SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995; OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________.
Commission file number: 1-10015
HERITAGE MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
IOWA 42-1299303
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13355 Noel Road, Suite 1500
Dallas, Texas 75240
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code:
(214) 702-7380
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Class A Common Stock, $.01 par value.
Preferred Stock Purchase Rights.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K..........................[ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 8, 1996 is $548,896,080.
The number of shares outstanding of each of the issuer's classes of
common stock, as of March 8, 1996:
Class Shares Outstanding
Class A, $.01 Par Value 17,742,807
List hereunder the following documents incorporated by reference:
DOCUMENT PART OF FORM 10-K
Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 16, 1996 III
(the "Proxy Statement").
HERITAGE MEDIA CORPORATION
1995 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
<TABLE>
<CAPTION>
Page
<C>
<S>
Item 1. Business 4
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
PART III
Item 10.Directors and Executive Officers of the Registrant 31
Item 11.Executive Compensation 31
Item 12.Security Ownership of Certain Beneficial Owners
and Management 31
Item 13.Certain Relationships and Related Transactions 31
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K 31
</TABLE>
PART I
Item 1. Business.
1.(a) General
Heritage Media Corporation, (the "Company", "Heritage", or "HMC"),
is the largest targeted marketing services company in the United States
through its ownership of DIMAC Corporation ("DIMAC") and ACTMEDIA, Inc.
("ACTMEDIA"). DIMAC is the largest full service, vertically integrated
direct marketing services company in the United States. ACTMEDIA is the
leading provider of in-store marketing products and services, primarily
to consumer packaged goods manufacturers with products in supermarkets,
drug stores, and mass merchandisers worldwide. Heritage also operates
four network-affiliated television stations and nineteen radio stations
in eight major markets.
ACTMEDIA provides coverage in over 37,000 grocery, drug and mass merchandiser
stores in the United States. ACTMEDIA operates in twenty-eight different
countries with core operations in the United States, Canada, Australia and
New Zealand, and equity interests in in-store marketing companies in Europe,
Asia, South America, the Middle East and Africa. ACTMEDIA uses this global
distribution network, coupled with its diverse product base, to provide its
clients with integrated solutions that combine sight, sound and one-to-one
selling to form effective targeted in-store marketing programs.
On February 21, 1996 Heritage completed its merger with DIMAC. DIMAC creates
and implements comprehensive, custom tailored marketing programs to enable
clients nationwide to focus their marketing expenditures on a highly targeted
potential customer base. DIMAC provides every component of a complete direct
marketing program, including customized market research, strategic and
creative planning, creation and management of relational databases,
telemarketing, media buying, production services, fulfillment services
and subsequent program analysis. DIMAC provides its services to clients
in a wide range of industries, including financial, retail, publishing
and healthcare, with a strong expertise and focus on telecommunications
related businesses.
Television is still the most effective mass media. Heritage's Television
Group contributes substantial cash flow from operations with a local sales
and news emphasis that yields one of the industry's leading operating
margins. The Radio Group has been very successful in acquiring under-
performing stations and improving their operations. The Radio Group also
acquired stations to form duopolies in six of its eight markets.
1.(b) Business Segment Information
The business segment information required by this item is set forth in
Note 12 of Notes to Consolidated Financial Statements of Heritage,
included herein.
1.(c) Description of the Business
IN-STORE MARKETING
Targeted media augments mass media advertising by reinforcing advertising and
promotional messages to consumers where they congregate and, in the case of
in-store marketing, where purchase decisions are made. The advent of the
targeted media industry was prompted by the realization that traditional
mass media vehicles (television, radio and print advertisements) were
becoming less effective due to changes in the profile of a typical shopper
and his or her shopping patterns and to the proliferation of the types of
media used to communicate to the shopping public. Changing shopping patterns
have led to shorter supermarket visits, usually without shopping lists, and
declining brand loyalty. Industry sources estimate that a significant
percentage (ranging from 40% to 70%) of brand purchase decisions are made in
the supermarket. Economic trends also support the continued growth of
in-store marketing because this medium is inexpensive in comparison to other
marketing alternatives such as television,radio and traditional print
advertisements. In-store marketing is based upon the foundation that the
store is the only place where the product,the manufacturer's message and the
consumer with an intent to buy all converge. In-store marketing products
and services thus allow advertisers to communicate with consumers at or near
the point-of-purchase before, or as, purchasing decisions are made, and
measure the results of their in-store marketing programs.
Products and Services
ACMTEDIA offers advertisers a broad assortment of in-store advertising and
promotional products which can be purchased separately or integrated under
the Company's "store domination" concept to produce a cohesive in-store
marketing presentation for a given product or brand. ACTMEDIA's products
and services include print advertising products, such as advertisements on
shopping carts, aisle directories and shelf talkers; promotional products,
such as cooperative coupon and sampling programs; on-shelf electronic
couponing; audio in-store advertising; customized in-store demonstrations;
and merchandising. By linking sight, sound and one-to-one selling, ACTMEDIA
provides its clients with an effective means to reach the consumer at the
point-of-purchase and provides solutions to manufacturer's in-store
challenges.
INSTANT COUPON MACHINE. The INSTANT COUPON MACHINE ("ICM"), which was
developed by ACTMEDIA, is an electronic coupon dispenser that is mounted on
shelf channels under or near featured products. Through independent market
research sponsored by the Company, the ICM has been shown to increase brand
switching substantially and to encourage first-time purchases of featured
products. Coupons featured in ACTMEDIA's ICM achieve an average redemption
rate of 18%, versus reported redemption rates of approximately 2% for coupons
in free-standing inserts, approximately 4% for coupons sent to consumers in
direct mailings and less than 1% for run of press coupons. The Company's
research also indicates that unit sales increase an average of 32% over four
weeks for products using the ICM.
In addition to its high redemption rate, research shows that the ICM
generates significant unplanned purchases; approximately 58% of purchases
made with coupons from the ICM are unplanned. The Company believes that the
ICM is also effective in reaching shoppers who do not normally use coupons;
in market tests approximately 47% of consumers who redeemed a coupon from
the ICM stated that they never use or only occasionally use a coupon.
The ICM holds 500 coupons and is marketed to advertisers on a category-
exclusive basis at the shelf. The ICM is sold in four-week cycles. In
January 1992, the Company was granted a patent with respect to certain
design features of the ICM. National rollout of the ICM commenced in
February 1992. By the end of 1995 the ICM was available in approximately
10,800 grocery stores and 9,100 drug stores. Also in 1995, ICM expanded
into mass merchandisers with 2,500 stores in such chains as Kmart, Venture,
Ames and Hills.
ACTNOW. The ACTNOW program provides cooperative in-store coupon and
sampling programs for groups of advertisers, generally five times per year.
Under these programs, ACTMEDIA's representatives distribute coupons, samples
and premiums inside the entrance of approximately 10,500 stores nationwide.
Up to 15 million co-op coupon booklets and up to 15 million solo coupons
and samples are distributed directly to shopping customers per event. In
addition, product awareness is reinforced through the placement of featured
products on a free-standing ACTNOW display.
Market tests indicate that these events typically result in 40% of coupon
redeemers being new brand users or switchers. Of the ACTNOW coupons redeemed,
research by the Company indicates approximately 18% are generally redeemed in
the first day of an event, which contrasts positively to free-standing insert
coupon rates of redemption.
IMPACT. IMPACT is the nation's leading in-store supermarket demonstration
program, offering advertisers complete turnkey service for their in-store
events. Customized events, such as tastings, premiums, samplings and
demonstrations, are conducted in up to 24,000 stores nationwide. All
demonstrations are monitored every day by full-time and part-time supervisors.
IMPACT's regular part-time staff of demonstrators, who implement the programs,
maintain a consistent professional appearance with matching aprons and
materials. Special display units are utilized in the programs and programs
are sold on a store-day basis. Events are generally conducted at the front
of the store but can be located elsewhere. Category exclusivity is offered
by store chains on event days.
CARTS. ACTMEDIA's 8" by 10", four-color advertisements, mounted in plastic
frames on the inside and outside of shopping carts, offer advertisers
continuous storewide category-exclusive advertising delivery of a print
advertisement. Because the shopping cart ads circulate around the entire
store with the shopper, these advertisements are an effective tool for
advertisers to reinforce their messages. Shopping cart advertisements are
available in approximately 8,100 supermarkets nationwide, offering coverage
of approximately 110 Designated Marketing Areas ("DMA"). Shopping cart
advertisements are sold in four-week cycles to a maximum of twelve
advertisers per cycle and, according to a study by Simmons Research,
reach store locations visited by more than 115 million shoppers per cycle.
According to studies by Audits & Surveys, Inc. ("A&S") conducted from 1973
to 1994, the use of shopping cart advertisements increased average unit
sales for the products advertised by approximately 11% in stores where they
were utilized.
AISLEVISION. AISLEVISION features 28" by 18" four-color advertisement
posters inserted in stores' overhead aisle directory signs. The large size
of AISLEVISION draws attention to the supermarket aisle in which the product
is stocked and has the added benefit of being frequently used by shoppers
during their shopping trips. ACTMEDIA's AISLEVISION is sold in approximately
5,800 stores nationwide, offering category-exclusive coverage of
approximately 160 DMA's. AISLEVISION is sold in four-week cycles to a
maximum of 18 advertisers per cycle. Studies conducted by A&S from 1985
to 1994 reported that the use of AISLEVISION increased average unit sales
for the products advertised by approximately 8%. An enhancement,
AISLEACTION, allows the manufacturer to include motion on the directory
sign, enhancing shopper awareness of the sign. Also, AISLEDIRECT, allows
the manufacturer to tie AisleVision with ICM and direct consumers to the
INSTANT COUPON MACHINE.
SHELFTALK/SHELFTAKE-ONE. SHELFTALK features advertisements placed in
plastic frames mounted on supermarket or drug store shelves near its
featured product. SHELFTAKE-ONE includes rebate offers or recipe ideas
which consumers may remove from the plastic frame at the site of the
featured product. These four-color, 5-1/4" by 4" ads, placed perpendicular
to the shelf and facing in both directions, are an effective means of
bringing attention to a product at the shelf level and reinforcing
advertising messages at the point-of-purchase. SHELFTALK and SHELFTAKE-ONE
are sold in approximately 10,000 supermarkets, offering coverage of
approximately 160 DMA's, and in approximately 8,500 drug and mass
merchandiser stores, covering approximately 150 DMA's. SHELFTALK and
SHELFTAKE-ONE are sold in four week cycles on a category-exclusive basis.
Studies conducted by A&S over a ten year period reported that SHELFTALK
resulted in an approximately 5% average unit sales gain for the products
advertised in grocery stores and an approximately 12% average unit sales
gain for the products advertised in drug stores. Studies conducted by
A & S through 1994 reported that SHELFTAKE-ONE increased average unit sales
by 7% for products advertised in grocery stores and by 5% for products in
drug stores.
ACTRADIO. ACTRADIO is the nation's largest advertiser-supported in-store
radio network. ACTRADIO delivers its in-store audio advertising in
conjunction with music entertainment services provided by the nation's
leading business music providers. The ACTRADIO network comprises
approximately 8,000 chain supermarkets, 8,300 chain drug stores and 800
Toys 'R' Us /Kids 'R' Us toy and children clothing stores. ACTRADIO
delivers over 800 million advertising impressions over a four-week period
reaching 69% of adults an average of 6.3 times according to recent Simmons
data. This massive reach and frequency makes ACTRADIO an attractive
alternative to traditional broadcast, published, or direct mail
advertising. Advertisers can extend their message at the point of sale
at a fraction of the CPM (cost per thousand) of traditional media.
In addition to its advertising value, A&S studies from 1987 through 1994
show that ACTRADIO delivers an average sales gain of 8% with a brand sell
ad, and up to 20% when a promotional tag or price tag is added. Research
conducted in 1992 also indicated that 94% of all shoppers are attentive to
the brand sell commercials, and that over half of all shoppers claim it has
a positive effect in their purchase choices.
POWERFORCE. In January 1995, the Company acquired POWERFORCE Services,
a leading national provider of in-store merchandising services. POWERFORCE
conducts merchandising and promotional activities such as shelf and store
restockings, special retailer events, point of purchase installations and
other merchandising for packaged goods manufacturers. Sales merchandising
is a rapidly-growing $420 million industry due to the growing trend of
manufacturers to down-size their full-time sales forces and outsource
in-store activities to third parties such as POWERFORCE. POWERFORCE
has 13,600 part-time merchandisers available across all major U.S. markets.
POWERFORCE operates in the supermarket, drug, mass merchandise, toy,
hardware and computer retail classes of trade. The "client-dedicated"
services which represent the majority of the POWERFORCE business, provides
clients with recruiting, general supervision, payroll and call reporting
services. Such contracts are generally on a long term basis. POWERFORCE
also provides fully managed customized programs which clients generally
use to accomplish a specific task. Such tasks may include stickering product,
display set-up and conducting sampling and demonstration programs.
ACTPROMOTE. In September 1995, ACTMEDIA introduced ACTPROMOTE, an electronic
"paperless" couponing network which supports price discounts distributed at
the checkout scanner with on-shelf advertising and in-store audio promotion.
National rollout of this network is expected during 1996.
In-store Network
ACTMEDIA's in-store network delivers its products and services in over 24,000
supermarkets and 13,000 drug and 2,400 mass merchandiser stores across the
country, a network substantially larger than that of any other in-store
marketing company. By contracting to purchase the Company's in-store
advertising and promotional products, advertisers gain access to up to
approximately 205 of the nation's 209 DMA's covering over 70% of the
households in the United States.
ACTMEDIA currently has contracts with approximately 300 store chains.
ACTMEDIA's store contracts generally grant it the exclusive right to
provide its customers with those in-store advertising services which are
contractually specified. The contracts are of various durations,
generally extending from three to five years and provide for a
revenue-sharing arrangement with the stores. ACTMEDIA's store contract
renewals are staggered and many of its relationships have been maintained
for almost two decades.
ACTMEDIA's advertising and promotional programs are executed through one
of the nation's largest independent in-store distribution and service
organizations, although certain chains require the Company to utilize
their own employees. ACTMEDIA believes the training, supervision and
size of its field service staff (approximately 400 full-time managers
and up to approximately 23,000 available part-time employees) provide
it with a significant competitive advantage as its competitors generally
do not have a comparable field service staff.
The Company is currently expanding its in-store products to additional
classes of trade, such as mass merchandisers, convenience stores,
club stores, and discount stores.
Customer Base
ACTMEDIA's customer base includes approximately 250 companies and 700 brands.
This customer base includes the 25 largest advertisers of consumer packaged
goods. In 1995, the Company's largest customers included the following:
Andrew Jergens Kraft Foods
Chesebrough-Pond's Lever Brothers
Coca-Cola McNeil
General Mills Procter & Gamble
Heinz Quaker Oats
Hunt-Wesson Ralston Purina
James River RJR Nabisco
Kelloggs
ACTMEDIA's sales organization markets its services to consumer packaged goods
brand managers, promotion managers and their advertising agencies.
ACTMEDIA's sales force consists of approximately 40 representatives, who are
compensated on a salary-plus-commission basis. In addition to its sales
force for its base products, ACTMEDIA has created an additional sales force
to pursue new manufacturer opportunities in the mass merchandiser class of
trade. Sales representatives stress the benefits of in-store marketing
services, including: (i) the exclusivity afforded advertisers for a specific
merchandise category, a feature generally unavailable in television, radio,
magazine or newspaper advertising; (ii) increases in sales volume; (iii)
the ability to reach customers at the point-of-purchase where industry
sources estimate that a significant number (ranging from 40% to 70%) of all
brand buying decisions are made; and (iv) ACTMEDIA's ability to reach a
significant number of consumers at costs per thousand that are significantly
less than comparable television or print advertising; (v) measurement of
results.
International Operations and Investments
ACTMEDIA's strategy includes the establishment of a significant business
presence outside of the United States. The majority of the Company's
advertisers are large, multinational companies for whom the use of in-store
marketing products in overseas markets is expected to be a logical extension
of their advertising and promotional budgets. ACTMEDIA's products and
services are now available in twenty-eight different countries with plans
for further expansion in 1996.
In November 1990, the Company acquired one of Canada's largest in-store
marketing companies (now renamed ACTMEDIA Canada), which primarily operated
an in-store cart advertising program. In August 1991, ACTMEDIA Canada
acquired a Canadian company whose services include in-store demonstrations,
merchandising and information collection. In October 1994, ACTMEDIA Canada
acquired Strategium Media, Inc. whose Infonet Media, Ltd. ("Infonet")
subsidiary is a leading supplier of shelf-based advertising, couponing
and promotional programs. The combination of these three companies now
offers program coverage in 4,300 supermarkets and has enabled ACTMEDIA
to attain a significant market position in Canada comparable to ACTMEDIA's
U.S. market position.
In January 1992, the Company formed ACTMEDIA Europe which simultaneously
acquired Media Meervoud, N.V., ("MMV") a dutch in-store marketing company
engaged in both cart advertising and promotions. In February 1994, ACTMEDIA
acquired in-store marketing companies in Australia and New Zealand.
In February 1996, ACTMEDIA sold Media Meervoud and took a one-time non-cash
write-off of the carrying value of its investment for the period ended
December 31, 1995. See Item 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion.
ACTMEDIA has commenced a program to license its name and train licensees in
the methods of conducting in-store operations in countries where the
in-store industry is just developing or is too small for a direct ACTMEDIA
presence. ACTMEDIA has minority equity participation and licensing agreements
in Asia (20%), Greece (10%), Japan (10%), Ireland (10%), and Brazil (10%).
ACTMEDIA also has licensing agreements in Israel, Puerto Rico, South Africa,
Venezuela, Costa Rica, France and Mexico.
International sales in 1995 accounted for $34.7 million (approximately 10%)
of the In-store Marketing revenues.
Development
ACTMEDIA is actively pursuing, testing, and developing new product and
new business opportunities. Introducing ACTMEDIA's products into mass
merchandisers and convenience store classes of trade remains a key focus
area. International in-store acquisitions continue to be evaluated as
vehicles to introduce ACTMEDIA's products worldwide.
Competition
The advertising and promotion industries are characterized by intense
competition. ACTMEDIA competes directly with other point-of-purchase
advertisers and coupon/sampling/distribution/demonstration companies and
indirectly with all other media in the supply of advertising and promotion
services, including national, local and cable television, radio, magazines,
outdoor advertising and newspapers. Also, certain store chains offer limited
advertising and promotional products and services.
The Company believes that the principal competitive factors affecting its
in-store marketing business are the ability to demonstrate the cost
effectiveness of its services as well as the comprehensive scope, coverage
and quality of the services provided. There are relatively few barriers
to entry particularly at the local level for suppliers of many different
types of marketing (including packaged goods manufacturers, advertising
agencies, retailers or other companies). However, the development of a
nationwide capacity would require enormous resources in addition to hiring
sufficient field service personnel to distribute and service comparable
advertising or promotional programs, and it would take substantial time,
effort and investment to obtain the comprehensive store relationships,
contracts and execution systems developed by ACTMEDIA over the years.
Although the Company believes that ACTMEDIA is the largest provider of
in-store marketing services, other companies (some of which are affiliated
with larger companies) offer similar services. Moreover, the in-store
marketing environment is characterized by rapid technological change,
and future technological developments (if and when cost effective)
may affect competition.
DIRECT MARKETING
Direct Marketing Industry
Direct marketing is a sophisticated, information driven communications
process that permits the seller to focus its marketing dollars on a target
audience of buyers and to precisely measure both the response to its
marketing program and the return on its marketing expenditures. These
attributes have contributed to the growth of direct marketing into a
$29 billion industry that commands an estimated 19% of all U. S. advertising
expenditures. Direct marketing has become an increasingly important
advertising medium and integral component of many companies' overall
marketing programs. Direct marketing is used for a variety of purposes
including prospecting for new customers, enhancing existing customer
relationships and exploring the potential for new products and services.
Whereas traditional forms of advertising aim at a broad audience and focus
on creating general brand or product awareness, direct marketing permits
advertisers to identify, target and reach a specifically defined audience
and accurately measure the response to their marketing message. The ability
to measure responses allows a direct marketing program to be continually
refined to further enhance its effectiveness. This capability facilitates
follow-up marketing campaigns and allows for accurate measurement of return
on marketing investment.
DIMAC
DIMAC was founded in 1921 and has evolved into the largest full service,
vertically integrated direct marketing services company in the United States.
DIMAC creates and implements comprehensive, custom tailored marketing
programs that enable clients nationwide to focus their marketing
expenditures on a highly targeted potential customer base. As a full service,
vertically integrated firm, DIMAC provides every component of a complete
direct marketing program, including customized market research, strategic
and creative planning, creation and management of relational databases,
telemarketing, media buying, production services, fulfillment services and
subsequent program analysis. Vertical integration provides a key attribute
in attracting new business and expanding existing relationships. Clients
come to DIMAC for all or part of the direct marketing process and typically
gravitate into additional services. DIMAC which is headquartered in
St. Louis, has additional facilities to service its client base in New York,
Philadelphia, Boston, Chicago, Palm Coast, Houston, San Francisco,
and Los Angeles.
Throughout the past thirty years, DIMAC has successfully expanded the
range of its marketing services and increased the size of its customer
base to include major corporations such as AT&T, American Express,
BLOCKBUSTER Entertainment, The Walt Disney Company, several Blue
Cross/Blue Shield organizations, Chemical Bank and a significant number
of U.S. public television stations.
Growth Opportunities
As a whole, the direct marketing industry is extremely fragmented,
with over 3,600 providers of related services. On average, these companies
generate annual revenues of less than $5 million each and typically
provide only one of the services provided by DIMAC. The increasing
sophistication of direct marketing, which is fueling the industry's
growth, is a challenge to smaller companies, which often lack the
resources to keep pace with clients' ever increasing expectations.
This combination of circumstances has initiated a period of consolidation
in the industry which provides tremendous potential for a well capitalized
and vertically integrated company like DIMAC. This industry consolidation
is expected to continue, affording DIMAC with the opportunity to further
expand, not only the services it offers its clients, but also the respective
industries it covers. DIMAC's full service capability, coupled with its
coast-to-coast presence, provide it with a critical mass increasingly
difficult for competitors to match. In fact, DIMAC's full service capability
has evolved into its most important competitive advantage. For clients,
it means one-stop shopping, a feature increasingly important to marketers
as businesses demand accountability and higher returns on advertising
dollars.
Business Strategy
DIMAC has successfully implemented a four part strategy which has set
the pace for its rapid growth and profitability. This strategy focuses on:
i) the expansion of the existing customer base through targeted business
development in selected industries;
ii) cross selling of services to existing customers;
iii) introduction of new products and services; and
iv) continued growth through targeted acquisitions.
In pursuit of its acquisition strategy, DIMAC has successfully completed
seven acquisitions since May 1990. With these acquisitions, DIMAC has
created a nationwide network, adding clients in new industries such as
not-for-profit, health care and publishing, and adding new services such
as television and video creative services, media buying and telemarketing.
In 1995, DIMAC completed two acquisitions. Palm Coast Data, Ltd. ("Palm Coast
Data") which was acquired in May 1995, is a direct marketing service provider
to the publishing industry. Palm Coast Data provides a full range of high
quality, low cost direct marketing and support services for consumer and
trade magazines, newsletters and books. Palm Coast Data is considered to
be the fastest growing and most innovative of the major magazine fulfillment
companies. Palm Coast Data brought DIMAC highly sophisticated proprietary
databases and software, and allowed it to further broaden the range of
services offered to its client base. The McClure Group ("McClure") is one
of the leading direct response advertising agencies in the country. This
acquisition closed in October 1995. McClure brings DIMAC a strong presence
in the health care industry, adding depth and breadth to its capabilities,
services, and client mix. Its client base includes major Blue-Cross
Blue-Shield health insurance providers, pharmaceutical companies, and
financial organizations.
Client Base
DIMAC primarily targets Fortune 500 companies with sophisticated direct
marketing requirements. DIMAC's clients include, among others, AT&T,
American Express, BLOCKBUSTER Entertainment, The Walt Disney Company,
MEDCO Containment Services, a number of Blue Cross/ Blue Shield organizations
and approximately 48% of all U.S. public television stations. AT&T accounted
for approximately 39% of DIMAC's total revenues for the year ended
December 31, 1995. On a combined basis after giving pro forma effect to
the Palm Coast acquisition and the McClure acquisition, AT&T accounted for
32% of DIMAC's revenues for the year ended December 31, 1995. DIMAC's large
client base includes major U.S. corporations as well as smaller companies
in a broad range of industries, including financial services,
telecommunications, packaged goods, automotive, not-for-profit television
and retail. As a part of DIMAC's business strategy, DIMAC will continue to
diversify its client base through new business development and selected
acquisitions.
Competition
Many of DIMAC's services are sold in highly competitive markets in the
United States, including the markets for planning and developing direct
marketing strategies, printing and distribution of direct mail advertising
materials, and tracking and analyzing the effectiveness of direct
marketing campaigns. Many formats, including television, radio and newspaper,
compete for the advertising dollars of DIMAC's clients. DIMAC competes across
the spectrum of the these markets with a significant number of companies of
varying sizes, including divisions and subsidiaries of larger corporations.
Management believes that DIMAC possesses a competitive advantage over these
other companies because of DIMAC's ability to provide vertically integrated
direct marketing services to its clients, resulting in cross-selling
opportunities for DIMAC and increased cost-efficiency for its clients. A
majority of these competitors typically specialize in limited areas of the
direct marketing process.
BROADCASTING
Heritage owns and operates four network-affiliated television stations
(plus one affiliate licensed as a satellite station but operated as a
partial stand-alone station) and nineteen radio stations in eight major
markets.
TELEVISION
The Television Group owns four network-affiliated television stations in
mid-sized markets. The following table sets forth selected information
relating to the television stations owned by Heritage:
<TABLE>
<CAPTION>
OTHER
TV DMA COMMERCIAL STATION STATION
STATION CHANNEL NETWORK HOMES MARKET STATIONS MARKET RANK IN
AND NUMBER AFFILITATION IN DMA(1) RANK(1) IN DMA SHARE(2) MARKET(3)
LOCATION
<S> <C> <C> <C> <C> <C> <C> <C>
KOKH-TV 25 FOX 585,270 43 4 7 4
(UHF)
Oklahoma City,
OK
WCHS-TV 8 ABC 479,320 57 3 11 3
(VHF)
Charleston/
Huntington,WV
WEAR-TV 3 ABC 436,200 61 4 19 1T
(VHF)
Mobile,AL/
Pensacola,FL
WPTZ-TV 5 NBC 286,230(4) 92(4) 2 16 2
(VHF)
Burlington,VT/
Plattsburg,NY
WNNE-TV 31 NBC 286,230(4) 92(4) 3 3 4
(UHF)(5)
Hartford,VT/
Hanover,NH
<FN>
(1) Source:Nielsen Television Designated Market Area ("DMA") Market
rankings September 1995.
(2) "Sign on-Sign off" market shares as reported in the November 1995
Nielsen ratings. Ratings are often quoted on a "sign on-sign off" basis,
representing the average percentage of televsion households viewing the
station during normal program viewing periods(approximately 6:00 a.m. to
2:00 a. m. for Nielsen). As such, ratings are one common measure used by
advertisers and others to compare a station's overall ranking in a market
to its competitors.
(3) Rankings based on relative "sign on-sign off" market shares in the
November 1995 ratings of Nielsen.
(4) Does not reflect any homes in southern Quebec (including most of
Montreal) which received the WPTZ-TV signal off the air or by cable.
WPTZ-TV's signal is accessible to approximately 3.4 million people in
the province of Quebec including approximately 2.8 million people in
the city of Montreal.
(5) Operated as a satellite of WPTZ-TV, but maintains some local programming
and sells advertising locally.
</TABLE>
Heritage operates its television stations in accordance with a cost-benefit
strategy that stresses primarily revenue and cash flow generation and
secondarily audience share and ratings. The objective of this strategy is
to deliver acceptable profit margins while maintaining a balance between the
large programming investment usually required to maintain a number one
ranking (with its resultant adverse effect on profit margins), and the
unfavorable impact on revenues that results from lower audience ratings.
Components of the Company's operating strategy include management's emphasis
on obtaining local advertising revenues by market segmentation, which
provides a competitive advertising advantage, focusing on local news
programming and tightly controlling operating expenses. By emphasizing
advertising sales from local businesses, the Company's stations produce a
higher percentage of local business (approximately 62% local and 37%
national) than the national average.
WEAR-TV, the ABC affiliate in Pensacola, is the only network affiliated
station in the Pensacola-Mobile market which is physically located in Florida
and benefits from the market's growth which comes primarily from Florida. In
1995, the station's newscast maintained the market's number one rating.
WEAR-TV operates from a newly constructed state-of-the-art broadcast facility
and enters the second year of a new five-year agreement with ABC.
The Television Group's station in Plattsburgh/Burlington, WPTZ-TV, an NBC
affiliate, also provides NBC programming to southern Quebec, including
Montreal. Additionally, WPTZ-TV operates WNNE-TV, a satellite station
serving portions of New Hampshire and Vermont, which allows advertisers to
selectively air their messages over WPTZ-TV's entire market or segments of
the market. WPTZ-TV and WNNE-TV recently entered into a new ten-year
affiliation agreement with NBC.
WCHS-TV, an ABC affiliate, is the only network affiliate based in the capital
city of Charleston, WV, within the Charleston and Huntington market. WCHS-TV
recently expanded its locally produced news programming to three hours each
weekday. WCHS-TV also extended its affiliation agreement with ABC for five
years.
The 1991 acquisition of KOKH-TV has been very successful. The improved
channel position, signal strength, elimination of a commercial station in
the Oklahoma City market, and the emergence of the Fox network have
contributed to the significant revenue increase since the acquisition.
KOKH-TV signed a new five-year affiliation agreement with Fox during 1995.
Heritage is increasing its investment in the station in 1996 by establishing
a local news department and upgrading the broadcast signal.
Heritage completed the sale of its smallest television station, KEVN-TV,
located in Rapid City, SD on February 8, 1996.
Three of the Company's stations, WEAR-TV, WPTZ-TV and WCHS-TV, which
represent 74% of the net revenues from Heritage's television operations in
1995, have developed specific market segmentation strategies based on their
status as the sole network affiliate in one geographic area of a hyphenated
market. This geographic advantage enables these stations to build strong
local identities and leading positions in local news programming in their
portions of these hyphenated markets. In addition, WPTZ-TV has a
transmission advantage in its market area compared to certain other network
affiliates.
The Company has shaped its sales efforts around two central beliefs: (1) that
national advertising spots and a station's relations with its clients are
based on ratings, while the sales of local spots depends to a greater extent
on the station's local sales force and their relations with clients and (2)
that the local advertising segment is the fastest growing advertising segment.
As a result of these beliefs, Heritage's stations generally maintain a larger,
more experienced sales force but a smaller general staff than its competitors.
The strength of the stations' sales forces and their orientation toward
generating local advertising revenue have resulted in more than 62% of the
stations' revenues being derived from local sources, against an industry
average estimated at approximately 50%.
In July 1995 the Company made a $1.1 million escrow deposit for the
construction permit for Channel 44 in Burlington, VT. The Company is in
the process of receiving certain regulatory approvals for the construction of
Channel 44 which, similar to Heritage's NBC affiliate serving the
Plattsburgh, NY/Burlington, VT market, will provide television programming
to Montreal upon becoming operational through a local marketing agreement
("LMA"). The Company has an option to purchase the station. On March 4, 1996,
Heritage entered into a LMA to operate Channel 35 in the Ft. Walton Beach
area. Heritage will operate Channel 35 as a commercial television station
with primary focus on local news service and popular entertainment
programming. The addition of Channel 35 in Ft. Walton Beach combined with
WEAR-TV, Heritage's ABC affiliate in Pensacola, allows the Company to
increase its broadcasting capacity on the Florida side of the
Mobile, AL/Pensacola, FL market. Under the agreement, Heritage has an
option to purchase the station, along with its FCC license.
RADIO
The Radio Group owns and operates five AM and fourteen FM radio stations
(including six FM "duopolies") in six of the top 30 markets and two others
in markets 30 to 70 -- Seattle, St. Louis, Portland, Cincinnati, Kansas City,
Milwaukee, Rochester, and Knoxville. The following table sets forth certain
information regarding the Company's radio stations (excluding the Knoxville
stations acquired in February 1996):
<TABLE>
<CAPTION>
FM FM STATION
STATION RANK IN
METRO STATIONS FORMAT TARGET
LOCATION RANK(1) CALL SIGN FORMAT IN MARKET RANK(2)AUDIENCE(3)
<S> <C> <C> <C> <C> <C> <C>
Seattle-Tacoma,WA 13 KRPM-AM Country 33
KCIN-FM Country 2 12
St.Louis,MO 17 WRTH-AM Standards 26
WIL-FM Country 1 2
KIHT-FM Rock Oldies 1 11
Portland,OR 24 KKSN-AM Standards 30
KKSN-FM Oldies 1 6
KKRH-FM Rock Oldies 1 7
Cincinnati,OH 25 WVAE-FM Smooth Jazz 22 1 4
Kansas City,MO-KS 26 KCFX-FM Rock Oldies 25 1 1
KCIY-FM Smooth Jazz 1 5
Milwaukee,WI 28 WEMP-AM Oldies 26
WMYX-FM Adult 1 7
Contemporary
WAMG-FM Adult 3 13
Contemporary
Rochester,NY 44 WBBF-AM Standards 19
WBEE-FM Country 1 1
WKLX-FM Oldies 1 7
<Ffn>
(1) Metropolitan areas as defined and ranked by Arbitron,Fall 1995.
(2) Heritage's FM station ranking against all radio stations in its market
with the same programming format, based on listenership by persons age 25
to 54 during the 6:00 a.m. to midnight time period. (Source: FAll 1995
Arbintron ratings).
(3) The target ranking against all radio stations in the market,based on
listenership by persons age 25 to 44 during the 6:00 a. m. to midnight
time period. (Source: Fall1995 Arbitron rations).
</TABLE>
The Company's strategy since its inception has been to identify, acquire, and
repair under-performing radio stations or groups through a strategic program
of management improvements, technical upgrades, programming and promotional
enhancements, and expense reallocations and controls. The radio station
portfolio also seeks to be diversified in terms of geography and programming
formats. Heritage radio stations strive to be top-rated in their programming
formats, and program varieties of six different mass appeal music formats
directed primarily to 25 to 54 year-old listeners, the target audience most
desired by advertisers. Presently, the Company's FM stations are format
leaders in six of its eight markets. In addition, Heritage stations are
ranked first or second among all stations in three of these markets.
The Federal Communications Commission ("FCC") has authority to limit radio
ownership both in the number of stations owned, operated, or controlled in
any one market, and in total. In late 1992, the FCC relaxed its rules to
double the number of stations (up to two AM's and two FM's) one entity can
own in one market. This new combination is commonly known as a "duopoly".
With the completion of the Knoxville, Tennessee acquisition, the Company has
six duopolies in eight markets.
The Company acquired two FM stations in 1995 that created new duopolies.
In March 1995, the Company began operating KKCJ-FM in Kansas City under a
Local Marketing Agreement, and subsequently changed its call letters to
KCIY-FM and its programming to a "smooth jazz" format. In June 1995, the
Company acquired KXYQ-AM/FM in the Portland, Oregon market, and immediately
changed the FM station's call letters to KKRH-FM, and its format to "rock
oldies". In July 1995, the Company closed on the purchase of KCIY-FM. In
November 1995, the Company disposed of KXYQ-AM. The financial results of
the Kansas City station were consolidated beginning April 1995, and the
Portland station beginning June 1995.
In February 1996, the Company completed the acquisition of radio stations
WMYU-FM and WWST-FM serving the Knoxville, Tennessee market. Consistent with
the approach on all radio acquisitions, the Company is conducting audience
research and evaluating format and operating strategies.
The Company's acquisitions and operating strategies have enabled its radio
group to increase operating income from $402,000 in 1988, its first full
year, to $9.4 million in 1995. The Radio Group has increased revenues from
$16 million in 1991 to $43.8 million in 1995, an average annual growth rate
of 28%.
Each of Heritage's FM facilities is of the highest class of service permitted
by the FCC ( Class B or C) with comprehensive signal coverage of its markets.
The AM stations operate as full-time facilities on regional or clear channels.
Competition
The Company's television and radio stations compete for revenues with other
media companies in their respective markets, as well as with other
advertising media, such as newspapers, magazines, outdoor advertising,
local cable systems, direct mail and alternative media. Some competitors
are part of larger companies with substantially greater financial resources
than Heritage.
Competition in the broadcasting industry occurs primarily in individual
markets. Generally, a television broadcasting station in one market does
not compete with stations in other market areas. Heritage's television
stations are located in highly competitive markets. While the pattern of
competition in the radio broadcasting industry is basically the same, it is
not uncommon for radio stations outside of the market area to place a signal
of sufficient strength within that area to gain a share of the audience.
In addition to the element of management experience, factors that are
material to competitive position include authorized power, assigned
frequency, network affiliation, audience characteristics and local program
acceptance, as well as strength of local competition. The broadcasting
industry is continuously faced with technological change and innovation,
the possible rise in popularity of competing entertainment and communications
media, changes in labor conditions and governmental restrictions or actions
of federal regulatory bodies, including the FCC and the Federal Trade
Commission ("FTC"), any of which could possibly have a material adverse
effect on Heritage's financial position and results of operations.
In recent years, broadcast television stations have faced increasing
competition from the other sources of television service, primarily cable
television, and the ratings have reflected a decline in the viewing audience.
These other sources can increase competition for a broadcasting station by
bringing into its market distant broadcasting signals not otherwise available
to the station's audience and also serving as a distribution system for non-
broadcast programming. Programming is now being distributed to cable
television systems by both terrestrial microwave systems and by satellite.
Other sources of competition include home entertainment systems (including
television game devices, video cassette recorder and playback systems and
video discs), multi-point distribution systems, multichannel multi-point
distribution systems and satellite master antenna television systems.
Heritage's television stations also face competition from direct broadcast
satellite services which transmit programming directly to homes equipped
with special receiving antennas or to cable television systems for
transmission to their subscribers. The likely entry of telephone companies
into the cable television business could increase the competition the
Company's television stations face from other distributors of audio and
video programming.
The broadcasting industry is continuously faced with technological change
and innovations, which could possibly have a material effect on the
Company's broadcast operations and results. Commercial television
broadcasting may face future competition from interactive video and data
services that may provide two-way interaction with commercial video
programming, along with information and data services that may be delivered
by commercial television stations, cable television, direct broadcast
satellites, multi-point distribution systems, multichannel multi-point
distribution systems, or other future video delivery systems. Commercial
radio broadcasting may face further competition from satellite delivered
digital audio radio services.
Federal Regulation of Broadcasting
Television and radio broadcasting are subject to the jurisdiction of the FCC,
which acts under authority granted by the Communications Act of 1934, as
amended (the "Communications Act"). The Communications Act prohibits radio
or television broadcasting except in accordance with a license issued by the
FCC. The Communications Act also empowers the FCC, among other things, to
issue, renew, modify or revoke broadcasting licenses, to determine the
location of stations, to regulate the equipment used by stations, to adopt
such regulations as may be necessary to carry out the provisions of the
Communications Act and to impose penalties for violation of such regulations.
The Telecommunications Act of 1996 (the "Telecommunications Act"), which
amends major provisions of the Communications Act, was enacted on
February 8, 1996. The FCC has not yet implemented the provisions of the
Telecommunications Act. The following is a brief summary of certain
provisions of the Communications Act and specific FCC regulations and
policies.
Renewal. Historically, Broadcasting licenses have been issued for a
maximum term of up to five years in the case of television stations and
up to seven years in the case of radio stations, and are renewable upon
application. Although not yet implemented, the Telecommunications Act
provides for license terms of up to eight years for both television and
radio stations. We cannot predict whether the FCC will apply this provision
of the Telecommunications Act only to new licenses and license renewals or
will also retroactively apply this provision to extend the terms of existing
licenses. In determining whether to renew a broadcast license, the FCC has
authority to evaluate the licensee's compliance with the provisions of the
Communications Act and the FCC's rules and policies. The FCC licenses for
each of Heritage's radio and television stations expire at different times
between October 1, 1996 and April 1, 1999.
The Communications Act authorizes the filing of petitions to deny any license
renewal applications during certain periods of time following the filing of
renewal applications. Petitions to deny can be used by interested parties,
including members of the public, to raise issues concerning a renewal
applicant's qualifications. If a substantial and material question of
fact concerning a renewal application is raised by the interested party,
the FCC will hold an evidentiary hearing on the application. In the vast
majority of cases, broadcast licenses are renewed by the FCC even where
there are petitions to deny filed against broadcast license renewal
applications. Under the Telecommunications Act, a competing application
for authority to operate a station and replace the incumbent licensee may
not be filed against a renewal applicant and considered by the FCC in
deciding whether to grant a renewal application. The statute modified the
license renewal process to provide for the grant of a renewal application
upon a finding by the FCC that the licensee (1) has served the public
interest, convenience, and necessity; (2) has committed no serious violations
of the Communications Act or the FCC's rules; and (3) has committed no other
violations of the Communications Act or the FCC's rules which would
constitute a pattern of abuse. If the FCC cannot make such a finding,
it may deny a renewal application, and only then may the FCC accept other
applications to operate the station of the former licensee.
Acquisitions or Sales. The Communications Act prohibits the assignment of
a license or the transfer of control of a licensee without the prior
approval of the FCC. Applications to the FCC for such assignments or
transfers are subject to petitions to deny by interested parties and are
granted by the FCC only upon a finding that such action will serve the
public interest, convenience and necessity. In determining whether to
grant such applications, the FCC has authority to evaluate the same types
of matters that it considers in evaluating a broadcast license renewal
application. In the vast majority of cases where petitions to deny are
filed against assignment or transfer applications, the applications are
granted and the petitions are denied. On July 27, 1995, the FCC denied
the NAACP's petition for reconsideration of the FCC's grant of the transfer
of control of Stations WRTH-AM and WIL-FM; Stations WBBF-AM and WBEE-FM;
Stations KRPM-AM and KRPM-FM; and Stations WEMP-AM and WMYX-FM; and the
renewal and the transfer of control of Station WEAR-TV, and the FCC's grant
has become a final order, not subject to judicial or administrative review.
Ownership Restrictions. Under the Communications Act, broadcast licenses
may not be held by or transferred or assigned to an alien or a
foreign entity. In addition, the Communications Act provides that no
broadcast license may be held by any corporation directly or indirectly
controlled by any other corporation of which more than one-fourth of the
capital stock of record is owned or voted by aliens, if the FCC finds the
public interest will be served by the refusal to grant such license. Under
the Telecommunications Act, aliens may serve as officers and directors of
a broadcast licensee and any corporation controlling, directly or indirectly,
such licensee.
The Telecommunications Act directs the FCC to eliminate or modify certain
rules regarding the multiple ownership of broadcast stations and other media
on a national and local level. The statute eliminates the limit on the
number of television stations that an individual or entity may own or
control, provided that the audience reach of all television stations owned
does exceed 35% of all U.S. households. The statute also directs the FCC to
conduct a rulemaking proceeding to determine whether to retain, eliminate,
or modify its limitations on the number of television stations that an
individual or entity may own within the same geographic market.
The Telecommunications Act eliminates the limit on the number of radio
broadcast stations that an individual or entity may own or control
nationally. The statute also relaxes the FCC's local radio multiple
ownership rules governing the common ownership of radio broadcast stations
in the same geographic market. The statute permits the common ownership of
up to 8 commercial radio stations, not more than 5 of which are in the same
service (i.e., AM or FM), in markets with 45 or more commercial radio
stations. In markets with 30 to 44 commercial radio stations, an individual
or entity may own up to 7 commercial radio stations, not more than 4 of
which are in the same service. In markets with 15 to 29 commercial radio
stations, an individual or entity may own up to 6 commercial radio stations,
not more than 4 of which are in the same service. In markets with 14 or
fewer commercial radio stations, an individual or entity may own up to 5
commercial radio stations, not more than 3 of which are in the same
service, provided that the commonly owned stations represent no more than
50% of the stations in the market.
The Telecommunications Act does not eliminate the FCC's rules restricting
the common ownership of a radio station and a television station in the same
geographic market ("one-to-a-market rule") and the common ownership of a
daily newspaper and a broadcast station located in the same geographic market.
The statute, however, does relax the FCC's one-to-a-market rule by
authorizing the FCC to extend its waiver policy to stations located in the
50 largest television markets. The statute also allows the common ownership
of a cable television system and a television station located in the same
geographic market. Finally, the statute directs the FCC to review all of its
ownership rules to determine whether they continue to serve the public
interest. These requirements do not require any changes in the Company's
present television and radio operations.
In applying the FCC's multiple and cross ownership rules, the licensee will
also have attributed to it any media interests of officers, directors and
shareholders who own 5% or more of the licensee's voting stock, except that
certain institutional investors who exert no control or influence over a
licensee may own up to 10% of such outstanding voting stock before
attribution results. These FCC rules do not require any changes in
Heritage's present television and radio operations.
Regulatory Changes. Legislation enacted by Congress called the Cable
Television Consumer Protection and Competition Act of 1992 (the "Act")
imposes certain regulatory requirements on the operation of cable
television systems. The Act provides television stations with the right
to control the use of their signals on cable television systems. Each
television station was required to elect prior to June 17, 1993 whether
it wanted to avail itself of must-carry rights or, alternatively, to
assert retransmission rights. If a television station elected to exercise
its authority to grant retransmission consent, cable systems were required
to obtain consent of that television station for the use of its signal and
could be required to pay the television station by October 6, 1993 for such
use. The Company believed that the preservation and continued cable
carriage of the station's signal was more important than any potential
negotiated consideration, and prior to the October 6 deadline elected
must-carry for all its stations except the Fox affiliate, which successfully
negotiated cable retransmission consents in association with the Fox
Television Network. These elections remain in effect until October 1, 1996
when the stations again elect. The Act further requires mandatory cable
carriage of all qualified local television stations not exercising their
retransmission rights. Several challenges to the constitutionality of these
requirements have been filed in Federal court. On December 13, 1995, a
special three-judge panel of the U.S. District Court for the District of
Columbia upheld the constitutionality of the provision in the Cable
Television Consumer Protection and Competition Act of 1992 requiring
mandatory cable carriage of all qualified local television stations not
exercising their retransmission rights. An appeal of the District Court's
decision is pending before the Supreme Court. In the meantime, the FCC's
must-carry regulations implementing the Cable Act remain in effect. The
Company cannot predict the outcome of such challenges or the effect that
the Act will have on the business of the Company if the constitutionality
of the requirements is not upheld.
The Telecommunications Act lifts the prohibition on the provision of cable
television services by telephone companies in their telephone areas subject
to regulatory safeguards and permits telephone companies to own cable systems
under certain circumstances. Various federal courts have held that the
prior statutory ban on the provision of video programming directly to
subscribers by a telephone company in its telephone service area is
unconstitutionally broad. The Supreme Court has agreed to review one of
these decisions. It is not possible to predict the impact of these recent
actions on the Company's television stations. The elimination or further
relaxation of the restriction, however, could increase the competition the
Company's television stations face from other distributors of video
programming.
The Telecommunications Act also authorizes the FCC to issue additional
licenses for advanced television ("ATV") services only to individuals or
entities that hold an authorization to operate or construct a television
station ("Existing Broadcasters"). The Telecommunications Act directs the
FCC to adopt rules to permit Existing Broadcasters to use their ATV channels
for various purposes, including foreign language, niche, or other
specialized programming. The statue also authorizes the FCC to collect
fees from Existing Broadcasters who use their ATV channels to provide
services for which payment is received. Prior to the enactment of The
Telecommunications Act, members of Congress sought assurance from the FCC
that it would not implement any plan to award spectrum for ATV service until
legislation is enacted to address spectrum issues such as whether
broadcasters should be required to pay for ATV licenses. In response, the
FCC stated that it would not award licenses or construction permits for A
TV service until legislation is enacted to address ATV spectrum issues.
Such legislation, if adopted, may require Existing Broadcasters to pay for
ATV licenses. Heritage cannot predict what action Congress will take with
respect to the ATV spectrum or the effect of any action on the business of
Heritage.
Legislation has been introduced from time to time which would amend the
Communications Act in various respects and the FCC from time to time
considers new regulations or amendments to its existing regulations.
In addition, a number of proposals for regulatory changes are pending
before the FCC. Such matters include proposals pending before the FCC to
relax the rules governing the common ownership of television stations
locally and nationally, to relax the rule governing the common ownership
of a television and radio station in the same market, to authorize a new
type of wireless cable system, and to authorize advanced (high definition)
television systems. Certain of these changes have the potential to increase
operating costs and/or increase the number of competing broadcast stations.
Heritage cannot predict whether such changes will be adopted or, if adopted,
the effect that any such changes would have on the business of Heritage.
Employees
Heritage and its subsidiaries employ approximately 3,200 full-time and up
to 23,000 available part-time employees. Of this total, ACTMEDIA employs
approximately 800 full-time and up to approximately 23,000 available part-
time personnel, including POWERFORCE Services. Substantially all of
ACTMEDIA's part-time personnel are field service staff. None of the
In-store Marketing Group's employees are represented by a collective
bargaining unit. DIMAC employs approximately 1,625 employees of which
100 employees in St. Louis are members of the Graphic Communications
International Union (G.C.I.U.) Local 505. The G.C.I.U. contract runs
through November 30, 1999. Heritage's broadcast subsidiaries currently
employ approximately 760 employees of which 40 employees are represented
by unions. The Company believes that it has a good relationship with its
employees and unions.
Item 2. Properties.
Heritage's headquarters are located in Dallas, Texas. The lease agreement
for the 13,350 square feet of office space in Dallas expires April 30, 2000.
ACTMEDIA leases office facilities with an aggregate of approximately 76,000
square feet in Norwalk, Connecticut and 8,100 square feet in Des Plaines,
Illinois with leases expiring in 2000 and 1998, respectively, and 46 field
offices with an aggregate of approximately 111,000 square feet pursuant to
leases with terms of three years or less. POWERFORCE leases office
facilities in Chicago totaling 15,619 square feet under an agreement that
expires June 30, 1998.
DIMAC leases a 275,000 square foot facility in St. Louis, Missouri with
an expiration date in October 2005. DIMAC has 10 remote locations, including
its subsidiaries, with an aggregate of approximately 337,000 square feet
pursuant to leases with terms expiring from 1996 to 2002. Palm Coast owns
its 83,000 square foot facility.
The types of properties required to support each of Heritage's broadcast
stations include offices, studios, transmitter sites and antenna sites.
A station's studios are generally housed with its offices in downtown or
business districts. Heritage's television stations own approximately 74
total acres in 5 locations upon which buildings with approximately 60,000
square feet of office and studio space are located. The television
stations own and lease approximately 92 and 1 acre, respectively, upon
which the tower or transmitters are located. Heritage's radio stations
own three AM transmitter sites totaling 58 acres and two facilities totaling
15,510 square feet. The radio stations lease approximately 47,000 square
feet in six locations upon which office and studio space is located. The
radio stations also lease tower space at six locations totaling 31 acres.
Item 3. Legal Proceedings.
Heritage is subject to litigation in the ordinary course of business.
It is not subject to any such legal proceedings which management believes
are likely to result in any material losses being incurred.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Shares of the Company's Class A Common Stock have been listed on the American
Stock Exchange ("AMEX") under the symbol "HTG" since 1988. No other class
of Heritage's common equity is currently publicly traded. The following
table sets forth the high and low closing prices of the Class A Common Stock
for each quarterly period within the two most recent fiscal years on the
AMEX:
<TABLE>
High Low
<S> <C> <C>
1995
First Quarter $ 27 1/4 $ 23 7/8
Second Quarter 29 1/2 25 1/2
Third Quarter 32 1/4 27 1/8
Fourth Quarter 30 25
1994
First Quarter $ 21 5/8 $ 17 1/2
Second Quarter 20 1/8 16 1/8
Third Quarter 22 3/8 17 1/4
Fourth Quarter 27 1/4 21 1/2
</TABLE>
On March 8, 1996 the last reported sale price of the Company's Class A
Common Stock was $33 5/8 per share. At March 8, 1996 there were
approximately 504 record holders of Class A Common Stock.
Heritage has never paid cash dividends on shares of any class of its common
stock. Heritage presently intends to retain its funds to support the
growth of its business or to repay indebtedness or for other general
corporate purposes and therefore does not anticipate paying cash dividends
on shares of any class of its common stock in the foreseeable future.
Additionally, the various financing agreements to which either Heritage or
one or more of its subsidiaries is a party may effectively prohibit or
sharply impact Heritage's ability to pay dividends. See Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capitalization and Liquidity".
Item 6. Selected Financial Data.
(In thousands, except per share data)
Set forth below is selected consolidated financial data with respect to
the Company for the years ended December 31, 1995, 1994, 1993, 1992, and
1991, which were derived from the audited consolidated financial statements
of the Company. The data as of December 31, 1995 and 1994 and for each of
the years in the three year period ended December 31, 1995 should be read
in conjunction with the audited consolidated financial statements of the
Company and its subsidiaries and the related notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31, (1)
1995 1994 1993 1992 1991
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 435,776 317,628 291,205 250,891 222,360
Operating income (2) 73,013 57,838 34,995 27,550 21,950
Income (loss) before
extraordinary item 26,571 22,299 77(14,966) (19,278)
Net income (loss) 26,571 22,299 512(18,560) (14,958)
Earnings (loss) per
share before extraordinary item(3)
1.50 .15 (.32) (1.51) (2.39)
Earnings (loss ) per share(3) 1.50 .15 (.29) (1.76) (1.97)
Equivalent shares(4) 17,676 17,381 16,314 14,449 10,369
Balance Sheet Data (at period end):
Property and equipment, net 56,155 54,799 57,422 55,832 48,659
Goodwill and other intangibles,
net 383,848 382,288 363,667 373,426 375,378
Total assets 551,011 514,147 492,849 496,296 481,147
Long-term debt(5) 339,865 351,525 314,989 319,385 345,916
Stockholders' equity 120,400 89,246 86,642 91,213 62,022
Other Data:
EBITDA(6) 104,416 90,058 68,353 54,242 45,103
Capital Expenditures (7) 15,088 13,271 18,534 15,531 11,421
Ratio of EBITDA to interest,
net 3.01x 2.97x 2.17x 1.45x 1.17x
Ratio of Debt to EBITDA 3.25 3.90 4.61 5.89 7.67
<FN>
____________________
(1)Information reflects acquisition and investment transactions described
under Note 2 of Notes to Consolidated Financial Statements. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations-General."
(2) Operating income contains certain other expenses that are unusual or
infrequent in nature and are not expected to be incurred by the Company
on a regular basis in future periods. Such costs are comprised of the
following: for the year ended December 31, 1995, $.8 million write-down
of program rights; for the year ended December 31, 1993, $4.7 million
relating to restructuring charges ($3 million) and the write-down of
program rights ($1.7 million). In addition, operating income contains
compensation expense relating to stock appreciation rights in the
amounts of $350,000, $500,000, $500,000, and $4.9 million during the
years ended December 31, 1991 through 1994, respectively.
(3) See Note 1(J) of Notes to Consolidated Financial Statements.
(4) Excludes shares reserved for issuance upon exercise of stock options
or upon conversion of outstanding preferred stock, as the effect would
be antidilutive or immaterial.
(5) Includes current installments. See Note 4 of Notes to Consolidated
Financial Statements.
(6) EBITDA represents operating income excluding depreciation, amortization
of goodwill and other assets (as presented on the face of the income
statement) and nonrecurring charges. EBITDA is presented because
management believes that is a widely accepted financial indicator of a
company's ability to service and/or incur indebtedness, maintain current
operating levels of fixed assets and acquire additional operations and
businesses. Accordingly, significant uses of EBITDA include, but are not
limited to, interest and principal payments on long-term debt, capital
expenditures, and acquisitions of new operations or businesses. However,
EBITDA should not be considered as an alternative to operating income or
net income (loss) as a measure of operating results in accordance with
generally accepted accounting principles or to cash flows from
operating, investing or financing activities as a measure of liquidity.
Items excluded from EBITDA, such as depreciation, amortization and
nonrecurring charges, are significant components of the Company's
operations and should be considered in evaluating the Company's
financial performance. Nonrecurring charges are excluded from EBITDA
due to the fact that management does not expect to incur these charges
on a regular basis in the future and does not believe that these
charges should be considered in evaluating the Company's ability
to service and/or incur indebtedness, maintain current operating
levels of fixed assets and acquire additional operations and
businesses in the future. Investors should be aware that EBITDA
as described above may differ in the method of calculation from
EBITDA presented by other companies due to the exclusion of
nonrecurring charges. See footnote (2) above for a description of
nonrecurring charges.
(7) Capital expenditures represent expenditures for long-term fixed
assets which are necessary to grow or maintain existing products or
services sold by the Company. Capital expenditures exclude cash
outlays relating to acquisitions, of $4.4 million, $11.9 million,
$5.1 million, $6.9 million and $19 million for the years ended
December 31, 1991 through 1995, respectively.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
Heritage Media has focused its growth strategy on acquiring in-store,
media, and other communications-related businesses it believes have the
potential for long-term appreciation and aggressively managing the
respective operations to improve their operating results.
In July 1993, the Company completed the acquisition of the broadcast
assets of radio station WKLX-FM, Rochester, New York. Heritage programmed
and marketed the station under a local marketing agreement ("LMA") from
May 1993 to the completion of the acquisition in July 1993. In October 1993,
the Company agreed to acquire radio station WEZW-FM, Milwaukee, Wisconsin
and began programming and marketing the station under an LMA. This
acquisition was completed in January 1994.
In February 1994, Heritage completed the acquisition of in-store marketing
companies located in Australia and New Zealand. In March 1994, Heritage
completed the acquisition of KRJY-FM in the St. Louis market. In October
1994, the Company completed the sale of the assets of KDLT-TV, its smallest
television station, located in Sioux Falls, South Dakota. The loss
attributable to the sale was approximately $1.4 million. In October 1994,
ACTMEDIA Canada, Inc. acquired Infonet. The purchase was financed by a
bank credit agreement with Canadian banks. Some of the major financing
activities in 1994 that simplified the Company's capitalization structure
included conversion of the preferred shares, eliminating related dividends;
early retirement of the settlement rights; and the secondary public offering
and conversion of Class C common shares.
On January 1, 1995 the Company completed the acquisition of POWERFORCE
Services located in Chicago. On June 15, 1995 Heritage purchased KXYQ-FM
in Portland, Oregon and changed the call letters to KKRH-FM. On March 10,
1995 the company agreed to acquire radio station KKCJ-FM in Kansas City and
began programming and marketing the station under an LMA. The acquisition
was completed on July 25, 1995. In December 1995, Heritage wrote off its
Netherlands in-store investment Media Meervoud.
Due to the numerous acquisitions, dispositions, and financing activities,
the results of operations from year to year are not comparable.
See Note 2 of Notes to Consolidated Financial Statements for additional
information concerning the Company's acquisitions, dispositions, and
related transactions.
Results of Operations: 1995 Compared to 1994
Consolidated net revenues of $435.8 million in 1995 represented a 37%
increase over the 1994 revenues of $317.6 million. Operating income of
$73.0 million in 1995 exceeded the comparable 1994 period by 26%. The
earnings per share was $1.50 versus $.15 in 1994. The improvement in the
Company's operating results for the 1995 period primarily reflects revenue
growth from all of the In-store Marketing Group's products, the addition of
POWERFORCE Services and increased Television and Radio Group advertising
revenues. The earnings per share improvement in 1995 versus 1994 was due
principally to $15.2 million of additional operating income reduced by
higher interest expense and income taxes. The 1995 period included an
$.8 million write-down of television program rights, a $3.6 million
write-off of the Netherlands investment, and an $.8 million gain on
sale of assets. The 1994 period included a $4.9 million non-cash expense
for stock appreciation rights. The 1994 period also included the $1.13 per
share impact of settlement rights accretion and dividends. All comparisons,
unless otherwise noted, are for the year ended December 31, 1995 versus the
comparable 1994 period.
In-store Marketing. The In-store Marketing Group contributed $346.4
million of revenues in 1995, an increase of 51%, compared to $230.1
million in 1994. All of the group's product revenues increased versus 1994.
Advertising and promotion revenues each improved by 20%. ICM revenues grew
14% to over $90 million. International revenues increased by 49% to $34.7
million in 1995 due primarily to the merger of Infonet into and the growth
of the Canadian operation. POWERFORCE Services added $68.8 million of
revenues in its first year with ACTMEDIA. The demonstration and sales
merchandising businesses continue to experience increased competition which
has adversely affected pricing.
The Netherlands investment, Media Meervoud, continued to incur losses in
1995. ACTMEDIA management's evaluation of the business concluded that due
to weak local management, turnover of sales people, limited retailer base
and single product dependence, the operation would not be funded beyond
December 31, 1995. ACTMEDIA actively sought a buyer for the business,
completed the sale on February 19, 1996 and wrote-off its $3.6 million
investment as of December 31, 1995.
In-store Marketing operating income of $50.5 million increased by 36%
from $37.2 million in the 1994 period due primarily to the increased 1995
revenues and an increase in the group's operating margin excluding the
POWERFORCE acquisition. The operating margin was 14% in 1995 versus 16%
in 1994. Excluding the operating results of POWERFORCE, which operates
with a higher level of variable expenses, the In-store Marketing Group's
operating margin increased to 18% in 1995.
Television. The Television Group generated $45.6 million of revenues in
1995, a 2% decline compared to $46.7 million in 1994. Revenues improved
2% compared to 1994 on a same station basis. The Television Bureau of
Advertising Times Sales Survey reported that industry-wide gross local
revenues increased by 5% and national revenues were up 1% compared to 1994.
The Television Group's local revenues increased 2% and national revenues
improved 12% compared to the 1994 period on a same station basis. Network
compensation increased $.9 million in 1995 versus 1994. The 1995 period
included $.5 million political revenues versus $3.3 million in 1994.
The Television Group's operating results were very strong for the first
six months of 1995 and slowed in the third and fourth quarters. This
performance was reflective of the Television industry's results by quarter.
All of the Television Group's stations, except Charleston, WV, generated
improved revenues and operating income in 1995 compared to 1994.
Operating income of $17.0 million increased by 13% compared to 1994 on
a same station basis, excluding the 1995 $.8 million write-down of program
rights, primarily as a result of higher revenues and reduced expenses. The
operating margin improved from 35% in 1994 to 37% in 1995.
The rate of growth of local and national advertising expenditures in the
industry continued to be slow entering 1996.
Radio. Net revenues of the Radio Group increased by 7% from $40.8 million
in 1994 to $43.8 million in 1995. The Radio Advertising Bureau reported that
total revenues grew by 7% (local up 8%, national up 3%) in the industry in
the comparable period. The Radio industry also had quarterly market growth
trends that declined sequentially each respective quarter. Revenues for the
stations owned for all of both periods increased 4% primarily as a result
of improved station ratings. The radio stations acquired in 1995 contributed
$1.6 million of the revenue increase. The 1994 period included $.5 million
of political revenues. The significant contributors to the growth were the
St. Louis and Rochester duopolies and the Kansas City station. The Cincinnati
station's revenues declined significantly due to the previously discussed
format competition. However, the station achieved the number four rank in
the market in the fourth quarter after the format change to smooth jazz.
Operating income grew from $8.7 million in 1994 to $9.4 million in 1995
primarily as a result of the improved revenues by the stations owned for
all or both periods as a $1.2 million operating loss was incurred by the
stations acquired in 1995. The operating margin improved from 21% in 1994
to 25% in 1995 on a same station basis.
The Radio industry has also seen a continued softening of advertising
expenditures entering 1996.
Corporate Expenses. Corporate expenses in 1995 of $3.8 million increased
4% compared to $3.7 million in 1994.
Other Operating Expenses. The 1995 period included a $.8 million writedown
of television program rights as a result of management's assessment of their
realizable value (based upon projected future utilization of the programs).
The 1994 period included a $4.9 million non-cash expense for stock
appreciation rights (see Note 8 of Notes to Consolidated
Financial Statements).
Depreciation and Amortization. Depreciation and amortization of $30.6
million in 1995 increased by 12% compared to $27.3 million in 1994 due
primarily to additional In-store Marketing depreciation associated with a
higher fixed asset base and additional amortization attributed to
acquisitions.
Interest Expense. Interest expense increased from $30.4 million in 1994
to $34.7 million in 1995 due to higher interest rates and higher debt levels.
Other Expenses. The 1995 results of operations included the non-cash
$3.6 million write-off of MMV.Included in the 1994 results was a $1.4
million non-cash charge to reflect the loss on the sale of television
station KDLT-TV.
Income Taxes. Income tax expense for 1994 relates primarily to state
income taxes. Income tax expense for 1995 is comprised of Federal income
tax of $6.4 million and state, local and foreign taxes of $2.7 million.
Income tax expense in 1995 was reduced by the recognition of the Company's
remaining net operating loss carryforwards of approximately $25 million.
In addition, the utilization of approximately $13 million of restricted
net operating carryforwards in 1995 was credited to goodwill as such
carryforwards were not recognized as deferred tax assets upon acquisition
of the related entities in prior periods. The Company expects that its 1996
effective income tax rate for financial statement purposes will be
approximately 53%, up from 26% in 1995, as a result of the Company's
utilization of its net operating loss carryforwards for financial
statement purposes in 1995.
Net Income. Primarily as a result of an additional $15.2 million of
operating income, reduced by $4.3 million additional interest and $6.4
million incremental taxes, the Company improved its net income from $22.2
million in 1994 to $26.6 million in 1995. Net income applicable to common
stock reflects settlement rights accretion of $19.5 million and preferred
dividends of $.1 million in 1994.
Balance Sheet: 1995 Compared to 1994
Trade receivables increased 51% from $51.1 million in 1994 to $77.1
million in 1995. Approximately $6 million was due to the POWERFORCE
acquisition, approximately $15 million was related to a 19% increase in
fourth quarter 1995 revenues compared to 1994 and the remainder due to an
increase in days sales outstanding. Receivables declined approximately $18
million subsequently in January 1996. Goodwill and other intangibles
increased by approximately $1.6 million, net from 1994 to 1995 due to
the approximately $21 million relating to acquisitions less $13.9 million
of amortization expense and the remainder dispositions. Deferred advertising
revenues increased from $13.9 million in 1994 to $25.2 million in 1995 due
primarily to an increase in and timing of promotion revenues which provide
for substantial billings prior to execution of the programs.
Results of Operations: 1994 Compared to 1993
Consolidated net revenues of $317.6 million represented a 9% increase over
the 1993 revenues of $291.2 million. Cost of services of $151 million in
1994 were level with 1993. Operating income of $57.8 million in 1994
exceeded the comparable 1993 period by 65%. The earnings per share was
$.15 versus a loss per share of $.29 in 1993. The improvement in the
Company's operating results for the 1994 period primarily reflects strong
revenue growth from the Instant Coupon Machine by the In-store Marketing
Group, higher revenues from the In-store international operations,
increased Television and Radio Group advertising revenues and positive
contributions from the Radio acquisitions. The earnings per share
improvement in 1994 versus 1993 was due principally to $22.8 million of
additional operating income and $1.1 million lower interest expense. The
1994 period included a $4.9 million noncash expense for stock appreciation
rights and 1993 included a $3 million noncash charge for ACTRADIO, a $1.7
million writedown of television broadcast program rights, and a $.4 million
extraordinary gain on the early extinguishment of debt. All comparisons,
unless otherwise noted, are for the year ended December 31, 1994 versus the
comparable 1993 period.
In-store Marketing. The In-store Marketing Group contributed $230.1
million of revenues in 1994, an increase of 6%, compared to $216.3 million
in 1993. The continued growth of the Instant Coupon Machine was a major
contributor to the revenue increase. The ICM generated approximately $82
million of revenues in its second full year which exceeded the $63 million
level in 1993 by 31%. International revenues grew from $17.7 million in
1993 to $23.2 million in 1994 due primarily to the Infonet and Australia
/New Zealand acquisitions. ACTNOW revenues declined from $21.1 million in
1993 to $18 million in 1994 principally due to the loss of one customer
program and a product switch by another. Revenues generated per program
decreased from $3.5 million in 1993 to $3 million in 1994. Advertising
revenues in 1994 declined 5% compared to 1993 reflecting the continuing
trend of some clients directing a portion of their spending to ICM and
away from the shelf-talk product. Impact revenues declined by 11% to
$47 million in 1994. The demonstration business has seen increased
competition which has adversely affected pricing and the free-standing
insert coupon pricing war has had a negative effect.
Net revenues of ACTRADIO increased to $6.9 million in 1994 from $6.6
million in 1993. In 1993 the Company terminated the MUZAK Joint Operating
Agreement, forming marketing alliances with three large music network
providers to accelerate the conversion to satellite delivery and expanding
its in-store audio network by approximately 9,000 stores. As a result of
launching this new program, the Company recorded a one-time noncash charge
of $3 million in the fourth quarter of 1993 reflecting the costs of closing
a tape machine servicing center ($1.1 million), the write-off of obsolete
delivery equipment ($1.5 million), and provisions for other costs ($.4
million). These actions reduced operating costs by approximately $4.9
million in 1994, reduced the long-term capital requirements, and increased
the size and quality of the in-store audio network.
In-store Marketing operating income of $37.2 million increased by 70%
from $21.9 million in the 1993 period due primarily to the increased
1994 revenues, favorable revenue mix of increased ICM and lower promotion
revenues resulting in higher margins, store operations efficiencies and
economies related to field execution, and the elimination of the ACTRADIO
losses. The operating margin increased to 16% in 1994 compared to 12% in
1993 (excluding the $3 million ACTRADIO charge). The termination of the
MUZAK agreement improved the operating margin by 2%.
The In-store Marketing Group contributed 72% of the Company's revenues
and 64% of operating income in 1994.
Television. The Television Group generated $46.7 million of revenues
in 1994, a 13% increase compared to $41.5 million in 1993. The Television
Bureau of Advertising Time Sales Survey reported that industry-wide gross
local revenues increased by 4% and national revenues were up 23%, including
additional political revenues, compared to 1993. The Television Group's
local revenues increased 9% and national revenues improved 22% compared to
the 1993 period including additional political advertising revenues of
$3.3 million in 1994. All of the Television Group's stations generated
increased revenues in 1994 with 78% of the improvement produced by the
Pensacola, Oklahoma City and Plattsburgh stations. Pensacola benefited
from local revenue growth of 10% and national revenue growth of 39%
including $1.8 million of political revenues. The Oklahoma City station
generated revenues of $8.3 million in 1994 compared to $7.3 million in
1993 primarily as a result of a 15% increase in local revenues. The
continuing increase in popularity of the FOX network programming,
the success of targeting programming to the age 18-49 audience, and
National Football League telecasts have favorably impacted KOKH-TV's
ratings. The Plattsburgh/Hanover stations' local and national revenues
improved 5% and 25%, respectively, including $.6 million of political
revenues.
Operating income of $15.7 million increased by 27% compared to 1993,
excluding the 1993 writedown of program rights, primarily as a result
of higher revenues. The operating margin improved from 30% in 1993 to 34%
in 1994.
Radio. Net revenues of the Radio Group increased by 22% from $33.4 million
in 1993 to $40.8 million in 1994. The Radio Advertising Bureau reported
that revenues grew by 11% in the industry in the comparable period. The
radio stations acquired in 1993 and 1994 contributed $3.9 million of the
increase. Revenues for the stations owned for all of both periods increased
11% primarily as a result of improved station ratings and the inclusion of
$.5 million of political revenues. The three duopolies combined, contributed
75% of the revenue increase from 1993 to 1994. The Cincinnati station
incurred direct format competition in the spring of 1994 which substantially
impacted the operating results of the station.
Operating income grew from $6 million in 1993 to $8.7 million in 1994
primarily as a result of the improved revenues by the stations owned for all
of both periods as a $.2 million operating loss was incurred by the acquired
stations. The operating margin improved from 18% in 1993 to 21% in 1994.
Corporate Expenses. Corporate expenses in 1994 of $3.7 million increased
5% compared to $3.6 million in 1993 due primarily to increased shareholder
related activities and performance related compensation expenses.
Other Operating Expenses. The 1994 period included a $4.9 million
nonrecurring expense for stock appreciation rights (see Note 8 of Notes
to Consolidated Financial Statements). The 1993 period included a $1.7
million writedown of television program rights as a result of management's
assessment of their realizable value (based upon projected future utilization
of the programs) and the $3 million ACTRADIO nonrecurring expense.
Depreciation and Amortization. Depreciation and amortization of $27.3
million in 1994 decreased by 3% compared to $28.2 million in 1993. The
majority of the decrease was due to the write-off of the obsolete ACTRADIO
delivery equipment in 1993.
Interest Expense. Interest expense declined from $31.5 million in 1993
to $30.4 million in 1994 due primarily to the expiration of interest rate
swaps in June 1993. During 1991, the Company entered into several interest
rate swap agreements to reduce the impact of changes in interest rates on
its floating rate senior debt. Such agreements had a notional principal
amount of $120 million and effectively limited the Company's interest
exposure on balances outstanding under the Company's credit agreement.
$100 million of the swap agreements expiring in June 1993 carried a fixed
rate of interest of 7.5% and $20 million of the swap agreements expiring
in December 1993 carried a fixed rate of interest of 6.95%. The swap
agreements were outstanding for their entire terms. Net amounts due under
the swap agreements were accrued monthly and totalled $2,556,000 and
$5,768,000 for the years ended December 31, 1993 and 1992, respectively.
At December 31, 1994, the Company was not party to any interest rate swap
agreements.
Other Expenses. Included in the 1994 results of operations is a $1.4
million non-cash charge to reflect the loss on the sale of television
station KDLT-TV.
Income Taxes. Income tax expense for 1994 and 1993 relates primarily to
state income taxes. As of December 31, 1994 the Company had net operating
loss carryforwards of $39.6 million available to offset future taxable
income for Federal income tax purposes. Only a portion of this amount,
however, reduced the Company's income tax provision for financial statement
purposes in 1995 and the remainder was applied against goodwill upon
realization.
Net Income Primarily as a result of an additional $22.8 million of
operating income, the Company improved its net income from $.5 million in
1993 to $22.3 million in 1994. Net income applicable to shareholders
reflects settlement rights accretion of $19.5 million in 1994 versus
$3.5 million in 1993 and preferred dividends of $.1 million in 1994
compared to $1.8 million in 1993.
Balance Sheet: 1994 Compared to 1993
Trade receivables increased approximately 7% from $47.9 million
in 1993 to $51.1 million in 1994 due primarily to a 9% increase in
fourth quarter 1994 revenues compared to 1993. Deferred revenues
declined from $17.3 million in 1993 to $13.9 million in 1994 due
primarily to an approximate $9 million decline in promotion revenues
which provide for substantial billings prior to execution of the programs.
Goodwill and other intangibles increased by $18.6 million from 1993 to 1994
due to $33 million of additions relating to acquisitions less $13 million of
amortization and the sale of the South Dakota television station.
Seasonality and Inflation
The advertising revenues of the Company vary over the calendar year,
with the fourth quarter reflecting the highest revenues for the year.
Stronger fourth quarter results are due in part to the In-store Marketing
Group having one extra 4-week cycle in the fourth quarter, increased retail
advertising in the fall in preparation for the holiday season, and political
advertising for broadcasting in election years. The slowdown in retail sales
following the holiday season accounts for the relatively weaker results
generally experienced in the first quarter. The Company believes inflation
generally has had little effect on its results.
Liquidity and Capital Resources
Cash flows provided by operating activities totaling approximately $53.8
million in 1995 increased by $4 million versus 1994. In 1995 the $53.8
million of cash provided by operating activities was utilized primarily
for acquisitions, net ($25 million), capital expenditures and investments
($15 million), and reduction of long-term debt ($13 million).
Cash flows provided by operating activities totaling approximately $50
million in 1994 increased compared to approximately $41 million in 1993
due primarily to the improved operating results reduced by additional
working capital requirements. In 1994, cash flows from operations of $50
million and net long-term borrowings of $11 million were principally
utilized for the retirement of settlement rights ($39 million), net capital
expenditures and investments ($10.9 million), acquisitions ($6.9 million),
and other debt reduction ($2.8 million).
At December 31, 1994, the Company, through its Heritage Media Services, Inc.
subsidiary ("HMSI"), had a $155 million bank credit facility (the "HMSI
Credit Agreement"). HMSI is the Company's subsidiary which owns ACTMEDIA
and the Company's broadcasting properties. The HMSI Credit Agreement was
comprised of an $80 million term loan which began to amortize on
December 31, 1994, continuing until June 1999 and a $75 million reducing
revolving credit facility. The Company completed an amendment to the HMSI
Credit Agreement on May 24, 1995 which renewed the available funds to $151.4
million deferring principal payments to 1997 through 1999. At
December 31, 1995, $76.4 million of the term loan facility and $37 million
of the revolving credit facility were outstanding and $38 million of
additional borrowings were available under the HMSI Credit Agreement.
The HMSI Credit Agreement includes a number of financial and other
covenants, including the maintenance of certain operating and financial
ratios and limitations on or prohibitions of dividends, indebtedness,
liens, capital expenditures, asset sales and certain other items. Loans
under the HMSI Credit Agreement are guaranteed by the Company and HMSI's
domestic subsidiaries and are secured by a pledge of the capital stock of
HMSI and its domestic subsidiaries.
On June 22, 1992, HMSI issued $150 million of 11% Senior Secured
Notes (the "Senior Notes") due June 15, 2002. Interest on the Senior
Notes is payable semi-annually. The Senior Notes rank on a parity with
the obligations under the HMSI Credit Agreement, are guaranteed by HMC,
and HMSI's domestic subsidiaries and are secured by a pledge of capital
stock of HMSI and its domestic subsidiaries.
On October 1, 1992 the Company issued $50 million of 11% Senior Subordinated
Notes (the "1992 Subordinated Notes") due October 1, 2002. Interest on the
1992 Subordinated Notes is payable semi-annually. The 1992 Subordinated
Notes are subordinate in right of payment to the prior payment in full
of the HMSI Credit Agreement and the Senior Notes.
In August 1995, the Company entered into several two-year interest rate
swap agreements with a combined notional principal amount of $50 million
to more proportionately balance the mix of floating and fixed rate debt.
Of the total $50 million, $40 million matures on June 15, 1997 and the
remaining $10 million matures on August 1, 1997. Under these arrangements,
the Company will receive an average rate of 6.13% during the term of these
agreements and will pay the respective six month LIBOR rate at each of the
three reset periods (every six months). The six month LIBOR rate on the day
these agreements were executed was 5.90%. The impact of the swap agreements
on interest expense for the year ended December 31, 1995 was not material.
The Company has reduced its Debt to EBITDA ratio from 7.67 in 1991 to
3.25 in 1995. The EBITDA to interest coverage ratio has increased from
1.17 in 1991 to 3.01 in 1995. However, the Company is still highly
leveraged and is expected to continue to have a high level of debt
for the foreseeable future. See Note 4 of Notes to Consolidated
Financial Statements for further discussion and details.
On February 20, 1996 the Company issued $175 million of 8.75% Senior
Subordinated Notes (the "1996 Subordinated Notes) due February 15, 2006,
to assist in funding the Company's merger with DIMAC. Interest on the 1996
Subordinated Notes is payable semi-annually commencing August 15, 1996.
The 1996 Subordinated Notes are subordinate in right of payment to the prior
payment in full of the HMSI and DIMAC Credit Agreements and the Senior Notes.
On February 21, 1996, the Company, through its DIMAC Corporation subsidiary,
entered into a $175 million bank credit facility (the "DIMAC Credit
Agreement") to assist in funding the Company's merger with DIMAC. The
DIMAC Credit Agreement is comprised of a $50 million term loan which
begins to amortize September 30, 1997, continuing until December 31,
2003 and a $125 million reducing revolving credit facility. The DIMAC
Credit Agreement includes a number of financial and other convenants,
including the maintenance of certain operating and financial ratios and
limitations on or prohibitions of dividends, indebtedness, liens, capital
expenditures, asset sales, and certain other items. Loans under the DIMAC
Credit Agreement are guaranteed by the Company and DIMAC's subsidiaries and
are secured by a pledge of the capital stock of DIMAC and its subsidiaries.
On February 21, 1996 the Company completed its merger with DIMAC for cash
in a transaction valued at approximately $260 million. The Company used the
net proceeds from its 1996 Subordinated Notes offering along with $50 million
drawn from the DIMAC Credit Agreement and $35 million drawn from the HMSI
Credit Agreement to fund the transaction. Approximately $183 million was
used to fund the purchase price of the DIMAC common stock and $77 million
to refinance DIMAC's indebtedness ($65 million) and cover the transaction's
merger and financing costs ($12 million). As a result of this transaction,
the Company's availability under its HMSI Credit Agreement and DIMAC Credit
Agreement equaled $17 million and $68 million, respectively. The Company's
Debt to EBITDA ratio, after giving proforma effect to the DIMAC merger,
equaled 4.5 to 1.0.
The Company expects the major requirements for cash in 1996 to include
$6.5 million to acquire the Knoxville radio stations, $5 million for debt
principal payments, approximately $11 million for leases and other
contractual obligations, and approximately $20 million for capital
expenditures. The Company has various financial options to meet these
cash requirements including cash on hand, projected cash provided from
operations, and available liquidity under the Credit Agreements.
Heritage will continue to expand and explore value-creating investments
and acquisitions. The Company will continue to review all expenditures
to maximize financial returns and maintain financial flexibility while
continuing its long-term goal to de-leverage its capital structure.
Recently Issued Accounting Principles in 1996
The Company does not believe the adoption in 1996 of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", will have a significant
effect on its financial position or results of operations.
The Company does not plan to adopt the fair value-based measurement
methodology for employee stock options contemplated by Statement of
Financial Accounting Standards No.123, "Accounting for Stock-Based
Compensation". Accordingly, this Standard is not expected to have a
significant effect on the Company's financial position or results of
operations.
Foreign Exchange
The Company has foreign operations, primarily in Canada, and
Australia/New Zealand. Exchange rate fluctuations between the
currencies of these countries and the U.S. Dollar result in the
translation and reporting of carrying amounts of foreign investments
which vary from year-to-year in the Company's consolidated financial
statements. Based on the current scope of its foreign operations, the
Company believes that any such fluctuations would not have a material
adverse effect on the Company's consolidated financial condition or
results of operations as reported in U. S. Dollars.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and financial statement schedules
of Heritage Media Corporation and Subsidiaries as of December 31, 1995
and 1994 and for the years ended December 31, 1995, 1994 and 1993 are
included on pages F-1 through F-29 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Certain information in response to this item is incorporated by reference
to the disclosure contained under the heading "Directors and Executive
Officers" in the Proxy Statement.
Item 11. Executive Compensation.
Certain information in response to this item is incorporated by reference
to the disclosure contained under the heading "Directors and Executive
Officers" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information in response to this item is incorporated by reference to the
disclosure contained under the headings "Principal Stockholders" and
"Directors and Executive Officers" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information in response to this item is incorporated by reference to
the disclosure contained under the heading "Directors and Executive Officers"
in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
Financial Statements to this form are listed in the "Index to
Consolidated Financial Statements" at page F-1.
(2) Schedules:
Financial statement schedules to this form are listed in the
"Index to Consolidated Financial Statements" at page F-1
herein.
(3) Exhibits:
See "Exhibit Index" included herein.
Registrant agrees to furnish, upon the request of the Commission, a
copy of all constituent instruments defining the rights of holders of
long-term debt of Registrant and its consolidated subsidiaries.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated December 11, 1995
(subsequently amended by Forms 8-K/A dated January 4, 1996 and
January 17, 1996) with respect to the Company's agreement and plan
of merger with DIMAC Corporation. Such report contains consolidated
financial statements of DIMAC Corporation; combined financial statements
of T.R. McClure and Company, Inc. and related companies; financial
statements of Palm Coast Data, Ltd.; and pro forma condensed combined
financial statements of the Company.
HERITAGE MEDIA CORPORATION
Index to Exhibits
Exhibit
Number
2(a)Agreement and Plan of Merger, dated October 23, 1995, by and among the
registrant, Arch Acquisition Corp. and DIMAC Corporation (1)
3(a)Articles of Incorporation(2)
3(b)Bylaws(3)
4(a)Indenture, dated as of June 15, 1992 of Heritage Media Services, Inc.
("HMSI") to Bankers Trust Company, as trustee (4)
4(b)Form of Pledge Agreement among the registrant, certain subsidiaries
of the registrant, Bankers Trust Company and Citibank N.A. (4)
4(c)Indenture dated as of October 1, 1992 of the registrant to Bank of
Montreal Trust Company, as trustee (5)
4(d)Indenture, dated as of February 15, 1996, of the registrant to The
Bank of New York, as trustee (6)
4(e)Registrant's Series A Junior Participating Preferred Plan (7)
4(f)First Supplemental Indenture, dated as of February 15, 1996,
of the registrant to The Bank of New York, as trustee (8)
10(a)Form of Credit Agreement among DIMAC Corporation, Citibank, N.A.,
as Administrative Agent, and NationsBank of Texas, N.A., as
Documentation Agent (8)
10(b)Form of Credit Agreement among HMSI, the banks named therein,
Citibank, N.A., as agent and NationsBank of Texas, N.A., as co-agent(4)
10(c)Registrant's Amended and Restated Stock Option Plan (9)
10(d)Registrant's Employee Stock Ownership Plan, as amended (10)
11 Computation of Earnings per share (8)
21 Subsidiaries of the registrant (8)
23(a) Consent of KPMG Peat Marwick LLP (8)
27 Financial Data Schedules (8)
99 Proxy statement for annual meeting to be held on May 16, 1996 (11)
[FN]
(1) Filed as an Exhibit to the registrant's Registration Statement No. 33-64473
on Form S-4 and incorporated herein by reference.
(2)Filed as an Exhibit to the registrant's Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.
(3)Filed as an Exhibit to the registrant's Form 10-K for the year ended
December 31, 1990 and incorporated herein by reference.
(4)Filed as an Exhibit to the registrant's Registration Statement
No. 33-47953 on Form S-2 and incorporated herein by reference.
(5)Filed as an Exhibit to the registrant's Registration Statement No.
33-52062 on Form S-2 and incorporated herein by reference.
(6)Filed as an Exhibit to the registrant's Registration Statement
No. 33-63963 on Form S-3 and incorporated herein by reference.
(7)Filed as an Exhibit to the registrant's Form 8-K filed August 29, 1994
and incorporated herein by reference.
(8)Filed herewith.
(9)Filed as an Exhibit to the registrant's Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
(10)Filed as an Exhibit to Amendment No. 2 to the registrant's
Registration Statement on Form S-8 and incorporated herein by reference.
(11)To be filed on or before April 30, 1996.
Exhibit 21
List of Subsidiaries
of Heritage Media Corporation
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
<S> <C>
1. Heritage Media, Inc. Delaware
2. Heritage Media Services, Inc. Iowa
3. Heritage Broadcasting Group, Inc Iowa
4. Rollins Telecasting, Inc. Delaware
5. WCHS, Ltd. Iowa
6. WEAR-TV, Ltd. Iowa
7. Heritage-Wisconsin Broadcasting
Corporation Wisconsin
8. WIL Music, Inc. Missouri
9. WBBF, Inc. New York
10. KKSN, Inc. Delaware
11. Supermarket Radio Network, Inc. Georgia
12. ACTMEDIA, Inc. Delaware
13. Channel 25 Acquisition Corporation Delaware
14. Heritage Media Management, Inc. Iowa
15. WNNE-TV Vermont
16. KOKH, Inc. Delaware
17. KCFX-FM, Inc. Iowa
18. WVAE-FM, Inc. Iowa
19. ACTMEDIA Canada Canada
20. BLS Retail Resource Group Canada
21. Evergreen Trading Company, Inc. Connecticut
22. Actmedia New Zealand New Zealand
23. Actmedia Australia Australia
24. Strategium Media, Inc. Canada
25. ACTMEDIA properties, Inc. Delaware
26. ACTMEDIA Services, Inc. Delaware
27. ACTMEDIA Group, Inc. Delaware
28. ACTMEDIA Europe Europe
29. Heritage GP, Inc. Delaware
30. HMCP, LTD Texas
31. DIMAC Corporation Delaware
32. DIMAC Direct Inc. Missouri
33. Palm Coast Data Inc. Missouri
34. The McClure Group Inc. Missouri
35. WMYU/WWST-FM Iowa
36. WFXC Iowa
</TABLE>
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized
on March 13, 1996.
HERITAGE MEDIA CORPORATION
By/s/ David Walthall
David N. Walthall
President, Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ James M. Hoak, Jr. Chairman of the Board and Director
______________
James M. Hoak, Jr.
/s/ David N. Walthall President , Chief Executive Officer and Director
______________
David N. Walthall (Principal Executive Officer)
/s/ James P. Lehr Senior Vice President
__________________ Chief Accounting & Administrative Officer
James P. Lehr (Principal Accounting Officer)
/s/ James S. Cownie Director
______________
James S. Cownie
/s/ Joseph M. Grant Director
______________
Joseph M. Grant
/s/ Clark A. Johnson Director
______________
Clark A. Johnson
/s/ Alan R. Kahn Director
______________
Alan R. Kahn
/s/ H. Berry Cash Director
______________
H. Berry Cash
HERITAGE MEDIA CORPORATION
Consolidated Financial Statements
"Form 10-K"
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements
<S> Page
<C>
Consolidated Financial Statements:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules:
I. Condensed Financial Information of Registrant
as of December 31, 1995 and 1994 and for the
years ended December 31, 1995, 1994 and 1993 F-25
II. Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1994 and 1993 F-29
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Heritage Media Corporation:
We have audited the consolidated financial statements of Heritage Media
Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedules as listed in the
accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules 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 financial position of Heritage
Media Corporation and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Dallas, Texas
February 23, 1996
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
(Dollars in thousands)
Assets 1995 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,383 4,270
Trade receivables, net of allowance for
doubtful accounts of
$4,033 in 1995 and $3,079 in 1994 77,068 51,096
Prepaid expenses and other 6,605 4,454
Inventory 5,008 5,711
Deferred income taxes (note9) 5,151 3,369
_____ _______
96,215 68,900
Property and equipment, net 56,155 54,799
Goodwill and other intangibles, net (note 1(b)) 383,848 382,288
Other Assets 14,793 8,160
_______ _______
$ 551,011 514,147
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ 5,000 -
Current installments of long-term debt (note 4) 5,026 11,823
Accounts payable and accrued expenses (note 3) 52,069 52,732
Deferred advertising revenues 25,219 13,864
Other current liabilities 1,911 1,842
_________ ________
Total current liabilities 89,225 80,261
Long-term debt, excluding current portion(note 4) 334,839 339,702
Other long-term liabilities 2,531 1,569
Deferred income taxes (note 9) 4,016 3,369
Stockholders' equity (notes 4,5,6, and 7):
Preferred stock, no par value, authorized 60,000,000
shares; none issued - -
Class A common stock, $.01 par value; 40,000,000 shares
authorized, issued 17,743,359 shares in 1995 and 17,548,716
shares in 1994 177 175
Additonal paid-in capital 223,408 219,092
Accumulated deficit (101,643) (128,214)
Accumulated foreign currency translation adjustments (1,088) (1,353)
Common stock in treasury, at cost (32,828 shares in
1995 and 1994) (454) (454)
________ __________
Total stockholders' equity 120,400 89,246
Commitments and contingencies (notes 2, 8 and 10) ________ ___________
$ 551,011 514,147
======== ===========
</TABLE>
See accompanying notes to consolidated financial statements
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands,except share information)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net Revenues: _____ _____ ______
In-store marketing $ 346,392 230,111 216,319
Television 45,596 46,732 41,517
Radio 43,788 40,785 33,369
__________ ___________ _________
435,776 317,628 291,205
__________ ____________ ________
Costs and expenses:
Cost of services:
In-store marketing 224,446 128,176 131,449
Television 10,586 10,836 10,166
Radio 12,112 11,958 9,477
Selling,general & administrative 84,216 76,600 71,760
Depreciation 16,115 14,676 16,268
Amortization of goodwill and
other assets 14,507 12,622 11,912
Other costs (notes 1(f)and 8) 781 4,922 5,178
________ ________ ________
362,763 259,790 256,210
________ ________ _________
Operating income 73,013 57,838 34,995
__________ _________ __________
Other expense:
Interest (note 4) (34,677) (30,373) (31,515)
Other,net (note 2) (2,632) (2,424) (459)
__________ __________ ___________
(37,309) (32,797) (31,974)
___________ ___________ ___________
Income before income
taxes and extraordinary item 35,704 25,041 3,021
Income taxes (note 9) 9,133 2,742 2,944
________ ________ _________
Income before
extraordinary item 26,571 22,299 77
Extraordinary item -
gain on early extinguishment of
debt (note 4) - - 435
___________ _________ _________
Net Income $ 26,571 22,299 512
============ ============ ==========
Net income (loss) applicable
to common stock (note 1 (j)) $ 26,571 2,648 (4,810)
============ ============= ===========
Weighted average common shares
outstanding 17,676,484 17,380,901 16,314,023
============ ============== ============
Earnings (loss) per common share
(note 1(j)):
Before extraordinary item $1.50 .15 (.32)
Extraordinary item - - .03
______ _______ _________
Net earnings (loss) $1.50 .15 (.29)
======= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in thousands)
<TABLE>
<CAPTION> Accumulated
foreign
Additional currency Total
Preferred Common Stock paid-in Accumulated translation Treasury stockholders'
stock Class A Class B Class C capital deficit adjustments stock equity
________ ______ ________ _______ _______ _________ ___________ _________ ____________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,1992 $16,195 113 16 41 201,986 (126,052) (632) (454) 91,213
Issuance of shares to retirement
savings plan - 1 - - 471 - - - 472
Conversion of Class B common stock - 8 (16) - 8 - - - -
Exercise of employee stock options - 1 - - 278 - - - 279
Excess of purchase price over
carrying amount of settlement rights
retired - - - - - (16) - - (16)
Accretion of settlement rights - - - - - (3,525) - - (3,525)
Preferred stock dividends - - - - - (1,781) - - (1,781)
Foreign currency translation
adjustment - - - - - - (512) - (512)
Net income - - - - - 512 - - 512
_______ ______ ________ ______ ________ ________ _______ ________ ___________
Balance at December 31,1993 16,195 123 - 41 202,743 (130,862) (1,144) (454) 86,642
Conversion of preferred stock (16,195) 4 - 7 16,184 - - - -
Conversion of Class C common
stock, net of expenses - 48 - (48) (276) - - - (276)
Exercise of employee stock options - - - - 441 - - - 441
Accretion of settlement rights - - - - - (19,503) - - (19,503)
Preferred stock dividends - - - - - (148) - - (148)
Foreign currency translation
adjustments - - - - - - (209) - (209)
Net income _ _ _ _ _ 22,299 - - 22,299
_______ ______ ________ ______ ________ ________ _______ ________ ___________
Balance at December 31,1994 - 175 - - 219,092 (128,214) (1,353) (454) 89,246
Exercise of employee stock options,
including tax benefit - 1 - - 1,617 - - - 1,618
Foreign currency translation
adjustment - - - - - - 265 - 265
Settlement of stock appreciation
rights - 1 - - 2,699 - - - 2,700
Net income - - - - - 26,571 - - 26,571
_______ ______ ________ ______ ________ ________ _______ ________ ___________
Balance at December 31,1995 $ - 177 - - 223,408 (101,643) (1,088) (454) 120,400
_______ ______ ________ ______ ________ ________ _______ ________ ___________
_______ ______ ________ ______ ________ ________ _______ ________ ___________
</TABLE>
See accompanying notes to consolidated financial statements.
HERITAGE MEDIA CORPORATION
Consolidated Statement of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
_______ ______ ______
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,571 22,299 512
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock appreciation rights - 4,922 500
Depreciation 16,115 14,676 16,268
Amortization:
Broadcast program rights 2,137 2,300 2,188
Goodwill and other assets 14,507 12,622 11,912
Debt issuance costs 738 717 651
Writedown of program rights 781 - 1,678
Write-off of foreign investment 3,596 - -
Write-off of fixed assets 348 570 1,685
(Gain)loss on sale of assets (2,358) 1,439 -
Gain on early extinguishment of debt - - (435)
Other (785) (444) 117
Changes in certain assets and liabilities, net of
effects of acquisitions:
Accounts receivable (21,424) (1,123) (345)
Other assets (2,269) (385) 597
Accounts payable and accrued expenses 5,153 (3,459) 2,273
Deferred advertising revenue 10,694 (4,501) 3,329
_______ ______ ________
Net cash provided by operating activities 53,804 49,633 40,930
_______ ______ ________
Cash flows from investing activities:
Acquisitions, net of cash acquired (18,973) (6,926) (5,106)
Capital expenditures (15,088) (13,271) (18,534)
Purchases of investments (9,200) - -
Sale of investments 5,309 - -
Proceeds from sale of property and equipment 1,500 3,999 152
Purchase of in-store marketing rights (973) (1,662) (834)
_______ ______ ________
Net cash provided by investing activities (37,425) (17,860) (24,322)
_______ ______ ________
Cash flows from financing activities:
Long-term borrowings $118,256 114,626 91,970
Retirements:
Long-term debt (130,776) (103,676) (96,795)
Other long-term liabilities (2,249) (2,834) (4,235)
Issuance of common stock 676 441 279
Retirement of settlement and stock appreciation rights (3,800) (39,017) (2,848)
Dividends on preferred stock - (445) (1,781)
Payment of offering costs - (276) -
Payment of debt issuance costs (373) (738) -
_______ ______ ________
Net cash used by financing activities (18,266) (31,919)(13,410)
_______ ______ ________
Net change during year (1,887) (146) 3,198
Cash and cash equivalents at beginning of year 4,270 4,416 1,218
_______ ______ ________
Cash and cash equivalents at end of year $ 2,383 4,270 4,416
_______ ______ ________
_______ ______ ________
Cash paid for interest $ 34,348 29,906 31,141
_______ ______ _______
_______ ______ ________
Cash paid for income taxes $ 3,352 4,575 3,160
_______ ______ ________
_______ ______ ________
</TABLE>
See accompanying notes to consolidated financial statements.
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
Heritage Media Corporation ("HMC" or "the Company"), through
Heritage Media Services, Inc. ("HMSI"), a wholly-owned subsidiary,
operates in three segments - in-store marketing and television and
radio broadcasting. The Company's in-store marketing operations
are conducted in the United States, Canada, New Zealand and Australia.
Broadcasting operations are conducted in the United States.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
(b) Acquisitions, Goodwill and Other Intangibles
The cost of acquired companies is allocated first to identifiable
assets and liabilities based on estimated fair market values. The
excess of cost over identifiable assets and liabilities is recorded
as goodwill and amortized over a period of 40 years. Costs allocated
to identifiable intangible assets are amortized over the remaining
estimated useful lives of the assets as determined by underlying
contract terms or independent appraisals. Useful lives of license
agreements and other intangibles are 15-25 and 4-10 years,
respectively.
Goodwill and other intangibles at December 31, 1995 and 1994 are
summarized as follows (thousands of dollars):
<TABLE>
1995 1994
____ ____
<S> <C> <C>
Goodwill, net of accumulated amortization
of $65,484 and $53,625 $353,332 363,696
License agreements, net of accumulated
amortization of $1,458 and $678 23,783 12,742
Other,net of accumulated amortization of
$4,285 and $2,861 6,733 5,850
________ ________
$383,848 $382,288
________ ________
________ ________
</TABLE>
The Company 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
the Company'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. At this time, the Company believes that
no significant impairment of the goodwill and other intangibles has occurred
and that no reduction of the estimated useful lives is warranted.
(c) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. At December 31, 1994, cash
equivalents were comprised of overnight repurchase agreements totalling
$2,998,000 (none in 1995).
(d) Inventory
Inventory consists of display devices used in the Company's in-store
marketing programs. Such amounts are stated at the lower of average cost
or market.
(e) Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided by
the straight-line method over the estimated useful lives of the assets.
The useful lives and the amounts of the Company's property and equipment
at December 31, 1995 and 1994 are as follows (thousands of dollars):
<TABLE>
<CAPTION>
Useful life 1995 1994
___________ _____ ______
<S> <C> <C> <C>
In-store marketing equipment 3-5 years $49,670 46,206
Broadcasting equipment 5-25 years 38,416 35,166
Buildings and improvements 12-30 years 9,191 8,440
Other equipment 4-8 years 9,592 8,586
Land 2,460 2,460
_________ _______
109,329 100,858
Less accumulated depreciation 53,174 46,059
_________ ________
Net property and equipment $ 56,155 54,799
========= ========
</TABLE>
The Company continually reevaluates the propriety of the carrying amount
of property and equipment and the estimated useful lives used for
depreciation. During the year ended December 31, 1993, the Company
recorded a writedown of in-store marketing equipment of $1,685,000 in
connection with certain changes in the Company's in-store radio marketing
delivery system (see note 8).
(f) Broadcast Program Rights
Broadcast program rights are recorded as assets and liabilities
at their gross amounts when the programs are available for
telecasting. The assets are carried at the lower of cost or
estimated net realizable value and are classified as current
or noncurrent based upon the expected use of the programs in
succeeding years. The contract liabilities are classified as
current or noncurrent in accordance with contract payment terms.
Costs are charged to operations by the straight-line method
over the contract period.
The Company continually reevaluates the propriety of the carrying
amounts of broadcast program rights to determine if circumstances
warrant adjustments to the carrying values. This evaluation is
based on the Company's projection of undiscounted program revenues
over the remaining contract term. To the extent the carrying amount
of a program asset exceeds such revenues, the excess is charged to
expense. As a result of this evaluation, the Company recorded
writedowns of program rights of $781,000 and $1,678,000 during the
years ended December 31, 1995 and 1993, respectively.
(g) Other Assets
Investments in marketable securities are generally made by the
Company in contemplation of an acquisition or other long-term
investment objectives and accordingly are classified as available
for sale. Such investments are recorded at their fair value based
on quoted market prices for the underlying security. Unrealized
gains and losses on investments are reported as a separate component
of stockholders' equity. During the year ended December 31, 1995,
the Company sold an investment in marketable securities for net
proceeds of $5,309,000 and recognized a gain on the sale of
$1,601,000. At December 31, 1995, the fair market value of
investments in marketable securities is $5,507,000 (included in
other assets), which approximates cost, and is comprised solely
of an investment in DIMAC Corporation ("DIMAC") common stock.
The Company did not make investments in marketable securities
during 1993 or 1994.
Debt issuance costs are amortized to interest expense using the
interest method over the period of the related debt agreement.
(h) Revenues
Revenues from in-store marketing are derived primarily from
providing advertising, promotion and production services in
retail stores and by selling advertising time to national
advertisers on an in-store music entertainment network. Revenues
from in-store marketing are recognized over the contract period of
the related advertising program as the services are performed and
revenues from advertisements on the in-store music network are
recognized when the commercial is aired. Advance payments received
from advertisers relating to contracted in-store marketing
advertising programs are recorded as deferred advertising revenues
until they are earned.
Television and radio broadcasting revenues are primarily derived
from local, regional and national advertising and network
compensation. Advertising revenues are recognized upon the
airing of commercials, while network revenues are recognized
monthly as earned. Revenues are presented net of advertising
agency and national sales representatives' commissions.
(i) Barter Transactions
The Company exchanges unsold advertising time for products and
services. These transactions are reported at the estimated fair
market value of the product or service received. Barter revenues
are recorded when the commercials are broadcast and barter expenses
are recorded when merchandise or services are used. If merchandise
or services are received prior to the broadcast of a commercial, a
liability is recorded. Likewise, a receivable is recorded if a
commercial is broadcast before the goods or services are received.
Barter amounts are not significant to the Company's consolidated
financial statements.
(j) Earnings (Loss) Per Share
Earnings (loss) per common share is computed by dividing net income,
adjusted for accretion and premium on retirement of the settlement
rights and dividends on preferred stock for applicable years by the
weighted average number of Class A and Class C common shares, and
one-half of the weighted average number of Class B common shares,
outstanding during each year. Common stock purchase options,
preferred stock and settlement rights have been excluded from the
computation as their effect is either antidilutive or immaterial.
Following is a reconciliation of net income to net income (loss)
applicable to common stock for the years ended December 31, 1995,
1994 and 1993 (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
____ ______ _______
<S> <C> <C> <C>
Net Income $26,571 22,299 512
Accretion on premium on retirement
of settlement rights - (19,503) (3,541)
Dividends on preferred stock - (148) (1,781)
_______ ________ _______
Net income (loss) applicable
to common stock $26,571 2,648 (4,810)
========= ======== ========
</TABLE>
(k) Income Taxes
The Company provides for deferred taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for net operating loss carryforwards and the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered.
(l) Foreign Currency Translation
For foreign operations, the balance sheet accounts are translated
at the current year-end exchange rate and income statement items are
translated at the average exchange rate for the year. Resulting
translation adjustments are presented as a separate component of
stockholders' equity. Foreign transaction exchange gains and losses
are recognized as income or expense; such amounts were not material
in any of the years presented.
(m) Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are
used to manage well-defined interest rate risks related to interest
on the Company's outstanding debt.
As interest rates change under interest rate swap agreements,
the differential to be paid or received is recognized as an
adjustment to interest expense. The Company is not exposed to
credit risk as its interest rate swap agreements are with the
participating banks under the Company's senior credit facility.
(n) Disclosure of Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
In the opinion of management, credit risk with respect to trade
receivables is limited due to the large number of diversified
customers and the geographic diversification of the Company's
customer base. The Company performs ongoing credit evaluations
of its customers and believes that adequate allowances for any
uncollectible trade receivables are maintained.
At December 31, 1995 and 1994, no receivable from any customer
exceeded 5% of stockholders' equity and no customer accounted
for more than 10% of net revenues in 1995, 1994 or 1993.
(o) Reclassifications
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to the 1995 presentation.
(2) Acquisitions and Dispositions
(a) In-store Marketing
On February 1, 1994, the Company acquired for $2,000,000 the
assets of two in-store marketing companies operating in
New Zealand and Australia.
On October 26, 1994, the Company acquired the stock of Strategium
Media, Inc., a Canadian in-store marketing company, for $17,811,000.
The acquisition was financed with proceeds of a bank credit agreement
with two Canadian banks (note 4).
On January 1, 1995, the Company completed its acquisition of
Powerforce Services, an in-store merchandise services company,
for $7.3 million.
In December 1995, the Company recognized a write-off of
$3,596,000 as a result of the disposition of its in-store marketing
subsidiary in The Netherlands in January 1996.
(b) Television and Radio
During the years ended December 31, 1995, 1994 and 1993, the Company
acquired the following FM radio stations (thousands of dollars):
<TABLE>
<CAPTION>
Station/market Date Cost
__________________ ______ ________
<S> <C> <C>
WKLX/Rochester, NY July 22,1993 $ 4,918
WEZW/Milwaukee,WI January 6,1994 6,021
KRJY/St.Louis,MO March 15,1994 7,754
KXYQ/Portland,OR June 15,1995 7,397
KKCJ/Kansas City,MO July 25, 1995 7,785
</TABLE>
On October 11, 1994, the Company sold television station KDLT-TV in
Sioux Falls, South Dakota, for $3,999,000, and recognized a loss on
the sale of $1,439,000.
On September 13, 1995, the Company sold the intellectual assets
(including format, call letters and trade name) of WOFX-FM in
Cincinnati, Ohio, for $1,500,000 and recognized a gain on the sale
of $800,000.
The acquisitions discussed above were recognized in the consolidated
financial statements as follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
_________ _________ ________
<S> <C> <C> <C>
Working capital deficit $ (4,466) (2,765) (732)
Goodwill and other intangibles 20,997 33,319 4,972
Other noncurrent assets 3,166 1,574 866
Long-term debt (152) (25,025) -
Other long-term liabilities (572) (177) -
_________ _________ ________
Total cash paid, net of cash $ 18,973 6,926 5,106
acquired ========= ========= =========
</TABLE>
(c) Pro Forma Information (Unaudited)
The following summary presents selected unaudited pro forma
consolidated information for the Company and its subsidiaries
assuming the acquisitions and dispositions of (a) the radio and
television stations acquired and sold during 1995 and 1994 and
(b) the in-store marketing companies acquired during 1995 and 1994
had occurred on January 1, 1994 (thousands of dollars, except per
share information):
<TABLE>
<CAPTION> Years ended
December 31,
___________
1995 1994
______ _______
<S> <C> <C>
Net revenues $436,645 385,767
Net income 25,335 20,707
Net earnings per common share $1.43 .06
</TABLE>
If the pro forma information were further adjusted to give effect to
the 1994 settlement rights retirements discussed in note 5 and the
conversion of preferred stock discussed in note 6, as if such
transactions had also occurred on January 1, 1994, the net income
and net income per common share would have been $19,114,000 and
$1.10 for the year ended December 31, 1994.
The pro forma amounts assume that the financing requirements of the
acquisitions were met by actual debt issuances, assuming that all such
financings were completed on January 1, 1994. The pro forma amounts are
not necessarily indicative of what the results would actually have been
if the transactions had been consummated earlier and are not intended to
be an indication of operating results expected to be achieved in the
future.
(d) Subsequent Events
On February 7, 1996, the Company sold KEVN-TV in Rapid City,
South Dakota, for $14,000,000 and recognized a gain of approximately
$6,000,000 upon closing.
On February 21, 1996, the Company acquired DIMAC for cash in a
transaction valued at approximately $260,000,000. Under the terms
of the merger agreement, each of the approximately 6.5 million
shares of DIMAC common stock were exchanged for merger consideration
of $28. The merger was accounted for by the Company as a purchase.
The Company financed the merger through a combination of bank
borrowings and the issuance of $175,000,000 of 8.75% subordinated
debentures.
On February 23, 1996, the Company acquired WMYU-FM and WWST-FM
serving the Knoxville, Tennessee market for $6,500,000.
(3) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 1995 and 1994
are summarized as follows (thousands of dollars):
<TABLE>
<CAPTION> 1995 1994
________ _______
<S> <C> <C>
Accounts Payable $ 17,329 16,906
Payroll and employee benefits 8,314 12,636
Store commissions 8,906 9,109
Interest 2,423 2,871
License fees 511 677
Other 14,586 10,533
________ _______
$ 52,069 52,732
======== ========
</TABLE>
(4) Long-term Debt
Long-term debt at December 31, 1995 and 1994 is summarized as
follows (thousands of dollars):
<TABLE>
<CAPTION> 1995 1994
______ _______
<S> <C> <C>
Senior Notes (a) $ 150,000 150,000
Credit agreement (b) 113,400 121,000
Senior subordinated notes (c) 50,000 50,000
Canadian credit agreement (d) 15,674 19,165
Other (e) 10,791 11,360
____________ __________
339,865 351,525
Less current installments 5,026 11,823
____________ __________
$ 334,839 339,702
============ ===========
</TABLE>
(a) HMSI has outstanding $150 million of 11% Senior Secured Notes
("the Senior Notes") due June 15, 2002. The Senior Notes are redeemable,
in whole or in part, at HMSI's option at any time on or after June 15, 1997,
at amounts decreasing from 105.5% to 100% of par on June 15, 1999. The
Senior Notes rank on a parity with the obligations of HMSI under its credit
agreement, are guaranteed by HMC and HMSI's domestic subsidiaries and are
secured by a pledge of capital stock of HMSI and its domestic subsidiaries.
(b) HMSI maintains a credit agreement ("the Credit Agreement") with a
group of banks providing for a $76.4 million term loan and a reducing
revolving credit facility of up to $75 million. Quarterly principal
payments under the Credit Agreement commence on March 31, 1997 and continue
until June 1999, when the balance is due. At December 31, 1995, $38 million
of additional borrowings were available under the Credit Agreement. HMSI
pays an annual commitment fee equal to 0.5% of the unadvanced portion of the
Credit Agreement. Loans under the Credit Agreement bear interest at rates
based on the agent bank's base rate, a Eurodollar rate or a CD rate plus a
margin depending on HMSI's ratio of consolidated total debt to operating
cash flow (as defined). At December 31, 1995, the interest rates were 6.5%
- - 8.5% under the Eurodollar and base rate options. The loans under the
Credit Agreement are secured by the stock of substantially all subsidiaries
of the Company.
(c) The Company has outstanding $50 million of 11% Senior Subordinated
Notes ("the Notes") due October 1, 2002. The Notes are redeemable, in whole
or in part, at the Company's option at any time on or after October 1, 1997,
at amounts decreasing from 105.5% to 100% of par at October 1, 1999. The
Notes are subordinated to the Senior Notes, HMSI's credit agreement and all
other indebtedness of the Company and its subsidiaries.
(d) The Company's Canadian subsidiary maintains a credit agreement with
two Canadian banks providing for a Cdn $27 million (US $19 million) term
loan and a Cdn $2 million (US $1.4 million) revolving credit facility.
At December 31, 1995, approximately Cdn $2 million of additional borrowings
were available under this credit agreement. Repayments under the term loan
are made quarterly, commencing September 30, 1995, and continue through
December 1999. Borrowings under this credit agreement bear interest at the
lender's prime rate plus the applicable margin. At December 31, 1995, the
interest rate was 9%. Borrowings under this credit agreement are guaranteed
by HMC and secured by the assets of Strategium Media, Inc.
(e) Other debt bears interest at varying rates ranging from 6% to 11% at
December 31, 1995 and consists primarily of notes payable, capital lease
obligations and industrial development revenue bonds due in varying amounts
through 2004. During 1993, the Company extinguished certain outstanding
indebtedness with a face amount of $3,235,000 prior to scheduled maturity,
resulting in an extraordinary gain of $435,000.
The loan agreements described above require the Company and/or its
subsidiaries to comply with various financial and other covenants,
including the maintenance of certain operating and financial ratios and
they contain substantial limitations on, or prohibitions of, dividends,
additional indebtedness, liens, capital expenditures, asset sales and
certain other items.
In August 1995, the Company entered into several two-year interest rate
swap agreements with a combined notional principal amount of $50 million
to more proportionately balance the mix of floating and fixed rate debt.
Of the total $50 million, $40 million matures on June 15, 1997 and the
remaining $10 million matures on August 1, 1997. Under these arrangements,
the Company will receive an average rate of 6.13% during the term of these
agreements and will pay the respective six month LIBOR rate at each of the
three reset periods (every six months). The six month LIBOR rate on the day
these agreements were executed was 5.90%. The impact of the swap agreements
on interest expense for the year ended December 31, 1995 was not material.
The Company is currently highly leveraged, and it is expected to continue to
have a high level of debt for the foreseeable future. As a result of its
leverage and in order to repay existing indebtedness, the Company will be
required to generate substantial operating cash flows.
The ability of the Company to meet these requirements will depend on, among
other things, prevailing economic conditions and financial, business and
other factors, some of which are beyond the control of the Company.
Further, being primarily a holding company of operating companies through
HMSI, the Company's ability to repay its indebtedness incurred at the parent
company level will be limited by restrictions on the ability of HMSI under
the Credit Agreement and Senior Note Indenture to declare and pay dividends
to the Company. Under the Credit Agreement, which is the most restrictive
of the loan agreements at December 31, 1995, the total amount of dividends
that could be paid by HMSI to the Company was $33,607,000. Such dividends
are not permitted if, as a result of such payments, a default would occur
under the Credit Agreement. As a result of the foregoing restrictions,
consolidated net assets of HMSI totaling approximately $138,485,000 at
December 31, 1995 are not available to the Company to pay dividends or
repay debt.
Aggregate annual maturities of long-term debt for each of the years in the
five year period ending December 31, 2000 are $5,026,000; $17,372,000;
$66,000,000; $47,762,000; and $263,000, respectively.
(5) Settlement Rights
In connection with the Actmedia acquisition in 1989, the Company issued
approximately 7,553,000 settlement rights. These rights originally
entitled the holders to receive cash or Class A or Class C common stock
having a value equal to approximately 18% of the fair market value of the
business, properties and assets of Actmedia as a going concern at specified
future dates. The settlement rights were initially recorded at their
estimated fair value at the date of issuance which approximated $7,553,000.
From time to time the Company estimated the value of the settlement rights
and, to the extent that such estimates exceeded the carrying value, such
excess was accreted by the interest method to accumulated deficit over the
appropriate accounting period. During the year ended December 31, 1994,
all remaining outstanding settlement rights were retired by the Company for
cash of $39,017,000, which resulted in the recognition of settlement rights
accretion of $19,503,000, or $1.12 per share.
(6) Stockholders' Equity
Each share of Class A common stock is entitled to one vote. On
March 30, 1992, the shareholders approved the elimination of the
Class B common stock effective upon the conversion of each share of
Class B common stock to one-half share of Class A common stock. All
remaining shares of Class B common stock outstanding at December 31, 1992
were converted to Class A common stock upon approval by the FCC on
July 20, 1993. Thereafter, the authorization of Class B common stock was
eliminated from the Company charter.
The Company has authorized 60,000,000 shares of preferred stock which can
be issued in series with varying preferences and conversion features as
determined by the Company's Board of Directors. In February 1992, the
Company issued 22,117 shares of Series B preferred stock and 139,828 shares
of Series C preferred stock at $100 per share. Each share of preferred
stock accrued cumulative dividends at an annual rate of $11 per share,
payable quarterly, and unpaid dividends accrued an amount equal to 11% per
annum. On February 1, 1994, the Company redeemed all outstanding shares of
preferred stock by the issuance of 429,609 shares of Class A and 693,560
shares of Class C common stock.
In August 1994, the Company adopted a rights plan which provided for the
distribution of one right for each outstanding share of the Company's
Class A or Class C common stock. The rights, which were distributed on
August 29, 1994, entitle the holder to buy 1/100 of a share of Series A
Junior Participating Preferred Stock ("Series A preferred stock") for
$70 per share. Each share of Series A preferred stock entitles the holder
to, among other things, 100 votes on all matters submitted to a vote of
the Company's shareholders. The rights are exercisable only if a person
or group, other than the Company and certain related entities, acquires
15% or more of the Company's common stock or announces a tender offer,
the consummation of which would result in ownership by such person or
group of 15% or more of the Company's common stock. No value was assigned
to the rights for accounting purposes.
During 1994, the holders of all outstanding shares of Class C common
stock converted such shares into an equal number of shares of Class A
common stock.
(7) Employee Benefit Plans
The Company has a nonqualified employee incentive stock option plan under
which options to purchase a total of 1,500,000 shares of the Company's
Class A common stock may be granted to key employees, officers and
directors. The purchase price may not be less than market value at
the date of grant without approval of the Board of Directors. The
options granted under such plan are exercisable beginning two years
from date of grant and expire ten years from date of grant.
Following is a summary of activity in the option plan for the years
ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
Shares Option
under option price per share
_____________ ________________
<S> <C> <C>
Balance at December 31,1992 641,551 $4.00-20.50
Granted 238,100 11.00-19.88
Exercised (35,673) 9.76-17.25
Cancelled (27,044) 7.50-20.50
_____________
Balance at December 31, 1993 816,934 4.00-20.50
Granted 315,500 19.75-24.25
Exercised (52,521) 4.00-20.50
Cancelled (92,500) 4.00-24.25
_____________
Balance at December 31, 1994 987,413 6.25-24.25
Granted 354,000 26.63-29.50
Exercised (89,624) 4.00-20.50
Cancelled (18,067) 4.00-25.75
_____________
Balance at December 31,1995 1,233,722 6.25-29.50
=============
Options exercisable at December 31,1995 577,554
=============
Shares available for grant 23,170
=============
</TABLE>
The Company has a Retirement Savings Plan ("the Plan") whereby participants
may contribute portions of their annual compensation to the Plan and certain
contributions may be made at the discretion of the Company based on criteria
set forth in the Plan agreement. Participants are generally 100% vested in
Company contributions after five years of employment with the Company.
For the years ended December 31, 1995, 1994 and 1993, Company expenses
under the Plan were approximately $903,000, $854,000 and $809,000,
respectively.
Effective January 1, 1995, the Company established a nonqualified
deferred contribution plan for full-time, highly compensated members
of Company management whereby participants may defer up to 25% of their
compensation (as defined) on a pre-tax basis. The Company may match
participants' deferrals at its discretion and currently provides for a
match of 100% of a participant's deferral up to 5% of eligible compensation.
Amounts contributed to the plan earn interest at a rate determined by the
Company annually (currently 6%). Participants are 100% vested in their
contributions to the plan and the related earnings and vest in matching
contributions of the Company and the related earnings if they are employed
by the Company on the last day of the plan year. Company expenses under
the plan, including matching contributions and interest, were $349,000 for
the year ended December 31, 1995.
(8) Other Costs
In 1993, the Company made the decision to upgrade its existing in-store
marketing radio network to a satellite-based delivery system. As a result,
certain personnel and facilities utilized by the former tape-based system
were no longer needed in the Company's operations. During the fourth
quarter of 1993, the Company recorded a provision for the following
writedowns and costs in connection with the change (thousands of dollars):
<TABLE>
<S> <C>
Writedown of in-store marketing equipment and
leashold improvements $1,685
Accrued lease and contract obligations 477
Accrued severance 277
Other 611
________
$ 3,000
=======
</TABLE>
The system upgrades began in October 1993 and continued into 1994.
The writedown of related equipment and leasehold improvements represents
the net book value of such assets at the time the decision was made.
In 1994, the Company paid all costs accrued in 1993 together with $450,000
of additional costs which were charged to expense in 1994.
The Company had a Stock Appreciation Rights Plan ("the SAR Plan") under the
terms of which certain Actmedia employees could be granted a total of
250,000 stock appreciation units. Upon termination of the Plan in
January 1995, unit holders received payments aggregating $6,522,000
which consisted of cash of $3,800,000 and 105,900 shares of the Company's
Class A common stock with a total value of $2,700,000. The shares issued
upon termination of the SAR Plan cannot be sold by the unit holders until
January 1996. For the years ended December 31, 1994 and 1993, compensation
expense accrued under the SAR Plan was $4,922,000 and $500,000, respectively.
(9) Income Taxes
Income tax expense (benefit) for the year ended December 31, 1995 consists
of (thousands of dollars):
<TABLE>
<CAPTION>
U.S. State and
federal local Foreign Total
<S> ___________ ___________ _________ ______
<C> <C> <C> <C>
Curent $ 2,577 2,820 28 5,425
Deferred (987) (148) - (1,135)
Utilization of tax benefits of
acquired entities, credited to
goodwill 4,495 - - 4,495
Compensation expense from stock
options in excess of amounts
recognized for financial
reporting purchases, credited
to addtional paid-in capital 348 - - 348
___________ ___________ _________ ______
$ 6,433 2,672 28 9,133
=========== ============ ========= =======
</TABLE>
Income tax expense attributable to income from continuing operations for
the years ended December 31, 1994 and 1993 of $2,742,000 and $2,944,000,
respectively, consisted primarily of current state income taxes.
Income tax expense for the years ended December 31, 1995, 1994 and 1993
differed from the amounts computed by applying the statutory U.S. federal
income tax rates to income before income taxes and extraordinary item as a
result of the following (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
_______ _______ _______
<S> <C> <C> <C>
Computed "expected" tax expense $ 12,496 8,764 1,057
Increase(reduction) in income taxes
resulting from:
Utilzation of net operating losses (8,696) (10,645) (2,627)
Amortization of goodwill 3,618 3,966 3,131
Other, net (primarily state income taxes) 1,715 657 1,383
_______ _______ _______
Income tax expense per financial
statements $ 9,133 2,742 2,944
======== ======= ======
</TABLE>
The valuation allowance related to deferred tax assets was reduced by
$13,539,000, $10,645,000 and $2,627,000 in the years ended
December 31, 1995, 1994 and 1993.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995
and 1994 are presented below (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
<S> ________ ________
Deferred tax assets: <C> <C>
Net operating loss carryforwards $ - 14,282
Capital loss carryforwards 1,447 2,417
Other 4,250 3,226
________ ________
Total gross deferred tax assets 5,697 19,925
Less valuation allowance - (13,539)
________ ________
Total deferred tax assets 5,697 6,386
________ ________
Deferred tax liabilities:
Property and equipment, primarily due to
differences in depreciation 4,512 6,067
Other 50 319
________ ________
Total deferred tax liabilities 4,562 6,386
________ ________
Net deferred tax asset $ 1,135 -
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
The Company considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon these considerations, deferred tax assets have been
recognized to the extent that they are expected to be realized through
reversals during the carryforward period of existing taxable temporary
differences giving rise to deferred tax liabilities and the anticipation of
the sale of KEVN-TV in February 1996.
Deferred tax assets and liabilities are computed by applying the U.S.
federal and state income tax rates in effect to the gross amounts of
temporary differences and other tax attributes, such as net operating
loss and capital loss carryforwards.
At December 31, 1995, the Company has capital loss carryforwards for tax
of purposes approximately $4,135,000 which are available to offset future
capital gains through 1997.
(10) Commitments and Contingencies
(a) Leases and Contracts
The Company and its subsidiaries lease certain real property, transportation
and other equipment under noncancellable operating leases expiring at
various dates through 2010. The Company also has long-term contractual
obligations to two major broadcast ratings firms that provide monthly
ratings services. Minimum commitments under all noncancellable leases and
contracts for the years ending December 31, 1996 through 2000 were
$10,916,000, $7,260,000, $5,075,000, $3,408,000 and $2,481,000, respectively.
Lease, rental and contractual expense for the years ended December 31, 1995,
1994 and 1993 amounted to approximately $10,840,000, $8,139,000 and
$7,907,000, respectively.
(b) Broadcast Program Rights
The Company has entered into contracts for broadcast program rights that
expire at various dates during the next five years. Contracts totaling
approximately $516,000 relate to programs which are not currently available
for use and, therefore, are not reflected as assets or liabilities in the
accompanying consolidated balance sheet at December 31, 1995. The aggregate
minimum payments under contracts for programs currently available (those
included on the consolidated balance sheet at December 31, 1995) and
programs not currently available (those not included on the consolidated
balance sheet at December 31, 1995) are approximately $1,911,000, $869,000,
$547,000 and $23,000 for the years ending December 31, 1996 through 1999,
respectively.
The Company entered into contracts for broadcast program rights of
approximately $2,200,000, $2,129,000 and $2,084,000 during the years
ended December 31, 1995, 1994 and 1993, respectively.
(c) Litigation
The Company is a party to lawsuits which are generally incidental to its
business. Management of the Company does not believe the resolution of
such matters will have a significant effect on its financial position or
results of operations.
(11) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values (thousands of dollars) of the Company's financial instruments
for which the estimated fair value of the instrument differs significantly
from its carrying amounts at December 31, 1995 and 1994. The fair value of
a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION> 1995 1994
_______________________ ____________________
Carrying Fair Carrying Fair
amount value amount value
_______ _________ ___________ _______
<S> <C> <C> <C> <C>
Interest rate swaps $ - 349 - -
Long-term debt -
Senior Notes (150,000) (162,750) (150,000) (152,250)
Long-term debt-
Senior
Subordinated Notes (50,000) (53,500) (50,000) (49,000)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and cash equivalents, accounts receivable and accounts payable:
The carrying amount of these assets and liabilities approximates fair
value because of the short maturity of these instruments.
Interest rate swaps: The fair value of the interest rate swap and cap
contracts is estimated by obtaining quotations from brokers. The fair
value is an estimate of the amounts that the Company would receive (pay)
at the reporting date if the contracts were transferred to other parties
or canceled by the broker. The carrying amounts of receivables (payables)
under interest rate swaps and caps are included in accrued expenses in the
accompanying consolidated balance sheets.
Long-term debt: The fair values of the Company's Senior Notes and
Senior Subordinated Notes are based on market quotes obtained from
dealers. As amounts outstanding under the Company's credit agreements
bear interest at current market rates, their carrying amounts approximate
fair market value.
(12) Segment Information
Information relating to the Company's business segments as
of and for the years ended December 31, 1995, 1994 and 1993
is as follows (thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
_______ ________ ________
<S> <C> <C> <C>
Net revenues:
In-store marketing $ 346,392 230,111 216,319
Television 45,596 46,732 41,517
Radio 43,788 40,785 33,369
_______ ________ ________
Total $ 435,776 317,628 291,205
========== ======== =========
Operating income (loss):
In-store marketing $ 50,530 37,163(a) 21,870(a)
Television 16,983(b)15,737 10,707(b)
Radio 9,401 8,681 5,981
Corporate (3,901) (3,743) (3,563)
_______ ________ ________
Total $ 73,013 57,838 34,995
========== ======== ========
Selling,general and administrative expenses:
In-store marketing $ 53,716 44,422 42,650
Television 9,726 12,296 11,183
Radio 16,981 16,226 14,473
Corporate 3,793 3,656 3,454
___________ _________ ________
Total $ 84,216 76,600 71,760
========== ======== =========
Depreciation,amortization and
writedown of program rights:
In-store marketing $ 17,700 15,428 16,850
Television 8,301(b) 7,863 9,460(b)
Radio 5,295 3,920 3,438
Corporate 107 87 110
___________ _________ ________
Total $ 31,403 27,298 29,858
========== ======== =========
Identifiable assets:
In-store marketing $ 310,637 289,559 269,437
Television 146,361 151,127 162,183
Radio 76,971 64,439 51,336
Corporate 17,042 9,022 9,893
_____________ __________ ________
Total $ 551,011 514,147 492,849
========== ======== =========
Capital expneditures:
In-store marketing $ 11,684 10,153 13,612
Television 2,131 2,332 4,271
Radio 3,605 2,809 1,845
Corporate 620 97 76
____________ _________ ________
Total(c) $ 18,040 15,391 19,804
========== ======== =========
<FN>
(a) Includes nonrecurring expenses of $4,922,000 in 1994 relating to
stock appreciation rights and $3,000,000 in 1993 relating to the shut-down
of certain in-store marketing facilities.
(b) Includes writedowns of program rights of $781,000 and $1,678,000
in 1995 and 1993, respectively.
(c) Includes amounts relating to fixed assets obtained in acquisitions,
fixed asset additions from barter agreements, and translation adjustments of
$2,952,000, $2,120,000 and $1,270,000 in 1995, 1994 and 1993, respectively.
In 1993, one customer in the in-store marketing segment accounted for 10%
of the Company's net revenues for the year.
During 1994, the in-store marketing segment reversed certain commission
accruals of $1,700,000 which were made in prior years.
</TABLE>
(13) Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION> First Second Third Fourth
quarter quarter quarter quarter Total
_______ _______ _______ _______ ______
(thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
1995:
Net revenues $83,263 107,094 108,708 136,711 435,776
Gross profit 36,727 44,756 46,587 60,562 188,632
Operating income 10,862 17,297 19,314 25,540 73,013
Net income 1,492 5,735 8,377 10,967 26,571
Net income per share .08 .32 .47 .62 1.50
1994:
Net revenues $65,313 70,025 75,488 106,802 317,628
Gross profit 31,043 38,525 41,191 55,899 166,658
Operating income 7,307 13,222 14,803 22,506 57,838
Net income (loss) (604) 2,759 6,313 13,831 22,299
Net income (loss) per share(.20) (.80) .36 .79 .15
</TABLE>
Gross profit represents net revenues less cost of services.
Operating income is defined as net revenue less cost of services; selling,
general and administrative expense; depreciation and amortization; and other
charges.
Actmedia reports its operations on a 13-cycle basis whereby the results of
operations of three,four-week periods are reported in each of the first three
quarters of the fiscal year and four,four-week periods are reported in the
fourth quarter of the fiscal year.
The total of net income per share for the four quarters within a given year
will not necessarily equal net income per share for the year due to the
different periods used to calculate weighted average shares outstanding.
HERITAGE MEDIA CORPORATION Schedule I
Financial Information of Registrant
Condensed Balance Sheets
December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
<S>
Assets 1995 1994
________ _________
<C> <C>
Current assets $ 6,867 4,245
Property and equipment,net of depreciation 3,521 1,181
Goodwill and other intangibles,net of
amortization 6,356 6,712
Investment in and advances to subsidiaries,
at equity 169,846 141,064
Other assets, net 4,183 -
___________ ____________
$ 190,773 153,202
=========== ============
Liabilities and Stockholder's Equity
Current liabilities $ 8,495 2,326
Deferred income taxes 4,016 3,369
Long-term debt,excluding current portion 57,862 58,261
________ ________
Total liabilities 70,373 63,956
________ ________
Stockholders' equity:
Preferred stock - -
Class A common stock 177 175
Additional paid-in capital 223,408 219,092
Accumulated deficit (101,643) (128,214)
Accumulated foreign currency
translation adjustments (1,088) (1,353)
Treasury stock at cost (454) (454)
__________ __________
Total stockholders' equity 120,400 89,246
__________ __________
$ 190,773 $ 153,202
========== ==========
</TABLE>
See accompanying notes to condensed financial information.
HERITAGE MEDIA CORPORATION
Financial Information of Registrant
Condensed Statements of Operations
Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
_____ ______ ______
<S>
<C> <C> <C>
Net revenues $ 3,410 1,761 1,673
_____ ______ ______
Expenses:
Cost of services 828 681 -
Selling,general and administrative 1,035 726 -
Depreciation and amortization 560 421 1,514
_____ ______ ______
2,423 1,828 1,514
_____ ______ ______
Operating income (loss) 987 (67) 159
_____ ______ ______
Other expense:
Interest (6,366) (6,070) (5,731)
Other,net 1,606 (563) (611)
_____ ______ ______
(4,760) (6,633) (6,342)
_____ ______ ______
Loss before equity in
income of subsidiaries
and extraordinary item (3,773) (6,700) (6,183)
Equity in income of subsidiaries before
extraordinary item 36,659 28,999 6,260
_____ ______ ______
Income before income taxes
and extraordinary item 32,886 22,299 77
Income taxes 6,315 - -
________ ________ _______
Income before extraordinary item 26,571 22,299 77
Extraordinary item - equity in
extraordinary items of subsidiary
- gain on early extinguishment - - 435
_____ ______ ______
$26,571 22,299 512
======= ====== ======
</TABLE>
See accompanying notes to condensed financial information.
HERITAGE MEDIA CORPORATION
Financial Information of Registrant
Condensed Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
______ ______ _______
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $26,571 22,299 512
Adjustments to reconcile net income to
net cash used by operating activities:
Equity in income of subsidiaries (38,260) (28,999) (6,695)
Depreciation and amortization 560 421 1,514
Gain on sale of investment 1,601 - -
Other - - (95)
Change in assets and liabilities,
net of acquisitions 4,194 (1,044) 175
______ ______ _______
Net cash used by operating activities (5,334) (7,323) (4,589)
______ ______ _______
Cash flows from investing activities:
Investment in and advances to subsidiaries (15,933) 1,831 (2,201)
Acquisitions, net of cash acquired - (2,457) -
Dividends from subsidiaries 27,693 47,922 11,581
Purchase of investments (7,891) - -
Sale of investments 5,309 - -
Capital expenditures (343) (563) -
Proceeds from sale of property - - 13
______ ______ _______
Net cash provided by investing
activities 8,835 46,733 9,393
______ ______ _______
Cash flows from financing activities:
Retirements of long-term debt (377) (245) (175)
Issuance of common stock 676 441 279
Dividends on preferred stock - (148) (1,781)
Retirement of settlement and stock
appreciation rights (3,800) (39,017) (2,848)
______ ______ _______
Net cash used by financing activities (3,501) (38,969) (4,525)
______ ______ _______
Net change during year - - -
Cash and cash equivalents at beginning of year - - -
______ ______ _______
Cash and cash equivalents at end of year $ - - -
______ ______ _______
______ ______ _______
Cash paid for interest $ 6,287 5,725 5,669
______ ______ _______
______ ______ _______
Cash paid for income taxes $ 3,352 4,575 3,160
______ ______ _______
______ ______ _______
</TABLE>
See accompanying notes to condensed fianancial information.
HERITAGE MEDIA CORPORATION
Notes to Condensed Financial Information
December 31, 1995, 1994 and 1993
(1) General
The accompanying condensed financial information of Heritage
Media Corporation ("Registrant" or the "Company") should be read
in conjunction with the consolidated financial statements of the
Registrant included in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
Heritage Media Corporation is primarily a holding company.
(2) Acquisition
On March 15, 1994, the Company acquired KIHT-FM in St. Louis,
Missouri for cash and other consideration aggregating $7,750,000.
This acquisition was recognized in the condensed financial
statements as follows (thousands of dollars):
<TABLE>
<S> <C>
Working capital deficit $ (177)
Property and equipment 715
Goodwill and other intangibles 7,035
Long-term debt (5,116)
_________
Total cash paid $ 2,457
==========
</TABLE>
(3) Other
See note 6 to consolidated financial statements for a description
of the common stock of the Company.
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
charged Additions
Balance (credited) charged
at to costs (credited) Balance
beginning and to other at end
Description of period expenses accounts Write-offs of period
___________ ___________ __________ ___________ _____________ ____________
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts:
Year ended
December 31, 1995 $ 3,079 2,183 - 1,229 4,033
======== ======== ========= =========== ========
Year ended
December 31,1994 $ 2,778 2,186 - 1,885 3,079
======== ======== ========= =========== ========
Year ended
December 31, 1993 $ 1,487 3,382 - 2,091 2,778
======== ======== ========= =========== ========
Deferred tax asset
valuation
allowance:
Year ended
December 31, 1995 $ 13,539 (8,696) (4,843) - -
======== ======== ========= =========== ========
Year ended
December 31,1994 $ 17,936 - (4,397) - 13,539
======== ======== ========= =========== ========
Year ended
December 31,1993 $ - - 17,936 - 17,936
======== ======== ========= =========== ========
</TABLE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Heritage Media Corporation:
We consent to incorporation by reference in the Registration Statement
(Nos. 33-29425, 33-32200 and 33-57251) on Form S-8 of Heritage Media
Corporation of our report dated February 23, 1996 relating to the
consolidated balance sheets of Heritage Media Corporation and subsidiaries
as of December 31, 1995 and 1994 and the related consolidated statements
of operations, stockholders' equity, and cash flows and related schedules
for each of the years in the three-year period ended December 31, 1995,
which report appears in the December 31, 1995 Annual Report on Form 10-K
of Heritage Media Corporation.
KPMG Peat Marwick LLP
Dallas, Texas
March 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<PERIOD-TYPE> 12-MOS
<CASH> 2,383
<SECURITIES> 5,507
<RECEIVABLES> 81,101
<ALLOWANCES> 4,033
<INVENTORY> 5,008
<CURRENT-ASSETS> 96,215
<PP&E> 109,329
<DEPRECIATION> 53,174
<TOTAL-ASSETS> 551,011
<CURRENT-LIABILITIES> 89,225
<BONDS> 334,839
<COMMON> 177
0
0
<OTHER-SE> 120,223
<TOTAL-LIABILITY-AND-EQUITY> 551,011
<SALES> 0
<TOTAL-REVENUES> 435,776
<CGS> 0
<TOTAL-COSTS> 247,144
<OTHER-EXPENSES> 115,196
<LOSS-PROVISION> 423
<INTEREST-EXPENSE> 34,677
<INCOME-PRETAX> 35,704
<INCOME-TAX> 9,133
<INCOME-CONTINUING> 26,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,571
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 0
</TABLE>
Exibit 4(f)
HERITAGE MEDIA CORPORATION
and
THE BANK OF NEW YORK
Trustee
First Supplemental Indenture
Dated as of February 15, 1996
8_% Senior Subordinated Notes due 2006
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
<S> <C>
ARTICLE ONE
Definitions
SECTION 101. Definitions 2
Acquisition 2
Adjusted Net Income 2
Asset Sale 2
Asset Swap 2
Broadcasting Business 2
Capital Expenditures 3
Cash Equivalents 3
Collateral 3
Consolidated Net Worth 3
Continuing Director 3
Credit Agreements 3
Cumulative Operating Cash Flow 4
Cumulative Total Interest Expense 4
Default 4
Disqualified Capital Stock 4
GAAP 4
Guarantee Obligation 4
Indebtedness 5
Interest Swap Agreements 5
Investments 5
Issue Date 5
Lien 5
Material Subsidiary 6
Obligations 6
Operating Cash Flow 6
Permitted Investments 6
Permitted Spin-Off 6
Proceeds 7
Pro Forma Operating Cash Flow 7
Pro Rata Amount 7
Qualified Capital Stock 8
Qualified Capital Stock Proceeds 8
Related Business 8
Restricted Investment 8
Restricted Payment 8
Restricted Subsidiary 9
Senior Indebtedness 9
Special Redemption Date 9
Total Interest Expense 9
Unrestricted Subsidiary 9
Voting Power 10
Weighted Average Life to Maturity 10
Wholly Owned Subsidiary 10
ARTICLE TWO
Terms and Issuance of 8_% Senior Subordinated Notes due 2006
SECTION 201. Terms of Notes 11
SECTION 202. Forms of Notes 12
ARTICLE THREE
Covenants
SECTION 301. Limitations on Indebtedness and Disqualified Capital Stock 12
SECTION 302. Limitations on Sales of Assets 13
SECTION 303. Limitations on Restricted Payments 16
SECTION 304. Limitations on Liens 16
SECTION 305. Limitations on Ranking of Future Indebtedness 17
SECTION 306. Limitations on Issuance of Restricted Subsidiary Stock 17
SECTION 307. Change of Control 17
SECTION 308. Limitations on Transactions with Affiliates 19
SECTION 309. Reports to Holders of the Notes 19
SECTION 310. Deposit of Proceeds with Trustee Pending Consummation
of Acquisitions 20
ARTICLE FOUR
Redemption Provisions
SECTION 401. Optional Redemption 21
SECTION 402. Special Redemption 21
ARTICLE FIVE
Miscellaneous
SECTION 501. Mergers, Consolidations and Certain Sales and Purchases
of Assets 22
SECTION 502. Supplemental Indentures with Consent of Holders. 23
SECTION 503. Special Redemption 23
SECTION 504. Ratification of Original Indenture 24
SECTION 505. Execution as Supplemental Indenture 24
SECTION 506. Conflict with Trust Indenture Act 24
SECTION 507. Effect of Headings 24
SECTION 508. Successors and Assigns 24
SECTION 509. Separability Clause 24
SECTION 510. Benefits of First Supplemental Indenture 25
SECTION 511. Execution and Counterparts 25
</TABLE>
FIRST SUPPLEMENTAL INDENTURE, dated as of February 15, 1996 (herein called
the "First Supplemental Indenture"), between Heritage Media Corporation, a
corporation duly organized and existing under the laws of the State of Iowa
(hereinafter called the "Company"), and The Bank of New York, as Trustee
under the Original Indenture referred to below (hereinafter called the
"Trustee").
RECITALS
WHEREAS, the Company has heretofore executed and delivered to the Trustee
an indenture dated as of February 15, 1996 (hereinafter called the "Original
Indenture"), to provide for the issuance from time to time of its unsecured
debentures, notes or other evidences of indebtedness (herein called the
"Securities"), the forms and terms of which are to be established as set
forth in Sections 201 and 301 of the Original Indenture;
WHEREAS, Section 901 of the Original Indenture provides, among other things,
that the Company and the Trustee may enter into indentures supplemental to
the Original Indenture for, among other things, the purpose of establishing
the forms and terms of the Securities of any series as permitted in Sections
201 and 301 of the Original Indenture;
WHEREAS, the Company desires to create a series of the Securities in an
aggregate principal amount limited to $175,000,000 (except as in the
Original Indenture provided) to be designated the "8_% Senior Subordinated
Notes due 2006" (the "Notes"), and all action on the part of the Company
necessary to authorize the issuance of the Notes under the Original
Indenture and this Supplemental Indenture has been duly taken; and
WHEREAS, all acts and things necessary to make the Notes, when executed by
the Company and authenticated and delivered by the Trustee as in the
Indenture provided, the valid and binding obligations of the Company and
to constitute these presents a valid and binding supplemental indenture and
agreement according to its terms, have been done and performed.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
That in consideration of the premises and of the acceptance and purchase of
the Notes by the Holders thereof and of the acceptance of this trust by the
Trustee, the Company covenants and agrees with the Trustee, for the equal
benefit of Holders of the Notes, as follows:
ARTICLE ONE
Definitions
SECTION 101. Definitions.
Terms defined in the Original Indenture and rules of construction set forth
therein are incorporated herein except to the extent expressly inconsistent
with any provision of this First Supplemental Indenture. For all purposes
of this First Supplemental Indenture and the Notes, the following terms
shall have the following meanings:
"Acquisition" means the acquisition of DIMAC Corporation pursuant to a
merger agreement dated October 23, 1995.
"Adjusted Net Income" means net income before extraordinary gains or
losses and before gains or losses in respect of the sale, lease, conveyance
or other disposition of assets not in the ordinary course of business
realized during any given period.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease or
other disposition by such Person or any of its Subsidiaries (including a
consolidation, merger or other sale of any such Subsidiaries with, into or
to another Person in a transaction in which such Subsidiary ceases to be a
Subsidiary, but excluding a disposition by a Subsidiary of such Person to
such Person or a Wholly Owned Subsidiary of such Person or by such Person
to a Wholly Owned Subsidiary of such Person) of (i) shares of Capital Stock
(other than directors' qualifying shares) or other ownership interests of a
Subsidiary of such Person, (ii) substantially all of the assets of such
Person or any of its Subsidiaries representing a division or line of
business or (iii) other assets or rights of such Person or any of its
Subsidiaries, whether owned on the date of the Indenture or thereafter
acquired, in one or more related transactions, having a value of $5.0
million or more, in the aggregate.
"Asset Swap" means any transaction pursuant to which property or assets of
the Company or a Restricted Subsidiary of the Company constituting a part
of the Company's Broadcasting Business or all of the shares of Capital Stock
of a Restricted Subsidiary of the Company, the property and assets of which
constitute a part of the Company's Broadcasting Business are to be exchanged
for property or assets constituting a part of the Broadcasting Business of
another Person or all of the shares of Capital Stock of another Person the
property and assets of which constitute a part of a Broadcasting Business.
"Broadcasting Business" of any Person means any or all of the television
stations or radio stations owned by such Person.
"Capital Expenditures" means the aggregate of all expenditures by the
Company and its Restricted Subsidiaries for property, plant and equipment
which would be reflected as additions to property, plant and equipment on
the consolidated balance sheet of the Company and its Restricted Subsidiaries
in accordance with GAAP.
"Cash Equivalents" means United States Treasury Obligations with maturities
of one year or less from the date of acquisition.
"Collateral" means (i) the Collateral Account as defined in Section 310(c)
hereof, (ii) the Special Redemption Amount as defined in Section 310(a)
hereof and all other cash deposited in the Collateral Account from time
to time and the investment in Cash Equivalents made pursuant to Section
310 hereof, (iii) all rights and privileges of the Company with respect
to the Collateral Account and the Cash Equivalents, (iv) all dividends,
interest and other payments and distributions made on or with respect to
the Cash Equivalents or the Collateral Account and (v) all Proceeds of any
of the foregoing.
"Consolidated Net Worth" means, with respect to any Person (i) other than
a partnership, the stockholders' equity of such Person and its Subsidiaries,
other than Disqualified Capital Stock, as determined on a consolidated basis,
less (a) all investments in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, investments in marketable
securities) and (b) all unamortized debt discount and expense and unamortized
deferred charges and (ii) that is a partnership, the common and preferred
partnership equity of such Person and its Subsidiaries, other than
Disqualified Capital Stock, as determined on a consolidated basis, all of
the foregoing determined in accordance with GAAP.
"Continuing Director" means any member of the Board of Directors of the
Company who (i) is a member of that Board of Directors on the date of the
Indenture or (ii) was nominated for election or elected to the Board of
Directors with the affirmative vote of a majority of the Continuing
Directors who were members of the Board at the time of such nomination or
election.
"Credit Agreements" means (i) the Credit Agreement entered into by and
among the Company, Heritage Media Services, Inc., certain financial
institutions parties thereto, Citibank, N.A. ("Citibank"), as agent, and
NationsBank of Texas, N.A. ("NationsBank"), as co-agent, initially providing
for an $80.0 million term loan facility and a $75.0 million revolving loan
facility, and (ii) the Credit Agreement entered into by and among DIMAC
Corporation, certain financial institutions parties thereto, Citibank and
NationsBank, as agents, initially providing for a $50.0 million term loan
facility and a $125.0 million revolving loan facility; whereby both clauses
(i) and (ii) include any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, in each case
as the same may be amended, modified, renewed, refunded or refinanced from
time to time as permitted by the covenant described under "Limitation on
Indebtedness and Disqualified Capital Stock."
"Cumulative Operating Cash Flow" of a Person means the Operating Cash Flow
of such Person and its consolidated subsidiaries for the period beginning
January 1, 1996, through and including the end of the most recently ended
fiscal quarter (taken as one accounting period) preceding the date of any
proposed Restricted Payment.
"Cumulative Total Interest Expense" of a Person means the Total Interest
Expense of such Person and its consolidated subsidiaries for the period
beginning January 1, 1996, through and including the end of the most
recently ended fiscal quarter (taken as one accounting period) preceding
the date of any proposed Restricted Payment.
"Default" means any event that is, or after the giving of notice or passage
of time or both would be, an Event of Default.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person that, by its terms (or by the terms of any security
into which it is convertible or for which it is exercisable, redeemable or
exchangeable), matures, or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or is redeemable at the option of the holder
thereof, in whole or in part, on or prior to the Stated Maturity of the
Notes.
"GAAP" means generally accepted accounting principles as applied in the
United States set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting Standards
Board or in such other statements by such other entity as may be approved
by a significant segment of the accounting profession in the United States,
which are applicable as of the date of the First Supplemental Indenture;
provided, however, that the definitions in the First Supplemental Indenture
and all ratios and calculations contained in the covenants shall be
determined in accordance with GAAP as in effect and applied by the Company,
as applicable, on the date of the First Supplemental Indenture, consistently
applied; provided, further, that in the event of any such change in GAAP or
in any change by the Company in GAAP applied that would result in any change
in any such ratio or calculation, the Company shall deliver to the Trustee,
for informational purposes only, each time any such ratio or calculation is
required to be determined or made, an Officer's Certificate setting forth
the computations showing the effect of such change or application on such
ratio or calculation.
"Guarantee Obligation" of any Person means any obligation, contingent or
otherwise, of such Person guaranteeing any Indebtedness of any other Person
(the "primary obligor") in any manner, whether directly or indirectly, and
including, without limitation, any obligation of such Person (i) to purchase
or pay (or advance or supply funds for the purchase of) such Indebtedness or
to purchase (or to advance or supply funds for the purchase of) any security
for the payment of such Indebtedness, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Indebtedness of
the payment of such Indebtedness, (iii) to maintain working capital, equity
capital or other financial statement condition or liquidity of the primary
obligor so as to cause the primary obligor to pay such Indebtedness or (iv)
otherwise primarily to assure or hold harmless the owner of any such
Indebtedness against loss in respect thereof; provided, however, that the
Guarantee Obligation of any Person shall not include endorsements of
instruments for collection or deposit in the ordinary course of business.
"Indebtedness" of any Person means, without duplication, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services (other than, in the case of any such deferred
purchase price, trade payables, on normal trade terms, incurred in the
ordinary course of business), (ii) except to the extent supporting
Indebtedness of such Person (but no other Indebtedness) of the type described
in clause (i) above, the face amount of all letters of credit issued for the
account of such Person and, without duplication, all unreimbursed drawings
thereunder, (iii) all liabilities secured by any Lien on any property owned
by such Person, whether or not such liabilities have been assumed, (iv)
Capital Lease Obligations of such Person, (v) all obligations to purchase,
redeem, retire, defray or otherwise acquire for value any Disqualified
Capital Stock of such Person and (vi) all Guarantee Obligations of such
Person.
"Interest Swap Agreements" means interest rate swap agreements, interest
rate cap agreements, interest rate collar agreements, interest rate
insurance and other agreements or arrangements designed to provide
protection against fluctuations in interest rates entered into by the
Company.
"Investments" of any Person means all investments in other Persons in
the form of loans, advances, capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases (or other acquisitions for consideration) of
Indebtedness, Capital Stock or other securities and all other items that are
or would be classified as investments (including, without limitation,
purchases of assets outside the ordinary course of business) on a balance
sheet prepared in accordance with GAAP.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any mortgage, lien, pledge, charge, security interest or
other encumbrance of any kind, whether or not filed, recorded or
otherwise perfected under applicable law (including any conditional sale
or other title retention agreement, any lease in the nature thereof, any
option or other agreement to sell or give any security interest in and
filing or other agreement to give any financing statement under the
Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Material Subsidiary" means any Subsidiary of the Company which at the time
of determination has total assets with a fair market value of five percent
(5%) or more of the fair market value of the total assets of the Company and
its Subsidiaries.
"Obligations" means any principal, interest, penalties, fees and other
liabilities payable under the documentation governing any Indebtedness.
"Operating Cash Flow" means, for any period, the sum of (i) Adjusted Net
Income for such period plus (ii) provision for taxes based on income or
profits included in computing Adjusting Net Income plus (iii) consolidated
interest expense (including amortization of original issue discount and
non-cash interest payments or accruals and the interest component of Capital
Lease Obligations) of the Company and its Restricted Subsidiaries for such
period plus (iv) other non-cash charges deducted from consolidated revenues
in determining Adjusted Net Income of such period, in each case determined
on a consolidated basis in accordance with generally accepted accounting
principles.
"Permitted Investments" means purchase of (a) marketable obligations of
or obligations guaranteed by the United States of America or issued by any
agency thereof and backed by the full faith and credit of the United States
of America, (b) marketable direct obligations issued by any state of the
United States of America or any political subdivision thereof having the
highest rating obtainable from either Moody's Investors Service or Standard
& Poor's Corporation, (c) commercial paper having a rating in one of the
two highest rating categories of Moody's Investors Service or Standard &
Poor's Corporation, (d) certificates of deposit issued by, bankers'
acceptances and deposit accounts of, and time deposits with, commercial
banks of recognized standing chartered in, or with branches or agencies
chartered in, the United States of America or Canada with capital, surplus
and undivided profits aggregating in excess of $200.0 million (a "Qualified
Bank"), (e) Eurodollar time deposits having a maturity of less than one
year purchased directly from any Qualified Bank, (f) repurchase agreements
and reverse repurchase agreements with a term of not more than one year with
a Qualified Bank relating to marketable direct obligations issued or
unconditionally guaranteed by the United States of America and (g) shares
of money market funds that invest solely in Permitted Investments of the
kind described in clauses (a) through (f) above.
"Permitted Spin-Off" means any series of integrated transactions
(the "Transaction') pursuant to which the Company or its Restricted
Subsidiaries shall (i) transfer, convey, sell, lease or otherwise dispose
of all or substantially all of the assets of the Company or a Restricted
Subsidiary constituting the Company's Broadcasting Business or Capital Stock
of any such Restricted Subsidiary to any Person; (ii) issue shares of
Capital Stock or securities convertible into, or warrants, rights or options,
to subscribe for or purchase shares of Capital Stock of a Restricted
Subsidiary which owns assets constituting part of the Company's Broadcasting
Business; or (iii) the Company distributes to its own stockholders the
shares of Capital Stock of a currently existing Subsidiary or newly created
Subsidiary (the "Successor") which owns all or substantially all of the
Company's non-Broadcasting Business assets in a transaction that would
qualify for tax-free treatment under Section 355 of the Internal Revenue
Code of 1986, as amended (the "Code") and would not trigger any other
significant tax liabilities, and immediately thereafter, the Company merges
with or is acquired by an unrelated United States corporation
in a tax-free transaction and the Company has received an opinion of counsel
to the effect that the assumption of the Notes by the Successor in
connection with such transaction is tax-free to the holders of the Notes;
provided that the Transaction satisfies the following conditions (a) the
Board of Directors of the Company determines that the Transaction is fair
and reasonable and in the best interests of the Company and which
determination shall be evidenced by a resolution of the Board of
Directors of the Company filed with the Trustee and (b) after giving pro
forma effect to such Transaction, the ratio for all Indebtedness of the
Company and its Restricted Subsidiaries and Disqualified Stock of the
Company (or in the case of a Transaction specified in subparagraph (iii)
above, of the Successor and its Restricted Subsidiaries), on a consolidated
basis, to Pro Forma Operating Cash Flow for the four full fiscal quarters
immediately preceding such Transaction is 0.5 times less than the same ratio
immediately prior to such Transaction.
"Proceeds" means all proceeds of, and all other profits, products, rents
or receipts, in whatever form, arising from the collection, sale, lease,
exchange, assignment, licensing, or other disposition of, or other
realization upon, collateral, whether now existing or hereafter arising.
"Pro Forma Operating Cash Flow" means, Operating Cash Flow after giving
effect to the following: (a) if, during such period, the Company or any
of its Restricted Subsidiaries shall have made any Asset Sale, Pro Forma
Operating Cash Flow of the Company for such period shall be computed so
as to give pro forma effect to such Asset Sale and (b) if, during such
period, the acquisition of any Person or business shall occur and
immediately after such acquisition such Person or business is a Subsidiary
or its assets are held directly by the Company or a Subsidiary, Pro Forma
Operating Cash Flow shall be computed so as to give pro forma effect to the
acquisition of such Person or business.
"Pro Rata Amount" shall mean (X) the principal amount of outstanding Notes
times (Y) the percentage that the principal amount of outstanding Notes
bears to the sum of the respective principal amounts of outstanding Notes
and outstanding $50.0 million 11% Senior Subordinated Notes due
October 1, 2002 of the Company.
"Qualified Capital Stock" means, with respect to any Person, any and
all Capital Stock issued by such Person after the date on which the Notes
are issued that is not Disqualified Capital Stock.
"Qualified Capital Stock Proceeds" means, with respect to any Person,
(a) in the case of any sale of Qualified Capital Stock (other than pursuant
to a transaction in which such Person incurs, guarantees or otherwise
becomes liable for any Indebtedness incurred in connection with the issuance
or acquisition of such Capital Stock), the aggregate net cash proceeds
received by such Person, after payment of expenses, commissions and the
like incurred in connection therewith and (b) in the case of any exchange,
exercise, conversion or surrender of any Indebtedness of such Person or any S
ubsidiary issued for cash after the date of the First Supplemental Indenture
for or into shares of Qualified Capital Stock of such Person, the net book
value of such Indebtedness as adjusted on the books of such Person to the
date of such exchange, exercise, conversion or surrender plus any additional
amount paid by the security holder to such Person upon such exchange,
exercise, conversion or surrender and less any and all payments made to
the security holders, and all other expenses (including commissions and
the like) incurred by such Person or any Subsidiary in connection therewith.
"Related Business" means marketing, advertising and related business
world-wide and the broadcasting business conducted in the United States.
"Restricted Investment" means any Investment other than (i) a Permitted
Investment or (ii) an investment in assets in a Related Business.
"Restricted Payment" means, with respect to any Person, without duplication,
(i) any dividend or other distribution of any shares of such Person's
Capital Stock (other than (a) dividends payable solely in shares of its
Capital Stock or options, warrants or other rights to acquire its Capital
Stock and (b) any payments made to the Company or a Wholly Owned Subsidiary
of the Company by a Subsidiary); (ii) any payment (other than a payment in
Qualified Capital Stock) on account of the purchase, redemption, retirement
or acquisition of (a) any shares of such Person's Capital Stock or (b) any
option, warrant or other right to acquire shares of such Person's Capital
Stock (other than any purchase, redemption or retirement in exchange for,
or solely from the proceeds of the issuance of, Qualified Capital Stock);
(iii) principal or interest payments on any loans from any Affiliate of such
Person other than a Wholly Owned Subsidiary of such Person; (iv) any loan,
advance, capital contribution to, orinvestment in, or payment on a guaranty
of any obligation of, or purchase, redemption or other acquisition of any
shares of Capital Stock or any Indebtedness of, any Affiliate (other than
such Person or a Wholly Owned Subsidiary of such Person); (v) the making of
any Restricted Investment; and (vi) any redemption, defeasance, repurchase
or other acquisition or retirement for value prior to any scheduled maturity,
repayment or sinking fund payment, of any Indebtedness of such Person which
is (a) pari passu with or subordinate in right of payment to the Notes or (b)
owed to any Affiliate of such Person other than a Wholly Owned Subsidiary of
such Person, other than a redemption, defeasance, repurchase or other
acquisition or retirement for value that is (1) part of a refinancing of such
Indebtedness permitted under the covenants described under "--Covenants--
Limitations on Indebtedness and Disqualified Capital Stock" or (2) required
to be repaid in connection with an Asset Sale.
"Restricted Subsidiary" means any Subsidiary of the Company, whether existing
on or after the date of the First Supplemental Indenture, unless such
Subsidiary is an Unrestricted Subsidiary.
"Senior Indebtedness" means, with respect to any Person, the Obligations
(including interest that, but for the filing of a petition initiating any
proceeding pursuant to any bankruptcy law with respect to such Person,
would accrue on such Obligations, whether or not such claim is allowed in
such bankruptcy proceeding) with respect to (a) any Indebtedness or
Guarantee Obligations by such Person, whether incurred on or prior to the
date of the First Supplemental Indenture or thereafter incurred and (ii)
amendments, renewals, extensions, modifications, refinancings and refundings
of any such debt. Notwithstanding the foregoing, "Senior Indebtedness"
shall not include (a) Indebtedness evidenced by the Notes, (b) Indebtedness
which by the terms of the instrument creating or evidencing the same is not
superior in right of payment to the Notes, (c) Indebtedness that is expressly
subordinated or junior in right of payment to any Indebtedness of such Person,
(d) any liability for federal, state, provincial, local or other taxes owed
or owing by such Person and (e) Indebtedness of such Person to a Subsidiary
of such Person.
"Special Redemption Date" means March 31, 1996.
"Total Interest Expense" of a Person means (i) the total amount of interest
expense (including amortization of original issue discount and noncash
interest payments or accruals and the interest component of any Capital
Lease Obligations but excluding any intercompany interest owed by any
Subsidiary to any other Subsidiary) and (ii) all fees, commissions,
discounts and other charges of the Company and its Subsidiaries with
respect to letters of credit and bankers' acceptances, determined on a
consolidated basis in accordance with GAAP.
"Unrestricted Subsidiary" means any Subsidiary organized or acquired after
the date of the First Supplemental Indenture as to which both of the
following conditions apply: (i)(a) neither the Company nor any of its other
Subsidiaries (other than Unrestricted Subsidiaries) (1) provides credit
support for any Indebtedness of such Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness) or (2) is directly or
indirectly liable for any Indebtedness of such Subsidiary, (b) no default
with respect to any Indebtedness of such Subsidiary (including any right
which the holders thereof may have to take enforcement action against such
Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of the Company and its other Subsidiaries (other than
other Unrestricted Subsidiaries) to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity, other than as permitted in clause (a) above,
and (c) neither the Company nor any of its other Subsidiaries (other
than Unrestricted Subsidiaries) has made an Investment in such Subsidiary
unless such Investment was permitted by the provisions described under
"--Covenants--Limitation on Restricted Payments" and (ii) the Board of
Directors of the Company, as provided below, shall designate such Subsidiary
as an Unrestricted Subsidiary. The Board of Directors of the Company may
designate any Subsidiary organized or acquired after the date of the First
Supplemental Indenture, which meets the requirements in the preceding
sentence, to be an Unrestricted Subsidiary, provided that, notwithstanding
the foregoing and subject to the provisions of the definition of Permitted
Spin-Off, no Subsidiary which is a Restricted Subsidiary as of the date of
the First Supplemental Indenture shall be reclassified as an Unrestricted
Subsidiary or be a Subsidiary of an Unrestricted Subsidiary. Any such
designation by the Board of Directors shall be evidenced to the Trustee
by filing with the Trustee a Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complies with the foregoing conditions.
"Voting Power" of any Person means the aggregate number of votes of all
classes of Capital Stock of such Person which ordinarily has voting power
for the election of directors or their equivalents of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtaining by dividing (i) the then
outstanding principal amount of such Indebtedness into (ii) the total of
the product obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b)
the number of years (calculated to the nearest one-twelfth) which will
elapse between such date and the making of such payment.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person,
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares or a nominal limited partnership
interest of one other partner) shall at the time be owned by such Person or
by one or more Wholly Owned Subsidiaries of such Person or by such Person
and one or more Wholly Owned Subsidiaries of such Person.
ARTICLE TWO
Terms and Issuance of 8_% Senior Subordinated Notes due 2006
SECTION 201. Terms of Notes.
The following terms of the Notes are hereby established pursuant to
Section 301 of the Original Indenture:
(1) the title of the Notes is the "8_% Senior Subordinated Notes
due 2006";
(2) the aggregate principal amount of the Notes which may be
authenticated and delivered is limited to $175,000,000 (which limit shall
not pertain to Notes authenticated and delivered upon registration of
transfer of, or in exchange for, or in lieu of, other Notes pursuant to
Section 304, 305, 306 or 1108 of the Original Indenture or any Notes that,
pursuant to Section 303 of the Original Indenture, are deemed never to have
been authenticated and delivered hereunder);
(3) the date on which the principal of the Notes is payable is
February 15, 2006;
(4) the Notes shall bear interest at 8_% per annum;
(5) the Notes may be redeemed, in whole or in part, at the option of the
Company as in Article Four hereof provided;
(6) the Company shall redeem the Notes upon the terms specified in
Section 302 and 307 hereof;
(7) the covenants of the Company set forth in Article Three
hereof are hereby added to the covenants of the Company set forth in
Article Ten of the Original Indenture pertaining to the Notes;
(8) Sections 1202 and 1203 of the Original Indenture shall be applicable
to the Notes;
(9) the Notes shall be issued in whole in global form;
(10) the Notes will be senior subordinated Obligations of the Company,
subordinated in right of payment to Senior Indebtedness of the Company,
including amounts outstanding under the credit agreements of the Company's
Subsidiaries (guaranteed by the Company), and senior in right of payment to
any current or future subordinated indebtedness of the Company, and the
Notes will rank pari passu in right of payment with the Company's 11% Senior
Subordinated Notes due October 1, 2002.
SECTION 202. Form of Notes.
The form of the Notes shall be substantially in the form of Exhibit A
attached hereto, the terms of which are hereby incorporated by reference
herein and made a part hereof.
ARTICLE THREE
Covenants
The following covenants are for the benefit of Holders of the Notes and
no other Holders.
SECTION 301. Limitations on Indebtedness and Disqualified Capital Stock.
The Company will not and will not permit any of its Restricted Subsidiaries
to (i) create, issue, incur or assume any Indebtedness and (ii) issue any
Disqualified Capital Stock unless at the time of such Incurrence or issuance
and after giving effect thereto, all Indebtedness of the Company and its
Restricted Subsidiaries and Disqualified Capital Stock of the Company, on
a consolidated basis, shall not be more than 6.5 times Pro Forma Operating
Cash Flow for the four full fiscal quarters immediately preceding such
Incurrence.
Notwithstanding the foregoing, the incurrence of any of the following is
permitted (collectively "Permitted Indebtedness"):
(i) Indebtedness evidenced by the Notes;
(ii) Indebtedness incurred by the Company or a Restricted Subsidiary
or Disqualified Capital Stock issued by the Company that does not exceed
$40.0 million at any time outstanding;
(iii) Indebtedness incurred by the Company or a Restricted Subsidiary
of the Company or Disqualified Capital Stock issued by the Company, the
proceeds of which are used to refinance outstanding Indebtedness of the
Company or such Restricted Subsidiary in a principal amount not to exceed
the principal amount so refinanced plus financing fees and other reasonable
expenses associated with such refinancing; provided, however, that (x) the
Weighted Average Life to Maturity of such Indebtedness shall be no shorter
than the Weighted Average Life to Maturity of the refinanced Indebtedness
and (y) if the refinanced Indebtedness is not Senior Indebtedness, such
refinanced Indebtedness is subordinated in all respects to the Notes;
(iv) Indebtedness outstanding at any time under, or in respect of, the
Credit Agreements in an aggregate principal amount not to exceed $330.0
million at any one time outstanding;
(v) Indebtedness entered into pursuant to Interest Swap Agreements;
and
(vi) Indebtedness issued to and held or owned by the Company or a
Wholly Owned Subsidiary of the Company that is a Restricted Subsidiary
(but only so long as held or owned by the Company or such Wholly Owned
Subsidiary of the Company that is a Restricted Subsidiary); provided,
however, that the obligations of the Company to any of its Wholly Owned
Subsidiaries with respect to such indebtedness shall be evidenced by an
intercompany promissory note and shall be subordinated in right of payment
to the payment and performance of the Company's obligations with respect to
the Notes.
SECTION 302. Limitations on Sales of Assets.
(a) The Company will not and will not permit any of its Restricted
Subsidiaries to make any Asset Sale unless:
(i) the consideration received by the Company or such Restricted
Subsidiary at the time of the Asset Sale is at least equal to the fair
market value of the shares or assets subject to such Asset Sale; and
(ii) at least 85% of the consideration received consists of cash or
readily marketable cash equivalents, provided that (a) any Indebtedness
assumed by the acquiror in the Asset Sale shall be deemed to be cash for
purposes of this covenant and (b) an Asset Sale which is all or a portion
of an Asset Swap shall not be subject to this requirement.
The provisions of this covenant shall not apply to a Permitted Spin-Off.
The Company or a Restricted Subsidiary may, within 365 days of such Asset
Sale, invest the Net Proceeds, as defined below, in the acquisition of a
Related Business. The amount of such Net Proceeds not invested in a Related
Business as set forth in this paragraph constitutes "Excess Proceeds."
For purposes of the foregoing, "Net Proceeds" means the aggregate amount of
cash (including other consideration that is converted into cash) received
by the Company or a Restricted Subsidiary in respect of such Asset Sale,
less the sum of (i) all fees, commissions and other expenses incurred in
connection with such Asset Sale, including the amount of income taxes
required to be paid by the Company or such Restricted Subsidiary in
connection therewith and (ii) the aggregate amount of cash so received
which is used to retire any existing Senior Indebtedness of the Company
and its Restricted Subsidiaries or Indebtedness that is ranked pari passu
with the Notes which is required to be repaid in connection therewith.
If at any time any funds are received by or for the account of the Company
or any of its Restricted Subsidiaries upon the sale, conversion, collection
or other liquidation of any non-cash consideration received in respect of
an Asset Sale, such funds shall, when received, constitute Net Proceeds and
may within 180 days after the receipt of such funds, be applied as provided
in the preceding paragraph as determined by the Company.
(b) When the aggregate amount of Excess Proceeds exceeds $5.0
million, within 30 days after the date on which the amount of Excess
Proceeds exceeds $5.0 million, the Company shall make an offer to
purchase the Pro Rata Amount of outstanding Notes (the "Offer to Purchase")
in an aggregate principal amount equal to such Excess Proceeds at a
purchase price of 100% of their principal amount plus accrued and unpaid
interest thereon to the date of purchase.
The Offer to Purchase shall remain open for a period of 20 business days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Offer Period"). No later than
five business days after the termination of the Offer Period (the "Purchase
Date"), the Company shall purchase the maximum principal amount of Notes
that may be purchased with such Excess Proceeds (which maximum principal
amount of Notes shall be the "Offer Amount") or, if less than the Offer
Amount has been tendered, all Notes tendered in response to the Offer to
Purchase.
If the Purchase Date is on or after an interest record date and on or before
the related interest payment date, any accrued interest shall be paid to the
Person in whose name a Note is registered at the close of business on such
record date, and no additional interest shall be payable to Holders who
tender Notes pursuant to the Offer to Purchase.
Upon the commencement of any Offer to Purchase, the Company shall send,
by first class mail, a notice to the Trustee and each of the Holders of
the Notes, with a copy to the Trustee. The notice shall contain all
instructions and materials necessary to enable such Holders to tender Notes
pursuant to the Offer to Purchase. The notice, which shall govern the terms
of the Offer to Purchase shall state:
(i) that the Offer to Purchase is being made pursuant to this Section
302 and the length of time the Offer to Purchase shall remain open;
(ii) the Offer Amount, the purchase price and the Purchase Date;
(iii) that any Note not tendered or accepted for payment shall continue
to accrue interest;
(iv) that any Note accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest after the Purchase Date;
(v) that Holders electing to have a Note purchased pursuant to any
Offer to Purchase shall be required to surrender the Note, with
the appropriate form on the Note completed, to the Company, a
depositary, if appointed by the Company, or a Paying Agent at
the address specified in the notice prior to termination of the
Offer to Purchase;
(vi) that Holders shall be entitled to withdraw their election if the
Company, depositary or Paying Agent, as the case may be, receives,
not later than the expiration of the Offer Period, a facsimile
transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder delivered for purchase
and a statement that such Holder is withdrawing his election to
have the Note purchased; and
(vii) that Holders whose Notes were purchased only in part shall be
issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered.
On or before the Purchase Date, the Company shall, to the extent lawful,
accept for payment, on a pro rata basis with the Company's $50.0 million
11% Senior Subordinated Notes due October 1, 2002 to the extent necessary,
the Offer Amount of Notes or portions thereof tendered pursuant to the Offer
to Purchase, or if less than the Offer Amount has been tendered, all Notes
or portion thereof tendered, and deliver to the Trustee an Officer's
Certificate stating that such Notes or portions thereof were accepted
for payment by the Company in accordance with the terms of this Section 302.
The Company, depositary or Paying Agent, as the case may be, shall promptly
(but in any case not later than five days after the Purchase Date) mail or
deliver to each tendering Holder an amount equal to the purchase price of
the Note tendered by such Holder and accepted by the Company for purchase,
and the Company shall promptly issue a new Note, and the Trustee shall
authenticate and mail or deliver such new Note to such Holder equal in
principal amount to any unpurchased portion of the Note surrendered.
Any Note not so accepted shall be promptly mailed or delivered by the
Company to the Holder thereof. The Company shall publicly announce the
results of the Offer to Purchase on the Purchase Date. To the extent that
the aggregate amount of Notes tendered pursuant to the Offer to Purchase
is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. Upon completion of the purchase of
Notes tendered pursuant to an Offer to Purchase, the amount of Excess
Proceeds shall be reset to zero.
The Company will comply with any tender offer rules under the Exchange
Act which may then be applicable, including Rule 14e-1 thereunder, in
connection with any offer required to be made by the Company to purchase
the Notes as a result of an Offer to Purchase.
SECTION 303. Limitations on Restricted Payments.
The Company will not and will not permit any of its Restricted Subsidiaries
to make any Restricted Payment unless at the time of and after giving effect
to such Restricted Payment (i) no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof; (ii)
the Company could incur at least $1.00 of additional Indebtedness pursuant
to Section 301 above (without regard to the second paragraph thereof); and
(iii) the total of all Restricted Payments of the Company and its Restricted
Subsidiaries on or after the date of this First Supplemental Indenture does
not exceed any amount equal to the sum of (a) Cumulative Operating Cash Flow
of the Company and its Restricted Subsidiaries less 1.4 times Cumulative
Total Interest Expense of the Company and its Restricted Subsidiaries plus
(b) an amount equal to 100% of the aggregate Qualified Capital Stock Proceeds
plus (c) $15.0 million. Notwithstanding the foregoing, the provisions of
this covenant will not prohibit (x) aggregate Restricted Payments by the
Company equal to 100% of aggregate Qualified Capital Stock Proceeds from
the contemporaneous sale of Qualified Capital Stock of the Company if such
Restricted Payments are used to redeem, repurchase or retire outstanding
shares of Capital Stock of the Company after the date of this First
Supplemental Indenture or (y) payment of any dividend within 60 days of the
date of its declaration if at the date of declaration such payment would
have been permitted. The provisions of this covenant shall not apply to a
Permitted Spin-Off.
SECTION 304. Limitations on Liens.
The Company will not and will not permit any of its Restricted Subsidiaries
to incur, assume, suffer to exist, create or otherwise cause to be effective
Liens upon any of their respective assets to secure Indebtedness except: (i)
Liens existing on the date of this First Supplemental Indenture; (ii) Liens
incurred or pledges and deposits in connection with workers' compensation,
unemployment insurance and other social security benefits, leases, appeal
bonds and other obligations of like nature incurred by the Company or any
Restricted Subsidiary in the ordinary course of business; (iii) Liens
imposed by law, including, without limitation, mechanics', carriers',
warehousemen's, materialmen's, suppliers' and vendors' Liens, incurred
by the Company or any of its Restricted Subsidiaries in the ordinary course
of business; (iv) zoning restrictions, easements, licenses, covenants,
reservations, restrictions on the use of real property or minor
irregularities of title incident thereto, which do notin aggregate have a
material adverse effect on the operation of the business of the Company or
its Subsidiaries taken as a whole; (v) Liens for ad valorem, income or
property taxes or assessments and similar charges either (a) not delinquent
or (b) contested in good faith by appropriate proceedings and as to which
the Company has set aside on its books reserves to the extent required by
GAAP; (vi) Liens in respect of purchase money Indebtedness incurred to
acquire assets, provided that such Liens are limited to the assets or
acquired with the proceeds of such Indebtedness ( and the proceeds of such
assets); (vii) Liens securing assets leased pursuant to Capital Lease
Obligations permitted by Section 301; (viii) Liens securing Indebtedness
permitted by Section 301; (ix) Liens on any assets of any Restricted
Subsidiary of the Company which assets are acquired by the Company or any
of its Restricted Subsidiaries subsequent to the date of this First
Supplemental Indenture, and which Liens were in existence on or prior to
the acquisition of such assets of such Restricted Subsidiary (to the extent
that such Liens were not created in contemplation of such acquisition),
provided that such Liens are limited to the assets so acquired and the
proceeds thereof; and (x) Liens imposed pursuant to condemnation or eminent
domain or substantially similar proceedings.
SECTION 305. Limitations on Ranking of Future Indebtedness.
The Company will not create, issue, incur, assume, guarantee or otherwise
become directly or indirectly liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness
of the Company and senior in any respect in right of payment to the Notes.
SECTION 306. Limitations on Issuance of Restricted Subsidiary Stock.
The Company will not and will not permit any of its Restricted Subsidiaries
to transfer, convey, sell, lease or otherwise dispose of any Capital Stock
of any such Restricted Subsidiary to any Person other than the Company and
no Restricted Subsidiary shall issue shares of its Capital Stock or
securities convertible into, or warrants, rights or options, to subscribe
for or purchase shares of, its Capital Stock to any Person other than the
Company. The provisions of this covenant shall not apply to a Permitted
Spin-Off.
SECTION 307. Change of Control.
Upon the occurrence of a Change of Control (as defined below), each
Holder of Notes will have the right, subject to the terms and conditions
of this section and the First Supplemental Indenture, to require that the
Company repurchase all or a portion of such Holder's Notes at a purchase
price in cash equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the Repurchase Date (as defined below),
in accordance with the terms set forth below (the "Change of Control Offer"),
(provided that if the date of purchase is on or after an interest record
date and on or before the related interest payment date, any accrued
interest shall be paid to the Person in whose name a Note is registered
at the close of business on such record date, and no additional interest
shall be paid or payable to Holders who tender Notes pursuant to the Change
of Control Offer). Any rights of Holders arising pursuant to a Change of
Control Offer shall be subordinated in right of payment to all Senior
Indebtedness of the Company to the same extent as the Notes are
subordinated to Senior Indebtedness of the Company.
Within 30 days following a Change of Control, the Company will send,
by first class mail, a notice to each Holder of a Note stating: (i) that
a Change of Control has occurred and that such Holder has the right to
require the Company to repurchase all or a portion of such Holder's Notes
at a repurchase price in cash equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the Repurchase Date; (ii) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to income, cash flow and capitalization after
giving effect to such Change of Control); (iii) the repurchase date specified
by the Company (which shall be not earlier than 45 days or later than 60
days from the date such notice is mailed (the "Repurchase Date"); and (iv)
the instructions together with any necessary materials determined by the
Company that a Holder of Notes requires in order to have its Notes
repurchased. Each Holder shall be entitled to tender all or any portion
of their Notes pursuant to the Change of Control Offer, subject to the
requirement that any portion of Notes tendered must be tendered in an
integral multiple of $1,000 principal amount. Holders of Notes will have
the right to have their Notes repurchased by the Company if such Notes are
properly tendered for repurchase at any time beginning on the date such
notice is mailed and ending at the close of business on the fifth business
day prior to the applicable Repurchase Date.
Prior to the Repurchase Date, the Company shall accept for payment Notes
or portions thereof tendered pursuant to the Change of Control Offer and
deliver to the Trustee an Officer's Certificate stating that such Notes or
portions thereof were accepted for payment by the Company in accordance with
the terms of this Section 307. The Company or Paying Agent, as the case may
be, shall promptly mail or deliver to Holders of Notes so accepted payment
in an amount equal to the repurchase price, and the Company shall promptly
execute and thereafter the Trustee shall promptly authenticate and mail or
deliver to such Holders, a new Note or Notes equal in principal amount to
any unpurchased portion of the Note surrendered as requested by the Holder.
Any Note not accepted for payment shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company shall publicly announce
the results of the Change of Control Offer on the Repurchase Date.
As used herein, a "Change of Control" means (i) directly or indirectly, a
sale, transfer or other conveyance of all or substantially all of the assets
of the Company, on a consolidated basis, (ii) any "person" or "group" (as
such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable) being or becoming the "beneficial owner"
(as such term is used for purposes of Section 13(d) of the Exchange Act,
whether or not applicable), directly or indirectly, of more than 50% of
the total Voting Power of the Company or (iii) the Continuing Directors
cease for any reason to constitute a majority of the directors of the
Company then in office.
The Company will comply with any tender offer rules under the Exchange
Act which may then be applicable, including Rule 14e-1 thereunder, in
connection with any offer required to be made by the Company to repurchase
the Notes as a result of a Change of Control.
SECTION 308. Limitations on Transactions with Affiliates.
The Company will not and will not permit any of its Restricted Subsidiaries
to enter into any transaction (including, without limitation, any purchase,
sale, lease or exchange of property or the rendering of any service) with
(i) any holder of 10% or more of any class of equity securities of the
Company or any Affiliate of the Company or (ii) any Affiliate (other than
the Company or a Restricted Subsidiary) of (a) any such holder or (b) any
Restricted Subsidiary of any such holder, unless a majority of the
disinterested members of the Board of Directors of the Company determine
(which determination will be evidenced by a resolution submitted to the
Trustee) that (x) such transaction is in the best interests of the Company
and (y) such transaction is on terms that are no less favorable to the
Company, or such Restricted Subsidiary, as the case may be, than those
which might be obtained at the time from Persons who are not such a holder
or Affiliate; provided, however, that any transaction orseries of related
transactions with an aggregate value of $5.0 million or more shall,
in addition to the foregoing, require an opinion delivered to the Trustee
by a nationally recognized investment bank to the effect that such
transaction is fair from a financial point of view to the Company;
provided, further, if there are no disinterested members of the Board of
Directors any transactions or series of related transactions with an
aggregate value of $1.0 million or more shall, in lieu of requiring the
pproval of such related disinterested members, require such a fairness
opinion; and provided, further, if there are no disinterested members of
the Board of Directors, as applicable, any transactions or series of
related transactions with an aggregate value of less than $1.0 million
shall require the determination required above by a vote of the Board of
Directors. The foregoing restrictions shall not apply to (i) Restricted
Payments permitted under Section 303, (ii) payment of any dividend within
60 days of the date of its declaration if at the date of declaration such
payment would have been permitted or (iii) other transactions expressly
permitted to be made under this First Supplemental Indenture.
SECTION 309. Reports to Holders of the Notes.
The Company will furnish the information required by Sections 13 and
15(d) of the Exchange Act to the Commission and to the Holders of the Notes.
Even if the Company is entitled under the Exchange Act not to furnish such
information to the Commission and to the Holders of the Notes, it shall
nonetheless continue to furnish such information to the Commission, the
Trustee and the Holders of the Notes as if it were subject to such periodic
reporting requirements.
SECTION 310. Deposit of Proceeds with Trustee Pending Consummation of
Acquisition.
(a) On the Issue Date, the Company shall deposit with the Trustee as
hereinafter provided the net proceeds from the issuance of the Notes (the
"Net Offering Proceeds") and such other amount as, when added to the Net
Offering Proceeds, equals $176,750,000 plus an amount equal to the interest
that would accrue on $175,000,000 from the Issue Date to March 31, 1996 at
an interest rate of 8_% per annum (the "Special Redemption Amount").
(b) In order to secure the full and punctual payment and performance
of the Company's obligation to redeem the Notes upon a Special Redemption,
the Company hereby irrevocably pledges, assigns and sets over to the Trustee,
and grants to the Trustee, for the benefit of the Holders of the Notes, a
first priority continuing security interest in and to the Collateral,
whether now owned or existing or hereafter acquired or arising.
(c) Prior to, contemporaneously herewith, and at any time and from
time to time hereafter, the Company will, at the Company's expense, execute
and deliver to the Trustee such other instruments and documents, and take
all further action as it deems necessary or advisable or as the Trustee may
reasonably request to confirm or perfect the security interest of the
Trustee granted or purported to be granted hereby or to enable the Trustee
to exercise and enforce its rights and remedies hereunder with respect to
any Collateral and the Company will take all necessary action to preserve
and protect the security interest created hereby as a first priority,
perfected lien and encumbrance upon the Collateral.
(d) At all times until the earlier to occur of (i) receipt by the
Trustee of an Officer's Certificate to the effect that all conditions
to the Acquisition (other than the funding of the purchase price) have
been fulfilled and requesting the Trustee to release the Collateral to
the order of the Company or (ii) receipt by the Trustee of notice from
the Company pursuant to Section 1103 of the Original Indenture (as
amended by Section 503 of this First Supplemental Indenture) to effect a
Special Redemption, there shall be maintained with the Trustee an account
(the "Collateral Account") designated "Heritage Media Corporation Account
Pledged to The Bank of New York as Trustee." On the Issue Date, the
Company shall cause the Special Redemption Amount to be deposited in the
Collateral Account. Any income received with respect to the balance from
time to time standing to the credit of the Collateral Account, including
any interest on Cash Equivalents shall remain, or be deposited, in the
Collateral Account. Amounts on deposit in the Collateral Account shall
be invested and re-invested from time to time in such Cash Equivalents as
the Company shall specifically direct in writing.
(e) Upon notice from the Company to the Trustee pursuant to subsection
(d)(i) above, the security interest in the Collateral shall terminate and
all funds in the Collateral Account shall be released to the order of the
Company; and upon notice from the Company to the Trustee pursuant to
subsection (d)(ii) above, the Trustee shall apply all funds in the
Collateral Account to fund the Special Redemption.
ARTICLE FOUR
Redemption Provisions
SECTION 401. Optional Redemption.
The Notes may not be redeemed at the option of the Company prior to F
ebruary 15, 2001, except as expressly provided below. Thereafter,
the Notes will be subject to redemption, at the option of the Company,
either in whole or in part, upon not less than 30 nor more than 60 days'
prior notice mailed to each Holder of Notes to be redeemed at the address
appearing in the register, at any time or from time to time at the following
redemption prices (expressed as percentages of principal amount), in each
case together with accrued and unpaid interest to the date fixed for
redemption if redeemed during the 12-month period beginning February 15,
of each of the years indicated below:
<TABLE>
<S> <C>
Year Percentage
2001 104.375%
2002 102.917%
2003 101.458%
2004 and thereafter 100.000%
</TABLE>
SECTION 402. Special Redemption.
The Notes will be subject to a special redemption (the "Special Redemption")
on, or at any time prior to, March 31, 1996 at a redemption price of 101% of
the principal amount of the Notes, plus accrued interest to the date of
redemption, if the Acquisition is not consummated on or before the Special
Redemption Date or if it appears, in the sole judgment of the Company, that
the Acquisition will not be consummated by the Special Redemption Date.
ARTICLE FIVE
Miscellaneous
SECTION 501. Mergers, Consolidations and Certain Sales and Purchases
of Assets.
With respect to the Notes only, Section 801 of the Original Indenture is
deleted in its entirety and replaced with the following:
Mergers, Consolidations and Certain Sales and Purchases of Assets.
The Company (a) shall not consolidate with or merge into any Person,
(b) shall not permit any other Person to consolidate with or merge
into the Company or any Restricted Subsidiary of the Company, (c)
shall not, directly or indirectly, transfer, sell, convey, lease or
otherwise dispose of all or substantially all of its assets as an entirety
and (d) shall not, and shall not permit any Restricted Subsidiary of the
Company to, directly or indirectly (i) acquire Capital Stock or other
ownership interests in any other Person such that such Person becomes a
Subsidiary of the Company or (ii) purchase, lease or otherwise acquire
all or substantially all of the property and assets of any Person as an
entirety or an existing business unless
(1) immediately after giving effect to such transaction and treating
any Indebtedness that becomes an obligation of the Company or a Subsidiary
of the Company, as a result of such transaction, as having been Incurred by
the Company or such Subsidiary at the time of the transaction, no Event of
Default or event that, with the passing of time or the giving of notice,
or both, would become an Event of Default, shall have occurred and be
continuing;
(2) in a transaction in which the Company does not survive or in which
the Company sells, leases or otherwise disposes of all or substantially
all of its assets, the successor entity to the Company is organized under
the laws of the United States or any State thereof or the District of
Columbia and expressly assumes, by a supplemental indenture executed and
delivered to the Trustee in the form satisfactory to the Trustee, all of
the Company's obligations under the First Supplemental Indenture;
(3) immediately after giving effect to such transaction, the Consolidated
Net Worth of the Company or such successor or transferee immediately after
the transaction is at least equal to the Company's Consolidated Net Worth
immediately prior to the transaction;
(4) immediately after giving effect to any such transaction involving the
Incurrence by the Company or any of its Restricted Subsidiaries, directly
or indirectly, of additional Indebtedness, the Company would be permitted
to incur at least $1.00 of additional Indebtedness pursuant to Section 301
of this First Supplemental Indenture; and
(5) the Company has delivered to the Trustee an Officer's Certificate
and an Opinion of Counsel, each stating that such consolidation, merger,
conveyance, transfer, lease or acquisition and, if a supplemental indenture
is required in connection with such transaction, such supplemental i
ndenture, complies with this Article and that all conditions precedent
herein provided for relating to such transaction have been complied with.
For the purposes of this section, a Transaction defined in sub-paragraph
(iii) of the definition of a Permitted Spin-Off will constitute an indirect
disposition of substantially all of the assets of the Company within
sub-paragraph (c) above, and will be subject to the provisions contained
in this subsection.
SECTION 502. Supplemental Indentures with Consent of Holders.
With respect to the Notes only, paragraph (1) of Section 902 of the
Original Indenture is deleted and replaced with the following paragraph:
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any Security, or reduce the principal amount thereof or the
rate of interest thereon or any premium payable thereon, or change the
place of payment where, or the currency in which, any Security or any
premium or interest thereof is payable, or adversely affect the rights
of Holders under any mandatory repurchase provision or any right of
repurchase at the option of any Holder, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date)
(except as permitted by Section 901(4)).
SECTION 503. Special Redemption.
(a) With respect to the Notes only, Section 1105 of the Original Indenture
is amended to include the following sentence at the end of the first
paragraph:
In the event of a Special Redemption, the Company shall mail by first-
class mail a notice of redemption to each Holder at least five business
days before the Special Redemption.
(b) With respect to the Notes only, Section 1103 of the Original
Indenture is amended to include the following additional paragraph:
In the case of a Special Redemption, the Company shall furnish to the
Trustee, two days before notice of the Special Redemption is to be mailed
to Holders (or such shorter time as may be satisfactory to the Trustee),
an Officer's Certificate stating that the Company is required to redeem
the Notes pursuant to Section 402 of the First Supplemental Indenture.
SECTION 504. Ratification of Original Indenture.
Except as supplemented by or deemed inconsistent with provisions of the
First Supplemental Indenture, provisions of the Original Indenture shall
remain in full force and effect with respect to the Notes and are ratified
and confirmed by each of the parties hereto.
SECTION 505. Execution as Supplemental Indenture.
This First Supplemental Indenture is executed and shall be construed as
an indenture supplemental to the Original Indenture and, as provided in
the Original Indenture, this First Supplemental Indenture forms a part
thereof.
SECTION 506. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this First Supplemental
Indenture by any of the provisions of the Trust Indenture Act, such required
provision shall control.
SECTION 507. Effect of Headings.
The Article and Section headings herein are for convenience only and shall
not affect the construction hereof.
SECTION 508. Successors and Assigns.
All covenants and agreements in this First Supplemental Indenture by the
Company shall bind its successors and assigns, whether so expressed or not.
SECTION 509. Separability Clause.
In case any provision in this First Supplemental Indenture or in the Notes
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 510. Benefits of First Supplemental Indenture.
Nothing in this First Supplemental Indenture or in the Notes, express or
implied, shall give to any person, other than the parties hereto and their
successors hereunder and the Holders of the Notes, any benefit or any legal
or equitable right, remedy or claim under this First Supplemental Indenture.
SECTION 511. Execution and Counterparts.
This First Supplemental Indenture may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above
written.
HERITAGE MEDIA CORPORATION
By: _____________________________
[SEAL]
ATTEST:
________________________________
THE BANK OF NEW YORK, as Trustee
By: ______________________________
[SEAL]
ATTEST:
________________________________
STATE OF TEXAS
COUNTY OF DALLAS
Before me, the undersigned, on this day personally appeared ________________,
known to me to be the person whose name is subscribed to the foregoing
instrument and acknowledged to me that he/she executed the same for the
purposes and consideration therein expressed.
Given under my hand and seal of office this ____ day of _________, 1996.
[SEAL] ______________________________
Notary Public, in and for the
State of Texas
My Commission Expires:
___________________________
STATE OF NEW YORK
COUNTY OF NEW YORK
Before me, the undersigned, on this day personally appeared ____________________
known to me to be the person whose name is subscribed to the foregoing
instrument and acknowledged to me that he/she executed the same for the
purposes and consideration therein expressed.
Given under my hand and seal of office this ____ day of _________, 1996.
[SEAL] ______________________________
Notary Public, in and for the
State of New York
My Commission Expires:
___________________________
