<PAGE>
================================================================================
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 MARCH 31, 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 May 13, 1998, the Registrant had 53,842,377 shares of common stock
outstanding. Consisting of 12,543,729 shares of Series A Common Stock,
41,298,648 shares of Series B Common Stock.
================================================================================
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998 (unaudited).. 1
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 1997 (Predecessor Company) and 1998 (unaudited)..................................... 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1997 (Predecessor Company) 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
</TABLE>
<TABLE>
<CAPTION>
PART II OTHER INFORMATION
<S> <C>
ITEM 1. Legal Proceedings......................................................................... 12
ITEM 2. Changes in Securities..................................................................... 12
ITEM 3. Defaults Upon Senior Securities........................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders....................................... 12
ITEM 5. Other Information......................................................................... 12
ITEM 6. Exhibits and reports on Form 8-K.......................................................... 12
Signatures............................................................................................ 14
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31, 1998
1997 (Unaudited)
-----------------------------------------------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 12,759 $ 47,059
Accounts receivable, net 89,988 68,186
Program and barter rights 35,737 23,387
Deferred income taxes 5,975 5,975
Related party receivable 3,695 8,106
Net assets held for sale 72,019 70,603
Other 7,070 7,735
-------- --------
Total current assets 227,243 231,051
-------- --------
Property, plant and equipment, net 97,804 103,808
-------- --------
Intangible assets, net 661,326 652,158
-------- --------
Other assets:
Deferred acquisition and financing costs,
net 27,796 28,428
Program and barter rights, noncurrent 3,511 3,382
Other 26,429 26,869
-------- --------
Total other assets 57,736 58,679
-------- --------
Total assets $1,044,109 $1,045,696
=========== ==========
</TABLE>
See accompanying notes.
1
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Balance Sheets (Continued)
December 31, March 31, 1998
1997 (Unaudited)
------------------------------
(In thousands)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 36,048 $ 41,743
Program and barter rights payable 35,769 23,893
Other 51 303
---------- ----------
Total current liabilities 71,868 65,939
---------- ----------
Program and barter rights payable 4,923 3,815
Long-term debt 490,000 502,596
Deferred income taxes 150,274 150,274
Other liabilities 390 993
---------- ----------
Total noncurrent liabilities 645,587 657,678
---------- ----------
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 363,404 362,963
Accumulated deficit (37,290) (41,424)
---------- ----------
Total stockholders' equity 326,654 322,079
---------- ----------
Total liabilities and stockholders' equity $1,044,109 $1,045,696
========== ==========
See accompanying notes.
2
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1998
----------------------------------------------
(Predecessor Company)
----------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
Total revenues $ 17,879 $ 87,252
Station operating expenses 10,781 42,442
Amortization of program rights 1,057 10,823
Depreciation and amortization 6,558 8,841
-------- --------
Station operating income (loss) (517) 25,146
Corporate general and administrative expenses 1,008 3,435
Non-cash compensation expense 260 -
-------- --------
Operating income (loss) (1,785) 21,711
Interest expense, net 4,418 10,960
-------- --------
Income (loss) before income taxes and extraordinary item (6,203) 10,751
Income taxes - (4,916)
-------- --------
Income (loss) before extraordinary item (6,203) 5,835
Extraordinary item, loss on early retirement of debt,
net of income tax benefit of $6,881 - (9,969)
-------- --------
Net loss (6,203) (4,134)
Less preferred stock dividends (356) (356)
-------- --------
Loss applicable to common stockholders $ (6,559) $ (4,490)
======== ========
Earnings (loss) per common share - basic:
Before extraordinary item $ (0.58) $ 0.10
Extraordinary item - (0.19)
-------- --------
Net loss $ (0.58) $ (0.09)
======== ========
Number of common shares used in the calculation 11,347 53,833
======== ========
Earnings (Loss) per common share - diluted:
Before extraordinary loss $ (0.58) $ 0.10
Extraordinary item - (0.18)
-------- --------
Net loss $ (0.58) $ (0.08)
======== ========
Number of common shares used in the calculation 11,347 54,043
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1998
----------------------------------
(Predecessor Company)
----------------------------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,203) $ (4,134)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Extraordinary item, loss on early retirement of debt - 16,850
Depreciation 1,353 2,827
Amortization of intangible assets 5,204 6,014
Amortization of deferred financing costs 162 631
Amortization of program rights 1,057 10,823
Program payments (1,229) (11,123)
Compensation element of stock options 260 -
Fair value adjustments of interest rate protection agreements (328) 546
Changes in operating assets and liabilities, net 4,727 22,744
-------- ---------
Net cash provided by operating activities 5,003 45,178
INVESTING ACTIVITIES
Acquisition of stations (20,921) -
Acquisition costs - (186)
Purchases of property, plant, and equipment:
Special projects/buildings - (1,837)
Digital - (1,007)
Maintenance (1,436) (2,058)
-------- ---------
Net cash used in investing activities (22,357) (5,088)
FINANCING ACTIVITIES
Financing costs and other - (4,154)
Issuance of Senior Notes - 200,000
Repayment of Senior Subordinated Notes - (116,280)
Dividends paid on preferred stock (356) (356)
Proceeds from issuance of long-term debt 22,000 -
Payment of long-term debt (2,000) (85,000)
-------- ---------
Net cash provided by (used in) financing activities 19,644 (5,790)
-------- ---------
Increase in cash and cash equivalents 2,290 34,300
Cash and cash equivalents at beginning of period 949 12,759
======== =========
Cash and cash equivalents at end of period $ 3,239 $ 47,059
======== =========
Business acquired in purchase transaction:
Fair market value of assets acquired $ 20,935 $ -
Liabilities assumed 14 -
======== =========
Net cash paid for acquisitions $ 20,921 $ -
======== =========
</TABLE>
See accompanying notes.
4
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. SUMMARY OF ACCOUNTING POLICIES
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. As
more fully discussed in Note 2, the Predecessor Company was acquired in a
business combination accounted for as a purchase. As a result of the
acquisition, the condensed consolidated financial statements for the period
subsequent to the acquisition are presented on a different basis of accounting
than those for the periods prior to the acquisition and, therefore, are not
directly comparable.
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-month period ended March 31,
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 March 31, 1998 presentation.
2. ACQUISITIONS
The Company is the successor to the combined operations of Argyle Television,
Inc. ("Argyle" and "Predecessor Company") and the television broadcast group of
The Hearst Corporation ("Hearst") pursuant to a merger transaction that was
consummated on August 29, 1997, effective September 1, 1997 for accounting
purposes (the "Hearst Transaction"). In that transaction, Hearst (the
accounting acquiror) contributed its television broadcast group and related
broadcast operations (the "Hearst Broadcast Group") to Argyle and merged a
wholly-owned subsidiary of Hearst with and into Argyle, with Argyle as the
surviving corporation (renamed "Hearst-Argyle Television, Inc."). As a result
of the Hearst Transaction at March 31, 1998, 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.
For accounting purposes, Hearst has been deemed to be the acquiror of Argyle.
Accordingly, the assets and liabilities of Argyle have been adjusted to the
extent acquired by Hearst to their estimated fair values based upon preliminary
purchase price allocation. The net assets of the Hearst Broadcast Group have
been reflected at their historical cost basis. The 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 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 March 31, 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 the acquired stations since the date of the
acquisition.
On January 31, 1997, Argyle swapped WZZM and WGRZ under the terms of an
agreement (the "Gannett Swap") for WLWT and KOCO with Gannett Co., Inc.
("Gannett").
5
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1998
2. ACQUISITIONS (CONTINUED)
Giving effect to the Hearst Transaction and the Gannett Swap discussed above,
unaudited pro forma results of operations reflect combined historical results
for WCVB, WTAE, WBAL, KMBC, WISN, WDTN, WAPT, KITV, WLWT, KOCO, KHBS/KHOG and
the Company's share of the combined broadcast cash flows from the Clear Channel
Venture and fees for providing management services to the Managed Stations
(WWWB, WPBF, KCWB and WBAL-AM and WIYY-FM) pursuant to a management agreement
(See Note 5), as if all acquisitions and financings (See Note 3) occurred as of
January 1, 1997, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1998
--------------------------------------
(In thousands, except per share data)
<S> <C> <C>
Total revenues $81,321 $87,252
Earnings from continuing operations applicable to common stockholders $ 4,247 $ 6,695
Earnings per common share - basic $ 0.08 $ 0.12
======= =======
- diluted $ 0.08 $ 0.12
======= =======
Pro forma number of shares used in calculations - basic 53,833 53,833
======= =======
- diluted 54,043 54,043
======= =======
</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.
On February 19, 1998, the Company announced that it agreed to exchange its WDTN
and WNAC stations with STC Broadcasting, Inc. ("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. In addition, the Company will pay STC Broadcasting, Inc. approximately
$21 million. The Company anticipates the transaction will close during the
second quarter of 1998.
On April 24, 1998, the Company loaned STC $70.5 million. The loan, which bears
interest at 7.75% per year and is collateralized by the stock of the STC
subsidiary that owns the assets comprising WPTZ/WNNE, is due upon the closing of
the exchange transaction, discussed above.
3. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, March 31,
1997 1998
----------------------------
(In thousands)
Credit Facility dated August 29, 1997:
Revolving credit facility $ 85,000 --
Senior Notes 300,000 $500,000
Senior Subordinated Notes 105,000 2,596
----------------------------
$490,000 $502,596
============================
6
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1998
3. LONG-TERM DEBT (CONTINUED)
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. Both the premium paid and the deferred financing fees relating to
the Notes were classified as an extraordinary item in the accompanying condensed
consolidated statement of operations for the period ended March 31, 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).
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 March 31, 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% $(311,023)
Fixed rate agreement $15,000,000 LIBOR 6.98% $(235,673)
</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.
7
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
MARCH 31, 1998
4. NET ASSETS HELD FOR SALE
Upon completion of the Hearst Transaction, the Company owns 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 is 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 sheets as of December 31, 1997 and March 31, 1998, are the net assets of
the stations located in Providence and Dayton at their carrying values. The
Company has agreed to exchange these assets during the second quarter of 1998,
for two television stations in markets without overlapping service contours (See
Note 2).
5. RELATED PARTY TRANSACTIONS
The Predecessor Company entered into separate agreements with one of its
shareholders, Argyle Television Investors, L.P., and the shareholder's general
partner, ATI General Partner, L.P. (the "Partnerships"), under which Argyle
provided to the Partnerships personnel, office, property, services, expertise,
systems and other assets and amenities. In consideration for such, the
partnerships were required to reimburse the Company for expenses and costs
allocated to providing these services to the Partnerships. During the three
months ended March 31, 1997, the Company recognized total reimbursements of
approximately $196,000 under these agreements. Such reimbursements were offset
against corporate general and administrative expenses in the accompanying
condensed consolidated statements of operations. Subsequent to the Hearst
Transaction such Partnerships are no longer shareholders of the Company, and
these agreements are no longer in effect.
The Company recorded revenues of approximately $430,000 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 $574,000 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 months ended March 31, 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.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
- --------------
RESULTS OF OPERATIONS
On August 29, 1997 (September 1, 1997 for accounting purposes), Argyle
consummated an agreement with The Hearst Corporation ("Hearst") to combine the
Hearst Broadcast Group (WCVB, WBAL, WTAE, WISN, WDTN and KMBC) with and into
Argyle to form Hearst-Argyle Television, Inc. (the "Company") (the "Hearst
Transaction"). In addition, the Company agreed to provide management services
with respect to WWWB, WPBF, KCWB 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 2 and 5 to the condensed consolidated
financial statements).
In January 1995, Argyle acquired three television stations -- WZZM, WNAC and
WAPT. Argyle acquired KITV in June 1995 and WGRZ in December 1995. In June
1996, Argyle acquired KHBS and its satellite KHOG (the "Arkansas Stations"). On
July 1, 1996, Argyle entered into a Joint Marketing and Programming Agreement
(the "Clear Channel Venture") with Clear Channel Communications, Inc. involving
WNAC and WPRI, the CBS affiliate in Providence, Rhode Island, owned by Clear
Channel Communications, Inc. On January 31, 1997, Argyle swapped WZZM and WGRZ
under the terms of an agreement (the "Gannett Swap") for WLWT and KOCO with
Gannett Co., Inc. ("Gannett"). (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 months ended March 31, 1997.
Results of operations for the three months ended March 31, 1998 include: (i)
KITV, WAPT, the Arkansas Stations, the Company's share of broadcast cash flows
from the Clear Channel Venture, WLWT, KOCO, the Hearst Broadcast Group and, (ii)
fees derived by the Company from the Managed Stations. Results of operations
for the three months ended March 31, 1997 include: (i) WAPT, KITV, the Arkansas
Stations and Argyle's share of broadcast cash flows from the Clear Channel
Venture for the entire period, (ii) WZZM and WGRZ for January, only and, (iii)
WLWT and KOCO for February and March, only. As a result of the Hearst
Transaction, the condensed consolidated financial statements for the period
subsequent to the Hearst Transaction are presented on a different basis of
accounting than those for the period prior to the Hearst Transaction and,
therefore, are not directly comparable.
Three Months Ended March 31, 1998 (The Company)
Compared to Three Months Ended March 31, 1997 (Predecessor Company)
Total revenues. Total revenues in the three months ended March 31, 1998 were
$87.3 million, as compared to $17.9 million in the three months ended March 31,
1997, an increase of $69.4 million or 388%. The increase was primarily
attributable to the Hearst Transaction which added $68.3 million to 1998 total
revenues. In addition, the incremental revenues resulting from Gannett Swap
were $1.1 million.
Station operating expenses. Station operating expenses in the three months
ended March 31, 1998 were $42.4 million, as compared to $10.8 million in the
three months ended March 31, 1997, an increase of $31.6 million or 293%. The
increase was primarily attributable to the Hearst Transaction, which added $31.1
million to station operating expenses during 1998. In addition, the incremental
station operating expenses resulting from the Gannett Swap were $0.4 million.
Amortization of program rights. Amortization of program rights in the three
months ended March 31, 1998 was $10.8 million, as compared to $1.1 million in
the three months ended March 31, 1997, an increase of $9.7 million or 882%. The
increase was primarily attributable to the Hearst Transaction, which added $9.7
million to amortization of program rights during 1998.
9
<PAGE>
Depreciation and amortization. Depreciation and amortization of intangible
assets was $8.8 million in the three months ended March 31, 1998, as compared to
$6.6 million in the three months ended March 31, 1997, an increase of $2.2
million or 33.3%. The increase was primarily attributable to the Hearst
Broadcast Group, which added $3.9 million to depreciation and amortization of
intangibles during 1998. In connection with the Hearst Transaction, the Argyle
Stations' fixed and intangible assets were stepped-up to fair-market value. In
addition, the Argyle Stations increased the estimated useful lives of their
fixed and intangible assets to conform with the lives used by the Hearst
Broadcast Group. This caused a $1.7 million net decrease in depreciation and
amortization of intangibles during 1998.
Station operating income. Station operating income in the three months ended
March 31, 1998 was $25.1 million, as compared to a station operating loss of
$0.5 million in the three months ended March 31, 1997, an increase of $25.6
million. The increase in station operating income was primarily attributable to
the Hearst Transaction.
Corporate general and administrative expenses. Corporate general and
administrative expenses were $3.4 million for the three months ended March 31,
1998, as compared to $1.0 million for the three months ended March 31, 1997, an
increase of $2.4 million or 240%. The increase was primarily attributable to
the increase in corporate staff following the Hearst Transaction and other costs
associated with the Hearst Transaction.
Non-cash compensation expense. Non-cash compensation expense of $0.3 million
during 1997, represents stock option expense recorded in compliance with SFAS
No. 123. Subsequent to the Hearst Transaction, the Company has elected to
account for employee stock-based compensation under APB No. 25 and related
interpretations. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Interest expense, net. Interest expense, net was $11.0 million in the three
months ended March 31, 1998, as compared to $4.4 million in the three months
ended March 31, 1997, an increase of $6.6 million or 150%. 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 March 31, 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, due to the lack of floating rate debt at March 31, 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 $4.9 million for the three months ended
March 31, 1998. This represents federal and state taxes as calculated on the
Company's net income before taxes and extraordinary item. The Company incurred
losses for all prior periods presented and therefore, did not record any federal
or state income tax benefit or expense.
Extraordinary item. The Company recorded an extraordinary item of $10.0 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 and the payment of a premium for the early repayment.
Net loss. Net loss was $4.1 million in the three months ended March 31, 1998,
as compared to $6.2 million in the three months ended March 31, 1997, a decrease
of $2.1 million or 33.9%. This reduction in net loss was attributable to the
items discussed above.
Broadcast Cash Flow. Broadcast cash flow was $33.7 million in the three months
ended March 31, 1998, as compared to $5.9 million in the three months ended
March 31, 1997, an increase of $27.8 million or 471%. The broadcast cash flow
increase resulted from the Hearst Transaction and to a lesser degree the effect
of the Gannett Swap. Broadcast cash flow margin increased to 38.6% in 1998 from
32.8% in 1997.
10
<PAGE>
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 March 31, 1998, no amount 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.
Capital expenditures were $30.4 million in 1997 and approximately $4.9 million
during the three-months ended March 31, 1998. The Company expects to invest
approximately $12.8 million in special projects/buildings including its new
station facility at WLWT, approximately $6.2 million in digital conversion
projects at various stations and $9.4 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.
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.
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. 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 internal-use 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.
11
<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
The Annual Meeting of Shareholders was held on April 14, 1998. All nominees
standing for election as directors were elected. The following chart indicates
the number of votes cast with respect to each nominee for director:
NOMINEE FOR AGAINST WITHHELD
------- --- ------- --------
Caroline Williams (1) 9,504,956 -0- 42,211
Frank A. Bennack, Jr. (2) 41,298,640 -0- -0-
John G. Conomikes (2) 41,298,640 -0- -0-
George R. Hearst, Jr. (2) 41,298,640 -0- -0-
Bob Marbut (2) 41,298,640 -0- -0-
Gilbert C. Maurer (2) 41,298,640 -0- -0-
____________
(1) Series A Director. To be elected by the holders of Series A shares voting
as a class.
(2) Series B Director. To be elected by the holders of Series B shares voting
as a class.
ITEM 5. OTHER INFORMATION NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No.
10.25 Amendment No. 1 to the Credit Agreement dated as of October 31, 1997
(incorporated by reference to Exhibit 10.25 of the Company's 10-K
dated March 28, 1998).
10.26 Amendment No. 2 to the Credit Agreement dated as of January 30, 1998
(incorporated by reference to Exhibit 10.26 of the Company's 10-K
dated March 28, 1998).
10.27 Asset Exchange Agreement between Hearst-Argyle Stations, Inc., STC
Broadcasting, Inc., STC Broadcasting of Vermont, Inc., STC License
Company and STC Broadcasting of Vermont Subsidiary, Inc., dated
February 18, 1998 (incorporated by reference to Exhibit 10.27 of the
Company's 10-K dated March 28, 1998).
10.28 Guaranty, given as of February 18, 1998 by the Company to STC
Broadcasting of Vermont, Inc., STC License Company and STC
Broadcasting of Vermont Subsidiary, Inc. (incorporated by reference
to Exhibit 10.28 of the Company's 10-K dated March 28, 1998).
27.1 Financial Data Schedule
12
<PAGE>
(b) Reports on Form 8-K
On January 13, 1998, the Company filed a Form 8-K, relating to the
completion of an underwritten public offering under the Company's existing
shelf registration statement which filing attached as exhibits certain
related documents and the press release relating to disclosing such
transaction.
On March 31, 1998, the Company filed a Form 8-K, relating to information
disclosed by The Hearst Corporation in an amendment to The Hearst
Corporation's Schedule 13D as filed with the Commission on April 4, 1997.
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.
------------------------------
Registrant
May 15,1998 By: /s/ Harry T. Hawks
- ----------- ------------------
Date Harry T. Hawks, Chief Financial Officer,
Assistant Secretary, and Treasurer
(Principal Financial Officer)
May 15, 1998 By: /s/ Teresa D. Lopez
- ------------ -------------------
Date Teresa D. Lopez, Controller and
Assistant Secretary
(Principal Accounting Officer)
14
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AS OF MARCH 31,1998 AND THE CONDENSED CONSOLIDATED
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<PERIOD-START> JAN-01-1998
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<PP&E> 103,808
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<COMMON> 538
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<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE CONDENSED CONSOLIDATED
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<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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<TOTAL-REVENUES> 17,879
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<LOSS-PROVISION> 0
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