<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
December 7, 1998 (September 17, 1998)
-----------------------------------------
Date of Report (Date of earliest event reported)
HEARST-ARGYLE TELEVISION, INC.
------------------------------
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Delaware 000-27000 74-271753
- -------- --------- ---------
(State of Organization) (Commission File Number) (IRS Employer Identification No.)
</TABLE>
888 Seventh Avenue
New York, New York 10106
------------------------
(Address of Registrant's Principal Executive Office) (Zip Code)
(212) 649-2300
--------------
(Registrant's telephone number, including area code)
<PAGE>
Item #5. Other Events.
------------
This Current Report on Form 8-K/A amends the Current Report on Form 8-K,
dated September 17, 1998 (the "September 17 8-K") of Hearst Argyle Television,
Inc., to replace the financial statements of Kelly Broadcasting Co. filed as
Exhibit 99.1 on the September 17 8-K with the revised financial statements of
Kelly Broadcasting Co. filed as Exhibit 99.1 hereto, and to include Kelly
Broadcasting Co. financial statements for the nine-month periods ended
September 30, 1998 and 1997.
Item #7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(c) Exhibits.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Kelly Broadcasting Co. financial statements for the
years ended December 31, 1997, 1996 and 1995, for the
six-month periods ended June 30, 1998 and 1997, and
for the nine-month periods ended September 30, 1998
and 1997.
<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 hereunto duly authorized.
HEARST-ARGYLE TELEVISION, INC.
By:
--------------------------------
Dean H. Blythe
Senior Vice President-
Corporate Development, Secretary
and General Counsel
Date: December 7, 1998
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Kelly Broadcasting Co. financial statements for the years ended
December 31, 1997, 1996 and 1995, for the six-month periods ended
June 30, 1998 and 1997, and for the nine-month periods ended
September 30, 1998 and 1997.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 333-35051 and
No. 333-61101) of Hearst-Argyle Television, Inc. of our report dated November,
13 1998 relating to the financial statements of Kelly Broadcasting Co, which
appears in the Current Report on Form 8-K/A of Hearst-Argyle Television, Inc.
dated December 7, 1998.
PRICEWATERHOUSECOOPERS LLP
Sacramento, California
December 7, 1998
<PAGE>
EXHIBIT 99.1
KELLY
BROADCASTING CO.
(A Limited Partnership)
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Kelly Broadcasting Co.
In our opinion, the accompanying balance sheets and the related statements of
income, of partners' equity and of cash flows present fairly, in all material
respects, the financial position of Kelly Broadcasting Co. (a limited
partnership) at December 31, 1996 and 1997 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Sacramento, California
November 13, 1998
<PAGE>
Kelly Broadcasting Co. (A Limited Partnership)
Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, September 30,
December 31, 1998 1998
Assets 1996 1997 (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents $ 8,273,620 $ 2,453,516 $ 1,725,916 $ 1,928,406
Investments 3,509,610 100,000 100,000 100,000
Receivables, less allowance for doubtful
accounts of $770,000 9,904,871 11,211,826 11,454,704 8,368,518
Other receivables 443,462 483,882 771,216 752,129
Current portion of film contract rights 3,976,602 6,116,867 4,608,620 9,458,416
Prepaid expenses and other assets 951,578 463,446 641,934 383,880
------------- ------------- ------------- -------------
Total current assets 27,059,743 20,829,537 19,302,390 20,991,349
Film contract rights, less current portion 1,106,277 4,593,592 3,984,094 6,446,736
Property, equipment and improvements, net 10,921,253 16,188,842 14,588,397 14,703,592
Intangible assets 1,860,675 80,965,586 78,201,297 76,819,143
Investments 1,501,990 - - -
Other assets 925,250 1,740,909 1,689,930 1,664,442
------------- ------------- ------------- -------------
Total assets $ 43,375,188 $ 124,318,466 $ 117,766,108 $ 120,625,262
============= ============= ============= =============
Liabilities and Partners' Equity
Current liabilities:
Accounts payable $ 1,366,597 $ 959,440 $ 1,013,753 $ 1,683,005
Accrued liabilities 1,830,722 2,322,784 1,801,455 2,045,202
Accrued compensation 980,712 1,545,801 759,167 1,009,883
Film contract obligations due within one year 4,014,630 4,474,016 3,828,048 7,530,450
Current portion of long-term debt 500,000 1,882,000 - -
------------- ------------- ------------- -------------
Total current liabilities 8,692,661 11,184,041 7,402,423 12,268,540
Refundable deposit 107,108 107,824 107,824 107,824
Film contract obligations due after one year 437,349 3,681,032 3,616,831 7,632,643
Long-term debt, less current portion 1,500,000 94,111,000 91,465,200 86,948,400
------------- ------------- ------------- -------------
10,737,118 109,083,897 102,592,278 106,957,407
Commitments and contingencies (Notes 5 & 7)
Partners' equity 32,638,070 15,234,569 15,173,830 13,667,855
------------- ------------- ------------- -------------
Total liabilities and partners' equity $ 43,375,188 $ 124,318,466 $ 117,766,108 $ 120,625,262
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Kelly Broadcasting Co. (A Limited Partnership)
Statements of Income
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year ended Six months ended Nine months ended
December 31, June 30, September 30,
1995 1996 1997 1997 1998 1997 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Broadcasting, net $53,075,389 $59,892,815 $64,093,444 $31,623,774 $34,825,020 $47,039,266 $51,203,998
Production and other 1,036,794 1,136,543 1,217,888 630,565 985,303 924,097 1,349,214
Interest income 282,000 536,419 400,623 227,458 76,634 345,933 99,755
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues 54,394,183 61,565,777 65,711,955 32,481,797 35,886,957 48,309,296 52,652,967
----------- ----------- ----------- ----------- ----------- ----------- -----------
Costs and expenses:
Programming 21,337,452 21,452,753 20,954,134 9,644,896 12,157,328 13,812,249 18,398,448
Technical 3,042,786 2,964,301 3,485,418 1,562,114 1,653,824 2,419,444 2,419,216
Selling and promotion 7,993,112 8,035,022 8,846,233 4,108,432 3,502,269 6,293,472 4,963,505
General and administrative 6,197,519 6,083,398 6,212,603 2,920,197 3,060,837 5,133,637 4,559,594
Depreciation 1,989,337 2,951,030 3,100,936 1,223,125 1,711,284 1,938,422 2,570,057
Amortization - - 1,382,145 - 2,764,289 - 4,146,443
Interest 327,649 227,346 1,604,295 91,600 3,728,037 139,311 5,503,845
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses 40,887,855 41,713,850 45,585,764 19,550,364 28,577,868 29,736,535 42,561,108
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income $13,506,328 $19,851,927 $20,126,191 $12,931,433 $7,309,089 $18,572,761 $10,091,859
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Kelly Broadcasting Co. (A Limited Partnership)
Statements of Partners' Equity
Page 1 of 5
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
General Partners
and Limited Partners Limited Partners
Robert E. Jon S. Christopher Gregory
Kelly Kelly Kelly Kelly Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 8,681,176 $ 10,612,537 $ 1,437,605 $ 5,506,177 $ 26,237,495
Contributions 344,920 345,390 - - 690,310
Net income 4,515,917 5,767,645 540,720 2,682,046 13,506,328
Withdrawals (2,808,905) (3,091,561) (422,042) (1,652,546) (7,975,054)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995 $ 10,733,108 $ 13,634,011 $ 1,556,283 $ 6,535,677 $ 32,459,079
============= ============= ============= ============= =============
Ownership interest at December 31, 1995:
General partnership interest 1.0% 1.0% - - 2%
Limited partnership interest 32.885% 41.885% 3.715% 19.515% 98%
------------- ------------- ------------- ------------- -------------
Total ownership interest 33.885% 42.885% 3.715% 19.515% 100%
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Kelly Broadcasting Co. (A Limited Partnership)
Statements of Partners' Equity
Page 2 of 5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
General Partners
and Limited Partners Limited Partners
Robert E. Jon S. Christopher Gregory
Kelly Kelly Kelly Kelly Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 10,733,108 $ 13,634,011 $ 1,556,283 $ 6,535,677 $ 32,459,079
Contributions 437,761 1,635,896 - 162,531 2,236,188
Net income 6,742,565 8,401,858 753,746 3,953,758 19,851,927
Unrealized gain on securities available for sale 648 821 71 373 1,913
Withdrawals (6,042,864) (11,957,973) (1,036,397) (2,873,803) (21,911,037)
-------------- ------------- ------------- ------------ --------------
Balance at December 31, 1996 $ 11,871,218 $ 11,714,613 $ 1,273,703 $ 7,778,536 $ 32,638,070
============== ============= ============= ============ ==============
Ownership interest at December 31, 1996:
General partnership interest 1.0% 1.0% - - 2%
Limited partnership interest 32.885% 41.885% 3.715% 19.515% 98%
-------------- ------------- ------------- ------------ --------------
Total ownership interest 33.885% 42.885% 3.715% 19,515% 100%
============== ============= ============= ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Kelly Broadcasting Co. (A Limited Partnership)
Statements of Partners' Equity
Page 3 of 5
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Partners
and Limited Partners
Robert E. Jon S. JS Kelly
Kelly Kelly LLC
<S> <C> <C> <C>
Balance at December 31, 1996 $11,871,218 $11,714,613 $ -
Transfer of ownership (10,352,201) (6,692,799) 6,692,799
Contributions 515,737 611,344 2,849,006
Net income 6,304,274 7,856,330 854,893
Unrealized loss on securities
available for sale (650) (821)
Interest on excess cash
distributions 4,268
Withdrawals (8,338,378) (13,488,667) (1,822,823)
----------- ----------- -----------
Balance at December 31, 1997 $ - $ - $ 8,578,143
=========== =========== ===========
Ownership interest at December 31, 1997:
General partnership interest 0.2000%
Limited partnership interest 64.8613%
-----------
Total ownership interest 65.0613%
===========
<CAPTION>
Limited Partners
Christopher Gregory GG Kelly Robert E. Total
Kelly Kelly LLC Kelly
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $1,273,703 $7,778,536 $ - $ - $32,638,070
Transfer of ownership (1,267,059) (6,313,902) 6,313,902 1,478,272 (10,140,988)
Contributions 7,284 - 503,584 43,871 4,530,826
Net income 692,405 3,719,753 459,728 238,808 20,126,191
Unrealized loss on securities
available for sale (71) (373) (1,915)
Interest on excess cash
distributions (4,447) 179
Withdrawals (706,262) (5,184,014) (2,205,771) (171,700) (31,917,615)
-------- ---------- ---------- ---------- -----------
Balance at December 31, 1997 $ - $ - $5,066,996 $1,589,430 $15,234,569
======== ========== ========== ========== ===========
Ownership interest at December 31, 1997:
General partnership interest 0.200%
Limited partnership interest 29.9387% 5.0% 99.800%
---------- ---------- -----------
Total ownership interest 29.9387% 5.0% 100.000%
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Kelly Broadcasting Co. (A Limited Partnership)
Statements of Partners' Equity
Page 4 of 5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
General Partner
and Limited Partner Limited Partners
JS Kelly GG Kelly Robert E.
LLC LLC Kelly Total
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ 8,578,143 $ 5,066,996 $ 1,589,430 $ 15,234,569
Contributions (unaudited) 5,381,515 2,614,792 - 7,996,307
Net income (unaudited) 4,510,122 2,076,885 722,082 7,309,089
Interest on excess cash
distributions (unaudited) (3,850) 1,523 2,327 -
Withdrawals (unaudited) (11,006,540) (4,109,595) (250,000) (15,366,135)
-------------- ------------- ------------- ------------
Balance at June 30, 1998 (unaudited) $ 7,459,390 $ 5,650,601 $ 2,063,839 $ 15,173,830
============== ============= ============= ============
Ownership interest at June 30, 1998 (unaudited):
General partnership interest 0.2000% - - 0.200%
Limited partnership interest 64.8613% 29.9387% 5.0% 99.800%
-------------- ------------- ------------- ------------
Total ownership interest 65.0613% 29.9387% 5.0% 100.00%
============== ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Kelly Broadcasting Co. (A Limited Partnership)
Statements of Partners' Equity
Page 5 of 5
<TABLE>
General Partner
and Limited Partner Limited Partners
JS Kelly GG Kelly Robert E.
LLC LLC Kelly Total
<S> <C> <C> <C> <C>
Balance at June 30, 1998 (unaudited) $ 7,459,390 $ 5,650,601 $ 2,063,839 $ 15,173,830
Contributions (unaudited) 4,295,148 2,082,378 - 6,377,526
Net income (unaudited) 1,690,653 778,707 313,410 2,782,770
Interest on excess cash
distributions (unaudited) 8,169 (9,799) 1,630 -
Withdrawals (unaudited) (5,219,736) (5,256,331) (190,204) (10,666,271)
-------------- ------------- ------------- ------------
Balance at September 30, 1998 (unaudited) $ 8,233,624 $ 3,245,556 $ 2,188,675 $ 13,667,855
============== ============= ============= ============
Ownership interest at September 30, 1998 (unaudited):
General partnership interest 0.2000% - - 0.200%
Limited partnership interest 64.8613% 29.9387% 5.0% 99.800%
-------------- ------------- ------------- ------------
Total ownership interest 65.0613% 29.9387% 5.0% 100.00%
============== ============= ============= ============
</TABLE>
9
<PAGE>
Kelly Broadcasting Co. (Limited Partnership)
Statements of Cash Flows
Page 1 of 2
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Six months ended
December 31, June 30,
1995 1996 1997 1997 1998
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net Income $13,506,328 $19,851,927 $20,126,191 $12,931,433 $7,309,089
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,989,337 2,951,030 3,100,936 1,223,125 1,711,284
Amortization of film contract rights 7,238,984 6,433,065 5,299,027 2,296,863 4,126,231
Amortization of intangible assets - - 1,409,998 - 2,764,289
Unrealized gain on investments available for sale
Loss on sale of property, equipment
and improvements (51,200) 37,316 296,301 (9,466) (4,969)
Donation of equity securities 387,488 - - - -
Changes in assets and liabilities:
Trade and other receivables (1,219,254) 839,799 (1,347,375) (2,478,529) (530,212)
Prepaid expenses and other assets (57,231) (425,695) 488,132 (340,186) (127,509)
Accounts payable and accrued liabilities (867,558) 1,754,626 85,621 (1,948,392) (467,016)
Accrued compensation 266,008 (442,002) 565,089 293,555 (786,634)
Film contract rights (2,376,478) (4,517,068) (9,582,009) (848,905) (2,008,486)
Film contract obligations (2,478,825) (75,102) 3,703,069 (1,351,469) (710,169)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities 16,337,599 26,407,896 24,144,980 9,768,029 11,275,898
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, equipment
and improvements (5,079,715) (2,293,226) (2,877,685) (1,582,165) (119,271)
Dispositions of property, equipment
and improvements 240,165 72,689 40,091 44,402 13,401
Purchase of investments - (10,421,600) (18,919,560) (8,998,308) -
Sales of investments - 5,417,063 23,829,245 8,905,053 -
Net cash (used in) provided by ----------- ----------- ----------- ----------- -----------
investing activities (4,839,550) (7,225,074) 2,072,091 (1,631,018) (105,870)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - 95,993,000 - -
Payment of debt issuance costs - - (843,512) - -
Partners' contributions 690,310 2,236,188 4,530,826 765,963 7,996,307
Partners' withdrawals (7,975,054) (21,911,037) (31,917,615) (12,580,880) (15,366,135)
Payment upon transfers of partnership interests - - (97,799,874) - -
Principal payments on long-term debt (1,000,000) (500,000) (2,000,000) - (4,527,800)
----------- ----------- ----------- ----------- -----------
Net cash used in financing activities (8,284,744) (20,174,849) (32,037,175) (11,814,917) (11,897,628)
----------- ----------- ----------- ----------- -----------
Net increast (decrease) in cash and cash equivalents 3,213,305 (992,027) (5,820,104) (3,677,906) (727,600)
Cash and cash equivalents, beginning of period 6,052,342 9,265,647 8,273,620 8,273,620 2,453,516
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 9,265,647 $ 8,273,620 $ 2,453,516 $ 4,595,714 $ 1,725,916
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 327,649 $ 227,346 $ 955,608 $ 91,600 $ 2,819,820
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF FINANCING ACTIVITIES:
Increase in assets upon transfer of
Partnership interests:
Property, equipment and improvements, net $ 5,827,232
Film contract rights 1,344,598
Intangible assets 80,487,056
------------
87,658,886
Partnership interests acquired 10,140,988
-----------
Payment upon transfers of Partnership interests $97,799,874
-----------
</TABLE>
10
<PAGE>
Kelly Broadcasting Co. (Limited Partnership)
Statements of Cash Flows
Page 2 of 2
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1998
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income 18,572,761 10,091,859
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,938,422 2,570,057
Amortization of film contract rights 3,902,132 7,677,238
Unrealized gain on investments available for sale - 4,146,443
Loss on sale of property, equipment 1,512 -
and improvements 281,391 (2,767)
Donation of equity securities - -
Changes in assets and liabilities:
Trade and other receivables (721,890) 2,575,061
Prepaid expenses and other assets 326,691 156,033
Accounts payable and accrued liabilities (1,594,570) 445,983
Accrued compensation 189,802 (535,918)
Film contract rights (10,957,427) (12,871,931)
Film contract obligations 5,590,008 7,008,045
----------- -----------
Net cash provided by operating activities 17,528,832 21,260,103
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, equipment
and improvements (2,632,730) (1,097,042)
Dispositions of property, equipment
and improvements 54,253 15,002
Purchase of investments (13,606,563) -
Sales of investments 13,455,189 -
----------- -----------
Net cash (used in) provided by
investing activities (2,729,851) (1,082,040)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - -
Payment of debt issuance costs - -
Partners' contributions 990,106 14,373,833
Partners' withdrawals (18,728,340) (26,032,406)
Payment upon transfers of partnership interests - -
Principal payments on long-term debt - (9,044,600)
----------- -----------
Net cash used in financing activities (17,738,234) (20,703,173)
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,939,253) (525,110)
Cash and cash equivalents, beginning of period 8,273,620 2,453,516
----------- -----------
Cash and cash equivalents, end of period 5,334,367 1,928,406
----------- -----------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid 139,311 4,671,147
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
11
<PAGE>
KELLY BROADCASTING CO. (A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Kelly Broadcasting Co. (the Partnership) owns and operates television
station KCRA (an NBC affiliate) and programs television station KQCA (a
United Paramount Network (UPN) affiliate) (see Note 4). In January, 1998
KQCA became a Warner Brothers (WB) affiliate. Both stations are located in
the greater Sacramento area of California.
In October 1997, the Partnership agreement was amended and a Partner
withdrew as General Partner and sold the majority of his partnership
interests to two related Limited Liability Companies (LLC Partners). Also, a
Limited Partner sold his entire partnership interest to one of the related
LLC's. In addition, a General Partner and a Limited Partner assigned their
partnership interests to the two related LLC's.
The LLC Partners entered into a debt agreement with several banks to finance
the purchase of partnership interests as described above, as well as
purchase partnership interests in a related television station. Borrowings
under the debt agreement totaled $255 million at December 31, 1997, of which
$95,993,000 or 37.6% was used for the purchase of interests in the
Partnership. Substantially all of the Partnerships' assets collateralize the
borrowings. Accordingly, push down accounting has been applied and the debt,
related interest expense and debt issuance costs attributable to this
Partnership are reflected on the Partnership's financial statements. See
Note 6 for further discussion of the borrowings.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PARTNERS' EQUITY
The amended Partnership agreement allows for income allocations and cash
distributions to be made to the LLC Partners on a non-pro rata basis. To the
extent cash distributions exceed or are less than the Partner's pro rata
share, interest is charged or credited to the Partner's capital account. The
loan covenants for the LLC borrowings described above restrict Partner
withdrawals to primarily tax and debt service payments.
Before the amendment to the Partnership agreement, each Partner was to
maintain a minimum level of capital with income allocated based upon
ownership percentages. Interest was charged or credited to the capital
accounts based upon the level of capital maintained.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits and deposits in money
market funds which invest in California municipal securities and Treasury
securities with average maturities of three months or less.
12
<PAGE>
KELLY BROADCASTING CO. (A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed
principally by declining-balance methods over the estimated useful lives of
the assets, which range from 3 to 39 years.
INVESTMENTS
Investments for which the Partnership has the positive intent and ability to
hold to maturity are classified as "held to maturity" and are carried at
cost, adjusted for unamortized premiums or discounts. The remainder of the
Partnership's investments may not necessarily be held to maturity and
accordingly have been classified as "available for sale." These investments
are reported at fair value and unrealized holding gains and losses are
netted and reported as a separate component of Partners' equity in the
Statement of Partners' Equity. Realized gains and losses on sales of
investments are determined using the specific identification method and are
recognized in current operations.
FINANCIAL INSTRUMENTS
The LLC Partners entered into interest rate swaps to manage exposure to
fluctuations in interest rates under its variable rate debt agreement. The
interest rate differential on interest rate swap contracts used to hedge the
underlying debt obligation is reflected as an adjustment to interest expense
over the life of the swaps.
REVENUES
Broadcasting revenues are principally from national and local advertisers
and the NBC and UPN networks. Revenue is recognized as the advertisements or
network programming are broadcast, net of any agency commissions.
FILM CONTRACT RIGHTS AND OBLIGATIONS
Film contract rights and the related obligations are recorded at gross
contract prices when the program is available for its first showing. The
costs of exhibition rights are charged to income on a basis related to the
terms of the agreement or the usage and estimated revenue realization of the
films. Syndicated products and feature program packages are amortized on an
accelerated basis over the contract term which is generally 1 to 4 years.
Special programs are amortized on a cost per run basis.
The value of film contract rights is evaluated regularly, and if necessary,
adjusted to reflect the lower of unamortized cost or estimated net
realizable value on a program by program basis.
BARTER AND TRADE TRANSACTIONS
The Partnership enters into barter and trade transactions where advertising
time is exchanged for programming rights, goods or services. Revenue and
expense related to these transactions are recorded at the estimated fair
value of the items exchanged. Revenue is recorded when the advertisement
airs. Goods and services are reported when received or used, and programming
rights are amortized over the corresponding contract period. All barter
related receivables and payables are netted for financial statement purposes
and recorded as either other receivables or accrued liabilities on the
balance sheet.
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<PAGE>
KELLY BROADCASTING CO. (A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INTANGIBLE ASSETS
Intangible assets consist principally of a FCC license and network
affiliation which are being amortized over 15 years.
ADVERTISING
Advertising costs, including radio and cable television, are expensed as
incurred.
INCOME TAXES
No provision has been made in the accompanying financial statements for the
partners' income tax liabilities arising from income of the Partnership.
Income tax payments for the partners are generally made by the Partnership
and are charged to the partners as withdrawals.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data for the six months ended June 30, 1997 and 1998
and for the nine months ended September 30, 1997 and 1998 is unaudited;
however, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the results for the interim periods.
2. INVESTMENTS
Investments classified as "held-to-maturity" totaled $1,045,180 and $100,000
at December 31, 1996 and 1997, respectively. Such investments were comprised
of municipal and agency debt securities with maturities less than 90 days.
Investments classified as "available for sale" totaled $3,966,420 at
December 31, 1996. Such investments were comprised of municipal and agency
debt securities with maturities ranging from 1997 to 1998. There were no
investments classified as "available for sale" at December 31, 1997.
3. BALANCE SHEET COMPONENTS
Property, equipment and improvements consist of the following:
December 31,
1996 1997
Land $ 375,630 $ 506,365
Buildings and improvements 11,280,204 13,297,733
Towers 3,612,776 4,795,655
Antenna and transmitter equipment 2,262,427 3,255,040
Technical equipment 18,226,873 17,055,184
Transportation equipment 2,965,840 3,444,490
Office furniture and equipment 5,184,800 5,064,016
Earth station 310,307 348,150
Construction in progress 224,320 157,785
------------- -------------
44,443,177 47,924,418
Less accumulated depreciation (33,521,924) (31,735,576)
------------- -------------
$ 10,921,253 $ 16,188,842
------------- -------------
14
<PAGE>
KELLY BROADCASTING CO. (A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accrued liabilities consists of the following:
December 31,
1996 1997
Accrued legal expense $ 20,719 $ 619,347
Accrued commissions payable 349,526 218,413
Accrued donation to related party 1,054,000 -
Accrued interest - 648,687
Other 406,477 836,337
-------------- --------------
$ 1,830,722 $ 2,322,784
-------------- --------------
4. TIME BROKERAGE AND OPTION AGREEMENTS
The Partnership has entered into a Time Brokerage Agreement with Channel 58,
Inc., the broadcast license holder of KQCA-TV, which provides for the
payment of a fee to Channel 58, Inc. in exchange for the right to program
the station and retain the related broadcasting revenues. See Note 7 for
future minimum payments under this agreement.
As part of the Time Brokerage Agreement, the Partnership paid $500,000 to
Channel 58, Inc. for the option to purchase the station in the event the
Federal Communications Commission modifies its rules which currently
prohibits a broadcaster from owning two broadcast licenses in the same
market. Upon exercise of the option, the Partnership would be required to
make an additional payment of approximately $325,000 and assume Channel 58,
Inc.'s existing debt totaling $1,156,000 at December 31, 1997. The option
expires at the end of the term of the Time Brokerage Agreement which is
December 31, 2004, assuming a five year renewal option will be exercised.
Under the terms of an equipment put option, the Partnership has also agreed
to purchase Channel 58, Inc.'s equipment at fair market value, in the event
Channel 58, Inc. defaults under its loan agreement and the lender is unable
to sell the equipment to a third party.
5. FILM CONTRACT OBLIGATIONS AND COMMITMENTS
Obligations at December 31, 1997, for recorded film contracts and for
contracts which have not been recorded because they relate to future
programming, are due as follows:
Future
Year ending Recorded Period
December 31, Obligations Commitments
1998 $ 4,474,016 $ 2,260,230
1999 1,850,593 4,753,201
2000 1,564,264 4,827,568
2001 266,175 3,414,429
2002 - 850,913
-------------- -------------
$ 8,155,048 $ 16,106,341
-------------- -------------
15
<PAGE>
KELLY BROADCASTING CO. (A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Management has estimated the fair value of the recorded film contract
obligations at approximately $7,540,000 as of December 31, 1997 based on
future cash flows discounted at the Partnership's current borrowing rate.
6. LONG-TERM DEBT
During 1997, the Partnership repaid all borrowings outstanding under a note
agreement with an insurance company. These borrowings totaled $2 million at
December 31, 1996. In addition, the Partnership was a co-borrower with KTC
on a note agreement totaling $1.5 million at December 31, 1996, which was
recorded as an obligation on KTC's financial statements. This note was also
paid in 1997 by KTC.
The Partnership has guaranteed the bank debt of the two LLC Partners, which
totaled $255 million at December 31, 1997. The debt was incurred to finance
the Partner transactions discussed at Note 1. The portion of the total debt
attributable to the purchase of Partnership interests has been reflected in
the Partnership's financial statements as a result of push down accounting.
The debt agreement is composed of a working capital revolving credit
facility and a reducing revolving credit facility. This credit agreement
expires in 2005. Maximum borrowings under the working capital revolving
credit facility are $10 million, for which no borrowings were outstanding at
December 31, 1997. Borrowings under the working capital revolving credit
facility are subject to an annual 30 day principal reduction period, during
which borrowings may not exceed $5 million. The maximum loan balance under
the reducing revolving credit facility is $260 million, which reduces to
$120 million by 2005. Principal reductions are required as follows:
Other
Partnership Guaranteed
Borrowings Borrowings Total
1998 $ 1,882,000 $ 3,118,000 $ 5,000,000
1999 5,640,000 9,360,000 15,000,000
2000 6,580,000 10,920,000 17,500,000
2001 5,640,000 9,360,000 15,000,000
2002 6,580,000 10,920,000 17,500,000
2003 6,580,000 10,920,000 17,500,000
2004 8,460,000 14,040,000 22,500,000
2005 54,631,000 90,369,000 145,000,000
------------ ------------- --------------
$ 95,993,000 $ 159,007,000 $ 255,000,000
------------ ------------- --------------
The debt agreement has a variable interest rate and includes offshore and
base rate pricing options. Certain interest rate swap agreements were in
place at December 31, 1997 as required under the loan agreement. The
borrowers also pay a commitment fee on unused credit facilities which starts
at .375% and decreases with a decline in the leverage ratio. The borrowers'
effective interest rate at December 31, 1997 was 7.9795%. The interest rate
also decreases with a decline in the leverage ratio.
16
<PAGE>
KELLY BROADCASTING CO. (A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Among other provisions, the loan agreement limits or restricts future liens
on Partnership assets, asset dispositions, leasing activity, merger
activity, loans and investments, future indebtedness, contingent obligations
and Partner withdrawals. In addition, the Partnership, the LLC Partners and
the related limited partnership of Kelly Television Co. (KTC), must maintain
certain financial ratios including maximum leverage, interest coverage and
fixed charge coverage ratios.
7. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS
The related LLC's have entered into interest rate swap agreements with two
financial institutions as of December 31, 1997 in notional amounts totaling
$127,500,000. The agreements were entered into for the purpose of managing
fluctuations in interest rates on the variable rate debt described above.
The terms of the swap agreements extend through 2005. The fair value of
these agreements, based upon estimated current settlement costs, totaled
($1,594,000) at December 31, 1997. Exposure to credit loss could occur when
the fair value of the agreements is a net receivable. The Partnership is a
guarantor of the LLC's obligations under these agreements. The financial
institutions are well capitalized and management considers the risk of
credit loss to be minimal.
LEASES AND TIME BROKERAGE AGREEMENT
The Partnership leases certain facilities under noncancelable operating
leases. In addition, as discussed at Note 4, the Partnership has entered
into a Time Brokerage Agreement with another television station. Future
minimum payments by year under these leases and the Time Brokerage Agreement
(assuming a five year renewal option is exercised) are as follows:
Time
Year ending Operating Brokerage
December 31, Leases Fees
1998 $ 191,259 $ 1,020,000
1999 164,654 1,260,000
2000 117,668 828,000
2001 90,484 480,000
2002 62,602 504,000
Thereafter 539,464 1,080,000
-------------- --------------
$ 1,166,131 $ 5,172,000
-------------- --------------
Rental expense charged to operations in 1995, 1996 and 1997 totaled
$148,246, $164,437 and $185,795, respectively. Time brokerage fees were
$1,152,000, $1,152,000 and 1,020,000 in 1995, 1996 and 1997.
CONTINGENCIES
The Partnership is party to claims and lawsuits arising in the ordinary
course of business. While the outcome of these matters is not presently
determinable, in the opinion of management, they are not expected to have a
material effect on the financial position or results of operations of the
Partnership.
17
<PAGE>
KELLY BROADCASTING CO. (A Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Partnership has guaranteed other bank debt incurred by a limited partner
in connection with the purchase of a separate partnership interest. The debt
totaled $10,140,000 at December 31, 1997.
8. DEFERRED COMPENSATION AND PROFIT-SHARING PLAN
All employees with a minimum of one year of service are eligible to
participate in the Kelly Group Tax Deferred Investment Plan, a deferred
compensation and profit-sharing plan. The Partnership, at its discretion,
makes certain matching or other contributions to the Plan. Contributions
charged to operations during 1995, 1996 and 1997 were $257,561, $270,513 and
$324,984, respectively.
9. RELATED PARTY TRANSACTIONS
In 1995, 1996 and 1997, KTC paid a management fee to the Partnership of
$234,000, $144,000 and $144,000. Additionally, included in accounts
receivable are amounts due from KTC and a related production company
totaling $206,509 and $247,515 at December 31, 1996 and 1997, respectively.
In 1995, the Partnership made contributions of investments in common stock
of two public companies with a combined book value $387,488 and a cash
contribution of $250,000 to the Kelly Foundation, a non-profit private
foundation principally sponsored by the Partnership. Additionally, the
Partnership made a contribution of $1,054,000 to the Kelly Foundation,
during 1996. No contributions were made by the Partnership to the Kelly
Foundation during 1997.
10. SUBSEQUENT EVENT (UNAUDITED)
In August 1998 Kelly Broadcasting Co. entered into a merger agreement with
Kelly Acquisition Corp., a wholly-owned subsidiary of Hearst-Argyle
Television, Inc., whereby Kelly Acquisition Corp. agreed to purchase the
equity interests of the Partnership for cash.
18
