<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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: 0-27000
HEARST-ARGYLE TELEVISION, INC.
(Exact name of registrant as specified in its charter)
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 offices) including area code)
---------------------------------------
(Former name, 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 November 11, 1998, the Registrant had 53,087,756 shares of common stock
outstanding. Consisting of 11,789,108 shares of Series A Common Stock,
41,298,648 shares of Series B Common Stock.
================================================================================
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE NO.
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998 (unaudited).. 1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1997 and 1998 (unaudited).......................................................... 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1998 (unaudited).......................................................... 4
Notes to Condensed Consolidated Financial Statements.............................................. 5
<CAPTION>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 9
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................................. 15
ITEM 2. Changes in Securities......................................................................... 15
ITEM 3. Defaults Upon Senior Securities............................................................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders........................................... 15
ITEM 5. Other Information............................................................................. 15
ITEM 6. Exhibits and reports on Form 8-K.............................................................. 15
Signatures................................................................................................ 16
</TABLE>
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 September 30, 1998
1997 (Unaudited)
---------------------------------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 12,759 $ 51,254
Accounts receivable, net 89,988 73,698
Program and barter rights 35,737 45,614
Deferred income taxes 5,975 4,172
Related party receivable 3,695 3,122
Net assets held for sale 72,019 -
Other 7,070 7,984
---------- ----------
Total current assets 227,243 185,844
---------- ----------
Property, plant and equipment, net 97,804 125,351
---------- ----------
Intangible assets, net 661,326 712,115
---------- ----------
Other assets:
Deferred acquisition and financing costs,
net 27,796 29,144
Program and barter rights, noncurrent 3,511 4,993
Other 26,429 27,057
---------- ----------
Total other assets 57,736 61,194
---------- ----------
Total assets $1,044,109 $1,084,504
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
1
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
December 31, September 30, 1998
1997 (Unaudited)
-------------------------------------------
(In thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 36,048 $ 40,058
Program and barter rights payable 35,769 45,890
Other 51 185
----------- -----------
Total current liabilities 71,868 86,133
----------- -----------
Program and barter rights payable 4,923 5,028
Long-term debt 490,000 502,596
Deferred income taxes 150,274 157,588
Other liabilities 390 814
----------- -----------
Total noncurrent liabilities 645,587 666,026
----------- -----------
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 202,152 201,889
Retained earnings 123,962 151,138
Treasury stock - (21,222)
----------- -----------
Total stockholders' equity 326,654 332,345
----------- -----------
Total liabilities and stockholders' equity $ 1,044,109 $ 1,084,504
=========== ===========
</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 Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
----------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues $ 77,730 $ 95,045 $ 221,296 $ 292,010
Station operating expenses 36,323 43,647 96,919 127,595
Amortization of program rights 10,149 10,358 29,201 32,027
Depreciation and amortization 5,504 9,037 13,694 26,678
----------------------------------------------------------
Station operating income 25,754 32,003 81,482 105,710
Corporate general and administrative expenses 2,079 3,065 6,546 9,619
----------------------------------------------------------
Operating income 23,675 28,938 74,936 96,091
Interest expense, net 8,039 10,151 20,524 29,978
----------------------------------------------------------
Income before extraordinary item and
income taxes 15,636 18,787 54,412 66,113
Income taxes 6,308 7,882 22,362 28,111
----------------------------------------------------------
Income before extraordinary item 9,328 10,905 32,050 38,002
Extraordinary item, loss on early retirement of
debt, net of income tax benefit - (49) - (10,826)
----------------------------------------------------------
Net income 9,328 10,856 32,050 27,176
Less preferred stock dividends (355) (355) (355) (1,066)
----------------------------------------------------------
Income applicable to common stockholders $ 8,973 $ 10,501 $ 31,695 $ 26,110
==========================================================
Income per common share - basic:
Before extraordinary item $ 0.20 $ 0.20 $ 0.75 $ 0.69
Extraordinary item - - - (0.20)
----------------------------------------------------------
Net income $ 0.20 $ 0.20 $ 0.75 $ 0.49
==========================================================
Number of common shares used in the calculation 43,998 53,409 42,208 53,678
Income per common share - diluted:
Before extraordinary item $ 0.20 $ 0.20 $ 0.75 $ 0.68
Extraordinary item - - - (0.20)
----------------------------------------------------------
Net income $ 0.20 $ 0.20 $ 0.75 $ 0.48
==========================================================
Number of common shares used in calculation 44,043 53,690 42,223 53,943
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1998
-----------------------------
Operating Activities (In thousands)
<S> <C> <C>
Net income $ 32,050 $ 27,176
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary item, loss on early retirement of debt - 17,191
Depreciation 5,659 9,959
Amortization of intangible assets 8,035 16,719
Amortization of deferred financing costs 975 1,822
Amortization of program rights 29,201 32,027
Program payments (29,480) (32,653)
Fair value adjustments of interest rate protection agreements - 471
Changes in operating assets and liabilities, net 11,190 (862)
-----------------------------
Net cash provided by operating activities 57,630 71,850
-----------------------------
Investing Activities
Acquisition of stations (111,076) (20,136)
Acquisition costs - (1,526)
Purchases of property, plant, and equipment:
Special projects/buildings - (4,106)
Digital - (2,124)
Maintenance (3,762) (6,545)
-----------------------------
Net cash used in investing activities (114,838) (34,437)
-----------------------------
Financing Activities
Issuance of Senior Notes - 200,000
Repayment of Senior Subordinated Notes - (116,621)
Proceeds from issuance of long-term debt 100,000 29,000
Repayment of long-term debt (15,000) (85,000)
Financing costs and other 345 (4,634)
Series A Common stock:
Issuances - 625
Repurchases - (21,222)
Dividends paid on preferred stock (355) (1,066)
-----------------------------
Net cash provided by financing activities 84,990 1,082
-----------------------------
Increase in cash and cash equivalents 27,782 38,495
Cash and cash equivalents at beginning of period 2,882 12,759
-----------------------------
Cash and cash equivalents at end of period $ 30,664 $ 51,254
=============================
Businesses acquired in purchase transaction:
Fair market value of assets acquired $ 523,961 $ 20,632
Liabilities assumed (229,640) (496)
Issuance of common stock (183,245)
-----------------------------
Net cash paid for acquisitions $ 111,076 $ 20,136
=============================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 2.0 million shares of the company's Series
A Common Stock (see Note 5), increasing its ownership to approximately 81.3% as
of September 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 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 historical
financial statements prior to September 1, 1997 have been revised to reflect the
financial statements of the Hearst Broadcast Group.
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 considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended
September 30, 1997 and 1998 are not necessarily indicative of the results that
may be expected for a full year.
Certain reclassifications have been made to the December 31, 1997 condensed
consolidated balance sheet to conform to the September 30, 1998 presentation.
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 fair market value. 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
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.
5
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
September 30, 1998
2. Acquisitions (continued)
Effective June 1, 1998, the Company exchanged its WDTN and WNAC stations 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 and cash of approximately $20 million (the
"STC Swap"), net of certain working capital adjustments which totaled
approximately $1.4 million.
Giving effect to the Hearst Transaction and the STC Swap discussed above, pro
forma results of operations reflect combined historical results for WCVB, WTAE,
WBAL, KMBC, WISN, WAPT, KITV, WLWT, KOCO, KHBS/KHOG, KSBW, WPTZ/WNNE and fees
for providing management services to the Managed Stations (WWWB, WPBF, KCWE and
WBAL-AM and WIYY-FM) pursuant to a management agreement (See Note 6), as if all
acquisitions and financings (See Note 3) occurred as of January 1, 1997, are as
follows:
<TABLE>
<CAPTION>
Pro Forma
Nine months ended September 30,
1997 1998
-----------------------------------------
(In thousands, except per share data)
<S> <C> <C>
Total revenues $ 275,779 $ 292,061
Net income $ 33,534 $ 38,400
Income from continuing operations applicable to common stockholders $ 32,468 $ 37,334
Income per common share - basic $ 0.60 $ 0.70
==== ====
- diluted $ 0.60 $ 0.69
==== ====
Pro forma number of shares used in calculations - basic 53,678 53,678
====== ======
- diluted 53,943 53,943
====== ======
</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 have been achieved had each of the stations been
acquired at the beginning of the periods presented, nor are they indicative of
future results of operations.
<TABLE>
<CAPTION>
3. Long-Term Debt
Long-term debt consists of the following:
December 31, September 30,
1997 1998
--------------------------------------------
(In thousands)
<S> <C> <C>
Credit Facility dated August 29, 1997 $ 85,000 $ --
Senior Notes 300,000 500,000
Senior Subordinated Notes 105,000 2,596
============================================
$ 490,000 $ 502,596
===============================================
</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, net of related income tax
benefit in the accompanying condensed consolidated statement of operations for
the nine months ended September 30, 1998.
6
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1998
3. LONG-TERM DEBT (CONTINUED)
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).
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 September 30, 1998 follows:
<TABLE>
<CAPTION>
AVERAGE AVERAGE ESTIMATED FAIR
NOTIONAL AMOUNT RECEIVE RATE PAY RATE VALUE
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swap agreements:
Fixed rate agreement $20,000,000 LIBOR 7.01% $(276,636)
Fixed rate agreement $15,000,000 LIBOR 6.98% $(194,336)
</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 exposure 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 and nine-months ended September 30, 1998, the Company spent
approximately $12.9 million and $21.2 million to repurchase approximately
382,000 shares and 619,000 shares, of Series A Common Stock at an average price
of $33.85 and $34.25, respectively. 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)
SEPTEMBER 30, 1998
6. RELATED PARTY TRANSACTIONS
The Company recorded revenues of approximately $925,000 and $2.8 million, during
the three and nine-months ended September 30, 1998, respectively, and
approximately $170,000 for both the three and nine-months ended September 30,
1997, 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 $1.6
million, 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 nine-
months ended September 30, 1998, respectively, and approximately $200,000 for
both the three and nine-months ended September 30, 1997. 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 regulatory and shareholder
approval and certain other conditions, to close during early 1999.
In August 1998, the Company announced that it entered into agreements to acquire
the one television station and one time brokerage agreement for another
television station and a production and syndication company from Kelly
Broadcasting Co. ("Kelly") in the aggregate purchase price of $530 million. The
Company expects this transaction to close during early 1999.
In October 1998, the Company announced that it has obtained commitments from
leading institutional investors to purchase $450 million of senior notes to be
issued by the Company. The notes will have a maturity of 12 years with an
average life of 10 years, and will bear interest at 7.18% per year. The
proceeds of this financing, expected to be received in late December and or
January, will be used to fund in part the Pulitzer and Kelly transactions.
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 have 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).
The following discussion of results of operations does not include the pro forma
effects of the Hearst Transaction for the three and nine-months ended September
30, 1997.
Results of operations for the three and nine-months ended September 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 1 to September 30. Results of operations for the
three and nine-months ended September 30, 1997 include: (i) the Hearst
Broadcast group for the entire period; (ii) fees derived by the Company from the
Managed Stations for September, only; and, (iii) Argyle for September, only.
Three Months Ended September 30, 1998
Compared to Three Months Ended September 30, 1997
Total revenues. Total revenues in the three months ended September 30, 1998
were $95 million, as compared to $77.7 million in the three months ended
September 30, 1997, an increase of $17.3 million or 22.3%. The increase was
primarily attributable to (i) the Hearst Transaction which added $12.4 million
to 1998 total revenues and (ii) an increase in local and political advertising
of $4.4 million period to period.
Station operating expenses. Station operating expenses in the three months
ended September 30, 1998 were $43.6 million, as compared to $36.3 million in the
three months ended September 30, 1997, an increase of $7.3 million or 20.1%.
The increase was primarily attributable to the Hearst Transaction, which added
$6.4 million to station operating expenses during 1998.
Amortization of program rights. Amortization of program rights in the three
months ended September 30, 1998 was $10.4 million, as compared to $10.1 million
in the three months ended September 30, 1997, an increase of $0.3 million or
3.0%. The increase was primarily attributable to the Hearst Transaction, which
added $0.8 million to amortization of program rights during 1998. This increase
was offset by the STC Swap which decreased the amortization of program rights by
$0.4 million.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $9.0 million in the three months ended September 30, 1998, as
compared to $5.5 million in the three months ended September 30, 1997, an
increase of $3.5 million or 63.6%. The increase was primarily attributable to
the Hearst Transaction, which added $2.4 million to depreciation and
amortization of intangibles during 1998.
9
<PAGE>
Station operating income. Station operating income in the three months ended
September 30, 1998 was $32 million, as compared to $25.8 million in the three
months ended September 30, 1997, an increase of $6.2 million or 24.5%. 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 September
30, 1998, as compared to $2.1 million for the three months ended September 30,
1997, an increase of $1.0 million or 47.6%. The increase was attributable to
the increase in corporate staff following the Hearst Transaction and other costs
associated with the Hearst Transaction.
Interest expense, net. Interest expense, net was $10.1 million in the three
months ended September 30, 1998, as compared to $8.0 million in the three months
ended September 30, 1997, an increase of $2.1 million or 26.2%. 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 three months ended September 30, 1998 was increased by $0.5
million as a result of the interest rate protection agreements. Interest rate
protection agreements were accounted for using hedge accounting during 1997;
however, because there was no floating rate debt at September 30, 1998, the
Company was required to mark-to-market the interest rate protection agreements,
in compliance with SFAS No. 119.
Income taxes. Income tax expense was $7.9 million for the three months ended
September 30, 1998, as compared to $6.3 million in the three months ended
September 30, 1997,an increase of $1.6 million or 25.4%. The effective rate was
42% for the three months ended September 30, 1998 as compared to 40.3% for the
three months ended September 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 relates principally to the increase in
the state and local income tax provision.
Extraordinary item. The Company recorded an extraordinary item of $0.05
million, net of the related income tax benefit, in the three months ended
September 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 $10.9 million in the three months ended September
30, 1998, as compared to $9.3 million in the three months ended September 30,
1997, an increase of $1.6 million or 17.2%. This increase in net income was
attributable to the items discussed above.
Broadcast Cash Flow. Broadcast cash flow was $40.7 million in the three months
ended September 30, 1998, as compared to $31.0 million in the three months ended
September 30, 1997, an increase of $9.7 million or 31.3%. The broadcast cash
flow increase resulted from (i) the Hearst Transaction which added $5.4 million
to broadcast cash flow during the 1998 period and (ii) an increase of $3.4
million in broadcast cash flow period to period mainly due to an increase in
local and political advertising. Broadcast cash flow margin increased to 42.8%
in 1998 from 39.9% in 1997. Broadcast cash flow does not purport to represent
cash provided by operating activities and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
Nine months ended September 30, 1998
Compared to Nine months ended September 30, 1997
Total revenues. Total revenues in the nine months ended September 30, 1998 were
$292 million, as compared to $221.3 million in the nine months ended September
30, 1997, an increase of $70.7 million or 31.9%. The increase was primarily
attributable to (i) the Hearst Transaction, which added $56.6 million to 1998
total revenues and (ii) an increase in total revenues of $11.4 million mainly
due to an increase in local and political advertising.
Station operating expenses. Station operating expenses in the nine months ended
September 30, 1998 were $127.6 million, as compared to $96.9 million in the nine
months ended September 30, 1997, an increase of $30.7 million or 31.7%. The
increase was primarily attributable to the Hearst Transaction, which added $28.4
million to station operating expenses during 1998.
10
<PAGE>
Amortization of program rights. Amortization of program rights in the nine
months ended September 30, 1998 was $32 million, as compared to $29.2 million in
the nine months ended September 30, 1997, an increase of $2.8 million or 9.6%.
The increase was primarily attributable to the Hearst Transaction, which added
$3.3 million to amortization of program rights during 1998. This increase was
offset by a decrease in amortization of program rights of $0.5 million due to
the net effect of the STC Swap.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $26.7 million in the nine months ended September 30, 1998, as
compared to $13.7 million in the nine months ended September 30, 1997, an
increase of $13.0 million or 94.9%. The increase was primarily attributable to
the Hearst Transaction, which added $12.8 million to depreciation and
amortization of intangibles during 1998.
Station operating income. Station operating income in the nine months ended
September 30, 1998 was $105.7 million, as compared to $81.5 million in the nine
months ended September 30, 1997, an increase of $24.2 million or 29.7%. The
increase in station operating income was attributable to the items discussed
above.
Corporate general and administrative expenses. Corporate general and
administrative expenses were $9.6 million for the nine months ended September
30, 1998, as compared to $6.5 million for the nine months ended September 30,
1997, an increase of $3.1 million or 47.7%. The increase was attributable to
the increase in corporate staff following the Hearst Transaction and other costs
associated with the Hearst Transaction.
Interest expense, net. Interest expense, net was $30 million in the nine months
ended September 30, 1998, as compared to $20.5 million in the nine months ended
September 30, 1997, an increase of $9.5 million or 46.3%. This increase in
interest expense was 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 nine months ended September 30, 1998 was increased by $0.8 million
as a result of the interest rate protection agreements. Interest rate
protection agreements were accounted for using hedge accounting during 1997;
however, because there was no floating rate debt at September 30, 1998, the
Company was required to mark-to-market the interest rate protection agreements,
in compliance with SFAS No. 119. In addition, interest expense, net was
decreased for the nine months ended September 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 $28.1 million for the nine months ended
September 30, 1998 as compared to $22.4 million for the nine months ended
September 30, 1997, an increase of $5.7 million or 25.4%. The effective rate
was 42.5% for the nine months ended September 30, 1998 as compared to 41.1% for
the nine months ended September 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 relates principally to
the increase in the state and local income tax provision.
11
<PAGE>
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 $27.2 million in the nine months ended September 30,
1998, as compared to $32 million in the nine months ended September 30, 1997, a
decrease of $4.8 million or 15%. This decrease in net income was attributable
to the items discussed above.
Broadcast Cash Flow. Broadcast cash flow was $131.8 million in the nine months
ended September 30, 1998, as compared to $94.9 million in the nine months ended
September 30, 1997, an increase of $36.9 million or 38.9%. The broadcast cash
flow increase resulted primarily from (i) the Hearst Transaction which added
$24.7 million to broadcast cashflow during the 1998 period and (ii) an increase
in local and political advertising of $10 million period to period. Broadcast
cash flow margin increased to 45.1% in 1998 from 42.9% in 1997. Broadcast cash
flow does not purport to represent cash provided by operating activities and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Hearst Transaction on August 29, 1997, the Company
entered into a $1 billion syndicated credit facility with Chase Manhattan Bank
(the "Credit Facility"). As of September 30, 1998, there was no amount
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 early 1999, the Company anticipates it will close on the acquisition the
Pulitzer and Kelly stations (See Note 7 to the condensed consolidated financial
statements). In connection with these transactions, the Company expects to
borrow approximately $780 million under the Credit Facility and $450 million in
private placement senior notes (See Note 7 to the condensed consolidated
financial statements). These borrowings will increase the Company's interest
expense by approximately $87 million per year. The Company anticipates that,
based upon 1997 earnings levels of Pulitzer and Kelly, 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 and
Kelly, of approximately $24 million. However, such increase in interest expense
will be funded from the increase in cash flow from operations due to the
Pulitzer and Kelly transactions.
Capital expenditures were $21.9 million in 1997 and approximately $4.8 million
and $12.8 million during the three and nine-months ended September 30, 1998,
respectively. The Company expects to invest approximately $12.7 million in
special projects/buildings including its new station facility at WLWT,
approximately $3.9 million in digital conversion projects at various stations
and $10.7 million in maintenance projects, during 1998.
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.
12
<PAGE>
YEAR 2000 READINESS DISCLOSURE
State of Readiness
- ------------------
The Company has undertaken various initiatives intended to ensure that its
information technology assets ("IT Assets") and non-IT Assets with embedded
microprocessors will function properly with respect to dates in the Year 2000
and thereafter. The Company has implemented a comprehensive plan including the
following four phases: (i) the identification of mission-critical operating
systems and applications and the inventory of all hardware and software at risk
of being date sensitive to the Year 2000; (ii) assessment and evaluation of
these systems including prioritization; (iii) modification, upgrading and
replacement of the affected systems; and, (iv) compliance testing of the
systems.
The plan's goal is either to certify systems as Year 2000 compliant or to
determine and fund the correction of the affected systems. To achieve this
goal, the Company has established Year 2000 teams that are responsible for
analyzing the Year 2000 impact on operations and for formulating appropriate
strategies to overcome and resolve the Year 2000 problems. The Company has
generally completed the inventory and assessment phases and is in various stages
of the remediation and testing phases of the Year 2000 plan. The Company's
evaluation program also includes inquiring into the Year 2000 readiness of its
third-party vendors, suppliers and service providers. The Company has initiated
formal communications with these third-party vendors, suppliers and service
providers to determine the impact of the Year 2000 on the technology they have
supplied and their plans to address any potential Year 2000 problems. The
Company is monitoring the progress of these third parties to ensure they have
accurately assessed the problem and have taken the corrective action.
Year 2000 Costs
- ---------------
The majority of costs associated with the Company's Year 2000 issues have been
and are expected to be for replacement systems for those that were fully
depreciated and scheduled for replacement prior to the Year 2000. These systems
replaced obsolete systems and were installed to provide users with enhanced
capabilities and functionality, not solely to bring systems into Year 2000
compliance. Through September 30, 1998; the Company has spent approximately
$0.3 million for replacement systems for those whose replacement schedule was
accelerated due to the Year 2000 issue. To date, the Company has not incurred
any costs solely for Year 2000 remediation.
The Company expects to spend approximately $0.6 million for replacement systems
with accelerated schedules due to the Year 2000 issue and approximately $0.8
million for remediation of equipment and systems with Year 2000 issues. This
estimate assumes that third-party suppliers have accurately assessed the
compliance of their products and that they will successfully correct the issue
in non-compliant products. Because of the complexity of correcting the Year 2000
issue, actual costs may vary from these estimates.
Contingency Plans
- -----------------
The Company has begun work on the development of a Year 2000 contingency plan
(the "Contingency Plan"). The Contingency Plan will include specific
instructions, to enable operating units to continue operations should mission-
critical systems become inoperable on or subsequent to January 1, 2000. An
initial draft of the Contingency Plan will be completed by the end of 1998 and
various simulated exercises will be planned for the first quarter of 1999 to
verify the plan's effectiveness. The Contingency Plan includes performing
certain processes and repairing systems manually, as well as changing third-
party vendors and suppliers, if necessary. The Company believes that due to the
pervasive nature of potential Year 2000 issues, the contingency planing process
is an ongoing one that will require further modifications as the Company obtains
additional information regarding (i) the Company's internal systems and
equipment during the remediation and testing phases of its Year 2000 program and
(ii) the status of third-party Year 2000 readiness.
Probable Acquisitions
- ---------------------
The Company has inquired into the Year 2000 readiness of Pulitzer and Kelly, two
groups of television and radio stations it plans to acquire during early 1999
(See Note 7 to the condensed consolidated financial statements). Although the
identification, assessment and evaluation phases of the Company's Year 2000
initiative for these stations is in preliminary stages, the Company believes
that the majority of the Pulitzer stations have some mission-critical systems
that will require upgrading or complete replacement. These include replacement
systems for those that were fully depreciated, obsolete and scheduled for
eventual replacement. Costs associated with remediation of these systems are
estimated to be approximately $1.5 million to $3 million. However, because of
the complexity of correcting the Year 2000 issue, actual costs may vary from
this estimate. The Company believes that the Kelly stations do not have any
significant Year 2000 issues. The evaluation of all systems and third-party
dependencies will continue subsequent to the closing of these transactions.
13
<PAGE>
Possible Consequences of Year 2000 Problems
- -------------------------------------------
The Company believes that completed and planned modifications and conversions of
its internal systems and equipment will allow it to be Year 2000 compliant in a
timely manner. There can be no assurance, however, that the Company's internal
systems or equipment or those of third parties on which the Company relies will
be Year 2000 compliant in a timely manner or that the Company's or third
parties' contingency plans will mitigate the effects of any noncompliance. The
failure of the systems or equipment of the Company or third parties (which the
Company believes is the most reasonable likely worst case scenario) could effect
the broadcast of advertisements and programming and could have a material effect
on the Company's business or consolidated financial statements.
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.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS Not Applicable
ITEM 2. CHANGES IN SECURITIES Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable
ITEM 5. OTHER INFORMATION Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No.
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(b) Reports on Form 8-K:
On September 17, 1998, the Company filed a Form 8-K including certain
audited and unaudited historical financial statements of Kelly
Broadcasting Co.
On September 29, 1998 the Company filed a form 8-K including certain
audited and unaudited historical financial statements of Pultizer
Broadcasting Co. and certain unaudited proforma financial statements of
the Company.
15
<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.
-------------------------------------------
Registrant
November 12, 1998 By: /s/ Harry T. Hawks
- ----------------- -------------------------------------
Date Harry T. Hawks, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
November 12, 1998 By: /s/ Teresa D. Lopez
- ----------------- -------------------------------------
Date Teresa D. Lopez, Vice President and
Controller (Principal Accounting Officer)
16
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND
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<PERIOD-END> SEP-30-1998 SEP-30-1998
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<RECEIVABLES> 73,698 73,698
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<CURRENT-ASSETS> 185,844 184,844
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<TOTAL-ASSETS> 1,084,504 1,084,504
<CURRENT-LIABILITIES> 86,133 86,133
<BONDS> 502,596 502,596
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<COMMON> 538 538
<OTHER-SE> 331,805 331,805
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<PAGE>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE
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