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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, 1996; 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
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HERITAGE MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 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:
(972) 702-7380
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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 3, 1997 is $369,497,300.
The number of shares outstanding of each of the issuer's classes of common
stock, as of March 3, 1997:
CLASS SHARES OUTSTANDING
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Common Stock, $.01 Par Value 34,772,342
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List hereunder the following documents incorporated by reference:
DOCUMENT PART OF FORM 10-K
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Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 15, 1997 III
(the "Proxy Statement").
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HERITAGE MEDIA CORPORATION
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders . . . . 18
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . 19
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 22
Item 8. Financial Statements and Supplementary Data . . . . . . . . 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . 28
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . 29
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 13. Certain Relationships and Related Transactions. . . . . . . 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . 29
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PART I
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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 Marketing Corporation ("DIMAC") and ACTMEDIA, Inc.
("ACTMEDIA"). DIMAC is the leading full service, vertically integrated direct
marketing services company in the United States. ACTMEDIA-Registered Trademark-
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 currently operates six
network affiliated television stations and twenty-three radio stations in eight
major markets.
ACTMEDIA provides coverage in over 40,000 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.
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 services, retail, publishing
and healthcare, with a strong expertise and focus on telecommunications related
businesses.
Television remains an 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 has focused on creating duopolies in
its markets.
1.(b) BUSINESS SEGMENT INFORMATION
Heritage operates in two business segments - Marketing Services and
Broadcasting. The business segment information required by this item is set
forth in Note 13 of Notes to Consolidated Financial Statements of Heritage,
included herein.
1.(c) DESCRIPTION OF THE BUSINESS
MARKETING SERVICES
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.
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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
ACTMEDIA offers advertisers a broad assortment of in-store advertising and
promotional products which can be purchased separately or integrated 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 manufacturers' in-
store challenges.
INSTANT COUPON MACHINE-Registered Trademark-. 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 less than 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 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. National
rollout of the ICM commenced in February 1992. Currently the ICM is available in
approximately 11,500 grocery stores, 10,200 drug stores and 2,600 mass
merchandise stores.
ACTNOW-Registered Trademark-. 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 10,600 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.
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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-Registered Trademark-. 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 105 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 122 million
shoppers per cycle. According to studies by Audits & Surveys, Inc. ("A&S")
conducted from 1973 to 1995, the use of shopping cart advertisements increased
average unit sales for the products advertised by approximately 11% in stores
where they were utilized.
AISLEVISION-Registered Trademark-. 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 5,300 stores nationwide, offering category-exclusive coverage of
approximately 151 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 1995
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-Registered Trademark-/SHELFTAKE-ONE-Registered Trademark-.
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 11,200 supermarkets, offering coverage
of approximately 170 DMA's, and in approximately 8,800 drug and mass
merchandiser stores, covering approximately 160 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 6% 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 1995 reported that
SHELFTAKE-ONE increased average unit sales by 7% for products advertised in
grocery stores and by 5% for products in drug stores.
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ACTRADIO-Registered Trademark-. ACTRADIO is the nation's largest
advertiser-supported satellite delivered 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 8,100 chain supermarkets, 8,100 chain
drug stores, 2,300 mass merchandise stores and 800 Toys 'R' Us /Kids 'R' Us toy
and children clothing stores. ACTRADIO delivers over 700 million advertising
impressions over a four-week period reaching 56% of adults an average of 6.8
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 1995 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-Registered Trademark-. 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, retail sales 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 9,000 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 products, setting up displays and
conducting sampling and providing demonstration programs.
ACTPROMOTE-Registered Trademark-. 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. Continued testing of this network is scheduled for 1997.
IN-STORE NETWORK
ACTMEDIA's in-store network delivers its products and services in over
24,000 supermarkets and 13,700 drug and 2,600 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 186 of the nation's 211 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
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utilize their own employees. ACTMEDIA believes the training, supervision
and size of its field service staff (approximately 450 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 1996, the Company's largest customers included the
following:
Campbells Soup Kraft Foods Nestle Foods Reckitt & Coleman
General Mills Kelloggs Pillsbury Thomas J. Lipton Co.
Heinz Corp. Kimberly-Clark Procter & Gamble Van Den Bergh Foods
Johnson & Johnson RJR Nabisco Ralston Purina
ACTMEDIA's sales organization markets its services to consumer packaged
goods brand managers, promotion managers and their advertising and promotion
agencies. ACTMEDIA's sales force consists of approximately 45 representatives,
who are compensated on a salary-plus-commission basis. 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; (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; and (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 1997.
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 February 1994,
ACTMEDIA acquired in-store marketing companies in Australia and New Zealand.
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
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(20%), Greece (10%), Japan (10%), and Ireland (10%). ACTMEDIA also has licensing
agreements in Israel, South Africa, France, Portugal, the United Kingdom,
Turkey, Mauritius and Zimbabwe.
ACTMEDIA has entered a joint venture with Publimart (Vista Group), a
Mexican marketing services company, to form ACTMEDIA LATINA, which will act as
master licensee for all Latin American countries. ACTMEDIA has a 10% equity
participation in ACTMEDIA LATINA. ACTMEDIA LATINA has equity interests ranging
from 10-51% in in-store marketing firms in Brazil, Mexico and Columbia. It
manages licenses in Puerto Rico, Venezuela, Costa Rica and Argentina.
International sales in 1996 were $38.3 million (approximately 11%) of the
In-store Marketing revenues.
DEVELOPMENT
ACTMEDIA's dedicated Venture Group is aggressively pursuing new product
development, alliances, joint ventures and acquisitions both in-store and within
complementary industries. The introduction of ACTMEDIA's current product line
into new classes of trade as well as development of new clients continue to
represent key focus areas. ACTMEDIA has several projects in the electronic
couponing area that represent growth opportunities. International licensing,
joint ventures and acquisitions continue to be evaluated as ways to further
expand 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, with a market share of
approximately 30-35%, is the largest provider of in-store marketing services,
other companies (some of which are affiliated with larger companies) offer
similar services. Such other companies include Catalina Marketing Corporation,
News America In-store and PIA Merchandising. Moreover, the in-store marketing
environment is characterized by rapid technological change, and future
technological developments (if and when cost effective) may affect competition.
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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 $32 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 one of 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,
NationsBank, several Blue Cross/Blue Shield organizations, Chase/Chemical Bank,
Bloomingdales, SAKS 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
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company like DIMAC. This industry consolidation is expected to continue,
affording DIMAC the opportunity to further expand not only the services it
offers its clients, but also the respective market segments its clients
serve. 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 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
eleven 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 1996, DIMAC completed three transactions. New York-based Wilcox &
Associates, acquired in March 1996, is a direct response agency that specializes
in bank merger communications. Through sophisticated database work and highly
personalized creative development, Wilcox enables its clients--banks which
acquire other banks--to communicate with their newly acquired customers, helping
to retain and cross-sell new services to those customers. DIMAC achieves synergy
with Wilcox by performing the majority of the data processing, printing and
lettershop work associated with its mailings. In May 1996, DIMAC acquired
MBS/Multimode, a Long Island-based database marketing firm that builds highly
sophisticated databases used by its clients to strategize and to analyze
millions of transaction records in order to better understand and capitalize on
the buying patterns of their customers. Working with DIMAC, MBS/Multimode is
able to expand its services to a more diverse client base. In September 1996,
DIMAC became a joint venture partner with KCET-TV, the public TV station in Los
Angeles, to form KCET/DIMAC Communications, L.L.C. The joint venture, based in
L.A., is designed to serve the fundraising efforts of KCET-TV and other public
TV stations, making use of a sophisticated telemarketing center and a viewer
service known as VideoFinders. KCET/DIMAC works closely with DIMAC's Boston
office, which is oriented almost exclusively toward serving the not-for-profit
sector, and with all three of DIMAC's production facilities as well as with its
MBS/Multimode database subsidiary.
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, NationsBank, Smithsonian, a number of Blue
Cross/Blue Shield organizations and approximately 55% of all U.S. public
television stations. AT&T accounted for approximately 24% of DIMAC's total
revenues for the year ended December 31, 1996. On a combined basis after giving
pro forma effect to the MBS, Wilcox, and KCET Communications acquisitions, AT&T
accounted for 23% of DIMAC's revenues for the year ended December 31, 1996.
DIMAC's large client base includes major U.S. corporations as well as smaller
companies in a broad range of industries, including financial services, health
care, telecommunications, publishing, packaged goods,
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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 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
TELEVISION
The Television Group owns five network-affiliated television stations in
mid-sized markets and operates one station under a Local Market Agreement
("LMA"). The following table sets forth selected information relating to the
television stations owned by Heritage:
<TABLE>
OTHER
STATION TV DMA COMMERCIAL STATION STATION
AND CHANNEL NETWORK HOMES MARKET STATIONS MARKET RANK IN
LOCATION NUMBER AFFILIATION IN DMA (1) RANK (1) IN DMA SHARE (2) MARKET (3)
- -------- ------ ----------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
KOKH-TV
(UHF)
Oklahoma City, OK 25 FOX 587,980 43 4 8 4
WCHS-TV
(VHF)
Charleston/
Huntington, WV 8 ABC 482,790 56 3 11 3
WEAR-TV
(VHF)
Mobile, AL/
Pensacola, FL 3 ABC 448,780 61 4 16 2
WPTZ-TV
(VHF)
Burlington, VT/
Plattsburgh, NY 5 NBC 292,870(4) 91(4) 2 14 2
WNNE-TV
(UHF)(5)
Hartford, VT/
Hanover, NH 31 NBC 292,870(4) 91(4) 3 3 4
</TABLE>
9
<PAGE>
- --------------------
(1) Source: Nielsen Television Designated Market Area ("DMA") Market rankings
September 1996.
(2) "Sign on-Sign off" market shares as reported in the November 1996
Nielsen ratings. Ratings are often quoted on a "sign on-sign off"
basis, representing the average percentage of television 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 1996 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.
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 65% local and 35% national) than the national
average.
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.
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
November 1996, the station's newscast remained the market's number one rating.
WEAR-TV operates from a newly constructed state-of-the-art broadcast facility
and enters the third year of a new five-year agreement with ABC.
On March 4, 1996, Heritage entered into a LMA to operate WFGX-TV Channel
35 in the Ft. Walton Beach, Florida area. Heritage operates 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. On October 1, 1996
WFGX-TV became an affiliate of the Warner Brothers Network.
10
<PAGE>
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 are in the second year of a 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.
Three of the Company's stations, WEAR-TV, WPTZ-TV and WCHS-TV, which
represent 82% of the net revenues from Heritage's television operations in 1996,
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.
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 increased its
investment in the station in 1996 by establishing a local news department and
upgrading the broadcast signal. The news operation began broadcasting in the
second quarter and the signal was upgraded in the third quarter of 1996.
In July 1995 the Company made a $1.1 million escrow deposit for the
construction permit for Channel 44 in Burlington, VT. The Company has received
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 LMA. The Company has an option to purchase the station.
Heritage completed the sale of its smallest television station, KEVN-TV,
located in Rapid City, SD on February 8, 1996.
RADIO
The Radio Group currently operates 23 radio stations, including three under
a LMA pending acquisition, and has recently announced two additional
transactions involving trades of existing stations in like-kind exchanges. The
Radio Group will own and operate 24 stations (7 AM, 17 FM) in seven of the top
50 largest markets by population after all pending transactions have been
completed. These holdings include at least three stations (and two FM stations)
in every market. The following table sets forth certain information regarding
the Company's Radio Group:
11
<PAGE>
<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 (Sale pending -- operated by prospective acquirer under Local Marketing
KBKS-FM Agreement)
St. Louis, MO 17 WRTH-AM Adult Standards 29
WIL-FM Country 1 4
KIHT-FM 70's Rock 1 10
Portland, OR 24 KKSN-AM Adult Standards 25
KKSN-FM 60's Oldies 1 6
KKRH-FM 70's Rock 1 10
Cincinnati, OH 25 WVAE-FM Smooth Jazz 21 1 9
Kansas City, MO-KS 26 KCAZ-AM Children's 25 1 1
KCFX-FM 70's Rock 1 8
KCIY-FM Smooth Jazz 1 15
KXTR-FM Classical
Milwaukee, WI 28 WEMP-AM 60's Oldies 28
WMYX-FM Adult Contemporary 1 6
WAMG-FM Rhythmic Contemporary 1 12
New Orleans, LA (4) 38 WBYU-AM Adult Standards 23
WEZB-FM Adult Contemporary 3 11
WRNO-FM 70's Rock 1 8
Rochester, NY 45 WBBF-AM Adult Standards 21
WBEE-FM Country 1 1
WKLX-FM 60's Oldies 1 7
WQRV-FM Classic Rock 1 11
Knoxville, TN 69 WMYU-FM 60's Oldies 22 1 2
WWST-FM Contemporary Hits 1 4
</TABLE>
- -----------------------
(1) Metropolitan areas as defined and ranked by Arbitron, Fall 1996.
(2) FM station ranking among radio stations in market with same programming
format, based on share of target audience.
(3) FM station ranking among all radio stations in market, based on share of
target audience.
(4) Purchase pending -- operated by Company under a Local Marketing Agreement.
The Radio Group's operating strategy since its inception has been to
identify, acquire, and repair under-performing radio stations through the
strategic implementation of management improvements, technical upgrades,
programming and promotional enhancements, and expense reallocations and
controls. As regulatory changes have occurred in the past several years that
relaxed station ownership limits (see "Federal Regulation of Broadcasting"), the
Radio Group has endeavored to acquire additional stations in its existing
markets and establish a multiple-station presence in new markets. The Radio
Group also seeks diversification in terms of geography and programming formats.
The Company's stations are programmed in a variety of research-directed formats,
and strive to be the highest-rated stations in their formats in each market.
Presently, the Company's stations are top-rated (or unique) in their formats in
every market, and three of its stations rank either first or second among all
stations in their market in their target audience.
The Federal Communications Commission ("FCC") has authority to regulate the
number of radio stations one entity can own in a single market area and in
total. In late 1992, the FCC changed its rules to permit the ownership of up to
two AM stations and two FM stations (such combinations being commonly known as
12
<PAGE>
"duopolies") in most markets. In 1996, Congress enacted legislation that allows
ownership of up to four FM stations in most of the markets in which the Radio
Group operates. During the period of 1992-1995, the Company acquired FM
duopolies in five markets. Since the beginning of 1996, (including announced
transactions that have not closed) the Radio Group has established at least a
duopoly presence in all of its markets, with ownership of 3 FM's and one AM in
Rochester, New York, and the maximum of 4 FM's and one AM in Kansas City.
The Company entered into four transactions in 1996 and announced two
transactions to date in 1997, three of which have closed. In February 1996, the
Company acquired two FM radio stations in the Knoxville, Tennessee, market, and
in March 1996, agreed to exchange its AM/FM stations in Seattle, Washington, for
an AM/FM/FM duopoly combination in New Orleans, Louisiana, plus cash paid to the
Company. The stations involved in the latter transactions are being operated by
the respective acquiring companies under LMA's. In September 1996, the Company
began operating its third FM station serving Rochester, New York, under an LMA,
and closed this purchase in January 1997. Also in September 1996, the Company
agreed to acquire an AM/FM combination in the Kansas City -- its first AM and
third FM in this market. This purchase closed in January 1997. Reported
results for 1996 include the Seattle stations through March 17th, the New
Orleans stations beginning March 18th, and the Rochester FM from September 2nd.
In January 1997, the Company entered into a like-kind exchange agreement in
which the Knoxville stations acquired in 1996 will be traded for a fourth FM
station in the Kansas City market. In February 1997, the Company agreed to an
exchange of its stand-alone FM in Cincinnati for an AM/FM/FM duopoly combination
in the Norfolk, Virginia, market, plus payment of cash to the Company.
The Company's acquisition and operating strategies have resulted in
operating income increases from break-even in 1987, its first full year, to
approximately $13 million in 1996. The Radio Group has reported thirty-six
consecutive quarters of year-to-year growth in operating cash flow.
COMPETITION
The financial success of the Company's television and radio stations is
dependent on audience ratings and revenues from advertisers within each
station's geographic market. 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.
13
<PAGE>
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 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, video
programming services available through the Internet, satellite master antenna
television systems and other video delivery 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 commenced, but
not yet completed, implementation of 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.
The FCC is implementing the provision in the Telecommunications Act which
provides for license terms of up to eight years for both television and radio
stations. The FCC will apply this provision of the Telecommunications Act to
renewals for radio station licenses expiring on or after October 1, 1995 and
television station licenses expiring on or after October 1, 1996. 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 February 1, 1998 and
February 1, 2005.
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
14
<PAGE>
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.
OWNERSHIP RESTRICTIONS. Under the Communications Act, broadcast licenses
may not be held by or transferred or assigned to an alien or a foreign entity.
Non-citizens, however, may own up to 20% of the capital stock of a licensee and
up to 25% of the capital stock of a United States corporation that, in turn,
owns a controlling interest in a licensee. 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. Pursuant to this directive, the FCC has eliminated
the limit on the number of television stations that an individual or entity may
own or control nationally, provided that the audience reach of all television
stations owned does exceed 35% of all U.S. households. The FCC also has
initiated a rulemaking proceeding, in accordance with the Telecommunications
Act, to determine whether to retain, eliminate, or modify its limitations on the
number of television stations (currently one in most instances) 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.
15
<PAGE>
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.
Irrespective of the FCC rules, the Justice Department and the Federal Trade
Commission ("Antitrust Agencies") have the authority to determine that a
particular transaction presents antitrust concerns. The Antitrust Agencies have
recently increased their scrutiny of the television and radio industries, and
have indicated their intention to review matters related to the concentration of
ownership within markets (including local marketing agreements ("LMAs") even
when the ownership or LMA in question is permitted under the regulations of the
FCC. There can be no assurance that future policy and rulemaking activities of
the Antitrust Agencies will not impact the Company's 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 by October 1, 1996, for the period from January 1, 1997 through December
31, 1999, 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 for such use. The Company,
prior to the October 1, 1996 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, 1999 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. If the Supreme Court finds the
must-carry rules to be unconstitutional, some cable systems may delete carriage
of signals of some of the Company's stations and it is likely that either
Congress or the FCC will attempt to enact new must-carry requirements intended
to withstand constitutional scrutiny.
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. It is not possible to predict the impact, on the
Company's television stations, of any future relaxation or elimination by the
FCC of this restriction. The elimination or
16
<PAGE>
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 each full-power
commercial television station and certain applicants for new television stations
("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 FCC has issued for public comment a proposed ATV Table of Allotments
intended to provide an ATV channel for each existing television station in a
manner that attempts to replicate each station's existing coverage area while
taking into account interference to existing television stations and between ATV
stations. On December 26, 1996, the FCC adopted a standard for the transmission
of digital television in the United States, which is consistent with a consensus
agreement voluntarily developed by a broad cross-section of parties, including
the broadcasting, equipment manufacturing and computer industries. The statute
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 ATV 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 impose
spectrum use or other fees on FCC licenses, to modify rules relating to
political advertising, 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 4,400 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 2,700 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 900 employees of which 40 employees
are represented by unions. The Company believes that it has a good relationship
with its employees and unions.
17
<PAGE>
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 276,000 square foot facility in St. Louis, Missouri with an
expiration date in September 2015. DIMAC has 11 remote locations, including its
subsidiaries, with an aggregate of approximately 484,000 square feet pursuant to
leases with terms expiring from 1997 to 2002. Palm Coast owns its 120,000 square
foot facility with a 30,000 square feet addition under construction with
expected completion in the third quarter of 1997. DIMAC has a 245,000 square
foot facility under construction in Central Islip, New York that will
consolidate DIMAC eastern region and MBS Multimode; the expected completion is
in the third quarter of 1997.
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 93 acres, 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 15 locations
totaling 50 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.
18
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PART II
===============================================================================
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of the Company's Common Stock are listed on the New York
Stock Exchange ("NYSE") under the symbol "HTG" since July 1996. Prior to this
time the Company's Common Stock was traded on the American Stock Exchange since
September 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 Common Stock for each quarterly period within the two most recent fiscal
years:
HIGH LOW
---- ---
1996
First Quarter. . . . . . $18 1/2 $12 3/4
Second Quarter . . . . . 20 5/8 17 3/8
Third Quarter. . . . . . 21 1/8 18 1/8
Fourth Quarter . . . . . 19 1/2 10 1/2
1995
First Quarter. . . . . . $13 5/8 $11 7/8
Second Quarter . . . . . 14 3/4 12 3/4
Third Quarter. . . . . . 16 1/8 13 1/2
Fourth Quarter . . . . . 15 12 1/2
On July 25, 1996, the Company declared a two-for-one stock split effected
as a stock dividend payable to all holders of record on August 5, 1996 with the
payment date of August 12, 1996. All per share information has been adjusted to
reflect the stock dividend on a retroactive basis.
On March 3, 1997 the last reported sale price of the Company's Common Stock
was $11.625 per share. At March 3, 1997 there were approximately 550 record
holders of 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, 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".
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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, 1996, 1995, 1994, 1993, and 1992 which
were derived from the audited consolidated financial statements of the Company.
This information should be read in conjunction with the audited Consolidated
Financial Statements of the Company and its subsidiaries and the related notes
thereto included elsewhere in this Report. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
YEARS ENDED DECEMBER 31, (1)
------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $620,830 435,776 317,628 291,205 250,891
Operating income (2) 94,869 73,013 57,838 34,995 27,550
Income (loss) before extraordinary item 21,971 26,571 22,299 77 (14,966)
Net income (loss) 19,099 26,571 22,299 512 (18,560)
Earnings (loss) per share before
extraordinary item (3) .60 .75 .08 (.16) (.76)
Earnings (loss) per share (3) .52 .75 .08 (.15) (.88)
Equivalent shares (4) 36,435 35,352 34,762 32,628 28,898
BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net 109,408 56,155 54,799 57,422 55,832
Goodwill and other intangibles, net 639,159 383,848 382,288 363,667 373,426
Total assets 901,736 551,011 514,147 492,849 496,296
Long-term debt (5) 600,169 339,865 351,525 314,989 319,385
Stockholders' equity 135,887 120,400 89,246 86,642 91,213
OTHER DATA:
EBITDA (6) 140,118 104,416 90,058 68,353 54,242
Capital expenditures (7) 32,451 15,088 13,271 18,534 15,531
Ratio of EBITDA to interest, net 2.65x 3.01x 2.97x 2.17x 1.45x
Ratio of Debt to EBITDA 4.28 3.25 3.90 4.61 5.89
</TABLE>
- -------------------
(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 $500,000, $500,000,
and $4.9 million during the years ended December 31, 1992 through 1994,
respectively.
(3) See Note 1(J) of Notes to Consolidated Financial Statements.
(4) On July 25, 1996, the Company declared a two-for-one stock split effected
as a stock dividend payable to all holders of record on August 5, 1996 with
the payment date of August 12, 1996. The consolidated financial
statements, including all references to the number of share of common stock
and all per share information have been adjusted to reflect the stock
dividend on a retroactive basis.
20
<PAGE>
(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 $11.9 million, $5.1 million, $6.9 million, $19 million, and
$220.9 million for the years ended December 31, 1992 through 1996,
respectively.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Some statements contained in this document are forward looking and actual
results may differ materially. Statements not based on historical facts involve
risks and uncertainties, including, but not limited to, the effect of economic
conditions, capacity and supply constraints or difficulties, actual purchases
under agreements by certain of the Company's largest clients, and the ability of
the Company to maintain favorable client relationships and competitive factors.
GENERAL
In February 1994, ACTMEDIA 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 located in Sioux Falls,
South Dakota. In October 1994, ACTMEDIA Canada, Inc. acquired Infonet.
In January 1995, ACTMEDIA completed the acquisition of POWERFORCE Services
located in Chicago. In June 1995, Heritage purchased KXYQ-FM in Portland, Oregon
and changed the call letters to KKRH-FM. In March 1995, the Company agreed to
acquire radio station KKCJ-FM in Kansas City, changed the call letters to KCIY-
FM, and began programming and marketing the station under a LMA, the acquisition
was completed in July 1995. In December 1995, ACTMEDIA wrote off its Netherlands
in-store investment Media Meervoud.
In February 1996, Heritage completed its merger with DIMAC Marketing
Corporation. In February 1996, DIMAC acquired Wilcox & Associates, Inc.
("Wilcox"), a New York City based direct response advertising agency. Also in
February 1996, the Company completed the acquisition of radio stations WMYU-FM
and WWST-FM serving Knoxville, Tennessee. In March 1996, the Company agreed to
exchange its Seattle, Washington radio stations KCIN-FM and KRPM-AM for EZ
Communications, Inc. radio stations WRNO-FM, WEZB-FM and WBYU-AM serving New
Orleans, Louisiana. The Company included the financial results of the New
Orleans stations from March 18, 1996 under the terms of a LMA. In March 1996,
the Company entered into a LMA with Television Fit for Life, Inc. to operate
Channel 35, WFGX-TV in Fort Walton Beach, Florida. The Company began operating
WFGX-TV in July 1996 as a commercial television station. In April 1996, DIMAC
acquired MBS/Multimode, Inc. ("MBS"), a database marketing firm based in
Huntington Station, New York. In August 1996, the Company agreed to acquire an
additional Rochester, New York, radio station, WHRR-FM. The Company began
operating the station under a LMA on September 1, 1996 and changed the call
letters to WQRV-FM. The acquisition was completed in January 1997. In
September 1996, DIMAC formed a marketing services joint venture with Community
Television of Southern California (CTSC) a public television station. DIMAC
retains majority ownership of the joint venture. Also in September 1996, the
Company agreed to purchase two additional radio stations in Kansas City,
Missouri, KXTR-FM and KCAZ-AM. Included in this transaction is a small monthly
business magazine which was sold in February 1997. No revenue or operating
income was reported in the 1996 consolidated financial statements. The purchase
was completed in January 1997. In February 1996, the Company completed the sale
of its smallest television station, KEVN-TV, located in Rapid City, South
Dakota.
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.
22
<PAGE>
RESULTS OF OPERATIONS: 1996 COMPARED TO 1995
Consolidated net revenues of $620.8 million increased 42% over the 1995
revenues of $435.8 million. Operating income of $94.9 million in 1996 exceeded
the comparable 1995 period by 30%. Pretax income of $46.4 million in 1996,
before extraordinary item, exceeded the $35.7 million in 1995 by 30%. Earnings
per share, before extraordinary item, was $.60 in 1996 versus $.75 per share in
1995. The improved operating results reflect the inclusion of DIMAC Marketing
Corporation, effective February 1, 1996, and increased operating income from the
Marketing Services and Broadcasting segments. Consolidated net revenues and
operating income increased 5% and 4%, respectively, in 1996 versus the 1995
period on a proforma basis including all acquisitions and dispositions. The
1996 period included a $6 million gain on the sale of the South Dakota
television station, a $1.1 million loss on the write-off of obsolete fixed
assets, and a $2.9 million extraordinary loss on the extinguishment of debt.
MARKETING SERVICES. The Marketing Services segment contributed $521.2
million of revenues in 1996, an increase of 51%, compared to $346.4 million in
1995. The inclusion of DIMAC results added $173.9 million in revenues as
ACTMEDIA's revenues were level to 1995. Marketing Services revenues in 1996
increased 4% versus comparable 1995 including DIMAC in both periods. ACTMEDIA's
growth of Instant Coupon Machine and advertising revenues were offset by lower
promotion and merchandising revenues. DIMAC generated proforma revenue
improvement of 11% over prior year.
Operating income for the Marketing Services segment of $70.1 million in
1996 significantly increased versus $50.5 million in 1995. The inclusion of
DIMAC's results in 1996 added $14.4 million and ACTMEDIA generated $5.2 million
of operating income growth. Marketing Services operating income in 1996 was
level with comparable 1995 including DIMAC in both periods. ACTMEDIA's 10%
improvement of operating income was offset by DIMAC's lower operating income due
to $6.7 million of increased amortization of intangibles associated with the
merger.
BROADCASTING. The Broadcasting segment generated $99.6 million of revenues
in 1996, an 11% increase compared to 1995. The Television Group, excluding the
South Dakota station sold in 1996, grew revenues by 9% to $46.3 million
primarily due to a 6% growth of local revenues and $3.1 million of additional
political revenues. National spot revenues decreased 4% in 1996 versus 1995.
The Pensacola, FL television station grew revenues by 20% in 1996 versus 1995.
The Radio Group contributed $53.3 million of revenues, a 9% increase over 1995,
on a same station basis, due primarily to an 11% growth of local revenues and a
10% increase in national revenues.
Operating income of $29.7 million in 1996 increased by 21% versus 1995
including the radio acquisitions and excluding the television station sold in
1996. The improvement reflects a 6% increase from the Television Group, despite
a $1.6 million increase in the Oklahoma station news operation expenses, and a
47% increase from the Radio Group primarily from the improvement of the
Portland and Kansas City duopolies, the Cincinnati station and positive
contributions from the New Orleans and Knoxville acquisitions.
CORPORATE EXPENSES. Corporate expenses of $5 million in 1996 increased
from $3.9 million in 1995, but remained less than 1% of consolidated net
revenues.
23
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of $45.2
million in 1996 increased by 48% compared to $30.6 million in 1995. This
increase resulted primarily from the inclusion of DIMAC, which added $12.8
million, a $.8 million increase in Radio Group amortization associated with
acquisitions, and $.7 million additional ACTMEDIA depreciation associated with
higher capital expenditures.
INTEREST EXPENSE. Interest expense increased from $34.7 million in 1995 to
$52.9 million in the 1996 period due to both higher interest rates and higher
debt levels associated with the DIMAC acquisition.
OTHER EXPENSE. Other expense in 1996 included the $6 million gain on the
sale of the South Dakota television station and a $1.1 million loss on the
write-off of obsolete In-store Marketing fixed assets.
INCOME TAXES. Income tax expense for 1995 relates primarily to Federal
income tax of $6.3 million and state and foreign income taxes of $2.8 million.
Income tax expense for 1996 is comprised of Federal income tax of $19.6 million
and state, local and foreign taxes of $4.8 million. Income tax expense in 1995
was reduced by the utilization of the Company's remaining net operating loss
carryforwards.
EXTRAORDINARY ITEM. Heritage Media Services, Inc. ("HMSI"), a wholly-owned
subsidiary, repurchased the Company's outstanding 11% Senior Subordinated Notes
with a cumulative face amount totaling $25.5 million prior to scheduled maturity
and recognized an extraordinary loss of $1.3 million, net of taxes, during 1996.
Also in 1996, HMSI repurchased outstanding 11% Senior Notes with a face amount
totaling $27.2 million prior to scheduled maturity and recognized a year-to-date
extraordinary loss of $ 1.6 million, net of taxes, which included the write-off
of $ .4 million of debt issuance costs.
NET INCOME. The Company improved its pretax income, before extraordinary
item, from $35.7 million in 1995 to $46.4 million in 1996 primarily as a result
of an additional $21.9 million of operating income and $4.9 million of net
nonrecurring other income, reduced by increased interest expense. Net income of
$19.1 million in 1996 decreased versus $26.6 million in 1995 due to the
significant increase in Federal income tax expense (discussed above) and the
$2.9 million extraordinary loss on the extinguishment of debt (see Note 4 of
Notes to Consolidated Financial Statements).
BALANCE SHEET: 1996 COMPARED TO 1995
The balance sheet changes from December 31, 1995 to December 31, 1996 were
primarily due to the DIMAC, Wilcox, MBS and radio station acquisitions and
respective financings. See Note 2 to the Consolidated Financial Statements for
purchase price allocation and Note 4 for long-term debt discussion.
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 $.75 versus $.08 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 Broadcasting 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 $.57 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.
24
<PAGE>
MARKETING SERVICES In-store Marketing 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%. 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 experienced 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 the
operation would not be funded beyond December 31, 1995. ACTMEDIA completed the
sale in February 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 improvement 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, In-store Marketing's operating margin increased to 18% in
1995.
BROADCASTING. 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. 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.
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. 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.
CORPORATE EXPENSES. Corporate expenses in 1995 of $3.9 million increased
4% compared to $3.7 million in 1994.
25
<PAGE>
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 9 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.
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.
CASH FLOW INFORMATION
Cash flows provided by operating activities totaling $61.8 million in 1996
increased by $8 million versus 1995 due primarily to higher non-cash items and
lower working capital requirements. In 1996 the $61.8 million of cash provided
by operating activities, $176.2 million from financing activities, and $13.8
million of asset sale proceeds, were utilized primarily for acquisitions, net
($220.9 million) and capital expenditures ($31.3 million).
Cash flows provided by operating activities totaled approximately $53.8
million in 1995 increased by $4 million versus 1994. These funds were
principally utilized for net capital expenditures ($15.1 million), acquisitions
($19 million), and reduction of long-term debt ($12.5 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company expects the major operating requirements for cash in 1997 to
include $12 million to complete contractually committed acquisitions,
approximately $8 million for earnout payments related to the DIMAC acquisition,
approximately $29 million for leases and other contractual obligations, and
approximately $38 million for capital expenditures. Capital expenditures are
expected to increase in 1997 to higher levels due to the construction and
expansion of DIMAC facilities on Long Island, NY ($11 million) and Palm Coast,
FL ($2 million) and the construction of the television station in Burlington, VT
($2 million). Heritage also has long-term debt maturities totaling $69.8
million during 1997.
26
<PAGE>
The Company expects to fund its anticipated cash requirements with
internally generated funds and from various external sources, which may include
the Company's existing credit agreements and additional financings. Heritage
maintains significant borrowing capacity to take advantage of growth and
investment opportunities. At December 31, 1996 the Company had committed bank
lines of credit totaling $285.7 million and available liquidity totaling $57.8
million for general corporate purposes.
During 1996, HMSI purchased the Company's outstanding 11% Senior
Subordinated Notes with cumulative face amount totaling $25.5 million prior to
maturity. Also during 1996, HMSI repurchased outstanding 11% Senior Notes with a
face amount totaling $27.2 million. HMSI entered into a $50 million bank credit
facility to refinance a portion of the 11% Senior Secured Notes. At December
31, 1996 $29.6 million of the facility was outstanding and $20.4 million of
additional borrowings were available.
The Company was in compliance with all debt covenants and had satisfied all
financial ratios and tests as of December 31, 1996 under its Credit Agreements
and the Company expects to remain in compliance and satisfy all such financial
ratios and tests during 1997. The Company manages its debt levels based on: the
ratio of debt to EBITDA, which has been reduced from 5.89 in 1992 to 4.28 in
1996; and the ratio of EBITDA to interest, net which has increased from 1.45x to
2.65x in 1996. However, the Company is still highly leveraged and is expected
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 January 14, 1997, the Company entered into a $50 million bank credit
facility (the "1997 HMC Credit Facility") for general corporate purposes. The
1997 HMC Credit Facility consists of a $50 million revolving credit facility
which matures January 12, 1998. The credit agreement includes a number of
financial and other convenants, and loans under this agreement are unsecured.
As of February 21, 1997, there were no outstanding borrowings under this
facility.
The HMSI 11% Senior Notes are redeemable in whole or in part, at HMSI's
option at any time on or after June 15, 1997. The 11% HMC Senior Subordinated
Notes are redeemable, in whole or in part, at the Company's option at any time
on or after October 1, 1997. The Company expects to redeem such notes in 1997,
replace the existing bank credit facilities and provide additional liquidity
through the use of new replacement indebtedness.
Heritage will continue to expand and explore value-creating investments and
acquisitions. The Company will review all expenditures to maximize financial
returns and maintain financial flexibility while continuing its long-term goal
to de-leverage its capital structure.
SHAREHOLDERS EQUITY
In conjunction with efforts to enhance common shareholder value, on October
14, 1996, the Board of Directors authorized the purchase of up to 5,000,000
shares of the Company's Common Stock, from time to time, through open market and
private purchases at prices then prevailing. The Company has purchased, in 1996
and 1997 to date, 891,000 shares at a total cost of $9,945,855 and an average
price of $11.16 per share.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of
27
<PAGE>
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. Management of the Company does not expect that
adoption of SFAS No. 125 will have a material impact on the Company's
financial position, results of operations, or liquidity.
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, 1996 and 1995 and
for the years ended December 31, 1996, 1995 and 1994 are included on pages F-1
through F-29 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
<PAGE>
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.
29
<PAGE>
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 10, 1997.
HERITAGE MEDIA CORPORATION
By /s/ DAVID N. 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 March 10, 1997
- -----------------------
James M. Hoak, Jr.
/s/ DAVID N. WALTHALL President, Chief Executive Officer March 10, 1997
- ----------------------- and Director (Principal Executive
David N. Walthall Officer)
/s/ JAMES P. LEHR Senior Vice President
- ----------------------- Chief Accounting & Administrative March 10, 1997
James P. Lehr Officer (Principal Accounting Officer)
/s/ JAMES S. COWNIE Director March 10, 1997
- -----------------------
James S. Cownie
/s/ JOSEPH M. GRANT Director March 10, 1997
- -----------------------
Joseph M. Grant
/s/ CLARK A. JOHNSON Director March 10, 1997
- -----------------------
Clark A. Johnson
/s/ ALAN R. KAHN Director March 10, 1997
- -----------------------
Alan R. Kahn
/s/ H. BERRY CASH Director March 10, 1997
- -----------------------
H. Berry Cash
30
<PAGE>
HERITAGE MEDIA CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
"FORM 10-K"
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
PAGE
----
Consolidated Financial Statements:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules:
I. Condensed Financial Information of Registrant
as of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994 F-25
II. Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995 and 1994 F-29
F-1
<PAGE>
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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, 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 21, 1997
F-2
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
ASSETS 1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash $ 1,716 2,383
Trade receivables, net of allowance for doubtful
accounts of $5,300 in 1996 and $4,033 in 1995 110,667 77,068
Prepaid expenses and other 10,688 6,605
Inventories 10,004 5,008
Deferred income taxes (note 10) 7,487 5,151
-------- --------
Total current assets 140,562 96,215
Property and equipment, net (note 1(d)) 109,408 56,155
Goodwill and other intangibles, net (note 1(b)) 639,159 383,848
Other assets 12,607 14,793
-------- --------
$901,736 551,011
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ -- 5,000
Current installments of long-term debt (note 4) 69,775 5,026
Accounts payable and accrued expenses (note 3) 114,788 52,069
Deferred advertising revenues 12,349 25,219
Other current liabilities 2,079 1,911
-------- --------
Total current liabilities 198,991 89,225
Long-term debt, excluding current portion (note 4) 530,394 334,839
Other long-term liabilities (note 11) 24,753 2,531
Deferred income taxes (note 10) 11,711 4,016
Stockholders' equity (notes 4, 5, 6 and 7):
Preferred stock, $.01 par value; authorized 10,000,000 shares;
none issued -- --
Common stock, $.01 par value; 100,000,000 shares
authorized, issued 35,725,644 shares in 1996 and
35,486,718 shares in 1995 357 355
Additional paid-in capital 225,685 223,230
Accumulated deficit (82,544) (101,643)
Accumulated foreign currency translation adjustments (748) (1,088)
Common stock in treasury, at cost (633,056 shares
in 1996 and 65,656 shares in 1995) (6,863) (454)
-------- --------
Total stockholders' equity 135,887 120,400
Commitments and contingencies (notes 2 and 11)
-------- --------
$901,736 551,011
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
Marketing Services $ 521,236 346,392 230,111
Broadcasting 99,594 89,384 87,517
----------- ---------- ----------
620,830 435,776 317,628
----------- ---------- ----------
Costs and expenses:
Cost of services:
Marketing Services 321,287 220,189 128,176
Broadcasting 25,318 22,698 22,794
Selling, general and administrative 134,107 88,473 76,600
Depreciation 20,689 16,115 14,676
Amortization of goodwill and other assets 24,560 14,507 12,622
Other costs (note 9) -- 781 4,922
----------- ---------- ----------
525,961 362,763 259,790
----------- ---------- ----------
Operating income 94,869 73,013 57,838
----------- ---------- ----------
Other expense:
Interest (note 4) (52,859) (34,677) (30,373)
Other, net (notes 1(d) and 2) 4,393 (2,632) (2,424)
----------- ---------- ----------
(48,466) (37,309) (32,797)
----------- ---------- ----------
Income before income
taxes and extraordinary item 46,403 35,704 25,041
Income taxes (note 10) 24,432 9,133 2,742
----------- ---------- ----------
Income before extraordinary item 21,971 26,571 22,299
Extraordinary item - loss on extinguishments
of debt, net of tax (note 4) (2,872) -- --
----------- ---------- ----------
Net income $ 19,099 26,571 22,299
----------- ---------- ----------
----------- ---------- ----------
Net income applicable to common stock
(note 1(i)) $ 19,099 26,571 2,648
----------- ---------- ----------
----------- ---------- ----------
Weighted average common and common
equivalent shares outstanding 36,434,628 35,352,968 34,761,802
----------- ---------- ----------
----------- ---------- ----------
Earnings per common and common
equivalent share (note 1(i)):
Before extraordinary item $ .60 .75 .08
Extraordinary item (.08) -- --
----------- ---------- ----------
Net income $ .52 .75 .08
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
ACCUMULATED
FOREIGN
ADDITIONAL CURRENCY TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED TRANSLATION TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT ADJUSTMENTS STOCK EQUITY
----- ----- ------- ------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 16,195 329 202,578 (130,862) (1,144) (454) 86,642
Conversion of preferred stock (16,195) 22 16,173 -- -- -- --
Conversion of Class C Common
Stock, net of expenses -- -- (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
adjustment -- -- -- -- (209) -- (209)
Net income -- -- -- 22,299 -- -- 22,299
----- --- ------- ------- ----- ------- -------
Balance at December 31, 1994 -- 351 218,916 (128,214) (1,353) (454) 89,246
Exercise of employee stock options,
including tax benefit -- 2 1,616 -- -- -- 1,618
Foreign currency translation
adjustment -- -- -- -- 265 -- 265
Settlement of stock appreciation
rights -- 2 2,698 -- -- -- 2,700
Net income -- -- -- 26,571 -- -- 26,571
----- --- ------- ------- ----- ------- -------
Balance at December 31, 1995 -- 355 223,230 (101,643) (1,088) (454) 120,400
Exercise of employee stock options,
including tax benefit -- 2 2,455 -- -- -- 2,457
Foreign currency translation
adjustment -- -- -- -- 340 -- 340
Purchase 567,400 shares of treasury
stock -- -- -- -- -- (6,409) (6,409)
Net income -- -- -- 19,099 -- -- 19,099
----- --- ------- ------- ----- ------- -------
Balance at December 31, 1996 $ -- 357 225,685 (82,544) (748) (6,863) 135,887
----- --- ------- ------- ----- ------- -------
----- --- ------- ------- ----- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,099 26,571 22,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock appreciation rights -- -- 4,922
Depreciation 20,689 16,115 14,676
Amortization:
Broadcast program rights 2,157 2,137 2,300
Goodwill and other assets 24,560 14,507 12,622
Debt issuance costs 1,292 738 717
Writedown of program rights -- 781 --
Write-off of foreign investment -- 3,596 --
Write-off of fixed assets 1,111 348 570
(Gain) loss on sale of assets (6,031) (2,358) 1,439
Loss on extinguishments of debt 2,872 -- --
Other 299 (785) (444)
Changes in certain operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (390) (21,424) (1,123)
Other assets (4,796) (1,134) (385)
Accounts payable and accrued expenses 8,463 5,153 (3,459)
Deferred advertising revenues (12,870) 10,694 (4,501)
Deferred income taxes 5,359 (1,135) --
--------- ------- -------
Net cash provided by operating activities 61,814 53,804 49,633
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (220,919) (18,973) (6,926)
Capital expenditures (31,302) (15,088) (13,271)
Purchases of investments -- (9,200) --
Sale of investments -- 5,309 --
Proceeds from sale of property and equipment 13,759 1,500 3,999
Purchase of in-store marketing rights (190) (973) (1,662)
--------- ------- -------
Net cash used in investing activities (238,652) (37,425) (17,860)
--------- ------- -------
</TABLE>
F-6
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings $ 498,781 118,256 114,626
Retirements:
Long-term debt (309,306) (130,776) (103,676)
Other long-term liabilities (2,395) (2,249) (2,834)
Issuance of common stock 1,499 676 441
Retirement of settlement and stock appreciation rights -- (3,800) (39,017)
Purchase of treasury stock (6,409) -- --
Dividends on preferred stock -- -- (445)
Payment of offering costs -- -- (276)
Payment of debt issuance costs (5,999) (373) (738)
---------- -------- --------
Net cash provided by (used in) financing activities 176,171 (18,266) (31,919)
---------- -------- --------
Net change during year (667) (1,887) (146)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,383 4,270 4,416
---------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,716 2,383 4,270
---------- -------- --------
---------- -------- --------
Cash paid for interest $ 41,864 34,348 29,906
---------- -------- --------
---------- -------- --------
Cash paid for income taxes $ 9,951 3,352 4,575
---------- -------- --------
---------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HERITAGE MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Heritage Media Corporation ("HMC" or "the Company") operates in two
segments - Marketing Services and Broadcasting. The Company's Marketing
Services segment includes ACTMEDIA, Inc.'s ("ACTMEDIA") in-store marketing
operations in the United States, Canada, New Zealand, and Australia and
DIMAC Marketing Corporation's ("DIMAC") direct marketing operations in the
United States. The Broadcasting segment includes Television and Radio
operations 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) 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. 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.
Goodwill and other intangibles at December 31, 1996 and 1995 are
summarized as follows (thousands of dollars):
<TABLE>
Useful Life 1996 1995
----------- ---- ----
<S> <C> <C> <C>
Goodwill, net of accumulated amortization
of $83,105 and $65,484 25-40 Years $579,874 353,332
License agreements, net of accumulated
amortization of $2,612 and $1,458 15-25 Years 26,754 23,783
Customer lists, net of accumulated
amortization of $604 3-15 Years 17,720 --
Other, net of accumulated amortization of
$7,620 and $4,285 4-10 Years 14,811 6,733
-------- -------
$639,159 383,848
-------- -------
-------- -------
</TABLE>
The Company continually reevaluates the propriety of the carrying
amount of goodwill 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.
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 goodwill,
such carrying amounts are written down by charges to expense in
amounts equal to the excess of the carrying amount of goodwill over
related undiscounted operating income. The assessment of the
recoverability of goodwill will be impacted if estimated operating
income is not achieved. At this time, the Company believes that no
impairment of the goodwill and other intangibles has occurred and that
no reduction of the estimated useful lives is warranted.
F-8
<PAGE>
(c) INVENTORIES
Inventories are stated at the lower of average cost or market for in-
store marketing and the lower of cost (first-in, first-out method) or
market for direct marketing.
(d) 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, 1996 and 1995 are as follows (thousands
of dollars):
<TABLE>
Useful Life 1996 1995
----------- ---- ----
<S> <C> <C> <C>
In-store marketing equipment 3-5 years $ 53,333 49,670
Broadcasting equipment 5-25 years 41,268 38,416
Buildings and improvements 12-39 years 31,600 9,191
Direct marketing and other equipment 3-11 years 41,217 9,592
Land 2,849 2,460
-------- -------
170,267 109,329
Less accumulated depreciation 60,859 53,174
-------- -------
Net property and equipment $109,408 56,155
-------- -------
-------- -------
</TABLE>
The Company recorded writedowns of obsolete in-store marketing
equipment of $1,111,000 in 1996 in connection with the Company's in-
store radio marketing delivery system.
(e) 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.
(f) OTHER ASSETS
Debt issuance costs are amortized to interest expense using the
interest method over the period of the related debt agreement.
(g) 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
F-9
<PAGE>
recorded as deferred advertising revenues until they are earned.
DIMAC performs services in accordance with individual client projects.
Revenues are generally recognized as services are performed and DIMAC
can reasonably determine the amount of revenue to be recognized.
Broadcasting revenues are derived primarily 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.
(h) BARTER TRANSACTIONS
The Company exchanges unsold advertising time for products and
services. These transactions are reported at the estimated fair 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.
(i) EARNINGS PER SHARE
Earnings 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 1994, by the weighted average number
of common shares outstanding during each year. The common stock
equivalent effect of common stock purchase options, preferred stock
and settlement rights have been excluded from the computation for 1995
and 1994 as their effect is either antidilutive or immaterial.
Following is a reconciliation of net income to net income applicable
to common stock for the year ended December 31, 1994 (thousands of
dollars):
Net income $ 22,299
Accretion and premium on retirement
of settlement rights (note 5) (19,503)
Dividends on preferred stock (148)
--------
Net income applicable to common stock $ 2,648
--------
--------
(j) 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. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-10
<PAGE>
(k) 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.
(l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, on January 1, 1996. This Statement requires that long-
lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount of fair value less costs to sell.
Initial adoption of this Statement, as of January 1, 1996, did not
have a material impact on the Company's financial position, results of
operations, or liquidity.
(m) DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. Such
financial instruments 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, 1996 and 1995, no
receivable from any customer exceeded 5% of stockholders' equity and
no customer accounted for more than 10% of net revenues in 1996, 1995
or 1994.
F-11
<PAGE>
(o) RECLASSIFICATIONS
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to the 1996 presentation.
(2) ACQUISITIONS AND DISPOSITIONS
(a) MARKETING SERVICES
In February 1996, the Company completed its acquisition of DIMAC
Marketing Corporation, one of the leading full service, vertically
integrated direct marketing services companies in the United States.
The Company acquired DIMAC for cash in a transaction valued at
approximately $260 million. 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 per share. The merger
was accounted for by the Company as a purchase. Goodwill resulting
from the acquisition of $220 million is being amortized on a straight-
line basis over 40 years. The Company included the financial results
of DIMAC beginning February 1, 1996.
On February 28, 1996, DIMAC acquired substantially all of the assets
of Wilcox & Associates, Inc., a subchapter S corporation providing
direct response advertising services to bank institutions, in a
purchase transaction. The purchase price was $3.9 million plus
assumption of certain specified liabilities of $1.6 million. Goodwill
resulting from the acquisition of $3.0 million is being amortized on a
straight-line basis over 40 years. The Company included the financial
results of Wilcox & Associates beginning March 1, 1996.
On April 30, 1996, DIMAC acquired substantially all of the assets of
MBS/Multimode, Inc., a database marketing firm based in Huntington
Station, New York for $24.7 million, plus the assumption of certain
specified liabilities. The acquisition was accounted for as a
purchase. Goodwill resulting from the acquisition of $22.4 million is
being amortized on a straight-line basis over 25 years. The Company
included the financial results of MBS/Multilmode, Inc. beginning May
1, 1996.
(b) BROADCASTING
During the years ended December 31, 1996, 1995 and 1994, the Company
acquired the following FM radio stations (thousands of dollars):
Station/Market Date Cost
-------------- ---- ----
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
WMYU and WWST/Knoxville February 17, 1996 6,500
In February 1996, the Company completed the sale of KEVN-TV, Rapid
City, South Dakota. As result of this sale, the Company recognized a
gain of $6.0 million.
F-12
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The acquisitions discussed above were accounted for as purchases and
recognized in the consolidated financial statements as follows (thousands
of dollars):
<TABLE>
1996 1995 1994
--------- ------- --------
<S> <C> <C> <C>
Working capital deficit $(15,955) (4,466) (2,765)
Goodwill and other intangibles 284,532 20,997 33,319
Fixed and other noncurrent assets 23,903 3,166 1,574
Long-term debt (65,397) (152) (25,025)
Other long-term liabilities (6,164) (572) (177)
-------- ------ -------
Total cash paid, net of cash acquired $220,919 18,973 6,926
-------- ------ -------
-------- ------ -------
</TABLE>
(c) PRO FORMA INFORMATION (UNAUDITED)
The following summary presents selected unaudited pro forma
consolidated information for the Company assuming the marketing
services and broadcasting acquisitions had occurred as of the
beginning of 1996 and 1995, after giving effect to certain
adjustments, including amortization of goodwill and other intangibles,
increased interest expense on debt related to the acquisitions, and
related income tax effects (thousands of dollars, except per share
information):
Years ended December 31,
------------------------
1996 1995
-------- -------
Net revenues $639,061 572,276
Net income 18,217 12,248
Net earnings per common share $ .50 .35
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 as of the beginning of 1996 and 1995. 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 January 7, 1997, the Company completed the purchase of the assets
of WHRR-FM serving Rochester, New York for $1.9 million. On January
24, 1997 the Company completed the purchase of the assets of KXTR-FM
serving Kansas City, Missouri for $9.7 million.
On January 21, 1997, the Company announced plans to trade its
Knoxville, Tennessee stations, WMYU-FM and WWST-FM for KQRC-FM serving
Kansas City in a like-kind exchange. On February 18, 1997, the
Company announced plans to exchange WVAE-FM, its station in
Cincinnati, for WGH-FM, WVCL-FM, and WGH-AM serving Norfolk, Virginia
plus $5 million cash. The Company will operate the Norfolk stations
under a Local Management Agreement ("LMA"). Both transactions are
subject to approval by the FCC.
F-13
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1996 and 1995 are
summarized as follows (thousands of dollars):
1996 1995
-------- ------
Accounts payable $ 35,968 17,329
Payroll and employee benefits 16,189 8,314
Taxes payable 15,429 1,386
Store commissions 11,676 8,906
Interest 7,426 2,423
Accrued promotion costs 3,064 3,757
License fees 346 511
Other 24,690 9,443
-------- ------
$114,788 52,069
-------- ------
-------- ------
(4) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 is summarized as follows
(thousands of dollars):
1996 1995
-------- -------
Senior notes(a) $122,845 150,000
Credit agreements(b) 257,500 113,400
1992 Senior subordinated notes(c) 24,520 50,000
1996 Senior subordinated notes(d) 175,000 --
Canadian credit agreement(e) 13,317 15,674
Other(f) 6,987 10,791
-------- -------
600,169 339,865
Less current installments 69,775 5,026
-------- -------
$530,394 334,839
-------- -------
-------- -------
(a) Heritage Media Services, Inc. ("HMSI") a wholly owned subsidiary,
issued $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. During 1996, HMSI repurchased $27.2 million
of the Senior Notes and recognized a $1.6 million extraordinary loss
related to the extinguishment of debt.
(b) HMSI maintains a credit agreement (the "1992 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 1992 Credit Agreement commence on March 31, 1997
and continue until June 1999, when the balance is due. At
December 31, 1996, $76.4 million of the term facility and $70.5
million of the revolving credit facility were outstanding and $4.5
million of additional borrowings were available under this credit
facility. HMSI pays an annual commitment fee equal to 0.5% of the
unadvanced portion of the 1992 Credit Agreement. Loans under the
1992 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
F-14
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
operating cash flow (as defined). At December 31, 1996, the interest
rates were 6.5% - 8.5% under the Eurodollar and base rate options. The
loans under the 1992 Credit Agreement are secured by the stock of
substantially all subsidiaries of the Company.
On February 21, 1996, the Company, through DIMAC, entered into a $175
million bank credit facility (the "DIMAC Credit Agreement") with a
group of banks to refinance the long-term obligations acquired through
the DIMAC merger and to assist in funding the balance of the
transaction. The DIMAC Credit Agreement is comprised of a $50 million
term loan which begins to amortize September 30, 1997, continuing
until June 30, 2003 and a $125 million reducing revolving credit
facility. The revolving credit commitment will reduce quarterly
beginning March 31, 1998. Loans under the DIMAC Credit Agreement bear
interest at rates based on the agent bank's base rate or a Eurodollar
rate plus a margin depending on DIMAC's total leverage ratio (as
defined). At December 31, 1996, $50 million of the term loan and
$31.0 million of the revolver were outstanding, all at the Eurodollar
rate less than 6.7% at December 31, 1996, and $53.3 million of
additional borrowings were available under this credit facility. The
remaining $40.7 million of the credit facility was unavailable due to
certain financial covenants. As DIMAC's trailing twelve month
operating cash flow (as defined) increases, the available portion of
the credit facility will gradually increase, eventually resulting in
the availability of the full $175 million. 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 May 31, 1996, the Company through HMSI, entered into a $50 million
bank credit facility (the "1996 HMSI Credit Facility") to refinance a
portion of its existing 11% Senior Secured Notes due June 15, 2002.
The 1996 HMSI Credit Facility consists of a $50 million revolving
credit facility which matures December 31, 1997. At December 31, 1996,
$29.6 million of the facility was outstanding and $20.4 million of
additional borrowings were available. Loans under the 1996 HMSI
Credit Facility 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.
(c) The Company issued $50 million of 11% Senior Subordinated Notes ("the
1992 Senior Subordinated Notes") due October 1, 2002. The 1992 Senior
Subordinated 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 1992
Senior Subordinated Notes rank on a parity with the 8.75% Senior
Subordinated Notes discussed below and are subordinated to all other
indebtedness of the Company and its subsidiaries. During 1996, HMSI
repurchased $25.5 million of the Company's 1992 Senior Subordinated
Notes and recognized a $1.3 million extraordinary loss related to the
extinguishment of debt.
(d) On February 20, 1996 the Company issued $175 million of 8.75% Senior
Subordinated Notes (the "1996 Senior Subordinated Notes") due February
15, 2006, to assist in funding the Company's merger with DIMAC.
Interest on the 1996 Senior Subordinated Notes is payable semi-
annually. The 1996 Senior Subordinated Notes rank on a parity with
the 1992 Senior Subordinated Notes and are subordinated to all other
indebtedness of the Company and its subsidiaries.
(e) The Company's Canadian subsidiary maintains a credit agreement with
one Canadian bank 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, 1996, approximately Cdn $3.3 million of
additional borrowings were available under this credit agreement.
Repayments under the term loan are made quarterly, commencing
September 30, 1996, 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, 1996, the interest rate
was 9%.
F-15
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Borrowings under this credit agreement are guaranteed by HMC and
secured by the assets of Strategium Media, Inc.
(f) Other debt bears interest at varying rates ranging from 6% to 11% at
December 31, 1996 and consists primarily of notes payable due in
varying amounts through 2004.
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 years ended December 31, 1996 and
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 flow. 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 a
holding company of operating companies through HMSI and DIMAC, 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 1992
Credit Agreement and Senior Note Indenture, and DIMAC under the DIMAC
Credit Agreement, to declare and pay dividends to the Company. Under the
1992 Credit Agreement, which is the most restrictive of the loan agreements
at December 31, 1996, the total amount of dividends that could be paid by
HMSI to the Company was approximately $1,716,000. Under the DIMAC Credit
Agreement, the total amount of dividends that could be paid by DIMAC to the
Company was $10,000,000 at December 31, 1996. Such dividends are not
permitted if, as a result of such payments, a default would occur under
either of the agreements. As a result of the foregoing restrictions,
consolidated net assets of HMSI totaling approximately $137,729,000 and
consolidated net assets of DIMAC of $166,118,000, at December 31, 1996 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, 2001 are $69,775,000; $92,664,000;
$53,164,000; $10,261,000; and $10,258,000, 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 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. During the year ended
December 31, 1994, all remaining
F-16
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $.56 per share.
(6) STOCKHOLDERS' EQUITY
At the Annual Meeting on May 16, 1996, the shareholders of the Company
approved and authorized the following: a) a change of the state of
incorporation of the Company from Iowa to Delaware, b) the elimination of
the different classes of common stock, c) the authorization of 100,000,000
shares of common stock, $.01 par value, and d) the authorization of
10,000,000 shares of preferred stock, $.01 par value, 800,000 shares of
which have been designated Series A Junior Participating Preferred 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
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.
On July 25, 1996, the Company declared a two-for-one stock split effected
as a stock dividend payable to all holders of record on August 5, 1996 with
the payment date of August 12, 1996. The consolidated financial
statements, including all references to the number of shares of common
stock and all per share information have been adjusted to reflect the stock
dividend on a retroactive basis.
On October 14, 1996, the Board of Directors authorized the purchase of up
to 5,000,000 shares of the Company's common stock, from time to time,
through open market and private purchase at prices then prevailing.
(7) STOCK OPTIONS PLANS
The Company has two stock option plans pursuant to which the Company's
Board of Directors may grant stock options to key employees, officers and
directors. Under the 1987 Plan, the Company may grant options for up to
three million shares of common stock. Under the 1996 Plan, adopted by the
Board of Directors in January 1996, the Company may grant options for up to
three million shares of common stock. Under both plans, the exercise price
of each option may not be less than market value at the date of grant
without approval of the Board of Directors, and the options are exercisable
beginning two years from date of grant and expire ten years from date of
grant. At December 31, 1996, there were 2,269,546 and 1,484,262 options
outstanding under the 1987 Plan and the 1996 Plan, respectively.
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, in accounting for its plans and accordingly, no compensation
cost has been recognized for its stock options in the consolidated
financial statements. Had compensation cost for the Company's two stock
based compensation plans been determined consistent with FASB statement No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share amounts):
F-17
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Years ended December 31,
------------------------
1996 1995
---- ----
Net income As Reported $ 19,099 26,571
Pro forma 17,150 26,496
Earnings per share As Reported $ .52 .75
Pro forma .47 .75
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used
for grants in both 1996 and 1995: dividend yield of 0 percent; expected
volatility of 58 percent; risk free interest rates ranging from 5% to 8.8%
over a ten-year period; and an expected life of 5 years.
A summary of the status of the Company's two stock option plans as of
December 31, 1996, 1995 and 1994, and changes during the years ended on
those dates is presented below:
<TABLE>
1996 1995 1994
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,467,444 $ 9.5243 1,974,826 $ 7.7345 1,633,868 $ 5.8675
Granted 1,599,014 9.6418 708,000 13.3214 631,000 12.0910
Exercised (238,926) 6.2463 (179,248) 3.8873 (105,042) 3.7533
Forfeited (73,724) 13.9177 (36,134) 11.0096 (185,000) 9.2075
---------- ---------- ----------
Outstanding at end
of year 3,753,808 9.6949 2,467,444 9.5243 1,974,826 7.7345
---------- ---------- ----------
Options exercisable
at year-end 2,098,980 1,155,108 934,126
---------- ---------- ----------
Weighted-average fair
value of options granted
during the year $ 12.9632 $ 13.3207 $ 11.9127
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Avg.
<TABLE>
Range of Number Remaining Weighted-Avg. Number Weighted-Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.7500 - $ 5.5550 1,033,586 5.68 $ 4.5901 1,033,586 $ 4.5901
$ 6.3750 - $10.5000 1,271,544 8.94 9.9501 486,394 9.0648
$11.6875 - $13.3125 1,252,000 8.49 12.7590 579,000 12.1194
$14.2500 - $19.3130 196,678 9.26 15.3616 -- --
--------- ---- --------- --------- ---------
$3.75000 - $19.3130 3,753,808 7.91 $ 9.6949 2,098,980 $ 7.7040
--------- ---- --------- --------- ---------
--------- ---- --------- --------- ---------
</TABLE>
F-18
<PAGE>
(8) EMPLOYEE BENEFIT PLANS
The Company has various 401(K) plans (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. Company expenses under the Plan were not material in 1996, 1995
or 1994.
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 each plan year. Company expenses under
the plan, including matching contributions and interest, were not material
in 1996 or 1995.
(9) OTHER COSTS
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 211,800 shares of the Company's common stock with
a total value of $2,700,000. For the year ended December 31, 1994,
compensation expense accrued under the SAR Plan was $4,922,000.
(10) INCOME TAXES
Total income tax expense for the years ended December 31, 1996, 1995 and
1994 was allocated as follows (thousands of dollars):
1996 1995 1994
---- ---- ----
Income from continuing operations $ 24,432 9,133 2,742
Extraordinary item (1,546) -- --
Utilization of tax benefits of acquired
entities, credited to goodwill -- (4,495) --
Tax benefit of compensation expense
from stock options in excess of
amounts recognized for financial
reporting purposes, credited to
additional paid-in-capital (958) (348) --
--------- ----- -----
$ 21,928 4,290 2,742
--------- ----- -----
--------- ----- -----
F-19
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Income tax expense attributable to income from continuing operations for
the years ended December 31, 1996 and 1995 consists of (thousands of
dollars):
U.S. State and
Federal Local Foreign Total
------- --------- ------- ------
Year Ended December 31, 1996:
Current $15,190 3,745 138 19,073
Deferred 4,384 975 --- 5,359
------- ----- --- ------
$19,574 4,720 138 24,432
------- ----- --- ------
------- ----- --- ------
U.S. State and
Federal Local Foreign Total
------- --------- ------- ------
Year Ended December 31, 1995:
Current $ 7,420 2,820 28 10,268
Deferred (987) (148) -- (1,135)
------- ----- --- ------
$ 6,433 2,672 28 9,133
------- ----- --- ------
------- ----- --- ------
Income tax expense attributable to income from continuing operations for the
year ended December 31, 1994 of $2,742,000 consisted primarily of current
state income taxes.
Income tax expense for the years ended December 31, 1996, 1995 and 1994
differed from the amounts computed by applying the U.S. federal income tax
rate of 35 percent to pretax income from continuing operations as a result of
the following (thousands of dollars):
<TABLE>
1996 1995 1994
--------- ------ -------
<S> <C> <C> <C>
Computed "expected" tax expense $ 16,241 12,496 8,764
Increase (reduction) in income taxes resulting from:
Utilization of net operating losses --- (8,696) (10,645)
Amortization of goodwill 5,258 3,618 3,966
Other, net (primarily state income taxes) 2,933 1,715 657
--------- ------ -------
Income tax expense per financial statements $ 24,432 9,133 2,742
--------- ------ -------
--------- ------ -------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below (thousands of dollars):
1996 1995
------- -----
Deferred tax assets:
Capital loss carryforwards $ 308 1,447
Alternative minimum tax credit carryforwards 4,026 1,462
Accounts receivable principally due to allowance 1,820 1,491
for doubtful accounts
Other 8,692 1,297
------- -----
Total deferred tax assets 14,846 5,697
------- -----
Deferred tax liabilities:
Property and equipment, primarily due to differences
in depreciation 7,342 4,512
Other intangibles 9,530 --
Other 2,198 50
------- -----
Total deferred tax liabilities 19,070 4,562
------- -----
Net deferred tax assets/(liabilities) $(4,224) 1,135
------- -----
------- -----
F-20
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The valuation allowance related to deferred tax assets was reduced by
$13,539,000 and $10,645,000 in the years ended December 31, 1995 and 1994,
respectively.
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.
At December 31, 1996, the Company has pre-tax capital loss carryforwards
for tax purposes of approximately $880,000 which are available to offset
future capital gains through 1997. In addition, the Company has
alternative minimum tax credit carryforwards of approximately $4,026,000
which are available to reduce future federal regular income taxes, if any,
over an indefinite period.
(11) COMMITMENTS AND CONTINGENCIES
(a) LEASES AND CONTRACTS
The Company and its subsidiaries lease certain property,
transportation and other equipment under noncancellable operating
leases expiring at various dates through 2010. The Company also has
long-term contractual obligations with two major broadcast ratings
firms that provide monthly ratings services, and guaranteed store
contracts. Minimum commitments under all noncancellable leases and
contracts for the years ending December 31, 1997 through 2001 were
approximately $29,279,000, $25,974,000, $20,422,000, $5,287,000 and
$3,544,000, respectively.
The Company has certain contingent payment obligations related to
acquisitions completed based on attainment of certain financial
performance targets by the acquired entities. The total contingent
consideration paid during 1996 was approximately $4,500,000. These
contingent payment obligations extend for various periods through July
2000.
Lease, rental and contractual expense for the years ended December 31,
1996, 1995 and 1994 amounted to approximately $16,194,000, $10,840,000
and $8,139,000, respectively.
In addition, the Company and its subsidiaries have acquired property
and other equipment through capital leases. Minimum payments of the
capital leases for the years ending December 31, 1997 through 2001 and
thereafter are approximately $4,077,000, $3,870,000, $2,755,000,
$2,007,000, $1,824,000 and $29,708,000, respectively. The minimum
capital lease payments include $24,255,000 of interest and $19,986,000
representing the present value of minimum capital lease payments. The
current portion of $2,040,000 is included in accrued expenses with the
remaining balance included in other long-term liabilities.
At December 31, 1996, the gross amount of property and equipment
recorded under capital leases were building $14,250,000 and
machinery/other equipment $5,730,000. Accumulated depreciation
relating to these assets was $1,440,000 at December 31, 1996.
F-21
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) BROADCAST PROGRAM RIGHTS
The Company has entered into contracts for broadcast program rights
that expire at various dates during the next four years. Contracts
totaling approximately $467,000 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, 1996. The aggregate minimum payments under contracts
for programs currently available (those included on the consolidated
balance sheet at December 31, 1996) and programs not currently
available (those not included on the consolidated balance sheet at
December 31, 1996) are approximately $2,176,000, $1,256,000, $481,000
and $167,000 for the years ending December 31, 1997 through 2000,
respectively.
The Company entered into contracts for broadcast program rights of
approximately $3,241,000, $2,200,000 and $2,129,000 during the years
ended December 31, 1996, 1995 and 1994, 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
liquidity, financial position or results of operations.
(12) 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, 1996 and 1995. 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 (thousands of
dollars):
<TABLE>
1996 1995
---------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ----- -------- -----
<S> <C> <C> <C> <C>
Interest rate swaps $ -- 25 -- 349
Long-term debt:
Senior Notes (122,845) (131,444) (150,000) (162,750)
1992 Senior Subordinated Notes (24,520) (26,359) (50,000) (53,500)
1996 Senior Subordinated Notes (175,000) (165,375) -- --
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash, 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 swaps 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.
Receivables (payables) under interest rate swaps were not material at
December 31, 1996 and 1995.
F-22
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Long-term debt: The fair values of the Company's Senior Notes, 1992 Senior
Subordinated Notes, and 1996 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 value.
(13) SEGMENT INFORMATION
Information relating to the Company's business segments as of and for the
years ended December 31, 1996, 1995 and 1994 is as follows (thousands of
dollars):
1996 1995 (c) 1994 (c)
-------- -------- --------
Net revenues:
Marketing Services $521,236 346,392 230,111
Broadcasting 99,594 89,384 87,517
-------- -------- --------
Total $620,830 435,776 317,628
-------- -------- --------
-------- -------- --------
Operating income (loss):
Marketing Services $ 70,104 50,530 37,163 (a)
Broadcasting 29,660 26,384 (b) 24,418
Corporate (4,895) (3,901) (3,743)
-------- -------- --------
Total $ 94,869 73,013 57,838
-------- -------- --------
-------- -------- --------
Selling, general and
administrative expenses:
Marketing Services $ 98,795 57,973 44,422
Broadcasting 30,604 26,707 28,522
Corporate 4,708 3,793 3,656
-------- -------- --------
Total $134,107 88,473 76,600
-------- -------- --------
-------- -------- --------
Depreciation, amortization and
writedown of program rights:
Marketing Services $ 31,050 17,700 15,428
Broadcasting 14,012 13,596 (b) 11,783
Corporate 187 107 87
-------- -------- --------
Total $ 45,249 31,403 27,298
-------- -------- --------
-------- -------- --------
Identifiable assets:
Marketing Services $660,132 310,637 289,559
Broadcasting 223,486 223,332 215,566
Corporate 18,118 17,042 9,022
-------- -------- --------
Total $901,736 551,011 514,147
-------- -------- --------
-------- -------- --------
Capital expenditures:
Marketing Services $ 23,167 10,746 9,538
Broadcasting 7,574 3,722 3,636
Corporate 561 620 97
-------- -------- --------
Total $ 31,302 15,088 13,271
-------- -------- --------
-------- -------- --------
(a) Includes nonrecurring expenses of $4,922,000 in 1994 relating to
stock appreciation rights.
(b) Includes writedowns of program rights of $781,000 in 1995.
(c) Segment information for 1995 and 1994 has been restated to combine
the prior year's television and radio segments as the broadcasting
segment.
F-23
<PAGE>
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- ------- ------- ------- -------
(thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
1996:
Net revenues $119,031 144,842 155,141 201,816 620,830
Gross profit 50,753 67,722 69,619 86,131 274,225
Operating income 15,341 24,065 25,286 30,177 94,869
Net income 1,743 3,706 5,723 7,927 19,099
Net income per share .05 .10 .16 .22 .52
1995:
Net revenues $ 83,263 107,094 108,708 136,711 435,776
Gross profit 37,468 45,851 47,642 61,928 192,889
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 .04 .16 .24 .31 .75
</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 expenses; 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.
F-24
<PAGE>
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
ASSETS 1996 1995
------ -------- -------
Current assets $ 6,077 6,277
Property and equipment, net of accumulated depreciation 2,110 2,154
Investment in and advances to subsidiaries, at equity 379,900 177,628
Other assets, net 2,018 4,183
-------- -------
$390,105 190,242
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 61,367 7,964
Deferred income taxes 2,720 4,016
Long-term debt, excluding current portion 190,131 57,862
-------- -------
Total liabilities 254,218 69,842
Stockholders' equity:
Preferred stock -- --
Common stock 357 355
Additional paid-in capital 225,685 223,230
Accumulated deficit (82,544) (101,643)
Accumulated foreign currency translation
adjustments (748) (1,088)
Treasury stock at cost (6,863) (454)
-------- -------
Total stockholders' equity 135,887 120,400
-------- -------
$390,105 190,242
-------- -------
-------- -------
See accompanying notes to condensed financial information.
F-25
<PAGE>
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Net revenues $ -- -- --
-------- ------ ------
Expenses:
Cost of services -- -- --
Selling, general and administrative -- -- --
Depreciation and amortization 81 26 --
-------- ------ ------
81 26 --
-------- ------ ------
Operating (loss) (81) (26) --
-------- ------ ------
Other expense:
Interest (20,363) (6,351) (6,056)
Other, net -- 1,606 (563)
-------- ------ ------
(20,363) (4,745) (6,619)
-------- ------ ------
Loss before equity in income of subsidiaries,
income taxes and extraordinary item (20,444) (4,771) (6,619)
Equity in income of subsidiaries before
extraordinary item 62,069 37,657 28,918
-------- ------ ------
Income before income taxes and extraordinary item 41,625 32,886 22,299
Income taxes 19,654 6,315 --
-------- ------ ------
Income before extraordinary item 21,971 26,571 22,299
Extraordinary item - equity in extraordinary item of
subsidiary and loss on extinguishment of debt 2,872 -- --
-------- ------ ------
Net income $ 19,099 26,571 22,299
-------- ------ ------
-------- ------ ------
</TABLE>
See accompanying notes to condensed financial information.
F-26
<PAGE>
HERITAGE MEDIA CORPORATION
FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 19,099 26,571 22,299
Adjustments to reconcile net income to net
cash used by operating activities:
Equity in income of subsidiaries (62,069) (37,657) (28,918)
Depreciation and amortization 81 26 --
Loss on extinguishment of debt 2,872 -- --
Change in assets and liabilities,
net of acquisitions 16,584 5,383 (1,708)
--------- ------- -------
Net cash used by operating activities (23,433) (5,677) (8,327)
--------- ------- -------
Cash flows from investing activities:
Investment in and advances to subsidiaries (59,158) (15,933) 1,831
Acquisitions, net of cash acquired (182,078) -- (2,457)
Dividends from subsidiaries 132,549 27,693 47,922
Purchase of investments -- (7,891) --
Sale of investments -- 5,309 --
--------- ------- -------
Net cash provided by (used) in investing
activities (108,687) 9,178 47,296
--------- ------- -------
Cash flows from financing activities:
Long term borrowings 175,000 -- --
Retirements of long-term debt (33,671) (377) (245)
Issuance of common stock 1,499 676 441
Purchase of treasury stock (6,409) -- --
Dividends on preferred stock -- -- (148)
Retirement of settlement and stock appreciation
rights -- (3,800) (39,017)
Payment of debt issuance costs (4,299) -- --
--------- ------- -------
Net cash provided by (used in) financing
activities 132,120 (3,501) (38,969)
--------- ------- -------
Net change during year -- -- --
Cash at beginning of year -- -- --
--------- ------- -------
Cash at end of year $ -- -- --
--------- ------- -------
--------- ------- -------
Cash paid for interest $ 14,058 6,287 5,725
--------- ------- -------
--------- ------- -------
Cash paid for income taxes $ 9,951 3,352 4,575
--------- ------- -------
--------- ------- -------
</TABLE>
See accompanying notes to condensed financial information
F-27
<PAGE>
SCHEDULE I, CONTINUED
HERITAGE MEDIA CORPORATION
NOTES TO CONDENSED FINANCIAL INFORMATION
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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,
1996.
Heritage Media Corporation is primarily a holding company.
(2) ACQUISITION AND DISPOSITION
In February, 1996 the Company completed its acquisition of DIMAC Marketing
Corporation ("DIMAC"), one of the leading full service, vertically
integrated direct marketing services companies in the United States. The
Company acquired DIMAC for cash in a transaction valued at approximately
$260 million. 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 per share. The merger was accounted for by the
Company as a purchase. The Company included the financial results of DIMAC
beginning February 1, 1996.
This acquisition was recognized in the condensed financial statements as
follows (thousands of dollars):
Working capital deficit $(14,941)
Goodwill and other intangibles 247,217
Other non current assets 18,535
Long-term debt (65,397)
Other long term liabilities (3,336)
--------
Total cash paid $182,078
--------
--------
On March 31, 1996, HMC contributed the stock of KIHT-FM to Heritage Media
Services, Inc. for $7.2 million. Accordingly, financial statements for
periods prior to the contribution are restated to provide comparative
information.
(3) OTHER
See note 6 to consolidated financial statements for a description of the
common stock of the Company.
F-28
<PAGE>
SCHEDULE II
HERITAGE MEDIA CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
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, 1996 $ 4,033 2,468 -- 1,201 5,300
------- ------ ------ ----- ------
------- ------ ------ ----- ------
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
------- ------ ------ ----- ------
------- ------ ------ ----- ------
Deferred tax asset valuation
allowance:
Year ended December 31, 1996 $ -- -- -- --- ---
------- ------ ------ ----- ------
------- ------ ------ ----- ------
Year ended December 31, 1995 $13,539 (8,696) (4,843) --- ---
------- ------ ------ ----- ------
------- ------ ------ ----- ------
Year ended December 31, 1994 $17,936 -- (4,397) --- 13,539
------- ------ ------ ----- ------
------- ------ ------ ----- ------
</TABLE>
F-29
<PAGE>
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 (12)
10(a) - Form of Credit Agreement among DIMAC Corporation, Citibank, N.A.,
as Administrative Agent, and NationsBank of Texas, N.A., as
Documentation Agent (12)
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)
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 15, 1997
(11)
- -------------------
(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.
31
<PAGE>
(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 the registrant's Registration Statement
No. 333-15511 on Form S-8 and incorporated herein by reference.
(11) To be filed on or before April 30, 1997.
(12) Filed as an exhibit to the registrant's Form 10-K for the year
ended December 31, 1995.
32
<PAGE>
LIST OF SUBSIDIARIES EXHIBIT 21
OF HERITAGE MEDIA CORPORATION
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
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. Heritage GP, Inc. Delaware
29. HMLP, LTD Texas
30. DIMAC Marketing Corporation Delaware
31. DIMAC Direct Inc. Missouri
32. Palm Coast Data Inc. Missouri
33. The McClure Group Inc. Missouri
34. Heritage Tennessee, LP Tennessee
35. KIHT-FM, Inc. Missouri
36. MBS/Multimode, Inc. Missouri
37. Wilcox & Associates Inc. Missouri
38. KCET/DIMAC Communications LLC Delaware
33
<PAGE>
Exhibit 23(a)
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 21, 1997 relating to the consolidated balance
sheets of Heritage Media Corporation and subsidiaries as of December 31, 1996
and 1995 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, 1996, which report appears in the
December 31, 1996 Annual Report on Form 10-K of Heritage Media Corporation.
KPMG Peat Marwick LLP
Dallas, Texas
March 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,716
<SECURITIES> 0
<RECEIVABLES> 115,967
<ALLOWANCES> 5,300
<INVENTORY> 10,004
<CURRENT-ASSETS> 140,562
<PP&E> 170,004
<DEPRECIATION> 60,859
<TOTAL-ASSETS> 901,736
<CURRENT-LIABILITIES> 198,991
<BONDS> 550,394
0
0
<COMMON> 357
<OTHER-SE> 135,530
<TOTAL-LIABILITY-AND-EQUITY> 901,736
<SALES> 0
<TOTAL-REVENUES> 620,830
<CGS> 0
<TOTAL-COSTS> 346,605
<OTHER-EXPENSES> 177,208
<LOSS-PROVISION> 2,148
<INTEREST-EXPENSE> 52,859
<INCOME-PRETAX> 46,403
<INCOME-TAX> 24,432
<INCOME-CONTINUING> 21,971
<DISCONTINUED> 0
<EXTRAORDINARY> 2,872
<CHANGES> 0
<NET-INCOME> 19,099
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.52
</TABLE>
