<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ___________ to ______
COMMISSION FILE NUMBER: 0-2700
HEARST-ARGYLE TELEVISION, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 74-2717523
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
959 EIGHTH AVENUE (212) 649-2307
NEW YORK, NY 10019 (Registrant's telephone number,
(Address of principal executive officer) including area code)
</TABLE>
-------------------------------------------------------------------
(Former home, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
As of August 11, 1998, the Registrant had 53,325,363 shares of common stock
outstanding. Consisting of 12,026,715 shares of Series A Common Stock,
41,298,648 shares of Series B Common Stock.
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
This amendment to Form 10-Q amends and revises Part I: Items 1 and 2 and Part
II: Item 6 on Form 10-Q for the quarter ended June 30, 1998 of Hearst-Argyle
Television, Inc. initially filed with the Securities and Exchange Commission on
August 14, 1998. Unless otherwise indicated, capitalized terms used herein
shall have the respective meanings given such terms in the Form 10-Q.
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Page
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1997 and June
30, 1998 (unaudited)............................................. 1
Condensed Consolidated Statements of Operations for the Three and Six
Months ended June 30, 1997 and 1998 (unaudited).................. 3
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1997 and 1998 (unaudited).................................... 4
Notes to Condensed Consolidated Financial Statements.................. 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 9
PART II OTHER INFORMATION
ITEM 6. Exhibits and reports on Form 8-K...................................... 13
Signatures...................................................................... 14
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARST-ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
(UNAUDITED)
-------------------------------------------------------
(In thousands)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $12,759 $13,938
Accounts receivable, net 89,988 85,938
Program and barter rights 35,737 12,567
Deferred income taxes 5,975 5,975
Related party receivable 3,695 2,303
Net assets held for sale 72,019 -
STC Note Receivable - 51,055
Other 7,070 6,503
------- -------
Total current assets 227,243 178,279
------- -------
Property, plant and equipment, net 97,804 124,043
------- -------
Intangible assets, net 661,326 716,736
------- -------
Other assets:
Deferred acquisition and financing costs,
net 27,796 28,033
Program and barter rights, noncurrent 3,511 3,904
Other 26,429 27,134
------- -------
Total other assets 57,736 59,071
------- -------
Total assets $1,044,109 $1,078,129
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
---------------------------------------------------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $36,048 $41,460
Program and barter rights payable 35,769 13,472
Other 51 433
---------- ----------
Total current liabilities 71,868 55,365
---------- ----------
Program and barter rights payable 4,923 3,755
Long-term debt 490,000 531,596
Deferred income taxes 150,274 152,428
Other liabilities 390 630
---------- ----------
Total noncurrent liabilities 645,587 688,409
---------- ----------
Commitments and contingencies
Stockholders' equity:
Series A preferred stock 1 1
Series B preferred stock 1 1
Series A common stock 125 125
Series B common stock 413 413
Additional paid-in capital 202,152 202,195
Retained earnings 123,962 139,926
Treasury stock - (8,306)
---------- ----------
Total stockholders' equity 326,654 334,355
---------- ----------
Total liabilities and stockholders' equity $1,044,109 $1,078,129
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------------
1997 1998 1997 1998
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues $81,513 $109,713 $143,566 $196,965
Station operating expenses 30,517 41,506 60,596 83,948
Amortization of program rights 9,533 10,846 19,052 21,669
Depreciation and amortization 4,102 8,800 8,190 17,641
----------------------------------------------------------------------------
Station operating income 37,361 48,561 55,728 73,707
Corporate general and administrative expenses 2,338 3,119 4,467 6,554
----------------------------------------------------------------------------
Operating income 35,023 45,442 51,261 67,153
Interest expense, net 7,384 8,867 12,485 19,827
----------------------------------------------------------------------------
Income before extraordinary item and
income taxes 27,639 36,575 38,776 47,326
Income taxes 11,313 15,313 16,054 20,229
----------------------------------------------------------------------------
Income before extraordinary item 16,326 21,262 22,722 27,097
Extraordinary item, loss on early retirement of
debt, net of income tax benefit - (808) - (10,777)
----------------------------------------------------------------------------
Net income 16,326 20,454 22,722 16,320
Less preferred stock dividends - (355) - (711)
----------------------------------------------------------------------------
Earnings applicable to common stockholders $16,326 $20,099 $22,722 $15,609
============================================================================
Earnings per common share - basic:
Before extraordinary item $0.40 $0.39 $0.55 $0.49
Extraordinary item - (0.02) - (0.20)
----------------------------------------------------------------------------
Net income $0.40 $0.37 $0.55 $0.29
============================================================================
Number of common shares used in the calculation 41,299 53,798 41,299 53,815
Earnings per common share - diluted:
Before extraordinary item $0.40 $0.39 $0.55 $0.49
Extraordinary item - (0.02) - (0.20)
----------------------------------------------------------------------------
Net income $0.40 $0.37 $0.55 $0.29
============================================================================
Number of common shares used in calculation 41,299 54,095 41,299 54,080
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------------------
1997 1998
<S> <C> <C>
Operating Activities (In thousands)
Net income $ 22,722 $16,320
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item, loss on early retirement of debt - 17,191
Depreciation 3,578 6,364
Amortization of intangible assets 4,612 11,277
Amortization of deferred financing costs - 1,236
Amortization of program rights 19,052 21,669
Program payments (19,108) (21,936)
Deferred income taxes (773) 2,154
Fair value adjustments of interest rate protection agreements - 76
Provision for doubtful accounts 522 -
Changes in operating assets and liabilities, net (8,483) 11,880
----------------------------------------------
Net cash provided by operating activities 22,122 66,231
----------------------------------------------
Investing Activities
Acquisition of stations - (20,136)
Issuance of STC note receivable, net - (51,055)
Acquisition costs - (124)
Purchases of property, plant, and equipment:
Special projects/buildings - (2,504)
Digital - (1,151)
Maintenance (1,683) (4,299)
----------------------------------------------
Net cash used in investing activities (1,683) (79,269)
----------------------------------------------
Financing Activities
Issuance of Senior Notes - 200,000
Repayment of Senior Subordinated Notes - (116,621)
Proceeds from issuance of long-term debt - 29,000
Payment of long-term debt - (85,000)
Financing costs and other - (4,374)
Series A Common stock:
Issuances - 229
Repurchases - (8,306)
Dividends paid on preferred stock - (711)
Due to Hearst (18,271) -
----------------------------------------------
Net cash (used in) provided by financing activities (18,271) 14,217
----------------------------------------------
Increase in cash and cash equivalents 2,168 1,179
Cash and cash equivalents at beginning of period 2,882 12,759
----------------------------------------------
Cash and cash equivalents at end of period $5,050 $13,938
==============================================
Businesses acquired in purchase transaction:
Fair market value of assets acquired - $20,632
Liabilities assumed - 496
----------------------------------------------
Net cash paid for acquisitions - $20,136
----------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
On August 29, 1997, effective September 1, 1997 for accounting purposes, The
Hearst Corporation ("Hearst") contributed its television broadcast group and
related broadcast operations (the "Hearst Broadcast Group") to Argyle
Television, Inc. ("Argyle") and merged a wholly-owned subsidiary of Hearst with
and into Argyle, with Argyle as the surviving corporation (renamed "Hearst-
Argyle Television, Inc."). The merger transaction is referred to as "the Hearst
Transaction". As a result of the Hearst Transaction, Hearst owned approximately
41.3 million shares of the Company's Series B Common Stock, comprising
approximately 77% of the total outstanding common stock of the Company. During
1998, Hearst purchased approximately 1.1 million shares of the Company's Series
A Common Stock (See Note 5), increasing its ownership to approximately 79.1% as
of June 30, 1998.
The merger was accounted for as a purchase of Argyle by Hearst in a reverse
acquisition. The assets and liabilities of Argyle were adjusted to the extent
acquired by Hearst to their estimated fair values based upon purchase price
allocations. The net assets of the Hearst Broadcast Group are reflected at
their historical cost basis. In a reverse acquisition, the accounting treatment
differs from the legal form of the transaction, as the continuing legal parent
company (Argyle), is not assumed to be the acquiror and the historical financial
statements of the entity become those of the accounting acquiror (Hearst
Broadcast Group). Consequently, the presentation of the Company's consolidated
financial statements prior to September 1, 1997 has been revised to reflect the
financial statements of the Hearst Broadcast Group. In addition, the divisional
equity of the Hearst Broadcast Group, which includes the amounts due to Hearst
and affiliates, has been reclassified retroactively to reflect the par value of
the approximately 41.3 million shares received by Hearst in the Hearst
Transaction in the accompanying financial statements for periods ending prior to
September 1, 1997. See Note 2.
GENERAL
The condensed consolidated financial statements include the accounts of Hearst-
Argyle Television, Inc. (the "Company") and its wholly-owned subsidiaries. All
significant intercompany accounts have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements 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 (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six-month periods ended June 30, 1997 and 1998 are not
necessarily indicative of the results that may be expected for a full year.
2. ACQUISITIONS
The acquisition of Argyle 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 preliminarily determined 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, network affiliation
agreements and goodwill. The final asset and liability fair values may differ
from those set forth in the accompanying condensed consolidated balance sheets
at December 31, 1997 and June 30, 1998; however, the changes, if any, are not
expected to have a material effect on the condensed consolidated financial
statements of the Company. The condensed consolidated financial statements
include the results of operations of Argyle since the date of the acquisition.
On April 24, 1998, the Company loaned STC Broadcasting, Inc. ("STC") $70.5
million ("STC Note Receivable"). The loan bore interest at 7.75% per
year and was collateralized by the stock of the STC subsidiary that owned the
assets comprising WPTZ/WNNE. On July 2, 1998, STC repaid this $70.5 million
loan along with accrued interest.
Effective June 1, 1998, the Company exchanged its WDTN and WNAC stations and
cash of approximately $20 million, net of a working capital adjustment, with STC
for KSBW, the NBC affiliate serving the Monterey Salinas, CA, television market,
and WPTZ/WNNE, the NBC affiliates serving the Burlington, VT Plattsburgh, NY,
television market (the "STC Swap").
5
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1998
2. ACQUISITIONS (CONTINUED)
Giving effect to the Hearst Transaction and the STC Swap discussed above,
unaudited pro forma results of operations reflect the acquisitions and
financings (See Note 3) as having occurred as of January 1, 1997, are as
follows:
<TABLE>
<CAPTION>
Pro Forma
Six Months Ended June 30,
1997 1998
--------------------- -------------------
(In thousands, except per share data)
<S> <C> <C>
Total revenues $185,271 $197,016
Net income $23,928 $26,997
Earnings from continuing operations applicable to common stockholders $23,217 $26,286
Earnings per common share - basic $0.43 $0.49
======== ========
- diluted $0.43 $0.49
======== ========
Pro forma number of shares used in calculations - basic 53,815 53,815
======== ========
- diluted 54,080 54,080
======== ========
</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.
3. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------------------------------------
(In thousands)
<S> <C> <C>
Credit Facility dated August 29, 1997 $ 85,000 $ 29,000
Senior Notes 300,000 500,000
Senior Subordinated Notes 105,000 2,596
----------------------------------------
$490,000 $531,596
========================================
</TABLE>
SENIOR SUBORDINATED NOTES
During February 1998, the Company repaid $102.4 million of the Senior
Subordinated Notes ("Notes") at a premium of approximately $13.9 million. In
addition, the Company wrote-off the remaining deferred financing fees related to
the Notes and incurred expenses related to the repayment of the Notes. The
premium paid, the deferred financing fees relating to the Notes and the expenses
incurred were classified as an extraordinary item in the accompanying condensed
consolidated statement of operations for the six months ended June 30, 1998.
SENIOR NOTES
On January 13, 1998, the Company issued $200 million aggregate principal amount
of 7.0% Senior Notes due 2018 (the "$200 million Senior Notes"). The $200
million Senior Notes are senior and unsecured obligations of the Company. In
addition, the indenture governing the Senior Notes imposes various conditions,
restrictions and limitations on the Company and its subsidiaries. Proceeds from
the $200 million Senior Notes offering were used to repay existing indebtedness
of the Company (See Senior Subordinated Notes, above).
6
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1998
3. LONG-TERM DEBT (CONTINUED)
INTEREST RATE RISK MANAGEMENT
The Company has two interest rate protection agreements effectively fixing the
Company's interest rate at approximately 7% on $35 million of its borrowings
under the Credit Facility until June 1999.
Additional information regarding these interest rate protection agreements in
effect at June 30, 1998 follows:
<TABLE>
<CAPTION>
AVERAGE AVERAGE ESTIMATED FAIR
NOTIONAL AMOUNT RECEIVE RATE PAY RATE VALUE
------------------------------------------------------------------------
Interest rate swap agreements:
<S> <C> <C> <C> <C>
Fixed rate agreement $20,000,000 LIBOR 7.01% $(255,973)
Fixed rate agreement $15,000,000 LIBOR 6.98% $(188,473)
</TABLE>
The Company is exposed to credit risk in the event of nonperformance by
counterparties to its interest rate swap agreements. Credit risk is limited by
entering into such agreements with primary dealers only; therefore, the Company
does not anticipate that nonperformance by counterparties will occur.
Notwithstanding this, the Company's treasury department monitors counterparty
credit ratings at least quarterly through reviewing independent credit agency
reports. Both current and potential exposures are evaluated, as necessary, by
obtaining replacement cost information from alternative dealers. Potential loss
to the Company from credit risk on these agreements is limited to amounts
receivable, if any. The Company enters into these agreements solely to hedge its
interest rate risk.
4. NET ASSETS HELD FOR SALE
Upon completion of the Hearst Transaction, the Company owned 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. To comply with these rules, the Company was required
to divest one station in each of the aforementioned areas. Included in the
caption Net Assets Held for Sale on the accompanying condensed consolidated
balance sheet as of December 31, 1997, are the net assets of the stations
located in Providence and Dayton at their carrying values. The Company
exchanged these assets during the second quarter of 1998, for two television
stations in markets without overlapping service contours (See Note 2).
5. COMMON STOCK
During the second quarter of 1998, the Company's Board of Directors authorized
the repurchase of up to $300 million of its outstanding Series A Common Stock.
The Company expects such repurchases to be effected from time to time in the
open market or in private transactions, subject to market conditions. During
the three months ended June 30, 1998, the Company spent approximately $8.3
million to repurchase approximately 238,000 shares of Series A Common Stock, at
an average price of $34.96. Hearst has also notified the Company of its
intention to purchase up to 10 million shares of the Company's Series A Common
Stock from time to time in the open market, in private transactions or
otherwise. (See Note 1.)
7
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1998
6. RELATED PARTY TRANSACTIONS
Prior to September 1, 1997, Hearst provided certain management services to the
Company. Such services include data processing, legal, tax, treasury, internal
audit, risk management, and other support services. For the three and six
months ended June 30, 1997, the Company was allocated expenses of approximately
$499,000 and $998,000, respectively, related to these services. In addition,
Hearst allocated interest expense to the Company which was based on the average
balance of divisional equity at an interest rate of 8% per annum. Allocated
expenses are based on the Hearst's estimate of expenses related to the services
provided to the Company in relation to those provided to other divisions or
subsidiaries of Hearst. Management believes that these allocations were made on
reasonable basis. However, the allocations are not necessarily indicative of
the level of expenses that might have been incurred had the Company contracted
directly with third parties. In addition, certain costs (principally salaries,
fringe benefits and incentive compensation) were incurred by the Company, paid
by Hearst and charged to the Company for the three and six months ended June 30,
1997 in the amounts of approximately $2.0 million and $4.0 million.
The Company recorded revenues of approximately $946,000 and $1.3 million,
respectively during the three and six-months ended June 30, 1998, relating to
the Management Agreement (whereby the Company provides certain management
services, such as sales, news, programming and financial and accounting
management services, with respect to certain Hearst owned or operated television
and radio stations); and expenses of approximately $536,000 and $1.1 million,
respectively, relating to the Services Agreement (whereby Hearst provides the
Company certain administrative services such as accounting, financial, legal,
tax, insurance, data processing and employee benefits), during the three and
six-months ended June 30, 1998. The Company believes that the terms of all
these agreements are reasonable to both sides; there can be no assurance,
however, that more favorable terms would not be available from third parties.
7. PROPOSED ACQUISITIONS AND SUBSEQUENT EVENTS
In May 1998, the Company announced that it entered into an agreement to acquire
the nine television and five radio stations of Pulitzer Publishing ("Pulitzer")
in a merger transaction. The Company will issue $1.15 billion in Series A
Common Stock (calculated on the basis of an equity adjustment "collar"
mechanism) to Pulitzer shareholders and assume $700 million in debt. The Company
expects the transaction, which is subject to a regulatory and shareholder
approval and certain other conditions, to close during early 1999.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
--------------
RESULTS OF OPERATIONS
On August 29, 1997, effective September 1, 1997 for accounting purposes, The
Hearst Corporation ("Hearst") contributed its television broadcast group and
related broadcast operations (the "Hearst Broadcast Group") to Argyle
Television, Inc. ("Argyle") and merged a wholly-owned subsidiary of Hearst with
and into Argyle, with Argyle as the surviving corporation (renamed "Hearst-
Argyle Television, Inc."). The merger transaction is referred to as "the Hearst
Transaction". The merger was accounted for as a purchase of Argyle by Hearst
in a reverse acquisition. In a reverse acquisition, the accounting treatment
differs from the legal form of the transaction, as the continuing legal parent
company (Argyle), is not assumed to be the acquiror and the historical financial
statements of the entity become those of the accounting acquiror (Hearst
Broadcast Group). Consequently, the presentation of the Company's consolidated
financial statements prior to September 1, 1997 has been revised to reflect the
financial statements of the Hearst Broadcast Group. In addition, the Company
agreed to provide management services with respect to WWWB, WPBF, KCWE and WBAL-
AM and WIYY-FM (the "Managed Stations"), three of which stations are owned by
Hearst and the other of which Hearst provides certain services to under a local
marketing agreement, in exchange for a management fee. (See Notes 1, 2 and 6 to
the condensed consolidated financial statements).
Effective June 1, 1998, the Company exchanged WDTN and WNAC under the terms of
an agreement (the "STC Swap") for KSBW and WPTZ/WNNE. (See Note 2 to the
condensed consolidated financial statements.)
The following discussion of results of operations does not include the pro forma
effects of the Hearst Transaction for the three and six-months ended June 30,
1997.
Results of operations for the three and six-months ended June 30, 1998 include:
(i)The Hearst Broadcast Group, KITV, WAPT, KHBS/KHOG, WLWT, and KOCO, for the
entire period; (ii) fees derived by the Company from the Managed Stations for
the entire period; (iii) WDTN and the Company's share of broadcast cash flows
from the Clear Channel Venture from January 1 to May 31; and, (iv) KSBW and
WPTZ/WNNE for June, only. Results of operations for the three and six-months
ended June 30, 1997 include the Hearst Broadcast Group for the entire period.
Three Months Ended June 30, 1998
Compared to Three Months Ended June 30, 1997
Total revenues. Total revenues in the three months ended June 30, 1998 were
$109.7 million, as compared to $81.5 million in the three months ended June 30,
1997, an increase of $28.2 million or 34.6%. The increase was primarily
attributable to the Hearst Transaction, which added $23.9 million to 1998 total
revenues. In addition, the increase was attributable to: (i) an increase in
political advertising, which added approximately $1.8 million to the 1998 period
and (ii) the net effect of the STC Swap, which added $.5 million to the 1998
period.
Station operating expenses. Station operating expenses in the three months
ended June 30, 1998 were $41.5 million, as compared to $30.5 million in the
three months ended June 30, 1997, an increase of $11.0 million or 36.1%. The
increase was primarily attributable to the Hearst Transaction, which added $10.9
million to station operating expenses during 1998.
Amortization of program rights. Amortization of program rights in the three
months ended June 30, 1998 was $10.8 million, as compared to $9.5 million in the
three months ended June 30, 1997, an increase of $1.3 million or 13.7%. The
increase was primarily attributable to the Hearst Transaction, which added $1.3
million to amortization of program rights during 1998.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $8.8 million in the three months ended June 30, 1998, as compared to
$4.1 million in the three months ended June 30, 1997, an increase of $4.7
million or 114.6%. The increase was primarily attributable to the Hearst
Transaction, which added $4.8 million to depreciation and amortization of
intangibles during 1998.
Station operating income. Station operating income in the three months ended
June 30, 1998 was $48.6 million, as compared to $37.4 million in the three
months ended June 30, 1997, an increase of $11.2 million. The increase in
station operating income was attributable to the items discussed above.
Corporate general and administrative expenses. Corporate general and
administrative expenses were $3.1 million for the three months ended June 30,
1998, as compared to $2.3 million for the three months ended June 30, 1997, an
increase of $0.8 million or 34.8%. The increase was primarily attributable to
the increase in corporate staff following the Hearst Transaction and other costs
associated with the Hearst Transaction.
9
<PAGE>
Interest expense, net. Interest expense, net was $8.9 million in the three
months ended June 30, 1998, as compared to $7.4 million in the three months
ended June 30, 1997, an increase of $1.5 million or 20.3%. This increase in
interest expense was primarily attributable to a larger outstanding debt balance
in 1998 than in 1997, which was the result of the Hearst Transaction. This was
offset by a decrease in interest expense, net for the three months ended June
30, 1998 of $0.4 million as a result of the interest rate protection agreements.
Because the Company's floating rate debt at June 30, 1998, was lower than the
notional amounts of the interest rate protection agreements, the Company was
required to mark-to-market a portion of the interest rate protection agreements,
in compliance with SFAS No. 119. Interest rate protection agreements did not
exist during the 1997 period. In addition, interest expense, net was decreased
for the three months ended June 30, 1998 due to approximately $0.9 million in
interest income recorded relating to the note receivable from the STC Swap.
(See Note 2 to the condensed consolidated financial statements.)
Income taxes. Income tax expense was $15.3 million for the three months ended
June 30, 1998, as compared to $11.3 million in the three months ended June 30,
1997, an increase of $4 million, or 35.4%. The effective rate was 41.9% for the
three months ended June 30, 1998 as compared to 40.9% for the three months ended
June 30, 1997. This represents federal and state income taxes as calculated on
the Company's net income before taxes and extraordinary item. The increase in
the effective rate is primarily due to the increase in the state and local
provision.
Extraordinary item. The Company recorded an extraordinary item of $0.8 million,
net of the related income tax benefit, in the three months ended June 30, 1998.
This extraordinary item resulted from an early repayment of the Company's $102.4
million Senior Subordinated Notes. The extraordinary item includes certain
expenses associated with the early repayment of the Senior Subordinated Notes.
Net income. Net income was $20.5 million in the three months ended June 30,
1998, as compared to $16.3 million in the three months ended June 30, 1997, an
increase of $4.2 million or 25.8%. This increase in net income was attributable
to the items discussed above.
Broadcast Cash Flow. Broadcast cash flow was $57.4 million in the three months
ended June 30, 1998, as compared to $41.5 million in the three months ended June
30, 1997, an increase of $15.9 million or 38%. The broadcast cash flow increase
resulted primarily from the Hearst Transaction, which added $11.8 million to
broadcast cash flow during 1998. In addition, the increase was attributable to
(i) an increase in politcal advertising, and (ii) the net effect of the STC
Swap, during the 1998 period. Broadcast cash flow margin increased to 52.3% in
1998 from 51% in 1997. Broadcast cash flow is defined as station operating
income, plus depreciation and amortization, plus amortization of program rights,
and minus program payments. Broadcast cash flow does not present a measure of
operating results and does not purport to represent cash provided by operating
activities. Broadcast cash flow should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. This measure may not be comparable to similarly
titled measures used by other companies.
Six Months Ended June 30, 1998
Compared to Six Months Ended June 30, 1997
Total revenues. Total revenues in the six months ended June 30, 1998 were $197
million, as compared to $143.6 million in the six months ended June 30, 1997, an
increase of $53.4 million or 37.2%. The increase was primarily attributable to
the Hearst Transaction, which added $43.6 million to 1998 total revenues. In
addition, the increase was attributable to: (i) an increase in total revenues
mainly due to an increase in local and political advertising which added
approximately $4.3 million to the 1998 period and (ii) the net effect of the STC
Swap, which added approximately $0.5 million to the period.
Station operating expenses. Station operating expenses in the six months ended
June 30, 1998 were $83.9 million, as compared to $60.6 million in the six months
ended June 30, 1997, an increase of $23.3 million or 38.4%. The increase was
primarily attributable to the Hearst Transaction, which added $22.1 million to
station operating expenses during 1998.
Amortization of program rights. Amortization of program rights in the six
months ended June 30, 1998 was $21.7 million, as compared to $19.1 million in
the six months ended June 30, 1997, an increase of $2.6 million or 13.6%. The
increase was primarily attributable to the Hearst Transaction, which added $2.5
million to amortization of program rights during 1998.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $17.6 million in the six months ended June 30, 1998, as compared to
$8.2 million in the six months ended June 30, 1997, an increase of $9.4 million
or 114.6%. The increase was primarily attributable to the Hearst Transaction,
which added $10 million to depreciation and amortization of intangibles during
1998.
Station operating income. Station operating income in the six months ended June
30, 1998 was $73.7 million, as compared to $55.7 million in the six months ended
June 30, 1997, an increase of $18.0 million or 32.3%. The increase in station
operating income was attributable to the items discussed above.
10
<PAGE>
Corporate general and administrative expenses. Corporate general and
administrative expenses were $6.6 million for the six months ended June 30,
1998, as compared to $4.5 million for the six months ended June 30, 1997, an
increase of $2.1 million or 46.7%. The increase was attributable increase in
corporate staff following the Hearst Transaction and other costs associated with
the Hearst Transaction.
Interest expense, net. Interest expense, net was $19.8 million in the six
months ended June 30, 1998, as compared to $12.5 million in the six months ended
June 30, 1997, an increase of $7.3 million or 58.4%. This increase in interest
expense was primarily attributable to a larger outstanding debt balance in 1998
than in 1997, which was the result of the Hearst Transaction. Interest expense,
net for the six months ended June 30, 1998 was increased by $0.3 million as a
result of the interest rate protection agreements. Because the Company's
floating rate debt at June 30, 1998, was lower than the notional amounts of the
interest rate protection agreements the Company was required to mark-to-market a
portion of the interest rate protection agreements, in compliance with SFAS No.
119. Interest rate protection agreements did not exist during the 1997 period.
In addition, interest expense, net was decreased for the six months ended June
30, 1998 due to approximately $0.9 million in interest income recorded relating
to the note receivable from the STC Swap. (See Note 2 to the condensed
consolidated financial statements.)
Income taxes. Income tax expense was $20.2 million for the six months ended
June 30, 1998, as compared to $16.1 million in the six months ended June 30,
1997, an increase of $4.1 million, or 25.5%. The effective rate was 42.7% for
the six months ended June 30, 1998 as compared to 41.4% for the six months ended
June 30, 1997. This represents federal and state income taxes as calculated on
the Company's net income before taxes and extraordinary item. The increase in
the effective rate was mainly due to the increase in the state and local
provision.
Extraordinary item. The Company recorded an extraordinary item of $10.8 million
net of the related income tax benefit, in 1998. This extraordinary item
resulted from an early repayment of the Company's $102.4 million Senior
Subordinated Notes. The extraordinary item includes the write-off of the
unamortized deferred financing costs associated with the Senior Subordinated
Notes, the payment of a premium for the early repayment and certain expenses
associated with the early repayment.
Net income. Net income was $16.3 million in the six months ended June 30, 1998,
as compared to $22.7 million in the six months ended June 30, 1997, a decrease
of $6.4 million or 28.2%. This decrease in net income was attributable
primarily to the increase in depreciation and amortization, interest expense,
net and the extraordinary item, offset by the increase in station operating
income.
Broadcast Cash Flow. Broadcast cash flow was $91.1 million in the six months
ended June 30, 1998, as compared to $63.9 million in the six months ended June
30, 1997, an increase of $27.2 million or 42.6%. The broadcast cash flow
increase resulted primarily from the Hearst Transaction, which added $19 million
to broadcast cash flow during 1998. In addition, the increase was attributable
to: (i) an increase in total revenues due to an increase in local and political
advertising and (ii) the net effect of the STC Swap, period to period.
Broadcast cash flow margin increased to 46.2% in 1998 from 44.5% in 1997.
Broadcast cash flow is defined as station operating income, plus depreciation
and amortization, plus amortization of program rights, and minus program
payments. Broadcast cash flow does not present a measure of operating results
and does not purport to represent cash provided by operating activities.
Broadcast cash flow should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. This measure may not be comparable to similarly titled
measures used by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Hearst Transaction on August 29, 1997, the Company
retired its existing credit agreement (the "Old Credit Agreement") and entered
into a $1 billion syndicated credit facility with Chase Manhattan Bank (the
"Credit Facility"). As of June 30, 1998, $29 million was outstanding under the
Credit Facility. The Company may borrow amounts under the Credit Facility from
time to time for additional acquisitions, capital expenditures and working
capital, subject to the satisfaction of certain conditions on the date of
borrowing.
During the second quarter of 1998, the Company's Board of Directors authorized
the repurchase of up to $300 million of its outstanding Series A Common Stock.
The Company expects such repurchases to be effected from time to time in the
open market or in private transactions, subject to market conditions. During
the three months ended June 30, 1998, the Company spent approximately $8.3
million to repurchase approximately 238,000 shares of Series A Common Stock, at
an average price of $34.96. Hearst has also notified the Company of its
intention to purchase up to 10 million shares of the Company's Series A Common
Stock from time to time in the open market, in private transactions or
otherwise. (See Note 1 to the condensed consolidated financial statements.)
During early 1999, the Company anticipates it will close on the acquisition of
the Pulitzer stations (See Note 7 to the condensed consolidated financial
statements). In connection with this transaction, the Company expects to borrow
approximately $700 million under the Credit Facility. These borrowings will
increase the Company's interest expense by approximately $49 million per year.
The Company anticipates that, based upon 1997 earnings levels of Pulitzer, the
increase in interest expense and amortization of intangible assets will result
in a decrease in the combined income from continuing operations of the Company,
including Pulitzer of approximately $9 million. However, such increase in
interest expense will be funded from the increase in cash flow from the
Pulitzer operations.
Capital expenditures were $21.9 million in 1997 and approximately $3.1 million
and $8.0 million, respectively, during the three and six-months ended June 30,
1998. The Company expects to invest approximately $12.7 million in special
projects/buildings including its new station facility at WLWT, approximately
$6.7 million in digital conversion projects at various stations and $10.3
million in maintenance projects, during 1998.
11
<PAGE>
The Company anticipates that its primary sources of cash, those being, current
cash balances, operating cash flow and amounts available under the Credit
Facility, will be sufficient to finance the operating and working capital
requirements of its stations, the Company's debt service requirements and
anticipated capital expenditures for the Company for both the next 12 months and
the foreseeable future thereafter.
IMPACT OF INFLATION
The impact of inflation on the Company's operations has not been significant to
date. There can be no assurance, however, that a high rate of inflation in the
future would not have an adverse impact on the Company's operating results.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. These statements are
based upon a number of assumptions and estimates, which are inherently subject
to uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions, which are subject to change.
Some of the assumptions may not materialize and unanticipated events may occur
which can affect the Company's results.
YEAR 2000
The Company has evaluated the potential impact of the situation commonly
referred to as the "Year 2000 problem." The Year 2000 problem, which is common
to most corporations, concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date sensitive
information related to the year 2000. Preliminary assessment indicates that
solutions will involve a mix of modifying existing systems, replacing obsolete
systems and confirming vendor compliance. The Company currently does not
anticipate any significant incremental capital expenditures associated with the
Year 2000 problem. However, Year 2000 assessments will continue and capital
expenditure estimates could change. The Company has initiated formal
communications with all of its significant suppliers and large customers to
determine the extent to which the Company's systems are vulnerable to those
third parties' failure to remediate their own Year 2000 issue. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted timely and would not have an adverse effect on the
Company's systems. The Company will utilize both internal and external resources
to upgrade or replace, and test the software for Year 2000 modifications.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for reporting certain financial and
descriptive information for reportable segments on the same basis that is used
internally for evaluating segment performance and the allocation of resources to
segments. This statement is effective for fiscal years beginning after December
15, 1997. In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits", which becomes effective for the Company's 1998 consolidated financial
statements. SFAS No. 132 standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain previously
required disclosures. In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which becomes effective for the Company's 2000
consolidated financial statements. SFAS 133 requires that derivative
instruments be measured at fair value and recognized as assets or liabilities in
a company's statement of financial position. The adoption of these statements
will not have a material effect on the Company's consolidated financial
statements.
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 98-5, Reporting on the Costs of Start-
Up Activities ("SOP 98-5"). SOP 98-5 requires that entities expense start-up
costs and organization costs as they are incurred. In March 1998, the AICPA
issued SOP No. 98-1, Accounting for the costs of computer software developed or
obtained for internal use ("SOP 98-1"). SOP 98-1 was issued to remedy the
diversity in the approaches to accounting for internaluse software by providing
guidance on expensing versus capitalization of costs, accounting for the costs
incurred in the upgrading and amortization of capitalized software costs. These
statements are effective for fiscal years beginning after December 15, 1998. The
Company's accounting practices are in compliance with these Statements.
12
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No.
27 Financial Data Schedule
13
<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.
December 10, 1998 By:
----------------------------------
Harry T. Hawks, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
December 10, 1998 By:
----------------------------------
Teresa D. Lopez, Vice President and
Controller
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE
30, 1998 AND FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1997 IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS 6-MOS 3-MOS
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