<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, 2000
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)
888 SEVENTH AVENUE (212) 887-6800
NEW YORK, NY 10106 (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 9, 2000, the Registrant had 92,143,098 shares of common stock
outstanding. Consisting of 50,844,450 shares of Series A Common Stock,
41,298,648 shares of Series B Common Stock.
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<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Index
<TABLE>
<CAPTION>
Page No.
Part I Financial Information
Item 1. Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 (unaudited)..1
Condensed Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1999 and 2000 (unaudited)...........................................................3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 2000 (unaudited)...........................................................4
Notes to Condensed Consolidated Financial Statements..............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................13
Part II Other Information
Item 6. Exhibits and reports on Form 8-K.................................................................13
Signatures .................................................................................................14
</TABLE>
<PAGE>
Part I Financial Information
Item 1. Financial Statements
------- --------------------
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
(Unaudited)
--------------------------------------------
(In thousands)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,632 $ 9,373
Accounts receivable, net 159,395 150,411
Program and barter rights 56,393 73,342
Deferred income taxes 3,905 3,905
Related party receivable - 35
Other 11,809 8,508
------------ ------------
Total current assets 237,134 245,574
------------ ------------
Property, plant and equipment, net 342,664 336,030
------------ ------------
Intangible assets, net 3,230,842 3,165,371
------------ ------------
Other assets:
Deferred acquisition and financing costs, net 30,836 26,876
Investments 29,938 58,787
Program and barter rights, noncurrent 5,072 3,633
Other 36,741 37,889
------------ ------------
Total other assets 102,587 127,185
------------ ------------
Total assets $ 3,913,227 $ 3,874,160
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
(Unaudited)
---------------------------------------
(In thousands)
Liabilities and Stockholders' Equity
Current liabilities:
<S> <C> <C>
Accounts payable $ 16,289 $ 14,978
Accrued liabilities 39,649 53,456
Program and barter rights payable 56,715 73,206
Related party payable 9,343 -
Other 1,669 557
------------ -----------
Total current liabilities 123,665 142,197
------------ -----------
Program and barter rights payable,
noncurrent 5,386 4,445
Long-term debt 1,563,596 1,489,596
Deferred income taxes 787,358 787,298
Other liabilities 16,431 13,630
------------ -----------
Total noncurrent liabilities 2,372,771 2,294,969
------------ -----------
Stockholders' equity:
Series A preferred stock 1 1
Series B preferred stock 1 1
Series A common stock 535 536
Series B common stock 413 413
Additional paid-in capital 1,271,666 1,273,608
Retained earnings 202,285 231,557
Treasury stock, at cost (58,110) (69,122)
------------ -----------
Total stockholders' equity 1,416,791 1,436,994
------------ -----------
Total liabilities and stockholders' equity $ 3,913,227 $ 3,874,160
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
-----------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues $166,731 $178,404 $466,209 $544,880
Station operating expenses 80,609 80,582 218,095 244,830
Amortization of program rights 16,051 14,612 44,641 44,585
Depreciation and amortization 30,401 31,199 76,543 94,488
-------- -------- -------- --------
Station operating income 39,670 52,011 126,930 160,977
Corporate general and administrative expenses 3,559 5,193 11,900 13,159
-------- -------- -------- --------
Operating income 36,111 46,818 115,030 147,818
Interest expense, net 28,968 28,532 77,960 88,514
(Gain) on disposition of assets - (1,070) - (1,070)
Equity in loss of affiliate - 1,919 - 4,296
-------- -------- -------- --------
Income before income taxes and extraordinary item 7,143 17,437 37,070 56,078
Income taxes 3,806 8,004 17,423 25,740
-------- -------- -------- --------
Income before extraordinary item 3,337 9,433 19,647 30,338
Extraordinary item, loss on early retirement of debt, net
of income tax benefit of $2,041 for the nine
months ended September 30, 1999 - - (3,092) -
-------- -------- -------- --------
Net income 3,337 9,433 16,555 30,338
Less preferred stock dividends (355) (355) (1,066) (1,066)
-------- -------- -------- --------
Income applicable to common stockholders $ 2,982 $ 9,078 $ 15,489 $ 29,272
======== ======== ======== ========
Income per common share - basic:
Before extraordinary item $ 0.03 $ 0.10 $ 0.23 $ 0.32
Extraordinary item - - (0.04) -
-------- -------- -------- --------
Net income $ 0.03 $ 0.10 $ 0.19 $ 0.32
======== ======== ======== ========
Number of common shares used in the calculation 92,883 92,308 79,963 92,563
======== ======== ======== ========
Income per common share - diluted:
Before extraordinary item $ 0.03 $ 0.10 $ 0.23 $ 0.32
Extraordinary item - - (0.04) -
-------- -------- -------- --------
Net income $ 0.03 $ 0.10 $ 0.19 $ 0.32
======== ======== ======== ========
Number of common shares used in the calculation 92,909 92,325 80,010 92,582
======== ======== ======== ========
</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,
1999 2000
-----------------------------------------
(In thousands)
Operating Activities
<S> <C> <C>
Net income $ 16,555 $ 30,338
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item, loss on early retirement of debt 5,133 -
Depreciation 22,714 29,418
Amortization of intangible assets 53,829 65,070
Amortization of deferred financing costs 2,334 3,828
Amortization of program rights 44,641 44,585
Program payments (41,629) (44,621)
Equity in loss of affiliate - 4,296
Provision for doubtful accounts 860 1,585
Gain on disposition of assets - (1,070)
Fair value adjustments of interest rate protection agreements (321) -
Deferred income taxes (234) (60)
Changes in operating assets and liabilities, net 3,336 7,486
------------ ----------
Net cash provided by operating activities 107,218 140,855
------------ ----------
Investing Activities
Investment in ProAct Technologies Corp. (formerly Consumer
Financial Network, Inc.) - (25,027)
Investment in Geocast Network Systems, Inc. (2,016) (8,000)
Proceeds from disposition of assets - 3,473
Acquisition of Pulitzer Broadcasting Company (711,914) -
Acquisition of Kelly Broadcasting Co. and Kelleproductions, Inc. (529,646) -
Capital call - Arizona Diamondbacks (491) -
Other investing activities (68) (368)
Purchases of property, plant, and equipment:
Special projects/buildings (23,503) (2,466)
Digital (8,075) (2,991)
Maintenance (14,756) (17,600)
------------ ----------
Net cash used in investing activities (1,290,469) (52,979)
------------ ----------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
----------------------------------------
(In thousands)
Financing Activities
<S> <C> <C>
Financing costs and other $ (10,550) $ -
Issuance of Private Placement Debt 110,000 -
Dividends paid on preferred stock (1,066) (1,066)
Revolving Credit Facility:
Proceeds from issuance of long-term debt 912,000 -
Payment of long-term debt (912,000) -
New Credit Facilities:
Proceeds from issuance of long-term debt 943,000 263,000
Payment of long-term debt (332,000) (334,000)
Series A Common Stock:
Issuances 99,477 -
Repurchases (6,021) (11,012)
Repayment of Senior Notes - (3,000)
Proceeds from employee stock purchase plan 1,166 1,843
Exercise of stock options 819 100
------------- -------------
Net cash provided by (used in) financing activities 804,825 (84,135)
------------- -------------
(Decrease) increase in cash and cash equivalents (378,426) 3,741
Cash and cash equivalents at beginning of period 380,980 5,632
------------- -------------
Cash and cash equivalents at end of period $ 2,554 $ 9,373
============= =============
Supplemental Cash Flow Information:
Businesses acquired in purchase transactions:
Pulitzer Merger
Fair market value of assets acquired $ 2,317,166
Fair market value of liabilities assumed (638,417)
Issuance of Series A Common Stock (966,835)
-------------
Net cash paid for acquisition $ 711,914
=============
Kelly Transaction
Fair market value of assets acquired $ 547,512
Fair market value of liabilities assumed (17,866)
-------------
Net cash paid for acquisition $ 529,646
=============
Cash paid during the period for interest $ 63,040 $ 77,075
============= =============
Cash paid during the period for taxes $ 29,843 $ 25,736
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
1. Summary of Accounting Policies
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, 1999 and 2000 are not necessarily indicative of the results that
may be expected for a full year.
2. Acquisitions, Dispositions and Investments
On March 18, 1999, the Company acquired the nine television and five radio
stations ("Pulitzer Broadcasting Company") of Pulitzer Publishing Company
("Pulitzer") and a 3.5% interest in the Arizona Diamondbacks in a merger
transaction (the "Pulitzer Merger"). In connection with the transaction, the
Company issued 37.1 million shares of Series A Common Stock (quoted market value
of $26.0625 on March 18, 1999) to Pulitzer shareholders (the "Pulitzer
Issuance") and assumed $700 million in debt, which was repaid on the acquisition
date using the Company's Revolving Credit Facility (the "Financing"), and paid
$5 million for the interest in the Arizona Diamondbacks. In addition, the
transaction was subject to an adjustment, which guaranteed the Company $41
million in working capital. The Pulitzer Merger was accounted for under the
purchase method of accounting and, accordingly, the purchase price (including
acquisition costs) of approximately $1.7 billion has been allocated to the
acquired assets and liabilities based upon their fair market values. The excess
of the purchase price and acquisition costs over the fair market value of the
tangible assets acquired less the liabilities assumed was allocated to FCC
licenses.
On January 31, 2000, the Company exercised its fixed-price option to acquire the
outstanding stock of Channel 58, Inc. (the licensee for KQCA-TV in Sacramento,
California) (the "KQCA Acquisition"). The Company was previously programming and
selling airtime of KQCA-TV under a Time Brokerage Agreement, which was acquired
as part of the acquisition of Kelly Broadcasting Co. on January 5, 1999. The
KQCA Acquisition was accounted for under the purchase method of accounting and,
accordingly, the purchase price (including acquisition costs) of approximately
$891,000 has been allocated to the acquired assets and liabilities based upon
their fair market values. The excess of the purchase price and acquisition costs
over the fair market value of the tangible assets acquired less the liabilities
assumed was allocated to FCC license.
On August 1, 2000, Emmis Communications Corp. ("Emmis") began managing the
Company's radio stations in Phoenix, Arizona (KTAR-AM, KMVP- AM and KKLT-FM)
(the "Phoenix Transaction") under a Program Service and Time Brokerage Agreement
for a period of up to three years. During that period, the Company will receive
a time brokerage fee from Emmis. Emmis has made an initial payment of $20
million to an intermediary for the option to acquire the stations during the
period of up to three years for a total purchase price of $160 million. See Note
5.
On August 8, 2000, the Company sold two of its radio stations, WXII-AM
(Greensboro, NC) and WLKY-AM (Louisville, KY), to Truth Broadcasting Corporation
for $3.5 million. This sale resulted in a $1.1 million gain which is included in
Gain on Disposition of Assets.
The unaudited pro forma results of operations include (i) the historical results
of the Company's 22 owned television stations (which excludes KQCA) (ii) fees
from the three television and two radio stations managed by the Company (see
Note 4), (iii) the time brokerage agreement for KQCA from January 1, 1999 to
January 31, 2000 and the results of KQCA, after its acquisition by the Company,
from February 1, 2000 to September 30, 2000, (iv) the historical results of
KTAR-AM, KMVP-AM and KKLT-FM from January 1, 1999 through July 31, 2000, and the
time brokerage agreement for these stations from August 1, 2000 through
September 30, 2000, and (v) the historical results of WXII-AM and WLKY-AM from
January 1, 1999 through August 8, 2000, adjusted to reflect the Pulitzer Merger,
the Pulitzer Issuance, the Financing, the issuance of 3.7 million shares of
Series A Common Stock to The Hearst Corporation ("Hearst") for $100 million and
the Phoenix Transaction, as if these transactions had occurred as of January 1,
1999, as follows:
6
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
September 30, 2000
2. Acquisitions, Dispositions and Investments (continued)
Nine Months Ended
September 30,
1999 2000
-------------------------------------
(unaudited)
(In thousands, except per share data)
Total revenues $ 501,459 $ 537,551
Net income $ 12,905 $ 30,338
Income applicable to common stockholders $ 11,839 $ 29,272
Income per common share - basic and diluted $ 0.13 $ 0.32
Pro forma number of shares
used in calculations - basic 92,857 92,563
- diluted 92,901 92,582
The above unaudited 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 January 5, 1999, effective January 1, 1999 for accounting purposes, the
Company acquired through a merger transaction all of the partnership interests
in Kelly Broadcasting Co., in exchange for approximately $520.4 million in cash,
including a working capital adjustment of $0.4 million. As a result of this
transaction, the Company acquired television broadcast station KCRA-TV,
Sacramento, California and the programming rights under an existing Time
Brokerage Agreement, with respect to KQCA-TV, Sacramento, California. In
addition, the Company acquired substantially all of the assets and certain of
the liabilities of Kelleproductions, Inc., for approximately $10 million in
cash. The merger and acquisition are collectively referred to as the "Kelly
Transaction". The Kelly Transaction was accounted for under the purchase method
of accounting and, accordingly, the purchase price and related acquisition costs
of approximately $1.1 million have been allocated to the acquired assets and
liabilities based upon their fair market values. The excess of the purchase
price and acquisition costs over the fair market value of the tangible assets
acquired less the liabilities assumed was allocated to FCC licenses and
goodwill.
On February 25, 2000, the Company invested an additional $8 million of cash for
a total investment of $10 million, in Geocast Network Systems, Inc. ("Geocast")
in return for an additional equity interest in Geocast. Geocast will use a
portion of the Company's stations' digital broadcast spectrum as part of a new
digital network infrastructure to deliver a program service, which includes the
local stations' content and other national content and services, to personal
computer users. As this total investment represents less than a 10% interest in
Geocast, the investment is accounted for using the cost method.
On March 22, 2000, the Company invested $25 million in ProAct Technologies Corp.
("ProAct") (formerly Consumer Financial Network, Inc.) for an equity interest in
ProAct. ProAct is an online provider of consumer financial information and
services. As this investment represents less than a 10% interest in ProAct, the
investment is accounted for using the cost method.
7
<PAGE>
HEARST-ARGYLE TELEVISION, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
September 30, 2000
3. Long-Term Debt
Long-term debt consists
of the following:
December 31, September 30,
(In thousands) 1999 2000
---------------------------------------
(unaudited)
New Credit Facilities $ 611,000 $ 540,000
Senior Notes 500,000 497,000
Private Placement Debt 450,000 450,000
Senior Subordinated Notes 2,596 2,596
---------- ----------
Total long-term debt $1,563,596 $1,489,596
========== ==========
Credit Facilities
On April 12, 1999, the Company entered into two new revolving credit facilities
(the "New Credit Facilities") with the Chase Manhattan Bank ("Chase"), as the
administrative agent for a consortium of banks. The credit facilities were
structured as a $1 billion revolver (the "$1 Billion Facility") and a $250
million revolver/term loan (the "$250 Million Facility"). Management elected to
cancel the $250 Million Facility on April 10, 2000. The $1 Billion Facility,
which had an outstanding balance of $540 million at September 30, 2000, will
mature on April 12, 2004.
Senior Notes
On September 29, 2000, the Company repaid $3 million of its 7.5% Senior Notes
due November 15, 2027, for a price of $2.7 million. The gain resulting from this
repayment was insignificant. The repayment was funded by the New Credit
Facility.
4. Related Party Transactions
The Company recorded revenues of approximately $1.2 million and $3.5 million
during the three and nine months ended September 30, 1999, respectively, and
$920,000 and $3.1 million during the three and nine months ended September 30,
2000, respectively, 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
$795,000 and $2.3 million during the three and nine months ended September 30,
1999, respectively, and $958,000 and $2.8 million during the three and nine
months ended September 30, 2000, respectively, relating to the Services
Agreement (whereby Hearst provides the Company certain administrative services
such as accounting, financial, legal, tax, insurance, data processing and
employee benefits). The Company believes that the terms of all these agreements
are reasonable to both sides; however, there can be no assurance that more
favorable terms would not be available from third parties.
The Company recorded net revenues of approximately $4.5 million during the nine
months ended September 30, 2000, relating to advertising sales to one of the
Company's equity interest investments (which is accounted for using the cost
method). See Note 2.
5. Proposed Acquisition and Subsequent Events
Proposed Acquisition
In September 2000, the Company announced that it entered into an agreement to
acquire WMUR-TV in Manchester, New Hampshire for $185 million. The Company
expects this acquisition to be part of a three party swap including Emmis (see
Note 2). The purchase price is expected be funded by (i) $160 million from
Emmis, once Emmis exercises their option to purchase the Phoenix radio stations
(see Note 2), and (ii) $25 million plus the cost of any transaction expenses
from the Company's New Credit Facility (see Note 3). This swap is expected to
close in the first quarter of 2001.
Financing Arrangements
On October 5, 2000 and October 20, 2000, the Company repaid $3.7 million and $10
million, respectively, of its 7% Senior Notes, due January 15, 2018, for a price
of $3.2 million and $8.7 million, respectively. Additionally, on November 7,
2000, the Company repaid $13.5 million of its 7.5% due November 15, 2027 for a
price of $12 million. These repayments were funded using the $1 Billion Facility
(see Note 3).
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
------- ------------------------------------------------------------
and Results of Operations
-------------------------
Results of Operations
On March 18, 1999, the Company acquired the nine television and five radio
stations ("Pulitzer Broadcasting Company") of Pulitzer Publishing Company
("Pulitzer") and a 3.5% interest in the Arizona Diamondbacks in a merger
transaction (the "Pulitzer Merger"). In connection with the Pulitzer Merger, the
Company issued approximately 37.1 million shares of Series A Common Stock to
Pulitzer shareholders (the "Pulitzer Issuance"). Additionally, in connection
with the Pulitzer Merger, the Company drew-down $725 million from the Revolving
Credit Facility (the "Financing"). See Note 2 of the notes to the condensed
consolidated financial statements.
On June 30, 1999, the Company issued approximately 3.7 million shares of the
Company's Series A Common Stock to The Hearst Corporation ("Hearst") for $100
million (the "Hearst Issuance").
On January 31, 2000, the Company exercised its fixed-price option to acquire the
outstanding stock of Channel 58, Inc. (the licensee for KQCA-TV in Sacramento,
California) for $850,000 (the "KQCA Acquisition"). The Company was previously
programming and selling airtime of KQCA-TV under a Time Brokerage Agreement,
which was acquired as part of the acquisition of Kelly Broadcasting Co. on
January 5, 1999.
On August 1, 2000, Emmis Communications Corp. ("Emmis") began managing the
Company's radio stations in Phoenix, Arizona (KTAR-AM, KMVP-AM and KKLT-FM) (the
"Phoenix Transaction") under a Program Service and Time Brokerage Agreement for
a period of up to three years. During that period, the Company will receive a
time brokerage fee from Emmis. Emmis has made an initial payment of $20 million
to an intermediary for the option to acquire the stations during the period of
up to three years for a total purchase price of $160 million. See Note 2 of the
notes to the condensed consolidated financial statements.
On August 8, 2000, the Company sold two of its radio stations, WXII-AM
(Greensboro, NC) and WLKY-AM (Louisville, KY), to Truth Broadcasting Corporation
for $3.5 million. See Note 2 of the notes to the condensed consolidated
financial statements.
Results of operations for the three and nine months ended September 30, 2000
include (i) the historical results of the Company's 22 owned television stations
(which excludes KQCA) and fees from the three television and two radio stations
managed by the Company (see Note 4 of the notes to the condensed consolidated
financial statements) for the entire period presented; (ii) the time brokerage
agreement for KQCA from January 1 through January 31, 2000 and the results of
KQCA, after its acquisition by the Company, from February 1 through September
30, 2000; (iii) the historical results of KTAR-AM, KMVP-AM and KKLT-FM from
January 1 through July 31, 2000, and the time brokerage agreement for these
stations from August 1 through September 30, 2000; and, (iv) the historical
results of WXII-AM and WLKY-AM from January 1 through August 8, 2000. Results of
operations for the three and nine months ended September 30, 1999 include the
historical results of: (i) WCVB, WTAE, WBAL, KMBC, WISN, WLWT, KOCO, KITV, WAPT,
KHBS/KHOG, KSBW, WPTZ/WNNE and KCRA; fees from the three television and two
radio stations managed by the Company (see Note 4 of the notes to the condensed
consolidated financial statements); and, the time-brokerage agreement for KQCA
for the entire period presented; and, (ii) the nine television stations and five
radio stations acquired in the Pulitzer Merger from March 19 through September
30, 1999.
The following discussion of results of operations does not include the pro forma
effects of the Pulitzer Merger and the related Pulitzer Issuance and Financing
or the Hearst Issuance (for the nine months ended September 30, 1999) or the
Phoenix Transaction (for the 1999 and 2000 periods).
Three Months Ended September 30, 2000
Compared to Three Months Ended September 30, 1999
Total revenues. Total revenues include (i) cash and barter advertising revenues,
net of agency and national representatives' commissions, (ii) network
compensation and (iii) other revenues. Total revenues in the three months ended
September 30, 2000 were $178.4 million, as compared to $166.7 million in the
three months ended September 30, 1999, an increase of $11.7 million or 7%. The
increase was primarily attributable to (i) an increase in gross political
advertising revenues during the 2000 period, and (ii) an increase in advertising
revenues resulting from the carriage of the Olympics on the Company's ten owned
NBC affiliates. This increase was partially offset by the Phoenix Transaction
which reduced total revenues by $1.7 million in the 2000 period, however, this
had no effect on Broadcast Cash Flow.
Station operating expenses. Station operating expenses were $80.6 million in the
three months ended September 30, 2000 and September 30, 1999.
9
<PAGE>
Amortization of program rights. Amortization of program rights in the three
months ended September 30, 2000 was $14.6 million, as compared to $16.1 million
in the three months ended September 30, 1999, a decrease of $1.5 million or
9.3%.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $31.2 million in the three months ended September 30, 2000, as
compared to $30.4 million in the three months ended September 30, 1999, an
increase of $0.8 million or 2.6%. The increase was primarily attributable to
increased capital expenditures in 1999 and 2000 related to digital conversions
and special projects.
Station operating income. Station operating income in the three months ended
September 30, 2000 was $52 million, as compared to $39.7 million in the three
months ended September 30, 1999, an increase of $12.3 million or 31%. The
increase in station operating income was attributable to the items discussed
above.
Corporate general and administrative expenses. Corporate general and
administrative expenses were $5.2 million in the three months ended September
30, 2000, as compared to $3.6 million in the three months ended September 30,
1999, an increase of $1.6 million or 44.4%. The increase was primarily
attributable to an increase in compensation expense due to the Company's
improved results of operations in 2000 as compared to 1999.
Interest expense, net. Interest expense, net was $28.5 million in the three
months ended September 30, 2000, as compared to $29 million in the three months
ended September 30, 1999, a decrease of $0.5 million or 1.7%. This decrease in
interest expense was primarily attributable to a lower outstanding debt balance
in the third quarter of 2000 than in the third quarter of 1999 offset by an
increase in interest rates, which impacted the variable portion of the Company's
debt.
Gain on disposition of assets. The Company recorded a gain on disposition of
assets of $1.1 million in the three months ended September 30, 2000. This gain
resulted from the sale of WXII-AM and WLKY-AM to Truth Broadcasting Corporation
on August 8, 2000. See Note 2 of the notes to the condensed consolidated
financial statements.
Equity in loss of affiliate. The Company recorded an equity loss of affiliate of
$1.9 million in the three months ended September 30, 2000. This loss represents
the Company's equivalent equity interest in the operating loss of Internet
Broadcasting Systems, Inc. ("IBS").
Income taxes. Income tax expense was $8 million in the three months ended
September 30, 2000, as compared to $3.8 million in the three months ended
September 30, 1999, an increase of $4.2 million or 111%. The effective rate was
45.9% for the three months ended September 30, 2000 as compared to 53.3% for the
three months ended September 30, 1999. This represents federal and state income
taxes as calculated on the Company's income before income taxes. The decrease in
the effective rate relates primarily to the impact of the non-tax deductible
goodwill amortization related to the Pulitzer merger. The effect of the non-tax
deductible goodwill amortization decreased as the pre-tax income increased in
2000 as compared to 1999. Management believes that the Company's effective rate
should continue to decrease as future pre-tax income increases and the effect of
such non-deductible expenses continues to decrease.
Net income. Net income was $9.4 million in the three months ended September 30,
2000, as compared to $3.3 million in the three months ended September 30, 1999,
an increase of $6.1 million or 185%. This increase in net income was
attributable to the items discussed above.
Broadcast Cash Flow. Broadcast cash flow was $83 million in the three months
ended September 30, 2000, as compared to $71.8 million in the three months ended
September 30, 1999, an increase of $11.2 million or 15.6%. The increase was
primarily attributable to (i) an increase in gross political advertising
revenues during the 2000 period, and (ii) an increase in advertising revenues
resulting from the carriage of the Olympics on the Company's ten owned NBC
affiliates. Broadcast cash flow margin increased to 46.5% for the three months
ended September 30, 2000 from 43.1% for the three months ended September 30,
1999. Broadcast cash flow is defined as station operating income, plus
depreciation and amortization, plus amortization of program rights, minus
program payments. The Company has included broadcast cash flow data because
management believes that such data are commonly used as a measure of performance
among companies in the broadcast industry. Broadcast cash flow is also
frequently used by investors, analysts, valuation firms and lenders as one of
the important determinants of underlying asset value. Broadcast cash flow should
not be considered in isolation or as an alternative to operating income (as
determined in accordance with generally accepted accounting principles) as an
indicator of the entity's operating performance, or to cash flow from operating
activities (as determined in accordance with generally accepted accounting
principles) as a measure of liquidity. This measure is believed to be, but may
not be, comparable to similarly titled measures used by other companies.
10
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Nine Months Ended September 30, 2000
Compared to Nine Months Ended September 30, 1999
Total revenues. Total revenues include (i) cash and barter advertising revenues,
net of agency and national representatives' commissions, (ii) network
compensation and (iii) other revenues. Total revenues in the nine months ended
September 30, 2000 were $544.9 million, as compared to $466.2 million in the
nine months ended September 30, 1999, an increase of $78.7 million or 16.9%. The
increase was primarily attributable to (i) the Pulitzer Merger which added $46
million to 2000 total revenues, (ii) an increase in gross political advertising
revenues during 2000, (iii) an increase in advertising revenues resulting from
the carriage of the Super Bowl on the Company's ten owned ABC affiliates, and
(iv) an increase in advertising revenues resulting from the carriage of the
Olympics on the Company's ten owned NBC affiliates. This increase was partially
offset by the Phoenix Transaction which reduced total revenues by $1.7 million
in the 2000 period, however, this had no effect on Broadcast Cash Flow.
Station operating expenses. Station operating expenses in the nine months ended
September 30, 2000 were $244.8 million, as compared to $218.1 million in the
nine months ended September 30, 1999, an increase of $26.7 million or 12.2%. The
increase was primarily attributable to the Pulitzer Merger, which added $24.9
million to station operating expenses during 2000.
Amortization of program rights. Amortization of program rights was $44.6 million
in the nine months ended September 30, 2000 and September 30, 1999.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $94.5 million in the nine months ended September 30, 2000, as
compared to $76.5 million in the nine months ended September 30, 1999, an
increase of $18 million or 23.5%. The increase was primarily attributable to (i)
the Pulitzer Merger, which added $14.7 million to depreciation and amortization
of intangibles during 2000 and, (ii) increased capital expenditures in 1999 and
2000 related to digital conversions and special projects.
Station operating income. Station operating income in the nine months ended
September 30, 2000 was $161 million, as compared to $126.9 million in the nine
months ended September 30, 1999, an increase of $34.1 million or 26.9%. The
increase in station operating income was attributable to the items discussed
above.
Corporate general and administrative expenses. Corporate general and
administrative expenses were $13.2 million in the nine months ended September
30, 2000, as compared to $11.9 million in the nine months ended September 30,
1999, an increase of $1.3 million or 10.9%. The increase was primarily
attributable to an increase in compensation expense due to the Company's
improved results of operations in 2000 as compared to 1999.
Interest expense, net. Interest expense, net was $88.5 million in the nine
months ended September 30, 2000, as compared to $78 million in the nine months
ended September 30, 1999, an increase of $10.5 million or 13.5%. This increase
in interest expense was primarily attributable to (i) a larger outstanding debt
balance during the first quarter of 2000 than in the first quarter of 1999,
which was the result of the Financing in connection with the Pulitzer Merger,
(ii) an increase in interest rates, which impacted the variable rate portion
of the Company's debt, and (iii) the write-off of approximately $1.3 million
unamortized deferred financing costs associated with management's election to
cancel the $250 Million Facility on April 10, 2000 (see Note 3 of the notes to
the condensed consolidated financial statements).
Gain on disposition of assets. The Company recorded a gain on disposition of
assets of $1.1 million in the nine months ended September 30, 2000. This gain
resulted from the sale of WXII-AM and WLKY-AM to Truth Broadcasting Corporation
on August 8, 2000. See Note 2 of the notes to the condensed consolidated
financial statements.
Equity in loss of affiliate. The Company recorded an equity loss of affiliate of
$4.3 million in the nine months ended September 30, 2000. This loss represents
the Company's equivalent equity interest in the operating loss of IBS.
Income taxes. Income tax expense was $25.7 million in the nine months ended
September 30, 2000, as compared to $17.4 million in the nine months ended
September 30, 1999, an increase of $8.3 million or 47.7%. The effective rate was
45.9% for the nine months ended September 30, 2000 as compared to 47.0 % for the
nine months ended September 30, 1999. This represents federal and state income
taxes as calculated on the Company's income before income taxes. The decrease in
the effective rate relates primarily to the impact of the non-tax deductible
goodwill amortization related to the Pulitzer merger. The effect of the non-tax
deductible goodwill amortization decreased as the pre-tax income increased in
2000 as compared to 1999. Management believes that the Company's effective rate
should continue to decrease as future pre-tax income increases and the effect of
such non-deductible expenses continues to decrease.
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Extraordinary item. The Company recorded an extraordinary item of $3.1 million,
net of the related income tax benefit, in the nine months ended September 30,
1999. This extraordinary item, which resulted from the early retirement of the
Company's Revolving Credit Facility, includes the write-off of the unamortized
deferred financing costs associated with the Revolving Credit Facility.
Net income. Net income was $30.3 million in the nine months ended September 30,
2000, as compared to net income of $16.6 million in the nine months ended
September 30, 1999, an increase of $13.7 million or 82.5%. This increase in net
income was attributable to the items discussed above.
Broadcast Cash Flow. Broadcast cash flow was $255.4 million in the nine months
ended September 30, 2000, as compared to $206.5 million in the nine months ended
September 30, 1999, an increase of $48.9 million or 23.7%. The increase was
primarily attributable to (i) the Pulitzer Merger, which added $18.6 million to
broadcast cash flow during the 2000 period, (ii) an increase in gross political
advertising revenues, (iii) an increase in advertising revenues resulting from
the carriage of the Super Bowl on the Company's ten owned ABC affiliates, and
(iv) an increase in advertising revenues resulting from the carriage of the
Olympics on the Company's ten owned NBC affiliates. Broadcast cash flow margin
increased to 46.9% for the nine months ended September 30, 2000 from 44.3% for
the nine months ended September 30, 1999. Broadcast cash flow is defined as
station operating income, plus depreciation and amortization, plus amortization
of program rights, minus program payments. The Company has included broadcast
cash flow data because management believes that such data are commonly used as a
measure of performance among companies in the broadcast industry. Broadcast cash
flow is also frequently used by investors, analysts, valuation firms and lenders
as one of the important determinants of underlying asset value. Broadcast cash
flow should not be considered in isolation or as an alternative to operating
income (as determined in accordance with generally accepted accounting
principles) as an indicator of the entity's operating performance, or to cash
flow from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity. This measure is
believed to be, but may not be, comparable to similarly titled measures used by
other companies.
Liquidity and Capital Resources
On April 12, 1999, the Company entered into two new revolving credit facilities
(the "New Credit Facilities") with the Chase Manhattan Bank ("Chase"), as the
administrative agent for a consortium of banks. The credit facilities were
structured as a $1 billion revolver (the "$1 Billion Facility") and a $250
million revolver / term loan (the "$250 Million Facility"). Management elected
to cancel the $250 Million Facility on April 10, 2000. The $1 Billion Facility,
which has an outstanding balance of $540 million at September 30, 2000, will
mature on April 12, 2004.
On February 25, 2000, the Company invested an additional $8 million of cash for
a total investment of $10 million, in Geocast Network Systems, Inc. ("Geocast")
in return for an additional equity interest in Geocast. On March 22, 2000, the
Company invested $25 million in Consumer Financial Network, Inc. ("CFN") for an
equity interest in CFN. See Note 2 of the notes to the condensed consolidated
financial statements. These equity investments were primarily funded through
cash flow from operations and drawdowns from the New Credit Facilities.
On September 26, 2000 and November 7, 2000, the Company repaid $3 million and
$13.5 million, respectively, of its 7.5% Senior Notes due November 15, 2027, for
a price of $2.6 million and $12 million, respectively. Additionally, on October
5, 2000 and October 20, 2000, the Company repaid $3.7 million and $10 million,
respectively, of its 7% Senior Notes, due January 15, 2018, for a price of $3.2
million and $8.7 million, respectively. These repayments were funded by
drawdowns from the $1 Billion Facility.
During the first quarter of 2001, the company anticipates it will close on the
swap of the Phoenix radio stations for WMUR-TV. In connection with this
transaction, the Company expects to borrow approximately $25 million plus the
cost of any transaction expenses from the New Credit Facility. See Note 5 of the
notes to the condensed consolidated financial statements.
Capital expenditures were $52.3 million in 1999 and $23.1 million during the
nine months ended September 30, 2000. The Company invested approximately (i)$2.5
million in special projects/towers, approximately (ii) $3 million in digital
conversion projects at various stations (iii) $17.6 million in maintenance
projects, during the 2000 period. The Company expects to spend approximately
$35.4 million for the year ended December 31, 2000 including approximately (i)
$23.5 million in maintenance projects, (ii) $8.5 million in digital projects,
and (iii) $3.4 million in special projects/towers.
The Company anticipates that its primary sources of cash, those being current
cash balances, operating cash flow and amounts available under the New Credit
Facilities, will be sufficient to finance the operating and working capital
requirements of its stations, the Company's debt service requirements and
anticipated capital expenditures of the Company for both the next 12 months and
the foreseeable future thereafter.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
------ ----------------------------------------------------------
The Company's $1 Billion Facility is sensitive to changes in interest rates. As
of September 30, 2000, the Company is not involved in any derivative financial
instruments. However, the Company may consider certain interest-rate risk
strategies in the future.
Part II Other Information
Item 6. Exhibits and reports on Form 8-K
------- --------------------------------
(a) Exhibits:
---------
Exhibit No.
-----------
10.1 Asset Purchase Agreement among Hearst-Argyle Television, Inc., Hearst-
Argyle Properties, Inc. and WMUR-TV, Inc. dated September 7, 2000.
10.2 Letter Agreement between Hearst-Argyle Television, Inc. and NBC
Television Network ("NBC") dated June 30, 2000.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
--------------------
The Company did not file any reports on Form 8-K in the quarter ended September
30, 2000.
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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 13, 2000 By: /s/ Harry T. Hawks
-------------------------------- ---------------------------------
Date Harry T. Hawks,
Executive Vice President and
Chief Financial Officer,
(Principal Financial and
Accounting Officer)
14
