FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For Quarter Ended: March 31, 1996
Commission file number: 1 - 11106
--------------
K-III COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3647573
- - --------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
745 Fifth Avenue, New York, New York
(Address of principal executive offices)
10151
(Zip Code)
Registrant's telephone number, including area code (212) 745-0100
--------------
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
------ -----
Number of shares of common stock, par value $.01 per share, outstanding as of
April 30, 1996: 128,724,962
<PAGE>
K III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
-----
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
------
Condensed Consolidated Balance Sheets
(Unaudited) as of December 31, 1995 and
March 31, 1996 2
Condensed Statements of Consolidated
Operations (Unaudited) for the three months
ended March 31, 1995 and 1996 3
Condensed Statements of Consolidated
Cash Flows (Unaudited) for the three months
ended March 31, 1995 and 1996 4
Notes to Condensed Consolidated
Financial Statements (Unaudited) 5-8
Item 2. Management's Discussion and Analysis of
------- Financial Condition and Results of Operations 9-14
Part II. Other Information
Item 6. (a) Exhibits 15
-------
(b) Reports on Form 8-K 15
Signatures 16
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
-------------- --------------
(dollars in thousands, except per share amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 27,226 $ 32,222
Accounts receivable, net 173,771 201,475
Inventories, net 70,844 66,779
Net assets held for sale 5,253 5,339
Prepaid expenses and other 26,732 28,063
-------------- --------------
Total current assets 303,826 333,878
Property and equipment, net 112,013 109,370
Other intangible assets, net 699,617 675,404
Excess of purchase price over net
assets acquired, net 534,554 731,802
Other non-current assets 231,406 238,512
-------------- --------------
$ 1,881,416 $ 2,088,966
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,414 $ 73,245
Accrued interest payable 9,326 23,449
Accrued expenses and other 125,967 125,405
Deferred revenues 128,679 135,125
Current maturities of long-term debt 6,000 6,000
-------------- --------------
Total current liabilities 360,386 363,224
-------------- --------------
Long-term debt 1,134,916 1,169,037
-------------- --------------
Other non-current liabilities 33,924 33,038
-------------- --------------
$2.875 Senior Exchangeable Preferred Stock ($.01 par value,
4,000,000 shares authorized and outstanding at
December 31, 1995 and March 31, 1996; liquidation
and redemption value of $100,000) 97,992 98,060
-------------- --------------
$11.625 Series B Exchangeable Preferred Stock ($.01 par value,
2,000,000 shares authorized; 1,365,707 and 1,405,397
shares outstanding at December 31, 1995 and March 31,
1996, respectively; liquidation and redemption value of
$136,571 and $140,540 at December 31, 1995 and March
31, 1996, respectively) 133,614 137,663
-------------- --------------
$10.00 Series C Exchangeable Preferred Stock ($.01 par value,
2,000,000 shares authorized and outstanding at March 31,
1996; liquidation and redemption value of $200,000) - 193,807
-------------- --------------
Common stock subject to redemption ($.01 par value, 2,406,513
shares and 2,266,736 shares outstanding at December 31,
1995 and March 31, 1996, respectively) 28,022 25,340
-------------- --------------
Shareholders' Equity
Common stock ($.01 par value,125,921,221 shares and
126,346,296 shares outstanding at December 31, 1995
and March 31, 1996, respectively) 1,259 1,263
Additional paid-in capital 748,194 752,017
Accumulated deficit (655,616) (683,200)
Cumulative foreign currency translation adjustments (1,275) (1,283)
-------------- --------------
Total shareholders' equity 92,562 68,797
-------------- --------------
$ 1,881,416 $ 2,088,966
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-3-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE><CAPTION>
Three Months Ended
March 31,
1995 1996
------------- -------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
Sales, net:
Education $ 83,954 $ 83,052
Information 51,455 67,854
Media 103,255 164,047
------------- -------------
Total sales, net 238,664 314,953
Operating costs and expenses:
Cost of goods sold 53,388 83,445
Marketing and selling 44,866 60,798
Distribution, circulation and fulfillment 46,884 55,481
Editorial 17,177 22,145
Other general expenses 29,616 36,074
Corporate administrative expenses 4,830 5,798
Depreciation and amortization of
prepublication costs, property and equipment 6,356 7,674
Amortization of intangible assets, excess of purchase
price over net assets acquired and other 30,884 36,553
------------- -------------
Operating income 4,663 6,985
Other income (expense):
Interest expense (24,614) (28,051)
Amortization of deferred financing and organizational costs (733) (900)
Other, net (17) 1,226
------------- -------------
Net loss (20,701) (20,740)
Preferred stock dividends:
Non-cash (3,539) (3,969)
Cash (2,875) (2,875)
------------- -------------
Loss applicable to common shareholders $ (27,115) $ (27,584)
============= =============
Loss per common and common equivalent
share $ (.25) $ (.21)
============= =============
Weighted average common and common equivalent
shares outstanding 109,622,179 128,502,847
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-4-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1996
--------------------------------
(dollars in thousands)
<S> <C> <C>
Operating activities:
Net loss $ (20,701) $ (20,740)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, amortization and other 37,973 45,127
Accretion of discount on acquisition obligation,
distribution advance and other 1,954 1,681
Other, net 55 (1,359)
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable, net 24,566 (7,716)
Inventories, net (5,233) 7,923
Prepaid expenses and other (5,315) (3,558)
Increase (Decrease) in:
Accounts payable (17,527) (19,916)
Accrued interest payable 9,864 14,123
Accrued expenses and other (17,834) (13,074)
Deferred revenues (11,785) (2,823)
Other non-current liabilities 599 (397)
----------- ----------
Net cash used in operating activities (3,384) (729)
----------- ----------
Investing activities:
Additions to property, equipment and other (4,681) (3,989)
Proceeds from sales of property, equipment and other 15 1,412
Payments for businesses acquired (146,696) (210,831)
----------- ----------
Net cash used in investing activities (151,362) (213,408)
----------- ----------
Financing activities:
Borrowings under the Revolving Credit Agreement 206,791 235,947
Repayments of borrowings under the Revolving Credit Agreement (268,000) (502,000)
Proceeds from issuance of 8 1/2% Senior Notes, net of
discount - 298,734
Borrowings under Chase Term Loan 150,000 -
Proceeds from issuances of common stock, net of redemptions 26,189 1,379
Proceeds from issuance of Old Preferred Stock 50,000 -
Proceeds from issuance of Series C Preferred Stock, net of
issuance costs - 193,721
Dividends paid to preferred shareholders (2,875) (2,875)
Deferred financing costs paid (2,438) (5,755)
Other (107) (18)
----------- ----------
Net cash provided by financing activities 159,560 219,133
----------- ----------
Increase in cash and cash equivalents 4,814 4,996
Cash and cash equivalents, beginning of period 18,232 27,226
----------- ----------
Cash and cash equivalents, end of period $ 23,046 $ 32,222
=========== ==========
Supplemental information:
Cash interest paid $ 12,682 $ 11,617
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
-5-
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
K-III Communications Corporation, together with its subsidiaries, is
collectively referred to as "K-III" or the "Company". In the opinion of
the Company's management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications have
been made to the prior year financial statements to conform to the
classifications used in the current period. The operating results for
the three month periods ended March 31 are not necessarily indicative
of the results that may be expected for a full year.
The Company's operations have been organized into three business segments:
education, information and media.
Effective January 1, 1996, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of". This standard establishes the accounting
for the impairment of long-lived assets, certain identifiable intangibles
and goodwill related to those assets to be held and used and for long-
lived assets and certain identifiable intangibles to be disposed of. The
adoption of this standard did not have a material effect on the
consolidated financial statements of the Company.
Effective January 1, 1996, the Company adopted the Financial Accounting
Standards Board's SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). This standard establishes accounting and reporting
standards for stock-based employee compensation. The Company will
continue to measure compensation costs for its stock-based compensation
plan using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees", and will include certain pro forma disclosures required by
SFAS 123 in its published annual report. The adoption of this standard
did not have a material effect on the consolidated financial statements of
the Company.
2. Acquisitions
------------
On January 2, 1996, K-III Magazine Corporation acquired certain net assets
of Cahners Consumer Magazines, a publisher of consumer and special
interest magazines including American Baby, Modern Bride, Sail and Power &
Motoryacht, along with 20 related properties. On January 2, 1996, Haas
Publishing Companies, Inc. ("Haas") acquired certain net assets of
Tri-State Publishing & Communications, Inc., a publisher of apartment
and new home guides. On January 2, 1996, Intertec Publishing
Corporation acquired certain net assets of Entertainment Technology
Communications Corporation, a publisher of trade publications for the
lighting industry. On March 1, 1996, K-III Reference Corporation
acquired Facts on File News Services Division. The News Services
Division produces and distributes news products to schools and libraries
in print, CD-ROM and on-line formats. On March 13, 1996, Intertec
Publishing Corporation traded EE Product News for Millimeter Magazine,
the leading trade title for TV commercial production, as well as TV
programming and movie production. The above acquisitions were financed
through borrowings under the Revolving Credit Agreement. These
acquisitions had an aggregate purchase price (net of liabilities assumed
of approximately $24,000) of $210,831 including certain immaterial
purchase price adjustments related to prior year acquisitions. The
excess purchase price over the fair value of the net assets acquired was
approximately $205,000.
The preliminary purchase cost allocations for the 1996 acquisitions are
subject to adjustment
<PAGE>
-6-
when additional information concerning asset and liability valuations is
obtained. The final asset and liability fair values may differ from those
set forth in the accompanying condensed consolidated balance sheet at
March 31, 1996; however, the changes are not expected to have a material
effect on the consolidated financial position of the Company.
These acquisitions have all been accounted for by the purchase method.
The financial statements include the operating results of these
acquisitions subsequent to their respective dates of acquisition. The
foregoing acquisitions, if they had occurred on January 1, 1996 would not
have had a material impact on the results of operations for the three
month period ended March 31, 1996.
If the acquisition of Cahners Consumer Magazines had occurred on January
1,1995, pro forma net sales would have been approximately $261,200 and pro
forma net loss would have been approximately $25,900 ($.29 per share) for
the quarter ended March 31, 1995.
3. Net Assets Held for Sale
-------------------------
Upon acquisition in 1995, the Company decided to sell AutoStar Productions,
Inc. ("AutoStar") and certain product lines of Argus Inc. ("Argus"). The
net assets of AutoStar and the Argus product lines are recorded at net
realizable value and have been classified as a current asset in net assets
held for sale on the accompanying consolidated balance sheets at December
31, 1995 and March 31, 1996. The difference between the proceeds to be
received on the sale of these businesses and their carrying values will be
treated as an adjustment to the excess of purchase price over net assets
acquired. The operating results of these businesses since acquisition have
been excluded from the accompanying statement of condensed consolidated
operations for the three months ended March 31, 1996. (See Note 9 -
Subsequent Events).
4. Private Offerings
-----------------
8 1/2% Senior Notes due 2006
On January 24, 1996, K-III completed a private offering of $300,000 of
8 1/2% Senior Notes. The Senior Notes were issued at 99.578% with related
issuance costs of approximately $6,000. The 8 1/2% Senior Notes mature on
February 1, 2006, with no sinking fund. Interest on the Senior Notes is
payable semi-annually in February and August at the annual rate of 8 1/2%.
The 8 1/2% Senior Notes may not be redeemed prior to February 1, 2001 other
than in connection with a change of control. Beginning in 2001 and
thereafter, the 8 1/2% Senior Notes are redeemable in whole or in part, at
the option of the Company, at prices ranging from 104.25% with annual
reductions to 100% in 2003 plus accrued and unpaid interest.
$10.00 Series C Exchangeable Preferred Stock
On January 24, 1996, K-III completed a private offering of 2,000,000 shares
of $10.00 Series C Exchangeable Preferred Stock ("Series C Preferred
Stock") at $100 per share, all of which are issued and outstanding at March
31, 1996. Annual dividends of $10.00 per share on the Series C Preferred
Stock are cumulative and payable quarterly, in cash, commencing May 1,
1996. On and after February 1, 2001, the Series C Preferred Stock may be
redeemed in whole or in part, at the option of the Company, at specified
redemption prices plus accrued and unpaid dividends. The Company is
required to redeem the Series C Preferred Stock on February 1, 2008 at a
redemption price equal to the liquidation preference of $100 per share,
plus accrued and unpaid dividends. The Series C Preferred Stock is
exchangeable in whole or in part, at the option of the Company, on any
scheduled dividend payment date into Class C Subordinated Debentures
provided that no shares of the Senior Preferred Stock are outstanding on
the date of exchange. The Series C Preferred Stock is recorded on the
accompanying condensed consolidated balance sheet at the aggregate
redemption value (net of unamortized issuance costs) of $193,807 at
March 31, 1996.
<PAGE>
-7-
Net proceeds from these private offerings of approximately $486,000 were
primarily used to pay down borrowings under the Revolving Credit
Agreement.
5. Inventories
-----------
Inventories consist of the following:
December 31, March 31,
1995 1996
---- ----
Finished goods $49,026 $41,855
Work in process 969 797
Raw materials 27,978 30,562
------- -------
77,973 73,214
Less: allowance for obsolescence 7,129 6,435
------- -------
$70,844 $66,779
======= =======
6. Long-term debt
---------------
Long-term debt consists of the following:
December 31, March 31,
1995 1996
---- ----
Borrowings under Revolving Credit
Agreement $ 435,988 $ 169,935
BONY Term Loan 150,000 150,000
Chase Term Loan 150,000 150,000
8 1/2% Senior Notes due 2006, net - 298,748
10 1/4% Senior Notes due 2004 100,000 100,000
10 5/8% Senior Notes due 2002 250,000 250,000
---------- ----------
Total 1,085,988 1,118,683
Acquisition obligation payable 54,928 56,354
---------- ----------
1,140,916 1,175,037
Less: current portion 6,000 6,000
---------- ----------
$1,134,916 $1,169,037
========== ==========
7. Accounting for Advertising Costs
--------------------------------
Effective July 1, 1994, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 93-7, "Reporting on
Advertising Costs" (the "Accounting Change"). The adoption of the
Accounting Change resulted in a decrease in the net loss of approximately
$16,000 ($.15 per share) and approximately $9,600 ($.07 per share) for
the three months ended March 31, 1995 and 1996, respectively. At March
31, 1996, approximately $29,500 of advertising costs were reported as a
net asset and included in other non-current assets on the accompanying
condensed consolidated balance sheet. Advertising expense was
approximately $29,000 and $30,000 for the three months ended March 31,
1995 and 1996, respectively.
8. Loss per Common and Common Equivalent Share
-------------------------------------------
Loss per common and common equivalent share for the three month periods
ended March 31, 1995 and 1996 was computed using the weighted average
number of common stock shares outstanding during each period. The
weighted average number of common stock shares outstanding during the
three month period ended March 31, 1995 includes incremental shares for
the common stock issued and non-qualified options granted to purchase
common stock which were issued within one year prior to the initial
filing of the registration statement for an initial public offering
in September 1995, at a purchase price below $10.00 per share (the
"Incremental Shares"). Such Incremental Shares were
<PAGE>
-8-
determined utilizing the treasury stock method. The effect of the assumed
exercise of stock options which were issued in periods prior to the
one-year period previously mentioned is not included because the effect is
antidilutive. Loss per common share assuming full dilution is not presented
because such calculation is antidilutive.
9. Subsequent Events
-----------------
Acquisitions
On April 1, 1996, Haas acquired certain net assets of ADC of Greater Kansas
City, Inc., an apartment guide and locator. On April 24, 1996, the Company
acquired Horticulture magazine, the leading publication for the serious
gardener. On April 30, 1996, Haas acquired certain net assets of VSD
Communications, Inc., a publisher of apartment and home guides and related
map publications. The aggregate purchase price for these acquisitions was
approximately $13,600.
Merger Agreement and Tender Offer
On April 22, 1996, the Company, K-III Prime Corporation ("Prime") and a
newly-formed wholly owned subsidiary of Prime ("WAC") entered into a
Merger Agreement with Westcott Communications, Inc. ("Westcott") providing
for the merger of WAC into Westcott with holders of Westcott common stock
receiving $21.50 per share or an aggregate net price of approximately
$422,000. The consummation of such merger is conditional, among other
things, upon the approval by holders of a majority of the outstanding
shares of Westcott, on a fully diluted basis. Pursuant to such Merger
Agreement, on April 26, 1996, the Company initiated a tender offer to
purchase all of the outstanding stock of Westcott for $21.50 per share.
The tender offer will expire on May 23, 1996, unless it is extended and
is conditioned upon, among other things, there being validly tendered at
least that number of shares which constitute a majority of the
outstanding shares on a fully diluted basis. Westcott generates
educational content for a broad range of markets and distributes it
through satellite and video tape across 23 networks.
Divestiture
On April 3, 1996, McMullen Argus completed the sale of AutoStar for
cash of $200 and a licensing agreement. The excess of the proceeds over
the carrying value of the net assets held for sale will result in a
reduction in the excess of the purchase price over the net assets acquired.
<PAGE>
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
K-III Communications Corporation, together with its subsidiaries, is
collectively referred to as "K-III" or the "Company". The following discussion
and analysis of K-III's unaudited financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and notes thereto. The Company organizes its businesses
into three segments: education, information and media. Management believes that
a meaningful comparison of the results of operations for 1995 and 1996 is
obtained by using this segment information.
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Unaudited Results of Consolidated Operations
(dollars in thousands)
Three Months Ended
March 31,
1995 1996
---------- ----------
Sales, net:
Education $ 83,954 $ 83,052
Information 51,455 67,854
Media 103,255 164,047
---------- ----------
Total $ 238,664 $ 314,953
========== ==========
Operating income (loss):
Education $ 6,187 $ 4,911
Information (3,200) (182)
Media 6,679 8,230
Corporate (5,003) (5,974)
---------- ----------
Total 4,663 6,985
Other income (expense):
Interest expense (24,614) (28,051)
Amortization of deferred financing and
organizational costs (733) (900)
Other, net (17) 1,226
---------- ----------
Net loss $ (20,701) $ (20,740)
========== ==========
<PAGE>
-10-
RESULTS OF OPERATIONS (dollars in thousands, except per share amounts)
- - ----------------------------------------------------------------------
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
- - ---------------------------------------------------------------------------
1995:
- - -----
Consolidated Results:
- - ---------------------
Consolidated sales increased by 32.0% to $314,953 in the first three months in
1996 over 1995. The sales increase resulted from a 13% increase in company-
wide advertising, a 12% improvement in circulation revenues and the impact of
select acquisitions made since the prior year period. Consolidated operating
profit increased by 49.8% to $6,985 in the first quarter 1996. Excluding the
effect of the Accounting Change from both periods, consolidated operating profit
would have grown approximately 76.9% in the first quarter 1996 as a result of
the same factors which drove sales growth, despite an increase in paper costs of
approximately 30% in 1996. Interest expense increased by $3,437 or 14.0% in the
first quarter 1996 over 1995 primarily due to the increased level of borrowings
associated with acquisitions as well as higher interest rates. The consolidated
net loss was $20,740 in the first quarter 1996 versus $20,701 in 1995.
Education:
- - ----------
The education segment's sales declined by $902 or 1.1% in the first quarter 1996
versus 1995. At Newbridge, the Company managed down its sales to improve member
quality and profitability, while Weekly Reader delayed a print run, deferring
certain sales to the second quarter. Growth in the rest of the education
segment's sales offset these decreases. The education segment's operating
income decreased by $1,276 in the first quarter 1996 versus 1995. The impact
of the Accounting Change benefitted results in the first quarter 1995 by $6,314
more than in the first quarter 1996. Excluding the effect of the Accounting
Change from both periods, the education segment's operating loss declined by
approximately 57.0% in the first quarter 1996 compared to 1995. Lower direct
mail and postage expenses at Weekly Reader as well as the benefits from the
restructuring of the network maintenance system at Channel One contributed to
this improvement.
Information:
- - ------------
The information segment's sales increased by $16,399 or 31.9% in the first
quarter 1996 over 1995 while the operating loss in the first quarter 1996 was
$182 as compared to an operating loss of $3,200 in the 1995 period. These
results were driven by the Apartment Guides, which continued to achieve double-
digit sales growth. In addition, Nelson had a strong quarter in part due to
increased demand for its electronic database, Institutional MarketPlace for
Windows. The addition of Bacon's contributed to the quarter's results,
accounting for approximately one-third of the information segment's growth.
Media:
- - -----
The media segment's sales increased by $60,792 or 58.9% in the first quarter
1996 versus 1995 due to advertising and circulation revenue growth and the
addition of the operating results of the newly acquired Cahners Consumer
Magazines. Circulation revenue for consumer magazines increased by 12% led by
increases at Seventeen and Soap Opera Digest. Based on its circulation of 2.2
million, Seventeen has become the #1 beauty/fashion magazine in the U.S. Soap
Opera Digest launched a website on America Online which has received an
enthusiastic response with over 20,000 hours of connect time in the first month
of availability. The media segment's operating profit increased by $1,551 in
the first quarter 1996 over 1995. The impact of the Accounting Change was to
decrease advertising expenses by $1,072 in the 1996 period as compared with a
decrease of $692 in the first quarter 1995. Excluding the effect of the
Accounting Change from both periods, the media segment's operating profit
increased approximately 19.6% in the first quarter 1996 over 1995 primarily due
to advertising and circulation revenue growth and acquisitions of businesses.
<PAGE>
-11-
Liquidity and Capital Resources
- - -------------------------------
Consolidated working capital (deficiency) including current maturities of long-
term debt was $(29,346) at March 31, 1996 compared to $(56,560) at December 31,
1995. Consolidated working capital reflects the expensing of editorial and
product development costs when incurred and the recording of unearned
subscription income as a current liability. Advertising costs are expensed when
the promotional activities occur except for certain direct-response advertising
costs which are capitalized as other non-current assets and amortized over the
estimated period of future benefit.
Earnings before interest, taxes, depreciation and amortization, or EBITDA, is
included in the following discussion to provide additional information for
determining the ability of the Company to meet its future debt service
requirements and to pay cash dividends on its preferred stock. EBITDA is not
intended to represent cash flow from operations and should not be considered as
an alternative to net loss as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company believes
EBITDA is a standard measure commonly reported and widely used by analysts,
investors and other interested parties in the media industry. Accordingly, this
information is disclosed herein to permit a more complete comparative analysis
of the Company's operating performance relative to other companies in its
industry.
Three Months Ended
March 31,
1995 1996
---- ----
EBITDA:
Education $18,412 $17,021
Information 9,106 12,900
Media 19,215 27,089
Corporate (4,830) (5,798)
-------- --------
Total $41,903 $51,212
======== ========
Net Cash Provided by (Used in)
Operating Activities:
Education $(5,828) $ 697
Information 13,779 13,461
Media 7,104 6,360
Corporate (18,439) (21,247)
-------- ---------
Total $(3,384) $ (729)
======== =========
Net Cash Used in
Investing Activities:
Education $ (2,808) $ (2,292)
Information (22,890) (26,004)
Media (124,804) (184,844)
Corporate (860) (268)
---------- ----------
Total $(151,362) $(213,408)
========== ==========
Net Cash Provided by (Used in)
Financing Activities:
Education $ (54) $ (1,443)
Information 751 (1,630)
Media (4) (3,372)
Corporate 158,867 225,578
-------- --------
Total $159,560 $219,133
======== ========
<PAGE>
-12-
Consolidated EBITDA increased by $9,309 in the three months ended March 31, 1996
over 1995 mainly as a result of growth from existing operations, new product
additions and acquisitions of businesses. The net cash used in operating
activities during the three months ended March 31, 1996, after interest payments
of $11,617, was $729. Net cash used in operating activities decreased by $2,655
during the three months ended March 31, 1996 over 1995 due primarily to the
EBITDA growth. Capital expenditures were $3,989 during the 1996 period which
was a decrease of $692 from the 1995 period. Payments of $210,831 (including
certain immaterial purchase price adjustments relating to previous acquisitions
and excluding Millimeter Magazine which was acquired through a magazine swap)
were made during the three months ended March 31, 1996 for the acquisitions of
Cahners Consumer Magazines, Tri-State Publishing & Communications, Inc.,
Entertainment Technology Communications Corporation and the Facts on File News
Services Division. Net cash used in investing activities increased as a result
of the higher cost of the acquisitions in the 1996 period as compared to the
acquisitions in the 1995 period.
Financing Arrangements
- - ----------------------
On January 24, 1996, K-III completed a private offering of $300,000 of 8 1/2%
Senior Notes. The Senior Notes were issued at 99.578% with related issuance
costs of approximately $6,000. The 8 1/2% Senior Notes mature on February 1,
2006, with no sinking fund. Interest on the Senior Notes is payable semi-
annually in February and August at the annual rate of 8 1/2%. The 8 1/2% Senior
Notes may not be redeemed prior to February 1, 2001 other than in connection
with a change of control. Beginning in 2001 and thereafter, the 8 1/2% Senior
Notes are redeemable in whole or in part, at the option of the Company, at
prices ranging from 104.25% with annual reductions to 100% in 2003 plus accrued
and unpaid interest.
On January 24, 1996, K-III completed a private offering of 2,000,000 shares of
$10.00 Series C Exchangeable Preferred Stock ("Series C Preferred Stock") at
$100 per share, all of which are issued and outstanding at March 31, 1996.
Annual dividends of $10.00 per share on the Series C Preferred Stock are
cumulative and payable quarterly, in cash, commencing May 1, 1996. On and after
February 1, 2001, the Series C Preferred Stock may be redeemed in whole or in
part, at the option of the Company, at specified redemption prices plus accrued
and unpaid dividends. The Company is required to redeem the Series C Preferred
Stock on February 1, 2008 at a redemption price equal to the liquidation
preference of $100 per share, plus accrued and unpaid dividends. The Series C
Preferred Stock is exchangeable in whole or in part, at the option of the
Company, on any scheduled dividend payment date into Class C Subordinated
Debentures provided that no shares of the Senior Preferred Stock are outstanding
on the date of exchange. The Series C Preferred Stock is recorded on the
accompanying condensed consolidated balance sheet at the aggregate redemption
value (net of unamortized issuance costs) of $193,807 at March 31, 1996.
Net proceeds from these private offerings of approximately $486,000 were
primarily used to pay down borrowings under the Revolving Credit Agreement.
The Company's primary credit agreement is the Revolving Credit Agreement with a
total of $670,000 in commitments which may be utilized through the incurrence of
revolving credit loans. At March 31, 1996, $163,000 of revolving credit loans,
$6,935 of Canadian dollar loans and $5,247 of letters of credit were outstanding
under the Revolving Credit Agreement. Also, at March 31, 1996, K-III had
outstanding $250,000 of 10 5/8% Senior Notes due 2002 (the "10 5/8% Senior
Notes"), $100,000 of 10 1/4% Senior Notes due 2004 (the "10 1/4% Senior Notes"),
$300,000 of 8 1/2% Senior Notes due 2006 (the "8 1/2% Senior Notes"), a $150,000
term loan (the "BONY Term Loan") under a term loan facility with the Bank of New
York, as agent, a $150,000 Chase Term Loan, 4,000,000 shares of $2.875 Senior
Exchangeable Preferred Stock, liquidation preference $25.00 per share ("Senior
Preferred Stock"), 1,405,397 shares of $11.625 Series B Exchangeable Preferred
Stock, liquidation preference $100.00 per share ("Series B Preferred Stock") and
2,000,000 shares of $10.00 Series C Exchangeable Preferred Stock, liquidation
preference $100.00 per share ("Series C Preferred Stock"). The Senior Preferred
Stock is exchangeable, at K-III's option, for the 11 1/2% Subordinated
Debentures due 2004, and the Series B Preferred Stock is exchangeable, at K-
III's option, for the 11 5/8% Class B Subordinated Exchange Debentures due 2005
(the "Subordinated Debentures"). The Series C Preferred Stock is exchangeable,
at K-III's option, for the 10% Class C Subordinated Debentures due 2008. Before
May 1, 1998, dividends or interest, as the case may
<PAGE>
-13-
be, on the Series B Preferred Stock or the Subordinated Debentures, may be paid
in cash or by issuing additional shares of the Series B Preferred Stock or
additional Subordinated Debentures, as the case may be. On or after May 1,
1998, such dividends or interest must be paid in cash. Dividends on the Senior
Preferred Stock and the Series C Preferred Stock are paid quarterly in cash.
The above indebtedness, among other things, limit the ability of the Company to
change the nature of its businesses, incur indebtedness, create liens, sell
assets, engage in mergers, consolidations or transactions with affiliates, make
investments in or loans to certain subsidiaries, make guarantees and certain
restricted payments. The Company is also prohibited from declaring or making
dividend payments in excess of $20,000 per year except for dividend payments
on the outstanding series of preferred stock (provided that no event of default
exists and certain fixed charge coverage ratios as defined are maintained).
Borrowings under the above indebtedness are guaranteed by each of the domestic
subsidiaries of the Company.
At March 31, 1996, the mandatory reductions of K-III's revolving credit
commitment under the Revolving Credit Agreement are $135,000 per year in 1997
through 1999 with a final reduction or paydown of $265,000 in 2000. At March
31, 1996, mandatory principal payments on the BONY Term Loan are $18,750 in
2001, $71,250 in 2002 and $60,000 in 2003. Principal payments on the 10 5/8%
Senior Notes are scheduled to be $125,000 in May 2001 and $125,000 in May 2002.
The 10 1/4% Senior Notes mature in June 2004 and the 8 1/2% Senior Notes mature
in February 2006. At March 31, 1996, the mandatory principal payments on the
Chase Term Loan are $30,000 in 1998, $35,000 in 1999, $40,000 in 2000 and
$45,000 in 2001. In addition, principal and interest payments of $6,000 relating
to an acquisition obligation are scheduled to be made in semi-annual
installments of $3,000 on June 30 and December 31 each year through 1997. The
remaining principal and interest amounts of $63,500 will be repaid from June
1998 through June 2001. K-III believes its liquidity, capital resources and
cash flows are sufficient to fund planned capital expenditures, working capital
requirements, interest and principal payments on its debt, the payment of
preferred stock dividends and other anticipated expenditures for the foreseeable
future.
Recent Developments
- - -------------------
Acquisitions
On April 1, 1996, Haas acquired certain net assets of ADC of Greater Kansas
City, Inc., an apartment guide and locator. On April 24, 1996, the Company
acquired Horticulture magazine, the leading publication for the serious
gardener. On April 30, 1996, Haas acquired certain net assets of VSD
Communications, Inc., a publisher of apartment and home guides and related
map publications. The aggregate purchase price for these acquisitions was
approximately $13,600.
Merger Agreement and Tender Offer
On April 22, 1996, the Company, K-III Prime Corporation ("Prime") and a newly-
formed wholly owned subsidiary of Prime ("WAC") entered into a Merger Agreement
with Westcott Communications, Inc. ("Westcott") providing for the merger of WAC
into Westcott with holders of Westcott common stock receiving $21.50 per share
or an aggregate net price of approximately $422,000. The consummation of such
merger is conditional, among other things, upon the approval by holders of a
majority of the outstanding shares of Westcott, on a fully diluted basis.
Pursuant to such Merger Agreement, on April 26, 1996, the Company initiated a
tender offer to purchase all of the outstanding stock of Westcott for $21.50
per share. The tender offer will expire on May 23, 1996, unless it is
extended and is conditioned upon, among other things, there being validly
tendered at least that number of shares which constitute a majority of the
outstanding shares on a fully diluted basis. Westcott generates educational
content for a broad range of markets and distributes it through satellite
and video tape across 23 networks.
Divestiture
On April 3, 1996, McMullen Argus completed the sale of AutoStar for cash of $200
and a licensing agreement. The excess of the proceeds over the carrying value
of the net assets held for sale will result in a reduction in the excess of the
purchase price over the net assets acquired.
<PAGE>
-14-
Impact of Inflation
- - -------------------
The impact of inflation was immaterial during 1995 and 1996, with the exception
of paper prices which began to rise around mid-year 1994 and continued to rise
more dramatically in 1995, and postal costs. Overall, paper prices increased
approximately 24% in 1995. In 1995, paper costs represented approximately 9% of
the Company's total operating costs and expenses. The Company believes it will
be able to meet its paper requirements in the future. Due to recent softening
in certain segments of the paper market, paper price increases of the magnitude
experienced in 1995 seem unlikely in the forseeable future. In early 1995, a
postal rate increase of approximately 13% went into effect, the first such
increase since 1991. In 1995, postal costs represented approximately 7% of
total operating costs and expenses. In an attempt to contain postage costs, the
Company takes advantage of various postal discounts. The Company continually
addresses postal cost increases by taking advantage of sortation and
classification efficiencies and by passing the cost onto the customer wherever
possible. In the past, the effects of inflation on operating expenses have
substantially been offset by K-III's ability to increase selling prices. In
addition to pricing actions, the Company is continuing to examine all aspects of
the manufacturing and purchasing processes to identify ways to offset some of
these price increases.
<PAGE>
-15-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) Agreement and Plan of Merger Among the Company, Prime, WAC and
Westcott dated April 22, 1996.
(11) Statement Regarding Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K was filed on January 12, 1996 in connection with the January 2, 1996
acquisition of certain net assets of Cahners Consumer Magazines. As of the date
of that report, it was impracticable to file financial statements for the
acquisition. Such financial statements and related pro formas were filed on
March 15, 1996.
Form 8-K was filed on or about April 24, 1996 to announce the execution of a
Merger Agreement among the Company, Prime, WAC and Westcott.
<PAGE>
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K-III Communications Corporation
--------------------------------
(Registrant)
Date: May 10,1996 /s/ William F. Reilly
----------- ---------------------------------
(Signature)
Chairman and Chief Executive Officer
Date: May 10, 1996 /s/ Curtis A. Thompson
------------ ---------------------------------
(Signature)
Vice President, Controller and Chief
Accounting Officer
Exhibit 10
AGREEMENT AND PLAN OF MERGER
Among
K-III COMMUNICATIONS CORPORATION,
K-III PRIME CORPORATION,
K-III ACQUISITION CORP.
and
WESTCOTT COMMUNICATIONS, INC.
Dated April 22, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I THE OFFER
1.01. The Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.02. Target Action . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II THE MERGER
2.01. The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.02. Effective Time; Closing . . . . . . . . . . . . . . . . . . . . . 5
2.05. Directors and Officers . . . . . . . . . . . . . . . . . . . . . 6
2.06. Conversion of Securities . . . . . . . . . . . . . . . . . . . . 6
2.07. Employee Stock Options . . . . . . . . . . . . . . . . . . . . . 6
2.08. Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . 7
2.09. Surrender of Shares; Stock Transfer Books . . . . . . . . . . . . 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE TARGET
3.01. Organization and Qualification; Subsidiaries . . . . . . . . . . 9
3.02. Articles of Incorporation and Bylaws . . . . . . . . . . . . . . 9
3.03. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.04. Authority Relative to This Agreement . . . . . . . . . . . . . . 10
3.05. No Conflict; Required Filings and Consents . . . . . . . . . . . 10
3.06. Permits; Compliance . . . . . . . . . . . . . . . . . . . . . . . 11
3.07. SEC Filings; Financial Statements . . . . . . . . . . . . . . . . 12
3.08. Absence of Certain Changes or Events . . . . . . . . . . . . . . 13
3.09. Absence of Litigation . . . . . . . . . . . . . . . . . . . . . . 13
3.10. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . 14
3.11. Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.12. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.13. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . 15
3.14. Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . 16
3.15. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.16. Tangible Property . . . . . . . . . . . . . . . . . . . . . . . . 17
3.17. Material Contracts . . . . . . . . . . . . . . . . . . . . . . . 17
3.18. Offer Documents; Schedule 14D-9 . . . . . . . . . . . . . . . . . 17
3.19. Amendment to Rights Agreement. . . . . . . . . . . . . . . . . . 18
3.20. Intellectual Property . . . . . . . . . . . . . . . . . . . . . . 18
3.21. Fees and Expenses of Transactions . . . . . . . . . . . . . . . . 18
3.22. Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . 18
3.23. Accreditation . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.24. Interactive Distance Training Network ("IDTN") . . . . . . . . . 19
3.25. Executive Education Network ("EXEN") . . . . . . . . . . . . . . 19
3.26. Renewal Rate . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
ARTICLE IVREPRESENTATIONS AND WARRANTIES OF PARENT,ACQUIROR AND ACQUIROR SUB
4.01. Corporate Organization . . . . . . . . . . . . . . . . . . . . . 20
4.02. Authority Relative to This Agreement . . . . . . . . . . . . . . 20
4.03. No Conflict; Required Filings and Consents . . . . . . . . . . . 20
4.04. Offer Documents; Proxy Statement . . . . . . . . . . . . . . . . 21
4.05. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.06. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER
5.01. Conduct of Business by the Target Pending the Acquiror Sub's
Election Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VI ADDITIONAL AGREEMENTS
6.01. Shareholder's Meeting . . . . . . . . . . . . . . . . . . . . . . 23
6.02. Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.03. Target Board Representation; Section 14(f) . . . . . . . . . . . 24
6.04. Access to Information; Confidentiality . . . . . . . . . . . . . 25
6.06. Directors' and Officers' Indemnification . . . . . . . . . . . . 26
6.07. Obligations of Acquiror Sub . . . . . . . . . . . . . . . . . . . 27
6.08. Public Announcements . . . . . . . . . . . . . . . . . . . . . . 27
6.09. Delivery of SEC Documents . . . . . . . . . . . . . . . . . . . . 27
6.10. Notification of Certain Matters . . . . . . . . . . . . . . . . . 27
6.11. Further Action . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE VII CONDITIONS TO THE MERGER
7.01. Conditions to the Merger . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER
8.01. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.02. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 31
8.03. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.04. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE IXGENERAL PROVISIONS
9.01. Non-Survival of Representations, Warranties and Agreements . . . 33
9.02. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.03. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . 34
9.04. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.05. Assignment; Binding Effect; Benefit . . . . . . . . . . . . . . . 35
9.06. Incorporation of Schedules . . . . . . . . . . . . . . . . . . . 35
9.07. Specific Performance . . . . . . . . . . . . . . . . . . . . . . 35
9.08. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.09. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.10. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.11. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . 35
<PAGE>
9.12. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 35
ANNEX A Conditions to the Offer
ANNEX B Articles of Incorporation of The Surviving Corporation
<PAGE>
Glossary of Defined Terms
-------------------------
Definition Location of Defined Term
---------- ------------------------
Acquiring Person Sec. 3.19
Acquiror Sub's Election Date Sec. 5.01
Acquiror Preamble
Acquiror Expenses Sec. 8.02(c)
affiliate Sec. 9.03(a)
Agreement Preamble
Alternative Proposal Fee Sec. 8.02(a)
Articles of Merger Sec. 2.02
beneficial owner Sec. 9.03(b)
Blue Sky Laws Sec. 3.05(b)
Board Recitals
business day Sec. 9.03(c)
Business Combination Transaction Sec. 8.02(a)
Certificates Sec. 2.09(b)
Claim Sec. 6.06
Code Sec. 3.10
Confidentiality Agreement Sec. 9.12
control Sec. 9.03(d)
Dissenting Shares Sec. 2.08
Distribution Date Sec. 3.19
Effective Time Sec. 2.02
Environmental Permits Sec. 3.13(b)
Environmental Laws Sec. 3.13(a)
ERISA Sec. 3.10
Exchange Act Sec. 1.02(b)
i
<PAGE>
Definition Location of Defined Term
---------- ------------------------
Expiration Date Sec. 3.19
Governmental Authority Sec. 3.06
group Sec. 8.02(a)
Hazardous Substances Sec. 3.13(a)
HSR Act Sec. 3.05(b)
Indemnified Parties Sec. 6.06
Material Adverse Effect Sec. 3.01
Material Contract Sec. 3.17
Merger Recitals
Merger Consideration Sec. 2.06(a)
Minimum Condition Sec. 1.01(a)
Offer Documents Sec. 1.01(b)
Offer Recitals
Offer to Purchase Sec. 1.01(b)
Option Sec. 2.07
Paying Agent Sec. 2.09(a)
Per Share Amount Recitals
person Sec. 9.03(e)
Plans Sec. 3.10
Proxy Statement Sec. 4.04
Rights Agreement Recitals
Schedule 14D-9 Sec. 1.02(b)
Schedule 14D-1 Sec. 1.01(b)
SEC Sec. 1.01(b)
Secretary Sec. 2.02
Shares Recitals
ii
<PAGE>
Definition Location of Defined Term
---------- ------------------------
Stock Acquisition Date Sec. 3.19(a)
subsidiary Sec. 9.03(f)
Subsidiary Sec. 3.01
Surviving Corporation Sec. 2.01
Target Disclosure Schedule Article III
Target Shareholder's Meeting Sec. 6.01(a)
Target SEC Reports Sec. 3.07(a)
Target Permits Sec. 3.06
Target Preferred Stock Sec. 3.03
Target Common Stock Recitals
Target Banker Sec. 3.14
Target Preamble
Tender Offer Acceptance Date Sec. 2.07
Texas Law Recitals
Transactions Sec. 1.02(a)
U.S. GAAP Sec. 3.07(b)
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 22, 1996 (this
"Agreement"), by and among K-III COMMUNICATIONS CORPORATION, a Delaware
---------
corporation ("Parent"), K-III PRIME CORPORATION, a Delaware corporation, a
direct, wholly owned subsidiary of Parent ("Acquiror"), K-III ACQUISITION CORP,
--------
a Texas corporation and a direct, wholly owned subsidiary of Acquiror ("Acquiror
--------
Sub"), and WESTCOTT COMMUNICATIONS, INC., a Texas corporation (the "Target").
- - --- ------
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Acquiror, Acquiror Sub and the
Target have each determined that it is in the best interests of their respective
shareholders for Acquiror, through Acquiror Sub, to acquire the Target upon the
terms and subject to the conditions set forth herein; and
WHEREAS, in furtherance of such acquisition, it is proposed that
Acquiror Sub shall make a cash tender offer (the "Offer") to acquire all the
-----
issued and outstanding shares of Common Stock, par value $.01 per share, of the
Target ("Target Common Stock"; shares of Target Common Stock being hereinafter
-------------------
collectively referred to as the "Shares") and the associated Rights (as defined
------
in Section 1.01) issued pursuant to the Rights Agreement (as defined below) for
$21.50 per Share (and associated Right) (such amount, or any greater amount per
Share (and associated Right) paid pursuant to the Offer, being hereinafter
referred to as the "Per Share Amount") net to the seller in cash, without
----------------
interest thereon, upon the terms and subject to the conditions of this Agreement
and the Offer; and
WHEREAS, the Board of Directors of Acquiror and Acquiror Sub have
approved the making of the Offer and the transactions related thereto; and
WHEREAS, the Board of Directors of the Target (the "Board") has (i)
-----
determined that the consideration to be paid for each Share in the Offer and in
the Merger (as defined below) is fair to and in the best interests of the
shareholders of the Target, (ii) approved this Agreement and the Offer and the
other transactions contemplated hereby and (iii) resolved and agreed to
recommend acceptance of the Offer and the Merger and approval of this Agreement
by such shareholders; and
WHEREAS, pursuant to and in accordance with the terms of the Rights
Agreement, dated as of January 9, 1996 between the Target and KeyCorp
Shareholder Services, Inc. (as amended, the "Rights Agreement"), the Board has
----------------
amended the Rights Agreement in the manner contemplated by Section 3.19; and
WHEREAS, also in furtherance of such acquisition, the Boards of
Directors of Acquiror, Acquiror Sub and the Target have each approved this
Agreement and the merger (the "Merger") of Acquiror Sub with and into the Target
------
in accordance with the Texas Business Corporation Act ("Texas Law") following
---------
the consummation of the Offer and upon the terms and subject to the conditions
set forth herein;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Acquiror, Acquiror Sub and the Target hereby agree as follows:
ARTICLE I
THE OFFER
SECTION 1.01. The Offer. (a) Provided that this Agreement shall not
---------
have been terminated in accordance with Section 8.01 and none of the events set
forth in Annex A hereto shall have occurred or be existing (unless such event
-------
shall have been waived by Acquiror Sub), Acquiror shall cause Acquiror Sub to
commence, and Acquiror Sub shall commence, the Offer at the Per Share Amount as
promptly as reasonably practicable after the date hereof, but in no event later
than five business days after the public announcement of Acquiror Sub's
intention to commence the Offer. The obligation of Acquiror Sub to accept for
payment and pay for Shares tendered pursuant to the Offer shall be subject only
to (i) the condition (the "Minimum Condition") that at least the number of
-----------------
Shares that, when combined with the Shares already owned by Parent and its
direct and indirect subsidiaries, constitute a majority of the then Outstanding
Shares on a Fully Diluted Basis shall have been validly tendered and not
withdrawn prior to the expiration of the Offer and (ii) the satisfaction or
waiver of the other conditions set forth in Annex A hereto. "Outstanding Shares
-------
on a Fully Diluted Basis" shall mean all outstanding shares plus all shares
available for issuance under the Target's Employee Stock Purchase Plan plus all
Shares issuable upon the conversion of any convertible securities or upon the
exercise of any options, warrants or rights (other than the Rights (as defined
in the Rights Agreement)). Acquiror Sub expressly reserves the right, in its
sole discretion, to waive any such condition (other than the Minimum Condition),
to increase the price per Share payable in the Offer, and to make any other
changes in the terms and conditions of the Offer; provided, however, that
(notwithstanding Section 8.03), without the prior written consent of the Target,
no change may be made which (A) decreases the price per Share payable in the
Offer, (B) reduces the maximum number of Shares to be purchased in the Offer,
(C) imposes conditions to the Offer in addition to those set forth in Annex A
-------
hereto, (D) amends or changes the terms and conditions of the Offer in any
manner materially adverse to the holders of Shares (other than Acquiror and its
subsidiaries) or (E) changes or waives the Minimum Condition. The Per Share
Amount shall, subject to applicable withholding of taxes, be net to the seller
in cash, without interest thereon, upon the terms and subject to the conditions
of the Offer. Subject to the terms and conditions of this Agreement and the
Offer (including, without limitation, the Minimum Condition), Acquiror Sub shall
accept for payment and pay, as promptly as practicable after expiration of the
Offer, for all Shares validly tendered and not withdrawn; provided, that
--------
Acquiror Sub shall have the right, in its sole discretion, to extend the Offer
from time to time for up to a maximum of 10 additional business days for all
such extensions, notwithstanding the prior satisfaction of the conditions set
forth in Annex A hereto. Acquiror Sub agrees that, in the event that it is
-------
unable to consummate the Offer at any scheduled expiration thereof due solely to
the failure of the Acquiror Sub to obtain the unconditional consents of the
Federal Communications Commission to the transfer of the Target's licenses to
Acquiror Sub (the "FCC Approvals"), it shall unless the Target is in willful
2
<PAGE>
breach of any obligation set forth in this Agreement, extend the Offer (unless
such FCC Approvals are not reasonably capable of being satisfied prior to the
expiration of 90 days from the commencement of the Offer) until the earlier of
(i) the expiration of 90 days from the commencement of the Offer or (ii) such
time as Acquiror Sub shall have received the FCC Approvals. It is agreed that
the conditions set forth in Annex A hereto are for the sole benefit of Acquiror
-------
Sub and Acquiror and may be asserted by Acquiror Sub or Acquiror regardless of
the circumstances giving rise to any such condition (including any action or
inaction by Acquiror or Acquiror Sub not inconsistent with the terms hereof) or,
except with respect to the Minimum Condition as set forth above, may be waived
by Acquiror Sub or Acquiror in whole or in part at any time and from time to
time in their sole discretion.
(b) As soon as reasonably practicable on the date of commencement of
the Offer, Acquiror Sub shall file with the Securities and Exchange Commission
(the "SEC") and disseminate to holders of Shares to the extent required by law a
---
Tender Offer Statement on Schedule 14D-1 (together with all amendments and
supplements thereto, the "Schedule 14D-1") with respect to the Offer and the
--------------
other Transactions (as hereinafter defined). The Schedule 14D-1 shall contain
or shall incorporate by reference an offer to purchase (the "Offer to Purchase")
-----------------
and forms of the related letter of transmittal and any related summary
advertisement (the Schedule 14D-1, the Offer to Purchase and such other
documents, together with all supplements and amendments thereto, being referred
to herein collectively as the "Offer Documents"). Acquiror, Acquiror Sub and
---------------
the Target agree to correct promptly any information provided by any of them for
use in the Offer Documents which shall have become false or misleading in any
material respect, and Acquiror and Acquiror Sub further agree to take all steps
necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC
and the other Offer Documents as so corrected to be disseminated to holders of
Shares, in each case as and to the extent required by applicable federal
securities laws. The Target and its counsel shall be given an opportunity to
review and comment on the Offer Documents and any amendments thereto prior to
the filing thereof with the SEC. Acquiror and Acquiror Sub will provide the
Target and its counsel with a copy of any written comments or telephonic
notification of any verbal comments Acquiror or Acquiror Sub may receive from
the SEC or its staff with respect to the Offer Documents promptly after the
receipt thereof and will provide the Target and its counsel with a copy of any
written responses and telephonic notification of any verbal response of
Acquiror, Acquiror Sub or their counsel. In the event that the Offer is
terminated or withdrawn by Acquiror Sub, Acquiror and Acquiror Sub shall cause
all tendered Shares to be returned to the registered holders of the Shares
represented by the certificate or certificates surrendered to the Paying Agent
(as defined herein).
SECTION 1.02. Target Action. (a) The Target hereby approves of and
-------------
consents to the Offer and represents that (i) the Board, at a meeting duly
called and held on April 21, 1996, has (A) determined that this Agreement and
the transactions contemplated hereby, including, without limitation, each of the
Offer and the Merger (the "Transactions"), are fair to and in the best interests
------------
of the holders of Shares (other than Acquiror and its subsidiaries), (B)
approved and adopted this Agreement and the Transactions and (C) resolved to
recommend, subject to the conditions set forth herein, that the shareholders of
the Target accept the Offer and approve and adopt this Agreement and the
Transactions; and (ii) Goldman, Sachs & Co. has delivered to the Board a written
opinion
3
<PAGE>
that the consideration to be received by the holders of Shares pursuant to each
of the Offer and the Merger is fair to such holders from a financial point of
view. The Target has been authorized by Goldman, Sachs & Co., subject to prior
review by Goldman, Sachs & Co., to include such fairness opinion (or references
thereto) in the Offer Documents and in the Schedule 14D-9 (as defined in
paragraph (b) of this Section 1.02) and the Proxy Statement referred to in
Section 6.02. Subject to the fiduciary duties of the Board under applicable law
as advised by independent legal counsel, the Target hereby consents to the
inclusion in the Offer Documents of the recommendation of the Board described
above.
(b) As soon as reasonably practicable on the date of commencement of
the Offer, the Target shall file with the SEC a Solicitation/Recommendation
Statement on Schedule 14D-9 (together with all amendments and supplements
thereto, the "Schedule 14D-9") containing, subject only to the fiduciary duties
--------------
of the Board under applicable law as advised by independent legal counsel, the
recommendation of the Board described in Section 1.02(a) and shall disseminate
the Schedule 14D-9 to the extent required by Rule 14d-9 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any other
------------
applicable federal securities laws. The Target, Acquiror and Acquiror Sub agree
to correct promptly any information provided by any of them for use in the
Schedule 14D-9 which shall have become false or misleading in any material
respect, and the Target further agrees to take all steps necessary to cause the
Schedule 14D-9 as so corrected to be filed with the SEC and disseminated to
holders of Shares, in each case as and to the extent required by applicable
federal securities laws. Acquiror, Acquiror Sub and their counsel shall be
given an opportunity to review and comment on the Schedule 14D-9 and any
amendments thereto prior to the filing thereof with the SEC. The Target will
provide Acquiror and Acquiror Sub and their counsel with a copy of any written
comments or telephonic notification of any verbal comments the Target may
receive from the SEC or its staff with respect to the Offer Documents promptly
after the receipt thereof and will provide Acquiror and Acquiror Sub and their
counsel with a copy of any written responses and telephonic notification of any
verbal response of the Target or its counsel.
(c) The Target shall promptly furnish Acquiror Sub with mailing
labels containing the names and addresses of all record holders of Shares and
with security position listings of Shares held in stock depositories, each as of
the most recent date reasonably practicable. The Target shall furnish Acquiror
Sub with such additional information, including, without limitation, updated
listings and computer files of shareholders, mailing labels, non-objecting
beneficial owner lists and security position listings, and such other assistance
as Acquiror, Acquiror Sub or their agents may reasonably request. Subject to
the requirements of applicable law, and except for such steps as are necessary
to disseminate the Offer Documents and any other documents necessary to
consummate the Offer or the Merger, Acquiror and Acquiror Sub shall hold in
confidence the information contained in such labels, listings and files, shall
use such information only in connection with the Offer and the Merger, and, if
this Agreement shall be terminated in accordance with Section 8.01, shall
deliver promptly to the Target all copies of such information then in their
possession and shall certify in writing to the Target its compliance with this
Section 1.02(c).
4
<PAGE>
ARTICLE II
THE MERGER
SECTION 2.01. The Merger. Upon the terms and subject to the
----------
conditions set forth in Article VII, and in accordance with Texas Law, at the
Effective Time (as hereinafter defined), Acquiror Sub shall be merged with and
into the Target. As a result of the Merger, the separate corporate existence of
Acquiror Sub shall cease and the Target shall continue as the surviving
corporation of the Merger (the "Surviving Corporation"). The name of the
---------------------
Surviving Corporation shall be WESTCOTT COMMUNICATIONS, INC. At Acquiror's
election, the Merger may alternatively be structured so that (i) the Target is
merged with and into Acquiror, Acquiror Sub or any other direct or indirect
wholly owned subsidiary of Acquiror or (ii) any direct or indirect wholly owned
subsidiary of Acquiror other than Acquiror Sub is merged with and into the
Target. In the event of such an election, the parties agree to execute an
appropriate amendment to this Agreement in order to reflect such election and
submit this Agreement, as so amended, to a vote of the Target's shareholders in
accordance with applicable laws.
SECTION 2.02. Effective Time; Closing. As promptly as practicable
-----------------------
and in no event later than the fifth business day following the satisfaction or
waiver of the conditions set forth in Article VII, the parties hereto shall
cause the Merger to be consummated by filing articles of merger (the "Articles
--------
of Merger") with the Secretary of State of the State of Texas (the "Secretary")
- - --------- ---------
in such form as is required by, and executed in accordance with the relevant
provisions of, Texas Law. The term "Effective Time" means the date and time of
--------------
the filing of the Articles of Merger with the Secretary (or such later time as
is specified in the Articles of Merger). Immediately prior to the filing of the
Articles of Merger, a closing will be held at the offices of Baker & McKenzie,
2001 Ross Avenue, Suite 4500, Dallas, Texas (or such other place and time as the
parties may agree).
SECTION 2.03. Effect of the Merger. The effect of the Merger shall
--------------------
be as provided in the applicable provisions of Texas Law.
SECTION 2.04. Articles of Incorporation; Bylaws. (a) At the
---------------------------------
Effective Time, the Articles of Incorporation of the Target, as in effect
immediately prior to the Effective Time, shall be amended as of the Effective
Time by operation of this Agreement and by virtue of the Merger without any
further action by the shareholders or directors of the Surviving Corporation to
read in its entirety as set forth on Annex B hereto.
-------
(b) At the Effective Time, the Bylaws of Acquiror Sub, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter amended as provided by law, the Articles of
Incorporation of the Surviving Corporation and such Bylaws.
SECTION 2.05. Directors and Officers. The directors of Acquiror Sub
----------------------
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation
5
<PAGE>
until a successor is elected or appointed and has qualified or until the
earliest of such director's death, resignation, removal or disqualification, and
the officers of the Target immediately prior to the Effective Time shall be the
initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and qualified, or as
otherwise provided in the Bylaws of the Surviving Corporation.
SECTION 2.06. Conversion of Securities. At the Effective Time, by
------------------------
virtue of the Merger and without any action on the part of Acquiror Sub, the
Target or the holders of any of the following shares of capital stock:
(a) Each Share issued and outstanding immediately prior to the
Effective Time (other than any Shares to be cancelled pursuant to Section
2.06(b) and any Dissenting Shares (as hereinafter defined)) shall be cancelled,
extinguished and converted automatically into the right to receive an amount
equal to the Per Share Amount in cash (the "Merger Consideration") payable,
--------------------
without interest, to the holder of such Share, upon surrender, in the manner
provided in Section 2.09, of the certificate that formerly evidenced such Share,
less any required withholding taxes;
(b) Each Share held in the treasury of the Target and each Share
owned by Acquiror Sub, Acquiror, Parent or any direct or indirect wholly owned
subsidiary of Parent or of the Target immediately prior to the Effective Time
shall be cancelled and retired without any conversion thereof and no payment or
distribution shall be made with respect thereto; and
(c) Each share of Common Stock, par value $.01 per share, of Acquiror
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock, par value $.01 per share, of the Surviving
Corporation.
SECTION 2.07. Employee Stock Options. Immediately after the Tender
----------------------
Offer Acceptance Date, each outstanding option to purchase Shares (in each case,
an "Option") granted under (a) the Target's Amended and Restated 1989 Stock
------
Option Plan, as amended, and (b) the Target's Nonemployee Stock Option Plan, as
amended, whether or not then exercisable, shall, subject to the Target's receipt
of any required consent of the holders of such Options, be cancelled by the
Target, and each holder of a cancelled Option shall be entitled to receive from
Acquiror Sub (or, at the option of Acquiror Sub, from the Target, which will be
reimbursed by the Acquiror Sub) at the same time as payment for Shares is made
by Acquiror Sub in connection with the Offer (or, with respect to any person
subject to Section 16 of the Exchange Act, as soon as practicable after the
first date payment can be made without liability to such person under Section
16(b) of the Exchange Act), in consideration for the cancellation of such
Option, an amount in cash equal to the product of (i) the number of Shares
previously subject to such Option and (ii) the excess, if any, of the Per Share
Amount over the exercise price per Share previously subject to such Option, less
any required withholding taxes. The term "Tender Offer Acceptance Date" means
----------------------------
the date on which the Acquiror Sub shall have accepted for payment all Shares
validly tendered and not withdrawn pursuant to the Offer.
6
<PAGE>
SECTION 2.08. Dissenting Shares. Notwithstanding any provision of
-----------------
this Agreement to the contrary, Shares that are outstanding immediately prior to
the Effective Time and which are held by shareholders who shall not have voted
in favor of this Agreement or consented thereto in writing and who shall have
timely filed with the Target a written objection to the action contemplated by
this Agreement in accordance with Section 5.12 of Texas Law (collectively, the
"Dissenting Shares") shall not be converted into or represent the right to
-----------------
receive the Merger Consideration. Such shareholders shall be entitled to
receive payment of the fair value of such Shares held by them in accordance with
the provisions of Texas Law, except that all Dissenting Shares held by
shareholders who effectively shall have withdrawn or lost their rights to demand
payment of the fair value of such Shares under Texas Law shall thereupon be
deemed to have been converted into and to have become exchangeable for, as of
the Effective Time, the right to receive the Merger Consideration, without any
interest thereon, upon surrender, in the manner provided in Section 2.09, of the
certificate or certificates that formerly evidenced such Shares, less any
required withholding taxes.
SECTION 2.09. Surrender of Shares; Stock Transfer Books. (a) Prior
-----------------------------------------
to the Effective Time, Acquiror Sub shall designate a bank or trust company
reasonably satisfactory to the Target to act as agent (the "Paying Agent") for
------------
the holders of Shares in connection with the Merger to receive the funds to
which holders of Shares shall become entitled pursuant to Section 2.06(a). At
the Effective Time, Acquiror shall cause the Surviving Corporation to have
sufficient funds to deposit, and shall cause the Surviving Corporation to
deposit in trust with the Paying Agent, sufficient funds to make all payments
pursuant to Section 2.09(b). Such funds shall be invested by the Paying Agent
as directed by the Surviving Corporation, provided that such investments shall
be in obligations of or guaranteed by the United States of America or of any
agency thereof and backed by the full faith and credit of the United States of
America, in commercial paper obligations rated A-1 or P-1 or better by Moody's
Investors Services, Inc. or Standard & Poor's Corporation, respectively, or in
deposit accounts, certificates of deposit or banker's acceptances of, repurchase
or reverse repurchase agreements with, or Eurodollar time deposits purchased
from, commercial banks with capital, surplus and undivided profits aggregating
in excess of $100 million (based on the most recent financial statements of such
bank which are then publicly available at the SEC or otherwise); provided,
--------
however, that no loss on any investment made pursuant to this Section 2.09 shall
- - -------
relieve Acquiror or the Surviving Corporation of its obligation to pay the Per
Share Amount for each Share outstanding immediately prior to the Effective Time.
Any gain on any investment made pursuant to this Section 2.09 shall be the
property of the Surviving Corporation.
(b) Promptly after the Effective Time, Acquiror shall cause the
Surviving Corporation to mail to each person who was, at the Effective Time, a
holder of record of Shares entitled to receive the Merger Consideration pursuant
to Section 2.06(a) a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
evidencing such Shares (the "Certificates") shall pass, only upon proper
------------
delivery of the Certificates to the Paying Agent) and instructions for use in
effecting the surrender of the Certificates pursuant to such letter of
transmittal. Upon surrender to the Paying Agent of a Certificate, together with
such letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, and such other documents as may be required
pursuant to such instructions, the
7
<PAGE>
holder of such Certificate shall be entitled to receive in exchange therefor the
Merger Consideration for each Share formerly evidenced by such Certificate, and
such Certificate shall then be cancelled. No interest shall accrue or be paid
on the Merger Consideration payable upon the surrender of any Certificate for
the benefit of the holder of such Certificate. If payment of the Merger
Consideration is to be made to a person other than the person in whose name the
surrendered Certificate is registered on the stock transfer books of the Target,
it shall be a condition of payment that the Certificate so surrendered shall be
endorsed properly or otherwise be in proper form for transfer and that the
person requesting such payment shall have paid all transfer and other taxes
required by reason of the payment of the Merger Consideration to a person other
than the registered holder of the Certificate surrendered or shall have
established to the satisfaction of the Surviving Corporation that such taxes
either have been paid or are not applicable. The Surviving Corporation shall
pay all charges and expenses, including those of the Paying Agent, in connection
with the distribution of the Merger Consideration.
(c) At any time following the sixth month after the Effective Time,
the Surviving Corporation shall be entitled to require the Paying Agent to
deliver to it any funds which had been made available to the Paying Agent and
not disbursed to holders of Shares (including, without limitation, all interest
and other income received by the Paying Agent in respect of all funds made
available to it) and, thereafter, such holders shall be entitled to look to the
Surviving Corporation (subject to abandoned property, escheat and other similar
laws) only as general creditors thereof with respect to any Merger Consideration
that may be payable upon due surrender of the Certificates held by them.
Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying
Agent shall be liable to any holder of a Share for any Merger Consideration
delivered in respect of such Share to a public official pursuant to any
abandoned property, escheat or other similar law.
(d) At the Effective Time, the stock transfer books of the Target
shall be closed and, thereafter, there shall be no further registration of
transfers of Shares on the records of the Target. From and after the Effective
Time, the holders of Shares outstanding immediately prior to the Effective Time
shall cease to have any rights with respect to such Shares except as otherwise
provided herein or by applicable law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE TARGET
Except as set forth in the Disclosure Schedule delivered by the Target
and signed by the Target and Acquiror for identification prior to the execution
and delivery of this Agreement (the "Target Disclosure Schedule"), which shall
--------------------------
be numbered in such a way as to correspond with the section references below and
the disclosure made shall relate only to the representations and warranties made
within the relevant section, the Target hereby represents and warrants to
Parent, Acquiror and Acquiror Sub that:
SECTION 3.01. Organization and Qualification; Subsidiaries. The
--------------------------------------------
Target is a corporation, and each subsidiary of the Target (a "Subsidiary") is a
----------
corporation or partnership, in
8
<PAGE>
each case duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization and has the requisite corporate or
partnership power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted. The Target and each
Subsidiary are duly qualified or licensed as a foreign corporation or
partnership to do business, and are in good standing, in each jurisdiction where
the character of the properties owned, leased or operated by them or the nature
of their business makes such qualification or licensing necessary, except for
such failures to be so qualified or licensed and in good standing that would
not, individually or in the aggregate, have a Material Adverse Effect on the
Target. As used in this Agreement, the term "Material Adverse Effect" means
-----------------------
with respect to any person, any change or effect that is or is reasonably likely
to be materially adverse to the financial condition, business or results of
operations of such person and its subsidiaries, taken as a whole, or on the
transactions contemplated by this Agreement. As of the date hereof, a true and
correct list of all Subsidiaries, together with the jurisdiction of organization
of each Subsidiary and the percentage of the outstanding capital stock or other
equity interests of each Subsidiary owned by the Target and each other
Subsidiary, is set forth in Section 3.01 of the Target Disclosure Schedule.
Except as disclosed in Section 3.01 of the Target Disclosure Schedule, the
Target does not directly or indirectly own any equity or similar interest in, or
any interest convertible into or exchangeable or exercisable for any equity or
similar interest in, any corporation, partnership, joint venture or other
business association or entity.
SECTION 3.02. Articles of Incorporation and Bylaws. The Target has
------------------------------------
heretofore furnished or made available to Acquiror a complete and correct copy
of the Articles of Incorporation and Bylaws or equivalent organizational
documents, each as amended to date, of the Target and each Subsidiary. Neither
the Target nor any Subsidiary is in violation of any provision of its Articles
of Incorporation, Bylaws or equivalent organizational documents.
SECTION 3.03. Capitalization. The authorized capital stock of the
--------------
Target consists of 29,000,000 shares of Target Common Stock and 1,000,000 shares
of preferred stock, $.01 par value ("Target Preferred Stock"). As of March 31,
----------------------
1996 (a) 19,816,435 shares of Target Common Stock were issued and outstanding,
all of which are validly issued, fully paid and nonassessable and not subject to
preemptive rights, and (b) 1,688,000 shares of Target Common Stock were issuable
pursuant to outstanding Options. The number of Options, by exercise price,
outstanding on March 31, 1996 are set forth in Section 3.03 of the Target
Disclosure Schedule. As of the date of this Agreement, no shares of Target
Preferred Stock are issued and outstanding. The authorized capital stock and
issued and outstanding stock of each subsidiary is set forth in Section 3.03 of
the Target Disclosure Schedule. Except as set forth in this Section 3.03,
Section 3.03 of the Target Disclosure Schedule or in the Target SEC Reports (as
herein defined) filed prior to the date of this Agreement, as of the date of
this Agreement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of, or other equity interests in, the Target or any Subsidiary
obligating the Target or any Subsidiary to issue or sell any shares of capital
stock of, or other equity interests in, the Target or any Subsidiary. Between
March 31, 1996 and the date of this Agreement, no shares of Target Common Stock
have been issued by the Target, except upon the exercise of stock options
described above and no shares of Target Common Stock pursuant to the Target's
Employee Stock Purchase Plan, in each case in
9
<PAGE>
accordance with their respective terms, and no Options have been granted.
Except as set forth in Section 3.03 of the Target Disclosure Schedule, there are
no outstanding contractual obligations of the Target or any Subsidiary to
repurchase, redeem or otherwise acquire any shares of Target Common Stock or any
capital stock of, or any equity interest in, any Subsidiary. Except as
described in the Target SEC Reports filed prior to the date of this Agreement or
Section 3.03 of the Target Disclosure Schedule, each outstanding share of
capital stock of, or other equity interest in, each Subsidiary is duly
authorized, validly issued, fully paid and nonassessable. As of the date
hereof, no more than 90,390 shares of Target Common Stock were available for
issuance under Target's Employee Stock Purchase Plan.
SECTION 3.04. Authority Relative to This Agreement. The Target has
------------------------------------
all necessary corporate power and authority to execute and deliver this
Agreement and, with respect to the Merger, upon the approval and adoption of
this Agreement and the Merger by the Target's shareholders in accordance with
this Agreement and Texas Law, to perform its obligations hereunder and to
consummate the Transactions. The execution and delivery of this Agreement by
the Target and the consummation by the Target of the Transactions have been duly
and validly authorized by all necessary corporate action and no other corporate
proceedings on the part of the Target are necessary to authorize this Agreement
or to consummate the Transactions (other than, with respect to the Merger, the
approval and adoption of this Agreement and the Merger by the Target's
shareholders in accordance with Texas Law and the filing and recordation of
appropriate Articles of Merger with the Secretary in accordance with this
Agreement and Texas Law). This Agreement has been duly and validly executed and
delivered by the Target and, assuming the due authorization, execution and
delivery of this Agreement by Acquiror and Acquiror Sub, constitutes a legal,
valid and binding obligation of the Target, enforceable against the Target in
accordance with its terms.
SECTION 3.05. No Conflict; Required Filings and Consents. (a) The
------------------------------------------
execution and delivery of this Agreement by the Target do not, and the
performance of this Agreement by the Target will not, subject to (x) with
respect to the Merger, obtaining the requisite approval and adoption of this
Agreement and the Merger by the Target's shareholders in accordance with this
Agreement and Texas Law, and (y) obtaining the consents, approvals,
authorizations and permits and making the filings described in Section 3.05(b)
and Section 3.05(b) of the Target Disclosure Schedule, (i) conflict with or
violate the Articles of Incorporation, Bylaws or equivalent organizational
documents of the Target or any Subsidiary, (ii) conflict with or violate any
domestic (federal, state or local) or foreign law, rule, regulation, order,
judgment or decree ("Law") applicable to the Target or any Subsidiary or by
which any property or asset of the Target or any Subsidiary is bound or
affected, or (iii) except as specified in Section 3.05(a)(iii) of the Target
Disclosure Schedule, result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any right of termination, unilateral amendment, acceleration
or cancellation of, or result in the creation of a lien or other encumbrance on
any property or asset of the Target or any Subsidiary, or require the consent of
any third party pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Target or any Subsidiary is a party or by which the Target or any
Subsidiary or any property or asset of the Target or any Subsidiary is bound or
affected, except for such conflicts, violations, breaches, defaults, rights,
liens and consents which
10
<PAGE>
individually or in the aggregate would not reasonably be expected to have a
Material Adverse Effect on the Target.
(b) The execution and delivery of this Agreement by the Target do
not, and the performance of this Agreement by the Target will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except (i)
pursuant to the Exchange Act, state securities or "blue sky" laws ("Blue Sky
--------
Laws"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
- - ----
(the "HSR Act") and the rules and regulations promulgated thereunder, and filing
-------
and recordation of appropriate Articles of Merger with the Secretary as required
by Texas Law, (ii) as specified in Section 3.05(b) of the Target Disclosure
Schedule and (iii) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay consummation of the Merger, or otherwise prevent the Target
from performing its obligations under this Agreement.
SECTION 3.06. Permits; Compliance. Except as disclosed in Section
-------------------
3.06 of the Target Disclosure Schedule, each of the Target and the Subsidiaries
is in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates, approvals and orders
of any United States (federal, state or local) or foreign government, or
governmental, regulatory or administrative authority, agency or commission or
court of competent jurisdiction ("Governmental Authority") necessary for the
----------------------
Target or any Subsidiary to own, lease and operate its properties or to carry on
its business as it is now being conducted, except for those which the failure to
possess would not individually or in the aggregate reasonably be expected to
have a Material Adverse Effect on the Target (the "Target Permits") and, as of
--------------
the date hereof, no suspension or cancellation of any of the Target Permits is
pending or, to the knowledge of the Target, threatened. Except as disclosed in
Section 3.06 of the Target Disclosure Schedule or as would not reasonably be
expected to have a Material Adverse Effect on the Target, neither the Target nor
any Subsidiary is in conflict with, or in default or violation of, or, with the
giving of notice or the passage of time, would be in conflict with, or in
default or violation of, (a) any Law applicable to the Target or any Subsidiary
or by which any property or asset of the Target or any Subsidiary is bound or
affected, (b) any of the Target Permits or (c) the terms and provisions of the
Affirmative Action Plan of the Target and the Subsidiaries. Except as disclosed
in Section 3.06 of the Target Disclosure Schedule, neither the Target nor any of
the Subsidiaries is subject to regulation by the Federal Communications
Commission, to the licensing requirements of the Communications Act of 1934, as
amended, or the Communications Satellite Act of 1962, as amended.
SECTION 3.07. SEC Filings; Financial Statements. (a) The Target has
---------------------------------
timely filed all forms, reports and documents required to be filed by it with
the Securities and Exchange Commission since December 31, 1992 (collectively,
the "Target SEC Reports"). The Target SEC Reports (i) were prepared in all
------------------
material respects in accordance with the requirements of the Securities Act of
1933, as amended, and the Exchange Act, as the case may be, and the rules and
regulations thereunder and (ii) did not, at the time they were filed (or at the
effective date thereof in the case of registration statements), contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements made
11
<PAGE>
therein, in the light of the circumstances under which they were made, not
misleading. No Subsidiary is currently required to file any form, report or
other document with the Securities and Exchange Commission.
(b) Each of the financial statements (including, in each case, any
notes thereto) contained in the Target SEC Reports was prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis ("U.S. GAAP") throughout the periods indicated (except as may
---------
be indicated in the notes thereto and except that financial statements included
with interim reports do not contain all U.S. GAAP notes to such financial
statements) and each fairly presented in all material respects the financial
position, results of operations and changes in shareholders' equity and cash
flows of the Target as at the respective dates thereof and for the respective
periods indicated therein (subject, in the case of unaudited statements, to
normal and recurring year-end adjustments which were not and are not expected,
individually or in the aggregate, to have a Material Adverse Effect on the
Target).
(c) Except (i) to the extent set forth on the balance sheet of the
Target and the consolidated Subsidiaries as at December 31, 1995, including the
notes thereto, (ii) as set forth in Section 3.07(c) of the Target Disclosure
Schedule or (iii) as disclosed in any SEC Report filed by the Target after
December 31, 1995 and prior to the date of this Agreement, neither the Target
nor any Subsidiary has any liability or obligation of any nature (whether
accrued, absolute, contingent or otherwise) which would be required to be
reflected on a balance sheet, or in the notes thereto, prepared in accordance
with U.S. GAAP, except for liabilities and obligations incurred in the ordinary
course of business consistent with past practice since December 31, 1995, which
would not, individually or in the aggregate, be material in amount.
(d) The Target has heretofore furnished or made available to Acquiror
complete and correct copies of all amendments and modifications (if any) that
have not been filed by the Target with the SEC to all agreements, documents and
other instruments that previously had been filed by the Target as exhibits to
the Target SEC Reports and are currently in effect.
(e) The receivables of the Target and the Subsidiaries, either
reflected on the balance sheet of the Target and the consolidated Subsidiaries
as at December 31, 1995 (the "December Balance Sheet") or created subsequent to
the December Balance Sheet are, to the extent not previously collected in full,
true and valid receivables, created in the ordinary course of the business of
the Target and its Subsidiaries. Since December 31, 1995, neither the Target
nor the Subsidiaries have (i) permitted or agreed to any extension in the time
for payment of receivables other than in the ordinary course of business and
consistent with past practice or (ii) changed their collection practices with
respect to the receivables including, without limitation, granted discounts in
return for the early collection thereof other than in the ordinary course of
business and consistent with past practice.
SECTION 3.08. Absence of Certain Changes or Events. Since December
------------------------------------
31, 1995, except as set forth in this Agreement or disclosed pursuant to Section
3.08 of the Target Disclosure Schedule, or disclosed in any Target SEC Report
filed since December 31, 1995 and prior to the date
12
<PAGE>
of this Agreement, the Target and the Subsidiaries have conducted their business
only in the ordinary course and in a manner consistent with past practice and,
since December 31, 1995, there has not been (a) any event or events (whether or
not covered by insurance), individually or in the aggregate, having a Material
Adverse Effect on the Target, (b) any material change by the Target in its
accounting methods, principles or practices, (c) any entry by the Target or any
Subsidiary into any commitment or transaction material to the Target, except in
the ordinary course of business and consistent with past practice, (d) any
declaration, setting aside or payment of any dividend or distribution in respect
of any capital stock of the Target or any redemption, purchase or other
acquisition of any of the Target's or the Subsidiaries' securities, (e) other
than pursuant to the Plans (as defined in Section 3.10), any increase in or
amendment to, or establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option, stock purchase
or other employee benefit plan, (f) granted any general increase in
compensation, bonus or other benefits payable to the employees of the Target or
the Subsidiaries or, except for increases in connection with periodic reviews
and in amounts consistent with past practice, any specific increase in the
compensation, bonus or other benefits payable to such employees, (g) paid any
bonus to the employees of the Target or the Subsidiaries except for bonuses
accrued on the December Balance Sheet, (h) any operation of the business of the
Target and the Subsidiaries other than in the ordinary course, consistent with
past practice; (i) any incurrence of indebtedness for borrowed money or
assumption or guarantee of indebtedness for borrowed money by the Target or any
of the Subsidiaries (other than loans from the Target to any wholly owned
Subsidiary or from any wholly owned Subsidiary to the Target or any other wholly
owned Subsidiary), or the grant of any lien on the assets of the Target or the
Subsidiaries to secure indebtedness for borrowed money, (j) any sale or transfer
of any assets of the Target or the Subsidiaries other than in the ordinary
course of business and consistent with past practice, or (k) any loan, advance
or capital contribution to or investment in any person in an aggregate amount in
excess of $100,000 by the Target or any Subsidiary (excluding any loan, advance
or capital contribution to, or investment in, the Target or any wholly owned
Subsidiary).
SECTION 3.09. Absence of Litigation. Except as disclosed in Section
---------------------
3.09 of the Target Disclosure Schedule or the Target SEC Reports filed prior to
the date of this Agreement, there is no claim, action, proceeding or
investigation pending or, to the best knowledge of the Target, threatened
against the Target or any Subsidiary, by, on behalf of or before any arbitrator
or Governmental Authority which (a) individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on the Target or (b)
seeks to and is reasonably likely to significantly delay or prevent the
consummation of the Offer or the Merger. Neither the Target or any Subsidiary
nor any property or asset of the Target or any Subsidiary is in violation of any
order, writ, judgment, injunction, decree, determination or award having,
individually or in the aggregate, a Material Adverse Effect on the Target.
Neither the Target nor any Subsidiary is subject to any judgment, order or
decree that could reasonably be expected to have a Material Adverse Effect on
the Target.
SECTION 3.10. Employee Benefit Plans. Section 3.10 of the Target
----------------------
Disclosure Schedule lists (a) all employee benefit plans, programs and
arrangements maintained for the benefit of any current or former employee,
officer or director of the Target or any Subsidiary (the "Plans")
-----
13
<PAGE>
and (b) all written contracts and agreements relating to employment and all
severance agreements with any of the directors, officers or employees of the
Target or any Subsidiaries (other than, in each case, any such contract or
agreement that is terminable by the Target or any Subsidiary at will without
penalty or other adverse consequence). Section 3.10 of the Target Disclosure
Schedule sets forth the name of each officer or employee of the Target or any
Subsidiary with an annual base compensation greater than $75,000 and the annual
base compensation applicable to each such officer or employee. The Target has
made available to Acquiror a copy of each Plan, each material document prepared
in connection with each Plan and each Target Employment Contract. None of the
Plans is a multiemployer plan within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). Except as set forth in
-----
Section 3.10 of the Target Disclosure Schedule, none of the Plans promises or
provides retiree medical or life insurance benefits to any person. Each Plan
intended to be qualified under Section 401(a) of the Internal Revenue Code, as
amended (the "Code") is so qualified. Each Plan has been operated in all
----
material respects in accordance with its terms and the requirements of
applicable Law. The Target has not incurred any direct or indirect material
liability under, arising out of or by operation of Title IV of ERISA in
connection with the termination of, or withdrawal from, any Plan or other
retirement plan or arrangement and, as of the date hereof, no fact exists or
event has occurred that would reasonably be expected to give rise to any such
liability. Except as set forth in Section 3.10 of the Target Disclosure
Schedule, no Plan is or has been covered by Title IV of ERISA or Section 412 of
the Code. Except as set forth in Section 3.10 of the Target Disclosure
Schedule, the Target and the Subsidiaries have complied in all respects with all
laws, rules and regulations pertaining to employment practices including,
without limitation, the Worker Adjustment Retraining Notification Act, the wage
hour laws, the Americans with Disabilities Act, and the discrimination laws, and
no fact or event exists that could give rise to liability under such acts, laws,
rules or regulations, except for such occurrences, noncompliances and
liabilities as would not, individually or in the aggregate, have a Material
Adverse Effect on the Target.
SECTION 3.11. Labor Matters. Neither the Target nor any Subsidiary
-------------
is a party to any collective bargaining agreement or other labor union contract
applicable to persons employed by the Target or any Subsidiary.
SECTION 3.12. Taxes. (a) Except as set forth in Section 3.12(a) of
-----
the Target Disclosure Schedule, the Target and each of the Subsidiaries have (i)
filed all federal, state, local and foreign tax returns required to be filed by
them prior to the date of this Agreement (taking into account extensions), (ii)
paid or accrued all taxes shown to be due on such returns and paid all
applicable ad valorem and value added taxes as are due and (iii) paid or accrued
all taxes for which a notice of assessment or collection has been received
(other than amounts being contested in good faith by appropriate proceedings),
except in the case of clause (i), (ii) or (iii) for any such filings, payments
or accruals which would not, individually or in the aggregate, have a Material
Adverse Effect on the Target. Except as set forth in Section 3.12(a) of the
Target Disclosure Schedule, neither the Internal Revenue Service nor any other
federal, state, local or foreign taxing authority has asserted any claim for
taxes, or to the best knowledge of the Target, is threatening to assert any
claims for taxes, which claims, individually or in the aggregate, could have a
Material Adverse Effect on the Target. The Target has open years for federal,
state and foreign income tax returns
14
<PAGE>
only as set forth in Section 3.12(a) of the Target Disclosure Schedule. The
Target and each Subsidiary have withheld or collected and paid over to the
appropriate governmental authorities (or are properly holding for such payment)
all taxes required by law to be withheld or collected, except for amounts which
would not, individually or in the aggregate, have a Material Adverse Effect on
the Target. There are no liens for taxes upon the assets of the Target or any
Subsidiary (other than liens for taxes that are not yet due or that are being
contested in good faith by appropriate proceedings), except for liens which
would not, individually or in the aggregate, have a Material Adverse Effect on
the Target.
(b) Neither the Target nor any Subsidiary has taken or agreed to take
any action that would prevent the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code.
SECTION 3.13. Environmental Matters. (a) For purposes of this
---------------------
Agreement, the following terms shall have the following meanings: (i)
"Hazardous Substances" means (A) those substances defined in or regulated under
--------------------
the following federal statutes and their state counterparts, as each may be
amended from time to time, and all regulations thereunder: the Hazardous
Materials Transportation Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the Clean
Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the Federal
Insecticide, Fungicide, and Rodenticide Act, the Toxic Substances Control Act
and the Clean Air Act; (B) petroleum and petroleum products, byproducts and
breakdown products including crude oil and any fractions thereof; (C) natural
gas, synthetic gas, and any mixtures thereof; (D) polychlorinated biphenyls; (E)
any other chemicals, materials or substances defined or regulated as toxic or
hazardous or as a pollutant or contaminant or as a waste under any applicable
Environmental Law; and (F) any substance with respect to which a federal, state
or local agency requires environmental investigation, monitoring, reporting or
remediation; and (ii) "Environmental Laws" means any federal, state, foreign, or
------------------
local law, rule or regulation, now or hereafter in effect and as amended, and
any judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment, relating to pollution or
protection of the environment, health, safety or natural resources, including
without limitation, those relating to (A) releases or threatened releases of
Hazardous Substances or materials containing Hazardous Substances or (B) the
manufacture, handling, transport, use, treatment, storage or disposal of
Hazardous Substances or materials containing Hazardous Substances.
(b) Except as described in Section 3.13 of the Target Disclosure
Schedule or as would not individually or in the aggregate result in or be likely
to result in any fine, tax, assessment, penalty, loss, cost, damage, liability,
expense or other payment related thereto in excess of $200,000: (i) the Target
and each Subsidiary are and have been in compliance with all applicable
Environmental Laws; (ii) the Target and each Subsidiary have obtained all
permits, approvals, identification numbers, licenses or other authorizations
required under any applicable Environmental Laws ("Environmental Permits") and
---------------------
are and have been in compliance with their requirements; (iii) such
Environmental Permits are transferable to the Surviving Corporation pursuant to
the Merger without the consent of any Governmental Authority; (iv) there are no
underground or aboveground
15
<PAGE>
storage tanks or any surface impoundments, septic tanks, pits, sumps or lagoons
in which Hazardous Substances are being or have been treated, stored or disposed
of on any owned or leased real property or on any real property formerly owned,
leased or occupied by the Target or any Subsidiary; (v) there is, to the best
knowledge of the Target, no asbestos or asbestos-containing material on any
owned or leased real property in violation of applicable Environmental Laws;
(vi) the Target and the Subsidiaries have not released, discharged or disposed
of Hazardous Substances on any real property owned or leased or on any real
property formerly owned or leased by the Target or any Subsidiary and none of
such property is contaminated with any Hazardous Substances; (vii) neither the
Target nor any of the Subsidiaries is undertaking, and neither the Target nor
any of the Subsidiaries has completed, any investigation or assessment or
remedial or response action relating to any such release, discharge or disposal
of or contamination with Hazardous Substances at any site, location or
operation, either voluntarily or pursuant to the order of any Governmental
Authority or the requirements of any Environmental Law; and (viii) there are no
pending or, to the knowledge of the Target, past or threatened actions, suits,
demands, demand letters, claims, liens, notices of non-compliance or violation,
notices of liability or potential liability, investigations, proceedings,
consent orders or consent agreements relating in any way to Environmental Laws,
any Environmental Permits or any Hazardous Substances against the Target or any
Subsidiary or any of their property, and there are no circumstances that can
reasonably be expected to form the basis of any such Environmental Claim,
including without limitation with respect to any off-site disposal location
presently or formerly used by the Target or any of the Subsidiaries or any of
their predecessors.
(c) The Target and the Subsidiaries have made available to Acquiror
copies of any environmental reports, studies or analyses in its possession or
under its control relating to owned or leased real property or the operations of
the Target or the Subsidiaries.
(d) Section 3.13 of the Target Disclosure Schedule sets forth a list
of all real property currently owned or owned within the last three years by the
Target or any of the Subsidiaries.
SECTION 3.14. Opinion of Financial Advisor. The Target has received
----------------------------
the opinion of Goldman, Sachs & Co. ("Target Banker") on the date of this
-------------
Agreement to the effect that the consideration to be paid by Acquiror Sub in the
Offer and the Merger is fair from a financial point of view to the Target's
shareholders as of the date thereof.
SECTION 3.15. Brokers. No broker, finder or investment banker (other
-------
than Target Banker) is entitled to any brokerage, finder's or other fee or
commission in connection with the Transactions based upon arrangements made by
or on behalf of the Target or any Subsidiary. The Target has heretofore
furnished to Acquiror a correct copy of all agreements between the Target and
Target Banker pursuant to which such firm would be entitled to any payment
relating to the Transactions.
SECTION 3.16. Tangible Property. The Target and the Subsidiaries
-----------------
have good and marketable title to all their tangible properties and assets, with
only such exceptions as, individually or in the aggregate, would not have a
Material Adverse Effect on the Target. All of the assets of the
16
<PAGE>
Target and the Subsidiaries have been maintained and repaired for their
continued operation and are in good operating condition, reasonable wear and
tear excepted, and usable in the ordinary course of business, except where the
failure to be in such repair or condition or so usable would not individually or
in the aggregate have a Material Adverse Effect on the Target.
SECTION 3.17. Material Contracts. Section 3.17 of the Target
------------------
Disclosure Schedule lists (a) each contract which is required by its terms or is
currently expected to result in the payment or receipt by the Target or any
Subsidiary of more than $500,000 and which is not terminable by the Target or
any Subsidiary without the payment of any penalty or fine on not more than three
months' notice (a "Material Contract"), (b) all material agreements relating to
-----------------
joint ventures, partnerships and equity or debt investments, (c) all noncompete
agreements with the Target or the Subsidiaries (whether as beneficiary or
obligor), (d) all agreements, notes, bonds, indentures or other instruments
governing indebtedness for borrowed money, and any guarantee thereof or the
pledge of any assets or other security therefor and (e) all agreements with any
affiliate (other than the Target or a wholly owned subsidiary) of the Target or
the Subsidiaries to which the Target or any Subsidiary is a party, in each case
other than contracts which have been filed as an exhibit to or have been
incorporated by reference in any Target SEC Report. Each Material Contract is
in full force and effect and is enforceable against the parties thereto (other
than the Target) in accordance with its terms and no condition or state of facts
exists that, with notice or the passage of time, or both, would constitute a
material default by the Target or, to the knowledge of the Target, any third
party under such Material Contracts. The Target has duly complied in all
material respects with the provisions of each Material Contract to which it is a
party.
SECTION 3.18. Offer Documents; Schedule 14D-9. Neither the Schedule
-------------------------------
14D-9 nor any information supplied by the Target for inclusion in the Offer
Documents shall, at the respective times the Schedule 14D-9, the Offer
Documents, or any amendments or supplements thereto are filed with the SEC or
are first published, sent or given to shareholders of the Target, as the case
may be, contain 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 made therein, in the light of the circumstances under which they are
made, not misleading, except that no representation or warranty is made by the
Target with respect to information supplied by Acquiror Sub or Acquiror for
inclusion in the Schedule 14D-9. The Schedule 14D-9 shall comply in all
material respects as to form with the requirements of the Exchange Act and the
rules and regulations thereunder.
SECTION 3.19. Amendment to Rights Agreement. (a) The Target has
------------------------------
heretofore provided Acquiror with a complete and correct copy of the Rights
Agreement, including all amendments (including the amendments contemplated by
this Section 3.19) and exhibits thereto. The Board and the Target have taken all
necessary action to amend the Rights Agreement so that, as long as this
Agreement has not been terminated in accordance with Section 8.01, (A) none of
the execution or delivery of this Agreement, the making of the Offer, the
acquisition of Shares pursuant to the Offer or the consummation of the Merger
will cause (i) the occurrence of a "Distribution Date" (as defined in the Rights
-----------------
Agreement), (ii) the Rights (as defined in the Rights Agreement) to become
exercisable under the Rights Agreement, (iii) Parent, Acquiror or Acquiror Sub
or any of their affiliates or associates to be deemed an "Acquiring Person" (as
----------------
defined in the Rights Agreement) or
17
<PAGE>
(iv) the "Stock Acquisition Date" (as defined in the Rights Agreement) to occur
----------------------
upon any such event, (B) none of the acceptance for payment or payment for
Shares by Acquiror Sub pursuant to the Offer will cause (i) the occurrence of a
Distribution Date, (ii) the Rights to become exercisable under the Rights
Agreement, (iii) Parent, Acquiror or Acquiror Sub or any of their affiliates or
associates to be deemed an Acquiring Person or (iv) the Stock Acquisition Date
to occur upon any such event, and (C) the "Expiration Date" (as defined in the
---------------
Rights Agreement) shall occur no later than immediately prior to the purchase of
shares pursuant to the Offer.
(b) The "Distribution Date" has not occurred as of the date of this
Agreement.
SECTION 3.20. Intellectual Property. Section 3.20 of the Target
---------------------
Disclosure Schedule sets forth a list of the trademarks and service marks owned
or used in the business of the Target or any of the Subsidiaries (the
"Trademarks"). Except as set forth in Section 3.20 of the Target Disclosure
Schedule, the Target and the Subsidiaries (a) own the copyright to, or (b) have
a license to use, all of the programming that has been employed in the operation
of the business (the "Programming"). To the best knowledge of the Target and
the Subsidiaries, the use by the Target and the Subsidiaries of the Trademarks
or the Programming does not infringe on any trademarks, copyrights or any other
rights of any other person and there are no existing or threatened claims
therefor.
SECTION 3.21. Fees and Expenses of Transactions. The fees and
---------------------------------
expenses of the attorneys, accountants, brokers, investment bankers and advisors
retained by the Target or any of the Subsidiaries in connection with the
transactions contemplated by this Agreement do not exceed the amount set forth
in Section 3.21 of the Target Disclosure Schedule.
SECTION 3.22. Capital Expenditures. The capital expenditures for the
--------------------
Target and the Subsidiaries for the calendar years ended December 31, 1994 and
1995 did not exceed $7 million in any such calendar year by a material amount,
excluding in each case the expenditures related to the one-time conversion of
the satellite transmission equipment from an analog to a digital signal and
investments made in program inventory.
SECTION 3.23. Accreditation. Section 3.23 of the Target Disclosure
-------------
Schedule sets forth a true and correct list of the networks that provide course
work eligible for applicable continuing education credit and the organizations
that accredit such course work. As of the date of this Agreement, to the best
knowledge of the Target and the Subsidiaries, none of the organizations listed
in Section 3.23 of the Target Disclosure Schedule has notified the Target or any
of the Subsidiaries of such organization's intent to withdraw accreditation.
SECTION 3.24. Interactive Distance Training Network ("IDTN"). (a) As
----------------------------------------------
of December 31, 1995, the Target and the Subsidiaries had contracts with
customers to provide IDTN services at a cost to such customers of not less than
$7.8 million for the calendar year 1996.
(b) Section 3.24(b) of the Target Disclosure Schedule lists the top
twenty customers for IDTN (based on revenues invoiced) for the year ending
December 31, 1995. As of
18
<PAGE>
the date of this Agreement, to the best knowledge of the Target and
Subsidiaries, except as set forth on Schedule 3.24(b) of the Target Disclosure
Schedule, none of such customers has given written notice of its intent to
cancel or not renew its contract with the Target or the Subsidiaries for IDTN
services.
SECTION 3.25. Executive Education Network ("EXEN"). (a) Section
------------------------------------
3.25(a) of the Target Disclosure Schedule lists the colleges, universities and
other educational institutions that provide course work to EXEN as of the date
of the Agreement. As of the date of this Agreement, to the best knowledge of
the Target and the Subsidiaries, except as set forth on Schedule 3.25(a) of the
Target Disclosure Schedule, none of such colleges, universities or other
educational institutions has given written notice of its intent to cancel or not
renew its relationship with the Target or the Subsidiaries in connection with
EXEN.
(b) As of the date of this Agreement, except as set forth in Section
3.25(b) of the Target Disclosure Schedule, all customers that have completed
"proof of concept" contracts with the Target or the Subsidiaries for EXEN
services have entered into contracts with the Target or the Subsidiaries, as
applicable, for further EXEN services.
SECTION 3.26. Renewal Rate. Section 3.26 to the Target Disclosure
------------
Schedule sets forth, for each subscription based satellite and video programming
network, by network, (a) the total number of subscribers as of January 1, 1995,
December 31, 1995 and March 31, 1996 and (b) the number of new subscribers
enrolled during the twelve months ended December 31, 1995 and the three months
ended March 31, 1996, respectively.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT,
ACQUIROR AND ACQUIROR SUB
Parent, Acquiror and Acquiror Sub hereby, jointly and severally,
represent and warrant to the Target that:
SECTION 4.01. Corporate Organization. Each of Parent, Acquiror and
----------------------
Acquiror Sub is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power and authority and all necessary governmental approvals
to own, lease and operate its properties and to carry on its business as it is
now being conducted, except where the failure to have such power, authority and
governmental approvals would not, individually or in the aggregate, have a
material adverse effect on the ability of Parent, Acquiror and Acquiror Sub to
perform their obligations hereunder and to consummate the Transactions.
SECTION 4.02. Authority Relative to This Agreement. Each of Parent,
------------------------------------
Acquiror and Acquiror Sub has all necessary corporate power and authority to
execute and deliver this Agreement, to perform its obligations hereunder and to
consummate the Transactions. The
19
<PAGE>
execution and delivery of this Agreement by Parent, Acquiror and Acquiror Sub
and the consummation by Parent, Acquiror and Acquiror Sub of the Transactions
have been duly and validly authorized by all necessary corporate action and no
other corporate proceedings on the part of Parent, Acquiror or Acquiror Sub are
necessary to authorize this Agreement or to consummate the Transactions (other
than with respect to the Merger, the filing and recordation of appropriate
Articles of Merger with the Secretary, as required by Texas Law). This
Agreement has been duly and validly executed and delivered by Parent, Acquiror
and Acquiror Sub and, assuming the due authorization, execution and delivery of
this Agreement by the Target, constitutes a legal, valid and binding obligation
of each of Parent, Acquiror and Acquiror Sub enforceable against each of Parent,
Acquiror and Acquiror Sub in accordance with its terms.
SECTION 4.03. No Conflict; Required Filings and Consents. (a) The
------------------------------------------
execution and delivery of this Agreement by Parent, Acquiror and Acquiror Sub do
not, and the performance of this Agreement by Parent, Acquiror and Acquiror Sub
will not, (i) conflict with or violate the Articles of Incorporation or Bylaws
of Parent, Acquiror or Acquiror Sub, (ii) conflict with or violate any Law
applicable to Parent, Acquiror or Acquiror Sub or by which any property or asset
of any of them is bound or affected, or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or other encumbrance on any property or asset of Parent, Acquiror or Acquiror
Sub or require the consent of any third party pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent, Acquiror or Acquiror Sub is a
party or by which Parent, Acquiror or Acquiror Sub or any property or asset of
any of them is bound or affected, except for any such conflicts, violations,
breaches, defaults or other occurrences which would not, individually or in the
aggregate, prevent Parent, Acquiror and Acquiror Sub from performing their
respective obligations under this Agreement and consummating the Transactions.
(b) The execution and delivery of this Agreement by Parent, Acquiror
and Acquiror Sub do not, and the performance of this Agreement by Parent,
Acquiror and Acquiror Sub will not require any consent, approval, authorization
or permit of, or filing with or notification to, any governmental or regulatory
authority, domestic or foreign, except (i) pursuant to the Exchange Act, Blue
Sky Laws, the HSR Act, the rules and regulations of the New York Stock Exchange,
and filing and recordation of appropriate Articles of Merger with the Secretary
as required by Texas Law and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not have a Material Adverse Effect on Acquiror and would not prevent or
delay consummation of the Transactions, or otherwise prevent Parent, Acquiror or
Acquiror Sub from performing their respective obligations under this Agreement.
SECTION 4.04. Offer Documents; Proxy Statement. The Offer Documents
--------------------------------
will not, at the time the Offer Documents are filed with the SEC or are first
published, sent or given to shareholders of the Target, as the case may be,
contain 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
made therein, in the light of the circumstances under which they are made, not
misleading. The information supplied by Parent, Acquiror or Acquiror Sub for
inclusion in the
20
<PAGE>
proxy statement to be sent to the shareholders of the Target in connection with
the Target Shareholders Meeting (such proxy statement, as amended and
supplemented, being referred to herein as the "Proxy Statement") and Schedule
---------------
14D-9 will not, on the date the Proxy Statement or Schedule 14D-9 (or any
amendment or supplement thereto) is first mailed to shareholders of the Target,
at the time of the Shareholders Meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
is made, is false or misleading with respect to any material fact, or omits to
state any material fact required to be stated therein or necessary in order to
make the statements therein not false or misleading or necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Shareholders Meeting which shall have become false or
misleading; provided, however, that Parent, Acquiror or Acquiror Sub makes no
-------- -------
representation or warranty with respect to information supplied by the Target
for inclusion in the Offer Documents. The Offer Documents shall comply in all
material respects as to form with the requirements of the Exchange Act and the
rules and regulations thereunder.
SECTION 4.05. Brokers. No broker, finder or investment banker is
-------
entitled to any brokerage, finder's or other fee or commission in connection
with the Transactions based upon arrangements made by or on behalf of Parent,
Acquiror or Acquiror Sub other than fees payable by the Parent, the Acquiror and
the Acquiror Sub.
SECTION 4.06. Financing. Parent, has and will make available to
---------
Acquiror Sub the funds to purchase all Shares tendered pursuant to the Offer and
to consummate the Merger.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.01. Conduct of Business by the Target Pending the Acquiror
------------------------------------------------------
Sub's Election Date. The Target covenants and agrees that, between the date of
- - -------------------
this Agreement and the election or appointment of Acquiror Sub's designees to
the Board pursuant to Section 6.03 upon the purchase by Acquiror Sub of any
Shares pursuant to the Offer (the "Acquiror Sub's Election Date"), unless
----------------------------
Acquiror shall otherwise agree in writing (which agreement shall not be
unreasonably withheld), (1) the business of the Target and the Subsidiaries
shall be conducted only in, and the Target and the Subsidiaries shall not take
any action except in, the ordinary course of business and in a manner
substantially consistent with past practice, (2) the Target shall use all
reasonable efforts to preserve substantially intact its business organization,
to keep available the services of the current officers, employees and
consultants of the Target and the Subsidiaries and to preserve the current
relationships of the Target and the Subsidiaries with customers, suppliers and
other persons with which the Target or any Subsidiary has significant business
relations and (3) the Target shall not, and shall not permit any Subsidiary to:
(a) amend or otherwise change its Articles of Incorporation or
Bylaws;
(b) issue, sell, pledge, dispose of, grant, encumber, or authorize
the issuance, sale, pledge, disposition, grant or encumbrance of, (i) any shares
of capital stock of the Target or any
21
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Subsidiary of any class, or any options, warrants, convertible securities or
other rights of any kind to acquire any shares of such capital stock, or any
other ownership interest (including, without limitation, any phantom interest),
of the Target (except for shares of the Target Common Stock, if any, issuable
under agreements currently in effect on the date hereof and described in Section
3.03 of the Target Disclosure Schedule, the issuance of rights pursuant to the
Rights Agreement and shares of capital stock pursuant to Options described in
Section 3.03 of the Target Disclosure Schedule or Plans currently in effect on
the date hereof and described in Section 3.10 of the Target Disclosure
Schedule), or (ii) any of the Target's or any Subsidiaries' assets, except for
sales in the ordinary course of business and in a manner consistent with past
practice;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock;
(d) reclassify, combine, split, divide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any interest in any
corporation, partnership, other business organization or any division thereof or
any assets (other than inventory, equipment and similar assets acquired in the
ordinary course of business); (ii) incur any indebtedness for borrowed money or
issue any debt securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any person, or make any
loans or advances, except for indebtedness in a principal amount not, in the
aggregate, in excess of $500,000 and repayable without premium or penalty; (iii)
enter into any contract or agreement material to the business, results of
operations or financial condition of the Target other than in the ordinary
course of business, consistent with past practice or enter into or amend any
Material Contract; (iv) authorize any capital expenditure, other than capital
expenditures set forth in Section 5.01(e)(iv) of the Target Disclosure Schedule;
or (v) enter into or amend any contract, agreement, commitment or arrangement
with respect to any matter set forth in this subsection (e);
(f) (i) except for annual increases in compensation payable or to
become payable to any officer or other employee of the Target or the
Subsidiaries consistent with past practices of the Target and the Subsidiaries,
increase the compensation payable or to become payable to any officer or other
employee, or grant any bonus to, any officer or other employee, or (ii) except
as contemplated by Schedule 3.10 of the Target Disclosure Schedule or in
accordance with the Company's current policies, grant any severance or
termination pay to, or enter into any employment or severance agreement with,
any director, officer or other employee of the Target or any Subsidiary or enter
into or amend any collective bargaining agreement, or (iii) establish, adopt,
enter into or amend any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation or other
plan, trust or fund for the benefit of any director, officer or class of
employees; or
(g) settle or compromise any pending or threatened litigation which
is material or which relates to the transactions contemplated hereby, provided
--------
that nothing in this Section
22
<PAGE>
5.01(g) will prohibit the Target from settling or compromising any such
litigation if, after consultation with counsel, the Target's Board believes that
such action is necessary to comply with its fiduciary duties; or
(h) take any action that would result in a breach of the
representations and warranties made in Section 3.08.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Shareholder's Meeting. (a) The Target shall, in
---------------------
accordance with applicable law and the Target's Articles of Incorporation and
Bylaws, (i) duly call, give notice of, convene and hold an annual or special
meeting of its shareholders as soon as practicable following consummation of the
Offer for the purpose of considering and taking action on this Agreement and the
transactions contemplated hereby (the "Target Shareholders Meeting") and (ii)
---------------------------
subject to the fiduciary obligations of the Board as advised by independent
legal counsel, include in the Proxy Statement the recommendation of the Board
that the shareholders of the Target approve and adopt this Agreement and the
Transactions, including, without limitation, the Merger and the written opinion
of Goldman, Sachs & Co. referred to in Section 1.2(a), and use its reasonable
best efforts to obtain such approval and adoption. To the extent permitted by
law, Parent, Acquiror and Acquiror Sub each agree to vote all Shares
beneficially owned by them in favor of the Merger.
(b) Notwithstanding the foregoing, if and to the extent permitted by
Law, the Target agrees, at the request of Acquiror Sub, subject to Article VII,
to take all necessary and appropriate action to cause the Merger to become
effective as soon as reasonably practicable after the Tender Offer Acceptance
Date, without a meeting of the Target's shareholders, in accordance with Section
5.16 of Texas Law.
SECTION 6.02. Proxy Statement. As promptly as practicable after the
---------------
purchase of all Shares validly tendered and not withdrawn pursuant to the Offer,
the Target shall file the Proxy Statement with the SEC under the Exchange Act,
and shall use its reasonable best efforts to have the Proxy Statement cleared by
the SEC. Acquiror, Acquiror Sub and the Target shall cooperate with each other
in the preparation of the Proxy Statement, and the Target shall notify Acquiror
of the receipt of any comments of the SEC with respect to the Proxy Statement
and of any requests by the SEC for any amendment or supplement thereto or for
additional information and shall provide to Acquiror promptly copies of all
correspondence between the Target or any representative of the Target and the
SEC. The Target shall give Acquiror and its counsel the opportunity to review
the Proxy Statement prior to its being filed with the SEC and shall give
Acquiror and its counsel the opportunity to review all amendments and
supplements to the Proxy Statement and all responses to requests for additional
information and replies to comments prior to their being filed with, or sent to,
the SEC. Each of the Target, Parent, Acquiror and Acquiror Sub agrees to use
its reasonable best efforts, after consultation with the other parties hereto,
to respond promptly to all such comments of and requests by the SEC and to cause
the Proxy Statement and all required amendments and
23
<PAGE>
supplements thereto to be mailed to the holders of Shares entitled to vote at
the Target Shareholders Meeting at the earliest practicable time.
SECTION 6.03. Target Board Representation; Section 14(f). (a)
------------------------------------------
Promptly upon the purchase by Acquiror Sub of Shares pursuant to the Offer, and
from time to time thereafter, Acquiror Sub shall be entitled to designate up to
such number of directors, rounded up to the next whole number, on the Board as
shall give Acquiror Sub representation on the Board equal to the product of the
total number of directors on the Board (giving effect to the directors elected
pursuant to this sentence) multiplied by the percentage that the aggregate
number of Shares beneficially owned by Acquiror Sub or any affiliate of Acquiror
Sub at such time bears to the total number of Shares then outstanding, and the
Target shall, at such time, promptly take all actions necessary to cause
Acquiror Sub's designees to be elected as directors of the Target, including
increasing the size of the Board or securing the resignations of incumbent
directors or both. At such times, the Target shall use its best efforts to
cause persons designated by Acquiror Sub to constitute the same percentage as
persons designated by Acquiror Sub shall constitute of the Board of (i) each
committee of the Board (some of whom may be required to be independent as
required by applicable law), (ii) each board of directors of each domestic
Subsidiary and (iii) each committee of each such board, in each case only to the
extent permitted by applicable law. Notwithstanding the foregoing, until the
time Acquiror Sub acquires a majority of the then Outstanding Shares on a Fully
Diluted Basis, the Target shall use its best efforts to ensure that all the
members of the Board and each committee of the Board and such boards and
committees of the domestic Subsidiaries as of the date hereof who are not
employees of the Target shall remain members of the Board and of such boards and
committees.
(b) The Target shall promptly take all actions required pursuant to
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order
to fulfill its obligations under this Section 6.03 and shall include in the
Schedule 14D-9 such information with respect to the Target and its officers and
directors as is required under Section 14(f) and Rule 14f-1 to fulfill such
obligations. Parent, Acquiror or Acquiror Sub shall supply to the Target and be
solely responsible for any information with respect to either of them and their
nominees, officers, directors and affiliates required by such Section 14(f) and
Rule 14f-1.
(c) Following the election or appointment of designees of Acquiror
Sub pursuant to this Section 6.03 and prior to the Effective Time, any amendment
of this Agreement or the Articles of Incorporation or Bylaws of the Target, any
termination of this Agreement by the Target, any extension by the Target of the
time for the performance of any of the obligations or other acts of Parent,
Acquiror or Acquiror Sub or waiver of any of the Target's rights hereunder shall
require the concurrence of a majority of the directors of the Target then in
office who neither were designated by Acquiror Sub nor are employees of the
Target or if no such directors are then in office, no such amendment,
termination, extension or waiver shall be effected which is materially adverse
to the holders of Shares (other than Acquiror and its subsidiaries).
SECTION 6.04. Access to Information; Confidentiality. (a) Subject to
--------------------------------------
the Confidentiality Agreement (as hereinafter defined), from the date hereof to
Acquiror Sub's Election Date, the Target shall, and shall cause its
subsidiaries, officers, directors, employees, auditors and
24
<PAGE>
other agents to, afford the officers, employees, auditors and other agents of
Acquiror, and financing sources who shall agree to be bound by the provisions of
the Confidentiality Agreement as though a party thereto, complete access at all
reasonable times to its officers, employees, agents, properties, offices, plants
and other facilities and to all books and records, and shall furnish Acquiror
and such financing sources with all financial, operating and other data and
information as Acquiror, through its officers, employees or agents, or such
financing sources may from time to time reasonably request. Notwithstanding
anything to the contrary contained in the Confidentiality Agreement, none of the
actions required to be taken by Acquiror or Acquiror Sub under this Agreement
shall be deemed to violate the Confidentiality Agreement.
(b) No investigation pursuant to this Section 6.04 shall affect any
representations or warranties of the parties herein or the condition of the
obligations of the parties hereto.
SECTION 6.05. No Solicitation of Transactions. The Target and its
-------------------------------
affiliates shall not, directly or indirectly, through any officer, director,
agent or otherwise, solicit, initiate or encourage the submission of any
proposal or offer from any person relating to any acquisition or purchase of all
or any material portion of the assets of, or any equity interest in, the Target
(or any subsidiary or division thereof) or any merger, consolidation, share
exchange, business combination or other similar transaction with the Target (or
any subsidiary or division thereof) or solicit, participate in or initiate any
negotiations regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other person to do or seek
any of the foregoing; provided, however, that nothing contained in this Section
-------- -------
6.05 shall prohibit the Target from furnishing information to, or entering into
discussions or negotiations with, any person in connection with an unsolicited
written proposal to the Target by such person to acquire the Target pursuant to
a merger, consolidation, share exchange, business combination or other similar
transaction or to acquire all or substantially all of the assets of the Target
received by the Target after the date of the Agreement, if, and only to the
extent that, (a) the Target's Board, as advised by independent legal counsel of
Target and Target Banker, determines in good faith that such action is required
in order for the Board not to breach its fiduciary duties to shareholders
imposed by law and (b) prior to furnishing such information to, or entering into
discussions or negotiations with, such person, the Target (i) gives Acquiror as
promptly as practicable prior written notice (which shall include a copy of such
written proposal except to the extent such disclosure would cause the Board of
Directors of Target to determine that such disclosure would be a breach of its
fiduciary duties to shareholders imposed by Law, as advised by independent legal
counsel of Target) of the Target's intention to furnish such information or
begin such discussions and (ii) receives from such person an executed
confidentiality agreement on terms no less favorable to the Target than those
contained in the Confidentiality Agreement. The Target agrees not to release
any third party from, or waive any provision of, any confidentiality or
standstill agreement to which the Target is a party. The Target and its
affiliates immediately shall cease and cause to be terminated all existing
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing.
SECTION 6.06. Directors' and Officers' Indemnification. The Articles
----------------------------------------
of Incorporation and Bylaws of the Surviving Corporation shall contain
provisions no less favorable
25
<PAGE>
with respect to indemnification than are set forth in the Articles of
Incorporation and Bylaws of the Target, which provisions shall not be amended,
repealed or otherwise modified for a period of six (6) years from the Effective
Time in any manner that would affect adversely the rights thereunder of
individuals who at any time prior to the Effective Time were directors, officers
or employees of the Target or any of its Subsidiaries, unless such modification
shall be required by Law.
From and after the Effective Time, Acquiror and the Surviving
Corporation shall indemnify, defend and hold harmless each person who is now, or
has been at any time prior to the date of this Agreement or who becomes prior to
the Effective Time, an officer, director or employee of the Target or any of the
Subsidiaries (collectively, the "Indemnified Parties") against all losses,
-------------------
reasonable expenses (including reasonable attorneys' fees), claims, damages,
liabilities or amounts that are paid in settlement of, with the approval of the
Surviving Corporation (which approval shall not unreasonably be withheld), or
otherwise in connection with, any threatened or actual claim, action, suit,
proceeding or investigation (a "Claim"), based in whole or in part on or arising
-----
in whole or in part out of the fact that the Indemnified Party (or the person
controlled by the Indemnified Party) is or was a director, officer or employee
of the Target or any of the Subsidiaries and pertaining to any matter existing
or arising out of actions or omissions occurring at or prior to the Effective
Time (including, without limitation, any Claim arising out of this Agreement or
any of the transactions contemplated hereby), whether asserted or claimed prior
to, at or after the Effective Time, in each case to the fullest extent permitted
under Texas Law, and shall pay any expenses, as incurred, in advance of the
final disposition of any such action or proceeding to each Indemnified Party to
the fullest extent permitted under Texas Law. Without limiting the foregoing,
in the event any such claim is brought against any of the Indemnified Parties,
(a) such Indemnified Parties may retain counsel (including local counsel)
satisfactory to them and which shall be reasonably satisfactory to Acquiror and
the Surviving Corporation and they shall pay all reasonable fees and expenses of
such counsel for such Indemnified Parties; and (b) the Acquiror and the
Surviving Corporation shall use all reasonable efforts to assist in the defense
of any such Claim, provided that the Acquiror and the Surviving Corporation
shall not be liable for any settlement effected without their written consent,
which consent, however, shall not be unreasonably withheld. The Indemnified
Parties as a group shall retain only one law firm (plus appropriate local
counsel) to represent them with respect to each such Claim unless there is, as
determined by counsel to the Indemnified Parties, under applicable standards of
professional conduct, a conflict or a reasonable likelihood of a conflict on any
significant issue between the positions of any two or more Indemnified Parties
at the expense of the Acquiror and the Surviving Corporation. Notwithstanding
the foregoing, nothing contained in this Section 6.06 shall be deemed to grant
any right to any Indemnified Party which is not permitted to be granted to such
person under Texas Law.
SECTION 6.07. Obligations of Acquiror Sub. Acquiror shall take all
---------------------------
action necessary to cause Acquiror Sub to perform its obligations under this
Agreement and to consummate the Merger on the terms and subject to the
conditions set forth in this Agreement.
SECTION 6.08. Public Announcements. (a) Parent, Acquiror, Acquiror
--------------------
Sub and the Target shall consult with each other before issuing any press
release or otherwise making any public statements with respect to this Agreement
or the Transactions and shall not issue any such press
26
<PAGE>
release or make any such public statement prior to such consultation, except as
may be required by Law or any listing agreement with its securities exchange,
and (b) prior to the Effective Time, the Target will not issue any other press
release or otherwise make any public statements regarding its business, except
as may be required by Law or any listing agreement with the National Association
of Securities Dealers, Inc. to which the Target is a party.
SECTION 6.09. Delivery of SEC Documents. The Target shall promptly
-------------------------
provide the Acquiror with any report, statement or schedule filed by the Target
with the SEC subsequent to the date of this Agreement and, to the extent
practicable, will provide Acquiror the opportunity to review and provide
comments to any such report, statement or schedule prior to its filing with the
SEC.
SECTION 6.10. Notification of Certain Matters. The Target shall give
-------------------------------
prompt notice to Acquiror, and Acquiror shall give prompt notice to the Target,
of (a) the occurrence, or non-occurrence, of any event the occurrence, or
non-occurrence, of which would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate and (b) any failure of
the Target, Parent, Acquiror or Acquiror Sub, as the case may be, to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant to
-------- -------
this Section 6.10 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
SECTION 6.11. Further Action. Upon the terms and subject to the
--------------
conditions hereof, each of the parties hereto shall use its reasonable best
efforts to take, or cause to be taken, all appropriate action, and to do or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including but not limited to (i) cooperation in
the preparation and filing of the Offer Documents, the Schedule 14D-9, the Proxy
Statement, any required filings under the HSR Act and other laws described in
clause (i) of the exception in Section 3.05(b), and any amendments to any
thereof and (ii) using its reasonable best efforts to make all required
regulatory filings and applications and to obtain all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and parties to contracts with the Target and its Subsidiaries as are
necessary for the consummation of the transactions contemplated by this
Agreement and to fulfill the conditions to the Offer and the Merger, including
but not limited to the FCC Approvals. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, the proper officers and directors of each party to this
Agreement shall use their reasonable best efforts to take all such necessary
action.
SECTION 6.12 Employee Benefits.
-----------------
(a) Acquiror agrees that, during the period commencing at the
Acquiror Sub's Election Date and ending on the first anniversary thereof, the
employees of the Target and the Subsidiaries will continue to be provided with
benefits under employee benefit plans that are no less favorable in the
aggregate than those currently provided by the Target and the Subsidiaries to
such employees; provided that it is understood and agreed that the failure to
provide the benefits (other
27
<PAGE>
than benefits accrued prior to the termination of the applicable plan) of the
Target's Amended and Restated 1989 Stock Option Plan, as amended, the Target's
Nonemployee Stock Option Plan, as amended, and the Target's Employee Stock
Purchase Plan shall not be a breach of this Section 6.12.
(b) Acquiror will cause the Target (and, after the Merger, the
Surviving Corporation) to honor all employee benefit obligations to current and
former employees and directors under the Target's employee benefit plans in
existence on the date hereof and disclosed in Section 3.10 of the Target
Disclosure Schedule and all employment or severance agreements entered into by
the Target or adopted by the Board of Directors of the Target prior to the date
hereof and disclosed in Section 3.10 or 6.12(b) of the Target Disclosure
Schedule; provided, however, that nothing shall prevent Acquiror or the Target
-------- -------
(and, after the Merger, the Surviving Corporation) from taking any action with
respect to such plans, obligations or agreements or refraining from taking any
such action which is permitted or provided for under the terms thereof or under
applicable Law.
(c) Employees of the Target (and, after the Merger, the Surviving
Corporation) shall be given credit for all actual service with the Target and
the Subsidiaries under all employee benefit plans, programs and policies of the
Surviving Corporation or Acquiror in which they become participants for all
purposes thereunder, except to the extent that such crediting would produce
duplication of benefits.
SECTION 6.13 Amendments to the Rights Agreement. The Target
----------------------------------
covenants and agrees that it will amend the Rights Agreement in the manner set
forth in Section 3.19, no later than the close of business on the date of this
Agreement, and, except as expressly contemplated by Section 3.19 of this
Agreement, the Target covenants and agrees that it will not amend the Rights
Agreement.
SECTION 6.14. Postponement of Annual Meeting. The Target shall as
------------------------------
soon as possible after the date of this Agreement indefinitely postpone its
annual meeting of shareholders currently scheduled for May 22, 1996, and shall
take no action unless compelled by legal process to reschedule such annual
meeting or to call a special meeting of shareholders of the Target, except in
accordance with this Agreement, unless and until this Agreement has been
terminated in accordance with its terms.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.01. Conditions to the Merger. The obligations of the
------------------------
Target, Acquiror, and Acquiror Sub to consummate the Merger shall be subject to
the satisfaction of the following conditions and only the following conditions:
(a) the Merger shall have been approved and adopted by the
affirmative vote of the shareholders of the Target to the extent required by
Texas Law and the Articles of Incorporation and Bylaws of the Target;
28
<PAGE>
(b) no Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any law, order, executive order, stay, decree,
judgment, injunction or other order or statute, rule or regulation which is in
effect and which has the effect of making the acquisition of Shares by Parent,
Acquiror or Acquiror Sub or any affiliate of either of them illegal or otherwise
preventing or prohibiting consummation of the Transactions;
(c) any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated; and
(d) Acquiror Sub or its permitted assignee shall have purchased all
Shares validly tendered and not withdrawn pursuant to the Offer; provided,
--------
however, that neither Acquiror nor Acquiror Sub shall be entitled to assert the
- - -------
failure of this condition if, in breach of this Agreement or the terms of the
Offer, Acquiror Sub fails to purchase any Shares validly tendered and not
withdrawn pursuant to the Offer.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. This Agreement may be terminated and the
-----------
Merger and the other Transactions may be abandoned at any time prior to the
Effective Time, notwithstanding any requisite approval and adoption of this
Agreement and the transactions contemplated hereby as follows:
(a) By mutual written consent duly authorized by the Boards of
Directors of each of Parent, Acquiror, Acquiror Sub and the Target; or
(b) By Acquiror if (i) due to an occurrence or circumstance that
results in a failure to satisfy any condition set forth in Annex A hereto,
-------
Acquiror Sub shall have (A) failed to commence the Offer within 10 days
following the date of this Agreement, (B) terminated the Offer without having
accepted any Shares for payment thereunder or (C) failed to pay for Shares
pursuant to the Offer within 120 days following the commencement of the Offer,
unless any such failure listed above shall have been caused by or resulted from
the failure of Parent, Acquiror or Acquiror Sub to perform in any material
respect any material covenant or agreement of either of them contained in this
Agreement or the material breach by Parent, Acquiror or Acquiror Sub of any
material representation or warranty of either of them contained in this
Agreement, (ii) prior to the purchase of Shares pursuant to the Offer, (A) the
Board of the Target withdraws or modifies (including by amendment of the
Schedule 14D-9) in a manner adverse to Acquiror its approval or recommendation
of this Agreement, the Offer or the Merger or shall have resolved to do so, (B)
the Board shall have recommended to the shareholders of the Target any Business
Combination Transaction (as hereinafter defined) other than the Transactions or
resolved to do so, (C) the Minimum Condition shall not have been satisfied by
the expiration date of the Offer and on or prior to such date any person
(including the Target or any of its Subsidiaries or affiliates), other than
Parent, Acquiror or
29
<PAGE>
Acquiror Sub or any of their affiliates, shall have become the beneficial owner
of 20% or more of the Shares, (D) there shall have been a breach of any
representation or warranty on the part of the Target which would reasonably be
expected to either have a Material Adverse Effect on the Target or prevent the
consummation of the Offer or (E) there shall have been a breach of any covenant
or agreement on the part of the Target which would reasonably be expected to
either have a Material Adverse Effect on the Target or prevent the consummation
of the Offer, which shall not have been cured prior to the earlier of (x) 10
days following notice of such breach and (y) two business days prior to the date
on which the Offer expires or (iii) the Offer shall have remained open for at
least twenty (20) business days, the Minimum Condition shall not have been
satisfied by the expiration date of the Offer and on or prior to such date any
person (other than Parent, Acquiror or Acquiror Sub or any of their affiliates)
shall have made (A) a public announcement or communication with respect to a
Business Combination Transaction (as defined below) or (B) a bona fide proposal
to consummate a Business Combination Transaction and the terms thereof shall
have become public information; or
(c) By the Target if Acquiror Sub shall have (A) failed to commence
the Offer within 10 days following the date of this Agreement, (B) terminated
the Offer without having accepted any Shares for payment thereunder or (C)
failed to pay for Shares pursuant to the Offer within 120 days following the
commencement of the Offer, unless in the case of (A), (B), or (C) immediately
above, such failure to pay for Shares shall have been caused by or resulted from
the failure of the Target to satisfy the conditions set forth in paragraph (c)
of Annex A; provided that any termination of this Agreement by the Target
------- --------
pursuant to this Section 8.01(c)(i) shall not be effective until the Target has
made payment of the full fee to the extent required by Section 8.02(a) hereof,
or (ii) prior to the purchase of Shares pursuant to the Offer, any person shall
have made a bona fide offer to acquire the Target (A) that the Board has
determined in its good faith judgment is more favorable to the Target's
shareholders than the Offer and the Merger and (B) as a result of which the
Board is obligated by its fiduciary duty under applicable law, as advised by
independent legal counsel, to terminate this Agreement, provided that any
termination of this Agreement by the Target pursuant to this Section 8.01(c)(ii)
shall not be effective until the Target has made payment of the full fee
required by Section 8.02(a) hereof; or
(d) By Acquiror or the Target if any court of competent jurisdiction
or other governmental body located or having jurisdiction within the United
States or any country or economic region in which either Acquiror or the Target,
directly or indirectly, has material assets or operations, shall have issued a
final order, decree or ruling or taken any other final action restraining,
enjoining or otherwise prohibiting the Offer or the Merger and such order,
decree, ruling or other action is or shall have become final and nonappealable.
SECTION 8.02. Fees and Expenses. (a) The Target shall pay Acquiror a
-----------------
fee (an "Alternative Proposal Fee") of $15,000,000, which amount is inclusive of
------------------------
all of Acquiror Expenses (as hereinafter defined): (i) within one business day
following notice of termination of this Agreement, if this Agreement is
terminated pursuant to Section 8.01(b)(ii)(A), (B) or (C) or Section 8.01
(c)(ii) or if this Agreement is terminated pursuant to Section 8.01(b)(ii)(D) or
(E) as a result of Target's willful breach of the representation, warranty,
covenant or agreement permitting such
30
<PAGE>
termination; (ii) within one business day following notice of termination of
this Agreement if this Agreement is terminated pursuant to Section 8.01(c)(i) in
the event that at the time of such termination Acquiror could have terminated
this Agreement under Section 8.01(b)(ii)(A), (B) or (C) or (iii) within one
business day following the execution of any agreement or any occurrence, as the
case may be, referred to in this clause (iii) if this Agreement is terminated
pursuant to Section 8.01 and (A) the Offer shall have remained open for at least
twenty (20) business days, (B) the Minimum Condition shall not have been
satisfied, (C) a Business Combination Transaction proposal shall have been made
prior to termination of the Offer, and (D) any Business Combination Transaction
is thereafter consummated (or an agreement with respect thereto is entered into)
within 12 months of such termination. As used herein, the term "Business
--------
Combination Transaction" shall mean any of the following involving the Target:
- - -----------------------
(1) any merger, consolidation, share exchange, business combination or other
similar transaction (other than the Transactions); (2) any sale, lease,
exchange, transfer or other disposition (other than a pledge or mortgage) of 20%
or more of the assets of the Target in a single transaction or series of related
transactions; (3) the acquisition by a person or entity or any "group" (as such
-----
term is defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of beneficial ownership of 20% or more of the shares of
Target Common Stock, whether by tender offer, exchange offer or otherwise; (4)
the adoption by the Target of a plan of liquidation or the declaration or
payment of an extraordinary dividend; or (5) the repurchase by the Target or any
of its Subsidiaries of 20% or more of the outstanding Shares, other than a
repurchase which was not approved by the Target or publicly announced prior to
the termination of this Agreement and which is not part of a series of
transactions resulting in a change of control.
(b) Acquiror shall be entitled to receive the Acquiror Expenses (but
not the Alternative Proposal Fee) in immediately available funds (not later than
one business day after submission of statements therefor) in the event that this
Agreement is terminated by Acquiror pursuant to Section 8.01(b)(i).
(c) As used herein, "Acquiror Expenses" means all out-of-pocket
-----------------
expenses and fees up to $5,000,000 actually incurred by Acquiror or Acquiror Sub
or on their respective behalf in connection with the Transactions prior to the
termination of this Agreement (including, without limitation, all fees and
expenses of counsel, financial advisors, accountants, banks or other entities
providing financing to Acquiror (including financing, commitment and other fees
payable thereto), accountants, environmental and other experts and consultants
to Acquiror and its affiliates, and all printing and advertising expenses) and
in connection with the negotiation, preparation, execution, performance and
termination of this Agreement, the structuring of the Transactions, any
agreements relating thereto and any filings to be made in connection therewith.
(d) Except as set forth in this Section, all costs and expenses
incurred in connection with this Agreement and the Transactions shall be paid by
the party incurring such expenses, whether or not any Transaction is
consummated.
SECTION 8.03. Amendment. This Agreement may be amended by the
---------
parties hereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; provided, however, that,
-------- -------
after the approval and adoption of this Agreement and the
31
<PAGE>
Transactions by the shareholders of the Target, no amendment may be made which
would violate Texas Law. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
SECTION 8.04. Waiver. At any time prior to the Effective Time, any
------
party hereto may (a) extend the time for the performance of any obligation or
other act of any other party hereto, (b) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid only if set forth
in an instrument in writing signed by the party or parties to be bound thereby.
SECTION 8.05 Effect of Termination. In the event of the termination
---------------------
of this Agreement pursuant to Section 8.01, this Agreement shall forthwith
become void and there shall be no liability on the part of any party hereto
except as set forth in Section 8.02 and Section 9.01; provided, however, that
-------- -------
nothing herein shall relieve any party from liability for any breach hereof.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Non-Survival of Representations, Warranties and
-----------------------------------------------
Agreements. The representations, warranties and agreements in this Agreement
- - ----------
shall terminate at the Effective Time or upon termination of this Agreement
pursuant to Section 8.01, as the case may be, except that (a) the
representations and warranties of the Target set forth in Article III shall
terminate on the Acquiror Sub's Election Date, and (b) the agreement set forth
in Articles II and IX and Sections 6.04(b), 6.06, 6.07, 6.12 and 8.02 and
Article IX shall survive termination indefinitely.
SECTION 9.02. 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,
facsimile, telegram or telex or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a
notice given in accordance with this Section 9.02):
if to Parent, Acquiror or Acquiror Sub:
c/o K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
Attention: Beverly C. Chell, Esq.
Facsimile: (212) 745-0199
32
<PAGE>
with a copy to:
Simpson Thacher & Bartlett
426 Lexington Avenue
New York, New York 10017
Attention: Gary I. Horowitz, Esq.
Facsimile: (212) 455-2502
if to the Target:
Westcott Communications, Inc.
1303 Marsh Lane
Carrollton, Texas 75006
Attention: President
Facsimile: (214) 716-5105
with a copy to:
Baker & McKenzie
2001 Ross Avenue, Suite 4500
Dallas, Texas 75201
Attention: Daniel W. Rabun and Alan G. Harvey
Facsimile: (214) 978-3099
SECTION 9.03. Certain Definitions. For purposes of this Agreement,
-------------------
the term:
(a) "affiliate" of a specified person means a person who, directly or
---------
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such specified person;
(b) "beneficial owner" with respect to any shares means a person who
----------------
shall be deemed to be the beneficial owner of such shares (i) which such person
or any of its affiliates or associates (as such term is defined in Rule 12b-2
promulgated under the Exchange Act) beneficially owns, directly or indirectly,
(ii) which such person or any of its affiliates or associates has, directly or
indirectly, (A) the right to acquire (whether such right is exercisable
immediately or subject only to the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of consideration rights,
exchange rights, warrants or options, or otherwise, or (B) the right to vote
pursuant to any agreement, arrangement or understanding, (iii) which are
beneficially owned, directly or indirectly, by any other persons with whom such
person or any of its affiliates or associates or any person with whom such
person or any of its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
such shares, or (iv) pursuant to Section 13(d) of the Exchange Act and any rules
or regulations promulgated thereunder;
33
<PAGE>
(c) "business day" means any day on which the principal offices of
------------
the SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized to close in New York, New York;
(d) "control" (including the terms "controlled by" and "under common
------- ------------- ------------
control with") means the possession, directly or indirectly or as trustee or
- - ------------
executor, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, as
trustee or executor, by contract or credit arrangement or otherwise;
(e) "person" means an individual, corporation, partnership, limited
------
partnership, syndicate, person (including, without limitation, a "person" as
defined in Section 13(d)(3) of the Exchange Act), trust, association or entity
or government, political subdivision, agency or instrumentality of a government;
and
(f) "subsidiary" or "subsidiaries" of any person means any
---------- ------------
corporation, partnership, joint venture or other legal entity of which such
person (either alone or through or together with any other subsidiary), owns or
has rights to acquire, directly or indirectly, more than 50% of the stock or
other equity interests the holders of which are generally entitled to vote for
the election of the board of directors or other governing body of such
corporation or other legal entity.
SECTION 9.04. Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of Law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Transactions is not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the Transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 9.05. Assignment; Binding Effect; Benefit. Neither this
-----------------------------------
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties, except that Acquiror and
Acquiror Sub may assign all or any of their respective rights and obligations
hereunder to any direct or indirect wholly owned subsidiary or subsidiaries of
Acquiror, provided that no such assignment shall relieve the assigning party of
--------
its obligations hereunder if such assignee does not perform such obligations.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Notwithstanding anything contained in this Agreement to the
contrary, except for the provisions of Section 6.06, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
34
<PAGE>
SECTION 9.06. Incorporation of Schedules. The Target Disclosure
--------------------------
Schedule and the Acquiror Disclosure Schedule referred to herein and signed for
identification by the parties hereto are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
SECTION 9.07. Specific Performance. The parties hereto agree that
--------------------
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 9.08. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY,
-------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD
TO THE RULES OF CONFLICTS OF LAW THEREOF. ALL ACTIONS AND PROCEEDINGS ARISING
OUT OF OR RELATING TO THIS AGREEMENT SHALL BE HEARD AND DETERMINED IN ANY COURT
SITTING IN THE CITY OF DALLAS, TEXAS.
SECTION 9.09. Headings. The descriptive headings contained in this
--------
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 9.10. Counterparts. This Agreement may be executed and
------------
delivered (including by facsimile transmission) in one or more counterparts, and
by the different parties hereto in separate counterparts, each of which when
executed and delivered shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
SECTION 9.11. Waiver of Jury Trial. Each of Acquiror, the Target and
--------------------
Acquiror Sub hereby irrevocably waives all right to trial by jury in any action,
proceeding or counterclaim (whether based on contract, tort or otherwise)
arising out of or relating to this Agreement or the actions of Acquiror, the
Target or Acquiror Sub in the negotiation, administration, performance and
enforcement thereof.
SECTION 9.12. Entire Agreement. This Agreement, the Target
----------------
Disclosure Schedule, the Acquiror Disclosure Schedule, the confidentiality
agreement, dated January 31, 1996 (the "Confidentiality Agreement"), between the
-------------------------
Target and Acquiror, and any documents delivered by the parties in connection
herewith constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings
among the parties with respect thereto. No addition to or modification of any
provision of this Agreement shall be binding upon any party hereto unless made
in writing and signed by all parties hereto.
SECTION 9.13. Parent Guarantee. Parent agrees to take all action
----------------
necessary to cause Acquiror and Acquiror Sub to perform all of their respective
agreements, covenants and obligations under this Agreement. Parent shall be
liable for any breach of any representation, warranty, agreement, covenant or
obligation of Acquiror or Acquiror Sub under this Agreement to the extent
Acquiror or Acquiror Sub would be liable under this Agreement.
35
<PAGE>
IN WITNESS WHEREOF, Acquiror, Acquiror Sub and the Target have caused
this Agreement to be executed as of the date first written above by their
respective officers thereunto duly authorized.
K-III COMMUNICATIONS CORPORATION
By /s/ Beverly C. Chell
-----------------------------------------------
Name: Beverly C. Chell
Title: Vice Chairman
K-III PRIME CORPORATION
By /s/ Beverly C. Chell
-----------------------------------------------
Name: Beverly C. Chell
Title: Vice Chairman
K-III ACQUISITION CORP.
By /s/ Beverly C. Chell
-----------------------------------------------
Name: Beverly C. Chell
Title: Vice Chairman
WESTCOTT COMMUNICATIONS, INC.
By /s/ Carl Westcott
-----------------------------------------------
Name: Carl H. Westcott
Title: Chief Executive Officer
<PAGE>
ANNEX A
Conditions to the Offer
Capitalized terms used herein shall have the meanings ascribed thereto
in the Agreement to which this Annex A is appended.
Notwithstanding any other provision of the Offer, Acquiror Sub shall
not be required to accept for payment or pay for any Shares tendered pursuant to
the Offer, and may terminate or amend the Offer (whether or not any Shares have
theretofore been purchased or paid for) and may postpone the acceptance for
payment of and payment for Shares tendered, if, immediately prior to the
expiration of the Offer, (i) the Minimum Condition shall not have been
satisfied, (ii) any applicable waiting period under the HSR Act shall not have
expired or been terminated, or any material approval, permit, authorization,
consent or waiting period of any domestic, foreign or supranational
governmental, administrative or regulatory agency (federal, state, local,
provincial or otherwise) located or having jurisdiction within the United States
or any country or economic region in which either the Target or Acquiror,
directly or indirectly, has material assets or operations (it being understood
that such material approvals shall include the FCC Approvals), shall not have
been obtained or satisfied on terms satisfactory to Acquiror in its reasonable
discretion or (iii) at any time on or after the date of this Agreement, and
prior to the acceptance for payment of Shares, any of the following conditions
shall exist:
(a) there shall have been any action or proceeding brought by any
Governmental Authority before any federal or state court, or any order or
preliminary or permanent injunction entered in any action or proceeding before
any federal or state court or governmental, administrative or regulatory
authority or agency, located or having jurisdiction within the United States or
any country or economic region in which either the Target or Acquiror, directly
or indirectly, has material assets or operations, or any other action taken,
proposed or threatened, or statute, rule, regulation, legislation,
interpretation, judgment or order proposed, sought, enacted, entered, enforced,
promulgated, amended, issued or deemed applicable to Acquiror, the Target or any
subsidiary or affiliate of Acquiror or the Target or the Offer or the Merger, by
an legislative body, court, government or governmental, administrative or
regulatory authority or agency located or having jurisdiction within the United
States or any country or economic region in which either the Target or Acquiror,
directly or indirectly, has material assets or operations, which could
reasonably be expected to have the effect of : (i) making illegal, or otherwise
directly or indirectly restraining or prohibiting or making materially more
costly, the making of the Offer, the acceptance for payment of, payment for, or
ownership, directly or indirectly, of some of or all the Shares by Acquiror or
Acquiror Sub, the consummation of any of the transactions contemplated by the
Agreement or materially delaying the Merger; (ii) prohibiting or materially
limiting the ownership or operation by the Target or any of its Subsidiaries, or
by Acquiror, Acquiror Sub or any of Acquiror's subsidiaries of all or any
material portion of the business or assets of the Target or any of its material
subsidiaries or Acquiror or any of its subsidiaries, or compelling Acquiror Sub,
Acquiror or any of Acquiror's subsidiaries to dispose of or hold separate all or
any material portion of the business or assets of the Target or any of its
material subsidiaries or Acquiror or any of its subsidiaries, as a result of the
A-1
<PAGE>
transactions contemplated by the Offer or the Agreement; (iii) imposing or
confirming limitations on the ability of Acquiror Sub, Acquiror or any of
Acquiror's subsidiaries effectively to acquire or hold or to exercise full
rights of ownership of Shares, including, without limitation, the right to vote
any Shares acquired or owned by Acquiror or Acquiror Sub or any of Acquiror's
subsidiaries on all matters properly presented to the shareholders of the
Target, including, without limitation, the adoption and approval of the
Agreement and the Merger or the right to vote any shares of capital stock of any
Subsidiary (other than immaterial Subsidiaries) directly or indirectly owned by
the Target; (iv) requiring divestiture by Acquiror or Acquiror Sub, directly or
indirectly, of any Shares; or (v) which would reasonably be expected to
materially adversely affect the business, financial condition or results of
operations of the Target and its Subsidiaries taken as a whole or the value of
the Shares or of the Offer to Acquiror Sub or Acquiror;
(b) (i) it shall have been publicly disclosed or Acquiror Sub shall
have otherwise learned that beneficial ownership (determined for the purposes of
this paragraph as set forth in Rule 13d-3 promulgated under the Exchange Act) of
20% or more of the then outstanding Shares has been acquired by any person or
entity or any "group" (as such term is defined under Section 13(d) of the
Exchange Act), other than Acquiror or any of its affiliates or (ii) (A) the
Board shall have withdrawn or modified in a manner adverse to Parent, Acquiror
or Acquiror Sub the approval or recommendation of the Offer, the Merger or this
Agreement or approved or recommended any takeover proposal or any other
acquisition of Shares other than the Offer and the Merger, (B) any such person
or other entity or group shall have entered into a definitive agreement or an
agreement in principle with the Target with respect to a tender offer or
exchange offer for any Shares or a merger, consolidation or other business
combination with or involving the Target or any of its Subsidiaries or (C) the
Board shall have resolved to do any of the foregoing;
(c) the Target shall have failed to perform in any material respect
any material obligation of the Target to be performed or complied with by it
prior to the Tender Offer Acceptance Date or any representation or warranty of
the Target in this Agreement shall not be true and correct and the failure to be
true and correct shall have a Material Adverse Effect on the Target; provided,
--------
however, in determining whether a Material Adverse Effect has occurred, any
- - -------
qualifications as to materiality contained in any such representation and
warranty shall be deemed not to apply.
(d) this Agreement shall have been terminated in accordance with its
terms;
(e) Acquiror Sub and the Target shall have agreed that Acquiror Sub
shall terminate or amend the Offer; or
(f) there shall have occurred, or Acquiror Sub shall have become
aware of any fact that would be reasonably expected to have a Material Adverse
Effect on the Target;
(g) shall have occurred (i) any general suspension of, or limitation
on prices for, or trading in securities on any national securities exchange;
(ii) a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States; (iii) any limitation (whether or not
mandatory) by any United States federal or state government or
A-2
<PAGE>
governmental, administrative or regulatory authority or agency, on, or any other
event that could reasonably be expected to materially adverse effect, the
extension of credit by banks or other lending institutions; (iv) a commencement
of a war or armed hostilities or other national or international calamity
directly or indirectly involving the United States that could reasonably be
expected to have a Material Adverse Effect on the Target or materially adverse
effect (or materially delay) the consummation of the Offer; (v) any
extraordinary or material adverse change in the United States securities or
financial markets generally from the date hereof, including, without limitation,
a decline as of any day and as of ten trading days after such day, of at least
35% in either the Dow Jones Average of Industrial Stocks or the Standard &
Poor's 400 index from the date hereof; or (vi) in the case of any of the
foregoing existing at the time of commencement of the Offer, a material
acceleration or worsening thereof;
(h) the Board of Directors of the Target shall not have been
increased from six to eight members; three of the existing Target directors
shall not have resigned effective as of the Tender Offer Acceptance Date; and
three designees of Acquiror (to the extent designated by Acquiror) shall not
have been validly designated by the existing directors as of the Tender Offer
Acceptance Date to fill such vacancies;
(i) the Target shall have, after the date of the Agreement, issued,
sold or granted or authorized the issuance, sale or grant of any shares of the
capital stock of the Target or any Subsidiary of any class, or any options,
warrants, convertible securities or other rights of any kind to acquire any
shares of such capital stock, or any other ownership interest (including,
without limitation, any phantom interest), of the Target (except for shares of
the Target Common Stock issuable upon the exercise of Options described in
clauses (a) and (b) of Section 2.07 of the Agreement which were outstanding on
the date of the Agreement or pursuant to the Target's Employee Stock Purchase
Plan);
which, in the reasonably judgment of Acquiror Sub with respect to each and
every matter referred to above and regardless of the circumstances (including
any action or inaction by Acquiror Sub or any of its affiliates not inconsistent
with the terms hereof) giving rise to any such condition, makes it inadvisable
to proceed with the Offer or with such acceptance for payment of or payment for
Shares or to proceed with the Merger.
The foregoing conditions are for the sole benefit of Acquiror Sub and
Acquiror and may be asserted by Acquiror Sub or Acquiror regardless of the
circumstances giving rise to any such condition (including any action or
inaction by Acquiror or Acquiror Sub not inconsistent with the terms hereof) or
may be waived by Acquiror Sub or Acquiror in whole or in part at any time and
from time to time in their sole discretion. The failure by Parent, Acquiror or
Acquiror Sub at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right; the waiver of any such right with respect to
particular facts and other circumstances shall not be deemed a waiver with
respect to any other facts and circumstances; and each such right shall be
deemed an ongoing right that may be asserted at any time and from time to time.
A-3
<PAGE>
ANNEX B
ARTICLES OF INCORPORATION
OF
WESTCOTT COMMUNICATIONS, INC.
ARTICLE ONE
The name of the Corporation is Westcott Communications, Inc.
ARTICLE TWO
The period of duration of the Corporation is perpetual.
ARTICLE THREE
The purpose for which the Corporation is organized is to engage in the
transaction of any and all lawful business for which corporations may be
incorporated under the Texas Business Corporation Act.
ARTICLE FOUR
The aggregate number of shares of capital stock which the Corporation
shall have authority to issue is 1,000, par value $.01 per share, designated
Common Stock. Each share of such Common Stock shall have identical rights and
privileges in every respect.
ARTICLE FIVE
No holder of any shares of capital stock of the Corporation, whether
now or hereafter authorized, shall, as such holder, have any preemptive or
preferential right to receive, purchase, or subscribe to (a) any unissued or
treasury shares of any class of stock (whether now or hereafter authorized) of
the Corporation, (b) any obligations, evidences of indebtedness, or other
securities of the Corporation convertible into or exchangeable for, or carrying
or accompanied by any rights to receive, purchase, or subscribe to, any such
unissued or treasury shares, (c) any right of subscription to, any right to
receive, or any warrant or option for the purchase of, any of the foregoing
securities, or (d) any other securities that may be issued or sold by the
Corporation.
ARTICLE SIX
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of $1,000.00, consisting
of money, labor done, or property actually received.
<PAGE>
ARTICLE SEVEN
Cumulative voting for the election of directors is expressly denied
and prohibited.
ARTICLE EIGHT
Any action of the Corporation which, under the provisions of the Texas
Business Corporation Act or any other applicable law, is required to be
authorized or approved by the holders of any specified fraction which is in
excess of one-half or any specified percentage which is in excess of fifty
percent of the outstanding shares (or of any class or series thereof) of the
Corporation shall, notwithstanding any law, be deemed effectively and properly
authorized or approved if authorized or approved by the vote of the holders of
more than fifty percent of the outstanding shares entitled to vote thereon (or,
if the holders of any class or series of the Corporation's shares shall be
entitled by the Texas Business Corporation Act or any other applicable law to
vote thereon separately as a class, by the vote of the holders of more than
fifty percent of the outstanding shares of each such class or series). Without
limiting the generality of the foregoing, the foregoing provisions of this
Article Eight shall be applicable to any required shareholder authorization or
approval of: (a) any amendment to these articles of incorporation; (b) any plan
of merger, share exchange, or reorganization involving the Corporation; (c) any
sale, lease, exchange, or other disposition of all, or substantially all, the
property and assets of the Corporation; and (d) any voluntary dissolution of the
Corporation.
Directors of the Corporation shall be elected by a plurality of the
votes cast by the holders of shares entitled to vote in the election of
directors of the Corporation at a meeting of shareholders at which a quorum is
present.
Except as otherwise provided in this Article Eight or as otherwise
required by the Texas Business Corporation Act or other applicable law, with
respect to any matter, the affirmative vote of the holders of a majority of the
Corporation's shares entitled to vote on that matter and represented in person
or by proxy at a meeting of shareholders at which a quorum is present shall be
the act of the shareholders.
Nothing contained in this Article Eight is intended to require
shareholder authorization or approval of any action of the Corporation
whatsoever unless such approval is specifically required by the other
provisions of these articles of incorporation, the bylaws of the Corporation, or
by the Texas Business Corporation Act or other applicable law.
2
<PAGE>
ARTICLE NINE
The street address of the registered office of the Corporation is 1212
Guadalupe, Suite 102, Austin, Texas 78701, and the name of its registered
agent at such address is Capitol Services, Inc.
ARTICLE TEN
To the fullest extent permitted by applicable law, a director of the
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for an act or omission in the director's capacity as a
director, except that this Article Ten does not eliminate or limit the liability
of a director of the Corporation to the extent the director is found liable for:
(i) a breach of the director's duty of loyalty to the Corporation or
its shareholders;
(ii) an act or omission not in good faith that constitutes a breach of
duty of the director to the Corporation or an act or omission
that involves intentional misconduct or a knowing violation of
the law;
(iii) a transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office; or
(iv) an act or omission for which the liability of a director is
expressly provided by an applicable statute.
Any repeal or amendment of this Article Ten by the shareholders of the
Corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director of the Corporation arising
from an act or omission occurring prior to the time of such repeal or amendment.
In addition to the circumstances in which a director of the Corporation is not
personally liable as set forth in the foregoing provisions of this Article Ten,
a director shall not be liable to the Corporation or its shareholders to such
further extent as permitted by any law hereafter enacted, including without
limitation any subsequent amendment to the Texas Miscellaneous Corporation Laws
Act or the Texas Business Corporation Act.
ARTICLE ELEVEN
Any action which may be taken, or which is required by law or the Articles
of Incorporation or bylaws of the Corporation to be taken, at any annual or
special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall have been signed by the holder or holders of shares
having not
3
<PAGE>
less than the minimum number of votes that would be necessary to take such
action at a meeting at which the holders of all shares entitled to vote on the
action were present and voted.
ARTICLE TWELVE
The Corporation shall indemnify any person who was, is, or is threatened to
be made a named defendant or respondent in a proceeding (as hereinafter
defined) because the person (i) is or was a director or officer of the
Corporation or (ii) while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, to the
fullest extent that a corporation may grant indemnification to a director under
the Texas Business Corporation Act, as the same exists or may hereafter be
amended.
4
Exhibit 11
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended March 31, 1995 and 1996
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1995 1996
<S> <C> <C>
Loss applicable to common
shareholders $ (27,115) $ (27,584)
============= =============
Weighted average common
shares 108,631,354 128,502,847
Incremental Shares for stock
options(1) 504,100 -
Incremental Shares for common
share issuances(1) 486,725 -
------------- -------------
Weighted average common
and common equivalent
shares outstanding(2) 109,622,179 128,502,847
============= =============
Loss per common and common
equivalent share $ (.25) $ (.21)
============= =============
</TABLE>
==============
(1) Represents the Incremental Shares for non-qualified options granted to
purchase common stock and common stock issued within one year prior to the
initial filing of the registration statement for the initial public
offering in September 1995 at a purchase price below $10.00 per share. Such
Incremental Shares were determined using the treasury stock method.
(2) The effect of the assumed exercise of stock options which were issued in
periods prior to the one-year period prior to the inital filing of the
registration statement is not included in the weighted average number of
common stock shares outstanding because the effect is antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 27,226 32,222
<SECURITIES> 0 0
<RECEIVABLES> 211,150 244,513
<ALLOWANCES> 37,379 43,038
<INVENTORY> 70,844 66,779
<CURRENT-ASSETS> 303,826 333,878
<PP&E> 161,770 166,306
<DEPRECIATION> 49,757 56,936
<TOTAL-ASSETS> 1,881,416 2,088,966
<CURRENT-LIABILITIES> 360,386 363,224
<BONDS> 1,134,916 1,169,037
231,606 429,530
0 0
<COMMON> 777,475 778,620
<OTHER-SE> (656,891) (684,483)
<TOTAL-LIABILITY-AND-EQUITY> 1,881,416 2,088,966
<SALES> 1,046,329 314,953
<TOTAL-REVENUES> 1,046,329 314,953
<CGS> 251,347 83,445
<TOTAL-COSTS> 251,347 83,445
<OTHER-EXPENSES> 821,257 224,523
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 105,384 28,051
<INCOME-PRETAX> (135,035) (20,740)
<INCOME-TAX> (59,600) 0
<INCOME-CONTINUING> (75,435) (20,740)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (75,435) (20,740)
<EPS-PRIMARY> (.91) (.21)
<EPS-DILUTED> 0 0
</TABLE>
