<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): December 8, 1995
HERITAGE MEDIA CORPORATION
(Exact name of registrant as specified in its charter)
IOWA 1-100155 42-1299303
(State of (Commission File (IRS employment
incorporation) Number) identification no.)
ONE GALLERIA TOWER
13355 NOEL ROAD, SUITE 1500
DALLAS, TEXAS 75240
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 214-702-7380
Page 1 of 31 pages
Exhibit index on page 29
<PAGE>
ITEM 5. OTHER EVENTS.
The registrant ("Heritage") has entered into an Agreement and Plan of
Merger (the "Merger Agreement") with DIMAC Corporation ("DIMAC") pursuant
to which Heritage has agreed to acquire DIMAC. DIMAC is the largest full
service, vertically integrated direct marketing services company in the
United States.
Pursuant to the Merger Agreement, a wholly owned subsidiary of Heritage
would merge (the "Merger") with and into DIMAC. Each outstanding share of
DIMAC common stock would as a result of the Merger be converted into the right
to receive $28 in cash. Notwithstanding the foregoing, however, Heritage may
elect to pay up to $7 of the $28 merger price by issuing shares of its Class
A Common Stock.
Consummation of the acquisition of DIMAC is subject to numerous
conditions, including approval of the transaction by the DIMAC stockholders,
and is anticipated to close during the first quarter of 1996.
Set forth on pages 3 through 28 of this report are (i) consolidated
financial statements of DIMAC at December 31, 1993 and 1994, and for each of
the three years in the period ended December 31, 1994, accompanied by the
report of Ernst & Young LLP thereon; (ii) unaudited consolidated financial
statements of DIMAC at September 30, 1995, and for the nine months ended
September 30, 1994 and 1995; and (iii) pro forma condensed combined financial
information of Heritage and DIMAC as of September 30, 1995 and for the year
ended December 31, 1994 and the nine months ended September 30, 1995.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS.
2.1 Agreement and Plan of Merger, dated as of October 23, 1995, by and among
Heritage Media Corporation, Arch Acquisition Corp., and DIMAC Corporation
(filed as Exhibit 2.1 to Form S-4, Reg. No. 33-64473, and incorporated
herein by reference)
24.1 Consent of Ernst & Young LLP (filed herewith).
1
<PAGE>
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.
HERITAGE MEDIA CORPORATION
Date: December 8, 1995 By: /s/ James P. Lehr
_______________________________
James P. Lehr
Vice President--Administration
and Controller
2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
DIMAC Corporation
We have audited the accompanying consolidated balance sheets of DIMAC
Corporation as of December 31, 1993 and 1994, and the related consolidated
statements of income (loss), stockholders' equity (deficiency), and cash flows
for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
DIMAC Corporation at December 31, 1993 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
Ernst & Young LLP
St. Louis, Missouri
February 24, 1995
3
<PAGE>
DIMAC CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 1,937 $ --
Accounts receivable -- trade, net of allowance for doubtful accounts of $250 in 1993 and
$346 in 1994............................................................................. 13,647 24,193
Prepaid income taxes...................................................................... 1,719 --
Inventories:
Raw materials........................................................................... 727 1,036
Work-in-process......................................................................... 2,497 5,094
Postage................................................................................. 849 705
Deferred taxes............................................................................ 192 166
Other current assets...................................................................... 596 1,164
--------- ---------
Total current assets.................................................................. 22,164 32,358
Property, equipment and leasehold improvements:
Land...................................................................................... 100 --
Machinery and equipment................................................................... 8,189 13,066
Furniture and fixtures.................................................................... 2,462 3,222
Leasehold improvements.................................................................... 611 935
Data processing software.................................................................. 3,135 3,520
--------- ---------
14,497 20,743
Less accumulated depreciation............................................................. (7,134) (8,707)
--------- ---------
7,363 12,036
Construction-in-process................................................................... 761 977
--------- ---------
8,124 13,013
Intangible assets:
Goodwill.................................................................................. 6,896 14,589
Debt issuance costs....................................................................... 3,353 2,467
Customer list............................................................................. 2,338 3,448
Other intangibles......................................................................... 931 2,153
--------- ---------
13,518 22,657
Less accumulated amortization............................................................. (2,350) (3,620)
--------- ---------
11,168 19,037
--------- ---------
$ 41,456 $ 64,408
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
4
<PAGE>
DIMAC CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1993 1994
---------- ----------
<S> <C> <C>
Current liabilities:
Cash management liability............................................................... $ -- $ 3,510
Accounts payable........................................................................ 5,973 11,433
Advances from customers................................................................. 5,622 5,882
Payable due to recapitalization......................................................... 2,614 --
Accrued liabilities:
Compensation.......................................................................... 1,808 3,006
Interest.............................................................................. 920 602
Other................................................................................. 991 1,003
Income taxes payable.................................................................... -- 460
Current maturities of long-term debt.................................................... 51 144
---------- ----------
Total current liabilities........................................................... 17,979 26,040
Long-term debt............................................................................ 49,017 36,159
Deferred rent benefit..................................................................... 2,033 2,136
---------- ----------
Total liabilities................................................................... 69,029 64,335
Stockholders' equity (deficiency):
Series preferred stock, $.01 par value; 10,000,000 shares authorized; none issued....... -- --
Common stock, $.01 par value; 20,000,000 shares authorized; issued 12,122,823 in 1993
and 1994............................................................................... 121 121
Additional paid-in capital.............................................................. 9,802 19,182
Retained earnings....................................................................... 13,813 13,641
---------- ----------
23,736 32,944
Treasury stock, at cost, common stock of 8,797,422 in 1993 and 5,631,418 in 1994........ (51,309) (32,871)
---------- ----------
Total stockholders' equity (deficiency)............................................. (27,573) 73
---------- ----------
$ 41,456 $ 64,408
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
5
<PAGE>
DIMAC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------------------
1992 1993 1994
--------- --------- ----------
<S> <C> <C> <C>
Sales........................................................................... $ 57,810 $ 63,800 $ 100,012
Cost of sales................................................................... 36,550 41,899 67,249
--------- --------- ----------
Gross profit.................................................................... 21,260 21,901 32,763
Operating expenses:
Sales expenses................................................................ 6,674 7,643 11,097
General and administrative expenses........................................... 7,821 7,301 10,083
Compensation element of recapitalization...................................... -- 1,091 --
Other general expenses........................................................ 475 757 664
--------- --------- ----------
14,970 16,792 21,844
--------- --------- ----------
Income from operations.......................................................... 6,290 5,109 10,919
Interest expense................................................................ 781 1,417 6,069
--------- --------- ----------
Income before provision for income taxes and extraordinary item................. 5,509 3,692 4,850
Provision for income taxes...................................................... 2,146 1,433 1,865
--------- --------- ----------
Income before extraordinary item................................................ 3,363 2,259 2,985
Extraordinary item, net of tax benefit.......................................... -- -- (3,157)
--------- --------- ----------
Net income (loss)............................................................... $ 3,363 $ 2,259 $ (172)
--------- --------- ----------
--------- --------- ----------
Per share of common and common equivalent stock:
Historical
Income before extraordinary item............................................ $ .22 $ .64
Extraordinary item, net of tax benefit...................................... -- (.68)
--------- ----------
Net income (loss)........................................................... $ .22 $ (.04)
--------- ----------
--------- ----------
Pro forma (Note 2)............................................................ $ .29 $ .68
--------- ----------
--------- ----------
</TABLE>
See accompanying notes.
6
<PAGE>
DIMAC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------- ADDITIONAL
COMMON TREASURY COMMON PAID-IN RETAINED TREASURY
STOCK STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991................ 7,271,473 (130,063) $ 73 $ 2,381 $ 8,191 $ (53) $ 10,592
Common stock issued for stock options
exercised.............................. 39,629 -- -- 43 -- -- 43
Net income.............................. -- -- -- -- 3,363 -- 3,363
--------- --------- ----- ----------- ----------- ----------- ---------
Balance as of December 31, 1992........... 7,311,102 (130,063) 73 2,424 11,554 (53) 13,998
Common stock issued for stock options
and warrants exercised................. 2,467,155 -- 25 799 -- -- 824
Sale of common stock.................... 1,948,273 -- 19 9,958 -- -- 9,977
Issuance of common stock with debt...... 396,293 -- 4 996 -- -- 1,000
Retirement of stock options and
warrants............................... -- -- -- (5,496) -- (6,202) (11,698)
Tax benefit from exercise and retirement
of stock options....................... -- -- -- 1,873 -- -- 1,873
Purchase of common stock................ -- (8,667,359) -- (752) -- (45,054) (45,806)
Net income.............................. -- -- -- -- 2,259 -- 2,259
--------- --------- ----- ----------- ----------- ----------- ---------
Balance as of December 31, 1993........... 12,122,823 (8,797,422) 121 9,802 13,813 (51,309) (27,573)
Stock award............................. -- 39,425 -- (24) -- 230 206
Net proceeds from initial public
offering............................... -- 3,131,459 -- 9,404 -- 18,257 27,661
Purchase of common stock................ -- (4,880) -- -- -- (49) (49)
Net loss................................ -- -- -- -- (172) -- (172)
--------- --------- ----- ----------- ----------- ----------- ---------
Balance as of December 31, 1994........... 12,122,823 (5,631,418) $ 121 $ 19,182 $ 13,641 $ (32,871) $ 73
--------- --------- ----- ----------- ----------- ----------- ---------
--------- --------- ----- ----------- ----------- ----------- ---------
</TABLE>
See accompanying notes.
7
<PAGE>
DIMAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1992 1993 1994
--------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................................... $ 3,363 $ 2,259 $ (172)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense......................................... 2,092 2,302 3,449
Extraordinary item............................................................ -- -- 3,157
Deferred compensation......................................................... 62 1,091 58
Other......................................................................... 424 190 192
Changes in net assets and liabilities, net of acquisitions:
Accounts receivable......................................................... (806) (3,709) (9,071)
Inventories................................................................. 429 (81) (2,416)
Other assets................................................................ 434 (547) 89
Accounts payable............................................................ (445) 3,362 7,536
Advances from customers..................................................... (4,130) 1,605 248
Accrued liabilities and deferred compensation............................... (343) 153 (207)
Income taxes................................................................ 457 (336) 3,518
--------- ---------- ----------
(1,826) 4,030 6,553
--------- ---------- ----------
Net cash provided by operating activities....................................... 1,537 6,289 6,381
INVESTING ACTIVITIES
Net assets of acquired business................................................. -- -- (11,902)
Proceeds from sale of fixed assets.............................................. 18 -- 90
Other intangibles............................................................... -- -- (770)
Purchase of property, equipment and leasehold improvements...................... (1,229) (2,530) (4,178)
--------- ---------- ----------
Net cash used in investing activities........................................... (1,211) (2,530) (16,760)
FINANCING ACTIVITIES
Payments of long-term debt...................................................... (7,370) (6,766) (186)
Net (repayments) borrowings under revolving credit agreements................... (2,000) -- 11,203
Debt issuance fees.............................................................. (105) (3,353) --
Payments for extinguishment of debt............................................. -- -- (27,573)
Proceeds from note payable to bank.............................................. 6,000 -- --
Net proceeds from issuance of common stock...................................... 43 10,977 27,661
Proceeds from long-term debt.................................................... -- 49,000 --
Exercise of stock options and warrants.......................................... -- 824 --
Retirement of stock options and warrants........................................ -- (11,698) --
Payable (payment) due to recapitalization....................................... -- 2,614 (2,614)
Purchase of common stock........................................................ -- (45,806) (49)
--------- ---------- ----------
Net cash provided by (used in) financing activities............................. (3,432) (4,208) 8,442
--------- ---------- ----------
Net (decrease) increase in cash and cash equivalents............................ (3,106) (449) (1,937)
Cash and cash equivalents, beginning of period.................................. 5,492 2,386 1,937
--------- ---------- ----------
Cash and cash equivalents, end of period........................................ $ 2,386 $ 1,937 $ --
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes.
8
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of DIMAC
Corporation (Company) and its wholly owned subsidiary DIMAC DIRECT Inc. whose
operations are located in St. Louis, San Francisco, Los Angeles, New York and
Boston. All significant intercompany balances and transactions have been
eliminated.
DIMAC Corporation has no operations of its own and was formed in 1987 solely
for the purpose of holding the stock of DIMAC DIRECT Inc. At December 31, 1994,
stockholders' equity (deficiency) of DIMAC DIRECT Inc. was $(28,396). The
stockholders' deficiency was created by the payment of a dividend to the Company
used for the purchase of Treasury shares in the recapitalization described in
Note 2.
CASH AND CASH EQUIVALENTS
All highly liquid debt investments purchased with a maturity of three months
or less are classified as cash equivalents.
RECEIVABLES
The Company provides an allowance for doubtful accounts for the estimated
losses that will be incurred in collection of receivables. The estimated losses
are based on historical collection experience coupled with a review of the
current status of the existing receivables.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and include appropriate elements of material, labor and overhead.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost.
Property and equipment are depreciated using the straight-line method over the
respective asset's estimated useful life (which ranges from 5 to 11 years).
Leasehold improvements are amortized using the straight-line method over the
lesser of the respective asset's estimated useful life or the lease term.
INTANGIBLES
Intangibles such as customers lists and noncompete agreements are amortized
over the estimated useful life of the asset or the contract term (which ranges
from 3 to 11 years).
The excess of the purchase price over the fair value of net assets acquired
in certain acquisitions is allocated to goodwill and is being amortized on a
straight-line basis over 40 years. The carrying value of goodwill is reviewed
periodically by management to determine if the facts and circumstances indicate
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows of the acquired
entity over the remaining amortization period, the Company's goodwill will be
reduced by the estimated shortfall of cash flows.
Debt issuance costs are being amortized using the straight-line method over
the term of the related debt agreement.
REVENUE RECOGNITION
The Company performs work in accordance with individual client projects.
Revenue generally is recognized after all work on a project has been completed
and the Company can reasonably determine the amount of income to be recognized.
9
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPENSATORY STOCK OPTIONS
Certain employees and nonemployee directors of the Company have been granted
options to purchase shares of the Company's voting common stock. Differences
between stock option exercise price and the estimated market value at the date
of grant is considered unearned compensation and is amortized over the option
vesting period of three years.
FACILITY LEASE
Initial rent concessions of $1,650 received in 1990 and rent payments, which
are scheduled to increase periodically, are recognized as expense on a
straight-line basis over the term of the lease.
STOCK SPLIT
In May 1994, the Board of Directors of the Company approved a stock split of
the Company's common stock. The stock split was approximately three shares for
each share of common stock outstanding immediately prior to the consummation of
the Company's initial public offering. Common stock amounts presented herein
have been restated to give effect to the split.
INCOME TAXES
Income tax expense is reported as the total of current year income tax
liability and the change in deferred taxes which are provided for temporary
differences. Deferred income taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
EARNINGS PER SHARE
Income before extraordinary item per share and net income per share are
based on the weighted average number of shares of common and common equivalent
shares outstanding during the periods. Earnings per share data has not been
presented for 1992 as the capitalization before the recapitalization and initial
public offering is not indicative of the current capitalization.
RECLASSIFICATIONS
Certain amounts for 1992 and 1993 were reclassified to conform with the 1994
presentation. Such reclassifications had no effect on net income.
2. DIMAC CORPORATION RECAPITALIZATION, DMG ACQUISITION, INITIAL PUBLIC OFFERING
AND DEBT EXTINGUISHMENT
Effective November 5, 1993, certain affiliates of McCown De Leeuw & Co.
(MDC) acquired beneficial ownership of approximately 64 percent of the
outstanding common stock of DIMAC Corporation. The transaction consisted of (i)
the purchase by MDC of 1,948,273 shares of DIMAC Corporation common stock from
the corporation at an aggregate purchase price of $9,977 and the purchase of
175,719 shares of DIMAC Corporation common stock directly from certain
stockholders at an aggregate purchase price of $900; (ii) the issuance by DIMAC
DIRECT of $50,000 12 percent Senior Notes and by DIMAC Corporation of 396,293
shares of common stock (valued at $1,000); (iii) the purchase by DIMAC
Corporation of 5,487,139 shares of its common stock from Golder Thoma Cressey
Fund II (GTC) (a limited partnership which previously owned a 48 percent
interest in DIMAC Corporation) and an additional 3,180,220 shares of common
stock from certain members of management and certain other DIMAC Corporation
stockholders for an aggregate purchase price of $45,806; (iv) the retirement by
DIMAC Corporation of 1,066,944 warrants to purchase DIMAC Corporation common
stock at an aggregate price of $5,496; and (v) the retirement by DIMAC
Corporation of 1,196,556 options to purchase DIMAC Corporation common stock held
by DIMAC management and directors at an aggregate price of $6,202.
10
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. DIMAC CORPORATION RECAPITALIZATION, DMG ACQUISITION, INITIAL PUBLIC OFFERING
AND DEBT EXTINGUISHMENT (CONTINUED)
Nonrecurring compensation expense recorded as a result of the
recapitalization was $1,091, which consists of $1,561 related to the exercise
and retirement of stock options less the write-off of the net deferred
compensation liability which existed at December 31, 1992. DIMAC Corporation
realized a tax benefit of $2,435 associated with the exercise and retirement of
stock options, of which $1,873 has been recorded as additional paid-in capital
in stockholders' equity (deficiency).
The effect of the transaction was that MDC replaced GTC as the majority
stockholder (64 percent) of DIMAC Corporation, with the remaining interest
consisting of management (24 percent) and various institutional interests (12
percent).
Effective May 31, 1994, the Company acquired substantially all of the assets
of The Direct Marketing Group, Inc. (DMG). DMG operates a creative and marketing
agency in New York City and a production facility in Farmingdale, Long Island.
The purchase price for the acquisition was $9,372 plus acquisition costs of
$1,830, the assumption of certain specified liabilities of $3,860 and certain
future contingent payment obligations. The acquisition has been accounted for
under the purchase method of accounting and the results of operations for the
seven months ended December 31, 1994 have been included in the Company's
financial statements. Goodwill, resulting from the preliminary purchase price
allocation, of $7,693 is being amortized on the straight-line method over 40
years. The contingent payment obligations, if any, will be accounted for as
additional goodwill as the payments are made.
On August 10, 1994, the Company completed an initial public offering of its
common stock in which 3,407,035 shares of common stock including 277,405 shares
by selling shareholders were registered at an initial price of $10.00 per share.
On September 9, 1994, the Company used the net proceeds of the common stock
offering to redeem $25,000 in aggregate principal amount of 12 percent Senior
Notes. The debt extinguishment resulted in an extraordinary charge of $3,157
consisting of the 10 percent call premium on the $25,000 principal amount of
Senior Notes of $2,500 plus the write-off of the unamortized debt issuance costs
associated with the Senior Notes redeemed and the costs incurred in redeeming
the Senior Notes of $2,116 less tax benefits of $1,459.
The unaudited pro forma consolidated financial data presented below gives
pro forma effect to the recapitalization, the DMG acquisition, the initial
public offering and debt extinguishment as if such transactions had occurred as
of January 1, 1993. The unaudited pro forma results have been prepared for
comparative purposes only and do not necessarily reflect the results of
operations of the Company that actually would have occurred had the
recapitalization, the DMG acquisition, the initial public offering and debt
extinguishment been consummated as of January 1, 1993, nor does the data give
effect to any transactions other than the recapitalization, the DMG acquisition,
the initial public offering and debt extinguishment.
<TABLE>
<CAPTION>
PRO FORMA
---------------------
YEARS ENDED DECEMBER
31
---------------------
1993 1994
--------- ----------
<S> <C> <C>
Net sales........................................................................ $ 79,820 $ 106,949
Net income....................................................................... 1,858 4,408
Net income per share............................................................. .29 .68
</TABLE>
11
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Notes payable:
12% Series A notes.............................................................. $ 50,000 $ --
12% Series B notes.............................................................. -- 25,000
Note payable to Heller Financial................................................ -- 11,203
Capital lease obligations......................................................... 51 542
--------- ---------
50,051 36,745
Less:
Current portion................................................................. 51 144
Unamortized debt discount....................................................... 983 442
--------- ---------
$ 49,017 $ 36,159
--------- ---------
--------- ---------
</TABLE>
DIMAC DIRECT Inc. issued $50,000 of 12 percent Series A unregistered Senior
Notes in conjunction with the recapitalization.
On February 14, 1994, DIMAC DIRECT registered $50,000 of Series B Senior
Notes, with no material alteration in terms, with the SEC to exchange for the
existing Series A Notes. The exchange offer was completed by March 17, 1994. As
stated in Note 2, the Company extinguished $25,000 of the Senior Notes in
September 1994. In February 1995, the Company extinguished the remaining $25,000
of Senior Notes. See Note 11 for additional discussion.
In November 1993, DIMAC DIRECT entered into a Credit Agreement (Revolver)
with Heller Financial, Inc. The Revolver (as amended May 1994) provided a
borrowing capacity of up to $15,000 until November 4, 1996 at which date all
borrowings become due and payable. In February 1995, the Company extinguished
the Revolver with proceeds from a new long-term debt agreement. See Note 11 for
additional discussion.
The Company made interest payments of $1,016, $461 and $6,059 for the years
ended December 31, 1992, 1993 and 1994, respectively. The Company capitalized
interest of $115 for the year ended December 31, 1994.
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
12
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation and amortization........................................ $ 888 $ 1,002
Other.............................................................................. -- 196
--------- ---------
888 1,198
Deferred tax assets:
Deferred lease benefit............................................................. 733 835
Accrued vacation................................................................... 218 272
Other.............................................................................. 129 257
--------- ---------
1,080 1,364
--------- ---------
$ 192 $ 166
--------- ---------
--------- ---------
</TABLE>
The components of income tax expense other than the tax benefit of the
extraordinary charge are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................................. $ 1,737 $ 1,304 $ 1,519
State.................................................................... 221 141 203
--------- --------- ---------
1,958 1,445 1,722
Deferred:
Federal.................................................................. 167 (19) 147
State.................................................................... 21 7 (4)
--------- --------- ---------
188 (12) 143
--------- --------- ---------
$ 2,146 $ 1,433 $ 1,865
--------- --------- ---------
--------- --------- ---------
</TABLE>
Differences between the amount of taxes provided and the amount computed by
applying the federal income tax statutory rate to earnings before income taxes
are explained as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1992 1993 1994
----------- ----------- ----------
<S> <C> <C> <C>
Provision at statutory rates................................................ 34.0% 34.0% 34.0%
State and local taxes....................................................... 4.0 3.8 4.1
Nondeductible expenses...................................................... 1.4 2.3 3.4
Other....................................................................... (.4) (1.3) (3.0)
--- --- ---
Effective tax rate.......................................................... 39.0% 38.8% 38.5%
--- --- ---
--- --- ---
</TABLE>
13
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. INCOME TAXES (CONTINUED)
The principal items in the deferred income tax provision are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Depreciation and amortization.................................................. $ 149 $ 22 $ 199
Relocation/severance........................................................... 154 (118) 128
Deferred lease benefit......................................................... (44) (41) (40)
Other.......................................................................... (71) 125 (144)
--------- --------- ---------
$ 188 $ (12) $ 143
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company made income tax payments of $1,501, $1,782 and $52 for the years
ended December 31, 1992, 1993 and 1994, respectively.
5. STOCK OPTIONS AND WARRANTS
Upon incorporation, the Company issued warrants to purchase 3,384,000 shares
of the common stock of the Company at $.33 per share.
On November 5, 1993, in conjunction with the recapitalization, 1,067,000
warrants were retired and 2,317,000 warrants were exercised at a price of $.33
per share, and the stock was repurchased and maintained as treasury stock as of
December 31, 1993. No warrants were outstanding at December 31, 1993.
In 1994, the Company adopted a stock option and restricted stock award plan
for officers and key employees, providing a maximum of 909,482 shares which may
be issued under the plan. Also, the Company adopted a nonemployee director stock
option plan for outside directors, providing a maximum of 32,481 shares which
may be issued under the plan. The option price under the above plans may not be
less than the fair market value of the stock at the time the option is granted.
No restricted stock had been awarded as of December 31, 1994.
Certain employees and nonemployee directors of the Company have been granted
options to purchase shares of the Company's voting common stock. Option
transactions are summarized below:
<TABLE>
<CAPTION>
1993
------------------------------
SHARES PRICE
----------- -----------------
<S> <C> <C>
Shares under option at the beginning of the period..................... 1,601,940 $.33 to $1.03
Options forfeited...................................................... (255,021) $.33
Options exercised...................................................... (150,363) $.33 to $1.03
Options retired........................................................ (1,196,556) $.33 to $1.03
-----------
Shares under option at the end of the period........................... -- --
-----------
-----------
<CAPTION>
1994
------------------------------
SHARES PRICE
----------- -----------------
<S> <C> <C>
Shares under option at the beginning of the period..................... -- $ --
Options granted........................................................ 370,000 $5.22 to $10.00
Options forfeited...................................................... (3,500) $10.00
-----------
Shares under option at the end of the period........................... 366,500 $5.22 to $10.00
-----------
-----------
</TABLE>
The weighted average price of shares under option at December 31, 1994 was
$9.93. There were 90,375 options currently exercisable at December 31, 1994.
14
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan which provides retirement
benefits to substantially all employees not covered by collective bargaining
agreements. The Company matches a portion of employee contributions to the plan.
Company contributions to this plan charged to expense were $178, $189 and $239
for the years ended December 31, 1992, 1993 and 1994, respectively.
7. LEASE COMMITMENTS
Equipment acquired under capital leases is included in property, equipment
and leasehold improvements, and the related obligations are in long-term debt.
Related amortization is included in depreciation.
Total rental expense for office and warehouse space, including short-term
rentals and rentals under noncancelable operating leases (primarily office and
warehouse space and production equipment), was $2,579, $2,915 and 4,378 for the
years ended December 31, 1992, 1993 and 1994, respectively.
The future minimum rental commitments required under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------- ---------
<S> <C>
1995........................................................... $ 3,972
1996........................................................... 3,333
1997........................................................... 3,045
1998........................................................... 2,866
1999........................................................... 2,353
Thereafter..................................................... 11,549
---------
$ 27,118
---------
---------
</TABLE>
8. TRANSACTIONS WITH MAJOR CUSTOMERS
The Company provides creative, printing and mailing services to companies in
diversified industries. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral or
advance payments other than for postage.
Transactions with one customer, which is a Fortune 50 company involved in
the communication industry, accounted for sales of $23,277 (40 percent), $30,990
(49 percent), and $55,745 (56 percent) for the years ended December 31, 1992,
1993 and 1994, respectively. Accounts receivable from this customer amounted to
$6,938 and $11,921 as of December 31, 1993 and 1994, respectively.
15
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1993
Sales..................................................... $ 13,885 $ 16,175 $ 16,001 $ 17,739
Gross profit.............................................. 5,074 5,669 5,586 5,572
Net income (loss)......................................... 595 985 1,162 (483)
Net income (loss) per common and common equivalent
share.................................................... .05 .08 .10 (.07)
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1994
Sales..................................................... $ 17,519 $ 24,303 $ 28,830 $ 29,360
Gross profit.............................................. 5,886 8,092 9,595 9,190
Income (loss) before extraordinary item................... (29) 651 1,107 1,256
Net income (loss)......................................... (29) 651 (1,640) 846
Income (loss) per common and common equivalent share:
Income (loss) before extraordinary item................. (.01) .19 .20 .19
Net income (loss)....................................... (.01) .19 (.30) .13
Common stock prices:
High.................................................... $ 12.63 $ 13.75
Low..................................................... $ 10.00 $ 11.25
</TABLE>
In the past two years, no cash dividends have been paid by the Company. The
indenture governing the Notes and Revolver each contain certain covenants,
including, but not limited to, covenants that effectively preclude the payment
of dividends.
10. RELATED PARTY
The Company has entered into a Management Services Agreement with MDC for
certain management and financial services to be provided to the Company. The
agreement provides for an annual fee equal to $250 to be paid to MDC plus
reimbursement of their reasonable out-of-pocket costs. The agreement will
terminate on November 30, 2000.
11. SUBSEQUENT EVENT
In February 1995, the Company received a $75,000 financing commitment from a
group of banks. The financing will be taken down in two parts. The Company
closed on a $45,000 portion of the commitment February 3, 1995 and intends to
close on the remaining commitment by March 31, 1995. The financing package
includes three major components. A five-year $40,000 term loan was used to
refinance the existing revolving credit facility and to redeem the remaining
$25,000 Series B Senior Notes and associated costs. A credit line of $25,000
will be provided for acquisitions and the remaining $10,000 (the Company has
closed on $5,000) will be a revolving credit line (secured by working capital)
for operating purposes. The associated interest rate for the term loan and both
credit lines is either the LIBOR rate plus 2 1/2 percent or the prime rate plus
1 1/4 percent, selected at the Company's option. The redemption of $25,000
Series B Senior Notes resulted in a nonrecurring after-tax charge of
approximately $2,379, to be recognized in the first quarter of 1995. The
scheduled maturities of the term loan for the years 1995 through 1999 is $3,000,
$7,000, $8,000, $11,000, and $11,000, respectively. The scheduled maturity for
the revolving credit lines is December 31, 1999 subject to interim payments
based on excess cash flows, as defined in the financing agreement. The financing
agreement effectively precludes dividends and limits additional borrowing, as
well as requires the Company to satisfy certain financial performance ratios.
16
<PAGE>
DIMAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. SUBSEQUENT EVENT (UNAUDITED)
On March 31, 1995, the Company completed a $75,000 financing commitment from
a group of banks. A five-year $40,000 term loan was used to refinance the
existing revolving credit facility and to redeem the remaining $25,000 12
percent Series B Senior Notes. A credit line of $25,000 is provided for
acquisitions and the remaining $10,000 is a revolving credit line for operating
purposes. The debt extinguishment resulted in an extraordinary charge of $2,379
consisting of the premium paid on the $25,000 principal amount of the Series B
Senior Notes of $1,133 plus the write-off of the unamortized debt issuance costs
associated with the redeemed Series B Senior Notes and refinanced credit
facility of $2,333 less tax benefit of $1,087.
On May 1, 1995, the Company completed the acquisition of Palm Coast Data,
Ltd. (Palm Coast). Sales and net income for Palm Coast were $12,916 and $1,709,
respectively, for the year ended December 31, 1994. The purchase price for Palm
Coast was approximately $13,200 in cash plus acquisition costs, the assumption
of certain specified liabilities and certain contingent payment obligations
based on the attainment of certain financial performance targets over the next
three years.
On October 2, 1995, the Company completed the acquisition of T.R. McClure
and Company, Inc. and related companies (McClure). Sales and net income for
McClure were $27,142 and $550, respectively, for the year ended December 31,
1994. The purchase price for McClure was approximately $16,000 in cash, subject
to adjustment for certain working capital charges, plus acquisition costs, the
assumption of certain specified liabilities and certain contingent payment
obligations based on the attainment of certain financial and performance targets
over the next four years.
On October 23, 1995, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Heritage Media Corporation ("Heritage") and
Arch Acquisition Corp. a wholly owned subsidiary of Heritage. Under the terms of
the Merger Agreement, each share of the Company's common stock will be exchanged
for merger consideration of $28.00. The parties are seeking to finalize the
merger by January 31, 1996.
17
<PAGE>
DIMAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30,
-------------
1995
----
ASSETS
Current assets:
Cash and cash equivalents $ --
Accounts receivable, net 26,552
Inventories:
Raw materials 1,487
Work-in-process 5,326
Postage 1,924
Deferred taxes 166
Other current assets 1,397
--------
Total current assets 36,852
Property, equipment and leasehold improvements 29,759
Less accumulated depreciation (10,483)
--------
19,276
Intangible assets 29,231
Less accumulated amortization (3,999)
--------
25,232
--------
$81,360
--------
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash management liability $ 1,941
Accounts payable 11,165
Advances from customers 6,647
Accrued liabilities:
Compensation 2,421
Interest 21
Other 661
Income taxes payable 2,001
Current maturities of long-term debt 6,856
--------
Total current liabilities 31,713
Long-term debt 44,606
Deferred rent benefit 2,230
--------
Total liabilities 78,549
Stockholders' equity:
Series preferred stock, $.01 par value;
10,000,000 shares authorized; none issued --
Common stock, $.01 par value; 20,000,000
shares authorized; issued 12,122,823 in
1995 and 1994 121
Additional paid-in-capital 19,182
Retained earnings 16,379
--------
35,682
Treasury stock, at cost, common stock of
5,631,418 in 1995 and 1994 (32,871)
--------
2,811
--------
$81,360
--------
--------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
DIMAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1995 1994
---- ----
Sales $89,030 $ 70,652
------- --------
Cost of sales 57,667 47,079
------- --------
Gross profit 31,363 23,573
Operating expenses:
Sales expenses 9,147 7,815
General and administrative expenses 9,552 7,431
Other general expenses 786 444
------- --------
19,485 15,690
------- --------
Income from operations 11,878 7,883
Interest expense 3,574 4,993
------- --------
Income before provision for
income taxes and extraordinary item 8,304 2,890
Provision for income taxes 3,187 1,161
------- --------
Income before extraordinary item 5,117 1,729
Extraordinary item, net of tax benefit (2,379) (2,747)
------- --------
Net income(loss) $ 2,738 $(1,018)
------- --------
------- --------
Per share of common and common equivalent
stock:
Historical
Income before extraordinary item $.77 $.43
Extraordinary item, net of tax benefit (.36) (.68)
------- --------
Net income(loss) $.41 $(.25)
------- --------
------- --------
Pro forma (Note B)
Income before extraordinary item $.87 $.60
Extraordinary item, net of tax benefit (.36) --
------- --------
Net income $.51 $.60
------- --------
------- --------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
DIMAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1995 1994
---- ----
OPERATING ACTIVITIES
Net income(loss) $ 2,738 $ (1,018)
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Depreciation and amortization expense 3,342 2,468
Extraordinary item 2,379 2,747
Other 115 219
Changes in net assets and liabilities:
Accounts receivable 659 (8,525)
Inventories (1,902) (2,783)
Other assets (170) (2,096)
Accounts payable (2,658) 6,220
Advances from customers (330) 5,456
Accrued liabilities (2,142) 61
Income taxes 2,628 2,441
-------- -------
Net cash provided by operating activities 4,659 5,743
INVESTING ACTIVITIES
Net assets of acquired business (11,335) (11,592)
Purchase of property, equipment and leasehold
improvements (2,166) (3,452)
Other intangibles (605) (166)
Proceeds from sale of fixed assets 66 90
-------- -------
Net cash used in investing activities (14,040) (15,120)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- (28,514)
Payments of long-term debt (2,277) (25,129)
Net (repayments) borrowings under revolving
credit agreements (11,078) 9,000
Debt issuance fees (2,331) --
Proceeds from note payable to bank 51,200 291
Payments for extinguishment of debt (26,133) (2,573)
Payment due to recapitalization -- (2,614)
Purchase of common stock -- (49)
-------- -------
Net cash provided by financing activities 9,381 7,440
Net increase (decrease) in cash and cash
equivalents -- (1,937)
Cash and cash equivalents, beginning of period -- 1,937
-------- -------
Cash and cash equivalents, end of period $ -- $ --
-------- -------
-------- -------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
DIMAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended
September 30, 1995 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1995. For further information, refer
to the consolidated financial statements and footnotes thereto included in
DIMAC Corporation's annual report on Form 10-K for the year ended December
31, 1994.
The consolidated financial statements include the accounts of DIMAC
Corporation (the "Company") and its wholly owned subsidiary DIMAC DIRECT
Inc. (including its wholly owned subsidiary Palm Coast Data Inc.) whose
operations are located in St. Louis, San Francisco, Los Angeles, New York,
Boston and Palm Coast, Florida. All significant intercompany balances and
transactions have been eliminated.
Certain amounts for 1994 were reclassified to conform with the 1995
presentation. Such reclassifications had no effect on net income.
NOTE B. ACQUISITIONS, INITIAL PUBLIC OFFERING AND DEBT EXTINGUISHMENT
Effective May 31, 1994, DIMAC DIRECT Inc. acquired substantially all of the
assets of the Direct Marketing Group, Inc. ("DMG"). DMG operates a creative
and marketing agency in New York City and production facility in Farmingdale,
Long Island.
On August 10, 1994, the Company completed an initial public offering of its
common stock in which 3,407,035 shares of common stock including 277,405
shares by selling shareholders were sold at an initial price of $10.00 per
share.
On September 9, 1994, the Company used the net proceeds of the common stock
offering to redeem $25,000 in aggregate principal amount of 12 percent Series
B Senior Notes. The debt extinguishment resulted in an extraordinary charge
of $2,747 consisting of the premium paid on the $25,000 principal amount of
the Series B Senior Notes of $2,500 plus the write-off of the unamortized
debt issuance costs associated with the Senior Notes redeemed and the costs
incurred in redeeming the Senior Notes of $2,116 less tax benefits of $1,869.
On May 1, 1995, DIMAC DIRECT Inc. acquired substantially all of the assets of
Palm Coast Data, Ltd. ("PCD"). PCD was a limited partnership providing direct
marketing data services to the publishing industry. PCD had revenue of
approximately $13,000 for the year ended December 31, 1994. PCD had a
marketing office and production facility in Palm Coast, Florida and a
marketing office in New York City. The purchase price for the acquisition was
approximately $12,400 in cash plus acquisition costs, the assumption of
certain specified liabilities and certain future contingent payment
obligations. The contingent payment obligations, if any, will be accounted
for as additional goodwill as the payments are made.
21
<PAGE>
On October 2, 1995, the Company acquired the assets of certain affiliated
corporations operating under various business and tradenames including "The
McClure Group" ("McClure"). The McClure Group, consisting of seven subchapter
S corporations, was an independent full service, multimedia marketing agency
headquartered in Valley Forge, Pennsylvania with offices in northern Florida,
Chicago and Houston. The McClure Group had revenue of approximately $27,000
for the year ended December 31, 1994. The purchase price for the acquisition
was $16,000 in cash plus acquisition costs and is subject to adjustment for
certain working capital changes and certain contingent payment obligations.
The unaudited pro forma consolidated financial data presented below gives pro
forma effect to DMG acquisition, the initial public offering, debt
extinguishment in conjunction with the initial public offering, the PCD
acquisition and the McClure acquisition as if such transactions had occurred
as of January 1, 1994. The unaudited pro forma results have been prepared for
comparative purposes only and do not necessarily reflect the results of
operations of the Company that actually would have occurred had the DMG
acquisition, the initial public offering, debt extinguishment in conjunction
with the initial public offering, the PCD acquisition and the McClure
acquisition been consummated as of January 1, 1994, nor does it give effect
to any transactions other than the DMG acquisition, the initial public
offering, debt extinguishment in conjunction with the initial public
offering, the PCD acquisition and the McClure acquisition.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $40,765 $37,846 $116,239 $107,148
Income before extraordinary item 2,358 1,696 5,774 3,875
Net income 2,358 1,696 3,395 3,875
Per Share:
Income before extraordinary item $.35 $.26 $.87 $.60
Extraordinary item, net of tax benefit -- -- (.36) --
------- ------- -------- --------
Net income $.35 $.26 $.51 $.60
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
NOTE C. LONG-TERM DEBT AND DEBT EXTINGUISHMENT
On March 31, 1995, the Company completed a $75,000 financing commitment from
a group of banks. A five-year $40,000 term loan was used to refinance the
existing revolving credit facility and to redeem the remaining $25,000 12 per
cent Series B Senior Notes. A credit line of $25,000 is provided for
acquisitions and the remaining $10,000 is a revolving credit line for
operating purposes. The debt extinguishment resulted in an extraordinary
charge of $2,379 consisting of the premium paid on the $25,000 principal
amount of the Series B Senior Notes of $1,133 plus the write-off of the
unamortized debt issuance costs associated with the redeemed Series B Senior
Notes and refinanced credit facility of $2,333 less tax benefit of $1,087.
NOTE D. SUBSEQUENT EVENT
On October 23, 1995, the Company entered into an Agreement and Plan of Merger
with Heritage Media Corporation ("Parent") and Arch Acquisition Corp., a
wholly owned subsidiary of Parent. Under the terms of the Merger Agreement,
each share of the Company's common stock will be exchanged for merger
consideration of $28.00. The parties are seeking to finalized the merger by
January 31, 1996.
22
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information consists of an unaudited Pro Forma Condensed Combined Balance
Sheet as of September 30, 1995 and the related unaudited Pro Forma Condensed
Combined Statements of Operations for the year ended December 31, 1994 and
the nine months ended September 30, 1995 (collectively, the "Pro Forma
Statements"). The Pro Forma Statements reflect adjustments to the historical
consolidated financial statements of Heritage and DIMAC to give effect to
certain transactions which have either occurred or (in the case of the
pending disposition of television station KEVN BY Heritage) are probably to
occur. The Pro Forma Statements have been further adjusted to give effect to
the Merger, the issuance by Heritage of $150 million principal amount of
Subordinated Notes (the "Notes") and the new DIMAC credit agreement under two
possible scenarios--(a) assuming the Merger is consummated entirely for cash
and (b) assuming the Merger is consummated for a combination of cash and
shares of Heritage Class A Common Stock--both as discussed in more detail in
the notes to the Pro Forma Statements. The Pro Forma Condensed Combined
Balance Sheet has been prepared assuming the Merger, issuance of the Notes
and the new DIMAC credit agreement occurred at September 30, 1995, and the
Pro Forma Condensed Combined Statements of Operations have been prepared
assuming the Merger, issuance of the Notes and the new DIMAC credit agreement
occurred on January 1, 1994. The unaudited Pro Forma Condensed Combined
Statements of Operations do not include extraordinary losses of $3,157,000
and $2,379,000 recognized by DIMAC during the year ended December 31, 1994
and the nine months ended September 30, 1995, respectively, resulting from
the retirement of certain indebtedness, nor do they include an extraordinary
loss of approximately $2 million to be recognized upon the retirement of
DIMAC's existing credit facility.
The Merger will be accounted for as a purchase. The purchase price has
been allocated in the Pro Forma Statements to the assets to be acquired and
the liabilities to be assumed on a preliminary basis based on management's
estimates of their fair values. The allocation of the purchase price is
subject to change based on the completion of an independent appraisal.
The Pro Forma Statements do not purport to present what Heritage's
results of operations or financial position actually would have been had such
transactions or events occurred on the dates indicated, or to project
Heritage's results of operations or financial position for any future period
or at any future date. The pro forma adjustments are based upon available
information and certain adjustments that management believes are reasonable.
In the opinion of management, all adjustments have been made that are
necessary to present fairly the Pro Forma Statements.
23
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR
HERITAGE OTHER HERITAGE HERITAGE AS DIMAC OTHER DIMAC DIMAC AS
ASSETS HISTORICAL TRANSACTIONS(A) ADJUSTED HISTORICAL TRANSACTIONS(B) ADJUSTED
- --------------------------------- ----------- ----------------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........ $ 1,788 $ (23) $ 1,765 $ -- $ 66 $ 66
Short-term investments........... 4,750 4,750 -- --
Trade receivables, net........... 66,308 (472) 65,836 26,552 3,391 29,943
Inventory........................ 6,201 6,201 8,737 8,737
Prepaid expenses and other....... 6,372 (66) 6,306 1,397 72 1,469
Deferred income taxes............ 5,385 5,385 166 166
----------- ------- ----------- ----------- ------- -----------
Total current assets........... 90,804 (561) 90,243 36,852 3,529 40,381
Property and equipment, net...... 58,374 (1,987) 56,387 19,276 1,500 20,776
Goodwill and other intangibles,
net............................. 392,046 (5,202) 386,844 25,232 13,227 38,459
Other assets..................... 9,919 (75) 9,844 --
----------- ------- ----------- ----------- ------- -----------
$ 551,143 $ (7,825) $ 543,318 $ 81,360 $ 18,256 $ 99,616
----------- ------- ----------- ----------- ------- -----------
----------- ------- ----------- ----------- ------- -----------
LIABILITIES AND EQUITY
- ---------------------------------
Current portion of long-term
debt............................ $ 3,278 $ (35) $ 3,243 $ 6,856 $ 3 $ 6,859
Accounts payable and accrued
expenses........................ 56,011 (171) 55,840 14,268 1,561 15,829
Other current liabilities........ 28,523 (54) 28,469 10,589 690 11,279
----------- ------- ----------- ----------- ------- -----------
Total current liabilities...... 87,812 (260) 87,552 31,713 2,254 33,967
Long-term debt, less current
portion......................... 347,102 (14,048) 333,054 44,606 16,002 60,608
Other long-term liabilities...... 2,503 (29) 2,474 2,230 2,230
Deferred income taxes............ 5,001 5,001 -- --
Stockholders' equity............. 108,725 6,512 115,237 2,811 2,811
----------- ------- ----------- ----------- ------- -----------
$ 551,143 $ (7,825) $ 543,318 $ 81,360 $ 18,256 $ 99,616
----------- ------- ----------- ----------- ------- -----------
----------- ------- ----------- ----------- ------- -----------
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR PRO FORMA
MERGER AND DEBT PRO FORMA OPTIONAL STOCK COMBINED AS
ASSETS OFFERING COMBINED CONSIDERATION ADJUSTED
- --------------------------------- ---------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents........ $ 146,413(c) $ 1,831 $ $ 1,831
3,669(d)
(150,082)(f)
Short-term investments........... 4,750 4,750
Trade receivables, net........... 95,779 95,779
Inventory........................ 14,938 14,938
Prepaid expenses and other....... 7,775 7,775
Deferred income taxes............ 5,551 5,551
---------------- ----------- --------------- -------------
Total current assets........... -- 130,624 -- 130,624
Property and equipment, net...... 77,163 77,163
Goodwill and other intangibles,
net............................. 195,423(f) 631,226 631,226
10,500(h)
Other assets..................... 3,587(c) 15,062 15,062
1,631(g)
---------------- ----------- --------------- -------------
$ 211,141 $ 854,075 $ -- $ 854,075
---------------- ----------- --------------- -------------
---------------- ----------- --------------- -------------
LIABILITIES AND EQUITY
- ---------------------------------
Current portion of long-term
debt............................ $ (6,250)(e) $ 3,852 $ $ 3,852
Accounts payable and accrued
expenses........................ 4,500(f) 76,169 76,169
Other current liabilities........ 39,748 39,748
---------------- ----------- --------------- -------------
Total current liabilities...... (1,750) 119,769 -- 119,769
Long-term debt, less current
portion......................... 150,000(c) 596,199 (47,535)(i) 548,664
6,250(e)
44,656(f)
1,631(g)
Other long-term liabilities...... 4,704 4,704
Deferred income taxes............ 10,500(h) 15,501 15,501
Stockholders' equity............. 3,669(d) 117,902 47,535(i) 165,437
2,665(f)
(6,480)(f)
---------------- ----------- --------------- -------------
$ 211,141 $ 854,075 $ -- $ 854,075
---------------- ----------- --------------- -------------
---------------- ----------- --------------- -------------
</TABLE>
See accompanying notes to Pro Forma Statements.
24
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR
HERITAGE OTHER HERITAGE HERITAGE AS DIMAC OTHER DIMAC DIMAC AS
HISTORICAL TRANSACTIONS (A) ADJUSTED HISTORICAL TRANSACTIONS (B) ADJUSTED
----------- ----------------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues................... $ 317,628 $ 64,859 $ 382,487 $ 100,012 $ 46,995 $ 147,007
----------- ------- ----------- ----------- ------- -----------
Cost of services............... 150,970 53,323 204,293 65,430 28,670 94,100
Selling, general and
administrative................ 76,600 11,392 87,992 20,629 11,844 32,473
Depreciation................... 14,676 (87) 14,589 2,155 1,413 3,568
Amortization................... 12,622 1,277 13,899 744 938 1,682
Other.......................... 4,922 4,922 135 42 177
----------- ------- ----------- ----------- ------- -----------
Total operating
expenses.................. 259,790 65,905 325,695 89,093 42,907 132,000
----------- ------- ----------- ----------- ------- -----------
Operating income........... 57,838 (1,046) 56,792 10,919 4,088 15,007
----------- ------- ----------- ----------- ------- -----------
Interest expense, net.......... (30,373) (3,503) (33,876) (6,069) (577) (6,646)
Other expense, net............. (2,424) 1,439 (985) -- --
----------- ------- ----------- ----------- ------- -----------
Income before income
taxes..................... 25,041 (3,110) 21,931 4,850 3,511 8,361
Income taxes................... 2,742 2,742 1,865 1,370 3,235
----------- ------- ----------- ----------- ------- -----------
Income (loss) before
extraordinary item........ 22,299 (3,110) 19,189 $ 2,985 $ 2,141 $ 5,126
----------- ------- -----------
----------- ------- -----------
Dividends and accretion........ (19,651) 19,651 --
----------- ------- -----------
Income applicable to common
stock before extraordinary
item.......................... $ 2,648 $ 16,541 $ 19,189
----------- ------- -----------
----------- ------- -----------
Income per share before
extraordinary item............ $ 0.15 $ 1.10 $ 0.64 $ 0.79
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares
outstanding................... 17,381 94 17,475
----------- ------- -----------
----------- ------- -----------
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR PRO FORMA
MERGER AND DEBT PRO FORMA OPTIONAL STOCK COMBINED AS
OFFERING COMBINED CONSIDERATION ADJUSTED
----------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
Net revenues................... $ $ 529,494 $ $ 529,494
-------- ----------- ------- -------------
Cost of services............... 298,393 298,393
Selling, general and
administrative................ (346)(j) 120,119 120,119
Depreciation................... 18,157 18,157
Amortization................... 7,390(k) 22,971 22,971
Other.......................... 5,099 5,099
-------- ----------- ------- -------------
Total operating
expenses.................. 7,044 464,739 -- 464,739
-------- ----------- ------- -------------
Operating income........... (7,044) 64,755 -- 64,755
-------- ----------- ------- -------------
Interest expense, net.......... (15,775)(l) (56,297) 3,327(n) (52,970)
Other expense, net............. (985) (985)
-------- ----------- ------- -------------
Income before income
taxes..................... (22,819) 7,473 3,327 10,800
Income taxes................... (2,701)(m) 3,276 3,276
-------- ----------- ------- -------------
Income (loss) before
extraordinary item........ $ (20,118) 4,197 $ 3,327 $ 7,524
-------- -------
-------- -------
Dividends and accretion........ -- --
----------- -------------
Income applicable to common
stock before extraordinary
item.......................... $ 4,197 $ 7,524
----------- -------------
----------- -------------
Income per share before
extraordinary item............ $ .24 $ .39
----------- -------------
----------- -------------
Weighted average shares
outstanding................... 17,475 1,761(n) 19,236
----------- ------- -------------
----------- ------- -------------
</TABLE>
See accompanying notes to Pro Forma Statements.
25
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR
HERITAGE OTHER HERITAGE HERITAGE AS DIMAC OTHER DIMAC DIMAC AS
HISTORICAL TRANSACTIONS(A) ADJUSTED HISTORICAL TRANSACTIONS(B) ADJUSTED
----------- --------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 299,065 $ (1,574) $ 297,491 $ 89,030 $ 27,209 $ 116,239
----------- ------- ----------- ----------- ------- -----------
Cost of services................ 170,995 (316) 170,679 55,865 17,133 72,998
Selling, general and
administrative................. 59,391 (16) 59,375 18,202 6,845 25,047
Depreciation.................... 11,081 (214) 10,867 2,056 286 2,342
Amortization.................... 10,125 289 10,414 956 490 1,446
Other........................... -- -- 73 73
----------- ------- ----------- ----------- ------- -----------
Total operating expenses.... 251,592 (257) 251,335 77,152 24,754 101,906
----------- ------- ----------- ----------- ------- -----------
Operating income............ 47,473 (1,317) 46,156 11,878 2,455 14,333
----------- ------- ----------- ----------- ------- -----------
Interest expense, net........... (26,190) 262 (25,928) (3,574) (1,365) (4,939)
Other expense, net.............. (77) (77) --
----------- ------- ----------- ----------- ------- -----------
Income (loss) before income
taxes...................... 21,206 (1,055) 20,151 8,304 1,090 9,394
Income taxes.................... 5,602 5,602 3,187 433 3,620
----------- ------- ----------- ----------- ------- -----------
Income (loss) before
extraordinary item......... $ 15,604 $ (1,055) $ 14,549 $ 5,117 $ 657 $ 5,774
----------- ------- ----------- ----------- ------- -----------
----------- ------- ----------- ----------- ------- -----------
Income per share before
extraordinary item............. $ 0.88 $ 0.82 $ 0.77 $ 0.87
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares
outstanding.................... 17,666 17,666
----------- -----------
----------- -----------
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR PRO FORMA
MERGER AND DEBT PRO FORMA OPTIONAL STOCK COMBINED AS
OFFERING COMBINED CONSIDERATION ADJUSTED
---------------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
Net revenues.................... $ $ 413,730 $ $ 413,730
-------- ----------- ------ ------------
Cost of services................ 243,677 243,677
Selling, general and
administrative................. (460)(j) 83,962 83,962
Depreciation.................... 13,209 13,209
Amortization.................... 5,358(k) 17,218 17,218
Other........................... 73 73
-------- ----------- ------ ------------
Total operating expenses.... 4,898 358,139 -- 358,139
-------- ----------- ------ ------------
Operating income............ (4,898) 55,591 -- 55,591
-------- ----------- ------ ------------
Interest expense, net........... (13,583)(l) (44,450) 3,209(n) (41,241)
Other expense, net.............. (77) (77)
-------- ----------- ------ ------------
Income (loss) before income
taxes...................... (18,481) 11,064 3,209 14,273
Income taxes.................... (885)(m) 8,337 2,288(n) 10,625
-------- ----------- ------ ------------
Income (loss) before
extraordinary item......... $ (17,596) $ 2,727 $ 921 $ 3,648
-------- ----------- ------ ------------
-------- ----------- ------ ------------
Income per share before
extraordinary item............. $ 0.15 $ 0.19
----------- ------------
----------- ------------
Weighted average shares
outstanding.................... 17,666 1,761(n) 19,427
----------- ------ ------------
----------- ------ ------------
</TABLE>
See accompanying notes to Pro Forma Statements.
26
<PAGE>
NOTES TO PRO FORMA STATEMENTS
(a) Balance sheet adjustments for other Heritage transactions give effect to the
sale of television station KEVN in Rapid City, South Dakota for $14 million,
which sale is expected to be consummated in December 1995 and result in
approximately a $6.5 million gain (the "KEVN sale"), as if such sale had
occurred on September 30, 1995. Statement of Operations adjustments for
other Heritage transactions give effect to (i) the KEVN sale (exclusive of
the $6.5 million gain); (ii) the retirement of preferred stock in February
1994 in exchange for Class A and Class C common stock; (iii) the retirement
of settlement rights in July 1994 for $39 million; (iv) the purchase of
radio station KIHT in St. Louis, Missouri for $7.7 million in March 1994;
(v) the sale of television station KDLT in Sioux Falls, South Dakota for $4
million in October 1994; (vi) the purchase of Strategium Media, Inc. for
$17.8 million in October 1994; (vii) the purchase of Powerforce Services,
Inc. for $7.3 million (including additional payments of $1 million to be
made in early 1996) in January 1995; (viii) the purchase of radio station
KXYQ in Portland, Oregon for $7.3 million in June 1995; and (ix) the
purchase of radio station KKCJ in Kansas City, Missouri for $7.6 million in
July 1995, as if each of such transactions had occurred on January 1, 1994.
The sale proceeds or fundings relating to these transactions are assumed to
be applied to amounts outstanding under Heritage's credit agreement at
Heritage's weighted average interest rates of 7% and 9% for the year ended
December 31, 1994 and the nine months ended September 30, 1995,
respectively.
(b) Balance sheet adjustments for other DIMAC transactions give effect to the
purchase of T.R. McClure and Company, Inc. and related companies for $16
million (the "McClure purchase") in October 1995 as if such purchase
occurred on September 30, 1995. Statement of Operations adjustments give
effect to (i) the purchase of The Direct Marketing Group, Inc. for $9.2
million in May 1994; (ii) the initial public offering of DIMAC Common Stock
in August 1994 and the use of proceeds generated therefrom to retire $25
million of DIMAC's senior notes; (iii) the purchase of Palm Coast Data, Ltd.
for $13.2 million in May 1995; and (iv) the McClure purchase, as if each of
such transactions had occurred on January 1, 1994. Fundings for these
transactions are assumed to be applied to amounts outstanding under DIMAC's
credit agreement at DIMAC's weighted average interest rate of 8.6% for the
year ended December 31, 1994 and the nine months ended September 30, 1995,
respectively.
(c) Reflects the issuance of $150 million of Notes at an interest rate of 9.25%,
net of estimated financing costs.
(d) Reflects the exercise of options by DIMAC management to purchase 299,250
shares of DIMAC common stock at various exercise prices and the resultant
receipt of cash. Management believes that these optionholders will exercise
such options prior to consummation of the Merger.
(e) Reflects the reclassification of the current portion of DIMAC's credit
agreement to long-term as the new DIMAC credit agreement will not require
principal payments until 1997.
(f) Reflects the consummation of the Merger for total consideration of $194.7
million of cash, including estimated acquisition costs of $4.6 million, and
options to purchase Heritage Common Stock with a fair market value of $2.7
million, assuming a fair value of $27 per share for the Heritage Common
Stock. The purchase price has been allocated on a preliminary basis to
assets acquired and liabilities assumed based on their estimated fair
values. Book values of DIMAC's working capital accounts, property and
equipment and long-term debt are assumed to approximate their fair value.
The fair value of identifiable intangible assets, such as customer lists and
noncompete agreements, is estimated to be $30 million and will be amortized
over an estimated weighted average life of 8 years. The excess of purchase
price over identifiable net assets will be amortized over an estimated life
of 40 years.
(g) Reflects capitalization of financing costs relating to DIMAC's new credit
agreement.
(h) Reflects the recognition of deferred income taxes at an estimated effective
rate of 35% on the excess of book value over tax bases relating to the DIMAC
net assets to be acquired.
27
<PAGE>
(i) Adjusts pro forma amounts previously recorded to reflect the payment of $7
of the merger consideration in shares of Heritage Common Stock.
(j) Reflects the elimination of certain corporate expenses of DIMAC which will
not be incurred by the combined entities. Such expenses include directors
and officers insurance, management fees and certain public company expenses.
(k) Reflects incremental amortization of intangible assets acquired in the
Merger.
(l) Reflects incremental interest and amortization of deferred finance costs
relating to the $150 million of Notes at 9.25% and DIMAC's new credit
agreement, assuming weighted average interest rates of 7% and 9% on
borrowings under such credit agreement for the year ended December 31, 1994
and the nine months ended September 30, 1995, respectively.
(m) Reflects the incremental adjustment necessary to present income tax expense
of the combined entities, assuming the other transactions of Heritage and
DIMAC, the Merger and the issuance of the Notes occurred on January 1, 1994.
Deferred tax assets have been recognized to the extent that they offset
deferred tax liabilities that will reverse in the carryforward period. For
the year ended December 31, 1994, pro forma federal tax was offset by
previously unrecognized deferred tax assets of $5.2 million ($6.3 million
assuming the Merger Consideration is comprised of cash and stock). For the
nine months ended September 30, 1995, pro forma tax was partially offset by
previously unrecognized deferred tax assets of $2.2 million ($1.1 million
assuming the Merger Consideration is comprised of cash and stock).
(n) Reflects the reduction in interest and increase in estimated income tax
expense resulting from the payment of $7 of the merger consideration in
shares of Heritage Common Stock, assuming a value of the shares to be issued
in the Merger of $27 per share.
28
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
24.1 CONSENT OF INDEPENDENT
AUDITORS
29
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in Heritage Media Corporation's Form 8-K to be
filed with the Securities and Exchange Commission, relating to the
acquisition of DIMAC Corporation, of our report dated February 24, 1995, with
respect to the consolidated financial statements of DIMAC Corporation as of
December 31, 1994 and 1993 and for each of the three years in the period
ended December 31, 1994.
ERNST & YOUNG LLP
St. Louis, Missouri
December 8, 1995
