UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________________ to
_______________________
Commission file number 0-18194
WESTCOTT COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
Texas 75-2110878
(State of Incorporation) (I.R.S. Employer Identification No.)
1303 Marsh Lane
Carrollton, Texas 75006
(Address of principal executive offices)
(214) 417-410
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of May 7, 1996 there were 19,820,435 shares of common stock
outstanding.
<PAGE>
WESTCOTT COMMUNICATIONS, INC.
INDEX
PART I: FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1995 and March 31, 1996 . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1995 and 1996. . . . . . . . . . 5
Condensed Consolidated Statement of Shareholders' Equity -
Three Months Ended March 31, 1996. . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1996 . . . . . . . . . . 7
Notes to Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. . . . . . . . . . . . .11
PART II: OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . .14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . .18
<PAGE>
<TABLE>
Part I - Financial Information
Item 1 - Financial Statements
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
December 31, March 31,
1995 1996
(Unaudited)
___________ ___________
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . $ 14,267,208 $ 17,207,550
Accounts receivable (net of allowance for
doubtful accounts of $811,000 and $798,000
at December 31, 1995 and March 31, 1996,
respectively). . . . . . . . . . . . . . 23,048,642 23,277,296
Program inventory. . . . . . . . . . . . . 7,784,585 7,769,197
Prepaid commissions. . . . . . . . . . . . 2,837,125 3,238,960
Other current assets . . . . . . . . . . . 4,028,521 4,873,145
___________ ___________
Total current assets . . . . . . . . . . 51,966,081 56,366,148
Property and equipment, at cost:
Downlink equipment . . . . . . . . . . . . 34,161,017 34,506,909
Studio equipment . . . . . . . . . . . . . 11,501,503 11,755,304
Office furniture and equipment . . . . . . 14,155,697 14,856,915
Leasehold improvements . . . . . . . . . . 2,628,201 2,638,994
___________ ___________
62,446,418 63,758,122
Accumulated depreciation
and amortization . . . . . . . . . . . . (29,750,234) (31,709,002)
___________ ___________
32,696,184 32,049,120
Other assets:
Equipment inventory. . . . . . . . . . . . 1,970,985 2,168,335
Program inventory. . . . . . . . . . . . . 11,533,303 12,453,117
Goodwill (net of accumulated amortization
of $4,808,000 and $5,223,000 at
December 31, 1995 and March 31, 1996,
respectively). . . . . . . . . . . . . . 20,483,469 20,068,619
Other intangibles (net of accumulated
amortization of $4,345,000 and
$4,492,000 at December 31, 1995
and March 31, 1996, respectively) . . . . 2,997,307 2,919,501
Other assets. . . . . . . . . . . . . . . . 3,335,908 3,379,694
___________ ___________
$124,983,237 $129,404,534
___________ ____________
___________ ____________
</TABLE>
<PAGE>
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
December 31, March 31,
1995 1996
(Unaudited)
___________ ___________
<S> <C> <C>
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $ 1,634,416 $ 1,461,972
Income taxes payable. . . . . . . . . . . . 54,913 1,901,549
Accrued liabilities . . . . . . . . . . . . 4,937,271 4,932,008
Deferred income taxes . . . . . . . . . . . 1,426,465 1,426,465
Unearned revenue. . . . . . . . . . . . . . 12,423,611 11,527,450
Current portion of long-term obligations. . 10,000 10,000
___________ ___________
Total current liabilities . . . . . . . 20,486,676 21,259,444
Long-term obligations . . . . . . . . . . . . 18,601 14,298
Deferred income taxes . . . . . . . . . . . . 2,825,260 2,825,260
Minority interest liability . . . . . . . . . 246,595 266,082
Shareholders' equity:
Common stock, $.01 par value; 29,000,000
shares authorized; 19,799,720 and
19,816,325 shares outstanding at
December 31, 1995 and March 31, 1996,
respectively. . . . . . . . . . . . . . . 197,997 198,163
Additional paid-in capital. . . . . . . . . 73,923,710 74,088,536
Retained earnings . . . . . . . . . . . . . 27,440,542 30,908,895
Less treasury shares at cost; 45,920 shares (156,144) (156,144)
___________ ___________
Total shareholders' equity. . . . . . . 101,406,105 105,039,450
___________ ___________
$124,983,237 $129,404,534
___________ ___________
___________ ___________
</TABLE>
See accompanying notes.
<PAGE>
<TABLE> WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
____________________________
1995 1996
___________ ____________
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 24,634,153 $ 24,911,915
Cost of revenues:
Programming and production. . . . . . . . 4,955,384 5,947,618
Delivery and transmission . . . . . . . . 3,369,820 3,147,890
Sales and marketing . . . . . . . . . . . 4,769,087 5,733,872
General and administrative. . . . . . . . 2,442,380 2,082,026
Depreciation and amortization . . . . . . 2,904,453 3,006,563
___________ ___________
Total . . . . . . . . . . . . . . . . . 18,441,124 19,917,969
Income from operations . . . . . . . . . . . 6,193,029 4,993,946
Interest expense . . . . . . . . . . . . . . (31,409) (22,619)
Interest income. . . . . . . . . . . . . . . 102,346 195,222
Other income (expense) . . . . . . . . . . . (19,305) 614,040
___________ ___________
Income before income taxes . . . . . . . . . 6,244,661 5,780,589
Provision for income taxes . . . . . . . . . 2,435,418 2,312,236
___________ ___________
Net income available to common shareholders. $ 3,809,243 $ 3,468,353
___________ ___________
___________ ___________
Earnings per common share (Note 2) . . . . . $ .20 $ .18
___________ ___________
___________ ___________
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . 19,530,490 19,760,225
___________ ___________
___________ ___________
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1996
(Unaudited)
<CAPTION>
Common Stock Additional
______________________ paid-in
Shares Amount capital
___________ _________ __________
<S> <C> <C> <C>
Balance at December 31, 1995 . . . . 19,799,720 $ 197,997 $73,923,710
Issuance of Common Stock under
Employee Stock Purchase Plan . . 5,105 51 65,038
Issuance of Common Stock under
Employee Stock Option Plan and
Non-Employee Stock Option Plan,
including federal income tax
benefit (Note 1) . . . . . . . . 11,500 115 99,788
Net Income . . . . . . . . . . . . . - - -
___________ _________ __________
Balance at March 31, 1996. . . . . . 19,816,325 $ 198,163 $74,088,536
___________ _________ __________
___________ _________ __________
</TABLE>
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1996
(Unaudited)
(CONTINUED)
<CAPTION>
Retained Treasury
earnings shares
___________ ________
<S> <C> <C>
Balance at December 31, 1995. . . . . . . . . $ 27,440,542 $(156,144)
Issuance of Common Stock under
Employee Stock Purchase Plan. . . . . . . - -
Issuance of Common Stock under
Employee Stock Option Plan and
Non-Employee Stock Option Plan,
including federal income tax
benefit (Note 1) . . . . . . . . . . . . - -
Net Income . . . . . . . . . . . . . . . . . 3,468,353 -
___________ ________
Balance at March 31, 1996. . . . . . . . . . $ 30,908,895 $(156,144)
___________ ________
___________ ________
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months ended March 31,
___________________________
1995 1996
___________ ____________
<S> <C> <C>
Operating activities:
Net income. . . . . . . . . . . . . . . . $ 3,809,243 $ 3,468,353
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . 2,904,453 3,006,563
(Gain) Loss on sale of property
and equipment . . . .. . . . . . . 26,294 (2,040)
(Gain) on marketable equity securities - (612,000)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . 2,092,973 (228,654)
Other current assets and prepaid
commissions . . . . . . . . . . . 207,760 (634,459)
Accounts payable and accrued liabilities (1,251,030) (177,707)
Income taxes payable. . . . . . . . 1,534,422 1,846,636
Unearned revenue. . . . . . . . . . (3,549,719) (896,161)
___________ ___________
Net cash provided by
operating activities. . . . . . . 5,774,396 5,770,531
Investing activities:
Net decrease in investments . . . . . . 625,778 -
Additions to property and equipment . . (773,656) (1,373,485)
Net increase in other assets. . . . . . (589,267) (734,494)
Net additions to program inventory. . . (946,969) (904,426)
Net additions to interest in partnership 15,466 19,487
Proceeds from sale of assets. . . . . . 17,412 2,040
Purchase business combinations, net of
cash acquired (Note 3). . . . . . . . (1,478,548) -
___________ ____________
Net cash used in
investing activities . . . . . . (3,129,784) (2,990,878)
Financing activities:
Payments on short-term debt
and capital leases. . . . . . . . . . (255,024) -
Payments on long-term debt. . . . . . . (191,802) (4,303)
Proceeds from issuance of stock, net. . 86,835 65,089
Proceeds from exercise of stock options 240,687 99,903
___________ ___________
Net cash provided by (used in)
financing activities . . . . . . (119,304) 160,689
Net increase in cash and cash equivalents. 2,525,308 2,940,342
Cash and cash equivalents
at beginning of period. . . . . . . . . 5,815,118 14,267,208
___________ ___________
Cash and cash equivalents at end of period $ 8,340,426 $ 17,207,550
___________ ___________
___________ ___________
Supplemental disclosures of cash flow information
Cash paid during the period:
Interest . . . . . . . . . . . . . . $ 31,409 $ 22,619
Income taxes . . . . . . . . . . . . $ 797,723 $ 440,480
</TABLE>
See accompanying notes.
<PAGE>
WESTCOTT COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions
to Form 10-Q and therefore do not include all information and footnotes
necessary for fair presentation of financial position, results of operations,
and cash flows in conformity with generally accepted accounting principles.
Management believes all adjustments necessary for a fair presentation of the
results of the interim period have been made and are of a normal recurring
nature.
In presenting the accompanying unaudited condensed consolidated
financial statements, certain amounts have been reclassified. These
individual reclassifications have not been disclosed as the impact on the
Company's financial statements is not material.
During the first three months of 1996, the Company recognized a federal
income tax benefit of approximately $28,000 resulting from the exercise of
employee stock options. Under generally accepted accounting principles, this
federal income tax benefit is recognized as a deferred tax asset and added to
additional paid-in-capital in the period of the tax deduction.
These unaudited condensed consolidated financial statements and the
notes thereto should be read in conjunction with the Company's most recent
audited financial statements included in its Annual Report on Form 10-K.
2. Earnings per share. Earnings per share are computed based on weighted
average common shares outstanding.
3. Acquisitions. Effective March 1, 1995, the Company acquired all of the
outstanding stock of Lockert Jackson & Associates, Inc. ("Lockert Jackson")
in exchange for a cash payment of $1,500,000 and the assumption of approximately
$2,075,000 of liabilities. In addition, the Company made a one-time payment
of $500,000 in return for five-year non-competition agreements, and will pay
approximately $318,000 of additional purchase price over the next three years.
Lockert Jackson is nationally recognized as a producer and distributor of
"Emergency Medical Update" and "Safety Watch", subscription based emergency
medical and safety video training products. This acquisition was accounted
for as a purchase, and accordingly, the net assets and results of operations
of Lockert Jackson are included in the Company's consolidated financial
statements commencing March 1, 1995.
Effective August 1, 1995, the Company acquired certain assets of Capital
Training Company ("CTC") in exchange for a cash payment of $1,380,000 and
the assumption of approximately $218,000 of liabilities. In addition, the
Company will pay approximately $250,000 of additional purchase price over the
next two years. CTC produces and distributes videotape training products for
the financial services industry. This acquisition was accounted for as a
purchase, and accordingly, the net assets and results of operations of CTC are
included in the Company's consolidated financial statements commencing
August 1, 1995.
4. Long-term Obligations. Effective June 28, 1993, the Company entered into
a two-year revolving credit facility with its bank pursuant to which it may
borrow up to $18,000,000. After the revolver term expires, outstanding amounts
under this facility would be convertible into a four-year term loan. Effective
June 28, 1995, this credit facility was extended for one year to June 28, 1996.
The facility provides a sublimit of $1,000,000 for standby letters of credit. A
commitment fee of one-half of 1% of the unused credit line and an interest rate
of prime, or if lower, an alternate CD rate plus 1 1/2% will be charged.
<PAGE>
WESTCOTT COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements -
(Continued)
(Unaudited)
The credit facility contains various restrictive covenants which, among
other things, limit the payment of dividends and require the Company to
maintain certain financial and tangible net worth ratios. The facility is
secured by studio equipment, downlink equipment, other equipment and fixtures,
subsidiary stock and accounts receivable. At March 31, 1996, there were no
amounts borrowed under this facility.
5. Subsequent Events. On April 22, 1996, the Company announced that the
Company, K-III Acquisition Corp. (the "Purchaser"), a Texas corporation, K-III
Prime Corporation ("K-III Prime"), a Delaware corporation, and K-III
Communications Corporation (the "Parent"), a Delaware corporation, entered into
an agreement and Plan of Merger (the "Merger Agreement"), pursuant to which the
Purchaser will commence a tender offer (the "Offer") for all of the outstanding
Common Stock of the Company for $21.50 per share (the "Per Share Amount") in
cash. The Offer will commence no later than April 26, 1996 and will be
conditioned on there being validly tendered that number of shares that, when
added to the shares already owned by the Parent and its direct and indirect
subsidiaries, constitutes a majority of the then Outstanding Shares on a Fully
Diluted Basis (as defined in the Merger Agreement) as well as other customary
conditions, including regulatory approvals. The Offer will be followed by a
merger of the Purchaser with and into the Company upon the approval and
adoption of the Merger Agreement by the affirmative vote of the shareholders of
the Company to the extent required by Texas law. In the Merger, each share of
Common Stock not owned by the Purchaser or its affiliates or by any dissenting
shareholders will be automatically converted into the right to receive the Per
Share Amount in cash.
Immediately prior to the execution of the Merger Agreement, the Company
executed an amendment (the "Amendment") to that certain Rights Agreement dated
January 9, 1996 by and between the Company and KeyCorp Shareholder Services Inc.
(the "Rights Agreement"). The Amendment provides that neither the execution or
delivery of the Merger Agreement or the making of the Offer, in each case in
accordance with the Merger Agreement, shall cause (i) Parent, K-III Prime or the
Purchaser or any of their Affiliates (as defined in the Rights Agreement) or
Associates (as defined in the Rights Agreement) to be an Acquiring Person (as
defined in the Rights Agreement), (ii) a Stock Acquisition Date (as defined in
the Rights Agreement) to occur, or (iii) a Distribution Date (as defined in the
Rights Agreement) to occur in accordance with the terms of the Rights Agreement.
None of the acceptance for payment or payment for shares of Common Stock by the
Purchaser pursuant to the Offer, in each case in accordance with the Merger
Agreement, shall cause (i) Parent, K-III Prime or the Purchaser or any of their
affiliates or associates to be an Acquiring Person, (ii) a Stock Acquisition
Date to occur, or (iii) a Distribution Date to occur in accordance with the
terms of the Rights Agreement; provided, that if, prior to the time that the
Rights have expired, the Merger Agreement is terminated pursuant to its terms,
then the provisions of the Amendment terminate. The Amendment also provides
that the Final Expiration Date (as defined in the Rights Agreement) shall occur
no later than immediately prior to the purchase of the shares pursuant to the
Offer.
<PAGE>
The following table contains information about products and
services offered by the Company.
<TABLE>
<CAPTION>
Current
Markets Offerings Description Medium
_______ _________ ________________ ______
<S> <C> <C> <C>
Government & LETN Law Enforcement Television Network S/V/W
Public FETN Fire & Emergency Television Network S/V
Services American Heat American Heat V
Pulse Pulse V
EMU Emergency Medical Update V
GSTN Government Services Television Network V
Automotive ASTN Automotive Satellite Television Network S
Detroit (WCMI) Custom Programming N/A
Health Care HSTN Health & Sciences Television Network S
AHA American Hospital Association T
WHTG Westcott Healthcare Teleconference Group T
JCSN Joint Commission Satellite Network T
PSYCHNET Sponsored Programming T
LTCN Long Term Care Network S
IMN Custom Programming N/A
FMTN Family Medical Television Network T
Corporate & The CPA Report The CPA Report V
Professional PSTN Professional Security Television Network V
AFTN Accounting & Financial Television Network V
ITS Industrial Training Systems V/C
Tel-A-Train Tel-A-Train V/C
ETC Excellence in Training V
Safety Watch Safety Watch V
ATSN Accounting Television Satellite Network I/S
IDTN Electronic Classroom I/S
EXEN Executive Education Network I/S
Financial BTCC Bankers Training & Consulting Company V/C
Services
Educational TI-IN K-12 Education I/S
</TABLE>
Legend: S = Private Satellite
V = Videotape
T = Teleconferencing
C = Computer Based Training
W = Workstation
I = Interactive Multimedia
N/A = Not Applicable
<PAGE>
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations:
Comparison of Three Months Ended March 31, 1996 to the Three Months Ended
March 31, 1995:
Revenues. The increase in revenues of $277,762 or 1% over the corresponding
period last year is primarily attributable to revenue growth in IDTN, which
began operations in 1994; and EXEN, which began offering courses in the fourth
quarter of 1995. Revenues from the Company's six principal markets for the
periods indicated were as follows:
<TABLE>
Markets Revenues
______________________________ __________________________
Three Months Ended
March 31, March 31,
1995 1996
___________ ____________
<S> <C> <C>
Government and Public Services. . . . . . . . $ 4,918,050 $ 3,845,980
Automotive. . . . . . . . . . . . . . . . . . 2,773,086 2,732,570
Health Care . . . . . . . . . . . . . . . . . 5,618,022 5,477,823
Corporate and Professional. . . . . . . . . . 6,568,321 8,691,963
Financial Services. . . . . . . . . . . . . . 1,424,705 1,598,641
Education . . . . . . . . . . . . . . . . . . 3,018,327 2,242,605
Other . . . . . . . . . . . . . . . . . . . . 313,642 322,333
___________ ___________
Total . . . . . . . . . . . . . . . . . . $ 24,634,153 $ 24,911,915
</TABLE>
Revenues in the Government and Public Services market decreased $1,072,070
or 22% primarily due to a decrease in revenues for LETN and FETN, as a direct
result of a decrease in the number of subscribers. LETN also experienced a
decrease in workstation sales over the same period last year.
Revenues in the Automotive market decreased $40,516 or 1% due primarily to
subscriber decreases for ASTN. Partially offsetting this decrease was an
increase in revenues for WCMI as a result of several large production projects
completed in the first quarter of 1996.
Revenues in the Healthcare market decreased $140,199 or 3% primarily as a
result of a reduction in the number of teleconference series broadcasts offered
by the Westcott Healthcare Teleconference Group. AHA also experienced a
decrease in the number of subscriber sites over the same period last year.
Partially offsetting these decreases was an increase in revenues for LTCN as a
direct result of an increase in the number of subscribers; and IMN, as a result
of an increase in revenues from its Family Medicine Television Network.
Revenues in the Corporate and Professional market increased $2,123,642 or
32% primarily as a result of the continued growth in revenues generated by
IDTN's electronic classroom operations, and EXEN, an internally-developed
network that began operations in the fourth quarter of 1995. Also contributing
to this increase was Safety Watch, a product acquired from Lockert Jackson in
the first quarter of 1995; ATSN, an internally-developed network which was
introduced during the second quarter of 1995; and ETC, which experienced an
increase in one time sales over the same period last year. Partially
offsetting these increases was a decrease in revenues for ITS which management
believes results from an industry-wide decline in safety training sales.
PSTN also experienced a decrease in revenues as a result of a decline in
subcribers over the same period last year.
<PAGE>
Revenues in the Financial Services market increased $173,936 or 12% as a
result of an increase in the average revenue per subscriber for BTCC over the
same period last year.
Revenues in the Education market decreased $775,722 or 26% due to a decrease
in the number of schools subscribing to TI-IN from the 1994/1995 to 1995/1996
school year. Also contributing to this decrease in revenues for TI-IN was a
decrease in student enrollments.
Programming and Production. Programming and production costs increased
$992,234 or 20% primarily as a result of the introduction of EXEN during the
fourth quarter of 1995; and WCMI, which incurred additional costs as several
large custom projects were completed in the first quarter of 1996. TI-IN
experienced an increase in programming and production costs as additional
courses and programming were offered under a government grant received in early
1995. Also contributing to this increase was IDTN, whose expenses increased as
the revenues for this network continue to grow. These increases were partially
offset by a decrease in programming costs for IMN over the same period last
year.
Delivery and Transmission. A decrease of $221,930 or 7% over the
corresponding period last year is primarily due to a decrease in equipment
cancellation expense as a result of a decline in the number of satellite network
subscribers that cancelled in the first quarter of 1996 over the same period
last year. Also, the cost of equipment sales for Tel-A-Train and LETN
workstations decreased compared to the same period last year.
Sales and Marketing. An increase of $964,785 or 20% over the corresponding
period last year is due primarily to an increase in sales and marketing costs
for EXEN, which was introduced in the fourth quarter of 1995; and IDTN, which
experienced an increase in commission expense resulting from continued growth
in sales. Also contributing to the overall increase was an increase in
advertising and other marketing costs for ETC as a result of the introduction of
new product lines during 1995.
Sales personnel are compensated through commissions on new sales and
renewals, supplemented by a small base salary. Commission expense for the
satellite networks in any reporting period will vary with the amount of
commissions paid for subscriptions and renewals sold during such reporting
period. Commissions relating to videotape, teleconference and interactive
multimedia networks, however, are deferred and amortized over the life of the
respective contract, which is generally a period of one to three years.
General and Administrative. General and administrative expenses
decreased $360,354 or 15%. This category includes bad debt expense, executive
compensation, facilities and other expenses not directly attributed to the
operation of the programming, production and sales and marketing departments.
The decrease in general and administrative expense over the same period last
year is primarily attributable to the overall decrease in administrative
compensation and other related expenses.
Depreciation and Amortization. The $102,110 or 4% increase in depreciation
and amortization expense over the same period last year is primarily
attributable to an increase in amortization expense attributable to costs
capitalized in connection with the start-up of EXEN; and to the increase in
goodwill amortization as a result of the acquisitions of Lockert Jackson and
Capital Training Company during 1995.
Interest. Interest expense remained relatively stable with a slight
decrease of $8,790 or 28%. Interest income increased $92,876 or 91% over the
same period last year primarily as a result of the increase in temporary
interest-bearing investments.
Other Income. Other income increased $633,345 or 3,280% primarily as a
result of an increase in the fair market value of the Company's investments in
marketable equity securities held for trading.
<PAGE>
Income Taxes. The provision for income taxes as a percentage of income
before income taxes increased from 39% for the three month period ended March
31, 1995 to 40% for the three month period ended March 31, 1996 primarily as a
result of an increase in non-deductible goodwill amortization, an increase in
state income taxes and the application of graduated tax rates.
Liquidity and Capital Resources. During the quarter ended March 31, 1996,
the Company satisfied its liquidity needs principally from cash flow from
operations. In addition, the Company has a credit facility under which the
Company may borrow up to $18,000,000. No amounts have been drawn against this
facility as of March 31, 1996. The facility, which the bank has extended
through June 28, 1996, provides a sublimit of $1,000,000 for standby letters of
credit. A commitment fee of one half of 1% of the unused credit line and an
interest rate of prime, or if lower, an alternate CD rate plus 1 1/2% will be
charged. As of March 31, 1996, the Company had $17,207,550 in cash, cash
equivalents and temporary investments.
During the three months ended March 31, 1996, the Company generated
approximately $6 million in cash from operations. Approximately $3 million in
cash was used in investment activities, primarily in connection with the
purchase of equipment and investment in program inventory. The Company's
financing activities during this period generated approximately $161,000 in
cash, primarily as a result of the issuance of common stock under the Company's
employee stock purchase and stock option plans.
The Company has identified capital needs of approximately $6 million
through the remainder of 1996 primarily to fund additions to the production
facility, additional purchases and installations of downlink equipment, computer
hardware and software for the A/S 400, purchases and installation of equipment
for EXEN classroom sites, and investments in program inventory. The Company
believes that cash generated from operations, cash on hand, and funds available
under the revolving line of credit will be sufficient to meet its budgeted
capital and liquidity requirements through the foreseeable future.
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
On January 9, 1996, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of common stock, par value $.01 per share, of the Company (the "Common
Stock"). The dividend is payable on January 22, 1996 (the "Record Date") to
the shareholders of record on that date. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, par value $.01 per share (the "Preferred
Stock") of the Company at a price of $80.00 per one one-hundredth of a share of
Preferred Stock (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement dated as of
January 9, 1996, as the same may be amended from time to time (the "Rights
Agreement"), between the Company and KeyCorp Shareholder Services, Inc., as
Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons has acquired
beneficial ownership of 20% or more of the outstanding shares of Common Stock
(thereby becoming an "Acquiring Person") or (ii) 10 business days (or such later
date as may be determined by action of the Board of Directors prior to such time
as any person or group of affiliated persons becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding shares of
Common Stock (the earlier of such dates being called the "Distribution Date"),
the Rights will be evidenced, with respect to any of the Common Stock
certificates outstanding as of the Record Date, by such Common Stock
certificate together with a copy of the summary of rights describing the Rights.
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Common Stock. Until the Distribution Date (or earlier redemption
or expiration of the Rights), new Common Stock certificates issued after the
Record Date upon transfer or new issuances of Common Stock will contain a
notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates for shares of Common Stock
outstanding as of the Record Date, even without such notation or a copy of this
Summary of Rights, will also constitute the transfer of the Rights associated
with the shares of Common Stock represented by suchcertificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Stock as of the close of business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights. Rights will be
issued with all shares of Common Stock issued between the Record Date and the
Distribution Date.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on January 9, 2006 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case as described below.
<PAGE>
The Purchase Price payable, and the number of shares of Preferred Stock or
other securities or property issuable, upon exercise of the Rights is subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights
or warrants to subscribe for or purchase Preferred Stock at a price, or
securities convertible into Preferred Stock with a conversion price, less than
the then-current market price of the Preferred Stock or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends or dividends payable in
Preferred Stock) or of subscription rights or warrants (other than those
referred to above).
The number of outstanding Rights is also subject to adjustment in the event
of a stock split of the Common Stock or a stock dividend on the Common Stock
payable in shares of Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Shares of Preferred Stock purchasable upon exercise of the Rights will not
be redeemable. Each share of Preferred Stock will be entitled, when, as and if
declared, to a minimum preferential quarterly dividend payment of $1.00 per
share but will be entitled to an aggregate dividend of 100 times the dividend
declared per share of Common Stock. In the event of liquidation, the holders of
the Preferred Stock will be entitled to a minimum preferential liquidation
payment of $100.00 per share (plus any accrued but unpaid dividends) but will be
entitled to an aggregate payment of 100 times the payment made per share of
Common Stock. Each share of Preferred Stock will have 100 votes, voting
together with the Common Stock. In addition, the Preferred Stock will vote
separately as a class were required by law. These rights are protected by
customary antidilution provisions.
Because of the nature of the Preferred Stock's dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a share of
Preferred Stock purchasable upon exercise of each Right should approximate the
value of one share of Common Stock.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereupon become void),
will thereafter have the right to receive upon exercise of a Right at the
then-current exercise price of the Right, that number of shares of Common Stock
having a market value of two times the exercise price of the Right.
In the event that, after a person or group has become an Acquiring Person,
the Company is acquired in a merger or other business combination transaction or
50% or more of its consolidated assets or earning power are sold, proper
provisions will be made so that each holder of a Right (other than Rights
beneficially owned by an Acquiring Person which will have become void) will
thereafter have the right to receive, upon the exercise thereof at the
then-current exercise price of the Right, that number of shares of common stock
of the person with whom the Company has engaged in the foregoing transaction (or
its parent) which at the time of such transaction will have a market value of
two times the exercise price of the Right.
At any time after any person or group becomes an Acquiring Person and prior
to the earlier of one of the events described in the previous paragraph or the
acquisition by such person or group of 50% or more of the outstanding shares of
Common Stock, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by such person or group which will have become void),
in whole or in part, for shares of Common Stock, or one one-hundredths of a
share of Preferred Stock (or shares of a class or series of the Company's
preferred stock having equivalent rights, preferences and privileges), having a
value per Right equal to the difference between the market value of the shares
of Common Stock receivable upon exercise of the Right and the exercise price of
the Right.
<PAGE>
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Preferred Stock will be issued
(other than fractions which are integral multiples of one one-hundredth of a
share of Preferred Stock, which may, at the election of the Company, be
evidenced by depositary receipts), and in lieu thereof an adjustment in cash
will be made based on the market price of the Preferred Stock on the last
trading day prior to the date of exercise.
At any time prior to the time an Acquiring Person has become such, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right (the "Redemption Price"). The redemption of
the Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
For so long as the Rights are then redeemable, the Company may, except with
respect to the redemption price, amend the Rights in any manner. After the
Rights are no longer redeemable, the Company may, except with respect to the
redemption price, amend the Rights in any manner that does not adversely affect
the interests of holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the
right to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
in certain circumstances. Accordingly, the existence of the Rights may deter
certain acquirors from making takeover proposals or tender offers. The Rights
should not interfere with any merger or other business combination approved by
the Board of Directors of the Company since the Board of Directors may, at its
option, at any time prior to the time an Acquiring Person has become such,
redeem all but not less than all the then outstanding Rights at $.01 per Right.
See Notes to Condensed Consolidated Financial Statements (Unaudited),
Note 5 - Subsequent Events.
Item 3 - Defaults
None
Item 4 - Submission of Matters to a Vote
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
4. Rights Agreement, dated as of January 9, 1996, between Westcott
Communications, Inc. and KeyCorp Shareholder Services, Inc. as Rights Agent,
which includes as Exhibit A the Form of Certificate of Designations of Series A
Junior Participating Preferred Stock of Westcott Communications, Inc. as
Exhibit B the Form of Right Certificate, and as Exhibit C the Summary of Rights
to Purchase Shares of Preferred Stock of Westcott Communications, Inc.
(Incorporated by reference from Exhibit 4 to the Company's Current Report on
Form 8-K dated January 9, 1996 filed with the Securities and Exchange
Commission.)
11. Computation of Earnings Per Share
27. Financial Data Schedule
b. Reports on Form 8-K
On January 11, 1996, the Company filed a Current Report on Form 8-K
reporting under Item 5 thereof the adoption of a shareholders' rights plan.
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTCOTT COMMUNICATIONS, INC.
Date: May 14, 1996 By: /s/ JACK T. SMITH
(Jack T. Smith)
President and
Chief Operating Officer
Date: May 14, 1996 By: /s/ PHYLLIS FARRAGUT
(Phyllis Farragut)
Executive Vice President and
Chief Financial Officer
(Chief Accounting Officer)
EXHIBIT 11
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months ended
March 31,
1995 1996
___________ ___________
<S> <C> <C>
Earnings per share:
Net income available to common shareholders $ 3,809,243 $ 3,468,353
___________ ___________
___________ ___________
Weighted average Common and Common
equivalent shares(1) . . . . . . . . . . . 19,530,490 19,760,225
___________ ___________
___________ ___________
Earnings per share. . . . . . . . . . . . . $ .20 $ .18
___________ ___________
___________ ___________
Earnings per Common and
Common Equivalent Share:
Weighted average shares outstanding . . . . 19,530,490 19,760,225
Net shares to be issued upon exercise
of dilutive stock options after applying
treasury stock method . . . . . . . . . . 250,774 157,118
___________ ___________
Weighted average Common and
Common equivalent shares . . . . . . . . 19,781,264 19,917,343
___________ ___________
___________ ___________
Earnings per Common and
Common equivalent shares. . . . . . . . . $ .19 $ .17
___________ ___________
___________ ___________
Earnings per Common Share
Assuming Full Dilution:
Weighted average shares outstanding . . . . 19,530,490 19,760,225
Net shares to be issued upon exercise
of dilutive stock options after applying
treasury stock method . . . . . . . . . . 250,833 263,314
___________ ___________
Weighted average Common and
Common equivalent shares. . . . . . . . . 19,781,323 20,023,539
___________ ___________
___________ ___________
Earnings per Common Share assuming
assuming full dilution. . . . . . . . . . $ .19 $ .17
___________ ___________
___________ ___________
</TABLE>
(1) The calculation of earnings per share was based upon weighted average
common shares outstanding, due to the fact that both primary and
fully-diluted earnings per share were more than 97% of earnings per common
share outstanding.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Condensed Consolidated Balance Sheets, Statements of Income, Statement
of Shareholders' Equity and Statements of Cash Flows at and for the three months
ended March 31, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 612,500
<RECEIVABLES> 24,074,907
<ALLOWANCES> 797,6110
<INVENTORY> 23,967,994
<CURRENT-ASSETS> 56,366,148
<PP&E> 63,758,122
<DEPRECIATION> 31,709,002
<TOTAL-ASSETS> 129,404,534
<CURRENT-LIABILITIES> 21,259,444
<BONDS> 24,298
<COMMON> 198,163
0
0
<OTHER-SE> 104,841,287
<TOTAL-LIABILITY-AND-EQUITY> 129,404,534
<SALES> 387,080
<TOTAL-REVENUES> 24,911,915
<CGS> 152,488
<TOTAL-COSTS> 19,917,969
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 328,091
<INTEREST-EXPENSE> 22,619
<INCOME-PRETAX> 5,780,589
<INCOME-TAX> 2,312,236
<INCOME-CONTINUING> 3,468,353
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,468,353
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
