merger were not considered in the Pro Forma
Statements. The Pro Forma Statements are not necessarily indicative of the
actual results of operations or financial position of Hearst-Argyle that would
have occurred had the Hearst Transaction occurred on the dates indicated nor are
they necessarily indicative of future operation results or financial position.
44
<PAGE>
Hearst-Argyle Television, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
as of June 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Hearst
Argyle Hearst Transaction
Historical Historical Adjustments
------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $2,160 $5,050 $ 200,000 a)
(200,000) b)
Accounts receivable, net 17,413 70,607
Program rights 7,053 6,844
Deferred tax asset - 2,964 5,600 b)
Other 1,372 3,834
----------------------------------------------
Total current assets 27,998 89,299 5,600
Property, plant, and equipment, net 51,264 30,208
Intangible assets, net 234,072 228,813 175,382 a)
Other:
Deferred acquisition and financing costs, net 6,096 6,000 a)
(564) b)
Program rights, noncurrent 4,640 419
Other assets 14,398 1,097 35,800 a)
----------------------------------------------
Total assets $ 338,468 $ 349,836 $ 222,218
==============================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable & accrued liabilities $6,436 $14,718 35,000 a)
Program rights payable 6,589 7,180
Other current liabilities 140 4,331
----------------------------------------------
Total current liabilities 13,165 26,229 35,000
Deferred tax liability - 54,170
Program rights payable, noncurrent 5,568 1,167
Other liabilities 85 4,799
Due to parent company - 263,471 (263,471) a)
Senior bank debt, net 49,000 405,000 b) c)
Bridge debt 200,000 a)
(200,000) b)
Private placement debt 275,000 a)
(275,000) b)
Subordinated debt 150,000
Stockholders' equity:
Series A common stock 39 43 a)
Series B common stock 1 395 a)
Series C common stock 73 (73) a)
Preferred stock 2
Additional paid-in-capital 159,247 24,284 a)
Retained earnings (deficit) (38,712) (564) b)
(10,400) b)
(3,500) a)
35,504 a)
----------------------------------------------
Total stockholders' equity 120,650 - 45,689
----------------------------------------------
Total liabilities and stockholders' equity $ 338,468 $ 349,836 $ 222,218
==============================================
<CAPTION>
Hearst-Argyle Divestiture Pro Forma
Pro Forma WNAC/WDTN (c) Divestiture
-----------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $7,210 $ (324) $6,886
Accounts receivable, net 88,020 (5,280) 82,740
Program rights 13,897 (1,626) 12,271
Deferred tax asset 8,564 8,564
Other 5,206 (260) 4,946
-----------------------------------------------
Total current assets 122,897 (7,490) 115,407
Property, plant, and equipment, net 81,472 (8,134) 73,338
Intangible assets, net 638,267 (40,218) 598,049
Other:
Deferred acquisition and financing costs, net 11,532 11,532
Program rights, noncurrent 5,059 (1,072) 3,987
Other assets 51,295 (195) 51,100
-----------------------------------------------
Total assets $ 910,522 $(57,109) $853,413
===============================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable & accrued liabilities $56,154 $ (1,780) $54,374
Program rights payable 13,769 (792) 12,977
Other current liabilities 4,471 (458) 4,013
-----------------------------------------------
Total current liabilities 74,394 (3,030) 71,364
Deferred tax liability 54,170 9,038 63,208
Program rights payable, noncurrent 6,735 (1,821) 4,914
Other liabilities 4,884 (248) 4,636
Due to parent company - -
Senior bank debt, net 454,000 (61,048) 392,952
Bridge debt - -
Private placement debt - -
Subordinated debt 150,000 150,000
Stockholders' equity:
Series A common stock 82 82
Series B common stock 396 396
Series C common stock - -
Preferred stock 2 2
Additional paid-in-capital 183,531 183,531
Retained earnings (deficit) (17,672) (17,672)
-----------------------------------------------
Total stockholders' equity 166,339 166,339
-----------------------------------------------
Total liabilities and stockholders' equity $ 910,522 $(57,109) $853,413
===============================================
</TABLE>
See explanations on the following page.
45
<PAGE>
Unaudited Pro Forma Combined Condensed Balance Sheet Adjustments:
For purposes of the Pro Forma Statements, the estimated purchase price
of Argyle was determined as follows:
<TABLE>
<S> <C>
Series A Common Stock outstanding at June 30, 1997
adjusted to reflect the conversion of Series B
Common Stock and Series C Common Stock and the
effect of all outstanding Argyle Options.................. 12,050,639
Value per share............................................. $ 26.50
------------
319,342,000
Approximate percentage acquired by Hearst................... 83%
------------
$265,053,000
Estimated transaction costs................................. 16,000,000
------------
Total estimated purchase price.............................. 281,053,000
============
</TABLE>
For purposes of these Pro Forma Statements, the total estimated purchase
price is allocated as follows:
<TABLE>
<S> <C>
Total estimated purchase price.............................. 281,053,000
83% of Argyle's net assets at June 30, 1997 adjusted for the
charge-off of $564,000 in deferred financing costs and non-
cash compensation expense related to the settlement of the
Argyle Options of $3,500,000............................... (99,671,000)
------------
Estimated excess purchase price to be allocated ............ $181,382,000
============
Allocations:
Intangibles (principally goodwill)......................... $175,382,000
Deferred financing costs................................... 6,000,000
------------
$181,382,000
============
</TABLE>
The estimated purchase price and the resulting allocations are based on
management's preliminary estimations and have been made solely for purposes of
developing the unaudited pro forma combined condensed financial statements. Any
subsequent adjustments and any uncertainties affecting the pro forma
presentation based upon such allocations are not expected to be significant.
(a) To reflect the Hearst Transaction and the adjustment to the extent
acquired by Hearst of the net assets of Argyle to their estimated fair
values including:
Merger with Cash Sub:
Issuance of 39,611,002 shares of Hearst-Argyle Series B Common
Stock to Hearst and Cash Sub for the net assets of the Hearst
Broadcast Group, including $35.8 million of surplus pension
assets, and in the Merger, substitution of Hearst's $275 million
Private Placement Debt and Net Asset adjustment of approximately
$33 million. Hearst may elect to take the value of the Net Asset
adjustment in the form of Hearst-Argyle Series B Common Stock,
which would have equaled, assuming a June 30, 1997 closing,
approximately 1.2 million shares.
46
<PAGE>
Conversion of Series B Common Stock and Series C Common Stock into
Series A Common Stock and the effect of the existing Argyle Options.
Redemption of Series A Common Stock for approximately $100 million cash.
Adjustment of Argyle intangible assets to estimated fair value.
Write-off of deferred stock option compensation expense in connection
with the exercise of all existing Argyle Options.
(b) To reflect the refinancing of the Bridge Debt, Existing Credit Facility and
the Private Placement Debt with borrowings under the New Credit Facility
and available cash and the write-off of unamortized financing fees related
to the Existing Credit Facility and the payment of make-whole premium
related to the Private Placement Debt. The four pieces of existing
indebtedness are the Bridge Debt, the Existing Credit Facility, the Private
Placement Debt and the Senior Subordinated Notes. The New Credit Facility
specifically provides that borrowings under such facility may be used to
refinance each piece of the existing indebtedness.
(c) Upon consummation of the Hearst Transaction, Hearst-Argyle will own
televisions stations in two areas (Boston and Providence, and Dayton and
Cincinnati) with overlapping service contours in violation of the FCC's
local ownership rules. The FCC's rules prohibit the ownership of two
stations in the same geographic area whose service contours overlap.
Accordingly, Heart-Argyle will be required to divest one station in each of
the aforementioned areas. A letter of intent has been signed to divest WNAC
for $47.5 million, and Argyle and Hearst currently are in negotiations
with a third party to divest WDTN. If either or both of these stations are
sold for cash, the proceeds of such sale will be used to reduce
indebtedness under the New Credit Facility and therefore the pro forma
balance sheets reflect a reduction in the New Credit Facility by an amount
equal to the sum of $47.5 million for WNAC and WDTN's net book value of
$13.5 million.
(d) Assumes that upon consummation of the Hearst Transaction, all of the Senior
Subordinated Notes will remain outstanding and will not be refinanced. If
the Senior Subordinated Notes are required to be refinanced, it is
anticipated that Hearst-Argyle will do so with borrowings under the New
Credit Facility. Fees associated with this possible refinancings would
approximate $1.5 million and would be funded by the New Credit Facility.
47
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations--Year
Ended December 31, 1996
<TABLE>
<CAPTION>
Hearst
Transaction Pro Forma
Pro Forma Historical Hearst and Financing Hearst- Divestiture Pro Forma
Argyle Broadcast Group Adjustments Argyle WNAC/WDTN(f) Divestiture
--------- ----------------- ------------- --------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.......... $ 84,243 $283,971 $ 2,035 (a) $370,249 $(24,488) $345,761
Station operating
expenses............... 41,772 121,501 (2,170)(g) 161,103 (14,708) 148,565
Amortization of program
rights................. 5,225 40,297 -- 45,522 (2,118) 43,404
Depreciation and
amortization........... 26,075 16,971 (11,198)(b) 31,848 (2,960) 28,888
-------- -------- -------- -------- -------- --------
Station operating
income................. 11,171 105,202 15,403 131,776 (4,702) 127,074
Corporate general and
administrative
expenses............... 4,285 7,658 (943)(c) 11,000 -- 11,000
Non-cash compensation
expense................ 675 -- (675)(b) -- -- --
-------- -------- -------- -------- -------- --------
Operating income
(loss)................. 6,211 97,544 17,021 120,776 (4,702) 116,074
Interest expense, net... 18,119 21,235 5,296 (d) 44,650 (3,968) 40,682
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... (11,908) 76,309 11,725 76,126 (734) 75,392
Income taxes............ -- 31,907 1,120 (e) 33,027 (301) 32,726
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations.. (11,908) $ 44,402 $ 10,605 43,099 $ (433) 42,666
======== ======== ========
Less preferred stock
dividends.............. (1,422) (1,422) (1,422)
-------- -------- --------
Earnings (loss)
applicable to common
stock.................. $(13,330) $ 41,677 $ 41,244
======== ======== ========
Earnings (loss per
common share........... $ (1.17) $ 0.87 $ 0.86
======== ======== ========
Number of shares used in
per share calculation.. 11,347 47,888 47,888
</TABLE>
See notes on the following pages.
48
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Hearst
Pro Forma Historical Hearst Transaction Pro Forma Divestiture Pro Forma
Argyle Broadcast Group Adjustments Hearst-Argyle WNAC/WDTN (f) Divestiture
----------------------------------------------- -----------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 41,049 $ 139,616 $ 906 (a) $ 181,571 $ (13,859) $ 167,712
Station operating expenses 22,497 58,594 (1,101) (g) 79,990 (7,032) 72,958
Amortization of program rights 2,289 21,476 23,765 (2,965) 20,800
Depreciation and amortization 12,378 8,584 (4,843) (b) 16,119 (4,797) 11,322
-------------------------------------------- ----------------------------------------
Station operating income 3,885 50,962 6,850 61,697 935 62,632
Corporate general and
administrative expenses 1,867 3,965 (332) (c) 5,500 5,500
Non-cash compensation expense 337 (337) (b) - -
-------------------------------------------- ----------------------------------------
Operating income 1,681 46,997 7,519 56,197 935 57,132
Interest expense, net 8,376 12,823 1,126 (d) 22,325 (1,984) 20,341
-------------------------------------------- ----------------------------------------
Income (loss) before income taxes (6,695) 34,174 6,393 33,872 2,919 36,791
Income taxes 14,244 555 (e) 14,799 1,194 15,993
-------------------------------------------- ----------------------------------------
Income (loss) from continuing
operations $ (6,695) $ 19,930 $ 5,838 $ 19,073 $ 1,725 $ 20,798
============================= ============
Less preferred stock dividends (712) (712) (712)
---------- ---------- -----------
Earnings (loss) applicable to
common stock $ (7,407) $ 18,361 $ 20,086
========== ========== ===========
Earnings (loss) per common
share $ (0.65) $ 0.38 $ 0.42
========== ========== ===========
Number of shares used in
per share calculation 11,347 47,888 47,888
</TABLE>
See explanations on the following page.
49
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Hearst
Pro Forma Historical Hearst Transaction Pro Forma Divestiture Pro Forma
Argyle Broadcast Group Adjustments Hearst-Argyle WNAC/WDTN (f) Divestiture
--------------------------------------------- -----------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 40,740 $ 143,566 $ 1,026 (a) $ 185,332 $ (11,357) $ 173,975
Station operating expenses 21,641 60,596 (1,290) (g) 80,947 (5,724) 75,223
Amortization of program rights 2,135 19,052 21,187 (1,424) 19,763
Depreciation and amortization 12,898 8,190 (5,363) (b) 15,725 (4,557) 11,168
--------------------------------------------- -----------------------------------------
Station operating income 4,066 55,728 7,679 67,473 348 67,821
Corporate general and
administrative expenses 1,904 4,467 (871) (c) 5,500 5,500
Non-cash compensation expense 504 (504) (b) -- --
--------------------------------------------- -----------------------------------------
Operating income 1,658 51,261 9,054 61,973 348 62,321
Interest expense, net 9,407 12,485 433 (d) 22,325 (1,984) 20,341
--------------------------------------------- -----------------------------------------
Income (loss) before income taxes (7,749) 38,776 8,621 39,648 2,332 41,980
Income taxes 16,054 1,108 (e) 17,162 954 18,116
--------------------------------------------- -----------------------------------------
Income (loss) from continuing
operations $ (7,749) $ 22,722 $ 7,513 $ 22,486 $ 1,388 $ 23,864
========= ======== =========
Less preferred stock dividends (712) (712) (712)
--------- --------- ---------
Earnings (loss) applicable to
common stock $ (8,461) $ 21,774 $ 23,152
========= ========= =========
Earnings (loss) per common share $ (0.75) $ 0.45 $ 0.48
========= ========= =========
Number of shares used in per share
calculation 11,347 47,888 47,888
</TABLE>
See explanations on the following page.
50
<PAGE>
Unaudited Pro Forma Combined Condensed Statements of Operations Adjustments:
(a) The fees associated with Hearst-Argyle's provision of certain management
services to Hearst with respect to KCWB, WWWB, WPBF and WBAL/WTYY from the
beginning of the periods presented.
(b) The conforming of accounting policies related to stock based compensation
and the amortization of intangible assets resulting from purchase
accounting adjustments, net of amortization already recorded in the
historical financial statements. The estimated useful lives used for
these intangible assets were as follows: Goodwill - 40 years; FCC
licenses - 40 years; network affiliation agreements - 40 years and other
intangibles assets - 2 to 5 years.
(c) The change in corporate expenses associated with Hearst-Argyle's new
organizational structure, including the Services Agreement (which includes
certain administrative services such as accounting, financial, legal, tax,
insurance, data processing and employee benefits) and other applicable
agreements expected to be entered into upon consummation of the merger.
(d) Interest expense on the pro forma debt and the amortization of deferred
financing costs over the period of the related financings as follows:
<TABLE>
<CAPTION>
Pro Forma
Hearst-Argyle
----------------------
6/30/96
&
6/30/97 12/30/96
======= ========
<S> <C> <C>
New Credit Facility at an assumed interest rate of 6.5%, net.... $14,713 $29,426
Senior Subordinated Notes at an interest rate of 9.75%.......... 7,312 14,624
Amortization of deferred financing costs........................ 300 600
------- -------
$22,325 $44,650
======= ========
</TABLE>
The pro forma statements of operations exclude the extraordinary charge
related to the Private Placement Debt make-whole premium of $16 million and
related tax benefit of $5.6 million.
(e) Estimated income tax effect of the above adjustments, after giving
consideration to the tax sharing agreement that is expected to be entered
into upon consummation of the Merger.
(f) Upon completion of the Hearst Transaction, Hearst-Argyle will own
television stations in two areas (Boston and Providence, and Dayton and
Cincinnati) with overlapping service contours in violation of the FCC's
local ownership rules. The FCC's rules prohibit the ownership of two
stations in the same geographic area whose service contours overlap.
Accordingly, Hearst-Argyle will be required to divest one station in each
of the aforementioned areas. A letter of intent has been signed to divest
WNAC for $47.5 million, and Argyle and Hearst currently are in negotiations
with a third party to divest WDTN. If either or both of these stations are
sold for cash, the proceeds of such sale will be used to reduce
indebtedness under the New Credit Facility, and therefore the pro forma
statements of operations reflect the effects of a reduction in the New
Credit Facility by an amount equal to the sum of $47.5 million for WNAC and
WDTN's net book value of $13.5 million.
(g) The estimated impact of the new Hearst-Argyle defined benefit plan
including the transfer of $35.8 million in surplus pension assets which is
reflected as a reduction of pension expense.
51
<PAGE>
Pro Forma Combined Condensed Statements of Operations of Argyle Television, Inc.
The Unaudited Pro Forma Combined Condensed Statements of Operations of
Argyle for the six months ended June 30, 1996 and 1997 have been prepared as if
the acquisition of the Arkansas Stations and the Clear Channel Venture and the
Gannett Swap transactions had been completed as of the beginning of the periods
presented. The acquisitions of the Arkansas Stations and the Clear Channel
Venture and the Gannett Swap transactions are accounted for using the purchase
method of accounting. Any subsequent adjustments and any uncertainties
affecting the pro forma presentation are not expected to be significant. The
pro forma statements of operations presented herein are not necessarily
indicative of Argyle's results of operations that might have occurred had such
transactions been completed at the beginning of the periods indicated and do not
purport to represent Argyle's consolidated results of operation for any future
period.
52
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Clear Channel
Historical Arkansas Venture Gannett Swap Pro Forma
Argyle (a) Adjustments Adjustments Adjustments Argyle
------------------------------------------------ ---------------- ------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total revenues $34,057 $3,462 $(2,684)(g) $5,502 (h) $41,049
712 (c)
Station operating expenses 18,372 2,677 (2,253)(g) 4,744 (h) 22,497
(357) (686)(c)
Amortization of program rights 2,571 88 (597)(g) 227 (h) 2,289
Depreciation and amortization 10,724 1,198 456 (d)(e) 12,378
------------------------------------------------ ---------------- ------------------
Station operating income (loss) 2,390 (144) 878 761 3,885
Corporate general and
administrative expenses 1,867 1,867
Non-cash compensation expense 337 337
------------------------------------------------ ---------------- ------------------
Operating income (loss) 186 (144) 878 761 1,681
Interest expense, net 7,304 422 (f) 650 (f) 8,376
------------------------------------------------ ---------------- ------------------
Income (loss) from continuing
operations $(7,118) $(144) $456 $111 $(6,695)
================================================ ================ ==================
</TABLE>
See notes on the following pages.
53
<PAGE>
Unaudited Pro Forma Combined Condensed Statement of Operations
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Historical Gannett Swap Pro Forma
Argyle (b) Adjustments Argyle
--------------------------------------------
(In thousands)
<S> <C> <C> <C>
Total revenues $39,765 $975 (h) $40,740
Station operating expenses 21,367 779 (h) 21,641
(505)(c)
Amortization of program rights 2,119 16 (h) 2,135
Depreciation and amortization 12,760 138 (d)(e) 12,898
--------------------------------------------
Station operating income 3,519 547 4,066
Corporate general and
administrative expenses 1,904 1,904
Non-cash compensation expense 504 504
--------------------------------------------
Operating income 1,111 547 1,658
Interest expense, net 9,407 9,407
--------------------------------------------
Income (loss) from continuing
operations $(8,296) $547 $(7,749)
============================================
</TABLE>
See notes on the following pages.
54
<PAGE>
Unaudited Pro Forma Combined Condensed Statements of Operations Adjustments:
(a) Includes the results of operations of Argyle, the results of WZZM, WAPT,
KITV, WNAC; and the Arkansas Stations from June 1, 1996.
(b) Includes the results of operations of Argyle, the results of WAPT, KITV,
the Arkansas Stations, Argyle's share of broadcast cash flows from the
Clear Channel Venture; WZZM and WGRZ for January only; and WLWT and KOCO
for February through June.
(c) Reflects the elimination of certain expenses relating to employees who have
either been terminated of will be terminated and not replaced and certain
other expenses which would have been eliminated under Argyle's management
and transition plan.
(d) Reflects change in depreciation expense due to purchase accounting
adjustments to equipment and buildings, net of depreciation already
recorded in the historical financial statements. The estimated useful
lives used for equipment range from 5 to 25 years and the estimated useful
life used for buildings range from 25 to 39 years.
(e) Reflects amortization of intangible assets resulting from purchase
accounting adjustments, net of amortization already recorded in the
historical financial statements. The estimated useful lives used for these
intangible assets were as follows: FCC licenses and network affiliation
agreements -- 15 years; other intangibles -- 2 to 5 years.
(f) Reflects interest expenses recorded in conjunction with FASB Statement No.
119 relating to interest rate protection agreements, interest expense on
the pro forma debt and the amortization of deferred financing costs over
the period of the related financings.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
1996 1997
------ ------
<S> <C> <C>
The Notes at an interest rate of 9.75%.................... $7,312 $7,312
Fair value adjustments of interest rate protection
agreements -- non-cash.................................. (1,142) (85)
Amortization of deferred financing costs.................. 296 310
Bank Credit Agreement at an assumed interest rate of
8.5%, net of interest income............................ 1,910 1,870
------ ------
$8,376 $9,407
====== ======
</TABLE>
(g) Reflects the inclusion of Argyle's share of WNAC/WPRI broadcast cash flow
in miscellaneous revenues.
(h) Reflects the inclusion of WLWT and KOCO and the exclusion of WZZM and WGRZ
results of operations from the beginning of the period.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEARST-ARGYLE TELEVISION, INC.
Date: September 26, 1997 By: /s/ Dean H. Blythe
------------------------------------------------
Dean H. Blythe
Senior Vice President-Corporate Development,
Secretary and General Counsel
56
