<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): January 17, 1996
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>
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 77 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; (iii) audited combined financial statements of
T.R. McClure and Company, Inc. and related companies at December 31, 1993 and
1994, and for each of the two years in the period ended December 31, 1994,
accompanied by the report of La Vecchia & Zarro thereon and the unaudited
financial statements of T.R. McClure and Company, Inc. and related companies at
September 30, 1995 and for the nine-month periods ended September 30, 1994
and 1995; (iv) the audited financial statements of Palm Coast Data, Ltd. at
December 31, 1993 and 1994, and for each of the two years in the period ended
December 31, 1994, accompanied by the report of Deloitte & Touche LLP and the
unaudited financial statements of Palm Coast Data, Ltd. for the four-month
periods ended April 30, 1994 and 1995; (v) the audited financial statements of
The Direct Marketing Group, Inc. at December 31, 1992 and 1993, and for each of
the two years in the period ended December 31, 1993, accompanied by the report
of Leslie Sufrin and Company, P.C.; and (vi) 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)
23.1 Consent of Ernst & Young LLP (previously filed).
23.2 Consent of Mortenson and Associates, P.C., formerly La Vecchia & Zarro
(previously filed).
23.3 Consent of Deloitte & Touche LLP (previously filed).
23.4 Consent of Leslie Sufrin and Company, P.C. (previously filed).
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: January 17, 1996 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)
--------- ----------
--------- ----------
</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)
Payments under revolving credit agreements...................................... (6,229) (3,200) (50,385)
Borrowings under revolving credit agreements.................................... 4,229 3,200 61,538
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 based on the attainment by the newly
formed DMG division of certain financial performance targets over the next three
years. 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 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 (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)
------- --------
------- --------
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) 614
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)
Payments under revolving credit agreements (62,810) (33,660)
Borrowings under revolving credit agreements 51,732 42,660
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 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
$12,140 plus acquisition costs of $250, the assumption of certain specified
liabilities of $2,170, and certain contingent payment obligations based on
the attainment by the newly formed Palm Coast Data subsidiary of certain
financial performance targets over the next three years. Goodwill, resulting
from the preliminary purchase price allocation of $6,398, is being amortized
on the straight-line method over 25 years. 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 $15,945 plus acquisition costs at $475, the assumption of certain
specified liabilities of $3,564, and certain contingent payment obligations
based on the attainment by the newly formed McClure Group subsidiary of
certain financial and operational performance targets over the next four
years. Goodwill resulting from the preliminary purchase price allocation, of
$13,493 is being amortized on a straight-line method over 25 years. The
contingent payment obligations, if any, will be accounted for as additional
goodwill as the payments are made.
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
------------------------------
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1995 1994
---- ----
<S> <C> <C>
Net sales $116,239 $107,148
Income before extraordinary item 5,774 3,875
Net income 3,395 3,875
Per Share:
Income before extraordinary item $.87 $.60
Extraordinary item, net of tax benefit (.36) --
-------- --------
Net income $.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 of 9.25% Senior
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.
Management does not believe that the final allocation of the purchase price
or the related useful lives assigned to acquired assets will be materially
different from the preliminary amounts presented in the Pro Forma Statements.
As a result of the Merger, the amounts of Heritage's goodwill and other
intangible assets and indebtedness will substantially increase from
historical levels. Heritage continually reevaluates the propriety of the
carrying amount of goodwill and other intangibles as well as the related
amortization period to determine whether current events and circumstances
warrant adjustments to the carrying values and/or revised estimates of useful
lives. This evaluation is based on Heritage's projection of the undiscounted
operating income before depreciation, amortization and interest over the
remaining lives of the amortization periods of related goodwill and
intangible assets. The projections are based on the historical trend line of
actual results since the commencement of operations and adjusted for expected
changes in operating results. To the extent such projections indicate that
the undiscounted operating income (as defined above) is not expected to be
adequate to recover the carrying amounts of related intangibles, such
carrying amounts are written down by charges to expense in amounts equal to
the excess of the carrying amount of intangible assets over related
undiscounted operating income. Based on undiscounted operating income (as
defined above) derived from current operating projections, management does
not believe that an impairment of goodwill and other intangibles will exist
on the effective date of the Merger.
Upon Heritage's adoption of FAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company's
policy for identifying impairment of goodwill and other intangible assets
will not change from the method currently in use. However, upon determining
that such impairment has occurred, the impairment will be measured based on
the estimated fair value of the asset. Management does not believe adoption
of FAS 121 will have a material effect on Heritage's consolidated financial
statements.
The Pro Forma Statements and accompanying notes should be read in
conjunction with the consolidated financial statements and related notes of
Heritage, DIMAC and the financial statements of other companies acquired by
DIMAC included herein or previously filed with the Securities Exchange
Commission. 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) 627,726 627,726
7,000(h)
Other assets..................... 3,587(c) 15,062 15,062
1,631(g)
---------------- ----------- --------------- -------------
$ 207,641 $ 850,575 $ -- $ 850,575
---------------- ----------- --------------- -------------
---------------- ----------- --------------- -------------
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............ 7,000(h) 12,001 12,001
Stockholders' equity............. 3,669(d) 117,902 47,535(i) 165,437
2,665(f)
(6,480)(f)
---------------- ----------- --------------- -------------
$ 207,641 $ 850,575 $ -- $ 850,575
---------------- ----------- --------------- -------------
---------------- ----------- --------------- -------------
</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................... 6,340(k) 21,921 21,921
Other.......................... 5,099 5,099
-------- ----------- ------- -------------
Total operating
expenses.................. 5,994 463,689 -- 463,689
-------- ----------- ------- -------------
Operating income........... (5,994) 65,805 -- 65,805
-------- ----------- ------- -------------
Interest expense, net.......... (18,051)(l) (58,573) 4,278(n) (54,295)
Other expense, net............. (985) (985)
-------- ----------- ------- -------------
Income before income
taxes..................... (24,045) 6,247 4,278 10,525
Income taxes................... (2,701)(m) 3,276 3,276
-------- ----------- ------- -------------
Income (loss) before
extraordinary item........ $ (21,344) 2,971 $ 4,278 $ 7,249
-------- -------
-------- -------
Dividends and accretion........ -- --
----------- -------------
Income applicable to common
stock before extraordinary
item.......................... $ 2,971 $ 7,249
----------- -------------
----------- -------------
Income per share before
extraordinary item............ $ .17 $ .38
----------- -------------
----------- -------------
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.................... 4,570(k) 16,430 16,430
Other........................... 73 73
-------- ----------- ------ ------------
Total operating expenses.... 4,110 357,351 -- 357,351
-------- ----------- ------ ------------
Operating income............ (4,110) 56,379 -- 56,379
-------- ----------- ------ ------------
Interest expense, net........... (13,583)(l) (44,450) 3,209(n) (41,241)
Other expense, net.............. (77) (77)
-------- ----------- ------ ------------
Income (loss) before income
taxes...................... (17,693) 11,852 3,209 15,061
Income taxes.................... (4,099)(m) 5,123 2,662(n) 7,785
-------- ----------- ------ ------------
Income (loss) before
extraordinary item......... $ (13,594) $ 6,729 $ 547 $ 7,276
-------- ----------- ------ ------------
-------- ----------- ------ ------------
Income per share before
extraordinary item............. $ 0.38 $ 0.37
----------- ------------
----------- ------------
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
(the KEVN sale), which sale is expected to be consummated in January 1996
and result in a $6.5 million gain, and the related elimination of historical
assets and liabilities of KEVN, as if such sale had occurred on September
30, 1995.
Statements of Operations adjustments for Other Heritage Transactions for the
year ended December 31, 1994 and the nine months ended September 30, 1995
are presented below in columnar form. The sale proceeds or fundings relating
to the transactions discussed in (1)-(6) below are assumed to be applied to
amounts outstanding under Heritage's credit agreement at Heritage's
historical weighted average interest rates of 7% and 9% for the year ended
December 31, 1994 and the nine months ended September 30, 1995,
respectively, assuming all such transactions were consummated as of January
1, 1994. The pro forma adjustments relating to the acquisition transactions
reflect the historical operating results of the respective businesses prior
to their acquisition by Heritage and include adjustments to amortization to
reflect amounts allocated to intangible assets as a result of the
acquisitions over periods of 40 and 15 years for in-store marketing and
radio station acquisitions, respectively.
YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS
--------------------------------------------------------- FOR OTHER
STRATEGIUM OTHER PRO FORMA HERITAGE
POWERFORCE MEDIA ACQUISITIONS (1) DISPOSITIONS (2) ADJUSTMENTS TRANSACTIONS
----------- ----------- --------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues........................ $ 58,901 $ 8,092 $ 3,015 $ (5,149) $ -- $ 64,859
----------- ----------- ------- ------- ------------- ------------
Cost of services.................... 51,658 2,005 1,280 (1,620) 53,323
Selling, general and
administrative..................... 6,225 5,775 1,036 (1,644) 11,392
Depreciation........................ 329 215 191 (822) (87)
Amortization........................ 155 534 (224) 812(3) 1,277
Other............................... --
----------- ----------- ------- ------- ------------- ------------
Total operating expenses........ 58,367 7,995 3,041 (4,310) 812 65,905
----------- ----------- ------- ------- ------------- ------------
Operating income (loss)......... 534 97 (26) (839) (812) (1,046)
Interest expense, net............... (155) (143) (3,205)(4) (3,503)
Other expense, net.................. 1,439(5) 1,439
----------- ----------- ------- ------- ------------- ------------
Income (loss) before
extraordinary items............ 379 97 (169) (839) (2,578) (3,110)
Dividends and accretion............. 19,651(6) 19,651
----------- ----------- ------- ------- ------------- ------------
Net income applicable to common
stock.............................. $ 379 $ 97 $ (169) $ (839) $ 17,073 $ 16,541
----------- ----------- ------- ------- ------------- ------------
----------- ----------- ------- ------- ------------- ------------
Weighted average shares
outstanding........................ 94(6) 94
------------- ------------
------------- ------------
</TABLE>
27
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS
------------------------------ FOR OTHER
OTHER PRO FORMA HERITAGE
ACQUISITIONS (1) DISPOSITION (2) ADJUSTMENTS TRANSACTIONS
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues.......................................... $ 869 $ (2,443) $ -- $ (1,574)
------- ------------- ------ ------------
Cost of services...................................... 309 (625) (316)
Selling, general and administrative................... 583 (599) (16)
Depreciation.......................................... 117 (331) (214)
Amortization.......................................... 166 (123) 246(6) 289
Other................................................. --
------- ------------- ------ ------------
Total operating expenses............................ 1,175 (1,678) 246 (257)
------- ------------- ------ ------------
Operating income.................................... (306) (765) (246) (1,317)
Interest expense, net................................. (293) 555(4) 262
Other expense, net.................................... --
------- ------------- ------ ------------
Income (loss) before extraordinary items.......... $ (599) $ (765) $ 309 $ (1,055)
------- ------------- ------ ------------
------- ------------- ------ ------------
</TABLE>
(1)Represents historical operating results of radio stations KIHT
(acquired March 1994), KKCJ (acquired April 1995) and KXYQ (acquired
June 1995) for the periods prior to their acquisition by Heritage.
(2)Represents historical operating results of KDLT (sold in October
1994) and KEVN (expected to be sold in January 1996) for the periods
prior to their sale or anticipated sale by Heritage.
(3)Represents net additional amortization expense resulting from
Heritage's acquisitions and dispositions as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER
1994 30, 1995
------------- ---------------
<S> <C> <C>
Eliminate historical amortization expense of acquirees.......... $ (689) $ (43)
Add amortization expense relating to new intangible balances for
periods prior to acquisition
Powerforce ($5.7 million over 40 years)........................ 143 --
Strategium Media ($18.4 million over 40 years)................. 384 --
Radio station acquisitions ($19.9 million over 15 years)....... 974 289
------ -----
Pro forma adjustment........................................ $ 812 $ 246
------ -----
------ -----
</TABLE>
28
<PAGE>
(4)Represents net additional interest expense resulting from Heritage's
acquisitions and dispositions as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER
1994 30, 1995
------------ ---------------
<S> <C> <C>
Eliminate historical interest expense of acquirees.............. $ 298 $ 293
Add interest expense relating to new amounts of debt outstanding
for periods prior to acquisition
Powerforce ($7.3 million of additional debt)................... (511) --
Strategium Media ($17.8 million of additional debt)............ (1,410) --
Radio station acquisitions ($22.7 million and $14.9 million
of additional debt in 1994 and 1995, respectively)............ (1,179) (683)
Add interest expense for additional debt used to retire the
settlement rights ($39 million)................................ (1,593) --
Deduct interest expense for net proceeds from dispositions...... 1,190 945
------------ ------
Pro forma adjustment........................................ $ (3,205) $ 555
------------ ------
------------ ------
</TABLE>
(5)Represents the elimination of the historical loss on the sale of KDLT
in October 1994 of $1.4 million.
(6)Represents the elimination of historical dividends on Heritage's
preferred stock which was converted to common stock in January 1994
and accretion on Heritage's settlement rights which were retired in
July 1994. Assuming the conversion of preferred stock occurred on
January 1, 1994 also results in an increase of 94,000 shares in the
weighted average shares outstanding for the year ended December 31,
1994.
(b) The unaudited pro forma condensed combined balance sheet as of September 30,
1995 and the unaudited pro forma consolidated statements of income for the
year ended December 31, 1995 and the nine months ended September 30, 1995
give pro forma effect for other DIMAC transactions which include the
acquisitions of The Direct Marketing Group, Inc. (May 31, 1994), Palm Coast
Data, Ltd. (May 1, 1995), and T.R. McClure and Company, Inc. and Related
Companies (October 2, 1995), as well as the initial public offering of
DIMAC's common stock (August 3, 1994), as follows:
29
<PAGE>
SEPTEMBER 30, 1995
(in thousands)
<TABLE>
<CAPTION>
MCCLURE PRO FORMA
HISTORICAL ADJUSTMENTS FOR
AS OF PRO FORMA OTHER DIMAC
9/30/95 ADJUSTMENTS TRANSACTIONS
----------- ------------- ---------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................................... $ 270 $ (204)(1) $ 66
Trade receivables, net.............................................. 3,391 -- 3,391
Prepaid expenses and other.......................................... 72 -- 72
----------- ------------- ---------------
Total current assets............................................ 3,733 (204) 3,529
Property and equipment, net......................................... 922 578 (2) 1,500
Goodwill and other intangibles, net................................. -- 13,227 (2) 13,227
Other assets........................................................ 182 (182)(1) --
----------- ------------- ---------------
$ 4,837 $ 13,419 $ 18,256
----------- ------------- ---------------
----------- ------------- ---------------
LIABILITIES AND EQUITY
Current portion of long-term debt................................... $ 1,446 $ (1,443)(3) $ 3
Accounts payable and accrued expenses............................... 1,601 (40)(3) 1,561
Other current liabilities........................................... 756 (66)(3) 690
----------- ------------- ---------------
Total current liabilities....................................... 3,803 (1,549) 2,254
Long-term debt, less current portion................................ 463 15,539 (4) 16,002
Stockholders' equity................................................ 571 (571)(5) --
----------- ------------- ---------------
$ 4,837 $ 13,419 $ 18,256
----------- ------------- ---------------
----------- ------------- ---------------
</TABLE>
(1) Reflects assets not acquired by DIMAC.
(2) Reflects the preliminary allocation of the purchase price paid to McClure
stockholders over the net historical cost of assets acquired. The
preliminary allocation of the purchase price does not include amounts
payable under certain contingent payment obligations. Such payments are
based on the attainment by the newly formed McClure Group subsidiary of
certain financial and operations performance targets over the next four
years. The contingent payment obligations, if any, will be accounted for as
additional goodwill as the payments are made.
(3) Reflects elimination of debt not assumed by DIMAC.
(4) Reflects the recording of net additional debt incurred by DIMAC to acquire
McClure.
(5) Reflects the elimination of all McClure equity balances as a result of the
acquisition.
30
<PAGE>
YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR OTHER
DMG PALM COAST MCCLURE PRO FORMA DIMAC
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTIONS
----------- ----------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues................................... $ 6,937 $ 12,916 $ 27,142 $ -- $ 46,995
Cost of services............................... 4,455 7,372 16,843 -- 28,670
Selling, general and administrative............ 2,022 3,040 9,482 (2,700)(6) 11,844
Depreciation................................... 171 875 225 142(7) 1,413
Amortization................................... 32 33 -- 873(8) 938
Other.......................................... -- 42 -- -- 42
----------- ----------- --------- -------------- ------------
Total operating expenses................... 6,680 11,362 26,550 (1,685) 42,907
----------- ----------- --------- -------------- ------------
Operating income............................... 257 1,554 592 1,685 4,088
Interest expense, net.......................... (267) (314) (22) 26(9) (577)
----------- ----------- --------- -------------- ------------
Income (loss) before income taxes.............. (10) 1,240 570 1,711 3,511
Income taxes................................... 3 -- 20 1,347 (10 1,370
----------- ----------- --------- -------------- ------------
Income (loss) before extraordinary
item.......................................... $ (13) $ 1,240 $ 550 $ 364 $ 2,141
----------- ----------- --------- -------------- ------------
----------- ----------- --------- -------------- ------------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1995
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR OTHER
PALM COAST MCCLURE PRO FORMA DIMAC
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTIONS
----------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 5,198 $ 22,011 $ -- $ 27,209
Cost of services........................................... 2,874 14,259 -- 17,133
Selling, general and administrative........................ 1,023 7,289 (1,467)(6) 6,845
Depreciation............................................... 26 218 42 (7) 286
Amortization............................................... 127 -- 363 (8) 490
----------- --------- ------- ------------
Total operating expenses............................... 4,050 21,766 (1,062) 24,754
----------- --------- ------- ------------
Operating income........................................... 1,148 245 1,062 2,455
Interest expense, net...................................... (89) (44) (1,232)(9) (1,365)
Other expense, net......................................... (349) -- 349 (11) --
----------- --------- ------- ------------
Income (loss) before income taxes.......................... 710 201 179 1,090
Income taxes............................................... -- 48 385 (10) 433
----------- --------- ------- ------------
Income (loss) before extraordinary item.................... $ 710 $ 153 $ (206) $ 657
----------- --------- ------- ------------
----------- --------- ------- ------------
</TABLE>
(6) The selling, general and administrative expense adjustment is as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEM-
1994 BER 30, 1995
------------ ------------
<S> <C> <C>
Elimination of costs associated with management positions eliminated in connection with
the sale of DMG to DIMAC and certian professional fees incurred by DMG and McClure in
anticipation of each sale................................................................ $ (400) $ (100)
Elimination of discretionary bonuses related to subchapter S status....................... (2,300) (1,367)
------------ ------------
$ (2,700) $ (1,467)
------------ ------------
------------ ------------
</TABLE>
31
<PAGE>
(7) The depreciation adjustment (based on preliminary purchase price allocation)
is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------- -------------
<S> <C> <C>
Increase in depreciation.................................................. $ 142 $ 42
------------- -------------
------------- -------------
</TABLE>
(8) The amortization expense adjustment (based on preliminary purchase price
allocation) is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------- -------------
<S> <C> <C>
Increase in amortization of goodwill (based on a preliminary weighted
average life of 25 years)................................................ $ 848 $ 490
Increase in amortization of non-compete agreements (based on a life of 4
years)................................................................... 49 --
Increase in amortization of customer list (based on preliminary life of 10
years)................................................................... 41 --
Elimination of historical amortization on assets not acquired............. (65) (127)
------------- -------------
$ 873 $ 363
------------- -------------
------------- -------------
</TABLE>
(9) The interest expense adjustment is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------- -------------
<S> <C> <C>
Elimination of historical interest expense on debt not assumed............ $ (481) $ (125)
Increase in interest expense on debt incurred by DIMAC for the various
acquisitions (based on the average effective interest rate of the
acquisition debt)........................................................ 2,694 1,357
Amortization of debt issuance costs relating to debt incurred by DIMAC for
the various acquisitions................................................. 111 --
Elimination of interest expense on redemption of $25,000 principal of debt
retired from proceeds of the initial public offering..................... (2,066) --
Elimination of pro rata portion of interest expense on debt incurred by
DIMAC for the DMG acquisition repaid from proceeds of the initial public
offering................................................................. (140) --
Elimination of amortization of debt issuance costs and original issue
discount on debt retired from proceeds of the initial public offering.... (144) --
------------- -------------
$ (26) $ 1,232
------------- -------------
------------- -------------
</TABLE>
(10) Reflects the tax effects of the various transactions based on DIMAC's
estimated marginal tax rate of 39.0%.
(11) Elimination of historical expense as a result of the Palm Coast write-offs
prior to acquisition.
(c) Reflects the issuance of $150 million of Notes at an interest rate of 9.25%
and receipt of related proceeds, net of estimated financing costs of
$3,587,000.
(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.
32
<PAGE>
(f) Reflects consummation of the Merger for total consideration as follows (in
thousands):
<TABLE>
<CAPTION>
ASSUMES CASH
ASSUMES CASH AND STOCK
MERGER MERGER
CONSIDERATION CONSIDERATION
------------- -------------
<S> <C> <C>
Consideration paid to DIMAC shareholders
Cash (6,790,655 shares outstanding x $28).............................. $ 190,138 --
Cash (6,790,655 shares outstanding x $21).............................. -- 142,603
Heritage stock (6,790,655 shares x $7)................................. -- 47,535
Consideration paid to remaining DIMAC optionholder....................... 2,665 2,665
Acquisition fees paid to advisors........................................ 4,600 4,600
------------- -------------
Total consideration paid............................................. $ 197,403 197,403
------------- -------------
------------- -------------
</TABLE>
For purposes of the Pro Forma Statements, the Heritage Trading Price is
assumed to be $27 per share, resulting in the issuance of 1,761,000 shares
of Heritage Common Stock. Consideration paid to the remaining DIMAC
optionholder results from the exchange of "in-the-money" options to purchase
155,000 shares of DIMAC Common Stock for options to purchase the same number
of shares of Heritage Common Stock with equivalent exercise prices,
resulting in the issuance of Heritage "in-the-money" options with a market
value of $2,665,000 assuming a Heritage Trading Price of $27 per share. See
(d) for pro forma treatment of remaining DIMAC options.
The purchase price has been allocated as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchase price $ 197,403
Historical book values of DIMAC assets and liabilities
Cash ($66 plus $3,669 (see (d) above)).................... 3,735
Trade receivables, net.................................... 29,943
Inventory................................................. 8,737
Prepaid expenses and other................................ 1,469
Deferred income taxes..................................... 166
Property and equipment, net............................... 20,776
Goodwill and other intangibles............................ 38,459
Accounts payable and accrued expenses..................... (15,829)
Other current liabilities................................. (11,279)
Debt...................................................... (67,467)
Other long-term liabilities............................... (2,230) 6,480
--------- ---------
Total remaining to be allocated......................... 190,923
Accrued liabilities resulting from the Merger............... 4,500
Adjustment to goodwill and other intangibles................ $ 195,423
---------
---------
Source of Merger consideration
Cash...................................................... $ 150,082
Additional borrowings under new credit facility........... 44,656
Equity, relating to Heritage options (see (d) above)...... 2,665
---------
Total................................................... $ 197,403
---------
---------
Elimination of pro forma DIMAC equity (historical
equity of $2,811 plus $3,669 (see (d) above)).............. $ 6,480
---------
---------
</TABLE>
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 trained work
force, is estimated to be $20 million and will be amortized over an
estimated weighted average life of 8 years. Amounts allocated to customer
lists and trained work force represents management's estimates of the fair
values of such assets considering previous services provided and anticipated
future
33
<PAGE>
services to be provided to such customers and estimated costs of hiring and
training employees of DIMAC. 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 of $1,631,000 relating to DIMAC's
new credit agreement. Such costs are assumed to be paid with borrowings
under the 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.
(i) Adjusts pro forma amounts previously recorded to reflect the payment of $7
of the Merger Consideration in shares of Heritage Common Stock. See (f) for
calculation of the pro forma adjustment.
(j) Reflects the elimination of certain corporate expenses of DIMAC which will
not be incurred by the combined entities. Such expenses represent
duplicative costs or management fees which will not be paid by DIMAC
subsequent to the Merger and are comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, 1994 SEPTEMBER 30, 1995
------------------- -------------------
<S> <C> <C>
Directors and officers insurance....................... $ 96 $ 173
Public company expenses................................ -- 100
Management fees........................................ 250 187
----- -----
Pro forma adjustment................................. $ 346 $ 460
----- -----
----- -----
</TABLE>
(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 a weighted average interest rate of 9% on borrowings
under such credit agreement for the year ended December 31, 1994 and the
nine months ended September 30, 1995 as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1994 SEPTEMBER 30, 1995
----------------- ------------------
<S> <C> <C>
Interest on $150 million Notes......................... $ 13,875 $ 10,406
Interest on borrowings of $112 million under the new
DIMAC credit agreement................................ 10,238 7,678
Amortization of debt issuance costs.................... 584 438
Less: DIMAC interest as adjusted....................... (6,646) (4,939)
-------- --------
Pro forma adjustment................................. $ 18,051 $ 13,583
-------- --------
-------- --------
</TABLE>
(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 Heritage Trading Price of $27
per share for the Heritage Common Stock. Such adjustment is calculated by
multiplying the amount of Merger Consideration to be paid in Heritage Common
Stock of $47,535,000 times the assumed weighted average interest rate under
the new DIMAC credit agreement of 9% for the respective periods.
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
T. R. McClure and Company, Inc. and Related Companies
We have audited the accompanying combined balance sheets of T. R. McClure
and Company, Inc. and related companies as of December 31, 1993 and 1994, and
the related combined statements of operations and retained earnings, and cash
flows for the years then ended. 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of T. R.
McClure and Company, Inc. and related companies at December 31, 1993 and 1994,
and the combined results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
Mortenson and Associates, P.C.,
formerly La Vecchia & Zarro
Nutley, New Jersey
February 1, 1995
35
<PAGE>
T. R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 12 $ 615
Accounts receivable -- trade, net of allowance for doubtful accounts of $13 in
1993, $15 in 1994, and $15 in 1995........................................... 2,625 2,933
Other current assets.......................................................... 22 65
--------- ---------
Total current assets........................................................ 2,659 3,613
Property, equipment and leasehold improvements:
Machinery and equipment....................................................... 540 815
Furniture and fixtures........................................................ 292 361
Lease hold improvements....................................................... 338 345
Data processing software...................................................... 122 161
--------- ---------
1,290 1,682
Less accumulated depreciation................................................... (540) (764)
--------- ---------
750 918
Due from Stockholders and Affiliates............................................ 43 279
Other Assets.................................................................... 43 24
--------- ---------
$ 3,495 $ 4,834
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash management liability..................................................... $ 230 $ --
Accounts payable.............................................................. 833 381
Advances from customers....................................................... 522 2,285
Accrued liabilities:
Compensation................................................................ 191 232
Other....................................................................... 499 533
Income taxes payable.......................................................... 7 8
Line of credit................................................................ -- --
Current maturities of long-term debt and capital lease obligations............ 133 147
--------- ---------
Total current liabilities................................................... 2,415 3,586
Long-term debt and capital lease obligations.................................... 407 396
--------- ---------
Total liabilities........................................................... 2,822 3,982
Stockholders' equity:
Common stock.................................................................. 1 2
Additional paid-in capital.................................................... 39 39
Retained earnings............................................................. 633 810
Unrealized gain............................................................... -- 1
--------- ---------
Total stockholders' equity.................................................. 673 852
--------- ---------
$ 3,495 $ 4,834
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
36
<PAGE>
T. R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Net sales........................................................... $ 17,871 $ 27,142
Cost of sales....................................................... 10,782 17,068
--------- ---------
Gross profit........................................................ 7,089 10,074
Selling, general and administrative expenses........................ 5,209 6,931
Discretionary bonuses............................................... 1,351 2,551
--------- ---------
Income from operations.............................................. 529 592
Interest expense, net............................................... 39 22
--------- ---------
Income before provision for state income taxes...................... 490 570
Provision for state income taxes.................................... 13 20
--------- ---------
Net income.......................................................... 477 550
Retained earnings, beginning of period.............................. 253 633
Less:
Dividends......................................................... 67 373
Retirement of treasury shares..................................... 30 --
--------- ---------
Retained earnings, end of period.................................... $ 633 $ 810
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
37
<PAGE>
T. R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 477 $ 550
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense............................... 188 225
Other............................................................... -- 2
Changes in net assets and liabilities:
Accounts receivable............................................... (1,233) (308)
Other assets...................................................... 5 (82)
Accounts payable.................................................. 762 (642)
Advances from customers........................................... 191 1,763
Accrued liabilities............................................... 357 75
--------- ---------
270 1,033
--------- ---------
Net cash provided by (used in) operating activities............. 747 1,583
INVESTING ACTIVITIES
Purchase of property, plant and equipment............................. (237) (345)
Net loans to Stockholders and Affiliates.............................. (273) (235)
Other................................................................. (33) 6
--------- ---------
Net cash used in investing activities........................... (543) (574)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.............................. 435 100
Principal payments on long-term debt and capital lease obligations.... (123) (134)
Dividends paid........................................................ (66) (372)
--------- ---------
Net cash used in financing activities................................. 246 (406)
--------- ---------
Net (decrease) increase in cash and cash equivalents.................. 450 603
Cash and cash equivalents, beginning of period........................ (438) 12
--------- ---------
Cash and cash equivalents, end of period.............................. $ 12 $ 615
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
38
<PAGE>
T. R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANIAL STATEMENTS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1993 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements include the accounts of T. R. McClure &
Company, Inc., Creative Commercial Productions, Inc., American Print, Inc.,
American Media Direct, Inc., Print America Direct, Inc. and New Era Marketing,
Inc. collectively referred to as the Companies. Print America Direct, Inc. and
American Data Marketing and Services, Inc. began operations in 1995 and 1994,
respectively. The Companies are related through common ownership and management.
All significant intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
All highly liquid debt investments purchased with a maturity of three months
or less are classified as cash equivalents.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost.
Property and equipment are depreciated using an accelerated method over the
respective asset's estimated useful life (which ranges from 5 to 7 years).
Leasehold improvements are amortized using an accelerated method over the lesser
of the respective asset's estimated useful life or the lease term.
REVENUE RECOGNITION
The Companies perform work in accordance with individual client projects.
Revenue generally is recognized after all work on a project has been completed
and the Companies can reasonably determine the amount of income to be
recognized.
2. COMMON STOCK
Details of the Companies' common stock are as follows:
<TABLE>
<CAPTION>
SHARES
SHARES ISSUED AND
PAR VALUE AUTHORIZED OUTSTANDING
--------- ----------- -----------
<S> <C> <C> <C>
T. R. McClure & Company, Inc. ............... No par 1,000 105.47
Creative Commercial Productions, Inc. ....... No par 1,000 105.47
American Print, Inc. ........................ No par 1,000 1,000
American Media Direct, Inc. ................. $1 1,000 100
American Data Marketing and Services, Inc. .. No par 1,000 1,000
Print America Direct, Inc. .................. No par 1,000 100
New Era Marketing, Inc. ..................... No par 1,000 100
</TABLE>
3. ADVANCES FROM CUSTOMERS
The Companies engage in the business of directly mailing a client's
printed advertisements through the hiring of a subcontractor to perform the
mailing. As a result, the Companies require "mailing" clients to provide
postage monies in advance, creating a current liability during the
transition between the receipt of postage monies and the eventual purchase
of postage at the time of mailing.
39
<PAGE>
T. R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. ADVANCES FROM CUSTOMERS (CONTINUED)
In addition, the Companies pre-bill certain clients for prospective special
order work to be performed in the near future.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital leases consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
$400 term note payable in monthly installments of $7 plus interest at
1.75% above the prime rate (8.5% and 9.0% at December 31, 1994 and June
30, 1995, respectively); matures January 1, 1998....................... $ 327 $ 247
$100 term note payable in monthly installments of $2 including interest
at 9.25%; matures November 10, 1999.................................... -- 100
$200 term note payable in monthly installments of $3 plus interest at
1.25% above the prime rate (9.0% at June 30, 1995); matures April 3,
2000................................................................... -- --
Note payable to former Stockholder for the purchase of their stock
holdings in the Companies payable in annual installments of $32 plus
interest at the lesser of 2% below the prime rate or 10% (4.23% and
6.5% at December 31, 1994 and June 30, 1995, respectively); matures
July 1, 1998; collateralized by the related stock holdings of the
Companies.............................................................. 128 96
Other loans for equipment............................................... 16 2
Capital lease obligations............................................... 33 63
Other................................................................... 36 35
--------- ---------
540 543
Less current portion.................................................... (133) (147)
--------- ---------
$ 407 $ 396
--------- ---------
--------- ---------
</TABLE>
The Companies have entered into a revolving credit agreement (the
Agreement) with Prime Savings Bank for the purpose of financing working
capital needs. The Agreement is subject to a limit of $1,460 or 80% of
the aggregate eligible accounts receivable less the sum of all the line of
credit advances outstanding and unpaid, and bears interest at the bank's
prime rate plus 0.75%. Amounts extended under the Agreement, which
includes the term loans above, are collateralized by the accounts
receivable, contracts, intangibles, equipment, and inventories of the
Companies and is guaranteed, jointly and severally, by T. R. McClure and
Company, Inc., Creative Commercial Productions, Inc. American Print, Inc.
American Media Direct, Inc. American Promotional Packaging, Inc. Print
America Direct, Inc., American Data Marketing and Services Inc., New Era
Marketing Inc. and by all the Stockholders. There also is an assignment of
a $500 life insurance policy on the life of Thomas R. McClure. There
were no outstanding line of credit balances due as of December 31, 1993 and
1994.
40
<PAGE>
T. R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
The Agreement places certain restrictions on the Companies' ratio of
liabilities to tangible net worth and requires average compensating deposit
balances, measured quarterly, equal to at least 10% of the average principal
balance.
Maturities of long-term debt and capital leases as of December 31, 1994 are
as follows:
<TABLE>
<CAPTION>
1994
---------
<S> <C>
1995............................................................ $ 147
1996............................................................ 179
1997............................................................ 144
1998............................................................ 33
Thereafter...................................................... 40
---------
$ 543
---------
---------
</TABLE>
5. EMPLOYEE BENEFITS
The Companies sponsor a defined contribution plan which provides retirement
benefits to substantially all employees. Participants may elect to defer a
percentage up to 10% of their compensation each year, subject to federal
limitations. The Companies may elect to make a discretionary contribution to
match a portion of employee contributions to the plan, as well as an additional
discretionary contribution. The Companies' contributions to this plan charged to
expense were $170 and $200 for the years ended December 31, 1993 and 1994,
respectively.
The Companies made payments to certain employees under a discretionary bonus
program. The amount charged to expense under that program was $1,351 and $2,551
for the years ended December 31, 1993 and 1994, respectively.
6. LEASE COMMITMENTS
The Companies conduct their operations from 12 corporate condominium units,
10 of which are located in Valley Forge, Pennsylvania, one in Jacksonville,
Florida and another in Chicago, Illinois. Triple net annual operating leases
exist on each of these units, which are renewable each year with no escalation.
Therefore, the Companies are responsible for all maintenance, insurance, and
real estate taxes on these units.
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, including short-term rentals and rentals under
noncancelable operating leases, was $272 and $334 for the years ended December
31, 1993 and 1994, respectively.
There are no rental commitments under noncancelable operating leases with
initial or remaining terms in excess of one year as of December 31, 1994.
7. INCOME TAXES
The Companies have elected by unanimous consent of their stockholders, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code. Under
those provisions, the Companies do not pay federal corporate income taxes on
their respective income; instead the Stockholders are liable for individual
federal income taxes on their respective shares of the Companies' taxable
income.
41
<PAGE>
T. R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. INCOME TAXES (CONTINUED)
Retained earnings includes undistributed S Corporation income of $553 and
$731 at December 31, 1993 and 1994, respectively.
8. CONCENTRATION OF CREDIT RISK
Financial statement items which potentially subject the Companies to
concentrations of credit risk are cash on deposit at a financial institution and
trade accounts receivable.
CASH ON DEPOSIT
The Companies maintain substantial cash balances in one bank which is
insured by the Federal Deposit Insurance Corporation up to a maximum of $100 for
each company. At December 31, 1994, uninsured accounts on deposit amounted to
$3,629. The significant difference between this amount and the amount shown in
the combined balance sheet is due to the issuance of checks by the Companies
which were outstanding at December 31, 1994.
ACCOUNTS RECEIVABLE
The Companies routinely assess the financial strength of their customers and
establish an allowance for uncollectible accounts based upon factors surrounding
the credit risk by the customers. Consequently, the Companies' management
believes that the accounts receivable credit risk exposure beyond such allowance
is limited.
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
Significant noncash transactions and supplemental cash flow activity is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Noncash transactions:
Capital lease issued for equipment................................... $ 39 $ 38
Retirement of outstanding treasury stock............................. 112 --
Cash paid during the period for:
Interest............................................................. 44 43
Income Taxes......................................................... 10 19
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Companies lease their facilities in Valley Forge, Pennsylvania from
certain Stockholders of the Companies. Lease payments for such facilities
totaled $227 and $261 in the years ended December 31, 1993 and 1994,
respectively.
The Companies provide certain administrative functions and working capital
funding for certain affiliated entities, which are not included in the combined
financial statements. The Companies are reimbursed for their actual expenses
incurred and payments made on the behalf of those entities. Amounts due from
Affiliates totaled $2 and $69 at December 31, 1993 and 1994, respectively.
11. SUBSEQUENT EVENTS (UNAUDITED)
On October 2, 1995 the Companies sold its operations and substantially all
of its assets to DIMAC Corporation.
42
<PAGE>
T. R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
T. R. McClure & Company, Inc. purchased the assets of SuperStuffers (a
general partnership) on July 10, 1995. The purchase price was $20. Related to
this transaction, the Company borrowed a $50 term loan from Prime Bank. The loan
has a term of five years with monthly principal payments of $0.8 plus interest
at 1.25% above the prime rate.
43
<PAGE>
T.R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
UNAUDITED COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER
1995
---------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 270
Accounts receivable -- trade, net of allowance for
doubtful accounts of $17 3,390
Other current assets 75
------
Total current assets 3,735
Property, equipment and leasehold improvements:
Machinery and Equipment 922
Furniture and Fixtures 385
Leasehold improvements 345
Data processing software 208
------
1,860
Less accumulated depreciation (938)
------
922
Due from Stockholders and Affiliates 45
Other Assets 135
------
$4,837
------
------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 638
Advances from customers 756
Accrued liabilities:
Compensation 100
Other 837
Income taxes payable 27
Line of credit 1,250
Current maturities of long-term debt and capital lease obligations 195
------
Total current liabilities 3,803
Long-term debt and capital lease obligations 463
------
Total liabilities 4,266
Stockholders' equity:
Common stock 3
Additional paid-in capital 40
Retained earnings 527
Unrealized holding gain on marketable securities 1
------
Total stockholders' equity 571
------
$4,837
------
------
</TABLE>
See accompanying notes.
44
<PAGE>
T.R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
UNAUDITED COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1994 1995
------- -------
<S> <C> <C>
Net sales $20,141 $22,011
Cost of sales 13,014 14,477
------- -------
Gross profit 7,127 7,534
Selling, general and administrative expenses 4,839 5,852
Discretionary bonuses 1,685 1,437
------- -------
Income from operations 603 245
Other Income and (Expenses):
Interest expense, net (26) (44)
Other Income and (Expenses), net -- --
------- -------
Total Other Income and (Expenses) (26) (44)
Income before provision for state income taxes 577 201
Provisions for state income taxes 15 48
------- -------
Net income 562 153
Retained earnings, beginning of period 633 810
Less: Dividends 66 436
------- -------
Retained earnings, end of period $ 1,129 $ 527
------- -------
------- -------
</TABLE>
See accompanying notes.
45
<PAGE>
T.R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
UNAUDITED COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1994 1995
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 562 $ 153
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization expense 149 213
Other (13) 6
Changes in net assets and liabilities:
Accounts Receivable (1,095) (456)
Other Assets (75) 3
Accounts Payable 1,392 310
Advances from customers 694 (1,595)
Accrued liabilities (128) 204
------- -------
(891) (1,315)
------- -------
Net cash provided by (used in) operating activities 1,486 (1,162)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (380) (256)
Net loans to Stockholders and Affiliates (20) 234
Other 0 (88)
------- -------
Net cash used in investing activities (400) (110)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 0 1,500
Principal payments on long-term debt and capital
lease obligations (139) (137)
Dividends paid (66) (436)
------- -------
Net cash used in financing activities (156) 927
------- -------
Net increase (decrease) in cash and cash equivalents 930 (345)
Cash and cash equivalents, beginning of period 12 615
------- -------
Cash and cash equivalents, end of period $ 942 $ 270
------- -------
------- -------
</TABLE>
See accompanying notes.
46
<PAGE>
T.R. MCCLURE AND COMPANY, INC. AND RELATED COMPANIES
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1995
NOTE A. BASIS OF PRESENTATION
The combined financial statements include the accounts of T.R. McClure &
Company, Inc., Creative Commercial Productions, Inc., American Print, Inc.,
American Media Direct, Inc., American Data Marketing and Services, Inc.,
Print America Direct, Inc., Superstuffers, Inc. and New Era Marketing, Inc.
collectively referred to as the Companies. The Companies are related through
common ownership and management. All significant intercompany balances and
transactions have been eliminated.
The unaudited financial statements reflect all adjustments of a normal
recurring nature necessary, in the opinion of management, for the fair
presentation of the financial position, the results of operations and the
cash flows for the interim periods presented.
NOTE B. SUBSEQUENT EVENTS
On July 26, 1995, the Companies signed a letter of intent to sell its
operations and substantially all of its assets of DIMAC Corporation. The
sales price, subject to certain working capital changes is $16,000.
47
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Palm Coast Data, Ltd.
Palm Coast, Florida
We have audited the accompanying balance sheets of Palm Coast Data, Ltd.
(the Company) as of December 31, 1993 and 1994, and the related statements of
income and retained earnings and of cash flows for the years then ended. 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, such financial statements present fairly, in all material
respects, the financial position of Palm Coast Data, Ltd. as of December 31,
1993 and 1994 and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Jacksonville, Florida
March 23, 1995
48
<PAGE>
PALM COAST DATA, LTD.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31
--------------------
1993 1994
--------- ---------
Current assets:
<S> <C> <C>
Cash and cash equivalents................................................ $ 7 $ 231
Accounts receivable -- trade, net of allowance for doubtful accounts of
$36 in 1994............................................................. 2,245 3,280
Other accounts receivable................................................ 11 27
Prepaid expenses......................................................... 30 105
--------- ---------
Total current assets....................................................... 2,293 3,643
Property, plant and equipment, net......................................... 2,164 2,950
Equipment under capital leases, net........................................ 1,538 1,201
Other assets:
Deferred charges, net of accumulated amortization of $53 and $90 in 1993
and 1994................................................................ 111 95
Other.................................................................... 51 246
--------- ---------
$ 6,157 $ 8,135
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 37 $ 12
Advances from customers.................................................. 75 1,044
Accrued liabilities:
Compensation........................................................... 104 124
Other.................................................................. 181 289
Current portion of long-term debt........................................ 543 600
Current portion of obligations under capital leases...................... 410 352
--------- ---------
Total current liabilities.................................................. 1,350 2,421
Long-term debt, net of current portion..................................... 2,297 2,513
Obligations under capital leases, net of current portion................... 1,141 892
--------- ---------
Total liabilities.......................................................... 4,788 5,826
Commitments (Notes 3 and 6)
Partners' equity:
Partners' capital account................................................ 600 600
Retained earnings........................................................ 769 1,709
--------- ---------
Total partners' equity..................................................... 1,369 2,309
--------- ---------
$ 6,157 $ 8,135
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
49
<PAGE>
PALM COAST DATA, LTD.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Revenue................................................................. $ 9,933 $ 12,916
Operating expenses...................................................... 6,369 8,280
General and administrative expenses..................................... 2,545 3,040
--------- ---------
Income from operations.................................................. 1,019 1,596
Other income (expense):
Interest income....................................................... 9 14
Interest expense...................................................... (254) (328)
Other expense......................................................... -- (42)
--------- ---------
(245) (356)
--------- ---------
Net income.............................................................. 774 1,240
Retained earnings, beginning of period.................................. 295 769
Distributions to partners............................................... (300) (300)
--------- ---------
Retained earnings, end of period........................................ $ 769 $ 1,709
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
50
<PAGE>
PALM COAST DATA, LTD.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................. $ 774 $ 1,240
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense................................. 548 908
Changes in net assets and liabilities:
Accounts receivable................................................. (295) (1,051)
Prepaid expenses.................................................... 31 (75)
Deferred charges.................................................... 33 (21)
Other assets........................................................ (27) (215)
Accounts payable.................................................... (227) (25)
Accrued compensation................................................ 29 20
Advances from customers............................................. 76 969
Accrued liabilities................................................. 41 108
--------- ---------
209 618
--------- ---------
Net cash provided by operating activities............................... 983 1,858
INVESTING ACTIVITIES
Purchase of property, plant and equipment............................... (504) (959)
--------- ---------
Net cash used in investing activities................................... (504) (959)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt................................ 270 737
Principal payments on long-term debt.................................... (334) (750)
Principal payments on capital lease obligations......................... (249) (412)
Distributions to partners............................................... (300) (300)
Net borrowings under line of credit..................................... -- 50
--------- ---------
Net cash used in financing activities................................... (613) (675)
--------- ---------
Net (decrease) increase in cash and cash equivalents.................... (134) 224
Cash and cash equivalents, beginning of period.......................... 141 7
--------- ---------
Cash and cash equivalents, end of period................................ $ 7 $ 231
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
51
<PAGE>
PALM COAST DATA, LTD.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1993 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of Palm Coast Data, Ltd. (the
Company), a limited partnership organized in the State of Florida and operating
in Palm Coast, Florida. The Company is engaged in the business of providing a
full range of subscription fulfillment and support services to various media
publications.
CASH AND CASH EQUIVALENTS
All highly liquid debt investments purchased with a maturity of three months
or less are classified as cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated
depreciation. Depreciation has been provided on a straight-line basis based on
the estimated useful lives of the related assets which range from 3 to 28 years.
LEASED PROPERTY
The Company leases various equipment and software under capital leases with
lease terms from 2 to 5 years. The underlying assets acquired are amortized over
either the lease term or the estimated useful lives in a manner consistent with
the depreciation of the property, plant and equipment. In addition, the Company
leases equipment and software under operating leases with lease terms up to 4
years.
DEFERRED CHARGES
Deferred charges represent organization costs and debt financing charges and
are amortized on a straight-line basis. Organization charges are amortized over
60 months and debt financing charges are amortized over the life of the loan.
REVENUE RECOGNITION
Revenues generally are recognized when services are rendered to customers.
COMPUTER SOFTWARE
The cost of computer software developed internally is charged to expense as
incurred.
INCOME TAXES
Palm Coast Data, Ltd. is not a taxable entity and the results of operations
are included in the tax returns of the partners. Accordingly, no income tax
provision is reflected in the accompanying financial statements.
52
<PAGE>
PALM COAST DATA, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Land..................................................................... $ 281 $ 281
Buildings................................................................ 1,148 1,148
Machinery and equipment.................................................. 177 647
Computer equipment....................................................... 503 620
Computer software........................................................ 496 505
Furniture and fixtures................................................... 82 99
Building in progress..................................................... -- 563
Automobiles and trucks................................................... -- 19
--------- ---------
2,687 3,882
Accumulated depreciation and amortization................................ (523) (932)
--------- ---------
$ 2,164 $ 2,950
--------- ---------
--------- ---------
</TABLE>
3. LEASES
Property under capital leases at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Machinery and equipment.................................................. $ 122 $ 173
Computer equipment....................................................... 1,775 1,830
--------- ---------
1,897 2,003
Accumulated amortization................................................. (359) (802)
--------- ---------
$ 1,538 $ 1,201
--------- ---------
--------- ---------
</TABLE>
The following is a schedule by years of future minimum lease payments under
capital and noncancelable operating leases together with the present value of
the net minimum lease payments as of December 31, 1994:
<TABLE>
<CAPTION>
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
1995.................................................................... $ 448 $ 327
1996.................................................................... 399 181
1997.................................................................... 369 87
1998.................................................................... 215 28
1999.................................................................... 12 --
--------- -----
Net minimum lease payments.............................................. 1,443 623
Amount representing interest............................................ (199) --
--------- -----
Present value of net minimum lease payments............................. $ 1,244 $ 623
--------- -----
--------- -----
</TABLE>
Rent expense was $267 and $569 for the years ended December 31, 1993 and
1994, respectively.
53
<PAGE>
PALM COAST DATA, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
$1,704 term note payable in monthly installments of $40 including interest at 6.41%
(final lump sum payment due February 1, 1998); collateralized in part by a mortgage
on the property, plant and equipment of the Company and personal guarantees of the
partners of the Company............................................................ $ 332 $ 1,383
Flagler County Industrial Revenue Bonds, payable in graduated monthly installments
plus interest at prime (7.67% at December 31, 1994); matures April 2005;
collateralized by the property, plant and equipment of the Company................. 867 823
$1,000 construction loan payable in monthly installments of $6, beginning March 1995
(final lump sum payment due February 1, 2001), plus interest monthly (9% at
December 31, 1994); interest only payments due until March 1995; collateralized by
mortgage on property and personal guarantees of the partners of the Company........ -- 534
$236 term note payable in monthly installments of $4 plus interest at 7.03%, matures
March 1999; collateralized by equipment............................................ -- 173
$204 term note payable in monthly installments of $3 plus interest at 6.85%, matures
March 1999; collateralized by equipment............................................ -- 200
$2,100 term note payable in monthly installments of $22 plus interest at prime plus
1/2% (8% at December 31, 1993); collateralized by the property, plant and equipment
of the Company; repaid during 1994................................................. 1,391 --
Borrowings under line of credit, interest payable monthly at prime (6.25% at
December 31, 1993); borrowings available at December 31, 1994 of $300.............. 250 --
--------- ---------
2,840 3,113
Less current portion................................................................ (543) (600)
--------- ---------
$ 2,297 $ 2,513
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
1994
---------
<S> <C>
1995.......................................................................................... $ 600
1996.......................................................................................... 642
1997.......................................................................................... 676
1998.......................................................................................... 297
Thereafter.................................................................................... 898
---------
$ 3,113
---------
---------
</TABLE>
5. THRIFT AND PROFIT SHARING PLAN
The Company sponsors a Thrift and Profit Sharing Plan (the Plan) under
Section 401(k) of the Internal Revenue Code. The Plan allows employees to defer
up to 8% of their income on a pre-tax basis through voluntary contributions to
the Plan. In accordance with the provisions of the Plan, the
Company can contribute 25% of the employees' basic contribution. The Company
contributed to the Plan approximately $23 and $28 for the year ended December
31, 1993 and 1994, respectively.
54
<PAGE>
PALM COAST DATA, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. COMMITMENTS
Various equipment purchase agreements are entered into in the normal course
of business. At December 31, 1994 the Company had commitments to purchase
equipment for approximately $125, for which deposits had been paid of $21.
7. SUPPLEMENTAL CASH FLOW DISCLOSURES
Noncash transactions and supplemental cash flow activity is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Noncash transactions:
Note payable issued to refinance debt.................... $ -- $ 1,704
Note payable issued for equipment........................ 322 236
Capital lease issued for equipment....................... 1,377 106
Cash paid during the period for:
Interest................................................. 270 320
</TABLE>
8. SUBSEQUENT EVENT (UNAUDITED)
On May 1, 1995 the Company sold its operations and substantially all of its
assets to DIMAC Corporation.
55
<PAGE>
PALM COAST DATA, LTD.
UNAUDITED STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
APRIL 30
------------------
1994 1995
------ ------
(UNAUDITED)
<S> <C> <C>
Revenue $3,912 $5,198
Operating expenses 2,657 3,027
General and administrative expenses 909 1,023
------ ------
Income from operations 346 1,148
Other income (expense):
Interest income 1 5
Interest expense (102) (94)
Other expense -- (349)
------ ------
(101) (438)
------ ------
Net income 245 710
Retained earnings, beginning of
period 769 1,709
Distributions to partners (50) (300)
------ ------
Retained earnings, end of period $ 964 $2,119
------ ------
------ ------
</TABLE>
56
<PAGE>
PALM COAST DATA, LTD.
UNAUDITED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
APRIL 30
-----------------
1994 1995
------ ------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 245 $ 710
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 326 153
Changes in net assets and liabilities:
Accounts receivable (414) 288
Prepaid expenses (42) 54
Other assets (48) 438
Accounts payable 439 171
Accrued liabilities 605 31
------ ------
867 1,135
------ ------
Net cash provided by operating activities 1,112 1,845
INVESTING ACTIVITIES
Purchase of property, plant and equipment (431) (560)
------ ------
Net cash used in investing activities (431) (560)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 439 385
Principal payments on long-term debt (362) (184)
Principal payments on capital lease obligations (135) (117)
Distributions to partners (50) (300)
------ ------
Net cash used in financing activities (108) (216)
------ ------
Net (decrease) increase in cash and cash equivalents 573 1,067
Cash and cash equivalents, beginning of period 7 231
------ ------
Cash and cash equivalents, end of period $ 580 $1,298
------ ------
------ ------
</TABLE>
57
<PAGE>
PALM COAST DATA, LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(dollars in thousands)
Four Months ended April 30, 1994 and 1995 (Unaudited)
NOTE A. BASIS OF PRESENTATION
The financial statements include the accounts of Palm Coast Data, Ltd.
(the Company), a limited partnership organized in the State of Florida and
operating in Palm Coast, Florida. The Company is engaged in the business of
providing a full range of subscription fulfillment and support services to
various media publications.
The unaudited financial statements reflect all adjustments of a normal
recurring nature necessary, in the opinion of management, for the fair
presentation of the results of operations and the cash flows for the interim
periods presented.
NOTE B. SUBSEQUENT EVENT
On May 1, 1995 the Company sold its operations and substantially all of
its assets to DIMAC Corporation.
58
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
The Direct Marketing Group, Inc.
We have audited the accompanying balance sheets of The Direct Marketing
Group, Inc. at December 31, 1992 and 1993, and the related statement of
operations, cash flows and stockholders' (deficiency) for the years then ended.
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 financial statements referred to above present fairly,
in all material respects, the financial position of the Direct Marketing Group,
Inc. at December 31, 1992 and 1993, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Notes 1, 5 and 14 to the financial statements, on May 31,
1994, the Company sold its business and substantially all of its assets in a
transaction approved by both the Company's shareholders and IBJ Schroder Bank
and Trust Company (the "Bank"), its principal secured creditor and a significant
Company shareholder. Prior to the May 31, 1994 sale, the Company was in default
of certain covenants of its indebtedness to the Bank.
As discussed in the notes to the financial statements, the Company has
entered into significant transactions with stockholders and other related
parties on a basis agreed to among the parties.
Leslie Sufrin and Company, P.C.
New York, New York
May 31, 1994, except for Note 14(e)
which date is June 29, 1994
59
<PAGE>
THE DIRECT MARKETING GROUP, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
--------------------
1992 1993
--------- ---------
Current assets:
<S> <C> <C>
Cash and cash equivalents.............................................. $ 2,225 $ 767
Trade receivables, less allowance for doubtful accounts of $108 in 1992
and $75 in 1993....................................................... 2,830 2,932
Inventory -- work-in-process........................................... 793 375
Prepaid postage........................................................ 91 40
Other current assets................................................... 156 160
--------- ---------
Total current assets................................................. 6,125 4,274
Property, equipment and leasehold improvements:
Machinery and equipment................................................ 5,182 5,567
Furniture and fixtures................................................. 1,147 1,153
Leasehold improvements................................................. 453 453
Data processing software............................................... 158 234
--------- ---------
6,940 7,407
Less accumulated depreciation............................................ (5,745) (6,230)
--------- ---------
1,195 1,177
Affiliates receivables................................................. 510 504
Other non-current assets............................................... 261 249
Intangible assets:
Goodwill 50 50
Debt issuance costs.................................................... 366 366
--------- ---------
416 416
Less accumulated amortization.......................................... (36) (114)
--------- ---------
380 302
--------- ---------
$ 8,471 $ 6,506
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
60
<PAGE>
THE DIRECT MARKETING GROUP, INC.
BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS DEFICIENCY
<S> <C> <C>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
Current liabilities:
Accounts payable..................................................... $ 1,524 $ 1,462
Advances from customers.............................................. 2,488 1,319
Bank overdraft....................................................... 566 210
Accrued liabilities:
Compensation......................................................... 199 294
Interest............................................................. 59 53
Other................................................................ 1,644 778
Industrial Development Revenue Bonds................................... 273 --
ESOT debt-current...................................................... 525 3,300
Bank loans-current..................................................... -- 9,535
Due to stockholder..................................................... 120 60
Capital lease obligations.............................................. 96 186
--------- ---------
Total current liabilities............................................ 7,494 17,197
ESOT debt.............................................................. 3,475 --
Bank loans............................................................. 8,235 --
Capital lease obligations.............................................. 158 326
Deferred rent benefit.................................................. 300 140
Due to stockholder..................................................... 70 --
--------- ---------
Total liabilities.................................................... 19,732 17,663
Commitments and contingencies (Note 13)
Stockholders' deficiency:
Common stock: Authorized and issued 600,000 shares, $0.01 par
value............................................................... 6 6
Additional paid-in capital........................................... 1,094 1,094
Accumulated (deficit)................................................ (5,949) (6,540)
--------- ---------
(4,849) (5,440)
Treasury stock, at cost, 36,493.83 shares in 1992 and 36,728.58
shares in 1993...................................................... (2,412) (2,417)
ESOT loan contra account............................................. (4,000) (3,300)
--------- ---------
Total stockholders' deficiency..................................... (11,261) (11,157)
--------- ---------
$ 8,471 $ 6,506
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
61
<PAGE>
THE DIRECT MARKETING GROUP, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Sales...................................................................................... $ 17,760 $ 16,020
Cost of sales.............................................................................. 11,619 10,482
Gross profit............................................................................... 6,141 5,538
Operating expenses:
Sales expenses........................................................................... 2,271 2,276
General and administrative............................................................... 2,424 2,412
Other general expenses................................................................... 21 78
--------- ---------
4,716 4,766
--------- ---------
Income from operations..................................................................... 1,425 772
Other expense.............................................................................. 2,400 --
Interest expense........................................................................... 894 683
--------- ---------
Income (loss) before ESOT principal payments and benefit (provision) for income taxes...... (1,869) 89
ESOT principal payments.................................................................... 2,000 700
Income (loss) before income taxes.......................................................... (3,869) (611)
Benefit (provision) for income taxes....................................................... (15) 20
--------- ---------
Net income (loss).......................................................................... $ (3,884) $ (591)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
62
<PAGE>
THE DIRECT MARKETING GROUP, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1992 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------- ADDITIONAL ESOT DEBT
COMMON TREASURY PAID-IN ACCUMULATED TREASURY CONTRA
STOCK STOCK COMMON STOCK CAPITAL (DEFICIT) STOCK ACCOUNT
--------- ----------- ------------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1991........... 530,543 69,457.00 $ 5 $ 1,394 $ (2,065) $ (216) $ (8,325)
Repurchase of treasury shares.......... -- 8,639.78 -- -- -- (170) --
Issuance of shares, including
reissuance of 3,993 shares from
treasury.............................. 69,457 (73,450.00) 1 (300) -- 299 --
Net loss -- 1992....................... -- -- -- -- (3,884) -- --
Reduction in ESOT debt, contra
account............................... -- -- -- -- -- -- 2,000
Assumption of ESOT debt by the Company
and related acquisition of treasury
share................................. -- 31,847.05 -- -- -- (2,325) 2,325
--
--------- ----------- ----------- ------------ --------- ---------
Balance -- December 31, 1992........... 600,000 36,493.83 6 1,094 (5,949) (2,412) (4,000)
Repurchase of treasury shares.......... -- 234.75 -- -- -- (5) --
Net loss -- 1993....................... -- -- -- -- (591) -- --
Reduction in ESOT debt, contra
account............................... -- -- -- -- -- -- 700
--
--------- ----------- ----------- ------------ --------- ---------
Balance -- December 31, 1993........... 600,000 36,728.58 $ 6 $ 1,094 $ (6,540) $ (2,417) $ (3,300)
--
--
--------- ----------- ----------- ------------ --------- ---------
--------- ----------- ----------- ------------ --------- ---------
<CAPTION>
TOTAL
---------
<S> <C>
Balance -- December 31, 1991........... $ (9,207)
Repurchase of treasury shares.......... (170)
Issuance of shares, including
reissuance of 3,993 shares from
treasury.............................. --
Net loss -- 1992....................... (3,884)
Reduction in ESOT debt, contra
account............................... 2,000
Assumption of ESOT debt by the Company
and related acquisition of treasury
share................................. --
---------
Balance -- December 31, 1992........... (11,261)
Repurchase of treasury shares.......... (5)
Net loss -- 1993....................... (591)
Reduction in ESOT debt, contra
account............................... 700
---------
Balance -- December 31, 1993........... $ (11,157)
---------
---------
</TABLE>
See accompanying notes.
63
<PAGE>
THE DIRECT MARKETING GROUP, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................................................... $ (3,884) $ (591)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Reduction in ESOT debt contra account................................................... 2,000 700
Reserve for affiliates receivables...................................................... 1,915 --
Depreciation expense.................................................................... 555 485
Amortization expense.................................................................... 21 78
Write-off of ESOT restructuring costs................................................... 289 --
Bad debt expense........................................................................ 48 (33)
Deferred rent expense................................................................... 350 (135)
Changes in net assets and liabilities:
Accounts receivables.................................................................... (415) (69)
Inventories and postage................................................................. (739) 469
Other assets............................................................................ 115 8
Accounts payable........................................................................ 113 (62)
Advances from customers................................................................. 1,835 (1,169)
Bank overdraft.......................................................................... 519 (356)
Accrued liabilities..................................................................... (58) (774)
Deferred rent........................................................................... -- (28)
--------- ---------
Net cash provided by (used in) operating activities................................... 2,664 (1,477)
--------- ---------
INVESTING ACTIVITIES
Repayment of affiliates receivables....................................................... 2,200 --
Advances to affiliates.................................................................... (706) 6
Capital expenditures...................................................................... (50) (112)
--------- ---------
Net cash provided by (used in) investing activities................................... 1,444 (106)
--------- ---------
FINANCING ACTIVITIES
Repayment of Industrial Development Revenue Bond.......................................... -- (273)
Increase (decrease) in due to stockholder................................................. 5 (130)
Proceeds from bank loans.................................................................. 660 1,300
Repayment of ESOT debt.................................................................... (2,000) (700)
Payment of bank refinancing costs......................................................... (367) --
Payment on capital lease obligations...................................................... (83) (97)
Repurchase of Treasury shares............................................................. (170) (5)
--------- ---------
Net cash provided by (used in) financing activities................................... (1,955) 95
--------- ---------
Net increase (decrease) in cash and cash equivalents........................................ 2,153 (1,488)
Cash and cash equivalents -- beginning of period............................................ 102 2,255
--------- ---------
Cash and cash equivalents -- end of period.................................................. $ 2,255 $ 767
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
64
<PAGE>
THE DIRECT MARKETING GROUP, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1992 1993
Supplemental schedule of cash flows: --------- ---------
<S> <C> <C> <C> <C>
Cash paid during the for:
Interest............................................................. $890 $689
Income taxes......................................................... $ 2 $ 3
</TABLE>
Supplemental schedule of non-cash financing activities:
In 1992, the Company assumed $2,325 of the ESOT debt on behalf of the ESOP,
and acquired 31,847.05 shares of treasury stock.
In 1992, accrued interest payable of $535 on the ESOT debt was converted to
a bank loan.
In 1992, advances to affiliates of $220 was repaid when a security deposit
for the Farmingdale facility, advanced by the principal stockholder on behalf of
the Company, was applied against unpaid rent.
Capital lease obligations of $355 were incurred in 1993, when the Company
entered into leases for machinery and equipment.
65
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1992 AND 1993
1. BASIS OF PRESENTATION
The Direct Marketing Group, Inc. (the "Company") provides creative, printing
and mailing services.
On April 22, 1994, the Company and DIMAC Direct Inc. ("DDI") signed a letter
of intent whereby DDI agreed to purchase substantially all of the assets of the
Company for $9,220 (subject to a working capital adjustment as defined) and to
assume certain of its liabilities. On May 12, 1994, the Company and DDI signed a
definitive purchase agreement; such purchase transaction closed on May 31, 1994
(See Note 14).
As mentioned in the accompanying notes, the Company has entered into
significant transactions with stockholders and other related parties on a basis
agreed to among the parties.
Certain reclassifications have been made to the accompanying financial
statements to conform to the DDI financial statement presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
All revenues, direct costs and related profits for specific customers are
recognized when the projects completed.
Direct costs associated with work-in-progress are deferred and reflected as
inventory until the projects are completed. Progress billings to customers for
jobs-in-process are classified as advances from customers and are deferred until
the projects are completed.
CASH AND CASH EQUIVALENTS
The Company considers all bank money market accounts and other investments
with a maturity of three months or less to be cash equivalents.
The Company maintains a majority of its cash balances with two financial
institutions. The Federal Deposit Insurance Corporation insures balances up to
$100. At various times throughout the year, the Company's balance at each
financial institution exceeded this limit. The Company has not experienced any
losses in these accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
DEPRECIATION AND AMORTIZATION
(a) Furniture and equipment are recorded at cost and are depreciated using
the straight-line method over their estimated useful lives (principally 5-10
years). Leasehold improvements are recorded at cost and are amortized over the
lesser of their estimated useful lies or lease terms. Expenditures for renewals
and improvements which extend the useful lives of assets are capitalized, while
maintenance and repairs are charged to operations as incurred.
(b) Financing costs associated with Industrial Development Revenue Bonds
were amortized on a straight-line basis over the terms of the bonds and have
been fully amortized (See Note 4). Refinancing costs of the ESOT loan (See Note
5) were amortized on a straight-line basis over the term of the loan, and were
fully written off at the time of the September 1992 restructuring. Fees
associated with the September 1992 restructuring of the bank and ESOT debt are
being amortized over the term of the restructured Bank and ESOT debt (See Note
5) and they will be written off in 1994, upon the closing of the transaction
discussed in Note 14.
66
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Taxable income (loss) for income tax purposes differs from that for
financial statement purposes principally due to timing differences such as
reserves for affiliates receivables, repayment of principal and interest on ESOT
debt, depreciation, certain accrued expenses and in 1992 only, the accumulated
accrual to cash basis difference as of February 9, 1989 when the Company ceased
to be treated as an S Corporation.
In 1993, the Company adopted Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes," which requires the use of the
asset and liability approach for financial accounting and reporting for income
taxes. As permitted by SFAS 109, the financial statements for 1992 have not been
restated. In 1993, deferred income taxes have been provided, net of a valuation
allowance for realization based on the difference between the financial
statement and income tax basis of assets and liabilities using statutory tax
rates in effect.
3. AFFILIATES RECEIVABLES
The principal stockholder of the Company is also the principal stockholder
of certain other entities in related business enterprises. Advances made by the
Company to these enterprises, as well as to the principal stockholder, have been
classified as affiliates receivables. In 1992, certain general and
administrative expenses were allocated to these affiliates based upon mutual
agreement of the parties.
(a) Due from Response Communications, Inc. ("RCI"), a corporation
wholly-owned by the principal stockholder of the Company, consists of the
working capital advances and corporate overhead charges allocated on a basis
agreed upon by the parties, as well as the cost of the acquisition of rights to
computer software developed by CDSSI (another company wholly owned by the
principal stockholder). The Company had previously advanced funds to CDSSI for
the development of this software. In 1992, the principal stockholder, on behalf
of the RCI, repaid $2,200 of the working capital advances and corporate overhead
charges. Furthermore, in 1992, the operations of RCI were substantially
discontinued and the Company will be unable to recover any portion of its
receivable from RCI remaining at December 31, 1992. Accordingly, in 1992, the
Company fully reserved $1,915 for this receivable in the accompanying financial
statements (See Note 10).
(b) The Company has made non-interest bearing advances to its principal
stockholder. In 1992, a portion of such advances were repaid, when a security
deposit for the Farmingdale facility, advanced by the principal stockholder on
behalf of the Company, was applied against unpaid rent (See Note 7). At December
31, 1992 and 1993, due from the principal stockholder was $510 and $504,
respectively.
4. INDUSTRIAL DEVELOPMENT REVENUE BONDS
In July 1985, IBJ Schroder Bank and Trust Co. (the "Bank") purchased from
the Suffolk County Industrial Development Agency a $1,500 bond. The proceeds of
the bond were used for construction and renovation of the Company's facility in
Farmingdale, New York along with the purchase and installation of machinery and
equipment. The bond bore interest at 69 percent of the prime rate (6 percent at
December 31, 1992), payable semi-annually, along with semi-annual sinking fund
payments of $136 until its redemption. Repayment of the principal thereon due
January 1, 1992 and July 1, 1992 was deferred with the agreement of the Bank,
until December 31, 1992, and was repaid on January 7, 1993. The agreements
provided for commitment fees to be paid to the Bank of 1 percent per annum,
payable quarterly in advance. In 1992, interest expense and commitment fees of
approximately $12 were incurred.
67
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. BANK LOANS AND ESOT DEBT
Bank loans and ESOT debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1992 1993
--------- ----------
<S> <C> <C>
ESOT debt (a)................................................................... $ 4,000 $ 3,300
Working capital line (b)........................................................ 1,875 3,300
Term loan A (c)................................................................. 2,610 2,785
Term loan B (c)................................................................. 2,250 2,250
Term loan D (d)................................................................. 1,500 1,500
--------- ----------
Total bank loans and ESOT debt.................................................. 12,235 12,835
Bank loans and ESOT debt -- current............................................. (525) (12,835)
--------- ----------
Bank loans and ESOT debt -- non-current......................................... $ 11,710 $ --
--------- ----------
--------- ----------
</TABLE>
The Company, RCI (a related party), the ESOT Plan, the principal stockholder
and the Bank entered into agreements dated as of September 30, 1992, which
restructured all of the Bank's then outstanding debt of the Company, the
principal stockholder and the ESOT. As part of the restructuring, the principal
stockholder repaid $2,000 of the ESOT debt on behalf of the Company and the
Company assumed $2,325 of ESOT debt, along with unpaid ESOT interest of $535. In
addition, as part of the restructuring, the Bank forgave a $1,000 loan made to
RCI. The restructuring resulted in the reduction of the ESOT debt from $8,325 to
$4,000 and an increase in the Company's overall bank indebtedness by $575.
The restructured ESOT debt is jointly and severally guaranteed by the
Company and on a limited basis, by the principal stockholder. All bank debt is
secured by a first security interest in all of the Company's assets, and the
principal stockholder also guarantees the Bank debt on a limited basis. The
guarantee of the principal stockholder is limited to the value of such
stockholder's investments held by the Bank in a trust account, along with all
dividends and capital gain or other distributions thereon, plus all of the
principal stockholder's stock in RCI and all of his shares of Company stock
(203,950) at December 31, 1992 and 1993. In addition, the unallocated shares of
the ESOT (54,791 and 40,141 shares, respectively), at December 31, 1992 and
1993, are pledged as collateral for the ESOT debt.
In addition, as part of the restructuring, the Bank acquired 73,500 shares
and 106,500 shares in the Company from the Company and its principal
stockholder, respectively, for an aggregate 180,000 shares in the Company.
Since, at the time of the restructure, the Company's authorized shares were
limited to 600,000, the Company could not issue to the Bank the full number of
shares it initially agreed to provide the Bank. The principal stockholder made
up for this shortfall by temporarily transferring to the Bank additional shares
(the "Additional Shares") over and above the shares he had initially agreed to
provide the Bank. It was the intent of the Company to increase the number of
authorized shares from 600,000 to 2,000,000 and issue, to the Bank, an
additional 102,067 shares. Upon this additional share issuance, the Additional
Shares would be returned by the Bank to the principal stockholder and the
Company and the principal stockholder would have provided 25 percent and 5
percent respectively of the Bank's original 20 percent ownership. In 1993, the
principal stockholder agreed to permanently transfer the 71,477 shares he had
initially temporarily transferred to the Bank. Accordingly the Company will not
increase the number of its authorized shares. No gain on the 1992 restructuring
has been recognized in the accompanying financial statements since the repayment
of principal and interest on the ESOT debt and other bank loans, as
restructured, equals the carrying among of debt prior to restructuring.
The Agreement covering the stock issuance to the Bank also provided for the
Bank to transfer shares annually, to the Company, within 10 days of the
Company's satisfaction of its annual financial reporting requirements, as set
forth in the Restructuring Agreement, provided the Company is not in default of
any
68
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. BANK LOANS AND ESOT DEBT (CONTINUED)
provision of the Restructuring Agreement. An aggregate of 36,000 shares can be
transferred to the Company if the authorized number of shares remains at
600,000, and 42,120 shares can be transferred if the authorized shares are
increased to 2,000,000. The Company did not earnback shares of incentive stock
in 1992 or 1993 as it was in default of certain provisions of the Restructuring
Agreement.
In addition, the Company, provided it has not defaulted under any provision
of the Restructuring Agreement or any other Loan Agreement, has the option to
acquire all of the Bank's shares at option prices which increase from $11.34 per
share in 1992 to $29.17 per share in 1997, based upon 600,000 shares authorized.
Such option was not exercised at December 31, 1992, or 1993.
The Bank Restructuring Agreement contains limitations on indebtedness,
ownership, permitted investments, certain financial ratio tests, and a borrowing
base test related to its working capital line [See Note 5(b). At December 31,
1992 and 1993, the Company was not and continues to not be in compliance with
certain convenants (See Note 5(b)). The Bank waived such defaults on July 6,
1993, and again on August 19, 1993 and October 29, 1993. This later forbearance
letter (the "Forbearance Agreement") expired on November 15, 1993, after which
date the Company and the Bank continued to further renegotiate and amend the
Bank Restructuring Agreement. On May 2, 1994, the Company and the Bank executed
a letter agreement whereby the Bank extended the Forbearance Agreement, pending
completion of the matters discussed in Note 14, as well as rendering its consent
to such transaction. Further, the Bank and the Company agreed that such letter
agreement will neither waive or impair the Bank's rights or remedies pursuant to
the Forbearance Agreement and the Restructuring Agreement, nor constitute a
waiver of default, unless such defaults are cured in accordance with the
Restructuring Agreement. Accordingly, the bank loans and ESOT debt have been
classified as a current liability at December 31, 1993.
(a) ESOT DEBT -- The ESOT debt, which had previously been refinanced in
1990, was again restructured in September 1992. The restructured ESOT debt is
payable in 17 quarterly installments of $175 beginning April 1, 1993 and a final
payment of $1,025 on July 1, 1997, the maturity date of the loan. Interest on
the restructured ESOT debt is at the Bank's base rate (6 percent at December 31,
1992 and 1993). Interest expense on the ESOT debt was $495 and $227 in 1992 and
1993, respectively, and payable monthly in arrears. The Company and the
principal stockholder (to a limited extent) are guarantors of the ESOT loan and
the unallocated shares sold to the ESOT also collateralize the loan. In
addition, the stock of RCI and certain marketable securities owned by the
principal stockholder, collateralize the loan.
(b) WORKING CAPITAL LINE -- The revolving credit facility was comprised of a
$1,000 demand revolver note and a $2,750 fixed date revolver maturing on
December 31, 1992. The revolving credit facility bore interest at prime and was
guaranteed by the principal stockholder and cross collateralized with the ESOT
loan. (See Note 5(a)). As part of the September 1992 restructuring, the working
capital line (also referred to as Term Loan C) was reduced to $1,875 and the
balance of the line outstanding at the time of restructuring ($5,825) was
converted to term loans. The working capital line, as restructured, is for the
Company's working capital needs and has a borrowing base of 80 percent of
eligible accounts receivable. The first amendment to the restructuring agreement
dated as of January 1, 1993 increased the working capital line by $300 to
$2,175. In February 1993, the Company drew down $175 of the additional line. On
May 21, 1993, in connection with the renegotiation of the lease on the
Farmingdale facility (See Note 7), the Bank paid, on the Company's behalf, $650
to the landlord, as evidenced by a promissory note secured on a limited basis,
by the principal stockholder. The promissory note was initially due June 19,
1993, however, repayment was further extended by the Bank until September 17,
1993. In August 1993, the Bank made an additional working capital advance of
$300, repayment of which was required on September 17, 1993. The September
17, 1993 scheduled repayments, which in the aggregate were $950, were not made.
The Forbearance Agreement further extended repayment through November 15, 1993;
however, the required repayments were not made and the Company is in default.
69
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. BANK LOANS AND ESOT DEBT (CONTINUED)
In addition, the Company and the Bank have agreed that the above working
capital commitment could be increased by $147 to provide additional funding
should either a bank letter of credit for the benefit of the landlord of the
Company's Farmingdale facility and a commitment to issue a letter of credit for
the benefit of JAB Madison Associates be drawn upon (See Notes 5(e) and 7). The
overline borrowings are guaranteed, on a limited basis, by the principal
stockholder and are not subject to the borrowing base. The working capital line
and the overline bear interest at prime (6 percent at December 31, 1993 and
1992), payable monthly.
(c) TERM LOANS A AND B -- Term loans A and B were established to refinance a
portion of existing Bank debt. On October 1, 1993, the Bank increased Term Loan
A by $175, the proceeds of which were used to fund the October 1, 1993 ESOT
principal payment. The entire principal balance is due on July 1, 1997, except
for the October 1, 1993 addition, for which repayment is required on October 1,
1994. If the Company is unable to fully pay the interest on Term Loan B, the
Bank may use certain funds of the principal stockholder held in the Bank's
custody, to satisfy any interest payment shortfall on behalf of the Company.
Term Loan A bears interest at prime (6 percent at December 31, 1993 and 1992),
payable monthly. Term Loan B bears interest at Libor plus .60 percent, payable
monthly.
(d) TERM LOAN D -- Term Loan D was established to refinance a portion of
existing debt and its entire principal balance is due July 1, 1997. Prepayments
are required if, starting April 1, 1993, cash flows exceeds certain
predetermined amounts. No such prepayment was required as of April 1, 1994 or
1993. Term Loan D is non-interest bearing. For financial statement purposes, no
interest has been imputed as the restructuring was considered a modification of
terms. Interest will, however, be imputed for income tax purposes.
(e) In May of 1993, as part of the lease renegotiation (See Note 7(a)), a
bank letter of credit for $147 was issued to the landlord of the Farmingdale
facility, in lieu of a security deposit. Such letter of credit will reduce to
$73.5 on June 30, 1996 and will terminate on July 31, 1996. The letter of credit
can only be drawn on if the Company defaults on its rental payments. Should the
bank letter of credit be drawn on, it will be due in two equal installments on
June 30, 1996 and July 31, 1996.
In April 1993, as part of the agreement reach with JAB Madison Associates
(See Note 7(c)), the Bank has a commitment to issue a bank letter of credit for
approximately $91. Drawings on the bank letter of credit may only be made in the
event the Company does not pay the rent on its former New York City office
facility by the tenth day of the calendar month. Any drawings under such bank
letter of credit agreement will reduce the amounts otherwise available for
borrowing by the Company pursuant to its working capital line of credit.
6. CAPITAL LEASE OBLIGATIONS
The capital lease obligations consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Office equipment (a)................................................................... $ 3 $ 126
Machinery and equipment (b)............................................................ 251 386
--------- ---------
Total capital lease obligation......................................................... 254 512
Capital lease obligation -- current.................................................... (96) (186)
--------- ---------
Capital lease obligation -- non-current................................................ $ 158 $ 326
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(a) The Company has leased office equipment and recorded the related capitalized
lease obligations based upon the present value of future lease payments. The
leases are payable in equal monthly installments including interest.
70
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. CAPITAL LEASE OBLIGATIONS (CONTINUED)
(b) The Company has leased machinery and equipment and recorded the related
capitalized lease obligation based upon the present value of future lease
payments. The various leases are payable in equal monthly installments
including interest.
The present value of the net minimum lease payments (including interest
rates ranging from 10 percent to 28 percent, through expiration) are 512 with
annual maturities of:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ----------------------------------------------------------------- -----------
<S> <C>
1994............................................................. $ 186
1995............................................................. 155
1996............................................................. 82
1997............................................................. 58
1998............................................................. 31
-----
$ 512
-----
-----
</TABLE>
7. DEFERRED RENT
Deferred rent consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1992 1993
--------- ---------
<S> <C> <C>
Deferred rent on:
Farmingdale facility (a).................................................. $ 337 $ 213
New York City -- present facility (b)..................................... 34 33
New York City -- former facility (c)...................................... 91 63
--------- ---------
Total deferred rent....................................................... 462 309
Deferred rent -- current.................................................. (162) (169)
--------- ---------
Deferred rent -- noncurrent............................................... $ 300 $ 140
--------- ---------
--------- ---------
</TABLE>
The current portion of deferred rent is included in accrued liabilities on
the accompanying balance sheet.
- ------------------------
(a) In July 1991, the Company commenced negotiations with the landlord of this
facility, in which the principal stockholder holds a 9.9 percent partnership
interest, to renegotiate the terms of its lease. While these negotiations
were in process, the Company had withheld rent payments of approximately
$1,200, which had been required pursuant to the terms of the original lease.
In addition, the landlord had applied a $220 security deposit advanced by
the principal stockholder to reduce the amount of unpaid rent. In May of
1993, the lease was renegotiated whereby the fixed-minimum annual rental
payments, exclusive of escalation and real estate taxes were reduced from
$825 to $720 with an expiration in July 1995. Although the lease term was
shortened by three and one half years, the Company obtained an option to
renew its new lease for a two and one half year period at a similar annual
cost of $720 per annum. In addition, the landlord agreed to accept a payment
of $650 to both settle all rent arrearages and to restructure the remaining
lease term as indicated above. The benefit of the rent abatement of
approximately $550 is being recorded, on a straight-line basis, beginning in
July 1991 and continuing throughout the lease term, as renegotiated. In
connection with the renegotiated lease, a bank letter of credit for $147 was
issued (See Notes 5(e), 13 and 14).
71
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. DEFERRED RENT (CONTINUED)
(b) In June 1992, the Company relocated its New York City office to another
facility. Deferred rent on this facility represented the effect of scheduled
rent increases and three months free rent, both of which are being amortized
over the 46 month term of the lease.
(c) Simultaneous with the Company's relocation of its New York City office
facility, the Company subleased most of its former New York City facility.
In April of 1993, the Company reached an agreement with the landlord which
effectively reduced the rent on the remaining space to 50 percent of the
original lease commitment, and granted the landlord the right to rent this
space. In 1992, the Company recorded a provision of approximately $91 which
represents the present value of the reduced rent payments through the
expiration of the lease in January of 1996. In Connection with the
agreement, an undrawn bank letter of credit was issued for approximately $91
(See Notes 5(e), 13 and 14).
8. DUE TO STOCKHOLDER
The stockholder loan, which is subordinate to the ESOT and bank loans, bears
interest at the brokers prevailing margin account rate (8 percent and 7.75
percent, at December 31, 1992 and 1993, respectively), payable monthly. The loan
was due starting May 1, 1992 with the first installment of $15 and the remainder
due in equal monthly installments of $10 until repaid in November of 1993. In
addition, the Company has agreed to repurchase, from the stockholder, 4,290
shares of common stock held by the stockholder as part of the ESOT for $80 in
eight monthly installments of $10 each, commencing with the completion of the
final payment due on the loan. Such shares have been reflected as treasury
stock, to be formally released to the Company upon final repayment. Such final
repayment was made in May 1994.
9. ESOT AND PROFIT-SHARING PLANS
(a) On February 9, 1989, the stockholders of the Company sold 147,250 shares
of the Company's common stock to The Direct Marketing Group, Inc. Employee Stock
Ownership Trust ("ESOT"). The ESOT plan ("ESOP") covers all eligible employees
of the Company and has received a favorable determination letter dated April 21,
1989, under Sections 401(a) and 4975(e) of the Internal Revenue Code. Each
employee is eligible to participate in the ESOP on the first allocation date
(December 31) following employment, provided the employee is at least 21 years
of age and was credited with 1,000 hours of service during the ESOP year then
ended. Employer contributions are paid for each plan year in amounts as
determined by the Board of Directors; contributions may be paid in cash or in
shares of Company stock. The assets of the ESOP are invested in Company stock.
The net operating results of the plan year are determined on the allocation
date and are allocated to each participant's account, as set forth in the
ESOP trust agreement. Participants are 20 percent vested in the ESOP after three
years of service, such vesting, increasing by 20 percent annually, until full
vesting is achieved after seven years of service. At the option of the Company,
administrative expenses of the ESOP may either be paid for by the Company, or
charged to and paid out of the ESOP assets. Concurrent with the transaction
discussed in Note 14(a), the Company plans to terminate the ESOP and make a
cash distribution to participants as discussed in Note 14(d).
(b) The Company had a qualified, non-contributory profit-sharing plan
covering all employees who met certain eligibility requirements as to age and
length of service. On June 28, 1990, the profit sharing plan was terminated and
merged with the ESOP. The employees vested interest in the stock so purchased is
their respective vested interest in the merged profit sharing plan at the date
of merger. Additional vesting conforms to the terms of the ESOP. The net assets
of the profit sharing plan of $1,286 were used to purchase 55,543 additional
shares of the Company's common stock, based upon an independent valuation
performed as of June 28, 1990.
(c) In June 1992, the Company repurchased 3,993 shares of common stock held
by stockholders who left the Company prior to July 1, 1991 for $83. In September
1992, the Company acquired 31,847.05 shares of
72
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. ESOT AND PROFIT-SHARING PLANS (CONTINUED)
stock from the ESOT when it assumed $2,325 of ESOT debt (see Note 5). The 1992
financial statements have been restated to reflect the acquisition of these
shares as treasury stock. In December 1992, the Company repurchased 356.78
shares of common stock from stockholders who retired from the Company in 1992,
for $7. In 1993, the Company repurchased 234.75 shares of common stock held by
stockholders who retired from the Company in 1993 for $5.
10. OTHER EXPENSE
Other expense for the year ended December 31, 1992 was comprised of:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
-----------------
<S> <C>
Provision for affiliates receivables (a)............... $ 1,915
New York City office relocation (b).................... 196
Write-off of refinancing costs (c)..................... 289
-------
$ 2,400
-------
-------
</TABLE>
- ------------------------
(a) As discussed in Note 3(a), in 1992, the operations of RCI, a Company owned
by the principal stockholder of the Company, were substantially discontinued
and it was determined that the Company will be unable to recover any portion
of the remaining unpaid receivable. Accordingly, in 1992, the Company fully
reserved for this receivable.
(b) The Company relocated its New York City office facility and incurred $196
associated with this move, including the write-off of leasehold improvements
of $43 at its former facility, the accrual of rent at its former facility
through the expiration of its lease of $91 (see Note 7(c)), and other moving
costs of $62.
(c) Refinancing costs of the ESOT loan (see Note 5) were written-off at the time
of the September 1992 restructuring.
11. INCOME TAXES
During 1993, the Company adopted SFAS 109, which requires the use of an
asset and liability approach for financial accounting and reporting of income
taxes. Accordingly, deferred tax assets and liabilities for the expected future
tax consequences (exclusive of changes in tax law or rates) are recognized in
the financial statements. If it is more than likely that a portion of a deferred
tax asset will not be realized, a valuation allowance is established. As
permitted by SFAS 109, the financial statements for 1992 have not been restated.
Because of a 100 percent valuation allowance which was established upon adoption
of SFAS 109, the Company determined that there is not cumulative effect on prior
year's results of operations due to the
73
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. OTHER EXPENSE (CONTINUED)
adoption of SFAS 109. In 1992, the Company accounted for income taxes using
APB 11. The 1992 provision related solely to state and local income taxes,
predominantly the New York City alternative minimum tax. The income tax benefit
consists of:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
-----------------
<S> <C>
Current taxes:
Federal............................................................................ $ --
State.............................................................................. 20
-------
Total current benefit (provision)................................................ 20
-------
Deferred taxes:
Federal............................................................................ 2,540
State.............................................................................. 380
-------
Total deferred..................................................................... 2,920
Less valuation allowance........................................................... (2,920)
-------
Net deferred....................................................................... --
-------
Total tax benefit (provision).................................................... $ 20
-------
-------
Significant components of the gross deferred tax assets are as follows
Deferred tax assets:
Affiliate receivable reserves...................................................... $ 2,083
Net operating loss and investment tax credit carryforwards......................... 495
Other, net......................................................................... 342
-------
Total gross deferred tax assets...................................................... $ 2,920
-------
-------
</TABLE>
A valuation allowance for the deferred tax asset has been provided, as
realization of such asset is not assured, without considering the gain on sale
of the Company's assets and partial elimination of bank indebtedness which is
not an acceptable tax planning strategy. The valuation allowance will be
reversed in 1994 upon completion of the sale. (See Note 14).
At December 31, 1993, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1,020, expiring in years 2005
through 2007. In addition, the Company had investment tax credits of
approximately $87 which expire at various dates throughout the year 2000.
12. MAJOR CUSTOMERS
(a) The Company provides creative, printing and mailing services to
customers in various industries. The Company requires advance payment for
postage and periodically evaluates the credit worthiness of its customers. Sales
to 3 customers in 1993 and 2 customers in 1992, each of whom were individually
at least 10 percent of sales, aggregated 34 percent and 21 percent of sales in
1993 and 1992, respectively. Accounts receivable from these customers were $661
and $433 at December 31, 1992 and 1993, respectively.
74
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. COMMITMENTS AND CONTINGENCIES
(a) The Company is committed for three facility leases with minimum annual
rental commitments, excluding normal escalation clauses as follows:
<TABLE>
<CAPTION>
FORMER OFFICE- NEW CURRENT OFFICE-
YORK NEW YORK FARMINGDALE TOTAL
----------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
1994.................................. $ 32 $ 145 $ 720 $ 897
1995.................................. 32 158 420 610
1996.................................. 3 55 -- 58
--- ----- ----------- ---------
$ 67 $ 358 $ 1,140 $ 1,565
--- ----- ----------- ---------
--- ----- ----------- ---------
</TABLE>
In addition to the minimum annual rental commitments, the leases contain
provisions for additional payments to reflect increases in property taxes and
operating expenses. For the years ended December 31, 1992 and 1993 rental
expenses, net of sublease income were approximately $1,172 and $771,
respectively. In connection with the leases on its former New York office
facility and its Farmingdale location, the Company has two undrawn bank letter
of credit agreements for approximately $91 and $147, respectively (see Note
5(e), 7 and 14).
(b) Simultaneous with the bank restructuring agreement, the Company entered
into an employment agreement with the principal stockholder, which expires in
1997. Upon termination prior to December 21, 1994, the principal stockholder is
entitled to a severance payment (see Note 14).
(c) In July 1993, the Company entered into an employment agreement to employ
a President for a term commencing on August 1, 1993 and terminating on July 31,
1996, unless otherwise terminated or extended. Upon termination, the President
is entitled to a severance payment (see Note 14).
(d) A participant in the ESOP and former Profit Sharing Plan of the Company
has asserted a claim against the sponsor of the plan and its assets and Trustee
relating to (i) the propriety of the merger of the plans (see Note 9), (ii)
requesting restitution be made to all Profit Sharing Plan participants, for
return of original plan account balance at the time of merger, along with
interest thereon from the date of merger, and (iii) indicates intent to request
the Department of Labor and Internal Revenue Service to conduct an investigation
regarding the propriety of the merger and possible breach of fiduciary
responsibilities. Management and counsel can not yet determine the impact of
this uncertainty to the Company. Accordingly, no provision for any liability
which might result from this claim has been made in the accompanying financial
statements.
(e) In August of 1992, the Company was notified by the New York State
Department of Taxation and Finance, that a law judge has concluded that
purchases of mailing lists were exempt from use tax as a purchase for resale.
Accordingly, the sales and use tax audit for the period March 1, 1976 through
February 28, 1979 resulted in no adjustments. A sales and use tax audit is
pending for the period subsequent to February 28, 1979. In the opinion of
management and counsel, such audit will not have a material adverse effect to
the Company's accumulated deficiency.
14. SUBSEQUENT EVENTS
(a) On April 22, 1994, the Company and DDI signed a letter of intent whereby
DDI agreed to purchase substantially all of the assets of the Company for
$9,220, and to assume the liabilities of the Company, except for the ESOT debt,
bank loans and other non-assumed liabilities, as defined. On May 12, 1994, the
Company and DDI signed a definitive purchase agreement, whereby both parities
agreed to use
75
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. SUBSEQUENT EVENTS (CONTINUED)
their best efforts to close the purchase transaction (the "Transaction") by
May 31, 1994. On May 26, 1994, the DMG stockholders voted to approve the
Transaction. The purchase price is subject to a working capital adjustment,
as defined in the asset purchase agreement.
Upon closing of the Transaction, the principal stockholder and the President
of the Company will terminate their employment with the Company and receive
payments which will settle the compensation and termination of employment
obligations pursuant to their employment agreements with the Company (see Note
13(b) and Note 13(c)). Simultaneously, each will enter into a four-year non-
compete agreement with DDI whereby they may be entitled to additional contingent
payments from DDI (see Note 14(c)). In addition, two key executives of the
Company will enter into non-solicitation agreements with DDI, each of whom may
be entitled to contingent payments from DDI (see Note 14(c)).
The cash proceeds from this Transaction will be used by the Company as
follows:
<TABLE>
<S> <C>
Partial repayment of ESOT debt and bank loans.............................. $ 7,658
Cash contribution to ESOT.................................................. 900
Severance payments......................................................... 562
Reserve for certain liabilities to be retained by the Company.............. 100
---------
$ 9,220
---------
---------
</TABLE>
On April 29, 1994, the Company and the Bank entered into a letter agreement
(the "Consent") whereby the Bank consented to the Transaction. Pursuant to the
Consent, the Bank agreed to:
(i) Sell to the Company all of the shares of the Company stock held by
the Bank for an amount not to exceed the greater of $10 or the book value of
such shares as at December 31, 1993;
(ii) Terminate its liens on the assets of the Company and the ESOP, and
the obligations of the principal stockholder of the Company, except for
$1,450 of the principal stockholder's collateral maintained in a bank trust
account;
(iii) Terminate its letter of credit agreements for the benefit of the
landlord of the Company's Farmingdale facility and JAB Madison Associates
(see Notes 7 and 13(a)).
Pursuant to the Consent, the Company agreed to:
(iv) Along with the principal stockholder, indemnity and hold the Bank
harmless from any liability or expense arising from any threatened
litigation or asserted claim under federal securities law or other statute
pursuant to its role as a lender, except with respect to claims arising out
of gross negligence or misconduct on the part of the Bank; and provided that
the principal stockholder will have no liability to the indemnification in
excess of $175 and for claims occurring four years after closing of the
transaction;
(v) Furnish the ESOT trustee and the Bank with a fairness opinion as to
the transaction, from a nationally recognized expert;
(vi) Notify the Bank of all events of default which occurred and were
waived by the Forbearance Agreement, along with additional defaults;
(vii) Provide evidence at the closing of the transaction, that all
liabilities of the Company and the ESOP, including contingencies have either
been satisfied or assumed by DIMAC. In addition, the Company will establish
a cash reserve of $100 to provide for such contingencies;
(viii) Assume the Bank's professional fees of approximately $41,
associated with the transaction.
76
<PAGE>
THE DIRECT MARKETING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. SUBSEQUENT EVENTS (CONTINUED)
(b) In connection with the Transaction, the Company and the Bank will enter
into an agreement whereby the Bank will accept an aggregate of $9,325 in full
satisfaction of the ESOT debt and bank loans which were $12,835 at December 31,
1993 and $12,659 at April 1, 1994, respectively. Accordingly, in 1994 upon
closing of the Transaction, the Company will realize a financial statement gain
of $3,335 on the forgiveness of debt, along with a gain equal to the excess of
the cash purchase price and liabilities assumed over the assets acquired. The
Bank will receive cash of $8,025 ($7,658 from the cash proceeds of the
Transaction and $367 from the Company) at the time of closing of the Transaction
and may receive from DDI, contingent consideration of up to $1,300 (which will
be credited against certain contingent consideration obligations owned as
described below) for granting its consent to consummate the Transaction.
Pursuant to the terms of the Transaction between the Company and the Bank,
DDI has agreed to pay contingent consideration to certain individuals previously
associated with the Company over a four year calendar period, commencing with
the calendar year ending December 31, 1994. For the calendar years ending
December 31, 1994, 1995 and 1996, respectively, total contingent consideration
will equal 2%, 5% and 10%, respectively, of the difference of the product of 5.5
multiplied by EBITDA of DDI's New York division (as defined in the agreements
granting such contingent consideration) for such calendar year MINUS the DDI
equity investment in DMG (as defined in the agreements granting such contingent
consideration), in each case MINUS any prior contingent consideration payments.
For the calendar year ending December 31, 1997, a total contingent consideration
shall be equal to 20% of the difference of the product of 5.5 multiplied by
EBITDA of DDI's New York division (as defined in the agreements granting such
contingent consideration) for the calendar year 1996 MINUS any prior contingent
consideration payments. The consideration payable to certain of these
individuals will be reduced by the amount of contingent consideration payable to
the Bank, as described in Note 14(b).
(c) The Company is obligated to pay a fee of $200 to its investment advisor
at the time of closing of the transaction.
(d) Contemporaneous with the closing of the Transaction, the Company
terminated the ESOP and made a $900 cash contribution to the ESOT. Subsequent to
the closing, the ESOT will offer to distribute the cash to the ESOP participants
based upon their respective vested portion of the ESOP shares (130,534 shares)
which had been allocated to participants.
(e) In June 1994, a minority stockholder of the Company, filed a complaint
in the Supreme Court of New York against the Company, certain officers of the
Company and the Bank. The minority stockholder alleges that the Transaction made
no provision for the purchase and redemption of his shares of stock, and
requested the attachment of $300 from the proceeds of the transaction, as
payment for his shares of stock, along with punitive damages of $50. In
addition, the minority stockholder has filed an election pursuant to Section 623
of the New York Business Corporation Law, to receive payment for the fair value
of his shares pursuant to an independent appraisal.
The Company's counsel has answered the complaint, indicating the Company's
opposition on the grounds that the complaint is moot, since the Transaction
closed and the assets were distributed on May 31, 1994, prior to the filing of
the complaint. In the opinion of the Company's counsel, the minority
stockholder's election for appraisal pursuant to Section 623 is an adequate
remedy of law, to determine the amount, if any, of compensation the minority
stockholder is entitled to. Such appraisal, however, has not yet been completed.
The Company and its counsel are unable to determine the impact, if any, which
might result from this claim. Accordingly, no provision has been made for this
claim in the accompanying financial statements.
77
