<PAGE>
As filed with the Securities and Exchange Commission on January 2, 1997
REGISTRATION NO. 333-18717
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
CUC INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8699 06-0918165
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
707 SUMMER STREET
STAMFORD, CONNECTICUT 06901
(203) 324-9261
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
COSMO CORIGLIANO AMY N. LIPTON, ESQ.
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SENIOR VICE PRESIDENT
CUC INTERNATIONAL INC. AND GENERAL COUNSEL
707 SUMMER STREET CUC INTERNATIONAL INC.
STAMFORD, CONNECTICUT 06901 707 SUMMER STREET
(203) 324-9261 STAMFORD, CONNECTICUT 06901
(203) 324-9261
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
COPIES TO:
BRADFORD P. WEIRICK, ESQ. MARGARET E. NIBBI, ESQ.
GIBSON, DUNN & CRUTCHER LLP GUNDERSON DETTMER
333 SOUTH GRAND AVENUE STOUGH VILLENEUVE
LOS ANGELES, CALIFORNIA 90071 FRANKLIN & HACHIGIAN, LLP
(213) 229-7000 155 CONSTITUTION DRIVE
MENLO PARK, CALIFORNIA 94025
(415) 321-2400
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement and the
effective time of the merger (the "Merger") of KA Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of CUC International Inc., a Delaware
corporation ("CUC International"), with and into Knowledge Adventure, Inc., a
Delaware corporation ("Knowledge Adventure"), as described in the Agreement and
Plan of Merger dated as of October 11, 1996 attached as Annex A-1 to the Proxy
Statement/Prospectus forming part of this Registration Statement (as amended by
Amendment No. 1 to the Agreement and Plan of Merger dated as of December 20,
1996 attached as Annex A-2 to the Proxy Statement/Prospectus forming part of
this Registration Statement, the "Merger Agreement").
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
[LOGO OF KNOWLEDGE ADVENTURE, INC.]
KNOWLEDGE ADVENTURE, INC.
1311 Grand Central Avenue
Glendale, California 91201
January 2, 1997
To Our Stockholders:
You are hereby cordially invited to attend a special meeting of the
stockholders of Knowledge Adventure, Inc., a Delaware corporation (the
"Company"), to be held at the Company's principal executive offices located at
1311 Grand Central Avenue, Glendale, California 91201, on Friday, January 31,
1997 at 9:00 a.m., local time (the "Meeting").
As described in the accompanying Proxy Statement/Prospectus, at the
Meeting, holders of record of shares of common stock and preferred stock of the
Company (collectively, the "Company Shares") at the close of business on
December 24, 1996 will be requested to consider and vote upon (i) a proposal to
approve and adopt an Agreement and Plan of Merger dated as of October 11, 1996
(as amended, the "Merger Agreement"), among the Company, CUC International Inc.,
a Delaware corporation ("CUC International"), and KA Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of CUC International ("Merger
Sub"), pursuant to which, among other things, Merger Sub will be merged with and
into the Company (the "Merger"), with the Company, as the surviving corporation
in the Merger, becoming a wholly owned subsidiary of CUC International, (ii) a
proposal to approve an amendment (the "Charter Clarification") to Article IV,
Section B.2 of the Restated Certificate of Incorporation of the Company to
clarify that the fair market value of the merger consideration to be received by
the holders of Company Shares in the Merger (for the purpose of allocating the
merger consideration among the holders of Company Shares) will be determined as
of the date of the closing of the Merger, and (iii) such other business as may
properly be presented at the Meeting and any adjournments or postponements
thereof.
The Board of Directors of the Company has received the written opinion
dated October 4, 1996 of Piper Jaffray Inc., the Company's financial advisor, to
the effect that, as of the date of the opinion, based on and subject to the
assumptions, factors and limitations set forth in the opinion and as described
herein, the aggregate consideration to be received by the holders of capital
stock of the Company as a group in the Merger was fair, from a financial point
of view, to such stockholders as a group. The full text of the written opinion
of Piper Jaffray, which sets forth assumptions made, matters considered and
limitations on the review undertaken, is attached as Annex D to the accompanying
-------
Proxy Statement/Prospectus and should be read carefully and in its entirety.
AFTER CAREFUL REVIEW AND CONSIDERATION OF THE TERMS AND CONDITIONS OF THE
MERGER AGREEMENT AND THE CHARTER CLARIFICATION, THE BOARD OF DIRECTORS OF THE
COMPANY HAS DETERMINED THAT THE MERGER (AND THE OTHER TRANSACTIONS CONTEMPLATED
BY THE MERGER AGREEMENT) AND THE CHARTER CLARIFICATION ARE IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS OF THE COMPANY HAS
APPROVED THE MERGER AGREEMENT (AND THE TRANSACTIONS CONTEMPLATED THEREBY) AND
THE CHARTER CLARIFICATION AND RECOMMENDS THAT THE HOLDERS OF COMPANY SHARES VOTE
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE CHARTER CLARIFICATION.
You should read carefully the accompanying Notice of Special Meeting and
Proxy Statement/Prospectus for details concerning the Merger, the Charter
Clarification and additional related information.
It is important that your shares be represented at the Meeting. Whether or
not you plan to attend the Meeting, I encourage you to sign, date and return the
enclosed proxy card at your earliest convenience in the enclosed postage-prepaid
envelope. Your Company Shares will be voted in accordance with the instructions
you have given in your proxy card. If you attend the Meeting, you may vote in
person if you wish, even though you previously have returned your proxy card.
Your prompt cooperation will be greatly appreciated.
Very truly yours,
Lawrence S. Gross
President and Chief Executive Officer
<PAGE>
[LOGO OF KNOWLEDGE ADVENTURE, INC.]
KNOWLEDGE ADVENTURE, INC.
1311 Grand Central Avenue
Glendale, California 91201
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON January 31, 1997
A Special Meeting of the holders of shares of common stock, par value
$.0001 per share ("Company Common Stock"), Series A Preferred Stock, par value
$.0001 per share, Series B Preferred Stock, par value $.0001 per share, Series C
Preferred Stock, par value $.0001 per share, Series D Preferred Stock, par value
$.0001 per share, Series E Preferred Stock, par value $.0001 per share, and
Series F Preferred Stock, par value $.0001 per share, of Knowledge Adventure,
Inc., a Delaware corporation (the "Company") (the shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock of the Company
being collectively referred to herein as the "Company Preferred Stock" and,
together with the Company Common Stock, the "Company Shares"), will be held at
the principal executive offices of the Company located at 1311 Grand Central
Avenue, Glendale, California 91201, on Friday, January 31, 1997, convening at
9:00 a.m., local time (the "Meeting"). At the Meeting, you will be asked to
consider and act upon the following matters, which are described more fully in
the accompanying Proxy Statement/Prospectus:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger dated as of October 11, 1996 (as amended, the "Merger
Agreement"), among the Company, CUC International Inc., a Delaware corporation
("CUC International"), and KA Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of CUC International ("Merger Sub"). Pursuant to the
Merger Agreement, among other things, Merger Sub will be merged with and into
the Company (the "Merger"), and the Company, as the surviving corporation in the
Merger, will become a wholly owned subsidiary of CUC International. At the
effective time of the Merger (the "Effective Time"), all of the Company Shares
that are outstanding immediately prior thereto (other than shares held by CUC
International, Merger Sub or any other subsidiary of CUC International, any
dissenting shares or any Company Shares held in the Company's treasury) will be
converted into the right to receive, in the aggregate, the sum of (i) 3,416,621
shares of common stock, par value $.01 per share, of CUC International ("CUC
Common Stock"), less (ii) the aggregate number of shares of CUC Common Stock
----
issuable upon the exercise of all CUC Replacement Options (as defined in the
accompanying Proxy Statement/Prospectus) that are issued in the Merger to the
holders of any options, whether vested or unvested, outstanding immediately
prior to the Effective Time to acquire shares of Company Common Stock ("Company
Common Options"), less (iii) the aggregate number of shares of CUC Common Stock
----
issuable upon the exercise of all Preferred Replacement Options (as defined in
the accompanying Proxy Statement/Prospectus) that are issued in the Merger to
the holders of any options, whether vested or unvested, outstanding immediately
prior to the Effective Time to acquire shares of Company Preferred Stock
("Company Preferred Options"), plus (iv) an additional 748.848 shares of CUC
----
Common Stock for each calendar day after December 1, 1996 and prior to the date
of the closing of the Merger (the "Closing Date"), in each case subject to the
indemnification and escrow provisions of the Merger Agreement and a related
Escrow Agreement (as defined in the accompanying Proxy Statement/Prospectus) (as
more fully described in the accompanying Proxy Statement/Prospectus, the "Merger
Consideration"). Each Company Share will be converted in the Merger into the
right to receive that portion of the Merger Consideration to which such Company
Share is entitled under, and in accordance with, Article IV, Section B.2 of the
Restated Certificate of Incorporation of the Company (the "Applicable Charter
Provision"), a copy of which is attached as Annex B to the accompanying Proxy
-------
Statement/Prospectus. No fractional shares of CUC Common Stock will be issued
to holders of Company Shares in the Merger.
2. To consider and vote upon a proposal to approve an amendment (the
"Charter Clarification") to the Applicable Charter Provision to clarify that the
fair market value of the Merger Consideration to be received by the holders of
Company Shares in the Merger (for the purpose of allocating the Merger
Consideration among the
<PAGE>
holders of Company Shares) will be determined as of the Closing Date. The
proposed text of the Charter Clarification is contained in "Proposal No. 2--The
Charter Clarification--General," and should be read carefully and in its
entirety. The obligations of CUC International and Merger Sub to effect the
Merger are subject to, among other things, the approval and adoption of the
Charter Clarification by the requisite votes of the stockholders of the Company.
3. To transact such other business as may properly be presented at the
Meeting and any adjournments or postponements thereof.
The affirmative votes of the holders of at least (i) a majority of all of
the outstanding shares of Company Common Stock voting together as a class with
all of the outstanding shares of Company Preferred Stock, with each share of
Company Preferred Stock being entitled to the number of votes equal to the
number of shares of Company Common Stock into which such share of Company
Preferred Stock may be converted at such time, and (ii) 66-2/3% of the
outstanding shares of Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock voting
together as a single class (with each such share of Company Preferred Stock
being entitled to the number of votes equal to the number of shares of Company
Common Stock into which such shares of Company Preferred Stock may be converted
at such time, provided that in any event each share of Series D Preferred Stock
will be deemed to be convertible at such time into six shares of Company Common
Stock), are necessary to approve and adopt the Merger Agreement and the Charter
Clarification.
The Board of Directors of the Company (the "Company Board") has fixed the
close of business on December 24, 1996 as the record date (the "Record Date")
for the purpose of determining the holders of Company Shares who are entitled to
receive notice of and to vote at the Meeting and any adjournments or
postponements thereof. No other business may be transacted at the Meeting
absent the provision of proper notice in accordance with the Company's Bylaws.
A list of the holders of Company Shares entitled to vote at the Meeting
will be made available for examination by any holder of Company Shares, for any
purpose germane to the Meeting, during ordinary business hours, at the offices
of the Company located at 1311 Grand Central Avenue, Glendale, California 91201,
commencing on January 20, 1997, and at the Meeting.
Holders of Company Shares may be entitled to dissenters' rights in the
Merger if their shares qualify as "dissenting shares" under applicable Delaware
and California law. If properly exercised, these rights would require the
Company to purchase such "dissenting shares" for cash at the fair market value
thereof. The full texts of the pertinent statutory provisions relating to the
proper exercise of such dissenters' rights are attached as Annexes C-1 and C-2
----------- ---
to the accompanying Proxy Statement/Prospectus and should be read carefully and
in their entirety. See "Proposal No. 1--The Merger--Rights of Dissenting
Stockholders."
It is important that your shares be represented at the Meeting. All
stockholders are cordially invited to attend the Meeting in person. However,
whether or not you attend the Meeting, please complete, date and sign the
enclosed proxy card and return it promptly in the enclosed postage pre-paid
envelope. Any stockholder who so desires may revoke his or her proxy at any
time prior to the time it is exercised by (i) providing written notice to such
effect to the Secretary of the Company, (ii) duly executing a proxy bearing a
date subsequent to that of a previously furnished proxy or (iii) attending the
Meeting and voting in person. Attendance at the Meeting will not in itself
constitute a revocation of a previously furnished proxy, and stockholders who
attend the Meeting in person need not revoke their proxy (if previously
furnished) and may vote thereat in person.
THE MERGER (AND THE RELATED TRANSACTIONS CONTEMPLATED THEREBY) AND THE
CHARTER CLARIFICATION ARE MORE FULLY DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS. THE FULL TEXT OF THE MERGER AGREEMENT AND THE AMENDMENT
THERETO ARE ATTACHED AS ANNEX A-1 AND A-2 THERETO, RESPECTIVELY, AND THE
--------- ---
PROPOSED TEXT OF THE CHARTER CLARIFICATION IS CONTAINED IN "PROPOSAL
2
<PAGE>
NO. 2--THE CHARTER CLARIFICATION," AND SHOULD BE READ CAREFULLY AND IN THEIR
ENTIRETY.
AFTER CAREFUL REVIEW AND CONSIDERATION OF THE TERMS AND CONDITIONS OF THE
MERGER AGREEMENT AND THE CHARTER CLARIFICATION, THE COMPANY BOARD HAS DETERMINED
THAT THE MERGER (AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT) AND THE CHARTER CLARIFICATION ARE IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS. THE COMPANY BOARD HAS APPROVED THE MERGER
AGREEMENT (AND THE TRANSACTIONS CONTEMPLATED THEREBY) AND THE CHARTER
CLARIFICATION AND RECOMMENDS THAT THE HOLDERS OF COMPANY SHARES VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE CHARTER CLARIFICATION.
Very truly yours,
Lawrence S. Gross
President and Chief Executive Officer
Glendale, California
January 2, 1996
3
<PAGE>
[LOGO OF KNOWLEDGE ADVENTURE, INC.]
KNOWLEDGE ADVENTURE, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 31, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
KNOWLEDGE ADVENTURE, INC.
The undersigned hereby appoints Lawrence S. Gross and Jay Meschel, or
either of them, as proxies, each with full power of substitution, and hereby
authorizes them to represent and vote, as designated below, all shares of Common
Stock and Preferred Stock of Knowledge Adventure, Inc. (the "Company"), held of
record by the undersigned on December 24, 1996, at the Special Meeting of
stockholders of the Company (the "Meeting") to be held at the Company's
principal executive offices located at 1311 Grand Central Avenue, Glendale,
California 91201 on Friday, January 31, 1997, at 9:00 a.m., local time, and at
any adjournments or postponements thereof.
THIS PROXY WILL BE VOTED AS DIRECTED BELOW. WHEN NO CHOICE IS INDICATED,
THIS PROXY WILL BE VOTED FOR PROPOSAL NO. 1 AND PROPOSAL NO. 2. In their
discretion, the proxy holders are authorized to vote upon such other business as
may properly come before the Meeting or any adjournments or postponements
thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF KNOWLEDGE
ADVENTURE, INC.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 1.
<TABLE>
<S> <C> <C>
1. APPROVAL AND ADOPTION OF THE FOR AGAINST ABSTAIN 3. To transact such other business as may
AGREEMENT AND PLAN OF MERGER [_] [_] [_] properly be presented at the meeting or
DATED AS OF OCTOBER 11, 1996, AS any adjournments or postponements
AMENDED, AMONG THE COMPANY, CUC thereof.
INTERNATIONAL INC. AND KA
ACQUISITION CORP.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 2.
<TABLE>
<S> <C> <C>
2. APPROVAL AND ADOPTION FOR AGAINST ABSTAIN
OF THE CHARTER [_] [_] [_]
CLARIFICATION
</TABLE>
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
Please sign exactly as your name(s) appears on your stock certificate. If shares
of stock are held of record in the names of two or more persons or in the name
of husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the proxy. If shares of stock are held of record by a
corporation, the proxy should be executed by the president or vice president and
the secretary or assistant secretary. If shares of stock are held of record by a
partnership, the proxy should be executed by a duly authorized officer of the
partnership. Executors, administrators or other fiduciaries who execute the
above proxy for a deceased stockholder should give their full title. Please date
this proxy.
Signature(s)____________________________________________ Date:________________
NOTE: Joint owners should each sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such.
<PAGE>
PROXY STATEMENT/PROSPECTUS
KNOWLEDGE ADVENTURE, INC. CUC INTERNATIONAL INC.
1311 GRAND CENTRAL AVENUE 707 SUMMER STREET
GLENDALE, CALIFORNIA 91201 STAMFORD, CONNECTICUT 06901
(818) 246-4400 (203) 324-9261
________________________
PROXY STATEMENT RELATING TO
SPECIAL MEETING OF STOCKHOLDERS OF KNOWLEDGE ADVENTURE, INC.
TO BE HELD ON FRIDAY, JANUARY 31, 1997
PROSPECTUS RELATING TO UP TO 3,461,552 SHARES OF
CUC INTERNATIONAL COMMON STOCK, $.01 PAR VALUE
________________________
This Proxy Statement/Prospectus and the accompanying proxy card are being
furnished to the holders of shares of common stock, par value $.0001 per share
("Company Common Stock"), Series A Preferred Stock, par value $.0001 per share,
Series B Preferred Stock, par value $.0001 per share, Series C Preferred Stock,
par value $.0001 per share, Series D Preferred Stock, par value $.0001 per
share, Series E Preferred Stock, par value $.0001 per share, and Series F
Preferred Stock, par value $.0001 per share, of Knowledge Adventure, Inc., a
Delaware corporation (the "Company") (the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock of the Company being
collectively referred to herein as the "Company Preferred Stock" and, together
with the Company Common Stock, the "Company Shares"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Company
Board") for use at a Special Meeting of the stockholders of the Company to be
held at the principal executive offices of the Company located at 1311 Grand
Central Avenue, Glendale, California 91201, on Friday, January 31, 1997 at 9:00
a.m., local time, and at any adjournments or postponements thereof (the
"Meeting"). At the Meeting, holders of record as of December 24, 1996 (the
"Record Date") of outstanding Company Shares will be requested to consider and
vote upon (i) a proposal to approve and adopt an Agreement and Plan of Merger
dated as of October 11, 1996 (as amended, the "Merger Agreement"), among the
Company, CUC International Inc., a Delaware corporation ("CUC International"),
and KA Acquisition Corp., a Delaware corporation and a wholly owned subsidiary
of CUC International ("Merger Sub"), and (ii) a proposal to approve an amendment
(the "Charter Clarification") to Article IV, Section B.2 of the Restated
Certificate of Incorporation of the Company (the "Applicable Charter Provision")
to clarify that the fair market value of the Merger Consideration (as defined
below) to be received by the holders of Company Shares in the Merger (for the
purpose of allocating the Merger Consideration among the holders of Company
Shares) will be determined as of the date of the closing of the Merger (the
"Closing Date").
SEE "SUMMARY--RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROXY
STATEMENT/PROSPECTUS FOR A DISCUSSION OF CERTAIN MATTERS WHICH SHOULD BE
CAREFULLY CONSIDERED BY HOLDERS OF COMPANY SHARES IN DETERMINING HOW TO VOTE IN
RESPECT OF THE MERGER AGREEMENT AND THE CHARTER CLARIFICATION.
THE SHARES OF CUC COMMON STOCK ISSUABLE IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
i
<PAGE>
Pursuant to the Merger Agreement, among other things, Merger Sub will be
merged with and into the Company (the "Merger"), and the Company, as the
surviving corporation in the Merger, will become a wholly owned subsidiary of
CUC International. At the effective time of the Merger (the "Effective Time"),
all of the Company Shares that are outstanding immediately prior thereto (other
than shares held by CUC International, Merger Sub or any other subsidiary of CUC
International, any dissenting shares and any Company Shares held in the
Company's treasury) will be converted into the right to receive, in the
aggregate, the sum of (i) 3,416,621 shares of common stock, par value $.01 per
share, of CUC International ("CUC Common Stock"), less (ii) the aggregate number
----
of shares of CUC Common Stock issuable upon the exercise of all CUC Replacement
Options (as defined below) that are issued in the Merger to the holders of any
options, whether vested or unvested, outstanding immediately prior to the
Effective Time to acquire shares of Company Common Stock ("Company Common
Options"), less (iii) the aggregate number of shares of CUC Common Stock
----
issuable upon the exercise of all Preferred Replacement Options (as defined
below) that are issued in the Merger to the holders of any options, whether
vested or unvested, outstanding immediately prior to the Effective Time to
acquire shares of Company Preferred Stock ("Company Preferred Options"), plus
----
(iv) an additional 748.848 shares of CUC Common Stock for each calendar day
after December 1, 1996 and prior to the Closing Date, in each case subject to
the indemnification and escrow provisions of the Merger Agreement and a related
Escrow Agreement (as defined below) (as more fully described herein, the "Merger
Consideration"). Each Company Share will be converted in the Merger into the
right to receive that portion of the Merger Consideration to which such Company
Share is entitled under, and in accordance with, the Applicable Charter
Provision, a copy of which is attached as Annex B hereto.
-------
As more fully described in "Proposal No. 1--The Merger," based upon the
equity capitalization of CUC International and the Company, the stockholders of
the Company, together with the holders of Company Common Options and Company
Preferred Options, immediately prior to the Effective Time will own, in the
aggregate and on a fully diluted basis, less than 1.0% of the shares of CUC
Common Stock outstanding immediately after the Effective Time.
CUC Common Stock is traded on The New York Stock Exchange, Inc. ("NYSE")
under the symbol "CU." The closing sales price of CUC Common Stock as reported
on the NYSE was $24.00 on December 30, 1996 (the latest practicable date
preceding the mailing of this Proxy Statement/Prospectus for which such prices
were available). Because the market price of shares of CUC Common Stock is
inherently subject to fluctuation, the aggregate value of the Merger
Consideration to be received by the Company's stockholders in the Merger is
subject to fluctuation. The Merger Agreement does not contain any minimum or
maximum price protection provisions. Furthermore, given that the Merger
Consideration will be valued as of the Closing Date for the purpose of
allocating the Merger Consideration among the Company's stockholders (see
"Proposal No. 2--The Charter Clarification"), fluctuations in the market price
for CUC Common Stock prior to the Closing Date will have an impact upon the
relative portions of the Merger Consideration to be received by holders of
Company Common Stock and Company Preferred Stock. For a discussion of the
allocation of the Merger Consideration among the Company's stockholders, see
"Proposal No. 1--The Merger--Provisions in the Merger Agreement--Exchange Ratios
for Company Shares."
This document, in addition to constituting the Company's Proxy Statement
relating to the Meeting, also includes and constitutes the Prospectus of CUC
International filed as part of its Registration Statement on Form S-4 (together
with all amendments thereto, the "Registration Statement") with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the CUC Common Stock issuable in the
Merger to holders of outstanding Company Shares. All information concerning CUC
International contained (or, as permitted by applicable rules and regulations of
the Commission, incorporated by reference with respect to CUC International) in
this Proxy Statement/Prospectus has been furnished or prepared by CUC
International, and all information concerning the Company contained in this
Proxy Statement/Prospectus has been furnished or prepared by the Company. No
person has been authorized to give any information or to give any representation
not contained in this Proxy Statement/Prospectus in connection with the Merger
and, if given or made, such information or representation must not be relied
upon as having been authorized by CUC International or the Company. Neither the
delivery of this Proxy Statement/Prospectus nor any
ii
<PAGE>
distribution of the securities to which this Proxy Statement/Prospectus relates
shall, under any circumstances, create an implication that there has been no
change in the information contained herein since the date hereof.
This Proxy Statement/Prospectus and the related form of proxy are first
being mailed to holders of Company Shares on or about January 2, 1997.
The date of this Proxy Statement/Prospectus is January 2, 1997.
iii
<PAGE>
AVAILABLE INFORMATION
CUC International is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. The reports, proxy statements and other information filed by
CUC International with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048, and Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at the Commission's Web site at
(http://www.sec.gov). Copies of such material also may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, material filed by CUC
International may be inspected at the offices of the NYSE at 20 Broad Street,
New York, New York 10005, on which exchange the shares of CUC Common Stock are
listed.
If the Merger is consummated, CUC International will continue to file
reports, proxy statements and other information with the Commission pursuant to
the Exchange Act.
CUC International has filed with the Commission the Registration Statement
under the Securities Act with respect to the shares of CUC Common Stock to be
issued in the Merger to holders of Company Shares. This Proxy
Statement/Prospectus omits certain of the information contained in the
Registration Statement as permitted by applicable rules and regulations of the
Commission, and reference is hereby made to the Registration Statement and to
the exhibits relating thereto for further information with respect to CUC
International and CUC Common Stock. Any statements contained herein concerning
the provisions of any document are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
THIS PROXY STATEMENT/PROSPECTUS, WHICH IS INCLUDED IN AND FORMS AN INTEGRAL
PART OF THE REGISTRATION STATEMENT, INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED
BY REFERENCE HEREIN) ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER OF COMPANY SHARES TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED, UPON WRITTEN OR ORAL REQUEST TO 707 SUMMER STREET, STAMFORD,
CONNECTICUT 06901, ATTENTION: SECRETARY, TELEPHONE: (203) 324-9261. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE
JANUARY 15, 1997.
iv
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents (and the amendments thereto) previously filed by
CUC International (File No. -10308) with the Commission are incorporated by
reference in and are made a part of this Proxy Statement/Prospectus:
(i) CUC International's Annual Report on Form 10-K for its fiscal year
ended January 31, 1996, filed with the Commission on April 26, 1996 (the
"CUC International 10-K");
(ii) CUC International's Quarterly Report on Form 10-Q for its fiscal
quarter ended October 31, 1996, filed with the Commission on December 13,
1996 (the "CUC International 10-Q");
(iii) CUC International's Current Reports on Form 8-K, filed with the
Commission on February 21, 1996, February 22, 1996, March 12, 1996, April
22, 1996, August 5, 1996, August 14, 1996, September 17, 1996, September
19, 1996, October 7, 1996 and October 28, 1996, and all other reports filed
pursuant to Section 13(a) and 15(d) of the Exchange Act since January 31,
1996 and prior to the date of this Proxy Statement/Prospectus; and
(iv) The description of CUC Common Stock contained in CUC
International's registration statements on Form 8-A, as filed with the
Commission on July 27, 1984 and August 15, 1989, including any amendment or
report filed with the Commission for the purpose of updating such
description.
All reports and other documents filed by CUC International pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the date of the Meeting shall be deemed to be incorporated
herein by reference and to be a part hereof on and from the date any such report
or other document is filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Proxy Statement/Prospectus shall be deemed to
be modified or superseded for purposes hereof to the extent that a statement
contained herein, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus. All information appearing in this Proxy
Statement/Prospectus is qualified in its entirety by the information and
financial statements (including the notes thereto) contained in the documents
incorporated herein by reference, except to the extent set forth in the
immediately preceding sentence.
NO PERSON IS AUTHORIZED TO PROVIDE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY CUC INTERNATIONAL OR THE COMPANY. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF CUC INTERNATIONAL OR THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THEREOF.
v
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE v
SUMMARY 1
SELECTED FINANCIAL DATA OF CUC INTERNATIONAL 18
MARKET PRICE INFORMATION OF CUC COMMON STOCK AND COMPANY SHARES 20
INFORMATION CONCERNING CUC INTERNATIONAL 21
INFORMATION CONCERNING THE COMPANY 23
THE MEETING 24
General 24
Matters to be Considered at the Meeting 24
Record Date; Quorum; Vote Required 24
Proxies 25
PROPOSAL NO. 1--THE MERGER 26
Background of the Merger 26
Reasons for the Merger 30
Recommendation of the Board of Directors of the Company 31
Opinion of the Company's Financial Advisor 32
Management of the Company After the Merger 35
Conduct of the Business of the Company and CUC International if the Merger is Not Consummated 35
Interests of Certain Persons in the Merger 35
Accounting Treatment 38
Certain Federal Income Tax Consequences 39
Regulatory Approvals 40
Certain Federal Securities Laws Consequences 40
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Stock Exchange Listing 40
Rights of Dissenting Stockholders 41
Provisions of the Merger Agreement 45
The Merger 45
Effective Time of the Merger 45
Merger Consideration 46
Exchange Ratios for Company Shares 46
Treatment of Company Common Options and Company Preferred Options 50
Exchange of Stock Certificates 52
Stockholder Indemnification; Escrow Agreement 52
Representations and Warranties 53
Certain Covenants 54
Conditions to the Merger 55
Termination; Fees and Expenses 57
Amendment 58
Waiver 58
Loan Agreement 59
PROPOSAL NO. 2--THE CHARTER CLARIFICATION AMENDMENT 60
General 60
Consent and Waiver 61
Recommendation of Board of Directors of the Company 61
CERTAIN ADDITIONAL INFORMATION REGARDING CUC INTERNATIONAL AND THE COMPANY 63
SELECTED FINANCIAL DATA OF THE COMPANY 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY 66
PRINCIPAL STOCKHOLDERS 74
MANAGEMENT OF CUC INTERNATIONAL 77
COMPARISON OF STOCKHOLDER RIGHTS 83
EXPERTS 91
LEGAL MATTERS 92
OTHER MATTERS 92
FINANCIAL STATEMENTS OF THE COMPANY F-1
</TABLE>
vii
<PAGE>
ANNEXES
<TABLE>
<C> <S> <C>
Annex A-1 Agreement and Plan of Merger dated as of October 11, 1996, among CUC
International Inc., KA Acquisition Corp. and Knowledge Adventure, Inc. A-1-1
Annex A-2 Amendment No. 1 to Agreement and Plan of Merger dated as of December 20, 1996,
among CUC International Inc., KA Acquisition Corp. and Knowledge Adventure, Inc. A-2-1
Annex B Applicable Charter Provision B-1
Annex C-1 Section 262 of the Delaware General Corporation Law C-1-1
Annex C-2 Section 1300 through and including Section 1312 of the California General
Corporation Law C-2-1
Annex D Opinion of Piper Jaffray Inc. D-1
Annex E Consent and Waiver E-1
</TABLE>
viii
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS AND THE ANNEXES HERETO. THIS SUMMARY IS NOT
INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION CONTAINED ELSEWHERE, OR INCORPORATED BY REFERENCE, IN
THIS PROXY STATEMENT/PROSPECTUS AND THE ANNEXES HERETO. STOCKHOLDERS ARE URGED
TO READ THIS PROXY STATEMENT/PROSPECTUS, THE ANNEXES HERETO (INCLUDING, WITHOUT
LIMITATION, THE MERGER AGREEMENT) AND THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE CAREFULLY AND IN THEIR ENTIRETY. UNLESS OTHERWISE DEFINED HEREIN, ALL
CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE RESPECTIVE MEANINGS ASSIGNED TO
THEM ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. IN ADDITION, UNLESS
OTHERWISE INDICATED, ALL BENEFICIAL OWNERSHIP INFORMATION AND SHARE AMOUNTS SET
FORTH IN THIS PROXY STATEMENT/PROSPECTUS (A) HAVE BEEN ADJUSTED FOR, AND GIVE
EFFECT TO, THE 3:2 SPLITS OF CUC COMMON STOCK EFFECTED ON EACH OF JUNE 12,
1992, APRIL 30, 1993, JUNE 30, 1995 AND OCTOBER 21, 1996, (B) HAVE BEEN ADJUSTED
TO GIVE EFFECT TO THE 4:1 SPLIT OF THE CAPITAL STOCK OF THE COMPANY EFFECTED IN
APRIL 1993, AND (C) ASSUME THAT OUTSTANDING OPTIONS TO PURCHASE CUC COMMON STOCK
WILL NOT BE EXERCISED PRIOR TO THE EFFECTIVE TIME.
THE COMPANIES
CUC INTERNATIONAL INC........ CUC International is a leading technology-
driven, membership-based consumer services
company. CUC International operates its
businesses through two separate business
segments, namely the membership-based consumer
services segment and the interactive media
segment. CUC International's primary line of
business is providing membership-based consumer
services, which provide more than 63.8 million
customers worldwide with access to a variety of
services, including home shopping, travel,
insurance, automobile, dining, home improvement,
lifestyle club, checking account enhancement,
discount program and other services. CUC
International provides such services as
individual, wholesale or discount program
memberships ("memberships") and derives its
revenues from these services principally through
membership fees. CUC International recently
acquired Davidson & Associates, Inc.
("Davidson") and Sierra On-Line, Inc.
("Sierra"). Davidson and Sierra develop,
publish, manufacture and distribute high-quality
educational/entertainment (or "edutainment") and
personal productivity (or "how to") interactive
multimedia products for home and school use.
These products incorporate characters, themes,
sound, graphics, music and speech in ways that
CUC International believes are engaging to the
user, and are designed for multimedia personal
computers, including CD-ROM-based personal
computer systems, and selected emerging
platforms. Davidson's and Sierra's products are
offered through a variety of distribution
channels, including specialty retailers, mass
merchandisers, discounters and schools. CUC
International's executive offices are located at
707 Summer Street, Stamford, Connecticut 06901,
and its telephone number is (203) 324-9261. See
"Information Concerning CUC International."
KNOWLEDGE ADVENTURE, INC..... The Company is engaged in the design,
development and distribution of interactive,
multimedia computer software for the children's
educational market. The Company's products have
been designed to encourage learning through
exploration, discovery and creativity rather
than through highly structured exercises and
games. The
1
<PAGE>
Company's award-winning JumpStart Series offers
full-year curriculum software products designed
for toddlers, preschool, kindergarten, first
grade, second grade, third grade and fourth
grade children. Each of the products, from
JumpStart Toddlers to JumpStart Fourth Grade,
blends an entire grade level of an appropriate
curriculum with puzzles and games that include
reading, math, language arts, science, art and
music. The Company currently expects that sales
of the JumpStart Series will account for more
than 70% of its revenue in the fiscal year
ending March 31, 1997. As a result, the
Company's future operating results are
significantly dependent upon continued market
acceptance of the JumpStart Series. The
Company's Cartoon Makers Series allows children
to create their own cartoons using the action
animations, artwork, sound effects and music
from top-rated television cartoon programs.
Characters available in the Cartoon Makers
Series include Batman & Robin, Spider-Man and X-
Men. The Company has products that allow
children to participate through interactive
technology in the movie-making process. Magic
Theatre allows children to create, narrate and
animate their own computer movies. The Company
recently introduced a multimedia product, Steven
Spielberg's Director's Chair, that allows the
user to personally direct and produce any number
of unique film sequences, receiving advice
throughout the process from writers, cameramen,
directors and producers from the film industry.
The Company's executive offices are located at
1311 Grand Central Avenue, Glendale, California
91201, and its telephone number is (818) 246-
4400. See "Information Concerning the Company."
KA ACQUISITION CORP.......... Merger Sub was incorporated in the State of
Delaware in October 1996 in order to effect the
Merger. CUC International currently owns all of
the outstanding capital stock of Merger Sub.
Merger Sub has no business activities other than
those incident to its formation and the
transactions contemplated by the Merger
Agreement.
SPECIAL MEETING OF STOCKHOLDERS
TIME, DATE AND PLACE......... The Meeting will be held at 9:00 a.m., local
time, on Friday, January 31, 1997, at the
principal executive offices of the Company
located at 1311 Grand Central Avenue, Glendale,
CA 91201. See "The Meeting--General."
MATTERS TO BE CONSIDERED AT The purpose of the Meeting is to consider and
THE MEETING.................. vote upon (i) a proposal to approve and adopt
the Merger Agreement, (ii) a proposal to approve
the Charter Clarification and (iii) such other
business as may properly be presented at the
Meeting and any adjournments or postponements
thereof. See "The Meeting--Matters to be
Considered at the Meeting."
2
<PAGE>
RECORD DATE; SHARES ENTITLED Only holders of record of Company Shares at the
TO VOTE...................... close of business on the Record Date are
entitled to notice of and to vote at the
Meeting. As of the Record Date, there were
an aggregate of 9,175,404 shares of Company
Common Stock outstanding and an aggregate of
12,908,940 shares of Company Preferred Stock
outstanding. See "The Meeting--Record Date;
Quorum; Vote Required."
QUORUM; VOTE REQUIRED;
PROXIES..................... The presence, in person or by proxy, of the
holders of more than 50% of the issued and
outstanding shares of capital stock of the
Company entitled to vote at the Meeting is
required to constitute a quorum at the Meeting.
The affirmative votes of the holders of at least
(i) a majority of all of the outstanding shares
of Company Common Stock voting together as a
class with all of the outstanding shares of
Company Preferred Stock, with each share of
Company Preferred Stock being entitled to the
number of votes equal to the number of shares of
Company Common Stock into which such share of
Company Preferred Stock may be converted at such
time, and (ii) 66-2/3% of the outstanding shares
of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred voting
together as a single class (with each such share
of Company Preferred Stock being entitled to the
number of votes equal to the number of shares of
Company Common Stock into which such shares of
Company Preferred Stock may be converted at such
time), provided that in any event each share of
Series D Preferred Stock will be deemed to be
convertible at such time into six shares of
Company Common Stock), are necessary to approve
and adopt the Merger Agreement and the Charter
Clarification. See "The Meeting--Record Date;
Quorum; Vote Required."
Abstentions and failures to vote will have the
practical effect of voting against approval and
adoption of the Merger Agreement and the Charter
Clarification. Company Shares represented by
properly executed proxies received at or prior
to the Meeting that have not been revoked will
be voted at the Meeting in accordance with the
instructions contained therein. Company Shares
represented by properly executed proxies for
which no instruction is provided will be voted
for adoption of the Merger Agreement and the
Charter Clarification. If the Meeting is
postponed or adjourned for any reason, at any
subsequent reconvening of the Meeting, all
proxies will be voted in the same manner as such
proxies would have been voted at the initial
convening of the Meeting (except for any proxies
that theretofore have effectively been revoked
or withdrawn), notwithstanding that they may
have been effectively voted on the same or any
other matter at a previous meeting. See "The
Meeting--Proxies."
3
<PAGE>
PROPOSAL NO. 1--THE MERGER
EFFECT OF THE MERGER......... In the Merger, Merger Sub will be merged with
and into the Company and the Company, as the
surviving corporation in the Merger, will become
a wholly owned subsidiary of CUC International.
See "Proposal No. 1--The Merger--Provisions of
the Merger Agreement--The Merger."
Based upon the equity capitalization of CUC
International and the Company, the stockholders
of the Company, together with the holders of
Company Common Options and Company Preferred
Options, immediately prior to the Effective Time
will own, in the aggregate and on a fully
diluted basis, less than 1.0% of the shares of
CUC Common Stock outstanding immediately after
the Effective Time.
EFFECTIVE TIME............... As soon as practicable after the satisfaction or
waiver of the conditions set forth in the Merger
Agreement, the parties thereto will cause the
Merger to be consummated by filing with the
Secretary of State of the State of Delaware a
certificate of merger with respect to the
Merger. For a description of the conditions to
the Merger, see "Proposal No. 1--The Merger--
Provisions of the Merger Agreement--Conditions
to the Merger."
REASONS FOR THE MERGER....... The Company. Among other things, the Company
Board believes that: (i) the Merger would
provide the Company's stockholders with CUC
Common Stock in a tax-free exchange at a price
for the Company believed by the Company Board to
be fair; (ii) the substantial public float and
trading volume of shares of CUC Common Stock
should provide the Company's stockholders with
liquidity in their investment; (iii) the Merger
affords the Company's stockholders the
opportunity to continue to participate in the
long-term growth and appreciation of the
Company's business through their continued
ownership interest in CUC International; and
(iv) CUC International's substantial domestic
and international direct sales capabilities
should provide an expanded opportunity for
direct distribution of the Company's products
both within the United States and in
international markets. See "Proposal No. 1--The
Merger--Reasons for the Merger--The Company."
4
<PAGE>
CUC International. CUC International believes
that the Merger will, among other things, better
enable CUC International to compete in the
multimedia computing market that both CUC
International and the Company now address
separately. In addition, the Merger is part of
CUC Internationals strategy to derive continued
growth through developing interactive media
channels. Recently, CUC International acquired
Davidson and Sierra in order to, among other
things, strengthen CUC International's ability
to take advantage of the rapidly expanding
personal computer and interactive access
information technology markets and better
position CUC International to diversify its
services by engaging in the development of
educational and entertainment products for the
global personal computer and Internet markets.
See "Proposal No. 1--The Merger--Reasons for the
Merger--CUC International."
AGGREGATE MERGER CONSIDERATION At the Effective Time of the Merger, all Company
Shares that are outstanding immediately prior
thereto (other than shares held by CUC
International, Merger Sub or any other
subsidiary of CUC International, dissenting
shares and Company Shares held in the Company's
treasury) will be converted into the right to
receive, in the aggregate, the sum of (i)
3,416,621 shares of CUC Common Stock, less (ii)
----
the aggregate number of shares of CUC Common
Stock issuable upon the exercise of all CUC
Replacement Options that are issued in the
Merger to the holders of Company Common Options,
less (iii) the aggregate number of shares of CUC
----
Common Stock issuable upon the exercise of all
Preferred Replacement Options that are issued in
the Merger to the holders of Company Preferred
Options, plus (iv) an additional 748.848 shares
----
of CUC Common Stock for each calendar day after
December 1, 1996 and prior to the Closing Date,
in each case subject to the indemnification and
escrow provisions of the Merger Agreement and
the Escrow Agreement. See "Proposal No. 1--The
Merger--Provisions of the Merger Agreement--
Merger Consideration."
EXCHANGE RATIOS FOR COMPANY Each Company Share will be converted in the
SHARES....................... Merger into the right to receive that portion of
the Merger Consideration to which such share is
entitled under, and in accordance with, the
Applicable Charter Provision, as amended by the
Charter Clarification. See "Proposal No. 2--The
Charter Clarification." The Applicable Charter
Provision provides that, in a transaction such
as the Merger, holders of shares of Company
Preferred Stock will be entitled to receive
distributions of "liquidation preferences" with
respect to their respective series of Company
Preferred Stock before any shares of CUC Common
Stock will be allocated to the holders of
Company Common Stock in the Merger. See
"Proposal No. 1--The Merger--Provisions of the
Merger Agreement--Exchange Ratios for Company
Shares" for a more detailed discussion of the
respective liquidation preferences of each
series of Company Preferred Stock.
5
<PAGE>
Each series of Company Preferred Stock is
"participating," which means that in the Merger,
after the issuance of shares of CUC Common Stock
to the holders of each series of Company
Preferred Stock in satisfaction of their
respective liquidation preferences, the
remaining shares of CUC Common Stock issued in
the Merger will be allocated ratably among the
holders of Company Common Stock and Company
Preferred Stock (assuming the conversion of each
series of Company Preferred Stock into shares of
Company Common Stock at the then applicable
conversion rates).
The number of shares of CUC Common Stock to
which each holder of a Company Share is entitled
in the Merger will depend upon the market value
of the CUC Common Stock, and, for the purpose of
satisfying the liquidation preferences of
holders of Company Shares, the shares of CUC
Common Stock to be issued in the Merger will be
valued based upon the closing sales price of CUC
Common Stock as reported on the NYSE on the
Closing Date. See "Proposal No. 2--The Charter
Clarification." To the extent that the market
value of CUC Common Stock is higher on the date
the valuation is determined, fewer shares of CUC
Common Stock will be required to be issued to
the holders of Company Preferred Stock in the
Merger to satisfy their liquidation preferences,
leaving more shares of CUC Common Stock to be
distributed among the holders of Company Common
Stock. Conversely, to the extent that the market
value of CUC Common Stock is lower on the date
the valuation is determined, more shares of CUC
Common Stock will be required to be issued to
the holders of Company Preferred Stock in the
Merger to satisfy their liquidation preferences,
leaving fewer shares of CUC Common Stock to be
distributed among the holders of Company Common
Stock. As a result, fluctuations in the market
price of CUC Common Stock will have a greater
impact, upward or downward, upon the value of
the Merger Consideration to be received by the
holders of Company Common Stock than upon the
value of the Merger Consideration to be received
by the holders of Company Preferred Stock.
In connection with the Merger, in order to
induce the holders of Company Common Stock who
do not hold Company Preferred Stock to vote
their shares in favor of the Merger and not
exercise dissenters' rights, the holders of all
of the outstanding shares of Company Preferred
Stock have irrevocably elected to forego a
portion of their liquidation preferences by
converting a portion of their shares of Company
Preferred Stock into shares of Company Common
Stock as of the Effective Time (as more fully
discussed below, the "Preferred Conversion
Amounts"). The number of shares of Company
Preferred Stock that such holders will convert
in the aggregate will be determined as of the
Effective Time and will be calculated so that
the aggregate value of the Merger Consideration
to be received in the Merger by all holders of
Company Common Stock prior to such conversion
who do not hold Company Preferred Stock will be
increased by $7,943,359 (the "Net Increase
Amount") as a result of such conversion. See
"Proposal No. 1--Provisions of the Merger
Agreement--The Merger--Exchange Ratios for
Company Shares--Exchange Ratio Variables."
6
<PAGE>
The following table sets forth certain exchange ratios in the Merger for each
share of each series of Company Preferred Stock and each share of Company Common
Stock, assuming a range of closing sales prices for CUC Common Stock from as of
the Closing Date:
Merger Consideration Exchange Ratios Per Share(1)
----------------------------------------------
<TABLE>
<CAPTION>
CUC
Closing
Sales Price
as of Closing
Date(2) Series A(2) Series B Series C Series D(3) Series E Series F Common
- ------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$15.00 0.3956 0.2342 0.2342 0.0000 0.4083 0.3845 0.0728
$16.00 0.3794 0.2281 0.2281 0.0000 0.3913 0.3690 0.0768
$17.00 0.3651 0.2227 0.2227 0.0000 0.3763 0.3553 0.0803
$18.00 0.3524 0.2179 0.2179 0.0000 0.3629 0.3431 0.0834
$19.00 0.3411 0.2136 0.2136 0.0000 0.3510 0.3322 0.0862
$20.00 0.3308 0.2098 0.2098 0.0000 0.3403 0.3224 0.0887
$21.00 0.3216 0.2063 0.2063 0.0000 0.3306 0.3136 0.0910
$22.00 0.3131 0.2031 0.2031 0.0000 0.3217 0.3055 0.0930
$23.00 0.3055 0.2002 0.2002 0.0000 0.3137 0.2982 0.0949
$24.00 0.2984 0.1975 0.1975 0.0000 0.3063 0.2914 0.0966
$25.00 0.2919 0.1951 0.1951 0.0000 0.2995 0.2852 0.0982
$26.00 0.2859 0.1928 0.1928 0.0000 0.2932 0.2795 0.0997
$27.00 0.2804 0.1907 0.1907 0.0000 0.2874 0.2742 0.1010
$28.00 0.2753 0.1888 0.1888 0.0000 0.2820 0.2693 0.1023
$29.00 0.2705 0.1870 0.1870 0.0000 0.2770 0.2647 0.1035
$30.00 0.2660 0.1853 0.1853 0.0000 0.2723 0.2604 0.1046
</TABLE>
________________________
(1) The exchange ratios shown above are based upon the total number of Company
Shares outstanding as of the Record Date and the total number of shares of
Company Common Stock issuable upon the exercise of outstanding Company
Common Options and Company Preferred Options as of the Record Date, and
give effect to the Preferred Conversion Amounts described below under
"Proposal No. 1--The Merger--Provisions of the Merger Agreement--Exchange
Ratio for Company Shares." To the extent that the total number of shares of
Company Common Stock is reduced prior to the Effective Time as a result of
repurchases of Company Common Stock or the forfeiture of options in
connection with any employee resignations or terminations, the exchange
ratio per share would be marginally increased. The exchange ratios shown
for each series of Company Preferred Stock reflect the total consideration
to be received (including both the liquidation preference and
"participating" liquidation rights) by each series.
(2) This column represents the assumed closing sales price per share of CUC
Common Stock on the Closing Date. The exchange ratio per share will
increase or decrease, as applicable, as the closing sales price of the CUC
Common Stock on the Closing Date fluctuates between the whole dollar
amounts shown above.
(3) The holder of all of the Series D Preferred Stock outstanding as of the
Record Date has elected to convert all of the outstanding shares of Series
D Preferred Stock immediately prior to the Effective Time. Accordingly, no
shares of Series D Preferred Stock will be outstanding as of the Effective
Time.
The foregoing table is for illustrative purposes only. The actual closing sales
price of CUC Common Stock on the Closing Date may vary from the assumptions set
forth in the tables. Stockholders should not conclude that they will receive the
number of shares of CUC Common Stock indicated in the table, but should use the
table as a means to understand how the exchange ratios for each Company Share
will be determined.
FOR A MORE DETAILED DISCUSSION OF THE EXCHANGE RATIOS THAT WILL APPLY TO THE
COMPANY COMMON STOCK AND EACH SERIES OF COMPANY PREFERRED STOCK IN THE MERGER,
SEE "PROPOSAL NO. 1--THE MERGER--PROVISIONS OF THE MERGER AGREEMENT--EXCHANGE
RATIOS FOR COMPANY SHARES."
7
<PAGE>
TREATMENT OF COMPANY COMMON At the Effective Time, each Company Common
OPTIONS AND COMPANY PREFERRED Option will be assumed by CUC International and
OPTIONS...................... converted into an option (a "CUC Replacement
Option") to acquire, on substantially the same
terms and conditions as were applicable under
such Company Common Option, the same number of
shares of CUC Common Stock as the holder of
such Company Common Option would have been
entitled to receive in the Merger had such
holder exercised such Company Common Option in
full immediately prior to the Effective Time.
In addition, at the Effective Time, each
Company Preferred Option will be assumed by CUC
International and converted into an option (a
"Preferred Replacement Option") to acquire, on
substantially the same terms and conditions as
were applicable under such Company Preferred
Option, the same number of shares of CUC Common
Stock as the holder of such Company Preferred
Option would have been entitled to receive in
the Merger had such holder exercised such
Company Preferred Option in full immediately
prior to the Effective Time. The repurchase
rights of the Company previously applicable to
such Company Common Options (or to Company
Common Stock previously issued pursuant to the
exercise of Company Common Options) will not be
assigned to, or assumed by, CUC International,
Merger Sub or the Company, as the surviving
corporation in the Merger. The Merger Agreement
provides that, with respect to any Company
Common Option to which Section 421 of the Code
applies by reason of its qualification under
Section 422 of the Code ("incentive stock
options"), the option price, the number of
shares purchasable and the terms and conditions
of such option will be determined in order to
permit such option to be treated as an
incentive stock option immediately after the
Effective Time. See "Proposal No. 1--The
Merger--Provisions of the Merger Agreement--
Treatment of Company Common Options."
8
<PAGE>
EXCHANGE OF STOCK CERTIFICATES As soon as practicable but no later than 30
days after the Effective Time, The First
National Bank of Boston (in such capacity, the
"Exchange Agent"), or another bank or trust
company designated by CUC International and
acceptable to the Company, will mail to each
holder of record of a certificate or
certificates which immediately prior to the
Effective Time represented Company Shares (i) a
letter of transmittal (specifying that delivery
will be effected, and risk of loss and title to
the certificates will pass, only upon delivery
of the certificates to the Exchange Agent) and
(ii) instructions for use in effecting the
surrender of such certificates in exchange for
certificates representing shares of CUC Common
Stock. Promptly following the surrender of a
certificate for cancellation to the Exchange
Agent, together with such letter of
transmittal, duly executed, the holder of such
certificate will be entitled to receive in
exchange therefor a certificate representing
that number of whole shares of CUC Common
Stock, less the number of Escrowed Shares to be
withheld from such holder pursuant to the terms
of the Merger Agreement and the Escrow
Agreement, and, if applicable, a check
representing the cash consideration to which
such holder may be entitled on account of a
fractional share of CUC Common Stock, and the
certificate so surrendered will be cancelled.
HOLDERS OF COMPANY SHARES SHOULD NOT SURRENDER
THEIR CERTIFICATES UNTIL THEY RECEIVE SUCH
LETTERS OF TRANSMITTAL OR INSTRUCTIONS AFTER
THE EFFECTIVE TIME. See "Proposal No. 1--The
Merger--Provisions of the Merger Agreement--
Exchange of Stock Certificates."
9
<PAGE>
INDEMNIFICATION BY STOCKHOLDERS AND
OPTIONHOLDERS; ESCROW AGREEMENT.... The Merger Agreement provides that the
Company's stockholders (and all holders of
Parent Replacement Options and Preferred
Replacement Options) will indemnify,
defend and hold harmless, jointly and
severally, CUC International, Merger Sub,
the Company, as the surviving corporation
in the Merger, and certain other persons
against and in respect of any and all
Losses (as defined below) that CUC
International, Merger Sub, the Company and
such other persons actually incur or
suffer in connection with, among other
things, (a) any breach of any of the
representations or warranties made by the
Company in the Merger Agreement or in any
certificate, instrument or other document
delivered pursuant thereto and (b) any
breach of any covenant of the Company
contained in the Merger Agreement. See
"Proposal No. 1--The Merger--Provisions of
the Merger Agreement--Stockholder
Indemnification; Escrow Agreement."
In addition, certificates representing an
aggregate of 9% of the total number of
shares of CUC Common Stock to be issued in
the Merger (the "Escrowed Shares") will be
deposited into an escrow account to be
held by The First National Bank of Boston
(in such capacity, the "Escrow Agent") to
serve as a source of satisfaction of
indemnification claims and to be
distributed pursuant to the terms and
conditions of an escrow agreement among
CUC International, the Company, as the
surviving corporation in the Merger, the
Escrow Committee (as defined below) and
the Escrow Agent, substantially in the
form of Exhibit D to the Merger Agreement
(the "Escrow Agreement"). The Escrowed
Shares, less the number of Escrowed Shares
having a fair market value most nearly
equal to the aggregate amount of all
indemnification claims made (for such
purposes, the fair market value of one
share of Escrowed Shares shall be equal to
the closing sales price of CUC Common
Stock as of the Closing Date), will be
released on the earlier to occur of (i)
the four (4) month anniversary of the
Closing Date and (ii) the date upon which
audited consolidated financial statements
of CUC International, which include the
results of operations of the Company, as
the surviving corporation in the Merger,
are completed and CUC has received a
signed opinion from its independent
auditors with respect to such financial
statements.
The Escrowed Shares will be withheld pro
rata from the number of shares of CUC
Common Stock to be issued in the Merger.
To the extent that CUC International,
Merger Sub, the Company, as the surviving
corporation, or such other persons have
any indemnification claims, it or they may
only seek recourse against the Escrowed
Shares and a portion of the shares of CUC
Common Stock issuable upon the exercise of
the CUC Replacement Options and Preferred
Replacement Options issued in the Merger
in seeking satisfaction of such claims.
See "Proposal No. 1--The Merger--
Provisions of the Merger Agreement--
Stockholder Indemnification; Escrow
Agreement."
10
<PAGE>
OWNERSHIP OF COMPANY SHARES BY
MANAGEMENT AND CERTAIN OTHER
PERSONS.......................... As of the Record Date, the executive
officers and directors of the Company (13 as
a group) owned approximately 47.00% of the
outstanding Company Common Stock and
approximately 73.05% of the outstanding
Company Preferred Stock. Neither CUC
International, Merger Sub nor any of their
subsidiaries, affiliates, directors or
executive officers owns any Company Shares.
OPINION OF THE COMPANY'S FINANCIAL
ADVISOR.......................... Piper Jaffray Inc. ("Piper Jaffray") was
retained by the Company to act as its
financial advisor in connection with the
Merger. Piper Jaffray delivered to the
Company Board on October 4, 1996 its oral
opinion, subsequently confirmed in writing,
to the effect that, as of the date of the
opinion, based on and subject to the
assumptions, factors and limitations set
forth in the opinion and as described
herein, the aggregate consideration to be
received by the holders of capital stock of
the Company as a group in the Merger was
fair, from a financial point of view, to
such stockholders as a group. Piper Jaffray
did not opine as to the appropriateness or
effect of any right or claim of
indemnification against the Escrowed Shares
pursuant to the Merger Agreement and the
Escrow Agreement. The full text of the
written opinion of Piper Jaffray which sets
forth assumptions made, matters considered
and limitations on the review undertaken, is
attached as Annex D to this Proxy
-------
Statement/Prospectus and should be read
carefully and in its entirety. See "Proposal
No. 1--The Merger--Opinion of the Company's
Financial Advisor."
RECOMMENDATION OF THE COMPANY
BOARD WITH RESPECT TO THE
MERGER.......................... After careful review and consideration of
the terms and conditions of the Merger
Agreement, the Company Board has determined
that the Merger and the other transactions
contemplated by the Merger Agreement are in
the best interests of the Company and its
stockholders. The Company Board has approved
the Merger Agreement (and the transactions
contemplated thereby) and recommends that
the holders of Company Shares vote FOR
approval and adoption of the Merger
Agreement.
MANAGEMENT OF THE COMPANY AFTER
THE MERGER...................... The officers of the Company immediately
prior of the Effective Time will be the
officers of the Company, as the surviving
corporation in the Merger, immediately after
the Effective Time, except that Jacques R.
Allewaert, the Chief Financial Officer of
Davidson, will become the Chief Financial
Officer of the Company. Each of Lawrence S.
Gross, the President and Chief Executive
Officer of the Company, and Barton Listick,
Vice President, Development of the Company,
has entered into an employment agreement
with CUC International and the Company,
effective as of the Closing Date. At the
Effective Time, the members of the Board of
Directors of the Company, as the surviving
corporation in the Merger, will be Mr.
Gross, Robert M. Davidson, a Vice Chairman
of CUC International and the Chief Executive
Officer of Davidson, and Mr. Allewaert. See
"Proposal No. 1--The Merger--Management of
the Company after the Merger" and
"--Interests of Certain Persons in the
Merger."
11
<PAGE>
INTERESTS OF CERTAIN PERSONS
IN THE MERGER................ In considering the recommendations of the
Company Board, holders of Company Shares should
consider that certain of the Company's executive
officers and directors have interests in the
Merger that are in addition to and not
necessarily aligned with the interests of the
holders of Company Shares generally. See
"Proposal No. 1--The Merger--Interests of
Certain Persons in the Merger."
CONDITIONS TO THE MERGER..... The obligations of CUC International, Merger Sub
and the Company to consummate the Merger are
subject to the satisfaction of certain
conditions, including, among others, the
accuracy, in all material respects, of the
representations and warranties and the
performance, in all material respects, of the
covenants and obligations of the respective
parties to the Merger Agreement; the approval
and adoption of the Merger Agreement by the
requisite votes of the holders of Company
Shares; no statute, rule, regulation, executive
order, decree, ruling or injunction having been
enacted, entered, promulgated or enforced by a
United States court or United States
governmental authority which prohibits,
restrains, enjoins or restricts the consummation
of the Merger; the Registration Statement having
been declared effective under the Securities Act
and not being subject to any stop order or
proceedings seeking a stop order; CUC
International having received a letter from its
independent auditors, Ernst & Young LLP ("E&Y"),
to the effect that "pooling-of-interests"
accounting (under Accounting Principles Board
Opinion No. 16) is appropriate for the Merger,
provided that the Merger is consummated in
accordance with the terms of the Merger
Agreement, and such letter having not been
withdrawn or modified in any material respect;
the receipt of all requisite consents, approval
and authorizations of non-governmental third
parties; the receipt by the Company of an
opinion from Gunderson Dettmer Stough Villeneuve
Franklin and Hachigian LLP, counsel to the
Company, as to certain tax matters; and the
aggregate number of dissenting shares, if any,
as of the Effective Time not exceeding 9% of the
then outstanding Company Shares on an as-
converted basis.
In addition, the obligations of CUC
International and Merger Sub to effect the
Merger are subject to, among other things, (i)
the approval and adoption of the Charter
Clarification by the requisite votes of the
stockholders of the Company and (ii) the
execution and delivery by (a) (x) all of the
Management Stockholders (as defined below) and
(y) the holders of at least 90% of the
outstanding shares of Company Preferred Stock,
of the Consent and Waiver, a copy of which is
attached as Annex E to this Proxy
-------
Statement/Prospectus, or (b) the conversion of
each share of Company Preferred Stock prior to
the Effective Time into shares of Company Common
Stock. See "Proposal No. 1--The Merger--
Provisions of the Merger Agreement--Conditions
to the Merger."
12
<PAGE>
TERMINATION; FEES AND
EXPENSES..................... The Merger Agreement may be terminated: (i) by
the mutual written consent of the parties
thereto; (ii) by CUC International and Merger
Sub or the Company if the Merger has not been
consummated by March 3, 1997, or as otherwise
extended by the parties (the "Termination
Date"); (iii) by the Company if CUC
International or Merger Sub breaches its
representations, warranties, covenants and
agreements or the Company's stockholders fail to
vote in favor of the Merger; or (iv) by CUC
International and Merger Sub if the Company
breaches its representations, warranties,
covenants and agreements or the Company Board
withdraws, modifies or changes its approval or
recommendation of the Merger, or recommends a
"Third Party Acquisition" (as defined in the
Merger Agreement) or a "Significant Acquisition"
(as defined in the Merger Agreement), or the
Companys stockholders fail to vote in favor of
the Merger. See "Proposal No. 1--The Merger--
Provisions of the Merger Agreement--Termination;
Fees and Expenses."
If the Merger Agreement is terminated because
(i) the Company fails to obtain the requisite
stockholder votes to approve the Merger after
convening the Meeting, (ii) there is a breach on
the part of the Company of a representation or
warranty such that a condition of the Merger
cannot be satisfied, (iii) there is a breach by
the Company of its covenants and agreements
having a Material Adverse Effect on the Company
(as defined in the Merger Agreement) or
materially adversely affecting (or materially
delaying) the Merger, and such breach is not
cured within the applicable grace period, or
(iv) the Company Board withdraws, modifies or
changes its approval or recommendation of the
Merger Agreement and the Merger, or recommends a
Third Party Acquisition or a Significant
Acquisition, then the Company will be obligated
to reimburse CUC International and Merger Sub
for their out-of-pocket expenses incurred in
connection with the Merger, up to a maximum of
$250,000.
Alternatively, if the Merger Agreement is
terminated because (i) there is a breach by CUC
International or Merger Sub of any
representation or warranty such that a condition
of the Merger could not be satisfied or (ii)
there is a breach by CUC International or Merger
Sub of any covenant or agreement under the
Merger Agreement having a Material Adverse
Effect on CUC International (as defined in the
Merger Agreement) or materially adversely
affecting (or materially delaying) the Merger,
and such breach is not cured within the
applicable grace period, then CUC International
will reimburse the Company for its out-of-pocket
expenses incurred in connection with the Merger,
up to a maximum of $425,000. See "Proposal
No. 1--The Merger--Provisions of the Merger
Agreement--Termination; Fees and Expenses."
RIGHTS OF DISSENTING
STOCKHOLDERS................. Stockholders of the Company who follow certain
procedures will be entitled, as dissenting
stockholders, to have the "fair value" of their
Company Shares determined by a court and to be
paid in cash therefor. See "Proposal No. 1--The
Merger--Rights of Dissenting Stockholders."
13
<PAGE>
ACCOUNTING TREATMENT......... The Merger is intended to qualify as a "pooling-
of-interests" for accounting and financial
reporting purposes. It is a condition to CUC
International's obligation to consummate the
Merger that CUC International shall have
received a letter from its independent auditors,
E&Y, to the effect that "pooling-of-interests"
accounting (under Accounting Principles Board
Opinion No. 16) is appropriate for the Merger,
provided that the Merger is consummated in
accordance with the terms of the Merger
Agreement, and such letter shall not have been
withdrawn or modified in any material respect.
The Company has agreed to use commercially
reasonable efforts to cause its independent
auditors, Price Waterhouse LLP ("PW"), to
cooperate fully with E&Y in connection with the
delivery to CUC International of such letter
(including, without limitation, delivering to
the Company, CUC International and E&Y a letter,
subject to customary qualifications, to the
effect that "pooling-of-interests" accounting
(under Accounting Principles Board Opinion No.
16) is appropriate for the Merger). See
"Proposal No. 1--The Merger--Accounting
Treatment."
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS............... The Merger is expected to qualify as a
reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). Holders of Company
Preferred Stock and Company Common Stock may,
however, be required to recognize income or gain
with respect to their pro rata portion of the
Net Increase Amount. Stockholders are urged to
consult their own tax advisors regarding the tax
consequences of the Merger. See "Proposal No.
1--The Merger--Certain Federal Income Tax
Consequences."
REGULATORY APPROVALS......... CUC International, Merger Sub and the Company
are not aware of any governmental or regulatory
approvals that will be required in order to
consummate the Merger, except for compliance
with applicable federal and state securities
laws and the filing and recording of the
Agreement of Merger required under the Delaware
General Corporation Law (the "DGCL"). See
"Proposal No. 1--The Merger--Regulatory
Approvals."
PROPOSAL NO. 2--CHARTER CLARIFICATION
PURPOSE OF CHARTER
CLARIFICATION................ The purpose of the Charter Clarification is to
amend the Applicable Charter Provision to
clarify that, for purposes of allocating the
Merger Consideration among the holders of
Company Shares, the fair market value of the CUC
Common Stock to be received by such holders in
the Merger will be determined as of the Closing
Date. See "Proposal No. 2--The Charter
Clarification."
The obligations of CUC International and Merger
Sub to effect the Merger are subject to, among
other things, the approval of the Charter
Clarification by the requisite votes of the
stockholders of the Company. See "Proposal
No. 1--The Merger--Provisions of the Merger
Agreement--Conditions to the Merger."
14
<PAGE>
REASONS FOR THE CHARTER
CLARIFICATION................ The Applicable Charter Provision expressly
provides for the distribution among the
stockholders of the Company of the Merger
Consideration, including specific provisions
pursuant to which the Merger Consideration would
be distributed among the stockholders of the
Company based upon the class or series of
capital stock of the Company held by such
stockholders. The date upon which the fair
market value of the Merger Consideration is
determined pursuant to the Applicable Charter
Provision will have an impact on the portion of
the Merger Consideration to be received by the
holders of Company Preferred Stock and,
consequently, on the portion of the Merger
Consideration to be received by the holders of
Company Common Stock. To the extent that the
market value of CUC Common Stock is higher on
the date the valuation is determined, fewer
shares of CUC Common Stock will be required to
be issued to the holders of Company Preferred
Stock in the Merger to satisfy their liquidation
preferences, leaving more shares of CUC Common
Stock to be distributed among the holders of
Company Common Stock. Conversely, to the extent
that the market value of CUC Common Stock is
lower on the date the valuation is determined,
more shares of CUC Common Stock will be required
to be issued to the holders of Company Preferred
Stock in the Merger to satisfy their liquidation
preferences, leaving fewer shares (or, in the
extreme, no shares) of CUC Common Stock to be
distributed among the holders of Company Common
Stock.
The Applicable Charter Provision is not entirely
clear regarding when the Merger Consideration
should be valued. The Company Board believes the
Applicable Charter Provision means, and the
Charter Clarification amends the Applicable
Charter Provision to clarify that the Applicable
Charter Provision means that the fair market
value of CUC Common Stock is to be computed as
of the Closing Date for purposes of allocating
the Merger Consideration among the holders of
Company Shares. See "Proposal No. 2--The Charter
Clarification."
RECOMMENDATION OF THE COMPANY
BOARD WITH RESPECT TO THE
CHARTER CLARIFICATION......... The Company Board has determined that the
Charter Clarification is in the best interests
of the Company and its stockholders. The Company
Board has approved the Charter Clarification and
recommends that holders of Company Shares vote
FOR approval of the Charter Clarification.
ADDITIONAL INFORMATION
COMPARISON OF STOCKHOLDER
RIGHTS....................... Upon the consummation of the Merger, among other
things, holders of Company Shares will become
stockholders of CUC International. While both
CUC International and the Company are governed
by the DGCL, there may be material differences
between the rights of holders of Company Shares
and the rights of holders of CUC Common Stock
pursuant to the respective charters and bylaws
of CUC International and the Company. See
"Certain Additional Information Concerning CUC
International and the Company--Comparison of
Stockholder Rights."
15
<PAGE>
RISK FACTORS
In determining how to vote their Company Shares at the Meeting, holders of
such shares should carefully consider all of the information contained in this
Proxy Statement/Prospectus and, in particular, the factors discussed below:
FIXED NUMBER OF SHARES OF CUC
COMMON STOCK................. Under the terms of the Merger Agreement, all of
the Company Shares outstanding immediately prior
to the Effective Time will be converted into the
right to receive a fixed number of shares of CUC
Common Stock. CUC Common Stock is traded on the
NYSE under the symbol "CU." The closing sales
price of CUC Common Stock as reported on the
NYSE was $24.00 on December 30, 1996 (the latest
practicable date preceding the mailing of this
Proxy Statement/Prospectus for which such prices
were available). Because the market price of
shares of CUC Common Stock is inherently subject
to fluctuation, the aggregate value of the
Merger Consideration to be received by the
Company's stockholders in the Merger is subject
to fluctuation. The Merger Agreement does not
contain any minimum or maximum price protection
provisions. Given that the holders of Company
Preferred Stock are entitled to receive a fixed
liquidation preference per share (in addition to
their "participating" liquidation rights) and
because the Merger Consideration will not be
valued until the Closing Date for the purpose of
allocating the Merger Consideration among the
Company's stockholders, fluctuations in the
market price for CUC Common Stock prior to the
Closing Date will have an impact upon the
relative portion of the Merger Consideration to
be received by holders of Company Common Stock
and Company Preferred Stock. See "Proposal
No. 1--The Merger--Provisions of the Merger
Agreement--Exchange Ratios for Company Shares"
and "Proposal No. 2--The Charter Clarification."
16
<PAGE>
ESCROWED SHARES.............. The Merger Agreement provides that the Escrowed
Shares will be deposited into an escrow account
with the Escrow Agent to serve as a source of
satisfaction of indemnification claims and to be
distributed pursuant to the terms and conditions
of the Escrow Agreement. The Escrowed Shares
will be withheld pro rata from the number of
shares of CUC Common Stock to be issued in the
Merger. To the extent that CUC International,
Merger Sub, the Company, as the surviving
corporation, or such other persons have any
indemnification claims, it or they may seek
recourse against the Escrowed Shares and a
portion of the shares of CUC Common Stock
issuable upon the exercise of CUC Replacement
Options and the Preferred Replacement Options
issued in the Merger in seeking satisfaction of
such claims. To the extent that CUC
International, Merger Sub, the Company, as the
surviving corporation, or any other indemnified
party successfully asserts an indemnification
claim in an amount in excess of the value of the
shares of CUC Common Stock held in the escrow
account (such value being determined as of the
Closing Date), the shares of CUC Common Stock
would not be released to the Company's
stockholders but would be cancelled and, as a
result, such shares would not be released to the
stockholders. See "Proposal No. 1--The Merger--
Provisions of the Merger Agreement--Stockholder
Indemnification; Escrow Agreement."
EFFECT OF ANTITAKEOVER
PROVISIONS OF DELAWARE LAW AND
CUC INTERNATIONAL'S CHARTER
DOCUMENTS.................... Upon the consummation of the Merger, the
stockholders of the Company will become
stockholders of CUC International. The Restated
Certificate of Incorporation of CUC
International includes what is generally
referred to as a "fair price provision," and CUC
International is subject to the provisions of
Section 203 of the DGCL. In contrast to the
Company, the Board of Directors of CUC
International is divided into three classes,
with each class standing for election once every
three years. Directors of CUC International
cannot be removed without cause, and amendments
to the Certificate of Incorporation and By-Laws
of CUC International cannot be effected, without
the affirmative vote of holders of 80% of the
outstanding shares of CUC Common Stock. These
and other provisions of CUC International's
organizational documents and applicable
provisions of DGCL may have the effect of
delaying, deterring or preventing changes in
control of CUC International or its management.
See "Certain Additional Information Concerning
CUC International and the Company--Comparison of
Stockholder Rights."
17
<PAGE>
SELECTED FINANCIAL DATA OF CUC INTERNATIONAL
The following selected financial data for the five years ended January 31,
1996 are derived from the audited consolidated financial statements of CUC
International. The selected financial data for the nine months ended October
31, 1996 and 1995 are derived from the unaudited interim financial statements of
CUC International. Operating results for the nine months ended October 31, 1996
are not necessarily indicative of the results that may be expected for the
entire year ending January 31, 1997. The following data should be read in
conjunction with the audited consolidated financial statements, the unaudited
interim financial statements and the related notes thereto and the other
financial information, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, incorporated herein by reference
to CUC International's Current Report on Form 8-K dated July 24, 1996 filed with
the Commission on September 17, 1996 (the "September 17, 1996 Form 8-K") and the
CUC International 10-Q.
CUC INTERNATIONAL INC.
(IN THOUSANDS, EXCEPT FOR PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
------------------------------------------------------------ --------------------------
1996(b) 1995(l) 1994 1993(m) 1992 1996 1995
---------- ---------- ---------- ---------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(A)
Total revenues............... $1,935,232 $1,554,611 $1,278,664 $1,043,311 $904,052 $1,673,426 $1,389,263
Income from continuing
operations before income
taxes....................... 235,312(c) 256,931(f) 198,319 117,434 100,896(g) 129,512(e) 132,503(k)
Income from continuing
operations.................. 144,975(c) 162,057(f) 124,705 80,239 70,479(g) 74,573(e) 79,335(k)
Income per common share from
continuing operations(d).... $ .37(c) $ .43(f) $ .34 $ .24 $ .24(g) $ .19(e) $ .20(e)
Cash dividends per common
share(i).................... $ .01 $ .01 $ .01 $ .01 $ .01 $ .01 $ .01
========== ========== ========== ========== ======== ========== ==========
Weighted average number of
common and dilutive common
equivalent shares
outstanding(d).............. 392,208 379,263 365,915 340,712 288,162 401,854 391,290
========== ========== ========== ========== ======== ========== ==========
BALANCE SHEET DATA(A)
Total assets................. $2,068,196 $1,772,122 $1,199,805 $1,032,269 $814,961 $2,262,107
Long-term obligations(h)..... 6,481 22,872 24,235 30,091 16,336 7,333
Zero-coupon convertible notes 14,410 15,046 22,176 37,295 69,228
Convertible debt............. 23,389 34,634 -- -- -- 23,457
Stockholders' equity......... 1,002,523(j) 826,083 558,181 389,461 235,675 1,174,409(e)
Working capital.............. 759,271 523,996 298,230 147,475 167,394 868,757
</TABLE>
- ----------------------
(a) During the nine months ended October 31, 1996, CUC International acquired
Davidson, Sierra and Ideon. These acquisitions were accounted for in
accordance with the "pooling-of-interests" method. Accordingly, all
financial data has been restated for all prior periods to include Davidson,
Sierra and Ideon. See "Information Concerning CUC International--Recent
Developments."
18
<PAGE>
(b) During the fiscal year ended January 31, 1996, CUC International acquired
Welcome Wagon International, Inc., CUC Europe Limited and Credit Card
Sentinel, and Ideon acquired National Leisure Group, Inc. These
acquisitions were accounted for in accordance with the purchase method and,
accordingly, have been included in CUC International's results of
operations from the respective dates of acquisition. The results of
operations of these acquired entities for the periods prior to their
acquisition were not significant to the historical financial statements of
CUC International.
(c) During fiscal 1996, Ideon recorded pre-tax charges of $43.8 million related
to the abandonment of certain new product development efforts and the
restructuring of its SafeCard division and its corporate infrastructure.
(d) Adjusted to give effect to the three-for-two stock split effected on
October 21, 1996 for holders of record of CUC Common Stock on October 7,
1996.
(e) Includes provisions for costs incurred in connection with the acquisitions
of Davidson, Sierra and Ideon. The charges aggregated $175.8 million
($114.6 million or $.29 per common share after-tax effect). Such costs in
connection with the Davidson Acquisition and Sierra Acquisition
(approximately $48.6 million) are non-recurring and are comprised primarily
of transaction costs, other professional fees and integration costs. Such
costs associated with the Ideon Acquisition (approximately $127.2 million)
are non-recurring and include integration and transaction costs as well as
a provision relating to certain litigation matters, giving consideration to
CUC International's intended approach to these matters. Most of such
provision is related to these outstanding litigation matters. See Notes 2
and 5 to the unaudited interim financial statements incorporated herein by
reference.
(f) During fiscal 1995, Ideon recorded a pre-tax charge of $7.9 million for
various severance agreements and a lease termination in connection with a
reorganization of its operations and senior management team.
(g) Includes provision for costs incurred in connection with the integration of
the operations of CUC International and Entertainment Publishing Corp.
(acquired during fiscal 1992 in a transaction accounted for in accordance
with the "pooling-of-interests" method) and costs of professional fees and
other expenses related to the merger with Entertainment Publishing Corp.
The charge aggregated $20.7 million ($15 million or $.05 per common share
after-tax effect). Also includes a gain from the sale of an unconsolidated
affiliate of Advance Ross Corporation ("Advance Ross"). The gain
aggregated $11.7 million ($7 million or $.02 per common share after-tax
effect). In addition, includes a pre-tax charge of $17.5 million in
connection with Ideon's relocation of an operations center.
(h) Includes current portion of long-term debt of $1.4 million, $9 million,
$6.3 million, $3.4 million, $1.2 million and $1.4 million at January 31,
1996, 1995, 1994, 1993, 1992 and October 31, 1996, respectively. Excludes
$15.4 million, $11.8 million, $5.5 million, $23.2 million, $26.7 million
and $30.2 million of amounts due under revolving credit facilities at
January 31, 1996, 1995, 1994, 1993, 1992, and October 31, 1996,
respectively, and $6 million due at January 31, 1993 under a note payable
issued in connection with the acquisition of Sally Foster Gift Wrap, LP
("Sally Foster").
(i) Represents cash dividends paid to Ideon common stockholders. No CUC Common
Stock cash dividends have been paid or declared during the five years ended
January 31, 1996 and the nine-month periods ended October 31, 1996 and
1995. However, an insignificant amount of cash dividends were paid in
respect of the common stock of North American Outdoor Group, Inc. ("NAOG")
for the fiscal years ended January 31, 1994, 1993 and 1992.
(j) Effective January 1, 1995, Ideon changed its fiscal year end from October
31 to December 31 (the "Ideon Transition Period"). The Ideon Transition
Period has been excluded from the accompanying supplemental consolidated
statement of income. Ideon's revenues and net loss for the Ideon
Transition Period were $34.7 million and $(49.9) million, respectively. The
net loss for the Ideon Transition Period was principally the result of a
$65.5 million one-time, non-cash, pre-tax charge recorded in connection
with a change in accounting for deferred membership acquisition costs.
(k) Includes Ideon pre-tax charges of $45.0 million related to the abandonment
of certain new product development efforts and the restructuring of its
SafeCard division and its corporate infrastructure. Also includes
marketing and operational costs incurred for Ideon products abandoned of
$52.6 million.
(l) During the fiscal year ended January 31, 1995, CUC International acquired
Essex Corporation ("Essex") and subsidiaries and Ideon acquired Wright
Express Corporation. These acquisitions were accounted for in accordance
with the purchase method and, accordingly, have been included in CUC
Internationals results of operations from the respective dates of
acquisition. The results of operations of these acquired entities for the
periods prior to their acquisition were not significant to the historical
financial statements of CUC International.
(m) During the fiscal year ended January 31, 1993, CUC International acquired
Leaguestar plc and Sally Foster. These acquisitions were accounted for in
accordance with the purchase method and, accordingly, have been included in
CUC International's results of operations from the respective dates of
acquisition. The results of operations of these acquired entities for the
periods prior to their acquisition were not significant to the historical
financial statements of CUC International.
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<PAGE>
MARKET PRICE INFORMATION OF CUC COMMON STOCK AND COMPANY SHARES
CUC INTERNATIONAL
CUC Common Stock is traded on the NYSE under the symbol "CU." The
following table sets forth the high and low closing sales prices for CUC Common
Stock as reported on the NYSE Composite Transactions for the periods indicated:
<TABLE>
<CAPTION>
CUC COMMON STOCK
PRICE RANGE
-----------------
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED:
JANUARY 1995
First Quarter........................... $14.583 $12.000
Second Quarter.......................... 13.583 11.417
Third Quarter........................... 15.417 13.583
Fourth Quarter.......................... 16.083 12.750
JANUARY 1996
First Quarter........................... 18.083 15.417
Second Quarter.......................... 20.750 16.333
Third Quarter........................... 24.250 19.917
Fourth Quarter.......................... 25.333 20.000
FISCAL YEAR ENDING:
JANUARY 1997
First Quarter........................... 26.083 18.667
Second Quarter.......................... 26.250 21.250
Third Quarter........................... 27.328 21.922
Fourth Quarter (through December 30,
1996).................................. 26.875 22.500
</TABLE>
The stock prices set forth above have been adjusted to give retroactive
effect to the 3:2 stock split effected on June 30, 1995 for holders of record of
CUC Common Stock on June 19, 1995, and for the 3:2 stock split effected on
October 21, 1996 for holders of record of CUC Common Stock on October 7, 1996.
The last reported sales price of CUC Common Stock on the NYSE Composite
Transactions on December 30, 1996 was $24.00 per share (the latest practicable
date preceding the mailing of this Proxy Statement/Prospectus for which such
prices were available).
CUC International has not paid any dividends in respect of CUC Common Stock
since its inception, other than an extraordinary dividend of cash and
convertible subordinated debentures distributed to stockholders in connection
with the recapitalization of CUC International effected in fiscal year 1990.
Because the market price of shares of CUC Common Stock is inherently
subject to fluctuation, the exact number and market value of shares of CUC
Common Stock that the holders of Company Shares will receive in the Merger may
increase or decrease prior to the Effective Time. The Company does not have the
right to terminate the Merger Agreement or abandon the Merger if the market
price of shares of CUC Common Stock changes.
THE COMPANY
There is no public market for the Company. In addition, the Company has
not paid any dividends in respect of any Company Shares since its inception.
STOCKHOLDERS OF THE COMPANY ARE ENCOURAGED TO OBTAIN CURRENT QUOTATIONS FOR
SHARES OF CUC COMMON STOCK.
20
<PAGE>
INFORMATION CONCERNING CUC INTERNATIONAL
GENERAL
CUC International is a leading technology-driven, membership-based consumer
services company. CUC International operates its businesses through two
separate business segments, namely the membership-based consumer services
segment and the interactive media segment.
MEMBERSHIP-BASED CONSUMER SERVICES SEGMENT. CUC International's primary
line of business is providing membership-based consumer services, which provide
more than 63.8 million customers worldwide with access to a variety of services,
including home shopping, travel, insurance, automobile, dining, home
improvement, lifestyle club, checking account enhancement, discount program and
other services. CUC International provides such services as individual,
wholesale or discount program memberships ("memberships") and derives its
revenues from these services principally through membership fees. Individual
memberships, whereby members pay directly for services and CUC International
pays the associated marketing costs, include Shoppers Advantage(R), Travelers
Advantage(R), Autovantage(R) and insurance products; individual membership fees
generally range between $10 and $250 per year. Wholesale memberships include
credit card and checking account enhancement packages sold through banks and
credit unions, and insurance products sold through credit unions, for which CUC
International acts as a third-party administrator; fees for these memberships
generally range between $6 and $50 per year. Discount program memberships,
which are sold primarily through fund-raising institutions or merchant-sponsored
or general advertising, include the Entertainment(R) and Gold C(R) coupon book
programs; fees for these memberships generally range from $10 to $50 per year.
CUC International's activities in this area are conducted principally
through its Comp-U-Card division and certain of CUC International's wholly owned
subsidiaries, including FISI, Benefit Consultants, Inc., Interval International
Inc. and Entertainment Publications, Inc.
INTERACTIVE MEDIA SEGMENT. As noted below under "--Recent Developments,"
CUC International recently acquired Davidson and Sierra. Davidson and Sierra
develop, publish, manufacture and distribute high-quality
educational/entertainment (or "edutainment") and personal productivity (or "how
to") interactive multimedia products for home and school use. These products
incorporate characters, themes, sound, graphics, music and speech in ways that
CUC International believes are engaging to the user, and are designed for
multimedia personal computers, including CD-ROM-based personal computer systems,
and selected emerging platforms. Davidsons and Sierras products are offered
through a variety of distribution channels, including specialty retailers, mass
merchandisers, discounters and schools. See "--Recent Developments," set forth
below, for a further description of such acquisitions.
FURTHER INFORMATION. For a more detailed description of the various
businesses of CUC International, see the descriptions set forth in the CUC
International 10-K and the other documents referred to above under
"Incorporation of Certain Documents by Reference" which were previously filed
with the Commission by CUC International.
LOCATION OF EXECUTIVE OFFICES. CUC International's executive offices are
located at 707 Summer Street, Stamford, Connecticut 06901, and its telephone
number is (203) 324-9261.
RECENT DEVELOPMENTS
IDEON ACQUISITION. On August 7, 1996, CUC International acquired all of
the outstanding capital stock of Ideon Group, Inc. ("Ideon") for a purchase
price of approximately $393.0 million (the "Ideon Acquisition"). Pursuant to
the Ideon Acquisition, approximately 16.6 million shares of CUC Common Stock
were issued to the former holders of Ideon common stock. The Ideon Acquisition
was accounted for as a "pooling-of-interests." Ideon is a holding company with
three principal business units: SafeCard Services, Incorporated ("SafeCard"),
Wright Express Corporation ("Wright Express") and National Leisure Group, Inc.
("NLG"). SafeCard, which is
21
<PAGE>
the largest subsidiary of Ideon, is a provider of credit card enhancement and
continuity products and services. Wright Express is a provider of information
processing, information management and financial services to commercial car, van
and truck fleets in the United States. NLG is a provider of vacation travel
packages and cruises directly to consumers in association with established
retailers and warehouse clubs throughout New England, New York and New Jersey
and with credit card issuers and travel club members nationwide.
DAVIDSON ACQUISITION. On July 24, 1996, CUC International acquired all of
the outstanding capital stock of Davidson for a purchase price of approximately
$1.0 billion (the "Davidson Acquisition"). Pursuant to the Davidson
Acquisition, approximately 45.1 million shares of CUC Common Stock were issued
to the former holders of Davidson common stock. The Davidson Acquisition was
accounted for as a "pooling-of-interests." See "--Interactive Media Segment."
SIERRA ACQUISITION. In addition, on July 24, 1996, CUC International
acquired all of the outstanding capital stock of Sierra for a purchase price of
approximately $858.0 million (the "Sierra Acquisition"). Pursuant to the Sierra
Acquisition, approximately 38.4 million shares of CUC Common Stock were issued
to the former holders of Sierra common stock. The Sierra Acquisition was
accounted for as a "pooling-of-interests." See "--Interactive Media Segment."
22
<PAGE>
INFORMATION CONCERNING THE COMPANY
The Company is engaged in the design, development and distribution of
interactive, multimedia computer software for the children's educational market.
The Company's products have been designed to encourage learning through
exploration, discovery and creativity rather than through highly structured
exercises and games. The Company's award-winning JumpStart Series offers full-
year curriculum software products designed for toddlers, preschool,
kindergarten, first grade, second grade, third grade and fourth grade children.
Each of the products, from JumpStart Toddlers to JumpStart Fourth Grade, blends
an entire grade level of an appropriate curriculum with puzzles and games that
include reading, math, language arts, science, art and music. The Company's
Cartoon Makers Series allows children to create their own cartoons using the
action animations, artwork, sound effects and music from top-rated television
cartoon programs. Characters available in the Cartoon Makers Series include
Batman & Robin, Spider-Man and X-Men. The Company has products that allow
children to participate through interactive technology in the movie-making
process. Magic Theatre allows children to create, narrate and animate their own
computer movies. The Company recently introduced a multimedia product, Steven
Spielberg's Director's Chair, that allows the user to personally direct and
produce any number of unique film sequences, receiving advice throughout the
process from writers, cameramen, directors and producers from the film industry.
The Company's award-winning Adventure series, including such titles as 3-D
Dinosaur Adventure, 3-D Body Adventure and Undersea Adventure, provides the user
with focused exploration experiences of the selected topic in a highly
interactive, multi-sensory experience. Other products such as Casper's Brainy
Book and My First Encyclopedia provide rich interactive experiences for children
at the early and pre-reading level.
The Company, through its Internet World Wide Web site (the "Company's Web
site"), has also created on-line resources designed for children. The Company's
Web site offers children the opportunity to explore a variety of multimedia
games and activities and to experience aspects of many of the Company's popular
titles. The Company has made available on its Web site innovative games such as
The Scavenger Hunt, which offers daily, weekly and monthly prizes, as well as a
fully navigable 3-D Knowledge Land world where kids can discover the JumpStart
elementary school campus. These on-line resources are designed to increase
access to the Company's products by providing convenient, cost-effective
distribution and marketing opportunities.
The Company has entered into a variety of commercial relationships with a
number of key publishing and entertainment companies to develop and market its
products and on-line resources. Steven Spielberg has previously collaborated in
the development of certain of the Company's multimedia products. The Company
also has an agreement with Random House to co-develop and jointly distribute
multimedia titles. The Company's relationships with both Mr. Spielberg and
Random House include significant equity investments in the Company. Additional
alliances were formed with Marvel Entertainment Group and DC Comics to develop
and market products based on their popular children's characters resulting in
the Cartoon Makers series. In August 1995, the Company acquired substantially
all of the assets of Fanfare Software, an independent developer of early
learning software. See "Proposal No. 1--The Merger--Interests of Certain Persons
in the Merger--Additional Payments to Barton Listick."
The Company's executive offices are located at 1311 Grand Central Avenue,
Glendale, California 91201, and its telephone number is (818) 246-4400.
23
<PAGE>
THE MEETING
GENERAL
This Proxy Statement/Prospectus and the accompanying proxy card are being
furnished to the holders of Company Shares in connection with the solicitation
of proxies by the Company Board for use at the Special Meeting of stockholders
of the Company and any adjournments or postponements thereof to be held on
January 31, 1997 at 9:00 a.m., local time, at the Company's principal executive
offices located at 1311 Grand Central Avenue, Glendale, California 91201.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, holders of Company Shares will be requested to consider and
vote upon (i) a proposal to approve and adopt the Merger Agreement, (ii) a
proposal to approve the Charter Clarification to clarify that the fair market
value of the Merger Consideration to be received by the holders of Company
Shares in the Merger (for purposes of allocating the Merger Consideration among
the holders of Company Shares) will be determined as of the Closing Date and
(iii) such other business as may properly be presented before the Meeting or any
adjournments or postponements thereof.
RECORD DATE; QUORUM; VOTE REQUIRED
The Company Board has fixed December 24, 1996 as the Record Date.
Accordingly, only holders of record of Company Shares at the close of business
on the Record Date are entitled to notice of and to vote at the Meeting. The
following table sets forth the number of Company Shares outstanding of each
class or series thereof, as of the Record Date.
<TABLE>
<CAPTION>
Issued and Outstanding Company
Class or Series of Capital Stock Shares as of the Record Date
-------------------------------- --------------------------------
<S> <C>
Company Common Stock 9,175,404
Series A Preferred Stock 3,253,754
Series B Preferred Stock 2,764,096
Series C Preferred Stock 3,634,412
Series D Preferred Stock 321,942
Series E Preferred Stock 2,186,053
Series F Preferred Stock 748,683
----------
Total 22,084,344
</TABLE>
As of the Record Date, there were outstanding Company Common Options
to purchase 3,017,526 shares of Company Common Stock and Company Preferred
Options to purchase 275,000 shares of Series A Preferred Stock. As of
the Record Date, there were 25,390,618 shares of Company Common Stock on a
fully diluted basis.
The presence, in person or by proxy, of the holders of more than 50% of the
issued and outstanding capital stock of the Company entitled to vote at the
Meeting is required to constitute a quorum at the Meeting. The affirmative
votes of the holders of at least (i) a majority of all of the outstanding shares
of Company Common Stock voting together as a class with all of the outstanding
shares of Company Preferred Stock, with each share of Company Preferred Stock
being entitled to the number of votes equal to the number of shares of Company
Common Stock into which such share of Company Preferred Stock may be converted
at such time, and (ii) 66-2/3% of the outstanding shares of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock voting together as a single class (with each
such share of Company Preferred Stock being entitled to the number of votes
equal to the number of shares of Company Common Stock into which such shares of
Company Preferred Stock may be converted at such time, provided that
24
<PAGE>
in any event each share of Series D Preferred Stock will be deemed to be
convertible at such time into six shares of Company Common Stock), are necessary
to approve and adopt the Merger Agreement and the Charter Clarification. The
holder of all of the Series D Preferred Stock outstanding as of the Record Date
has elected to convert all of the outstanding shares of Series D Preferred Stock
immediately prior to the Effective Time.
In the event that the aggregate number of dissenting shares, if any, as of
the Effective Time exceeds 9% of the then outstanding Company Shares on an as-
converted basis, CUC International and Merger Sub could elect not to consummate
with the Merger. See "Proposal No. 1--The Merger--Provisions of the Merger
Agreement--Conditions to the Merger."
PROXIES
This Proxy Statement/Prospectus and the accompanying proxy card are being
furnished to the holders of Company Shares in connection with the solicitation
of proxies by and on behalf of the Company Board for use at the Meeting.
Abstentions and failures to vote will have the practical effect of voting
against approval and adoption of the Merger Agreement and the Charter
Clarification. Company Shares represented by properly executed proxies received
at or prior to the Meeting that have not been revoked will be voted at the
Meeting in accordance with the instructions contained therein. Company Shares
represented by properly executed proxies for which no instruction is provided
will be voted for adoption of the Merger Agreement and the Charter
Clarification. If the Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the initial convening of the
Meeting (except for any proxies that theretofore effectively have been revoked
or withdrawn), notwithstanding that they may have been effectively voted on the
same or any other matter at a previous meeting.
Holders of Company Shares are requested to complete, date and sign the
proxy card and return it promptly in the enclosed postage-prepaid envelope. Any
holder of Company Shares who so desires may revoke his or its proxy at any time
prior to the time it is exercised by (i) providing written notice to such effect
to the Secretary of the Company, (ii) duly executing a proxy bearing a date
subsequent to that of a previously furnished proxy or (iii) attending the
Meeting and voting in person. Attendance at the Meeting will not in itself
constitute a revocation of a previously furnished proxy and stockholders who
attend the Meeting in person need not revoke their proxy (if previously
furnished) and vote in person.
If the Meeting is postponed or adjourned for any reason, at any subsequent
reconvening of the Meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the initial convening of the Meeting (except
for any proxies that theretofore effectively have been revoked or withdrawn),
notwithstanding that they may have been effectively voted on the same or any
other matter at a previous meeting.
No other business may be transacted at the Meeting absent the provision of
proper notice in accordance with the Company's Bylaws. If any other matters
properly are presented at the Meeting for consideration, including among other
things, consideration of a motion to adjourn the Meeting to another time and/or
place, the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
The Company will bear the cost of soliciting proxies from the holders of
Company Common Stock, including the cost of preparing and mailing this Proxy
Statement/Prospectus. In addition to solicitation by mail, directors, officers
and employees of the Company may solicit proxies by telephone, facsimile
transmission or otherwise. Such directors, officers and employees of the
Company will not be specially compensated for such solicitation, but may be
reimbursed for out-of-pocket expenses incurred in connection therewith.
IN CONNECTION WITH THE MEETING, HOLDERS OF COMPANY SHARES SHOULD NOT RETURN TO
THE COMPANY ANY STOCK CERTIFICATES WITH THEIR PROXIES.
25
<PAGE>
PROPOSAL NO. 1--THE MERGER
BACKGROUND OF THE MERGER
The timing, terms and conditions of the Merger Agreement are the result of
arm's-length negotiations between representatives of CUC International and the
Company. Set forth below is a summary of the background of these negotiations.
After the Christmas selling season of 1995, it became clear to the Company
Board that obtaining retail shelf space was becoming more difficult and product
development costs were increasing. These trends, combined with the quickening
pace of consumer software industry consolidation, led the Company Board to
conclude that large companies with greater financial resources offered better
opportunities for long-term viability. Therefore, the Company Board decided to
pursue a strategy of allying itself with a well-capitalized company with large
market share in the educational and/or entertainment software industry, strong
product lines and a desire to be a leader in its segment of the software
industry.
In January 1996, the Company Board engaged the investment banking firm of
Piper Jaffray as its exclusive agent to assist the Company in evaluating
possible mergers, acquisitions and direct investments. The Company Board
authorized Piper Jaffray to approach a number of companies in the educational
software industry to determine their level of interest in a possible acquisition
of the Company. Since the educational software industry is relatively small,
Piper Jaffray's approach was to contact key individuals at each of these
companies and present limited financial and market data about the Company to see
if there was an interest in a possible business combination. A number of the
parties expressed interest in discussing a transaction, executed confidentiality
agreements, received certain confidential data and met with senior management of
the Company. However, no negotiations with such parties were entered into at
that time.
At the January 1996 Consumer Electronics Show in Las Vegas, Nevada,
Lawrence S. Gross, President and Chief Executive Officer of the Company, William
T. Gross, the Company's Chairman of the Board, and a representative from Piper
Jaffray met with Kenneth A. Williams and Michael Brochu, Chief Executive Officer
and Chief Operating Officer, respectively, of Sierra, now a wholly owned
subsidiary of CUC International. At that meeting, financial schedules were
reviewed and possible merger scenarios were discussed. A subsequent meeting to
discuss further details was planned for February 14, 1996 at the Piper Jaffray
conference in New York. During the second half of the month of January and the
first half of February 1996 before the Piper Jaffray conference, Lawrence S.
Gross met with two other interested parties and had similar discussions
regarding a possible merger. Then at the Piper Jaffray conference, Mr. Gross
met again with the interested parties, including Mr. Brochu, to discuss such
details.
On February 20, 1996, CUC International announced that it had signed
definitive merger agreements to acquire both Sierra and Davidson. As a result,
further merger discussions with Sierra were suspended.
During the month of May 1996, the Company was contacted by two other
companies who were interested in discussing a possible business combination.
One company was contacted on behalf of the Company by Piper Jaffray, and the
other company contacted Piper Jaffray on its own initiative. Each company
executed confidentiality agreements, received certain confidential data and met
with senior management of the Company. Preliminary negotiations proceeded with
both companies, but the Company discontinued its negotiations with one of the
companies.
At the May 21, 1996 meeting of the Company Board, the president of the
other company made a presentation to the Company Board describing the benefits
to the Company and its stockholders of a possible merger transaction between his
company and the Company. After much discussion, the members of the Company
Board who were present at the meeting voted unanimously in favor of pursuing
further discussions with this company. During the remainder of May and June
1996, representatives of this company and the Company held
26
<PAGE>
several meetings to discuss a merger transaction. Preliminary financial and
legal due diligence followed. Nevertheless, external market conditions during
June and July 1996 caused further actions to be suspended.
By July 1996, CUC International's acquisitions of Sierra and Davidson were
near completion and, at the July 16, 1996 meeting of the Company Board, the
Company Board requested that Piper Jaffray contact Robert M. Davidson, Chairman
and Chief Executive Officer of Davidson and now a Vice Chairman of CUC
International, regarding a potential acquisition of the Company. Later that
day, the Company entered into a confidentiality agreement among itself, Davidson
and CUC International.
Mr. Davidson extended an invitation to Lawrence S. Gross to meet with him
on August 5, 1996 to discuss the possible synergies between CUC International
and the Company and to discuss financial and strategic information regarding the
Company. The meeting was held at Davidson's offices in Torrance, California.
Mr. Davidson gave Mr. Gross a tour of the Davidson facilities and discussed with
him certain financial data of the Company received by Mr. Davidson from Piper
Jaffray.
On August 7, 1996, Mr. Gross met with representatives of another software
company to discuss a possible acquisition of the Company. The meeting was held
at the Company's executive offices and was the third such meeting between the
two companies, the first of which occurred in February 1996. Discussions
regarding a merger with this company regained momentum due to favorable market
conditions and renewed interest on their part in further acquisitions.
Subsequently, a number of meetings took place at the Company's executive
offices between August 9, 1996 and August 14, 1996 between several senior
managers of the Company and several senior managers of Davidson. Representing
the Company were Lawrence S. Gross, William T. Gross, George Lichter, Vice
President of Business Development and Legal Affairs, and Jay Meschel, acting
Chief Financial Officer. Representing CUC International were Mr. Davidson,
Jacques R. Allewaert, the Chief Financial Officer of Davidson, Paula V. Duffy,
Vice President and General Counsel, John R. Sosoka, Chief Technical Officer and
Brooke Abercrombie, Manager of Product Development. At these meetings,
representatives of CUC International and the Company explored the feasibility of
a possible business combination, and representatives of CUC International
commenced technological and financial due diligence with respect to the Company
and its products. During such meetings, more detailed financial, legal and
technical information was provided to CUC International.
On August 14, 1996, representatives of CUC International presented a non-
binding letter of interest to the Company Board containing a summary of the
principal terms of a possible merger of the Company into CUC International or a
subsidiary of CUC International, including a proposed valuation of the Company
of $82.5 million in the aggregate. The letter of interest also provided, among
other things, that the transaction would have to qualify as a tax-free
reorganization and be recorded as a "pooling-of-interests" for accounting
purposes.
Senior management of the Company was also presented with a formal letter of
intent dated August 14, 1996 from the other potential acquiring party with which
the Company met on August 7th. The letter of intent provided for an acquisition
of all of the capital stock of the Company on terms substantially similar to
those contained in CUC International's letter of interest. The proposals
differed, however, with respect to the price offered, the time required for
closing and the registration of the shares of CUC Common Stock to be received by
the Company's stockholders in the transactions.
On August 14, 1996, the Company Board met by telephonic conference,
together with representatives of Piper Jaffray and Gunderson Dettmer Stough
Villenueve Franklin & Hachigian, LLP, the Company's financial advisor and legal
counsel, respectively, to discuss CUC International's proposal and the proposal
submitted by the other potential acquiror. At that meeting, the Company Board
discussed the advantages and disadvantages of each proposal, including
strategic, financial, employee and shareholder issues. As a result of the
Company Board's deliberations, the Company directed Piper Jaffray to continue
negotiating with both parties.
27
<PAGE>
On August 15, 1996, representatives of Piper Jaffray discussed the
proposals with representatives of CUC International and the other potential
acquiring party, respectively. Negotiations proceeded with each bidder
separately and the specific terms of each bidder's proposal were not discussed
with the other.
On August 16, 1996, the Company Board met again by telephonic conference,
together with the Company's legal and financial advisers, to discuss the most
recent proposals of CUC International and the other potential acquiror. The
Company Board discussed the merits of the two proposals, including the relative
stability of the stock of the two potential acquirors, their management teams,
the timing of the proposed transactions, the penetration of the two parties in
the institutional educational software market, the registration of the shares of
the potential acquiror to be issued in the transaction and other diligence
matters regarding the potential acquirors. In particular, the Company Board
focused on the stock price trading histories of both potential acquirors and
noted that, over the long-term, CUC Common Stock had been historically less
volatile. The price proposed by the other potential acquiring party was
nominally higher than that proposed by CUC International, based on the then-
current market price of the stock of such other potential acquiror. However,
the Company Board concluded that, on balance, after considering the terms of
each party's proposal, the proposal by CUC International was more desirable than
the other party's proposal. The Company Board directed Piper Jaffray to proceed
with final negotiations with both bidders. Later that day, after discussions
with representatives of Piper Jaffray, the other potential acquiring company
withdrew its proposal.
Between August 17 and 30, 1996, representatives of the Company and CUC
International held a number of telephonic meetings to discuss further the
structure and terms of a possible merger transaction. The parties decided that
it was in their mutual best interests to enter into a letter of intent that
would set forth more completely the terms and conditions of the merger, and
negotiations then ensued concerning the principal terms thereof, including terms
regarding, among other things, the structure of the merger, the timing of the
valuation of the CUC Common Stock to be issued to the Company's stockholders in
the merger (for purposes of determining the number of shares having a value
equal to $82.5 million), the treatment of Company stock options, indemnification
and escrow provisions, employment and non-competition arrangements with certain
senior management of the Company, the conditions to closing, the conduct of the
Company's business until the closing, the exclusivity of negotiations between
the Company and CUC International, break-up fees and expenses, a possible loan,
accounting and tax issues and other related matters. The parties reiterated
their desire to structure the transaction as a stock-for-stock exchange to be
accounted for as a "pooling-of-interests" in order to provide the Company's
stockholders with the future equity appreciation of CUC Common Stock, to
preserve CUC International's cash position and to maximize the financial
position of CUC International and its subsidiaries.
On August 26, 1996, the Company and CUC International entered into a
confidentiality agreement pursuant to which the Company agreed to keep
confidential certain financial and other information regarding CUC International
furnished to representatives of the Company. From August 26 through August 30,
1996 representatives of the Company continued the Company's due diligence
investigation of CUC International. Generally, this diligence consisted of
reviewing CUC International's publicly available financial and other information
and development strategies as well as meeting with key CUC International
executives to understand its organizational structure.
On August 30, 1996, the Company entered into a letter of intent with CUC
International that provided for, among other things, the delivery of
consideration in the form of CUC Common Stock valued at $82.5 million in the
aggregate (based upon a trading price at a time to be determined), an agreement
by the Company not to solicit offers during a certain period, the reservation
for issuance to employees of the Company of options to purchase CUC Common Stock
and a possible loan to the Company of up to $3.0 million prior to the Closing.
Throughout the month of September 1996 and the first half of October 1996,
representatives of the Company and CUC International and their respective
counsel exchanged drafts of the proposed merger agreement and engaged in
negotiations regarding the terms of the proposed merger agreement and ancillary
agreements. At the same time, representatives of both CUC International and the
Company continued due diligence investigations of one another.
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On September 17, 1996, the Company Board met at the Company's executive
offices, together with the Company's legal and financial advisors, to discuss
the latest draft of the merger agreement and ancillary agreements. Among other
things, the Company Board discussed issues regarding termination dates, fees and
expenses, indemnification and the escrow period. Mr. Davidson also participated
in a portion of this meeting to provide information regarding the proposed
timing of the transaction. The Company Board proposed, and CUC International
subsequently agreed, that the value of CUC Common Stock on September 16, 1996 of
$24.15 would be used to determine the aggregate number of shares of CUC Common
Stock to be issued in the Merger to the stockholders of the Company in the
transaction, and determined to provide for the issuance of a fixed number of
additional shares for each day that passes after December 1, 1996 and prior to
the Closing Date.
At a meeting of the Board of Directors of CUC International held on
September 10, 1996, the Board of Directors of CUC International, by unanimous
vote of all of the directors, approved the Merger Agreement and ancillary
agreements (with such changes thereto as management deemed appropriate) and
authorized management to execute and deliver the Merger Agreement and ancillary
documents and to perform the transactions contemplated thereby.
On October 4, 1996, the Company Board met by telephonic conference,
together with the Company's legal and financial advisors, to consider and vote
upon the proposed transaction (the "October 4th Meeting"). All members of the
Company Board were in attendance at the meeting, other than Messrs. Alberto
Vitale and Jonathan Feiber. At the outset of the October 4th Meeting, the
Company's Chief Executive Officer provided the Company Board with an overview of
the discussions and negotiations that had occurred since the last meeting of the
Company Board and presented management's recommendations that the Merger be
effected pursuant to the terms of the revised merger agreement. The Board asked
questions relating to the proposed transaction, the Merger Agreement and
ancillary agreements, and representatives from the Company's legal counsel
reviewed for the Company Board all of the principal terms as proposed in the
latest draft of the Merger Agreement.
Piper Jaffray then made a financial presentation to the Company Board and
rendered its oral opinion (subsequently confirmed by delivery of a written
opinion dated October 4, 1996) to the effect that, as of such date and based
upon and subject to certain matters stated in such opinion, the consideration to
be received by the holders of capital stock of the Company as a group in the
Merger was fair, from a financial point of view, to the stockholders of the
Company as a group. See "--Opinion of the Company's Financial Advisor." The
fairness opinion and the rationale for extending such opinion were discussed at
that meeting. In addition to the aforementioned presentation and opinion, the
Company Board considered the potential risks and benefits of the proposed
transaction described under "--Reasons for the Merger--The Company."
In considering its fiduciary responsibilities, the Company Board discussed
information regarding the market prices and trading activities in the securities
of CUC International, the management of CUC International and its wholly owned
subsidiaries, the respective technological and competitive positions of the
Company and CUC International, potential synergies that could be achieved
through a possible combination and the availability and desirability of other
alternatives through which similar or greater long-term value or liquidity could
be achieved for the Company's shareholders.
The Company Board then determined that the Merger and the other
transactions contemplated by the Merger Agreement were fair to and in the best
interests of the Company and its stockholders and approved the Merger Agreement
and the transactions contemplated thereby. The Company Board authorized
management to execute and deliver the Merger Agreement and the ancillary
agreements (with such changes thereto as management deemed appropriate) and to
perform the transactions contemplated thereby. The Company Board also
recommended to the Company's stockholders that they vote for approval and
adoption of the Merger Agreement.
During the week of October 7, 1996, representatives of the Company and CUC
International engaged in further negotiations regarding certain provisions of
the most recent drafts of the Merger Agreement and ancillary agreements. On
October 11, 1996, the Merger Agreement was executed and delivered.
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In early December 1996, CUC International and the Company entered into
negotiations to amend certain provisions of the Merger Agreement to, among other
things, clarify the formula for allocating the Merger Consideration between the
Company's stockholders and the holders of Company Common Options and Company
Preferred Options and to revise the treatment of Company Common Options and
Company Preferred Options remaining outstanding and unexercised as of the
Effective Time.
On December 17, 1996, the Company Board met to discuss the Charter
Clarification and the amendments to the Merger Agreement. At such meeting, the
Company Board, by the unanimous vote of all of the directors present, approved
the Charter Clarification and the amendments to the Merger Agreement. On
December 20, 1996, the parties entered into Amendment No. 1 to the Merger
Agreement.
Other than discussions and negotiations relating to, and the execution of,
the Merger Agreement discussed above, and the ancillary documents thereto,
neither CUC International nor the Company knows of any past, present or proposed
material contracts, arrangements, understandings, relationships, negotiations or
transactions in the last five years between the Company and its affiliates and
CUC International and its affiliates.
REASONS FOR THE MERGER
The Company. The Company Board believes that the terms of the Merger are
fair to and in the best interests of the Company and its stockholders, and the
Company Board has approved the Merger Agreement and the transactions
contemplated thereby. In its evaluation, the directors considered a number of
factors, including the following:
. The Merger would provide the Company's stockholders with CUC Common
Stock in a tax-free exchange at a price for the Company believed by the
Company Board to be fair;
. The substantial public float and trading volume of shares of CUC Common
Stock should provide the Company's stockholders with liquidity in their
investment;
. The Merger affords the Company's stockholders the opportunity to
continue to participate in the long-term growth and appreciation of the
Company's business through their continued ownership interest in CUC
International;
. CUC International's substantial domestic and international direct sales
capabilities should provide an expanded opportunity for direct
distribution of the Company's products both within the United States and
in international markets;
. Information with respect to the financial condition and businesses of
CUC International including, among other things, CUC International's
recent and historical stock and earnings performance, the ability of CUC
International to successfully implement its growth strategy, the ability
of CUC International to access capital markets and CUC International's
commitment to the institutional educational software market; and
. The financial presentation and opinion of Piper Jaffray to the effect
that, as of the date of the opinion, based on and subject to the
assumptions, factors and limitations set forth in the opinion and as
described herein, the aggregate consideration to be received by the
holders of capital stock of the Company as a group in the Merger was
fair, from a financial point of view, to such stockholders as a group.
In the course of its deliberations, the Company Board reviewed a number of
additional factors relevant to the Merger, including principally: (i) reports
from management and legal advisors on specific terms of the Merger
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Agreement, the Escrow Agreement, the employment and non-competition agreements
and the ancillary transaction documents described in the Merger Agreement to be
entered into in connection with the Merger; (ii) public information concerning
the financial performance, business operations and prospects of CUC
International presented at meetings of the Company Board; (iii) the process that
had been undertaken by the Company in soliciting indications of interest to
acquire or merge with the Company prior to the commencement of discussions with
CUC International; (iv) the performance of the management of CUC International
and its wholly owned subsidiaries; (v) the potential benefits to be derived from
a combination of Davidson, Sierra and the Company, including potential cost
savings through production efficiencies and selling, general and administrative
cost savings and the enhanced ability to compete in what the Company believes
will be a consolidating and increasingly competitive software industry; (vi) the
favorable results of the due diligence investigation regarding CUC International
performed on behalf of the Company; and (vii) the proposed terms, timing and
structure of the Merger.
The Company Board also considered a number of potentially negative factors
in its deliberations concerning the Merger, including, among other things: (i)
the fact that CUC Common Stock has historically traded at a high multiple of
price to earnings and any decline in future earnings growth could have a
material adverse effect on the trading price of CUC Common Stock; (ii) the
potential volatility in the trading price of CUC Common Stock; and (iii) the
loss of independence which would result from being a wholly owned subsidiary of
CUC International and the resulting loss of the stockholder's ability to realize
fully the benefits of any potential future growth of the Company's business as
an independent entity. The Company Board concluded, however, that the benefits
of the transaction to the Company and its stockholders outweighed the risks
associated with the foregoing factors.
The foregoing discussion of the information and factors considered by the
Company Board is not intended to be exhaustive but is intended to include the
material factors considered by the directors. In view of the wide variety of
factors considered by the Company Board, the directors did not find it practical
to, and did not, quantify or otherwise assign relative weight to the specific
factors considered and individual directors may have ascribed differing weights
to different factors.
CUC International. CUC International has identified several potential
benefits of the Merger, including:
. Changing Nature of Multimedia Computing Market. CUC International
believes that the Merger will better enable CUC International to compete
in the multimedia computing market that both CUC International and the
Company now address separately. Specifically, CUC International will
have greater sales and marketing, product distribution and research and
development resources and broader, more diverse product offerings that
should allow it to realize greater efficiencies in this market. CUC
International further believes that these additional resources and
efficiencies should give it a larger presence in the marketplace, more
complete solutions to both distribution channels and end-users and
expansion of the combined companys product offerings into new markets
and through new channels.
. Enhanced Development of Interactive Media Channels. The Merger is part
of CUC International's strategy to derive continued growth through
developing interactive media channels. Recently, CUC International
acquired Davidson and Sierra in order to, among other things, strengthen
CUC Internationals ability to take advantage of the rapidly expanding
personal computer and interactive access information technology markets
and better position CUC International to diversify its services by
engaging in the development of educational and entertainment products
for the global personal computer and Internet markets. See "Information
Concerning CUC International--Recent Developments."
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY
AFTER CAREFUL REVIEW AND CONSIDERATION OF THE TERMS AND CONDITIONS OF THE
MERGER AGREEMENT, THE COMPANY BOARD HAS DETERMINED THAT THE MERGER (AND THE
OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER
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AGREEMENT) ARE IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. THE
COMPANY BOARD HAS APPROVED THE MERGER AGREEMENT (AND THE TRANSACTIONS
CONTEMPLATED THEREBY) AND RECOMMENDS THAT THE HOLDERS OF COMPANY SHARES VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Piper Jaffray was retained by the Company as of January 15, 1996 to act as
financial advisor to the Company in connection with a possible business
combination involving the Company and, if requested by the Company, to render an
opinion to the Company Board concerning the fairness, from a financial point of
view, of the aggregate consideration to be paid to the stockholders of the
Company as a group in the proposed transaction.
Piper Jaffray delivered to the Company Board on October 4, 1996, its oral
opinion, subsequently confirmed in writing, to the effect that, as of the date
of the opinion, based on and subject to the assumptions, factors and limitations
set forth in the opinion and as described below, the aggregate consideration
proposed to be paid to the holders of capital stock of the Company as a group in
the Merger was fair, from a financial point of view, to such stockholders as a
group. A copy of the opinion letter dated October 4, 1996 (the "Opinion"), is
attached as Annex D to this Proxy Statement/Prospectus and is incorporated
-------
herein by reference. Piper Jaffray has consented to the inclusion of the Opinion
in this Proxy Statement/Prospectus. Holders of capital stock of the Company are
urged to read the attached Opinion in its entirety.
Piper Jaffray provided financial advice to the management of the Company in
connection with the structuring and negotiation of the Merger, but made no
recommendation to the Company Board as to the form or amount of the
consideration to be received by the stockholders of the Company in the Merger,
which was determined through negotiations between the parties to the Merger. The
Opinion is directed to the Company Board and does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote at the Meeting. The Opinion does not address (i) the Company's
underlying business decision to proceed with or effect the Merger or (ii)
whether the consideration proposed to be paid to the holders of capital stock of
the Company is fair from a financial point of view to any particular class of
capital stock of the Company as compared to any other class of capital stock of
the Company or options to purchase capital stock of the Company (which were
assumed to be exercised in full or cancelled prior to the Effective Time).
In arriving at the Opinion, Piper Jaffray reviewed (i) the latest available
draft of the Merger Agreement, (ii) certain information relative to the
business, financial condition and operations of the Company, (iii) certain
internal financial planning information of the Company furnished by management
of the Company, (iv) certain financial and securities data of the Company and
companies deemed similar to the Company or representative of the business sector
in which the Company operates, (v) to the extent publicly available, the
financial terms of certain acquisition transactions, (vi) certain publicly
available information relative to the business, financial condition and
operations of CUC International and (vii) certain publicly available financial
and securities data of CUC International and companies deemed similar to CUC
International or representative of the business sector in which CUC operates.
In addition, Piper Jaffray engaged in discussions with members of management of
CUC International and the Company concerning the respective financial
conditions, current operating results and business outlook of CUC International
and the Company and the plans and business outlook for CUC International
following the Merger.
In delivering the Opinion to the Company Board on October 4, 1996, Piper
Jaffray prepared and delivered to the Company Board certain written materials
containing various analyses and other information material to the Opinion. The
following is a summary of these materials.
Estimated Purchase Price. Piper Jaffray calculated an estimate of the
total purchase price of $91.7 million (the "Estimated Purchase Price") for
the capital stock of the Company based on the closing price of CUC
International's Common Stock on the NYSE on October 3, 1996 of $26.83 (the
last trading day prior to the Opinion) and an aggregate of approximately
3,416,621 shares of CUC Common Stock to be issued to holders of capital
stock of the Company. With the consent of the Company, Piper Jaffray made
no adjustment for, and expressed no opinion concerning, the terms and
conditions of the escrow of CUC Common Stock contemplated by the Merger
Agreement and assumed for purposes of its Opinion
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that the holders of capital stock of the Company would receive all the
shares of CUC Common Stock proposed to be exchanged.
Stock Price Analysis. Piper Jaffray reviewed the stock trading
history of CUC Common Stock and presented data from published analysts'
reports and data concerning relative stock price performance for CUC
International against certain indices and the CUC Comparable Companies (as
defined below).
Comparable Public Company Analyses. Piper Jaffray compared certain
financial information and valuation ratios relating to CUC International
and the Company to corresponding data and ratios from a group of selected
publicly traded companies deemed comparable to CUC International and the
Company.
The comparable companies selected for comparison to CUC International
(the "CUC Comparable Companies") included seven publicly traded personal
services and business services providers with a noncyclical recurring
revenue base and a market capitalization in excess of $1.0 billion. Based
upon the closing sales price for CUC Common Stock of $26.83 on October 3,
1996, this analysis produced multiples of selected valuation data as
follows: market price to latest twelve months (LTM) earnings for the CUC
Comparable Companies ranging from 20.8x to 79.2x, with a mean and median of
35.2x and 26.7x, respectively, and for CUC International of 42.4x; market
price to 1996 calendar earnings estimate for CUC Comparable Companies
ranging from 18.7x to 68.8x, with a mean and median of 30.8x and 24.0x,
respectively, and for CUC International of 38.6x; market price to 1997
calendar earnings estimate for CUC Comparable Companies ranging from 15.7x
to 54.4x, with a mean and median of 25.8x and 20.5x, respectively, and for
CUC International of 30.1x; company value (market capitalization plus debt
less cash) to LTM revenue for CUC Comparable Companies ranging from 2.1x to
12.5x, with a mean and median of 5.1x and 3.5x, respectively, and for CUC
International of 5.1x; company value to LTM operating income for CUC
Comparable Companies ranging from 13.5x to 50.9x, with a mean and median of
22.8x and 18.9x, respectively, and for CUC International of 27.8x.
Earnings estimates were based on publicly available analysts' reports.
The comparable companies selected for comparison to the Company (the
"Company Comparable Companies") included five publicly traded educational
software companies with market capitalizations in excess of $50.0 million.
This analysis produced multiples of selected valuation data as follows:
market capitalization to fiscal 1997 earnings estimate (adjusted for a
March 31 year end) for the Company Comparable Companies ranging from 10.8x
to 71.2x, with a mean and median of 36.4x and 31.9x, respectively, and for
the Company (using the Estimated Purchase Price in lieu of market
capitalization) of 54.1x; market capitalization to forward four quarters
earnings for the Company Comparable Companies ranging from 10.3x to 52.0x,
with a mean and median of 25.4x and 19.7x, respectively, and for the
Company of 36.9x; company value to LTM revenue for the Company Comparable
Companies ranging from 1.9x to 5.4x, with a mean and median of 2.9x and
2.4x, respectively, and for the Company of 4.4x; and company value to
forward four quarters revenues for the Company Comparable Companies ranging
from 1.4x to 3.2x, with a mean and median of 2.1x and 2.0x, respectively,
and for the Company of 3.4x. Earnings estimates for the Company Comparable
Companies were based on publicly available analysts' reports. Company
value for the Company was based on Estimated Purchase Price less cash and
the estimated value of the Company's investment in Worlds, Inc.
Comparable Acquisition Analysis. Piper Jaffray reviewed merger and
acquisition transactions since June 1, 1992 for which information was
publicly available involving target companies in the prepackaged software
business comparable to the Company and transaction values greater than
$10.0 million. This review produced 20 transactions (the "Comparable
Transactions") deemed comparable to the Merger. Piper Jaffray calculated
company value to LTM revenues for the Comparable Transactions ranging from
1.0x to 9.4x, with a mean and median of 3.6x and 3.5x, respectively, and
for the Merger of 4.1x. No other valuation multiple produced meaningful
comparisons due to the Company's history of losses.
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Dilution/Accretion Analysis. Piper Jaffray examined the hypothetical
pro forma effect of the Merger on CUC International's earnings per share
for one quarter ending January 31, 1997 and for the four quarters ending
January 31, 1998, without anticipated synergies and with synergies
anticipated by Company management. In each case, this analysis indicated
no meaningful accretion or dilution. Estimated earnings for CUC
International were based on published analyst reports, and estimated
earnings for the Company were based on internal financial planning data
furnished to Piper Jaffray by management of the Company.
Contribution Analysis. Piper Jaffray also analyzed the expected
contributions of each of CUC International and the Company to revenue,
operating income, pre-tax income and net income of CUC for the quarter
ending January 31, 1997 and the four quarters ending January 31, 1998 based
on the Company's financial planning data and publicly available analysts
reports for CUC International. This analysis indicated that the percentage
ownership of CUC International by the Company stockholders following the
Merger approximated the relative contribution of the Company to revenue,
operating income, pre-tax income and net income of CUC International for
the periods indicated above.
In reaching its conclusion as to the fairness of the aggregate
consideration to be received in the Merger and in its presentation to the
Company Board, Piper Jaffray did not rely on any single analysis or factor
described above, assign relative weights to the analyses or factors considered
by it, or make any conclusions as to how the results of any given analysis,
taken alone, supported its Opinion. The preparation of a fairness opinion is a
complete process and not necessarily susceptible to partial analyses or summary
description. Piper Jaffray believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all factors and analyses, would create a misleading
view of the processes underlying the Opinion. The analyses of Piper Jaffray are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. Analyses
relating to the value of companies do not purport to be appraisals or valuations
or necessarily reflect the price at which companies may actually be sold. No
company or transaction used in any comparable analysis as a comparison is
identical to CUC International, the Company or the Merger. Accordingly, an
analysis of the results is not mathematical; rather, it involves complex
considerations and judgments concerning differences in the various
characteristics of the Comparable Transactions to which the Merger was compared
and in financial and operating characteristics of the CUC Comparable Companies
or the Company Comparable Companies and other factors that could affect the
public trading value of the CUC Comparable Companies or the Company Comparable
Companies to which CUC International and the Company were compared.
For purposes of the Opinion, Piper Jaffray relied upon and assumed the
accuracy, completeness and fairness of the financial and other information made
available to it and did not assume responsibility independently to verify such
information. Piper Jaffray relied upon the assurances of the respective
managements of CUC International and the Company that the information provided
by CUC International and the Company had a reasonable basis and, with respect to
financial planning data of the Company, products and technologies under
development and other business outlook information, reflected the best available
estimates, and that they were not aware of any information or fact that would
make the information provided to Piper Jaffray incomplete or misleading.
Financial planning data of the Company was prepared based on numerous variables
and assumptions that are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions, and actual
results could vary significantly from those set forth in such financial planning
data. Piper Jaffray has assumed no liability for such financial planning data.
Piper Jaffray was not provided access to internal financial planning data of CUC
International. Upon the advice of CUC International and the Company and their
legal and accounting advisors, Piper Jaffray assumed (i) the Merger would be
treated as a "pooling-of-interests" for accounting purposes and (ii) the Merger
would qualify as a reorganization within the meaning of Section 368(a) of the
Code. In arriving at the Opinion, Piper Jaffray did not perform and was not
provided any appraisal or valuation of specific assets or liabilities
(contingent or otherwise) of CUC International or the Company (other than
relative to the Company's investment in Worlds, Inc.) and expressed no opinion
regarding the liquidation value of any entity. Piper Jaffray did not make any
physical inspection of the properties or assets of the Company or CUC
International. No other limitations were imposed by the Company on the scope of
Piper Jaffray's investigation or the procedures to be followed in rendering its
Opinion. Piper Jaffray expressed no opinion as to the price at which
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shares of CUC Common Stock may trade at any future time. The Opinion is based
upon information available to Piper Jaffray and the facts and circumstances as
they existed and were subject to evaluation on the date of the Opinion. Events
occurring after such date could materially affect the assumptions used in
preparing the Opinion.
Piper Jaffray, as a customary part of its investment banking business, is
engaged in the evaluation of businesses and their securities in connection with
mergers and acquisitions, underwritings and other distributions of securities,
private placements and evaluations for estate, corporate and other purposes.
The Company Board selected Piper Jaffray because of its expertise, reputation
and familiarity with the software industry in general and the Company in
particular.
For rendering its services to the Company Board in connection with the
Merger, the Company has agreed to pay Piper Jaffray fees of $200,000 upon
rendering the Opinion, and has agreed to pay a fee of 1.5% of the total
consideration paid in the Merger (net of the Opinion fee) upon consummation of
the Merger. The contingent nature of a portion of these fees may have created a
potential conflict of interest in that the Company would be unlikely to
consummate the Merger unless it had received the Opinion. Whether or not the
Merger is consummated, the Company has agreed to pay the reasonable out-of-
pocket expenses of Piper Jaffray and to indemnify Piper Jaffray against certain
liabilities incurred (including liabilities under the federal securities laws)
in connection with the engagement of Piper Jaffray by the Company.
MANAGEMENT OF THE COMPANY AFTER THE MERGER
The officers of the Company immediately prior to the Effective Time will be
the officers of the Company, as the surviving corporation in the Merger,
immediately after the Effective Time, except that Jacques R. Allewaert, the
Chief Financial Officer of Davidson, will become the Chief Financial Officer of
the Company. Each of Lawrence S. Gross, the President and Chief Executive
Officer of the Company, and Barton Listick, Vice President, Development, of the
Company, has entered into an employment agreement with CUC International and the
Company, effective as of the Closing Date. See "--Interests of Certain Persons
in the Merger--Employment Agreement with Lawrence S. Gross" and "--Employment
Agreement with Barton Listick."
At the Effective Time, the members of the Board of Directors of the
Company, as the surviving corporation, will be Lawrence S. Gross, Robert M.
Davidson, a Vice Chairman of CUC International and the Chief Executive Officer
of Davidson, and Mr. Allewaert.
CONDUCT OF THE BUSINESS OF THE COMPANY AND CUC INTERNATIONAL IF THE MERGER IS
NOT CONSUMMATED
If the Merger is not consummated, it is expected that the business and
operations of the Company will continue to be conducted substantially as they
are currently being conducted, provided that the Loan Agreement will terminate
by its terms. See "--Provisions of the Merger Agreement--Loan Agreement."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Company Board with respect to the
Merger Agreement, holders of Company Shares should be aware that certain
executive officers and employees of the Company have certain interests in the
Merger that are in addition to and not necessarily aligned with the interests of
holders of Company Shares generally. The Company Board has considered these
interests, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
Employment Agreement with Lawrence S. Gross. Lawrence S. Gross, the
President and Chief Executive Officer of the Company and a member of the Company
Board, has entered into an employment agreement with CUC International and the
Company, effective as of the Closing Date. The employment agreement provides
that Mr. Gross will serve as President and Chief Executive Officer of the
Company, and the Company will use its best efforts to maintain Mr. Gross as a
member of the Board of Directors of the Company. The initial term of Mr. Gross'
employment will be for a period of five years, commencing on the Closing Date.
Mr. Gross will receive an annual base salary of $175,000, and will receive an
annual bonus (the "Annual Bonus"), to be awarded by the
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Board of Directors of the Company, of up to 40% of the amount of his base salary
during the applicable year, provided that for 1997 fiscal year, Mr. Gross will
be entitled to receive an annual bonus of $75,000. In addition to the Annual
Bonus, Mr. Gross will be entitled to receive an additional bonus (the
"Additional Bonus") in the aggregate amount of $562,000, payable in ten equal
installments of $56,200 each every six months, commencing on July 1, 1997
continuing to and including February 1, 2002. CUC International will also grant
to Mr. Gross an option to acquire 150,000 shares of CUC Common Stock at an
exercise price equal to the fair market value of CUC Common Stock. During the
term of Mr. Gross' employment agreement, CUC International will maintain at its
expense a term life insurance policy in the amount of $1,000,000 and a
disability income insurance policy in an amount to be determined. The Company
may terminate Mr. Gross' employment at any time after the first year of the
employment term for any reason, with or without "Cause" (as defined therein),
and may terminate Mr. Gross' employment during the first year of the employment
term only for Cause. In the event that the Company terminates Mr. Gross'
employment for any reason other than for Cause, or Mr. Gross terminates his
employment for "Good Reason" (as defined therein), he will be entitled to
receive salary continuation payments for a period of one year following the date
of termination, an Annual Bonus equal to the maximum Annual Bonus payable for
the fiscal year in which such termination occurs, all Additional Bonuses that
have not been previously paid and continued health, life and disability
insurance coverage for one year after termination. Mr. Gross may terminate his
employment at any time for any reason by giving at least 30 days prior written
notice.
Employment Agreement with Barton Listick. Barton Listick, the Vice
President, Development of the Company, has entered into an employment agreement
with CUC International and the Company, effective as of the Closing Date. The
employment agreement provides that Mr. Listick will serve as Vice President of
the JumpStart products division of the Company, as the surviving corporation in
the Merger. The term of Mr. Listick's employment will be for a period of five
years, commencing on the Closing Date; the employment period will continue
thereafter for one-year terms unless either party elects not to commence a new
one-year term. Mr. Listick will receive an annual base salary of $162,500, and
will receive a basic bonus (the "Basic Bonus") in the aggregate amount of
$377,750, payable as follows: (i) $151,000 on February 1, 1997; (ii) $75,550 on
July 1, 1997; (iii) $75,550 on February 1, 1998; and (iv) $75,550 on July 1,
1998. In addition to the Basic Bonus, commencing for the period commencing July
1, 1998, Mr. Listick will be entitled to receive an additional annual bonus
("Additional Annual Bonus"), to be awarded by the Board of Directors of the
Company, of up to 25% of the amount of his base salary during the applicable
year; the Additional Annual Bonus will be prorated for any partial year based
upon the amount of base salary paid during such partial fiscal year. CUC
International will also grant to Mr. Listick an option to acquire 15,000 shares
of CUC Common Stock at an exercise price equal to the fair market value of CUC
Common Stock as of the Closing Date. The Company may terminate Mr. Listick's
employment at any time after the first year of the employment term for any
reason, with or without "Cause" (as defined therein), and may terminate Mr.
Listick's employment during the first year of the employment term only for
Cause. In the event that the Company terminates Mr. Listick's employment for
any reason other than for Cause, or Mr. Gross terminates his employment for
"Good Reason" (as defined therein), he will be entitled to receive salary
continuation payments for a period of six months following the date of
termination, an Additional Annual Bonus equal to the maximum Additional Annual
Bonus payable for the fiscal year in which such termination occurs, all Basic
Bonuses that have not been previously paid and continued health, life and
disability insurance coverage for six months after termination. Mr. Listick may
terminate his employment at any time for any reason by giving at least 30 days
prior written notice.
Non-Competition Agreements with Messrs. Gross and Listick. Lawrence S.
Gross and Barton Listick have entered into identical Non-Competition Agreements
(as defined below), effective as of the Closing Date. The Non-Competition
Agreements provide, among other things, that for the period (the "Covenant
Period") commencing on the Closing Date and ending on the later of (i) one year
from the Closing Date and (ii) either (A) if such person's employment is
terminated by the Company for Cause or if such person voluntarily terminates his
employment with the Company without Good Reason, the date that is six months
following the date of termination, or (B) if such person's employment with the
Company is terminated by the Company other than for Cause or if such person
terminates his employment with the Company with Good Reason, the date of such
termination, such person will not, directly or indirectly, manage, operate or
control, or join or participate in the management, operation or control of, or
be actively participating in any manner with any "Competing Business" (as
defined therein) that is located in or doing business in any counties, cities,
states and countries throughout the world in which the
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Company distributes its products on the Closing Date, either as a general
partner, officer, director, agent, employee, consultant, manager, operator,
trustee or otherwise, but only for so long as CUC International, the Company or
any of their subsidiaries is engaged in any business that is competitive with
the business of the Company as such business is conducted on the Closing Date.
Additional Payments to Barton Listick. Pursuant to an Asset Purchase
Agreement dated as of August 1, 1995, between the Company and Barton Listick,
the Company acquired from Mr. Listick substantially all of the assets of Fanfare
Software, an independent developer of early learning software, including, among
others, the computer software and related materials and technology developed or
being developed by Mr. Listick known as the Broadway engine, and other
technology proposed or intended to be included in the JumpStart Series of
programs, and all related intellectual property. In consideration therefor, the
Company agreed to pay to Mr. Listick a purchase price equal to $1.35 million,
payable in several installments. The Asset Purchase Agreement provides that
upon the occurrence of any "Corporate Transaction," which definition includes
the Merger, the remaining balance of the purchase price will be accelerated and
become due and payable 30 days after the consummation of such Corporate
Transaction. Accordingly, thirty (30) days following the Closing Date, the
Company will be obligated to pay to Mr. Listick the outstanding balance of the
purchase price which, assuming the Closing Date occurs prior to April 1, 1997,
will be $787,500.
Indemnification of Directors and Executive Officers of the Company. The
directors and executive officers of the Company will be entitled to certain
indemnification rights. See "--Provisions of the Merger Agreement--Certain
Covenants--Indemnification of Directors and Executive Officers."
Liquidation Preferences of Company Preferred Stock. The holders of each
series of Company Preferred Stock will be entitled to receive a liquidation
preference on its series of Preferred Stock pursuant to the Applicable Charter
Provision. All of the members of the Company Board either hold shares of
Company Preferred Stock or have been designated to serve on the Company Board by
a holder of Company Preferred Stock. See "--Provisions of the Merger
Agreement--Exchange Ratios for Company Shares."
Acceleration of Company Common Options; Lapse of Repurchase Rights. In
addition, substantially all of the Company Common Options are subject to the
right of the Company to repurchase unvested shares of Company Common Stock that
may be acquired upon the exercise of such Company Common Options. To the extent
that any Company Common Options and Company Preferred Options are subject to the
Company's repurchase rights, such repurchase rights will not be assigned to CUC
International, Merger Sub or the Company, as the surviving corporation in the
Merger. Consequently, in accordance with the terms of the Company Common
Options and Company Preferred Options subject to the Company's repurchase
rights, such repurchase rights will lapse in their entirety, and the Company
Common Options and Company Preferred Options will become fully vested at the
Effective Time. See "--Provisions of the Merger Agreement--Treatment of Company
Common Options and Preferred Options."
CUC Replacement Options. At the Effective Time, each Company Common Option
will be assumed by CUC International and converted into a CUC Replacement Option
to acquire, on substantially the same terms and conditions as were applicable
under such Company Common Option, the same number of shares of CUC Common Stock
as the holder of such Company Common Option would have been entitled to receive
in the Merger had such holder exercised such Company Common Option in full
immediately prior to the Effective Time (assuming, for the purpose of such
calculation, that all outstanding and unexercised Company Common Options and
Company Preferred Options, whether or not then exercisable, were exercised in
full immediately prior to the Effective Time and that, for the purpose of such
calculation, the Merger Consideration equals the sum of the Base Consideration
(as defined below) and the Additional Consideration (as defined below)). In
addition, in the case of any Company Common Option to which Section 421 of the
Code applies by reason of its qualification under Section 422 of the Code (an
"incentive stock option"), the option price, the number of shares purchasable
and the terms and conditions of such option will be determined in order to
permit such option to be treated as an incentive stock option immediately after
the Effective Time.
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In addition, each Company Preferred Option will be assumed by CUC
International and converted into a Preferred Replacement Option to acquire, on
substantially the same terms and conditions as were applicable under such
Company Preferred Option, the same number of shares of CUC Common Stock as the
holder of such Company Preferred Option would have been entitled to receive in
the Merger had such holder exercised such Company Preferred Option in full
immediately prior to the Effective Time. See "--Provisions of the Merger
Agreement--Treatment of Company Common Options and Company Preferred Options."
As of the Record Date, the executive officers and directors of the Company
(13 as a group) held Company Common Options and Company Preferred Options to
purchase up to an aggregate of 404,000 shares of Company Common Stock and
275,000 shares of Company Preferred Stock, respectively. See "Certain Additional
Information Concerning CUC International and the Company--Principal
Stockholders--The Company."
Option Plan. At the Closing, CUC International has agreed to grant to
certain employees of the Company identified by Lawrence S. Gross, President and
Chief Executive Officer of the Company, and agreed upon by CUC International,
options to acquire an aggregate of 450,000 shares of CUC Common Stock under CUC
International's 1992 Employee Stock Option Plan at an exercise price equal to
the closing sales price per share of CUC Common Stock as reported on the NYSE on
the business day immediately preceding the Effective Time. Each CUC Stock
Option will vest over a five year period in accordance with the custom and
practice of grants made by CUC International to its own employees under such
Stock Option Plan. See "--Provisions of the Merger Agreement--Certain
Covenants."
Bonus Pool. As an incentive to cause existing employees of the Company to
remain in the employment of the Company following the Merger, CUC International
will cause the Company, as the surviving corporation in the Merger, to establish
a cash bonus pool of up to $1.16 million that will be available for persons
(other than Lawrence S. Gross and Barton Listick) who are employees of the
Company on the Closing Date and who remain employees of the Company for a
minimum of six months following the Closing Date (the "Remaining Employees").
On July 1, 1997, the Company will make cash bonus awards totaling approximately
20% of the bonus pool in the aggregate to the Remaining Employees, in specific
amounts for each Remaining Employee as determined by the Board of Directors of
the Company (each such Remaining Employee's July 1, 1997 cash bonus being
referred to as his or her "Base Award"). On each of February 1, 1998, July 1,
1998, February 1, 1999 and July 1, 1999, the Company will make cash bonus awards
to each of the Remaining Employees who remains in the employ of the Company as
of such date in an amount equal to each Remaining Employee's Base Award.
See "--Provisions of the Merger Agreement--Certain Covenants."
ACCOUNTING TREATMENT
The Company and CUC International have each agreed that they will not
engage in or take any action that could prevent the Merger from being accounted
for as a "pooling-of-interests" for accounting purposes, and the Company has
agreed to bring to the attention of CUC International, and CUC International has
agreed to bring to the attention of the Company, any actions, or agreements or
understandings, whether written or oral, that could be reasonably likely to
prevent CUC International from accounting for the Merger as a "pooling-of-
interests." CUC International has agreed to use commercially reasonable efforts
to cause its independent auditors, E&Y, to deliver to CUC International a letter
to the effect that "pooling-of-interests" accounting (under Accounting
Principles Board Opinion No. 16) is appropriate for the Merger, provided that
the Merger is closed and consummated in accordance with the terms of the Merger
Agreement. The Company has agreed to use commercially reasonable efforts to
cause its independent auditors, Price Waterhouse LLP ("PW"), to cooperate fully
with E&Y in connection with the delivery to CUC International of such letter
(including, without limitation, delivering to the Company, CUC International and
E&Y a letter, subject to customary qualifications, to the effect that "pooling-
of-interests" accounting (under Accounting Principles Board Opinion No. 16) is
appropriate for the Merger). The Company has also agreed to inform all
Affiliates (as defined below) and other relevant employees as to those actions
that should or should not be taken by such persons so that the Merger will be
accounted for as a "pooling-of-interests."
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Pursuant to the Merger Agreement each person who is an "Affiliate" of the
Company for purposes of Rule 145 promulgated under the Securities Act has
delivered to CUC International a written agreement that such "Affiliate" will
not sell or in any other way reduce such "Affiliate's" risk relative to any
shares of CUC Common Stock received in the Merger (within the meaning of the
Commission's Financial Reporting Release No. , "Codification of Financial
Reporting Policies," (S) 201.01 47 F.R. 21028 (May 17, 1982), until such time as
financial results (including combined sales and net income) covering at least 30
days of post-Effective Time operations have been published. See "Federal
Securities Law Consequences."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are applicable to holders of Company
Shares. This discussion is based on currently existing provisions of the Code,
existing Treasury Regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences to CUC
International, the Company or the Company's stockholders as described herein.
Stockholders of the Company should be aware that this discussion does not
deal with all federal income tax considerations that may be relevant to
particular stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, who are subject to the alternative
minimum tax provisions of the Code, who are foreign persons, who do not hold
their Company Shares as capital assets, who acquired their shares in connection
with stock option or stock purchase plans or in other compensatory transactions
or who receive cash for their Company Shares pursuant to the exercise of their
dissenters' rights under the DGCL or the CGCL. In addition, the following
discussion does not address the tax consequences of the Merger under foreign,
state or local tax laws, nor, except as expressly set forth below, does this
discussion address the tax consequences of any transaction undertaken prior to
or after the Merger, including, without limitation, the tax consequences of
sales, conversions or other dispositions of Company Shares or CUC Common Stock.
ACCORDINGLY, STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT
OF ANY FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND OF ANY CHANGES IN
APPLICABLE LAW.
It is expected that the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code (a Reorganization). Provided that the
Merger does so qualify, the following tax consequences will obtain with respect
to the Merger:
(i) No gain or loss will be recognized by a holder of Company Shares
as a result of the exchange of Company Shares for CUC Common Stock pursuant
to the Merger (except as described below and except to the extent of cash
received in lieu of a fractional share of CUC Common Stock);
(ii) The aggregate tax basis of the CUC Common Stock received by a
holder of Company Shares in the Merger (including any fractional share of
CUC Common Stock not actually received and the Escrowed Shares), except as
described below, will be the same as the aggregate tax basis of the Company
Shares surrendered in exchange therefor; and
(iii) The holding period of the CUC Common Stock received by a holder
of Company Shares in the Merger (including any fractional share of CUC
Common Stock not actually received and the Escrowed Shares), except as
described below, will include the period for which the Company Shares
surrendered in exchange therefor were considered to be held, provided that
the Company Shares so surrendered were held as capital assets at the time
of the Merger.
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP will render
an opinion to the Company Board to the effect that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code. In rendering
its opinion, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP will
rely upon and assume as correct as of the Effective Time, the information
contained in this
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Proxy Statement/Prospectus, and certain representations as to factual matters
made by the Company, CUC International and certain stockholders of the Company.
In addition, such opinion will be subject to certain assumptions, limitations
and qualifications as set forth in such opinion. Any inaccuracy or change with
respect to such information, representations or assumptions, or any past or
future actions by the Company, CUC International or the stockholders of the
Company contrary to such representations or assumptions, could adversely affect
the conclusions reached in such opinion and herein.
The opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP will be based upon the federal income tax laws in effect as of the date of
such opinion, including the Code, applicable Treasury Regulations, published
rulings and administrative practices of the Internal Revenue Service ("IRS") and
court decisions, which are subject to change, possibly with retroactive effect.
The opinion will represent counsel's best legal judgment as to the matters
addressed herein, but will not be binding on the IRS or the courts. Any change
in such authorities might affect the conclusions stated in such opinion and
herein. The parties have not and will not request a ruling from the IRS in
connection with the federal income tax consequences of the Merger. If the IRS
successfully challenges the status of the Merger as a Reorganization, holders of
Company Shares will be treated as if they sold their Company Shares in a taxable
transaction. In such event, each holder of Company Shares would recognize gain
or loss equal to the difference between the holder's tax basis in the Company
Shares surrendered in the Merger and the fair market value, at the Effective
Time, of the CUC Common Stock received in exchange therefor (plus any cash
received for fractional shares). In addition, the IRS may assert that (i)
holders of Company Common Stock should recognize income or gain to the extent of
their pro rata portion of the Net Increase Amount (see "Exchange Ratios for
Company Shares--Exchange Ratio Variables"), which would result in a fair market
value basis and new holding period for the CUC Common Stock attributable to such
portion, and/or (ii) holders of Company Preferred Stock who convert such stock
into Company Common Stock in order to generate the Net Increase Amount should be
treated as having received CUC Common Stock equal in value to their pro rata
share of the Net Increase Amount (thereby decreasing the basis allocable to
other shares of CUC Common Stock received) and as having sold such stock in a
fully taxable transaction for an amount equal to its fair market value, thereby
recognizing the taxable income or gain inherent in such stock. There can be no
assurance that the IRS would not be successful in any such assertion.
REGULATORY APPROVALS
CUC International, Merger Sub and the Company are not aware of any
governmental or regulatory approvals that will be required in order to
consummate the Merger, except for compliance with applicable federal and state
securities laws and the filing and recording of the Agreement of Merger required
under Delaware law.
CERTAIN FEDERAL SECURITIES LAWS CONSEQUENCES
The issuance in the Merger of shares of CUC Common Stock has been
registered under the Securities Act and, therefore, such shares will be freely
transferable, except that any shares of CUC Common Stock received by persons who
are deemed to be "Affiliates" (as such term is defined under the Securities Act)
of the Company prior to the Merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act (or Rule
144 under the Securities Act if such persons are or become Affiliates of CUC
International) or as otherwise permitted under the Securities Act. Persons who
may be deemed to be Affiliates of the Company or CUC International generally
include individuals or entities that directly, or indirectly through one or more
intermediaries, control, are controlled by, or are under common control with,
such party and may include certain officers and directors of such party as well
as principal stockholders of such party. Prior to execution of the Merger
Agreement, certain persons identified by the Company as Affiliates of the
Company have executed a written agreement to the effect, among other things,
that such Affiliate will not sell, pledge, transfer or otherwise dispose of any
shares of CUC Common Stock issued to such Affiliate pursuant to the Merger,
except pursuant to an effective registration statement under the Securities Act,
in compliance with Rule 145 or pursuant to an exemption from the registration
requirements of the Securities Act.
STOCK EXCHANGE LISTING
CUC International has agreed to use its reasonable efforts to cause the
shares of CUC Common Stock to be issued in the Merger to be approved for listing
on the NYSE, subject to official notice of issuance, prior to the Effective
Time. A supplemental application has been filed for the listing of such
additional shares of CUC Common Stock on the NYSE. It is a condition to the
Company's obligation to consummate the Merger that the shares of CUC Common
Stock to be issued in the Merger be authorized for listing on the NYSE upon
official notice of issuance. See--"Provisions of the Merger Agreement--
Conditions to the Merger."
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RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of the Company who do not wish to accept the Merger
Consideration provided for in the Merger Agreement and who follow certain
procedures will be entitled, as dissenting stockholders, to seek an appraisal
of, and be paid the fair cash value for, his or her Company Shares, as
determined by a court. Because the Company's operating facilities are located
in California and the majority of the Company Shares are held of record by
persons having California addresses, the Company is subject to certain
California laws, including those governing the availability of dissenters'
rights, in addition to the comparable provisions of the DGCL. Both the DGCL and
the CGCL provide a statutory dissenters' rights procedure, and the Company's
stockholders may utilize the law of either state in exercising dissenters'
rights.
IN THE EVENT THAT THE AGGREGATE NUMBER OF DISSENTING SHARES, IF ANY, AS OF
THE EFFECTIVE TIME EXCEEDS 9% OF THE THEN OUTSTANDING COMPANY SHARES ON AN AS-
CONVERTED BASIS, CUC INTERNATIONAL AND MERGER SUB COULD ELECT NOT TO CONSUMMATE
THE MERGER. SEE "PROPOSAL NO. 1--THE MERGER--PROVISIONS OF THE MERGER
AGREEMENT--CONDITIONS TO THE MERGER."
Delaware Law
If the Merger Agreement is adopted by the requisite vote of the
stockholders of the Company and is not terminated, any holder of record of
Company Shares who holds such Company Shares from the date of making a demand
for appraisal continuously through the effective date of the Merger and who has
neither voted in favor of the Merger nor consented thereto in writing may, by
complying with Section 262 of the DGCL, dissent from the Merger and be entitled
to have the "fair value" of his or her dissenting shares at the Effective Time
of the Merger determined by the Delaware Court of Chancery (the "Court") and
paid to them by complying with the provisions of Section 262 of the DGCL.
The following is intended as a brief summary of the material provisions of
Section 262 of the DGCL which sets forth the statutory procedures required to be
followed by a stockholder in order to dissent from the Merger and perfect the
stockholder's appraisal rights under the DGCL. THIS SUMMARY DOES NOT PURPORT TO
BE A COMPLETE STATEMENT OF THE PROVISIONS OF DELAWARE LAW RELATING TO THE RIGHTS
OF HOLDERS OF COMPANY SHARES TO AN APPRAISAL OF THE VALUE OF THEIR SHARES, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SECTION 262 OF THE
DGCL WHICH IS ATTACHED AS ANNEX C-1 HERETO. FAILURE TO FOLLOW SUCH PROCEDURES
---------
PRECISELY COULD RESULT IN THE LOSS OF APPRAISAL RIGHTS.
If any holder of record elects to demand appraisal of his or her Company
Shares, such stockholder must satisfy each of the following conditions:
(i) such stockholder must deliver to the Company a written demand for
appraisal of his or her Company Shares before the vote with respect to
the Merger is taken (this written demand for appraisal must be in
addition to and separate from any proxy or vote abstaining from or
against the Merger; voting against or failing to vote for the Merger
by itself does not constitute a demand for appraisal within the
meaning of Section 262); and
(ii) such stockholder must not vote in favor of the Merger (an abstention
or failure to vote will satisfy this requirement, but a vote in favor
of the Merger, by proxy or in person, will constitute a waiver of such
stockholder's appraisal right in respect of the Company Shares so
voted and will nullify any previously filed written demands for
appraisal).
Within ten days after the Effective Time, the Company must give written
notice that the Merger has become effective to each holder of record of Company
Shares who so filed a written demand for appraisal and who
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did not vote in favor of the Merger. Within 120 days after the Effective Time,
but not thereafter, either the Company or any stockholder who has complied with
the requirements of Section 262 of the DGCL may file a petition in the Delaware
Court of Chancery (the "Court") demanding a determination of the fair value of
the Company Shares held by all stockholders entitled to appraisal. The Company
does not presently intend to file such a petition in the event there are
dissenting stockholders. INASMUCH AS THE COMPANY HAS NO OBLIGATION TO FILE SUCH
A PETITION, THE FAILURE OF A STOCKHOLDER TO DO SO WITHIN THE PERIOD SPECIFIED
WOULD NULLIFY SUCH STOCKHOLDER'S PREVIOUSLY WRITTEN DEMAND FOR APPRAISAL. At any
time within 60 days after the Effective Time, any such stockholder who has
demanded appraisal has the right to withdraw the demand and to accept the
payment of the Merger Consideration pursuant to the Merger Agreement.
If any stockholder fails to comply with the above provisions of Section 262
and the Merger becomes effective, the stockholder will be entitled to receive
the Merger Consideration as provided for in the Merger Agreement but will have
no appraisal rights with respect to his or her Company Shares.
All demands for appraisal should be addressed to the Company at Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, 155 Constitution Drive,
Menlo Park, California 94025, Attention: Margaret E. Nibbi, Esq., before the
vote on the Merger Agreement is taken at the Meeting, and should be executed by,
or on behalf of, the holder of record of the Company Shares. The demand must
reasonably inform the Company of the identity of the stockholder and the
intention of the stockholder to demand appraisal of his or her Company Shares.
To be effective, a demand for appraisal must be made by or in the name of
such holder of record of Company Shares, fully and correctly, as the holder's
name appears on his or her stock certificate(s) and cannot be made by the
beneficial owner of Company Shares. The beneficial owner must, in such cases,
have the holder of record of such Company Shares submit the required demand in
respect of such Company Shares.
If Company Shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of a demand for appraisal should be
made in such a capacity, and if the Company Shares are owned of record by more
than one person, as in joint tenancy or tenancy in common, the demand should be
executed by or for all joint owners. An authorized agent, including one for two
or more joint owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, he or she is acting
as agent for the record owner. A record owner, such as a broker, who holds
Company Shares as a nominee for others, may exercise his or her right of
appraisal with respect to the Company Shares held for one or more beneficial
owners, while not exercising this right for other beneficial owners. In such
case, the written demand should state the number of Company Shares as to which
appraisal is sought. Where no number of Company Shares is expressly mentioned,
the demand will be presumed to cover all Company Shares held in the name of such
record owner.
If a petition for appraisal is duly filed by a stockholder and a copy
thereof is delivered to the Company, the Company will then be obligated within
20 days thereafter to provide the Registry of Chancery with a duly verified list
containing the names and addresses of all stockholders who have properly
demanded an appraisal of their Company Shares. After notice, the Court is
empowered to conduct a hearing upon the petition, to determine those
stockholders who have complied with Section 262 of the DGCL and who have become
entitled to appraisal rights. The Court may require the stockholders who have
demanded payment for their Company Shares to submit their stock certificates to
the Register in Chancery for notation thereon of the pendency of the appraisal
proceedings, and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to an appraisal, the Court
will appraise the Company Shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the Merger.
When the value is so determined, the Court will direct the payment by the
Company of such value, with interest thereon accrued during the pendency of the
proceeding if the Court so determines, to the stockholders entitled to receive
the same, upon surrender to the Company by such holders of the certificates
representing such Company Shares. In determining fair value, the Court is
required to take into account all
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relevant factors provable by techniques or methods generally considered
acceptable in the financial community and that are otherwise admissible in
court, excluding only those speculative elements of value that may arise from
the accomplishment or expectation of the Merger. Elements of value which are not
a part of the Company as a going concern as of the date of the Merger would not
be excluded merely because the value arose for reasons related to the Merger.
Stockholders considering seeking appraisal should be aware that the fair
value of their Company Shares determined under Section 262 could be more, the
same or less than the Merger Consideration that they are entitled to receive
pursuant to the Merger Agreement if they do not seek appraisal of their Company
Shares, and that investment banking opinions as to fairness from a financial
point of view are not necessarily opinions as to fair value under Section 262.
Costs of the appraisal proceeding may be imposed upon the parties thereto
(i.e., the Company and the stockholders participating in the appraisal
proceeding) by the Court as the Court deems equitable in the circumstances.
Upon the application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
Company Shares entitled to appraisal.
Any stockholder who had demanded appraisal rights will not, after the
Effective Time, be entitled to vote Company Shares subject to such demand for
any purpose or to receive payments of dividends or any other distribution with
respect to such Company Shares (other than with respect to payment as of a
record date prior to the Effective Time) or to receive the Merger Consideration
pursuant to the Merger Agreement; however, if no petition for appraisal is filed
within 120 days after the Effective Time, or if such stockholder delivers a
written withdrawal of his or her demand for appraisal and an acceptance of the
Merger, either within 60 days after the Effective Time, or thereafter with
written approval of the Company and the Court (if such petition is filed), then
the right of such stockholder to appraisal will cease and such stockholder will
be entitled to receive the Merger Consideration without interest.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. IN VIEW OF
THE COMPLEXITY OF SECTION 262 OF THE DGCL, STOCKHOLDERS OF THE COMPANY WHO ARE
CONSIDERING DISSENTING FROM THE MERGER SHOULD CONSULT THEIR LEGAL ADVISORS.
California Law
If the Merger is approved by the requisite vote of the stockholders of the
Company and is not terminated, any holder of Company Shares may, by complying
with the provisions of Sections 1300 to and including 1312 of the CGCL, require
the Company to purchase for cash at fair market value the Company Shares owned
by such holder which were not voted in favor of the Merger. The fair market
value will be determined as of the day before the first announcement of the
terms of the Merger, excluding any appreciation or depreciation in consequence
of the Merger, but adjusted for any stock split, reverse stock split or share
dividend which becomes effective thereafter.
The following is intended as a brief summary of the material provisions of
Sections 1300 to and including 1312, which sets forth certain procedures for
dissenting from the Merger and demanding statutory appraisal rights under the
CGCL. THIS SUMMARY DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE
PROVISIONS OF CALIFORNIA LAW RELATING TO THE RIGHTS OF HOLDERS OF COMPANY SHARES
TO AN APPRAISAL OF THE VALUE OF THEIR SHARES, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SECTIONS 1300 TO AND INCLUDING 1312 OF THE CGCL
WHICH IS ATTACHED AS ANNEX C-2 HERETO. FAILURE TO FOLLOW SUCH PROCEDURES
---------
PRECISELY COULD RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
43
<PAGE>
For a holder of Company Shares to exercise dissenters' rights, the
procedures to be followed under Chapter 13 of the CGCL include the following
requirements:
(1) The stockholder of record must not have voted in favor of the Merger.
(2) Any such stockholder who does not vote in favor of the Merger, and who
wishes to have his or her Company Shares purchased, must make a
written demand to have the Company purchase such Company Shares for
cash at their fair market value. The demand must include the
information specified below and must be received by the Company not
later than the date of the Meeting. Merely voting or delivering a
proxy directing a vote against the approval of the Merger does not
constitute a demand for purchase. A written demand is essential.
The written demand that the dissenting stockholder must deliver to the
Company shall:
(1) Be made by the person who was the stockholder of record on the Record
Date (or such stockholder's duly authorized representative) and not by
someone who is merely a beneficial owner of the shares and not by a
stockholder who acquired the shares subsequent to the Record Date;
(2) State the number and class of dissenting shares held of record by the
dissenting stockholders; and
(3) Include a demand that the Company purchase his or her Company Shares
at the dollar amount that the stockholder claims to be the fair market
value of such shares on the day before the terms of the Merger were
first announced, excluding any appreciation or depreciation because of
the proposed Merger but adjusted for any stock split, reverse stock
split or share dividend which becomes effective thereafter. The
Company believes that this day is November 4, 1996. A stockholder may
take the position in the written demand that a different date is
applicable. The stockholder's statement of fair market value
constitutes an offer by such dissenting stockholder to sell the shares
to the Company at such price.
The written demand should be delivered to the Company at Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park,
California 94025, Attention: Margaret E. Nibbi, Esq.
A stockholder may not withdraw a demand for payment without the consent of
the Company. Under the terms of the CGCL, a demand by a stockholder is not
effective for any purpose unless it is received by the Company (or any transfer
agent thereof).
Within 10 days after the approval of the Merger by the Company's
stockholders, the Company must notify all holders of dissenting shares of the
approval and must offer all of such stockholders a cash price for their shares
which the Company considers to be the fair market value thereof. The notice
also must contain a brief description of the procedures to be followed under
Chapter 13 of the CGCL to dispute the price offered and attach a copy of the
relevant provisions of the CGCL in order for a stockholder to exercise the right
to have the Company purchase his or her dissenting shares.
Within 30 days after the date on which the notice of the approval of the
Merger is mailed by the Company to holders of dissenting shares, the
stockholder's certificates, representing any shares which the stockholder
demands be purchased, must be submitted to the Company, at its principal office,
or at the office of any transfer agent, to be stamped or endorsed with a
statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed. Upon
subsequent transfer of those shares, the new certificates will be similarly
stamped, together with the name of the original dissenting stockholder.
If the Company and a holder of dissenting shares agree that the shares held
by such stockholder are eligible for dissenters' rights and agree upon the price
of such shares, such holder of dissenting shares is entitled to
44
<PAGE>
receive from the Company the agreed price with interest thereon at the legal
rate on judgments from the date of such agreement. Any agreement fixing the fair
market value of dissenting shares as between the Company and the holders thereof
must be filed with the Secretary of the Company at the address set forth below.
Subject to certain provisions of Section 1306 and Chapter 5 of the CGCL, payment
of the fair market value of the dissenting shares shall be made within 30 days
after the amount has been agreed upon or within 30 days after any statutory or
contractual conditions to the Merger are satisfied, whichever is later, subject
to the surrender of the certificate therefor, unless provided otherwise by
agreement.
If the Company and a holder of dissenting shares fail to agree on either
the fair market value of the shares or on the eligibility of the shares to be
purchased, then either such holder of dissenting shares or the Company may file
a complaint for judicial resolution of the dispute in the superior court of the
proper county. The complaint must be filed within six months after the date on
which the respective notice of approval is mailed to the stockholders. If a
complaint is not filed within six months, the shares will lose their status as
dissenting shares. Two or more holders of dissenting shares may join as
plaintiffs or be joined as defendants in such an action. If the eligibility of
the shares is at issue, the court must first decide that issue. If the fair
market value of the shares is in dispute, the court must determine, or shall
appoint one or more impartial appraisers to assist in its determination of, the
fair market value. The cost of the action will be assessed or apportioned as
the court considers equitable. If, however, the appraised value of the
dissenting shares exceeds the price offered by the Company, the Company must pay
the costs.
Any demands, notices, certificates or other documents required to be
delivered to the Company may be sent to Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, California 94025,
Attention: Margaret E. Nibbi, Esq.
PROVISIONS OF THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE MERGER AGREEMENT,
AS AMENDED, COPIES OF WHICH ARE ATTACHED AS ANNEXES A-1 AND A-2 HERETO. THIS
----------- ---
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER
AGREEMENT WHICH IS INCORPORATED HEREIN BY REFERENCE. CAPITALIZED TERMS USED AND
NOT DEFINED BELOW HAVE THE RESPECTIVE MEANINGS SET FORTH IN THE MERGER
AGREEMENT. BOLDFACE SECTION REFERENCES ARE REFERENCES TO THE APPLICABLE
SECTIONS OF THE MERGER AGREEMENT. ALL STOCKHOLDERS OF THE COMPANY ARE
ENCOURAGED TO READ THE MERGER AGREEMENT CAREFULLY AND IN ITS ENTIRETY.
THE MERGER
The Merger Agreement provides that, subject to the satisfaction or waiver
of the terms and conditions contained therein, including the adoption thereof by
the requisite vote of the stockholders of the Company, Merger Sub will be merged
with and into the Company, and the Company will be the surviving corporation in
the Merger and become a wholly owned subsidiary of CUC International. At the
Effective Time, the Certificate of Incorporation of the Company in effect
immediately prior to such time will become the Certificate of Incorporation of
the Company as the surviving corporation in the Merger, and the Bylaws of the
Company in effect immediately prior to such time will become the Bylaws of the
Company as the surviving corporation in the Merger, in each case until
thereafter amended or restated (SECTIONS 1.1, 1.2 AND 1.5).
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, subject to the satisfaction or waiver
of the terms and conditions contained therein, including the adoption thereof by
the requisite vote of the stockholders of the Company, the Merger will become
effective on the date on which a Certificate of Merger is filed with the
Secretary of State of Delaware or at such time thereafter as provided in the
Certificate of Merger. It is currently expected that the Effective Time will
occur on or about January 31, 1997 (SECTION 1.2). See "--Conditions to the
Merger."
45
<PAGE>
MERGER CONSIDERATION
The Merger Agreement provides that, at the Effective Time of the Merger, by
virtue of the Merger and without any action on the part of the Company, CUC
International, Merger Sub or any holder of Company Shares, all of the Company
Shares will be exchanged for and converted into the right to receive, in the
aggregate:
(i) 3,416,621 shares of CUC Common Stock (the "Base Consideration"), minus
-----
(ii) the aggregate number of shares of CUC Common Stock issuable upon the
exercise of all CUC Replacement Options that are issued in the Merger
to holders of Company Common Options outstanding immediately prior the
Effective Time, minus
-----
(iii) the aggregate number of shares of CUC Common Stock issuable upon the
exercise of all Preferred Replacement Options issued in the Merger to
holders of Company Preferred Options outstanding immediately prior to
the Effective Time, plus
----
(iv) an additional 748.848 shares of CUC Common Stock (the "Additional
Consideration") for each calendar day after December 1, 1996 and prior
to the Closing Date;
in each case subject to the indemnification and escrow provisions contained in
the Merger Agreement and the Escrow Agreement (SECTION 1.8).
EXCHANGE RATIOS FOR COMPANY SHARES
Applicable Charter Provision. Each Company Share will be converted in the
Merger into the right to receive that portion of the Merger Consideration to
which such share is entitled under, and in accordance with, the Applicable
Charter Provision, as amended by the Charter Clarification. The Applicable
Charter Provision provides that, in a transaction such as the Merger, holders of
shares of Company Preferred Stock will be entitled to receive distributions of
"liquidation preferences" with respect to their respective series of Company
Preferred Stock before any shares of CUC Common Stock will be allocated to the
holders of Company Common Stock in the Merger. In addition, each series of
Company Preferred Stock is "participating," which means that, after payment of
the liquidation preferences to the holders of each series of Company Preferred
Stock, the remaining shares of CUC Common Stock issued in the Merger will be
allocated ratably among the holders of Company Common Stock and Company
Preferred Stock (assuming the conversion of each series of Company Preferred
Stock into shares of Company Common Stock at the then applicable conversion
rates). See "Certain Additional Information Concerning CUC International and
the Company--Comparison of Stockholder Rights--Preferred Stock--The Company."
Specifically, the Applicable Charter Provision provides that the holders of
Company Shares are entitled to receive the following amounts (payable in shares
of CUC Common Stock issued in the Merger) in the following order of priority:
(i) First, holders of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock are entitled to receive an amount per share equal to
$0.8885, $2.4213, $6.2123, $5.0319 or $4.6749, respectively, plus any
declared but unpaid dividends on such shares;
(ii) Second, holders of Series A Preferred Stock and Series B Preferred
Stock are entitled to receive amounts per share equal to $3.0656 and
$1.5328, respectively, plus any declared and unpaid dividends on such
shares of Series A Preferred Stock;
(iii) Third, holders of Series A Preferred Stock are entitled to receive
an amount per share equal to $1.777; and
46
<PAGE>
(iv) Finally, the remaining Merger Consideration will be distributed among
the holders of Company Preferred Stock and Company Common Stock pro
rata and on an as-converted basis. See "Certain Additional
Information Concerning CUC International and the Company--Comparison
of Stockholder Rights--Preferred Stock--The Company."
Exchange Ratio Variables. The number of shares of CUC Common Stock to
which each holder of a Company Share is entitled in the Merger will depend upon
the market value of the CUC Common Stock and, for the purpose of satisfying the
liquidation preferences of holders of Company Shares, the shares of CUC Common
Stock to be issued in the Merger will be valued based upon the closing sales
price per share of CUC Common Stock as reported on the NYSE on the Closing Date.
See "Proposal No. 2--The Charter Clarification." To the extent that the market
value of CUC Common Stock is higher on the date the valuation is determined,
fewer shares of CUC Common Stock will be required to be issued to the holders of
Company Preferred Stock in the Merger to satisfy their liquidation preferences,
leaving more shares of CUC Common Stock to be distributed among the holders of
Company Common Stock. Conversely, to the extent that the market value of CUC
Common Stock is lower on the date the valuation is determined, more shares of
CUC Common Stock will be required to be issued to the holders of Company
Preferred Stock in the Merger to satisfy their liquidation preferences, leaving
fewer shares of CUC Common Stock to be distributed among the holders of Company
Common Stock. As a result, fluctuations in the market price of CUC Common Stock
will have a greater impact, upward or downward, upon the value of the Merger
Consideration to be received by the holders of Company Common Stock than upon
the value of the Merger Consideration to be received by the holders of Company
Preferred Stock.
The number of shares of CUC Common Stock to which each holder of a Company
Share is entitled in the Merger also depends on the number of shares of Company
Common Stock and of each series of Company Preferred Stock outstanding as of the
Closing Date (i.e., the number of shares of Company Preferred Stock that are
----
converted into Company Common Stock prior to the Effective Time). To the extent
that holders of Company Preferred Stock convert their shares into Company Common
Stock prior to the Effective Time, they will forego a portion of their
liquidation preference, which will have the effect of marginally increasing the
portion of the Merger Consideration to be received by each holder of Company
Common Stock in the Merger.
The holders of all of the outstanding shares of Company Preferred Stock, in
order to induce the holders of Company Common Stock who do not hold Company
Preferred Stock to vote their shares in favor of the Merger and not exercise
dissenters' rights, have voluntarily irrevocably elected to forego a portion of
their liquidation preferences by converting a portion of their shares of Company
Preferred Stock into shares of Company Common Stock as of the Effective Time.
The number of shares of Company Preferred Stock that such holders will convert
in the aggregate will be determined as of the Effective Time and will be
calculated so that the aggregate value of the Merger Consideration to be
received in the Merger by all holders of Company Common Stock prior to such
conversion who do not hold Company Preferred Stock will be increased by
$7,943,359 (the "Net Increase Amount") as a result of such conversion. The
precise number of shares of each series of Company Preferred Stock that such
holders will convert in order to cause the aggregate value of the Merger
Consideration to be received in the Merger by all such holders of Company Common
Stock to be increased by the Net Increase Amount will depend upon the closing
sales price per share of CUC Common Stock on the Closing Date. See "Certain
Federal Income Tax Consequences."
47
<PAGE>
For informational purposes, the following table illustrates the numbers of
shares of Company Preferred Stock that will be converted into Company Common
Stock (the "Preferred Conversion Amounts") immediately prior to the Effective
Time, based upon a range of closing sales prices for CUC Common Stock on the
Closing Date as indicated below:
Preferred Conversion Amounts
----------------------------
<TABLE>
<CAPTION>
CUC Closing
Sales Prices on
Closing Date(1) Series A Series B Series C Series D(2) Series E Series F Total
- ---------------- ------------- ------------- ------------ ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$15.00 2,448,042 1,787,144 1,531,085 321,942 444,130 163,358 6,695,701
$16.00 2,400,490 1,773,427 1,591,243 321,942 471,580 169,788 6,718,458
$17.00 2,361,229 1,762,103 1,640,913 321,942 475,988 175,076 6,737,251
$18.00 2,328,265 1,752,595 1,682,617 321,942 488,085 179,525 6,753,029
$19.00 2,300,196 1,744,499 1,718,130 321,942 498,386 183,314 6,766,467
$20.00 2,276,007 1,737,522 1,748,735 321,942 507,264 186,580 6,778,050
$21.00 2,254,943 1,731,446 1,775,384 321,942 514,994 182,423 6,788,132
$22.00 2,236,436 1,726,108 1,798,795 321,942 521,785 191,921 6,796,987
$23.00 2,220,049 1,721,381 1,819,529 321,942 527,800 194,133 6,804,834
$24.00 2,205,436 1,717,166 1,838,016 321,942 533,162 196,105 6,811,827
$25.00 2,192,324 1,713,384 1,854,604 321,942 537,974 197,875 6,818,103
$26.00 2,180,494 1,709,971 1,869,572 321,942 542,316 199,472 6,823,767
$27.00 2,169,765 1,706,877 1,883,147 321,942 546,253 200,920 6,828,904
$28.00 2,159,992 1,704,060 1,895,513 321,942 549,841 202,240 6,833,588
$29.00 2,151,052 1,701,480 1,906,825 321,942 553,122 203,447 6,837,868
$30.00 2,142,838 1,699,110 1,917,210 321,942 556,135 204,555 6,841,790
</TABLE>
_____________________
(1) This column represents the assumed closing sales price per share of CUC
Common Stock on the Closing Date. The number of shares of each series of
Company Preferred Stock to be converted will increase or decrease, as
applicable, as the closing sales price of the CUC Common Stock on the
Closing Date fluctuates between the whole dollar amounts shown.
(2) The holder of all of the Series D Preferred Stock outstanding as of the
Record Date has elected to convert all of the outstanding shares of Series
D Preferred Stock immediately prior to the Effective Time. Accordingly, no
shares of Series D Preferred Stock will be outstanding as of the Effective
Time.
Because the holders of all of the outstanding Company Preferred Stock have
irrevocably elected to convert an agreed upon portion of their shares of Company
Preferred Stock into Company Common Stock immediately prior to the Effective
Time, the number of shares of Company Common Stock and Company Preferred Stock
that will be outstanding as of the Effective Time (and the number of shares of
Company Common Stock outstanding on a fully diluted basis) for any assumed
closing sales price for CUC Common Stock on the Closing Date have been fixed
(subject to the possibility that the number shares of Company Common Stock
outstanding on a fully diluted basis could be reduced as a result of the
repurchase of Company Shares or the forfeiture of options in connection with any
employee resignations or terminations). As a result, the exchange ratios per
share in the Merger and the value of the Merger Consideration to be received per
Company Share may be calculated for any assumed closing sales price for CUC
Common Stock on the Closing Date. See "Merger Exchange Ratio Tables," below.
Merger Exchange Ratio Tables. For the purpose of providing holders of
Company Shares with an indication of the approximate number of shares of CUC
Common Stock into which their Company Shares could be converted in the Merger,
the following tables illustrate, first, the exchange ratios for each share of
Company Preferred Stock and Company Common Stock and, second, the corresponding
dollar values of the consideration to be received for each share of Company
Preferred Stock and Company Common Stock assuming a range of closing sales
prices for CUC Common Stock on the Closing Date. The tables set forth the
results based on closing sales prices per share of CUC Common Stock on the
Closing Date ranging from $15 to $30 per share.
48
<PAGE>
THE FOLLOWING TABLES ARE FOR ILLUSTRATIVE PURPOSES ONLY. THE ACTUAL
CLOSING SALES PRICE OF CUC COMMON STOCK ON THE CLOSING DATE MAY VARY FROM THE
ASSUMPTIONS SET FORTH IN THE TABLES. STOCKHOLDERS SHOULD NOT CONCLUDE THAT THEY
WILL RECEIVE THE NUMBER OF SHARES OF CUC COMMON STOCK INDICATED IN THE "MERGER
CONSIDERATION EXCHANGE RATIO PER SHARE" TABLE OR THAT THEY WILL RECEIVE THE
SPECIFIC VALUE PER SHARE INDICATED IN THE "MERGER CONSIDERATION VALUE PER SHARE"
TABLE, BUT SHOULD USE THE TABLES AS A MEANS TO UNDERSTAND HOW THE EXCHANGE RATIO
FOR EACH COMPANY SHARE WILL BE DETERMINED.
Merger Consideration Exchange Ratios Per Share(1)
----------------------------------------------
<TABLE>
<CAPTION>
CUC
Closing
Sales Price
as of Closing
Date(2) Series A Series B Series C Series D(3) Series E Series F Common
- ------------- ---------- ---------- ---------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$15.00 0.3956 0.2342 0.2342 0.0000 0.4083 0.3845 0.0728
$16.00 0.3794 0.2281 0.2281 0.0000 0.3913 0.3690 0.0768
$17.00 0.3651 0.2227 0.2227 0.0000 0.3763 0.3553 0.0803
$18.00 0.3524 0.2179 0.2179 0.0000 0.3629 0.3431 0.0834
$19.00 0.3411 0.2136 0.2136 0.0000 0.3510 0.3322 0.0862
$20.00 0.3308 0.2098 0.2098 0.0000 0.3403 0.3224 0.0887
$21.00 0.3216 0.2063 0.2063 0.0000 0.3306 0.3136 0.0910
$22.00 0.3131 0.2031 0.2031 0.0000 0.3217 0.3055 0.0930
$23.00 0.3055 0.2002 0.2002 0.0000 0.3137 0.2982 0.0949
$24.00 0.2984 0.1975 0.1975 0.0000 0.3063 0.2914 0.0966
$25.00 0.2919 0.1951 0.1951 0.0000 0.2995 0.2852 0.0982
$26.00 0.2859 0.1928 0.1928 0.0000 0.2932 0.2795 0.0997
$27.00 0.2804 0.1907 0.1907 0.0000 0.2874 0.2742 0.1010
$28.00 0.2753 0.1888 0.1888 0.0000 0.2820 0.2693 0.1023
$29.00 0.2705 0.1870 0.1870 0.0000 0.2770 0.2647 0.1035
$30.00 0.2641 0.1853 0.1853 0.0000 0.2723 0.2604 0.1046
</TABLE>
________________________
(1) The exchange ratios shown above are based upon the total number of Company
Shares outstanding as of the Record Date and the total number of
shares of Company Common Stock issuable upon the exercise of outstanding
Company Common Options and Company Preferred Options as of the Record Date,
and gives effect to the Preferred Conversion Amounts described under
"Exchange Ratio Variables," above. To the extent that the total number of
shares of Company Common Stock is reduced prior to the Effective Time as a
result of repurchases of Company Shares or the forfeiture of options in
connection with any employee resignations or terminations, the exchange
ratio per share and the value of the Merger Consideration per share for all
other stockholders of the Company would be marginally increased. The
exchange ratios shown for each series of Company Preferred Stock reflect
the total consideration to be received (including both the liquidation
preference and "participating" liquidation rights) by each series.
(2) This column represents the assumed closing sales price per share of CUC
Common Stock on the Closing Date. The exchange ratio per share will
increase or decrease, as applicable, as the closing sales price of the CUC
Common Stock on the Closing Date fluctuates between the whole dollar
amounts shown above.
(3) The holder of all of the Series D Preferred Stock outstanding as of the
Record Date has irrevocably elected to convert all of the outstanding
shares of Series D Preferred Stock immediately prior to the Effective Time.
Accordingly, no shares of Series D Preferred Stock will be outstanding as
of the Effective Time.
49
<PAGE>
Merger Consideration Value Per Share(1)
------------------------------------
<TABLE>
<CAPTION>
CUC
Closing
Sales Price
as of Closing
Date(2) Series A Series B Series C Series D(3) Series E Series F Common (4)
- ------------- -------- -------- -------- ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$15.00 $5.93 $3.51 $3.51 $0.00 $6.12 $5.77 $1.09
$16.00 6.07 3.65 3.65 0.00 6.26 5.90 1.23
$17.00 6.21 3.79 3.79 0.00 6.40 6.04 1.36
$18.00 6.34 3.92 3.92 0.00 6.53 6.18 1.50
$19.00 6.48 4.06 4.06 0.00 6.67 6.31 1.64
$20.00 6.62 4.20 4.20 0.00 6.81 6.45 1.77
$21.00 6.75 4.33 4.33 0.00 6.94 6.59 1.91
$22.00 6.89 4.47 4.47 0.00 7.08 6.72 2.05
$23.00 7.03 4.60 4.60 0.00 7.21 6.86 2.18
$24.00 7.16 4.74 4.74 0.00 7.35 6.99 2.32
$25.00 7.30 4.88 4.88 0.00 7.49 7.13 2.46
$26.00 7.43 5.01 5.01 0.00 7.62 7.27 2.59
$27.00 7.57 5.15 5.15 0.00 7.76 7.40 2.73
$28.00 7.71 5.29 5.29 0.00 7.90 7.54 2.86
$29.00 7.84 5.42 5.42 0.00 8.03 7.68 3.00
$30.00 7.98 5.56 5.56 0.00 8.17 7.81 3.14
</TABLE>
________________________
(1) The Merger Consideration values per share shown above are based upon the
total number of Company Shares outstanding as of the Record Date and the
total number of shares of Company Common Stock issuable upon the exercise
of outstanding Company Common Options and Company Preferred Options as of
the Record Date, and give effect to the Preferred Conversion Amounts
described under "Exchange Ratio Variables," above. To the extent that the
total number of shares of Company Common Stock is reduced prior to the
Effective Time as a result of repurchases of Company Shares or the
forfeiture of options in connection with any employee resignations or
terminations, the exchange ratio per share and the value of the Merger
Consideration per share for all other stockholders of the Company would be
marginally increased. The Merger Consideration values per share for each
series of Company Preferred Stock reflect the total consideration to be
received (including both the liquidation preference and "participating"
liquidation rights) by each series.
(2) This column represents the assumed closing sales price per share of CUC
Common Stock on the Closing Date. The value of the Merger Consideration to
be received per share will increase or decrease, as applicable, as the
closing sales price of the CUC Common Stock on the Closing Date fluctuates
between the whole dollar amounts shown above.
(3) The holder of all of the Series D Preferred Stock outstanding as of the
Record Date has irrevocably elected to convert all of the outstanding
shares of Series D Preferred Stock immediately prior to the Effective Time.
Accordingly, no shares of Series D Preferred Stock will be outstanding as
of the Effective Time.
(4) As the closing sales price of CUC Common Stock on the Closing Date
increases or decreases, as applicable, the value of the Merger
Consideration per share to be received in the Merger by holders of Company
Common Stock increases or decreases, as applicable, at a higher rate than
the value of the Merger Consideration to be received in the Merger by
holders of Company Preferred Stock.
No fractional shares of CUC Common Stock will be issued in the Merger to
the Company's stockholders. See "--Exchange of Stock Certificates."
TREATMENT OF COMPANY COMMON OPTIONS AND COMPANY PREFERRED OPTIONS
At the Effective Time, each Company Common Option will be assumed by CUC
International and converted into a CUC Replacement Option to acquire, on
substantially the same terms and conditions as were applicable under such
Company Common Option, the same number of shares of CUC Common Stock as the
holder of such Company Common Option would have been entitled to receive in the
Merger had such holder exercised such Company Common Option in full immediately
prior to the Effective Time (assuming, for the purpose of such calculation, that
all outstanding and unexercised Company Common Options and Company Preferred
Options, whether or not then exercisable, were exercised in full immediately
prior to the Effective Time and that, for the
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purpose of such calculation, the Merger Consideration equals the sum of the Base
Consideration and the Additional Consideration), at a price per share equal to
(i) the aggregate exercise price for the shares of Company Common Stock subject
to such Company Common Option, divided by (ii) the number of full shares of CUC
Common Stock deemed purchasable pursuant to such Company Common Option as
described above; provided, however, that (A) the number of CUC Replacement
Options, and the number of shares of CUC Common Stock that may be purchased upon
the exercise of such CUC Replacement Options, will be subject to the
indemnification provisions of the Merger Agreement and (B) the number of shares
of CUC Common Stock that may be purchased upon exercise of such CUC Replacement
Options will not include any fractional shares and, upon exercise of the CUC
Replacement Options, any fractional share shall be rounded down to the nearest
whole share. In addition, in the case of any Company Common Option to which
Section 421 of the Code applies by reason of its qualification under Section 422
of the Code (an "incentive stock option"), the option price, the number of
shares purchasable and the terms and conditions of such option will be
determined in order to comply with Section 424(a) of the Code (SECTION 1.11).
In addition, at the Effective Time, each Company Preferred Option will be
assumed by CUC International and converted into a Preferred Replacement Option
to acquire, on substantially the same terms and conditions as were applicable
under such Company Preferred Option, the same number of shares of CUC Common
Stock as the holder of such Company Preferred Option would have been entitled to
receive in the Merger had such holder exercised such Company Preferred Option in
full immediately prior to the Effective Time (assuming, for the purpose of such
calculation, that all outstanding and unexercised Company Common Options and
Company Preferred Options, whether or not then exercisable, were exercised in
full immediately prior to the Effective Time and that, for the purpose of such
calculation, the Merger Consideration equals the sum of the Base Consideration
and the Additional Consideration), at a price per share equal to (i) the
aggregate exercise price for the shares of Company Preferred Stock subject to
such Company Preferred Option, divided by (ii) the number of full shares of CUC
Common Stock deemed purchasable pursuant to such Company Preferred Option as
described above; provided, however, that (A) the number of Preferred Replacement
Options, and the number of shares of CUC Common Stock that may be purchased upon
the exercise of such Preferred Replacement Options, shall be subject to the
indemnification provisions of the Merger Agreement and (B) the number of shares
of CUC Common Stock that may be purchased upon exercise of such Preferred
Replacement Options shall not include any fractional share and, upon exercise of
the Preferred Replacement Options, any fractional share shall be rounded down to
the nearest whole share (SECTION 1.11).
To the extent that any Company Common Options and Company Preferred Options
are subject to the Company's repurchase rights, such repurchase rights will not
be assigned to CUC International, Merger Sub or the Company, as the surviving
corporation in the Merger. Consequently, in accordance with the terms of the
Company Common Options and Company Preferred Options subject to the Company's
repurchase rights, such repurchase rights will lapse in their entirety, and the
Company Common Options and Company Preferred Options will become fully vested at
the Effective Time.
No less than twenty (20) business days prior to the Effective Time, the
Company will notify each holder of any Company Common Options and any Company
Preferred Options, at the address of such holder shown on the Company's records,
of the holder's right to exercise such Company Common Options or Company
Preferred Options in accordance with its terms prior to the Effective Time and
that, in the event the holder elects not to exercise such Company Common Options
or Company Preferred Options prior to the Effective Time, such Company Common
Option or Company Preferred Option will be assumed by CUC International and
converted into CUC Replacement Options or Preferred Replacement Options, as the
case may be, on substantially the same terms and conditions as were applicable
to such Company Common Options or Company Preferred Options.
CUC International has agreed to reserve for issuance a sufficient number of
shares of CUC Common Stock for delivery upon exercise of the CUC Replacement
Options and Preferred Replacement Options and to use its best efforts to cause
to be effective as of the Effective Time, or as soon as practicable thereafter,
a registration statement on Form S-8 (or any successor form) or another
appropriate form with respect to the CUC Common Stock subject to any CUC
Replacement Options and Preferred Replacement Options held by persons who are or
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were directors, officers, employees or consultants (subject to the rules of such
form) of the Company. In addition, CUC International has agreed to use its best
efforts to maintain the effectiveness of such registration statement for so long
as such CUC Replacement Options and Preferred Replacement Options remain
outstanding.
EXCHANGE OF STOCK CERTIFICATES
As of the Effective Time, CUC International will make available to the
Exchange Agent for the benefit of holders of shares of CUC Common Stock, (i)
certificates representing the appropriate number of shares of CUC Common Stock
to be issued in the Merger and (ii) cash to be paid in lieu of fractional shares
of CUC Common Stock. As soon as practicable but no later than 30 days after the
Effective Time, the Exchange Agent, or another bank or trust company designated
by CUC International and acceptable to the Company, will mail to each holder of
record of a certificate or certificates which immediately prior to the Effective
Time represented Company Shares (i) a letter of transmittal (specifying that
delivery will be effected, and risk of loss and title to the certificates will
pass, only upon delivery of the certificates to the Exchange Agent) and (ii)
instructions for use in effecting the surrender of such certificates in exchange
for certificates representing shares of CUC Common Stock. Promptly following
the surrender of a certificate for cancellation to the Exchange Agent, together
with such letter of transmittal, duly executed, the holder of such certificate
will be entitled to receive in exchange therefor a certificate representing that
number of whole shares of CUC Common Stock, less the number of Escrowed Shares
to be withheld from such holder pursuant to the terms of the Merger Agreement
and the Escrow Agreement, and, if applicable, a check representing the cash
consideration to which such holder may be entitled on account of a fractional
share of CUC Common Stock, and the certificate so surrendered will be cancelled.
In the event of a transfer of ownership of Company Shares which is not
registered in the transfer records of the Company, a certificate representing
the proper number of shares of CUC Common Stock may be issued to a transferee if
the certificates representing such Company Shares is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until a certificate representing Company Shares has been surrendered to
the Exchange Agent, each such certificate will be deemed after the Effective
Time to represent only the right to receive upon such surrender the certificate
representing the number of shares of CUC Common Stock to which the stockholder
is entitled under the Merger Agreement, and cash in lieu of any fractional
shares of CUC Common Stock (SECTION 1.10).
No fractional shares of a CUC Common Stock will be issued in the Merger,
but in lieu thereof each holder of Company Shares otherwise entitled to a
fraction of a share of CUC Common Stock will, upon surrender of his or her
certificate or certificates representing Company Shares, be entitled to receive
an amount of cash (without interest) equal to the product of (i) the closing
sales price per share of CUC Common Stock as reported on the NYSE on the day
immediately preceding the date of the Effective Time, multiplied by (ii) the
-------------
fractional share interest which such holder would otherwise be entitled to
receive in the Merger.
All shares of CUC Common Stock issued to the Company's stockholders in the
Merger upon the surrender for exchange of Company Shares in accordance with the
terms of the Merger, including the Escrowed Shares and any cash paid in lieu of
fractional shares of CUC Common Stock, will be deemed to have been issued in
full satisfaction of all rights pertaining to the Company Shares.
CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF COMPANY SHARES
UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
STOCKHOLDER INDEMNIFICATION; ESCROW AGREEMENT
The Merger Agreement provides that the stockholders of the Company will
indemnify, defend and hold harmless, jointly and severally, CUC International,
Merger Sub, the Company, as the surviving corporation in the Merger, and certain
other persons against and in respect of any and all claims, demands, losses,
costs, expenses, obligations, liabilities, damages, remedies and penalties
(including, without limitation, interest, penalties,
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settlements costs and any legal, accounting or other fees and expenses for
investigating or defending any claims or threatened actions) (collectively,
"Losses") that CUC International, Merger Sub, the Company, as the surviving
corporation, and such other persons actually incur or suffer in connection with
(a) any breach of any of the representations or warranties made by the Company
in the Merger Agreement or in any certificate, instrument or other document
delivered pursuant thereto, (b) any breach of any covenant of the Company
contained in the Merger Agreement, (c) the restatement, if any, by the auditors
of the Company of certain financial statements of the Company (provided that
such indemnification will be limited to Losses actually incurred or suffered as
a result of a claim or demand made by any person against CUC International,
Merger Sub, the Company or such other persons) and (d) any default under or
violation of the provisions of certain existing loan documents between the
Company and its senior secured lender (SECTION 1.12).
Of the total number of shares of CUC Common Stock to be issued to the
Company Stockholders in the Merger, certificates representing an aggregate of 9%
(the "Escrowed Shares") will be deposited into an escrow account with the Escrow
Agent to serve as a source of satisfaction of indemnification claims and to be
distributed pursuant to the terms and conditions of the Escrow Agreement. The
Escrowed Shares will be withheld pro rata from the number of shares of CUC
Common Stock to be issued in the Merger. To the extent that CUC International,
Merger Sub, the Company, as the surviving corporation in the Merger, or such
other persons have any indemnification claims, it or they may only seek recourse
against the Escrowed Shares in seeking satisfaction of such claims, except as
provided in the following sentence. If there are any Company Common Options or
Company Preferred Options that remain outstanding and unexercised at the
Effective Time, CUC International, Merger Sub, the Company, as the surviving
corporation, or such other persons would also be permitted to seek recourse
against holders of CUC Replacement Options and Preferred Replacement Options
issued in the Merger in exchange for such options, which recourse would be
limited to a demand for return (or cancellation) of a number of CUC Replacement
Options, Preferred Replacement Options or CUC Common Stock if such CUC
Replacement Options have previously been exercised, having a fair market value
that does not exceed 9% of the fair market value of such CUC Replacement
Options, Preferred Replacement Options, or CUC Common Stock, as applicable,
received by such holders in exchange for their Company Common Options and
Company Preferred Options (SECTION 1.12).
The Escrowed Shares, less the number of Escrowed Shares having a fair
market value most nearly equal to the aggregate amount of all indemnification
claims made (for such purposes, the fair market value of one Escrowed Share
shall be equal to the closing sales price of CUC Common Stock as of the Closing
Date), will be released to the respective former stockholders of the Company on
the earlier to occur of (i) the four (4) month anniversary of the Closing Date
and (ii) the date upon which audited consolidated financial statements of CUC
International, which include the results of operations of the Company, as the
surviving corporation in the Merger, are completed and CUC International has
received a signed opinion from its independent auditors with respect to such
financial statements. Upon the approval by the stockholders of the Company of
the Merger Agreement, such stockholders will be deemed to have irrevocably
appointed an escrow committee consisting of two current members of the Company
Board, Michael Levinthal and Jon Feiber (the "Escrow Committee"), to act as
their attorneys-in-fact on their behalf and on behalf of the holders, if any, of
Company Common Options or Company Preferred Options to consent to, contest,
settle, compromise or otherwise dispose of any indemnification claim.
Stockholders are urged to read the Escrow Agreement carefully and in its
entirety.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto. These include representations and warranties by the Company
with respect to, among other things: corporate organization and qualification;
capitalization; authority relative to the Merger Agreement and the transactions
contemplated thereby; consents and approvals; financial statements; net assets;
opinion of the Company's financial advisor; no default; information supplied; no
undisclosed liabilities and absence of changes; litigation; compliance with
applicable law; employee plans; brokers; information included in this Proxy
Statement/Prospectus; tax matters; properties and inventories; intellectual and
other intangible property; material contracts; returns; related
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party transactions; accounting matters; environmental laws and regulations;
labor and employment matters; disclosure; and other matters (ARTICLE 2).
CUC and Merger Sub also have made certain representations and warranties
with respect to: organization; capitalization; authority relative to the Merger
Agreement; reports filed with the Commission; financial statements; information
supplied; consents and approvals; no violations; no undisclosed liabilities;
brokers; accounting matters; litigation; disclosure; and other matters (ARTICLE
3).
CERTAIN COVENANTS
The Merger Agreement contains certain covenants and agreements, certain of
which are summarized below.
Conduct of Business of the Company. Pursuant to the Merger Agreement, the
Company has agreed that, during the period from the date of the Merger Agreement
until the Effective Time, except as permitted by the Merger Agreement or as
otherwise consented to in writing by CUC International, the Company will conduct
its operations in the ordinary course of business consistent with past practice
and, to the extent consistent therewith, use its reasonable efforts to (i)
preserve intact its current business organizations, (ii) keep available the
service of its current officers and employees and (iii) preserve its
relationships with customers, suppliers and others having business dealings with
it to the end that goodwill and ongoing businesses shall be unimpaired at the
Effective Time. The Merger Agreement includes a number of more restrictive
covenants that limit the activities of the Company prior to the Effective Time
(SECTION 4.1).
Proxy Statement/Prospectus; The Meeting. The Company has agreed to call a
meeting of the stockholders of the Company to be held for the purpose of voting
upon (i) the Merger Agreement and related matters and (ii) the Charter
Clarification. In addition, the Company has agreed that the Company Board would
recommend to its stockholders adoption of the Merger Agreement and the Charter
Clarification and use its best efforts to obtain the requisite stockholder
approval (SECTION 4.3).
Other Potential Acquirors. The Company has agreed that neither it nor any
of its affiliates will, nor will the Company authorize or permit any of its or
their respective officers, directors, employees, representatives or agents to
directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than CUC
International and Merger Sub, any affiliate or associate of CUC International
and Merger Sub or any designees of CUC International and Merger Sub) concerning
any merger, sale of assets, sale of shares of capital stock or similar
transaction involving the Company or any division of the Company (SECTION 4.4).
Indemnification of Directors and Officers of the Company. CUC
International and Merger Sub have agreed that all rights to indemnification or
exculpation existing in favor of the directors, officers, employees and agents
of the Company as provided in its charter or bylaws, the indemnification
agreements of such persons with the Company or otherwise in effect with respect
to matters occurring prior to the Effective Time or as a result of action taken
by the Company Board in connection with the consummation of the Merger will
survive the Merger and will continue in full force and effect for a period of
five years from the Effective Time (SECTION 4.9).
Pooling. Each of the Company and CUC International has agreed that it will
not engage in, or take any action which might result in, any Pooling Prevention
Event (as defined in the Merger Agreement) and will use its best efforts to
refrain from taking any other action which could prevent the Merger from being
accounted for as a "pooling-of-interests" for accounting purposes (SECTION
4.11). See "--Accounting Treatment."
Employment and Non-Competition Agreements. The Merger Agreement provides
that, on or prior to the Effective Time, the Company, as the surviving
corporation in the Merger, will enter into an employment agreement with Lawrence
S. Gross, the President and Chief Executive Officer of the Company and a member
of the Company Board, effective on the Closing Date, on substantially the terms
set forth in the form of the Amended
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and Restated Employment Agreement attached as Exhibit F to the Merger Agreement,
and that the Company will enter into an employment agreement with Barton
Listick, Vice President, Development, of the Company, effective as of the
Closing Date on terms to be agreed upon. In addition, pursuant to the Merger
Agreement, CUC International will enter into non-competition agreements with
Messrs. Gross and Listick (the "Non-Competition Agreements") (SECTION 4.14).
Each of Messrs. Gross and Listick has entered into an employment agreement with
CUC International and the Company and a Non-Competition Agreement with the
Company, effective as of the Closing Date. See "--Interests of Certain Persons
in the Merger--Employment Agreement with Lawrence S. Gross" and "--Employment
Agreement with Barton Listick." See "--Interests of Certain Persons in the
Merger."
Option Plan. At the Closing, CUC International has agreed to grant to
certain employees of the Company identified by Lawrence S. Gross and agreed upon
by CUC International, options to acquire an aggregate of 450,000 shares of CUC
Common Stock under CUC International's 1992 Employee Stock Option Plan (SECTION
4.16). See "--Interests of Certain Persons in the Merger."
Bonus Pool. As an incentive to cause existing employees of the Company to
remain in the employment of the Company following the Merger, CUC International
will cause the Company to establish a cash bonus pool of up to approximately
$1.16 million that will be available for persons (other than Lawrence S. Gross
and Barton Listick) who are Remaining Employees of the Company (SECTION 4.16).
See "--Interests of Certain Persons in the Merger."
Consent and Waiver. The Company has agreed to obtain from Lawrence S.
Gross, William Gross, Barton Listick, George Lichter and Jay Meschel
(collectively, the "Management Stockholders"), and has agreed to use its best
efforts to obtain from each holder of Company Preferred Stock (the "Preferred
Stockholders"), a signed Consent and Waiver pursuant to which each Management
Stockholder and each such holder of Company Preferred Stock will acknowledge and
consent to the methodology adopted or to be adopted by the Company Board in
connection with the allocation among the stockholders of the Company of the
Merger Consideration to be received in the Merger and will agree to waive any
rights, claims or causes of action such holder may have against CUC
International, Merger Sub, the Company, as the surviving corporation in the
Merger, or any of their respective affiliates arising out of or relating to the
application of such methodology by the Company Board (SECTION 4.17). See
"--Conditions to the Merger" and "Proposal No. 2--The Charter Clarification."
Other Covenants. Each of CUC International, Merger Sub and the Company
has, with respect to the Merger, agreed to use its best efforts to take, or
cause to be taken, all action, and to do, or cause to be done, all things
reasonably necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by the Merger
Agreement, including, without limitation, (i) cooperation in the preparation and
filing of this Proxy Statement/Prospectus, any filings that may be required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
any amendments or supplements thereto, (ii) the taking of all action reasonably
necessary, proper or advisable to secure any necessary consents under existing
obligations of the Company or amend any agreements relating thereto to the
extent required by such agreements; (iii) contesting any legal proceeding
relating to the Merger; and (iv) the execution and delivery of any additional
instruments, including the Certificate of Merger, necessary to consummate the
transactions contemplated by the Merger Agreement (SECTION 4.6).
CONDITIONS TO THE MERGER
The respective obligations of each of CUC International, Merger Sub and the
Company to consummate the Merger are subject to the following conditions, among
others, that: (i) the Merger Agreement shall have been approved and adopted by
the requisite vote of the stockholders of the Company; (ii) no statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or enforced by a United States court or United
States governmental authority which prohibits, restrains, enjoins or restricts
the consummation of the Merger; and (iii) the Registration Statement shall have
been declared effective under the Securities Act and shall not be subject to any
stop order or proceedings seeking a stop order (SECTION 5.1).
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The obligations of CUC International and Merger Sub to effect the Merger
are further subject to the following additional conditions, among others, that:
(i) the representations and warranties of the Company set forth in the Merger
Agreement or in any other document delivered pursuant thereto shall be true and
correct in all material respects on and as of the Effective Time and, at the
Closing, the Company shall have delivered a certificate to such effect (provided
that for any representation other than those contained in Sections 2.1, 2.2(b)
or (d), 2.3, 2.5 or 2.9, it shall only be a condition to closing that the
aggregate effect of any inaccuracies shall not have had, between the date of the
Merger Agreement and the Effective Time and at and as of the Effective Time, and
shall not be reasonably likely to have, a material adverse effect on the
business, operations, condition or prospects of the Company); (ii) the Company
shall have duly performed in all material respects at or before the Effective
Time each of its obligations to be performed at or before the Effective Time,
and the Company shall have delivered at the Effective Time an officers'
certificate to such effect dated the Effective Time; (iii) each Company
Affiliate shall have performed his or its obligations under the applicable
Affiliate Letter, and CUC International shall have received a certificate signed
by each of them to such effect; (iv) CUC International shall have received a
letter from E&Y to the effect that "pooling-of-interests" accounting is
appropriate for the Merger, provided that the Merger is closed and consummated
in accordance with the terms and subject to the conditions of the Merger
Agreement, and such letter shall not have been withdrawn or modified in any
material respect; (v) the Company shall have obtained the consent or approval of
each person whose consent or approval shall be required in order to permit the
succession by the surviving corporation pursuant to the Merger to any
obligation, right or interest of the Company under any loan or credit agreement,
note, mortgage, indenture, lease or other agreement or instrument, except for
those for which failure to obtain such consents or approvals would not, in the
reasonable opinion of CUC International, individually or in the aggregate, have
a Material Adverse Effect on the Company; (vi) the aggregate number of
dissenting shares, if any, as of the Effective Time shall not exceed 9% of the
then outstanding Company Shares on an as-converted basis; (vii) the Escrow
Agreement shall have been duly executed and delivered by the Company, the Escrow
Committee and the Escrow Agent and shall be in full force and effect; (viii) the
Employment Agreement between the Company and Lawrence S. Gross shall be in full
force and effect, and Lawrence S. Gross shall be in good physical and mental
health and capable of performing his obligations under such Employment
Agreement; (ix) the Non-Competition Agreements shall be in full force and
effect; (x) the Restated Investors' Rights Agreement dated as of September 25,
1995 (the "Investors' Rights Agreement"), by and among the Company, the persons
listed on Exhibit A thereto as Investors, the persons listed on Exhibit A
thereto as Founders, and William Lohse and William Gross, as amended from time
to time, and all registration rights existing with respect to any securities of
the Company, shall have been terminated, and CUC International and Merger Sub
shall have received written evidence of the same; (xi) the Charter Clarification
shall have been approved and adopted by the requisite vote of the stockholders
of the Company; (xii) all of the Management Stockholders, together with
Preferred Stockholders holding at least 90% of the Company Shares held by all
Preferred Stockholders, shall have executed and delivered to the Company a
Consent and Waiver, or each share of Company Preferred Stock shall have been
converted prior to the Effective Time into shares of Company Common Stock
pursuant to Article IV, Section A5(c)(i) of the Restated Certificate of
Incorporation of the Company; and (xiii) there shall have been no events,
changes or effects with respect to the Company having or which could reasonably
be expected to have a Material Adverse Effect on the Company and, at the
Closing, the Company shall have delivered to CUC International and Merger Sub a
certificate to that effect (SECTION 5.3).
The obligations of the Company to effect the Merger is subject to the
following additional conditions, among others, that: (i) the aggregate effect of
any inaccuracies in the representations and warranties of CUC International and
Merger Sub contained in the Merger Agreement and any other document delivered
pursuant thereto shall not have had at and as of the Effective Time, and is not
reasonably likely to have, a Material Adverse Effect on CUC International and
its subsidiaries taken as a whole and, at the Closing, Parent and Merger Sub
shall have delivered a certificate to such effect; (ii) CUC International and
Merger Sub shall have duly performed in all material respects at or before the
Effective Time each of its obligations to be performed at or before the
Effective Time, and the Company shall have delivered at the Effective Time an
officers' certificate to such effect dated the Effective Time; (iii) the shares
of CUC Common Stock issuable to the stockholders of the Company and such other
shares required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on the NYSE upon official notice of issuance;
(iv) the opinions of (a) Gunderson Dettmer Stough Villeneuve Franklin and
Hachigian, LLP, counsel to the Company, addressed to the Company and its
stockholders to the effect that the
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Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and (b) Robert Tucker, Esq.,
special counsel to CUC International and Merger Sub, to the effect that the CUC
International Common Stock has been duly authorized and validly issued and is
fully paid and non-assessable, shall have been delivered, and such opinions
shall not have been withdrawn or modified in any material respect; (v) CUC
International shall have granted to certain employees of the Company, as the
surviving corporation, identified by the Chief Executive Officer of the Company
and agreed upon by CUC International the CUC Stock Options; and (vi) there shall
have been no events, changes or effects with respect to CUC International or
Merger Sub or any of their respective subsidiaries having or which could
reasonably be expected to have a Material Adverse Effect on CUC International
and, at the Closing, CUC International shall have delivered to the Company a
certificate to that effect (SECTION 5.2).
TERMINATION; FEES AND EXPENSES
Termination by Mutual Consent. The Merger Agreement may be terminated and
the Merger abandoned at any time prior to the Effective Time by the mutual
written consent of the Boards of Directors of CUC International, Merger Sub and
the Company (SECTION 6.1).
Termination by Either CUC International and Merger Sub or the Company. The
Merger Agreement may be terminated and the Merger abandoned at any time prior to
the Effective Time by action of the Boards of Directors of CUC International and
Merger Sub or the Company Board if (i) any court of competent jurisdiction in
the United States or other United States governmental authority shall have
issued a final order, decree or ruling or taken any other final action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action is or shall have become nonappealable or (ii) the
Merger has not been consummated by the Termination Date (SECTION 6.1). Because
the Registration Statement was declared effective by the Commission on January
2, 1997, the Termination Date for all purposes under the Merger Agreement is
March 3, 1997.
Termination by the Company. The Merger Agreement may be terminated and the
Merger abandoned at any time prior to the Effective Time by action of the
Company Board if: (i) there shall have been a breach of any representation or
warranty on the part of CUC International or Merger Sub set forth in the Merger
Agreement, or if any representation or warranty of CUC International or Merger
Sub shall have become untrue, in either case such that the Company's conditions
to closing would be incapable of being satisfied by the Termination Date, (ii)
there shall have been a breach by CUC International or Merger Sub of any of
their respective covenants or agreements hereunder having a Material Adverse
Effect on CUC International or materially adversely affecting (or materially
delaying) the consummation of the Merger, and CUC International or Merger Sub,
as the case may be, has not cured such breach within twenty (20) business days
after notice by the Company thereof, provided that, with respect to clauses (i)
and (ii) above, the Company has not materially breached any of its obligations
hereunder and has not failed to timely cure such breach, or (iii) the Company
shall have convened a meeting of its stockholders to vote upon the Merger or
solicited written consents to approve the Merger for thirty (30) days and, in
either case, shall have failed to obtain the requisite vote or consent of its
stockholders (SECTION 6.1).
Termination by CUC International and Merger Sub. The Merger Agreement may
be terminated and the Merger abandoned at any time prior to the Effective Time
by action of the Boards of Directors of CUC International and Merger Sub or the
Company if: (i) there shall have been a breach of any representation or warranty
on the part of the Company set forth in the Merger Agreement, or if any
representation or warranty of the Company shall have become untrue, in either
case such that CUC International's conditions to closing would be incapable of
being satisfied by the Termination Date, (ii) there shall have been a breach by
the Company of its covenants or agreements hereunder having a Material Adverse
Effect on the Company or materially adversely affecting (or materially delaying)
the consummation of the Merger, and the Company has not cured such breach within
twenty (20) business days after notice by CUC International or Merger Sub
thereof, provided that, with respect to clauses (i) or (ii) above, neither CUC
International nor Merger Sub has materially breached any of their respective
obligations hereunder and has not failed to timely cure such breach, (iii) the
Company Board shall have withdrawn, modified or changed its approval or
recommendation of the Merger Agreement or the Merger, or shall have recommended
to the Company's stockholders a Third Party Acquisition or a Significant
Acquisition, or shall
57
<PAGE>
have failed to call, give notice of, convene or hold a stockholders' meeting to
vote upon the Merger Agreement or to solicit written consents to approve the
Merger Agreement, or shall have adopted any resolution to effect any of the
foregoing, or (iv) the Company shall have convened a meeting of its stockholders
to vote upon the Merger Agreement or solicited written consents to approve the
Merger Agreement for thirty (30) days and, in either case, shall have failed to
obtain the requisite vote or consent of its stockholders (SECTION 6.1).
The term "Third Party Acquisition" means the occurrence of any of the
following events: (i) the acquisition of the Company by merger or otherwise by
any person (which includes a "person" as such term is defined in Section
13(d)(3) of the Exchange Act) or entity other than CUC International, Merger Sub
or any affiliate thereof (a "Third Party"); (ii) the acquisition by a Third
Party of more than 30% of the total assets of the Company; or (iii) the
acquisition by a Third Party of 30% or more of the outstanding shares of Company
Common Stock. The term "Significant Acquisition" means the acquisition by the
Company, by merger, purchase of stock or assets, joint venture or otherwise, of
a direct or indirect ownership interest or investment in any business whose
annual revenues, net income or assets is equal to or greater than 40% of the
annual revenues, net income or assets of the Company.
In the event of the termination of the Merger Agreement, the Merger
Agreement will be void and have no effect. If the Merger Agreement is
terminated because (i) the Company fails to obtain the requisite stockholder
votes to approve the Merger after convening the Meeting, (ii) there is a breach
by the Company of a representation or warranty such that a condition of the
Merger cannot be satisfied, (iii) there is a breach by the Company of its
covenants and agreements having a Material Adverse Effect on the Company (as
defined in the Merger Agreement) or materially adversely affecting (or
materially delaying) the Merger, and such breach is not cured within the
applicable grace period, or (iv) the Company Board withdraws, modifies or
changes its approval or recommendation of the Merger Agreement and the Merger,
or recommends a Third Party Acquisition or a Significant Acquisition, then the
Company will be obligated to reimburse CUC International and Merger Sub for
their out-of-pocket expenses incurred in connection with the Merger, up to a
maximum of $250,000. Alternatively, if the Merger Agreement is terminated
because (a) there is a breach by CUC International or Merger Sub of any
representation or warranty such that a condition of the Merger cannot be
satisfied or (b) there is a breach by CUC International or Merger Sub of its
covenants and agreements having a Material Adverse Effect on CUC International
(as defined in the Merger Agreement) or materially adversely affecting (or
materially delaying) the Merger, and such breach is not cured within the
applicable grace period, then CUC International will reimburse the Company for
its out-of-pocket expenses incurred in connection with the Merger, up to a
maximum of $425,000 (SECTION 6.1).
AMENDMENT
The Merger Agreement may be amended by action taken by the Company, CUC
International and Merger Sub at any time before or after approval of the Merger
by the holders of a majority of the outstanding shares of Company Shares but,
after any such approval, no amendment may be made which requires the approval of
such stockholders under applicable law without such approval. The Merger
Agreement may not be amended except by an instrument in writing signed on behalf
of the parties to the Merger Agreement (SECTION 6.4).
WAIVER
At any time prior to the Effective Time, CUC International, the Company or
Merger Sub may, in writing (i) extend the time for the performance of any of the
obligations or other acts of the other party to the Merger Agreement; (ii) waive
any inaccuracies in the representations and warranties of the other party
contained in the Merger Agreement or in any document, certificate or writing
delivered pursuant to the Merger Agreement; or (iii) waive compliance by the
other party with any of the agreements or conditions contained in the Merger
Agreement (SECTION 6.5).
58
<PAGE>
LOAN AGREEMENT
In contemplation of the consummation of the Merger, CUC International and
the Company have entered into a Loan Agreement (the "Loan Agreement") pursuant
to which, on the terms and subject to the conditions set forth therein, the
Company may borrow from CUC International up to a maximum of $3.0 million to
repay certain of its outstanding indebtedness and to fund its business
operations in the ordinary course. As of the date hereof, the Company has not
made any borrowings under the Loan Agreement.
59
<PAGE>
PROPOSAL NO. 2--THE CHARTER CLARIFICATION
GENERAL
The Merger Agreement provides that each Company Share will be converted
into the right to receive that portion of the Merger Consideration to which such
Company Share is entitled under, and in accordance with, the Applicable Charter
Provision. The Applicable Charter Provision expressly provides for the
distribution among the stockholders of the Company of the consideration to be
received in the event of a "Liquidating Event" (as defined therein), which
includes the Merger, including specific provisions pursuant to which such
consideration would be distributed among the stockholders of the Company based
upon the class or series of capital stock of the Company held by such
stockholders. See "Certain Additional Information Concerning CUC International
and the Company--Comparison of Stockholder Rights--Preferred Stock."
The Applicable Charter Provision is not entirely clear as to when the
Merger Consideration is to be valued for the purpose of allocating the Merger
Consideration among holders of Company Shares in satisfaction of their
liquidation preferences. The Applicable Charter Provision provides that, for
purposes of distributing the consideration in a transaction such as the Merger,
if the consideration to be received by the corporation is other than cash, the
value of such consideration will be deemed to be its fair market value. If
securities or other property is paid or distributed, the Applicable Charter
Provision provides that its value will be "computed at fair market value at the
------
time of payment to the corporation or at the time made available to [the
- ------------------------------------------------------------------------
Company's] stockholders, all as determined by the [Company Board] in the good
- -----------------------
faith exercise of its reasonable business judgment," provided that if such
securities are listed on any established national securities exchange (as are
the shares of CUC Common Stock constituting the Merger Consideration), the fair
market value of such securities shall be the closing sales price for such
securities as quoted on such exchange "for the date the value is to be
-------------------------------
determined . . ." [Emphasis added]
- ----------
The Company Board has concluded that the foregoing provisions mean that,
for purposes of allocating the Merger Consideration among the holders of Company
Shares, the fair market value of the CUC Common Stock to be received by such
holders in the Merger is to be valued as of the Closing Date, notwithstanding
that the parties to the Merger Agreement used the trading price of CUC Common
Stock on September 16, 1996 for purposes of determining the aggregate number of
shares of CUC Common Stock to be issued in the Merger. In order to clarify the
Applicable Charter Provision, the Company Board is soliciting the vote of such
holders on the Charter Clarification pursuant to this Proxy
Statement/Prospectus. The Charter Clarification will explicitly provide that
the fair market value of the Merger Consolidation will be determined as of the
Closing Date. In order to implement the amendment to the Applicable Charter
Provision, paragraph (f) of Section B.2 of Article IV of the Restated
Certificate of Incorporation of the Company will be amended by deleting such
paragraph in its entirety and replacing it with the following:
"(f) If any of the events described in Section 2(e) shall occur and
if the consideration received by the corporation is other than cash, its
value will be deemed its fair market value. The value of securities and
property paid or distributed pursuant to this Section 2 shall be computed
at fair market value at the time of payment to the corporation or at the
time made available to stockholders (which, for such purposes, shall be the
date upon which any such transaction described in Section 2(e) is
consummated), all as determined by the Board of Directors in the good faith
exercise of its reasonable business judgment, provided that (i) if such
securities are listed on any established stock exchange or a national
market system, their fair market value shall be the closing sales price for
such securities as quoted on such system or exchange (or the largest such
exchange) on the date payment to the corporation is made or on the date
such securities or other property is made available to stockholders (which,
for such purposes, shall be the date upon which any such transaction
described in Section 2(e) is consummated) (or if there are no sales for
such date, then for the last preceding business day on which there were
sales), as reported in the Wall Street Journal or similar publication, and
-------------------
(ii) if such securities are regularly quoted by a recognized securities
dealer but selling prices are not reported, their fair market value shall
be the mean between the high bid and low ask prices for such securities on
the date payment to the corporation is made or on the date such securities
or other property is made available to stockholders
60
<PAGE>
(which, for such purposes, shall be the date upon which any such
transaction described in Section 2(e) is consummated) (or if there are no
quoted prices for such date, then for the last preceding business day on
which there were quoted prices)." [Emphasis added]
Approval of the Charter Clarification by the requisite vote of the holders
of Company Shares is a condition to the obligation of CUC International and
Merger Sub to consummate the Merger. See "Proposal No. 1--The Merger-Provisions
of the Merger Agreement--Conditions to the Merger." However, whether or not the
Charter Clarification is approved, the Company Board has interpreted the
Applicable Charter Provision to mean that the CUC Common Stock to be issued in
the Merger is to be valued as of the Closing Date. Even if the Charter
Clarification is not approved by the requisite vote of the holders of Company
Shares, CUC International could elect to waive the Charter Clarification
requirement, although it is not obligated to do so, and the Merger could be
consummated based upon the Company Board's interpretation of the Applicable
Charter Provision.
The holders of Company Preferred Stock have certain rights and preferences
with respect to the allocation of the Merger Consideration described in the
Applicable Charter Provision, and the date upon which the Merger Consideration
is valued for the purpose of such allocation will have an impact upon the
relative portion of the Merger Consolidation to be received by the holders of
the Company Common Stock and the Company Preferred Stock. Specifically, to the
extent that the market value of CUC Common Stock is higher on the date the
valuation is determined, fewer shares of CUC Common Stock will be required to be
issued to the holders of Company Preferred Stock in the Merger to satisfy their
liquidation preferences, leaving more shares of CUC Common Stock to be
distributed among the holders of Company Common Stock. Conversely, to the
extent that the market value of CUC Common Stock is lower on the date the
valuation is determined, more shares of CUC Common Stock will be required to be
issued to the holders of Company Preferred Stock in the Merger to satisfy their
liquidation preferences, leaving fewer shares of CUC Common Stock to be
distributed among the holders of Company Common Stock. As a result,
fluctuations in the market price of CUC Common Stock will have a greater impact,
upward or downward, upon the value of the Merger Consideration to be received by
the holders of Company Common Stock than upon the value of the Merger
Consideration to be received by the holders of Company Preferred Stock. For a
more detailed explanation of the impact of changes in the market price of CUC
Common Stock on the relative portion of the Merger Consideration to be received
by the holders of Company Shares, see "Proposal No. 1--The Merger--Provisions of
the Merger Agreement--Exchange Ratios for Company Shares."
CONSENT AND WAIVER
As a condition to the obligations of CUC International and Merger Sub to
consummate the transaction, all of the Management Stockholders, together with
Preferred Stockholders holding at least 90% of the Company Shares held by all
Preferred Stockholders, will be required to execute and deliver to CUC
International the Consent and Waiver. The purpose of the Consent and Waiver is
to obtain (i) the consent of such persons to the methodology adopted by the
Company Board to allocate, based upon the Applicable Charter Provision, as
amended by the Charter Clarification, the Merger Consideration to be received by
the holders of Company Shares in the Merger, and (ii) the waiver by such persons
of (and release of CUC International, Merger Sub and the Company from) any
claims and/or actions that such persons have or may have in connection with the
application of such methodology to determine such allocation. Notwithstanding
that the Consent and Waiver may not be executed by the requisite number of
holders of Company Shares, CUC International could elect to waive the
requirement that the Consent and Waiver be executed by such holders.
A copy of the Consent and Waiver is attached as Annex E to this Proxy
-------
Statement/Prospectus and should be read carefully and in its entirety. See
"Proposal No. 1--The Merger--Provisions of the Merger Agreement--Conditions to
the Merger."
RECOMMENDATION OF BOARD OF DIRECTORS OF THE COMPANY
AT A REGULAR MEETING OF THE COMPANY BOARD HELD ON DECEMBER 17, 1996, THE
DIRECTORS DETERMINED THAT THE CHARTER CLARIFICATION IS IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS. THE COMPANY
61
<PAGE>
BOARD HAS APPROVED THE CHARTER CLARIFICATION AND RECOMMENDS THAT HOLDERS OF
COMPANY SHARES VOTE FOR APPROVAL OF THE CHARTER CLARIFICATION.
62
<PAGE>
CERTAIN ADDITIONAL INFORMATION CONCERNING CUC INTERNATIONAL AND THE
COMPANY
SELECTED FINANCIAL DATA OF THE COMPANY
The following selected financial data for the Company, insofar as it
relates to each of the fiscal years ended 1991 through 1996, has been derived
from annual financial statements, including the balance sheets at March 31, 1996
and 1995, and the related statements of operations and of cash flows for the
years ended March 31, 1996 and 1995, the three-month period ended March 31,
1994, and the year ended December 31, 1993 and the notes thereto appearing
elsewhere herein. The data for the six months ended September 30, 1996 and 1995
has been derived from unaudited financial statements also appearing herein and
which, in the opinion of management, include all adjustments, consisting only of
normally recurring adjustments, necessary for a fair statement of the results
for the unaudited interim periods. Operating results for the six months ended
September 30, 1996 are not necessarily indicative of the results for the entire
year ending March 31, 1997. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the audited financial statements, related notes and other
financial information appearing elsewhere in this Proxy Statement/Prospectus.
KNOWLEDGE ADVENTURE, INC.
(IN THOUSANDS, EXCEPT FOR PER COMMON SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
THREE PERIOD FROM
MONTHS JULY 1, 1991
YEARS ENDED ENDED YEARS ENDED (INCEPTION) TO SIX MONTHS ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31 SEPTEMBER 30,
-------------------- --------- ------------------- -------------- --------------------
1996 (3) 1995 1994 (1) 1993 1992 1991 1996 (3) 1995 (4)
--------- -------- --------- -------- -------- -------------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................... $ 16,401 $21,461 $ 3,872 $ 8,837 $ 2,852 $ 143 $11,575 $ 6,073
Cost of goods sold........... 7,811 8,281 1,309 3,337 1,025 103 2,089 5,520
-------- ------- ------- ------- ------- ------ ------- --------
Gross profit................. 8,590 13,180 2,563 5,500 1,827 40 9,486 553
Selling and marketing
expenses.................... 7,709 9,086 1,428 4,393 1,400 117 3,658 4,167
Research and development
expenses.................... 7,289 7,627 1,167 2,387 757 95 3,377 3,971
General and administrative
expenses.................... 4,437 3,872 1,021 2,763 992 138 1,576 2,666
-------- ------- ------- ------- ------- ------ ------- --------
Income (loss) from operations (10,845) (7,405) (1,053) (4,043) (1,322) (310) 875 (10,250)
Interest income (expense),
net......................... (51) 230 9 66 4 (2) (134) 73
-------- ------- ------- ------- ------- ------ ------- --------
Net income (loss)............ $(10,896) $(7,175) $(1,044) $(3,977) $(1,318) $ (312) $ 741 $(10,177)
Net income (loss) per share
(2)......................... (1.57) (1.21) (0.25) (0.61) (0.18) (0.05) 0.03 (1.61)
Weighted average shares used
in calculating net income
(loss) per share (2) (5).... 6,955 5,926 4,132 6,495 7,427 6,839 24,681 6,330
</TABLE>
<TABLE>
<CAPTION>
AT AT AT AT
MARCH 31, MARCH 31, DECEMBER 31, SEPTEMBER 30,
-------------------- --------- ------------------------------- --------------------
1996 1995 1994 1993 1992 1991 1996 1995
--------- -------- --------- -------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $(1,425) $ 4,640 $1,141 $1,412 $ (61) $(93) $ (903) $ (754)
Total assets................. 8,514 11,482 5,717 6,048 1,584 120 8,690 10,629
Long-term debt, net of
current portion............. 2,057 638 1,064 21 0 0 1,752 1,784
Total equity (deficit)....... 93 7,284 1,452 2,555 163 (82) 979 524
</TABLE>
- ---------------------
(1) Effective January 1, 1994, the Company changed its fiscal year end from
December 31 to March 31.
(2) Adjusted to give effect to the four-for-one stock split effective in April
1993.
(3) Fiscal 1996 revenues reflect the expiration of certain licensing
arrangements with original equipment manufacturers (OEMs).
63
<PAGE>
(4) The results of operations for the six month period ended September 30, 1995
include (i) the write-off of in-process research and development of $644,000
in conjunction with the acquisition of substantially all of the assets of
Fanfare Software and (ii) the write-off of certain purchased images and
other media which has limited usefulness in the JumpStart products
resulting in a charge against earnings of $3.0 million.
(5) The weighted average shares used in calculating net income (loss) per share
for the six months ended September 30, 1996 is based on the total number of
shares of Company Common Stock and common stock equivalents outstanding
during such period, including dilutive stock options and dilutive
convertible preferred stock outstanding. Because the effect of including
common stock equivalents in the calculation of weighted average shares for
periods other than the six months ended September 30, 1996 would have been
antidilutive, such common stock equivalents were excluded from the
calculation of weighted average shares for such other periods.
64
<PAGE>
COMPARATIVE PER COMMON SHARE DATA
The following table sets forth the book value and income per share from
continuing operations of CUC Common Stock and the book value and income per
share from continuing operations of Company Shares on a fully diluted basis.
The pro forma combined information of CUC International is based on the
consolidated financial statements included in the September 17, 1996 Form 8-K.
The pro forma combined information and the Company equivalent pro forma
information set forth below are unaudited. The information set forth below
regarding CUC International should be read in conjunction with the audited and
unaudited consolidated financial statements of CUC International, including the
notes thereto, incorporated herein by reference, and the information set forth
below regarding the Company should be read in conjunction with the audited and
unaudited financial statements of the Company, including the notes thereto,
appearing elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT
OCTOBER 31, 1996
----------------
<S> <C>
Book Value Per Common Share:
Historical:
CUC International................................................... $2.96
The Company......................................................... 0.11
Pro Forma Combined--CUC International and the Company................ 2.94
Company Equivalent Pro Forma--CUC International and the Company (a).. 0.27
</TABLE>
<TABLE>
<CAPTION>
CUC INTERNATIONAL
-------------------------------------------
NINE MONTHS
FISCAL YEAR ENDED ENDED
JANUARY 31, OCTOBER 31,
--------------------------- -----------
1996 1995 1994 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Cash Dividends Per Common Share:
Historical:
CUC International (b)................................. $ .01 $ .01 $ .01 $ .01
Pro Forma Combined--CUC International and the Company... .01 .01 .01 .01
Company Equivalent Pro Forma--CUC International and
the Company (a)........................................ .00 .00 .00 .00
Income (Loss) Per Common Share From Continuing
Operations
Historical:
CUC International.................................... .37 .43 .34 .19
The Company (c)...................................... (1.57) (1.21) (.61) .03
Pro Forma Combined--CUC International
and the Company......................... .34 .41 .33 .19
Company Equivalent Pro Forma--CUC International and the
Company (a)............................................ .03 .04 .03 .02
</TABLE>
- -----------------
(a) The Company equivalent pro forma information was computed by multiplying the
pro forma combined information by the exchange ratio in the Merger
applicable to shares of Company Common Stock, which equals .0911, assuming
that the Closing Date is January 31, 1997, the holders of each series of
Company Preferred Stock convert the Preferred Conversion Amounts (see
"Proposal No. 1--The Merger--Provisions of the Merger Agreement--Exchange
Ratios for Company Shares"), and the closing sales price of one share of CUC
Common Stock as reported on the NYSE on the Closing Date is $22.00.
(b) Represents cash dividends paid to Ideon stockholders. CUC International,
Davidson, Sierra and the Company paid no cash dividends on its common stock
during the periods presented. In addition, an insignificant amount of cash
dividends were paid in respect of the NAOG common stock for the year ended
January 31, 1994.
(c) The weighted average shares used in calculating net income (loss) per share
for the six months ended September 30, 1996 is based on the total number of
shares of Company Common Stock and common stock equivalents outstanding
during such period, including dilutive stock options and dilutive
convertible preferred stock outstanding. Because the effect of including
common stock equivalents in the calculation of weighted average shares for
periods other than the six months ended September 30, 1996 would have been
antidilutive, such common stock equivalents were excluded from the
calculation of weighted average shares for such other periods. See "Certain
Additional Information Concerning CUC International and the Company--
Selected Financial Data of the Company."
65
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY SHOULD BE READ IN
CONJUNCTION WITH THE "SELECTED FINANCIAL DATA OF THE COMPANY" AND THE COMPANY'S
FINANCIAL STATEMENTS, AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS. IN JANUARY 1994, THE COMPANY CHANGED ITS FISCAL YEAR-END
FROM DECEMBER 31 TO MARCH 31. THE PERIOD COMMENCING JANUARY 1, 1994 AND ENDING
MARCH 31, 1994 IS NOT DISCUSSED BELOW AS CHANGES IN SUCH PERIOD WERE NOT
SIGNIFICANT AND TRENDS THEREIN ARE ADEQUATELY DISCUSSED IN THE DESCRIPTION OF
THE PRIOR AND LATTER PERIODS. UNLESS OTHERWISE INDICATED, "FISCAL 1996" REFERS
TO THE TWELVE MONTH PERIOD ENDING MARCH 31, 1996, "FISCAL 1995" REFERS TO THE
TWELVE MONTH PERIOD ENDING MARCH 31, 1995, AND "FISCAL 1993" REFERS TO THE
TWELVE MONTH PERIOD ENDING DECEMBER 31, 1993.
OVERVIEW
Evolution of the Company's Product Line
The Company is engaged in the design, development and distribution of
interactive, multimedia computer software for the children's educational market.
The Company's products have been designed to encourage learning through
exploration, discovery and creativity rather than through highly structured
exercises and games. Since its inception in August 1991, the Company has
produced a family of multimedia software products designed to create unique,
appealing and enriching educational experiences for children.
In November 1991, the Company introduced its first software title,
"Knowledge Adventure." Building upon the popularity of this initial product
offering, the Company developed complementary software products which comprise
the Company's Adventure Series. Titles in this Series include "Dinosaur
Adventure," "Science Adventure," "Undersea Adventure" and "Space Adventure." As
a result of the introduction of these multiple titles, and, in particular, the
popularity of Dinosaur Adventure, the Company experienced rapid revenue growth
in each of its first three years of existence. However, the titles comprising
the Adventure Series experienced a relatively short life cycle; accordingly, the
Company was required to develop new products on a continuous basis.
Because of the nature of the development of the Company's products,
including the substantial programming necessary to create unique interactive
experiences of its products, the purchase of featured images and the inclusion
of celebrity hosts, the cost of producing these titles was substantial. In
addition, as part of management's effort to continue to offer new product
offerings to consumers, the Company incurred significant costs in developing new
titles, certain of which were abandoned prior to completion or failed to
generate significant consumer interest. Moreover, in response to the Company's
increased revenue growth, management made significant investments in sales and
marketing as well as corporate infrastructure, including recruiting senior
executives from outside the Company and expanding its corporate facilities.
Despite increasing revenues derived from product sales, however, the Company
continued to incur significant losses as a result of increased operating costs
and required periodic infusions of equity capital to offset negative cash flows
from operations.
From 1993 to 1994, the Company continued to broaden its product line and,
in so doing, introduced titles which were not strictly limited to the
educational software market. As part of this strategy, the Company diversified
into the game and entertainment software market, including licensing popular
childrens characters to add to this new product line. The pursuit of this
diversification strategy enabled the Company to continue its increasing revenue
growth; however, these products, including "Speed," "Magic Theater," "Casper"
and "X-Men," failed to achieve the sales levels reached by the Company's earlier
educational software products. In addition, these new products, like those
comprising the Adventure series, had relatively short shelf lives and were
similarly costly to produce, due to significant programming costs, their
dependence upon purchased images and the fees associated with licensing feature
characters. The Company also faced increasing competition within the children's
software market. In response to increased competition, management sought to
differentiate its products through increased spending on promotions, as well as
unique packaging for certain titles. The Company also continued to devote
66
<PAGE>
significant resources to developing new educational software products. During
the spring and summer of 1994, the Company worked with Fanfare Software, a small
software developer, to develop a new software product, "JumpStart Kindergarten,"
the first of a new line of educational software products. The Company
successfully introduced JumpStart Kindergarten in the United States in October
1994.
In August 1995, in connection with the Company's development of other
products in its JumpStart Series, the Company acquired substantially all of the
assets of Fanfare Software. In addition, due to the Company's development of
new products, including products within the JumpStart Series, and expanded
sales, marketing and executive functions, the Company relocated its corporate
headquarters to a substantially larger and more costly facility. Management
offset a portion of these increased operating costs by entering into licensing
agreements with certain original equipment manufacturers ("OEMs"), PackardBell
and other personal computer manufacturers that promoted the sale of certain of
the Companys software titles in combination with other software titles or
personal computers (a practice known within the software industry as
"bundling"). While this strategy decreased the Company's sales and marketing
expenses, the Company's other operating costs continued to increase.
In September 1995, in response to continuing losses from operations and
increased competition, management initiated a restructuring of the Company's
operations. In conjunction with this restructuring, a significant number of the
Company's product development, sales and marketing and administrative employees
were terminated. This restructuring also included a strategic decision to
refocus the Company's efforts on the educational software market. As a result,
the Company de-emphasized titles that were not directly related to the
children's education market and emphasized the development of the JumpStart
Series. The success of JumpStart Kindergarten led to the introduction of a
wider range of similar titles. The JumpStart product line currently offers full
year curriculum software products designed for toddlers, preschool,
kindergarten, first grade, second grade, third and fourth grade children.
Because of the complementary nature of products within the JumpStart Series, the
Company has been able to effectively market such products at a lower cost than
the diverse titles previously offered. In addition, many of the JumpStart
products have been developed from a single software development "engine" which
reduces both product development costs and the time required from product design
to its completion. Moreover, these products are not dependent upon the
inclusion of significant amounts of purchased media or the licensing of popular
television or comic book characters. The decision to concentrate resources on
the JumpStart series, in combination with cost reductions implemented in
connection with the restructuring, has recently enabled the Company to achieve
profitable operations.
The Company currently expects that sales of the JumpStart Series will
account for more than 70% of its revenue in the fiscal year ending March 31,
1997. As a result, the Company's future operating results are significantly
dependent upon continued market acceptance of the JumpStart Series.
Market for the Company's Products
The Company's revenues are derived from the sale of its software products
and, to a lesser extent, product licensing and royalty agreements. The Company
sells its multimedia educational software products primarily through large
software distributors, such as Ingram Micro and Merisel, Inc. Distributors
accounted for an aggregate of approximately 42%, 34%, and 60% of the Company's
net sales for fiscal years 1996, 1995 and 1993, respectively. The Company's
products are also sold through specialty software stores, retail chains,
computer superstores and mass merchants. The Company's has recently begun
efforts to distribute is product via the Internet through its World Wide Web
site, www.Adventure.com.
The Company recognizes revenue from the sale of its products upon shipment.
However as the Company provides to its customers full rights of return for its
products or, alternatively, price reductions, allowances for stock balancing and
returns of defective, shelf-worn and damaged products, and for estimated
potential future returns of products are established at the time of shipment.
Product returns during fiscal 1996 amounted to $3.7 million, or 23.0% of net
sales, compared to $2.8 million, or 13.0% of net sales, in fiscal 1995, compared
to $1.5 million, or 17.0% of net sales, in fiscal 1993. The increase in returns
in fiscal 1996 was primarily related to returns of MS-DOS based product
resulting from the release of Windows 95 in August 1995.
67
<PAGE>
The educational software business for children is highly seasonal.
Typically, sales are highest during the last calendar quarter (which includes
the holiday buying season), and decline significantly in the first calendar
quarter. This seasonal pattern is due primarily to the increased demand for
educational software products during the year-end holiday buying season.
Although the Company believes its curriculum-based software products may be
subject to less pronounced seasonality factors than its previous product
offerings, the Company expects its revenues and operating results will continue
to significantly reflect seasonal factors.
Although the Company has recently attained profitable operations, future
operating results will depend on many factors, including the demand for the
Company's products, the size, timing and structure of significant licenses, the
level of product and price competition, the Company's success in expanding its
direct sales force and indirect distribution channels, changes in pricing
policies by the Company and its competitors, the ability of the Company to
develop and market new products and managements ability to continue to control
operating costs. There can be no assurance that the Company's revenue will grow
or be sustained in future periods or that the Company will remain profitable in
any future period. As is typical in the educational software industry, the
Company depends on the introduction of new products or upgrades to existing
products to replace declining revenues from older products. In addition, the
market for the Company's products is highly competitive. Any significant
reduction in the price of the Company's products or the market's acceptance of
any products, in particular the JumpStart Series, could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's future success depends in large part upon its ability to
continue to offer a broad range of educational computer software products, to
continue to enhance its existing products, to develop and introduce in a timely
manner new products that take advantage of technological advances and to respond
to developing customer demands. The Company also believes that providing a high
level of technical support is key to success in the software market.
Furthermore, while the Company updates its products on a regular basis,
competitors may announce new products with capabilities or technologies that
could have the potential to replace or shorten the life cycles of the Company's
existing products. As a result, the Company believes that continuing investments
in product development and technical support, which may be substantial, are
essential. The timing and amount of research and development expenses may vary
significantly based upon the number of new products and upgrades to existing
products under development during a given period.
68
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue for certain
items in the Company's statements of operations for the fiscal years ended March
31, 1996, March 31, 1995 and December 31, 1993, and for the six months ended
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
YEARS ENDED YEAR ENDED SIX MONTHS ENDED
MARCH 31, DECEMBER 31, SEPTEMBER 30,
------------------ ------------ --------------------
1996 1995 1993 1996 1995
------- ------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................... 47.6% 38.6% 37.8% 18.1% 90.9%
Gross profit............................ 52.4% 61.4% 62.2% 81.9% 9.1%
Expenses:
Research and development.............. 44.5% 35.5% 27.0% 27.9% 65.4%
Sales and marketing................... 47.0% 42.3% 49.7% 34.3% 68.6%
General and administrative............ 27.1% 18.0% 31.3% 12.2% 43.9%
Total operating expenses...... 118.6% 95.8% 108.0% 74.4% 177.9%
Income (loss) from operations........... (66.2%) (34.4%) (45.8%) 7.5% (168.8%)
Other income (expense), net............. (0.3%) 1.1% 0.7% (1.2%) 1.2%
Net income (loss)....................... (66.5%) (33.3%) (45.1%) 6.3% (167.6%)
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net Sales. Net sales increased 91% to $11.6 million during the six months
ended September 30, 1996 from $6.1 million during the comparable period of 1995.
This growth in net revenues was primarily attributable to the introduction of
three new titles in the JumpStart Series, which brought the number of titles in
this series to nine. Management believes that the Company's ability to offer a
wider array of JumpStart products has enabled it to increase sales and decrease
sales and marketing expenditures as a percentage of net sales. This increase in
product sales was offset by a reduction in licensing revenue following the
expiration of agreements with certain personal computer manufacturers and OEM's
which were in place in the prior year, but which were not renewed in fiscal
1996. See "--Fiscal 1996 Compared to Fiscal 1995--Net Sales."
Gross Profit. Cost of goods sold includes the cost of disk and CD-ROM's, product
packaging and other production costs, third party royalties and shipping costs.
Gross profit increased 1615% to $9.5 million during the six months ended
September 30, 1996 from $0.6 million during the comparable period in 1995, while
gross margin increased to 82% from 9.1%. The primary reason for this increase,
as more fully described below, arises from management's decision to charge to
expense approximately $3.0 million of images and other purchased media which
could not be used in the JumpStart products. This increase is also partially
attributable to management's cost-reduction initiative designed to reduce direct
manufacturing costs per product unit. Such efforts included simplifying product
packaging, as well as standardizing packaging used for the JumpStart Series
which enabled the Company to take advantage of quantity discounts.
Sales and Marketing. Sales and marketing expenses, which consist primarily
of salaries, sales commissions and bonuses, decreased 9% to $4.0 million during
the six months ended September 30, 1996 from $4.4 million during the comparable
period of 1995. This decrease was primarily the result of the Company's ability
to leverage advertising and promotion costs across the JumpStart titles as a
result of the commonality among these products. In addition, as part of
management's cost reduction initiative, the Company decreased advertising
expenditures and significantly reduced participation in industry trade shows.
Despite the recent decrease in sales and marketing expenses, management
anticipates that sales and marketing expenses will increase as the Company
further expands its sales, marketing and support staff and responds to increased
levels of competition.
69
<PAGE>
Research and Development. Research and development expenses decreased 15%
to $3.4 million during the six months ended September 30, 1996 from $4.0 million
during the comparable period in 1995. This decrease represents reduced product
development costs, primarily attributable to reduced headcount, as the Company
focused its development efforts on the JumpStart Series. Such cost reductions
were offset by a charge of approximately $600,000 to research and development
arising from the acquisition of substantially all of the assets of Fanfare
Software.
General and Administrative. General and administrative expenses decreased
49% to $1.4 million during the six months ended September 30, 1996 from $2.8
million during the comparable period of 1995. The decrease in such costs
primarily reflected a reduction in the use of management consultants as part of
the Company's cost cutting initiative. Despite the decrease, management believes
that general and administrative costs will increase in the future in order to
support anticipated revenue growth.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales decreased 24% in fiscal 1996 to $16.4 million from
$21.5 million in fiscal 1995. The decrease from fiscal 1995 to fiscal 1996 was
primarily due to a decrease in licensing revenues from OEM's related to certain
titles within the Adventure Series. During fiscal 1996, as part of management's
revised marketing focus on the JumpStart Series, such agreements were not
renewed. Decreased revenues from licensing with OEM's were partially offset by
increased licensing revenues agreements with personal computer manufacturers IBM
and PackardBell to market several of the Company's titles, including certain
older titles in Japan and Western Europe.
Gross Profit. Gross profit decreased 35% in fiscal 1996 to $8.6 million
from $13.2 million in fiscal 1995. The primary cause of this decrease relates to
management's decision to charge to expense approximately $3.1 million of images
and other purchased content. These images had been accumulated for use in titles
to be developed in the Company's Adventure Series. As a result of management's
change in product development focus, such purchased images were deemed to have
no future value and were accordingly charged to cost of goods sold during fiscal
1996. As a consequence, gross margin decreased to 61% from 52%.
Sales and Marketing. Sales and marketing expenses decreased 15% in fiscal
1996 to $7.7 million from $9.1 million in fiscal. This decrease was primarily
due to reduction in sales and sales support personnel and the termination of
certain marketing and product promotion programs in connection with the Company,
strategy to de-emphasize products not directly related to educational software
market and, in particular, the JumpStart Series of products.
Research and Development. Research and development decreased 4% from $7.6
million in fiscal 1995 to $7.3 million in fiscal 1996. This decrease resulted
from reduced development efforts in connection with management's decision to
focus research and development on the JumpStart line of products.
General and Administrative. General and administrative expenses increased
15% in fiscal 1996 to $4.4 million from $3.9 million in fiscal 1995. This
increase reflects increased occupancy costs due to the Company's relocation to
its new facility in August 1995, and increased fees paid to management
consultants and increased order fulfillment costs as the Company outsourced
certain order processing and product delivery functions as a cost savings
measure.
70
<PAGE>
FISCAL 1995 COMPARED TO FISCAL 1993
Net Sales. Net sales increased 143% in fiscal 1995 to $21.5 million from
$8.8 million in fiscal 1993. This increase was primarily due to the broadening
of the Company's product line as additional titles in the Adventure Series were
developed and released, and the diversification of the Company's products into
game and entertainment titles. In addition, the Company earned approximately $2
million in licensing revenue under a licensing agreement with PackardBell
pursuant to which certain of the Company's titles were sold with personal
computers, and an additional $2 million related to software bundling agreements
with certain OEM's.
Gross Profit. Gross profit increased 140% in fiscal 1995 to $13.2 million
from $5.5 million for fiscal 1993; gross margin remained relatively unchanged,
decreasing from 62% to 61%. Although the Company reduced per unit prices on
certain titles within the Adventure Series in response to increased competition,
the resultant decrease in gross profit was substantially offset by the higher
margins generated under licensing agreements.
Sales and Marketing. Sales and marketing expenses increased 107% in fiscal
1995 to $9.1 million from $4.4 million in fiscal 1993. This increase was
primarily the result of a greater number of employees performing the sales and
marketing function to support increased product revenues, increased advertising
and trade show expenses and expanded third-party marketing activities and
promotions related to new product releases.
Research and Development. Research and development expenses increased 217%
to $7.6 million in fiscal 1995 from $2.4 million in fiscal 1993. The increase
primarily reflects additional headcount and related development costs incurred
in support of efforts to expand the Company's product line.
General and Administrative. General and administrative expenses increased
40% to $3.9 million in fiscal 1995 from $2.8 million in fiscal 1993. The
increase is primarily attributable to the addition of executive and
administrative personnel, including costs associated with the recruitment and
relocation of a new Chief Executive Officer in November 1994 and the hiring of
additional employees for the customer support function as the Company expanded
its product line.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's principal sources of liquidity have
consisted of net proceeds of approximately $30.3 million derived from the
private sales of Company Common Stock and Company Preferred Stock, cash
generated from operations of approximately $53.6 million, borrowings from time
to time pursuant to its existing revolving credit facilities and equipment
leasing arrangements.
As a consequence of infusions of cash arising from private sales of Company
Preferred Stock and, to a lesser extent, the seasonality of the Company's
business, the Company has periodically generated significant cash reserves. The
Company's policy is to invest such excess cash in short-term and intermediate-
term investment grade instruments, primarily obligations of the United States
government. Management has in turn liquidated such investments, as required, to
support the Company's growth and its ongoing investment activities in research
and development. The Company's operating activities used cash of $5.6 million,
$6.5 million, $0.2 million and $3.9 million for the fiscal years ended March 31,
1996 and 1995, the three month period ended March 31, 1994 and the fiscal year
ended December 31, 1993, respectively, primarily as a consequence of continuing
losses from operations.
Investing activities provided cash of $0.2 million for the year ended March
31, 1996. The principal source of such funds arose as a result of the
liquidation of certain short-term investments purchased with the proceeds from a
private placement of Company Preferred Stock. For the year ended March 31,
1995, the three month period ended March 31, 1994 and the year ended December
31, 1993, investing activities used $4.5 million, $0.4 million and $1.0 million,
respectively. Investing activities for these periods included the purchase of
short-term investments, the acquisition of property and equipment, and the
purchase of raw materials for inclusion in the Company's software products.
71
<PAGE>
The software development business is not capital intensive; however the
Company is required to periodically upgrade equipment, comprising primarily
personal computers and related peripherals, as part of its ongoing product
development efforts. The Company has financed the majority of its computer
equipment, through a capital lease line of credit arrangement. This capital
lease arrangement provides for financing of equipment acquisitions of up to $1.5
million. The obligations arising from such acquisitions are to be repaid over a
forty-two month term along with annual interest at a rate of 10.7%. As of
September 30, 1996, the Company has acquired equipment aggregating $1.2 million
pursuant to this arrangement. In addition, in connection with the relocation of
the Company's facilities in August 1995, the Company obtained financing from a
financial institution for certain leasehold improvements in exchange for a $0.8
million note. The note is to be repaid over a five year term and bears interest
at an annual rate of 11%. The note is secured by a stand-by letter of credit,
which also secures the Company's performance under the Company's lease of its
facilities. In October 1996, the financial institution agreed to release the
letter of credit in the event the Company repaid amounts outstanding under the
note.
Financing activities have provided $4.3 million, $11.9 million, $0.9
million and $6.2 million for the years ended March 31, 1996 and 1995, the three
month period ended March 31, 1994 and the year ended December 31, 1993,
respectively. Such cash inflows principally comprise proceeds from the sale of
Company Preferred Stock and, to a lesser extent, borrowings under the Company's
revolving credit facilities.
As of September 30, 1996, the Company had $1.4 million in cash on deposit.
The Company has no material cash commitments for debt repayment, equipment
purchases or any other expenditure. Management believes that its existing cash
resources in combination with cash flow expected to be provided by its
continuing operations and the availability of funds under its existing revolving
credit facilities will provide adequate funding to meet the Company's cash
requirements as an independent entity through March 1998. However, in the event
that the Merger is not consummated and management seeks to expand the Company's
operations through additions to its existing product line, penetration of new
markets or the acquisition of complementary businesses, the Company would be
required to raise additional funds through the private placement of preferred
stock of the Company, an initial public offering of Company Common Stock or
other means.
The Company presently has access to additional funds from its existing
revolving credit facilities with a bank which provide for short-term borrowings
of up to $3.0 million as well as from a revolving loan arrangement with CUC
International which provides for short-term borrowings of a similar amount. See
"Proposal No. 1--The Merger--Loan Agreement." Borrowings under each such credit
arrangements are secured by the Company's assets and require the payment of
interest on the outstanding principal balances at an annual rate of prime plus
2%. As of September 30, 1996, the Company had utilized $0.8 million of the
amount available under the bank line of credit agreement in connection with the
issuance of the letter of credit discussed above, and no amounts were
outstanding under the agreement with CUC International.
In the event the proposed Merger is not consummated, the lending agreement
with CUC International will terminate by its terms. The revolving credit
arrangements with the bank will expire in April 1997. As of September 30, 1996,
the Company was not in compliance with certain covenants contained in its line
of credit arrangement with the bank; a waiver of such events of non-compliance
has been granted through January 31, 1997. Management believes it will be able
to obtain further waivers, if necessary, and extend the term of the line of
credit agreement or, if unable to do so, to obtain replacement financing under
substantially similar terms. However, no assurances can be given that
management would be successful in obtaining such waiver, extension or
replacement financing.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of." SFAS 121 will become effective for the
year ending March 31, 1997. The Company has studied the implication of SFAS 121
and, based upon its initial evaluation, does not believe the adoption of this
Statement will have a material impact on its financial condition or results of
operations.
72
<PAGE>
In October 1995, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation", which will be effective for the Company beginning April 1,
1997. SFAS 123 requires expanded disclosures on stock-based compensation
arrangements with employees and encourages, but does not require, compensation
costs to be measured based upon the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 for
its stock-based compensation awards and will disclose the pro forma effect on
its results of operations.
IMPACT OF INFLATION
The Company does not believe that inflation will have a significant impact
on its results of operations or financial condition.
73
<PAGE>
PRINCIPAL STOCKHOLDERS
THE COMPANY
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of Company Shares as of the Record Date
by (i) each person (or group of affiliated persons) who is known by the Company
to beneficially own more than 5% of any class of the Company's capital stock,
(ii) each of the Company's directors and executive officers and (iii) the
Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------------------- ---------------------------------
NUMBER OF
5% STOCKHOLDERS, NUMBER OF SHARES PERCENT SHARES PERCENT
DIRECTORS, EXECUTIVE BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OFFICERS AND DIRECTORS AS A GROUP OWNED(1) OWNED(1)(2) OWNED(1) OWNED(1)(2)
- -------------------------------------- ----------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Entities Affiliated with Mayfield - * 1,747,702 13.52%
Ventures
2800 Sand Hill Road
Menlo Park, CA 94025
Mohr, Davidow Ventures III, L.P. - * 3,137,722 24.28%
3000 Sand Hill Road
Bldg. 1, Ste. 240
Menlo Park, CA 94025
Random House, Inc. - * 2,216,940 17.16%
201 E. 50th St., 12th Flr.
New York, NY 10022
Steven Spielberg (3) 1,645,487 15.21% 354,306 2.74%
c/o Sanders, Barnett, Goldman,
Simons & Mosk
1901 Avenue of the Stars
Suite 850
Los Angeles, California 90067
William T. Gross 996,749 10.86% 1,456,749 11.27%
Chairman of the Board
Knowledge Adventure, Inc.
1311 Grand Central Avenue
Glendale, CA 91201
Lawrence Gross(4) 1,380,000 14.56% 275,000 2.08%
President, Chief Executive Officer and
Director
Knowledge Adventure, Inc.
1311 Grand Central Avenue
Glendale, CA 91201
Gerald Breslauer - * - *
Director
Jon Feiber(5) - * 3,137,722 24.28%
Director
Mohr, Davidow Ventures III, L.P.
3000 Sand Hill Road
Bldg. 1, Ste. 240
Menlo Park, CA 94025
Michael Levinthal(6) - * 1,747,702 13.52%
Director
Entities Affiliated with Mayfield
Ventures
2800 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
74
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
William Lohse 806,749 8.79% 806,749 6.24%
Director
c/o Brobeck, Phleger & Harrison
1301 Avenue of the Americas
New York, New York 10019
Alberto Vitale(7) - * 2,216,940 17.16%
Director
Random House, Inc.
201 E. 50th St., 12th Flr.
New York, NY 10022
Jay A. Gordon 125,000 1.36% - *
Vice President of Sales
Robert Wrubel(8) 200,000 2.16% - *
Vice President, Development
Barton Listick(9) 609,000 6.63% - *
Vice President, Development
Knowledge Adventure, Inc.
1311 Grand Central Avenue
Glendale, CA 91201
George Lichter(10) 125,000 1.36% - *
Vice President, Business Development
and Legal Affairs
Jay Meschel 100,000 1.09% - *
Acting Chief Financial Officer
Marcee Kleinman(11) 160,000 1.74% - *
Vice President of Operations
All executive officers and directors as 4,502,498 47.00% 9,640,862 73.05%
a group (13 persons)
</TABLE>
* Less than 1.0%
____________________
(1) Except as otherwise indicated in the other footnotes to the table, the
information provided in the table is based upon information furnished to
the Company by the persons named therein. Subject to applicable community
property laws, the persons named in the table have sole voting and
investment power with respect to all of the Company Shares shown as
beneficially owned by them.
(2) Percentage ownership reflected in the table is based on 9,175,404 shares of
Company Common Stock and 12,922,688 shares of Company Preferred Stock
outstanding on the Record Date, calculated on an as-converted basis.
The ownership of shares of Company Preferred Stock is expressed on an as-
converted basis, and, consequently, the number of shares of Series D
Preferred Stock and Series E Preferred Stock reflected in the table include
anti-dilution adjustments pursuant to Article IV, Section 5(e) of the
Restated Certificate of Incorporation of the Company of 1.02757-to-1 and
1.00223-to-1, respectively. The number of shares of Company Common Stock
and Company Preferred Stock beneficially owned includes the shares issuable
pursuant to stock options that are exercisable within 60 days of the Record
Date. Shares issuable pursuant to stock options are deemed outstanding for
computing the percentage owned by the person holding such options but are
not deemed outstanding for computing the percentage of any other person.
(3) Includes options to purchase 1,645,487 shares of Company Common Stock.
(4) Includes options to purchase 300,000 shares of Company Common Stock and
275,000 shares of Series A Preferred Stock. Also includes 110,000 shares
of Company Common Stock held by Lawrence Gross as custodian for a family
member for which Mr. Gross disclaims beneficial ownership.
(5) Includes 3,137,722 shares of Company Preferred Stock held by funds
affiliated with Mohr, Davidow Ventures. Mr. Feiber is a General Partner of
Mohr, Davidow Ventures and disclaims beneficial
75
<PAGE>
ownership of shares held by funds affiliated with Mohr, Davidow Ventures
except to the extent of his pecuniary interest.
(6) Includes 1,747,702 shares of Company Preferred Stock held by funds
affiliated with Mayfield Venture Partners. Mr. Levinthal is a General
Partner of Mayfield Venture Partners and disclaims beneficial ownership of
shares held by funds affiliated with Mayfield Venture Partners except to
the extent of his pecuniary interest.
(7) Includes 2,216,940 shares of Company Preferred Stock held by Random House,
Inc.. Mr. Vitale is the Chairman of Random House, Inc. and disclaims
beneficial ownership of shares held by Random House.
(8) Includes options to purchase 70,000 shares of Company Common Stock.
(9) Includes options to purchase 9,000 shares of Company Common Stock.
(10) Includes options to purchase 25,000 shares of Company Common Stock.
(11) Marcee Kleinman is the sister of Lawrence S. Gross and William T. Gross.
None of the current executive officers or directors of the Company will
serve as an executive officer or director of CUC International.
CUC INTERNATIONAL
CUC International is not aware of any person who owns, as of December 20,
1996, more than 5% of the outstanding shares of CUC Common Stock.
76
<PAGE>
MANAGEMENT OF CUC INTERNATIONAL
DIRECTORS AND EXECUTIVE OFFICERS OF CUC INTERNATIONAL
The following table sets forth certain information regarding the current
directors of CUC International:
<TABLE>
<CAPTION>
Year First Appointed
or Elected Year Term
to the Board Expires
Name Principal Occupation & Other Directorships Age -------------------- ---------
- ---- ------------------------------------------ ---
<S> <C> <C> <C> <C>
Walter A. Forbes Mr. Forbes has been Chairman of CUC 54 1974 1997
International's Board of Directors
since 1983 and its Chief Executive
Officer since 1976, and was CUC
International's President between 1982
and May 1991. Mr. Forbes is a director
of Sierra and NFO Research, Inc.
E. Kirk Shelton Mr. Shelton has been President of CUC 41 1995 1998
International since May 1991, Chief
Operating Officer of CUC International
since 1988 and Executive Vice President
of CUC International from 1984 to 1991.
Christopher K. McLeod Mr. McLeod has been an Executive Vice 41 1995 1999
President of CUC International since
1986, a member of the Office of the
President of CUC International since
1988 and served as President of CUC
International's Comp-U-Card Division
between 1988 and August 1995.
Robert M. Davidson Mr. Davidson has been a Vice Chairman 52 1996 1998
and a director of CUC International
since July 1996, when CUC International
acquired Davidson. In addition, Mr.
Davidson is the Chief Executive Officer
and a director of Davidson, and is the
Chairman and Chief Executive Officer of
CUC Software. Prior to joining CUC
International, Mr. Davidson was the
Chairman of the Board and Chief
Executive Officer of Davidson. He
joined Davidson as an employee in 1989
and served as Secretary of Davidson
from 1984 to 1996.
Janice G. Davidson Ms. Davidson has been the President of 52 1996 1997
Davidson and a director of CUC
International since July 1996, when CUC
International acquired Davidson. Prior
to joining CUC International, Ms.
Davidson was the President and a
director of Davidson since she founded
Davidson in 1982.
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Kenneth A. Williams Mr. Williams has been a Vice Chairman 42 1996 1999
and a director of CUC International
since July 1996, when CUC International
acquired Sierra. He is also a member
of the Office of the President of CUC
International. In addition, Mr.
Williams is the Chief Executive Officer
and a director of Sierra. Prior to
joining CUC International, Mr. Williams
was the Chairman of the Board and Chief
Executive Officer of Sierra.
Bartlett Burnap Mr. Burnap is an independent investor. 64 1976 1997
Since 1978, he has been President of
the Ralph J. Weiler Foundation, a
charitable foundation. Since 1981, he
has been President of CIB Associates, a
venture capital firm. Mr. Burnap was
Chairman of the Board of Directors of
CUC International between 1976 and 1983.
Stephen A. Greyser Mr. Greyser is a professor of marketing 61 1984 1998
at the Harvard Business School, on
whose faculty he has served for over 25
years. He also serves as a director of
Edelman Worldwide (a public relations
firm) and Opinion Research Corporation
and is a past Vice Chairman of the
Public Broadcasting Service.
Burton C. Perfit In 1986, Mr. Perfit retired from Jack 67 1982 1998
Eckerd Corporation after fifteen years
of service. Mr. Perfit became a Senior
Vice President of Eckerd in 1980 and
served as such until 1986.
Robert P. Rittereiser Mr. Rittereiser is Chairman and Chief 57 1982 1997
Executive Officer of Gruntal Financial
Corp., an investment services firm based in
New York City. He is Chairman of Yorkville
Associates Corp., a private investment
and financial concern formed in April
1989. He served as a Trustee of the DBL
Liquidating Trust from April 1992 until
April 1996. He served as a Director in 1990,
as Chairman in November 1992 and President
and Chief Executive Officer from March 1993
until February 1995 of Nationar Inc., a banking
services corporation.(1) He is Director of
Ferrofluidics Corporation, Interchange
Financial Services Corp. and Wallace Computer
Services, Inc.
</TABLE>
- ------------------
(1) On February 6, 1995, the Acting Superintendent of Banks of the State of New
York filed a petition to take over the business of such corporation and the
New York State Banking Department has since been liquidating the assets of
such corporation.
78
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
T. Barnes Donnelley Mr. Donnelley is, and has been for at 62 1977 1999
least the past five years, an
independent investor.
Stanley M. Rumbough, Jr. Mr. Rumbough is, and has been for at 76 1976 1999
least the past five years, an
independent investor and is a director
of International Flavors and
Fragrances, Inc.
</TABLE>
The following table sets forth certain information regarding the
current executive officers of CUC International:
<TABLE>
<CAPTION>
Name Age Position and Period Served
---- --- --------------------------
<S> <C> <C>
Walter A. Forbes 54 Chairman of the Board of Directors of
CUC International since 1983, Chief
Executive Officer since 1976 and
President from 1982 to May 1991.
E. Kirk Shelton 41 President of CUC International since
May 1991, Chief Operating Officer since
1988 and Executive Vice President from
1984 to May 1991.
Christopher K. McLeod 41 Executive Vice President of CUC
International since 1986, member of the
Office of the President since 1988 and
President of CUC International's
Comp-U-Card Division from 1988 to
August 1995.
Cosmo Corigliano 37 Senior Vice President of CUC
International since 1991, Chief
Financial Officer of CUC International
since February 1, 1995 and Controller
of CUC International from 1984 through
January 1995.
Amy N. Lipton 42 Senior Vice President and General
Counsel of CUC International since
1990, Vice President and General
Counsel of CUC International since 1987.
</TABLE>
All executive officers of CUC International are appointed at the annual
meeting or interim meetings of the Board of Directors of CUC International.
Each executive officer is appointed by the Board to hold office until his or her
successor is duly appointed and qualified.
EXECUTIVE COMPENSATION
For certain information concerning the executive compensation of the
directors and executive officers of CUC International, see the CUC International
10-K which is incorporated herein by reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions
with respect to the directors and executive officers of CUC International other
than Robert M. Davidson, Janice G. Davidson and Kenneth A. Williams, see the CUC
International 10-K which is incorporated herein by reference. The following
sets forth information concerning certain relationships and related
transactions with respect to Mr. Davidson, Ms. Davidson and Mr. Williams:
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Registration Rights.
In connection with the Davidson Acquisition, CUC International entered into
a registration rights agreement (the "Davidson Registration Rights Agreement")
with Robert M. Davidson, Janice G. Davidson and certain related parties (Mr. and
Mrs. Davidson and such related parties are hereinafter referred to herein as
the "Davidsons"). As more fully discussed below, the Registration Rights
Agreement entitles the Davidsons to effect the registration of the shares they
received pursuant to the Davidson Acquisition, including those shares received
by the Davidsons in connection with the sale of certain real property owned by
them to a wholly owned subsidiary of CUC International.
Demand Registration. Pursuant to the Registration Rights Agreement, CUC
International agreed, among other things, that at any time, and from time to
time, commencing on July 24, 1996 (the "Davidson Effective Date") and ending
on July 24, 2002 (such six-year period, the "Davidson Effective Period"), upon
the written request of the Davidsons requesting that CUC International effect
the registration under the Securities Act of Registrable Securities (as
defined in the Registration Rights Agreement) which, in the aggregate,
constitute at least 3,000,000 shares of CUC Common Stock, CUC International
will use its best efforts to register under the Securities Act (a "Demand
Registration"), as expeditiously as may be practicable, the Registrable
Securities which CUC International has been requested to register, all to the
extent requisite to permit the disposition of such Registrable Securities in
accordance with the methods intended by the Davidsons; provided that (A) the
Davidsons may not exercise a Demand Registration within three months of the
effective date of any registration statement covering equity securities of CUC
International (other than on Form S-4 or Form S-8 or any successor or similar
registration form) and (B) CUC International will not be required to effect
any Demand Registration if CUC International reasonably determines that the
sale of the Registrable Securities would be likely to cause the Davidson
Acquisition not to be accounted for as a "pooling-of-interests."
Pursuant to the Demand Registration rights of the Davidsons, CUC
International filed a registration statement covering the resale of CUC Common
Stock issued by CUC International in connection with a certain acquisition,
which registration statement was declared effective by the Commission on
September 18, 1996. In connection therewith, CUC International waived the
condition described in clause (A) above in order to allow the Davidsons to
exercise the Demand Registration to which such offering related.
Pursuant to the Registration Rights Agreement, CUC International also may
defer the filing or effectiveness of any registration statement related to a
Demand Registration for a reasonable period of time not to exceed 90 days
after such request if (A) CUC International is, at such time, conducting an
underwritten public offering of CUC Common Stock and is advised by the
managing underwriter(s) that such offering would be adversely affected by such
filing or (B) CUC International determines, in its good faith and reasonable
judgment, that any such filing or the offering of any Registrable Securities
would materially impede, delay or interfere with any material proposed
financing, offer or sale of securities, acquisition, corporate reorganization
or other significant transaction involving CUC International; provided,
however, with respect to clauses (A) or (B) above, that CUC International is
not entitled to postpone such filing or effectiveness if, within the preceding
12 months, it has effected two postponements, and following such postponements
the Registrable Securities to be sold pursuant to the postponed registration
statements were not sold (for any reason); and provided further, that during
the period commencing on the Davidson Effective Date and ending 120 days
thereafter, CUC International may not defer the filing or effectiveness of the
first Demand Registration requested for more than 30 days.
Incidental ("Piggyback") Registration. CUC International has further
agreed that if at any time it proposes to register shares of CUC Common Stock
under the Securities Act for its own account (other than a registration on
Form S-4 or Form S-8, or any successor or similar registration form) in a
manner that would permit registration of Registrable Securities for sale to
the public under the Securities Act, it will promptly give written notice to
the Davidsons of its intention to do so and will use its best efforts to
include in the proposed CUC International registration all Registrable
Securities that CUC International is requested in writing to register by the
Davidsons.
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<PAGE>
Directorships. Immediately following the Davidson Acquisition and the
Sierra Acquisition, CUC International increased the size of its Board of
Directors by three directors and caused Robert M. Davidson, Janice G. Davidson
and Kenneth A. Williams to be appointed to the Board of Directors of CUC
International for initial ierms expiring two years, one year and three years,
respectively, following the date of the Company's first annual meeting of
stockholders next following February 19, 1996, and further caused each of Mr.
Davidson and Mr. Williams to be elected as a Vice Chairman of the Board of
Directors of CUC International. From and after the Davidson Effective Date, and
for so long as Mr. and Mrs. Davidson collectively beneficially own (as such term
is defined in Section 13 of the Exchange Act and the rules and regulations
thereunder) 25% of the shares of CUC Common Stock received by them in the
Davidson Acquisition, the Company has agreed to cause at least one of the
Davidsons to be included in the slate of nominees for election to the Board of
Directors of CUC International at each annual meeting of holders of CUC Common
Stock and at any special meeting of such holders at which Directors are to be
elected (unless one of the Davidsons is then a member of a director class whose
term does not expire at such meeting).
Employment and Noncompetition Agreements.
In connection with the Davidson Acquisition, the Davidsons entered into
separate employment and noncompetition agreements with CUC International.
Pursuant to his employment agreement with CUC International, Mr. Davidson
serves (i) as a Vice Chairman of the CUC International Board and as Davidson's
Chief Executive Officer and a director of Davidson and (ii) as a director,
Chairman and Chief Executive Officer of CUC International's educational and
entertainment software division, and is responsible for the overall management
of Davidson and CUC International's educational and entertainment software
division. Pursuant to her employment agreement with CUC International, Mrs.
Davidson serves as Davidson's President and as a director of Davidson, and
serves as a director of CUC International's educational and entertainment
software division. The term of each of the Davidsons' employment continues
through July 24, 1999, subject to extension or termination as provided in their
agreements. The Davidsons are eligible for discretionary annual incentive
compensation awards and are entitled to participate in all compensation or
employee benefit plans or programs and receive all benefits and perquisites for
which salaried employees of CUC International are eligible under any plan or
program now in effect or later established by CUC International for salaried
employees generally.
The non-competition agreements with the Davidsons provide that, until July
24, 2001, without the prior written approval by the Board of Directors of CUC
International, the Davidsons must abstain from (i) engaging in competition, or
directly or indirectly owning or holding a proprietary interest in or being
employed by, or consulting with or receiving compensation from, any party which
competes in any way or manner with the business of Davidson or any of its
subsidiaries, as such business or businesses may be conducted from time to time;
(ii) soliciting any clients of Davidson or any of its subsidiaries for any
business of Davidson or any of its subsidiaries or discussing with any employee
of CUC International or any of its affiliates information or operations of any
business intended to compete with CUC International or any of its affiliates;
and (iii) soliciting or inducing any person who is an employee of Davidson or
any of its subsidiaries to terminate any relationship such person may have with
Davidson or any of its subsidiaries. In addition, the Davidsons have agreed
that during such period, they will not directly or indirectly engage, employ or
compensate, or cause or permit any person with whom they may be affiliated to
engage, employ or compensate, any employee of CUC International or any of its
affiliates.
In connection with the Sierra Acquisition, Mr. Williams entered into
employment and noncompetition agreements with CUC International.
Pursuant to his employment agreement with CUC International, Mr. Williams
(i) is a member of the Board of Directors of CUC International and serves as a
Vice Chairman of such Board, and is a member of the Office of the President of
CUC International, and (ii) continues to serve as a director and the Chief
Executive Officer of Sierra and reports to the President of CUC International.
The term of his employment continues for a period of 36 months, subject to
extension or termination as provided in the agreement. Mr. Williams is eligible
for discretionary annual incentive compensation awards and is entitled to
participate in all compensation or employee
81
<PAGE>
benefit plans or programs and receive all benefits and perquisites for which
salaried employees of CUC International are eligible under any plan or program
now in effect or later established by CUC International for salaried employees
generally.
The non-competition agreement with Mr. Williams provides, among other
things, that, from the date of the closing of the Sierra Acquisition to the
third anniversary thereof, he will not make any statements or perform any acts
intended to or which may have the effect of advancing the interest of any
existing or prospective competitors of Sierra or any of its subsidiaries or in
any way injuring the interests of Sierra or any of its subsidiaries and, without
the prior written approval of the Board of Directors of CUC International, he
will not engage in competition, or directly or indirectly own or hold a
proprietary interest in or be employed by, or consult with or receive
compensation from, any party which competes, in any way or manner with the
business of CUC International or any of its subsidiaries.
Real Property Agreement. Pursuant to a certain agreement dated July 23,
1996, Mr. and Mrs. Davidson sold to a subsidiary of CUC International,
simultaneously with the closing of the Davidson Acquisition, certain real
property then owned by them and leased to Davidson. The purchase price was paid
by delivery of 221,799 shares of CUC Common Stock, which shares constitute
Registrable Securities pursuant to the Registration Rights Agreement.
82
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The rights of the stockholders of the Company are governed by the Restated
Certificate of Incorporation of the Company (the "Company's Certificate"), its
Bylaws (the "Company's Bylaws") and the DGCL. The rights of the stockholders of
CUC International are governed by the Restated Certificate of Incorporation of
CUC International ("CUC International's Certificate"), its By-Laws ("CUC
International's By-Laws") and the DGCL. After the Effective Time, the rights of
the stockholders of the Company who become CUC stockholders will be governed by
CUC International's Certificate, CUC International's By-Laws and the DGCL. In
most respects, the rights of the respective stockholders of the Company and CUC
International are similar because the Company and CUC International are each
governed by the DGCL. The following is a summary of the material differences
between the rights of the Company's stockholders and the CUC International's
stockholders under the Company's Certificate and Bylaws and CUC International's
Certificate and By-Laws, respectively, and is qualified in its entirety by such
documents.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of CUC International consists of 1,000,000
shares of preferred stock, par value $.01 per share, of which no shares are
issued and outstanding, and 600,000,000 shares of CUC Common Stock, of which
approximately 397,000,000 shares were issued and outstanding as of December 1,
1996.
The authorized capital stock of the Company consists of 50,000,000 shares
of Company Common Stock and 30,000,000 shares of Company Preferred Stock, of
which there are six outstanding series as more fully described under
"--Preferred Stock--The Company" below. As of the Record Date, there were
9,175,404 shares of Company Common Stock outstanding held of record by
approximately 240 stockholders, and 12,908,940 shares of Company Preferred Stock
outstanding held of record by approximately 33 stockholders.
COMMON STOCK
Holders of CUC Common Stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of CUC Common Stock are not entitled to
vote cumulatively for the election of directors. Holders of CUC Common Stock
have no redemption, conversion, preemptive or other subscription rights. There
are no sinking fund provisions relating to the CUC Common Stock. In the event
of the liquidation, dissolution or winding up of CUC International, holders of
CUC Common Stock are entitled to share ratably in all of the assets of CUC
International, if any, remaining after satisfaction of the debts and liabilities
of CUC International. The outstanding shares of CUC Common Stock are, and the
shares of CUC Common Stock to be issued to the Company's stockholders in the
Merger will be, upon payment therefor as contemplated therein, validly issued,
fully paid and nonassessable.
Holders of Company Common Stock are entitled to one vote per share upon
such matters and in such manner as may be provided by law. Subject to
preferences that may be applicable to any outstanding Company Preferred Stock,
the holders of Company Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. As described more fully below
under "--Preferred Stock--The Company--Liquidation Preference," in the event of
liquidation, dissolution or winding up of the Company (which includes the
Merger), the holders of Company Common Stock are entitled to share ratably with
the holders of Company Preferred Stock in all assets remaining after the payment
of liabilities and the liquidation preference rights of the holders of Company
Preferred Stock. The Company Common Stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Company Common Stock. All outstanding shares of
Company Common Stock are fully paid and non-assessable.
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<PAGE>
PREFERRED STOCK
CUC International
The Board of Directors of CUC International is authorized, subject to
certain limitations prescribed by law, to issue preferred stock in one or more
classes or series and to fix the designations, powers, preferences, rights,
qualifications, limitations or restrictions of any such class or series. The
rights of holders of CUC Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of CUC International. CUC
International has no current plans to issue shares of preferred stock.
The Company
The Company Preferred Stock has been divided into six series as follows:
5,000,000 shares are designated Series A Preferred Stock, 3,253,754 of which
were issued and outstanding as of the Record Date; 2,764,096 shares are
designated Series B Preferred Stock, all of which were issued and outstanding as
of the Record Date; 3,634,412 shares are designated Series C Preferred Stock,
all of which were issued and outstanding as of the Record Date; 321,942 shares
are designated Series D Preferred Stock, all of which were issued and
outstanding as of the Record Date; 2,186,053 shares are designated Series E
Preferred Stock, all of which were issued and outstanding as of the Record Date;
and 800,000 shares are designated Series F Preferred Stock, 748,683 of which
were issued and outstanding as of the Record Date.
Liquidation Preference.
----------------------
In the event of any liquidation, dissolution or winding up of the Company
(which includes the Merger), the holders of Company Shares are entitled to
receive the following amounts in the following order of priority:
(i) First, holders of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock are entitled to receive an amount per share equal to
$0.8885, $2.4213, $6.2123, $5.0319 or $4.6749, respectively, plus any
declared but unpaid dividends on such share;
(ii) Second, holders of Series A Preferred Stock and Series B Preferred
Stock are entitled to receive amounts per share equal to $3.0656 and
$1.5328, respectively, plus any declared and unpaid dividends on such
shares of Series A Preferred Stock;
(iii) Third, holders of Series A Preferred Stock are entitled to receive
an amount per share equal to $1.777; and
(iv) Finally, the remaining assets of the Company available for
distribution are distributed pro rata among the holders of shares of
Company Preferred Stock and Company Common Stock on an as-converted
basis. See "Proposal No. 2--The Charter Clarification."
Dividends.
---------
Subject to the preferences of any outstanding Company Preferred Stock,
holders of Company Preferred Stock are entitled to receive ratably such
noncumulative dividends, at the same time and on the same basis, as holders of
Company Common Stock when, as and if declared by the Company Board.
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<PAGE>
Redemption.
----------
The holders of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock may elect
to have their shares redeemed, and, upon such election, the Company is obligated
to redeem, out of funds legally available therefor, on each of June 30, 1997,
June 30, 1998, June 30, 1999 and June 30, 2000 (each of which is hereinafter
referred to as a "Redemption Date") one-fourth of the shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock held by each holder thereof . The
Redemption Dates are intended to provide four separate opportunities for holders
of Company Preferred Stock to elect a redemption. The Company would effect such
redemption by paying in cash a sum per share equal to:
(i) $0.8885 for each share of Series B Preferred Stock plus all declared
but unpaid dividends on such share;
(ii) $2.4213 for each share of Series C Preferred Stock plus all declared
but unpaid dividends on such share;
(iii) $6.2123 for each share of Series D Preferred Stock plus all declared
but unpaid dividends on such share;
(iv) $5.0319 for each share of Series E Preferred Stock plus all declared
but unpaid dividends on such share; and
(v) $4.6749 for each share of Series F Preferred Stock plus all declared
but unpaid dividends on such share.
Notwithstanding the redemption obligations of the Company set forth above,
the Company is under no obligation to make any redemption payment on a
Redemption Date if it receives a waiver of such obligation on the fifth day
preceding such Redemption Date from holders of at least 66-2/3% of the then
outstanding Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock (voting
together on an as-converted basis).
Conversion.
----------
At the option of the holder, each share of Company Preferred Stock may be
converted at any time and from time to time into one share of Company Common
Stock, subject to adjustment for, among other things, stock splits, stock
dividends and issuances of additional shares of Common Stock and securities
convertible into Company Common Stock at a per share price less than the
original issue price of such share of Company Preferred Stock. In addition, each
share of Company Preferred Stock shall automatically be converted into Company
Common Stock upon the vote of 66-2/3% of the then outstanding Series B, Series
C, Series D, Series E, and Series F Preferred Stock or upon the sale of the
Company Common Stock in a firm commitment underwritten public offering in which
the offering price is not less than $6.2123 per share, subject to adjustment,
and $7.5 million in the aggregate.
Voting.
------
In general, the holder of each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock is entitled to the number of votes
equal to the number of shares of Company Common Stock into which such share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
could be converted as of the record date for determination of the stockholders
entitled to vote on such matters or, if no such record date is established, at
the date such vote is taken, such vote to be counted together with all other
shares of stock of the Company having general voting power and not separately
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<PAGE>
as a class., on all matters on which holders of Company Common Stock are
entitled to vote and as otherwise provided by law. See "--Directors--Election,"
below for information regarding the election of directors.
Protective Provisions.
---------------------
The protective provisions of the Company's Certificate require that the
Company obtain the approval of the holders of at least 66-2/3% of the
outstanding shares of Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock (voting
together as a single class and on an as-converted basis, and subject to the last
paragraph of this subsection) to:
(i) amend the charter or bylaws of the Company to change the preferences,
rights, privileges, or powers of, or the restrictions provided for
the benefit of, the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock;
(ii) increase the authorized number of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock;
(iii) authorize or issue shares of any class or Series of stock having any
preference as to dividends, liquidation preferences, or voting
rights, superior to any such preference or priority of the Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock or Series F Preferred Stock;
(iv) reclassify any shares of capital stock of the corporation into shares
having any preference or priority as to dividends, liquidation
preferences, or voting rights, superior to any such preference or
priority of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock;
(v) pay any dividends on the Company Common Stock;
(vi) repurchase, acquire, or retire any shares of Company Common Stock,
other than pursuant to the terms of any agreement approved by the
Company Board between the Company and any stockholder, employee,
director, officer, consultant or vendor; or
(vii) sell, convey, or otherwise dispose of all or substantially all of its
property or business or merge into or consolidate with any other
corporation (other than a wholly owned subsidiary corporation) or
effect any transaction or series of related transactions in which
more than fifty percent (50%) of the voting power of the Company is
disposed of.
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<PAGE>
For the purposes of voting on these matters, each share of Series D
Preferred Stock shall be deemed to be convertible into six shares of Company
Common Stock. In addition, the Company may not increase the authorized number
of shares of Series D Preferred Stock without the approval of the holders of 66-
2/3% of the outstanding shares of Series D Preferred Stock.
DIRECTORS
Number. Under DGCL, the number of directors shall be fixed by, or in the
manner provided in, the bylaws, unless the number of directors is fixed in the
certificate of incorporation, in which case a change in the number of directors
may be made only by amendment to the certificate of incorporation. CUC
International's Certificate does not fix the number of directors and, as a
result, the Board of Directors of CUC International, acting without stockholder
approval, may change such number in the manner provided in CUC International's
By-Laws. CUC International's By-Laws currently provide that the Board cannot be
fixed at less than three directors. The Board of Directors of CUC International
currently has 12 members. See "Management of CUC International."
The Company's Certificate also does not fix the number of directors and, as
a result, the Company Board, acting without stockholder approval, may change
such number in the manner provided in the Company's Bylaws. The Company's
Bylaws currently provide that the Company Board shall not be less than five nor
more than seven directors. The Company Board currently has seven members.
Classified Board. A classified board is one on which a certain number, but
not all, of the directors are elected on a rotating basis each year. The DGCL
permits, but does not require, a classified board of directors, pursuant to
which the directors can be divided into as many as three classes with staggered
terms of office, with only one class of directors standing for election each
year. CUC International's By-Laws provide for a classified board which is
divided into three classes serving staggered terms of office, with one class of
director elected annually. The Company does not have a staggered board.
Election. In an election of directors, the holders of all CUC Common Stock
vote together as a single class for the election of directors whose terms expire
at the annual election of directors.
In an election of directors to the Company Board, the Company's Certificate
provides that, with respect to each of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, as long
as a majority of the shares of such Series originally issued remain outstanding,
the holders of such Series will be entitled to elect one (1) director of the
Company at each annual election of directors. The Company's Certificate further
provides that holders of outstanding Company Common Stock and Series A Preferred
Stock, voting together as a single class and on an as-converted basis, will be
entitled to elect two (2) directors of the Company at each annual election of
directors. Finally, the holders of all shares of Company Preferred Stock and
Company Common Stock, voting together as a single class and on an as-converted
basis, shall be entitled to elect any remaining directors of the Company.
Removal. CUC International's Certificate and By-Laws provide that any and
all directors may be removed, with or without cause, by the affirmative vote of
holders of at least 80% of the combined voting power of the outstanding shares
of stock entitled to vote for the election of directors. The Company's
Certificate provides that a director elected by the holders of a class or series
of stock may be removed during their term of office, with or without cause, by,
and only by, the affirmative vote of the holders of the shares of the class or
series of stock entitled to elect such director or directors, and any vacancy
created by such removal may be filled by the holders of that class or series of
stock.
Indemnification of Directors and Officers. CUC International's By-Laws
provide that the corporation shall indemnify to the full extent permitted by,
and in the manner permissible under, the DGCL any person made, or threatened to
be made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative The Company's Certificate and Bylaws provide
that the Company shall, to the fullest extent authorized under the DGCL,
indemnify any director made, or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of being a director of the Company.
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The Company Board, in its discretion, has the power under the Company's
Certificate and Bylaws on behalf of the Company to indemnify any person, other
than a director, made a party to any action, suit or proceeding by reason of the
fact that he is or was an officer or employee of the Company. The Company has
entered into indemnification agreements with its directors and officers
containing provisions that may require the Company to indemnify such directors
and officers against certain liabilities that may arise by reason of their
status or service as directors or officers.
AMENDMENTS TO CHARTERS
CUC International's Certificate requires the approval of the holders of at
least 80% of the outstanding shares of stock entitled to vote to amend
provisions of CUC International's Certificate relating to the following: (i)
the number, election, term and nomination of directors and newly created
directorships, vacancies in directorships and removal of directors; (ii) certain
business combinations; (iii) amendment of certain provisions of CUC
International's By-Laws dealing with shareholder meetings and directors; (iv)
shareholder action without a meeting. All other amendments to CUC
International's Certificate must be approved by the affirmative vote of the
holders of a majority of the outstanding shares entitled to vote thereon.
Under the DGCL, except as provided below, amendments to the Company's
Certificate must be approved by the affirmative vote of the holders of a
majority of the outstanding stock entitled to vote thereon, unless such
amendments would increase or decrease the number of authorized shares or any
class or series or the par value of such shares or would adversely affect the
shares of such class or series, in which case a majority of the outstanding
stock of such class or series would have to approve the amendment. The
Company's Certificate requires the consent of the holders of at least 66-2/3% of
the outstanding shares of Series B, Series C, Series D, Series E and Series F,
voting together on an as-converted basis and with each share of Series D
Preferred Stock deemed for the purposes of such consent to be convertible into
six (6) shares of Company Common Stock, to amend the Company's Certificate to:
(i) change the preferences, rights, privileges, or powers of, or the
restrictions provided for the benefit of, any series of Company
Preferred Stock;
(ii) increase the authorized number of shares of any series of Company
Preferred Stock;
(iii) authorize or issue any shares of any class or series of stock having
any preference as to dividends, liquidation preferences, or voting
rights, superior to any such preference or priority of any series of
Company Preferred Stock, excluding Series A Preferred Stock; or
(iv) reclassify any shares of capital stock into shares having any
preference or priority as to dividends, liquidation preferences, or
voting rights, superior to any such preference or priority of any
series of Company Preferred Stock, excluding Series A Preferred
Stock.
In addition, the Company may not amend its Certificate to increase the
authorized number of shares of Series D Preferred Stock without first obtaining
the affirmative vote of the holders of at least 66-2/3% of the outstanding
shares of Series D Preferred Stock.
AMENDMENTS TO BYLAWS
Amendments to certain provisions of CUC International's By-Laws dealing
with shareholder meetings and directors must be approved by at least 80% of the
shares of outstanding stock entitled to vote thereon. The Company's Bylaws
provide that the Bylaws may be altered, amended or repealed or new bylaws may be
adopted by the stockholders or by the Company Board, when such power is
conferred upon the Company Board by the Company's Certificate. The Company's
Certificate provides that the Company Board is expressly authorized to make,
repeal, alter, amend and rescind any or all of the Company's Bylaws.
88
<PAGE>
QUORUM
CUC International's By-Laws provide that a quorum for the purpose of a
meeting of the holders of CUC Common Stock shall consist of not less than one-
third of the issued and outstanding shares of stock of CUC International. The
Company's Bylaws provide that the holders of fifty percent (50%) of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, will constitute a quorum at all stockholder meetings for
the transaction of business.
VOTE REQUIRED FOR MERGER UNDER THE DGCL AND CERTAIN OTHER TRANSACTIONS
Under the DGCL and CUC International's Certificate, an agreement of merger,
sale, lease or exchange of all or substantially all of the corporation's assets
must be approved by the Board of Directors of CUC International and then adopted
by the holders of a majority of the voting power of the outstanding shares of
stock entitled to vote thereon. Under the DGCL and the Company's Certificate,
an agreement of merger, consolidation, sale, lease, exchange or other disposal
of all or substantially all of the Company's assets must be approved by the
Company Board and then adopted by the holders of a majority of the voting power
of the outstanding shares of stock entitled to vote thereon. In addition, as
described above, the Company's Certificate provides that a merger or
consolidation with another corporation or any transaction or series of related
transactions in which more than 50% of the voting power of the Company is
disposed of requires the affirmative vote of the holders of at least 66-2/3% of
the outstanding shares of Series B, Series C, Series D, Series E and Series F,
voting together on an as-converted basis and with each share of Series D
Preferred Stock deemed for the purposes of such vote to be convertible into six
(6) shares of Company Common Stock.
BUSINESS COMBINATION FOLLOWING A CHANGE OF CONTROL
CUC International's Certificate includes what generally is referred to as a
"fair price provision," which requires the affirmative vote of the holders of at
least 80% of the outstanding shares of capital stock entitled to vote generally
in the election of directors, voting together as a single class, to approve
certain business combinations (including certain mergers, recapitalizations, and
the issuance or transfer of securities of CUC International or a subsidiary
having an aggregate fair market value of $10 million or more) involving CUC
International or a subsidiary and an owner or any affiliate of an owner of 5% or
more of the outstanding shares of capital stock entitled to vote, unless either
(i) such business combination is approved by a majority of disinterested
directors or (ii) the stockholders receive a "fair price" for their holdings and
certain other procedural requirements are met. The Company's charter does not
include such provision.
Section 203 of the DGCL also prohibits certain business combinations
between a Delaware corporation, the shares of which are listed on a national
securities exchange, and an "interested stockholder" for a period of three years
following the time that such person became an "interested stockholder" without
board approval, unless certain conditions are met and unless the certificate of
incorporation contains a provision expressly electing not to be governed by such
provisions. CUC International's charter does not contain such an election. A
"business combination" includes mergers, sales of assets and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, unless the transaction is approved by the board and the
holders of at least 66-2/3% of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder), Section 203 prohibits
significant business transactions such as a merger with, disposition of assets
to or receipt of disproportionate financial benefits by the interested
stockholder, or any other transaction that would increase the interested
stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon the consummation
of the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both officers and
directors or by certain employee stock plans).
89
<PAGE>
CUMULATIVE VOTING
Under the DGCL, stockholders are not entitled to cumulative voting in the
election of directors unless specifically provided for in the certificate of
incorporation. Neither CUC International's Certificate nor the Company's
Certificate contains such a provision.
SPECIAL MEETINGS OF STOCKHOLDERS; ACTION BY CONSENT
CUC International's Certificate and CUC International's By-Laws provide
that special meetings of stockholders may be called only by the Chairman of the
Board, the President or the Board of Directors pursuant to a resolution approved
by a majority of the entire Board of Directors. The Company's Certificate and
Bylaws provide that special meetings of the stockholders may be called by the
President, upon the written request of a majority of the members of the Company
Board or upon the written request of stockholders owning at least ten percent
(10%) of the outstanding voting shares of the Company.
CUC International's Certificate provides that any action taken by
stockholders must be effected at an annual or special meeting and may not be
effected by written consent without a meeting. The Company's Certificate and
Bylaws provide that any action that is required to be taken at any annual or
special meeting of stockholders of the Company or any action that may be taken
at any annual or special meeting of stockholders of the Company may be taken
without a meeting, without prior notice and without vote, upon the written
consent of the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
90
<PAGE>
EXPERTS
The consolidated financial statements and schedule of CUC International
appearing in the CUC International 10-K have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference which, as to the years ended January 31, 1995
and 1994, are based in part on the report of Deloitte & Touche LLP, independent
auditors of Advance Ross. The consolidated financial statements of CUC
International included in its Current Report on Form 8-K filed with the
Commission on September 17, 1996, have also been audited by Ernst & Young LLP,
as set forth in their report included therein and incorporated herein by
reference which, as to the years ended January 31, 1996, 1995 and 1994, are
based in part on the reports of Deloitte & Touche LLP, independent auditors of
Sierra and Advance Ross, KPMG Peat Marwick LLP, independent auditors of
Davidson, and Price Waterhouse LLP, independent auditors of Ideon. The
consolidated financial statements and schedule referred to above are
incorporated herein by reference in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the three-month periods and nine-month periods ended October 31,
1996 and 1995 incorporated by reference in this Proxy Statement/Prospectus,
Ernst & Young LLP have reported that they have applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate report, included in CUC International's Quarterly Report
on Form 10-Q for the fiscal quarter ended October 31, 1996 (filed with the
Commission on December 13, 1996) and incorporated herein by reference, states
that they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their report on
such information should be restricted considering the limited nature of the
review procedures applied. The independent auditors are not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the Registration Statement prepared or certified by the auditors
within the meaning of Sections 7 and 11 of the Securities Act.
The consolidated financial statements included in the CUC International
10-K and CUC International's Current Report on Form 8-K filed with the
Commission on September 17, 1996, have not been adjusted to give effect to the
three-for-two stock split effected on October 21, 1996.
The financial statements of the Company as of March 31, 1996, 1995 and 1994
and as of December 31, 1993, and for each of the two fiscal years ended March
31, 1996, the three months ended March 31, 1994 and the year ended December 31,
1993 included in this Proxy Statement/Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Ideon as of December 31, 1995 and
1994 and as of October 31, 1994 and for the year ended December 31, 1995, the
two months ended December 31, 1994 and each of the two years in the period ended
October 31, 1994, incorporated in this Proxy Statement/Prospectus by reference
to CUC International's Current Report on Form 8-K filed with the Commission on
September 17, 1996, have been so incorporated in reliance upon the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements and related financial statement
schedules of Davidson, incorporated in this Proxy Statement/Prospectus by
reference to CUC International's Current Report on Form 8-K filed with the
Commission on September 17, 1996, have been audited by KPMG Peat Marwick LLP,
independent auditors, as stated in their report which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements and related financial statement
schedule of Sierra as of March 31, 1996 and 1995 and the three years in the
period ended March 31, 1996, incorporated in this Proxy Statement/Prospectus by
reference to CUC International's Current Report on Form 8-K filed with the
Commission
91
<PAGE>
on September 17, 1996, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements and related financial statement
schedule of Advance Ross as of December 31, 1994 and for the two years ended
December 31, 1994, incorporated in this Proxy Statement/Prospectus by reference
to the CUC International 10-K and CUC International's Current Report on Form 8-K
filed with the Commission on September 17, 1996, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the shares of CUC International Common Stock to be issued
in connection with the Merger will be passed upon for CUC International by
Robert T. Tucker, Esq., Corporate Secretary of CUC International.
The opinion of counsel as described under "Proposal No. 1--The Merger--
Certain Federal Income Tax Consequences," will be rendered by Gunderson Dettmer
Stough Villeneuve Franklin and Hachigian LLP, which opinion is based on current
law, certain information and certain representations.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Company Board does
not intend to present, and has not been informed that any other person intends
to present, any matter for action at the Meeting, other than as specifically
discussed herein.
BY ORDER OF THE BOARD OF DIRECTORS,
Lawrence S. Gross
President and Chief Executive Officer
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<S> <C>
Knowledge Adventure
Report of Independent Accountants....................................................... F-2
Balance Sheet at March 31, 1995 and 1996 and September 30, 1996 (unaudited)............. F-3
Statement of Operations for each of the two years in the period ended
March 31, 1996, the three month period ended March 31, 1994,
the year ended December 31, 1994 and for the (unaudited)
six months ended September 30, 1995 and 1996........................................... F-4
Statement of Changes in Shareholders' Equity for each of the two years in the
period ended March 31, 1996, the three month period ended
March 31, 1994, the year ended December 31, 1993 and for
the (unaudited) six months ended September 30, 1996.................................... F-5
Statement of Cash Flows for each of the two years in the
period ended March 31, 1996, the three month period
ended March 31, 1994, the year ended December 31, 1994
and for the (unaudited) six months ended September 30, 1995 and 1996................... F-7
Notes to Financial Statements........................................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of
Knowledge Adventure, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Knowledge Adventure, Inc. at
March 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended, the three month period ended March 31, 1994, and the
year ended December 31, 1993, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Costa Mesa, California
May 31, 1996
F-2
<PAGE>
KNOWLEDGE ADVENTURE, INC.
BALANCE SHEET
-------------
<TABLE>
<CAPTION>
March 31,
--------------------- September 30,
1996 1995 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,049,000 $ 3,209,000 $ 1,388,000
Short-term investments 2,954,000
Trade accounts receivable, net (Note 3) 1,769,000 434,000 2,269,000
Inventories, net (Note 4) 677,000 1,204,000 669,000
Accounts receivable, other 304,000 63,000 38,000
Current employee receivables 87,000 172,000 105,000
Prepaid expenses and other assets 53,000 164,000 587,000
------------ ------------ ------------
Total current assets 4,939,000 8,200,000 5,056,000
Noncurrent employee receivables, net (Note 5) 174,000 206,000 186,000
Advance royalties 248,000 359,000 688,000
Property and equipment, net (Note 6) 2,604,000 1,932,000 2,281,000
Intangible assets, net 424,000 660,000 354,000
Other assets 125,000 125,000 125,000
------------ ------------ ------------
$ 8,514,000 $ 11,482,000 $ 8,690,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,786,000 $ 2,331,000 $ 3,534,000
Accrued royalty expense 506,000 443,000
Accrued advertising expense 512,000
Other accrued expenses 778,000 661,000 1,447,000
Bank line of credit (Note 8) 1,006,000
Deferred royalties and license fees 270,000 333,000
Current portion of capital lease obligations (Note 7) 366,000 235,000 387,000
Current portion of note payable (Note 8) 140,000 148,000
------------ ------------ ------------
Total current liabilities 6,364,000 3,560,000 5,959,000
------------ ------------ ------------
Noncurrent portion of capital lease obligations (Note 7) 717,000 638,000 582,000
Noncurrent portion of notes payable (Note 8) 594,000 518,000
Other noncurrent liabilities (Note 9) 746,000 652,000
Commitments and contingencies (Note 7)
Stockholders' equity: (Notes 10, 12 and 13)
Series A convertible preferred stock, $.0001 par value ($15,757,000
liquidation preference), 3,253,755 shares issued and outstanding 1,000 1,000 1,000
Series B convertible preferred stock, $.0001 par value ($6,693,000
liquidation preference), 2,764,096 shares issued and outstanding 1,000 1,000 1,000
Series C convertible preferred stock, $.0001 par value ($8,800,000
liquidation preference), 3,634,412 shares issued and outstanding 1,000 1,000 1,000
Series D convertible preferred stock, $.0001 par value ($2,000,000
liquidation preference), 321,942 shares issued and outstanding 1,000 1,000 1,000
Series E convertible preferred stock, $.0001 par value ($11,000,000
liquidation preference), 2,186,053 shares issued and outstanding 1,000 1,000 1,000
Series F convertible preferred stock, $.0001 par value ($3,500,000
liquidation preference), 800,000 shares authorized, 748,683 issued
and outstanding 1,000 1,000
Common stock, $.0001 par value, 50,000,000 shares authorized,
8,557,568, 6,264,230 and 8,947,017 shares issued and outstanding 1,000 1,000 1,000
Additional paid-in capital 30,332,000 25,606,000 30,573,000
Common stock subscriptions receivable from related parties (2,115,000) (1,093,000) (2,211,000)
Accumulated deficit (28,131,000) (17,235,000) (27,390,000)
------------ ------------ ------------
Total stockholders' equity 93,000 7,284,000 979,000
------------ ------------ ------------
$ 8,514,000 $ 11,482,000 $ 8,690,000
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
KNOWLEDGE ADVENTURE, INC.
STATEMENT OF OPERATIONS
-----------------------
<TABLE>
<CAPTION>
For the
For the Year Three Months For the For the Six
Ended Ended Year Ended Months Ended
March 31, March 31, December 31, September 30,
---------------------------- ------------- ------------- -----------------------------
1996 1995 1994 1993 1996 1995
------------- ------------ ------------- ------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 16,401,000 $21,461,000 $ 3,872,000 $ 8,837,000 $ 11,575,000 $ 6,073,000
Cost of goods sold 7,811,000 8,281,000 1,309,000 3,337,000 $ 2,089,000 $ 5,520,000
------------ ----------- ------------ ------------ ------------ ------------
Gross profit 8,590,000 13,180,000 2,563,000 5,500,000 9,486,000 553,000
Expenses:
Selling and marketing 7,709,000 9,086,000 1,428,000 4,393,000 3,657,000 4,167,000
Research and development 7,289,000 7,627,000 1,021,000 2,763,000 3,378,000 3,971,000
General and administrative 4,437,000 3,872,000 1,167,000 2,387,000 1,576,000 2,666,000
------------ ----------- ------------ ------------ ------------ ------------
19,435,000 20,585,000 3,616,000 9,543,000 8,611,000 10,804,000
------------ ------------ ------------ ------------ ------------- ------------
Income (loss) from operations (10,845,000) (7,405,000) (1,053,000) (4,043,000) 875,000 (10,251,000)
Interest income (249,000) (305,000) 15,000 71,000 87,000 157,000
Interest expense 300,000 75,000 (6,000) (5,000) (221,000) (84,000)
------------ ----------- ------------ ------------ ------------ ------------
Net income (loss) ($10,896,000) ($7,175,000) ($1,044,000) ($3,977,000) $ 741,000 ($10,178,000)
============ ============ ============ =========== ============ ============
Net income (loss) per share ($1.57) ($1.21) ($0.25) ($0.61) $ 0.03 ($1.61)
============ =========== ============ ============ ============ ============
Weighted average number of
shares outstanding 6,955,060 5,926,364 4,131,796 6,495,474 24,681,407 6,330,111
============ =========== ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
KNOWLEDGE ADVENTURE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------
<TABLE>
<CAPTION>
Series A Series B Series C
Common Stock Preferred Stock Preferred Stock Preferred Stock
---------------------- --------------------- ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 6,953,716 $ 407,000 2,774,096 $2,465,000
Exercise of common
stock options 443,647 48,000
Repurchase of stock
(Note 9) (989,077) (65,000) (10,000) (24,000)
Series C preferred
stock issue 3,634,412 $ 8,764,000
Compensation associated
with stock option granted 20,000
Recapitalization (Note 9) (3,203,755) (409,000) 3,203,755 $ 1,000 (2,440,000) (8,763,000)
Costs associated with
recapitalization
Exercise of common
stock options 1,545,960
Net loss
---------- ----------- --------- ---------- ---------- ------------ ----------- ---------
Balance at
December 31, 1993 4,750,491 1,000 3,203,755 1,000 2,764,096 1,000 3,634,412 1,000
Exercise of stock options 13,083 10,000
Costs associated with
recapitalization
Cancellation of common
stock subscriptions (945,372)
Compensation associated
with stock options granted
Net loss
---------- ----------- --------- ---------- ---------- ------------ ----------- ---------
Balance at
March 31, 1994 3,812,202 $ 1,000 3,213,755 $ 1,000 2,764,096 $ 1,000 3,634,212 $ 1,000
========== =========== ========= ========== ========== ============ =========== =========
<CAPTION>
Series D Series E Series F
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
--------- ----------- ------------ -------------- ----------- ------
<C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992
Exercise of common
stock options
Repurchase of stock
(Note 9)
Series C preferred
stock issue
Compensation associated
with stock option granted
Recapitalization (Note 9)
Costs associated with
recapitalization
Exercise of common
stock options
Net loss
--------- ----------- ------------ -------------- ----------- ------
Balance at
December 31, 1993
Exercise of stock options
Costs associated with
recapitalization
Cancellation of common
stock subscriptions
Compensation associated
with stock options granted
Net loss
--------- ----------- ------------ -------------- ----------- ------
Balance at
March 31, 1994
========= =========== ============ ============== =========== ======
<CAPTION>
Additional Common Stock
Paid-in Subscriptions Accumulated
Capital Receivable Deficit Total
---------- ---------- ------- -----
<C> <C> <C> <C>
Balance at
December 31, 1992 ($2,709,000) $ 163,000
Exercise of common
stock options 48,000
Repurchase of stock
(Note 9) (2,330,000) (2,419,000)
Series C preferred
stock issue 8,764,000
Compensation associated
with stock option granted 20,000
Recapitalization (Note 9) $11,611,000
Costs associated with
recapitalization (44,000) (44,000)
Exercise of common
stock options 618,000 (618,000)
Net loss (3,977,000) (3,977,000)
----------- --------- ------------ ----------
Balance at
December 31, 1993 12,185,000 (618,000) (9,016,000) 2,555,000
Exercise of stock options 2,000 2,000
Costs associated with
recapitalization (66,000) (66,000)
Cancellation of common
stock subscriptions (378,000) 378,000
Compensation associated
with stock options granted 5,000 5,000
Net loss (1,044,000) (1,044,000)
---------- --------- ------------ ----------
Balance at
March 31, 1994 $11,748,000 $(240,000) $(10,060,000) $ 1,452,000
=========== ========= ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
KNOWLEDGE ADVENTURE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------
<TABLE>
<CAPTION>
Series A Series B Series C
Common Stock Preferred Stock Preferred Stock Preferred Stock
---------------------- --------------------- ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance forward 3,818,202 $1,000 3,213,755 $1,000 2,764,096 $1,000 3,634,412 $1,000
Series D preferred
stock issued
Series E preferred
stock issued
Exercise of stock
options 2,565,344 40,000
Cancellation of
common stock
subscriptions (119,316)
Compensation
associated with
stock options granted
Net loss
--------- ------ --------- ------ --------- ------ --------- ------
Balance at
March 31, 1995 6,264,230 1,000 3,253,755 1,000 2,764,096 1,000 3,634,412 1,000
Series F preferred
stock issued
Exercise of stock
options 1,048,802
Cancellation of
common stock
subscriptions (105,464)
Common stock
issued (Notes 9 and 10) 1,350,000
Net loss
--------- ------ --------- ------ --------- ------ --------- ------
Balance at
March 31, 1996 8,557,568 1,000 3,253,755 1,000 2,764,096 1,000 3,634,412 1,000
Unaudited information:
Exercise of stock options 445,752
Cancellation of
common stock
subscriptions (56,303)
Net income
Balance at
September 30, 1996 8,947,017 $1,000 3,253,755 $1,000 2,764,096 $1,000 3,634,412 $1,000
========= ====== ========= ====== ========= ====== ========= ======
<CAPTION>
Series D Series E Series F
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
--------- ----------- ------------ -------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance forward
Series D preferred
stock issued 321,942 $1,000
Series E preferred
stock issued 2,186,053 $1,000
Exercise of stock
options
Cancellation of
common stock
subscriptions
Compensation
associated with
stock options granted
Net loss
------- ------ --------- ------ ------- ------
Balance at
March 31, 1995 321,942 $1,000 2,186,053 $1,000
Series F preferred
stock issued 748,683 $1,000
Exercise of stock
options
Cancellation of
common stock
subscriptions
Common stock
issued
Net loss
------- ------ --------- ------ ------- ------
Balance at
March 31, 1996 321,942 1,000 2,186,053 1,000 748,683 1,000
Unaudited information:
Exercise of stock options
Cancellation of
common stock
subscriptions
Net income
------- ------ --------- ------ ------- ------
Balance at
September 30, 1996 321,942 $1,000 2,186,053 $1,000 748,683 $1,000
======= ====== ========= ====== ======= ======
<CAPTION>
Additional Common Stock
Paid-in Subscriptions Accumulated
Capital Receivable Deficit Total
---------- ---------- ------- -----
<S> <C> <C> <C> <C>
Balance forward $11,748,000 ($ 240,000) ($10,060,000) $ 1,452,000
Series D preferred
stock issued 1,980,000 1,981,000
Series E preferred
stock issued 10,894,000 10,895,000
Exercise of stock
options 1,017,000 (901,000) 116,000
Cancellation of
common stock
subscriptions (48,000) 48,000
Compensation
associated with
stock options granted 15,000 15,000
Net loss (7,175,000) (7,175,000)
----------- ----------- ------------ -----------
Balance at
March 31, 1995 25,606,000 (1,093,000) (17,235,000) 7,284,000
Series F preferred
stock issued 3,388,000 3,389,000
Exercise of stock
options 548,000 (232,000) 316,000
Cancellation of
common stock
subscriptions (47,000) 47,000
Common stock
issued 837,000 (837,000)
Net loss (10,896,000) (10,896,000)
----------- ----------- ------------ -----------
Balance at
March 31, 1996 30,332,000 (2,115,000) (28,131,000) 93,000
Unaudited information:
Exercise of stock options 268,000 (123,000) 145,000
Cancellation of
common stock
subscriptions (27,000) 27,000
Net income 741,000 741,000
----------- ----------- ------------ -----------
Balance at
September 30, 1996 $30,573,000 $(2,211,000) $(27,390,000) $ 979,000
=========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
KNOWLEDGE ADVENTURE, INC.
STATEMENT OF CASH FLOWS
-----------------------
(NOTE 13)
<TABLE>
<CAPTION>
For the Three For the Year For the Six
For the Year Ended Month Period Ended Months Ended
March 31, Ended March 31, December 31, September 30,
---------------------- ----------------------
1996 1995 1994 1993 1996 1995
---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) ($10,896,000) ($7,175,000) ($1,044,000) ($3,977,000) $ 741,000 $(10,178,000)
Adjustments to reconcile net
income (loss) to net
cash provided by operating
activities:
Depreciation and
amortization 1,390,000 886,000 236,000 205,000 592,000 751,000
Writeoff of purchased
software 3,045,000 3,037,000
Compensation expense
associated with stock
options granted 15,000 5,000 20,000
Provision for losses on
accounts receivable 250,000 (317,000) (193,000) 483,000 162,000 87,000
Provision for obsolete
inventory 120,000 (148,000) 16,000 65,000 397,000 17,000
Provision for losses on
employee receivables 228,000 228,000
Changes in assets and
liabilities:
Restricted cash 102,000 (67,000) (35,000)
Trade accounts
receivable (1,585,000) 567,000 1,011,000 (1,519,000) (662,000) (2,068,000)
Inventories 407,000 (287,000) 195,000 (764,000) (389,000) 133,000
Current employee
receivable 85,000 138,000 (22,000) (319,000) (18,000) 78,000
Accounts receivable,
other (241,000) (32,000) 266,000 213,000
Prepaid expenses and
other assets 111,000 29,000 (124,000) (40,000) (534,000) 115,000
Noncurrent employee
receivables (196,000) (106,000) (100,000) (240,000) (135,000)
Advance royalties 111,000 (288,000) 7,000 (36,000) (440,000) 209,000
Accounts payable 455,000 (253,000) (69,000) 1,483,000 748,000 2,094,000
Accrued expenses 1,135,000 76,000 94,000 954,000
Deferred royalties and
license fees (63,000) 333,000 (21,000) 656,000 (270,000) 874,000
----------- ----------- ----------- ----------- ----------- -----------
Net cash used for
operating activities (5,644,000) (6,460,000) (270,000) (3,878,000) 675,000 (3,819,000)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from investing
activities:
Net change in short-term
investments 2,954,000 (2,954,000) 2,954,000
Change in other assets (125,000)
Acquisition of property and
equipment (286,000) (664,000) (282,000) (712,000) (177,000) (580,000)
Purchase of intangible
assets (2,449,000) (720,000) (105,000) (246,000) (22,000) (3,292,000)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
(used for)
investing activities 219,000 (4,463,000) (387,000) (958,000) (199,000) (918,000)
----------- ----------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Bank line of credit 1,006,000 (1,000,000) 1,000,000 (1,006,000) 718,000
Principal payments under
capital lease obligations (360,000) (113,000) (5,000) (2,000) (114,000) 300,000
Principal payments under
note obligations (85,000) (162,000) 952,000
Proceeds from sale of
common stock 316,000 116,000 2,000 48,000 145,000 3,431,000
Proceeds from sale of
preferred stock 3,388,000 12,876,000 8,764,000 1,000
Repayment of stockholder (1,000)
Repayment of note payable to
stockholder (100,000)
Repurchase of common stock (2,395,000)
Repurchase of preferred stock (24,000)
Costs associated with
recapitalization (66,000) (44,000)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities 4,265,000 11,879,000 931,000 6,246,000 (1,137,000) 5,402,000
----------- ----------- ----------- ----------- ----------- -----------
Net decrease/increase in
cash and cash equivalents (1,160,000) 956,000 274,000 1,410,000 (661,000) 665,000
Cash and cash equivalents at
beginning of period 3,209,000 2,253,000 1,979,000 569,000 2,049,000 3,209,000
----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period $ 2,049,000 $ 3,209,000 $ 2,253,000 $ 1,979,000 $ 1,388,000 $ 3,874,000
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
KNOWLEDGE ADVENTURE, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - THE COMPANY:
- ---------------------
Knowledge Adventure, Inc. (the "Company"), a Delaware Corporation, develops and
markets interactive, educational software products. Which are designed to
encourage learning through exploration, discovery and creativity rather than
through highly structured exercises or games. The Company's products use a
proprietary compression technology to incorporate full motion video, sound,
text, and images in both disk-based and CD-ROM software products. Products are
sold primarily to distributors who in turn sell to mass merchandisers and
specialty retail outlets. In addition, product is sold directly to resellers
and catalog companies throughout the United States and Canada. The Company also
markets its products internationally through distribution and licensing
agreements.
The Company has a minority ownership in Worlds, Inc. ("Worlds"). Worlds
leverages the Company's proprietary technology to create on-line collaborative
worlds on the Internet and other on-line services.
Effective April 1993, the Board of Directors authorized a four-for-one stock
split of both common and preferred shares. All references to number of shares
and per share amounts have been restated to reflect the split.
In December 1993, the Company reincorporated in Delaware and concurrently
effected a change in its capital structure. As a consequence of this
restructuring, each share of the Company's common stock was converted into one-
half share of common stock and one-half share of Series A Convertible Preferred
Stock. In addition, each share of the Company's existing Series A and Series B
Convertible Preferred Stock were converted into one share of Series B and Series
C Convertible Preferred Stock, respectively. All references to the classes of
stock and number of shares have been restated to reflect this restructuring.
In January 1994, the Company changed its year end for financial reporting
purposes to March 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------------
Interim Financial Data
- ----------------------
The interim financial data is unaudited; however, in the opinion of the
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results of the
interim periods.
Operating results for the six months ended September 30, 1996 are not
necessarily indicative of the results for the entire year ending March 31, 1997.
F-8
<PAGE>
NOTE 2: (Continued)
- --------------------
Revenue Recognition
- -------------------
Revenue generated from sales of software to distributors, resellers and end-
users are recognized upon shipment of products. Because the Company provides its
customers with full rights of return, allowances for stock balancing, defective
or damaged products, and for estimated future returns of products are
established at the time of shipment. The Company calculates the required
allowance based primarily upon historical experience.
Revenues arising from licensing agreements are recognized ratably over the term
of the underlying agreement.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect 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.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, the Company considers investments with an
original maturity of three months or less to be cash equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined using
the weighted average costing method.
Property and Equipment
- ----------------------
Property and equipment is stated at cost. Expenditures which substantially
increase the useful lives of assets are capitalized. Repair and maintenance
costs are expensed as incurred. Depreciation of property and equipment is
calculated utilizing the straight-line method over the assets' estimated useful
lives, which range from three to seven years. Leasehold improvements are
amortized over the shorter of the term of the lease or the useful life of the
asset.
Intangible Assets
- -----------------
Intangible assets are recorded at cost and consist of purchased software, as
well as licenses and trademarks. Amortization is calculated using the straight-
line method over the assets' estimated useful lives, ranging from six months to
five years. The Company evaluates its intangibles periodically to determine
whether any impairment has
F-9
<PAGE>
NOTE 2: (Continued)
- -------------------
occurred. The Company bases its determination on the revenue and profitability
generated by the related software title. Accumulated amortization of intangible
assets was $140,000 and $430,000 as of March 31, 1996 and March 31, 1995,
respectively.
In March 1995, the Financial Accounting Standards Board issued Statement No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." SFAS 121 will become effective for the year ending
March 31, 1997. The Company has studied the implication of SFAS 121 and, based
upon its initial evaluation, does not believe the adoption of this Statement
will have a material impact on its financial condition or results of operations.
Investments
- -----------
The Company accounts for its investment in Worlds using the cost method.
Concentration of Credit Risk
- ----------------------------
Certain financial instruments potentially subject the Company to credit risk.
These financial instruments consist primarily of trade receivables and temporary
cash investments. The Company sells to distributors, resellers and directly to
end users. The Company performs on-going credit evaluations of its customers
but does not require collateral. The Company maintains reserves for potential
credit losses and such losses have generally been within management's
expectations. As described in Note 3, the Company derives a significant
portion of its revenues from sales to certain large software distributors.
In addition, the Company invests its excess cash in highly liquid short-term
investments. The Company places such investments with quality financial
institutions and, accordingly, management believes minimal credit risk exists
with respect to these investments.
Research and Development Costs
- ------------------------------
Research and development costs, which primarily comprise software development
costs incurred prior to attaining technological feasibility, are charged to
expense as incurred.
Income Taxes
- ------------
Income taxes are provided based on the asset and liability approach pursuant to
Statement of Financial Accounting Standards No. 109, Accounting for Income
---------------------
Taxes. Deferred tax liabilities and assets are recorded to reflect the expected
- -----
future tax consequences of temporary differences between the carrying amounts
and the tax bases of other assets and liabilities. Valuation allowances are
provided for any deferred tax assets which management believes are not likely to
be realized.
Stock Options
- -------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", which will be effective for the Company beginning April 1, 1997.
SFAS
F-10
<PAGE>
NOTE 2: (Continued)
- ------
123 requires expanded disclosures of stock-based compensation arrangements with
employees and encourages, but does not require, compensation cost to be measured
based upon the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will apply APB Opinion No. 25 for stock-based compensation awards to
employees pursuant to its stock option plans and will disclose the required pro
forma effect on its results of operations.
Fair Value of Financial Instruments
- -----------------------------------
To meet the reporting requirements of SFAS No. 107 ("Disclosures about Fair
Value of Financial Instruments"), the Company calculates the fair value of
financial instruments and includes this additional information in the notes to
financial statements when the fair value is different than the book value of
those financial instruments. When the fair value is equal to the book value, no
additional disclosure is made. The Company uses quoted market prices whenever
available to calculate these fair values.
Per Share Data
- --------------
Net income (loss) per share is computed using the weighted average number of
shares of common stock outstanding, common equivalent shares from dilutive
convertible preferred stock (using the if-converted method) and common
equivalent shares from dilutive stock options (using the treasury stock method).
NOTE 3 - TRADE ACCOUNTS RECEIVABLE:
- -----------------------------------
Trade accounts receivable comprise the following:
<TABLE>
<CAPTION>
March 31,
-----------------------
1996 1995
----------- ---------
<S> <C> <C>
Trade accounts receivable $2,047,000 $462,000
Allowance for doubtful accounts (278,000) (28,000)
---------- --------
$1,769,000 $434,000
========== ========
</TABLE>
Two software distributors accounted for $3,549,000 and $1,845,000 of the
Company's revenues for the year ended March 31, 1996. Trade accounts receivable
at March 31, 1996 includes $1,002,000 and $45,000 related to these customers.
Four customers accounted for $3,970,000, $3,083,000, $2,438,000 and $2,279,000
of the Company's revenues for the year ended March 31, 1995. Trade accounts
receivable at March 31, 1995 include $308,000, $58,000, $77,000 and $427,000
F-11
<PAGE>
NOTE 3: (Continued)
- ------
related to these customers.
Two customers accounted for $843,000 and $836,000 of the Company's revenues for
the three months ended March 31, 1994. Trade accounts receivable at March 31,
1994 include $696,000 and $489,000 related to these customers.
Four customers accounted for $1,627,000, $1,252,000, $1,140,000 and $1,054,000
of the Company's revenues for the year ended December 31, 1993. Trade accounts
receivable at December 31, 1993 include $872,000, $305,000, $368,000 and
$412,000 related to these customers.
<TABLE>
<CAPTION>
NOTE 4 - INVENTORIES:
- --------------------------------------
<S> <C> <C>
Inventories comprise the following:
March 31,
-------------------
1996 1995
---- ----
Raw materials $ 226,000 $ 568,000
Finished goods 451,000 636,000
--------- ----------
$ 677,000 $1,204,000
========= ==========
</TABLE>
NOTE 5 - RELATED PARTY TRANSACTIONS:
- ------------------------------------
During 1993, the Company loaned $300,000 to an officer of the Company at an
interest rate of 3% per year. The balance plus accrued interest was repaid in
September 1994.
In December 1993, the Company loaned $100,000 to a second officer. The loan
bore interest at a major regional bank's reference rate plus 2%. This loan was
secured by a lien on the officer's home. Following this individual's resignation
in December 1995 the loan, including accrued interest in the amount of $19,000,
was refinanced. The new loan bears interest at 6.36% per year. Principal and
accrued interest are to be repaid in December 2000, unless accelerated due to
the Company's acquisition (as defined within the note) or the completion of an
initial public offering. The new loan is secured by the former officer's common
stock holdings.
The Company has also loaned $262,000 to another officer of the Company. The
loan bears interest at 5.65% per year and is payable in December 1998. The
individual resigned during fiscal 1996. The loan is secured by the former
officer's common stock
F-12
<PAGE>
NOTE 5: (Continued)
- ------
holdings.
Revenues for the years ended March 31, 1996 and 1995 include $236,000 and
$453,000 from sales to a stockholder of the Company. At March 31, 1996 and
1995, $29,000 and $63,000 was due from this stockholder.
NOTE 6 - PROPERTY AND EQUIPMENT:
- --------------------------------
Property and equipment comprise the following:
<TABLE>
<CAPTION>
March 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Computer equipment $ 2,667,000 $2,238,000
Office equipment 644,000 413,000
Furniture and fixtures 146,000 131,000
Leasehold improvements 987,000 85,000
----------- ----------
4,444,000 2,867,000
Less: accumulated depreciation and amortization (1,840,000) (935,000)
----------- ----------
$ 2,604,000 $1,932,000
=========== ==========
</TABLE>
Depreciation and amortization expense amounted to $1,003,000, $627,000, $173,000
and $95,000 for the years ended March 31, 1996 and March 31, 1995, the three
months ended March 31, 1994, and the year ended December 31, 1993, respectively.
At March 31, 1996 and 1995, property and equipment includes $965,000 and
$822,000 of assets financed under capital lease arrangements, net of $500,000
and $170,000 of accumulated amortization, respectively.
NOTE 7 - COMMITMENTS:
- ---------------------
The Company leases office facilities under operating leases which expire in
March 2001. Rent expense aggregated $409,000, $174,000, $32,000 and $60,000 for
the years ended March 31, 1996 and 1995, the three month period ended March 31,
1994 and the year ended December 31, 1993, respectively.
F-13
<PAGE>
NOTE 7: (Continued)
- --------------------
The Company also leases certain equipment under capital lease arrangements. The
future minimum payments under non-cancelable leases as of March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Ending
March 31, Operating Capital
----------- ---------- -------
<S> <C> <C>
1997 $ 267,000 $ 503,000
1998 267,000 481,000
1999 265,000 329,000
2000 263,000 16,000
Thereafter 263,000
---------- ----------
Total future minimum lease payments $1,325,000 1,329,000
==========
Less amount representing interest (246,000)
----------
Present value of future minimum lease payments 1,083,000
Less current portion 366,000
----------
Non-current portion of capital lease obligations $ 717,000
==========
</TABLE>
NOTE 8 - BORROWINGS:
- --------------------
The Company has a $3,000,000 bank line of credit secured by substantially all of
the Company's assets. The line of credit accrues interest at the prime rate
plus 0.25%. In 1996, the line of credit agreement was amended, adjusting the
interest rate to prime plus 2%. Amounts available under this agreement are
reduced by the balance of any outstanding letters of credit. At March 31, 1996,
outstanding letters of credit aggregated $819,000. As of September 30, 1996,
the Company was not in compliance with certain covenants contained within the
lending agreement; a waiver of such events of noncompliance has been granted
through January 31, 1997.
The Company has a capital lease line of credit agreement with a leasing company.
This agreement provides for borrowings of up to $1,500,000 at an interest rate
of 10.7%. Amounts are to be repaid over a forty-two month term. At the
conclusion of the repayment period, the Company may purchase the leased
equipment at a price equal to 15% of the asset's original cost, or elect to
extend the repayment period an additional year and purchase the assets at the
conclusion thereof for $1. At March 31, 1996, $1,083,000 was outstanding under
the agreement.
In connection with the Company's relocation in August 1995, management
negotiated
F-14
<PAGE>
NOTE 8: (Continued)
- ------
certain tenant improvement financing in the amount of $819,000. This amount is
to be repaid over a five-year term, including interest at 11%, and is secured by
a stand-by letter of credit. Future principal payments to be made pursuant to
this agreement are as follows:
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
1997 $140,000
1998 156,000
1999 174,000
2000 194,000
2001 70,000
--------
$734,000
========
</TABLE>
NOTE 9 - ACQUISITION:
- ---------------------
Effective August 1995, the Company acquired substantially all of the outstanding
assets of a software developer for $1,144,000. A portion of the purchase price,
in the amount of $150,000, was paid at the time of the acquisition. The
remainder is payable in equal semi-annual installments over a four year period
commencing April 1, 1996. As such obligations are non-interest bearing, the
amounts to be paid pursuant to this agreement have been discounted for financial
reporting purposes using an annual interest rate of 10.25%.
The Company has estimated that the fair value of in process research and
development to be $624,000 and the fair value of the existing product to be
$500,000. The purchase price has been allocated accordingly.
The individual from whom such assets were purchased and who became an employee
of the Company was also permitted to purchase 600,000 shares of the Company's
common stock at a price per share of $0.62. In exchange, the individual executed
a full recourse, interest bearing note to the Company. The note, which bears
interest at an annual rate of 5.75%, is to be repaid over thirty months
commencing March 1996.
NOTE 10 - STOCKHOLDERS' EQUITY:
- -------------------------------
The Company is authorized to issue 50,000,000 shares of common stock and
30,000,000 shares of preferred stock. Of the total authorized preferred shares,
5,000,000, 2,764,096, 3,634,412, 321,942, 2,186,053 and 800,000 shares have been
designated as Series A, Series B, Series C, Series D, Series E and Series F
Convertible Preferred Stock, respectively.
Shares of each series of preferred stock have full voting rights and are
convertible into common stock at the option of the holder. Upon consummation of
an initial public offering, all series of preferred stock automatically convert
into an equal number of shares of common stock, with the exception of the Series
D and Series E shares, which convert to 330,817 and 2,190,926 common shares,
respectively.
In June 1993, the Company concluded a private placement of 3,634,412 shares of
Series C Convertible Preferred Stock at a price of $2.42 per share. In
conjunction with the issuance of Series C Preferred Stock, the Company
repurchased 989,077 shares of
F-15
<PAGE>
NOTE 10: (Continued)
- -------
its common stock for $2,395,000 and 10,000 shares of its Series B preferred
Stock for $24,000. The common stock repurchased includes 437,872 shares which
were issued as a result of the concurrent exercise of stock options.
In connection with the sale of the Series D stock, the purchaser was granted an
option to purchase 1,645,487 shares of common stock. Such shares may be
purchased at a price of $0.62 per share. Fifty percent of the shares vested
immediately with the remaining shares vesting ratably over twelve months.
In December 1995, the Company agreed to sell 750,000 shares of common stock to
the newly elected Chief Executive Officer at a price per share of $0.62. In
exchange, the Chief Executive Officer executed a full recourse, interest-bearing
note to the Company. The note, which bears interest at the Applicable Federal
Rate, provides for repayment over a four year term commencing January 1, 1996.
No dividends have been declared to date on any of the Company's classes of
stock.
The 1993 Stock Option Plan (see Note 12) permits employees to deliver promissory
notes in payment of the exercise of their common stock options. Options granted
pursuant to this plan may be exercised whether fully vested or not. Each
employee is permitted to borrow an amount equal to the exercise price of the
options. Loans outstanding bear interest at the Applicable Federal Rate (5.45%
at March 31, 1996). Such loans are presented as common stock subscriptions
receivable in the accompanying balance sheet. Payments of interest are to be
made annually with the principal balance due in four years. Included in
interest income is $85,000, $54,000 , $6,000 and $1,000 related to these loans
for the years ended March 31, 1996 and 1995, the three month period ended March
31, 1994 and the year ended December 31, 1993, respectively. The Company
retains the right to repurchase all unvested options at the time of an
employee's termination.
NOTE 11 - INCOME TAXES:
- -----------------------
No provision for income taxes has been recorded in the accompanying financial
statements as the Company operated at a loss during the period. At March 31,
1996, the Company had federal and California net operating loss carryforwards of
$18,541,000 and $9,271,000, respectively. California only allows 50% of net
operating losses to be carried forward to offset future taxes. Net operating
losses are scheduled to expire between the years 2007 and 2011 for federal tax
purposes and 1996 and 2001 for state tax purposes. The Company also had federal
and California research and development credit carryforwards of $169,000 and
$64,000, respectively. These federal carryforwards will expire between the
years 2007 and 2011. The California credits will expire between the years 2006
and 2011.
As a result of the private placements described in Note 10, a change in
ownership as defined in the Internal Revenue Code has occurred. Such ownership
change has not, however, resulted in a limitation on the use of the Company's
net operating loss carryforwards.
F-16
<PAGE>
NOTE 11: (Continued)
- -------
Deferred tax liabilities and assets comprise the following items:
<TABLE>
<CAPTION>
March 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Reserves $ 663,000 $ 449,000
Miscellaneous accruals 484,000 40,000
Amortization 698,000 226,000
NOL carryforwards 6,860,000 4,816,000
R&D credit carryforwards 233,000 227,000
----------- -----------
8,938,000 5,758,000
Less: Valuation allowance (8,938,000) (5,758,000)
----------- -----------
Net deferred tax asset $ - 0 - $ - 0 -
=========== ===========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes of deferred tax assets in future tax returns, the Company has
recorded a valuation allowance and accordingly, no deferred tax asset has been
recorded in the accompanying balance sheet.
NOTE 12 - COMMON STOCK OPTIONS:
- -------------------------------
During 1991 and 1992, as part of its efforts to attract and retain quality
employees and consultants, the Company granted options to purchase the Company's
common stock under a nonstatutory stock option plan (the "1991 Plan"). The
vesting period of options granted under the 1991 Plan ranges from grant date to
four years.
Certain options granted during the period January 1992 through June 1992 were
issued at exercise prices which were less than fair market value. The
difference between the fair market value of these options and their exercise
price has been charged against results of operations as compensation expense
over the options' vesting period.
In December 1993, in conjunction with the Company's reincorporation and change
in capital structure, each option granted pursuant to the 1991 Plan was
converted into an option to purchase one-half share of common stock and one-half
share of Series A Convertible Preferred Stock. The accompanying financial
statements and related footnotes have been retroactively restated to reflect
this change in capital structure.
Effective December 1993, the Board of Directors adopted the Knowledge Adventure,
Inc. 1993 Incentive Stock Option Plan (the "1993 Plan") and reserved 6,684,576
shares
F-17
<PAGE>
NOTE 12: (Continued)
- -------
of common stock for issuance thereunder. The vesting period of options granted
under the 1993 Plan ranges from grant date to four years.
In December 1993, the Board of Directors adopted the Option Regrant Package (the
"Regrant Package"). Pursuant to the Regrant Package, holders of options granted
under the 1991 Plan were permitted to convert each option granted under the 1991
Plan to one option under the 1993 Plan. The exercise price of options regranted
is equal to the fair market value of the common stock at the date of conversion.
Exercise prices are equivalent to the fair market value of the Company's common
stock as determined by the Board of Directors. The table below summarizes
option activity through March 31, 1996:
<TABLE>
<CAPTION>
Shares Exercise price
------ --------------
<S> <C> <C>
Outstanding at March 31, 1992 2,581,580 $.003 - 0.400
Granted 2,476,532 0.400
Exercised (1,988,832) 0.400
Cancelled (76,000) .003 - 0.400
----------
Outstanding at March 31, 1993 2,993,280 .003 - 0.400
Granted 464,499 .400
Exercised (23,083) 0.400
Cancelled (217,371) 0.400
----------
Outstanding at March 31, 1994 3,217,325 $.003 - 0.400
Granted 3,319,854 .400 - 0.620
Exercised (2,609,344) .025 - 0.400
Cancelled (353,631) .003 - 0.400
----------
Outstanding at March 31, 1995 3,574,204 .003 - 0.400
Granted 1,717,400 .620
Exercised (1,048,802) .400 - .620
Cancelled (1,366,919) .400 - .620
----------
Outstanding at March 31, 1996 2,875,883 .003 - .620
==========
</TABLE>
In addition, options to purchase 550,000 units under the 1991 Plan were
exercisable at March 31, 1996.
F-18
<PAGE>
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- -----------------------------------------------------------
Capitalized lease obligations of $570,000, $890,000, $36,000 and $67,000 were
incurred for property and equipment purchases during the years ended March 31,
1996, March 31, 1995, the three months ended March 31, 1994 and the year ended
December 31, 1993, respectively. In addition, as described in Note 8, the
Company financed certain leasehold improvements via a note payable.
The Company paid $286,000, $82,000, $5,000 and $6,000 in interest expense during
the years ended March 31, 1996 and 1995, the three month period ended March 31,
1994 and the year ended December 31, 1993, respectively.
As described in Note 10, the Company loaned certain employees $1,070,000 in
conjunction with the exercise of options to purchase common stock.
NOTE 14 - SUBSEQUENT EVENTS (Unaudited):
- ---------------------------------------
In October 1996, the Company agreed to a plan of merger with CUC International,
Inc. ("CUC") pursuant to which all of the Company's outstanding common stock
preferred stock and options to purchase to common stock are to be exchanged for
shares of CUC common stock. In connection with this agreement, CUC has agreed
to provide short term financing of up to $3 million available to the Company.
F-19
<PAGE>
ANNEX A-1
MERGER AGREEMENT
===============================================================================
Agreement And Plan Of Merger
Dated As Of October 11, 1996
Among
CUC International Inc.,
KA Acquisition Corp.
And
Knowledge Adventure, Inc.
===============================================================================
A-1-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE 1............................................................................... A-1-9
SECTION 1.1. The Merger.......................................................... A-1-9
SECTION 1.2. Effective Time...................................................... A-1-9
SECTION 1.3. Closing of the Merger............................................... A-1-9
SECTION 1.4. Effects of the Merger............................................... A-1-9
SECTION 1.5. Certificate of Incorporation and Bylaws............................. A-1-9
SECTION 1.6. Directors........................................................... A-1-9
SECTION 1.7. Officers............................................................ A-1-10
SECTION 1.8. Conversion of Company Shares........................................ A-1-10
SECTION 1.9. Shares of Dissenting Holders........................................ A-1-12
SECTION 1.10. Exchange of Certificates............................................ A-1-12
SECTION 1.11. Company Stock Options............................................... A-1-15
SECTION 1.12. Indemnification; Escrowed Parent Common Stock....................... A-1-16
ARTICLE 2............................................................................... A-1-18
SECTION 2.1. Organization and Qualification...................................... A-1-18
SECTION 2.2. Capitalization of the Company....................................... A-1-19
SECTION 2.3. Authority Relative to this Agreement and Merger; Consents and
Approvals.......................................................... A-1-21
SECTION 2.4. Financial Statements; Net Assets.................................... A-1-22
SECTION 2.5. Information Supplied by the Company................................. A-1-22
SECTION 2.6. Consents and Approvals; No Violations............................... A-1-23
SECTION 2.7. No Default.......................................................... A-1-24
</TABLE>
A-1-2
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 2.8. No Undisclosed Liabilities; Absence of Changes...................... A-1-24
SECTION 2.9. Litigation.......................................................... A-1-24
SECTION 2.10. Compliance with Applicable Law...................................... A-1-24
SECTION 2.11. Employee Benefit Plan Matters....................................... A-1-25
SECTION 2.12. Environmental Laws and Regulations.................................. A-1-26
SECTION 2.13. Labor and Employment Matters........................................ A-1-27
SECTION 2.14. Tax Matters......................................................... A-1-27
SECTION 2.15. Properties and Inventories.......................................... A-1-30
SECTION 2.16. Insurance........................................................... A-1-31
SECTION 2.17. Returns............................................................. A-1-31
SECTION 2.18. Intellectual Property............................................... A-1-31
SECTION 2.19. Opinion of Financial Adviser........................................ A-1-32
SECTION 2.20. Accounting Matters.................................................. A-1-32
SECTION 2.21. Material Contracts.................................................. A-1-33
SECTION 2.22. Related Party Transactions.......................................... A-1-34
SECTION 2.23. Brokers............................................................. A-1-34
SECTION 2.24. Disclosure.......................................................... A-1-35
ARTICLE 3............................................................................... A-1-35
SECTION 3.1. Organization........................................................ A-1-35
SECTION 3.2. Capitalization of Parent............................................ A-1-36
SECTION 3.3. Authority Relative to this Agreement................................ A-1-36
SECTION 3.4. SEC Reports; Financial Statements................................... A-1-36
SECTION 3.5. Information Supplied by Parent...................................... A-1-37
</TABLE>
A-1-3
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
SECTION 3.6. Consents and Approvals; No Violations............................... A-1-37
SECTION 3.7. No Undisclosed Liabilities.......................................... A-1-38
SECTION 3.8. No Prior Activities................................................. A-1-38
SECTION 3.9. Brokers............................................................. A-1-38
SECTION 3.10. Accounting Matters.................................................. A-1-38
SECTION 3.11. Litigation.......................................................... A-1-39
SECTION 3.12. Disclosure.......................................................... A-1-39
ARTICLE 4............................................................................... A-1-39
SECTION 4.1. Conduct of Business of the Company.................................. A-1-39
SECTION 4.2. Exemption from Registration or Securities Act Registration.......... A-1-41
SECTION 4.3. Stockholders' Meeting; Proxy Statement/Information Statement........ A-1-42
SECTION 4.4. Other Potential Acquirors........................................... A-1-43
SECTION 4.5. Access to Information............................................... A-1-43
SECTION 4.6. Additional Agreements; Reasonable Efforts........................... A-1-44
SECTION 4.7. Consents............................................................ A-1-44
SECTION 4.8. Public Announcements................................................ A-1-45
SECTION 4.9. Directors' and Officers' Indemnification............................ A-1-45
SECTION 4.10. Notification of Certain Matters..................................... A-1-45
SECTION 4.11. Pooling............................................................. A-1-46
SECTION 4.12. Tax-Free Reorganization Treatment................................... A-1-46
SECTION 4.13. Taxes............................................................... A-1-46
SECTION 4.14. Employment and Non-Competition Agreements........................... A-1-46
SECTION 4.15. Company Affiliates.................................................. A-1-47
</TABLE>
A-1-4
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
SECTION 4.16. Parent Stock Option and Employee Bonus Pool......................... A-1-47
SECTION 4.17. Consent and Waiver.................................................. A-1-48
SECTION 4.18. Stock Exchange Listing.............................................. A-1-48
SECTION 4.19. SEC Filings......................................................... A-1-48
SECTION 4.20. Exercise of Company Stock Options................................... A-1-48
SECTION 4.21. Certain Filing by Parent............................................ A-1-48
SECTION 4.22. Termination of Certain Side Letters................................. A-1-49
SECTION 4.23. Delivery of Certified Financial Statements.......................... A-1-49
SECTION 4.24. Defaults Under the Silicon Loan Documents........................... A-1-49
ARTICLE 5............................................................................... A-1-49
SECTION 5.1. Conditions to Each Party's Obligations to Effect the Merger......... A-1-49
SECTION 5.2. Conditions to the Obligations of the Company........................ A-1-50
SECTION 5.3. Conditions to the Obligations of Parent and Acquisition............. A-1-50
ARTICLE 6............................................................................... A-1-53
SECTION 6.1. Termination......................................................... A-1-53
SECTION 6.2. Effect of Termination............................................... A-1-54
SECTION 6.3. Expenses............................................................ A-1-55
SECTION 6.4. Amendment........................................................... A-1-55
SECTION 6.5. Extension; Waiver................................................... A-1-55
ARTICLE 7............................................................................... A-1-56
SECTION 7.1. Survival of Representations and Warranties.......................... A-1-56
SECTION 7.2. Entire Agreement; Assignment........................................ A-1-56
SECTION 7.3. Validity............................................................ A-1-56
</TABLE>
A-1-5
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
SECTION 7.4. Notices............................................................. A-1-56
SECTION 7.5. Governing Law....................................................... A-1-57
SECTION 7.6. Headings; Construction.............................................. A-1-57
SECTION 7.7. Parties in Interest................................................. A-1-57
SECTION 7.8. Specific Performance................................................ A-1-57
SECTION 7.9. Brokers............................................................. A-1-58
SECTION 7.10. Counterparts........................................................ A-1-58
SECTION 7.11. Definition of Knowledge............................................. A-1-58
SECTION 7.12. Recapitalization.................................................... A-1-58
</TABLE>
A-1-6
<PAGE>
EXHIBITS
Exhibit A -- Form of Certificate of Merger
Exhibit B -- Directors of Surviving Corporation at the Effective Time
Exhibit C -- Officers of Surviving Corporation at the Effective Time
Exhibit D -- Form of Escrow Agreement
Exhibit E -- Certificate to be delivered by Parent and Acquisition in
Connection with Tax Opinion of Company Counsel
Exhibit F -- Form of Amended and Restated Employment Agreement of Lawrence
S. Gross
Exhibit G-1 -- Form of Non-Competition Agreement of Lawrence S. Gross
Exhibit G-2 -- Form of Non-Competition Agreement of Barton Listick
Exhibit H -- Form of Consent and Waiver
Exhibit I -- Form of Internet Domain Name Assignment
A-1-7
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of October 11, 1996 (this
"Agreement"), is among KNOWLEDGE ADVENTURE, INC., a Delaware corporation (the
"Company"), CUC INTERNATIONAL INC., a Delaware corporation ("Parent"), and KA
ACQUISITION CORP., a Delaware corporation and a direct wholly owned subsidiary
of Parent ("Acquisition").
WHEREAS, the Boards of Directors of the Company, Parent and Acquisition
each have, in light of and subject to the terms and conditions set forth herein,
(i) determined that the Merger (as defined in Section 1.1) is fair to their
respective stockholders and in the best interests of such stockholders and (ii)
approved the Merger in accordance with this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, it is intended that the Merger shall be recorded for accounting
purposes as a "pooling-of-interests";
WHEREAS, the Company has delivered to Parent a letter identifying all
persons (each, a "Company Affiliate") who are, on the date hereof, "affiliates"
of the Company as defined for purposes of paragraphs (c) and (d) of Rule 145
under the Securities Act of 1933, as amended (the "Securities Act"), and each
Company Affiliate (other than those identified herein) has delivered to Parent a
letter (each, an "Affiliate Letter") relating to (i) the transfer, prior to the
Effective Time (as defined in Section 1.2), of the Company Shares (as defined in
Section 1.8) beneficially owned by such Company Affiliate on the date hereof and
(ii) the transfer of the shares of Parent Common Stock (as defined in Section
1.8(a)(i)) to be received by such Company Affiliate in and pursuant to the
Merger; and
WHEREAS, in contemplation of the consummation of the Merger, Parent has
agreed to loan to the Company, on the terms and subject to the conditions set
forth in a Loan Agreement dated of even date herewith (the "Loan Agreement")
between Parent and the Company, and the loan documents executed and delivered in
connection therewith (together with the Loan Agreement, the "Loan Documents"),
up to a maximum of $3.0 million to repay certain outstanding indebtedness of the
Company and to fund the business operations of the Company in the ordinary
course.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained, and intending to be
legally bound hereby, the Company, Parent and Acquisition hereby agree as
follows:
A-1-8
<PAGE>
ARTICLE 1
THE MERGER
SECTION 1.1. The Merger. At the Effective Time and upon the terms and
----------
subject to the conditions of this Agreement and in accordance with the Delaware
General Corporation Law (the "DGCL"), Acquisition shall be merged with and into
the Company (the "Merger"). Following the Merger, the Company shall continue as
the surviving corporation (the "Surviving Corporation") and the separate
corporate existence of Acquisition shall cease.
SECTION 1.2. Effective Time. Subject to the terms and conditions set
--------------
forth in this Agreement, the certificate of merger to be filed with the
Secretary of State of the State of Delaware in the form attached as Exhibit A
(the "Certificate of Merger") shall be duly executed and acknowledged by
Acquisition and the Company and thereafter delivered to the Secretary of State
of the State of Delaware for filing pursuant to the DGCL on the Closing Date (as
defined in Section 1.3). The Merger shall become effective at such time as a
properly executed and certified copy of the Certificate of Merger is duly filed
by the Secretary of State of the State of Delaware in accordance with the DGCL
or at such time as is provided in the Certificate of Merger (the time the Merger
becomes effective being referred to herein as the "Effective Time").
SECTION 1.3. Closing of the Merger. The closing of the Merger (the
---------------------
"Closing") will take place at a time and on a date to be specified by the
parties (the "Closing Date"), which date shall occur on the second business day
after satisfaction (or waiver) of the latest to occur of the conditions set
forth in Article 5 but in any case no earlier than December 31, 1996 (unless
otherwise agreed by Parent), at the offices of Gibson, Dunn & Crutcher, 333
South Grand Avenue, Los Angeles, California 90071, unless another time, date or
place is agreed to in writing by the parties.
SECTION 1.4. Effects of the Merger. The Merger shall have the effects
---------------------
set forth in the DGCL. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the properties, rights, privileges,
powers and franchises of the Company and Acquisition shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and
Acquisition shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.5. Certificate of Incorporation and Bylaws. The Certificate of
---------------------------------------
Incorporation of the Company in effect at the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation until amended in
accordance with applicable law. The Bylaws of the Company in effect at the
Effective Time shall be the Bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 1.6. Directors. The directors of Acquisition at the Effective
---------
Time shall be the persons identified in Exhibit B, and such persons shall be the
initial directors of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation until such director's successor is duly elected or appointed and
qualified.
A-1-9
<PAGE>
SECTION 1.7. Officers. The officers of the Company at the Effective
--------
Time shall be the persons identified in Exhibit C, and such persons shall be
---------
the initial officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation until such officer's successor is duly elected or appointed and
qualified.
SECTION 1.8. Conversion of Company Shares.
----------------------------
(a) At the Effective Time, by virtue of the Merger and without any action
on the part of the Company, Parent, Acquisition or the holder of any of the
Company Shares (other than (x) Company Shares held by Parent, Acquisition or any
other subsidiary of Parent, (y) Company Dissenting Shares (as defined in Section
1.9) and (z) Company Shares held in the Company's treasury), all of the shares
of:
(i) Common Stock, par value $.0001 per share, of the Company
("Company Common Stock");
(ii) Series A Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series A Preferred Stock");
(iii) Series B Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series B Preferred Stock");
(iv) Series C Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series C Preferred Stock");
(v) Series D Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series D Preferred Stock");
(vi) Series E Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series E Preferred Stock"); and
(vii) Series F Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series F Preferred Stock");
issued and outstanding immediately prior to the Effective Time shall be
converted into the right to receive, in the aggregate, the total of (a)
2,277,747 fully paid and nonassessable shares of common stock, $.01 par value
per share, of Parent ("Parent Common Stock"), minus (b) a number of fully paid
-----
and nonassessable shares of Parent Common Stock determined by dividing the Gross
Option Spread (as defined below) by $36.22, minus (c) the Preferred Option
-----
Consideration (as defined in Section 1.8(b)), plus, (d) if and only if the
----
Effective Time does not occur prior to December 1, 1996, an additional 499.232
fully paid and nonassessable shares of Parent Common Stock for each calendar day
after December 1, 1996 and prior to the Closing Date, in each case subject to
the indemnification and escrow provisions of Section 1.12 and the Escrow
Agreement (as defined below) (the total of clause (a), minus clause (b), minus
----- -----
clause (c) and plus clause (d), subject to such indemnification and escrow
----
provisions, being hereinafter
A-1-10
<PAGE>
referred to as the "Merger Consideration"). Each share of Company Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
shall be converted into the right to receive that portion of the Merger
Consideration to which such share is entitled under, and in accordance with,
Article IV, Section 2 of the Restated Certificate of Incorporation of the
Company. For the purposes of this Section 1.8, the term "Gross Option Spread"
shall mean the positive number, if any, obtained by subtracting (a) the
aggregate exercise price under all Parent Replacement Options (as defined in
Section 1.11(a)) issued in exchange for Company Stock Options pursuant to
Section 1.11 from (b) the product of $36.22 multiplied by the aggregate number
-------------
of full shares of Parent Common Stock deemed purchasable (as determined under
Section 1.11) following the Merger pursuant to all such Parent Replacement
Options.
Issued and outstanding shares of Company Common Stock and issued and
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series
F Preferred Stock (collectively, "Company Preferred Stock") are referred to
herein collectively as the "Company Shares."
(b) If, as of the Effective Time, there remain outstanding and unexercised
any options, warrants or similar securities, whether vested or unvested,
entitling the holders thereof to acquire any shares of Company Preferred Stock
(as defined below) ("Preferred Options"), then, at the Effective Time, by virtue
of the Merger and without any action on the part of the Company, Parent,
Acquisition or the holder of any Preferred Options, all Preferred Options that
remain outstanding and unexercised as of the Effective Time shall be converted
into the right to receive, in the aggregate, a number of fully paid and
nonassessable shares of Parent Common Stock (such number of shares of Parent
Common Stock being referred to herein as the "Preferred Option Consideration")
determined by:
(i) multiplying (A) the number of shares of Company Preferred Stock
purchasable upon the exercise of the Preferred Options that remain
outstanding and unexercised as of the Effective Time, times (B) the number
-----
of shares of Parent Common Stock, or a fraction thereof, that a person
holding the number of shares of Company Preferred Stock into which such
Preferred Options were exercisable would have been entitled to receive in
the Merger pursuant to the last sentence of the immediately succeeding
paragraph (without taking into account whether such Preferred Options were
in fact exercisable and without adjusting the allocation of the Merger
Consideration among the Company Shares to give effect to any deemed
exercise of Preferred Options), and
(ii) subtracting from the product determined under clause (i) above a
number of shares of Parent Common Stock determined by dividing (A) the
aggregate exercise prices of all Preferred Options that remain outstanding
and unexercised as of the Effective Time by (B) $36.22;
--
in each case, subject to the indemnification and escrow provisions of Section
1.12 and the Escrow Agreement, to be divided among the holders of Preferred
Options pro rata in accordance with the
A-1-11
<PAGE>
respective liquidation preferences of the shares of Company Preferred Stock
theretofore purchasable on exercise of such Preferred Options.
(c) At the Effective Time, each outstanding share of the common stock, par
value $0.01 per share, of Acquisition shall be converted into one share of
common stock, par value $0.0001 per share, of the Surviving Corporation.
(d) At the Effective Time, each Company Share, if any, held by Parent,
Acquisition or any subsidiary of Parent or Acquisition immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of Parent, Acquisition or such subsidiary, be canceled, retired and cease to
exist, and no payment shall be made with respect thereto.
(e) At the Effective Time, each Company Share held in the Company's
treasury immediately prior to the Effective Time shall be canceled, retired and
cease to exist, and no payment shall be made with respect thereto.
SECTION 1.9. Shares of Dissenting Holders.
----------------------------
(a) Notwithstanding anything to the contrary contained in this Agreement,
any holder of Company Shares issued and outstanding immediately prior to the
Effective Time with respect to which dissenters' rights, if any, are granted by
reason of the Merger under the DGCL and who does not vote in favor of the Merger
and who otherwise complies with Section 262 of the DGCL and, if applicable,
Chapter 13 of the California General Corporation Law ("CGCL") ("Company
Dissenting Shares") shall not be entitled to receive shares of Parent Common
Stock pursuant to Section 1.8, unless such holder fails to perfect, effectively
withdraws or loses his right to dissent from the Merger under the DGCL or the
CGCL. Such holder shall be entitled to receive only such rights as are granted
by Section 262 of the DGCL and/or Chapter 13 of the CGCL. If any such holder so
fails to perfect, effectively withdraws or loses his or her dissenters' rights
under the DGCL or the CGCL, his or her Company Dissenting Shares shall thereupon
be deemed to have been converted, as of the Effective Time, into the right to
receive shares of Parent Common Stock pursuant to Section 1.8 based upon the
class of equity security comprising such Company Dissenting Shares.
(b) Any payments relating to Company Dissenting Shares shall be made
solely by the Surviving Corporation and no funds or other property have been or
will be provided by Acquisition or any of Parent's other direct or indirect
subsidiaries for such payment.
SECTION 1.10. Exchange of Certificates.
------------------------
(a) As of the Effective Time, Parent shall deposit with The Bank of
Boston, or another bank or trust company designated by Parent and reasonably
acceptable to the Company (the "Exchange Agent"), for the benefit of the holders
of Company Shares, for exchange in accordance with this Article 1, through the
Exchange Agent: (i) certificates representing the appropriate number of shares
of Parent Common Stock into which the Company Shares held by the stockholders of
the Company immediately prior to the Effective Time shall become convertible
A-1-12
<PAGE>
pursuant to Section 1.8 (rounded down to the nearest whole share), less the
number of shares of Escrowed Common Stock (as defined below) (rounded up to the
nearest whole share) to be deposited into the escrow account pursuant to Section
1.12(b) and the Escrow Agreement, and (ii) cash to be paid in lieu of fractional
shares of Parent Common Stock (such shares of Parent Common Stock and such cash
are hereinafter referred to as the "Exchange Fund") issuable pursuant to
Sections 1.8 and 1.10(f) in exchange for outstanding Company Shares.
(b) As soon as practicable but no later than thirty (30) days after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding Company Shares (the "Certificates") whose Company Shares
were converted into the right to receive shares of Parent Common Stock pursuant
to Section 1.8 and whose shares are not Company Dissenting Shares: (i) a letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock. Promptly following the surrender of
a Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Parent and Acquisition, together with such letter
of transmittal, duly executed, the Exchange Agent shall deliver to the holder of
such Certificate a certificate representing that number of whole shares of
Parent Common Stock, less the number of shares of Escrowed Parent Common Stock,
and, if applicable, a check representing the cash consideration to which such
holder may be entitled on account of a fractional share of Parent Common Stock
pursuant to Section 1.10(f), which such holder has the right to receive pursuant
to the provisions of this Article 1, and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Company
Shares which is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of Parent Common Stock may
be issued to a transferee if the Certificate representing such Company Shares is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 1.10, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the certificate
representing shares of Parent Common Stock, subject to the indemnification and
escrow provisions of Section 1.12 and the Escrow Agreement, and cash in lieu of
any fractional shares of Parent Common Stock to which the holder may be entitled
as contemplated by this Section 1.10.
(c) No dividends or other distributions declared or made after the
Effective Time with respect to Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to any whole shares of Parent Common Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to the effect of applicable laws, following surrender of such Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of Parent Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any dividends or other distributions with
a record date after the Effective Time theretofore paid
A-1-13
<PAGE>
prior to surrender with respect to such whole shares of Parent Common Stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to surrender
and a payment date subsequent to surrender payable with respect to such whole
shares of Parent Common Stock.
(d) In the event that any Certificate for Company Shares shall have been
lost, stolen or destroyed, the Exchange Agent shall issue in exchange therefor,
upon the making of an affidavit of that fact by the holder thereof, such shares
of Parent Common Stock and cash in lieu of fractional shares, if any, as may be
required pursuant to this Agreement; provided, however, that Parent may, in its
discretion, require the delivery of a bond or indemnity of a type that is usual
and customary in transactions of this nature.
(e) All shares of Parent Common Stock issued upon the surrender for
exchange of Company Shares in accordance with the terms hereof (including the
Escrowed Parent Common Stock and any cash paid pursuant to Section 1.10(c) or
1.10(f)) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such Company Shares, and there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the
Company Shares which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article 1.
(f) No fractions of a share of Parent Common Stock shall be issued in the
Merger, but in lieu thereof each holder of Company Shares otherwise entitled to
a fraction of a share of Parent Common Stock shall, upon surrender of his or her
Certificate or Certificates, be entitled to receive an amount of cash (without
interest) determined by multiplying the closing price per share for Parent
Common Stock as reported on the NYSE (as defined below) on the day immediately
preceding the date of the Effective Time by the fractional share interest to
which such holder would otherwise be entitled. The parties acknowledge that
payment of the cash consideration in lieu of issuing fractional shares was not
separately bargained for consideration but merely represents a mechanical
rounding off for purposes of simplifying the corporate and accounting problems
which would otherwise be caused by the issuance of fractional shares.
(g) Any portion of the Exchange Fund which remains undistributed to the
stockholders of the Company for six (6) months after the Effective Time shall be
delivered to Parent, upon demand, and any stockholders of the Company who have
not theretofore complied with this Article 1 shall thereafter look only to
Parent for payment of their claim for Parent Common Stock, any cash in lieu of
fractional shares of Parent Common Stock and/or any dividends or distributions
with respect to Parent Common Stock.
(h) Neither Parent nor the Company shall be liable to any holder of
Company Shares, or Parent Common Stock, as the case may be, for such shares (or
dividends or other distributions with respect thereto) or cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
A-1-14
<PAGE>
SECTION 1.11. Company Stock Options.
---------------------
(a) At the Effective Time, each outstanding option, warrant or similar
security, whether vested or unvested, to acquire any Company Common Stock,
whether issued pursuant to the Company's 1991 Stock Option Plan or the Company's
1993 Stock Option Plan (collectively, the "Company Plans") or otherwise
(individually, a "Company Stock Option," and, collectively, "Company Stock
Options"), shall be cancelled and, in lieu thereof, Parent shall issue to each
holder of a Company Stock Option an option (each, a "Parent Replacement Option")
to acquire, on substantially the same terms and conditions as were applicable
under such Company Stock Option, the number of shares of Parent Common Stock
that a person holding the number of shares of Company Common Stock into which
such Company Stock Option was exercisable would have been entitled to receive
pursuant to the Merger (without taking into account whether such option was in
fact exercisable at such time and without adjusting the allocation of the Merger
Consideration among the Company Shares to give effect to any deemed exercise of
the Company Stock Options), at a price per share equal to (i) the aggregate
exercise price for the shares of Company Common Stock subject to such Company
Stock Option divided by (ii) the number of full shares of Parent Common Stock
deemed purchasable pursuant to such Company Stock Option as described above;
provided, however, that (A) the number of Parent Replacement Options, and the
number of shares of Parent Common Stock that may be purchased upon the exercise
of such Parent Replacement Options, shall be subject to the indemnification
provisions of Section 1.12 and (B) the number of shares of Parent Common Stock
that may be purchased upon exercise of such Parent Replacement Option shall not
include any fractional share and, upon exercise of the Parent Replacement
Option, any fractional share shall be rounded up to the nearest whole share.
The term "Closing Price" shall mean, on any day, the last reported sale price of
one share of Parent Common Stock on the New York Stock Exchange (the "NYSE")
Composite Transactions.
(b) No less than twenty (20) business days prior to the Effective Time,
the Company shall deliver a notice to each holder of any Company Stock Options,
at the address of such holder shown on the Company's records, notifying such
holder (i) of the right of such holder to exercise such Company Stock Options in
accordance with their terms prior to the Effective Time and (ii) that any of
such holder's Company Stock Options that remain unexercised as of the Effective
Time will be cancelled and exchanged for Parent Replacement Options pursuant to
Section 1.11(a).
(c) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery upon
exercise of the Parent Replacement Options. Parent shall use its best efforts
to cause there to be effective as of the Effective Time, or as soon as
practicable thereafter, a registration statement on Form S-8 (or any successor
form) or another appropriate form with respect to the Parent Common Stock
subject to any Parent Replacement Options held by persons who are or were
directors, officers, employees or consultants (subject to the rules of such
form) of the Company, and shall use its best efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain
A-1-15
<PAGE>
the current status of the prospectus or prospectuses contained therein) for so
long as such Parent Replacement Options remain outstanding.
(d) The Company shall not assign to Parent, Acquisition or the Surviving
Corporation any rights of the Company under certain stock purchase agreements
between the Company and certain employees and other persons to repurchase
Company Common Stock acquired upon the exercise of Company Stock Options.
SECTION 1.12. Indemnification; Escrowed Parent Common Stock.
---------------------------------------------
(a) The stockholders of the Company immediately prior to the Effective
Time (including for all purposes in this Section 1.12, all holders of Preferred
Options that remain outstanding and unexercised immediately prior to the
Effective Time) and all holders of Parent Replacement Options shall indemnify,
defend and hold harmless, jointly and severally, Parent, Acquisition and, after
the Effective Time, the Surviving Corporation, and each of their respective
affiliates, successors, assigns, agents and representatives (collectively, the
"Affiliated Parties"), against and in respect of any and all claims, demands,
losses, costs, expenses, obligations, liabilities, damages, remedies and
penalties (including, without limitation, interest, penalties, settlement costs
and any legal, accounting or other fees and expenses for investigating or
defending any claims or threatened actions) (collectively, "Losses") that
Parent, Acquisition, the Surviving Corporation or any of their respective
Affiliated Parties actually incur or suffer in connection with:
(i) any breach of any of the representations or warranties made by
the Company in this Agreement or in any certificate, instrument or other
document delivered pursuant hereto;
(ii) any breach of any covenant of the Company contained in this
Agreement;
(iii) the restatement, if any, by Price Waterhouse LLP, the Company's
auditors, of the financial statements of the Company identified in Sections
2.4(a)(i) or (ii), provided that, in respect of this clause (iii), such
indemnification shall be limited to Losses that are actually incurred or
suffered as a result of a claim or demand made by any person against
Parent, Acquisition, the Surviving Corporation or any of their respective
Affiliated Parties, whether for Taxes or otherwise; or
(iv) any default under or violation of the Loan and Security
Agreement dated February 2, 1994, between the Company and Silicon Valley
Bank, including all exhibits and schedules thereto and all related
agreements, instruments and other documents (in each case as supplemented,
amended or otherwise modified from time to time, the "Silicon Loan
Documents"), whether in existence on the date hereof or arising after the
date hereof and prior to the Effective Time;
provided, however, that no claim, demand, suit or cause of action shall be
brought against the stockholders of the Company or holders of Parent Replacement
Options under Section 1.12(a)(i)
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<PAGE>
or (ii) unless and until the aggregate amount of claims under this Section
1.12(a) exceeds, on a cumulative basis, $250,000, in which event Parent,
Acquisition, the Surviving Corporation and any of their respective Affiliated
Parties shall be entitled to indemnification from the stockholders of the
Company or holders of Parent Replacement Options for all claims under Section
1.12(a)(i) or (ii) relating back to the first dollar.
(b) At the Closing, certificates representing nine percent (9%) of the
number of shares of Parent Common Stock (rounded up to the nearest whole share)
issued in the Merger pursuant to Section 1.8 (the "Escrowed Parent Common
Stock") shall be deposited into an escrow account and held pursuant to the terms
of an Escrow Agreement among Parent, the Surviving Corporation, the Escrow
Committee (as defined therein) and the escrow agent, in substantially the form
of Exhibit D (the "Escrow Agreement"). The Escrowed Parent Common Stock shall
---------
be withheld pro rata from the number of shares of Parent Common Stock to be
received by each stockholder of the Company in the Merger. To the extent that
Parent, Acquisition, the Surviving Corporation or any of their respective
Affiliated Parties shall have any claims for indemnification pursuant to Section
1.12(a), it or they may seek recourse against the Escrowed Parent Common Stock
in seeking satisfaction of such claims. The Escrowed Parent Common Stock, less
----
the number of shares of Escrowed Parent Common Stock having a fair market value
most nearly equal to the aggregate amount of all indemnification claims made by
Parent, Acquisition, the Surviving Corporation or their respective Affiliated
Parties under Section 1.12(a) (for such purposes, the fair market value of one
share of Escrowed Parent Common Stock shall be equal to $36.22), shall be
released to the stockholders of the Company pursuant to the Escrow Agreement on
the earlier to occur (the "Escrow Release Date") of (i) the four (4) month
anniversary of the Closing and (ii) the date upon which audited consolidated
financial statements of Parent, which include the results of operations of the
Surviving Corporation, shall have been completed and Parent shall have received
a signed opinion of Ernst & Young LLP ("E&Y"), its independent auditors, with
respect to such financial statements. Upon the approval by the stockholders of
the Company of the Merger Agreement and the Merger, such stockholders shall be
deemed to have irrevocably appointed an escrow committee consisting of Michael
Levinthal and Jon Feiber (the "Escrow Committee") to act as their attorney-in-
fact on behalf of such stockholders and the holders, if any, of Preferred
Options to consent to, contest, settle, compromise or otherwise dispose of any
claim made by Parent or any other Affiliated Party in accordance with Section
1.12(a) and the Escrow Agreement. No further documentation shall be required to
evidence such appointment, and such power of attorney shall be coupled with an
interest, thereby confirming such appointment as irrevocable. The Escrow
Committee shall be empowered to act by majority vote with respect to all matters
arising under Section 1.12(a) and the Escrow Agreement. If any member of the
Escrow Committee shall die, become disabled or otherwise be unable or unwilling
to fulfill his responsibilities hereunder, each the remaining members of the
Escrow Committee shall select a replacement member. Such remaining members of
the Escrow Committee shall notify Parent and the Escrow Agent in writing of any
change in the composition of the Escrow Committee.
(c) The sole and exclusive remedy of Parent, Acquisition, the Surviving
Corporation and their respective Affiliated Parties against the stockholders of
the Company for any
A-1-17
<PAGE>
indemnification claim brought under Section 1.12(a) following the Effective Time
shall be the return of shares of Escrowed Parent Common Stock pursuant to the
Escrow Agreement. If, and to the extent that, there are Company Stock Options
that remain outstanding and unexercised immediately prior to the Effective Time,
Parent, Acquisition, the Surviving Corporation and any of their respective
Affiliated Parties will be entitled to have recourse against the holders of
Parent Replacement Options issued in the Merger in exchange for such Company
Stock Options in seeking satisfaction of any indemnification claims, which
recourse shall only be available prior to the Escrow Release Date and shall be
limited solely to the right to demand the return (or cancellation) of a number
of Parent Replacement Options, or Parent Common Stock if such Parent Replacement
Options have theretofore been exercised, having a fair market value most nearly
equal to the aggregate amount of all indemnification claims; provided, however,
that such indemnified parties shall only be entitled pursuant to this sentence
to demand the return (or cancellation) of Parent Replacement Options, or Parent
Common Stock, having a fair market value that does not exceed 9% of the fair
market value of the Parent Replacement Options, or Parent Common Stock, as
applicable, received by such holders in exchange for their Company Stock Options
(for all such purposes, the fair market value of one share of Parent Common
Stock shall be equal to $36.22). Notwithstanding anything to the contrary,
nothing contained in this Section 1.12 shall in any way limit any claim, cause
of action or remedy that may be available to Parent, Acquisition, the Surviving
Corporation or any of their respective Affiliated Parties against (i) any
stockholder of the Company or any holder of options to acquire capital stock of
the Company, whether at law or in equity, for willful or intentional fraud or in
connection with the execution and/or delivery by such stockholder or
optionholder of its Affiliate Letter or any certificate, instrument or agreement
executed and/or delivered by such stockholder or optionholder or (ii) the
Company for breach of any representation, warranty, covenant or agreement
contained herein or in any other certificate, instrument or agreement (including
any Affiliate Letter) executed and delivered in connection with the Merger.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of Parent and
Acquisition as follows:
SECTION 2.1. Organization and Qualification.
------------------------------
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its businesses as now being conducted, except where
the failure to be so organized, existing and in good standing or to have such
power and authority would not have a Material Adverse Effect (as defined below)
on the Company. When used in connection with the Company, the term "Material
Adverse Effect" means any change or effect that (i) is or is reasonably likely
to be materially adverse to the properties, business, results of operations or
condition (financial or otherwise) of the Company, or
A-1-18
<PAGE>
(ii) may materially impair the ability of the Company to consummate the
transactions contemplated hereby.
(b) Except as disclosed in Section 2.1 of the Company Disclosure Schedule
dated October 11, 1996, previously delivered by the Company to Parent (the
"Company Disclosure Schedule"), the Company does not own any equity or other
interest, or right to acquire any equity or other interest, in any corporation,
partnership, joint venture, limited liability company or similar entity other
than (i) 997,407 shares of common stock of Worlds, Inc., a Delaware corporation
("Worlds"), which, to the knowledge of the Company, represents 17.85% of the
outstanding common stock of Worlds and (ii) 28,498 shares of series A preferred
stock of Worlds. To the knowledge of the Company, the outstanding common stock
and series A preferred stock of Worlds held by the Company represents
approximately 12.45% of the total outstanding capital stock of Worlds on a fully
diluted basis.
(c) Except as set forth in Section 2.1 of the Company Disclosure Schedule,
the Company is duly qualified or licensed and in good standing to do business in
each jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed and in good standing would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
(d) The Company has heretofore delivered to Parent copies of the Restated
Certificate of Incorporation and Bylaws of the Company, in each case as
currently in effect, which copies are true, correct and complete except as set
forth in Section 2.1 of the Company Disclosure Schedule.
SECTION 2.2. Capitalization of the Company.
-----------------------------
(a) The authorized capital stock of the Company consists of:
(i) 50,000,000 shares of Company Common Stock, of which 8,725,381
are issued and outstanding as of the date hereof;
(ii) 5,000,000 shares of Series A Preferred Stock, of which
3,253,754 are issued and outstanding as of the date hereof;
(iii) 2,764,096 shares of Series B Preferred Stock, all of which are
issued and outstanding as of the date hereof;
(iv) 3,634,412 shares of Series C Preferred Stock, all of which are
issued and outstanding as of the date hereof;
(v) 321,942 shares of Series D Preferred Stock, all of which are
issued and outstanding as of the date hereof;
(vi) 2,186,053 shares of Series E Preferred Stock, all of which are
issued and outstanding as of the date hereof; and
A-1-19
<PAGE>
(vii) 800,000 shares of Series F Preferred Stock, of which 748,683
shares are issued and outstanding as of the date hereof.
All of the Company Shares have been validly issued, and are fully paid,
nonassessable and free of preemptive rights. As of August 31, 1996, 3,426,149
shares of Company Common Stock were reserved for issuance and issuable upon or
otherwise deliverable in connection with the exercise of outstanding Company
Stock Options, and 275,000 shares of Series A Preferred Stock were reserved for
issuance and issuable upon or otherwise deliverable in connection with the
outstanding Preferred Options. Section 2.2 of the Company Disclosure Schedule
sets forth a true, correct and complete list, as of August 31, 1996, of Company
Stock Options and Preferred Options, including, for each such Company Stock
Option and Preferred Option, the date of grant, the Company Plan under which it
was granted, if applicable, the number of shares of Company capital stock which
may be purchased and the exercise price. The Company has previously delivered
to Parent copies of all forms of stock option agreements, notes and stock pledge
agreements used by the Company in connection with the grant and exercise of
Company Stock Options and Preferred Options. All Company Stock Options and
Preferred Options that are not exercised prior to the Effective Time will
terminate by their terms unless assumed by Parent pursuant to Section 1.11.
Since August 31, 1996, no shares of the Company's capital stock have been issued
other than pursuant to the exercise of Company Stock Options and Preferred
Options in existence on such date and no additional Company Stock Options or
Preferred Options have been granted. Except as set forth above, as of the date
hereof, there are outstanding no (i) shares of capital stock or other voting
securities of the Company, (ii) securities of the Company convertible into or
exchangeable for shares of capital stock or voting securities of the Company,
(iii) except as set forth in Section 2.2 of the Company Disclosure Schedule,
options, warrants or other rights to acquire from the Company, and no
obligations of the Company to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of the Company, and (iv) equity equivalents or other similar rights
(collectively, "Company Securities").
(b) There are no outstanding obligations of the Company to repurchase,
redeem or otherwise acquire any Company Securities. Other than the Restated
Investors Rights Agreement referred to in Section 5.3(j), there are no
stockholder agreements, voting trusts or other agreements or understandings to
which the Company is a party or to which it is bound relating to the voting or
registration of any Company Securities. Section 2.2 of the Company Disclosure
Schedule sets forth a true, correct and complete list, as of August 31, 1996, of
all record holders of Company Shares, including the names of such holders and
the number and type(s) of Company Shares held.
(c) All of the outstanding shares of capital stock of Worlds owned by the
Company are held directly by the Company, free and clear of any Lien (as defined
below) or any other limitation or restriction (including any restriction on the
right to vote or sell the same, except as may be provided as a matter of law).
For purposes of this Agreement, "Lien" means, with respect to any asset
(including, without limitation, any security), any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
A-1-20
<PAGE>
(d) None of the Company Securities are registered or required to be
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
SECTION 2.3. Authority Relative to this Agreement and Merger; Consents
---------------------------------------------------------
and Approvals.
- --------------
(a) The Company has all necessary corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of the Company (the "Company Board"), and no other
corporate proceedings on the part of the Company are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby other than as
provided in Section 2.3(c). This Agreement has been duly and validly executed
and delivered by the Company and constitutes a valid, legal and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except as the same may be limited by applicable bankruptcy, insolvency,
moratorium or similar laws of general application relating to or affecting
creditors' rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances and preferential transfers, and by
the limitations imposed by general principles of equity.
(b) The Company Board, at a meeting duly called and held, has, by
unanimous vote of the members of the Company Board present at such meeting, duly
and validly approved, and taken all corporate actions required to be taken by
the Company Board for the consummation of, the Merger and the other transactions
contemplated hereby. Without limiting the generality of the foregoing, the
Company Board has (i) determined that the Merger is fair and in the best
interests of the Company and its stockholders, (ii) adopted this Agreement in
accordance with the DGCL and (iii) directed that this Agreement and the Merger
be submitted to the stockholders of the Company for their adoption and approval
and resolved to recommend that the stockholders of the Company approve and adopt
this Agreement and the Merger. No state takeover statute or similar statute or
regulation applies or purports to apply to this Agreement, the Merger or any of
the transactions contemplated hereby or thereby.
(c) The affirmative votes of the holders of at least (i) a majority of all
of the outstanding Company Common Stock voting together as a class with all of
the outstanding Company Preferred Stock (with each share of Company Preferred
Stock being entitled to the number of votes equal to the number of shares of
Company Common Stock into which such shares of Company Preferred Stock may be
converted at such time), and (ii) 66-2/3% of the outstanding shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock voting as a single class (with each
such share of Company Preferred Stock being entitled to the number of votes
equal to the number of shares of Company Common Stock into which such shares of
Company Preferred Stock may be converted at such time, provided that each share
of Series D Preferred Stock shall be deemed to be convertible at such time into
six shares of Company Common Stock), are the only votes of the holders of any
class or series of the Company Securities necessary to approve and adopt this
Agreement, the Merger and the Articles Amendment (as defined in Section 4.3(a)).
A-1-21
<PAGE>
SECTION 2.4. Financial Statement Net Assets.
------------------------------
(a) The consolidated financial statements of the Company, which consist of
(i) the audited consolidated balance sheets of the Company and the notes thereto
as of March 31, 1995 and 1996 and the audited consolidated statements of income,
stockholder's equity and cash flow and the notes thereto for the three fiscal
years ended March 31, 1996, certified by Price Waterhouse LLP whose reports
thereon are included therewith, and (ii) the unaudited consolidated balance
sheet of the Company as of August 31, 1996 (the "Company Balance Sheet") and
unaudited consolidated statements of income and cash flow for the five (5)
months then ended, true and correct copies of which Company Balance Sheet and
unaudited consolidated statements of income and cash flow were previously
delivered to Parent, were prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis with respect to
prior periods and present fairly the consolidated financial position of the
Company and the results of its operations as of the relevant dates thereof and
for the periods covered thereby, except that the unaudited financial statements
are subject to normal year-end audit adjustments. The unaudited consolidated
balance sheet and the unaudited consolidated statements of income and cash flow
referred to above were prepared in accordance with GAAP on a basis consistent
with prior interim periods and include all adjustments (consisting only of
normal recurring accruals but subject to normal year-end audit adjustments)
necessary for a fair presentation of the results of operations for such periods.
Except as set forth in Section 2.4 of the Company Disclosure Schedule, (A) all
of the accounts receivable reflected on the Company Balance Sheet and all
accounts receivable incurred since the date of the Company Balance Sheet are
fully collectible in the normal course of business and there are no known or
asserted claims or other rights of set-off against any thereof, except for any
reserves established on the Company Balance Sheet for sales returns or
uncollectible accounts, and (B) as of August 31, 1996, there is (w) no account
debtor delinquent in its payment by more than ninety (90) days, (x) no account
debtor that has refused (or, to the knowledge of the Company, threatened to
refuse) to pay its obligations for any reason, (y) to the knowledge of the
Company, no account debtor that is insolvent or bankrupt, and (z) no account
receivable which is pledged to any third party by the Company.
(b) The "Net Assets" of the Company as of the Closing shall be not less
than $100,000. For purposes of this Agreement, "Net Assets" means the excess of
(i) the sum of the Company's cash, cash equivalents, collectible receivables,
saleable inventory, fixed assets, prepaid expenses and marketable securities
over (ii) all of the Company's liabilities, including, without limitation, all
liabilities with respect to Taxes, in each case as determined in accordance with
GAAP in conformity with the practices consistently applied by the Company with
respect to prior periods.
SECTION 2.5. Information Supplied by the Company.
-----------------------------------
(a) None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in (i) the Hearing Documents (as defined
in Section 4.2(a)) to be filed with the Commissioner of Corporations of the
State of California (the "California Commissioner of Corporations") contains or
will contain, at the time such information is supplied,
A-1-22
<PAGE>
at the time such Hearing Documents are filed or at the time the Fairness Hearing
(as defined in Section 4.2(a)) is held, or (ii) the proxy statement furnished by
the Company to its stockholders relating to the meeting of the Company's
stockholders to be held in connection with the Merger or the information
statement to be furnished to the Company's stockholders in the event the Company
solicits consents of its stockholders to approve the Merger in lieu of a meeting
of the Company's stockholders (the "Proxy Statement/Information Statement")
contains or will contain, at the time such information is supplied, on the date
such Proxy Statement/Information Statement is mailed to stockholders, at the
time the Fairness Hearing is held or at the times of such meeting or meetings of
stockholders, any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
(b) In the event that the parties prepare, and Parent files with the
Securities and Exchange Commission (the "SEC"), a registration statement on Form
S-4 (the "S-4") in connection with the issuance of shares of Parent Common Stock
in the Merger as contemplated by Section 4.2(b), none of the information
supplied or to be supplied by the Company for inclusion or incorporation by
reference in the S-4 contains or will contain, at the time the information is
supplied, at the time the S-4 is filed with the SEC or at the time it becomes
effective under the Securities Act, any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
(c) The Proxy Statement/Information Statement will comply in all material
respects with the requirements of the DGCL and, to the extent applicable, the
CGCL. The S-4, if filed, will comply as to form in all material respects with
the provisions of the Exchange Act or the Securities Act, as the case may be,
and the rules and regulations promulgated thereunder.
SECTION 2.6. Consents and Approvals; No Violations. Except for filings,
-------------------------------------
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the California Corporate
Securities Law of 1968, as amended (the "California Securities Law") and other
state securities or blue sky laws, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), and the filing and recordation of the
Certificate of Merger as provided by the DGCL, no filing with or notice to, and
no permit, authorization, consent or approval of, any court or tribunal or
administrative, governmental or regulatory body, agency or authority (a
"Governmental Entity") is necessary for the execution and delivery by the
Company of this Agreement or the consummation by the Company of the transactions
contemplated hereby, except where the failure to obtain such permits,
authorizations, consents or approvals or to make such filings or give such
notice would not have a Material Adverse Effect on the Company. Neither the
execution, delivery and performance of this Agreement or the Certificate of
Merger by the Company nor the consummation by the Company of the transactions
contemplated hereby or thereby will (a) conflict with or result in any breach of
any provision of the Certificate of Incorporation or Bylaws (or similar
governing documents) of the Company, (b) except as set forth in Section 2.6 of
the Company Disclosure Schedule, result in a violation or breach of, or
constitute (with or
A-1-23
<PAGE>
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation, acceleration or Lien) under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
the Company is a party or by which it or any of its properties or assets may be
bound, or (c) except as set forth in Section 2.6 of the Company Disclosure
Schedule, violate any order, writ, injunction, decree, law, statute, rule or
regulation applicable to the Company or any of its properties or assets, except,
in the case of clauses (b) and (c), for violations, breaches or defaults which
would not have a Material Adverse Effect on the Company.
SECTION 2.7. No Default. Except as set forth in Section 2.7 of the
----------
Company Disclosure Schedule, the Company is not in default or violation (and no
event has occurred which with notice or the lapse of time or both would
constitute a default or violation) of any term, condition or provision of (a)
its Certificate of Incorporation or Bylaws, (b) any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which the Company is now a party or by which it or any of its properties or
assets may be bound, except for defaults or breaches that would not have a
Material Adverse Effect on the Company, or (c) any order, writ, injunction,
decree, law, statute, rule or regulation applicable to the Company or any of its
properties or assets.
SECTION 2.8. No Undisclosed Liabilities; Absence of Changes. Except as
----------------------------------------------
set forth in Section 2.8 of the Company Disclosure Schedule, as of August 31,
1996, the Company did not have any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which would be required by GAAP to be reflected
in, reserved against or otherwise described in the consolidated balance sheet of
the Company (including the notes thereto) as of such date or which, individually
or in the aggregate, could have a Material Adverse Effect on the Company. Since
August 31, 1996, the business of the Company has been carried on in the ordinary
and usual course, the Company has not incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, which could have, and there
have been no events, changes or effects with respect to the Company having, or
which could have, individually or in the aggregate, a Material Adverse Effect on
the Company.
SECTION 2.9. Litigation. Except as set forth in Section 2.9 of the
----------
Company Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of the Company, threatened against
the Company or any of its properties or assets which, individually or in the
aggregate, (a) could reasonably be expected to have a Material Adverse Effect on
the Company or (b) questions the validity of this Agreement or any action to be
taken by the Company in connection with the consummation of the transaction
contemplated hereby or could otherwise prevent or delay the consummation of the
transactions contemplated by this Agreement. The Company is not subject to any
outstanding order, writ, injunction or decree which, insofar as can be
reasonably foreseen in the future, could have a Material Adverse Effect on the
Company or could prevent or delay the consummation of the transactions
contemplated hereby.
SECTION 2.10. Compliance with Applicable Law. Section 2.10 of the
------------------------------
Company Disclosure Schedule sets forth a list of all permits, licenses,
variances, exemptions, orders and
A-1-24
<PAGE>
approvals of all Governmental Entities (the "Company Permits") used by the
Company in the conduct of its businesses. The Company holds all permits,
licenses, variances, exemptions, orders and approvals of all Governmental
Entities necessary for the lawful conduct of their respective businesses, except
for failures to hold such permits, licenses, variances, exemptions, orders and
approvals which, individually or in the aggregate, could not have a Material
Adverse Effect on the Company. The Company is in compliance with the terms of
the Company Permits, except where the failure so to comply could not have a
Material Adverse Effect on the Company. Except as set forth in Section 2.10 of
the Company Disclosure Schedule, the business of the Company is not being
conducted in violation of any law, ordinance or regulation of any Governmental
Entity, except that no representation or warranty is made in this Section 2.10
with respect to Environmental Laws (as defined in Section 2.12(a)) and except
for violations or possible violations which do not, and, insofar as reasonably
can be foreseen, in the future would not, individually or in the aggregate, have
a Material Adverse Effect on the Company. No investigation or review by any
Governmental Entity with respect to the Company is pending or, to the knowledge
of the Company, threatened, nor, to the knowledge of the Company, has any
Governmental Entity indicated an intention to conduct the same.
SECTION 2.11. Employee Benefit Plan Matters.
-----------------------------
(a) Section 2.11 of the Company Disclosure Schedule sets forth each
employee pension, retirement, profit sharing, stock bonus, stock option, stock
purchase, incentive, deferred compensation, hospitalization, medical, dental,
vision, life insurance, sick pay, disability, severance, golden parachute or
other plan, fund, program, policy, contract or arrangement providing employee
benefits maintained or contributed to by the Company in which any employee of
the Company has participated or under which any employee has accrued and remains
entitled to any benefits (the "Benefit Plans"). The Company has delivered to
Parent true, complete and correct copies of (i) each Benefit Plan (or, in the
case of any unwritten Benefit Plans, descriptions thereof), (ii) the most recent
annual report on Form 5500 filed with the Internal Revenue Service ("IRS") with
respect to each Benefit Plan (if any such report was required), (iii) the most
recent summary plan description for each Benefit Plan for which such a summary
plan description is required, and (iv) each trust agreement and group annuity
contract relating to any Benefit Plan.
(b) The Benefit Plans maintained or contributed to, or formerly maintained
or contributed to, by the Company have been maintained, operated and
administered in all material respects in accordance with their terms and with
all provisions of the Employee Retirement Income Security Act of 1974, as
amended (including the rules and regulations thereunder) ("ERISA") and other
applicable laws. All accrued obligations of the Company applicable to its
employees whether arising by operation of law, by contract, by past custom or
otherwise, for payments by the Company to any Benefit Plan or to any
governmental agency, with respect to unemployment compensation benefits, social
security benefits or any other benefits for its employees with respect to
employment, or to said employees through the date hereof have been paid or will
be paid in the ordinary course within sixty (60) days.
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<PAGE>
(c) There are no "pension benefit plans" as defined by Section 3(2) of
ERISA that are defined benefit plans (including a multiemployer plan) that at
any time have been established, maintained or contributed to by the Company.
(d) No Benefit Plan that is an employee welfare benefit plan (as defined
in Section 3(1) of ERISA) provides retiree medical benefits to any employees of
the Company except as required under the provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, as set forth in Section 4980B of
the Code and Part 6 of Title I of ERISA ("COBRA").
(e) Except as set forth in Section 2.11 of the Company Disclosure
Schedule, no employee of the Company will accrue or receive severance benefits
or additional benefits, service or accelerated rights to payment of benefits
under any Benefit Plan maintained by the Company, including, without limitation,
the right to receive any parachute payment, as a result of the transactions
contemplated by this Agreement. There are no material claims or lawsuits (other
than routine claims for benefits) which have been asserted or instituted in
respect of any of the Benefit Plans maintained or contributed to by the Company
and, to the knowledge of the Company, no basis for any such claim or lawsuit
exists.
(f) Section 2.11 of the Company Disclosure Schedule sets forth a true,
complete and correct list of all loans and advances made by the Company to any
of its directors, officers or employees or other persons, whether or not made in
connection with the acquisition of Company Securities or pursuant to the
exercise of any Company Stock Options, and indicating whether such director,
officer, employee or other person is a current employee of the Company. To the
knowledge of the Company, all loans or advances made by the Company to any of
its directors, officers or employees or other persons in connection with the
acquisition of Company Securities or pursuant to the exercise of any Company
Stock Options were made in accordance with all applicable laws, rules and
regulations.
SECTION 2.12 Environmental Laws and Regulations.
----------------------------------
(a) Except as set forth in Section 2.12 of the Company Disclosure
Schedule, (i) to the knowledge of the Company, the Company is in compliance in
all material respects with all applicable federal, state and local laws and
regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata) (collectively, "Environmental Laws"),
which compliance includes, without limitation, the possession by the Company of
all permits and other governmental authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof, except
where the failure to possess such permits and other governmental authorizations
could not have a Material Adverse Effect on the Company; (ii) the Company has
not received written notice of, or, to the knowledge of the Company, is not the
subject of, any action, cause of action, claim, investigation, demand, notice or
Lien by any person or entity alleging liability under or non-compliance with any
Environmental Law (an "Environmental Claim"); and (iii) to the knowledge of the
Company, there are no circumstances that are reasonably likely to prevent or
interfere with such material compliance in the future.
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<PAGE>
(b) There are no Environmental Claims against the Company that are pending
or, to the knowledge of the Company, threatened against the Company or against
any person or entity whose liability for any Environmental Claim the Company has
or may have retained or assumed either contractually or by operation of law.
SECTION 2.13. Labor and Employment Matters. Except as set forth in
----------------------------
Section 2.13 of the Company Disclosure Schedule, there is no collective
bargaining agreement or other labor agreement to which the Company is a party or
by which the Company is bound. The Company has complied in all material respects
with all applicable laws, rules and regulations relating to the employment of
the employees of the Company, including, without limitation, those related to
wages, hours, collective bargaining and the payment and withholding of taxes and
other sums as required by appropriate governmental authorities and have withheld
and paid to the appropriate governmental authorities, or are holding for payment
not yet due to such authorities, all amounts required to be withheld from the
employees of the Company and are not liable for any arrears of wages, taxes,
penalties or other sums for failure to comply with any of the foregoing. There
is no: (a) unfair labor practice complaint against the Company pending before
the National Labor Relations Board or any state or local agency; (b) pending
labor strike or other material labor trouble affecting the Company; (c) material
labor grievance pending against the Company; (d) pending representation question
respecting the employees of the Company; (e) pending arbitration proceedings
arising out of or under any collective bargaining agreement to which the Company
is a party or by which it is bound; or (f) to the knowledge of the Company, any
basis for which a claim may be made under any collective bargaining agreement
listed in Section 2.13 of the Company Disclosure Schedule.
SECTION 2.14. Tax Matters.
-----------
(a) For purposes of this Agreement:
(i) the term "Tax" (including with correlative meaning, the terms
"Taxes" and "Taxable") means (A) all federal, state, local, foreign and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs, duties or other taxes, fees,
assessments or charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts with respect
thereto, (B) any liability for payment of amounts described in clause (A)
whether as a result of transferee liability, of being a member of an
affiliated, consolidated, combined or unitary group for any period, or
otherwise through operation of law and (C) any liability for the payment of
amounts described in clauses (A) or (B) as a result of any tax sharing, tax
indemnity or tax allocation agreement or any other express or implied
agreement to indemnify any other person; and
(ii) the term "Tax Return" means any return, declaration, report,
statement, information statement and other document required to be filed
with respect to Taxes.
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<PAGE>
(b) The Company has prepared and timely filed all Tax Returns required to
be filed. Such Tax Returns are accurate and correct in all material respects
and do not contain a disclosure statement under Section 6662 of the Code (or any
predecessor provision or comparable provision of state, local or foreign law).
(c) As of the taxable year ended March 31, 1996, to the knowledge of the
Company based upon the advice of its independent public accountants, the Company
had approximately $18,541,000 and $9,271,000 of net operating loss carryovers
for federal and California Tax purposes, respectively. To the knowledge of the
Company based upon the advice of its independent public accountants, the Company
has not experienced an "ownership change" within the meaning of Section 382(g)
of the Code other than the "ownership change" that occurred on December 6, 1993
or that will occur as a result of the transactions contemplated by this
Agreement.
(d) (i) No claim has been made by any Taxing authority in any jurisdiction
where the Company does not file Tax Returns that the Company is or may be
subject to Tax by that jurisdiction, and (ii) no extensions or waivers of
statutes of limitations with respect to the Tax Returns have been given by or
requested from the Company other than with respect to periods for which the
statute of limitations on the assessment and collection of Taxes has now
expired.
(e) Section 2.14 of the Company Disclosure Schedule sets forth:
(i) the taxable years of the Company as to which the applicable
statutes of limitations on the assessment and collection of Taxes have not
expired;
(ii) those years for which examinations by the Taxing authorities
have been completed;
(iii) those years for which examinations by Taxing authorities are
presently being conducted;
(iv) those years for which notice of pending or threatened
examination or adjustment has been received; and
(v) those years for which required income Tax Returns have not yet
been filed.
(f) All deficiencies asserted or assessments made as a result of any
examinations by any Taxing authority have been fully paid, or are fully
reflected as a liability in the Company Balance Sheet.
(g) There are no liens for Taxes (other than for current Taxes not yet due
and payable) upon the assets of the Company.
(h) Except as set forth in Section 2.14 of the Company Disclosure
Schedule, the Company is not a party to or bound by any Tax indemnity, Tax
sharing or Tax allocation agreement.
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<PAGE>
(i) The Company is not a party to or bound by any closing agreement or
offer in compromise with any Taxing authority.
(j) (i) The Company has not been a member of an affiliated group of
corporations, within the meaning of Section 1504 of the Code, or a member of
combined, consolidated or unitary group for state, local or foreign Tax purposes
(other than a group the common parent of which is the Company), (ii) the Company
has not had any liability for Taxes of any person (other than the Company) under
Treasury Regulations Section 1.1502-6 (or any corresponding provision of state,
local or foreign income Tax law), as transferee or successor, by contract, or
otherwise; (iii) the Company has not filed a consent pursuant to the collapsible
corporation provisions of Section 341(f) of the Code (or any corresponding
provision of state, local or foreign income Tax law) or agreed to have Section
341(f)(2) of the Code (or any corresponding provision of state, local or foreign
income Tax law) apply to any disposition of any asset owned by any of them; (iv)
the Company has not made a consent dividend election under Section 565 of the
Code; (v) the Company has not been a personal holding company under Section 542
of the Code; and (vi) the Company has not participated in an international
boycott within the meaning of Section 999 of the Code.
(k) None of the assets of the Company is property that the Company is
required to treat as being owned by any other person pursuant to the so-called
"safe harbor lease" provisions of former Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended; none of the assets of the Company secures,
directly or indirectly, any debt the interest on which is tax exempt under
Section 103(a) of the Code; none of the assets of the Company is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(l) The Company has not agreed to make, nor is it required to make, any
adjustment under Section 481(a) (or any change in the manner in which the
Company applies Section 263A) of the Code or any comparable provision of state
or foreign Tax laws by reason of a change in accounting method or otherwise.
The Company has not taken action which is not in accordance with past practice
that could defer a liability for Taxes of the Company from any taxable period
ending on or before the Closing Date to any taxable period ending after such
date.
(m) Except as set forth in Section 2.14 of the Company Disclosure
Schedule, the Company is not a party to any agreement, contract, arrangement or
plan that has resulted or could result, separately or in the aggregate, in
connection with this Agreement or any change of control of the Company, in the
payment of any "excess parachute payments" within the meaning of Section 280G of
the Code.
(n) Except as set forth in Section 2.14 of the Company Disclosure
Schedule, the Company does not have, or has not had, a permanent establishment
in any foreign country, as defined in any applicable Tax treaty or convention
between the United States and such foreign country, and the Company has not
engaged in a trade or business within, or derived any income from, any foreign
country.
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<PAGE>
(o) To the knowledge of the Company, the Company is not a party to any
joint venture, partnership, or other arrangement or contract which could be
treated as a partnership for federal income Tax purposes.
(p) No material election with respect to Taxes of the Company will be made
after the date of this Agreement without the prior written consent of Parent.
(q) The provisions for Taxes currently payable on the Company Balance
Sheet are at least equal, as of the date thereof, to all unpaid Taxes of the
Company, whether or not disputed.
(r) Except as may result as a consequence of the transactions contemplated
by this Agreement, none of the income recognized, for federal, state, local or
foreign income Tax purposes, by the Company during the period commencing on the
date hereof and ending on the Closing Date will be derived other than in the
ordinary course of business, and all Taxes that are due prior to the Closing
Date shall be paid on or prior to the date such Taxes are due.
(s) The Company is not, and has not been, a "United States real property
holding corporation" (as defined in Section 897(c)(2)(2) of the Code) during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code (or any
corresponding Tax provision).
SECTION 2.15. Properties and Inventories.
--------------------------
(a) The Company has good title to, valid leasehold interests in or other
valid and enforceable rights to use all of the tangible assets used in its
operations or necessary for the conduct of its businesses, including, without
limitation, the assets reflected on the Company Balance Sheet, free and clear of
any Liens except as set forth in Section 2.15 of the Company Disclosure
Schedule, material restrictions or adverse claims, except for such imperfections
of title and Liens, if any, which are not substantial in character, amount or
extent, and which do not and are not reasonable likely to materially detract
from the value, or interfere with the present use, of the property subject
thereto or affected thereby. All of such assets are in good operating
condition, normal wear and tear excepted, and are adequate and suitable for the
purposes for which they are presently being used.
(b) Since the date of the Company Balance Sheet, there has not occurred
any transfer of title other than in the ordinary course of business or any
abandonment, any pilferage or any other material loss with respect to, any of
its property, plant or equipment, except where the occurrence of any such
abandonment, pilferage or other material loss could not have a Material Adverse
Effect on the Company.
(c) The Company does not own any real property. Section 2.15 of the
Company Disclosure Schedule also sets forth a true, correct and complete list of
all real property leases to which the Company is a party or by which it is
bound. All improvements on leased property used in the business of the Company
and the present uses thereof are in compliance with all applicable laws, rules
and regulations, except where the failure to be in compliance could not have a
Material Adverse Effect on the Company.
A-1-30
<PAGE>
SECTION 2.16. Insurance. Section 2.16 of the Company Disclosure
---------
Schedule sets forth a true, complete and correct list of the insurance policies
held by the Company and providing coverage for the Company. The Company is in
compliance with each of such policies such that none of the coverage provided
under such policies has been invalidated. The Company reasonably believes that
such policies provide adequate coverage for the operations conducted by the
Company.
SECTION 2.17. Returns. The Company has not had any of its products
-------
returned by a purchaser or user thereof, other than for minor, nonrecurring
warranty problems, stock balancing, overstock and version changes and upgrades.
The Company is not aware of any pending warranty claims against it other than
those that arise in the ordinary course of business and which are not expected
to require a bulk recall of products currently sold to customers or in the
distribution channel.
SECTION 2.18. Intellectual Property.
---------------------
(a) Section 2.18 of the Company Disclosure Schedule contains a true,
complete and correct list of all patents, patent applications, trademarks,
trademark applications, copyrights, copyright applications, servicemarks,
servicemark applications and trade names owned by or licensed to the Company and
used in its business. Except as set forth in Section 2.18 of the Company
Disclosure Schedule, the Company owns, licenses or otherwise has lawful rights
to use all patents, patent rights, trademarks, trademark rights, copyrights,
servicemarks, servicemark rights, trade names, trade name rights, trade secrets,
know-how and other proprietary rights and information (collectively,
"Intellectual Property Rights") necessary or required for the conduct of its
businesses as presently conducted, free and clear of any Liens other than Liens
created by the license agreements set forth in Section 2.18 of the Company
Disclosure Schedule, and such ownership or other rights to use, sell or license
are sufficient for such conduct of its businesses (provided, however, that this
sentence shall not be deemed to be a representation or warranty by the Company
regarding any infringement by the Company on the intellectual property rights of
others). To the knowledge of the Company and except as set forth in Section
2.18 of the Company Disclosure Schedule, all Intellectual Property Rights used
in its businesses as now conducted (i) do not infringe on the rights of others
and (ii) are valid, subsisting, unexpired, enforceable and have not been
abandoned.
(b) Except as set forth in Section 2.18 of the Company Disclosure
Schedule, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
breach of any instrument or agreement to which the Company is a party or by
which it is bound governing any Intellectual Property Right, will not cause the
forfeiture or termination or give rise to a right of forfeiture or termination
of any Intellectual Property Right or materially impair the right of the Company
to use, sell or license any Intellectual Property Right or portion thereof.
(c) Except as set forth in Section 2.18 of the Company Disclosure
Schedule, neither the development, manufacture, marketing, license, sale or
intended use of any product currently or within the previous five (5) years
licensed or sold by the Company or currently under
A-1-31
<PAGE>
development by the Company violates any license or agreement between the Company
and any third party or, to the knowledge of the Company, infringes any
Intellectual Property Right of any other party, and there is no pending or, to
the knowledge of the Company, threatened claim or litigation contesting or
materially impacting the validity, ownership or right to use, sell, license or
dispose of any Intellectual Property Right or alleging the violation by the
Company of any obligation of confidentiality or nondisclosure, nor, to the
knowledge of the Company, is there any basis for any such claim, nor has the
Company received any notice asserting that any Intellectual Property Right or
the proposed use, sale, license or disposition thereof conflicts or will
conflict with the rights of any other party, nor, to the knowledge of the
Company, is there any basis for any such assertion.
(d) The Company has taken reasonable steps designed to safeguard and
maintain the secrecy and confidentiality of, and their proprietary rights in,
all Intellectual Property Rights, except where the failure to take such steps
could not reasonably be expected to have a Material Adverse Effect on the
Company. The Company has not breached any confidentiality, non-disclosure or
other agreement covering any information of third parties as to which there
exists an obligation of confidentiality on the part of the Company. Except as
set forth in Section 2.18 of the Company Disclosure Schedule, all former and
current officers, employees, independent contractors and consultants of the
Company have executed and delivered to the Company a written agreement regarding
the protection of proprietary information and the assignment to the Company of
all Intellectual Property Rights arising from the services performed for the
Company by such persons. No current or former officers, employees or
consultants of the Company claim an ownership interest in any Intellectual
Property Rights as a result of having been involved in the development of such
property while employed by or consulting to the Company or otherwise.
SECTION 2.19. Opinion of Financial Adviser. Piper Jaffray, Inc. (the
----------------------------
"Financial Adviser") has delivered to the Company Board its written opinion,
dated the date of this Agreement, to the effect that, as of such date, the
Merger Consideration is fair to the holders of all of the Company Shares from a
financial point of view. A signed, true, correct and complete copy of such
opinion has been delivered to Parent, and such opinion has not been modified in
any material respect or withdrawn.
SECTION 2.20. Accounting Matters.
------------------
(a) Neither the Company nor, to the knowledge of the Company, any of its
affiliates or stockholders (including, without limitation, the Company
Affiliates) has taken or agreed to take any of the following actions in
contemplation of, or for purposes of effecting, any reorganization, merger,
consolidation, combination or similar transaction (collectively, "Pooling
Prevention Events") during the two (2) year period immediately prior to the date
hereof: (i) changed the equity interests of any shares of Company Common Stock;
(ii) reacquired any shares of Company Common Stock; (iii) made any distributions
to the stockholders of the Company or issued, exchanged or retired any of the
Company's securities; or (iv) deprived or restricted the voting rights of any
holder of Company Common Stock.
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<PAGE>
(b) In addition to the representations and warranties set forth in Section
2.20(a), to the knowledge of the Company, neither the Company nor any of its
affiliates or stockholders (including, without limitation, the Company
Affiliates) has taken or agreed to take any other action that could prevent
Parent from accounting for the business combination to be effected by the Merger
as a "pooling-of-interests."
(c) The Company has not failed to bring to the attention of Parent any
actions, or agreements or understandings, whether written or oral, to act that,
to the knowledge of the Company, could be reasonably likely to prevent Parent
from accounting for the Merger as a "pooling-of-interests."
SECTION 2.21. Material Contracts.
------------------
(a) The Company has delivered or otherwise made available to Parent true,
correct and complete copies of the following contracts and agreements (and all
amendments, modifications and supplements thereto and all side letters to which
the Company is a party affecting the obligations of any party thereunder) to
which the Company is a party or by which any of its properties or assets are
bound:
(i) any agreement presently in effect for the purchase of
inventory, supplies, equipment or other real or personal property, or the
procurement of services, except individual purchase orders or aggregate
purchase orders to a single vendor involving payments of less than
$100,000;
(ii) any lease presently in effect or ownership of equipment,
machinery or other personal property involving aggregate annual payments in
excess of $100,000;
(iii) any agreement presently in effect for the sale or lease of
products or furnishing of its services, except individual purchase orders
or aggregate purchase orders from a single customer involving payments of
less than $100,000;
(iv) any joint venture, partnership or other contract or arrangement
presently in effect involving the sharing of profits other than license
agreements;
(v) any agreement presently in effect relating to the purchase or
acquisition, by merger or otherwise, of a significant portion of its
business, assets or securities by any other person, or of any other person
by it, other than as contemplated herein;
(vi) any agreement presently in effect containing a covenant or
covenants which purport to limit its ability or right to engage in any
lawful business activity material to it or to compete with any person or
entity in a business material to it;
(vii) any agreement presently in effect pursuant to which it has
appointed any organization or person to act as its distributor or sales
agent or pursuant to which it has been appointed a distributor or sales
agent by any third party;
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<PAGE>
(viii) any agreement presently in effect with any of its officers,
directors or affiliates;
(ix) any agreement presently in effect for the license of any
patent, copyright, trade secret or other proprietary information agreements
involving the payment by or to the Company in excess of $25,000;
(x) any agreement presently in effect involving payments to or
obligations of it in excess of $100,000, not otherwise described in this
Section 2.21; or
(xi) any agreement of indebtedness or capital equipment leases
presently in effect in excess of $100,000 (collectively, together with any
such contracts entered into in accordance with Section 4.1, the
"Contracts").
(b) Except as set forth in Section 2.21 of the Company Disclosure
Schedule:
(I) There is no default under any Contract either by the Company
or, to the knowledge of the Company, by any other party thereto, and no
event has occurred that with the lapse of time or the giving of notice or
both could constitute a default thereunder by the Company or, to the
knowledge of the Company, any other party, in any such case, individually
or in the aggregate, in which such default or event could reasonably be
expected to have a Material Adverse Effect on the Company;
(II) No party to any such Contract has given notice to the Company
of or made a claim against the Company with respect to any breach or
default thereunder, in any such case in which such breach or default could
reasonably be expected to have a Material Adverse Effect on the Company;
and
(III) To the knowledge of the Company, no party to any such Contract
intends to cancel, withdraw, modify or amend any such Contract.
SECTION 2.22. Related Party Transactions. Except as set forth in Section
--------------------------
2.22 of the Company Disclosure Schedule, (a) no current or former employee,
officer or director of the Company, or member of his or her immediate family, is
indebted to the Company, nor is the Company indebted (or committed to make loans
or extend or guarantee credit) to any of them, and (b) none of such persons has
any direct or indirect ownership interest in any firm or corporation with which
the Company is affiliated or with which the Company has a business relationship,
or any firm or corporation that competes with the Company, except that such
employees, officers or directors, and members of their immediate families, may
own stock in publicly traded companies that may compete with the Company. No
member of the immediate family of any former or current officer or director of
the Company is directly interested in any material contract with the Company.
SECTION 2.23. Brokers. No broker, finder or investment banker
-------
(other than the Financial Adviser, a true and correct copy of whose engagement
agreements have been provided
A-1-34
<PAGE>
to Parent) is entitled to any brokerage, finder's or other fee or commission or
expense reimbursement in connection with the transactions contemplated by this
Agreement based upon arrangements made by and on behalf of the Company or any of
its affiliates or stockholders (including the Company Affiliates). The Company
shall be responsible for all such fees and expenses, except that, as of the
Effective Time, the Surviving Corporation shall assume the Company's obligation
to pay the Financial Adviser any amounts owing under the terms of the engagement
agreements previously provided to Parent.
SECTION 2.24. Disclosure. None of this Agreement or any certificate
----------
delivered by the Company to Parent or Acquisition, or any item of information
set forth in the Company Disclosure Schedule or otherwise supplied by or on
behalf of the Company to Parent or Acquisition, contains or will contain any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements contained herein or therein not misleading when taken
together in light of the circumstances in which they were made. Except as set
forth in Section 2.24 of the Company Disclosure Schedule, the Company does not
know of any facts which now or in the future are reasonably likely to cause a
Material Adverse Effect on the Company.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF PARENT AND ACQUISITION
Parent and Acquisition hereby represent and warrant to the Company as
follows:
SECTION 3.1. Organization.
------------
(a) Each of Parent and Acquisition is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its businesses as now being
conducted, except where the failure to be so organized, existing and in good
standing or to have such power and authority would not have a Material Adverse
Effect (as defined below) on Parent. When used in connection with Parent or
Acquisition, the term "Material Adverse Effect" means any change or effect that
(i) is or is reasonably likely to be materially adverse to the properties,
business, results of operations or condition (financial or otherwise) of Parent
and its subsidiaries, taken as a whole, or (ii) may materially impair the
ability of Parent and/or Acquisition to consummate the transactions contemplated
hereby.
(b) Parent has heretofore delivered to the Company accurate and complete
copies of the certificates of incorporation and bylaws, as currently in effect,
of Parent and Acquisition. Each of Parent and Acquisition is duly qualified or
licensed and in good standing to do business in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary, except in such
jurisdictions where the failure to be so duly qualified or licensed and in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect on Parent.
A-1-35
<PAGE>
SECTION 3.2. Capitalization of Parent. The authorized capital stock of
------------------------
Parent consists of (a) 600,000,000 shares of Parent Common Stock, of which, as
of August 31, 1996, approximately 264,000,000 shares of Parent Common Stock were
issued and outstanding and approximately 4,000,000 shares of Parent Common Stock
were held in treasury, and (b) 1,000,000 shares of preferred stock, $.01 par
value per share, none of which is issued or outstanding. All of the shares of
Parent Common Stock have been validly issued, and are fully paid, nonassessable
and free of preemptive rights. As of August 31, 1996, approximately 45,000,000
shares of Parent Common Stock were reserved for issuance and issuable upon or
otherwise deliverable in connection with the exercise of outstanding stock
options and otherwise. Except (i) as described in the Parent SEC Reports (as
defined in Section 3.4), (ii) for stock options granted from time to time
pursuant to the Parent Stock Option Plan (as defined in Section 4.16) or any
other stock incentive plan of Parent or any capital stock issued or issuable
from time to time upon the exercise of such stock options and (iii) for
issuances of capital stock of Parent from time to time in connection with
acquisition transactions that are not, individually or in the aggregate,
material to Parent, as of the date hereof, there are outstanding no (A) shares
of capital stock or other voting securities of Parent, (B) securities of Parent
convertible into or exchangeable for shares of capital stock or voting
securities of Parent, (C) options or other rights to acquire from Parent, and no
obligations of Parent to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of Parent, or (D) equity equivalents of Parent or other similar
rights (collectively, "Parent Securities"). Except as described in the Parent
SEC Reports, there are no outstanding obligations of Parent to repurchase,
redeem or otherwise acquire any Parent Securities.
SECTION 3.3. Authority Relative to this Agreement. Each of Parent and
------------------------------------
Acquisition has all necessary corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
boards of directors of Parent and Acquisition and by Parent as the sole
stockholder of Acquisition, and no other corporate proceedings on the part of
Parent or Acquisition are necessary to authorize this Agreement or to consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Parent and Acquisition and constitutes a
valid, legal and binding agreement of each of Parent and Acquisition,
enforceable against each of Parent and Acquisition in accordance with its terms,
except as the same may be limited by applicable bankruptcy, insolvency,
moratorium or similar laws of general application relating to or affecting
creditors' rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances and preferential transfers, and by
the limitations imposed by general principles of equity.
SECTION 3.4. SEC Reports; Financial Statements. Parent has filed all
---------------------------------
required forms, reports and documents with the SEC since February 1, 1994, each
of which has complied in all material respects with all applicable requirements
of the Securities Act and the Exchange Act, each as in effect on the dates such
forms, reports and documents were filed. Parent has heretofore delivered to the
Company, in the form filed with the SEC (including any amendments thereto), (i)
its Annual Reports on Form 10-K for each of the fiscal years ended January 31,
1994,
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<PAGE>
1995 and 1996, (ii) all definitive proxy statements relating to Parent's
meetings of stockholders (whether annual or special) held since February 1, 1994
and (iii) all other Exchange Act reports filed by Parent with the SEC since
February 1, 1994 (the "Parent SEC Reports"). None of such forms, reports or
documents, including, without limitation, any financial statements or schedules
included or incorporated by reference therein, contained, when filed, any untrue
statement of a material fact or omitted to state a material fact required to be
stated or incorporated by reference therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The consolidated financial statements of Parent included in the
Parent SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto and fairly present, in conformity with GAAP applied on a
consistent basis (except as may be indicated in the notes thereto), the
consolidated financial position of Parent and its subsidiaries as of the dates
thereof and their consolidated results of operations and changes in financial
position for the periods then ended (subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments and except that, in
the case of financial statements included therein which were later restated to
account for one or more business combinations accounted for as poolings-of-
interests, such original financial statements do not reflect such restatements).
SECTION 3.5. Information Supplied by Parent.
------------------------------
(a) None of the information supplied or to be supplied by Parent for
inclusion or incorporation by reference in (i) the Hearing Documents to be filed
with the California Commissioner of Corporations contains or will contain, at
the time such information is supplied, at the time such Hearing Documents are
filed or at the time the Fairness Hearing is held, or (ii) the Proxy
Statement/Information Statement contains or will contain, at the time such
information is supplied, on the date such Proxy Statement/Information Statement
is mailed to stockholders, at the time the Fairness Hearing is held or at the
times of such meeting or meetings of the Company's stockholders, any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
(b) In the event that the parties prepare and file with the SEC the S-4 in
connection with the issuance of shares of Parent Common Stock in the Merger as
contemplated by Section 4.2(b), none of the information supplied or to be
supplied by Parent for inclusion or incorporation by reference in the S-4
contains or will contain, at the time the information is supplied, at the time
the S-4 is filed with the SEC or at the time it becomes effective under the
Securities Act, any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading.
(c) The S-4, if filed, will comply as to form in all material respects
with the provisions of the Exchange Act or the Securities Act, as the case may
be, and the rules and regulations promulgated thereunder.
SECTION 3.6. Consents and Approvals; No Violations. Except for filings,
-------------------------------------
permits, authorizations, consents and approvals as may be required under, and
other applicable
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<PAGE>
requirements of, the Securities Act, the Exchange Act, the California Securities
Law and other state securities or blue sky laws, the HSR Act, and the filing and
recordation of the Certificate of Merger as provided by the DGCL, no filing with
or notice to, and no permit, authorization, consent or approval of, any
Governmental Entity is necessary for the execution and delivery by Parent or
Acquisition of this Agreement or the consummation by Parent or Acquisition of
the transactions contemplated hereby, except where the failure to obtain such
permits, authorizations, consents or approvals or to make such filings or give
such notice would not have a Material Adverse Effect on Parent. Neither the
execution, delivery and performance of this Agreement by Parent or Acquisition
nor the consummation by Parent or Acquisition of the transactions contemplated
hereby will (a) conflict with or result in any breach of any provision of the
respective certificates of incorporation or bylaws (or similar governing
documents) of Parent or Acquisition, (b) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, amendment, cancellation, acceleration or
Lien) under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, license, contract, agreement or other instrument or
obligation to which Parent or Acquisition is a party or by which any of them or
any of their respective properties or assets may be bound or (c) violate any
order, writ, injunction, decree, law, statute, rule or regulation applicable to
Parent or Acquisition or any of their respective properties or assets, except in
the case of (b) or (c) for violations, breaches or defaults which would not have
a Material Adverse Effect on Parent.
SECTION 3.7. No Undisclosed Liabilities. Except as and to the extent
--------------------------
publicly disclosed by Parent, as of July 31, 1996, none of Parent or its
subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which would be required by GAAP to be reflected in, reserved
against or otherwise described in the consolidated balance sheet of Parent and
its subsidiaries (including the notes thereto) as of such date or which would
reasonably be expected to have a Material Adverse Effect on Parent.
SECTION 3.8. No Prior Activities. Except for obligations incurred in
-------------------
connection with its incorporation or organization or the negotiation and
consummation of this Agreement and the transactions contemplated hereby,
Acquisition has neither incurred any obligation or liability nor engaged in any
business or activity of any type or kind whatsoever or entered into any
agreement or arrangement with any person or entity.
SECTION 3.9. Brokers. No broker, finder or investment banker is
-------
entitled to any brokerage, finder's or other fee or commission or expense
reimbursement in connection with the transactions contemplated by this Agreement
based upon arrangements made by and on behalf of Parent or Acquisition.
SECTION 3.10. Accounting Matters. Neither Parent nor Acquisition has
------------------
taken or agreed to take any action that could prevent Parent from accounting for
the business combination to be effected by the Merger as a "pooling-of-
interests." Neither Parent nor Acquisition has failed to bring to the attention
of the Company any actions, or agreements or understandings, whether
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<PAGE>
written or oral, to act that, to the knowledge of Parent, could be reasonably
likely to prevent Parent from accounting for the Merger as a "pooling-of-
interests."
SECTION 3.11. Litigation. Except as publicly disclosed by Parent, there
----------
is no suit, claim, action, proceeding or investigation pending or, to the
knowledge of Parent, threatened against Parent or any of its properties or
assets which, individually or in the aggregate, (a) could reasonably be expected
to have a Material Adverse Effect on Parent or (b) questions the validity of
this Agreement or any action to be taken by Parent in connection with the
consummation of the transaction contemplated hereby or could otherwise prevent
or delay the consummation of the transactions contemplated by this Agreement.
Parent is not subject to any outstanding order, writ, injunction or decree
which, insofar as can be reasonably foreseen in the future, could have a
Material Adverse Effect on Parent or could prevent or delay the consummation of
the transactions contemplated hereby.
SECTION 3.12. Disclosure. None of this Agreement or any certificate
----------
delivered by Parent or Acquisition to the Company, or any item of information
supplied by or on behalf of Parent or Acquisition to the Company, contains or
will contain any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained herein or therein not
misleading when taken together in light of the circumstances in which they were
made. Neither Parent nor Acquisition knows of any facts which now or in the
future are reasonably likely to cause a Material Adverse Effect on Parent.
ARTICLE 4
COVENANTS
SECTION 4.1. Conduct of Business of the Company. Except as otherwise
----------------------------------
contemplated by this Agreement or the Loan Documents, during the period from the
date hereof to the Effective Time, the Company will conduct its operations in
the ordinary course of business consistent with past practice and, to the extent
consistent therewith, use its reasonable efforts to (a) preserve intact its
current business organizations, (b) keep available the service of its current
officers and employees and (c) preserve its relationships with customers,
suppliers and others having business dealings with it to the end that goodwill
and ongoing businesses shall be unimpaired at the Effective Time. Without
limiting the generality of the foregoing, and except as otherwise expressly
provided in this Agreement, prior to the Effective Time, the Company will not,
without the prior written consent of Parent:
(i) amend its certificate of incorporation or bylaws;
(ii) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any
capital stock of any class or any other securities or equity equivalents
(including, without limitation, any stock options or stock appreciation rights);
provided, however, that the Company shall be permitted to issue shares of
Company Common Stock pursuant to any outstanding Company Stock Options and to
grant to
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<PAGE>
newly-hired employees and to its existing employees in the ordinary course of
business options to acquire up to 150,000 shares of Company Common Stock so long
as the grant of any such options does not adversely affect or otherwise
jeopardize the "pooling of interests" treatment of the Merger and, provided
further, however, that the Company shall be permitted to issue shares of Company
Common Stock on conversion of outstanding shares of Company Preferred Stock
pursuant to the terms of the Restated Certificate of Incorporation of the
Company as in effect on the date hereof;
(iii) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock,
make any other actual, constructive or deemed distribution in respect of any
shares of its capital stock or otherwise make any payments to stockholders in
their capacity as such, or redeem or otherwise acquire any of its securities or
any securities of its subsidiary;
(iv) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
of the Company (other than the Merger);
(v) alter through merger, liquidation, reorganization, restructuring or
in any other fashion the corporate structure or ownership of any subsidiary;
(vi) (A) incur or assume any long-term or short-term indebtedness or
issue any debt securities, except for borrowings under the Loan Agreement; (B)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person
except in the ordinary course of business consistent with past practice and in
amounts not material to the Company; (C) except with respect to the issuance of
Company Common Stock or Company Stock Options pursuant to clause (ii) above,
make any loans, advances or capital contributions to, or investments in, any
other person (other than advances to employees in the ordinary course of
business consistent with past practice and in amounts not material to the maker
of such loan or advance); (D) pledge or otherwise encumber shares of capital
stock of the Company; or (E) mortgage or pledge any of its material assets,
tangible or intangible, or create any material Lien thereupon;
(vii) except as may be required by law or as contemplated by this
Agreement, enter into, adopt or amend or terminate any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, stock equivalent, stock purchase agreement,
pension, retirement, deferred compensation, employment, severance or other
employee benefit agreement, trust, plan, fund, award or other arrangement for
the benefit or welfare of any director, officer or employee in any manner, or
increase in any manner the compensation or fringe benefits of any director,
officer or employee or pay any benefit not required by any plan and arrangement
as in effect as of the date hereof (including, without limitation, the granting
of stock appreciation rights or performance units), except for normal increases
in the ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to the Company;
A-1-40
<PAGE>
(viii) acquire, sell, lease or dispose of any assets outside the ordinary
course of business or any assets which in the aggregate are material to the
Company, or enter into any commitment or transaction outside the ordinary course
of business consistent with past practice;
(ix) except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
principles or practices used by it;
(x) revalue any of its assets, including, without limitation, writing
down the value of inventory or writing-off notes or accounts receivable other
than in the ordinary course of business;
(xi) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or division
thereof or any equity interest therein; (ii) enter into any contract or
agreement other than in the ordinary course of business consistent with past
practice which would be material to the Company; (iii) authorize any new capital
expenditure or expenditures which, individually, is in excess of $100,000 or, in
the aggregate, are in excess of $100,000; or (iv) enter into or amend any
contract, agreement, commitment or arrangement providing for the taking of any
action that would be prohibited hereunder;
(xii) make or revoke any material Tax election or settle or compromise
any Tax liability material to the Company (or make a request to any Taxing
authority to change) any material aspect of its method of accounting for Tax
purposes;
(xiii) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in, or contemplated by, the
consolidated financial statements (or the notes thereto) of the Company or
incurred in the ordinary course of business consistent with past practice;
(xiv) settle or compromise any pending or threatened suit, action or
claim relating to the transactions contemplated hereby; or
(xv) take, propose to any person other than Parent, Acquisition or any
affiliate thereof (a "Third Party") to take or agree in writing or otherwise to
take, any of the actions described in Sections 4.1(i) through 4.1(xiv).
SECTION 4.2. Exemption from Registration or Securities Act Registration.
----------------------------------------------------------
(a) As soon as practicable following the execution of this Agreement, the
parties (i) shall (A) file with the California Commissioner of Corporations an
Application for Qualification of Securities by Permit under Section 25121 of the
California Securities Law, including a related notice of hearing, the proxy
statement of the Company and related disclosure materials (collectively, the
"Hearing Documents"), to qualify the shares of Parent Common Stock, and (B) hold
a fairness hearing (the "Fairness Hearing") to enable the California
Commissioner of Corporations to determine the fairness of the terms and
conditions of the Merger pursuant to
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<PAGE>
Section 25142 of the California Securities Law, and (ii) except as otherwise
provided in Section 4.2(b), Parent shall thereby issue the Parent Common Stock
to the stockholders of the Company in the Merger in reliance upon the exemption
under Section 3(a)(10) of the Securities Act from the registration requirements
thereunder.
(b) In the event that the exemption under Section 3(a)(10) of the
Securities Act is not available to the parties or, after holding a Fairness
Hearing, the California Commissioner of Corporations does not determine that the
terms and conditions of the Merger are fair, then, the parties shall defer the
timing of the Effective Time and prepare, and Parent shall file as soon as
practicable with the SEC, the S-4 with respect to the shares of Parent Common
Stock to be issued to the stockholders of the Company in the Merger. The
parties will use their reasonable best efforts to cause the S-4 to be declared
effective as soon as practicable after the date of such filing.
SECTION 4.3. Stockholders' Meeting; Proxy Statement/Information Statement.
------------------------------------------------------------
(a) The Company shall (i) call, give notice of, convene and hold a special
meeting of the stockholders of the Company to be held for the purpose of voting
upon (A) this Agreement, the Merger and related matters and (B) an amendment to
the Restated Certificate of Incorporation of the Company to clarify that the
Merger Consideration shall be valued on the Closing Date under Article IV,
Section 2(f) for the purposes of determining the liquidation preferences of the
holders of Company Shares under Article IV, Section 2 of the Restated
Certificate of Incorporation of the Company (the "Articles Amendment") or (ii)
solicit written consents to approve this Agreement, the Merger and related
matters and the Articles Amendment for a period of at least thirty (30) days.
The Company, Parent and Acquisition shall coordinate and cooperate with respect
to the timing of such meeting, provided that the Company shall use its best
efforts to call, give notice of, convene and hold such meeting, or solicit such
written consents, as soon as practicable after the Fairness Hearing or, if
applicable, after the S-4 has been declared effective by the SEC.
(b) The Company shall prepare, with the cooperation of Parent and
Acquisition, the Proxy Statement/Information Statement for the stockholders of
the Company (i) to approve this Agreement, the Merger and the transactions
contemplated hereby and (ii) the Articles Amendment, and Parent shall have a
reasonable opportunity to review the form and content of the Proxy
Statement/Information Statement and approve the same prior to its mailing to the
Company's stockholders, which approval shall not be unreasonably withheld. Each
of Parent, Acquisition and the Company agrees to provide promptly to the other
such information concerning its business and financial statements and affairs as
may be reasonably required or appropriate for inclusion in the Proxy
Statement/Information Statement or, if applicable, the S-4, or in any amendments
or supplements thereto, and to cause its counsel and auditors to cooperate with
the other's counsel and auditors in the preparation of the same.
(c) The Company shall include in the Proxy Statement/Information Statement
the recommendation of the Company Board that the stockholders of the Company
vote in favor of this Agreement and the approval of the Merger and the Articles
Amendment, and shall use its best
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<PAGE>
efforts to obtain the requisite stockholder approvals. If, at any time prior to
the Effective Time, any event with respect to the Company, its officers and
directors or any of its subsidiaries should occur which is required to be
described in an amendment of, or a supplement to, the Hearing Documents, the S-4
or the Proxy Statement/Information Statement, as applicable, the Company shall
promptly so advise Parent and Acquisition and such event shall be so described,
and such amendment or supplement (which Parent and Acquisition shall have a
reasonable opportunity to review) shall be promptly filed with the California
Commissioner of Corporations or the SEC, as applicable, and, if required by law,
disseminated to the stockholders of the Company.
SECTION 4.4. Other Potential Acquirors. The Company, its affiliates and
-------------------------
their respective officers, directors, employees, representatives and agents
shall immediately cease any existing discussions or negotiations, if any, with
any parties conducted heretofore with respect to any acquisition of all or any
material portion of the assets of, or any equity interest in, the Company or any
business combination with the Company. The Company Board shall (a) provide a
copy of any such written proposal and a summary of any oral proposal to Parent
and Acquisition immediately after receipt thereof (and shall specify the
material terms and conditions of such proposal and identify the person making
such proposal), (b) afford Parent and Acquisition a reasonable opportunity to
respond to such proposal and (c) keep Parent and Acquisition promptly advised of
any development with respect thereto. Neither the Company nor any of its
affiliates shall, nor shall the Company authorize or permit any of its or their
respective officers, directors, employees, representatives or agents to directly
or indirectly, encourage, solicit, participate in or initiate discussions or
negotiations with, or provide any information to, any corporation, partnership,
person or other entity or group (other than Parent and Acquisition, any
affiliate or associate of Parent and Acquisition or any designees of Parent and
Acquisition) concerning any merger, sale of assets, sale of shares of capital
stock or similar transaction involving the Company or any division of the
Company.
SECTION 4.5. Access to Information.
---------------------
(a) Between the date hereof and the Effective Time, the Company will give
Parent and Acquisition and their authorized representatives reasonable access to
all employees, plants, offices, warehouses and other facilities and to all books
and records of the Company, will permit Parent and Acquisition to make such
inspections as Parent and Acquisition may reasonably request and will cause the
Company's officers to furnish Parent and Acquisition with such financial and
operating data and other information with respect to the business, properties
and personnel of the Company as Parent or Acquisition may from time to time
reasonably request, provided that no investigation pursuant to this Section
4.5(a) shall affect or be deemed to modify any of the representations or
warranties made by the Company.
(b) Between the date hereof and the Effective Time, Parent will cause its
officers to furnish to the Company, as the Company may reasonably request from
time to time, such financial and operating data and other information with
respect to the business, properties and personnel of Parent and Acquisition as
may be included in the Parent SEC Reports or is otherwise publicly available,
provided that no investigation pursuant to this Section 4.5(b) shall affect or
be deemed to modify any of the representations or warranties of Parent or
Acquisition.
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<PAGE>
(c) Between the date hereof and the Effective Time, the Company shall
furnish to Parent and Acquisition within twenty (20) business days after the end
of each calendar month (commencing with September 30, 1996), an unaudited
balance sheet of the Company as of the end of such month and the related
statements of earnings, stockholders' equity (deficit) and, within twenty (20)
business days after the end of each calendar quarter, cash flows for the quarter
then ended, each prepared in accordance with GAAP in conformity with the
practices consistently applied by the Company with respect to its monthly
financial statements. All the foregoing shall be in accordance with the books
and records of the Company and fairly present the financial position of the
Company (taking into account the differences between the monthly and quarterly
statements prepared by the Company in conformity with its past practices) as of
the last day of the period then ended.
(d) Each of Parent and Acquisition will hold and will cause its
consultants and advisors to hold in confidence all documents and information
concerning the Company furnished to Parent or Acquisition in connection with the
transactions contemplated by this Agreement pursuant to the terms of that
certain Confidentiality Agreement dated July 16, 1996, entered into among the
Company, Parent and Davidson & Associates, Inc. The Company will hold and will
cause its consultants and advisors to hold in confidence all documents and
information concerning Parent and its subsidiaries furnished to the Company in
connection with the transactions contemplated hereby pursuant to the terms of
that certain Confidentiality Agreement dated August 26, 1996, between Parent and
the Company.
SECTION 4.6. Additional Agreements; Reasonable Efforts. Subject to the
-----------------------------------------
terms and conditions herein provided, each of the parties agrees to use its best
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things reasonably necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the transactions contemplated
by this Agreement, including, without limitation, (a) cooperation in the
preparation and filing of the Hearing Documents, the Proxy Statement/Information
Statement and, if filed, the S-4, any filings that may be required under the HSR
Act, and any amendments or supplements thereto, and in the holding of the
Fairness Hearing, (b) the taking of all action reasonably necessary, proper or
advisable to secure any necessary consents under existing obligations of the
Company or amend any agreements relating thereto to the extent required by such
agreements; (c) contesting any legal proceeding relating to the Merger; and (d)
the execution and delivery of any additional instruments, including the
Certificate of Merger, necessary to consummate the transactions contemplated
hereby. Subject to the terms and conditions of this Agreement, Parent and
Acquisition agree to use all reasonable efforts to cause the Effective Time to
occur as soon as practicable after the stockholder vote with respect to the
Merger. In case at any time after the Effective Time any further action is
necessary to carry out the purposes of this Agreement, the proper officers and
directors of each party shall take all such necessary action.
SECTION 4.7. Consents. Each of Parent, Acquisition and the Company will
--------
use all reasonable efforts to obtain consents of all third parties and
Governmental Entities necessary, proper or advisable for the consummation of the
transactions contemplated by this Agreement.
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<PAGE>
SECTION 4.8. Public Announcements. Parent, Acquisition and the Company,
--------------------
as the case may be, will consult with one another before issuing any press
release or otherwise making any public statements with respect to the
transactions contemplated by this Agreement, including, without limitation, the
Merger, and shall not issue any such press release or make any such public
statement prior to such consultation, except, in the case of Parent or
Acquisition, as may be required by applicable law or by obligations pursuant to
any listing agreement with the NYSE as determined by Parent in its sole
discretion.
SECTION 4.9. Directors' and Officers' Indemnification. Parent and
----------------------------------------
Acquisition agree that all rights to indemnification or exculpation now existing
in favor of the directors, officers, employees and agents of the Company as
provided in the charter or bylaws of the Company, the indemnification agreements
of such persons with the Company or otherwise in effect as of the date hereof
with respect to matters (a) occurring prior to the Effective Time or (b) as a
result of any action taken by the Company Board in connection with the
consummation of the Merger shall survive the Merger and shall continue in full
force and effect for a period of five (5) years from the Effective Time;
provided, however, that all rights to indemnification in respect of any claim (a
"Claim") asserted or made within such period shall continue until the
disposition of such Claim. To the maximum extent permitted by the DGCL, such
indemnification shall be mandatory rather than permissive and the Surviving
Corporation shall advance expenses in connection with such indemnification to
the fullest extent permitted under applicable law, provided that the person to
whom expenses are advanced provides an undertaking to repay such advances if it
is ultimately determined that such person is not entitled to indemnification);
provided, however, the indemnification provided hereunder shall not be greater
than the indemnification permissible pursuant to the charter and bylaws of the
Company or such indemnification agreements as in effect as of the date hereof.
SECTION 4.10. Notification of Certain Matters. The Company shall give
-------------------------------
prompt notice to Parent and Acquisition, and Parent and Acquisition shall give
prompt notice to the Company, of (a) the occurrence or nonoccurrence of any
event the occurrence or nonoccurrence of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Effective Time, (b) any
material failure of the Company, Parent or Acquisition, as the case may be, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder, (c) any notice of, or other communication relating
to, a default or event which, with notice or lapse of time or both, would become
a default, received by it subsequent to the date of this Agreement and prior to
the Effective Time, under any contract or agreement material to the financial
condition, properties, businesses or results of operations of it to which it is
a party or is subject, (d) any notice or other communication from any third
party alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement, or (e) any
material adverse change in their respective financial condition, properties,
businesses, results of operations or prospects, taken as a whole, other than
changes resulting from general economic conditions; provided, however, that the
delivery of any notice pursuant to this Section 4.10 shall not cure such breach
or non-compliance or limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
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<PAGE>
SECTION 4.11. Pooling. Each of the Company and Parent agrees that it (a)
-------
will not engage in, or take any action which might result in, any Pooling
Prevention Event and (b) will use its best efforts to refrain from taking any
other action which could prevent the Merger from being accounted for as a
"pooling-of-interests" for accounting purposes. The Company will bring to the
attention of Parent, and Parent will bring to the attention of the Company, any
actions, or agreements or understandings, whether written or oral, that could be
reasonably likely to prevent Parent from accounting for the Merger as a
"pooling-of-interests." Parent shall use commercially reasonable efforts to
cause E&Y to deliver to Parent a letter to the effect that pooling-of-interests
accounting is appropriate for the Merger if it is closed and consummated in
accordance with the terms of this Agreement, and the Company shall use
commercially reasonable efforts to cause Price Waterhouse LLP to cooperate fully
with E&Y (including, without limitation, sharing information, analysis and work
product, engaging in active discussions and delivering to Parent, the Company
and E&Y a letter substantially similar to E&Y's letter to Parent) in connection
with E&Y's delivery of such letter. The parties acknowledge that the receipt of
a letter from Price Waterhouse LLP regarding pooling matters substantially
similar to E&Y's letter to Parent is a precondition to E&Y's ability to deliver
its letter to Parent. The Company will cause Price Waterhouse LLP to inform all
Company Affiliates and other relevant employees as to those actions that should
or should not be taken by such persons so that the Merger will be accounted for
as a "pooling-of-interests."
SECTION 4.12. Tax-Free Reorganization Treatment. The Company, on the one
---------------------------------
hand, and Parent and Acquisition, on the other hand, shall execute and deliver
at the Closing to Gunderson Dettmer Stough Villeneuve Franklin and Hachigian,
LLP, counsel to the Company, certificates, in a form reasonably satisfactory to
Parent in the case of the Company and substantially in the form attached as
Exhibit E in the case of Parent, in connection with its delivery of an opinion
with respect to the transactions contemplated hereby, and the Company and Parent
shall each provide a copy thereof to the other parties. Prior to the Effective
Time, none of the Company, Parent or Acquisition shall take or cause to be taken
any action which would cause to be untrue (or fail to take or cause not to be
taken any action which would cause to be untrue) any of their respective
representations in such form, in the case of the Company, or in the form of
Exhibit E, in the case of Parent and Acquisition.
- ---------
SECTION 4.13. Taxes. If any Tax Return is required to be filed on or
-----
prior to the Effective Time, the Company shall prepare and timely file such Tax
Return in a manner consistent with prior years and all applicable laws and
regulations; provided, however, that Parent shall be notified and given an
opportunity to review and to comment, prior to the filing thereof, on any such
Tax Return (a) which relates to a Tax which is based upon or measured by income,
(b) which is not regularly filed by the Company in connection with the conduct
of its business in the ordinary course, or (c) for which Parent requests such
opportunity, although neither Parent's approval nor consent shall be required
prior to the filing of any such Tax Return.
SECTION 4.14. Employment and Non-Competition Agreements.
-----------------------------------------
(a) The Company shall, as of or prior to the Effective Time, enter into an
employment agreement with Lawrence S. Gross, on substantially the terms set
forth in the form of the
A-1-46
<PAGE>
Amended and Restated Employment Agreement attached as Exhibit F, and an
---------
employment agreement with Barton Listick, in form and substance acceptable to
Parent (such employment agreements being hereinafter referred to as the
"Employment Agreements").
(b) The Company shall, as of or prior to the Effective Time, enter into
non-competition agreements with Lawrence S. Gross and Barton Listick, on
substantially the terms set forth in the forms of Non-Competition Agreement
attached as Exhibit G-1 and Exhibit G-2, respectively (the "Non-Competition
----------- -----------
Agreements").
SECTION 4.15. Company Affiliates. The Company has identified to Parent
------------------
each Company Affiliate, and each Company Affiliate (other than those identified
in Section 4.15 of the Company Disclosure Schedule) has delivered to Parent on
or prior to the date hereof, the Affiliate Letter providing, among other things,
that (i) such Company Affiliate will not sell, pledge, transfer or otherwise
dispose of any shares of Parent Common Stock issued to such Company Affiliate
pursuant to the Merger, except as permitted by, and in accordance with, Rule 145
promulgated under the Securities Act or an exemption from the registration
requirements of the Securities Act and (ii) until after such time as
consolidated financial statements covering at least thirty (30) days of post-
merger combined operations of Parent and the Company have been published by
Parent, such Company Affiliate will not sell or in any other way reduce such
Company Affiliate's risk relative to any shares of Parent Common Stock received
in the Merger (within the meaning of the SEC's Financial Reporting Release No.
1, "Codification of Financing Reporting Policies" (April 15, 1982), (S) 201.01
(Risk-Sharing Business Combinations Accounted for as Pooling-of-Interests)),
except as permitted by Staff Accounting Bulletin No. 76 issued by the SEC. The
Company will use its best efforts to cause each Company Affiliate identified in
Section 4.15 of the Company Disclosure Schedule to execute and deliver Affiliate
Letters in form and substance acceptable to Parent as promptly as practicable
and, in any event, by no later than October 18, 1996.
SECTION 4.16. Parent Stock Option and Employee Bonus Pool.
-------------------------------------------
(a) At the Closing, Parent will grant to certain employees of the
Surviving Corporation identified by the Chief Executive Officer of the Company
and agreed upon by Parent, options to acquire an aggregate of 300,000 shares of
Parent Common Stock ("Parent Stock Options") under the Parent's 1992 Employee
Stock Option Plan (the "Parent Stock Option Plan"). The exercise price of each
such Parent Stock Option will be equal to the closing price per share of Parent
Common Stock as reported on the NYSE on the business day immediately preceding
the Effective Time. Each Parent Stock Option will vest over a five (5) year
period in accordance with the custom and practice of grants made by Parent to
its own employees under the Parent Stock Option Plan.
(b) As an incentive to cause existing employees of the Company to remain
in the employment of the Surviving Corporation following the Merger, the
Surviving Corporation will establish a cash bonus pool of up to $1.538 million
that will be available for persons who are employees of the Company on the
Closing Date and who remain employees of the Surviving Corporation for a minimum
of six months following the Closing Date ("Remaining Employees").
A-1-47
<PAGE>
On July 1, 1997, the Surviving Corporation will make cash bonus awards totaling
approximately 20% of the bonus pool in the aggregate to the Remaining Employees,
in specific amounts for each Remaining Employee as determined by the Board of
Directors of the Surviving Corporation (each such Remaining Employee's July 1,
1997 cash bonus being referred to as his or her "Base Award"). On each of
February 1, 1998, July 1, 1998, February 1, 1999 and July 1, 1999, the Surviving
Corporation will make cash bonus awards to each of the Remaining Employees who
remains in the employ of the Surviving Corporation as of such date in an amount
equal to each Remaining Employee's Base Award.
SECTION 4.17. Consent and Waiver. The Company shall obtain from Lawrence
------------------
S. Gross, William Gross, Barton Listick, George Lichter and Jay Meschel
(collectively, the "Management Stockholders"), and shall use its best efforts to
obtain from each holder of outstanding Company Preferred Stock (the "Preferred
Stockholders"), a signed Consent and Waiver, in substantially the form of
Exhibit H (a "Consent and Waiver"), pursuant to which each Management
- ---------
Stockholder and each such holder shall acknowledge and consent to the
methodology adopted or to be adopted by the Company Board in connection with the
allocation among the stockholders of the Company of the Merger Consideration to
be received in the Merger pursuant to Section 1.8 and the Company's Restated
Certificate of Incorporation and shall agree to waive any rights, claims or
causes of action such holder may have against Parent, Acquisition, the Company,
the Surviving Corporation or any of their respective Affiliated Parties arising
out of or relating to the application of such methodology by the Company Board.
The Company shall include a form of Consent and Waiver in the Proxy
Statement/Information Statement.
SECTION 4.18. Stock Exchange Listing. Parent shall use its reasonable
----------------------
efforts to cause the shares of Parent Common Stock to be issued to the
stockholders of the Company in the Merger to be approved for listing on the
NYSE, subject to official notice of issuance, prior to the Effective Time.
SECTION 4.19. SEC Filings. Parent shall promptly furnish the Company with
-----------
copies of all filings made by Parent with the SEC or any other federal or state
Governmental Entity after the date of this Agreement and prior to the Effective
Time.
SECTION 4.20. Exercise of Company Stock Options. On the Closing Date,
---------------------------------
the Company will deliver to Parent an annotated copy of Section 2.2 of the
Company Disclosure Schedule, certified by an officer of the Company, showing (i)
all Company Stock Options that have been granted since the date of this
Agreement, (ii) all Company Stock Options that have been exercised since the
date of this Agreement and (iii) all Company Stock Options that shall be
cancelled in exchange for Parent Replacement Options pursuant to Section 1.11.
SECTION 4.21. Certain Filing by Parent. If the Closing Date shall occur
------------------------
at any time after December 31, 1996, Parent agrees to file with the SEC under
the Exchange Act, as soon as practicable (but no later than thirty (30) days)
after the results of the combined operations of Parent and the Surviving
Corporation for a full thirty (30)-day calendar month become available, a
Current Report on Form 8-K reporting such results of operations.
A-1-48
<PAGE>
SECTION 4.22. Termination of Certain Side Letters. The Company entered
-----------------------------------
into a letter agreement dated June 8, 1994 with Steven Spielberg and a letter
agreement dated August 19, 1994 with Random House, in each case with respect to,
among other things, the issuance of additional securities of the Company under
certain circumstances. The Company agrees to use its best efforts to cause the
termination of each such letter agreement on or prior to the Closing Date.
SECTION 4.23. Delivery of Certified Financial Statements. The Company
------------------------------------------
shall use its best efforts to deliver to Parent, as soon as practicable but in
any event no later than the Closing Date, the restatement, if any, of the
Company's financial statements identified in Section 2.4(a)(i), certified by
Price Waterhouse LLP; provided, however, that in no event shall any such
restatement or restatements, in the aggregate, result in a reduction of more
than $400,000 in the assets of the Company or the historic revenues or earnings
of the Company or an increase of more than $400,000 in the liabilities of the
Company.
SECTION 4.24. Defaults Under the Silicon Loan Documents. The Company
-----------------------------------------
shall use its best efforts to cure any defaults under or violations of the
Silicon Loan Documents and/or obtain a duly executed waiver by Silicon Valley
Bank of such defaults or violations, in form and substance satisfactory to
Parent.
ARTICLE 5
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 5.1. Conditions to Each Party's Obligations to Effect the Merger.
-----------------------------------------------------------
The respective obligations of each party hereto to effect the Merger are subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) this Agreement shall have been approved and adopted by the requisite
vote or consent of the stockholders of the Company;
(b) no statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
United States court or United States governmental authority which prohibits,
restrains, enjoins or restricts the consummation of the Merger;
(c) any waiting period applicable to the Merger under the HSR Act shall
have terminated or expired, and any other governmental or regulatory notices or
approvals required with respect to the transactions contemplated hereby shall
have been either filed or received;
(d) the issuance of a favorable fairness determination from the California
Commissioner of Corporations in the Fairness Hearing (without the imposition of
any material conditions or changes to the terms of the Merger) and a permit to
issue the Parent Common Stock to the stockholders of the Company in the Merger
or, if a favorable fairness determination shall not have been so issued, the S-4
contemplated by Section 4.2(b) shall have been declared
A-1-49
<PAGE>
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
SECTION 5.2. Conditions to the Obligations of the Company. The
--------------------------------------------
obligation of the Company to effect the Merger is subject to the satisfaction at
or prior to the Effective Time of the following conditions:
(a) the aggregate effect of any inaccuracies in the representations and
warranties of Parent and Acquisition contained in this Agreement or in any other
document delivered pursuant hereto has not had at and as of the Effective Time,
and is not reasonably likely to have, a Material Adverse Effect on Parent and
its subsidiaries taken as a whole, and, at the Closing, Parent and Acquisition
shall have delivered to the Company a certificate to that effect;
(b) each of the obligations of Parent and Acquisition to be performed at
or before the Effective Time pursuant to the terms of this Agreement shall have
been duly performed in all material respects at or before the Effective Time and
at the Closing Parent and Acquisition shall have delivered to the Company a
certificate to that effect;
(c) the shares of Parent Common Stock issuable to the Company stockholders
pursuant to this Agreement and such other shares required to be reserved for
issuance in connection with the Merger shall have been authorized for listing on
the NYSE upon official notice of issuance;
(d) the opinions of (i) Gunderson Dettmer Stough Villeneuve Franklin and
Hachigian, LLP, counsel to the Company, addressed to the Company and its
stockholders to the effect that the Merger will be treated for Federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Code, and (ii) Robert Tucker, Esq., special counsel to Parent and Acquisition,
to the effect that the Parent Common Stock has been duly authorized and validly
issued and is fully paid and non-assessable, shall have been delivered, and such
opinions shall not have been withdrawn or modified in any material respect;
(e) Parent shall have granted to certain employees of the Surviving
Corporation identified by the Chief Executive Officer of the Company and agreed
upon by Parent the Parent Stock Options as contemplated by, and in accordance
with, Section 4.16; and
(f) there shall have been no events, changes or effects with respect to
Parent or Acquisition or any of their respective subsidiaries having or which
could reasonably be expected to have a Material Adverse Effect on Parent and, at
the Closing, Parent shall have delivered to the Company a certificate to that
effect.
SECTION 5.3. Conditions to the Obligations of Parent and Acquisition.
-------------------------------------------------------
The respective obligations of Parent and Acquisition to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
A-1-50
<PAGE>
(a) each of the representations and warranties of the Company contained in
this Agreement or in any other document delivered pursuant hereto is true and
correct in all material respects at and as of the Effective Time with the same
effect as if made at and as of the Effective Time and, at the Closing, the
Company shall have delivered to Parent and Acquisition a certificate to such
effect; provided, however, that for any representation or warranty other than
those contained in Sections 2.1, 2.2(b) or (d), 2.3, 2.5 or 2.9, it shall only
be a condition to closing that the aggregate effect of any inaccuracies in such
representations or warranties shall not have had, between the date hereof and
the Effective Time and at and as of the Effective Time, and shall not be
reasonably likely to have, a material adverse effect on the business,
operations, condition (financial or otherwise) or prospects of the Company, or
have resulted in, or be reasonably likely to result in, a decrease in the value
of the assets of the Company or an increase in the liabilities of the Company of
in excess of $5.0 million; and provided further, however, that, except as
otherwise provided in Section 1.12(c), notwithstanding the occurrence of the
Closing, neither Parent nor Acquisition shall be deemed to have waived or
otherwise limited its right to recover Losses pursuant to Section 1.12 or
otherwise for any breach of or inaccuracy in any such representations and
warranties of the Company.
(b) each of the obligations of the Company to be performed at or before
the Effective Time pursuant to the terms of this Agreement shall have been duly
performed in all material respects at or before the Effective Time and at the
Closing the Company shall have delivered to Parent and Acquisition a certificate
to that effect;
(c) each Company Affiliate shall have performed his or its obligations
under the applicable Affiliate Letter, and Parent shall have received a
certificate signed by each of them to such effect;
(d) Parent shall have received a letter from E&Y to the effect that
"pooling-of-interests" accounting is appropriate for the Merger if the Merger is
closed and consummated in accordance with the terms of this Agreement, and such
letter shall not have been withdrawn or modified in any material respect.
(e) the Company shall have obtained the consent or approval of each person
whose consent or approval shall be required in order to permit the succession by
the Surviving Corporation pursuant to the Merger to any obligation, right or
interest of the Company under any loan or credit agreement, note, mortgage,
indenture, lease or other agreement or instrument, except for those for which
failure to obtain such consents or approvals would not, in the reasonable
opinion of Parent, individually or in the aggregate, have a Material Adverse
Effect on the Company;
(f) the number of Company Dissenting Shares as of the Effective Time shall
not exceed 9% of the then issued and outstanding Company Shares (with each share
of Company Preferred Stock being converted into the number of shares of Company
Common Stock into which such share of Company Preferred Stock may be converted);
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<PAGE>
(g) the Escrow Agreement shall have been duly executed and delivered by
the Company, the Escrow Committee and The Bank of Boston, in its capacity as
escrow agent, and shall be in full force and effect;
(h) the Employment Agreement between the Company and Lawrence S. Gross
shall be in full force and effect, and Lawrence S. Gross shall be in good
physical and mental health and capable of performing his obligations under such
Employment Agreement;
(i) the Non-Competition Agreements shall be in full force and effect;
(j) (i) the Restated Investors' Rights Agreement dated as of September 25,
1995, by and among the Company, the persons listed on Exhibit A thereto as
Investors, the persons listed on Exhibit A thereto as Founders, and William
Lohse and William Gross, as amended from time to time, and (ii) all registration
rights existing with respect to any Company Securities, shall have been
terminated, and Parent and Acquisition shall have received written evidence of
the same;
(k) the Articles Amendment shall have been approved and adopted by the
requisite vote or consent of the stockholders of the Company;
(l) all of the Management Stockholders, together with Preferred
Stockholders holding at least 90% of the Company Shares held by all Preferred
Stockholders, shall have executed and delivered to the Company a Consent and
Waiver as contemplated by Section 4.17, or each share of Company Preferred Stock
shall have been converted prior to the Effective Time into shares of Company
Common Stock pursuant to Article IV, Section 5(c)(i) of the Restated Certificate
of Incorporation of the Company;
(m) William Gross shall have executed and delivered to the Company an
internet domain assignment agreement, substantially in the form of Exhibit I,
---------
pursuant to which Mr. Gross will assign the entire right, title and interest
held by him and/or certain entities owned or controlled (in whole or in part) by
him in the internet domain names and related intellectual property identified in
such form;
(n) each of the Company Affiliates identified in Section 4.15 of the
Company Disclosure Schedule shall have executed and delivered the Affiliate
Letter; and
(o) there shall have been no events, changes or effects with respect to
the Company having or which could reasonably be expected to have a Material
Adverse Effect on the Company and, at the Closing, the Company shall have
delivered to Parent and Acquisition a certificate to that effect.
A-1-52
<PAGE>
ARTICLE 6
TERMINATION; AMENDMENT; WAIVER
SECTION 6.1. Termination. This Agreement may be terminated and the
-----------
Merger may be abandoned at any time, but prior to the Effective Time:
(a) by mutual written consent of Parent, Acquisition and the Company;
(b) by Parent and Acquisition or the Company if (i) any court of competent
jurisdiction in the United States or other United States governmental authority
shall have issued a final order, decree or ruling or taken any other final
action restraining, enjoining or otherwise prohibiting the Merger and such
order, decree, ruling or other action is or shall have become nonappealable or
(ii) the Merger has not been consummated by January 15, 1997, or as otherwise
extended by the parties or as contemplated by the penultimate paragraph of this
Section 6.1 (the "Termination Date"); provided that no party may terminate this
Agreement pursuant to this clause (ii) if such party's failure to fulfill any of
its obligations under this Agreement shall have directly resulted in the failure
of the Effective Time to occur on or before said date;
(c) by the Company if (i) there shall have been a breach of any
representation or warranty on the part of Parent or Acquisition set forth in
this Agreement, or if any representation or warranty of Parent or Acquisition
shall have become untrue, in either case such that the conditions set forth in
Section 5.2(a) would be incapable of being satisfied by the Termination Date,
(ii) there shall have been a breach by Parent or Acquisition of any of their
respective covenants or agreements hereunder having a Material Adverse Effect on
Parent or materially adversely affecting (or materially delaying) the
consummation of the Merger, and Parent or Acquisition, as the case may be, has
not cured such breach within twenty (20) business days after notice by the
Company thereof, provided that, with respect to clauses (i) and (ii) above, the
Company has not materially breached any of its obligations hereunder and has not
failed to timely cure such breach, or (iii) the Company shall have convened a
meeting of its stockholders to vote upon the Merger or solicited written
consents to approve the Merger for thirty (30) days and, in either case, shall
have failed to obtain the requisite vote or consent of its stockholders;
(d) by Parent and Acquisition if (i) there shall have been a breach of any
representation or warranty on the part of the Company set forth in this
Agreement, or if any representation or warranty of the Company shall have become
untrue, in either case such that the conditions set forth in Section 5.3(a)
would be incapable of being satisfied by the Termination Date, (ii) there shall
have been a breach by the Company of its covenants or agreements hereunder
having a Material Adverse Effect on the Company or materially adversely
affecting (or materially delaying) the consummation of the Merger, and the
Company has not cured such breach within twenty (20) business days after notice
by Parent or Acquisition thereof, provided that, with respect to clauses (i) or
(ii) above, neither Parent nor Acquisition has materially breached any of their
respective obligations hereunder and has not failed to timely cure such breach,
(iii) the Company Board shall have withdrawn, modified or changed its approval
or recommendation of this
A-1-53
<PAGE>
Agreement or the Merger, or shall have recommended to the Company's stockholders
a Third Party Acquisition (as defined below) or a Significant Acquisition (as
defined below), or shall have failed to call, give notice of, convene or hold a
stockholders' meeting to vote upon the Merger or to solicit written consents to
approve the Merger, or shall have adopted any resolution to effect any of the
foregoing, or (iv) the Company shall have convened a meeting of its stockholders
to vote upon the Merger or solicited written consents to approve the Merger for
thirty (30) days and, in either case, shall have failed to obtain the requisite
vote or consent of its stockholders.
(e) by Parent and Acquisition if each of the Company Affiliates identified
in Section 4.15 of the Company Disclosure Schedule shall not have executed and
delivered Affiliate Letters in form and substance acceptable to Parent on or
before October 18, 1996.
Notwithstanding Section 6.1(b), in the event that the parties prepare, and
Parent files with the SEC, the S-4 as contemplated by Section 4.2(b), the
Termination Date shall be January 31, 1997, or as otherwise extended by the
parties, provided that if the S-4 is filed with the SEC and, as of January 31,
1997, (A) the S-4 shall not have been declared effective by the SEC, or (B) the
S-4 shall have been declared effective by the SEC but a sufficient period of
time has not transpired since the date the S-4 shall have been declared
effective to allow the Company to mail the Proxy Statement/Information Statement
to its stockholders, to solicit proxies to approve the Merger and the Articles
Amendment and to convene a special meeting of stockholders to vote on the
Merger, or (C) if the Company elects to solicit written consents to the Merger
and the Articles Amendment in lieu of holding a special meeting of stockholders,
the S-4 shall have been declared effective but sufficient consents of the
stockholders of the Company approving the Merger and the Articles Amendment
shall not have been received and the Company has not been able to solicit such
consents for at least thirty (30) days following the effective date of the S-4,
then, in any such case, the Termination Date shall be automatically extended to
a date which is sixty (60) days following the date upon which the S-4 shall have
been or is declared effective by the SEC.
The term "Third Party Acquisition" means the occurrence of any of the
following events: (i) the acquisition of the Company by merger or otherwise by
any person (which includes a "person" as such term is defined in Section
13(d)(3) of the Exchange Act) or entity other than Parent, Acquisition or any
affiliate thereof (a "Third Party"); (ii) the acquisition by a Third Party of
more than 30% of the total assets of the Company; or (iii) the acquisition by a
Third Party of 30% or more of the outstanding shares of Company Common Stock.
The term "Significant Acquisition" means the acquisition by the Company, by
merger, purchase of stock or assets, joint venture or otherwise, of a direct or
indirect ownership interest or investment in any business whose annual revenues,
net income or assets is equal to or greater than 40% of the annual revenues, net
income or assets of the Company.
SECTION 6.2. Effect of Termination. In the event of the termination and
---------------------
abandonment of this Agreement pursuant to Section 6.1, this Agreement shall
forthwith become void and have no effect, without any liability on the part of
any party hereto or its affiliates, directors, officers or stockholders, other
than the provisions of this Section 6.2 and Sections 4.5(c), 6.3, 7.5, 7.8 and
7.9. Nothing contained in this Section 6.2 shall relieve any party from
liability for any breach of this Agreement.
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<PAGE>
SECTION 6.3. Expenses.
--------
(a) Upon the termination of this Agreement pursuant to Section 6.1(c)(iii)
or Section 6.1(d), the Company shall reimburse Parent, Acquisition and their
affiliates (not later than ten (10) business days after submission of statements
therefor) for all actual documented out-of-pocket fees and expenses, not to
exceed $250,000, actually and reasonably incurred by any of them or on their
behalf in connection with the Merger and the consummation of all transactions
contemplated by this Agreement (including, without limitation, fees payable to
counsel to any of the foregoing, and accountants). If Parent or Acquisition
shall submit a request for reimbursement hereunder, Parent or Acquisition will
provide the Company in due course with invoices or other reasonable evidence of
such expenses upon request. The Company shall in any event pay the amount
requested (not to exceed $250,000) no later than ten (10) business days
following such request, subject to the Company's right to demand a return of any
portion as to which invoices are not received in due course.
(b) Upon the termination of this Agreement pursuant to Section 6.1(c)(i)
or (ii), Parent shall reimburse the Company and their affiliates (not later than
ten (10) business days after submission of statements therefor) for all actual
documented out-of-pocket fees and expenses, not to exceed $425,000, actually and
reasonably incurred by any of them or on their behalf in connection with the
Merger and the consummation of all transactions contemplated by this Agreement
(including, without limitation, fees payable to investment bankers, counsel to
any of the foregoing, and accountants). If the Company shall have submitted a
request for reimbursement hereunder, the Company will provide Parent in due
course with invoices or other reasonable evidence of such expenses upon request.
Parent shall in any event pay the amount requested (not to exceed $425,000) no
later than ten (10) business days following such request, subject to Parent's
right to demand a return of any portion as to which invoices are not received in
due course.
(c) Except as specifically provided in this Section 6.3, each party shall
bear its own expenses in connection with this Agreement and the transactions
contemplated hereby.
SECTION 6.4. Amendment. This Agreement may be amended by action taken
---------
by the Company, Parent and Acquisition at any time before or after approval of
the Merger by the stockholders of the Company (if required by applicable law)
but, after any such approval, no amendment shall be made which requires the
approval of such stockholders under applicable law without such approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of the parties.
SECTION 6.5. Extension; Waiver. At any time prior to the Effective Time,
-----------------
each party may (a) extend the time for the performance of any of the obligations
or other acts of the other party, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate or writing delivered pursuant hereto or (c) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of any party to any such extension or waiver
shall be valid only if set forth
A-1-55
<PAGE>
in an instrument in writing signed on behalf of such party. The failure of any
party to assert any of its rights hereunder shall not constitute a waiver of
such rights.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1. Survival of Representations and Warranties. The
------------------------------------------
representations and warranties made herein shall be deemed to have been made as
of the Effective Time and, for purposes of Section 1.12 and the Escrow
Agreement, survive the Effective Time and continue until the Escrow Release Date
(except to the extent that claims against the Escrowed Parent Common Stock shall
have been made during such period, in which case such survival period shall
continue until such claims have been resolved).
SECTION 7.2. Entire Agreement; Assignment. This Agreement, together
----------------------------
with the Loan Documents, and the Confidentiality Agreements referred to in
Section 4.5(d), (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersedes all other prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) shall not be assigned by operation of law or
otherwise; provided, however, that Acquisition may assign any or all of its
rights and obligations under this Agreement to any subsidiary of Parent, but no
such assignment shall relieve Acquisition of its obligations hereunder if such
assignee does not perform such obligations.
SECTION 7.3. Validity. If any provision of this Agreement, or the
--------
application thereof to any person or circumstance, is held invalid or
unenforceable, the remainder of this Agreement, and the application of such
provision to other persons or circumstances, shall not be affected thereby, and
to such end, the provisions of this Agreement are agreed to be severable.
SECTION 7.4. Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telegram, facsimile or telex, or by registered or certified mail (postage
prepaid, return receipt requested), to the other party as follows:
if to Parent or Acquisition: CUC International Inc.
707 Summer Street
Stamford, CT 06901
Attention: Amy N. Lipton, Esq.
Facsimile: (203) 348-1982
with copies to: Davidson & Associates, Inc.
19840 Pioneer Avenue
Torrance, CA 90503
Attention: Paula V. Duffy, Esq.
Facsimile: (310) 793-0735
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<PAGE>
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA
Attention: Bradford P. Weirick, Esq.
Facsimile: (213) 229-6765
if to the Company: Knowledge Adventure, Inc.
1311 Grand Central Avenue
Glendale, CA. 91201
Attention: Lawrence S. Gross
Facsimile: (818) 246-9186
with a copy to: Gunderson Dettmer Stough Villeneuve
Franklin and Hachigian, LLP
600 Hansen Way, 2nd Floor
Palo Alto, CA. 94304
Attention: Margaret E. Nibbi, Esq.
Facsimile: (415) 843-0314
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above.
SECTION 7.5. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware, without regard
to the principles of conflicts of law thereof.
SECTION 7.6. Headings; Construction. The descriptive headings herein
----------------------
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement, Article,
section, exhibit, schedule, preamble, recital and party references are to this
Agreement unless otherwise stated. No party, nor its respective counsel, shall
be deemed the drafter of this Agreement for purposes of construing the
provisions of this Agreement, and all language in all parts of this Agreement
shall be construed in accordance with its fair meaning, and not strictly for or
against any party.
SECTION 7.7. Parties in Interest. This Agreement shall be binding upon
-------------------
and inure solely to the benefit of each party hereto and its successors and
permitted assigns, and except as provided in Sections 4.9 and 7.2, nothing in
this Agreement, express or implied, is intended to or shall confer upon any
other person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement.
SECTION 7.8. Specific Performance. The parties acknowledge that
--------------------
irreparable damage would result if this Agreement were not specifically
enforced, and they therefore consent that the rights and obligations of the
parties under this Agreement may be enforced by a decree of specific performance
issued by a court of competent jurisdiction. Such remedy shall, however, not be
A-1-57
<PAGE>
exclusive and shall be in addition to any other remedies which any party may
have under this Agreement or otherwise.
SECTION 7.9. Brokers. Except as otherwise provided in Section 6.3, the
-------
Company agrees to indemnify and hold harmless Parent and Acquisition from and
against any and all liability to which Parent and Acquisition may be subjected
by reason of any brokers, finders or similar fees or expenses with respect to
the transactions contemplated by this Agreement to the extent such similar fees
and expenses are attributable to any action undertaken by or on behalf of the
Company.
SECTION 7.10. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same instrument.
SECTION 7.11. Definition of Knowledge. When any fact is stated to be to
-----------------------
the "knowledge of the Company," such reference shall mean that one or more of
the members of the Company Board and/or any of the following executive officers
or employees of the Company knows or should have known in the normal course of
business of the existence or non-existence of such fact: Lawrence S. Gross,
William Gross, Barton Listick and George Lichter.
SECTION 7.12. Recapitalization. Whenever (a) the number of outstanding
----------------
shares of Parent Common Stock is changed after the date hereof by reason of a
subdivision or combination of shares, whether effected by reclassification of
shares or otherwise or (b) Parent pays a stock dividend or makes a similar stock
distribution on shares of Parent Common Stock, each specified number of shares
of Parent Common Stock referred to in this Agreement, the Escrow Agreement or
any other document or agreement executed and delivered in connection herewith
and each specified per share amount (other than par values) with respect to
shares of Parent Common Stock (including, without limitation, $36.22 wherever
such figure appears) referred to herein or therein shall be adjusted.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
KNOWLEDGE ADVENTURE, INC., a
Delaware corporation
By: /s/ Lawrence S. Gross
------------------------------------
Lawrence S. Gross
President
CUC INTERNATIONAL INC., a Delaware
corporation
By: /s/ Robert M. Davidson
------------------------------------
Robert M. Davidson
Vice Chairman
KA ACQUISITION CORP., a Delaware
corporation
By: /s/ Paula V. Duffy
------------------------------------
Paula V. Duffy
Vice President
A-1-59
<PAGE>
EXHIBIT A
FORM OF
CERTIFICATE OF MERGER
---------------------
[INTENTIONALLY OMITTED]
A-1-60
<PAGE>
EXHIBIT B
DIRECTORS OF SURVIVING CORPORTION
AT THE EFFECTIVE TIME
---------------------
[INTENTIONALLY OMITTED]
A-1-61
<PAGE>
EXHIBIT C
OFFICERS OF SURVIVING CORPORTION
AT THE EFFECTIVE TIME
---------------------
[INTENTIONALLY OMITTED]
A-1-62
<PAGE>
EXHIBIT D
FORM OF
ESCROW AGREEMENT
----------------
THIS ESCROW AGREEMENT is made and entered into as of the ___th day of
_________, 199__, by and among CUC INTERNATIONAL INC., a Delaware corporation
("Parent"), KNOWLEDGE ADVENTURE, INC., a Delaware corporation (the "Company"),
the persons listed on the signature page hereto in their respective capacities
as members of the escrow committee (the "Escrow Committee") acting on behalf of
all of the Company Stockholders (as defined below), and ______________________,
in its capacity as escrow agent (the "Escrow Agent").
R E C I T A L S
---------------
A. Parent, KA Acquisition Corp., a Delaware corporation and a wholly
owned direct subsidiary of Parent ("Acquisition Sub"), and the Company have
entered into an Agreement and Plan of Merger dated as of October __, 1996
(collectively, with all schedules, exhibits, amendments and certificates
referred to therein, the "Merger Agreement"), which provides for the acquisition
by Parent of the Company by way of a merger of Acquisition Sub with and into the
Company (the "Merger"), with the Company continuing as the surviving
corporation. Capitalized terms not otherwise defined herein shall have the
meanings set forth in the Merger Agreement.
B. The Merger Agreement provides that at the Effective Time of the
Merger, upon the terms and subject to the conditions set forth in the Merger
Agreement, certain shares of common stock, par value $.01 per share, of Parent
("Parent Common Stock") to be issued to the stockholders of the Company
immediately prior to the Effective Time (the "Stockholders") and the holders, if
any, of all Preferred Options that remain outstanding and unexercised
immediately prior to the Effective Time (the "Preferred Optionholders" and,
collectively with the Stockholders, the "Company Stockholder") in the Merger
will be deposited into an escrow account and held by the Escrow Agent pursuant
to the terms of this Agreement.
C. Pursuant to Section 3.1 hereof and Section 1.12(b) of the Merger
Agreement, and by virtue of the approval by the Stockholders of the Merger
Agreement and the Merger, the Company Stockholders shall be deemed to have,
without any further action on the part of Parent, the Company or any Company
Stockholder, irrevocably appointed the Escrow Committee as their attorney-in-
fact to act on behalf of the Company Stockholders with respect to the Escrow
Shares (as defined below).
A-1-63
<PAGE>
A G R E E M E N T
-----------------
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement and the Merger Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
ARTICLE I
ESCROW AND ESCROW SHARES
------------------------
SECTION 1.1 ESCROW. At the Closing, nine percent (9%) of the shares of
------
Parent Common Stock (rounded up to the nearest whole share) to be issued to the
Company Stockholders in the Merger shall be withheld pro rata from the number of
shares of Parent Common Stock to be received by each Company Stockholder and
delivered to the escrow agent for deposit into an escrow account (such shares of
Parent Common Stock to be delivered to the Escrow Agent for deposit into the
escrow account are referred to herein as the "Escrow Shares"). The initial
number of Escrow shares is _________, and the initial number of Escrow Shares
beneficially owned by each company stockholder is set forth in Exhibit A. The
---------
Escrow Agent shall deposit into the escrow account certificates representing the
shares of Parent Common Stock constituting the Escrow Shares, which certificates
shall be in the names of each of the Company Stockholders. The Escrow Agent
shall hold, distribute and release the Escrow Shares in accordance with the
terms and conditions of this Agreement.
ARTICLE II
APPLICATION OF ESCROW SHARES
----------------------------
SECTION 2.1 DISTRIBUTION OF ESCROW SHARES.
-----------------------------
(a) The Escrow Shares shall be held as a source of satisfaction of
indemnification claims made by Parent, Acquisition Sub or, after the Effective
Time, the Company, and their respective Affiliated Parties (individually, an
"Indemnified Party" and, collectively, the "Indemnified Parties") under Section
1.12(a) of the Merger Agreement.
(b) Within five (5) business days after the earlier to occur of (i) the
four (4) month anniversary of the Closing of the Merger and (ii) the date upon
which audited consolidated financial statements of Parent, which include the
results of operations of the Company, shall have been completed and Parent shall
have received a signed opinion from Ernst & Young LLP, its independent auditors,
with respect to such financial statements, the Escrow Agent shall, upon receipt
of written notice from Parent (with a copy delivered simultaneously by Parent to
the Escrow Committee), distribute to the respective Company Stockholders the
Escrow Shares (rounded down to the nearest whole share) then held in the escrow
account pursuant to this Agreement and Section 1.12(b) of the Merger Agreement,
less the number of Escrow Shares (rounded up to the nearest whole share) having
- ----
a fair market value most nearly equal to the aggregate amount of all pending
claims asserted by the Indemnified Parties (determined in
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<PAGE>
accordance with Section 2.1(c)), with the value of such pending claims
determined in good faith by the Board of Directors of Parent, after taking into
account such factors as such Board of Directors shall deem appropriate. If the
Escrow Committee does not agree with the determination made by the Board of
Directors of Parent of the value of such pending claims and promptly furnishes a
written objection to the Escrow Agent and Parent stating in detail the nature of
its objection, the value of such pending claims shall be finally determined by
arbitration in accordance with Section 2.5. Each Company Stockholder shall
receive in any such distribution the number of Escrow Shares then held in the
escrow account for the account of such Company Stockholder, less such Company
----
Stockholder's pro rata share of the number of Escrow Shares to be held in the
escrow account in respect of such pending claims.
(c) For purposes of calculating the number of Escrow Shares having a "fair
market value most nearly equal to the aggregate amount of any pending claims
asserted by the Indemnified Parties" under Section 2.1(b), the value of one
share of Parent Common Stock shall be equal to $36.22.
(d) The Escrow Shares not distributed to the Company Stockholders pursuant
to Section 2.1(b) shall be retained by the Escrow Agent in the escrow account
until all pending claims asserted by the Indemnified Parties shall have been
resolved (by mutual agreement or otherwise) and the Escrow Agent shall have
received written instructions from Parent to distribute such Escrow Shares;
provided, however, that upon the resolution of less than all of the claims
pending at any time, the Escrow Agent shall, upon receipt of written
instructions from Parent, deliver to the Company Stockholders such number of
Escrow Shares (rounded down to the nearest whole share) as is indicated in such
written notice and as is most nearly equal to the excess of the fair market
value of the Escrow Shares then held over the aggregate amount of all remaining
unresolved and pending claims as determined above. The number of Escrow Shares
to be so distributed to each Company Stockholder shall be determined in the same
manner as set forth in Section 2.1(b).
SECTION 2.2 PROCEDURE FOR INDEMNIFICATION OF PARENT AND THE OTHER
-----------------------------------------------------
INDEMNIFIED PARTIES (NON-THIRD PARTY CLAIMS). If any Indemnified Party shall
- --------------------------------------------
have any indemnification claim pursuant to Section 1.12(a) of the Merger
Agreement for which it seeks recourse against the escrow shares, it shall
promptly give written notice thereof to the Escrow Agent and the Escrow
Committee, including in such notice a brief description of the nature of the
claim and the amount thereof. If the Escrow Committee objects to the allowance
of such claim, it shall give written notice to such Indemnified Party and the
Escrow Agent within thirty (30) days following receipt of such notice of claim,
stating in detail the nature of its objection and that it does not consent to
the delivery of any Escrow Shares for application to such claim. If no such
written notice is received by such Indemnified Party and the Escrow Agent within
such thirty (30) day notice period or notice is timely received from the Escrow
Committee stating that no objection will be made, the Escrow Agent shall, within
five (5) days after the expiration of such notice period or timely receipt of
such notice from the Escrow Committee, deliver to parent from the escrow account
the number of Escrow Shares (rounded up to the nearest whole share) that has a
fair market value (determined as provided in Section 2.1(c)) most nearly equal
to the aggregate amount of the then existing claim to be satisfied or, if the
aggregate
A-1-65
<PAGE>
amount of the then existing claim to be satisfied is greater than the
fair market value of the escrow shares then held in the escrow account, all of
the Escrow Shares remaining in the escrow account. If the Escrow Committee
provides such Indemnified Party and the Escrow Agent with such written notice
within such thirty (30) day notice period, the Escrow Agent shall continue to
hold the number of Escrow shares (rounded to the nearest whole share) that has a
fair market value (determined as provided in Section 2.1(c)) most nearly equal
to the aggregate amount of the claim to be satisfied until the rights of such
Indemnified Party and the Company Stockholders with respect thereto have been
agreed upon by parent and the Escrow Committee (or otherwise resolved in
accordance with section 2.5) and the Escrow Agent receives joint written
instructions from parent and the Escrow Committee directing the disposition of
such Escrow Shares. If any distribution to an indemnified party in satisfaction
of a claim hereunder involves fewer than all of the Escrow Shares, the number of
Escrow Shares so distributed shall be deducted pro rata from the number of
Escrow Shares then held in the escrow account for the account of each Company
Stockholder at the time of such distribution.
SECTION 2.3 PROCEDURE FOR INDEMNIFICATION OF PARENT AND THE OTHER
-----------------------------------------------------
INDEMNIFIED PARTIES FOR THIRD PARTY CLAIMS.
- -------------------------------------------
If any Indemnified Party shall have a claim based upon the assertion of
liability by a third party and shall seek indemnification with respect to such
claim pursuant to Section 1.12 of the Merger Agreement, it shall follow the
procedures set forth in Section 2.2. In addition, such Indemnified Party may
select and employ counsel in connection with such claim (which counsel shall be
subject to the reasonable approval of the Escrow Committee, which approval shall
not be unreasonably withheld), and such Indemnified Party shall be reimbursed
from the escrow account for all fees and expenses of such counsel reasonably
incurred by such Indemnified Party as such fees and expenses accrue, in
accordance with the procedures set forth in Section 2.2 for the satisfaction of
claims.
SECTION 2.4 OWNERSHIP OF ESCROW SHARES; VOTING RIGHTS. The Company
-----------------------------------------
Stockholders shall remain the registered owners of the Escrow Shares held for
their respective accounts, subject to any claims made by the Indemnified
Parties. The Company Stockholders shall retain the right to vote their
respective Escrow Shares and receive distributions thereon, as well as the
obligation to pay all taxes, assessments, and charges with respect thereto.
notwithstanding anything to the contrary, the Company Stockholders shall not
have the right to sell, transfer, pledge, hypothecate or otherwise dispose of
any of their Escrow Shares (or any interest therein), and any distribution of
Parent Common Stock on or with respect to such escrow shares, and any other
securities into which such Escrow Shares may be changed or for which they may be
exchanged pursuant to corporate action on the part of parent affecting holders
of Parent Common Stock generally, shall be delivered to the Escrow Agent and,
upon such delivery and receipt, held in the escrow account and made subject to
the provisions of this Agreement. Any amounts earned and received into the
escrow account on account of such Escrow Shares (including, without limitation,
dividends or other distributions) shall be distributed pro rata to the Company
Stockholders (based upon the number of shares of Parent Common Stock then held
in
A-1-66
<PAGE>
the escrow account for the account of each Company Stockholder at the time of
receipt of such amounts) from time to time upon the written request of the
Escrow Committee. The Escrow Agent shall have no responsibility or liability
for shares or property not delivered and received by it.
SECTION 2.5 ARBITRATION. Any dispute or controversy involving an
-----------
indemnification claim by Parent or any other Indemnified Party pursuant to
Section 1.12(a) or (b) of the Merger Agreement or this Agreement shall be
finally settled by arbitration in Los Angeles, California, in accordance with
the then-current Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. Such arbitration shall be
conducted by one (1) arbitrator, who shall be a retired judge, chosen by mutual
agreement of Parent and the Escrow Committee. Failing such agreement, the
arbitrator shall be chosen in accordance with the foregoing Commercial
Arbitration Rules. There shall be limited discovery prior to the arbitration
hearing, subject to the discretion of the arbitrator, as follows: (a) exchange
of witness lists and copies of documentary evidence and documents related to or
arising out of the issues to be arbitrated; (b) depositions of all party
witnesses; and (c) such other depositions as may be allowed by the arbitrator
upon a showing of good cause. Depositions shall be conducted in accordance with
the California Code of Civil Procedure. The prevailing party in any such
arbitration shall be entitled to recover its cost and expenses (including,
without limitation, attorneys' fees) of any such arbitration. The Escrow
Committee and Parent shall use their best efforts to cause the arbitrator to
decide the matter submitted for arbitration pursuant hereto within ninety (90)
days after the formal appointment of the arbitrator. Upon final settlement of
any claim pursuant to this Section 2.5, the arbitrator shall provide written
notice thereof to the Escrow Agent.
ARTICLE III
AUTHORITY AND INDEMNIFICATION
OF ESCROW COMMITTEE
-------------------
SECTION 3.1 AUTHORITY. Upon the approval by the Stockholders of the
---------
Merger Agreement and the Merger and in consideration of the issuance of the
Escrow Shares to the Company Stockholders in the Merger, the Company
Stockholders shall be deemed to have irrevocably appointed Michael Levinthal and
John Feiber as members of the Escrow Committee to act as their attorney-in-fact
to consent to, contest, settle, compromise or otherwise dispose of any claim
made by Parent or any other Indemnified Party in accordance with this Agreement.
No further documentation shall be required to evidence such appointment, and
such power of attorney shall be coupled with an interest, thereby confirming
such appointment as irrevocable. The Escrow Committee shall be empowered to act
by majority vote with respect to all matters arising under this Agreement.
SECTION 3.2 INDEMNITY. No Escrow Committee member shall be liable to
---------
anyone whatsoever by reason of any error of judgment or for any act done or step
taken or omitted to be taken by him in good faith or for any mistake of fact or
law for anything which he may do or refrain from doing in connection herewith,
unless caused by or arising out of his own gross
A-1-67
<PAGE>
negligence or willful misconduct. The Escrow Committee shall not be required to
take any action hereunder involving any expense unless the payment of such
expense is made or provided for in a manner reasonably satisfactory to it. The
Company Stockholders shall, jointly and severally, indemnify and hold harmless
the Escrow Committee, and each of them, from any and all liability and expense
arising out of any action taken or omitted to be taken by the Escrow Committee
in accordance with this Agreement, except where such liability or expense is a
result of the gross negligence or willful misconduct of the Escrow Committee (or
any Escrow Committee member).
SECTION 3.3 REPLACEMENT OF MEMBER. If any member of the Escrow Committee
---------------------
shall die, become disabled or otherwise be unable or unwilling to fulfill his
responsibilities hereunder, the remaining members of the Escrow Committee shall
select a replacement member. The remaining members of the Escrow Committee
shall notify in writing Parent and the Escrow Agent of any change in the
composition of the Escrow Committee.
ARTICLE IV
ESCROW AGENT
------------
SECTION 4.1 DUTIES AND OBLIGATIONS. The duties and obligations of the
----------------------
Escrow Agent are exclusively set forth in this Agreement, as they may be amended
from time to time. The Escrow Agent may request and rely upon, and shall be
protected in acting or refraining from acting upon, any written notice, request,
waiver, consent, receipt or other document from Parent, the Company or the
Escrow Committee (or any Escrow Committee member), not only as to its due
execution and the validity and effectiveness of its provisions, but also as to
the truth of any information therein contained, that the Escrow Agent in good
faith believes to be genuine and as to which the Escrow Agent shall have no
notice of invalidity, lack of authority or other deficiency.
The Escrow Agent shall not be liable for any error of judgment, or for any
act done or step taken or omitted to be taken by it in good faith, or for any
mistake of fact or law, or for anything which it may do or refrain from doing in
connection therewith, except for any liability caused by or arising from its own
gross negligence or willful misconduct.
The Escrow Agent shall be entitled to consult with competent and
responsible counsel of its choice with respect to the interpretation of the
provisions hereof, and any other legal matters relating hereto, and shall be
protected in taking any action or omitting to take any action in good faith in
accordance with the advice of such counsel. The Escrow Agent shall be entitled
to request written instructions from Parent or the Escrow Committee, as the case
may be, and shall have the right to refrain from acting until it has received
such written instructions.
No provision in this Agreement or in the Merger Agreement shall require the
Escrow Agent to risk or expend its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder. The Escrow Agent
shall be promptly paid or reimbursed upon request for any and all expenses,
fees, costs, disbursements or advances which may be incurred or made by it in
accordance with the provisions hereof (including reasonable compensation, and
any
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<PAGE>
expenses and disbursements of Escrow Agent's counsel, and all agents not
regularly in Escrow Agent's employ).
SECTION 4.2 RISK OF LOSS. The Escrow Agent acknowledges and agrees that
------------
the Escrow Agent bears the exclusive risk of loss, theft or damage with respect
to the Escrow Shares in its possession.
SECTION 4.3 COMPENSATION OF ESCROW AGENT. Parent shall pay to the Escrow
----------------------------
Agent compensation in respect of the duties and obligations of the Escrow Agent
under this Agreement. Upon the execution of this Agreement and the delivery of
the Escrow Shares to the Escrow Agent, the Escrow Agent shall be entitled to a
one-time escrow fee of $_______; provided that in the event that the escrow
contemplated by this Agreement remains in effect after the six month anniversary
of the consummation of the Merger, then the Escrow Agent shall be entitled to
receive from Parent such additional escrow fees as the parties may agree.
SECTION 4.4 RESIGNATION; SUCCESSOR ESCROW AGENT. The Escrow Agent may
-----------------------------------
resign at any time by giving not less than sixty (60) days' prior written notice
thereof to each of Parent and the Escrow Committee. Upon receipt of the Escrow
Agent's notice of resignation, Parent and the Escrow Committee may appoint a
successor escrow agent. Upon the acceptance by a successor escrow agent of the
appointment as escrow agent hereunder and the transfer to such successor escrow
agent of the Escrow Shares then remaining in the escrow account, the resignation
of the Escrow Agent shall become effective and the Escrow Agent shall be
discharged from any future duties and obligations under this Agreement.
SECTION 4.5 INDEMNITY. Parent, on the one hand, and the Company
---------
Stockholders, on the other hand, hereby agree to jointly and severally indemnify
and hold harmless the Escrow Agent against any loss, liability or expense
arising out of or in connection with this Agreement and carrying out its duties
hereunder, including the costs and expenses of defending itself against any
claim asserted by any person (other than a party to this Agreement), except in
those cases where such loss, liability or expense is caused by or arises from
the gross negligence or willful misconduct of the Escrow Agent.
ARTICLE V
MISCELLANEOUS
-------------
SECTION 5.1 NOTICES. Unless otherwise provided, all notices or other
-------
communications required or permitted to be given to the parties shall be in
writing and shall be deemed to have been given if personally delivered
(including personal delivery by facsimile, provided that the sender receives
telephonic or electronic confirmation that the facsimile was received by the
recipient), or three (3) days after mailing by certified or registered mail,
return receipt requested,
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<PAGE>
first class postage-prepaid, addressed as follows (or at such other address as
the addressed party may have substituted by notice pursuant to this Section
5.1):
If to Parent, the CUC International Inc.
Company or any 707 Summer Street
other Indemnified Stamford, CT. 06901
Party: Attention: Amy N. Lipton, Esq.
Facsimile: (203) 348-1982
with copies to:
--------------
Davidson & Associates, Inc.
19840 Pioneer Avenue
Torrance, CA 90503
Attention: Paula V. Duffy, Esq.
Facsimile: (310) 793-0735
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA
Attention: Bradford P. Weirick, Esq.
Facsimile: (213) 229-6765
If to the Escrow ___________________________
Committee: ___________________________
Attention: __________________
Facsimile: __________________
If to the Escrow Agent: ___________________________
___________________________
Attention: __________________
Facsimile: __________________
SECTION 5.2 TERMINATION. This Agreement shall terminate upon the mutual
-----------
written express agreement of Parent and the Escrow Committee. In any event, this
Agreement shall terminate when all of the Escrow Shares remaining in the escrow
account shall have been distributed according to the terms hereof.
SECTION 5.3 GOVERNING LAW. The validity, construction, interpretation and
-------------
enforcement of this Agreement shall be determined and governed by the laws of
the State of Delaware, excluding the conflicts and choice of law principles.
SECTION 5.4 SEVERABILITY. The invalidity or unenforceability of any
------------
provision of this Agreement or the invalidity or unenforceability of any
provision as applied to a particular occurrence or circumstance shall not affect
the validity or enforceability of any of the other provisions of this Agreement
or the applicability of such provision, as the case may be.
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<PAGE>
SECTION 5.5 CONSTRUCTION; INTERPRETATION. The headings contained in this
----------------------------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Article, section, recital and
party references are to this Agreement unless otherwise stated. No party, nor
its counsel, shall be deemed the drafter of this Agreement for purposes of
construing the provisions of this Agreement, and all provisions of this
Agreement shall be construed in accordance with their fair meaning, and not
strictly for or against any party. In the event of a conflict between the terms
of this Agreement and the Merger Agreement, the terms of the Merger Agreement
shall govern.
SECTION 5.6 COUNTERPARTS. This Agreement may be signed in two or more
------------
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
SECTION 5.7 TRANSFER OF INTERESTS. None of the Company Stockholders shall
---------------------
sell, transfer, pledge, hypothecate or otherwise dispose of any Escrow Shares,
or any interest therein prior to the distribution of such Escrow Shares in
accordance with Section 2.1 above.
SECTION 5.8 TAXES. For purposes of federal and state income taxation, the
-----
Escrow Shares shall be treated as owned by the Company Stockholders as provided
in Section 2.4, and this Agreement shall be interpreted in a manner to effect
the Company Stockholders' ownership of the Escrow Shares for such tax purposes.
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<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement on the day and
year first above written.
PARENT
------
CUC INTERNATIONAL INC., a Delaware corporation
By:_______________________________
Name:
Its:
COMPANY
-------
KNOWLEDGE ADVENTURE, INC., a Delaware
corporation
By:_______________________________
Name:
Its:
ESCROW COMMITTEE
----------------
_______________________________
Name:
_______________________________
Name:
_______________________________
Name:
ESCROW AGENT
------------
_______________________________
By:_______________________________
Name:
Its:
A-1-72
<PAGE>
EXHIBIT E
FORM OF
TAX CERTIFICATE OF PARENT
-------------------------
CUC International Inc.
707 Summer Street
Stamford, CT 06901
[Insert Date of Closing], 1996
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
600 Hansen Way, Second Floor
Palo Alto, CA 94304
Re: Merger pursuant to the Agreement and Plan of Merger (the
"Agreement"), dated October 11, 1996, among KA Acquisition
Corp., a Delaware corporation ("Sub"), CUC International Inc.,
a Delaware corporation ("Parent"), and Knowledge Adventure,
Inc., a Delaware corporation ("Target")
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions pursuant to Section 5.2(d)(i) of the Agreement regarding certain
federal income tax consequences of the Merger. Unless otherwise indicated,
capitalized terms not defined herein have the meanings set forth in the
Agreement.
A. Representations. After due inquiry and investigation
---------------
regarding the meaning of and factual support for the following representations,
the undersigned hereby certify and represent that, assuming the Merger were to
occur on the date hereof and without waiver of the conditions set forth in
Section 5.3(f) of the Agreement, the following facts are now true and will
continue to be true as of the Effective Time (as defined in Section 1.2 of the
Agreement):
1. Pursuant to the Merger, Sub will merge with and into Target, and
Target will acquire all of the assets and liabilities of Sub. Either (i) at
least ninety percent (90%)
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<PAGE>
of the fair market value of the net assets and at least seventy percent (70%) of
the fair market value of the gross assets held by Target immediately prior to
the Merger will continue to be held by Target immediately after the Merger or
(ii) except for assets used by Target to pay shareholders with respect to
Dissenting Shares or to pay other expenses or liabilities incurred in connection
with the Merger, all assets held by Target immediately prior to the Merger will
continue to be held by Target immediately after the Merger. At least ninety
percent (90%) of the fair market value of the net assets and at least seventy
percent (70%) of the fair market value of the gross assets held by Sub
immediately prior to the Merger will be held by Target immediately after the
Merger. For the purpose of determining the percentage of Target's and Sub's net
and gross assets held by Target immediately following the Merger, the following
assets will be treated as property held by Target or Sub, as the case may be,
immediately prior but not subsequent to the Merger: (i) assets used by Target or
Sub to pay shareholders with respect to Dissenting Shares or to pay other
expenses or liabilities incurred in connection with the Merger, and (ii) assets
used to make distribution, redemption or other payments in respect of Target
capital stock (except for regular, normal distributions) or rights to acquire
such stock (including payments treated as such for tax purposes) that are made
in contemplation of the Merger or related thereto;
2. Parent is participating in the Merger for good and valid
business reasons and not for tax purposes;
3. Prior to the Merger, Parent will be in "Control" of Sub. As used
herein, "Control" of a corporation shall consist of direct ownership of stock
possessing at least eighty percent (80%) of the total combined voting power of
all classes of stock entitled to vote and at least eighty percent (80%) of the
total number of shares of all other classes of stock of the corporation. For
purposes of determining Control, a person shall not be considered to own voting
stock if rights to vote such stock (or to restrict or otherwise control the
voting of such stock) are held by a third party (including a voting trust) other
than an agent of such person;
4. Parent has no plan or intention to cause Target to issue
additional shares of stock after the Merger that would result in Parent losing
Control of Target;
5. Other than with respect to (i) the possible acquisition of shares
held by Target employees pursuant to a surrender of such shares to Parent as
part or full payment for the exercise price of options granted under the Company
Plans, and (ii) the possible reacquisition of Escrowed Parent Common Stock
pursuant to the provisions of the Escrow Agreement attached as Exhibit D to the
Agreement, Parent has no plan or intention to reacquire any of the Parent Common
stock issued pursuant to the Merger;
6. Except for transfers described in both Section 368(a)(2)(C) of the
Code and Treasury Regulation Section 1.368-2(j)(4) ("Permissible Transfers"),
Parent has no plan or intention to take any of the following actions: (i)
liquidate Target; (ii) except for the Merger, merge Target with or into another
corporation including Parent or its affiliates; (iii) sell, distribute or
otherwise dispose of the capital stock of Target; or (iv) cause Target to sell
or otherwise dispose of any of its assets or of any of the assets acquired from
Sub except for dispositions made
A-1-74
<PAGE>
in the ordinary course of business or payment of expenses incurred by Target
pursuant to the Merger (including payments with respect to Dissenting Shares and
fractional shares, if any);
7. In the Merger, Sub will have no liabilities assumed by Target and
will not transfer to Target any assets subject to liabilities, except to the
extent incurred in connection with the transactions contemplated by the
Agreement. Sub is a newly formed corporation that was created for the sole
purpose of facilitating the Merger, and it has conducted no business activities
and has not disposed of any assets prior to the Effective Time, other than
pursuant to its obligations under the Agreement;
8. Following the Merger, Target will either continue its historic
business or use a significant portion of Target's historic business assets in a
business; provided, however, that to the extent that the business or assets are
subject to a Permissible Transfer, Parent will cause the transferee to continue
the historic business of Target or use a significant portion of Target's assets
in a business;
9. Neither Parent nor any current or former subsidiary of Parent
owns, or has owned during the past five (5) years, directly or indirectly, any
shares of Target capital stock, or the right to acquire or vote any such shares;
10. Neither Parent nor Sub is an investment company within the
meaning of Section 368(a)(2)(F)(iii) and (iv) of the Code;
11. No shareholder of Target is acting as agent for Parent in
connection with the Merger or approval thereof, and Parent will not reimburse
any Target shareholder for Target capital stock such shareholder may have
purchased or for other obligations such shareholder may have incurred;
12. Neither Parent nor Sub is under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code;
13. Parent and Sub are not participating in any plan or arrangement
(a "Plan") that would result in Target's shareholders engaging in a sale,
exchange, transfer, distribution (including, without limitation, a distribution
by a partnership to its partners or by a corporation to its stockholders),
pledge, disposition or any other transaction which results in a reduction in the
risk of ownership or a direct or indirect disposition (a "Sale") of shares of
Parent Common Stock to be issued to such shareholders in the Merger, that would
reduce ownership by shareholders of Target of Parent Common Stock issued to such
shareholders to a number having an aggregate fair market value, as of the
Effective Time, of less than fifty percent (50%) of the aggregate fair market
value, immediately prior to the Merger, of all outstanding shares of Target
capital stock. For purposes of this paragraph, shares of Target capital stock
(or the portion thereof) (i) with respect to which a Target shareholder receives
consideration in the Merger other than Parent Common Stock (including, without
limitation, cash received with respect to Dissenting Shares or in lieu of
fractional shares of Parent Common Stock), and/or (ii) with respect to which a
Sale occurs prior to and in contemplation of the Merger (other than the
conversion of
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<PAGE>
Target Preferred Stock into Target Common Stock) shall be considered shares of
outstanding Target capital stock exchanged for Parent Common Stock in the Merger
and then disposed of pursuant to a Plan. Parent's and Sub's compliance with
Sections 4.2, 4.3, 4.18 and 4.21 of the Agreement shall in no event constitute
participation in a Plan for purposes of the foregoing;
14. The payment of cash in lieu of fractional shares of Parent Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Parent of issuing fractional shares and does not represent separately bargained-
for consideration. The total cash consideration that will be paid in the Merger
to Target shareholders in lieu of fractional shares of Parent Common Stock will
not exceed one percent (1%) of the total consideration that will be issued in
the Merger to Target shareholders in exchange for their shares of Target capital
stock;
15. Except with respect to (i) payments of cash to Target
shareholders in lieu of fractional shares of Parent Common Stock, (ii) payments
of cash to Target shareholders with respect to Dissenting Shares, and (iii)
shares of Target stock cancelled pursuant to Section 1.8(c) and Section 1.8(d)
of the Agreement, one hundred percent (100%) of the Target capital stock
outstanding immediately prior to the Merger will be exchanged solely for Parent
Common Stock;
16. The number of Target Dissenting Shares as of the Effective Time
shall not exceed 9% of the then issued and outstanding Target shares of capital
stock then outstanding (with each share of target Preferred Stock being
converted into the number of shares of Target Common Stock into which such share
of Target Preferred Stock may be converted);
17. At the Effective Time, the fair market value of the Parent Common
Stock received by each Target shareholder will be approximately equal to the
fair market value of the Target capital stock surrendered in exchange therefor,
and the aggregate consideration received by Target shareholders in exchange for
their Target capital stock will be approximately equal to the fair market value
of all of the outstanding shares of Target capital stock immediately prior to
the Merger;
18. No shares of Sub have been or will be used as consideration or
issued to shareholders of Target pursuant to the Merger;
19. The Escrow Agreement is being established for good and valid
business reasons;
20. The Escrowed Parent Common Stock will appear as issued and
outstanding on the balance sheet of Parent;
21. Sub, Parent, Target and the shareholders of Target will each pay
separately its or their own expenses in connection with the Merger as
contemplated by the Agreement, other than Target expenses solely and directly
related to the Merger in accordance with Rev. Rul. 73-54, 1973-1 C.B. 187;
A-1-76
<PAGE>
22. There is no intercorporate indebtedness existing between Parent
and Target or between Sub and Target that was issued at a discount (other than
any indebtedness issued pursuant to the Loan Agreement), acquired at a discount
(other than any indebtedness acquired pursuant to the Loan Agreement) or that
will be settled at a discount as a result of the Merger;
23. The terms of the Agreement and all other agreements entered into
in connection therewith are the product of arm's-length negotiations;
24. None of the compensation received by any shareholder-employees of
Target will be separate consideration for, or allocable to, any of their shares
of Target capital stock; none of the shares of Parent Common Stock received by
any shareholder-employees of Target will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and the
compensation paid to any shareholder-employees of Target will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services;
25. Any amounts paid to Target shareholders that have perfected
dissenters' rights shall be paid by Target, solely from Target's assets, and
without reimbursement therefor by Parent or Sub;
26. No "poison pill" or similar rights will be associated with the
Parent Common Stock on or prior to the date of the Merger; and
27. Parent and Sub are authorized to make all of the
representations set forth herein.
B. Reliance by You in Rendering Opinions; Limitations on Your Opinions.
-------------------------------------------------------------------
1. The undersigned recognizes that (i) your opinions will be based
on, among other things, certain assumptions and the representations and
statements set forth herein, in the Agreement (including Exhibits and Schedules
attached thereto) and in the documents related thereto, and the opinions may not
be relied upon if any such assumptions, representations, or statements are not
accurate in all material respects, and (ii) your opinions will be subject to
certain stated limitations and qualifications.
2. Notwithstanding anything herein to the contrary, the undersigned
makes no representations regarding any actions or conduct of Target prior to the
Effective Time.
A-1-77
<PAGE>
3. The undersigned recognize that your opinions will not address any
tax consequences of the Merger or any action taken in connection therewith
except as expressly set forth in such opinions.
Very truly yours,
CUC INTERNATIONAL INC.,
a Delaware corporation
By:
-------------------------------
Title:
KA ACQUISITION CORP.,
a Delaware corporation
By:
-------------------------------
Title:
A-1-78
<PAGE>
EXHIBIT F
FORM OF
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
FOR LAWRENCE S. GROSS
---------------------
[INTENTIONALLY OMITTED]
A-1-79
<PAGE>
EXHIBIT G-1
FORM OF
COVENANT NOT TO COMPETE
FOR LAWRENCE S. GROSS
---------------------
[INTENTIONALLY OMITTED]
A-1-80
<PAGE>
EXHIBIT G-2
FORM OF
COVENANT NOT TO COMPETE
FOR BARTON LISTICK
------------------
[INTENTIONALLY OMITTED]
A-1-81
<PAGE>
EXHIBIT H
FORM OF
CONSENT AND WAIVER
------------------
[Included at page E-1]
A-1-82
<PAGE>
EXHIBIT I
FORM OF
INTERNET DOMAIN ASSIGNMENT
--------------------------
[INTENTIONALLY OMITTED]
A-1-83
<PAGE>
ANNEX A-2
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AMENDMENT NO. 1, dated as of December 20, 1996 (this "Amendment"), is
among KNOWLEDGE ADVENTURE, INC., A Delaware corporation (the "Company"), CUC
INTERNATIONAL INC., a Delaware corporation ("Parent"), and KA ACQUISITION CORP.,
a Delaware corporation and a direct wholly owned subsidiary of Parent
("Acquisition").
R E C I T A L S
---------------
A. Parent, Acquisition and the Company have entered into an Agreement and
Plan of Merger dated as of October 11, 1996 (collectively, with all schedules,
exhibits, amendments and certificates referred to therein, the "Merger
Agreement"), which provides for the acquisition by Parent of the Company by way
of a merger of Acquisition Sub with and into the Company (the "Merger"), with
the Company continuing as the surviving corporation and becoming a wholly owned
subsidiary of Parent. Capitalized terms not otherwise defined herein shall have
the meanings set forth in the Merger Agreement.
B. The parties wish to amend the Merger Agreement on the terms and subject
to the conditions set forth herein.
A G R E E M E N T
-----------------
NOW, THEREFORE, in consideration of the foregoing and the provisions set
forth herein, and for other good and valuable consideration, the parties hereby
agree as follows:
1. AMENDMENT OF SECTION 1.8 (CONVERSION OF COMPANY SHARES). Section 1.8
-------------------------------------------------------
of the Merger Agreement is hereby amended by deleting such section in its
entirety and replacing it with the following:
"Section 1.8 Conversion of Company Shares.
----------------------------
(a) At the Effective Time, by virtue of the Merger and without any
action on the part of the Company, Parent, Acquisition or the holders of
any of the Company Shares (other than (x) Company Shares held by Parent,
Acquisition or any other subsidiary of Parent, (y) Company Dissenting
Shares (as defined in Section 1.9) and (z) Company Shares held in the
Company's treasury), all of the shares of:
(i) Common Stock, par value $.0001 per share, of the Company
("Company Common Stock");
(ii) Series A Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series A Preferred Stock");
A-2-1
<PAGE>
(iii) Series B Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series B Preferred Stock");
(iv) Series C Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series C Preferred Stock");
(v) Series D Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series D Preferred Stock");
(vi) Series E Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series E Preferred Stock"); and
(vii) Series F Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series F Preferred Stock");
issued and outstanding immediately prior to the Effective Time shall be
converted into the right to receive, in the aggregate, the total of (a)
2,277,747 fully paid and nonassessable shares of common stock, $.01 par
value per share, of Parent ("Parent Common Stock") (the "Base
Consideration"), minus (b) the aggregate number of fully paid and
nonassessable shares of Parent Common Stock issuable after the Effective
Time upon exercise of all Parent Replacement Options (as defined in Section
1.11(a)) minus (c) the aggregate number of fully paid and nonassessable
-----
shares of Parent Common Stock issuable after the Effective Time upon
exercise of all Preferred Replacement Options (as defined in Section
1.11(a)), plus, (d) an additional 499.232 fully paid and nonassessable
----
shares of Parent Common Stock for each calendar day after December 1, 1996
and prior to the Closing Date (the "Additional Consideration"), in each
case subject to the indemnification and escrow provisions of Section 1.12
and the Escrow Agreement (as defined below) (the total of clause (a), minus
-----
clause (b), minus clause (c) and plus clause (d), subject to such
----- ----
indemnification and escrow provisions, being hereinafter referred to as the
"Merger Consideration"). Each share of Company Common Stock, Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
shall be converted into the right to receive that portion of the Merger
Consideration to which such share is entitled under, and in accordance
with, Article IV, Section B.2 of the Restated Certificate of Incorporation
of the Company.
Issued and outstanding shares of Company Common Stock and issued and
outstanding shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock (collectively, "Company Preferred
Stock") are referred to herein collectively as the "Company Shares."
(b) [Intentionally omitted.]
A-2-2
<PAGE>
(c) At the Effective Time, each outstanding share of the common
stock, par value $0.01 per share, of Acquisition shall be converted into
one share of common stock, par value $0.0001 per share, of the Surviving
Corporation.
(d) At the Effective Time, each Company Share, if any, held by
Parent, Acquisition or any subsidiary of Parent or Acquisition immediately
prior to the Effective Time shall, by virtue of the Merger and without any
action on the part of Parent, Acquisition or such subsidiary, be canceled,
retired and cease to exist, and no payment shall be made with respect
thereto.
(e) At the Effective Time, each Company Share held in the Company's
treasury immediately prior to the Effective Time shall be canceled, retired
and cease to exist, and no payment shall be made with respect thereto."
2. AMENDMENT OF SECTION 1.11 (COMPANY STOCK OPTIONS). Section 1.11 of the
-------------------------------------------------
Merger Agreement is hereby amended by deleting such section in its entirety and
replacing it with the following:
"Section 1.11 Company Stock Options.
---------------------
(a) At the Effective Time, each outstanding option, warrant or
similar security, whether vested or unvested, entitling the holder thereof
to acquire any Company Common Stock, whether issued pursuant to the
Company's 1991 Stock Option Plan or the Company's 1993 Stock Option Plan
(collectively, the "Company Plans") or otherwise (individually, a "Company
Stock Option," and, collectively, "Company Stock Options"), shall be
assumed by Parent and converted into an option (each, a "Parent Replacement
Option") to acquire, on substantially the same terms and conditions as were
applicable under such Company Stock Option, the same number of shares of
Parent Common Stock as the holder of such Company Stock Option would have
been entitled to receive pursuant to this Agreement had such holder
exercised such option in full immediately prior to the Effective Time
(assuming, for the purpose of such calculation only, that all outstanding
and unexercised Preferred Options and Company Stock Options, whether or not
then exercisable, were exercised in full immediately prior to the Effective
Time and that, for the purpose of such calculation only, the Merger
Consideration will equal the sum of the Base Consideration and the
Additional Consideration), at a price per share equal to (i) the aggregate
exercise price for the shares of Company Common Stock subject to such
Company Stock Option, divided by (ii) the number of full shares of Parent
----------
Common Stock deemed purchasable pursuant to such Company Stock Option as
described above; provided, however, that (A) the number of Parent
Replacement Options, and the number of shares of Parent Common Stock that
may be purchased upon the exercise of such Parent Replacement Options,
shall be subject to the indemnification provisions of Section 1.12, (B) the
number of shares of Parent Common Stock that may be purchased upon exercise
of such Parent Replacement Options shall not include any fractional share
and, upon exercise of the Parent Replacement Options, any fractional share
shall be rounded down to the nearest whole share, and (C) in the case of
any Company Stock Option to which Section 421 of the Code (as defined
below) applies by reason of its
A-2-3
<PAGE>
qualification under Section 422 of the Code ("incentive stock options"),
the option price, the number of shares purchasable pursuant to such option
and the terms and conditions of such option shall be determined in order to
comply with Section 424(a) of the Code. At the Effective Time, each
outstanding option, warrant or similar security, whether vested or
unvested, entitling the holders thereof to acquire any shares of Company
Preferred Stock (individually, a "Preferred Option," and, collectively,
"Preferred Options"), shall be assumed by Parent and converted into an
option (each, a "Preferred Replacement Option") to acquire, on
substantially the same terms and conditions as were applicable under such
Preferred Option, the same number of shares of Parent Common Stock as the
holder of such Preferred Option would have been entitled to receive
pursuant to this Agreement had such holder exercised such option in full
immediately prior to the Effective Time (assuming, for the purpose of such
calculation only, that all outstanding and unexercised Preferred Options
and Company Stock Options, whether or not then exercisable, were exercised
in full immediately prior to the Effective Time and that, for the purpose
of such calculation only, the Merger Consideration will equal the sum of
the Base Consideration and the Additional Consideration), at a price per
share equal to (i) the aggregate exercise price for the shares of Company
Preferred Stock subject to such Preferred Option, divided by (ii) the
----------
number of full shares of Parent Common Stock deemed purchasable pursuant to
such Preferred Option as described above; provided, however, that (A) the
number of Preferred Replacement Options, and the number of shares of Parent
Common Stock that may be purchased upon the exercise of such Preferred
Replacement Options, shall be subject to the indemnification provisions of
Section 1.12 and (B) the number of shares of Parent Common Stock that may
be purchased upon exercise of such Preferred Replacement Options shall not
include any fractional share and, upon exercise of the Preferred
Replacement Options, any fractional share shall be rounded down to the
nearest whole share. It is understood that each Company Plan and each
agreement pertaining to any other Company Stock Option or Preferred Option
(other than any rights on the part of the Company contained therein to
repurchase shares of Company Common Stock received on exercise of options)
shall continue in effect as a plan or agreement of the Company as the
Surviving Corporation in the Merger, unaffected and unmodified by the
Merger, other than that each such Company Stock Option and each such
Preferred Option shall thereafter be exercisable for Parent Common Stock as
a Parent Replacement Option or Preferred Replacement Option, as provided
above. The foregoing shall not obligate the Company, Surviving Company or
Parent to issue any further options under any Company Plan.
(b) No less than twenty (20) business days prior to the Effective
Time, the Company shall deliver a notice to each holder of any Company
Stock Options or any Preferred Options, at the address of such holder shown
on the Company's records, notifying such holder (i) of the right of such
holder to exercise such Company Stock Options or Preferred Options in
accordance with their terms prior to the Effective Time and (ii) that any
of such holder's Company Stock Options or Preferred Options that remain
unexercised as of the Effective Time will be assumed by Parent and
converted into Parent Replacement Options or Preferred Replacement Options,
as applicable, pursuant to Section 1.11(a).
A-2-4
<PAGE>
(c) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery
upon exercise of the Parent Replacement Options and Preferred Replacement
Options. Parent shall use its best efforts to cause there to be effective
as of the Effective Time, or as soon as practicable thereafter, a
registration statement on Form S-8 (or any successor form) or another
appropriate form with respect to the Parent Common Stock subject to any
Parent Replacement Options and Preferred Replacement Options held by
persons who are or were directors, officers, employees or consultants
(subject to the rules of such form) of the Company, and shall use its best
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus
or prospectuses contained therein) for so long as such Parent Replacement
Options and Preferred Replacement Options remain outstanding.
(d) The Company shall not assign to Parent, Acquisition or the
Surviving Corporation, and neither Parent, Acquisition nor the Surviving
Corporation shall assume, any rights of the Company under certain stock
purchase agreements between the Company and certain employees and other
persons to repurchase Company Common Stock acquired upon the exercise of
Company Stock Options."
3. AMENDMENTS TO SECTION 1.12 (INDEMNIFICATION; ESCROWED PARENT COMMON
-------------------------------------------------------------------
STOCK). Section 1.12 of the Merger Agreement is hereby amended by deleting such
- ------
Section in its entirety and replacing it with the following:
"Section 1.12 Indemnification; Escrowed Parent Common Stock.
---------------------------------------------
(a) The holders of Company Shares immediately prior to the Effective
Time and all holders of Parent Replacement Options and Preferred
Replacement Options shall indemnify, defend and hold harmless, jointly and
severally, Parent, Acquisition and, after the Effective Time, the Surviving
Corporation, and each of their respective affiliates, successors, assigns,
agents and representatives (collectively, the "Affiliated Parties"),
against and in respect of any and all claims, demands, losses, costs,
expenses, obligations, liabilities, damages, remedies and penalties
(including, without limitation, interest, penalties, settlement costs and
any legal, accounting or other fees and expenses for investigating or
defending any claims or threatened actions) (collectively, "Losses") that
Parent, Acquisition, the Surviving Corporation or any of their respective
Affiliated Parties actually incur or suffer in connection with:
(i) any breach of any of the representations or warranties
made by the Company in this Agreement or in any certificate,
instrument or other document delivered pursuant hereto;
(ii) any breach of any covenant of the Company contained in
this Agreement;
(iii) the restatement, if any, by Price Waterhouse LLP, the
Company's auditors, of the financial statements of the Company
identified
A-2-5
<PAGE>
in Sections 2.4(a)(i) or (ii), provided that, in respect of this
clause (iii), such indemnification shall be limited to Losses that are
actually incurred or suffered as a result of a claim or demand made by
any person against Parent, Acquisition, the Surviving Corporation or
any of their respective Affiliated Parties, whether for Taxes or
otherwise; or
(iv) any default under or violation of the Loan and Security
Agreement dated February 2, 1994, between the Company and Silicon
Valley Bank, including all exhibits and schedules thereto and all
related agreements, instruments and other documents (in each case as
supplemented, amended or otherwise modified from time to time, the
"Silicon Loan Documents"), whether in existence on the date hereof or
arising after the date hereof and prior to the Effective Time;
provided, however, that no claim, demand, suit or cause of action shall be
brought against the stockholders of the Company or holders of Parent
Replacement Options or Preferred Replacement Options under Section
1.12(a)(i) or (ii) unless and until the aggregate amount of claims under
this Section 1.12(a) exceeds, on a cumulative basis, $250,000, in which
event Parent, Acquisition, the Surviving Corporation and any of their
respective Affiliated Parties shall be entitled to indemnification from the
stockholders of the Company or holders of Parent Replacement Options or
Preferred Replacement Options for all claims under Section 1.12(a)(i) or
(ii) relating back to the first dollar.
(b) At the Closing, certificates representing nine percent (9%) of
the number of shares of Parent Common Stock (rounded up to the nearest
whole share) issued in the Merger pursuant to Section 1.8 (the "Escrowed
Parent Common Stock") shall be deposited into an escrow account and held
pursuant to the terms of an Escrow Agreement among Parent, the Surviving
Corporation, the Escrow Committee (as defined therein) and the escrow
agent, in substantially the form of Exhibit D (the "Escrow Agreement").
---------
The Escrowed Parent Common Stock shall be withheld pro rata from the number
of shares of Parent Common Stock to be received by each stockholder of the
Company in the Merger; for such purpose, rounding shall be utilized so that
the total withheld is exactly nine percent (9%) of the number of shares of
Parent Common Stock (rounded up to the nearest whole share). To the extent
that Parent, Acquisition, the Surviving Corporation or any of their
respective Affiliated Parties shall have any claims for indemnification
pursuant to Section 1.12(a), it or they may seek recourse against the
Escrowed Parent Common Stock in seeking satisfaction of such claims. The
Escrowed Parent Common Stock, less the number of shares of Escrowed Parent
----
Common Stock having a fair market value most nearly equal to the aggregate
amount of all indemnification claims made by Parent, Acquisition, the
Surviving Corporation or their respective Affiliated Parties under Section
1.12(a) (for such purposes, the fair market value of one share of Escrowed
Parent Common Stock shall be equal to its Closing Price (as defined below)
as of the Closing Date), shall be released to the stockholders of the
Company pursuant to the Escrow Agreement on the earlier to occur (the
"Escrow Release Date") of (i) the four (4) month anniversary of the Closing
and (ii) the date upon which audited consolidated financial statements of
Parent, which include the results of operations of the Surviving
Corporation,
A-2-6
<PAGE>
shall have been completed and Parent shall have received a signed opinion
of Ernst & Young LLP ("E&Y"), its independent auditors, with respect to
such financial statements. Upon the approval by the stockholders of the
Company of the Merger Agreement and the Merger, such stockholders shall be
deemed to have irrevocably appointed an escrow committee consisting of
Michael Levinthal and Jon Feiber (the "Escrow Committee") to act as their
attorney-in-fact on behalf of such stockholders to consent to, contest,
settle, compromise or otherwise dispose of any claim made by Parent or any
other Affiliated Party in accordance with Section 1.12(a) and the Escrow
Agreement. No further documentation shall be required to evidence such
appointment, and such power of attorney shall be coupled with an interest,
thereby confirming such appointment as irrevocable. The Escrow Committee
shall be empowered to act by majority vote with respect to all matters
arising under Section 1.12(a) and the Escrow Agreement. If any member of
the Escrow Committee shall die, become disabled or otherwise be unable or
unwilling to fulfill his responsibilities hereunder, each the remaining
members of the Escrow Committee shall select a replacement member. Such
remaining members of the Escrow Committee shall notify Parent and the
Escrow Agent in writing of any change in the composition of the Escrow
Committee. The term "Closing Price" shall mean, on any day, the last
reported sale price of one share of Parent Common Stock on the New York
Stock Exchange (the "NYSE") Composite Transactions.
(c) The sole and exclusive remedy of Parent, Acquisition, the
Surviving Corporation and their respective Affiliated Parties against the
stockholders of the Company for any indemnification claim brought under
Section 1.12(a) following the Effective Time shall be the return of shares
of Escrowed Parent Common Stock pursuant to the Escrow Agreement. If, and
to the extent that, there are Company Stock Options or Preferred Options
that remain outstanding and unexercised immediately prior to the Effective
Time, Parent, Acquisition, the Surviving Corporation and any of their
respective Affiliated Parties will be entitled to have recourse against the
holders of Parent Replacement Options and/or Preferred Replacement Options,
as applicable, issued in the Merger in exchange for such Company Stock
Options or Preferred Options in seeking satisfaction of any indemnification
claims, which recourse shall only be available prior to the Escrow Release
Date and shall be limited solely to the right to demand the return (or
cancellation) of a number of Parent Replacement Options and/or Preferred
Replacement Options, or Parent Common Stock if such Parent Replacement
Options or Preferred Replacement Options, as applicable, have theretofore
been exercised, having a fair market value most nearly equal to the
aggregate amount of all indemnification claims; provided, however, that
such indemnified parties shall only be entitled pursuant to this sentence
to demand the return (or cancellation) of Parent Replacement Options,
Preferred Replacement Options, or Parent Common Stock, as applicable,
having a fair market value that does not exceed 9% of the fair market value
of the Parent Replacement Options, Preferred Replacement Options, or Parent
Common Stock, as applicable, received by such holders in exchange for their
Company Stock Options or Preferred Options (for all such purposes, the fair
market value of one share of Parent Common Stock shall be equal to its
Closing Price as of the Closing Date). Notwithstanding anything to the
contrary, nothing contained in this Section 1.12 shall in any way limit any
claim, cause of action or remedy
A-2-7
<PAGE>
that may be available to Parent, Acquisition, the Surviving Corporation or
any of their respective Affiliated Parties against (i) any stockholder of
the Company or any holder of options to acquire capital stock of the
Company, whether at law or in equity, for willful or intentional fraud or
in connection with the execution and/or delivery by such stockholder or
optionholder of its Affiliate Letter or any certificate, instrument or
agreement executed and/or delivered by such stockholder or optionholder or
(ii) the Company for breach of any representation, warranty, covenant or
agreement contained herein or in any other certificate, instrument or
agreement (including any Affiliate Letter) executed and delivered in
connection with the Merger."
4. AMENDMENT OF SECTION 2.2 (CAPITALIZATION OF THE COMPANY). Section
--------------------------------------------------------
2.2(a) of the Merger Agreement is hereby amended by deleting the penultimate
sentence in the last paragraph of Section 2.2(a) in its entirety and replacing
it with the following:
"Since August 31, 1996, no shares of the Company's capital stock have been
issued other than pursuant to the exercise of Company Stock Options or
Preferred Options in existence on such date and no additional Company Stock
Options or Preferred Options have been granted, other than shares of
Company capital stock and options permitted to be issued and granted
pursuant to Section 4.1(ii)."
5. CLARIFICATION OF SECTION 2.4(a) (FINANCIAL STATEMENTS; NET ASSETS).
------------------------------------------------------------------
The first sentence of Section 2.4(a) of the Merger Agreement refers to audited
consolidated statements of income, stockholder's equity and cash flow and the
notes thereto of the Company for the three years ended March 31, 1996. as a
matter of clarification, the parties acknowledge and agree that the fiscal year
ended March 31, 1994 was a short fiscal year commencing January 1, 1994.
6. AMENDMENT OF SECTION 2.4(b) (FINANCIAL STATEMENTS: NET ASSETS).
----------------------------------------------------------------
Section 2.4(b) of the Merger Agreement is hereby amended to read in its entirety
as follows:
"The "Net Assets" of the Company as of the Closing shall be not less than
$100,000. For purposes of this Agreement, "Net Assets" means the excess of
(i) the sum of the Company's cash, cash equivalents, capitalized software
acquisition costs, licenses and trademarks, investment in KA Worlds,
collectible receivables, salable inventory (including raw materials for
inventory), fixed assets, prepaid expenses (including advance royalties),
marketable securities and up to $425,000 of capitalized costs of the Merger
over (ii) all of the Company's liabilities, including, without limitation,
all liabilities with respect to Taxes, in each case as determined in
accordance with GAAP in conformity with the practices consistently applied
by the Company with respect to prior periods. The parties acknowledge that
the unaudited balance sheet of the Company as of September 30, 1996
reflects "Net Assets" of approximately $979,000."
7. AMENDMENT OF SECTION 4.2 (EXEMPTION FROM REGISTRATION OR SECURITIES ACT
-----------------------------------------------------------------------
REGISTRATION). Section 4.2 of the Merger Agreement is hereby amended by adding
- -------------
thereto a new paragraph (c), which shall read in full as follows:
A-2-8
<PAGE>
"(c) The parties have agreed that, in light of the recent adoption of
the National Securities Markets Improvement Act of 1996 (the "Improvement
Act"), the availability of the exemption under Section 3(a)(10) of the
Securities Act with respect to the securities to be issued in the Merger is
unclear, and, accordingly, the parties have agreed to prepare and file with
the SEC the S-4. If, prior to the time the S-4 is declared effective by
the SEC, the Company and/or Parent receive a formal written interpretive
letter from the SEC advising them that the exemption under Section 3(a)(10)
of the Securities Act continues to be available with respect to the
issuance of securities of a NYSE listed corporation in a merger transaction
that is the subject of a Fairness Hearing under Section 25142 of the
California Securities Law, then, if Parent and the Company mutually elect,
the parties shall withdraw the S-4 from the SEC and recommence the
preparation and filing of the necessary documentation to hold a Fairness
Hearing with respect to the Merger, as contemplated by Section 4.2(a)
above."
8. AMENDMENT TO SECTION 4.11 (POOLING). The third, fourth and fifth
-----------------------------------
sentences of Section 4.11 of the Merger Agreement are hereby amended by deleting
such sentences in their entirety and replacing them with the following:
"Parent shall use commercially reasonable efforts to cause E&Y to
deliver to Parent a letter to the effect that pooling-of-interest
accounting (under Accounting Principles Board Opinion No. 16) is
appropriate for the Merger if it is closed and consummated in accordance
with the terms of this Agreement, and the Company shall use commercially
reasonable efforts to cause Price Waterhouse LLP to cooperate fully with
E&Y (including, without limitation, sharing information, analysis and work
product, engaging in active discussions and delivering to Parent, the
Company and E&Y a letter (the "PW Pooling Letter"), subject to customary
qualifications, to the effect that pooling-of-interest accounting (under
Accounting Principles Board Opinion No. 16) is appropriate for the Merger)
in connection with E&Y's delivery of such letter. The parties acknowledge
that the receipt of the PW Pooling Letter from Price Waterhouse LLP is a
precondition to E&Y's ability to delivery its letter to Parent. The
Company will inform all Company affiliates and other relevant employees as
to those actions that should or should not be taken by such persons so that
the Merger will be accounted for as a pooling-of-interests."
9. AMENDMENT OF SECTION 4.16 (PARENT STOCK OPTION AND EMPLOYEE BONUS
-----------------------------------------------------------------
POOL). Section 4.16(b) of the Merger Agreement is hereby amended by replacing
- -----
the figure "$1.538 million" in the first sentence of such Section with "$1.16
million."
10. AMENDMENT OF SECTION 4.21 (CERTAIN FILING BY PARENT). Section 4.21 of
----------------------------------------------------
the Merger Agreement is hereby amended and restated to read in its entirety as
follows:
"If the Closing Date shall occur at any time after December 31, 1996,
Parent agrees to file with the SEC under the Exchange Act a Current Report
on Form 8-K reporting the results of the combined operations of Parent and
the Surviving Corporation for a full thirty (30) day period (the "Combined
Period"), no later than thirty (30) days following the completion of such
Combined Period."
A-2-9
<PAGE>
11. AMENDMENT OF SECTION 5.3 (CONDITIONS TO THE OBLIGATIONS OF PARENT AND
---------------------------------------------------------------------
ACQUISITION). Section 5.3 of the Merger Agreement is amended by deleting
- ------------
Section 5.3(m) thereof in its entirety. the parties hereto agree that, for
purposes of the agreement, (i) Section 2.18 of the Company Disclosure Schedule
shall be deemed to include the top-level internet domain names listed in Exhibit
A to this Amendment (the "Domain Names"), (ii) the Domain Names shall be deemed
included within the term "Intellectual Property Rights" as such term is used
throughout the Agreement, and (iii) the representations and warranties of the
Company contained in the second sentence and the third sentence of Section
2.18(a) of the Agreement shall be deemed to cover the Domain Names, whether or
not such Domain Names are used in the Company's businesses as presently
conducted or are necessary or required for the conduct of the Company's
businesses as presently conducted.
12. AMENDMENT OF SECTION 6.2 (EFFECT OF TERMINATION). The first sentence
------------------------------------------------
of Section 6.2 of the Merger Agreement is hereby amended by replacing the
reference to "Section 4.5(c)" therein with the reference to "Section 4.5(d)."
13. AMENDMENT OF COMPANY DISCLOSURE SCHEDULE. The references in Section
----------------------------------------
2.2 to the Company Disclosure Schedule to certain agreements between William
Gross and other individuals relating to the issuance or grant of options to
acquire Company Common Stock and Company Preferred Stock by William Gross are
hereby deleted in their entirety and replaced with the schedule of option grants
attached to that certain letter from William Gross to Lawrence S. Gross dated
October 11, 1996, a copy of which has been provided to Parent.
14. STOCK SPLIT. The parties acknowledge that, since the date of the
-----------
Agreement, the Common Stock of parent has split on a 3 for 2 basis effective as
of October 21, 1996. References in this Amendment are to the pre-split shares.
15. MISCELLANEOUS. This Amendment shall be governed by and construed and
-------------
enforced in accordance with, the laws of the State of Delaware, without regard
to its conflicts or choice of law principles. This amendment may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
16. FULL FORCE AND EFFECT. Except as provided herein, the Merger
---------------------
Agreement shall remain in full force and effect. As amended hereby, the Merger
Agreement is hereby ratified and confirmed in all respects.
A-2-10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
KNOWLEDGE ADVENTURE, INC., a
Delaware corporation
By: /s/ Lawrence S. Gross
------------------------------
Lawrence S. Gross
President
CUC INTERNATIONAL INC., a Delaware
corporation
By: /s/ Robert M. Davidson
------------------------------
Robert M. Davidson
Vice Chairman
KA ACQUISITION CORP., a Delaware
corporation
By: /s/ Paula V. Duffy
------------------------------
Paula V. Duffy
Vice President
A-2-11
<PAGE>
EXHIBIT A
---------
DOMAIN NAMES
1stgrade.com
2ndgrade.com
3rdgrade.com
4thgrade.com
5thgrade.com
6thgrade.com
7thgrade.com
8thgrade.com
9thgrade.com
10thgrade.com
11thgrade.com
12thgrade.com
firstgrade.com
secondgrade.com
thirdgrade.com
fourthgrade.com
fifthgrade.com
sixthgrade.com
pre-k.com
kidchat.com
knowledgeland.com
jumpstart.com
jumpstart-ka.com
A-2-12
<PAGE>
ANNEX B
-------
APPLICABLE CHARTER PROVISION
2. LIQUIDATION PREFERENCE.
-----------------------
In the event of any liquidation, dissolution, or winding up of the
corporation (a "Liquidation Event"), whether voluntary or not, distributions to
the stockholders of the corporation shall be made in the following manner:
(a) Subject to the rights of series of Preferred Stock that may from time
to time come into existence, each holder of Series B, Series C, Series D, Series
E and Series F Preferred Stock shall be entitled to receive, prior and in
preference to any distribution to the holders of Series A Preferred Stock or
Common Stock, an amount per share equal to the sum of (i) in the case of the
Series B Preferred Stock, (A) $.8885 for each share of series B Preferred Stock
then held by such holder, plus (B) an amount equal to all declared but unpaid
dividends on such share of Series B Preferred Stock, (ii) in the case of the
Series C Preferred Stock, (A) $2.4213 for each share of Series C Preferred Stock
then held by such holder, plus (B) an amount equal to all declared but unpaid
dividends on such share of Series C Preferred Stock, (iii) in the case of the
Series D Preferred Stock, (A) $6.2123 for each share of Series D Preferred Stock
then held by such holder, plus (B) an amount equal to all declared but unpaid
dividends on such share of Series D Preferred Stock, (iv) in the case of the
Series E Preferred Stock, (A) $5.0319 for each share of Series E Preferred Stock
then held by such holder, plus (B) an amount equal to all declared but unpaid
dividends on such share of Series E Preferred Stock, and (v) in the case of the
Series F Preferred Stock, (A) $4.6749 for each share of Series F Preferred Stock
then held by such holder, plus (B) an amount equal to all declared but unpaid
dividends on such share of Series F Preferred stock. If upon the occurrence of
a Liquidation Event the assets and funds available to be distributed among the
holders of Series B, Series C, Series D, Series E and Series F Preferred Stock
pursuant to this subsection 2(a) shall be insufficient to permit the Payment to
such holders of the full aforesaid preferential amounts, then the entire assets
and funds of the corporation legally available for distribution to such holders
pursuant to this subsection 2(a) shall be distributed ratably among the holders
of Series B, Series C, Series D, Series E and Series F Preferred Stock in
proportion to the preferential amount each such holder is otherwise entitled to
receive by reason of this subsection 2(a).
(b) Upon the completion of the distributions required by subsection (a) of
this Section 2 and any other distribution that may be required with respect to
series of Preferred Stock that may from time to time come into existence, each
holder of Series A and Series B Preferred Stock shall be entitled to receive,
prior and in preference to any further distribution to the holders of Series C,
Series D, Series E or Series F Preferred Stock or any distribution to the
holders of Common Stock, an amount per share equal to (i) in the case of the
Series A Preferred Stock, (A) $3.0656 for each share of Series A Preferred Stock
then held by such holder, plus (B) an amount equal to all declared but unpaid
dividends on such share of Series A Preferred Stock, and (ii) in the case of the
Series B Preferred Stock, $1.5328 for each share of Series B Preferred Stock
then held by such holder (in addition to the amounts paid pursuant to subsection
(a) of this Section 2). If upon the occurrence of a Liquidation Event, the
assets and funds available to be distributed among the holders of the Series A
and Series B Preferred stock pursuant to this subsection 2(b) shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire remaining assets and funds of the
corporation legally available for distribution to such holders pursuant to this
subsection 2(b) shall be distributed ratably among the holders of Series A and
Series B Preferred Stock in proportion to the preferential amount each such
holder is otherwise entitled to receive by reason of this subsection 2(b).
(c) Upon the completion of the distributions required by subsection (a) and
subsection (b) of this Section 2 and any other distribution that may be required
with respect to series of Preferred Stock that may from time to time come into
existence, each holder of Series A Preferred Stock shall be entitled to receive,
prior and in preference to any further distribution to the holders of Series B,
Series C, Series D, Series E or Series F Preferred
B-1
<PAGE>
Stock or to any distribution to the holders of Common Stock, an amount per share
equal to $1.777 for each share of Series A Preferred Stock then held by such
holder (in addition to the amounts paid pursuant to subsection (b) of this
Section 2). If upon the occurrence of a Liquidation Event, the assets and funds
available to be distributed among the holders of the Series A Preferred Stock
pursuant to this subsection 2(c) shall be insufficient to permit the payment to
such holders of the full aforesaid preferential amounts, then the entire
remaining assets and funds of the corporation legally available for distribution
to such holders pursuant to this subsection 2(c) shall be distributed ratably
among the holders of Series A Preferred Stock in proportion to the preferential
amount each such holder is otherwise entitled to receive by reason of this
subsection 2(c).
(d) After payment has been made to the holders of the Series A, Series B,
Series C, Series D, Series E and Series F Preferred Stock of the full amounts to
which they shall be entitled as aforesaid and any other distribution that may be
required with respect to series of Preferred Stock that may from time to time
come into existence, the remaining assets of the corporation available for
distribution to stockholders shall be distributed ratably among the holders of
Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock
and Common Stock based on the number of shares of Common Stock held by each
(assuming conversion of all Series A, Series B, Series C, Series D, Series E and
Series F Preferred Stock at the then applicable Conversion Rates).
(e) For purposes of this Section 2, a liquidation, dissolution or winding
up of the corporation shall be deemed to be occasioned by, or to include, (A)
the acquisition of the corporation by another entity by means of any transaction
or series of related transactions (including, without limitation, any
reorganization, merger or consolidation) that results in the transfer of fifty
percent (50%) or more of the outstanding voting power of the corporation; or (B)
a sale of all or substantially all of the assets of the corporation.
(f) If any of the events described in Section 2(e) shall occur and if the
consideration received by the corporation is other than cash, its value will be
deemed its fair market value. The value of securities and property paid or
distributed pursuant to this Section 2 shall be computed at fair market value at
the time of payment to the corporation or at the time made available to
stockholders, all as determined by the Board of Directors in the good faith
exercise of its reasonable business judgment, provided that (i) if such
securities are listed on any established stock exchange or a national market
system, their fair market value shall be the closing sales price for such
securities as quoted on such system or exchange (or the largest such exchange)
for the date the value is to be determined (or if there are no sales for such
date, then for the last preceding business day on which there were sales), as
reported in the Wall Street Journal or similar publication, and (ii) if such
-------------------
securities are regularly quoted by a recognized securities dealer but selling
prices are not reported, their fair market value shall be the mean between the
high bid and low ask prices for such securities on the date the value is to be
determined (or if there are no quoted prices for such date, then for the last
preceding business day on which there were quoted prices).
(g) Nothing hereinabove set forth shall affect in any way the right of each
holder of Series A, Series B, Series C, Series D, Series E or Series F Preferred
Stock to convert such shares at any time and from time to time into Common Stock
in accordance with Section 5 hereof.
B-2
<PAGE>
ANNEX C-1
---------
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
C-1-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to
C-1-2
<PAGE>
give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware, or such publication
as the Court deems advisable. The forms of the notices by mail and by
publication shall be approved by the Court, and the costs thereof shall be borne
by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
C-1-3
<PAGE>
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(1) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
349, L. '96, eff. 7-1-96.)
C-1-4
<PAGE>
ANNEX C-2
---------
SECTION 1300 THROUGH AND INCLUDING SECTION 1312 OF
THE CALIFORNIA GENERAL CORPORATION LAW
SECTION
- -------
1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions.
1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents.
1302. Submission of share certificates for endorsement; uncertificated
securities.
1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment.
1304. Action to determine whether shares are dissenting shares or fair market
value; limitation; joinder; consolidation; determination of issues;
appointment of appraisers.
1305. Report of appraisers; confirmation; determination by court; judgment;
payment; appeal; costs.
1306. Prevention of immediate payment; status as creditors; interest.
1307. Dividends on dissenting shares.
1308. Rights of dissenting shareholders pending valuation; withdrawal of demand
for payment.
1309. Termination of dissenting share and shareholder status.
1310. Suspension of right to compensation or valuation proceedings; litigation
of shareholders' approval.
1311. Exempt shares.
1312. Right of dissenting shareholder to attack, set aside or rescind merger or
reorganization; restraining order or injunction; conditions.
(S) 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange certified
by the Commissioner of Corporations under subdivision (o) of Section 25100
or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 an 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in * * * subparagraph (A) or (B) if demands
for payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
C-2-1
<PAGE>
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in * * * subparagraph
(A) or (B) of paragraph (1) (without regard to the provisos in that
paragraph), were voted against the reorganization, or which were held of
record on the effective date of a short-form merger; provided, however,
that * * * subparagraph (A) rather than * * * subparagraph (B) of this
paragraph, applies in any case where the approval required by Section 1201
is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
(S) 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND FOR
PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
(S) 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the
C-2-2
<PAGE>
corporation purchase. Upon subsequent transfers of the dissenting shares on the
books of the corporation, the new certificates, initial transaction statement,
and other written statements issued therefor shall bear a like statement,
together with the name of the original dissenting holder of the shares.
(S) 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
(S) 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT; JUDGMENT;
PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1 306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
C-2-3
<PAGE>
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
(S) 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(S) 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
(S) 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
C-2-4
<PAGE>
(S) 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
(S) 1311. EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
(S) 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or short-
form merger, or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
C-2-5
<PAGE>
ANNEX D
-------
OPINION OF PIPER JAFFRAY INC.
-----------------------------
October 4, 1996
Board of Directors
Knowledge Adventure, Inc.
1311 Grand Central Avenue
Glendale, CA 91201
Members of the Board:
We understand that Knowledge Adventure, Inc., a California corporation (the
"Company"), and CUC International Inc., a Delaware corporation ("CUC"), will
enter into an Agreement and Plan of Merger (the "Merger Agreement"), which will
provide, among other things, for the merger of a wholly owned subsidiary of CUC
with and into the Company (the "Merger"). Pursuant to the Merger Agreement, the
Company will become a wholly owned subsidiary of CUC and each issued and
outstanding share of common stock, par value $.0001 per share, and each issued
and outstanding share of convertible preferred stock, par value $.0001 per
share, of the Company (collectively, "Company Stock") other than the shares held
in treasury or subject to dissenter's rights will be converted automatically
into the right to receive the number of shares of common stock, par value $.01
per share, of CUC ("CUC Common Stock") as set forth in the Merger Agreement.
The terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
You have requested our opinion, as of this date, as to whether the aggregate
consideration to be received by the holders of shares of the Company Stock as a
group pursuant to the Merger Agreement is fair to such holders as a group from a
financial point of view.
Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, underwritings and secondary
distributions of securities, private placements and valuations for estate,
corporate and other purposes. For our services in rendering this opinion, the
Company will pay us a fee and indemnify us against certain liabilities. The
opinion fee is not contingent upon the consummation of the Merger.
In arriving at our opinion, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have:
1. Reviewed a draft dated October 2, 1996 of the Merger Agreement and certain
related documents;
2. Analyzed certain internal financial and operating data concerning the Company
prepared by management of the Company, including the Company's audited
financial statements for its fiscal year ended March 31, 1996;
3. Analyzed certain publicly available historical business and financial
information relating to CUC as presented in documents filed with the
Securities and Exchange Commission, including CUC's Annual Report on Form 10-
K for its fiscal year ended January 31, 1996 and CUC's Quarterly Reports on
Form 10-Q for its quarters ended April 30 and July 31, 1996;
4. Reviewed certain financial forecasts and budgets for the Company prepared by
management of the Company;
D-1
<PAGE>
5. Conducted discussions with certain members of the senior management of the
Company and CUC concerning their respective businesses, operations and
strategic objectives, as well as the strategic implications and operating
efficiencies that might be realized following the consummation of the Merger;
6. Compared the financial performance of the Company and CUC and the price and
trading activity of CUC Common Stock with that of certain other publicly-
traded companies which we considered to be similar to the Company and CUC;
7. Reviewed the trading history of CUC Common Stock, including its performance
in comparison to market indices and to selected companies in comparable
businesses;
8. Reviewed the financial terms, to the extent publicly available, of certain
merger and acquisition transactions involving acquired entities deemed
similar to the Company; and
9. Performed such other analyses as we considered appropriate.
We have relied upon and assumed the accuracy and completeness of the financial
statements and other information provided by the Company and CUC or otherwise
made available to us and have not assumed responsibility independently to
verify such information. We have further relied upon the assurances of the
Company's and CUC's management that the information provided pertaining to the
Company and CUC has been prepared on a reasonable basis and, with respect to
financial planning data, reflects the best currently available estimates and
that they are not aware of any information or facts that would make the
information provided to us incomplete or misleading. Without limiting the
generality of the foregoing, for the purpose of this opinion, we have assumed
that neither the Company nor CUC is a party to any pending transaction,
including external financing, recapitalizations, acquisitions or merger
discussions, other than the Merger or in the ordinary course of business.
In arriving at our opinion, we have not performed any appraisals or valuations
of specific assets or liabilities of the Company or CUC and express no opinion
regarding the liquidation value of the Company or CUC. Our opinion is
necessarily based upon information available to us, facts and circumstances and
economic, market and other conditions as they exist and are subject to
evaluation on the date hereof; events occurring after the date hereof could
materially affect the assumptions used in preparing this opinion. We have not
undertaken to reaffirm or revise this opinion or otherwise comment upon any
events occurring after the date hereof. We express no opinion herein as to the
prices at which shares of CUC Common Stock may trade at any future time, nor do
we express any opinion herein concerning the terms and conditions of the escrow
of CUC Common Stock contemplated by the Merger Agreement and have assumed for
purposes hereof that the holders of Company Stock will receive all the shares of
CUC Common Stock proposed to be exchanged.
This opinion is for the benefit of the Board of Directors of the Company and
shall not be published or otherwise used, nor shall any public references to
Piper Jaffray be made without our prior written consent. This opinion is not
intended to be and does not constitute a recommendation to any stockholder as to
how such stockholder should vote with respect to the Merger. In connection with
this opinion, we were not requested to opine as to, and this opinion does not
address, the merits of the basic business decision to proceed with or effect the
Merger.
Based upon and subject to the foregoing and based upon such other factors as we
consider relevant, it is our opinion that the aggregate consideration to be
received by the holders of shares of Company Stock as a group pursuant to the
Merger Agreement is fair, from a financial point of view, to such holders as a
group, as of the date hereof.
Sincerely,
PIPER JAFFRAY INC.
D-2
<PAGE>
ANNEX E
-------
CONSENT AND WAIVER
------------------
CONSENT AND WAIVER (this "Consent and Waiver"), made by the stockholder of
KNOWLEDGE ADVENTURE, INC., a Delaware corporation (the "Company"), named below
(the "Stockholder").
A. PURPOSE OF CONSENT AND WAIVER.
------------------------------
This Consent and Waiver is being executed and delivered by the Stockholder
in connection with the consummation of the transactions contemplated by the
Agreement and Plan of Merger dated as of October 11, 1996 (the "Merger
Agreement"), among the Company, CUC INTERNATIONAL INC., a Delaware corporation
("CUC"), and KA ACQUISITION CORP., a Delaware corporation and a wholly owned
subsidiary oF CUC ("Merger Sub"), pursuant to which, among other things, at the
Effective Time and upon the terms and subject to the conditions set forth in the
Merger Agreement and in accordance with applicable law, Merger Sub will be
merged with and into the Company (the "Merger"). Following the consummation of
the Merger, the Company will continue as the surviving corporation and a wholly
owned subsidiary of CUC. Capitalized terms not otherwise defined herein shall
have the meanings set forth in the merger agreement.
The purpose of this Consent and Waiver is to obtain the consent of the
Stockholder to the methodology adopted by the Board of Directors of the Company
(the "Company Board") to allocate, based upon the provisions of the existing
Restated Certificate of Incorporation of the Company (the "Restated
Certificate"), the Merger Consideration (as defined below) to be received in the
Merger among the holders of the classes or series of capital stock of the
Company, and the waiver by the Stockholder of any claims and/or actions that the
Stockholder has or may have in connection with the application of such
methodology to determine such allocation.
Pursuant to Section 1.8 of the Merger Agreement, at the Effective Time of
the Merger, all of the shares of Common Stock, par value $.0001 per share, of
the Company ("Common Shares"), Series A Convertible Preferred Stock, par value
$.0001 per share, of the Company ("Series A Preferred Shares"), Series B
Convertible Preferred Stock, par value $.0001 per share, of the Company ("Series
B Preferred Shares"), Series C Convertible Preferred Stock, par value $.0001 per
share, of the Company ("Series C Preferred Shares"), Series D Convertible
Preferred Stock, par value $.0001 per share, of the Company ("Series D Preferred
Shares"), Series E Convertible Preferred Stock, par value $.0001 per share, of
the Company ("Series E Preferred Shares"), and Series F Convertible Preferred
Stock, par value $.0001 per share, of the Company ("Series F Preferred Shares"),
issued and outstanding immediately prior to the Effective Time (collectively,
the "Company Shares") will be converted into the right to receive the Merger
Consideration contemplated by, and in accordance with, Section 1.8 of the Merger
Agreement.
The Merger Agreement provides that each Company Share will be converted
into the right to receive that portion of the Merger Consideration to which such
Company Share is entitled under, and in accordance with, Article IV, Section 2
of the Restated Certificate (the "Applicable Charter Provision"). The
Applicable Charter Provision expressly provide for the distribution among the
stockholders of the Company of the consideration to be received in the event of
a "Liquidating Event" (as defined therein), which includes the Merger, including
specific provisions pursuant to which the Merger Consideration would be
distributed among the stockholders of the Company based upon the class or series
of capital stock held by such stockholders.
The Applicable Charter Provision provide that, for purposes of distributing
the consideration to be received in the Merger, if a Liquidating Event occurs
and if the consideration to be received by the corporation is other than cash,
the value of such consideration will be deemed its fair market value. The
Applicable
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<PAGE>
Charter Provision further provide that the value of securities or
other property paid or distributed thereunder will be "computed at fair market
value at the time of payment to the corporation or at the time made available to
[the Company's] stockholders, all as determined by the [Company Board] in the
good faith exercise of its reasonable business judgment," provided that if such
securities are listed on any established national securities exchange (as are
the shares of CUC Common Stock constituting the Merger Consideration), the fair
market value of such securities shall be the closing sales price for such
securities as quoted on such exchange "for the date the value is to be
determined . . . ." The Company Board has concluded that the foregoing
provisions should be interpreted to mean that, for purposes of allocating the
Merger Consideration among the holders of Company Shares, the value of the
consideration to be received by such holders in the Merger is to be computed as
of the Closing Date of the Merger, and, in order to clarify the meaning of the
Applicable Charter Provision, the Company Board has solicited the vote or
consent of such holders in the Proxy Statement/Information Statement to a
clarifying amendment to the Restated Certificate (the "Articles Amendment") that
will explicitly provide that the value of the Merger Consolidation will be
determined as of the Closing Date. Approval of the Articles Amendment by the
requisite vote or consent of the holders of Company Shares is a condition to the
obligations of CUC to consummate the Merger. However, whether or not the
Articles Amendment is approved, the Company Board believes that its
interpretation of the Applicable Charter Provision is correct. Notwithstanding
that the Articles Amendment may not be approved by the requisite vote or consent
of the holders of Company Shares, CUC could elect to waive the Articles
Amendment requirement, and the Merger could be consummated based upon the
Company Board's existing interpretation of the Applicable Charter Provision.
The holders of the Series A Preferred Shares, Series B Preferred Shares,
Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares
and Series F Preferred Shares (collectively, the "Preferred Shares") have
certain rights and preferences with respect to the allocation of the Merger
Consideration described in the Applicable Charter Provision, and the date upon
which the Merger Consideration is valued for the purpose of such allocation and
other methodologies that are adopted by the Company Board for allocating the
Merger Consideration among the holders of the Company Shares will have an impact
upon the relative portion of the Merger Consolidation to be received by the
holders of the Common Shares and the series of Preferred Shares.
Based upon the Applicable Charter Provision as described above and solely
for the purpose of allocating the Merger Consideration among the Company Shares,
the Company Board will value the Merger Consideration based upon the closing
price of the CUC Common Stock as reported on the New York Stock Exchange
Composite Transactions ("NYSE") as of the closing of business on the Closing
Date, and has adopted other methodologies (collectively, the "Adopted
Methodology") to allocate the value of the Merger Consideration to be received
in the Merger among the holders of Company Shares. For the purpose of providing
holders of Company Shares with an indication of the approximate number of shares
of CUC Common Stock into which their Company Shares could be converted in the
Merger, set forth in the Proxy Statement/Prospectus are tables that illustrate,
first, the exchange ratios for each share of Company Preferred Stock and Company
Common Stock and, second, the corresponding dollar values of the consideration
to be received by each holder of Company Preferred Stock and Company Common
Stock assuming a range of closing sales prices for CUC Common Stock on the
Closing Date. The tables set forth the results based on closing sales prices
per share of CUC Common Stock on the Closing Date ranging from $15 to $30 per
share.
The examples of the application of the Adopted Methodology do not purport
to represent all possible variables and outcomes; rather, they are intended to
provide an example of how the Adopted Methodology would be applied to allocate
the Merger Consideration among the holders of Company Shares under certain
particular circumstances.
E-2
<PAGE>
B. CONSENT AND WAIVER.
-------------------
In consideration for the portion of the Merger Consideration to be
allocated to the Stockholder by virtue of his ownership of Company, as
determined by the application of the Adopted Methodology by the Company Board,
and for other good and valuable consideration:
1. Representations and Warranties. The Stockholder represents and
warrants that:
(a) The Stockholder has received the Proxy Statement/Information Statement,
which includes a copy of the Merger Agreement and all exhibits thereto
(collectively, the "Disclosure Document"), and has carefully reviewed them, and
the Stockholder has had the opportunity to review it with counsel of the
Stockholder's choosing. The Stockholder has had adequate opportunity to make
whatever investigation or inquiry the Stockholder deems necessary or desirable
in connection with the subject matter of this Consent and Waiver prior to the
execution hereof. No information in addition to that contained in the
Disclosure Document has been given to the Stockholder by the Company or anyone
acting on its behalf in connection with the Disclosure Document.
(b) The Stockholder is the record owner of the type and number of Company
Shares referred to on the signature page below.
2. Consent to Methodology. The Stockholder hereby acknowledges that the
application by the Company Board of the Adopted Methodology, as reflected in the
examples set forth in the Proxy Statement/Information Statement, will result in
a proper allocation of the Merger Consideration to be received in the Merger
among the holders of Company Shares and hereby consents to the application of
the Adopted Methodology for such purpose.
3. Waiver and Release.
(a) The Stockholder, for himself and his successors and assigns, hereby
waives, settles, releases and absolutely discharges CUC, Merger Sub, the Company
and their respective subsidiaries, affiliates, successors, assigns,
stockholders, officers, directors, agents, employees, accountants, attorneys and
representatives (collectively, the "Released Parties"), from all claims,
damages, liabilities, costs, expenses, obligations and causes of action, in each
case of every kind and nature whatsoever, whether known or unknown, suspected or
unsuspected, arising out of or relating to the application of the Adopted
Methodology to determine the proper allocation of the Merger Consideration to be
received in the Merger among the holders of Company Shares (the "Released
Matters"), including, without limitation, any claim that the Stockholder is
entitled to receive a number of shares of CUC Common Stock that is different
from the number of shares of CUC Common Stock to which such Stockholder is
entitled by application of the Adopted Methodology.
(b) The Stockholder waives and relinquishes any right or benefit which the
Stockholder has or may have under Section 1542 of the Civil Code of the State of
California (the "California Civil Code") or any similar provision of the
statutory or non-statutory law of any other jurisdiction to the full extent that
the Stockholder may lawfully waive such rights and benefits pertaining to the
subject matter of this Consent and Waiver. Section 1542 of the California Civil
Code reads:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR."
In connection with the foregoing waiver and relinquishment, the Stockholder
acknowledges that the Stockholder is aware that he or his attorneys or others
may hereafter discover claims or facts in addition to or different from those
which the Stockholder now knows or believes to exist with respect to the subject
matter of
E-3
<PAGE>
this Consent and Waiver, but that it is nevertheless the Stockholder's intention
to fully, finally and forever settle, release, waive and discharge all of the
Released Matters. The release given herein shall remain in effect as a full and
complete general release, notwithstanding the discovery or existence of any such
additional or different claims or facts.
4. Covenant Not to Sue. The Stockholder hereby agrees that the
Stockholder will not commence, maintain or join any action (at law or otherwise)
involving any of the Released Parties in which any of the Released Matters is
asserted. In addition, the Stockholder further agrees that the Stockholder will
opt-out of any class of which the Stockholder is a member which has been
certified in any class action which is prohibited under the immediately
preceding sentence.
5. No Admission of Liability. Nothing contained herein shall be construed
as an admission by any person of any liability of any kind to any person.
6. Miscellaneous.
(a) Governing Law. This Consent and Waiver in all respects shall be
interpreted, enforced and governed by and under the internal laws, and not the
laws pertaining to the choice or conflicts of laws, of the State of Delaware.
(b) Construction; Interpretation. The headings contained in this Consent
and Waiver are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Consent and Waiver. Article, section,
schedule, exhibit, recital and party references are to this Consent and Waiver
unless otherwise stated. No party, nor its counsel, shall be deemed the drafter
of this Consent and Waiver for purposes of construing the provisions of this
Consent and Waiver, and all provisions of this Consent and Waiver shall be
construed in accordance with their fair meaning, and not strictly for or against
any party hereto.
(c) Severability. If any provision or portion of this Consent and Waiver
is held for any reason to be unenforceable or illegal in any jurisdiction, that
provision or portion shall be severed from this Consent and Waiver in such
jurisdiction and the remainder of this Consent and Waiver shall be valid and
enforceable just as if the provision or portion held to be illegal or
unenforceable has never been included.
(d) Successors and Third Party Beneficiaries. This Consent and Waiver
shall inure to the benefit of each of the Released Parties and its successors
and assigns, each of which is a third party beneficiary of this Consent and
Waiver. This Consent and Waiver shall be binding upon the successors and
assigns of the Stockholder, whether by will, bequest, the laws of descent and
distribution, merger, reverse merger, consolidation, sale of assets or, without
limitation, otherwise.
E-4
<PAGE>
The Stockholder has executed this Consent and Waiver, either in an
individual capacity or pursuant to due authorization on behalf of the
Stockholder.
Dated: ________________, 199__ ____________________________________
Print Name
____________________________________
Signature
____________________________________
Title or Representative Capacity
(if applicable)
____________________________________
Signature of Spouse
(if applicable)
Company Shares of the Stockholder:
------------------------------------------
Number of Series A Preferred Shares: _____
Number of Series B Preferred Shares: _____
Number of Series C Preferred Shares: _____
Number of Series D Preferred Shares: _____
Number of Series E Preferred Shares: _____
Number of Series F Preferred Shares: _____
Number of Common Shares: _____
E-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware empowers
a Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided that such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. A Delaware corporation is permitted to indemnify directors, officers,
employees and other agents of such corporation in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the person to be indemnified has been
adjudged to be liable to the corporation. Where a director, officer, employee
or agent of the corporation is successful on the merits or otherwise in the
defense of any action, suit or proceeding referred to above or in defense of any
claim, issue or matter therein, the corporation must indemnify such person
against the expenses (including attorneys' fees) which he or she actually and
reasonably incurred in connection therewith.
CUC International's By-Laws contain provisions that indemnify officers and
directors and their heirs and distributees to the fullest extent permitted by,
and in the manner permissible under, the General Corporation Law of the State of
Delaware.
As permitted by Section 102(b)(7) of the General Corporation Law of the State
of Delaware, CUC International's Restated Certificate of Incorporation, as
amended, contains a provision eliminating the personal liability of a director
to CUC International or its stockholders for monetary damages for breach of
fiduciary duty as a director, subject to certain exceptions.
CUC International maintains policies insuring its officers and directors
against certain civil liabilities, including liabilities under the Securities
Act.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- --------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of October 11, 1996, among
CUC International Inc., KA Acquisition Corp. and Knowledge
Adventure, Inc.**
2.2 Amendment No. 1 to Agreement and Plan of Merger dated as of
December 20, 1996, among CUC International Inc., KA Acquisition
Corp. and Knowledge Adventure, Inc.**
2.3 Form of Escrow Agreement among CUC International Inc., Knowledge
Adventure, Inc., the Escrow Agent and the Escrow Committee.**
4 Form of Certificate evidencing shares of CUC International Common
Stock (Filed as Exhibit 4.1 to CUC International's Registration
Statement (No. 33-44453), on Form S-4 dated December 19, 1991).*
5 Opinion of Robert T. Tucker, Esq. as to the legality of CUC
International's Common Stock.**
8 Tax Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
15 Letter of Ernst & Young LLP re: Unaudited Interim Financial
Information of CUC International Inc.
23.1 Consent of Robert T. Tucker, Esq. (included in Exhibit 5).**
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of Price Waterhouse LLP (relating to the Knowledge
Adventure, Inc. financial statements).
23.5 Consent of Price Waterhouse LLP (relating to the Ideon Group, Inc.
financial statements).
23.6 Consent of KPMG Peat Marwick LLP (relating to the Davidson &
Associates, Inc. financial statements).
23.7 Consent of Deloitte & Touche LLP (relating to the Sierra On-Line,
Inc. financial statements).
23.8 Consent of Deloitte & Touche LLP (relating to the Advance Ross
Corporation financial statements).
23.9 Consent of Piper Jaffray Inc.
24 Power of Attorney (included as part of the signature page of this
Registration Statement).
27 Financial Data Schedule of CUC International Inc.
99.1 Proxy Card (included in this Registration Statement).
</TABLE>
- ---------------------
* Incorporated herein by reference.
** Previously filed.
II-2
<PAGE>
(b) Financial Statement Schedules.
The following Financial Statement Schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts of Knowledge Adventure,
Inc.
(c) See Exhibits 5 and 8 in Item 21(a) above and the Opinion of Piper Jaffray
Inc. included in the Proxy Statement/Prospectus which is part of this
Registration Statement.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934, as amended) that is incorporated by
reference in this registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(b)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned registrant hereby undertakes that every prospectus (i)
that is filed pursuant to paragraph (b)(1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933, as amended, and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, as
amended, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut, on January 2, 1997.
CUC INTERNATIONAL INC.
By: /s/ WALTER A. FORBES
-----------------------------------
Walter A. Forbes
Chief Executive Officer and Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WALTER A. FORBES Chief Executive Officer and January 2, 1997
- ----------------------------- Chairman of the Board
Walter A. Forbes (Principal Executive Officer)
* Senior Vice President and January 2, 1997
- ----------------------------- Chief Financial Officer
Cosmo Corigliano (Principal Financial and
Accounting Officer)
* Director January 2, 1997
- -----------------------------
Bartlett Burnap
* Director January 2, 1997
- -----------------------------
Janice G. Davidson
* Director January 2, 1997
- -----------------------------
Robert M. Davidson
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
* Director January 2, 1997
- -----------------------------
T. Barnes Donnelley
* Director January 2, 1997
- -----------------------------
Stephen A. Greyser
* Director January 2, 1997
- -----------------------------
Christopher K. McLeod
* Director January 2, 1997
- -----------------------------
Burton C. Perfit
* Director January 2, 1997
- -----------------------------
Robert P. Rittereiser
* Director January 2, 1997
- -----------------------------
Stanley M. Rumbough, Jr.
* Director January 2, 1997
- -----------------------------
E. Kirk Shelton
* Director January 2, 1997
- -----------------------------
Kenneth A. Williams
* By /s/ WALTER A. FORBES January 2, 1997
------------------------
Walter A. Forbes
Attorney-in Fact
</TABLE>
II-6
<PAGE>
KNOWLEDGE ADVENTURE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning costs and end
of period expenses Deductions of period
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DESCRIPTION
Year ended March 31, 1996
Allowance for doubtful accounts $ 28,000 259,000 9,000 $ 278,000
========== ========== ========== ==========
Year ended March 31, 1995
Allowance for doubtful accounts $ 345,000 360,000 677,000 $ 28,000
========== ========== ========== ==========
Year ended March 31, 1996
Returns Reserve $ 813,268 $4,693,264 $4,481,108 $1,025,424
========== ========== ========== ==========
Year ended March 31, 1995
Returns Reserve $1,215,317 $7,255,540 $5,379,911 $ 813,268
========== ========== ========== ==========
Three Months Ended March 31, 1994
Returns Reserve $1,676,351 $ 368,403 $ 829,437 $1,215,317
========== ========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 8
FORM OF OPINION OF GUNDERSON DETTMER STOUGH VILLENEUVE
FRANKLIN & HACHIGIAN, LLP
January __, 1997
Knowledge Adventure, Inc.
1311 Grand Central Avenue
Glendale, CA 91201
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 5.2(d)(i)
of the Agreement and Plan of Reorganization (the "Agreement") among CUC
International, Inc., a Delaware corporation ("CUC"), its wholly owned
subsidiary, KA Acquisition Corp., a Delaware corporation ("Sub") and Knowledge
Adventure, Inc., a Delaware corporation ("Knowledge Adventure"), dated as of
October 11, 1996, as amended by Amendment No. 1 to Agreement and Plan of Merger
dated December 20, 1996 (the "Agreement"). Pursuant to the Agreement and the
related Certificate of Merger (collectively, the "Merger Agreements"), Sub will
merge with and into Knowledge Adventure (the "Merger"), and Knowledge Adventure
will become a wholly owned subsidiary of CUC.
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Merger Agreements. All section references,
unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended
(the "Code").
We have acted as legal counsel to Knowledge Adventure in connection
with the Merger. As such, and for the purpose of rendering this opinion, we
have examined (or will examine on or prior to the Effective Time) and are
relying (or will rely) upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all schedules and exhibits thereto):
1. The Merger Agreements (including Exhibits);
2. Representations made to us by CUC and Sub in a letter reproduced
as Exhibit A hereto;
3. Representations made to us by Knowledge Adventure in a letter
reproduced as Exhibit B hereto;
4. Representations made to us by certain shareholders of Knowledge
Adventure in the Affiliates and Continuity of Interest Certificates;
<PAGE>
Knowledge Adventure, Inc.
January __, 1997
Page 2
5. The Registration Statement on Form S-4 (No. 333-18717) filed by
CUC with the Securities and Exchange Commission (the "Commission") on December
24, 1996 and amended by Amendment No. 1 thereto filed with the Commission on
January __, 1997 (the "Registration Statement"); and
6. Such other instruments and documents related to the formation,
organization and operation of CUC, Knowledge Adventure and Sub or to the
consummation of the Merger and the transactions contemplated thereby as we have
deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
A. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Time) due execution and delivery of all
documents where due execution and delivery are prerequisites to effectiveness
thereof;
B. Any representation or statement made "to the best knowledge of" or
otherwise similarly qualified is correct without such qualification. As to all
matters in which a person or entity making a representation has represented that
such person or entity either is not a party to, does not have, or is not aware
of any plan, intention, understanding or agreement to take an action, there is
in fact no plan, intention, understanding or agreement and such action will not
be taken;
C. The Merger will be consummated pursuant to the Merger Agreements
and will be effective under the laws of the state of Delaware;
D. The shareholders of Knowledge Adventure do not, and will not on or
before the Effective Time, have an existing plan or intent to dispose of an
amount of CUC Common Stock to be received in the Merger (or to dispose of
Knowledge Adventure capital stock in anticipation of the Merger) such that the
shareholders of Knowledge Adventure will not receive and retain a meaningful
continuing equity ownership in CUC that is sufficient to satisfy the continuity
of interest requirement as specified in Treas. Reg. (S)1.368-1(b) and as
interpreted in certain Internal Revenue Service rulings and federal judicial
decisions;
<PAGE>
Knowledge Adventure, Inc.
January __, 1997
Page 3
E. After the Merger, Knowledge Adventure will hold "substantially
all" of its and Sub's properties within the meaning of Section 368(a)(2)(E)(i)
of the Code and the regulations promulgated thereunder and will continue its
historic business or use a significant portion of its historic business assets
in a business;
F. To the extent any expenses relating to the Merger (or the "plan of
reorganization" within the meaning of Treas. Reg. (S)1.368-1(c) with respect to
the Merger) are funded directly or indirectly by a party other than the
incurring party, such expenses will be within the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187; any such expenses paid on behalf of
Knowledge Adventure shareholders will not exceed one percent (1%) of the total
consideration that will be issued in the Merger to Knowledge Adventure
shareholders in exchange for their shares of Knowledge Adventure capital stock;
and
G. No Knowledge Adventure shareholder guaranteed any Knowledge
Adventure indebtedness outstanding during the period immediately prior to the
Merger, and at all relevant times, including as of the Effective Time, (i) no
outstanding indebtedness of Knowledge Adventure, CUC or Sub has or will
represent equity for tax purposes; (ii) no outstanding equity of Knowledge
Adventure, CUC or Sub has or will represent indebtedness for tax purposes; and
(iii) no outstanding security, instrument, agreement or arrangement that
provides for, contains, or represents either a right to acquire Knowledge
Adventure capital stock or to share in the appreciation thereof constitutes or
will constitute "stock" for purposes of Section 368(c) of the Code.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, for federal income tax purposes, the Merger will be a
"reorganization" as defined in Section 368(a) of the Code.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below.
1. This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive
<PAGE>
Knowledge Adventure, Inc.
January __, 1997
Page 4
basis, would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax
laws.
2. This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger). In particular, we express no opinion regarding,
(i) whether and the extent to which any Knowledge Adventure shareholder who has
provided or will provide services to Knowledge Adventure, CUC or Sub will have
compensation income under any provision of the Code; (ii) the effects of such
compensation income, including but not limited to the effect upon the basis and
holding period of the CUC Common Stock received by any such shareholder in the
Merger; (iii) the potential application of the "golden parachute" provisions
(Sections 280G, 3121(v)(2) and 4999) of the Code, the alternative minimum tax
provisions (Sections 55, 56 and 57) of the Code or Sections 305, 306, 357, 424,
and 708, or the regulations promulgated thereunder; (iv) the corporate level tax
consequences of the Merger to CUC, Sub or Knowledge Adventure, including without
limitation the recognition of any income or gain and the survival and/or
availability, after the Merger, of any of the federal income tax attributes or
elections of Knowledge Adventure, after application of any provision of the
Code, as well as the regulations promulgated thereunder and judicial
interpretations thereof; (v) the basis of any equity interest in Knowledge
Adventure acquired by CUC in the Merger; (vi) the tax consequences of any
transaction in which Knowledge Adventure capital stock or a right to acquire
Knowledge Adventure capital stock was received; (vii) the tax consequences to
any Knowledge Adventure shareholder or to Knowledge Adventure, CUC or Sub of a
forfeiture to CUC of all or any part of the Escrow Parent Company stock; and
(viii) the tax consequences of the Merger (including the opinion set forth
above) or any actions taken in connection therewith (including, without
limitation, the conversion of Knowledge Adventure Preferred Stock into Knowledge
Adventure Common Stock) as applied to shareholders of Knowledge Adventure and/or
holders of options or warrants for Knowledge Adventure capital stock or that may
be relevant to particular classes of Knowledge Adventure shareholders and/or
holders of options or warrants for Knowledge Adventure capital stock such as
dealers in securities, corporate shareholders subject to the alternative minimum
tax, foreign persons, and holders of shares acquired upon exercise of stock
options or in other compensatory transactions.
3. No opinion is expressed as to any transaction other than the
Merger as described in the Merger Agreements or to any transaction whatsoever,
including the Merger, if all
<PAGE>
Knowledge Adventure, Inc.
January __, 1997
Page 5
the transactions described in the Merger Agreements are not consummated in
accordance with the terms of such Merger Agreements and without waiver or breach
of any material provision thereof or if all of the representations, warranties,
statements and assumptions upon which we relied are not true and accurate at all
relevant times. In the event any one of the statements, representations,
warranties or assumptions upon which we have relied to issue this opinion is
incorrect, our opinion might be adversely affected and may not be relied upon.
4. This opinion has been delivered to you for the purpose of
satisfying the condition set forth in Section 5.2(d)(i) of the Agreement and is
intended solely for your benefit; it may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement and to
the reference to our name under the captions "Legal Matters" and "Certain
Federal Income Tax Consequences." This consent is not to be construed as an
admission that we are a person whose consent is required to be filed with the
Registration Statement under the provisions of the Securities Act of 1933.
Very truly yours,
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
<PAGE>
Exhibit A
CUC International Inc.
707 Summer Street
Stamford, CT 06901
[Insert Date of Closing], 1997
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Re: Merger pursuant to the Agreement and Plan of Merger (the
"Agreement"), dated October 11, 1996, as amended by Amendment No.
1 dated December 20, 1996, among KA Acquisition Corp., a Delaware
corporation ("Sub"), CUC International Inc., a Delaware
corporation ("Parent"), and Knowledge Adventure, Inc., a Delaware
corporation ("Target")
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions pursuant to Section 5.2(d)(i) of the Agreement regarding certain
federal income tax consequences of the Merger. Unless otherwise indicated,
capitalized terms not defined herein have the meanings set forth in the
Agreement.
A. Representations. After due inquiry and investigation regarding the
---------------
meaning of and factual support for the following representations, the
undersigned hereby certify and represent that, assuming the Merger were to occur
on the date hereof and without waiver of the conditions set forth in Section
5.3(f) of the Agreement, the following facts are now true and will continue to
be true as of the Effective Time (as defined in Section 1.2 of the Agreement):
1. Pursuant to the Merger, Sub will merge with and into Target, and
Target will acquire all of the assets and liabilities of Sub. Either (i) at
least ninety percent (90%) of the fair market value of the net assets and at
least seventy percent (70%) of the fair market value of the gross assets held by
Target immediately prior to the Merger will continue to be held by Target
immediately after the Merger or (ii) except for assets used by Target to pay
shareholders with respect to Dissenting Shares or to pay other expenses or
liabilities incurred in connection with the Merger, all assets held by Target
immediately prior to the Merger will continue to be held by Target immediately
after the Merger. At least ninety percent (90%) of the fair market value of the
net assets and at least seventy percent (70%) of the fair market value of the
gross assets held by Sub immediately prior to the Merger will be held by Target
immediately after the Merger. For the purpose of determining the percentage of
Target's and Sub's net and gross assets held by Target immediately following the
Merger, the following assets will be treated as property held by Target
<PAGE>
or Sub, as the case may be, immediately prior but not subsequent to the Merger:
(i) assets used by Target or Sub to pay shareholders with respect to Dissenting
Shares or to pay other expenses or liabilities incurred in connection with the
Merger, and (ii) assets used to make distribution, redemption or other payments
in respect of Target capital stock (except for regular, normal distributions) or
rights to acquire such stock (including payments treated as such for tax
purposes) that are made in contemplation of the Merger or related thereto.;
2. Parent is participating in the Merger for good and valid business
reasons and not for tax purposes;
3. Prior to the Merger, Parent will be in "Control" of Sub. As used
herein, "Control" of a corporation shall consist of direct ownership of stock
possessing at least eighty percent (80%) of the total combined voting power of
all classes of stock entitled to vote and at least eighty percent (80%) of the
total number of shares of all other classes of stock of the corporation. For
purposes of determining Control, a person shall not be considered to own voting
stock if rights to vote such stock (or to restrict or otherwise control the
voting of such stock) are held by a third party (including a voting trust) other
than an agent of such person;
4. Parent has no plan or intention to cause Target to issue
additional shares of stock after the Merger that would result in Parent losing
Control of Target;
5. Other than with respect to (i) the possible acquisition of shares
held by Target employees pursuant to a surrender of such shares to Parent as
part or full payment for the exercise price of options granted under the Company
Plans, and (ii) the possible reacquisition of Escrowed Parent Common Stock
pursuant to the provisions of the Escrow Agreement attached as Exhibit D to the
Agreement, Parent has no plan or intention to reacquire any of the Parent Common
stock issued pursuant to the Merger;
6. Except for transfers described in both Section 368(a)(2)(C) of the
Code and Treasury Regulation Section 1.368-2(j)(4) ("Permissible Transfers"),
Parent has no plan or intention to take any of the following actions: (i)
liquidate Target; (ii) except for the Merger, merge Target with or into another
corporation including Parent or its affiliates; (iii) sell, distribute or
otherwise dispose of the capital stock of Target; or (iv) cause Target to sell
or otherwise dispose of any of its assets or of any of the assets acquired from
Sub except for dispositions made in the ordinary course of business or payment
of expenses incurred by Target pursuant to the Merger (including payments with
respect to Dissenting Shares and fractional shares, if any);
7. In the Merger, Sub will have no liabilities assumed by Target and
will not transfer to Target any assets subject to liabilities, except to the
extent incurred in connection with the transactions contemplated by the
Agreement. Sub is a newly formed corporation that was created for the sole
purpose of facilitating the Merger, and it has conducted no business activities
and has not disposed of any assets prior to the Effective Time, other than
pursuant to its obligations under the Agreement;
8. Following the Merger, Target will either continue its historic
business or use a significant portion of Target's historic business assets in a
business; provided, however, that to the extent that the business or assets are
subject to a Permissible Transfer, Parent will cause the
2
<PAGE>
transferee to continue the historic business of Target or use a significant
portion of Target's assets in a business;
9. Neither Parent nor any current or former subsidiary of Parent
owns, or has owned during the past five (5) years, directly or indirectly, any
shares of Target capital stock, or the right to acquire or vote any such shares;
10. Neither Parent nor Sub is an investment company within the meaning
of Section 368(a)(2)(F)(iii) and (iv) of the Code;
11. No shareholder of Target is acting as agent for Parent in
connection with the Merger or approval thereof, and Parent will not reimburse
any Target shareholder for Target capital stock such shareholder may have
purchased or for other obligations such shareholder may have incurred;
12. Neither Parent nor Sub is under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code;
13. Parent and Sub are not participating in any plan or arrangement (a
"Plan") that would result in Target's shareholders engaging in a sale, exchange,
transfer, distribution (including, without limitation, a distribution by a
partnership to its partners or by a corporation to its stockholders), pledge,
disposition or any other transaction which results in a reduction in the risk of
ownership or a direct or indirect disposition (a "Sale") of shares of Parent
Common Stock to be issued to such shareholders in the Merger, that would reduce
ownership by shareholders of Target of Parent Common Stock issued to such
shareholders to a number having an aggregate fair market value, as of the
Effective Time, of less than fifty percent (50%) of the aggregate fair market
value, immediately prior to the Merger, of all outstanding shares of Target
capital stock. For purposes of this paragraph, shares of Target capital stock
(or the portion thereof) (i) with respect to which a Target shareholder receives
consideration in the Merger other than Parent Common Stock (including, without
limitation, cash received with respect to Dissenting Shares or in lieu of
fractional shares of Parent Common Stock), and/or (ii) with respect to which a
Sale occurs prior to and in contemplation of the Merger (other than the
conversion of Target Preferred Stock into Target Common Stock) shall be
considered shares of outstanding Target capital stock exchanged for Parent
Common Stock in the Merger and then disposed of pursuant to a Plan. Parent's and
Sub's compliance with Sections 4.2, 4.3, 4.18 and 4.21 of the Agreement shall in
no event constitute participation in a Plan for purposes of the foregoing;
14. The payment of cash in lieu of fractional shares of Parent Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Parent of issuing fractional shares and does not represent separately bargained-
for consideration. The total cash consideration that will be paid in the Merger
to Target shareholders in lieu of fractional shares of Parent Common Stock will
not exceed one percent (1%) of the total consideration that will be issued in
the Merger to Target shareholders in exchange for their shares of Target capital
stock;
15. Except with respect to (i) payments of cash to Target shareholders
in lieu of fractional shares of Parent Common Stock, (ii) payments of cash to
Target shareholders with respect to Dissenting Shares, and (iii) shares of
Target stock cancelled pursuant to Section 1.8(c)
3
<PAGE>
and Section 1.8(d) of the Agreement, one hundred percent (100%) of the Target
capital stock outstanding immediately prior to the Merger will be exchanged
solely for Parent Common Stock;
16. The number of Target Dissenting Shares as of the Effective Time
shall not exceed 9% of the then issued and outstanding Target shares of capital
stock then outstanding (with each share of target Preferred Stock being
converted into the number of shares of Target Common Stock into which such share
of Target Preferred Stock may be converted);
17. At the Effective Time, the fair market value of the Parent Common
Stock received by each Target shareholder will be approximately equal to the
fair market value of the Target capital stock surrendered in exchange therefor,
and the aggregate consideration received by Target shareholders in exchange for
their Target capital stock will be approximately equal to the fair market value
of all of the outstanding shares of Target capital stock immediately prior to
the Merger;
18. No shares of Sub have been or will be used as consideration or
issued to shareholders of Target pursuant to the Merger;
19. The Escrow Agreement is being established for good and valid
business reasons;
20. The Escrowed Parent Common Stock will appear as issued and
outstanding on the balance sheet of Parent;
21. Sub, Parent, Target and the shareholders of Target will each pay
separately its or their own expenses in connection with the Merger as
contemplated by the Agreement, other than Target expenses solely and directly
related to the Merger in accordance with Rev. Rul. 73-54, 1973-1 C.B. 187;
22. There is no intercorporate indebtedness existing between Parent
and Target or between Sub and Target that was issued at a discount (other than
any indebtedness issued pursuant to the Loan Agreement), acquired at a discount
(other than any indebtedness acquired pursuant to the Loan Agreement) or that
will be settled at a discount as a result of the Merger;
23. The terms of the Agreement and all other agreements entered into
in connection therewith are the product of arm's-length negotiations;
24. None of the compensation received by any shareholder-employees of
Target will be separate consideration for, or allocable to, any of their shares
of Target capital stock; none of the shares of Parent Common Stock received by
any shareholder-employees of Target will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and the
compensation paid to any shareholder-employees of Target will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services;
25. Any amounts paid to Target shareholders that have perfected
dissenters' rights shall be paid by Target, solely from Target's assets, and
without reimbursement therefor by Parent or Sub;
4
<PAGE>
26. No "poison pill" or similar rights will be associated with the
Parent Common Stock on or prior to the date of the Merger; and
27. Parent and Sub are authorized to make all of the representations
set forth herein.
B. Reliance by You in Rendering Opinions; Limitations on Your Opinions.
--------------------------------------------------------------------
1. The undersigned recognizes that (i) your opinions will be based
on, among other things, certain assumptions and the representations and
statements set forth herein, in the Agreement (including Exhibits and Schedules
attached thereto) and in the documents related thereto, and the opinions may not
be relied upon if any such assumptions, representations, or statements are not
accurate in all material respects, and (ii) your opinions will be subject to
certain stated limitations and qualifications.
2. Notwithstanding anything herein to the contrary, the undersigned
makes no representations regarding any actions or conduct of Target prior to the
Effective Time.
3. The undersigned recognize that your opinions will not address any
tax consequences of the Merger or any action taken in connection therewith
except as expressly set forth in such opinions.
Very truly yours,
CUC INTERNATIONAL INC.,
a Delaware corporation
By:
-----------------------------
Title:
--------------------------
KA ACQUISITION CORP.,
a Delaware corporation
By:
-----------------------------
Title:
--------------------------
5
<PAGE>
Exhibit B
Knowledge Adventure, Inc.
1311 Grand Central Avenue
Glendale, CA 91201
[Insert Date of Closing], 1997
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Re: Merger pursuant to the Agreement and Plan of Merger (the
"Agreement"), dated October 11, 1996, as amended by Amendment No.
1 dated December 20, 1996, among CUC International Inc., a
Delaware corporation ("Parent"), KA Acquisition Corp., a Delaware
corporation ("Sub"), and Knowledge Adventure, Inc., a Delaware
corporation ("Target")
-----------------------------------------------------------------
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of
opinions pursuant to Section 5.2(d)(i) of the Agreement regarding certain
federal income tax consequences of the Merger. Unless otherwise indicated,
capitalized terms not defined herein have the meanings set forth in the
Agreement:
A. Representations. After consulting with its counsel and auditors
---------------
regarding the meaning of and factual support for the following representations,
the undersigned hereby certifies and represents that the following facts are now
true and will continue to be true as of the Effective Time (as defined in
Section 1.2 of the Agreement).
1. Pursuant to the Merger, Sub will merge with and into Target, and
Target will acquire all of the assets and liabilities of Sub. At least ninety
percent (90%) of the fair market value of the net assets and at least seventy
percent (70%) of the fair market value of the gross assets held by Target
immediately prior to the Merger will continue to be held by Target immediately
after the Merger. For the purpose of determining the percentage of Target's net
and gross assets held by it immediately following the Merger, the following
assets will be treated as property held by Target immediately prior but not
subsequent to the Merger: (i) assets disposed of by Target prior to or
subsequent to the Merger and in contemplation thereof (including without
limitation any asset disposed of by Target, other than in the ordinary course of
business, pursuant to a plan or intent existing during the period ending on the
Effective Time and beginning with the
<PAGE>
commencement of negotiations (whether formal or informal) with Parent regarding
the Merger (the "Pre-Merger Period")), (ii) assets used by Target to pay
shareholders with respect to Dissenting Shares or other expenses or liabilities
incurred in connection with the Merger, and (iii) assets used to make
distribution, redemption or other payments in respect of Target capital stock or
rights to acquire such stock (including payments treated as such for tax
purposes) that are made in contemplation of the Merger or related thereto;
2. Target has made no transfer of any of its assets (including any
distribution of assets with respect to, or in redemption of, stock) in
contemplation of the Merger or during the Pre-Merger Period other than (i) in
the ordinary course of business, (ii) cash paid to Target shareholders
perfecting dissenters' rights, and (iii) payments for expenses incurred in
connection with the Mergers;
3. Target is participating in the Merger for good and valid business
reasons and not for tax purposes;
4. At the Effective Time, Target will have no outstanding equity
interests other than shares of Target Common Stock, shares of Target Series A
Preferred Stock, shares of Target Series B Preferred Stock, shares of Target
Series C Preferred Stock, shares of Target Series D Preferred Stock, shares of
Target Series E Preferred Stock, shares of Target Series F Preferred Stock and
rights to acquire shares of Target Common Stock. At the time of the Merger,
except as specified in, or disclosed in a schedule or exhibit to the Agreement,
Target will have no outstanding warrants, options, or convertible securities nor
any other type of right outstanding pursuant to which any person could acquire
shares of Target capital stock or any other equity interest in Target;
5. In the Merger, shares of Target capital stock representing
"Control" of Target will be exchanged solely for voting stock of Parent; at the
time of the Merger, there will exist no rights to acquire Target capital stock
or to vote (or restrict or otherwise control the vote of) Target capital stock
which, if exercised, could affect Parent's acquisition and retention of Control
of Target. For purposes of this paragraph, shares of Target capital stock
exchanged in the Merger for cash and other property (including, without
limitation, cash paid to Target shareholders with respect to Dissenting Shares
or in lieu of fractional shares of Parent Common Stock) will be treated as
Target capital stock outstanding on the date of the Merger but not exchanged for
voting stock of Parent. As used herein, "Control" of a corporation shall
consist of ownership of stock possessing at least eighty percent (80%) of the
total combined voting power of all classes of stock entitled to vote and at
least eighty percent (80%) of the total number of shares of all other classes of
stock of the corporation. For purposes of determining Control, a person shall
not be considered to own voting stock if rights to vote such stock (or to
restrict or otherwise control the voting of such stock) are held by a third
party (including a voting trust) other than an agent of such person;
6. Target has not declared any dividends on shares of Target
Preferred Stock;
7. The total fair market value of all consideration other than Parent
Common Stock received by Target shareholders in the Merger (including, without
limitation, cash paid to
2
<PAGE>
Target shareholders with respect to Dissenting Shares or in lieu of fractional
shares of Parent Common Stock) will be less than ten percent (10%) of the
aggregate fair market value of Target capital stock outstanding immediately
prior to the Merger;
8. Target has no obligation, understanding, agreement or intention to
issue additional shares of stock after the Merger that would result in Parent
losing Control of Target;
9. Target has no plan or intention to sell or otherwise dispose of
any of its assets or of any of the assets acquired from Sub in the Merger,
except for dispositions made in the ordinary course of business or the payment
of expenses incurred by Target pursuant to the Merger (including payments made
with respect to Dissenting Shares and fractional shares, if any);
10. Target will continue to operate its historic business through the
Effective Time, and it anticipates that Parent will cause Target to continue
Target's historic business or use a significant portion of Target's historic
business assets in a business following the Merger;
11. The liabilities of Target have been incurred by Target in the
ordinary course of its business;
12. The fair market value of Target's assets will, on the Effective
Time, exceed the aggregate liabilities of Target plus the amount of liabilities,
if any, to which such assets are subject;
13. Other than shares of Target capital stock or options to acquire
Target capital stock issued as compensation to present or former service
providers (including, without limitation, employees and directors) of Target in
the ordinary course of business, no issuances of Target capital stock or rights
to acquire Target capital stock have occurred or will occur during the Pre-
Merger Period other than pursuant to options, warrants or agreements outstanding
prior to the Pre-Merger Period;
14. Cash or other property paid to employees of Target during the
Pre-Merger Period has been or will be in the ordinary course of business or
pursuant to agreements entered into prior to the Pre-Merger Period;
15. Target is not and will not be, on the Effective Time, an
investment company" within the meaning of Section 368(a)(2)(F)(iii) and (iv) of
the Code;
16. Target is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368 (a)(3)(A) of the Code;
17. After due inquiry with officers and directors, Target has no
knowledge of, and believes that there does not exist, any plan or intention on
the part of Target's shareholders (a "Plan") to engage in a sale, exchange,
transfer, distribution (including, without limitation, a distribution by a
partnership to its partners or by a corporation to its stockholders), pledge,
disposition or any other transaction which results in a reduction in the risk of
ownership or a direct or indirect disposition (a "Sale") of (i) shares of Parent
Common Stock to be issued to such shareholders in the Merger, which shares would
have an aggregate fair market value, as of the
3
<PAGE>
Effective Time, in excess of fifty percent (50%) of the aggregate fair market
value, immediately prior to the Merger, of all outstanding shares of Target
capital stock (excluding all shares of Target capital stock acquired in
anticipation of the Merger), or (ii) more than fifty percent (50%) of the shares
of Parent Common Stock to be received in exchange for Target capital stock
(excluding all shares of Target capital stock acquired in anticipation of the
Merger) in the Merger. For purposes of this paragraph, shares of Target capital
stock (or the portion thereof) (i) with respect to which a Target shareholder
receives consideration in the Merger other than Parent Common Stock (including,
without limitation, cash received with respect to Dissenting Shares or in lieu
of fractional shares of Parent Common Stock) and/or (ii) with respect to which a
Sale occurs prior to and in contemplation of the Merger (other than the
conversion of Target Preferred Stock into Target Common Stock), shall be
considered shares of outstanding Target capital stock exchanged for Parent
Common Stock in the Merger and then disposed of pursuant to a Plan;
18. The payment of cash in lieu of fractional shares of Parent is
solely for the purpose of avoiding the expense and inconvenience to Parent of
issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
Target shareholders in lieu of fractional shares of Parent Common Stock will not
exceed one percent (1%) of the total consideration that will be issued in the
Merger to Target shareholders in exchange for their shares of Target capital
stock. The fractional share interests of each Target shareholder will be
aggregated, and no Target shareholder will receive cash in an amount greater
than the value of one full share of Parent Common Stock;
19. Except with respect to (i) payments of cash to Target
shareholders in lieu of fractional shares of Parent Common Stock, (ii) payments
of cash to Target shareholders with respect to Dissenting Shares, and (iii)
shares of Target stock cancelled pursuant to Section 1.8(c) and Section 1.8(d)
of the Agreement, one hundred percent (100%) of the Target capital stock
outstanding immediately prior to the Merger will be exchanged solely for Parent
Common Stock. Thus, except as set forth in the preceding sentence, Target
intends that no consideration be paid or received (directly or indirectly,
actually or constructively) for Target capital stock other than Parent Common
Stock;
20. At the Effective Time, the fair market value of the Parent Common
Stock received by each Target shareholder will be approximately equal to the
fair market value of the Target capital stock surrendered in exchange therefor,
and the aggregate consideration received by Target shareholders in exchange for
their Target capital stock will be approximately equal to the fair market value
of all of the outstanding shares of Target capital stock immediately prior to
the Merger;
21. No shares of Sub have been or will be used as consideration or
issued to shareholders of Target pursuant to the Merger;
22. The Escrow Agreement is being established for good and valid
business reasons;
23. Sub, Parent, Target and the shareholders of Target will each pay
separately its or their own expenses in connection with the Merger as
contemplated by the Agreement, other
4
<PAGE>
than Target expenses solely and directly related to the Merger in accordance
with Rev. Rul. 73-54, 1973-1 C.B. 187;
24. There is no intercorporate indebtedness existing between Parent
and Target or between Sub and Target that was issued at a discount (other than
any indebtedness issued pursuant to the Loan Agreement), acquired at a discount
(other than any indebtedness issued pursuant to the Loan Agreement) or that will
be settled at a discount as a result of the Merger, and Parent will assume no
liabilities of Target or any Target shareholder in connection with the Merger;
25. The terms of the Agreement and all other agreements entered into
in connection therewith are the product of arm's length negotiations;
26. None of the compensation received by any shareholder-employees of
Target will be separate consideration for, or allocable to, any of their shares
of Target capital stock; none of the shares of Parent Common Stock received by
any shareholder-employees of Target will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and the
compensation paid to any shareholder-employees of Target will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services;
27. Any amounts paid to Target shareholders with respect to
Dissenting Shares shall be paid by Target, solely from Target's assets, and
without reimbursement therefor by Parent or Sub;
28. No direct or indirect subsidiary of Target owns any shares of
Target capital stock;
29. No "poison pill" or similar rights will be associated with shares
of Target capital stock on or prior to the date of the Merger;
30. With respect to each instance, if any, in which shares of Target
capital stock have been purchased by a shareholder of Parent (a "Shareholder")
during the Pre-Merger Period (a "Stock Purchase"): (i) to the best knowledge of
Target, (A) the Stock Purchase was made by such Shareholder on its own behalf
and with its own funds, rather than as a representative, or for the benefit, of
Parent, (B) the Stock Purchase was entered into solely to satisfy the separate
interests of such Shareholder and the seller, and (C) the purchase price paid by
such Shareholder pursuant to the Stock Purchase was the product of arm's length
negotiations; and (ii) the Stock Purchase was not a formal or informal condition
to consummation of the Merger; and
31. Target is authorized to make all of the representations set forth
herein.
B. Reliance by You in Rendering Opinions; Limitations on Your Opinions.
--------------------------------------------------------------------
The undersigned recognizes that (i) your opinions will be based on,
among other things, certain assumptions and the representations and statements
set forth herein, in the
5
<PAGE>
Agreement (including Exhibits and Schedules) and in the documents related
thereto, and the opinions may not be relied upon if any such assumptions,
representations, or statements are not accurate in all material respects, and
(ii) your opinions will be subject to certain stated limitations and
qualifications.
1. Notwithstanding anything herein to the contrary, the undersigned
makes no representations regarding any actions or conduct of Target pursuant to
Parent's exercise of control over Target after the Merger.
2. The undersigned recognizes that your opinions will not address any
tax consequences of the Merger or any action taken in connection therewith
except, as expressly set forth in such opinions.
Very truly yours,
KNOWLEDGE ADVENTURE, INC., a Delaware
corporation
By:
-----------------------------------
Title:
--------------------------------
6
<PAGE>
EXHIBIT 15
CUC INTERNATIONAL INC. AND SUBSIDIARIES
EXHIBIT 15--LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
December 30, 1996
Shareholders and Board of Directors
CUC International Inc.
We are aware of the incorporation by reference in Amendment No. 1 on the
Registration Statement (Form S-4) of CUC International Inc. for the registration
of 3,472,785 shares (post-split) of its common stock of our report dated
December 2, 1996 relating to the unaudited condensed consolidated interim
financial statements of CUC International Inc. that are included in its
Quarterly Report on Form 10-Q for the quarter October 31, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933, our reports are not a
part of this registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Stamford, Connecticut
<PAGE>
EXHIBIT 23.2
December 30, 1996
CUC International Inc.
707 Summer Street
Stamford, CT 06901
Ladies and Gentlemen:
We hereby consent to the filing of our form of opinion as an exhibit
to the Registration Statement on Form S-4 (No. 333-18717) filed by CUC
International Inc. with the Securities and Exchange Commission (the
"Commission") on December 24, 1996 and amended by Amendment No. 1 thereto filed
with the Commission on January 2, 1997 (the "Registration Statement") and to
the reference to our name under the captions "Legal Matters" and "Certain
Federal Income Tax Consequences." This consent is not to be construed as an
admission that we are a person whose consent is required to be filed with the
Registration Statement under the provisions of the Securities Act of 1933.
Very truly yours,
GUNDERSON DETTMER STOUGH VILLENEUVE FRANKLIN &
HACHIGIAN, LLP
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in Amendment
No. 1 on the Registration Statement (Form S-4) and related Prospectus of CUC
International Inc. for the registration of 3,472,785 shares (post-split) of its
common stock and to the incorporation by reference therein of our report dated
March 19, 1996, with respect to the consolidated financial statements and
schedule of CUC International Inc. included in its Annual Report on Form 10-K
for the year ended January 31, 1996 and our report dated September 12, 1996 with
respect to the consolidated financial statements of CUC International Inc.
included in its Current Report on Form 8-K dated July 24, 1996, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Stamford, Connecticut
December 30, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of CUC International, Inc. of our report
dated May 31, 1996 relating to the financial statements of Knowledge Adventure,
Inc., which appears in such Prospectus. We also consent to the application of
such report to the Financial Statement Schedule listed under Item 21(a) of this
Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the reference to us
under the heading "Experts".
PRICE WATERHOUSE LLP
Costa Mesa, California
December 30, 1996
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-4 of CUC International
Inc. of our reports dated February 2, 1996 and December 5, 1994, relating to the
consolidated financial statements of Ideon Group, Inc., which appears in the
Current Report on Form 8-K of CUC International Inc., filed with the Securities
and Exchange Commission on or about September 17, 1996. We also consent to the
reference to us under the heading "Experts."
PRICE WATERHOUSE LLP
Tampa, Florida
December 30, 1996
<PAGE>
EXHIBIT 23.6
ACCOUNTANTS' CONSENT
The Board of Directors
Davidson & Associates, Inc.
We consent to the incorporation herein of our report dated February 21,
1996 with respect to the consolidated balance sheets of Davidson & Associates,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995, and to the
reference to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Long Beach, California
December 30, 1996
<PAGE>
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
- ----------------------------------------------------
We consent to the incorporation by reference in this Registration Statement of
CUC International Inc. on Form S-4 of our report dated June 24, 1996 (relating
to the consolidated financial statements of Sierra On-Line, Inc. and
subsidiaries for the year ended March 31, 1996, not presented separately
therein), appearing in the CUC International Inc. Current Report on Form 8-K
(filed with the Securities and Exchange Commission on September 17, 1996), and
to the reference to us under the heading "Experts" in the Prospectus, which is
part of this Registration Statement.
DELOITTE & TOUCHE LLP
Seattle, Washington
December 30, 1996
<PAGE>
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-18717 of CUC International Inc. of our report
dated March 13, 1995 (relating to the financial statements of Advance Ross
Corporation as of December 31, 1994 and for the years ended December 31, 1994
and 1993, not presented separately therein), appearing in the CUC International
Inc. Annual Report on Form 10-K for the year ended January 31, 1996 and the CUC
International Inc. Current Report on Form 8-K (filed with the Securities and
Exchange Commission on September 17, 1996) and to the reference to us under the
heading "Experts" in the Proxy Statement/Prospectus, which is part of this
Registration Statement.
DELOITTE & TOUCHE LLP
Chicago, Illinois
December 30, 1996
<PAGE>
EXHIBIT 23.9
CONSENT OF PIPER JAFFRAY INC.
We hereby consent to the use of our name in the Registration Statement of
CUC International Inc. (Reg. No. 333-18717) and to the inclusion of our opinion
dated October 4, 1996 therein.
In giving the foregoing consent, we do not admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
PIPER JAFFRAY INC.
Minneapolis, Minnesota
December 30, 1996
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