SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
SCHEDULE 13E-4
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the
Securities Exchange Act of 1934)
K-III COMMUNICATIONS CORPORATION
--------------------------------
(Name of Issuer)
K-III COMMUNICATIONS CORPORATION
--------------------------------
(Name of Person(s) Filing Statement)
$10.00 Series C Exchangeable Preferred Stock
--------------------------------------------
(Title of Class of Securities)
482727500
---------------------------------------------
(CUSIP Number of Class of Securities)
Ann M. Riposanu, Esq.
K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
(212) 745-0100
------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications on Behalf
of Person(s) Filing Statement)
Copy to:
Gary I. Horowitz, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
July 24, 1996
- ---------------------------------------------------------------------------
(Date Tender Offer First Published, Sent or Given to Security Holders)
- ---------------------------------------------------------------------------
Page 1 of 5 pages
Exhibit Index at Page 5
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This Amendment No. 1 to the Issuer Tender Offer Statement on
Schedule 13E-4 being filed by K-III Communications Corporation ("K-III"),
amends and supplements the Issuer Tender Offer Statement on Schedule
13E-4 filed by K-III on July 24, 1996 (the "K-III 13E-4"), and relates to
the Exchange Offer described therein. All capitalized terms used herein
but not otherwise defined shall have the meanings given them in the K-III
13E-4.
Item 8. Additional Information.
- ------- -----------------------
(e) The conditions of the exchange offer which are set forth in the
prospectus dated July 24, 1996 (the "Prospectus") are hereby amended to change
the standard of "sole judgment of K-III" which appears in subsections (a),
(b), (c) and (d) of the "Conditions of the Exchange Offers" in the Prospectus,
to the standard of "reasonable judgment of K-III".
<PAGE>
3
Item 9. Material to be Filed as Exhibits.
- ------- ---------------------------------
(a)(i) Prospectus, dated July 24, 1996.
(a)(ii) Letter of Transmittal with respect to the Old Preferred
Stock.*
(a)(iii) Instruction to Registered Holder from Beneficial Owner
of the Old Preferred Stock.*
(a)(iv) Form of Notice of Guaranteed Delivery with respect to
the Old Preferred Stock.*
(a)(v) Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.*
(b) Not applicable.
(c) Registration Rights Agreement dated as of January 24,
1996 among K-III, Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation,
and Salomon Brothers, Inc.*
(d) Opinion of Simpson Thacher & Bartlett regarding the
material United States federal income tax consequences
to holders of the Old and New Preferred Stock.*
(e) See the Prospectus filed as Exhibit (a)(i) above.
(f) Not applicable.
- ----------------
* Previously Filed.
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4
SIGNATURE
---------
After due inquiry and to the best of its knowledge and belief,
the undersigned certifies that the information set forth in this amended
statement is true, complete and correct.
K-III COMMUNICATIONS CORPORATION
By: /s/ Beverly C. Chell
--------------------------------------
Name: Beverly C. Chell
Title: Vice Chairman and Secretary
Dated: August 13, 1996
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5
EXHIBIT INDEX
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Page
Number Exhibit Number
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(a)(i) Prospectus, dated July 24, 1996.
(a)(ii) Letter of Transmittal with respect to the Old Preferred Stock.*
(a)(iii) Instruction to Registered Holder from Beneficial Owner of the
Old Preferred Stock.*
(a)(iv) Form of Notice of Guaranteed Delivery with respect to the Old
Preferred Stock.*
(a)(v) Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9.*
(b) Not applicable.
(c) Registration Rights Agreement dated as of January 24, 1996
among K-III, Morgan Stanley & Co. Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation, and Salomon Brothers
Inc.*
(d) Opinion of Simpson Thacher & Bartlett regarding the material
United States federal income tax consequences to holders of the
Old and New Preferred Stock.*
(e) See the Prospectus filed as Exhibit (a)(i) above.
(f) Not applicable.
- ----------------
* Previously Filed.
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Exhibit 99(a)(i)
PROSPECTUS
JULY 24, 1996
[K-III LOGO]
K-III COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE
$1,000 IN PRINCIPAL AMOUNT OF ITS 8 1/2% SENIOR NOTES DUE 2006 FOR EACH $1,000
IN PRINCIPAL AMOUNT OF ITS OUTSTANDING 8 1/2% SENIOR NOTES DUE 2006
OFFER TO EXCHANGE
ITS $10.00 SERIES D EXCHANGEABLE PREFERRED STOCK REDEEMABLE 2008 (LIQUIDATION
PREFERENCE $100.00 PER SHARE) (EXCHANGEABLE AT THE OPTION OF K-III) FOR ANY AND
ALL OUTSTANDING SHARES OF ITS $10.00 SERIES C EXCHANGEABLE PREFERRED STOCK
REDEEMABLE 2008 (LIQUIDATION PREFERENCE $100.00 PER SHARE) (EXCHANGEABLE AT THE
OPTION OF K-III)
-------------------
K-III Communications Corporation, a Delaware corporation ("K-III"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus (this "Prospectus") and the accompanying Letters of Transmittal (the
"Letters of Transmittal") (i) to exchange (the "Notes Exchange Offer") up to
$300,000,000 in aggregate principal amount of a new series of its 8 1/2% Senior
Notes due 2006 (the "New Notes") for $300,000,000 in aggregate principal amount
of its outstanding 8 1/2% Senior Notes due 2006 (the "Old Notes") and (ii) to
exchange (the "Preferred Stock Exchange Offer" and, together with the Notes
Exchange Offer, the "Exchange Offers") one share of its $10.00 Series D
Exchangeable Preferred Stock Redeemable 2008, par value $.01 per share,
liquidation preference $100.00 per share (the "New Preferred Stock"), for each
outstanding share of its $10.00 Series C Exchangeable Preferred Stock Redeemable
2008, par value $.01 per share, liquidation preference $100.00 per share (the
"Old Preferred Stock"), of which 2,000,000 shares are outstanding. There will be
no cash proceeds to K-III from these Exchange Offers.
The form and terms of the New Notes and the New Preferred Stock are the same
as the form and terms of the Old Notes and the Old Preferred Stock except that
(i) the New Notes and the shares of New Preferred Stock will have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and thus will not bear restrictive legends restricting their transfer pursuant
to the Securities Act and (ii) holders of New Notes and/or New Preferred Stock
will not be entitled to certain rights of holders of the Old Notes and the Old
Preferred Stock, respectively, to register their securities, which rights will
terminate upon the consummation of the Exchange Offers. See "The Exchange
Offers--Consequences of Failure to Exchange." The Old Notes and the New Notes
are sometimes referred to herein collectively as the "Notes." The Old Preferred
Stock and the New Preferred Stock are sometimes referred to herein collectively
as the "Preferred Stock." The New Preferred Stock is exchangeable into 10% Class
D Subordinated Exchange Debentures due 2008 (the "New Subordinated Debentures"),
in whole but not in part, at the option of K-III, provided that no shares of
K-III's $2.875 Senior Exchangeable Preferred Stock (the "Senior Preferred
Stock") are outstanding on the date of the exchange. The form and terms of the
New Subordinated Debentures will be the same as the form and terms of the 10%
Class C Subordinated Exchange Debentures due 2008 (the "Old Subordinated
Debentures"), except that the New Subordinated Debentures will have been
registered under the Securities Act pursuant to the Registration Statement of
which this Prospectus is a part. The New Subordinated Debentures are
exchangeable for the New Preferred Stock on the same basis as the Old
Subordinated Debentures are exchangeable for the Old Preferred Stock. The New
Subordinated Debentures and the Old Subordinated Debentures are sometimes
referred to herein collectively as the "10% Subordinated Debentures," and the
New Notes, the New Preferred Stock and the New Subordinated Debentures are
sometimes referred to herein collectively as the "Securities."
Interest on the New Notes shall accrue from the last interest payment date on
which interest was paid on the Old Notes surrendered in exchange therefor or, if
no interest has been paid, from the original date of issuance of the Old Notes.
The Notes are fully and unconditionally guaranteed jointly and severally by all
the domestic subsidiaries of K-III. Dividends on the New Preferred Stock will
accrue and will be cumulative from the last dividend payment date on which
dividends were paid on the shares of Old Preferred Stock surrendered in exchange
therefor or, if no dividends have been paid, from the original date of issuance
of the Old Preferred Stock.
The Old Notes and Old Preferred Stock were originally issued and sold on
January 24, 1996 in transactions not registered under the Securities Act, in
reliance upon the exemption provided in Section 4(2) of the Securities Act.
Accordingly, the Old Notes and Old Preferred Stock may not be reoffered, resold
or otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. Based on interpretations by the staff of the
Securities and Exchange Commission, New Notes and New Preferred Stock issued
pursuant to the Exchange Offers in exchange for Old Notes and Old Preferred
Stock may be offered for resale, resold and otherwise transferred by holders
thereof (other than any such holder which is an "affiliate" of K-III within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes and New Preferred Stock are acquired in the ordinary course
of such holder's business and such holders have no arrangement with any person
to participate in the distribution of such New Notes and New Preferred Stock.
However, K-III has not sought, and does not intend to seek, its own no-action
letter, and there can be no assurance that the staff of the Securities and
Exchange Commission would make a similar determination with respect to the
Exchange Offers. Each broker-dealer that receives New Notes and New Preferred
Stock for its own account pursuant to the Exchange Offers must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes and
New Preferred Stock. The Letters of Transmittal relating to the Exchange Offers
state that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes and New Preferred Stock received in exchange for Old Notes and Old
Preferred Stock where such Old Notes and Old Preferred Stock were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. K-III will, for a period of 90 days after the Expiration Date (as
defined herein), make copies of this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
The Notes and the Preferred Stock constitute new issues of securities with no
established trading market. Any Old Notes or shares of Old Preferred Stock not
tendered and accepted in the Exchange Offers will remain outstanding. To the
extent that Old Notes or shares of Old Preferred Stock are tendered and accepted
in the Exchange Offers, a holder's ability to sell untendered Old Notes or
shares of Old Preferred Stock could be adversely affected. No assurance can be
given as to the liquidity of the trading market for either the Notes or the
Preferred Stock. See "Risk Factors--Lack of Public Market."
K-III will accept for exchange any and all Old Notes or shares of Old
Preferred Stock validly tendered and not withdrawn prior to 12:00 a.m., New York
City time, on August 21, 1996, unless extended by K-III in its sole discretion
(such date as it may be so extended, the "Expiration Date"). Tenders of Old
Notes or shares of Old Preferred Stock may be withdrawn at any time prior to the
Expiration Date. The Exchange Offers are subject to certain customary
conditions. See "The Exchange Offers."
-------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DESCRIPTION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
AVAILABLE INFORMATION
K-III has filed with the Securities and Exchange Commission (the
"Commission" or "SEC") a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act for the registration of the Securities
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to K-III and the Securities
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto, and financial statements and notes filed as a part thereof. In
addition, K-III has agreed to furnish to holders of the Old Notes and Old
Preferred Stock, and prospective purchasers thereof, the information required to
be delivered pursuant to Rule 144A(d)(4) under the Securities Act until the
consummation of the Exchange Offers.
K-III is subject to the informational requirements of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy or information statements and other information
with the Commission. The Registration Statement and the exhibits and schedules
thereto, as well as such reports and other information filed by K-III with the
Commission may be inspected and copied, at prescribed rates, at the public
reference facilities of the Commission, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the Commission's regional offices at Seven World
Trade Center, 13th floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Reports
and other information concerning K-III are also available for inspection and
copying at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
K-III hereby incorporates by reference in this Prospectus its Annual Report
on Form 10-K, File No. 1-11106, for the year ended December 31, 1995 (the "Form
10-K"), as amended by Form 10-K/A dated June 21, 1996 as filed with the
Commission. K-III also hereby incorporates by reference in this Prospectus its
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1996 and its
Current Reports on Form 8-K dated January 12, 1996 as amended by Form 8-K/A
dated March 15, 1996, April 23, 1996 and June 14, 1996, each as filed with the
Commission.
All documents filed by K-III pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the Exchange Offers shall be deemed to be incorporated by
reference in the Prospectus and made a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other document subsequently filed with the Commission which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON WRITTEN OR ORAL
REQUEST FROM: CORPORATE SECRETARY, K-III COMMUNICATIONS CORPORATION, 745 FIFTH
AVENUE, NEW YORK, NEW YORK 10151, (212) 745-0100. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY AUGUST 13, 1996.
UNTIL OCTOBER 22, 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------------
In this Prospectus, references to "dollar" and "$" are to United States
dollars, and the terms "United States" and "U.S." means the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
2
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TABLE OF CONTENTS
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PAGE
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Available Information.......................................................................... 2
Incorporation of Certain Documents by Reference................................................ 2
Summary........................................................................................ 4
Glossary of Certain Defined Terms.............................................................. 16
Risk Factors................................................................................... 18
Use of Proceeds................................................................................ 21
Capitalization................................................................................. 22
Selected Financial Data........................................................................ 23
Business....................................................................................... 27
The Exchange Offers............................................................................ 38
Description of Notes........................................................................... 47
Description of Preferred Stock and 10% Subordinated Debentures................................. 69
Description of Capital Stock of K-III.......................................................... 86
Description of Certain Indebtedness............................................................ 90
Certain Federal Income Tax Considerations...................................................... 95
Plan of Distribution........................................................................... 105
Legal Matters.................................................................................. 106
Experts........................................................................................ 106
Unaudited Pro Forma Consolidated Financial Data................................................ P-1
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFERS COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY K-III. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE NOTES OR THE PREFERRED STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF K-III SINCE THE DATE HEREOF.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Unless the context indicates
otherwise, all references herein to the "Company" include K-III and its
subsidiaries. Pro forma amounts include adjustments for acquisitions,
divestitures, the redemption of preferred stock, the initial public offering of
common stock and the offerings of the Old Notes and Old Preferred Stock (the
"Offerings") described herein. Please refer to "Glossary of Certain Defined
Terms" for definitions of certain capitalized terms used in this Prospectus.
THE COMPANY
Through its wholly-owned subsidiaries, K-III is a leading content provider
to the education, business and special interest consumer markets; its best-known
brands include Channel One News, The World Almanac, Nelson's, Weekly Reader,
Daily Racing Form, Seventeen, Modern Bride and Soap Opera Digest. Most of the
Company's products serve niche markets and are recognized within those markets
as premier franchises, and many hold dominant positions. The Company focuses on
ownership and development of content, because content can be tailored to
specific information needs across print, electronic and multimedia formats.
Furthermore, proprietary branded content exists independent of any specific
delivery technology. The Company organized its businesses into three segments,
education, information and media, which accounted, respectively, for
approximately 32%, 25%, and 43% of K-III's 1995 consolidated net sales of $1,046
million.
The principal executive office of the Company is located at 745 Fifth
Avenue, New York, New York 10151, telephone number (212) 745-0100.
RECENT DEVELOPMENTS
On May 30, 1996, K-III Acquisition Corp. ("Acquiror Sub"), a Texas
corporation and a wholly-owned subsidiary of K-III Prime Corporation, a Delaware
corporation and a wholly-owned subsidiary of K-III, acquired 19,363,464 shares
of Westcott Communications, Inc. ("Westcott"), which represented approximately
97.9% of the outstanding shares, for a cash price of $21.50 per share pursuant
to a tender offer (the "Offer") commenced on April 26, 1996. Westcott's business
is the delivery of workplace training and education utilizing various multimedia
technologies. Westcott provides training, news, and information to professionals
and students in the corporate and professional, automotive, banking, government
and public service, education, health care, and interactive distance training
markets. On May 31, 1996, K-III completed the merger (the "Merger") of Acquiror
Sub with Westcott. Upon consummation of the Merger, Westcott became a
wholly-owned subsidiary of K-III and the shareholders of Westcott who did not
tender their shares became entitled to receive $21.50 per share. The aggregate
amount paid, and to be paid, to acquire all of the Westcott shares at $21.50 per
share pursuant to the Offer and the Merger and to pay related fees and expenses
is approximately $445 million.
On May 31, 1996, the Company replaced its existing credit facilities (under
which the Company could borrow $970 million in the aggregate) with new credit
facilities (under which the Company can borrow $1.5 billion in the aggregate).
See "Description of Certain Indebtedness."
4
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THE EXCHANGE OFFERS
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Registration Rights Agreement;
Effect on Holders.............. The Old Notes and Old Preferred Stock were sold by K-III on
January 24, 1996 to Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation and
Salomon Brothers Inc, as the initial purchasers (the
"Initial Purchasers") pursuant to a Purchase Agreement
dated January 19, 1996 between K-III and the Initial
Purchasers (the "Purchase Agreement"). The Initial
Purchasers subsequently sold the Old Notes and Old
Preferred Stock to qualified institutional buyers and
accredited investors in reliance on Rule 144A and
Regulation S under the Securities Act. Pursuant to the
Purchase Agreement, K-III and the Initial Purchasers
entered into a Registration Rights Agreement dated as of
January 24, 1996 (the "Registration Rights Agreement")
which grants the holders of the Old Notes and Old Preferred
Stock certain exchange and registration rights. These
Exchange Offers are intended to satisfy such rights.
Therefore, the holders of the Securities are not entitled
to any exchange or registration rights with respect
thereto. All untendered Old Notes and shares of Old
Preferred Stock will continue to be subject to the
restrictions on transfer described under "The Exchange
Offers--Consequences of Failure to Exchange." To the extent
that Old Notes or shares of Old Preferred Stock are
tendered and accepted in the Exchange Offers, the trading
market for untendered Old Notes or shares of Old Preferred
Stock (as the case may be) could be adversely affected. See
"The Exchange Offers--Purpose and Effect of the Exchange
Offers" and "--Consequences of Failure to Exchange" and
"Risk Factors--Lack of Public Market."
The Notes Exchange Offer........ Up to $300,000,000 in principal amount of New Notes will be
exchanged for 300,000,000 in aggregate principal amount of
Old Notes. K-III will issue the New Notes to holders on the
earliest possible date following the Expiration Date.
The Preferred Stock Exchange
Offer.......................... One share of New Preferred Stock will be exchanged for each
share of Old Preferred Stock. As of the date hereof,
2,000,000 shares of Old Preferred Stock are outstanding.
K-III will issue the New Preferred Stock to holders on the
earliest practicable date following the Expiration Date.
Expiration Date................. 12:00 a.m., New York City time, on August 21, 1996, unless
the Exchange Offers are extended by K-III in its sole
discretion, in which case the term "Expiration Date" means
the latest date and time to which the Exchange Offers are
extended.
Conditions to the Exchange
Offers......................... The Exchange Offers are not conditioned upon any minimum
aggregate principal amount of Old Notes or number of shares
of Old Preferred Stock being tendered for exchange.
However, the Exchange Offers are subject to certain
customary conditions, which may be waived by K-III. See
"The Exchange Offers-- Conditions of the Exchange Offers".
K-III reserves the right to
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terminate the Exchange Offers if any of such conditions
have not been satisfied and to amend the Exchange Offers at
any time prior to the Expiration Date.
Procedures for Tendering the Old
Notes and the Old Preferred
Stock.......................... See "The Exchange Offers--Procedures for Tendering" and
"--Guaranteed Delivery Procedures."
Withdrawal Rights............... Tenders may be withdrawn at any time prior to the Expiration
Date. See "The Exchange Offers--Withdrawal of Tenders."
Acceptance of the Old Notes or
the Old Preferred Stock and
Delivery of the New Notes or
the New Preferred Stock........ K-III will accept for exchange any and all Old Notes or
shares of Old Preferred Stock which are properly tendered in
the Exchange Offers prior to the Expiration Date. The New
Notes or shares of New Preferred Stock issued pursuant to
the Exchange Offers will be delivered on the earliest
practicable date following the Expiration Date. See "The
Exchange Offers--Terms of the Exchange Offers."
Certain Tax Considerations...... For a discussion of certain federal income tax consequences
of the exchange of the Old Notes and the Old Preferred
Stock, see "Certain Federal Income Tax Considerations--Tax
Consequences of the Exchange Offers."
Exchange Agent.................. The Bank of New York is serving as the exchange agent (the
"Exchange Agent") in connection with the Exchange Offers.
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6
<PAGE>
TERMS OF THE NOTES, THE PREFERRED STOCK
AND THE 10% SUBORDINATED DEBENTURES
The Exchange Offers apply to $300,000,000 aggregate principal amount of the
Old Notes and 2,000,000 shares of the Old Preferred Stock. The form and terms of
the New Notes and the New Preferred Stock are the same as the form and terms of
the Old Notes and the Old Preferred Stock except that the New Notes and the
shares of New Preferred Stock will have been registered under the Securities Act
and thus will not bear restrictive legends restricting their transfer pursuant
to the Securities Act. The form and terms of the New Subordinated Debentures
will be the same as the Old Subordinated Debentures. See "Description of Notes,
Preferred Stock and 10% Subordinated Debentures."
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THE NOTES
Maturity Date.............. February 1, 2006.
Interest Payment Dates..... February 1 and August 1 of each year, commencing August 1,
1996. Interest on the Old Notes has accrued from the original
date of issuance thereof will cease to accrue on the date
the New Notes are exchanged for the Old Notes and shall be
paid on the first interest payment date after the date the
New Notes are exchanged for the Old Notes. Interest on the
New Notes will accrue from the date the New Notes are
exchanged for the Old Notes.
Optional Redemption........ The Notes are redeemable at the option of K-III in whole or in
part, on or after February 1, 2001, or prior thereto upon a
Change of Control (as defined) at the redemption prices set
forth herein, plus accrued and unpaid interest to the
redemption date. See "Description of Notes."
Change of Control.......... In the event of a Change of Control (i) each holder of the
Notes will have the right to require K-III to repurchase such
holder's Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to
the repurchase date and (ii) K-III will have the option to
redeem the Notes, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid interest to
the redemption date. The redemption prices for optional
redemptions in the event of a Change of Control will in all
cases be equal to or greater than this repurchase price.
Because of the highly leveraged nature of the Company, there
can be no assurance that K-III will have sufficient funds to
repurchase the Notes in the event of a Change of Control.
See "Description of Notes."
"Change of Control" means such time as (i) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2)
of the Exchange Act), other than Kohlberg Kravis Roberts &
Co., L.P. ("KKR") and its Affiliates (as defined), becomes
the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than (A) 35% of the total voting power
of the then outstanding voting stock of K-III and (B) the
total voting power of the then outstanding voting stock of
K-III beneficially owned by KKR and
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its Affiliates or (ii) during any period of two consecutive
calendar years, individuals who at the beginning of such
period constituted K-III's Board of Directors (together with
any new directors whose election by K-III's Board of
Directors or whose nomination for election by K-III's
shareholders was approved by a vote of at least two-thirds
of the Directors then still in office who either were
Directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease
for any reason to constitute a majority of the directors
then in office.
Indebtedness under the Credit Agreements (as defined) will
automatically accelerate upon the earlier of 30 days from
the Change of Control and the date payment is required to be
made in respect of any tendered Notes. As of June 17, 1996,
there was approximately $900.9 million outstanding under the
Credit Agreements. See "Description of Certain
Indebtedness." If the Company has insufficient funds with
which to repay the indebtedness under the Credit Agreements
and to repurchase the Notes, the holders of the Notes will
have a claim on the funds of the Company equal to that of
the lenders under the Credit Agreements.
Neither the trustee for the Notes, the Company nor its Board
of Directors will be able to waive the Change of Control
obligation of the Company. In the case of a leveraged buyout
in which KKR and its Affiliates maintain or increase their
voting control of the Company, such leveraged buyout will
not result in a "Change of Control."
Guarantees................. The Notes are fully and unconditionally guaranteed jointly and
severally on a senior basis by each of the domestic
Restricted Subsidiaries (as defined), which guarantees (the
"Guarantees") rank pari passu with such subsidiaries'
guarantees of K-III's obligations under the Credit
Agreements and the Company's 10 5/8% Senior Notes and 10
1/4% Senior Notes (collectively, the "Outstanding Notes").
Each such Guarantee is enforceable to the fullest extent
permitted by law, limited only to the extent necessary for
such Guarantee to not constitute a fraudulent conveyance.
Ranking.................... The Notes rank pari passu with the obligations of K-III under
the Credit Agreements and the Outstanding Notes. At June 17,
1996, the aggregate principal amount of outstanding
indebtedness was $900.9 million under the Credit Agreements
and $350.0 million under the Outstanding Notes. None of such
indebtedness was secured. The Notes will rank senior in
right of payment to all future subordinated indebtedness of
the Company. Such subordinated indebtedness will be limited
to the Company's 11 1/2% Subordinated Debentures due 2004
(the "Exchange Debentures"), the Company's 11 5/8%
Subordinated Exchange Debentures due 2005 (the "Class B
Subordinated Debentures") and the 10% Subordinated
Debentures, if and when the same are issued at the option of
K-III in exchange for the Senior Preferred Stock, the
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Series B Preferred Stock, and the Preferred Stock,
respectively, and additional subordinated indebtedness that
is permitted to be incurred by the terms of the Credit
Agreements, the Senior Note Indentures and such other
indebtedness as K-III may have outstanding from time to
time. As of the date of this Prospectus, the Company has no
subordinated indebtedness outstanding, and the Company has
no current intention to issue subordinated indebtedness. As
used herein, the statement that certain indebtedness ranks
pari passu with other indebtedness means only that in the
event of the bankruptcy or insolvency of the debtor such
certain indebtedness and such other indebtedness will have
an equal claim on money or other property of the debtor
available for distribution.
Certain Covenants.......... The Note Indenture pursuant to which the Old Notes have been
and the New Notes will be issued contains certain covenants
which, among other things, limit the ability of the Company
to (i) incur indebtedness, (ii) create liens, (iii) sell
assets, (iv) engage in mergers, consolidations or
transactions with affiliates, (v) make investments in
certain subsidiaries, (vi) pay dividends on or repurchase or
retire capital stock and (vii) make certain investments. See
"Description of Notes--Certain Covenants."
Sinking Fund............... There are no sinking fund payments for the Notes.
THE PREFERRED STOCK
Dividends.................. Cumulative at $10.00 per annum. All dividends are payable in
cash on February 1, May 1, August 1, and November 1 of each
year, commencing May 1, 1996. Dividends on the Old Preferred
Stock have accrued and are cumulative from the original date
of issuance thereof to the date on which shares of Old
Preferred Stock are surrendered and shall be paid on the
first dividend payment date after the date the New Preferred
Stock is exchanged for the Old Preferred Stock. Dividends on
the New Preferred Stock will accrue and will be cumulative
from the date the New Preferred Stock is exchanged for the
Old Preferred Stock. For federal income tax purposes,
distributions with respect to the Preferred Stock will not
qualify as dividends and will be treated as a return of
capital until the Company has earnings and profits as
determined under applicable federal income tax principles.
Distributions that are treated as a non-taxable return of
capital will reduce the adjusted tax basis of the Preferred
Stock, but not below zero. The amount of any distribution
that exceeds the adjusted tax basis of the Preferred Stock
will be treated as capital gain. Distributions that do not
qualify as dividends will not be eligible for the
dividends-received deduction. See "Certain Federal Income
Tax Considerations."
Liquidation Preference..... $100.00 per share, plus accrued and unpaid dividends.
Voting..................... Holders of the Preferred Stock have no general voting rights
except as provided by law and as provided in the Certificates
of Designations
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
therefor. Upon the failure of the Company to pay dividends
in cash for more than six consecutive quarters, holders of a
majority of the outstanding shares of Preferred Stock,
voting together as a class, will be entitled to elect two
members to the Board of Directors of K-III. Subject to
certain exceptions, holders of a majority of the outstanding
Preferred Stock together with any parity securities issued
in the future ("Future Parity Securities") will have the
right, voting together as a class, to approve certain
mergers, consolidations and sales of assets by the Company
where the net worth of the Company is impaired unless the
holders of senior equity securities or indebtedness have
consented to such merger, consolidation or sale. See
"Description of Preferred Stock and 10% Subordinated
Debentures--The Preferred Stock--Merger, Consolidation and
Sale of Assets." Parity securities are equity securities of
the Company that rank equally in their right to receive
dividends and/or distributions upon liquidation.
Mandatory Redemption....... K-III is required to redeem the Preferred Stock on February 1,
2008 at a redemption price equal to the liquidation preference
plus accrued and unpaid dividends to the redemption date.
Optional Redemption........ On and after February 1, 2001, the Preferred Stock is
redeemable, at the option of K-III, in whole or in part, at
the redemption prices set forth herein, plus accrued and
unpaid dividends to the redemption date.
Optional Redemption Upon
Public Equity Offering....... At any time on or prior to February 1, 1999, K-III may, at its
option, redeem up to $100 million of the aggregate liquidation
preference of the Preferred Stock at a price per share of
$110.00, plus accrued and unpaid dividends to the redemption
date, with the net proceeds of one or more Public Equity
Offerings (as defined under "Description of Preferred Stock
and 10% Subordinated Debentures--the 10% Subordinated
Debentures--Certain Definitions"), provided such redemption
occurs within 180 days of such Public Equity Offering. See
"Description of Preferred Stock and 10% Subordinated
Debentures--The Preferred Stock."
Ranking.................... The Preferred Stock ranks junior to the Senior Preferred Stock
and pari passu with the Series B Preferred Stock. As of March
31, 1996, 4,000,000 shares of the Senior Preferred Stock
($100,000,000 aggregate liquidation preference) were issued
and outstanding and 1,405,397 shares of Series B Preferred
Stock ($140,539,700 aggregate liquidation preference), which
include dividends paid in kind from time to time thereon to
such date, were issued and outstanding. See "Description of
Capital Stock of K-III."
Exchange Feature........... The Preferred Stock is exchangeable on any scheduled dividend
payment date into 10% Subordinated Debentures at the option
of K-III, in whole but not in part, provided that no shares
of the Senior Preferred Stock are outstanding on the date of
exchange.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
See "Description of Preferred Stock and 10% Subordinated
Debentures--The Preferred Stock."
THE 10% SUBORDINATED DEBENTURES
Maturity Date.............. February 1, 2008.
Interest Payment Dates..... February 1, May 1, August 1 and November 1 of each year,
commencing with the first of such dates to occur after the
issuance of the 10% Subordinated Debentures.
Optional Redemption........ On and after February 1, 2001 or after a Change of Control,
the 10% Subordinated Debentures are redeemable, at the option
of K-III, in whole or in part, at the redemption prices set
forth herein plus accrued and unpaid interest to the
redemption date. The redemption prices in an optional
redemption upon a Change of Control or upon a Public Equity
Offering will in all cases be equal to or higher than the
price applicable to a repurchase upon a Change of Control
required by a holder. If K-III were to effect an optional
Change of Control redemption before the date Change of
Control payments are due, holders that had previously
tendered 10% Subordinated Debentures to K-III for repurchase
could withdraw such tenders prior to such date so as to
participate in the optional redemption. However, K-III would
have no obligation to announce such an optional Change of
Control redemption prior to the closing of the mandatory
Change of Control Offer.
Optional Redemption Upon
Public Equity Offering....... At any time prior to February 1, 1999, K-III may, at its
option, redeem up to $100 million of the aggregate principal
amount of the 10% Subordinated Debentures at 110% of their
principal amount, plus accrued and unpaid interest to the
redemption date with the net proceeds of one or more Public
Equity Offerings, provided such redemption occurs within 180
days of such Public Equity Offering. See "Description of
Preferred Stock and 10% Subordinated Debentures--The 10%
Subordinated Debentures."
Change of Control.......... In the event of a Change of Control (i) each holder of the 10%
Subordinated Debentures will have the right to require K-III
to repurchase such holder's 10% Subordinated Debentures at a
purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the repurchase date and
(ii) K-III will have the option to redeem the 10%
Subordinated Debentures, in whole or in part, at the
redemption prices set forth herein, plus accrued and unpaid
interest to the redemption date. The redemption prices for
optional redemptions in the event of a Change of Control
will in all cases be equal to or greater than this
repurchase price. Notwithstanding the foregoing, K-III shall
not be required to make any such repurchase unless K-III
shall have either repaid all outstanding Senior Indebtedness
(as defined) or obtained the requisite consents, if any,
under all agreements governing all such outstanding Senior
Indebtedness, to permit the repurchase of the 10%
Subordinated Debentures. Because of the
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
highly leveraged nature of the Company, there can be no
assurance that K-III will have sufficient funds to
repurchase the 10% Subordinated Debentures in the event of a
Change of Control. See "Description of Preferred Stock and
10% Subordinated Debentures--The 10% Subordinated
Debentures."
Indebtedness under the Credit Agreements will automatically
accelerate upon the earlier of 30 days from the Change of
Control and the date payment is required to be made in
respect of any tendered 10% Subordinated Debentures. As of
June 17, 1996 there was approximately $900.9 million
outstanding under the Credit Agreements. See "Description of
Certain Indebtedness."
Neither the trustee for the Notes, the Company nor its Board
of Directors will be able to waive the Change of Control
obligation of the Company. In the case of a leveraged buyout
in which KKR and its Affiliates maintain or increase their
voting control of the Company, such leveraged buyout will
not result in a "Change of Control."
Ranking.................... The 10% Subordinated Debentures will rank pari passu with the
Class B Subordinated Debentures and will be subordinate to
all existing and future senior indebtedness of K-III and
structurally subordinate to the creditors, including trade
creditors, of K-III's subsidiaries. The amount of senior
indebtedness (including indebtedness and other current and
non-current liabilities of K-III's subsidiaries) as of March
31, 1996, on a pro forma basis, was approximately $2,048
million. None of such indebtedness was secured.
Certain Covenants.......... The 10% Subordinated Debenture Indenture contains certain
covenants which, among other things, limit the ability of
the Company to engage in certain mergers, consolidations and
sales of assets and certain transactions with Affiliates and
to pay dividends on or retire or repurchase capital stock.
</TABLE>
USE OF PROCEEDS
There will be no cash proceeds to K-III from the Exchange Offers.
RISK FACTORS
Prospective purchasers of the Securities should take into account the
specific considerations set forth under "Risk Factors" as well as the other
information set forth in this Prospectus. In particular, the Company has
substantial debt service requirements, which reduce funds available for capital
expenditures and future business opportunities, and the Company has historical
operating losses. In addition, prospective investors should take into account
the following risk factors: (i) there is a deficiency in earnings to fixed
charges and a deficiency in earnings to fixed charges and dividends on preferred
stock; (ii) the Company is sensitive to increases in paper and postage costs;
(iii) there has been no public market for the Securities; and (iv) approximately
76% of the shares of Common Stock (on a fully diluted basis) are controlled by
certain investment partnerships of which an affiliate of KKR is the general
partner.
12
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables present summary consolidated financial data derived
from the Company's unaudited consolidated financial statements for the three
months ended March 31, 1996 and 1995 and the Company's audited consolidated
financial statements for the years ended December 31, 1995, 1994 and 1993. In
addition, the following tables present summary consolidated financial data
relating to the Company's unaudited pro forma operating results for the three
months ended March 31, 1996 and the year ended December 31, 1995.
The summary unaudited pro forma consolidated operating data for the three
months ended March 31, 1996 and the year ended December 31, 1995 give effect to
the following transactions and events as if they had occurred on January 1,
1995: (i) the acquisitions of certain net assets or capital stock all of which
have been completed as described in Notes 4 and 29 of the notes to the Company's
consolidated financial statements for the years ended December 31, 1995, 1994
and 1993 incorporated by reference into this Prospectus, and the acquisition of
the common stock of Westcott Communications, Inc. ("Westcott") which occurred on
May 30, 1996 as described on the Company's Current Report on Form 8-K dated June
14, 1996 incorporated by reference into this Prospectus (collectively referred
to as the "Acquired Businesses"); (ii) the divestitures of Sales Prospector,
Lakewood Publications, Inc. and Motorcycle Product News, which were acquired in
1995, Newfield Publications, Inc. ("Newfield") and Premiere magazine
(collectively referred to as the "Divested Businesses"); (iii) the August 3,
1995 redemption (the "Redemption") of old preferred stock through borrowings
under the Old Revolving Credit Agreement; (iv) the Initial Public Offering and
(v) the Offerings. The adjustments to reflect the acquisition of the Acquired
Businesses, the divestiture of the Divested Businesses, the Redemption, the
Initial Public Offering and the Offerings are hereinafter referred to as the
"Pro Forma Adjustments." The unaudited pro forma consolidated balance sheet data
as of March 31, 1996 give effect to the acquisition of Westcott as if it
occurred on March 31, 1996.
The summary unaudited pro forma consolidated financial data do not purport
to represent what the Company's consolidated financial position or consolidated
results of operations would actually have been if the transactions that give
rise to the Pro Forma Adjustments had in fact occurred on the dates assumed in
making such adjustments and do not purport to project the consolidated financial
position or consolidated results of operations of the Company for any future
date or period. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the Company's historical consolidated financial statements and the
notes thereto incorporated by reference into this Prospectus and the Company's
unaudited pro forma consolidated financial data and the notes thereto included
elsewhere in this Prospectus.
13
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------------------------- ----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993
PRO FORMA ACTUAL ACTUAL PRO FORMA ACTUAL ACTUAL ACTUAL
------------ ------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales, net.................. $ 339,120 $ 314,953 $ 238,664 $ 1,342,972 $ 1,046,329 $ 964,648 $ 844,748
Depreciation and
amortization................ 57,591 44,227 37,240 298,188 192,276 136,866 143,267
Other charges(1)............ -- -- -- 14,667 50,114 15,025 2,644
Operating income
(loss)(2)................... (673) 6,985 4,663 (24,104) (26,275) 10,203 (7,669)
Interest expense............ 35,090 28,051 24,614 140,691 105,384 78,244 74,336
Amortization of deferred
financing and
organizational costs........ 933 900 733 3,773 3,135 3,080 3,520
Income tax benefit(3)....... -- -- -- 59,600 59,600 42,100 --
Net loss(2)................. (34,661) (20,740) (20,701) (108,618) (75,435) (41,403) (86,496)
Preferred stock dividends... 11,844 6,844 6,414 46,287 28,978 25,959 22,290
Loss applicable to common
shareholders................ $ (46,505) $ (27,584) $ (27,115) $ (154,905) $ (104,413) $ (67,362) $ (108,786)
Loss per common and common
equivalent share(4)......... $ (.36) $ (.21) $ (.25) $ (1.20) $ (.91) $ (.65) $ (1.18)
------------ ------------ ------------ ----------- ------------ ------------ -----------
------------ ------------ ------------ ----------- ------------ ------------ -----------
Weighted average common and
common equivalent shares
outstanding(4).............. 128,502,847 128,502,847 109,622,179 129,452,500 115,077,498 103,642,668 92,392,189
------------ ------------ ------------ ----------- ------------ ------------ -----------
------------ ------------ ------------ ----------- ------------ ------------ -----------
OTHER DATA:
EBITDA(5)................... $ 56,918 $ 51,212 $ 41,903 $ 288,751 $ 216,115 $ 162,094 $ 138,242
Capital expenditures........ 5,362 3,989 4,681 34,527 25,179 16,118 13,416
Net cash provided by (used
in) operating activities... (5,443) (729) (3,384) 91,778 64,062 64,890 27,072
Net cash used in investing
activities................. (214,779) (213,408) (151,362) (964,380) (318,712) (442,126) (95,669)
Net cash provided by
financing activities....... 214,133 219,133 159,560 887,595 263,644 383,924 63,579
Deficiency of earnings to
fixed
charges(6)(7)(8)(9)......... (34,661) (20,740) (20,701) (168,218) (135,035) (83,503) (86,496)
Deficiency of earnings to
fixed charges and preferred
stock
dividends(6)(7)(8)(9)...... (46,505) (27,584) (27,115) (214,505) (164,013) (109,462) (108,786)
Ratio of EBITDA to cash
interest expense(10)....... 2.0x(13) 2.1x(13) 2.5x(13) 2.1x 2.1x 2.2x 2.1x
Ratio of EBITDA to cash
interest expense and cash
dividends on preferred
stock(10).................. 1.7x(13) 1.9x(13) 2.1x(13) 1.7x 1.9x 1.9x 1.8x
Ratio of EBITDA to interest
expense and dividends on
preferred stock............ 1.5x(13) 1.6x(13) 1.8x(13) 1.5x 1.6x 1.6x 1.4x
<CAPTION>
AT MARCH 31, 1996
------------------------
PRO FORMA ACTUAL
---------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 49,430 $ 32,222
Working capital (deficiency)...................................................... (19,845) (29,346)
Intangible assets, net............................................................ 1,803,107 1,407,206
Total assets...................................................................... 2,571,787 2,088,966
Long-term debt (excluding current maturities)..................................... 1,614,037 1,169,037
Senior and Series B Preferred Stock............................................... 235,723 235,723
Series C Exchangeable Preferred Stock/New Preferred Stock......................... 193,807 193,807
Common stock subject to redemption................................................ 25,340 25,340
Shareholders' equity.............................................................. 68,797 68,797
</TABLE>
- ------------
(1) Represents provision for restructuring and other costs in 1995, net
provision for loss on the sales of businesses in 1995 and 1994 and
provision for write-down of real estate no longer utilized in 1993.
(2) The adoption of a change in method of accounting for advertising costs (the
"Accounting Change") resulted in an increase in operating income or
decrease in operating loss and a decrease in net loss of approximately
$9,600 ($.07 per share) and approximately $16,000 ($.15 per share) for the
(Footnotes continued on following page)
14
<PAGE>
(Footnotes continued from preceding page)
three months ended March 31, 1996 and 1995, respectively, and approximately
$11,800 ($.10 per share) and approximately $9,800 ($.09 per share) for the
years ended December 31, 1995 and 1994, respectively.
(3) At December 31, 1995 and 1994, management of the Company reviewed recent
operating results for the years ended December 31, 1995 and 1994 and
projected future operating results for the years ending December 31, 2001
and determined that a portion of the net deferred income tax assets at
December 31, 1995 and 1994 would likely be realized. Accordingly, the
Company recorded an income tax benefit of $59,600 in 1995 and $42,100 in
1994. At December 31, 1995, the Company had net operating losses ("NOLs")
of approximately $632,000 which will be available to reduce future taxable
income. In addition, including the Acquired Businesses, management
estimates that more than $725,000 of unamortized goodwill and other
intangible assets will be available as a deduction from any future taxable
income.
(4) Loss per common and common equivalent share, as well as the weighted
average common and common equivalent shares outstanding, were computed as
described in Note 8 of the notes to the consolidated financial statements
for the three months ended March 31, 1996 and 1995 and Note 3 of the notes
to the consolidated financial statements for the years ended December 31,
1995, 1994 and 1993 incorporated by reference into this Prospectus.
(5) Earnings before interest, taxes, depreciation, amortization and provision
for one-time charges ("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 has
been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in its
industry.
(6) The deficiency of earnings to fixed charges consists of loss before income
taxes plus fixed charges. Loss before income taxes includes (i)
depreciation and amortization of prepublication costs, deferred financing
costs, property and equipment, intangible assets and excess of purchase
price over net assets acquired, (ii) interest expense, (iii) write-off of
unamortized deferred financing costs, (iv) provision for write-down of real
estate no longer utilized, (v) net provision for loss on sales of
businesses, (vi) restructuring and other costs, and (vii) that portion of
operating rental expense that represents interest. Prepublication costs
include editorial, artwork, composition and printing plate costs incurred
prior to publication date. Fixed charges consist of interest expense
associated with long-term debt and other non-current obligations (including
current maturities of long-term debt), amortization of deferred financing
costs and that portion of operating rental expense that represents
interest.
(7) The calculation of loss applicable to common shareholders includes non-cash
charges for depreciation and amortization of property and equipment,
prepublication costs, intangible assets, excess of purchase price over net
assets acquired and deferred financing costs, write-offs of unamortized
deferred financing costs, provision for write-down of real estate no longer
utilized, provision for loss on the sales of businesses, restructuring and
other costs, non-cash interest expense on an acquisition obligation,
distribution advance, original issue discount and other current liability,
and non-cash preferred stock dividend requirements. These non-cash charges
totaled $50,777 and $43,466 for the three months ended March 31, 1996 and
1995, respectively, and $259,014, $187,111 and $168,754 for the years ended
December 31, 1995, 1994 and 1993, respectively. The pro forma non-cash
charges totaled $64,174 for the three months ended March 31, 1996 and
$327,510 for the year ended December 31, 1995.
(8) Adjusted to eliminate the non-cash charges described in Note 7 above, such
earnings would have exceeded fixed charges and fixed charges plus preferred
stock cash dividends by $26,068 and $23,193, respectively, for the three
months ended March 31, 1996, by $19,226 and $16,351, respectively, for the
three months ended March 31, 1995, by $106,501 and $95,001, respectively,
for the year ended December 31, 1995, by $89,149 and $77,649, respectively,
for the year ended December 31, 1994 and by $71,468 and $59,968,
respectively, for the year ended December 31, 1993.
(9) Adjusted to eliminate the pro forma non-cash charges described in Note 7
above, such pro forma earnings would have exceeded pro forma fixed charges
and pro forma fixed charges plus preferred stock cash dividends by $25,544
and $17,669, respectively, for the three months ended March 31, 1996 and by
$144,505 and $113,005, respectively, for the year ended December 31, 1995.
(10) For purpose of this computation, cash interest represents interest expense
less the non-cash portion of interest expense on an acquisition obligation,
distribution advance, original issue discount and other current liability.
(11) The leverage ratio represents the ratio of consolidated debt (which
includes total indebtedness, deferred purchase price liabilities,
outstanding letters of credit, capitalized lease obligations and the
<PAGE>
principal amount outstanding under the acquisition obligation) to EBITDA,
as defined in the Company's credit agreements.
(12) The pro forma leverage ratio reflects the ratio of the Company's
consolidated debt as described in Note 11 above to the Company's
consolidated EBITDA both adjusted to give effect to the Pro Forma
Adjustments.
(13) The ratios have been calculated for the twelve months ended March 31, 1996
and 1995 because management believes that a twelve-month basis is more
meaningful.
15
<PAGE>
GLOSSARY OF CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
10 1/4% Senior Notes................... The $100,000,000 principal amount of 10 1/4%
Senior Notes due 2004 issued by K-III.
10 5/8% Senior Notes................... The $250,000,000 principal amount of 10 5/8%
Senior Notes due 2002 issued by K-III.
10% Subordinated Debenture Indenture... The Indenture governing the Old Subordinated
Debentures and, upon exchange, the New
Subordinated Debentures.
10% Subordinated Debentures............ The collective reference to the Old Subordinated
Debentures and the New Subordinated Debentures.
BONY Credit Agreement.................. The credit agreement dated as of May 23, 1994,
among K-III, The Bank of New York, as agent, and
the various lending institutions from time to
time named therein, governing the BONY Term
Loan, which credit agreement was terminated on
May 31, 1996.
BONY Term Loan......................... The $150,000,000 term loan under the BONY Credit
Agreement, which loan was repaid on May 31,
1996.
Old Chase Credit Agreement............. The credit agreement dated as of March 6, 1995,
among K-III, The Chase Manhattan Bank, N.A., as
agent, and the co-agents and various lending
institutions from time to time named therein,
governing the Chase Term Loan, which credit
agreement was terminated on May 31, 1996.
Old Chase Term Loan.................... The $150,000,000 term loan under the Old Chase
Credit Agreement, which loan was repaid on May
31, 1996.
Class B Debenture Indenture............ The Indenture governing the Class B Subordinated
Debentures, if and when issued.
Class B Subordinated Debentures........ The 11 5/8% Subordinated Exchange Debentures due
2005, issuable upon exchange of the Series B
Preferred Stock.
Common Stock........................... The common stock, par value $.01 per share, of
K-III.
Company................................ K-III and its subsidiaries.
Credit Agreements...................... The collective reference to the New Revolving
Credit Agreement and the New Chase Credit
Agreement.
Exchange Debenture Indenture........... The Indenture governing the Exchange Debentures,
if and when issued.
Exchange Debentures.................... The 11 1/2% Subordinated Debentures due 2004,
issuable upon exchange of the Senior Preferred
Stock.
Initial Public Offering................ The initial public offering of 17,250,000 shares
of Common Stock.
New Chase Credit Agreement............. The credit agreement dated as of May 24, 1996,
among K-III, Canadian Sailings Inc., a subsidiary
of K-III, The Chase Manhattan Bank, N.A., as
administrative agent, and the co-agents and
various lending institutions from time to time
named therein, providing for credit facilities
in an amount equal to $1,250,000,000.
New Notes.............................. The $300,000,000 principal amount of 8 1/2% Senior
Notes due 2006, being exchanged hereby for the
Notes.
New Preferred Stock.................... The 2,000,000 shares of $10.00 Series D
Exchangeable Preferred Stock Redeemable 2008, par
value $.01 per share, liquidation preference
$100.00 per share, being exchanged hereby for
the Old Preferred Stock.
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
New Revolving Credit Agreement......... The credit agreement dated as of May 24, 1996,
among K-III, The Chase Manhattan Bank, N.A., as
administrative agent, and the co-agents and
various lending institutions from time to time
named therein, providing for a $250,000,000
revolving credit facility.
New Subordinated Debentures............ The 10% Class D Subordinated Exchange Debentures
due 2008 issuable upon exchange of the New
Preferred Stock.
Note Indenture......................... The Indenture governing the Old Notes and, upon
exchange, the New Notes, between K-III and The
Bank of New York, as trustee.
Notes.................................. The collective reference to the Old Notes and the
New Notes.
Notes Exchange Offer................... The offer by K-III to holders of the Old Notes to
exchange the same for the New Notes.
Old Notes.............................. The $300,000,000 principal amount of outstanding 8
1/2% Senior Notes due 2006 issued by K-III.
Old Preferred Stock.................... The 2,000,000 shares of outstanding $10.00 Series
C Exchangeable Preferred Stock Redeemable 2008,
par value $.01 per share, liquidation preference
$100.00 per share.
Old Revolving Credit Agreement......... The amended and restated revolving credit
agreement, dated as of May 23, 1994 and amended
and restated as of November 17, 1994, among
K-III, Canadian Sailings Inc., a subsidiary of
K-III, The Chase Manhattan Bank, N.A., as agent,
and the co-agents and various lending
institutions from time to time named therein,
providing for a $670,000,000 revolving credit
facility, which credit agreement was terminated
on May 31, 1996.
Old Subordinated Debentures............ The 10% Subordinated Exchange Debentures due 2008,
issuable upon exchange of the Old Preferred
Stock.
Outstanding Note Indentures............ The collective reference to the indentures
governing the Outstanding Notes.
Outstanding Notes...................... The collective reference to the 10 5/8% Senior
Notes and the 10 1/4% Senior Notes.
Preferred Stock........................ The collective reference to the Old Preferred
Stock and the New Preferred Stock.
Preferred Stock Exchange Offer......... The offer by K-III to holders of the Old Preferred
Stock to exchange the same for the New Preferred
Stock.
Securities............................. The collective reference to the New Notes, the New
Preferred Stock and the New Subordinated
Debentures, if and when issued.
Senior Note Indentures................. The collective reference to the Outstanding Note
Indentures and the Note Indenture.
Senior Notes........................... The collective reference to the Outstanding Notes
and the Notes.
Senior Preferred Stock................. The 4,000,000 Shares of $2.875 Senior Exchangeable
Preferred Stock, par value $.01 per share,
liquidation preference $25.00 per share.
Series B Preferred Stock............... The 1,405,397 Shares of $11.625 Series B Preferred
Stock, par value $.01 per share, liquidation
preference $100.00 per share, plus dividends
which are paid in kind from time to time
thereon.
Subordinated Debenture Indentures...... The collective reference to the Exchange Debenture
Indenture, the Class B Debenture Indenture and
the 10% Subordinated Debenture Indenture.
Subordinated Debentures................ The collective reference to the Class B
Subordinated Debentures and the 10% Subordinated
Debentures.
</TABLE>
17
<PAGE>
RISK FACTORS
Prospective investors should take into account the considerations set forth
below as well as the other information set forth in this Prospectus before
purchasing any of the Securities offered hereby.
SUBSTANTIAL LEVERAGE
The Company has substantial indebtedness. At March 31, 1996, on a pro forma
basis, the Company had a ratio of consolidated debt to total equity (including
all preferred stock and Common Stock subject to redemption) of 3.1 to 1. See
"Capitalization" and "Selected Financial Data." The indebtedness of the Company
requires the dedication of a substantial portion of the Company's cash flow to
the payment of principal and interest on indebtedness, thereby reducing funds
available for capital expenditures and future business opportunities.
FLOATING INTEREST RATES
At March 31, 1996, on a pro forma basis, borrowings under the Company's
credit facilities were approximately $914.9 million. Such borrowings bear
interest at floating rates. Increases in interest rates on indebtedness under
the Credit Agreements would increase the Company's interest payment obligations
and could have an adverse effect on the Company.
RESTRICTIVE COVENANTS IN DEBT INSTRUMENTS
The agreements governing the outstanding indebtedness of the Company impose
certain operating and financial restrictions on the Company. Such restrictions
prohibit or limit, among other things, the ability of the Company to pay
dividends on or redeem capital stock, incur additional indebtedness, create
liens on its assets, sell assets or engage in mergers or consolidations or make
investments. Under the Note Indenture, the Company cannot incur additional
indebtedness other than certain permitted indebtedness if its Debt to
Consolidated Cash Flow Ratio (as defined) would exceed 6 to 1. In addition, the
Credit Agreements contain financial covenants including a minimum interest
coverage ratio of 1.8 to 1 (increasing to 2.5 to 1 after July 1, 2001) and a
maximum leverage ratio of 6.0 to 1 (decreasing to 4.5 to 1 on or after July 1,
2001). These restrictions, in combination with the leveraged nature of the
Company, could limit the ability of the Company to effect future acquisitions or
financings or otherwise restrict corporate activities. Failure to comply with
the terms of such restrictions could result in the acceleration of the
indebtedness governed by such agreements. See "Description of Certain
Indebtedness."
DEFICIENCIES OF EARNINGS TO COVER FIXED CHARGES
The Company's pro forma earnings are inadequate to cover pro forma fixed
charges and pro forma fixed charges plus preferred stock dividends by $34.7
million and $46.5 million, respectively, for the three months ended March 31,
1996 and $168.2 million and $214.5 million, respectively, for the year ended
December 31, 1995. Fixed charges consist of interest expense associated with
long-term debt and other non-current obligations (including current maturities
on long-term debt), amortization of deferred financing costs and that portion of
operating rental expense that represents interest. Such earnings have been
reduced by pro forma non-cash charges (including depreciation, amortization and
non-cash dividends) of $64.2 million for the three months ended March 31, 1996
and $327.5 million for the year ended December 31, 1995. Adjusted to eliminate
these pro forma non-cash charges, such pro forma earnings would have exceeded
pro forma fixed charges and pro forma fixed charges plus preferred stock cash
dividends by $25.5 million and $17.7 million, respectively, for the three months
ended March 31, 1996 and $144.5 million and $113.0 million, respectively, for
the year ended December 31, 1995.
18
<PAGE>
ACCELERATION OF CREDIT AGREEMENTS AND SENIOR NOTES
In the event that the Company is unable to generate cash flow sufficient to
meet required payments or does not make required payments of principal and
interest on its indebtedness under the Credit Agreements or is otherwise in
default with respect to the covenants thereunder or under the Senior Note
Indentures or the Subordinated Debenture Indentures, if entered into, the
holders of indebtedness under the Credit Agreements could elect to declare all
of the funds borrowed pursuant thereto to be due and payable together with
accrued and unpaid interest and to terminate their commitments under the Credit
Agreements. The final stated maturity of indebtedness under the Credit
Agreements and the Outstanding Notes, and the Exchange Debentures and Class B
Subordinated Debentures, if issued, is earlier than the final stated maturity of
the Notes. Any default under the documents governing the indebtedness of the
Company could have a significant adverse effect on the market value of the
Securities.
(LOSSES) AFTER AMORTIZATION OF INTANGIBLES AND EXCESS PURCHASE PRICE
The Company had operating income (losses) for the three months ended March
31, 1996 and for the years ended December 31, 1995, 1994 and 1993 of $7.0
million, $(26.3) million, $10.2 million and $(7.7) million, respectively.
Included in the operating income (losses) for such periods are the amortization
of intangible assets, excess of purchase price over net assets acquired and
other in the amounts of $36.6 million, $166.5 million, $120.7 million and $133.8
million, respectively. The Company expects to continue to incur net operating
losses in the foreseeable future primarily due to its growth strategy.
ABILITY OF COMPANY TO GROW THROUGH FUTURE ACQUISITIONS
To expand its markets and diversify its business mix, the Company's business
strategy includes growth through acquisitions and investments. There can be no
assurance that appropriate acquisition candidates will be available. The absence
of acquisition opportunities may inhibit the Company's ability to increase its
revenues. Also, there can be no assurance that any newly acquired companies will
be successfully integrated into the Company's operations. Therefore, the results
from new acquisitions may not be as good as the results from existing
operations. The Company may use equity or incur additional long-term
indebtedness or a combination thereof for all or a portion of the consideration
to be paid in future acquisitions. Therefore, such acquisitions may result in
additional leverage to the Company.
FRAUDULENT CONVEYANCE CONSIDERATIONS MAY AFFECT GUARANTEES
As of March 31, 1996, all of the assets of the Company were held by K-III's
subsidiaries and for the three months ended March 31, 1996 and for the year
ended December 31, 1995, all of the Company's operating revenues were derived
from operations of K-III's subsidiaries. Therefore, K-III's ability to make
payments when due to holders of the Notes is dependent upon the receipt of
sufficient funds from its subsidiaries. K-III's obligations under the Notes will
be guaranteed on a joint and several basis by its domestic Restricted
Subsidiaries.
If a Guarantee is set aside or "avoided" under applicable provisions of the
federal bankruptcy law or comparable provisions of state fraudulent transfer
law, an event of default with respect to debt under the Credit Agreements would
occur, which could result in acceleration of such debt. In addition, holders of
the Notes would cease to have any claim in respect of a Guarantor and would be
creditors solely of K-III and any Guarantor whose Guarantee was not avoided or
held unenforceable. In such event, a court might require that any prior payments
in respect of such debt (or an equivalent amount) be returned to or for the
benefit of existing or future creditors of such Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Notes relating to any voided
portions of any of the Guarantees.
Under applicable federal bankruptcy law or comparable provisions of state
fraudulent transfer law, a Guarantee could be avoided or claims in respect of
any such Guarantee could be subordinated to all
19
<PAGE>
other debts of the relevant Guarantor if such Guarantor at the time it incurred
obligations (whether at the time such Guarantee was entered into or at the time
guaranteed indebtedness is incurred) under such Guarantee (a)(i) was or is
insolvent or rendered insolvent by reason of such incurrence or (ii) was or is
engaged in a business or transaction for which the assets remaining with such
Guarantor constituted unreasonably small capital or (iii) intended or intends to
incur, or believed or believes that it would incur, debts beyond its ability to
pay such debts as they mature, and (b) any such Guarantor received or receives
less than reasonably equivalent value or fair consideration in connection with
the making of such Guarantee.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Guarantor would be considered insolvent if the sum of its debts, including
contingent liabilities, were greater than the fair saleable value of all of its
assets at a fair valuation or if the present fair saleable value of its assets
were less than the amount that would be required to pay its probable liability
on its existing debts, including contingent liabilities, as they become absolute
and mature.
The Company believes that none of the Guarantors will be, at the time the
Guarantees are given, insolvent under the foregoing standards, that none of the
Guarantors is engaged in a business or transaction for which its remaining
assets constituted unreasonably small capital and that none of the Guarantors
intended or intends or will intend to incur debts beyond its ability to pay such
debts as they mature. There can be no assurance, however, that a court passing
on such questions would agree with the Company.
SUBORDINATION OF PREFERRED STOCK AND 10% SUBORDINATED DEBENTURES; HOLDING
COMPANY STRUCTURE
The Preferred Stock is junior in right of payment to all existing and future
liabilities and obligations (whether or not for borrowed money) of K-III (other
than common stock, Series B Preferred Stock and any preferred stock of K-III
which by its terms is on parity with or junior to the Preferred Stock).
The 10% Subordinated Debentures will rank pari passu with the Class B
Subordinated Debentures, if any, but will be subordinated to all existing and
future senior indebtedness of the Company, including the Senior Notes, the
obligations of the Company under the Credit Agreements and the Exchange
Debentures, if any. In addition, the 10% Subordinated Debentures will be
unsecured obligations of K-III. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of K-III will be available to pay
obligations on the 10% Subordinated Debentures only after all Senior Notes,
obligations under the Credit Agreements, Exchange Debentures, if any, and other
senior indebtedness of K-III have been paid in full. The 10% Subordinated
Debenture Indenture will not prohibit the incurrence by K-III of additional
indebtedness that is senior to or pari passu with the Class C Subordinated
Debentures.
The operations of K-III are and will be conducted through its subsidiaries,
and, therefore, K-III is dependent on the cash flow of its subsidiaries to meet
its obligations. Because the assets of K-III are and will be held by operating
subsidiaries, the claims of holders of the Preferred Stock and the 10%
Subordinated Debentures (which are not guaranteed by the operating subsidiaries)
will be structurally subordinate to all existing and future liabilities and
obligations (whether or not for borrowed money), including guarantees of
indebtedness under the Credit Agreements and Senior Note Indentures and trade
payables and advances of such subsidiaries. The amount of senior indebtedness
(including indebtedness and other current and non-current liabilities of K-III's
subsidiaries) as of March 31, 1996, on a pro forma basis, was approximately
$2,048 million. None of such indebtedness was secured.
LACK OF PUBLIC MARKET
The Notes and the Preferred Stock constitute new issues of securities with
no established trading market. In addition, because the Exchange Offers are not
conditioned upon any minimum amount of
20
<PAGE>
Old Notes or shares of Old Preferred Stock being tendered for exchange, the
amount of New Notes or shares of New Preferred Stock issued could be quite
small, which could have an adverse effect on the liquidity of the New Notes or
the New Preferred Stock, respectively. Also, to the extent that Old Notes or
shares of Old Preferred Stock are tendered and accepted in the Exchange Offers,
a holder's ability to sell untendered Old Notes or shares of Old Preferred Stock
could be adversely affected. Therefore, no assurance can be given as to the
liquidity of the trading market for either the Notes or the Preferred Stock.
EFFECT OF INCREASES IN PAPER AND POSTAGE COSTS
The price of paper is a significant expense of the Company relating to its
print products and direct mail solicitations and in the last two years has
increased significantly after three years of price decreases. 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 the Company's ability to increase
selling prices; however, no assurance can be given that the Company can recoup
any such increases by passing cost increases through to its customers. 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.
CONTROL BY KKR
Approximately 76% of the shares of Common Stock (on a fully diluted basis)
are held by certain investment partnerships, of which KKR Associates, a New York
limited partnership and an affiliate of KKR, is the general partner (the "Common
Stock Partnerships"). KKR Associates has sole voting and investment power with
respect to such shares. Consequently, KKR Associates and its general partners,
four of whom are also directors of K-III, control the Company and have the power
to elect all of its directors and to approve any action requiring stockholder
approval, including adopting amendments to K-III's Certificate of Incorporation
and approving mergers or sales of all or substantially all of the Company's
assets. It is an event of default under each Credit Agreement if KKR and its
Affiliates cease to own, directly or indirectly, at least 25% (on a fully
diluted basis) of the economic and voting interest in K-III's Common Stock or if
any other person or group becomes the beneficial owner of more voting Common
Stock of K-III then that owned by KKR and its Affiliates. The Senior Note
Indentures, the Exchange Debenture Indenture and the Class B Debenture Indenture
provide for certain redemptions upon a Change of Control. See "Description of
Certain Indebtedness."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performances and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
USE OF PROCEEDS
There will be no cash proceeds to K-III from the Exchange Offers.
21
<PAGE>
CAPITALIZATION
The following table sets forth, at March 31, 1996 the actual cash and cash
equivalents and the consolidated capitalization of the Company as well as the
pro forma cash and cash equivalents and consolidated capitalization of the
Company which gives effect to the acquisition of Westcott by the Company. The
information below should be read in conjunction with the Company's historical
consolidated financial statements and the notes thereto incorporated by
reference into this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------
PRO FORMA ACTUAL
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 49,430 $ 32,222
---------- ----------
---------- ----------
Long-term debt:
Borrowings under Old Revolving Credit Agreement(6)............... $ 614,935 $ 169,935
BONY Term Loan(6)................................................ 150,000 150,000
Old Chase Term Loan(6)........................................... 150,000 150,000
10 5/8% Senior Notes due 2002.................................... 250,000 250,000
10 1/4% Senior Notes due 2004.................................... 100,000 100,000
8 1/2% Senior Notes due 2006/New Notes(1)........................ 298,748 298,748
Acquisition Obligation Payable(2)................................ 56,354 56,354
---------- ----------
Total Indebtedness............................................. 1,620,037 1,175,037
Less current maturities.................................... (6,000) (6,000)
---------- ----------
Total long-term debt........................................... 1,614,037 1,169,037
$2.875 Senior Exchangeable Preferred Stock......................... 98,060 98,060
$11.625 Series B Exchangeable Preferred Stock...................... 137,663 137,663
$10.00 Series C Exchangeable Preferred Stock/New Preferred
Stock(3)........................................................... 193,807 193,807
Common stock subject to redemption(4).............................. 25,340 25,340
Shareholders' equity:
Common stock and additional paid-in capital...................... 753,280 753,280
Accumulated deficit(5)........................................... (683,200) (683,200)
Cumulative foreign currency translation adjustments.............. (1,283) (1,283)
---------- ----------
Total shareholders' equity..................................... 68,797 68,797
---------- ----------
Total capitalization............................................... $2,137,704 $1,692,704
---------- ----------
---------- ----------
</TABLE>
- ------------
(1) Reflects reduction for de minimis original issue discount.
(2) Represents the present value at March 31, 1996 of the principal and interest
obligations under notes payable to News America Publications, Inc. that have
been or will be issued in connection with the acquisition of certain of the
consumer magazines and Daily Racing Form.
(3) Represents net proceeds to the Company after deduction for estimated
issuance costs.
(4) Represents Common Stock that employees have the right to resell to the
Company under certain circumstances including termination of employment in
connection with the sale of the business for which they work, death,
disability or retirement after age 65. The resale feature expires five years
after the effective purchase date of the Common Stock. Since inception of
the Company, none of the employees has exercised such resale feature as a
result of such sale, death, disability or retirement and the likelihood of
significant resales is considered by management to be remote. Common Stock
subject to redemption at March 31, 1996 was computed at $11.625 per share
which approximates the quoted market value of the Common Stock at March 31,
1996.
(5) The accumulated deficit includes non-cash expenses related to the
accumulated amortization of intangible assets, the excess of the purchase
price over the net assets acquired and deferred financing costs, the
provision for the sale of a business, restructuring and other costs and the
write-offs of the unamortized balance of deferred financing costs
(associated with all previous financings) in the aggregate amount of
approximately $851,000 at March 31, 1996 which is net of the non-cash income
tax benefits aggregating $101,700 recognized in 1995 and 1994.
(6) On May 31, 1996, borrowings under the Old Revolving Credit Agreement, BONY
Term Loan and Old Chase Term Loan were replaced with borrowings under the
New Chase Credit Agreement and the New Revolving Credit Agreement.
22
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below give effect to the
1992 Restructuring as if it had occurred on January 1, 1992. Such data were
derived from the consolidated financial statements and other data of the Company
which are incorporated by reference into this Prospectus. The data should be
read in conjunction with the Company's consolidated financial statements, the
related notes thereto and other data of the Company incorporated by reference
into this Prospectus.
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales, net.................... $ 314,953 $ 238,664 $ 1,046,329 $ 964,648 $ 844,748 $ 778,224
Depreciation and
amortization.................. 44,227 37,240 192,276 136,866 143,267 171,581
Other charges(2).............. -- -- 50,114 15,025 2,644 --
Operating income (loss)(3).... 6,985 4,663 (26,275) 10,203 (7,669) (46,230)
Interest expense.............. 28,051 24,614 105,384 78,244 74,336 76,719
Income tax benefit(4)......... -- -- 59,600 42,100 -- 314
Net loss(3)(5)................ (20,740) (20,701) (75,435) (41,403) (86,496) (145,342)
Preferred stock dividends..... 6,844 6,414 28,978 25,959 22,290 16,530
Loss applicable to common
shareholders.................. (27,584) (27,115) (104,413) (67,362) (108,786) (161,872)
Loss per common and common
equivalent share(6)........... $ (.21) $ (.25) $ (.91) $ (.65) $ (1.18) $ (1.77)
------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ----------- -----------
Weighted average common and
common equivalent shares
outstanding(6).............. 128,502,847 109,622,179 115,077,498 103,642,668 92,392,189 91,317,610
------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ----------- -----------
OTHER DATA:
EBITDA(7)..................... $ 51,212 $ 41,903 $ 216,115 $ 162,094 $ 138,242 $ 125,351
Capital expenditures.......... 3,989 4,681 25,179 16,118 13,416 14,497
Net cash provided by (used in)
operating activities........ (729) (3,384) 64,062 64,890 27,072 16,618
Net cash used in investing
activities................... (213,408) (151,362) (318,712) (442,126) (95,669) (79,725)
Net cash provided by financing
activities................... 219,133 159,560 263,644 383,924 63,579 60,877
Deficiency of earnings to
fixed charges(8)............. (20,740) (20,701) (135,035) (83,503) (86,496) (145,656)
Deficiency of earnings to
fixed charges and preferred
stock dividends(8).......... (27,584) (27,115) (164,013) (109,462) (108,786) (162,186)
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 32,222 $ 23,046 $ 27,226 $ 18,232 $ 11,544 $ 16,562
Working capital (deficiency)(9)... (29,346 ) 34,252 (56,560 ) 1,338 3,605 1,189
Intangible assets, gross.......... 2,196,868 1,787,075 1,996,564 1,656,590 1,343,482 1,276,123
Less accumulated amortization... 789,662 631,427 762,393 602,542 504,538 383,784
----------- ----------- ----------- ----------- ----------- -----------
Intangible assets, net............ 1,407,206 1,155,648 1,234,171 1,054,048 838,944 892,339
Total assets...................... 2,088,966 1,728,712 1,881,416 1,589,692 1,166,502 1,197,896
Long-term debt(10)................ 1,169,037 1,125,047 1,134,916 1,034,689 661,297 704,802
$2.875 Senior Exchangeable
Preferred Stock.................. 98,060 97,786 97,992 97,718 97,444 ]97,171
$11.625 Series B Exchangeable
Preferred Stock................. 137,663 122,130 133,614 118,511 105,009 --
$10.00 Series C Exchangeable
Preferred Stock................. 193,807 -- -- -- -- --
Common stock subject to
redemption....................... 25,340 11,187 28,022 16,552 25,287 16,746
Shareholders' equity:
Convertible Preferred Stock..... -- -- -- -- -- 78,797
Series C Preferred Stock........ -- 50,000 -- -- -- --
Common stock.................... 1,263 1,090 1,259 1,053 947 853
Additional paid-in capital...... 752,017 604,310 748,194 572,940 488,541 421,926
<PAGE>
Accumulated deficit............. (683,200 ) (578,319 ) (655,616 ) (551,203 ) (483,841 ) (375,055 )
Cumulative foreign currency
translation adjustments........ (1,283 ) (1,347 ) (1,275 ) (1,324 ) (1,220 ) (222 )
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity........ $ 68,797 $ 75,734 $ 92,562 $ 21,466 $ 4,427 $ 126,299
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
(Footnotes on following page)
23
<PAGE>
(Footnotes for preceding page)
- ------------
(1) In June 1989, K-III Holdings, L.P., a Delaware limited partnership ("LP
I"), was formed for the purpose of acquiring businesses currently owned by
Intertec Publishing Corporation ("Intertec") and Newbridge Communications,
Inc. ("Newbridge"). The aggregate purchase price (including fees) for such
acquisitions was $320,000. Most of the business of K-III Directory
Corporation ("K-III Directory") (collectively, with Intertec and Newbridge,
"K-III Holdings I") was acquired by a subsidiary of LP I in February 1990
for a purchase price (including fees) of $21,000. In March 1991, K-III
Holdings, L.P. II, a Delaware limited partnership ("LP II"), was formed for
the purpose of acquiring certain of the businesses now owned by Weekly
Reader Corporation ("Weekly Reader"), K-III Reference Corporation ("K-III
Reference") (formerly known as Funk & Wagnalls Corporation) and Newfield.
The aggregate purchase price (including fees and subsequent purchase price
adjustments) of such acquisitions was $161,900. In February 1992, LP II
acquired, through a subsidiary, the business of Krames Communications
Incorporated ("Krames") (collectively with Weekly Reader, K-III Reference
and Newfield, "K-III Holdings II") for a purchase price of $44,300. In June
1991, K-III Prime Corporation, a Delaware corporation ("K-III Prime"), was
formed for the purpose of acquiring certain consumer magazines currently
owned by K-III Magazine Corporation ("K-III Magazines") and Daily Racing
Form, Inc. ("Daily Racing Form") ("K-III Holdings III") for a purchase
price (including fees) of $675,000. In May 1992, K-III Holdings I, K-III
Holdings II and K-III Holdings III were consolidated into the Company (the
"1992 Restructuring").
(2) Represents provision for restructuring and other costs in 1995, net
provision for loss on the sales of businesses in 1995 and 1994 and
provision for write-down of real estate no longer utilized in 1993.
(3) The adoption of a change in method of accounting for advertising costs (the
"Accounting Change") resulted in an increase in operating income or
decrease in operating loss and a decrease in net loss of approximately
$9,600 ($.07 per share) and approximately $16,000 ($.15 per share) for the
three months ended March 31, 1996 and 1995, respectively, and approximately
$11,800 ($.10 per share) and approximately $9,800 ($.09 per share) for the
years ended December 31, 1995 and 1994, respectively.
(4) The income tax benefit in 1992 reflects the reversal of an overprovision
for Canadian income taxes. At December 31, 1995 and 1994, management of the
Company reviewed recent operating results for the years ended December 31,
1995 and 1994 and projected future operating results for the years ending
December 31, 2001 and determined that a portion of the net deferred income
tax assets at December 31, 1995 and 1994 would likely be realized.
Accordingly, the Company recorded an income tax benefit of $59,600 in 1995
and $42,100 in 1994. At December 31, 1995, the Company had NOLs of
approximately $632,000 which will be available to reduce future taxable
income. In addition, including the Acquired Businesses, management
estimates that more than $725,000 of unamortized goodwill and other
intangible assets will be available as a deduction from any future taxable
income.
(5) The write-off of unamortized deferred financing costs as a result of the
refinancings in 1994 and 1992 increased net loss by $11,874 and $19,814 for
the years ended December 31, 1994 and 1992, respectively.
(6) Loss per common and common equivalent share, as well as the weighted
average common and common equivalent shares outstanding, were computed as
described in Note 8 of the notes to the consolidated financial statements
for the three months ended March 31, 1996 and 1995 and Note 3 of the notes
to the consolidated financial statements for the years ended December 31,
1995, 1994 and 1993 incorporated by reference into this Prospectus.
(7) Earnings before interest, taxes, depreciation, amortization and provision
for one-time charges ("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 has
been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in its
industry.
(8) The deficiency of earnings to fixed charges consists of loss before income
taxes plus fixed charges. Loss before income taxes includes (i)
depreciation and amortization of prepublication costs, deferred financing
costs, property and equipment, intangible assets and excess of purchase
price over net assets acquired, (ii) interest expense, (iii) write-off of
unamortized deferred financing costs, (iv) provision for write-down of real
estate no longer utilized, (v) net provision for loss on sales of
businesses, (vi) restructuring and other costs and (vii) that portion of
operating rental expense that represents interest. Prepublication costs
include editorial, artwork, composition and printing plate costs incurred
prior to publication date. Fixed charges consist of interest expense
associated with long-term debt and other non-current obligations (including
current maturities of long-term debt), amortization of deferred financing
costs and that portion of operating rental expense that represents
interest.
(9) Includes current maturities of long-term debt.
(10) Excludes current maturities of long-term debt.
24
<PAGE>
K-III HOLDINGS I, K-III HOLDINGS II AND K-III HOLDINGS III
(DOLLARS IN THOUSANDS)
The selected historical financial data presented below for K-III Holdings I
relate to the year ended December 31, 1991. The selected consolidated financial
data presented below for K-III Holdings II relate to the predecessor companies
with respect to the three-month period ended March 27, 1991, and to the
successor with respect to the nine-month period ended December 31, 1991. The
selected consolidated financial data presented below for K-III Holdings III
relate to the predecessor companies for the period July 1, 1990 to June 16,
1991, and to the successor with respect to the period June 17, 1991 to December
31, 1991.
<TABLE>
<CAPTION>
K-III HOLDINGS II K-III HOLDINGS III
--------------------------- ---------------------------
PREDECESSOR PREDECESSOR
COMPANIES COMPANIES
K-III HOLDINGS I ------------ ------------
---------------- JANUARY 1 MARCH 28 JULY 1,
YEAR ENDED TO TO 1990 TO JUNE 17, TO
DECEMBER 31, MARCH 27, DECEMBER 31, JUNE 16, DECEMBER 31,
1991 1991 1991 1991 1991
---------------- ------------ ------------ ------------ ------------
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Sales, net............................ $237,140 $ 56,967 $ 175,133 $290,386 $ 164,910
Depreciation and amortization......... 56,354 3,461 32,694 18,385 52,941
Operating income (loss)............... (16,578) (7,969) (1,938) 39,319 (18,471)
Net income (loss)..................... (43,531) (10,622) (9,230) 38,781 (42,971)
OTHER DATA:
EBITDA(1)............................. $ 39,776 $ (4,508) $ 30,756 $ 57,704 $ 34,470
Net cash provided by (used in)
operating activities................ 6,611 (8,658) 14,490 64,700 (7,391)
Net cash used in investing
activities........................... (6,481) (345) (157,252) (2,178) (600,679)
Net cash provided by (used in)
financing activities................ (444) 2,351 138,001 (62,522) 623,008
Excess (deficiency) of earnings to
fixed charges(2).................... (43,487) (10,622) (9,230) 39,319 (42,665)
Excess (deficiency) of earnings to
fixed charges and preferred stock
dividends (2)........................ (60,142) (10,622) (9,230) 39,319 (47,157)
<CAPTION>
AT AT AT
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1991 1991 1991
---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 1,904 $ 1,950 $ 14,938
Working capital (deficiency)(3)....... 24,489 18,365 (58,416)
Intangible assets, net................ 203,678 93,449 648,098
Total assets.......................... 301,740 191,788 740,049
Long-term debt and other non-current
liabilities(4)....................... 229,366 73,000 416,815
Shareholders' equity.................. 16,477 50,771 202,537
</TABLE>
- -------------------
(1) Earnings before interest, taxes, depreciation, amortization and provision
for one-time charges ("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 has
been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in its industry.
(2) The deficiency of earnings to fixed charges consists of loss before income
taxes plus fixed charges. Loss before income taxes includes (i) depreciation
and amortization of prepublication costs, deferred financing costs, property
and equipment, intangible assets and excess of purchase price over net
assets acquired, (ii) interest expense, (iii) write-off of unamortized
deferred financing costs, (iv) provision for write-down of real estate no
longer utilized and (v) that portion of operating rental
(Footnotes continued on following page)
25
<PAGE>
(Footnotes continued from preceding page)
expense that represents interest. Prepublication costs include editorial,
artwork, composition and printing plate costs incurred prior to publication
date. Fixed charges consist of interest expense associated with long-term
debt and other non-current obligations (including current maturities of
long-term debt), amortization of deferred financing costs and that portion
of operating rental expense that represents interest.
(3) Includes current maturities of long-term debt.
(4) Excludes current maturities of long-term debt.
26
<PAGE>
BUSINESS
Through its wholly owned subsidiaries, K-III is a leading content provider
to the education, business and special interest consumer markets; its best-known
brands include Channel One News, The World Almanac, Nelson's, Weekly Reader,
Daily Racing Form, Seventeen, Modern Bride and Soap Opera Digest. Most of the
Company's products serve niche markets and are recognized within those markets
as premier franchises, and many hold dominant positions. The Company focuses on
ownership and development of content, because content can be tailored to
specific information needs across print, electronic and multimedia formats.
Furthermore, proprietary branded content exists independent of any specific
delivery technology. The Company organized its businesses into three segments,
education, information and media, which accounted, respectively, for
approximately 32%, 25%, and 43% of K-III's 1995 consolidated net sales of $1,046
million.
EDUCATION
The Company is the largest provider of supplementary educational materials
in the United States. The Company targets both the juvenile and the adult
educational markets. Customers of these products include educators, educational
institutions and professionals as well as advertisers reaching specific
audiences by sponsoring educational materials. The best-known brands in the
juvenile education area are Weekly Reader and Channel One News.
The Company's adult supplementary educational and career development
materials target various professional groups including computer users, teachers,
nurses, scientists, architects and other professionals. The Company also
publishes medical information used to educate patients and other healthcare
users.
Educational Programming
The Company operates Channel One News, The Classroom Channel and Films for
the Humanities and Sciences.
Channel One News, established in 1990, pioneered the delivery of world
events and educational programming into American classrooms via satellite. Its
award-winning daily news broadcast reaches approximately eight million middle
and high school students, significantly more than any other electronically
delivered educational product. The installed base of Channel One schools is
approximately 12,000, or 40%, of the middle and high schools in the United
States. Schools sign up for Channel One News under a three-year renewable
contract pursuant to which they agree to show Channel One News, in its entirety,
on at least 90% of school days. The Company provides to schools a turnkey
technology system of video cassette recorders and networked televisions. These
services are provided to schools at no charge; sales are generated by two
minutes of advertising in the 12-minute daily newscast. Virtually all school
contracts have come up for renewal and approximately 99% have been renewed.
Channel One News is produced at the Hacienda, its Los Angeles studio, using
staff anchors and correspondents reporting on location both domestically and
internationally. Channel One has a library of over 1,100 broadcasts including
approximately 160 single subject series.
Channel One News has no direct competition in the schools, but does compete
for advertising dollars with other media aimed at teenagers. The Company's
primary competitive advantage is its total audience of approximately eight
million teenagers. For the school year ended June 1995, approximately 60% of the
revenues of Channel One were pursuant to long-term contracts (which expire on or
after December 31, 1997). For the same school year, the top five advertisers by
dollars were PepsiCo, M&M
27
<PAGE>
Mars, Procter & Gamble, AT&T and Quaker Oats, which accounted for approximately
64% of advertising revenue.
The Classroom Channel offers a range of instructional programming to enhance
each school's curriculum. The Classroom Channel offers an average of 90 minutes
of daily programming at no charge to schools. Programming and operation of The
Classroom Channel was outsourced until July 1995 when it was taken in-house to
widen the programming selection.
Films for the Humanities and Sciences ("Films") is the exclusive distributor
of approximately 6,000 educational videos as well as videodiscs, CD-ROMs and
related products. These materials are sold primarily by direct mail, targeting
teachers and librarians in the K-12 and college market. Films is the largest
distributor of such products and competes on the basis of quality and breadth of
the subject matter it markets. Since January 1, 1993, Films has increased the
number of titles offered by an average of 18% per year.
Periodicals and Supplementary Learning Materials
The Company publishes and markets periodicals and other supplemental
learning materials primarily for the elementary and secondary school markets.
First published in 1928, Weekly Reader is the best-known student newspaper
in the United States and has the highest circulation of any student newspaper
with approximately 6.6 million subscribers in the elementary school market
alone. Weekly Reader is sold in approximately 70% of all elementary schools.
Eight separate editions of Weekly Reader consisting of 26 issues per year are
distributed to elementary school students. Each edition is written and designed
for particular reading and comprehension levels in order to bring current world
news to children at a level commensurate with their comprehension abilities. A
teacher's guide with background information, discussion topics and follow-up
questions is included with each edition. Weekly Reader is sold to schools and
teachers for classroom use. Other titles include Read, Current Events, Current
Science and Current Health.
Editorial materials for Weekly Reader are generated through a combination of
in-house staff written material and work from outside authors on a work-for-hire
basis.
For the 1994-1995 school year, Weekly Reader periodicals had a 56.4% share
of the elementary school market and a 38.4% share of the secondary school
market. The Company's largest competitor in these markets is Scholastic, Inc.
Weekly Reader generally competes on the basis of price, editorial quality and
content.
Professional Book Services
The Company's professional book services have more than 800,000 members in
the United States, more than any competitor. The Company has 20 separate
professional book services. The books, computer software and other materials
offered are technical in nature and of special interest to members of targeted
groups of professionals, including computer users, teachers and scientists.
These products are generally otherwise available only through specialized book
stores and libraries; the Company's professional book services are, therefore, a
key distribution channel for these books.
The best known of these services are targeted to personal and network
computer users such as the Small Computer Book Club. The number of members in
these services has grown from approximately 190,000 at the end of 1992 to
approximately 256,000 in December 1995. Certain of these services offer both
software and books. Approximately two-thirds of the revenues for the year ended
December 31, 1995 from these computer user services related to software bundled
with related books. To expand further the computer user membership, the Company
recently established a World Wide Web site on the Internet for offering its
computer book services.
28
<PAGE>
The Company has exclusive book club rights to distribute most main selection
titles offered by its professional book services. These exclusive rights have
been acquired from more than 500 publishers and generally must be renegotiated
every three years. Most of the professional and scientific book services have
limited competition in their markets.
Historically, direct mail has been the most effective source of new members.
Customers are also obtained through printed advertisements, internal promotions
and telemarketing. Specialized target subscription lists, which are rented from
various sources, are used to solicit new members and customers. In addition,
advertising is placed in special interest magazines.
Supplementary Educational Programs
The Company develops and markets supplementary educational programs for
grades pre-K to 6, which are marketed to teachers for use in schools. Many of
these materials are sold under the "Macmillan" name. Other programs are marketed
to nurses and computer and business professionals. One program is a video series
marketed to behavioral science professionals. The programs are all marketed on a
continuity basis. Continuity programs consist of publications or materials that
are automatically sent and invoiced to a member at regular intervals until the
member requests no further shipments. At December 31, 1995, there were
approximately 180,000 subscribers to these continuity programs.
In 1994, the Company launched an institutional sales program to reach
additional markets for its supplementary educational materials.
An in-house staff performs most of the editorial and design work on the
educational programs. The Company and its predecessors have since 1981 developed
all of its educational continuity programs, sales of which in the year ended
December 31, 1995 were $29.8 million. Extensive market research and testing is
performed in connection with new programs, which have historically averaged two
per year. The Company is the largest provider of continuities sold for use in
schools and competes in this market primarily with Scholastic, Inc.
The principal method of obtaining new members for its continuity program is
through direct marketing.
Medical Publications
Under the brand name Krames, the Company is a leading publisher of patient
information sold to doctors and other healthcare providers to be distributed to
patients and other healthcare users. During 1995, the Company sold 29.1 million
units. Krames' products are used by an estimated 66% of United States hospitals,
34% of HMO's and 36% of private practice physicians in targeted medical
specialties. The product line includes booklets, brochures, posters, videos and
training manuals. Approximately 95% of the units sold are four-color booklets of
eight to 32 pages and brochures of four to eight pages which are used to educate
patients on medical conditions and treatment options ranging from self-care to
surgery. It is the Company's belief that healthcare providers purchase Krames'
products because they reduce the time healthcare professionals must spend
educating their patients. The Company also publishes health promotion materials
to be distributed to employees and safety training products to help companies
comply with government standards.
Since the beginning of 1992, Krames has created 321 new products. The
healthcare information products are created internally by product development
teams composed of editors, designers and members of the production staff. The
Company competes on the basis of editorial quality, content and price.
29
<PAGE>
Professional Training
The Katharine Gibbs Schools is a highly regarded chain of seven business
schools located in the northeastern United States. All seven schools operate as
accredited post-secondary institutions and five schools are authorized as
degree-granting institutions. Programs offered include business administration,
accounting, and hotel and restaurant management, in addition to the secretarial
arts program. The schools market via newspaper and magazine advertisements,
direct mail and, to a lesser extent, via broadcast media for students.
The Katharine Gibbs Schools competes with other private business schools and
two-year colleges. The schools operate in a highly regulated environment, as all
schools are licensed by state agencies and are granted eligibility and
certification to participate in Federal student assistance programs.
Workplace Training & Education
Westcott's business is the delivery of workplace training and education
utilizing various multimedia technologies. Westcott provides training, news and
information to professionals and students in the corporate and professional,
automotive, banking, government and public service, education, healthcare and
interactive distance training markets.
INFORMATION
The Company's information segment maintains databases of critical
information which it sells in a variety of formats to decision makers in
business, professional and special interest consumer markets. Many of the
databases, available traditionally only in print form, are now also available
electronically or on CD-ROM, and add value to the original print product. The
best-known brand names used in the information segment include Nelson's, Funk &
Wagnalls, World Almanac and Daily Racing Form.
Directories
The Company publishes 69 specialized database directories, as well as
related products. Products are targeted to specific industries: financial
services, transportation, musical performance, credit and collection,
construction, global trade and public relations. To complement its public
relations directories, the Company operates a periodicals clipping service. The
databases are compiled by an in-house editorial staff, are marketed directly to
subscribers and advertisers by an in-house sales staff and distributed
predominantly on a paid subscription basis.
One of the best-known brand names of the directory group is Nelson's. Seven
reference directories and two periodicals used in the financial services
industry are published under the name Nelson's. The Nelson's electronic database
is incorporated in a marketing management software package, Institutional
MarketPlace for Windows and data are also sold to third party distributors such
as Bloomberg Financial Services. Key titles published under Nelson's name
include Directory of Investment Research and Directory of Investment Managers.
Most of the directories published by the Company have no competition, and in
markets where competition does exist, the Company's publication is dominant.
Competition, where present, is on the basis of price and quality of data and, in
the case of Nelson's, on the basis of electronic availability. Management
believes that the comprehensiveness and quality of its data and the specialized
focus of its publications has prevented others from launching competing
publications.
Trade and Technical Newsletters and Database Products
The Company's trade and technical newsletters provide in-depth information
and data on selected markets. Ward's Automotive Reports is recognized as the
authoritative source for industry-wide
30
<PAGE>
statistics on automotive production and sales. This newsletter competes on the
basis of the nature and quality of its editorial content.
The trade and technical database division publishes, in print and electronic
formats, used vehicle valuation information. Titles include Market Reports,
Marine Blue Book, Waterway Guides and Aircraft Bluebook. Other databases include
The Electronics Sourcebook, Ac-U-Kwik and equipment servicing information and
manuals.
Apartment Guides
The Company is the most extensive publisher of rental apartment guides in
the United States with 51 local versions of its Apartment Guides. The Company's
Apartment Guides are published monthly and provided at no charge to apartment
shoppers. Ninety percent of these revenues are generated from the sale of
advertising space to owners and management companies of apartment communities.
During the year ended December 31, 1995, the Company started new guides in Fort
Myers, Florida and acquired guides covering Washington, D.C., Baltimore and
Detroit.
The Apartment Guides contain information listings which highlight the
features of available apartment communities. Owners and managers of apartment
communities, whose goal is to maximize the occupancy rates at their apartment
properties, purchase advertising space. Apartment rental guides are generally
the most cost-effective way to attract new tenants to rental apartment
communities. The Company's primary competition comes from For Rent Magazine,
single city guides and local newspapers.
The DistribuTech Division of the Company distributes Apartment Guides as
well as third party publications. Apartment Guides are distributed in a wide
variety of locations including grocery, convenience and drug stores, hotels,
apartments, chambers of commerce, universities, military bases, and major
employers. At retail locations, Apartment Guides are typically displayed in free
standing, multi-pocket racks along with other free publications. DistribuTech,
which manages the largest free publication distribution network in the United
States, enjoys exclusive arrangements with most of the retail locations and, as
a result, generates substantial revenues from the leasing of additional pockets
on each rack to other free publications. Revenues from the distribution of other
publications partly offset Apartment Guides' distribution costs. DistribuTech
manages distribution for over 15,500 retail locations in 60 cities nationwide.
Fifty of those cities are also cities where Apartment Guides are published.
DistribuTech competes on the basis of price paid to the retail locations and
service on the rack program.
Daily Racing Form
The Company maintains the most comprehensive database of horse racing
statistics in North America. The principal method of distribution of this
database is Daily Racing Form, a national daily newspaper covering thoroughbred
horse racing. Up to 30 individual editions of Daily Racing Form are published a
day, each covering three to six racetracks, and these editions report on every
thoroughbred and many quarterhorse races in the United States and Canada. The
Daily Racing Form is sold in all 40 states that allow pari-mutuel betting,
Canada, and Mexico. Daily Racing Form's 1995 annual circulation was
approximately 22.8 million copies, of which approximately two-thirds were sold
through newsstands and one-third were sold at racetracks. The Daily Racing Form
database is also delivered via a pay-per-use 900 telephone number and electronic
and facsimile transmission. In addition Daily Racing Form licenses its database
for electronic delivery and handicapping services.
The re-engineering and upgrading of pre-publication and database software
were completed in 1995. The proprietary database contains tens of millions of
statistics about jockeys, trainers and racetracks, as well as past performances
of more than 200,000 thoroughbred horses, including racing
31
<PAGE>
conditions such as weather, track condition, jockey weight, stakes, type of
race, distance and post position.
Although Daily Racing Form is the only newspaper that provides past
performance statistics, Equibase licenses its past performance database to
racetracks for inclusion in their programs. Daily Racing Form competes on the
basis of advance availability, content and quality of data. For the year ended
December 31, 1995, the Company's statistics were available at all North American
tracks and were the exclusive statistics provided at racetracks having more than
50% of all track attendees.
Reference Materials
Funk & Wagnalls' New Encyclopedia licenses its editorial content to
Microsoft Corporation as the textual basis for Microsoft's Encarta CD-ROM
product and to Future Vision for inclusion in the Infopedia CD-ROM. Also,
content of the New Encyclopedia is licensed to three on-line services and a
classroom computer instruction service. Funk & Wagnalls is the third-largest
publisher, ranked by complete-set sales, of general reference encyclopedias in
the United States and Canada and the leading seller of encyclopedias in
supermarkets. In 1995, over 1.5 million volumes of the Funk & Wagnalls' New
Encyclopedia were sold. In addition, the Company publishes a yearbook and a
science supplement to the New Encyclopedia each year, designed to update the New
Encyclopedia. A new edition is introduced every three years and a major
statistical revision incorporating census data is introduced every 10 years.
The Company experiences competition for its New Encyclopedia from print
products sold in the home and in the supermarket as well as CD-ROM versions of
encyclopedias.
The World Almanac is the leading almanac in the English language ranked by
unit sales and data content. Over 1.3 million copies of the 1996 edition,
published in December 1995, have been sold. For 1995, the Company introduced
World Almanac For Kids and added The Kids World Almanac of Basketball. A
baseball version was introduced in 1993 and the football version introduced in
1994. The World Almanac licenses its content for use on four CD-ROM products and
five on-line services. The Company's World Almanac Education Division sells
reference books to the school and library market by catalogue. The World Almanac
and World Almanac Education Division compete in their respective markets on the
basis of quality and name recognition.
Facts on File News Services Division was acquired on March 1, 1996. Facts on
File News Services publishes subscription products which are sold to schools and
libraries. The flagship product, World News Digest, published weekly, is
available in print, CD and on-line formats, and has a subscriber base of
approximately 7,000. Other publications include Editorials on File, Today's
Science on File and Software and CD-ROM Reviews on File.
MEDIA
The media segment consists of consumer magazines, special interest magazines
and trade and technical magazines. The Company's media businesses are a key
source of need-to-know information for specific targeted interest groups.
Fifty-nine of the 104 magazines have the number one market share in their
respective niche markets.
Consumer Magazines
The Consumer Magazine group publishes thirteen well-known magazines. The
principal sources for consumer magazine revenues are advertising and
circulation. In the year ended December 31, 1995, approximately 51% of the
Consumer Magazines' sales were from advertising, 46% were from circulation and
3% from other sources.
32
<PAGE>
The following table sets forth certain information about the Company's
consumer magazines other than Stagebill:
<TABLE>
<CAPTION>
AVERAGE
CIRCULATION FOR THE
TWELVE MONTHS
ENDED DECEMBER 31, FREQUENCY OF
MAGAZINE 1995 PUBLICATION
- ------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
Soap Opera Digest...................................... 1,345,300 bi-weekly
Soap Opera Weekly...................................... 480,523 weekly
Seventeen.............................................. 2,117,988 monthly
New York............................................... 426,975 50 times per year
New Woman.............................................. 1,282,879 monthly
Automobile............................................. 613,999 monthly
Chicago................................................ 168,255 monthly
Modern Bride........................................... 364,322 bi-monthly
American Baby.......................................... 1,572,306 monthly
Sail................................................... 175,558 monthly
Power & Motoryacht..................................... 156,861 monthly
Healthy Kids........................................... 1,504,301 bi-monthly
</TABLE>
Soap Opera Digest and Soap Opera Weekly are sister publications--the former
digest-sized and bi-weekly, the latter tabloid-sized and weekly--covering soap
operas aired on network television. Soap Opera Digest is the leading publication
in this market. Soap Opera Weekly was launched to complement and expand the
market that Soap Opera Digest created. Soap Opera Digest focuses on synopses of
episodes and Soap Opera Weekly reports primarily on soap opera news. Soap Opera
Digest and Soap Opera Weekly are distributed mainly at supermarket, convenience
store and drugstore checkout counters. They compete for circulation on the basis
of editorial content and quality against Soap Opera Magazine and Soap Opera
Update, both of which have substantially lower circulation. Soap Opera Digest
On-Line was launched in early 1996.
Seventeen created the young women's magazine market when it was founded in
1944. Seventeen's editorial content covers a wide variety of topics relevant to
girls aged 12 to 19, including fashion, boys, beauty, talent and lifestyle. The
principal competition of Seventeen is YM. Against this competitor, Seventeen
competes for circulation based on the nature and quality of its editorial. It is
the leader by far based on advertising pages and is also the leader in total
circulation. Seventeen On-Line was launched on America Online in September 1995.
New York, the oldest weekly city magazine in the United States, is the only
city magazine published weekly. It contains feature articles and regular columns
on politics, business, the fine arts, entertainment, food, fashion and current
events. New York competes for circulation based on the nature and quality of its
editorial content with The New Yorker, which has a larger circulation. New York
Magazine On-Line was launched on CompuServe in September 1995.
Automobile contains articles and columns on newly introduced domestic and
foreign automobile models, and prominent people and collectors in the auto
industry. Automobile competes for circulation on the basis of the nature and
quality of its editorial content primarily with Car and Driver, Road and Track
and Motor Trend, all of which have larger circulations. Automobile Live, the
on-line version of Automobile, was launched on CompuServe in July 1995.
Modern Bride, launched in 1949, provides valuable information on bridal
fashions, home furnishings and honeymoon travel to engaged and newlywed couples.
Modern Bride competes for circulation and advertising pages with Bride's, Bridal
Guide and Elegant Bride. While the magazine regularly vies with Bride's for the
largest total circulation, Modern Bride is the leader in subscription
circulation.
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<PAGE>
American Baby, published since 1938 for expectant and new parents, contains
articles on all aspects of pregnancy and baby care. American Baby is the largest
circulation baby care publication and ranks first in baby product related
advertising pages. While the magazine competes with Parents, Parenting and Child
for the larger childcare market, American Baby's principal competitor is Baby
Talk. American Baby also supports several ancillary products including sampling
and couponing programs and a cable television show.
Sail is the largest circulation magazine in its niche and the only
publication with a "how-to" editorial focus. It contains technical articles on
design, technique, new boat features and gear as well as product reviews and
stories from experienced cruisers and racers. Sail's primary competitors are
Cruising World and Sailing World.
Power & Motoryacht covers the high-end of the powerboat market. With its
controlled circulation to owners of large powerboats, the magazine reaches a
more affluent and dedicated audience than its competitors. Power & Motoryacht
competes with a variety of magazines that target a segment of its readership
including Boating, Motorboating and Sailing, Yachting, and Saltwater Sportsman.
The other consumer magazines published by the Company are: New Woman--a
guide for personal relationships and careers; Stagebill--the largest performing
arts magazine in the United States; Chicago--the number one city magazine in
Chicago; and Healthy Kids--a magazine published in exclusive association with
the American Academy of Pediatrics. The Company also publishes a number of
annual publications including First Year of Life, Childbirth, Wedding Gown
Guide, Your Prom and Sailboat Buyers Guide, as well as several custom publishing
projects.
Subscriptions for consumer magazines are obtained using printed
advertisements, direct mail, clearinghouses and subscription cards included in
each magazine. Advertising sales are made principally by in-house advertising
staffs at each magazine. The consumer magazines compete for advertising on the
basis of circulation and the niche market served by the publication.
Special Interest Magazines
The special interest magazine group publishes 34 titles in the sewing and
crafts, truck and automotive and sporting areas, 21 of which rank first or
second in their respective markets based on circulation. The principal sources
for the special interest magazine group revenues are circulation and
advertising. In the year ended December 31, 1995, approximately 37% of the
specialty interest magazines' sales were from advertising, 54% were from
circulation and 9% were from various other sources. The products of the special
interest magazine group include titles well-known in their markets such as
Crafts, Sew News, Truckin' and Dog World.
The special interest magazines target enthusiasts in each of their
respective activities. A majority of the titles are number one or number two in
their market based on circulation. Readers value the special interest magazines
for their editorial content and also rely on them as a catalogue of products in
the relevant topic area. This catalogue aspect makes the special interest
magazines an important media buy for advertisers. The sewing and crafts
magazines are primarily sold by subscription, while circulation sales of the
truck and automotive titles are primarily newsstand driven.
Since the beginning of 1993, the special interest magazine group launched 11
titles, all of which were spin-offs of established titles.
Magazine editorial is provided by in-house writers and freelance authors.
Advertising sales are generated by a combination of in-house staff and outside
advertising representative firms.
Each of the titles faces competition in its subject area from a variety of
publishers. The Company's special interest magazines compete on the basis of
high quality, targeted editorial.
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Trade and Technical Magazines
The Company publishes 57 trade and technical magazines that provide vital
information to professionals in the apparel, automotive, telecommunications,
electronics, engineering, transportation, agricultural, printing, packaging,
construction, real estate, retail, architectural lighting, municipal services,
facilities management, health and financial planning industries. Thirty-seven of
these publications are ranked number one, and approximately 85% of these
publications are ranked number one or two, in the fields they serve based on
advertising. These magazines are distributed primarily on a "controlled
circulation" basis to members of a targeted industry group and provide
career-enhancing technical and tutorial editorial content.
Capitalizing on the centralized circulation, fulfillment, production and
other back office services, add-on titles can either be spun-off from existing
titles or acquired and integrated editorially.
During the year ended December 31, 1995, approximately 78% of the revenues
of the trade and technical titles were generated from advertising. Because each
of the trade and technical magazines is distributed almost exclusively to
purchasing decision makers in a targeted industry group, product and service
providers are able to focus their advertising. The advertising rates charged are
based on the size of the circulation within the target group as well as
competitive factors. These magazines compete for advertising on the basis of
circulation, reach, editorial content and readership commitment. Advertising
sales are made by in-house sales forces, supplemented by independent
representatives in selected regions and overseas. Classified advertising is sold
through telemarketing. Magazine editorial is provided by specialized in-house
writers and freelance authors, well-known in their specific industry niches.
These trade and technical magazines compete in their niche markets on the
basis of content, advertising rates and targeted readership.
PRODUCTION AND FULFILLMENT
Virtually all of the Company's print products are printed and bound by
independent printers. The Company believes that outside printing services at
competitive prices are readily available. Many of the books distributed by the
Company's book services are purchased directly from the publishers' print runs.
The principal raw material used in the Company's products is paper. The
Company has paper supply contracts and, in almost all cases, supplies paper used
by its outside printers. The Company believes that even though paper is in
limited supply, the existing arrangements providing for the supply of paper have
been adequate, although at higher prices. The Company was able to meet its paper
requirements during 1995. In 1995, approximately 30% and 25% of the Company's
paper was supplied by Lindenmeyr Central and Bulkley Dunton, respectively. The
Company's relationship with these suppliers is good and is expected to continue
to be good for the foreseeable future.
Many of the Company's products are packaged and delivered to the United
States Postal Service directly by the printer. Other products are sent from
warehouses and other facilities operated by the Company. Postage costs represent
a significant expense for the Company. See "Risk Factors."
EMPLOYEES
As of January 2, 1996, the Company had approximately 6,300 full- and
part-time employees, of whom approximately 30 were union members. Management
considers its relations with its employees to be good.
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EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of K-III:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
William F. Reilly......................... 57 Chairman of the Board and Chief Executive
Officer and Director
Charles G. McCurdy........................ 40 President and Director
Beverly C. Chell.......................... 53 Vice Chairman, General Counsel, Secretary
and Director
Harry A. McQuillen........................ 49 Executive Vice President, President-Media
Group
Jack L. Farnsworth........................ 50 Vice President, President-Information
Group
Pedro F. Mata............................. 51 Vice President, President-Education Group
George Philips............................ 65 Vice President, President-Reference Group
Curtis A. Thompson........................ 44 Vice President and Controller
Michaelanne C. Discepolo.................. 43 Vice President
Douglas B. Smith.......................... 35 Treasurer
</TABLE>
Mr. Reilly is Chairman of the Board, Chief Executive Officer and a Director
of K-III (and served in such capacities with its predecessors). Prior to March
1990 he was President and Chief Operating Officer of Macmillan, Inc.
("Macmillan"). Mr. Reilly is also a director of FMC Corporation.
Mr. McCurdy became President and a Director of K-III in November 1991 and
was Treasurer from 1991 to August 1993 (and served in such capacity with its
predecessors). Prior to February 1989 he was Vice President-Corporate Finance at
Macmillan.
Ms. Chell became Vice Chairman, General Counsel and Secretary of K-III (and
served in such capacity with its predecessors) in November 1991 and a Director
in March 1992. Prior thereto she was Vice President, General Counsel and
Secretary of Macmillan.
Mr. McQuillen has been Executive Vice President of K-III since December
1995, President of K-III Media Group since December of 1992 and President of
K-III Magazines since November 1991. Prior thereto he was Vice President of
K-III from May 1992 through December 1995. He was previously President of
Macmillan Publishing Company and a Vice President at Macmillan.
Mr. Farnsworth has been Vice President of K-III since May 1992, President of
K-III Information Group since May 1992, President of Daily Racing Form since
April 1992 and President of Westcott since June 1996. He was previously
President of Simon & Schuster Higher Education Group from August 1990 to
February 1992 and prior to that time he was a Vice President at Macmillan in
charge of educational publications.
Mr. Mata has been Vice President of K-III and President of K-III Education
Group since November 1995. He was previously the Senior Vice President of W.R.
Grace & Co. and President and CEO of Grace Cocoa.
Mr. Philips has been a Vice President of K-III since May 1992 and President
of the Reference Group since March 1992. Prior to that time he was President of
P.F. Collier, Inc. and a Vice President at Macmillan.
Mr. Thompson became Vice President and Controller of K-III in November 1991.
He has also served as Vice President and Controller of each of the subsidiaries
of K-III since August 1989 until other persons assumed the office of Controller
at certain of the subsidiaries. Prior to that time he was Vice President and
Controller and Chief Financial Officer of The Michie Company.
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Ms. Discepolo became a Vice President of K-III in January 1993. She joined
the Company in March 1991 as Director of Human Resources. She held the position
of Director of Benefits with Macmillan prior thereto.
Mr. Smith became Treasurer of K-III in August 1993. Prior thereto he was at
The Bank of New York starting in 1982 holding various positions. He held the
position of Senior Vice President prior to joining K-III.
The business address of Messrs. Reilly, McCurdy, Farnsworth, Mata,
McQuillen, Philips, Thompson, Smith and Mses. Chell and Discepolo is the address
of the principal executive offices of K-III.
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<PAGE>
THE EXCHANGE OFFERS
PURPOSE AND EFFECT OF THE EXCHANGE OFFERS
The Old Notes and the Old Preferred Stock were sold by K-III on January 24,
1996 (the "Closing Date") to the Initial Purchasers, pursuant to the Purchase
Agreement. The Initial Purchasers subsequently sold the Old Notes and the Old
Preferred Stock to qualified institutional buyers and accredited investors in
reliance on Rule 144A and Regulation S under the Securities Act. As a condition
to the Purchase Agreement, K-III and the Initial Purchasers entered into the
Registration Rights Agreement on January 24, 1996. Pursuant to the Registration
Rights Agreement, K-III agreed to file with the SEC a registration statement
under the Securities Act with respect to the Exchange Offers no later than 180
days following the Closing Date, (ii) to use its reasonable best efforts to
cause such registration statement to become effective under the Securities Act
no later than 180 days after the Closing Date, and (iii) upon effectiveness of
the registration statement, to commence the Exchange Offers. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Registration Statement is
intended to satisfy K-III's obligations under the Registration Rights Agreement
and the Purchase Agreement.
As a result of the effectiveness of the Registration Statement of which this
Prospectus is a part, payment of certain liquidated damages provided for in the
Registration Rights Agreement will not occur. Following the consummation of the
Exchange Offers, holders of Notes and shares of Preferred Stock will not have
any further registration rights and the Old Notes and the Old Preferred Stock
will continue to be subject to certain restrictions on transfer. See
"--Consequences of Failure to Exchange." Accordingly, the liquidity of the
market for the Old Notes and the Old Preferred Stock could be adversely
affected.
TERMS OF THE EXCHANGE OFFERS
Upon the terms and subject to the conditions set forth in this Prospectus
and in the applicable Letter of Transmittal, K-III will accept (i) any Old Notes
in principal amounts of $1,000 validly tendered and not withdrawn prior to the
Expiration Date and (ii) any and all shares of Old Preferred Stock validly
tendered and not withdrawn prior to the Expiration Date. K-III will issue (i)
New Notes in principal amounts of $1,000 for each $1,000 in principal amount
outstanding of the Old Notes, and (ii) one share of New Preferred Stock in
exchange for each share of Old Preferred Stock, accepted in the Exchange Offers.
Holders may tender some or all of their Old Notes or shares of Old Preferred
Stock pursuant to the Exchange Offers.
The form and terms of the New Notes and the New Preferred Stock are the same
as the form and terms of the Old Notes and the Old Preferred Stock except that
the shares of New Notes and New Preferred Stock will have been registered under
the Securities Act and hence will not bear legends restricting their transfer
pursuant to the Securities Act.
As of the date of this Prospectus, $300,000,000 principal amount of Old
Notes and 2,000,000 shares of Old Preferred Stock were outstanding and there
were approximately 361 and 162 beneficial owners, respectively. Solely for
reasons of administration (and for no other purpose), K-III has fixed the close
of business on July 22, 1996 as the record date for the Exchange Offers for
purposes of determining the persons to whom this Prospectus and the Letters of
Transmittal will be mailed initially. Only a registered holder of the Old Notes
or Old Preferred Stock (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the transfer agent and
registrar for the Notes or the Preferred Stock may participate in the Exchange
Offers. There will be no fixed record date for determining registered holders of
the Old Notes or the Old Preferred Stock entitled to participate in the Exchange
Offers.
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<PAGE>
Holders of the Old Preferred Stock do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Certificate of
Designations for the Old Preferred Stock in connection with the Preferred Stock
Exchange Offer. K-III intends to conduct the Exchange Offers in accordance with
the applicable requirements of the Exchange Act and the rules and regulations of
the Commission thereunder.
K-III shall be deemed to have accepted validly tendered Old Notes or shares
of Old Preferred Stock when, as and if K-III has given oral or written notice
thereof to the Exchange Agent. The Exchange Agent will act as agent for the
tendering holders of the Old Notes or the Old Preferred Stock, as applicable,
for the purposes of receiving the New Notes or the New Preferred Stock from
K-III.
If any tendered Old Notes or shares of Old Preferred Stock are not accepted
for exchange because of an invalid tender, the occurrence of certain other
events set forth herein or otherwise, certificates for any such unaccepted Old
Notes or shares of Old Preferred Stock will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes or shares of Old Preferred Stock in the
Exchange Offers will not be required to pay brokerage commissions or fees or,
subject to the instructions in the applicable Letter of Transmittal, transfer
taxes with respect to the exchange of Old Notes or shares of Old Preferred Stock
pursuant to the Exchange Offers. K-III will pay all charges and expenses, other
than certain applicable taxes, in connection with the Exchange Offers. See
"--Fees and Expenses."
Each broker-dealer that receives New Notes or New Preferred Stock for its
own account in exchange for Old Notes or Old Preferred Stock, where such New
Notes or New Preferred Stock were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes or New
Preferred Stock. See "Plan of Distribution."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
August 21, 1996, unless K-III, in its sole discretion, extends the Exchange
Offers, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offers are extended.
In order to extend the Exchange Offers, K-III will notify the Exchange Agent
of any extension by oral or written notice and will make a public announcement
thereof, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
K-III reserves the right, (i) to delay accepting any Old Notes or shares of
Old Preferred Stock, (ii) to extend the Exchange Offers, (iii) if any of the
conditions set forth below under "--Conditions of the Exchange Offers" shall not
have been satisfied, to terminate the Exchange Offers, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (iv) to
amend the terms of the Exchange Offers in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offers are amended
in a manner determined by K-III to constitute a material change, K-III will
promptly disclose such amendments by means of a prospectus supplement that will
be distributed to the registered holders of the Old Notes and the Old Preferred
Stock, and K-III will extend the Exchange Offers for a period of five to ten
business days, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the Exchange Offers would otherwise
expire during such five to ten business day period.
Without limiting the manner in which K-III may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offers, K-III shall not have an obligation
39
<PAGE>
to publish, advertise, or otherwise communicate any such public announcement,
other than by making a timely release to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder (which term, for the purposes described herein,
shall include any participant in The Depository Trust Company (also referred to
as a book-entry transfer facility) whose name appears on a security listing as
the owner of the Notes) of Old Notes or shares of Old Preferred Stock may tender
such Old Notes or shares of Old Preferred Stock in the Exchange Offers. To
tender in the Exchange Offers a holder must complete, sign and date the
applicable Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the applicable Letter of Transmittal and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes or the shares of Old Preferred Stock and any other required
documents, to the Exchange Agent at the address set forth below under "Exchange
Agent" for receipt prior to the Expiration Date (or comply with the procedure
for book-entry transfer described below).
The tender by a holder will constitute an agreement between such holder and
K-III in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF THE OLD NOTES OR THE SHARES OF OLD PREFERRED STOCK
AND THE APPLICABLE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE
EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY
MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE
EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL, OLD NOTES
OR SHARES OF OLD PREFERRED STOCK SHOULD BE SENT TO K-III. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES
TO EFFECT THE ABOVE TRANSACTION FOR SUCH HOLDERS.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Old Notes and the Old
Preferred Stock at the book-entry transfer facility for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of Old Notes and/or shares of Old
Preferred Stock by causing such book-entry transfer facility to transfer such
Old Notes and/or shares of Old Preferred Stock into the Exchange Agent's account
with respect to the Old Notes and/or shares of Old Preferred Stock in accordance
with the book-entry transfer facility's procedures for such transfer. Although
delivery of Old Notes and/or shares of Old Preferred Stock may be effected
through book-entry transfer into the Exchange Agent's accounts at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth on the back cover page of this Prospectus on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures.
Any beneficial owner whose Old Notes or shares of Old Preferred Stock are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. See "Instruction to Registered Holder from Beneficial Owner"
included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Old Notes or the shares of Old
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<PAGE>
Preferred Stock tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Delivery Instructions" on
the Letter of Transmittal, or (ii) for the account of an Eligible Institution.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(each an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of Old Notes or any shares of Old Preferred Stock listed therein, such
Old Notes or shares of Old Preferred Stock must be endorsed or accompanied by a
properly completed stock power, signed by such registered holder as such
registered holder's name appears on such Old Notes or shares of Old Preferred
Stock.
If the Letter of Transmittal, Old Notes or any shares of Old Preferred Stock
or stock powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
evidence satisfactory to K-III of their authority to so act must be submitted
with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes or shares of Old
Preferred Stock will be determined by K-III in its sole discretion, which
determination will be final and binding. K-III reserves the absolute right to
reject any and all Old Notes or shares of Old Preferred Stock not properly
tendered or any Old Notes or shares of Old Preferred Stock K-III's acceptance of
which would, in the opinion of counsel for K-III, be unlawful. K-III also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes or shares of Old Preferred Stock. K-III's
interpretation of the terms and conditions of the Exchange Offers (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of the Old Notes or the shares of Old Preferred Stock must be cured within such
time as K-III shall determine. Although K-III intends to notify holders of
defects or irregularities with respect to tenders of the Old Notes or the shares
of Old Preferred Stock, neither K-III, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of the
Old Notes or the shares of Old Preferred Stock will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Notes or shares of Old Preferred Stock received by the Exchange Agent that are
not validly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the applicable Letter of Transmittal, as soon as
practicable following the Expiration Date.
By tendering, each registered holder will represent to K-III that, among
other things, (i) the New Notes or the New Preferred Stock to be acquired by the
holder and any beneficial owner(s) of the Old Notes or the Old Preferred Stock
("Beneficial Owner(s)") in connection with the Exchange Offers are being
acquired by the holder and any Beneficial Owner(s) in the ordinary course of
business of the holder and any Beneficial Owner(s), (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes or the New Preferred Stock, (iii) the holder and
each Beneficial Owner acknowledge and agree that any person participating in the
Exchange Offers for the purpose of distributing the New Notes or the New
Preferred Stock must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the New Notes or the New Preferred Stock acquired by such person
and cannot rely on the position of the Staff of the Commission set forth in the
no-action letters that are discussed herein under "--Resales of the New Notes
and the New Preferred Stock", (iv) the holder and each Beneficial Owner
understands that a secondary resale transaction described in clause (iii) above
should be covered by an
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<PAGE>
effective registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K of the Commission, and (v)
neither the holder nor any Beneficial Owner(s) is an "affiliate," as defined
under Rule 405 of the Securities Act, of K-III except as otherwise disclosed to
K-III in writing.
Each broker-dealer receiving New Notes or New Preferred Stock for its own
account must acknowledge that it will deliver a prospectus in connection with
any resale of such New Notes or New Preferred Stock. By so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes or New Preferred Stock
received in exchange for Old Notes or Old Preferred Stock where such Old Notes
or Old Preferred Stock were acquired by such broker-dealer as a result of
market-making activities or other trading activities. K-III will, for a period
of 90 days after the Expiration Date, make copies of this Prospectus available
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes or shares of Old Preferred Stock
and (i) whose Old Notes or shares of Old Preferred Stock are not immediately
available, or (ii) who cannot deliver their Old Notes or shares of Old Preferred
Stock, the applicable Letter of Transmittal or any other required documents to
the Exchange Agent prior to the Expiration Date or complete the procedure for
book-entry transfer on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes or shares of Old Preferred Stock and the principal amount
of Old Notes or the number of shares of Old Preferred Stock being tendered,
stating that the tender is being made thereby and guaranteeing that, within
five business days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof) together with the certificate(s) representing the Old
Notes or the shares of Old Preferred Stock (or a confirmation of book-entry
transfer of such Old Notes or shares of Old Preferred Stock into the
Exchange Agent's account at the book-entry transfer facility) and any other
documents required by the applicable Letter of Transmittal will be deposited
by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes or shares of Old Preferred Stock in proper form for transfer and
all other documents required by the Letter of Transmittal are received by
the Exchange Agent within five business days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes or shares of Old Preferred
Stock according to the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of the Old Notes or the shares
of Old Preferred Stock may be withdrawn at any time prior to the Expiration Date
or, if tendered notes or shares have not yet been accepted for exchange, after
the expiration of forty business days from the commencement of the Exchange
Offers.
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To withdraw a tender of Old Notes or shares of Old Preferred Stock in the
Exchange Offers, a written or facsimile transmission notice of withdrawal must
be received by the Exchange Agent at its address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes or the shares of Old Preferred Stock to be
withdrawn (the "Depositor"), (ii) identify the Old Notes or the shares of Old
Preferred Stock to be withdrawn (including the certificate number or numbers and
number of shares), and (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes or
shares of Old Preferred Stock were tendered (including any required signature
guarantees). If Old Notes or shares of Old Preferred Stock have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the book-entry transfer facility
to be credited with the withdrawn Old Notes or shares of Old Preferred Stock or
otherwise comply with the book-entry transfer facility procedure. All questions
as to the validity, form and eligibility (including time of receipt) of such
notices will be determined by K-III in its sole discretion, which determination
shall be final and binding on all parties. Any Old Notes or shares of Old
Preferred Stock so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offers and no shares of New Preferred Stock will be
issued with respect thereto unless the Old Notes or the shares of Old Preferred
Stock so withdrawn are validly retendered. Properly withdrawn Old Notes or
shares of Old Preferred Stock may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time prior
to the Expiration Date.
Any Old Notes or shares of Old Preferred Stock which have been tendered but
which are not accepted for exchange due to rejection of tender or termination of
the Exchange Offers, or which have been validly withdrawn, will be returned as
soon as practicable to the holder thereof without cost to such holder.
CONDITIONS OF THE EXCHANGE OFFERS
Notwithstanding any other term of the Exchange Offers, K-III shall not be
required to accept for exchange, or exchange shares of New Preferred Stock for,
any Old Notes or shares of Old Preferred Stock, and may terminate the Exchange
Offers as provided herein before the acceptance of such Old Notes or shares of
Old Preferred Stock, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offers
which, in the reasonable judgment of K-III, might materially impair the
ability of K-III to proceed with the Exchange Offers or materially impair
the contemplated benefits of the Exchange Offers to K-III, or any material
adverse development has occurred in any existing action or proceeding with
respect to K-III or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of K-III or any of its subsidiaries has
occurred which, in the reasonable judgment of K-III, might materially impair
the ability of K-III to proceed with the Exchange Offers or materially
impair the contemplated benefits of the Exchange Offers to K-III; or
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the reasonable judgment of K-III, might materially
impair the ability of K-III to proceed with the Exchange Offers or
materially impair the contemplated benefits of the Exchange Offers to
K-III; or
(d) any governmental approval has not been obtained, which approval
K-III shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offers as contemplated hereby.
If K-III determines in its sole discretion that any of the conditions are
not satisfied, K-III may (i) refuse to accept any Old Notes or shares of Old
Preferred Stock and return all tendered Old Notes or
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shares of Old Preferred Stock to the tendering holders, (ii) extend the Exchange
Offers and retain all Old Notes or shares of Old Preferred Stock tendered prior
to the Expiration Date, subject, however, to the rights of holders to withdraw
such Old Notes or shares of Old Preferred Stock (see "--Withdrawal of Tenders")
or (iii) waive such unsatisfied conditions with respect to the Exchange Offers
and accept all validly tendered Old Notes or shares of Old Preferred Stock which
have not been withdrawn. If such determination or waiver constitutes a material
change to the Exchange Offer, K-III will promptly disclose such determination or
waiver by means of a prospectus supplement that will be distributed to the
registered holders, and K-III will extend the Exchange Offers for a period of
five to ten business days, depending upon the significance of the waiver and the
manner of disclosure to the registered holders, if the Exchange Offers would
otherwise expire during such five to ten business day period.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offers. Questions and request for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
For the Notes--
<TABLE>
<CAPTION>
By Mail: By Facsimile Transmission: By Hand or Overnight Courier:
<S> <C> <C>
Reorganization Section (212) 571-3080 Reorganization Section
101 Barclay Street--7 East Confirm by Telephone: 101 Barclay Street--7 East
New York, NY 10286 (212) 815-2742 New York, NY 10286
Attention: Henry Lopez Attention: Henry Lopez
</TABLE>
For the Preferred Stock--
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Hand or Overnight Courier:
Tender & Exchange (For Eligible Institutions Tender & Exchange
Department Only) Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station Confirm Facsimile by Telephone: Receive and Deliver Window
New York, NY 10286-1248 (For Confirmation Only) New York, NY 10286
(800) 507-9357
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by K-III. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telecopy, telephone or in person by officers and regular employees of K-III
and its affiliates.
K-III has not retained any dealer-manager in connection with the Exchange
Offers and will not make any payments to brokers, dealers or others soliciting
acceptance of the Exchange Offers. K-III, however, will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offers will
be paid by K-III and are estimated in the aggregate to be approximately
$300,000. Such expenses include fees and expenses of the Exchange Agent and
transfer agent and registrar, accounting and legal fees and printing costs,
among others.
K-III will pay all transfer taxes, if any, applicable to the exchange of the
Old Notes or the Old Preferred Stock pursuant to the Exchange Offers. If,
however, a transfer tax is imposed for any reason
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other than the exchange of the Old Notes or the Old Preferred Stock pursuant to
the Exchange Offers, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the applicable Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes or the shares of Old Preferred Stock which are not exchanged
for New Notes or shares of New Preferred Stock pursuant to the Exchange Offers
will remain restricted securities within the meaning of Rule 144 of the
Securities Act. Accordingly, such Old Notes or shares of Old Preferred Stock may
be resold only (i) to K-III or the Initial Purchasers, (ii) inside the United
States to a qualified institutional buyer in compliance with Rule 144A under the
Securities Act, (iii) inside the United States to an institutional accredited
investor that, prior to such transfer, furnishes to K-III a signed letter
containing certain representations and agreements relating to the restrictions
on transfer of this security (the form of which letter can be obtained from
K-III) and if such transfer is in respect of an aggregate principal amount or
liquidation preference, as applicable, of securities at the time of transfer of
less than $1,000,000 an opinion of counsel acceptable to K-III that such
transfer is in compliance with the Securities Act, (iv) outside the United
States in an offshore transaction in compliance with Rule 904 under the
Securities Act, (v) pursuant to the exemption from registration provided by Rule
144 under the Securities Act (if available), or (vi) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States and subject to
certain requirements of the transfer agent and registrar being met. The
liquidity of the Old Notes or the Old Preferred Stock could be adversely
affected by the Exchange Offers. Following the consummation of the Exchange
Offers, holders of the Old Notes or the Old Preferred Stock will have no further
registration rights under the Registration Rights Agreement.
ACCOUNTING TREATMENT
The carrying value of the Old Notes or the Old Preferred Stock is not
expected to be materially different from the fair value of New Notes or the New
Preferred Stock, respectively, at the time of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. The expenses of the Exchange
Offers associated with the New Preferred Stock will be reported as a reduction
in the carrying value of the New Preferred Stock. The expenses of the Exchange
Offers associated with the New Senior Notes will be reported as a non-current
asset and amortized over the term of the New Senior Notes. Such carrying value
of the New Preferred Stock will increase to the amount of the redemption value
of the New Preferred Stock over the term of the New Preferred Stock.
RESALES OF THE NEW NOTES AND THE NEW PREFERRED STOCK
With respect to resales of the New Notes or the New Preferred Stock, based
on interpretations by the staff of the SEC set forth in no-action letters issued
to third parties, and in a previous no-action letter issued to K-III for its
exchange offer of the Series B Preferred Stock, K-III believes that a holder
(other than a person that is an "affiliate" of K-III within the meaning of Rule
405 under the Securities Act) who exchanges Old Notes or shares of Old Preferred
Stock for New Notes or shares of New Preferred Stock in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes or the New Preferred Stock, will be allowed to
resell the New Notes or the New Preferred Stock to the public without further
registration under the Securities Act and without delivering to the purchasers
of the New Notes or the New Preferred Stock a prospectus that satisfies the
requirements of Section 10 thereof. However, if any holder acquires New Notes or
shares of New Preferred Stock in the Exchange Offers for the purpose of
distributing or participating in a distribution
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<PAGE>
of the New Notes or the New Preferred Stock, such holder cannot rely on the
position of the staff of the SEC in such no-action letter and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. Each broker-dealer that receives New Notes
and New Preferred Stock for its own account in exchange for Old Notes and Old
Preferred Stock, where such Old Notes and Old Preferred Stock were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes and New Preferred Stock. See "Plan of
Distribution."
As contemplated by the above no-action letters and the Registration Rights
Agreement, each holder accepting one of the Exchange Offers is required to
represent to K-III in the applicable Letter of Transmittal that (i) the New
Notes or the shares of New Preferred Stock are to be acquired by the holder in
the ordinary course of business, (ii) the holder is not engaging and does not
intend to engage, in the distribution of the New Notes or the New Preferred
Stock, and (iii) the holder acknowledges that if such holder participates in
such Exchange Offer for the purpose of distributing the New Notes or the New
Preferred Stock such holder must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale of the New Notes or the New Preferred Stock and cannot rely on the above
no-action letter; however, holders of the New Notes or New Preferred Stock will
have no registration rights under the Registration Rights Agreement.
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<PAGE>
DESCRIPTION OF NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes will have been registered under the
Securities Act and thus will not bear restrictive legends restricting their
transfer pursuant to the Securities Act and (ii) holders of New Notes will not
be entitled to certain rights of holders of the Old Notes under the Registration
Rights Agreement which will terminate upon the consummation of the Notes
Exchange Offer. The summary contained herein of certain provisions of the Notes
does not purport to be complete and is qualified in its entirety by reference to
the provisions of the Note Indenture.
GENERAL
The Old Notes have been and the New Notes will be issued pursuant to the
Note Indenture entered into among K-III, the Guarantors and The Bank of New
York, as trustee (the "Trustee"). The terms of the Notes include those stated in
the Note Indenture and those made part of the Note Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes
are subject to all such terms, and holders of the Notes are referred to the Note
Indenture and the Trust Indenture Act for a statement thereof. A copy of the
Note Indenture is available upon request. The definitions of certain terms used
in the following summary are set forth below under "--Certain Definitions."
Other terms used in this summary but not defined in this Prospectus shall have
the meanings given to them in the Note Indenture.
The Notes rank senior in right of payment to all subordinated Indebtedness
of the Company, and will be guaranteed on a senior basis by each of the domestic
Restricted Subsidiaries of K-III. Such subordinated indebtedness will be limited
to the Exchange Debentures, Class B Subordinated Debentures and 10% Subordinated
Debentures, if and when the same are issued at the option of K-III in exchange
for the Senior Preferred Stock, Series B Preferred Stock and Preferred Stock,
respectively, and additional subordinated indebtedness that is permitted to be
incurred by the terms of the Credit Agreements, the Senior Note Indentures and
such other senior indebtedness as K-III may have outstanding from time to time.
When the New Notes are issued, the Company will have no subordinated
indebtedness outstanding. The Company has no current intention to issue
subordinated indebtedness. The Notes rank pari passu in right of payment with
all senior indebtedness, including the Company's obligations under the Credit
Agreements and Outstanding Notes. As used herein, the statement that certain
indebtedness ranks pari passu with other indebtedness means only that in the
event of the bankruptcy or insolvency of the debtor such certain indebtedness
and such other indebtedness will have an equal claim on money or other property
of the debtor available for distribution. As of June 17, 1996, the aggregate
principal amount of outstanding indebtedness was $900.9 million under the Credit
Agreements and $350.0 million under the Outstanding Notes none of which was
secured.
The operations of K-III are conducted through its subsidiaries, and,
therefore, K-III depends upon the cash flow of its subsidiaries to meet its
obligations, including its obligations under the Notes. The Notes are guaranteed
on a senior basis by each of the domestic Restricted Subsidiaries of K-III. As a
result, the claims of holders of the Notes will be at least pari passu with all
existing and future liabilities and obligations (whether or not for borrowed
money), including trade credit, of such subsidiaries. The Note Indenture,
however, permits the Company to organize Unrestricted Subsidiaries and foreign
Restricted Subsidiaries which would not be required to guarantee the Notes or
any other indebtedness of the Company.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $300,000,000 and will
mature on February 1, 2006. Interest on the Old Notes has accrued from the date
of issuance at the rate of 8 1/2% per annum. Interest on Notes is payable
semi-annually on February 1 and August 1, commencing on
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<PAGE>
August 1, 1996, to holders of record on the immediately preceding January 15 and
July 15. Interest on the New Notes will accrue from the date the New Notes are
exchanged for the Old Notes. Interest will be computed on the basis of a 360-day
year consisting of twelve 30-day months. The Notes will be payable both as to
principal and interest at the office or agency of K-III maintained for such
purpose within or without the City and State of New York or, at the option of
K-III, payment of interest may be made by check mailed to the holders of the
Notes at their respective addresses set forth in the register of holders of
Notes. Until otherwise designated by K-III, its office or agency in New York
will be the office of the Trustee maintained for such purpose. The New Notes
will be issued in registered form, without coupons, in denominations of $1,000
and integral multiples thereof.
OPTIONAL REDEMPTION
The Notes are not redeemable at K-III's option before February 1, 2001
(other than in connection with a Change of Control, as described below).
Thereafter, the Notes will be subject to redemption at the option of K-III, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of the principal amount) set forth
below plus accrued and unpaid interest thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning February 1 of the
years indicated below:
YEAR PERCENTAGE
- ------------------------------------------------------------ ----------
2001........................................................ 104.250%
2002........................................................ 102.125
2003 and thereafter......................................... 100.000
The Outstanding Note Indentures prohibit such redemption or prepayment
unless the Company has built a sufficient basket for such redemption or
prepayment.
SINKING FUND
There will be no sinking fund payments for the Notes.
CHANGE OF CONTROL
Holders' Right to Require Repurchase Upon Change of Control. Upon the
occurrence of a Change of Control, each holder shall have the right to require
the repurchase of such holder's Notes pursuant to the offer described below (the
"Change of Control Offer") at a purchase price equal to 101% of the aggregate
principal amount plus accrued and unpaid interest, if any, to the date of
purchase (the "Change of Control Payment"). The redemption prices for optional
redemptions in the event of a Change of Control would in all cases be equal to
or greater than this repurchase price. Because of the highly leveraged nature of
the Company, there can be no assurance that K-III will have sufficient funds to
repurchase the Notes in the event of a Change of Control. The right of the
holders of the Notes to require K-III to repurchase the Notes in the event of a
Change of Control cannot be waived by the Trustee, K-III or K-III's Board of
Directors. Within 40 days following any Change of Control, K-III shall mail a
notice to each holder stating: (1) that the Change of Control Offer is being
made pursuant to the Change of Control covenant and that all Notes tendered will
be accepted for payment; (2) the purchase price and the purchase date, which
shall be no earlier than 30 days nor later than 40 days from the date such
notice is mailed (the "Change of Control Payment Date"); (3) that any Note not
tendered will continue to accrue interest; (4) that, unless the Company defaults
in the payment of the Change of Control Payment, all Notes accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest after the
Change of Control Payment Date; (5) that holders electing to have any Notes
purchased pursuant to a Change of Control Offer will be required to surrender
the Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Note completed, to the
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<PAGE>
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day preceding the Change of Control Payment Date; (6)
that holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of the Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such Notes purchased and (7) that holders whose
Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Holder will tender Notes, and each Note purchased and each such new
Note issued by K-III will be in a principal amount of $1,000 or integral
multiples thereof.
On the Change of Control Payment Date, K-III will, to the extent lawful, (1)
accept for payment Notes or portions thereof tendered pursuant to the Change of
Control Offer, (2) deposit with the Paying Agent (as defined in the Note
Indenture) an amount equal to the Change of Control Payment in respect of all
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee, the Notes so accepted together with an officers' certificate
stating the Notes or portions thereof that were tendered to K-III. The Paying
Agent shall promptly mail to each holder of Notes so accepted, payment in an
amount equal to the purchase price for such Notes, and the Trustee shall
promptly authenticate and mail to such holder a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered; provided that each
such new Note shall be in a principal amount of $1,000 or integral multiples
thereof. K-III will publicly announce the results of the Change of Control Offer
on or as soon as practicable after the Change of Control Payment Date.
Indebtedness under the Credit Agreements will automatically accelerate upon
the earlier of 30 days from the Change of Control and the Change of Control
Payment Date. If the Company has insufficient funds with which to repay the
indebtedness under the Credit Agreements and to repurchase the Notes, the
holders of the Notes will have a claim on the funds of the Company equal to that
of the lenders under the Credit Agreements.
Optional Redemption Upon Change of Control. In addition to the rights set
forth under "Optional Redemption," the Notes will be redeemable, at the option
of K-III, in whole or in part, at any time within 160 days after a Change of
Control upon not less than 30 nor more than 60 days' prior notice to each holder
of Notes to be redeemed, at a redemption price equal to the sum of (i) the then
outstanding principal amount thereof plus (ii) accrued and unpaid interest, if
any, to the redemption date plus (iii) the Applicable Premium. The following
definitions are used to determine the Applicable Premium:
"Applicable Premium" with respect to the Notes shall be calculated with
respect to the date of redemption and shall equal the greater of (i) 1.0% of the
then outstanding principal amount of such Notes and (ii) the excess of (A) the
present value of the required interest and principal payments due on such Notes,
computed using a discount rate equal to the Treasury Rate plus the Applicable
Spread, over (B) the then outstanding principal amount of such Notes.
"Applicable Spread", for purposes of the Note Indenture, is defined as one
half of one percent.
"Treasury Rate", for purposes of the Note Indenture, is defined as the yield
to maturity at the time of computation of United States Treasury securities with
a constant maturity (as compiled by and published in the most recent Federal
Reserve Statistical Release H.15 (519) which has become publicly available at
least two business days prior to the date fixed for prepayment (or, if such
Statistical Release is no longer published, any publicly available source of
similar market data)) most nearly equal to the then remaining Average Life of
the Notes; provided, that if the Average Life of the Notes is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the Average Life of the Notes is less than one year, the
weekly average yield on
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<PAGE>
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
The redemption prices in an optional redemption upon a Change of Control
will in all cases be equal to or higher than the price applicable to a
repurchase upon a Change of Control required by a holder. If K-III were to
effect an optional Change of Control redemption before the Change of Control
Payment Date, holders that had previously tendered Notes to K-III for repurchase
could withdraw such tenders prior to the Change of Control Payment Date so as to
participate in the optional redemption. However, K-III would have no obligation
to announce such an optional Change of Control redemption prior to the closing
of the mandatory Change of Control Offer.
K-III will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Notes
triggered by a Change of Control.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
the Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not listed on a national securities
exchange, on a pro rata basis, by lot or by such method as the Trustee shall
deem fair and appropriate, provided that no Notes of $1,000 or less shall be
redeemed in part. Notice of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon cancellation of the original Note. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
CERTAIN COVENANTS
Limitations on Restricted Payments. K-III will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on account of K-III or any of its
Restricted Subsidiaries' Capital Stock or other Equity Interests (other than (A)
dividends or distributions payable in Equity Interests (other than Redeemable
Stock) of K-III or such Restricted Subsidiary or (B) dividends or distributions
payable to K-III or any of its Restricted Subsidiaries), (ii) (A) voluntarily
purchase, redeem or otherwise acquire or retire for value any preferred stock of
K-III or any of its Restricted Subsidiaries which, by its terms, is exchangeable
for any Indebtedness ("Exchangeable Preferred Stock") that is pari passu with or
subordinated in right of payment to the Notes or (B) purchase, redeem or
otherwise acquire or retire for value any Equity Interests (other than
Exchangeable Preferred Stock) of K - III or any of its Restricted Subsidiaries
(other than any such Equity Interests purchased from K - III or any of its
Restricted Subsidiaries), (iii) voluntarily purchase, repay, redeem, defease
(including, but not limited to, in-substance or legal defeasance) or otherwise
acquire or retire for value any Indebtedness (other than (A) the Notes, (B)
Indebtedness under the New Chase Credit Agreement, (C) Indebtedness permitted
under clause (v) or (vi) of the second paragraph of the Incurrence of
Indebtedness covenant and any extension, refinancing, renewal, replacement,
substitution or refunding thereof permitted under clause (vii) of the second
paragraph of the Incurrence of Indebtedness covenant or (D) Indebtedness between
and among K-III and the Restricted Subsidiaries) that is pari passu with or
subordinated in right of payment to the Notes (other than in connection with the
refunding or refinancing of such Indebtedness) or (iv) make
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Investments in Restricted Payment Unrestricted Subsidiaries (the foregoing
actions set forth in clauses (i) through (iv) being referred to as "Restricted
Payments"), if, at the time of such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; or
(b) K-III could not incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of the Incurrence of Indebtedness covenant
(without giving effect to clauses (i) through (xv) of the second paragraph
thereof), which calculation shall be made on a pro forma basis deducting
from Adjusted Consolidated Net Income the amount of any Investment K-III has
made in an Unrestricted Subsidiary during the relevant period and any
Investment K-III intends to make in an Unrestricted Subsidiary, to the
extent that such Investment is made with amounts included in Adjusted
Consolidated Net Income as a result of Transfers described in clause (c)(x)
below or clause (c)(y) of the Investments in Unrestricted Subsidiaries
covenant; or
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after May 13, 1992, the date of the indenture
governing the 10 5/8% Senior Notes (the "10 5/8% Senior Note Indenture"),
exceeds the sum of the following: (w) 50% of the amount of the Adjusted
Consolidated Net Income (other than amounts included in the next succeeding
clause (c)(x)) of K-III for the period (taken as one accounting period) from
the beginning of the first quarter commencing immediately after May 13,
1992, through the end of K-III's fiscal quarter ending immediately prior to
the time of such Restricted Payment (or, if Adjusted Consolidated Net Income
for such period is a deficit, 100% of such deficit); plus (x) 100% of the
amount of all Transfers from a Restricted Payment Unrestricted Subsidiary up
to the aggregate amount of the Investment (after taking into account all
prior Transfers from such Restricted Payment Unrestricted Subsidiary) in
such Restricted Payment Unrestricted Subsidiary (valued in each case as
provided in the definition of "Investment"); plus (y) in the event of a
designation of a Restricted Payment Unrestricted Subsidiary as a Restricted
Subsidiary, 100% of an amount equal to the Consolidated Net Cash Flow
generated by such Subsidiary for the period (taken as one accounting period)
from the beginning of its first fiscal quarter commencing immediately after
the date of its designation as a Restricted Payment Unrestricted Subsidiary
through such Subsidiary's fiscal quarter ending immediately prior to its
designation as a Restricted Subsidiary (or if such Consolidated Net Cash
Flow for such period is a deficit, 100% of such deficit); plus (z) 100% of
the aggregate net cash proceeds received by K-III from (i) the issuance or
sale of Equity Interests of K-III (other than such Equity Interests issued
or sold to a Restricted Subsidiary of K-III and other than Redeemable Stock)
or (ii) the sale of the stock of an Unrestricted Subsidiary or the sale of
all or substantially all of the assets of an Unrestricted Subsidiary to the
extent that a liquidating dividend is paid to K-III or any Restricted
Subsidiary from the proceeds of such sale;
provided, however, that for purposes of making Investments in Unrestricted
Subsidiaries, if the amount determined in accordance with clauses (w) or (y)
above is a deficit, such deficit shall be excluded from the computation of
this clause (c); and provided, further, that all such amounts applied
pursuant to this clause (c) shall not be available for application under
clause (c) of the Investments in Unrestricted Subsidiaries covenant.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the Note
Indenture; (ii) (A) the retirement of any shares of K-III's Capital Stock (the
"Retired Capital Stock") either (1) in exchange for or (2) out of the net
proceeds of the substantially concurrent sale (other than to a Restricted
Subsidiary of K-III) of other shares of, K-III's Capital Stock (the "Refunding
Capital Stock") other than any Redeemable Stock, and (B) if immediately prior to
such retirement of such Retired Capital Stock the declaration and payment of
dividends thereon was permitted under either clause (iii) or (vii) of this
paragraph, the declaration and payment of dividends
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on the Refunding Capital Stock in an aggregate amount per year no greater than
the aggregate amount of dividends per year that was declarable and payable on
such Retired Capital Stock immediately prior to such retirement; (iii) the
declaration and payment of dividends to the holders of the Senior Preferred
Stock, Series B Preferred Stock and Preferred Stock; (iv) the repurchase,
redemption or other acquisition or retirement for value of any Equity Interests
of K-III issued to present and former members of management of K-III and its
Subsidiaries pursuant to subscription and option agreements in effect on the
date of the Note Indenture and Equity Interests of K-III issued to future
members of management pursuant to subscription agreements executed subsequent to
the date of the Note Indenture, containing provisions for the repurchase of such
Equity Interests upon death, disability or termination of employment of such
persons which are substantially identical to those contained in the subscription
agreements in effect on the date of the Note Indenture; (v) the declaration and
payment of dividends on the Common Stock of up to 6% per annum of the net
proceeds received at any time by K-III in any public offering of Common Stock;
(vi) the repurchase, redemption or other acquisition or retirement for value of
Indebtedness of K-III which is subordinated in right of payment to the Notes
either (A) in exchange for or (B) with the proceeds of the issuance of, Equity
Interests (other than Redeemable Stock) of K-III; (vii) the declaration and
payment of dividends to holders of any class or series of K-III's preferred
stock issued after the date of the Note Indenture (including, without
limitation, the declaration and payment of dividends on Refunding Capital Stock
in excess of the dividends declarable and payable thereon pursuant to clause
(ii) of this paragraph), provided that at the time of such issuance K-III's
Fixed Charge Coverage Ratio, after giving effect to such issuance, would be
greater than 1.25 to 1; (viii) the redemption, repurchase or other acquisition
or retirement for value of any Indebtedness of K-III which is subordinated in
right of payment to the Notes (A) with the proceeds of, or in exchange for,
Indebtedness incurred pursuant to clause (vii) of the second paragraph of the
Incurrence of Indebtedness covenant or (B) if, after giving effect to such
redemption, repurchase or retirement, K-III could incur at least $1.00 of
Indebtedness under the first paragraph of the Incurrence of Indebtedness
covenant (without giving effect to clauses (i) through (xv) of the second
paragraph thereof); (ix) the retirement of the Senior Preferred Stock, Series B
Preferred Stock and Preferred Stock in exchange for the issuance of the Exchange
Debentures, Class B Subordinated Debentures and 10% Subordinated Debentures,
respectively, pursuant to the respective certificates of designations relating
thereto and (x) the purchase of Exchange Debentures, Class B Subordinated
Debentures and 10% Subordinated Debentures in accordance with the Change of
Control covenants in the Exchange Debenture Indenture, Class B Debenture
Indenture and 10% Subordinated Debenture Indenture, respectively; provided that
in determining the aggregate amount expended for Restricted Payments in
accordance with paragraph (c) above, (1) no amounts expended under clauses
(ii)(A)(1), (vi)(A), (viii) and (ix) of this paragraph will be included, (2)
100% of the amounts expended under clauses (ii)(A)(2), (iv), (v), (vi)(B), (vii)
and (x) of this paragraph will be included, (3) 50% of the amounts expended
under clause (iii) of this paragraph will be included, (4) amounts expended
under clause (ii)(B) of this paragraph will be included to the extent previously
included for the Retired Capital Stock and (5) 100% of the amounts expended
under clause (i) to the extent not included under subclauses (1) through (4) of
this proviso will be included.
Not later than the date of making any Restricted Payment, K-III shall
deliver to the Trustee an Officer's Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the Restricted Payments covenant were computed, which calculations
may be based on the Company's latest available internal financial statements.
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Investments in Unrestricted Subsidiaries. K-III will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, make any Investment
in any Unrestricted Subsidiary, if at the time of such Investment:
(a) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; or
(b) immediately before such Investment, K-III would not be permitted to
incur at least $1.00 of Indebtedness pursuant to the first paragraph of the
Incurrence of Indebtedness covenant (without giving effect to clauses (i)
through (xv) of the second paragraph thereof), which calculation shall be
made on a pro forma basis deducting from Adjusted Consolidated Net Income
the amount of any Investment K-III has made in an Unrestricted Subsidiary
during the relevant period and any Investment K-III intends to make in an
Unrestricted Subsidiary, to the extent that such Investment is made with
amounts included in Adjusted Consolidated Net Income as a result of the
Transfers described in clause (c)(x) of the Limitation on Restricted
Payments covenant or clause (c)(y) below; or
(c) such Investment, together with the aggregate of all other
Investments in Unrestricted Subsidiaries made after May 13, 1992, the date
of the 10 5/8% Note Indenture, exceeds (w) the aggregate Consolidated Net
Cash Flow of K-III for the period (taken as one accounting period) from the
beginning of the first quarter immediately after May 13, 1992, to the end of
K-III's most recently ended fiscal quarter at the time of such Investment;
plus (x) 100% of the aggregate net cash proceeds received by K-III from (i)
the issue or sale of Equity Interests of K-III (other than such Equity
Interests issued or sold to a Restricted Subsidiary of K-III and other than
Redeemable Stock) or (ii) the sale of the stock of an Unrestricted
Subsidiary or the sale of all or substantially all of the assets of an
Unrestricted Subsidiary to the extent that a liquidating dividend is paid to
K-III or any Restricted Subsidiary from the proceeds of such sale; plus (y)
100% of the amount of all Transfers from a Net Cash Flow Unrestricted
Subsidiary up to the aggregate Investment (after taking into account all
prior Transfers from such Net Cash Flow Unrestricted Subsidiary) in such Net
Cash Flow Unrestricted Subsidiary resulting from such payments or transfers
of assets (valued in each case as provided in the definition of
"Investment"); plus (z) in the event of a designation of an Unrestricted
Subsidiary as a Restricted Subsidiary, 100% of an amount equal to the
Consolidated Net Cash Flow generated by such Subsidiary for the period
(taken as one accounting period) from the beginning of its first fiscal
quarter commencing immediately after the date of its designation as an
Unrestricted Subsidiary through such Subsidiary's fiscal quarter ending
immediately prior to its designation as a Restricted Subsidiary (or if such
Consolidated Net Cash Flow for such period is a deficit, 100% of such
deficit);
provided that all such amounts applied pursuant to this clause (c) shall not
be available for application under clause (c) of the Restricted Payments
covenant.
The foregoing limitations will not apply to an Investment to the extent that
it is (i) to capitalize a Restricted Payment Unrestricted Subsidiary permitted
pursuant to the Restricted Payments covenant or (ii) funded by the issuance of
Equity Interests of K-III to the extent net proceeds are not used to fund an
optional redemption of Notes.
All Restricted Subsidiaries and all Net Cash Flow Unrestricted Subsidiaries
shall at all times remain wholly-owned, directly or indirectly, by K-III or a
Restricted Subsidiary.
Not later than the date of making any Investment described above, K-III
shall deliver to the Trustee an Officer's Certificate stating that such
Investment is permitted (including, without limitation, whether such Investment
is capitalizing a Net Cash Flow Unrestricted Subsidiary or a Restricted Payment
Unrestricted Subsidiary) and setting forth the basis upon which the calculations
required by the Investments in Unrestricted Subsidiaries covenant were computed,
which calculations may be based on the Company's latest available internal
financial statements.
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Dividends and Payment Restrictions Affecting Restricted Subsidiaries. K-III
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)
pay dividends or make any other distributions on its Capital Stock, or any other
interest or participation in, or measured by, its profits, owned by K-III or any
of its Restricted Subsidiaries, or pay any Indebtedness owed to K-III or any of
its Restricted Subsidiaries, (ii) make loans or advances to K-III or any of its
Restricted Subsidiaries or (iii) transfer any of its properties or assets to
K-III or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of: (A) the terms (as in effect on the
date of the Note Indenture) of the Existing Indebtedness, (B) the terms (as in
effect on the date of the Note Indenture) of the Old Chase Credit Agreement, Old
Revolving Credit Agreement and BONY Credit Agreement and the Outstanding Notes
and Outstanding Note Indentures, (C) the terms of Indebtedness of K-III incurred
in accordance with the Incurrence of Indebtedness covenant; provided that such
terms of any such Indebtedness constitute no greater encumbrance or restriction
on the ability of any Restricted Subsidiary to pay dividends or make
distributions, make loans or advances or transfer properties or assets than is
permitted by this covenant, (D) the terms of the Note Indenture and the Notes,
(E) applicable law, (F) customary non-assignment provisions entered into in the
ordinary course of business and consistent with past practices, (G) the terms of
purchase money obligations for property acquired in the ordinary course of
business, but only to the extent that such purchase money obligations restrict
or prohibit the transfer of the property so acquired, (H) the terms of the
Exchange Debentures, Exchange Debenture Indenture, the Class B Subordinated
Debentures, the Class B Debenture Indenture, the 10% Subordinated Debentures and
the 10% Subordinated Debenture Indenture, (I) any encumbrance or restriction
with respect to a Subsidiary of K-III that is not a Subsidiary of the Company on
the date of the Note Indenture, which encumbrance or restriction is in existence
at the time such person becomes a Subsidiary of K-III or is created on the date
it becomes a Subsidiary of K-III, (J) any encumbrance or restriction with
respect to a Subsidiary of K-III imposed pursuant to an agreement which has been
entered into for the sale or disposition of all or substantially all the Capital
Stock or assets of such Subsidiary, or (K) any encumbrance or restriction
existing under any agreement which refinances or replaces the agreements
described in clauses (A), (B), (D) and (H), provided that the terms and
conditions of any such encumbrances or restrictions contained in any such
agreement constitute no greater encumbrance or restriction on the ability of any
Restricted Subsidiary to pay dividends or make distributions, make loans or
advances or transfer properties or assets than those under or pursuant to the
agreement evidencing the Indebtedness or obligations refinanced. Nothing
contained in this covenant shall prevent K-III or a Restricted Subsidiary from
entering into any agreement permitting or providing for the incurrence of Liens
otherwise permitted by the Limitation on Liens covenant.
Incurrence of Indebtedness. K-III will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable with respect
to any Indebtedness unless K-III's Debt to Consolidated Cash Flow Ratio for its
four full fiscal quarters ending immediately prior to the date such additional
Indebtedness is created, incurred, issued, assumed or guaranteed would have been
no greater than 6 to 1, and such Indebtedness is not senior in right of payment
to the Notes; provided that such calculation shall give effect to (A) the
incurrence of any Indebtedness (after giving effect to the application of the
proceeds thereof) in connection with the simultaneous acquisition of any person,
business, property or assets, and (B) the Consolidated Cash Flow generated by
such acquired person, business, property or assets, giving effect in each case
to such incurrence of Indebtedness, application of proceeds and Consolidated
Cash Flow as if such acquisition had occurred at the beginning of such four
quarter period. For purposes of the foregoing provision, cash flow generated by
any acquired person, business, property or asset shall be determined on the same
basis as the definition of Consolidated Cash Flow and shall be based on the
actual earnings before interest, taxes, depreciation and amortization of such
acquired person, business, property or asset during the immediately preceding
four full fiscal quarters plus (y) (i) the savings in cost of goods sold that
would have resulted during that period from the effect of using the Company's
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actual costs for comparable goods and services during that period and (ii) other
savings in cost of goods sold or eliminations of selling, general and
administrative expenses as determined by K-III in good faith in its
consideration of such acquisitions and consistent with the Company's experiences
in acquisitions of similar businesses minus (z) the incremental expenses that
would be included in cost of goods sold and selling, general and administrative
expenses that would have been incurred by the Company in the operation of such
acquired person, business, property or assets during such period.
The foregoing limitations will not apply to the incurrence of (i)
Indebtedness pursuant to the New Chase Credit Agreement (provided that the
principal amount of such Indebtedness shall not exceed $1,250 million, less the
amount of all repayments made in respect of term loans and of all permanent
commitment reductions with respect to revolving loans (except to the extent, and
only to the extent, that any required repayments of principal in connection with
such commitment reduction are not made) made under the New Chase Credit
Agreement (excluding such repayments and commitment reductions which occur
substantially contemporaneously with a refinancing or a refunding thereof)),
plus any amounts then available under clause (vi) of this paragraph; (ii)
Existing Indebtedness; (iii) Indebtedness represented by the Outstanding Notes;
(iv) Indebtedness represented by the Exchange Debentures issued in exchange for
all outstanding Senior Preferred Stock, Class B Subordinated Debentures issued
in exchange for all the outstanding Series B Preferred Stock and the 10%
Subordinated Debentures issued in exchange for all the outstanding Preferred
Stock; (v) Capital Lease Obligations at any one time outstanding not in excess
of $75 million; (vi) Indebtedness in an aggregate principal amount equal to the
greater of (A) $150 million in the aggregate at any one time outstanding for
K-III and its Restricted Subsidiaries or (B) Indebtedness created, incurred,
issued, assumed or guaranteed (x) by K-III at any one time outstanding not in
excess of 7% of the Consolidated Net Worth of K-III at the time of such
creation, incurrence, issuance, assumption or guarantee or (y) by any Restricted
Subsidiary of K-III at any one time outstanding not in excess of 7% of the
Consolidated Net Worth of such Restricted Subsidiary at the time of such
creation, incurrence, issuance, assumption or guarantee; (vii) Indebtedness
created, incurred, issued, assumed or guaranteed in exchange for or the proceeds
of which are used to extend, refinance, renew, replace, substitute or refund
Indebtedness referred to in clauses (i) through (vi) above (the "Refinancing
Indebtedness"); provided, that (A) the principal amount of such Refinancing
Indebtedness shall not exceed the principal amount of Indebtedness (including
unused commitments) so extended, refinanced, renewed, replaced, substituted or
refunded plus any amounts then available under clause (vi) of this paragraph,
(B) in the case of Refinancing Indebtedness for Indebtedness permitted under
clauses (ii) and (iv) of this paragraph, the Refinancing Indebtedness permitted
under clauses (ii) and (iv) of this paragraph shall have an Average Life equal
to or greater than the Average Life of the Indebtedness being extended,
refinanced, renewed, replaced, substituted or refunded and (C) the Refinancing
Indebtedness for Indebtedness permitted under clauses (ii) and (iv) of this
paragraph shall rank, in right of payment, no more senior than such Indebtedness
being extended, refinanced, renewed, replaced, substituted or refunded and the
Refinancing Indebtedness for Indebtedness permitted under clauses (i), (iii),
(v) and (vi) of this paragraph shall rank, in right of payment, pari passu with
or junior to the Notes; (viii) intercompany Indebtedness incurred in connection
with Investments in Unrestricted Subsidiaries; provided that such Investments
are permitted by the Restricted Payments covenant or the Investments in
Unrestricted Subsidiaries covenant; (ix) Indebtedness under Currency Agreements
and Interest Rate Agreements, provided that in the case of Currency Agreements
which relate to other Indebtedness, such Currency Agreements do not increase the
Indebtedness of K-III outstanding other than as a result of fluctuations in
foreign currency exchange rates; (x) Indebtedness arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of K-III or any Restricted Subsidiary
of K-III pursuant to such agreements, incurred or assumed by the acquired
Subsidiary in connection with the acquisition or disposition of any business,
assets or Restricted Subsidiary of K-III, other than guarantees or similar
credit support by K-III of Indebtedness incurred by any person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition; provided that the
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maximum aggregate liability in respect of all such Indebtedness in the nature of
such guarantees shall at no time exceed the gross proceeds actually received
from the sale of such business, assets or Restricted Subsidiary; (xi)
Indebtedness arising from the honoring by a bank or other financial institution
of a check, draft or similar instrument inadvertently (except in the case of
daylight overdrafts, which will not be, and will not be deemed to be,
inadvertent) drawn against insufficient funds in the ordinary course of
business, provided that such Indebtedness is extinguished within three business
days of its incurrence; (xii) Indebtedness of an entity at the time it is
acquired as a Restricted Subsidiary, provided that such Indebtedness was not
incurred or assumed by such entity in connection with or in anticipation of such
acquisition; (xiii) Indebtedness between K-III and any Restricted Subsidiary;
(xiv) Non-Compete Notes, not to exceed $50 million in aggregate principal amount
less the amount of all principal repayments made in respect thereof; and (xv)
K-III's Obligations arising from the repurchase, redemption or other
acquisitions of Capital Stock from management investors to the extent permitted
by the Limitation on Restricted Payments covenant. For the purposes of
determining the aggregate Indebtedness of any referent person, Indebtedness
shall not include guarantees by any other person of such Indebtedness.
Limitations on Liens. K-III will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens) on any of its assets or
any income or profits therefrom or assign or convey any right to receive income
therefrom unless the Notes are equally and ratably secured.
Limitations on Asset Sales. K-III will not, and will not permit any of its
Subsidiaries to, directly or indirectly, consummate an Asset Sale (including the
sale of any of the stock of any Subsidiary) unless at least 100% of the Net
Proceeds from such Asset Sale are applied first to repay Obligations or reduce
commitments under the New Chase Credit Agreement in accordance with the terms
thereof and second to offer to redeem at par the Outstanding Notes and third to
offer to redeem at par the Notes. The foregoing application of Net Proceeds from
Asset Sales is not required in the case of (i) sales or dispositions generating
cash proceeds of less than, with respect to K-III and Restricted Subsidiaries,
$2,500,000 and (ii) sales and dispositions as to which K-III delivers a
reinvestment notice and the proceeds are so reinvested in one or more
communications, publishing, information, education or media assets or businesses
within twelve months of the date the relevant Asset Sale is consummated.
Notwithstanding the foregoing, neither K-III nor its Subsidiaries will be
required to apply the Net Proceeds from any Asset Sale (i) to the extent that
the aggregate Net Proceeds from such Asset Sale, together with the Net Proceeds,
if any, of any other Asset Sale which have not been previously applied, are less
than $25,000,000 or (ii) to the extent that, and for so long as, such Net
Proceeds cannot be so applied as a result of an encumbrance or restriction
permitted pursuant to the Limitations on Liens covenant. The procedure for
offering to redeem the Notes in connection with Asset Sales is substantially the
same as the mechanism for redeeming the Notes in connection with a Change of
Control.
Transactions with Affiliates. Neither K-III nor any of its Restricted
Subsidiaries will make any loan, advance, guarantee or capital contribution to,
or for the benefit of, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or for the benefit of, or purchase or lease any
property or assets from, or enter into or amend any contract, agreement or
understanding with, or for the benefit of, (i) any person (or any Affiliate of
such person) holding 10% or more of any class of Capital Stock of K-III or any
of its Restricted Subsidiaries or (ii) any Affiliate of K-III or any of its
Restricted Subsidiaries (each an "Affiliate Transaction"), except on terms that
are no less favorable to K-III or the relevant Restricted Subsidiary, as the
case may be, than those that could have been obtained in a comparable
transaction on an arm's-length basis from a person that is not such a holder or
Affiliate; provided that a transaction with any such holder (or Affiliate
thereof) or any Affiliate of K-III or any of its Restricted Subsidiaries shall
be deemed to be on terms that are no less favorable to K-III or such Restricted
Subsidiary than those obtainable at the time of the transaction from a person
who is not such a holder or Affiliate if (a) K-III or such Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to K-III or
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such Restricted Subsidiary from a financial point of view or (b) a disinterested
majority of the Board of Directors of K-III or such Restricted Subsidiary
approves the transaction; and provided, further, that, the foregoing restriction
shall not apply to (i) the payment of an annual fee to KKR for the rendering of
management consulting and financial services to K-III and its Restricted
Subsidiaries in an aggregate amount which is reasonable in relation thereto,
(ii) the payment of transaction fees to KKR in amounts which are in accordance
with past practices for the rendering of financial advice and services in
connection with acquisitions, dispositions and financings by K-III and its
Subsidiaries, (iii) the payment of reasonable and customary regular fees to
directors of K-III and its Subsidiaries who are not employees of K-III or its
Restricted Subsidiaries, (iv) loans to officers, directors and employees of
K-III and its Subsidiaries for business or personal purposes and other loans and
advances to such officers, directors and employees for travel, entertainment,
moving and other relocation expenses made in the ordinary course of business of
K-III and its Subsidiaries, (v) any Restricted Payments not prohibited by the
Restricted Payments covenant or any Investment not prohibited by the Investments
in Unrestricted Subsidiaries covenant, (vi) transactions between or among any of
K-III and its Restricted Subsidiaries or (vii) allocation of corporate overhead
to Unrestricted Subsidiaries on a basis no less favorable to K-III than such
allocations to Restricted Subsidiaries.
Merger, Consolidation, or Sale of Assets. K-III may not consolidate with,
merge with or into, or transfer all or substantially all of its assets (as an
entirety or substantially as an entirety in one transaction or a series of
related transactions), to any person (except a Restricted Subsidiary with a
positive Consolidated Net Worth, provided that in connection with any merger of
K-III with a Restricted Subsidiary of K-III, no consideration (other than common
stock in the surviving corporation or K-III) shall be issued or distributed to
the shareholders of K-III) or permit any person to merge with or into it unless:
(i) K-III shall be the continuing person, or the person (if other than K-III)
formed by such consolidation or into which K-III is merged or to which the
properties and assets of K-III are transferred shall be a corporation organized
and existing under the laws of the United States or any State thereof or the
District of Columbia and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
of the obligations of K-III under the Notes and Note Indenture; (ii) immediately
after giving effect to such transaction, no Default and no Event of Default
under the Note Indenture shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Consolidated Net Worth of the surviving entity is at least equal to the
Consolidated Net Worth of K-III immediately prior to such transaction; (iv)
immediately after giving effect to such transaction on a pro forma basis, the
Fixed Charge Coverage Ratio of the surviving entity is at least 1:1; provided
that if the Fixed Charge Coverage Ratio of K-III before giving effect to such
transaction is within the range set forth in column (A) below, then the pro
forma Fixed Charge Coverage Ratio of the surviving entity shall be at least
equal to the lesser of (x) the ratio determined by multiplying the percentage
set forth in Column B by the Fixed Charge Coverage Ratio of K-III prior to such
transaction, and (y) the ratio set forth in Column C below:
(A) (B) (C)
- ------------------------------------------------------- --- -----
1.11:1 to 1.99:1....................................... 90% 1.5:1
2.00:1 to 2.99:1....................................... 80% 2.1:1
3.00:1 to 3.99:1....................................... 70% 2.4:1
4.00:1 or more......................................... 60% 2.5:1
Payments for Consent. Neither K-III nor any of its Subsidiaries shall,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Note Indenture or the Notes unless such consideration is offered to be
paid or agreed to be paid to all holders of the Notes which so consent, waive or
agree to amend in the time frame set forth in solicitation documents relating to
such consent, waiver or agreement.
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GUARANTEES
Guarantees. The Notes are fully and unconditionally guaranteed jointly and
severally on a senior basis by each of the domestic Restricted Subsidiaries.
Each Guarantee is enforceable to the fullest extent permitted by law, limited
only to the extent necessary for such Guarantee to not constitute a fraudulent
conveyance. The Guarantees rank pari passu with the guarantees made for the
benefit of the lenders under the Credit Agreements and with guarantees made for
the benefit of the holders of the Outstanding Notes. No Unrestricted Subsidiary
shall become a guarantor of any Indebtedness of K-III or any Restricted
Subsidiaries unless such Unrestricted Subsidiary becomes a guarantor of the
Notes.
Releases of Guarantees. Upon the sale or disposition (by merger or
otherwise) of any Guarantor by K-III or any subsidiary of K-III to any entity
that is not an affiliate of K-III or any of its subsidiaries and which sale or
disposition is otherwise in compliance with the terms of the Note Indenture,
each such Guarantor shall automatically be released from all obligations under
its Guarantee, provided, that each such Guarantor is sold or disposed of for at
least fair market value (evidenced by a resolution of the Board of Directors of
K-III set forth in an Officer's Certificate delivered to the Trustee) (the
foregoing proviso shall not apply to the sale or disposition of a Guarantor in a
foreclosure proceeding to the extent that such proviso would be inconsistent
with the requirements of the Uniform Commercial Code).
The Guarantors. The Guarantors on the date of this Prospectus are set forth
below:
Argus Publishers Corporation K-III Directory Corporation
Bacon's Information, Inc. K-III Holdings Corporation III
Channel One Communications K-III HPC, Inc.
Corporation K-III KG Corporation--Massachusetts
Daily Racing Form, Inc. K-III KG Corporation--New York I
DRF Finance, Inc. K-III KG Corporation--New York II
The Electronics Source Book, Inc. K-III Magazine Corporation
Funk & Wagnalls Yearbook Corp. K-III Magazine Finance Corporation
Haas Publishing Companies, Inc. K-III Prime Corporation
Intermodal Publishing Company, K-III Reference Corporation
Ltd. Krames Communications Incorporated
Intertec Market Reports, Inc. Lifetime Learning Systems, Inc.
Intertec Presentations, Inc. McMullen Argus Publishing, Inc.
Intertec Publishing Corporation MH West, Inc.
The Katharine Gibbs Schools, Inc. Musical America Publishing, Inc.
The Katharine Gibbs Schools of Nelson Publications, Inc.
Montclair, Inc. Newbridge Communications, Inc.
The Katharine Gibbs Schools of Paramount Publishing, Inc.
Norwalk, Inc. PJS Publications, Inc.
The Katharine Gibbs Schools of R.E.R. Publishing Corporation
Piscataway, Inc. Stagebill, Inc.
The Katharine Gibbs Schools of Symbol of Excellence Publishers,
Providence, Inc. Inc.
Tunnell Publications, Inc.
Weekly Reader Corporation
Westcott Communications, Inc.
EVENTS OF DEFAULT AND REMEDIES
The Note Indenture will provide that each of the following constitutes an
"Event of Default": (i) the failure to make any payment of interest on the Notes
when the same becomes due and payable and the continuance of such failure for a
period of 30 days; (ii) the failure to make any payment when due of principal or
premium on the Notes, whether at maturity, or upon acceleration, redemption or
otherwise; (iii) failure by K-III to comply with any of its other agreements in
the Note Indenture or the Notes and such Default continues for 30 days after
receipt of a written notice from the Trustee or holders of at least 25% of the
aggregate principal amount of the Notes then outstanding, specifying such
Default and requiring that it be remedied; (iv) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for
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money borrowed by K-III or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by K-III or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee is now existing or thereafter created in the future,
if either (A) such default is the failure to pay the final scheduled principal
installment in an amount of at least $10 million in respect of any such
Indebtedness on the stated maturity date thereof (after giving effect to any
extension of such maturity date by the holder of such Indebtedness and after the
expiration of any grace period in respect of such final scheduled principal
installment contained in the instrument under which such Indebtedness is
outstanding) or (B) as a result of such default the maturity of such
Indebtedness has been accelerated prior to its express maturity and the
principal amount of such Indebtedness, together with the principal amount of any
other such Indebtedness the maturity of which has been accelerated, aggregates
$20 million or more; provided that an Event of Default shall not be deemed to
occur with respect to any accelerated indebtedness which is repaid or prepaid
within 20 days after such declaration; (v) failure by K-III or any of its
Restricted Subsidiaries to pay certain final judgments that exceed $15 million
individually or $25 million in the aggregate, which judgments are not
discharged, satisfied, stayed, annulled or rescinded within 60 days after their
entry; (vi) certain events of bankruptcy or insolvency with respect to K-III or
any of its Restricted Subsidiaries; and (vii) except as permitted by the Note
Indenture and the Notes, the cessation of the effectiveness of the Guarantees or
the finding in any judicial proceeding that the Guarantees are unenforceable or
invalid or the denial or disaffirmation by any Guarantor of its obligations
under its Guarantee. The term "Default" means any event which is, or after
notice or passage of time or both would be, an Event of Default.
If a Default or an Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to each holder of the Notes a
notice of the Default or Event of Default within 30 days after it occurs or, if
later, within 10 days after such Default or Event of Default becomes known to
the Trustee, unless such Default or Event of Default has been cured. Except in
the case of a Default or Event of Default in the payment of principal of,
premium, if any, or interest on any Note or that results from a failure to
comply with the Change of Control covenant, the Trustee may withhold the notice
if and so long as a committee of its Responsible Officers in good faith
determines that withholding the notice is in the interest of the holders of the
Notes.
If an Event of Default (other than an Event of Default with respect to K-III
resulting from bankruptcy, insolvency or reorganization) occurs and is
continuing, the Trustee by written notice to K-III, or the holders of at least
25% of the principal amount of the Notes then outstanding by written notice to
K-III and the Trustee, may, and such Trustee at the request of such holders
shall, declare all unpaid principal of, premium, if any, and accrued interest on
the Notes to be due and payable, as specified below. Upon a declaration of
acceleration, such principal, premium, if any, and accrued interest shall be due
and payable immediately. If an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization occurs with respect to K-III, all
unpaid principal of, premium, if any, and accrued interest on the Notes then
outstanding shall ipso facto become and be immediately due and payable without
any declaration, notice or other act on the part of the Trustee or any holder.
The holders of at least a majority in principal amount of the Notes by notice to
the Trustee may rescind an acceleration and its consequences upon conditions
provided in the Note Indenture. Subject to certain restrictions set forth in the
Note Indenture, the holders of at least a majority in principal amount of the
outstanding Notes by notice to the Trustee may waive an existing Default or
Event of Default and its consequences (including waivers obtained in connection
with a tender offer or exchange offer for Notes), except a continuing Default or
Event of Default in the payment of principal of, premium, if any, or interest
on, the Notes (including, without limitation, pursuant to any mandatory or
optional redemption obligation under the Note Indenture) or a continuing Default
or Event of Default resulting from the failure to comply with the Change of
Control or Limitations on Asset Sales covenants. When a Default or Event of
Default is waived, it is cured and ceases. A holder of Notes may not pursue any
remedy with respect to the Note Indenture, the Notes or any Guarantee unless:
(1) the holder gives to the Trustee written notice of a continuing Event of
Default; (2) the holders of at least 25% in principal amount of such Notes
outstanding make a written request to the Trustee to pursue the remedy; (3) such
holder or
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holders offer to the Trustee indemnity satisfactory to the Trustee against any
loss, liability or expense (including, without limitation, fees of counsel); (4)
the Trustee does not comply with the request within 30 days after receipt of the
request and the offer of indemnity; and (5) during such 30-day period the
Holders of a majority in principal amount of the outstanding Notes do not give
the Trustee a direction which is inconsistent with the request.
K-III is required to deliver to the Trustee annually a statement regarding
compliance with the Note Indenture, and K-III is required upon becoming aware of
any Default or Event of Default to deliver a statement to the Trustee specifying
such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Note Indenture or the Guarantees or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
the Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the Commission that such a waiver is against public policy.
DEFEASANCE AND DISCHARGE OF THE NOTE INDENTURE AND THE NOTES
If K-III irrevocably deposits, or causes to be deposited, in trust with the
Trustee or the Paying Agent, at any time prior to the stated maturity of the
Notes or the date of redemption of all the outstanding Notes, as trust funds in
trust, money or direct noncallable obligations of or guaranteed by the United
States of America in an amount sufficient (without reinvestment thereof) to pay
timely and discharge the entire principal of the then outstanding Notes and all
interest due thereon to maturity or redemption, the Note Indenture shall cease
to be of further effect as to all outstanding Notes (except, among other things,
as to (i) remaining rights of registration of transfer and substitution and
exchange of the Notes, (ii) rights of holders to receive payment of principal of
and interest on the Notes, and (iii) the rights, obligations and immunities of
the Trustee).
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Note
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and K-III
may require a holder to pay any taxes and fees required by law or permitted by
the Note Indenture. K-III is not required to transfer or exchange any Note
selected for redemption. Also, K-III is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the Note Indenture, the
Guarantees or the Notes may be amended or supplemented with the consent of the
holders of at least 51% in principal amount of the Notes then outstanding, and
any existing default or compliance with any provision of the Note Indenture or
the Notes may be waived with the consent of the holders of 51% in principal
amount of the then outstanding Notes.
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder of Notes) (i) reduce
the principal amount of Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption or purchase
price in
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connection with repurchases of the Notes with proceeds of Asset Sales, upon a
Change of Control or otherwise, (iii) reduce the rate of or change the time for
payment of interest on any Note, (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the Notes or that
resulted from a failure to comply with the Change of Control or Limitations on
Asset Sales covenants (except a rescission of acceleration of the Notes by the
holders of at least 51% in aggregate principal amount of the Notes), (v) make
any Notes payable in money other than that stated in the Notes, (vi) make any
change in the provisions of the Note Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal of
or interest on the Notes, (vii) waive a redemption payment with respect to any
Note or (viii) make any change in the foregoing.
Notwithstanding the foregoing, without the consent of any holder of the
Notes, K-III and the Trustee may amend or supplement the Note Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of K-III's obligations to holders of the Notes in the
case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the holders of the Notes or that does not
adversely affect the legal rights under the Note Indenture of any such holder,
or to comply with requirements of the Commission in order to effect or maintain
the qualification of the Note Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Note Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within ninety days, apply to the Commission for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Note Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of its own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Note
Indenture at the request of any of the holders of the Notes, unless they shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Note Indenture
without charge by writing to: K-III Communications Corporation, 745 Fifth
Avenue, New York, NY 10151, Attention: Beverly C. Chell, Esq.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form, without coupons. The New Notes will be deposited with, or on
behalf of, The Depository Trust Company, New York, New York ("DTC"), and
registered in the name of Cede & Co. ("Cede") as DTC's nominee in the form of
one or more global New Notes.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Note Indenture.
Reference is made to the Note Indenture for a full disclosure of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
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"Adjusted Consolidated Net Income" means, with respect to any person for any
period, (i) the Consolidated Net Income of such person for such period, plus
(ii) in the case of K-III and its Restricted Subsidiaries, all cash received
during such period by K-III or any Restricted Subsidiary from its Unrestricted
Subsidiaries from the payment of dividends or distributions (including tax
sharing payments and loans or advances which are junior in right of payment to
the Notes and have a longer Average Life than the Notes), but only to the extent
such cash payments are not otherwise included in "Adjusted Consolidated Net
Income." Each item of Adjusted Consolidated Net Income will be determined in
conformity with GAAP, except that, for purposes of the application of Accounting
Principles Board Opinions Nos. 16 and 17, such person may select any
amortization practice allowable by GAAP up to 40 years, notwithstanding the use
of a different amortization in such person's consolidated financial statements.
Any designation of a Subsidiary of K-III as a Restricted Subsidiary or
Unrestricted Subsidiary at or prior to the time of the calculation of Adjusted
Consolidated Net Income of a Subsidiary will be treated as if it had occurred at
the beginning of the applicable period.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. A person shall be deemed to "control"
(including the correlative meanings, the terms "controlling," "controlled by,"
and "under common control with") another person if the controlling person
possesses, directly or indirectly, the power to direct or cause the direction of
the management or policies of the controlled person, whether through ownership
of voting securities, by agreement or otherwise.
"Asset Sale" means, with respect to any person, the sale, lease, conveyance,
disposition or other transfer by the referent person of any of its assets
(including by way of a sale-and-leaseback and including the sale or other
transfer of any of the Capital Stock of any Subsidiary of the referent person);
provided, that notwithstanding the foregoing, the term "Asset Sale" shall not
include the sale, lease, conveyance, disposition or other transfer of (i) with
respect to any Unrestricted Subsidiary, (A) any assets not constituting all or
substantially all of the assets of any Net Cash Flow Unrestricted Subsidiary and
(B) any Capital Stock or any assets of any Restricted Payment Unrestricted
Subsidiary, (ii) all or substantially all of the assets of K-III, as permitted
pursuant to the Merger, Consolidation or Sale of Assets covenant, (iii) any
assets between K-III, any Restricted Subsidiary or any Unrestricted Subsidiary,
(iv) any sale, conveyance, disposition or other transfer of (A) cash and cash
equivalents, (B) inventory in the ordinary course of business and (C) any other
tangible or intangible asset, in each case in the ordinary course of business of
K-III or its Restricted Subsidiaries or (v) the sale or discount, in each case
without recourse, of accounts receivable arising in the ordinary course of
business, but only in connection with the compromise or collection thereof.
"Average Life" means, as of the date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment (assuming the exercise by the obligor of
such debt security of all unconditional (other than as to the giving of notice)
extension options of each such scheduled payment date) of such debt security
multiplied by the amount of such principal payment by (ii) the sum of all such
principal payments.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease which
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than KKR and
its Affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than (A) 35 percent (35%) of the total voting power of
the then outstanding voting stock of K-III and (B) the total voting power of the
then outstanding voting stock of K-III beneficially owned by KKR and its
Affiliates or (ii)
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during any period of two consecutive calendar years, individuals who at the
beginning of such period constituted K-III's Board of Directors (together with
any new directors whose election by K-III's Board of Directors or whose
nomination for election by K-III's shareholders was approved by a vote of at
least two-thirds of the Directors then still in office who either were Directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
directors then in office.
"Consolidated Cash Flow" means, with respect to any person for any period,
the Adjusted Consolidated Net Income of such person for such period plus (a)
provision for taxes based on income or profits to the extent such provision for
taxes was included in computing Adjusted Consolidated Net Income, plus (b)
consolidated Interest Expense, whether paid or accrued, to the extent such
expense was deducted in computing Adjusted Consolidated Net Income (including
amortization of original issue discount and non-cash interest payments), plus
(c) depreciation, amortization and other non-cash charges to the extent such
depreciation, amortization and other non-cash charges were deducted in computing
Adjusted Consolidated Net Income (including amortization of goodwill and other
intangibles); provided, with respect to the calculation of a person's Debt to
Consolidated Cash Flow Ratio, that if, during such period, (i) such person or
any of its Subsidiaries shall have made any Asset Sales (other than, in the case
of K-III and its Restricted Subsidiaries, sales of the Capital Stock of or any
assets of Unrestricted Subsidiaries which constitute Asset Sales), Consolidated
Cash Flow of such person for such period shall be reduced by an amount equal to
the Consolidated Cash Flow (if positive), to the extent such Consolidated Cash
Flow was included in computing Consolidated Cash Flow, directly attributable to
the assets or Capital Stock which are the subject of such Asset Sales for such
period or increased by an amount equal to the Consolidated Cash Flow (if
negative), to the extent such Consolidated Cash Flow was included in computing
Consolidated Cash Flow, directly attributable thereto for such period and (ii)
such person or any of its Subsidiaries (other than, in the case of K-III and its
Restricted Subsidiaries, Unrestricted Subsidiaries) has made any acquisition of
assets or Capital Stock (occurring by merger or otherwise), including, without
limitation, any acquisition of assets or Capital Stock occurring in connection
with a transaction causing a calculation to be made hereunder, Consolidated Cash
Flow of such person shall be calculated (notwithstanding clause (ii) of the
definition of Consolidated Net Income) as if such acquisition of assets or
Capital Stock (including the incurrence of any Indebtedness in connection with
any such acquisition and the application of the proceeds thereof) took place on
the first day of such period. Consolidated Cash Flow of such person shall be
determined for any period without regard to changes in Working Capital of such
person and its Subsidiaries during such period.
"Consolidated Fixed Charges" means, with respect to any person for any
period, the (a) consolidated Interest Expense, whether paid or accrued, to the
extent such expense was deducted in computing Adjusted Consolidated Net Income
(including amortization of original issue discount and non-cash interest
payments) and (b) the amount of all cash dividend payments on all series of
preferred stock other than cash dividends on preferred stock of Unrestricted
Subsidiaries and cash dividends paid to such person or its Subsidiaries;
provided, that if during such period (i) such person or any of its Subsidiaries
shall have made any Asset Sales (other than, in the case of K-III and its
Restricted Subsidiaries, sales of the Capital Stock of or any assets of
Unrestricted Subsidiaries which constitute Asset Sales), Consolidated Fixed
Charges of such person for such period shall be reduced by an amount equal to
the Consolidated Fixed Charges directly attributable to the assets which are the
subject of such Asset Sales for such period and (ii) such person or any of its
Subsidiaries (other than, in the case of K-III and its Restricted Subsidiaries,
Unrestricted Subsidiaries) has made any acquisition of assets or Capital Stock
(occurring by merger or otherwise), including, without limitation, any
acquisition of assets or Capital Stock occurring in connection with the
transaction causing a calculation to be made hereunder, Consolidated Fixed
Charges of such person shall be calculated as if such acquisition of assets or
Capital Stock (including the incurrence of any Indebtedness in connection with
any such acquisition and the application of the proceeds thereof) took place on
the first day of such period.
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"Consolidated Net Cash Flow" means, with respect to any person for any
period, the aggregate Consolidated Cash Flow of such person for such period,
minus (a) capital expenditures of such person and its Subsidiaries (other than,
in the case of K-III and its Restricted Subsidiaries, Unrestricted
Subsidiaries), minus (b) the aggregate amount of all cash dividends paid by such
person and its Subsidiaries (other than, in the case of K-III and its Restricted
Subsidiaries, Unrestricted Subsidiaries) to holders of its Capital Stock other
than to such person or its Subsidiaries, minus (c) the aggregate amount of all
taxes based on income or profits paid by such person and its Subsidiaries (other
than, in the case of K-III and its Restricted Subsidiaries, Unrestricted
Subsidiaries) other than to such person or its Subsidiaries minus (d) cash
Interest Expense of such person and its Subsidiaries (other than, in the case of
K-III and its Restricted Subsidiaries, Unrestricted Subsidiaries), minus (e)
repayments of principal of Indebtedness by such person and its Subsidiaries
(other than, in the case of K-III and its Restricted Subsidiaries, Unrestricted
Subsidiaries), minus (f) any increases in Working Capital of such person and its
Subsidiaries (other than, in the case of K-III and its Restricted Subsidiaries,
Unrestricted Subsidiaries), and plus (g) any decreases in Working Capital of
such person and its Subsidiaries (other than, in the case of K-III and its
Restricted Subsidiaries, Unrestricted Subsidiaries), in each case, for such
period and determined in accordance with GAAP; provided that in calculating the
amount referred to in clause (f) or (g) above, as the case may be, for any
period during which K-III or any of its Restricted Subsidiaries has consummated
an Asset Sale (other than, in the case of K-III and its Restricted Subsidiaries,
sales of Capital Stock of, cash or any assets of Unrestricted Subsidiaries which
constitute Asset Sales), the portion of the change in Working Capital for such
period attributable to the entity or business sold or purchased shall be based
(x) in the case of such an Asset Sale, on the change in Working Capital
attributable to the entity or business sold from the first day of such period to
the date of the consummation of such sale and (y) in the case of an acquisition,
on the change in Working Capital attributable to the entity or business acquired
from the date of consummation of such acquisition to the last day of such
period.
"Consolidated Net Income" means, with respect to any person for any period,
the aggregate net income (or loss) of such person and its Subsidiaries (other
than, in the case of K-III and its Restricted Subsidiaries, Unrestricted
Subsidiaries) for such period, on a consolidated basis, determined in accordance
with GAAP, provided that (i) the net income (or loss) of any person which is not
a Subsidiary or is accounted for by the equity method of accounting shall be
included only to the extent of the amount of cash dividends or distributions
(including tax sharing payments and loans or advances which are junior in right
of payment to the Notes and have a longer Average Life than the Notes) paid to
the referent person or a Subsidiary of the referent person, (ii) except to the
extent includable pursuant to the foregoing clause (i), the income (or loss) of
any person accrued prior to the date it becomes a Subsidiary of such person or
is merged into or consolidated with such person or any of its Subsidiaries or
that person's assets are acquired by such person or any of its Subsidiaries
shall be excluded, and (iii) any gains or losses attributable to Asset Sales net
of related tax costs or tax benefits, as the case may be, shall be excluded.
"Consolidated Net Worth" means, at any date of determination, the sum of the
Capital Stock and additional paid-in capital plus retained earnings (or minus
accumulated deficit) of the referent person and its Subsidiaries on a
consolidated basis, less amounts attributable to Redeemable Stock, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52), except that all effects of the
application of Accounting Principles Board Opinions Nos. 16 and 17 and related
interpretations shall be disregarded.
"New Chase Credit Agreement" means, the New Chase Credit Agreement,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, in each case as amended, modified,
renewed, refunded or refinanced from time to time, as permitted in clause (i) of
the second paragraph of the Incurrence of Indebtedness covenant.
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"Currency Agreement" means the obligations of any person pursuant to any
foreign exchange contract, currency swap agreement or other similar agreement or
arrangement designed to protect such person or any of its subsidiaries against
fluctuations in currency values.
"Debt to Consolidated Cash Flow Ratio" means the ratio of all Indebtedness
of K-III and its Restricted Subsidiaries to Consolidated Cash Flow.
"Equity Interests" means Capital Stock, warrants, options or other rights to
acquire Capital Stock (but excluding any debt security which is convertible
into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of K-III and its Subsidiaries
(other than the Credit Agreements and the Outstanding Notes) in existence on the
date of the Note Indenture, until such amounts are repaid.
"Fixed Charge Coverage Ratio" means the ratio of Consolidated Cash Flow to
Consolidated Fixed Charges.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are applicable to the circumstances as of the date of the Note Indenture.
"Indebtedness" of any person is defined as any indebtedness, contingent or
otherwise, in respect of borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement obligations with respect thereto) or
representing the balance deferred and unpaid of the purchase price of any
property (including pursuant to financing leases), if and to the extent any of
the foregoing indebtedness would appear as a liability upon a balance sheet of
such person prepared in accordance with GAAP (except that any such balance that
constitutes a trade payable and/or an accrued liability arising in the ordinary
course of business shall not be considered Indebtedness), and shall also
include, to the extent not otherwise included, any Capital Lease Obligations,
the maximum fixed repurchase price of any Redeemable Stock, indebtedness secured
by a Lien to which the property or assets owned or held by such person is
subject, whether or not the obligations secured thereby shall have been assumed,
guarantees of items that would be included within this definition to the extent
of such guarantees (exclusive of whether such items would appear upon such
balance sheet), and net liabilities in respect of Currency Agreements and
Interest Rate Agreements. For purposes of the preceding sentence, the maximum
fixed repurchase price of any Redeemable Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable Stock as if such Redeemable Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to the Note
Indenture, provided that if such Redeemable Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Redeemable
Stock. The amount of Indebtedness of any person at any date shall be without
duplication (i) the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability of any such contingent
obligations at such date and (ii) in the case of Indebtedness of others secured
by a Lien to which the property or assets owned or held by such person is
subject, the lesser of the fair market value at such date of any asset subject
to a Lien securing the Indebtedness of others and the amount of the Indebtedness
secured. For the purpose of determining the aggregate Indebtedness of K-III and
its Restricted Subsidiaries, such Indebtedness shall exclude the Indebtedness of
any Unrestricted Subsidiary of K-III or any Unrestricted Subsidiary of a
Restricted Subsidiary.
"Interest Expense" means, with respect to any person, for any period, the
aggregate amount of interest in respect of Indebtedness (including all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing and the net cost (benefit)
associated with Interest Rate Agreements, and excluding amortization of deferred
finance fees and
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interest recorded as accretion in the carrying value of liabilities (other than
Indebtedness) recorded at a discounted value) and all but the principal
component of rentals in respect of Capital Lease Obligations, paid, accrued or
scheduled to be paid or accrued by such person during such period.
"Interest Rate Agreements" means the obligations of any person pursuant to
any interest rate swap agreement, interest rate collar agreement or other
similar agreement or arrangement designed to protect such person or any of its
subsidiaries against fluctuations in interest rates.
"Investment" means any direct or indirect advance, loan (other than advances
to customers in the ordinary course of business, which are recorded as accounts
receivable on the balance sheet of any person or its Subsidiaries) or other
extension of credit or capital contribution to (by means of any transfer of cash
or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities issued by any other person. For the
purposes of the Restricted Payments and Investment in Unrestricted Subsidiaries
covenants described above, (i) "Investment" shall include and be valued at the
fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at fair market value at the time of such
transfer, in each case as determined by the Board of Directors of K-III in good
faith.
"Lien" means any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind, whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give any security interest in and any filing or other agreement to give
any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction).
"Net Cash Flow Unrestricted Subsidiary" means an Unrestricted Subsidiary
which is not a Restricted Payment Unrestricted Subsidiary.
"Net Proceeds" shall mean, with respect to any Asset Sale, the aggregate
cash proceeds (including any cash received by way of deferred payment pursuant
to a note receivable issued in connection with such Asset Sale, other than the
portion of such deferred payment constituting interest, and including any
amounts received as disbursement or withdrawals from any escrow or similar
account established in connection with any such Asset Sale, but, in either such
case, only as and when so received) received by K-III or any of its Subsidiaries
in respect of such Asset Sale, net of (i) the cash expenses of such sale
(including, without limitation, the payment of principal, premium, if any, and
interest on Indebtedness required to be paid as a result of such Asset Sale
(other than the Senior Notes and amounts repaid pursuant to the New Chase Credit
Agreement) and legal, accounting and investment banking fees and sales
commissions), (ii) taxes paid or payable as a result thereof, (iii) any portion
of cash proceeds which K-III determines in good faith should be reserved for
post-closing adjustments, it being understood and agreed that on the day that
all such post-closing adjustments have been determined, the amount (if any) by
which the reserved amount in respect of such Asset Sale exceeds the actual
post-closing adjustments payable by K-III or any of its Subsidiaries shall
constitute Net Proceeds on such date and (iv) any relocation expenses and
pension, severance and shutdown costs incurred as a result thereof.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims which are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory Liens of landlords and carriers',
warehousemen's, mechanics', suppliers', materialmen's, repairmen's, or other
like Liens arising in the ordinary
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course of business and with respect to amounts not yet delinquent or being
contested in good faith by appropriate proceedings, if a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor; (iii) Liens incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
obligations, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a like nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the business of K-III or any of its
Subsidiaries incurred in the ordinary course of business; (vi) Liens (including
extensions and renewals thereof) upon real or tangible personal property
acquired after the date of the Note Indenture, provided that (a) any such Lien
is created solely for the purpose of securing Indebtedness representing, or
incurred to finance, refinance or refund, the cost (including the cost of
construction) of the item of property subject thereto, (b) the principal amount
of the Indebtedness secured by such Lien does not exceed 100% of such cost, (c)
such Lien does not extend to or cover any other property other than such item of
property and any improvements on such item and (d) the incurrence of such
Indebtedness is permitted by the Incurrence of Indebtedness covenant; (vii)
Liens securing reimbursement obligations with respect to letters of credit which
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (viii) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (ix) judgment and attachment Liens not
giving rise to an Event of Default; (x) leases or subleases granted to others
not interfering in any material respect with the business of K-III or any of its
Subsidiaries; (xi) Liens encumbering customary initial deposits and margin
deposits, and other Liens incurred in the ordinary course of business and which
are within the general parameters customary in the industry, in each case
securing Indebtedness under Interest Rate Agreements and Currency Agreements;
(xii) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of K-III or its
Subsidiaries; (xiii) Liens arising out of consignment or similar arrangements
for the sale of goods entered into by K-III or any of its Subsidiaries in the
ordinary course of business of K-III and its Subsidiaries; (xiv) any interest or
title of a lessor in the property subject to any Capital Lease Obligation or
operating lease; (xv) Liens arising from filing Uniform Commercial Code
financing statements regarding leases; (xvi) Liens permitted by the Old Chase
Credit Agreement, Old Revolving Credit Agreement and BONY Credit Agreement as in
effect on the date of the Note Indenture; (xvii) Liens securing Indebtedness
described in clause (xii) of the second paragraph of the Incurrence of
Indebtedness covenant; (xviii) Liens between K-III and any Restricted Subsidiary
or between Restricted Subsidiaries; (xix) Liens securing letters of credit in an
amount not to exceed $50 million in the aggregate at any one time; and (xx)
Liens in an amount not to exceed $25 million in the aggregate at any one time.
"Redeemable Stock" means any Equity Interest which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable before the stated maturity of the Notes), or upon the happening of
any event, matures or is mandatorily redeemable, in whole or in part, prior to
the stated maturity of the Notes, or is, by its terms or upon the happening of
any event, redeemable at the option of the holder thereof, in whole or in part,
at any time prior to the stated maturity of the Notes except for Equity
Interests of K-III issued to present and former members of management of K-III
and its Subsidiaries pursuant to subscription and option agreements in effect on
the date of the Note Indenture and common stock and options of K-III issued to
future members of management of K-III and its Subsidiaries pursuant to
subscription agreements executed subsequent to the date of the Note Indenture
containing provisions for the repurchase of such common stock and options upon
death, disability or termination of employment of such persons which are
substantially identical to those contained in the subscription agreements in
effect on the date of the Note Indenture; provided that for purposes of the
"Limitation on Restricted Payments" covenant and that for purposes
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of the definition of Indebtedness, Redeemable Stock does not include the Senior
Preferred Stock and the Series B Preferred Stock.
"Restricted Payment Unrestricted Subsidiary" means an Unrestricted
Subsidiary which was capitalized exclusively with a permitted Restricted Payment
or with the proceeds from the issuance of an Equity Interest by K-III or with
the proceeds of the sale of stock or substantially all of the assets of any
other Unrestricted Subsidiary which was capitalized with such funds to the
extent that a liquidating dividend is paid to K-III or any Restricted Subsidiary
from the proceeds of such sale.
"Restricted Subsidiary" means a Subsidiary of K-III which at the time of
determination is not an Unrestricted Subsidiary. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that immediately after giving effect to such designation, K-III could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of the
Incurrence of Indebtedness covenant on a pro forma basis taking into account
such designation.
"Subsidiary" of any person means any corporation, association or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by such person or one or more of
the other Subsidiaries of that person or a combination thereof.
"Transfers" means (i) any payment of interest on Indebtedness, dividends or
repayments of loans or advances and (ii) any other transfers of assets, in each
case from an Unrestricted Subsidiary to K-III or any of its Restricted
Subsidiaries.
"Unrestricted Subsidiary" means (i) any Subsidiary of K-III which at the
time of determination is an Unrestricted Subsidiary (as designated by the Board
of Directors of K-III, as provided below) and (ii) any subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
K-III (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns, or holds any Lien on, any property of, any other Subsidiary of K-III which
is not a Subsidiary of the Subsidiary to be so designated; provided that (a)
K-III certifies that such designation complies with the Limitation on Restricted
Payments and Investments in Unrestricted Subsidiaries covenants, and (b) the
Subsidiary to be so designated has not at the time of designation, and does not
thereafter, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable with respect to any Indebtedness pursuant to which the
lender has recourse to any of the assets of K-III or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that immediately after giving effect to
such designation, K-III could incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of the Incurrence of Indebtedness covenant on a
pro forma basis taking into account such designation.
"Working Capital" means, with respect to any person for any period, the
current assets of such person and its Subsidiaries (other than, in the case of
K-III and its Restricted Subsidiaries, Unrestricted Subsidiaries) on a
consolidated basis, after excluding therefrom cash and cash equivalents and
deferred income taxes, less the current liabilities of such person and its
Subsidiaries (other than, in the case of K-III and its Restricted Subsidiaries,
Unrestricted Subsidiaries) on a consolidated basis, after excluding therefrom,
in each case to the extent otherwise included therein, all short-term
Indebtedness for borrowed money, the current portion of any long-term
Indebtedness, liabilities arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in the
case of daylight overdrafts, which will not be, and will not be deemed to be,
inadvertent) drawn against insufficient funds in the ordinary course of
business, provided that such liabilities are extinguished within three business
days of this incurrence, and deferred income taxes of such person and its
Subsidiaries (other than, in the case of K-III and its Restricted Subsidiaries,
Unrestricted Subsidiaries).
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DESCRIPTION OF PREFERRED STOCK AND
10% SUBORDINATED DEBENTURES
The form and terms of the New Preferred Stock are the same as the form and
terms of the Old Preferred Stock except that (i) the New Preferred Stock will
have been registered under the Securities Act and thus will not bear restrictive
legends restricting their transfer pursuant to the Securities Act and (ii)
holders of New Preferred Stock will not be entitled to certain rights of holders
of the Old Preferred Stock under the Registration Rights Agreement which will
terminate upon the consummation of the Preferred Stock Exchange Offer. The form
and terms of the New Subordinated Debentures will be the same as the Old
Subordinated Debentures, except that the New Subordinated Debentures will have
been registered under the Securities Act. The summary contained herein of
certain provisions of the Preferred Stock and the 10% Subordinated Debentures
does not purport to be complete and is qualified in its entirety by reference to
the provisions of the Certificate of Designations for the Old Preferred Stock,
the Certificate of Designations for the New Preferred Stock (together, the
"Certificates of Designations") and the 10% Subordinated Debenture Indenture
(which relates to both the Old Subordinated Debentures and the New Subordinated
Debentures) relating thereto.
THE PREFERRED STOCK
GENERAL
Two million shares of each of the New Preferred Stock and the Old Preferred
Stock with a liquidation preference of $100.00 per share will be or have been,
respectively, authorized pursuant to the respective Certificates of
Designations. The Preferred Stock ranks junior in right of payment to all
liabilities and obligations (whether or not for borrowed money) of K-III (other
than common stock of K-III, the Series B Preferred Stock and any preferred stock
of K-III which by its terms is on parity with or junior to the Series C
Preferred Stock). In addition, creditors and stockholders of K-III's
subsidiaries have priority over the Preferred Stock with respect to claims on
the assets of such subsidiaries. See "Risk Factors--Subordination of Preferred
Stock and 10% Subordinated Debentures; Holding Company Structure." The Preferred
Stock is fully paid and non-assessable and holders thereof have no preemptive
rights in connection therewith.
Neither the stated value nor the liquidation preference of the Preferred
Stock is necessarily indicative of the price at which shares of Preferred Stock
will actually trade, and the Preferred Stock may trade at prices below its
stated value. The market price of the Preferred Stock can be expected to
fluctuate with changes in the market and economic conditions, the financial
condition and prospects of the Company and other factors that generally
influence the market prices of securities.
RANK
The Preferred Stock's dividend rights and rights on liquidation, winding-up
and dissolution, rank (i) senior to all classes of Common Stock, each other
class of capital stock or series of preferred stock established by the board of
directors of K-III which does not expressly provide that it ranks senior to or
on a parity with the Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution (collectively referred to with the
Common Stock as "Junior Securities"); (ii) on a parity with the Series B
Preferred Stock and any Future Parity Securities, which expressly provides that
such series will rank on a parity with the Preferred Stock as to dividend rights
and rights on liquidation, winding-up and dissolution (the Series B Preferred
Stock and the Future Parity Securities collectively referred to as "Parity
Securities"); and (iii) junior to the Senior Preferred Stock and each other
class of capital stock or series of preferred stock issued by K-III established
after the initial issuance of the Preferred Stock by the Board of Directors of
K-III the terms of which specifically provide that such series will rank senior
to the Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution (collectively referred to as "Senior Securities").
The Preferred Stock is subject to the issuance of series of Junior Securities,
Parity Securities and Senior Securities. As of March 31, 1996, 4,000,000 shares
of
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the Senior Preferred Stock ($100,000,000 aggregate liquidation preference) were
issued and outstanding and 1,405,397 shares of the Series B Preferred Stock
($140,539,700 aggregate liquidation preference), which include dividends paid in
kind from time to time thereon to such date, were issued and outstanding. See
"Description of Capital Stock of K-III."
DIVIDENDS
Holders of Preferred Stock are entitled to receive, when, as and if declared
by the board of directors of K-III, out of funds legally available therefor,
dividends in cash on the Preferred Stock, at an annual rate equal to 10%.
Dividends on the Old Preferred Stock have accrued and are cumulative from the
original date of issuance thereof to the date on which shares of Old Preferred
Stock are surrendered and shall be paid on the first dividend payment date after
the date the New Preferred Stock is exchanged for the Old Preferred Stock.
Dividends on the New Preferred Stock will accrue and will be cumulative from the
date the New Preferred Stock is exchanged for the Old Preferred Stock. Dividends
on the Preferred Stock are payable quarterly in arrears on February 1, May 1,
August 1 and November 1 of each year, commencing on May 1, 1996. Dividends,
whether or not declared, will cumulate without interest until declared and paid.
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Securities for any period unless full cumulative
dividends shall have been paid or set apart for such payment on the Preferred
Stock. If full dividends are not so paid, the Preferred Stock shall share
dividends pro rata with the Parity Securities. No dividends may be paid or set
apart for such payment on Junior Securities (except dividends on Junior
Securities in additional shares of Junior Securities) and no Junior Securities
may be repurchased, redeemed or otherwise retired nor may funds be set apart for
payment with respect thereto, if full dividends have not been paid on the
Preferred Stock. Accumulated unpaid dividends will not bear interest.
OPTIONAL REDEMPTION
The Preferred Stock may be redeemed (subject to contractual and other
restrictions with respect thereto and to the legal availability of funds
therefor) at any time after February 1, 2001, in whole or in part, at the option
of K-III, at the redemption prices set forth below plus accrued and unpaid
dividends (including an amount equal to a prorated dividend from the last
payment date to the redemption date):
REDEMPTION
YEAR PRICE
- ------------------------------------------------ ----------
2001............................................ $ 105.00
2002............................................ 104.00
2003............................................ 103.00
2004............................................ 102.00
2005............................................ 101.00
2006 and thereafter............................. 100.00
In addition, up to $100 million of the Preferred Stock may be redeemed at
the option of K-III at any time on or prior to February 1, 1999 at a price per
share of $110.00, plus accrued and unpaid dividends, out of the net proceeds of
one or more Public Equity Offerings, provided such redemption occurs within 180
days of such Public Equity Offering.
In the event of partial redemptions of Preferred Stock, the shares to be
redeemed will be determined pro rata, except that K-III may redeem such shares
held by any holders of fewer than 100 shares (or shares held by holders who
would hold less than 100 shares as a result of such redemption), as may be
determined by K-III. The Credit Agreements, and the Senior Note Indentures, the
Exchange Debenture Indenture and the Senior Preferred Stock restrict the ability
of K-III to redeem the
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Preferred Stock. See "Description of Certain Indebtedness" and "Description of
Capital Stock of K-III--The Senior Preferred Stock."
MANDATORY REDEMPTION
On February 1, 2008, K-III will be required to redeem (subject to
contractual and other restrictions with respect thereto and to the legal
availability of funds therefor) all outstanding shares of Preferred Stock at a
price equal to the liquidation preference thereof plus all accumulated dividends
to the date of redemption.
PROCEDURE FOR REDEMPTION
On and after a redemption date, unless K-III defaults in the payment of the
redemption price, dividends will cease to accrue on shares of Preferred Stock
called for redemption and all rights of holders of such shares will terminate
except for the right to receive the redemption price. K-III will send a written
notice of redemption by first class mail to each holder of record of shares of
Preferred Stock, not fewer than 30 days nor more than 60 days prior to the date
fixed for such redemption. Shares of Preferred Stock issued and reacquired will,
upon compliance with the applicable requirements of Delaware law, have the
status of authorized but unissued shares of preferred stock of K-III
undesignated as to series and may with any and all other authorized but unissued
shares of preferred stock of K-III be designated or redesignated and issued or
reissued, as the case may be, as part of any series of preferred stock of K-III,
except that such shares may not be reissued or sold as shares of Preferred
Stock.
EXCHANGE
K-III may, at its option, on any scheduled dividend payment date, exchange
the Preferred Stock, in whole but not in part, for the 10% Subordinated
Debentures; provided that the Senior Preferred Stock is no longer outstanding on
the Exchange Date. See "--The 10% Subordinated Debentures" below for the terms
of the 10% Subordinated Debentures. Holders of Preferred Stock so exchanged will
be entitled to receive the principal amount of 10% Subordinated Debentures equal
to $100.00 for each $100.00 of liquidation preference of Preferred Stock held by
such holders at the time of exchange plus an amount per share in cash equal to
all accrued but unpaid dividends thereon to the date of exchange (including an
amount equal to a pro rated dividend from the last dividend payment date to the
exchange date). The 10% Subordinated Debentures will be issuable only in
denominations of $1,000 and integral multiples thereof. An amount in cash may be
paid to holders for any principal amount otherwise issuable which is less than
$1,000. Following such exchange, all dividends on the Preferred Stock will cease
to accrue, the rights of the holders of Preferred Stock as stockholders of K-III
shall cease and the person or persons entitled to receive the 10% Subordinated
Debentures issuable upon exchange shall be treated as the registered holder or
holders of such 10% Subordinated Debentures. Notice of exchange will be mailed
at least 30 days but not more than 60 days prior to the date of exchange to each
holder of Preferred Stock. See "--The 10% Subordinated Debentures" below.
In addition, under applicable provisions of the federal bankruptcy law or
comparable provisions of state fraudulent transfer law, if at the time of
K-III's payment of dividends on, redemption of or exchange of 10% Subordinated
Debentures for, the Preferred Stock (i) K-III is insolvent or rendered insolvent
by reason thereof, (ii) K-III is engaged in a business or transaction for which
the Company's remaining assets constitute unreasonably small capital or (iii)
K-III intends to incur or believes that it would incur debts beyond its ability
to pay such debts as they mature, then the relevant distribution to holders of
Preferred Stock could be avoided in whole or in part as a fraudulent conveyance
and such holders could be required to return the same or equivalent amounts to
or for the benefit of existing or future creditors of K-III. The measure of
insolvency for purposes of the foregoing will vary depending on the law of the
jurisdiction which is being applied. Generally K-III would be considered
insolvent if the sum of its debts, including contingent liabilities, were
greater than the fair saleable value of its
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assets at a fair valuation or if the present fair saleable value of its assets
were less than the amount that would be required to pay its probable liability
on its existing debts, including contingent liabilities, as they become absolute
and mature.
The Credit Agreements and the Senior Note Indentures and the Exchange
Debenture Indenture restrict K-III's ability to exchange the Preferred Stock for
the 10% Subordinated Debentures. The Credit Agreements permit such exchange so
long as no default or event of default thereunder exists or would result
therefrom (including, on a pro forma basis, under the financial covenants). The
Senior Note Indentures would treat the issuance of the 10% Subordinated
Debentures as the incurrence of new debt and the issuance would, therefore, be
subject to the debt incurrence covenant contained therein. The Senior Note
Indentures and the Exchange Debenture Indenture would prohibit such exchange if
there is a default or event of default thereunder.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
K-III, holders of Preferred Stock will be entitled to be paid out of the assets
of K-III available for distribution $100.00 per share, plus any accrued and
unpaid dividends thereon to the date fixed for liquidation, dissolution or
winding-up (including an amount equal to a prorated dividend from the last
dividend payment date to the date fixed for liquidation, dissolution or
winding-up), before any distribution is made on any Junior Securities,
including, without limitation, Common Stock. If upon any voluntary or
involuntary liquidation, dissolution or winding-up of K-III, the amounts payable
with respect to the Preferred Stock and all other Parity Securities are not paid
in full, the holders of the Preferred Stock and the Parity Securities will share
equally and ratably in any distribution of assets of K-III in proportion to the
full liquidation preference to which each is entitled. After payment of the full
amount of the liquidation preferences to which they are entitled, the holders of
shares of Preferred Stock will not be entitled to any further participation in
any distribution of assets of K-III. However, neither the sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of K-III
nor the consolidation or merger of K-III with one or more corporations shall be
deemed to be a liquidation, dissolution or winding-up of K-III.
The Certificates of Designations for the Preferred Stock do not contain any
provision requiring funds to be set aside to protect the liquidation preference
of the Preferred Stock, although such liquidation preference will be
substantially in excess of the par value of such shares of Preferred Stock. In
addition, K-III is not aware of any provision of Delaware law or any controlling
decision of the courts of the State of Delaware (the state of incorporation of
the Company) that requires a restriction upon the surplus of K-III solely
because the liquidation preference of the Preferred Stock will exceed its par
value. Consequently, there will be no restriction upon the surplus of K-III
solely because the liquidation preference of the Preferred Stock will exceed the
par value and there will be no remedies available to holders of the Preferred
Stock before or after the payment of any dividend, other than in connection with
the liquidation of K-III, solely by reason of the fact that such dividend would
reduce the surplus of K-III to an amount less than the difference between the
liquidation preference and the Preferred Stock and its par value.
VOTING RIGHTS
Holders of the Preferred Stock have no voting rights, except as provided by
law or as set forth in the Certificates of Designations for the Preferred Stock.
The Certificates of Designations provide that in the event that dividends on the
Preferred Stock are in arrears and unpaid for six consecutive quarterly periods,
the Board of Directors of K-III will be increased by two directors and the
holders of the majority of the Preferred Stock, voting together as a class, will
be entitled to elect two directors of the expanded Board of Directors. Such
voting rights will continue until such time as all dividends in arrears on the
Preferred Stock are paid in full.
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Under Delaware law, holders of the preferred stock are entitled to vote as a
class upon a proposed amendment to the certificate of incorporation, whether or
not entitled to vote thereon by the certificate of incorporation, if the
amendment would increase or decrease the aggregate number of authorized shares
of such class, increase or decrease the par value of the shares of such class,
or alter or change the powers, preferences, or special rights of the shares of
such class so as to affect them adversely.
MERGER, CONSOLIDATION AND SALE OF ASSETS
Unless the requisite holders of any Senior Security or any indebtedness of
the Company have consented or granted a waiver with respect to such merger,
consolidation or transfer of all or substantially all of the Company's assets,
K-III may not merge or consolidate with or into or transfer all or substantially
all of its assets (as an entirety in one transaction or a series of related
transactions), to any person without the consent of the holders of a majority of
the issued and outstanding shares of Preferred Stock together with any
outstanding shares of Future Parity Securities entitled to vote thereon, voting
as one class, unless (i) K-III shall be the continuing person, or the person (if
other than the Company) formed by such consolidation or into which K-III is
merged or to which the properties and assets of K-III are transferred shall be a
corporation organized and existing under the laws of the United States or any
State thereof or the District of Columbia and the Preferred Stock shall be
converted into or exchanged for and shall become shares of such successor or
resulting company, having in respect of such successor or resulting company
substantially the same powers, preferences and relative participating, optional
or other special rights, and the qualifications, limitations or restrictions
thereon, that the Preferred Stock had immediately prior to such transaction and
(ii) immediately after giving effect to such transaction on a pro forma basis,
the Consolidated Net Worth of the surviving entity is at least equal to the
lesser of (a) the Consolidated Net Worth of the Company immediately prior to
such transaction and (b) the Consolidated Net Worth of the Company on the first
date any Preferred Stock was issued. "Consolidated Net Worth" means, at any date
of determination, the sum of the capital stock of K-III and additional paid-in
capital plus retained earnings (or minus accumulated deficit) of K-III and its
Subsidiaries on a consolidated basis, less amounts attributable to stock that is
redeemable prior to the scheduled final redemption of the Preferred Stock, each
item to be determined in conformity with GAAP (excluding the effects upon K-III
and the person with which K-III is merging or consolidating or to which K-III is
selling all or substantially all its assets of foreign currency exchange
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52), except that all effects upon K-III and the person
with which K-III is merging or consolidating or to which K-III is selling all or
substantially all its assets of the application of Accounting Principles Board
Opinions Nos. 16 and 17 and related interpretations and all reasonable costs
incurred in connection with or arising out of such merger, consolidation or
transfer of assets shall be disregarded. If any fee is paid to any holder of
Senior Securities or indebtedness in connection with obtaining the foregoing
consent or waiver, K-III shall pay to the holders of the Preferred Stock a fee
equal to the aggregate liquidation preference thereof times a fraction, the
numerator of which shall be the fee paid to such holders of Senior Securities
and indebtedness and the denominator of which shall be the aggregate liquidation
preference and aggregate principal amount of all Senior Securities and
indebtedness, respectively, with respect to which such fee was paid. If the
above-described payment in cash (or any portion thereof) would violate any
agreement to which the Company is a party or any terms of any security of the
Company then outstanding, then such payment or portion thereof may be made in
additional shares of Preferred Stock, and if making such payment in additional
shares of Preferred Stock would constitute such a violation, then such payment
or portion thereof may be postponed until the terms of such agreement or
security would permit such payment in cash or Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for the Preferred
Stock.
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THE 10% SUBORDINATED DEBENTURES
GENERAL
The 10% Subordinated Debentures will, if and when issued, be issued under
the 10% Subordinated Debenture Indenture, to be dated as of the date of first
issuance (the "Exchange Date") of the 10% Subordinated Debentures, between K-III
and The Bank of New York (the "Subordinated Debenture Trustee"). The New
Subordinated Debentures and the Old Subordinated Debentures would be issued
under the same Indenture. The terms of the 10% Subordinated Debentures include
those stated in the 10% Subordinated Debenture Indenture and those made part of
the 10% Subordinated Debenture Indenture by reference to the Trust Indenture
Act. The 10% Subordinated Debentures are subject to all such terms, and holders
of the 10% Subordinated Debentures are referred to the 10% Subordinated
Debenture Indenture and the Trust Indenture Act for a statement thereof. A copy
of the proposed form of the 10% Subordinated Debenture Indenture is available
upon request. The following summary of certain provisions of the 10%
Subordinated Debenture Indenture does not purport to be complete and is
qualified in its entirety by reference to the 10% Subordinated Debenture
Indenture, including the definitions therein of certain terms used below.
The 10% Subordinated Debentures will be issued in registered form, without
coupons, only in principal amounts of $1,000 and integral multiples thereof. The
10% Subordinated Debentures will represent general unsecured obligations of
K-III, and holders of the 10% Subordinated Debentures will rank junior in right
of payment to holders of Senior Indebtedness. The 10% Subordinated Debentures
are limited in aggregate principal amount to $200,000,000.
Each 10% Subordinated Debenture will mature on February 1, 2008 and will
bear interest from the date of issuance at the rate of 10% per annum, payable
quarterly on February 1, May 1, August 1, and November 1, commencing with the
first of such dates to occur after the Exchange Date.
Interest on the 10% Subordinated Debentures will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
original date of issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. The 10% Subordinated Debentures will be
payable both as to principal and interest at the office or agency of K-III
maintained for such purpose within or without the City of New York, or, at the
option of K-III, payment of interest may be made by check mailed to the holders
of the 10% Subordinated Debentures at their respective addresses set forth in
the register of holders of the 10% Subordinated Debentures. Until otherwise
designated by K-III, the office maintained by K-III for such purpose shall be
the office of the Trustee.
RANKING
The right to payment of principal and interest on the 10% Subordinated
Debentures will be subordinated to the prior payment in full of all "Senior
Indebtedness." "Senior Indebtedness" is defined as all present or future
Indebtedness, including all Indebtedness incurred under the Credit Agreements,
the Senior Note Indentures and the Exchange Debenture Indenture, created,
assumed, incurred or guaranteed by K-III (and all renewals, extensions and
refundings thereof), unless by its terms such Indebtedness is not senior to the
10% Subordinated Debentures. Senior Indebtedness does not include any
Indebtedness of K-III to any of its subsidiaries or trade indebtedness.
Substantially all of the operations of K-III are conducted through its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors and creditors holding guarantees issued by such subsidiaries, will
have priority with respect to the assets and earnings of such subsidiaries over
the claims of creditors of K-III, including holders of the 10% Subordinated
Debentures, even though such obligations do not constitute Senior Indebtedness.
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The amount of senior indebtedness (including indebtedness and other current
and non-current liabilities of K-III's subsidiaries) as of March 31, 1996, on a
pro forma basis, was approximately $2,048 million. None of such indebtedness was
secured.
The 10% Subordinated Debenture Indenture provides that no payment of
principal of or interest on the 10% Subordinated Debentures, whether pursuant to
the terms of the 10% Subordinated Debentures or otherwise, may be made (i) if a
default in payment of any Senior Indebtedness occurs and has not been cured or
waived, (ii) for a period of 180 days upon the occurrence of a default (other
than a payment default) in respect of Senior Indebtedness and for successive
periods of 180 days if the default is continuing at the end of such 180 day
period or another default (other than a payment default) in respect of Senior
Indebtedness has occurred or (iii) upon the maturity of any Senior Indebtedness,
prior to the payment of all Obligations with respect to Senior Indebtedness that
is then due and payable. In addition, upon the acceleration of the 10%
Subordinated Debentures prior to their stated maturity, holders of the Senior
Indebtedness will receive payment in full before any payment will be made to
holders of the 10% Subordinated Debentures. By reason of such subordination, in
the event of insolvency, holders of the Senior Indebtedness will receive payment
in full prior to any payment being made to holders of 10% Subordinated
Debentures.
OPTIONAL REDEMPTION
On and after February 1, 2001 and on and after a Change of Control of K-III,
the 10% Subordinated Debentures will be subject to redemption at the option of
K-III, in whole or in part, upon not less than 30 nor more than 60 days' notice,
at the redemption prices (expressed as percentages of the principal amount) set
forth below plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning February 1
of the years indicated below.
YEAR PERCENTAGE
- ------------------------------------------------ ----------
2001............................................ 105%
2002............................................ 104
2003............................................ 103
2004............................................ 102
2005............................................ 101
2006 and thereafter............................. 100
In addition, at any time on or prior to February 1, 1999, up to $100 million
of the 10% Subordinated Debentures may be redeemed at a redemption price of 110%
of the principal amount thereof, plus accrued and unpaid interest, out of the
net proceeds of one or more Public Equity Offerings, provided such redemption
occurs within 180 days of such Public Equity Offering.
The Senior Note Indentures prohibit such redemption or prepayment unless the
Company has built a sufficient basket for such redemption or prepayment.
The redemption prices in an optional redemption upon a Change of Control or
upon a Public Equity Offering will in all cases be equal to or higher than the
price applicable to a repurchase upon a Change of Control required by a holder.
If K-III were to effect an optional Change of Control redemption before the
Change of Control Payment Date (as defined), holders that had previously
tendered 10% Subordinated Debentures to K-III for repurchase could withdraw such
tenders prior to the Change of Control Payment Date so as to participate in the
optional redemption. However, K-III would have no obligation to announce such an
optional Change of Control redemption prior to the closing of the mandatory
Change of Control Offer.
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CHANGE OF CONTROL
Holders' Right to Require Repurchase Upon Change of Control. Upon the
occurrence of a Change of Control, subject to the two last sentences of this
paragraph, each holder shall have the right to require the repurchase of such
holder's 10% Subordinated Debentures pursuant to the offer described below (the
"Change of Control Offer") at a purchase price equal to 101% of the aggregate
principal amount of such 10% Subordinated Debentures plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control Payment"). If
there is a Change of Control under the 10% Subordinated Debenture Indenture
there will also be a Change of Control under the Exchange Debenture Indenture,
the Class B Debenture Indenture and the Senior Note Indentures and, upon the
earlier of 30 days from the Change of Control and the date payment is required
for any tendered Senior Notes, Exchange Debentures, Class B Subordinated
Debentures or 10% Subordinated Debentures indebtedness under the New Chase
Credit Agreement will be accelerated. Within the later of 40 days following any
Change of Control and the date that the foregoing conditions are satisfied,
K-III shall mail a notice to each holder stating: (1) that the Change of Control
Offer is being made pursuant to the "Change of Control" covenant of the 10%
Subordinated Debenture Indenture and that all 10% Subordinated Debentures
tendered will be accepted for payment; (2) the purchase price and the purchase
date (which shall be no earlier than 30 days nor later than 40 days from the
date such notice is mailed) (the "Change of Control Payment Date"); (3) that any
10% Subordinated Debentures not tendered will continue to accrue interest; (4)
that, unless K-III defaults in the payment of the Change of Control Payment, all
10% Subordinated Debentures accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of Control Payment
Date; (5) that holders electing to have any 10% Subordinated Debentures
purchased pursuant to a Change of Control Offer will be required to surrender
the 10% Subordinated Debentures, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the 10% Subordinated Debenture completed, to
the Paying Agent (as defined in the 10% Subordinated Debenture Indenture) at the
address specified in the notice prior to the close of business on the Business
Day preceding the Change of Control Payment Date; (6) that holders will be
entitled to withdraw their election if the Paying Agent receives, not later than
the close of business on the third Business Day preceding the Change of Control
Payment Date, a telegram, telex, facsimile transmission or letter setting forth
the name of the holder, the principal amount of the 10% Subordinated Debentures
delivered for purchase, and a statement that such holder is withdrawing his
election to have such 10% Subordinated Debentures purchased; and (7) that
holders whose 10% Subordinated Debentures are being purchased only in part may
be issued new 10% Subordinated Debentures equal in principal amount to the
unpurchased portion of the 10% Subordinated Debentures surrendered; provided
that each 10% Subordinated Debenture purchased and each such new 10%
Subordinated Debenture issued by K-III will be in a principal amount of $1,000
or integral multiples thereof. Notwithstanding the occurrence of a Change of
Control, K-III shall not be required to repurchase the 10% Subordinated
Debentures unless it shall have either repaid all outstanding Senior
Indebtedness or obtained the requisite consents, if any, under all agreements
governing all such outstanding Senior Indebtedness to permit the repurchase of
the 10% Subordinated Debentures. If any fee is paid to the holders of Senior
Indebtedness in connection with obtaining their consent to the repurchase of the
10% Subordinated Debentures, K-III shall pay the holders of the 10% Subordinated
Debentures a fee equal to the principal amount of the 10% Subordinated
Debentures times a fraction the numerator of which shall be the aggregate fee
paid to such holders of Senior Indebtedness and the denominator of which shall
be the aggregate of all Senior Indebtedness with respect to which such fee was
paid.
On the Change of Control Payment Date, K-III will, to the extent lawful, (1)
accept for payment 10% Subordinated Debentures or portions thereof tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all 10% Subordinated
Debentures or portions thereof so tendered and (3) deliver or cause to be
delivered to the Subordinated Debenture Trustee, 10% Subordinated Debentures so
accepted together with an
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officers' certificate stating the 10% Subordinated Debentures or portions
thereof tendered to K-III. The Paying Agent shall promptly mail to each holder
of 10% Subordinated Debentures so accepted, payment in an amount equal to the
purchase price for such 10% Subordinated Debentures, and the Subordinated
Debenture Trustee shall promptly authenticate and mail to such holder a new 10%
Subordinated Debenture equal in principal amount to any unpurchased portion of
the 10% Subordinated Debentures surrendered; provided that each such new 10%
Subordinated Debenture shall be in a principal amount of $1,000 or integral
multiples thereof. K-III will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
Optional Redemption Upon Change of Control. In addition to the rights set
forth under "Optional Redemption," the 10% Subordinated Debentures will be
redeemable, at the option of K-III, in whole or in part at any time within 160
days after a Change of Control upon not less than 30 nor more than 60 days'
prior notice to each holder of 10% Subordinated Debentures to be redeemed, at a
redemption price equal to the sum of (i) the then outstanding principal amount
thereof plus (ii) accrued and unpaid interest, if any, to the redemption date
plus (iii) the Applicable Premium.
"Applicable Premium" with respect to a 10% Subordinated Debenture is defined
as the greater of (i) 1.0% of the then outstanding principal amount of such 10%
Subordinated Debenture and (ii) the excess of (A) the present value of the
required interest and principal payments due on such 10% Subordinated Debenture,
computed using a discount rate equal to the Treasury Rate plus the Applicable
Spread, over (B) the then outstanding principal amount of such 10% Subordinated
Debenture.
"Applicable Spread", for purposes of the 10% Subordinated Debenture
Indenture, is defined as 100 basis points.
"Treasury Rate", for purposes of the 10% Subordinated Debenture Indenture,
is defined as the yield to maturity at the time of computation of United States
Treasury securities with a constant maturity (as compiled by and published in
the most recent Federal Reserve Statistical Release H.15 (519) which has become
publicly available at least two business days prior to the date fixed for
prepayment (or, if such Statistical Release is no longer published, any publicly
available source of similar market data)) most nearly equal to the then
remaining Average Life of the 10% Subordinated Debentures; provided, that if the
Average Life of the 10% Subordinated Debentures is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given, except
that if the Average Life of the 10% Subordinated Debentures is less than one
year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
SELECTION AND NOTICE
If less than all of the 10% Subordinated Debentures are to be redeemed at
any time, selection of the 10% Subordinated Debentures for redemption will be
made by the Subordinated Debenture Trustee in compliance with the requirements
of the principal national securities exchange, if any, on which the 10%
Subordinated Debentures are listed or, if the 10% Subordinated Debentures are
not listed on a national securities exchange, on a pro rata basis, by lot or by
such method as the Subordinated Debenture Trustee shall deem fair and
appropriate, provided that no 10% Subordinated Debentures of $1,000 or less
shall be redeemed in part. Notice of redemption shall be mailed by first class
mail at least 30 but not more than 60 days before the redemption date to each
holder of 10% Subordinated Debentures to be redeemed at its registered address.
If any 10% Subordinated Debenture is to be redeemed in part only, the notice of
redemption that relates to such 10% Subordinated Debenture shall state the
portion of the principal amount thereof to be redeemed. A new 10% Subordinated
Debenture in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder
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thereof upon cancellation of the original 10% Subordinated Debenture. On and
after the redemption date, interest ceases to accrue on 10% Subordinated
Debentures or portions of them called for redemption.
CERTAIN COVENANTS
Limitation on Restricted Payments. K-III will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on account of K-III's or any of its
Restricted Subsidiaries' Capital Stock or other Equity Interests (other than (A)
dividends or distributions payable in Equity Interests of K-III or such
Restricted Subsidiary or (B) dividends or distributions payable to K-III or any
of its Restricted Subsidiaries) or (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of K-III or any Restricted Subsidiary
(other than any such Equity Interests owned by K-III or any of its Restricted
Subsidiaries) (the foregoing actions set forth in clauses (i) and (ii) being
referred to as "Restricted Payments"), if, at the time of such Restricted
Payment, a default or event of default under the 10% Subordinated Debenture
Indenture shall have occurred and be continuing or will occur as a consequence
thereof.
"Restricted Subsidiary" for purposes of the 10% Subordinated Debenture
Indenture, means a Subsidiary of K-III which at the time of determination is not
an Unrestricted Subsidiary. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary.
"Unrestricted Subsidiary" for purposes of the 10% Subordinated Debenture
Indenture, means (i) any Subsidiary of K-III which at the time of determination
is an Unrestricted Subsidiary (as designated by the Board of Directors, as
provided below) and (ii) any subsidiary of an Unrestricted Subsidiary. The Board
of Directors may designate any Subsidiary of K-III (including any newly acquired
or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns, or holds any Lien on, any
property of, any other Subsidiary of K-III which is not a Subsidiary of the
Subsidiary to be so designated; provided that the Subsidiary to be so designated
has not at the time of designation, and does not thereafter, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable with
respect to any Indebtedness pursuant to which the lender has recourse to any of
the assets of K-III or any of its Restricted Subsidiaries. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary.
Transactions with Affiliates. Neither K-III nor any of its Restricted
Subsidiaries will make any loan, advance, guarantee or capital contribution to,
or for the benefit of, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or for the benefit of, or purchase or lease any
property or assets from, or enter into or amend any contract, agreement or
understanding with, or for the benefit of, (i) any person (or any Affiliate of
such person) holding 10% or more of any class of Capital Stock of K-III or any
of its Restricted Subsidiaries or (ii) any Affiliate of K-III or any of its
Restricted Subsidiaries (each an "Affiliate Transaction"), except on terms that
are no less favorable to K-III or the relevant Restricted Subsidiary, as the
case may be, than those that could have been obtained in a comparable
transaction on an arm's length basis from a person that is not such a holder or
Affiliate; provided that a transaction with any such holder (or Affiliate
thereof) or any Affiliate of K-III or any of its Restricted Subsidiaries shall
be deemed to be on terms that are no less favorable to K-III or such Restricted
Subsidiary than those obtainable at the time of the transaction from a person
who is not such a holder or Affiliate if (a) K-III or such Restricted Subsidiary
delivers to the Subordinated Debenture Trustee a written opinion of a nationally
recognized investment banking firm stating that the transaction is fair to K-III
or such Restricted Subsidiary from a financial point of view or (b) a
disinterested majority of the Board of Directors of K-III or such Restricted
Subsidiary approves the transaction; and provided, further, that, the foregoing
restriction shall not apply to (i) the payment of an annual fee to KKR for the
rendering of management consulting and financial services to K-III and its
Restricted Subsidiaries in an aggregate amount which is reasonable in relation
thereto, (ii) the payment of transaction fees to KKR in amounts which are in
accordance with past practices for the
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rendering of financial advice and services in connection with acquisitions,
dispositions and financings by K-III and its Subsidiaries, (iii) the payment of
reasonable and customary regular fees to directors of K-III and its Subsidiaries
who are not employees of K-III or its Restricted Subsidiaries, (iv) loans to
officers, directors and employees of K-III and its Subsidiaries for business or
personal purposes and other loans and advances to such officers, directors and
employees for travel, entertainment, moving and other relocation expenses made
in the ordinary course of business of K-III and its Subsidiaries, (v) any
Restricted Payments not prohibited by the Restricted Payments covenant in the
Senior Note Indentures, the Exchange Debenture Indenture or Series B Debenture
Indenture, or any Investment not prohibited by the Investments in Unrestricted
Subsidiaries covenant in the Senior Note Indentures, (vi) transactions between
or among any of K-III and its Restricted Subsidiaries or (vii) allocation of
corporate overhead to Unrestricted Subsidiaries on a basis no less favorable to
K-III than such allocations to Restricted Subsidiaries.
Merger, Consolidation, or Sale of Assets. K-III may not consolidate with,
merge with or into, or transfer all or substantially all of its assets (as an
entirety or substantially as an entirety in one transaction or a series of
related transactions) to any person or permit any person to merge with or into
it unless: (i) K-III shall be the continuing person, or the person (if other
than K-III) formed by such consolidation or into which K-III is merged or to
which the properties and assets of K-III are transferred shall be a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia and shall expressly assume, by a supplemental
indenture, executed and delivered to the Subordinated Debenture Trustee, in form
satisfactory to the Subordinated Debenture Trustee, all of the obligations of
K-III under the 10% Subordinated Debentures and the 10% Subordinated Debenture
Indenture; (ii) immediately after giving effect to such transaction, no Default
and no Event of Default under the 10% Subordinated Debenture Indenture shall
have occurred and be continuing; and (iii) immediately after giving effect to
such transaction on a pro forma basis, the Consolidated Net Worth of the
surviving entity is at least equal to the Consolidated Net Worth of K-III
immediately prior to such transaction. "Consolidated Net Worth" means, for
purposes of the 10% Subordinated Debenture Indenture, at any date of
determination, the sum of the Capital Stock and additional paid-in capital plus
retained earnings (or minus accumulated deficit) of the referent person and its
Subsidiaries on a consolidated basis, less amounts attributable to Redeemable
Stock, each item to be determined in conformity with GAAP (excluding the effects
of foreign currency exchange adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52), except that all
effects of the application of Accounting Principles Board Opinions Nos. 16 and
17 and related interpretations shall be disregarded. "Redeemable Stock" means
any Equity Interest issued after the date of the Note Indenture which, by its
terms (or by the terms of any security into which it is convertible or by which
it is exchangeable before the stated maturity of the 10% Subordinated
Debentures), or upon the happening of any event, matures or is mandatorily
redeemable, in whole or in part, prior to the stated maturity of the 10%
Subordinated Debentures, or is, by its terms or upon the happening of any event,
redeemable at the option of the holder thereof, in whole or in part, at any time
prior to the stated maturity of the 10% Subordinated Debentures.
EVENTS OF DEFAULT AND REMEDIES THEREOF
The 10% Subordinated Debenture Indenture will provide that each of the
following will constitute an "Event of Default" with respect to the 10%
Subordinated Debentures: (i) the failure to make any payment of interest on any
of the 10% Subordinated Debentures when the same becomes due and payable and the
continuance of any such failure for 30 days and for five days after written
notice of default is given to K-III by the holders of at least 51% in principal
amount of the 10% Subordinated Debentures following the expiration of such
30-day period, (ii) the failure to make any payment of principal or premium on
any of the 10% Subordinated Debentures when the same shall become due and
payable, whether at maturity, upon acceleration, redemption or otherwise, and
such Default continues for a period of ten days, (iii) the failure by K-III to
comply with any of its other agreements in the 10%
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Subordinated Debenture Indenture or the 10% Subordinated Debentures and such
Default continues for 60 days after receipt of a written notice from the
Subordinated Debenture Trustee or holders of at least 51% of the principal
amount of the 10% Subordinated Debentures outstanding, specifying such Default
and requiring that it be remedied, (iv) the occurrence of an event of default
with respect to any Indebtedness for borrowed money of K-III or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by K-III or any
of its Restricted Subsidiaries) having an outstanding principal amount of $22.5
million or more individually or $45 million or more in the aggregate which has
caused the acceleration of such Indebtedness and such Indebtedness has not been
discharged or such acceleration has not been rescinded within 60 days after such
acceleration, and (v) certain events of bankruptcy, insolvency or
reorganization. The term "Default" means any event, act or condition that is, or
after notice or the passage of time or both would be, an Event of Default.
If a Default or an Event of Default occurs and is continuing and if it is
known to the Subordinated Debenture Trustee, the Subordinated Debenture Trustee
shall mail to each holder of the 10% Subordinated Debentures notice of the
Default or Event of Default within 90 days after it occurs or, if later, within
10 days after such Default or Event of Default becomes known to the Subordinated
Debenture Trustee, unless such Default or Event of Default has been cured.
Except in the case of a Default or Event of Default in the payment of principal
of, premium, if any, or interest on any 10% Subordinated Debenture or that
results from a failure to comply with the Change of Control covenant, the
Subordinated Debenture Trustee may withhold the notice if and so long as a
committee of its trust officers in good faith determines that withholding the
notice is in the interest of the holders of the 10% Subordinated Debentures.
If an Event of Default (other than an Event of Default with respect to K-III
resulting from bankruptcy, insolvency or reorganization) occurs and is
continuing, the Subordinated Debenture Trustee or the holders of at least 51% in
principal amount of the 10% Subordinated Debentures then outstanding, by written
notice to K-III and to the agents under the Credit Agreements, the trustees
under the Senior Note Indentures and the Exchange Debenture Indenture (and to
the Subordinated Debenture Trustee if such notice is given by the holders of 10%
Subordinated Debentures) may, and the Subordinated Debenture Trustee at the
request of such holders of 10% Subordinated Debentures shall, declare all unpaid
principal of premium, if any, and accrued interest on the 10% Subordinated
Debentures to be due and payable upon the first to occur of an acceleration
under any of the Credit Agreements, any of the Senior Notes or the Exchange
Debentures or 15 business days after the receipt by K-III, such agent and such
trustees of such written notice to the extent that the Event of Default is
continuing. If an Event of Default resulting from certain events of bankruptcy,
insolvency or reorganization occurs with respect to K-III, all unpaid principal
of, premium, if any, and accrued interest on the 10% Subordinated Debentures
then outstanding shall ipso facto become and be immediately due and payable
without any declaration, notice or other act on the part of the Subordinated
Debenture Trustee or any holder. The holders of at least 51% in principal amount
of the 10% Subordinated Debentures by notice to the Subordinated Debenture
Trustee may rescind an acceleration and its consequences upon conditions
provided in the 10% Subordinated Debenture Indenture. Subject to certain
restrictions set forth in the 10% Subordinated Debenture Indenture, the holders
of at least 51% in principal amount of the outstanding 10% Subordinated
Debentures by notice to the Subordinated Debenture Trustee may waive an existing
Default or Event of Default and its consequences (including waivers obtained in
connection with a tender offer or exchange offer for 10% Subordinated
Debentures), except a continuing Default or Event of Default in the payment of
principal of, premium, if any, or interest on, such 10% Subordinated Debentures
(including, without limitation, pursuant to any mandatory or optional redemption
obligation under the 10% Subordinated Debenture Indenture) or a continuing
Default or Event of Default that resulted from the failure to comply with the
Change of Control covenant. When a Default or Event of Default is waived, it is
cured and ceases. A holder of 10% Subordinated Debentures may not pursue any
remedy with respect to the 10% Subordinated Debenture Indenture or the 10%
Subordinated Debentures unless: (1) the holder gives to the Subordinated
Debenture Trustee written
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notice of a continuing Event of Default; (2) the holders of at least 51% in
principal amount of such 10% Subordinated Debentures outstanding make a written
request to the Subordinated Debenture Trustee to pursue the remedy; (3) such
holder or holders offer to the Subordinated Debenture Trustee indemnity
satisfactory to the Subordinated Debenture Trustee against any loss, liability
or expense; (4) the Subordinated Debenture Trustee does not comply with the
request within 30 days after receipt of the request and the offer of indemnity;
and (5) during such 30-day period the holders of at least 51% in principal
amount of the outstanding 10% Subordinated Debentures do not give the
Subordinated Debenture Trustee a direction which is inconsistent with the
request.
K-III is required to deliver to the Subordinated Debenture Trustee annually
a statement regarding compliance with the 10% Subordinated Debenture Indenture
and K-III is required upon becoming aware of any Default or Event of Default to
deliver a statement to the Subordinated Debenture Trustee specifying such
Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of K-III, as
such, shall have any liability for any obligations of K-III under the 10%
Subordinated Debentures or the 10% Subordinated Debenture Indenture or for any
claim based on, in respect of, or by reason of, such obligations of their
creations. Each holder of the 10% Subordinated Debentures by accepting a 10%
Subordinated Debenture waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the 10% Subordinated
Debentures. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
DEFEASANCE AND DISCHARGE OF THE 10% SUBORDINATED DEBENTURE INDENTURE AND THE 10%
SUBORDINATED DEBENTURES
If the Company irrevocably deposits, or causes to be deposited, in trust
with the Subordinated Debenture Trustee or the Paying Agent, at any time prior
to the stated maturity of the 10% Subordinated Debentures or the date of
redemption of all the outstanding 10% Subordinated Debentures, as trust funds in
trust, money or direct noncallable obligations of or guaranteed by the United
States of America sufficient (without reinvestment thereof) to pay timely and
discharge the entire principal of the then outstanding 10% Subordinated
Debentures and all interest due thereon to maturity or redemption, and if such
deposit does not violate the subordination provisions of the 10% Subordinated
Debenture Indenture, the 10% Subordinated Debenture Indenture shall cease to be
of further effect as to all outstanding 10% Subordinated Debentures (except,
among other things, as to (i) remaining rights of registration of transfer,
substitution and exchange of 10% Subordinated Debentures, (ii) rights of holders
to receive payment of principal of and interest on the 10% Subordinated
Debentures, and (iii) the rights, obligations and immunities of the Subordinated
Debenture Trustee).
The Credit Agreements and the Senior Note Indentures restrict K-III from
defeasing the Exchange Subordinated Debentures.
TRANSFER AND EXCHANGE
A holder may transfer or exchange 10% Subordinated Debentures in accordance
with the 10% Subordinated Debenture Indenture. The Registrar and the
Subordinated Debenture Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents, and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
10% Subordinated Debenture Indenture. K-III is not required to transfer or
exchange any 10% Subordinated Debenture selected for redemption. Also, K-III is
not required to transfer or exchange any 10% Subordinated Debenture for a period
of 15 days before a selection of 10% Subordinated Debentures to be redeemed.
The registered holder of a 10% Subordinated Debenture will be treated as its
owner for all purposes.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the 10% Subordinated
Debenture Indenture or the 10% Subordinated Debentures may be amended or
supplemented with the written consent of the holders of at least 51% in
principal amount of the 10% Subordinated Debentures then outstanding (including
consents obtained in connection with a tender offer or exchange offer for 10%
Subordinated Debentures), and any existing default under or compliance with any
provision of the 10% Debenture Indenture or the 10% Subordinated Debentures may
be waived with the consent of the holders of 51% in principal amount of the then
outstanding 10% Subordinated Debentures (including waivers obtained in
connection with a tender offer or exchange offer for 10% Subordinated
Debentures).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any 10% Subordinated Debentures held by a non-consenting holder
of 10% Subordinated Debentures) (i) reduce the principal amount of 10%
Subordinated Debentures whose holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any 10%
Subordinated Debenture or alter the provisions with respect to the redemption
price in connection with repurchases of 10% Subordinated Debentures upon a
Change of Control or otherwise, (iii) reduce the rate of or change the time for
payments of interest on any 10% Subordinated Debenture, (iv) waive a Default or
Event of Default in the payment of the principal of, or premium, if any, or
interest on 10% Subordinated Debentures or that resulted from a failure to
comply with the Change of Control covenant (except a rescission of acceleration
of the 10% Subordinated Debentures by the holders of at least 51% in aggregate
principal amount of the 10% Subordinated Debentures), (v) make any 10%
Subordinated Debenture payable in money other than that stated in the 10%
Subordinated Debenture Indenture, (vi) make any change in the subordination
provisions of the 10% Subordinated Debenture Indenture that adversely affects
the rights of any 10% Subordinated Debenture holder, (vii) make any change in
the provisions of the 10% Subordinated Debenture Indenture relating to waivers
of past defaults or the rights of holders of 10% Subordinated Debentures to
receive payments of principal of or interest on the 10% Subordinated Debentures,
(viii) waive a redemption payment with respect to any 10% Subordinated Debenture
or (ix) make any change in the foregoing.
Notwithstanding the foregoing, without the consent of any holder of the 10%
Subordinated Debentures, K-III and the Subordinated Debenture Trustee may amend
or supplement the Debenture Indenture or 10% Subordinated Debentures to cure any
ambiguity, defect or inconsistency, to provide for uncertificated 10%
Subordinated Debentures in addition to or in place of certificated 10%
Subordinated Debentures, to provide for the assumption of K-III's obligations to
holders of the 10% Subordinated Debentures in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the holders of the 10% Subordinated Debentures or that does not
adversely affect the legal rights under the 10% Subordinated Debenture Indenture
of any such holder, or to comply with requirements of the Commission in order to
effect or maintain the qualification of the 10% Subordinated Debenture Indenture
under the Trust Indenture Act.
CONCERNING THE SUBORDINATED DEBENTURE TRUSTEE
The 10% Subordinated Debenture Indenture contains certain limitations on the
rights of the Subordinated Debenture Trustee, should it become a creditor of
K-III, to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Subordinated Debenture Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within ninety days, apply to the Commission for permission to
continue or resign.
The holders of a majority in principal amount of the then outstanding 10%
Subordinated Debentures will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the
Subordinated Debenture Trustee, subject to certain exceptions.
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The 10% Subordinated Debenture Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Subordinated Debenture
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, the Subordinated Debenture Trustee will be under no obligation to
exercise any of its rights or powers under the 10% Subordinated Debenture
Indenture at the request of any of the holders of the 10% Subordinated
Debentures, unless they shall have offered to the Subordinated Debenture Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Preferred Stock will be issued in
fully registered form, without coupons. The New Preferred Stock will be
deposited with, or on behalf of, DTC, and registered in the name of Cede as
DTC's nominee in the form of one or more global New Preferred Stock
certificates.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the 10% Subordinated
Debenture Indenture. Reference is made to the 10% Subordinated Debenture
Indenture for a full disclosure of all such terms, as well as any other
capitalized terms used herein for which no definition is provided.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. A person shall be deemed to "control"
(including the correlative meanings, the terms "controlling," "controlled by,"
and "under common control with") another person if the controlling person
possesses, directly or indirectly, the power to direct or cause the direction of
the management or policies of the controlled person, whether through ownership
of voting securities, by agreement or otherwise.
"Average Life" means, as of the date of determination, with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment (assuming the exercise by the obligor of
such debt security of all unconditional (other than as to the giving of notice)
extension options of each such scheduled payment date) of such debt security
multiplied by the amount of such principal payment by (ii) the sum of all such
principal payments.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease which
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than KKR and
its Affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than (A) 35 percent (35%) of the total voting power of
the then outstanding voting stock of K-III and (B) the total voting power of the
then outstanding voting stock of K-III beneficially owned by KKR and its
Affiliates or (ii) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted K-III's Board of
Directors (together with any new directors whose election by K-III's Board of
Directors or whose nomination for election by K-III's shareholders was approved
by a vote of at least two-thirds of the Directors then still in office who
either were Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the directors then in office.
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"Currency Agreement" means the obligations of any person pursuant to any
foreign exchange contract, currency swap agreement or other similar agreement or
arrangement designed to protect such person or any of its subsidiaries against
fluctuations in currency values.
"Equity Interests" means Capital Stock, warrants, options or other rights to
acquire Capital Stock (but excluding any debt security which is convertible
into, or exchangeable for, Capital Stock).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Princples Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are applicable to the circumstances as of the date of the 10% Subordinated
Debenture Indenture.
"Indebtedness" of any person is defined as any indebtedness, contingent or
otherwise, in respect of borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement obligations with respect thereto) or
representing the balance deferred and unpaid of the purchase price of any
property (including pursuant to financing leases), if and to the extent any of
the foregoing indebtedness would appear as a liability upon a balance sheet of
such person prepared in accordance with GAAP (except that any such balance that
constitutes a trade payable and/or an accrued liability arising in the ordinary
course of business shall not be considered Indebtedness), and shall also
include, to the extent not otherwise included, any Capital Lease Obligations,
the maximum fixed repurchase price of any Redeemable Stock, indebtedness secured
by a Lien to which the property or assets owned or held by such person is
subject, whether or not the obligations secured thereby shall have been assumed,
guarantees of items that would be included within this definition to the extent
of such guarantees (exclusive of whether such items would appear upon such
balance sheet), and net liabilities in respect of Currency Agreements and
Interest Rate Agreements. For purposes of the preceding sentence, the maximum
fixed repurchase price of any Redeemable Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable Stock as if such Redeemable Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to the 10%
Subordinated Debenture Indenture, provided that if such Redeemable Stock is not
then permitted to be repurchased, the repurchase price shall be the book value
of such Redeemable Stock. The amount of Indebtedness of any person at any date
shall be without duplication (i) the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability of any
such contingent obligations at such date and (ii) in the case of Indebtedness of
others secured by a Lien to which the property or assets owned or held by such
person is subject, the lesser of the fair market value at such date of any asset
subject to a Lien securing the Indebtedness of others and the amount of the
Indebtedness secured. For the purpose of determining the aggregate Indebtedness
of K-III and its Restricted Subsidiaries, such Indebtedness shall exclude the
Indebtedness of any Unrestricted Subsidiary of K-III or any Unrestricted
Subsidiary of a Restricted Subsidiary.
"Interest Rate Agreements" means the obligations of any person pursuant to
any interest rate swap agreement, interest rate collar agreement or other
similar agreement or arrangement designed to protect such person or any of its
subsidiaries against fluctuations in interest rates.
"Lien" means any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind, whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give any security interest in and any filing or other agreement to give
any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction).
"Public Equity Offering" means an underwritten public offering of primary
shares of K-III's Common Stock (or any other class of common stock hereinafter
duly authorized by K-III) pursuant to a
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registration statement (other than a registration statement on form S-8 or S-4
or successor forms) filed with the Commission in accordance with the Securities
Act.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Subsidiary" means any corporation, association or other business entity of
which more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by any person or one or more of the other
Subsidiaries of that person or a combination thereof.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the 10%
Subordinated Debenture Indenture without charge by writing to: K-III
Communications Corporation, 745 Fifth Avenue, New York, NY 10151, Attention:
Beverly C. Chell, Esq.
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DESCRIPTION OF CAPITAL STOCK OF K-III
GENERAL
The Certificate of Incorporation of K-III authorizes 250 million shares of
Common Stock, and 50 million shares of preferred stock, par value $0.01 per
share. The Board of Directors of K-III, in its sole discretion, may issue Common
Stock from the authorized and unissued shares of Common Stock and may designate
and issue one or more series of preferred stock from the authorized and unissued
shares of preferred stock. Subject to limitations imposed by law or the
Certificate of Incorporation, the Board of Directors is empowered to determine
the designation of and the number of shares constituting a series of preferred
stock; the dividend rate for the series; the terms and conditions of any voting,
conversion and exchange rights for the series; the amounts payable on the series
upon redemption or K-III's liquidation, dissolution or winding-up; the
provisions of any sinking fund for the redemption or purchase of shares of any
series; and the preferences and relative rights among the series of preferred
stock. Pursuant to the Certificates of Designations for the New Preferred Stock
and the Old Preferred Stock, 2 million shares of Old Preferred Stock have been,
and 2 million shares of New Preferred Stock will be, authorized for issuance.
Pursuant to the Certificate of Designations for the Senior Preferred Stock, four
million shares of Senior Preferred Stock, liquidation preference $25 per share,
have been authorized for issuance. Of these authorized shares, all have been
issued and are outstanding. Pursuant to the Certificate of Designations for the
Series B Preferred Stock, two million shares of Series B Preferred Stock,
liquidation preference $100 per share, have been authorized for issuance. As of
March 31, 1996, 1,405,397 of such shares were issued and outstanding, which
include paid in kind dividends as of such date.
THE COMMON STOCK
As of March 31, 1996, 128,613,032 shares of Common Stock were issued and
outstanding, and 11,930,253 shares were issuable upon exercise of outstanding
Options, 7,413,595 of which were immediately exerciseable.
Each share of Common Stock is entitled to one vote at all meetings of
stockholders of K-III for the election of directors and all other matters
submitted to stockholder vote. The Common Stock does not have cumulative voting
rights. Accordingly, the holders of a majority of the outstanding shares of
Common Stock can elect all the directors if they choose to do so. Dividends may
be paid to the holders of Common Stock when, as and if declared by the Board of
Directors of K-III out of funds legally available therefor. The Common Stock has
no preemptive or similar rights. Holders of Common Stock are not liable to
further call or assessment. Upon the liquidation, dissolution or winding up of
the affairs of K-III, any assets remaining after provision for payment of
creditors and holders of preferred stock would be distributed pro rata among
holders of Common Stock. K-III does not anticipate declaring and paying cash
dividends on the Common Stock at any time in the foreseeable future. The
decision whether to apply legally available funds to the payment of dividends on
the Common Stock will be made by the Board of Directors from time to time in the
exercise of its prudent business judgment, taking into account, among other
things, the Company's results of operations and financial condition, any then
existing or proposed commitments for the use by the Company of available funds,
and K-III's obligations with respect to any then outstanding class or series of
its preferred stock. In addition, K-III is restricted by the terms of the Credit
Agreements and the Outstanding Note Indentures from paying cash dividends on its
capital stock, and may in the future enter into loan or other agreements or
issue debt securities or preferred stock that restrict the payment of cash
dividends on K-III's capital stock. See "Description of Certain Indebtedness."
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THE SENIOR PREFERRED STOCK
The holders of Senior Preferred Stock have no preemptive rights or
cumulative voting rights and are not subject to future assessments by K-III. All
outstanding shares of Senior Preferred Stock are fully paid and nonassessable.
The Senior Preferred Stock has an aggregate liquidation preference of
$100,000,000.
Rank. The Senior Preferred Stock, with respect to dividend rights and rights
on liquidation, winding up and dissolution, ranks senior to the Series B
Preferred Stock, the Preferred Stock and to the Common Stock.
Dividends. The holders of the shares of Senior Preferred Stock are entitled
to receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, cash dividends at an annual rate equal to 11 1/2%.
Such dividends are payable quarterly in arrears on each February 1, May 1,
August 1 and November 1. Dividends on shares of the Senior Preferred Stock
accrue and are cumulative from the date of issuance of such shares. As of the
date of this Offering Memorandum, all such dividends have been paid.
Optional Redemption. K-III may, at its option, redeem at any time on or
after May 1, 1997, from any source of funds legally available therefor, in whole
or in part, any or all of the shares of Senior Preferred Stock at redemption
prices declining ratably from 105.80% of liquidation value for the twelve months
commencing May 1, 1997 to 100.00% on and after May 1, 2002, plus in each case an
amount in cash equal to all accumulated and unpaid dividends per share
(including an amount equal to a prorated dividend from the last dividend payment
date to the redemption date).
Mandatory Redemption. The Senior Preferred Stock is subject to mandatory
redemption (subject to contractual and other restrictions with respect thereto
and to the legal availability of funds therefor). On each of May 1, 2003 and May
1, 2004, K-III is required to redeem 50% of the shares of Senior Preferred Stock
originally issued at a price equal to the liquidation preference thereof plus
all accumulated dividends to the date of redemption. K-III will be permitted to
credit toward its mandatory redemption obligation in each year shares of Senior
Preferred Stock theretofore acquired by K-III through optional redemption or
otherwise than through mandatory redemption that have not previously been so
applied.
Voting Rights. Holders of the Senior Preferred Stock have no voting rights
with respect to general corporate matters except as provided by law or as set
forth in the Certificate of Designations for the Senior Preferred Stock. Such
Certificate of Designations provides that in the event that dividends on the
Senior Preferred Stock are in arrears and unpaid for six consecutive quarterly
periods, the Board of Directors of K-III will be increased by two directors and
the holders of the majority of the Senior Preferred Stock, voting separately as
a class, will be entitled to elect two directors of the expanded board of
directors. Such voting rights will continue until such time as all dividends in
arrears on the Senior Preferred Stock are paid in full.
In addition, the Certificate of Designations for the Senior Preferred Stock
provides that K-III will not authorize a new class of parity securities without
the affirmative vote or consent of holders of a majority of the shares of Senior
Preferred Stock and each other series of preferred stock of K-III then
outstanding which are entitled to vote thereon, voting or consenting, as the
case may be, as one class, and that K-III will not authorize a new class of
senior securities without the affirmative vote or consent of holders of at least
a majority of the shares of Senior Preferred Stock and each other series of
preferred stock of K-III then outstanding which are entitled to vote thereon,
voting or consenting, as the case may be, as one class.
In addition, K-III may not merge or consolidate with or into or transfer all
or substantially all of its assets (as an entirety in one transaction or a
series of related transactions), to any person without the consent of the
holders of a majority of the issued and outstanding shares of Senior Preferred
Stock,
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voting separately as a class, unless (i) K-III shall be the continuing person,
or the person (if other than K-III) formed by such consolidation or into which
K-III is merged or to which the properties and assets of K-III are transferred
shall be a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia and the Senior Preferred
Stock shall be converted into or exchanged for and shall become shares of such
successor or resulting company, having in respect of such successor or resulting
company substantially the same powers, preferences and relative participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereon, that the Senior Preferred Stock had immediately prior to
such transaction and (ii) immediately after giving effect to such transaction on
a pro forma basis, the Consolidated Net Worth of the surviving entity is at
least equal to the Consolidated Net Worth of K-III (as defined in its
Certificate of Incorporation) immediately prior to such transaction.
Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment, whether or not entitled to vote thereon by the
certificate of incorporation, if, among other matters, the amendment would
increase or decrease the par value of the shares of such class, or alter or
change the powers, preferences, or special rights of the shares of such class so
as to affect them adversely.
Exchange. K-III may, at its option, out of any source of funds legally
available therefor, on any scheduled dividend payment date, exchange the Senior
Preferred Stock, in whole but not in part, for the Exchange Debentures. Holders
of Senior Preferred Stock so exchanged will be entitled to receive the principal
amount of Exchange Debentures equal to $25.00 for each $25.00 of liquidation
preference of Senior Preferred Stock held by such holders at the time of
exchange plus an amount per share in cash equal to all accrued but unpaid
dividends thereon to the date of exchange (including an amount equal to a pro
rated dividend from the last dividend payment date to the exchange date).
THE SERIES B PREFERRED STOCK
The holders of Series B Preferred Stock have no preemptive rights or
cumulative voting rights and are not subject to future assessments by K-III. All
outstanding shares of Series B Preferred Stock are fully paid and nonassessable.
As of March 31, 1996, 1,405,397 shares of the Series B Preferred Stock
($140,539,700 aggregate liquidation preference), which include dividends paid in
kind from time to time thereon to such date, were issued and outstanding.
Rank. The Series B Preferred Stock, with respect to dividend rights and
rights on liquidation, winding up and dissolution, ranks junior to the Senior
Preferred Stock, pari passu with the Preferred Stock and senior to the Common
Stock.
Dividends. The holders of the shares of Series B Preferred Stock are
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, cash dividends at an annual rate equal to 11
5/8%. Such dividends are payable quarterly in arrears on each February 1, May 1,
August 1 and November 1. Before May 1, 1998 dividends may, at the option of
K-III, be paid in cash or by issuing fully paid and nonassessable shares of
Series B Preferred Stock with an aggregate liquidation preference equal to the
amount of such dividend. On and after May 1, 1998, dividends may only be paid in
cash. Dividends on shares of the Series B Preferred Stock accrue and are
cumulative from the date of issuance of such shares. As of the date of this
Offering Memorandum, all such dividends have been paid in additional shares of
Series B Preferred Stock.
Optional Redemption. K-III may, at its option, redeem at any time on or
after February 1, 1998, from any source of funds legally available therefor, in
whole or in part, any or all of the shares of Series B Preferred Stock at
redemption prices declining ratably from 105.80% of liquidation value for the
twelve months commencing February 1, 1998 to 100.00% on and after February 1,
2003, plus in each case an amount in cash equal to all accumulated and unpaid
dividends per share (including an amount equal to a prorated dividend from the
last dividend payment date to the redemption date).
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In addition, up to 50% of the Series B Preferred Stock may be redeemed at
any time before February 1, 1996 at a price per share of $108, plus accrued and
unpaid dividends out of the net proceeds of an initial public offering of Common
Stock, provided such redemption occurs within 180 days of such initial public
offering.
Mandatory Redemption. The Series B Preferred Stock is subject to mandatory
redemption (subject to contractual and other restrictions with respect thereto
and to the legal availability of funds therefor) on May 1, 2005 at a price equal
to the liquidation preference thereof plus all accumulated dividends to the date
of redemption.
Voting Rights. Holders of the Series B Preferred Stock have no voting rights
with respect to general corporate matters except as provided by law or as set
forth in the Certificate of Designations for the Series B Preferred Stock. Such
Certificate of Designations provides that in the event that dividends on the
Series B Preferred Stock are in arrears and unpaid for six consecutive quarterly
periods, the Board of Directors of K-III will be increased by two directors and
the holders of the majority of the Series B Preferred Stock, voting separately
as a class, will be entitled to elect two directors of the expanded board of
directors. Such voting rights will continue until such time as all dividends in
arrears on the Series B Preferred Stock are paid in full.
Unless the requisite holders of any senior security or any indebtedness of
K-III have consented to or granted a waiver with respect thereto, K-III may not
merge or consolidate with or into or transfer all or substantially all of its
assets (as an entirety in one transaction or a series of related transactions),
to any person without the consent of the holders of a majority of the issued and
outstanding shares of Series B Preferred Stock, voting separately as a class,
unless (i) K-III shall be the continuing person, or the person (if other than
K-III) formed by such consolidation or into which K-III is merged or to which
the properties and assets of K-III are transferred shall be a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia and the Series B Preferred Stock shall be converted
into or exchanged for and shall become shares of such successor or resulting
company, having in respect of such successor or resulting company substantially
the same powers, preferences and relative participating, optional or other
special rights, and the qualifications, limitations or restrictions thereon,
that the Series B Preferred Stock had immediately prior to such transaction and
(ii) immediately after giving effect to such transaction on a pro forma basis,
the Consolidated Net Worth of the surviving entity is at least equal to the
Consolidated Net Worth of K-III (as defined in its Certificate of Incorporation)
immediately prior to such transaction.
Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment, whether or not entitled to vote thereon by the
certificate of incorporation, if, among other matters, the amendment would
increase or decrease the par value of the shares of such class, or alter or
change the powers, preferences, or special rights of the shares of such class so
as to affect them adversely.
Exchange. K-III may, at its option, out of any source of funds legally
available therefor, on any scheduled dividend payment date, issue Class B
Subordinated Debentures in exchange for the Series B Preferred Stock, in whole
but not in part. Holders of Series B Preferred Stock so exchanged will be
entitled to receive the principal amount of Subordinated Debentures equal to
$100 for each $100 of liquidation preference of Series B Preferred Stock held by
such holders at the time of exchange plus an amount per share in cash equal to
all accrued but unpaid dividends thereon to the date of exchange (including an
amount equal to a pro rated dividend from the last dividend payment date to the
exchange date). No Class B Subordinated Debentures may be issued so long as any
Senior Preferred Stock remains outstanding. The indenture for the 10 5/8% Senior
Notes restricts the ability of K-III to issue Class B Subordinated Debentures in
exchange for Series B Preferred Stock.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
GENERAL
The following is a description of the principal agreements governing the
indebtedness of K-III. All of such indebtedness is unsecured and is guaranteed
by substantially all of K-III's subsidiaries (except that the Exchange
Debentures and Class B Subordinated Debentures described below, if issued, will
not be so guaranteed). Capitalized terms used in this section but not defined in
the Prospectus are defined in the relevant agreement.
NEW CHASE CREDIT AGREEMENT
General. The New Chase Credit Agreement provides that K-III may borrow up to
$750,000,000 under a revolving credit commitment and up to $250,000,000 under a
term loan commitment. In addition, K-III has the option, subject to the consent
of participating lenders, to increase the revolving credit commitments by up to
$250,000,000. The revolving credit facility may be utilized through the
incurrence of revolving credit loans, swingline loans, Canadian dollar loans or
the issuance of letters of credit. Term loans, revolving credit loans, Canadian
dollar loans and swingline loans may be used by the Company for general
corporate purposes, including acquisitions.
The term loans are payable in semi-annual installments of $25,000,000 on
June 30 and December 31 of each year, commencing June 30, 2000, with a final
installment of $50,000,000 payable on June 30, 2004. The total revolving credit
commitment amount will be reduced and, to the extent outstanding revolving
credit borrowings would exceed the resulting commitment amount, revolving credit
borrowings must be repaid, semi-annually on June 30 and December 31 each year,
commencing June 30, 1999 and ending June 30, 2004. The scheduled revolving
credit commitment reductions are in the amount of 5% of the original commitment
amount (as increased pursuant to the procedure described above) on June 30, 1999
and December 31, 1999 and 10% of such amount on each subsequent semi-annual
date.
At June 17, 1996, $250,000,000 of term loans and approximately $650,900,000
in principal amount of borrowings under the revolving credit facility were
outstanding under the New Chase Credit Agreement.
Covenants. The New Chase Credit Agreement contains covenants restricting
K-III and its subsidiaries from, among other things: (i) with certain
exceptions, selling or otherwise disposing of any of their businesses; (ii)
changing the nature of its businesses; (iii) with certain exceptions, merging or
consolidating with any party; (iv) with certain exceptions, having indebtedness
other than existing indebtedness and indebtedness under the New Chase Revolving
Credit Agreement, the Senior Note Indentures, the Exchange Debenture Indenture
and the Subordinated Debenture Indenture; (v) with certain exceptions, making
guarantees or becoming liable with respect to contingent obligations; (vi) with
certain exceptions, making investments or loans; (vii) incurring any liens,
other than certain limited permitted liens on its assets; (viii) with certain
exceptions, entering into transactions with affiliates on terms less favorable
than could be obtained from non-affiliates; (ix) redeeming or making prepayments
on other indebtedness (other than through the issuance of Refinancing
Indebtedness or with the proceeds from an issuance of equity); and redeeming the
Senior Preferred Stock, the Series B Preferred Stock or other permitted
preferred stock (other than through the issuance of other stock or by the
issuance of Exchange Debentures or Subordinated Debentures, as appropriate); (x)
with certain exceptions, paying dividends on preferred and common stock; and
(xi) with certain exceptions, modifying the agreements relating to the Company's
indebtedness and preferred stock or its corporate charter documents.
In addition, the New Chase Credit Agreement requires that K-III and its
Restricted Subsidiaries, on a consolidated basis, satisfy an interest coverage
test and a leverage test. The minimum required interest coverage ratio (which is
defined as the ratio of consolidated adjusted earnings before interest, taxes,
depreciation and amortization to interest expense) for periods ending on or
prior to June 30, 1999
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is 1.80, which ratio increases annually until it reaches 2.50 for periods ending
on or after July 1, 2001. The maximum allowable leverage ratio for determination
dates occurring on or prior to June 30, 1999 is 6.00, which ratio decreases
annually until it reaches 4.50 for determination dates occurring on or after
July 1, 2001.
The New Chase Credit Agreement also requires that K-III and its Restricted
Subsidiaries, on a consolidated basis, satisfy a fixed charge coverage test at
the end of each fiscal quarter. The minimum required ratio for all test periods
is 1.05. Fixed charges include, among other items, interest expense and cash
common and preferred stock dividends, provisions for income taxes, cash capital
expenditures and scheduled principal payments on indebtedness.
It is an event of default under the New Chase Credit Agreement if KKR and
its affiliates cease to own, directly or indirectly, at least 25% (on a fully
diluted basis) of the economic and voting interest in K-III's Common Stock or if
any other person or group becomes the beneficial owner of more voting common
stock of K-III then that owned by KKR and its Affiliates.
NEW REVOLVING CREDIT AGREEMENT
General. Pursuant to the New Revolving Credit Agreement, K-III may borrow up
to $250,000,000 under a revolving credit commitment. The loans may be used by
the Company for general corporate purposes, including acquisitions. The
revolving credit commitments terminate on May 23, 1997. Any outstanding loans on
that date will be converted to term loans. Such term loans will be payable in
semi-annual installments of 10% of the original aggregate amount of term loans
on June 30 and December 31 of each year, commencing June 30, 2000, with a final
installment of 20% of such amount on June 30, 2004.
Covenants. The restrictive covenants and financial covenants contained in
the New Revolving Credit Agreement are substantially similar to those contained
in the New Chase Credit Agreement. The New Revolving Credit Agreement has a
change of control provision substantially the same as the one in the New Chase
Credit Agreement.
THE 10 5/8% SENIOR NOTES
The following is a description of the 10 5/8% Senior Note Indenture. The
terms of the 10 5/8% Senior Notes include those stated in the 10 5/8% Senior
Note Indenture and those made part of the 10 5/8% Senior Note Indenture by
reference to the Trust Indenture Act.
General. The 10 5/8% Senior Notes rank senior in right of payment to all
subordinated Indebtedness of the Company, and are guaranteed on a senior basis
by each of the domestic Restricted Subsidiaries. The 10 5/8% Senior Notes rank
pari passu in right of payment with all senior borrowings, including borrowings
under the Credit Agreements, the 10 1/4% Senior Notes and the Notes.
Principal, Maturity and Interest. The 10 5/8% Senior Notes are limited in
aggregate principal amount to $250,000,000 and mature on May 1, 2002. The entire
principal amount permitted is currently outstanding. Interest on the 10 5/8%
Senior Notes accrues at the rate of 10 5/8% per annum.
Redemption. The 10 5/8% Senior Notes are not redeemable at K-III's option
before May 1, 1997 (other than in connection with a Change of Control (as
defined under the 10 5/8% Senior Note Indenture)). Thereafter, the 10 5/8%
Senior Notes are subject to redemption at the option of K-III, at redemption
prices declining ratably from 104.00% of principal amount for the twelve months
commencing May 1, 1997 to 100.00% on and after May 1, 2000, plus in each case
accrued and unpaid interest thereon to the applicable redemption date.
The 10 5/8% Senior Note Indenture requires K-III to make a mandatory sinking
fund payment on May 1, 2001, sufficient to retire by redemption on such date
Outstanding Notes in an aggregate
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principal amount equal to $125,000,000. Outstanding Notes that K-III has
theretofore acquired or that have otherwise been redeemed may be applied to
reduce K-III's obligations to make sinking fund payments.
Upon a Change of Control, K-III is required to make an offer to purchase all
of the then-outstanding 10 5/8% Senior Notes at a purchase price of 101% of the
aggregate principal amount of such Outstanding Notes plus accrued and unpaid
interest thereon to the redemption date. In addition the 10 5/8% Senior Notes
will be redeemable in whole or in part at the option of K-III, in the event of a
Change of Control.
Covenants. The 10 5/8% Senior Note Indenture contains covenants
substantially similar to those in the Note Indenture.
THE 10 1/4% SENIOR NOTES
The following is a description of the 10 1/4% Senior Note Indenture. The
terms of the 10 1/4% Senior Notes include those stated in the 10 1/4% Senior
Note Indenture and those made part of the 10 1/4% Senior Note Indenture by
reference to the Trust Indenture Act.
General. The 10 1/4% Senior Notes rank senior in right of payment to all
subordinated Indebtedness of the Company, and are guaranteed on a senior basis
by each of the domestic Restricted Subsidiaries. The 10 1/4% Senior Notes rank
pari passu in right of payment with all senior borrowings, including borrowings
under the Credit Agreements, the 10 5/8% Senior Notes and the Notes.
Principal, Maturity and Interest. The 10 1/4% Senior Notes are limited in
aggregate principal amount to $100,000,000 and mature on June 1, 2004. The
entire principal amount permitted is currently outstanding. Interest on the 10
1/4% Senior Notes accrues at the rate of 10 1/4% per annum.
Redemption. The 10 1/4% Senior Notes are not redeemable at K-III's option
before June 1, 1999 (other than in connection with a Change of Control (as
defined under the 10 1/4% Senior Note Indenture) or certain public offerings of
Common Stock, as described below). Thereafter, the 10 1/4% Senior Notes due 2004
are subject to redemption at the option of K-III, at redemption prices declining
ratably from 104.95% of principal amount for the twelve months commencing June
1, 1999 to 100.00% on and after June 1, 2002, plus in each case accrued and
unpaid interest thereon to the applicable redemption date.
In addition, at any time on or before June 1, 1997, up to 35% of the
aggregate principal amount of the 10 1/4% Senior Notes may be redeemed at a
redemption price of 109 1/4% of the principal amount thereof, plus accrued and
unpaid interest, out of the net proceeds of public offerings of primary shares
of Common Stock, provided such redemption occurs within 160 days of such public
offering.
Upon a Change of Control, K-III is required to make an offer to purchase all
of the then-outstanding 10 1/4% Senior Notes at a purchase price of 101% of the
aggregate principal amount of such Outstanding Notes plus accrued and unpaid
interest, if any, to the redemption date. In addition the 10 1/4% Senior Notes
will be redeemable, in whole or in part, at the option of K-III in the event of
a Change of Control.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than KKR and
its affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than (A) 35 percent (35%) of the total voting power of
the then outstanding voting stock of K-III and (B) the total voting power of the
then outstanding voting stock of K-III beneficially owned by KKR and its
affiliates or (ii) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted K-III's Board of
Directors (together with any new directors whose election by K-III's Board of
Directors or whose nomination for election by K-III's shareholders was approved
by a vote of at least two-thirds of the Directors then still in office who
either were Directors at the beginning of such period
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or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the directors then in office.
Covenants. The 10 1/4% Senior Note Indenture contains certain covenants
substantially similar to those in the Note Indenture.
THE EXCHANGE DEBENTURES
The following is a description of the Exchange Debenture Indenture, to be
dated as of the date of first issuance (the "Exchange Debentures Exchange Date")
of the Exchange Debentures between K-III and Chemical Bank (the "Exchange
Debenture Trustee"), pursuant to which the Exchange Debentures may be issued in
exchange for the Senior Preferred Stock. The terms of the Exchange Debentures
include those stated in the Exchange Debenture Indenture and those made part of
the Exchange Debenture Indenture by reference to the Trust Indenture Act.
General. The Exchange Debentures will represent general unsecured
obligations of K-III, and holders of the Exchange Debentures will rank junior in
right of payment to holders of Senior Debt (as defined in the Exchange Debenture
Indenture). The right to payment of principal and interest on the Exchange
Debentures will be subordinated to the prior payment in full of all Senior Debt.
Senior Debt includes indebtedness under the Credit Agreements and the Senior
Notes but does not include any Indebtedness of K-III to any of its subsidiaries
or trade indebtedness. The Exchange Debentures will rank senior in right of
payment to holders of the Class B Subordinated Debentures and the 10%
Subordinated Debentures.
Principal, Maturity and Interest. The Exchange Debentures will be limited in
aggregate principal amount to $100,000,000 and will mature on May 1, 2004. None
of the principal amount is currently outstanding. Interest on the Exchange
Debentures will accrue from the Exchange Debentures Exchange Date at the rate of
11 1/2% per annum, commencing after the Exchange Debentures Exchange Date.
Redemption. The Exchange Debentures will be subject to redemption at the
option of K-III at any time on or after May 1, 1997 at redemption prices
declining ratably from 105.8% of the principal amount thereof to 100.0% on or
after May 1, 2002, in each case plus accrued and unpaid interest, if any, to the
applicable redemption date.
The Credit Agreements prohibit the redemption or prepayment of the Exchange
Debentures other than with the net proceeds from the issuance of refunding
indebtedness or equity, and the Senior Note Indentures make such redemption or
prepayment a Restricted Payment.
The Exchange Debenture Indenture will require K-III to make a mandatory
sinking fund payment on May 1, 2003, sufficient to retire by redemption on such
date 50% of the aggregate principal amount of the Exchange Debentures originally
issued under the Exchange Debenture Indenture. Exchange Debentures that K-III
has theretofore acquired or that have otherwise been redeemed may be applied to
reduce K-III's obligations to make sinking fund payments.
In addition, upon a Change of Control, K-III is required to make an offer to
purchase the then outstanding Exchange Debentures at a purchase price of 101% of
the aggregate principal amount of the Exchange Debentures plus accrued and
unpaid interest to the redemption date.
Covenants. The Exchange Debenture Indenture will contain certain covenants
which, among other things, limit the ability of the Company to engage in
mergers, consolidations or transactions with affiliates and to pay dividends on
or repurchase or retire capital stock.
THE CLASS B SUBORDINATED DEBENTURES
The following is a description of the Class B Debenture Indenture to be
dated as of the date of first issuance (the "Class B Subordinated Exchange
Date") of Subordinated Debentures between K-III and
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Marine Midland Bank, N.A. (the "Class B Debenture Trustee"), pursuant to which
the Class B Subordinated Debentures may be issued in exchange for the Series B
Preferred Stock. The terms of the Class B Subordinated Debentures include
those stated in the Class B Debenture Indenture and those made part of the
Class B Debenture Indenture by reference to the Trust Indenture Act.
Capitalized terms used in this section that are not defined in this Offering
Memorandum are defined in the Subordinated Debenture Indenture.
General. The Class B Debentures will represent general unsecured obligations
of K-III, and holders of the Class B Debentures will rank junior in right of
payment to holders of Senior Debt (as defined in the Class B Debenture
Indenture). The right to payment of principal and interest on the Class B
Debentures will be subordinated to the prior payment in full of all Senior Debt.
Senior Debt includes the indebtedness under the Credit Agreements, the Senior
Notes and the Exchange Debentures but does not include any Indebtedness of K-III
to any of its subsidiaries or trade indebtedness.
Principal, Maturity and Interest. The Class B Debentures will be limited in
aggregate principal amount to $200,000,000 and will mature on May 1, 2005.
Interest on the Class B Debentures will accrue from the Class B Subordinated
Exchange Date at the rate of 11 5/8%, payable quarterly on February 1, May 1,
August 1, and November 1, commencing with the first of such dates to occur after
the Class B Subordinated Exchange Date.
Redemption. The Class B Debentures will be subject to redemption at the
option of K-III at any time on or after February 1, 1998 at the redemption
prices declining ratably from 105.8% of the principal amount thereof to 100.0%
on and after February 1, 2003, plus in each case, accrued and unpaid interest
thereon to the applicable redemption date.
In addition, at any time before February 1, 1996, up to 50% of the Class B
Debentures may be redeemed at a redemption price of 108% of the principal amount
thereof, plus accrued and unpaid interest, out of the net proceeds of an initial
public offering of the Common Stock, provided such redemption occurs within 180
days of such public offering.
The terms of the Credit Agreements prohibit the redemption or repayment of
the Class B Debentures other than with the net proceeds from the issuance of
refunding indebtedness or equity, and the Senior Note Indentures make such
redemption or prepayment a Restricted Payment.
Upon a Change of Control, K-III is required to make an offer to purchase
100% of the outstanding Class B Debentures at a purchase price of 101% of the
aggregate principal amount of the Class B Debentures plus accrued and unpaid
interest thereon to the redemption date.
Covenants. The Class B Debenture Indenture contains covenants substantially
similar to those in the Exchange Debenture Indenture.
NON-COMPETE NOTES
In connection with the Company's acquisition of certain consumer magazines
operations and Daily Racing Form, K-III Holdings Corporation III, a subsidiary
of K-III, issued to the seller $50 million in notes, payable over ten years in a
principal amount of $5 million per year (collectively, the "Non-Compete Notes").
The Non-Compete Notes provide for scheduled payments of principal and interest
through June 17, 2001, effective on December 17, 1991, provided that no payments
under the Non-Compete Notes need be made at any time when the terms of any debt
relating to the acquisition or any refinancing thereof prohibits such payment
(although all payments due and owing under the Non-Compete Notes must be
promptly paid after the termination or waiver of any such prohibition). If all
payments of interest and principal are paid on the Non-Compete Notes, K-III
Holdings Corporation III will have paid $2,500,000 in year one, $6,000,000
in each of years two through seven, $22,200,000 in year eight, $20,200,000
in year nine and $18,100,000 in year ten.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Simpson Thacher & Bartlett, tax counsel to the Company,
the following are the material federal income tax consequences of the purchase,
ownership and disposition of the Notes, the Preferred Stock and the 10%
Subordinated Debentures as of the date hereof. Except where noted, it deals only
with Notes, the Preferred Stock and 10% Subordinated Debentures held as capital
assets by United States Holders and does not deal with special situations, such
as those of dealers in securities or currencies, financial institutions, life
insurance companies, persons holding Notes, Preferred Stock and 10% Subordinated
Debentures as a part of a hedging or conversion transaction or a straddle or
United States Holders whose "functional currency" is not the U.S. dollar.
Furthermore, the discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations, including final
Treasury regulations addressing debt instruments issued with OID (the "OID
Regulations"), rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
federal income tax consequences different from those discussed below. ALL
PROSPECTIVE PURCHASERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF NOTES, PREFERRED STOCK OR 10% SUBORDINATED
DEBENTURES.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
As used herein, a "United States Holder" means a holder that is a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, or an estate or trust the income of which is subject to
United States federal income taxation regardless of its source. An individual
may, subject to certain exceptions, be deemed to be a resident (as opposed to a
non-resident alien) of the United States by virtue of being present in the
United States on at least 31 days in the calendar year and for an aggregate of
at least 183 days during a three-year period ending in the current calendar year
(counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). A "Non-United States Holder"
is a holder that is not a United States Holder.
Dividends on Preferred Stock
Distributions on the Preferred Stock will be treated as dividends to United
States Holders to the extent of the Company's current or accumulated earnings
and profits as determined under federal income tax principles. The amount of the
Company's earnings and profits at any time will depend upon the future actions
and financial performance of the Company. The Company believes that it does not
presently have any current or accumulated earnings and profits. Consequently,
unless the Company generates earnings and profits in the future, distributions
with respect to the Preferred Stock may not qualify as dividends for federal
income tax purposes. To the extent that the amount of a distribution on the
Preferred Stock exceeds the Company's current and accumulated earnings and
profits, such distributions will be treated as a nontaxable return of capital
and will be applied against and reduce the adjusted tax basis of the Preferred
Stock in the hands of each United States Holder (but not below zero), thus
increasing the amount of any gain (or reducing the amount of any loss) which
would otherwise be realized by such United States Holder upon the sale or other
taxable disposition of such Preferred Stock. The amount of any such distribution
which exceeds the adjusted tax basis of the Preferred Stock in the hands of the
United States Holder will be treated as capital gain and will be either
long-term or short-term capital gain depending on the United States Holder's
holding period for the Preferred Stock.
Under Section 243 of the Code, corporate stockholders generally will be able
to deduct 70% of the amount of any distribution qualifying as a dividend. As
described above, distributions with respect to
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the Preferred Stock will not qualify as dividends until the Company has earnings
and profits. Distributions that do not qualify as dividends will not be eligible
for the dividends-received deduction. In addition, there are many exceptions and
restrictions relating to the availability of a dividends-received deduction for
any distribution qualifying as a dividend and recent legislative proposals, if
enacted, would reduce the dividends received deduction from 70% to 50%. It is
unclear whether, and in what form, such proposals will be enacted.
Section 246A of the Code reduces the dividends-received deduction allowed to
a corporate United States Holder that has incurred indebtedness "directly
attributable" to its investment in portfolio stock. Section 246(c) of the Code
requires that, in order to be eligible for the dividends-received deduction, a
corporate United States Holder must generally hold the shares of Preferred Stock
for a 46-day minimum holding period. A taxpayer's holding period for these
purposes is suspended during any period in which a United States Holder has
certain options or contractual obligations with respect to substantially
identical stock or holds one or more other positions with respect to
substantially identical stock that diminishes the risk of loss from holding the
Preferred Stock. A recent legislative proposal would provide that a corporate
shareholder would not be entitled to a dividends-received deduction on
distributions on the Preferred Stock if such shareholder protects itself from
risk of loss immediately before or immediately after the shareholder becomes
entitled to the dividend. It is unclear whether and in what form such proposal
will be enacted.
Under Section 1059 of the Code a corporate stockholder is required to reduce
its tax basis (but not below zero) in the Preferred Stock by the nontaxed
portion of any "extraordinary dividend" if such stock has not been held for more
than two years before the earliest of the date such dividend is declared,
announced, or agreed to. Generally, the nontaxed portion of an extraordinary
dividend is the amount excluded from income by operation of the
dividends-received deduction provisions of Section 243 of the Code. An
extraordinary dividend on the Preferred Stock generally would be a dividend that
(i) equals or exceeds 5% of the corporate stockholder's adjusted tax basis in
the Preferred Stock, treating all dividends having ex-dividend dates within an
85-day period as one dividend or (ii) exceeds 20% of the corporate stockholder's
adjusted tax basis in such stock, treating all dividends having ex-dividend
dates within a 365-day period as one dividend. In determining whether a dividend
paid on the Preferred Stock is an extraordinary dividend, a corporate
stockholder may elect to substitute the fair market value of the stock for such
United States Holder's tax basis for purposes of applying these tests, provided
such fair market value is established to the satisfaction of the Secretary of
Treasury (the "Secretary") as of the day before the ex-dividend date. An
extraordinary dividend also currently includes any amount treated as a dividend
in the case of a redemption that is either non-pro rata as to all stockholders
or in partial liquidation of the Company, regardless of the stockholder's
holding period and regardless of the size of the dividend. If any part of the
nontaxed portion of an extraordinary dividend is not applied to reduce the
United States Holder's tax basis as a result of the limitation on reducing such
basis below zero, such part will be treated as gain upon sale or exchange of the
stock. However, recently introduced legislation would require gain on the
nontaxed portion of an extraordinary dividend to be recognized at the time when
the extraordinary dividend is paid rather than at the time of the sale or
exchange of the Preferred Stock. It is unclear whether and in what form such
legislation will be enacted. Special rules exist with respect to extraordinary
dividends for "qualified preferred dividends." A qualified preferred dividend is
any fixed dividend payable with respect to any share of stock which (i) provides
for fixed preferred dividends payable not less frequently than annually and (ii)
is not in arrears as to dividends at the time the United States Holder acquired
such stock. A qualified preferred dividend does not include any dividend payable
with respect to any share of stock if the actual rate of return of such stock
exceeds 15%. Section 1059 does not apply to qualified preferred dividends if the
corporate stockholder holds such stock for more than five years. If the
stockholder disposes of such stock before it has been held for more than five
years, the amount subject to extraordinary dividend treatment with respect to
qualified preferred dividends is limited to the excess of the actual rate of
return over the stated rate of return. Actual or stated rates of return are the
actual or stated dividends expressed as a percentage of the lesser of (1) the
stockholder's tax basis in such stock or (2) the liquidation preference of such
stock. CORPORATE
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STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
POSSIBLE APPLICATION OF SECTION 1059 TO THEIR OWNERSHIP AND DISPOSITION OF THE
PREFERRED STOCK.
A corporate stockholder's liability for alternative minimum tax may be
affected by the portion of the dividends received which such corporate
stockholder deducts in computing taxable income. This results from the fact that
corporate stockholders are required to increase alternative minimum taxable
income by 75% of the excess of current earnings and profits (with certain
adjustments) over alternative minimum taxable income (determined without regard
to earnings and profits adjustments or the alternative tax net operating loss
deduction).
Redemption Premium
Under Section 305(c) of the Code and the applicable regulations thereunder,
if the redemption price of Preferred Stock exceeds its issue price the
difference ("redemption premium") may be taxable as a constructive distribution
of additional Preferred Stock to the United States Holder (treated as a dividend
to the extent of the Company's current and accumulated earnings and profits and
otherwise subject to the treatment described above for distributions) over a
certain period. Because Preferred Stock provides for an optional right of
redemption by the Company at a price in excess of the issue price, stockholders
could be required to recognize such redemption premium under a constant interest
rate method similar to that described below for accruing original issue discount
("OID") (see "Consequences of Owning Subordinated Debentures--Original Issue
Discount") if, based on all of the facts and circumstances, the optional
redemption is more likely than not to occur. If stock may be redeemed at more
than one time, the time and price at which such redemption is most likely to
occur must be determined based on all of the facts and circumstances. Applicable
regulations provide a "safe harbor" under which a right to redeem will not be
treated as more likely than not to occur if (i) the issuer and the United States
Holder are not related within the meaning of the regulations; (ii) there are no
plans, arrangements, or agreements that effectively require or are intended to
compel the issuer to redeem the stock (disregarding, for this purpose, a
separate mandatory redemption), and (iii) exercise of the right to redeem would
not reduce the yield of the stock, as determined under the regulations.
Regardless of whether the optional redemption is more than likely not to occur,
constructive dividend treatment will not result if the redemption premium does
not exceed a de minimis amount. The Company intends to take the position that
the existence of the Company's optional redemption right does not result in a
constructive distribution to the United States Holders.
Redemption and Exchange for 10% Subordinated Debentures
A redemption of shares of the Preferred Stock for cash or an exchange of the
Preferred Stock for 10% Subordinated Debentures (or 10% Subordinated Debentures
and cash in the case of dividend arrearages) will be a taxable transaction on
which a United States Holder will generally recognize capital gain or loss
(except to the extent of cash payments received on the exchange that are
attributable to declared dividends which will be treated in the same manner as
distributions described above) provided that a United States Holder owns no
stock of the Company, actually or constructively, following a redemption or
exchange. The gain or loss recognized on such exchange will generally be equal
to the difference between the amount realized by the United States Holder of the
Preferred Stock and such United States Holder's adjusted tax basis in the
Preferred Stock surrendered in the redemption.
In the case of a redemption for cash, the amount realized will be the cash
received on the redemption. In the case of an exchange of Preferred Stock for
10% Subordinated Debentures, the amount realized on receipt of the 10%
Subordinated Debenture would be equal to the "issue price" of the 10%
Subordinated Debenture. Thus, the amount realized on the exchange will be equal
to the issue price of the 10% Subordinated Debentures plus any cash received on
the exchange (other than cash received with respect to declared dividends). The
issue price of a 10% Subordinated Debenture would be equal to (i) its fair
market value as of the exchange date if the 10% Subordinated Debentures are
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traded on an established securities market on or at any time during the 60 day
period ending 30 days after the exchange date or (ii) the fair market value at
the exchange date of the Preferred Stock if such Preferred Stock is traded on an
established securities market during the 60 day period ending 30 days after the
exchange date but the 10% Subordinated Debentures are not. If neither the
Preferred Stock nor the 10% Subordinated Debentures are so traded, the issue
price of the 10% Subordinated Debentures is determined under Section 1274 of the
Code, in which case the issue price would be the stated principal amount of the
Subordinated Debentures provided that the yield on the 10% Subordinated
Debentures is equal to or greater than the "applicable federal rate" in effect
at the time the Preferred Stock is issued. If the yield on the 10% Subordinated
Debentures is less than such applicable federal rate, its issue price under
section 1274 of the Code would be equal to the present value as of the issue
date of all payments to be made on the 10% Subordinated Debentures, discounted
at the applicable federal rate. It cannot be determined at the present time
whether the Preferred Stock or the 10% Subordinated Debentures will be, at the
relevant time, traded on an established securities market within the meaning of
the Proposed Regulations.
Depending upon a United States Holder's particular circumstances, the tax
consequences of holding 10% Subordinated Debentures may be less advantageous
than the tax consequences of holding Preferred Stock because, for example,
payments of interest on the Subordinated Debentures will not be eligible for any
dividends-received deduction that may be available to corporate United States
Holders and because, as discussed below, the 10% Subordinated Debentures may be
issued with OID.
Payments of Interest on Notes and 10% Subordinated Debentures
Except as set forth below, interest on a Note or a 10% Subordinated
Debenture will generally be taxable to a United States Holder as ordinary
income.
Original Issue Discount
10% Subordinated Debentures issued in exchange for Preferred Stock may be
issued with OID, because their issue price is determined at the time of such
exchange, as further discussed below. United States Holders of 10% Subordinated
Debentures issued with OID will be subject to special tax accounting rules, as
described in greater detail below. Holders of such 10% Subordinated Debentures
should be aware that they generally must include OID in gross income in advance
of the receipt of cash attributable to that income. However, United States
Holders of such 10% Subordinated Debentures generally will not be required to
include separately in income cash payments received on 10% Subordinated
Debentures issued with OID, even if denominated as interest, to the extent such
payments do not constitute qualified stated interest (as defined below). 10%
Subordinated Debentures issued with OID will be referred to as "Original Issue
Discount Debentures." If any 10% Subordinated Debentures are issued with OID,
the Company will report to United States Holders on a timely basis the
reportable amount of OID, if any, and interest income based on its understanding
of then applicable law. STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO THE CONSEQUENCES OF OWNING 10% SUBORDINATED DEBENTURES.
A 10% Subordinated Debenture with an "issue price" (determined as explained
above--see "Redemption and Exchange for 10% Subordinated Debentures") that is
less than its stated redemption price at maturity (the sum of all payments to be
made on the 10% Subordinated Debenture other than "qualified stated interest")
will be issued with OID if such difference is at least 0.25 percent of the
stated redemption price at maturity multiplied by the number of complete years
to maturity. The term "qualified stated interest" means stated interest that is
unconditionally payable in cash or in property (other than debt instruments of
the issuer) at least annually at a single fixed rate. With respect to the 10%
Subordinated Debentures, (i) all interest payments on any 10% Subordinated
Debenture issued will be qualified stated interest, (ii) the stated redemption
price at maturity of any 10% Subordinated Debenture will be equal to its
principal amount and (iii) any 10% Subordinated Debenture will
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therefore be issued with OID only to the extent its principal amount exceeds its
issue price (provided that such excess is not de minimis).
In the case of a 10% Subordinated Debenture issued with de minimis OID
(i.e., discount that is not OID because it is less than 0.25 percent of the
stated redemption price at maturity multiplied by the number of complete years
to maturity), the United States Holder generally must include such de minimis
OID in income as principal payments on the 10% Subordinated Debentures are made
in proportion to the stated principal amount of the 10% Subordinated Debenture.
Any amount of de minimis OID that has been included in income shall be treated
as capital gain.
The 10% Subordinated Debentures may be redeemed prior to their Stated
Maturity at the option of the Company. Under the OID Regulations, if, based on
all of the facts and circumstances as of the issue date, it is more likely than
not that an Original Issue Discount Debenture's stated payment schedule will not
occur, then the yield and maturity of the Original Issue Discount Debenture will
be computed based on the payment schedule most likely to occur. Moreover, the
Company will be deemed to exercise or not exercise its option to redeem the
Original Issue Discount Debentures in a manner that minimizes the yield on the
Original Issue Discount Debentures.
United States Holders of Original Issue Discount Debentures must, in
general, include OID in income in advance of the receipt of some or all of the
related cash payments. The amount of OID includible in income by the initial
United States Holder of an Original Issue Discount Debenture is the sum of the
"daily portions" of OID with respect to the Original Issue Discount Debenture
for each day during the taxable year or portion of the taxable year in which
such United States Holder held such Debenture ("accrued OID"). The daily portion
is determined by allocating to each day in any "accrual period" a pro rata
portion of the OID allocable to that accrual period. The "accrual period" for an
Original Issue Discount Debenture may be of any length and may vary in length
over the term of the Original Issue Discount Debenture, provided that each
accrual period is no longer than one year and each scheduled payment of
principal or interest occurs on the first day or the final day of an accrual
period. The amount of OID allocable to any accrual period is an amount equal to
the excess, if any, of (a) the product of the Original Issue Discount
Debenture's adjusted issue price at the beginning of such accrual period and its
yield to maturity (determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of the accrual period) over
(b) the sum of any qualified stated interest allocable to the accrual period.
OID allocable to a final accrual period is the difference between the amount
payable at maturity (other than a payment of qualified stated interest) and the
adjusted issue price at the beginning of the final accrual period. Special rules
will apply for calculating OID for an initial short accrual period. The
"adjusted issue price" of an Original Issue Discount Debenture at the beginning
of any accrual period is equal to its issue price increased by the accrued OID
for each prior accrual period (determined without regard to the amortization of
any acquisition or bond premium, as described below) and reduced by any payments
made on such Debenture (other than qualified stated interest) on or before the
first day of the accrual period. Under these rules, a United States Holder will
have to include in income increasingly greater amounts of OID in successive
accrual periods.
United States Holders may elect to treat all interest on any 10%
Subordinated Debenture as OID and calculate the amount includible in gross
income under the constant yield method described above. For the purposes of this
election, interest includes stated interest, acquisition discount, OID, de
minimis OID, market discount, de minimis market discount and unstated interest,
as adjusted by any amortizable bond premium or acquisition premium. The election
is to be made for the taxable year in which the United States Holder acquired
the 10% Subordinated Debenture, and may not be revoked without the consent of
the Internal Revenue Service (the "IRS"). UNITED STATES HOLDERS SHOULD CONSULT
WITH THEIR OWN TAX ADVISORS ABOUT THIS ELECTION.
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Market Discount on Resale of Notes or 10% Subordinated Debentures
If a United States Holder purchases a Note or a 10% Subordinated Debenture
(other than an Original Issue Discount Debenture) for an amount that is less
than its stated redemption price at maturity or, in the case of an Original
Issue Discount Debenture, its adjusted issue price, the amount of the difference
will be treated as "market discount" for federal income tax purposes, unless
such difference is less than a specified de minimis amount. Under the market
discount rules, a United States Holder will be required to treat any principal
payment on, or any gain on the sale, exchange, retirement or other disposition
of, a Note or a 10% Subordinated Debenture as ordinary income to the extent of
the market discount which has not previously been included in income and is
treated as having accrued on such Note or 10% Subordinated Debenture at the time
of such payment or disposition. In addition, the United States Holder may be
required to defer, until the maturity of the Note or 10% Subordinated Debenture
or its earlier disposition in a taxable transaction, the deduction of all or a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such Note or 10% Subordinated Debenture.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note or 10%
Subordinated Debenture, unless the United States Holder elects to accrue on a
constant interest method. A United States Holder of a Note or 10% Subordinated
Debenture may elect to include market discount in income currently as it accrues
(on either a ratable or constant interest method), in which case the rule
described above regarding deferral of interest deductions will not apply. This
election to include market discount in income currently, once made, applies to
all market discount obligations acquired on or after the first taxable year to
which the election applies and may not be revoked without the consent of the
IRS.
Acquisition Premium; Amortizable Bond Premium
A United States Holder that purchases a 10% Subordinated Debenture for an
amount that is greater than its adjusted issue price but equal to or less than
the sum of all amounts payable on the 10% Subordinated Debenture after the
purchase date other than payments of qualified stated interest will be
considered to have purchased such 10% Subordinated Debenture at an "acquisition
premium." Under the acquisition premium rules, the amount of OID, if any, which
such United States Holder must include in its gross income with respect to such
10% Subordinated Debenture for any taxable year will be reduced by the portion
of such acquisition premium properly allocable to such year.
If at the time the Preferred Stock is exchanged for 10% Subordinated
Debentures or at the time a subsequent United States Holder purchases 10%
Subordinated Debentures or Notes, the United States Holder's tax basis in any
such 10% Subordinated Debenture or Note exceeds the sum of all amounts payable
on the 10% Subordinated Debenture or Note after the exchange date or purchase
date other than qualified stated interest, such excess may constitute "premium"
and such United States Holder will not be required to include any OID in income.
A United States Holder generally may elect to amortize the premium over the
remaining term of the 10% Subordinated Debenture or Note on a constant yield
method. The amount amortized in any year will be treated as a reduction of the
United States Holder's interest income from the 10% Subordinated Debenture or
Note. Bond premium on a 10% Subordinated Debenture or Note held by a United
States Holder that does not make such an election will decrease the gain or
increase the loss otherwise recognized on disposition of the 10% Subordinated
Debenture or Note. The election to amortize premium on a constant yield method
once made applies to all debt obligations held or subsequently acquired by the
electing United States Holder on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent of
the IRS.
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Redemption, Sale or Exchange of Notes and 10% Subordinated Debentures
The adjusted tax basis of a United States Holder who received 10%
Subordinated Debentures in exchange for Preferred Stock will, in general, be
equal to the issue price of such 10% Subordinated Debentures, increased by OID
and market discount previously included in income by the United States Holder
and reduced by any amortized premium and any cash payments on the 10%
Subordinated Debentures other than qualified stated interest. A United States
Holder's tax basis in a Note will, in general, be the United States Holder's
cost therefor, increased by market discount previously included in income by the
United States Holder and reduced by any amortized premium and any cash payments
on the Note other than qualified stated interest. Upon the redemption, sale,
exchange or retirement of a Note or 10% Subordinated Debenture, a United States
Holder will recognize gain or loss equal to the difference between the amount
realized upon the redemption, sale, exchange or retirement (less any accrued
qualified stated interest, which will be taxable as such) and the adjusted tax
basis of the Note or 10% Subordinated Debenture. Such gain or loss will be
capital gain or loss and will be long-term capital gain or loss if at the time
of redemption, sale, exchange or retirement the Note or 10% Subordinated
Debenture has been held for more than one year. Under current law, net capital
gains of individuals are, under certain circumstances, taxed at lower rates than
items of ordinary income. The deductibility of capital losses is subject to
limitations.
Applicable High Yield Discount Obligations
If the yield-to-maturity on Original Issue Discount Debentures equals or
exceeds the sum of (x) the "applicable federal rate" (as determined under
Section 1274(d) of the Code) in effect for the month in which the Original Issue
Discount Debentures are issued (the "AFR") and (y) 5% and the OID on such
Original Issue Discount Debentures is "significant", the Original Issue Discount
Debentures will be considered "applicable high yield discount obligations"
("AHYDOs") under Section 163(i) of the Code. Consequently, the Company will not
be allowed to take a deduction for interest (including OID) accrued on the
Original Issue Discount Debentures for U.S. federal income tax purposes until
such time as the Company actually pays such interest (including OID) in cash or
in other property (other than stock or debt of the Company or a person deemed to
be related to the Company under Section 453(f)(1) of the Code). Because the
amount of OID, if any, attributable to the Original Issue Discount Debentures
will be determined at such time such Original Issue Discount Debentures are
issued and the AFR at the time such Original Issue Discount Debentures are
issued in exchange for Preferred Stock is not predictable, it is impossible to
determine at the present time whether an Original Issue Discount Debenture will
be treated as an AHYDO.
Moreover, if the yield-to-maturity on the Original Issue Discount Debenture
exceeds the sum of (x) the AFR and (y) 6% (such excess shall be referred to
hereinafter as the "Disqualified Yield"), the deduction for interest (including
OID) accrued on the Original Issue Discount Debentures will be permanently
disallowed (regardless of whether the Company actually pays such interest or OID
in cash or in other property) for U.S. federal income tax purposes to the extent
such interest or OID is attributable to the Disqualified Yield on the Original
Issue Discount Debentures ("Dividend-Equivalent Interest"). For purposes of the
dividends-received deduction, such Dividend-Equivalent Interest will be treated
as a dividend to the extent it is deemed to have been paid out of the Company's
current or accumulated earnings and profits. Accordingly, a United States Holder
of Original Issue Discount Debentures that is a corporation may be entitled to
take a dividends-received deduction with respect to any Dividend-Equivalent
Interest received by such corporate United States Holder on such Original Issue
Discount Debentures.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of dividends, principal, interest, OID, if any, and premium and to the
proceeds of sales of Notes, 10% Subordinated Debentures and Preferred Stock made
to United States Holders other than certain exempt recipients
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(such as corporations). A 31 percent backup withholding tax will apply to such
payments if the United States Holder fails to provide a taxpayer identification
number or certification of foreign or other exempt status or fails to report in
full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such United States Holder's U.S. federal income tax
liability provided the required information is furnished to the IRS.
TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
Dividends on Preferred Stock
Although as discussed above (see "Tax Consequences to United States
Holders--Dividends on Preferred Stock"), distributions on the Preferred Stock
will only be treated as dividends for United States federal income tax purposes
to the extent of the Company's current or accumulated earnings and profits (as
determined under United States tax principles), distributions paid to a
Non-United States Holder of Preferred Stock generally will be subject to
withholding of United States federal income tax at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty. However, dividends that
are effectively connected with the conduct of a trade or business by the
Non-United States Holder within the United States or, if a tax treaty applies,
are attributable to a United States permanent establishment of the Non-United
States Holder, are not subject to the withholding tax, but instead are subject
to United States federal income tax on a net income basis at applicable
graduated individual or corporate rates. Any such effectively connected
dividends received by a foreign corporation may, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty.
Dividends paid to an address outside the United States are presumed to be
paid to a resident of such country (unless the payer has knowledge to the
contrary) for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. Under proposed United States
Treasury regulations not currently in effect, however, a Non-United States
Holder of Preferred Stock who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy applicable certification and other
requirements. Currently, certain certification and disclosure requirements must
be complied with in order to be exempt from withholding under the effectively
connected income exemption discussed above.
If it is subsequently determined that some or all of a distribution on the
Preferred Stock should be treated as a return of capital, a Non-United States
Holder may obtain a refund of some or all of the tax withheld by filing an
appropriate claim for refund with the Internal Revenue Service (the "IRS"). A
Non-United States Holder of Preferred Stock eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
Interest on Notes or 10% Subordinated Debentures
Under present United States federal income tax law, and subject to the
discussion below concerning backup withholding, no withholding of United States
federal income tax will be required with respect to the payment by the Company
or any paying agent of principal or interest (which for purposes of this
discussion includes OID) on a Note or 10% Subordinated Debenture owned by a
Non-United States Holder, provided (i) that the beneficial owner does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder, (ii) the
beneficial owner is not a controlled foreign corporation that is related to the
Company through stock ownership, (iii) the beneficial owner is not a bank whose
receipt of interest on a Note or 10% Subordinated Debenture is described in
section 881(c)(3)(A) of the Code and (iv) the beneficial owner satisfies the
statement
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requirement (described generally below) set forth in section 871(h) and section
881(c) of the Code and the regulations thereunder.
To satisfy the requirement referred to in (iv) above, the beneficial owner
of such Note or 10% Subordinated Debenture, or a financial institution holding
the Note or 10% Subordinated Debenture on behalf of such owner, must provide, in
accordance with specified procedures, the Company or its paying agent with a
statement to the effect that the beneficial owner is not a U.S. person. Pursuant
to current temporary Treasury regulations, these requirements will be met if (1)
the beneficial owner provides his name and address, and certifies, under
penalties of perjury, that he is not a U.S. person (which certification may be
made on an Internal Revenue Service Form W-8 (or successor form)) or (2) a
financial institution holding the Note or 10% Subordinated Debenture on behalf
of the beneficial owner certifies, under penalties of perjury, that such
statement has been received by it and furnishes a paying agent with a copy
thereof.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described above, payments of premium, if any, and
interest (including OID) made to such Non-United States Holder will be subject
to a 30% withholding tax unless the beneficial owner of the Note or 10%
Subordinated Debenture provides the Company or its paying agent, as the case may
be, with a properly executed (1) Internal Revenue Service Form 1001 (or
successor form) claiming an exemption from withholding under the benefit of a
tax treaty or (2) Internal Revenue Service Form 4224 (or successor form) stating
that interest paid on the Note or 10% Subordinated Debenture is not subject to
withholding tax because it is effectively connected with the beneficial owner's
conduct of a trade or business in the United States.
If a Non-United States Holder is engaged in a trade or business in the
United States and premium, if any, or interest (including OID) on the Note or
10% Subordinated Debenture is effectively connected with the conduct of such
trade or business, the Non-United States Holder, although exempt from the
withholding tax discussed above, will be subject to United States federal income
tax on such interest and OID on a net income basis in the same manner as if it
were a United States Holder. In addition, if such holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, such premium, if any, and interest (including
OID) on a Note or 10% Subordinated Debenture will be included in such foreign
corporation's earnings and profits.
Sale, Exchange, Redemption or other Disposition of Notes, 10% Subordinated
Debentures or Preferred Stock
A Non-United States Holder will generally not be subject to United States
federal income tax with respect to gain recognized on a sale, exchange,
redemption or other disposition of Notes, 10% Subordinated Debentures or
Preferred Stock, including an exchange of Preferred Stock for 10% Subordinated
Debentures, unless (i) the gain is effectively connected with a trade or
business of the Non-United States Holder in the United States, or, if a tax
treaty applies, is attributable to a United States permanent establishment of
the Non-United States Holder, (ii) in the case of a Non-United States Holder who
is an individual and holds the Notes, 10% Subordinated Debentures or Preferred
Stock as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition and certain other
conditions are met, or (iii) in the case of Preferred Stock, the Company is or
has been a "U.S. real property holding corporation" for United States federal
income tax purposes. The Company has not been, is not and does not anticipate
becoming a "U.S. real property holding corporation" for United States federal
income tax purposes.
Unless shares of a United States corporation are treated as regularly traded
on an established securities market (as defined in applicable Treasury
regulations), or another exemption applies, upon a sale or other disposition of
such shares by a Non-United States Holder, the transferee of such Shares would
be required to withhold 10% of the proceeds of such sale or disposition if the
United States
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corporation does not provide certification that it is not (and has not been
during a specified period) a "U.S. real property holding corporation" for United
States federal income tax purposes. Amounts withheld with respect to stock of a
United States corporation that is not "U.S. real property holding corporation"
for United States federal income tax purposes may be refunded to a Non-United
States Holder who files an appropriate claim for refund with the IRS. It is
anticipated that the Preferred Stock will not be treated as publicly traded for
purposes of applicable Treasury regulations but that the New Preferred Stock,
for which the Preferred Stock will be exchanged pursuant to an effective
registration statement (See "Notice to Investors--Registration Rights"), will be
treated as publicly traded for purposes of applicable Treasury regulations.
If an individual Non-United States Holder falls under clause (i) above, he
will be taxed on his net gain derived from the sale or other disposition under
regular graduated United States federal income tax rates. If an individual
Non-United States Holder falls under clause (ii) above, he will be subject to a
flat 30% tax on the gain derived from the sale or other disposition, which may
be offset by United States capital losses recognized within the same taxable
year as such sale or other disposition (notwithstanding the fact that he is not
considered a resident of the United States).
If a Non-United States Holder that is a foreign corporation falls under
clause (i) above, it will be taxed on its gain under regular graduated United
States federal income tax rates and, in addition, may be subject to the branch
profits tax equal to 30% of its effectively connected earnings and profits
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable income tax
treaty.
Federal Estate Tax
Preferred Stock held by an individual Non-United States Holder at the time
of death will be included in such holder's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
A Note or 10% Subordinated Debenture beneficially owned by an individual who
at the time of death is a Non-United States Holder will not be subject to United
States federal estate tax as a result of such individual's death, provided that
such individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the company entitled to vote
within the meaning of section 871(h)(3) of the Code and provided that the
interest payments with respect to such Note or 10% Subordinated Debenture would
not have been, if received at the time of such individual's death, effectively
connected with the conduct of a United States trade or business by such
individual.
Information Reporting and Backup Withholding
No information reporting or backup withholding will be required with respect
to payments made by the Company or any paying agent to Non-United States Holders
if a statement described in (iv) under "Non-United States Holders--Interest on
Notes or 10% Subordinated Debentures" has been received and the payor does not
have actual knowledge that the beneficial owner is a United States person.
In addition, backup withholding and information reporting will not apply if
payments of dividends, principal, interest, OID or premium on a Note, 10%
Subordinated Debenture, or Preferred Stock are paid or collected by a foreign
office of a custodian, nominee or other foreign agent on behalf of the
beneficial owner of such Note, 10% Subordinated Debenture or Preferred Stock, or
if a foreign office of a broker (as defined in applicable Treasury regulations)
pays the proceeds of the sale of a Note, 10% Subordinated Debenture or Preferred
Stock to the owner thereof. If, however, such nominee, custodian, agent or
broker is, for United States federal income tax purposes, a U.S. person, a
controlled foreign corporation or a foreign person that derives 50% or more of
its gross income for certain periods from the conduct of a trade or business in
the United States, such payments will not be subject to backup withholding but
will be subject to information reporting, unless (1) such custodian, nominee,
agent or
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broker has documentary evidence in its records that the beneficial owner is not
a U.S. person and certain other conditions are met or (2) the beneficial owner
otherwise establishes an exemption. Temporary Treasury regulations provide that
the Treasury is considering whether backup withholding will apply with respect
to such payments of principal, interest or the proceeds of a sale that are not
subject to backup withholding under the current regulations.
Payments of dividends, principal, interest, OID and premium on a Note, 10%
Subordinated Debenture or Preferred Stock paid to the beneficial owner of a
Note, 10% Subordinated Debenture or Preferred Stock by a United States office of
a custodian, nominee or agent, or the payment by the United States office of a
broker of the proceeds of sale of a Note, 10% Subordinated Debenture or
Preferred Stock will be subject to both backup withholding and information
reporting unless the beneficial owner provides the statement referred to in
(a)(iv) above and the payor does not have actual knowledge that the beneficial
owner is a United States person or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
TAX CONSEQUENCES OF THE EXCHANGE OFFERS
The exchanges of Old Notes for New Notes and Old Preferred Stock for New
Preferred Stock will not constitute recognition events for federal income tax
purposes. Consequently, no gain or loss will be recognized by Holders upon
receipt of the New Notes or New Preferred Stock. For purposes of determining
gain or loss upon the subsequent sale or exchange of New Notes or New Preferred
Stock, a Holder's basis in New Notes or New Preferred Stock will be the same as
such Holder's basis in the Old Notes or Old Preferred Stock exchanged therefor.
Holders will be considered to have held the New Notes or New Preferred Stock
from the time of their original acquisition of the Old Notes or Old Preferred
Stock.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes or New Preferred Stock for its
own account pursuant to the Exchange Offers must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes or New
Preferred Stock. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
or New Preferred Stock received in exchange for Old Notes or Old Preferred Stock
where such Old Notes or Old Preferred Stock were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 90 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes or New
Preferred Stock by broker-dealers. New Notes or New Preferred Stock received by
broker-dealers for their own account pursuant to the Exchange Offers may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or New
Preferred Stock or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or purchasers of any
such New Notes or New Preferred Stock. Any broker-dealer that resells New Notes
or New Preferred Stock that were received by it for its own account pursuant to
the Exchange Offers and any broker or dealer that participates in a distribution
of such New Notes or New Preferred Stock may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
New Notes or New Preferred Stock and any commissions or concessions received by
any such persons may be
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deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offers and will indemnify the holders of the Notes or the Preferred
Stock (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The legality under state law of the New Notes, the New Preferred Stock and
the New Subordinated Debentures and certain tax matters will be passed upon for
the Company by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York.
EXPERTS
The consolidated financial statements and the related financial statement
schedules of K-III Communications Corporation and subsidiaries incorporated in
this Prospectus by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 have been audited by Deloitte & Touche LLP,
independent public accountants, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
106
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma statements of consolidated operations for the three
months ended March 31, 1996 and the year ended December 31, 1995 give effect to
the following transactions and events as if they had occurred on January 1,
1995: (i) the acquisitions of certain net assets or capital stock all of which
have been completed as described in Notes 4 and 29 of the notes to the Company's
consolidated financial statements for the years ended December 31, 1995, 1994
and 1993, incorporated by reference into this Prospectus, and the acquisition of
the common stock of Westcott Communications, Inc. ("Westcott") which occurred on
May 30, 1996 as described on the Company's Current Report on Form 8-K dated June
14, 1996 incorporated by reference into this Prospectus (collectively referred
to as the "Acquired Businesses"); (ii) the divestitures of Sales Prospector,
Lakewood Publications, Inc. and Motorcycle Product News which were acquired in
1995, Newfield and Premiere magazine (collectively referred to as the "Divested
Businesses"); (iii) the August 3, 1995 redemption (the "Redemption") of old
preferred stock through borrowings under the Old Revolving Credit Agreement;
(iv) the Initial Public Offering and (v) the Offerings. The adjustments to
reflect the acquisition of the Acquired Businesses, the divestiture of the
Divested Businesses, the Redemption, the Initial Public Offering and the
Offerings are hereinafter referred to as the "Pro Forma Adjustments." The
unaudited pro forma consolidated balance sheet as of March 31, 1996 gives effect
to the acquisition of Westcott as if it occurred on March 31, 1996.
The Company believes the accounting used for the Pro Forma Adjustments
provides a reasonable basis on which to present the pro forma consolidated
financial data. The pro forma consolidated balance sheet and statements of
consolidated operations are unaudited and were derived by adjusting the
historical consolidated financial statements of the Company. THE UNAUDITED PRO
FORMA CONSOLIDATED STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE COMPANY'S CONSOLIDATED FINANCIAL
POSITION OR CONSOLIDATED RESULTS OF OPERATIONS HAD THE TRANSACTIONS BEEN
CONSUMMATED ON THE DATES ASSUMED AND DO NOT PROJECT THE COMPANY'S CONSOLIDATED
FINANCIAL POSITION OR CONSOLIDATED RESULTS OF OPERATIONS FOR ANY FUTURE DATE OR
PERIOD.
The unaudited pro forma consolidated financial statements and accompanying
notes should be read in conjunction with the historical consolidated financial
statements of the Company and Westcott and the notes thereto incorporated by
reference into this Prospectus.
P-1
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------
ACQUIRED PRO FORMA
HISTORICAL BUSINESSES(1) OFFERINGS(2) CONSOLIDATED
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Sales, net:
Education................................. $ 83,052 $ 24,167 $ $ 107,219
Information............................... 67,854 67,854
Media..................................... 164,047 164,047
------------- ---------- ----------- ------------
Total sales, net............................ 314,953 24,167 339,120
Operating costs and expenses:
Cost of goods sold........................ 83,445 6,862 90,307
Marketing and selling..................... 60,798 6,369 67,167
Distribution, circulation and
fulfillment................................. 55,481 3,148 58,629
Editorial................................. 22,145 22,145
Other general expenses.................... 36,074 2,082 38,156
Corporate administrative expenses......... 5,798 5,798
Depreciation and amortization of
prepublication costs, property and
equipment............................... 7,674 2,256 9,930
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other...................... 36,553 11,108 47,661
------------- ---------- ----------- ------------
Operating income (loss)..................... 6,985 (7,658) (673)
Other income (expense):
Interest expense.......................... (28,051) (7,618) 579 (35,090)
Amortization of deferred financing
costs.................................... (900) (33) (933)
Other, net................................ 1,226 809 2,035
------------- ---------- ----------- ------------
Net income (loss)........................... (20,740) (14,467) 546 (34,661)
Preferred stock dividends:
Non-cash.................................. (3,969) (3,969)
Cash...................................... (2,875) (5,000) (7,875)
------------- ---------- ----------- ------------
Loss applicable to common shareholders(3)... $ (27,584) $ (14,467) $ (4,454) $ (46,505)
------------- ---------- ----------- ------------
------------- ---------- ----------- ------------
Pro forma loss per common and common
equivalent share(4)........................ $ (.36)
------------
------------
Pro forma common and common equivalent
shares outstanding(4)...................... 128,502,847
------------
------------
Ratio of earnings to fixed
charges(3)(5)(6)........................... --
------------
------------
Ratio of earnings to combined fixed charges
and preferred stock dividends(3)(5)(6)..... --
------------
------------
</TABLE>
See notes to unaudited pro forma consolidated financial data.
P-2
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------------------------------------
INITIAL
ACQUIRED DIVESTED PUBLIC
HISTORICAL BUSINESSES(1) BUSINESSES(7) REDEMPTION(8) OFFERING(9) OFFERINGS(2)
---------- ------------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net:
Education................... $ 330,414 $ 97,799 $ $ $ $
Information................. 263,542 11,179
Media....................... 452,373 187,665
---------- ------------- ------------- ------ ----- ------------
Total sales, net............. 1,046,329 296,643
Operating costs and expenses:
Cost of goods sold.......... 251,347 86,943
Marketing and selling....... 177,167 48,771
Distribution, circulation
and fulfillment........... 188,147 44,910
Editorial................... 73,703 13,307
Other general expenses...... 122,816 30,076
Corporate administrative
expenses................... 17,034
Depreciation and
amortization of
prepublication costs,
property and equipment.... 25,761 10,974
Provision for loss on the
sales of businesses,
net....................... 35,447 (35,447)
Restructuring and other
costs...................... 14,667
Amortization of intangible
assets, excess of purchase
price over net assets
acquired and other........ 166,515 94,938
---------- ------------- ------------- ------ ----- ------------
Operating income (loss)...... (26,275) (33,276) 35,447
Other income (expense):
Interest expense............ (105,384) (54,525) 2,054 (2,231) 9,889 9,506
Amortization of deferred
financing costs........... (3,135) (638)
Other, net.................. (241) 591
---------- ------------- ------------- ------ ----- ------------
Income (loss) before income
taxes....................... (135,035) (87,210) 37,501 (2,231) 9,889 8,868
Income tax benefit........... 59,600
---------- ------------- ------------- ------ ----- ------------
Net income (loss)............ (75,435) (87,210) 37,501 (2,231) 9,889 8,868
Preferred stock dividends:
Non-cash.................... (17,478) 2,691
Cash........................ (11,500) (20,000)
---------- ------------- ------------- ------ ----- ------------
Income (loss) applicable to
common shareholders(3)...... $ (104,413) $ (87,210) $ 37,501 $ 460 $ 9,889 $ (11,132)
---------- ------------- ------------- ------ ----- ------------
---------- ------------- ------------- ------ ----- ------------
Pro forma loss per common and
common equivalent share(4)...
Pro forma common and common
equivalent shares
outstanding(4)..............
Ratio of earnings to fixed
charges (3)(5)(6)...........
Ratio of earnings to combined
fixed charges and preferred
stock dividends (3)(5)(6)...
<CAPTION>
<S> <C>
PRO FORMA
CONSOLIDATED
------------
Sales, net:
Education................... $ 428,213
Information................. 274,721
Media....................... 640,038
------------
Total sales, net............. 1,342,972
Operating costs and expenses:
Cost of goods sold.......... 338,290
Marketing and selling....... 225,938
Distribution, circulation
and fulfillment........... 233,057
Editorial................... 87,010
Other general expenses...... 152,892
Corporate administrative
expenses..................... 17,034
Depreciation and
amortization of
prepublication costs,
property and equipment.... 36,735
Provision for loss on the
sales of businesses,
net....................... --
Restructuring and other
costs...................... 14,667
Amortization of intangible
assets, excess of purchase
price over net assets
acquired and other........ 261,453
------------
Operating income (loss)...... (24,104)
Other income (expense):
Interest expense............ (140,691)
Amortization of deferred
financing costs........... (3,773)
Other, net.................. 350
------------
Income (loss) before income
taxes....................... (168,218)
Income tax benefit........... 59,600
------------
Net income (loss)............ (108,618)
Preferred stock dividends:
Non-cash.................... (14,787)
Cash........................ (31,500)
------------
Income (loss) applicable to
common shareholders(3)...... $ (154,905)
------------
------------
Pro forma loss per common and
common equivalent share(4).. $ (1.20)
------------
------------
Pro forma common and common
equivalent shares
outstanding(4).............. 129,452,500
------------
------------
Ratio of earnings to fixed
charges (3)(5)(6)........... --
------------
------------
Ratio of earnings to combined
fixed charges and preferred
stock dividends (3)(5)(6)... --
------------
------------
</TABLE>
See notes to unaudited pro forma consolidated financial data.
P-3
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA PRO FORMA
K-III WESTCOTT(1) ADJUSTMENTS CONSOLIDATED
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
E
Cash and cash equivalents.................... $ 32,222 $ 17,208 G $ 445,000(10) $ 49,430
H (445,000)(11)
Accounts receivable, net..................... 201,475 23,277 (745)(12) 224,007
Inventories, net............................. 66,779 7,769 (3,205)(12) 71,343
Net assets held for sale..................... 5,339 5,339
Prepaid expenses and other................... 28,063 8,112 (5,094)(12) 31,081
---------- ----------- ----------- ------------
Total current assets..................... 333,878 56,366 (9,044) 381,200
Property and equipment, net................... 109,370 32,049 1,020(12) 142,439
E
Other intangible assets, net.................. 675,404 2,920 G 197,950(12) 873,354
H (2,920)(12)
Excess of purchase price over net assets E
acquired, net................................ 731,802 20,069 G 197,951(12) 929,753
H (20,069)(12)
E
Investment in Westcott........................ G 445,000(11) --
H (445,000)(12)
Other non-current assets...................... 238,512 18,001 (11,472)(12) 245,041
---------- ----------- ----------- ------------
$2,088,966 $ 129,405 $ 353,416 $2,571,787
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 73,245 $ 1,462 $ $ 74,707
Accrued interest payable..................... 23,449 23,449
Accrued expenses and other................... 125,405 8,260 16,572(12) 150,237
Deferred revenues............................ 135,125 11,527 146,652
Current maturities of long-term debt......... 6,000 10 (10)(12) 6,000
---------- ----------- ----------- ------------
Total current liabilities................ 363,224 21,259 16,562 401,045
---------- ----------- ----------- ------------
E
Long-term debt................................ 1,169,037 14 G (14)(12) 1,614,037
H 445,000(10)
---------- ----------- ----------- ------------
Other non-current liabilities................. 33,038 3,092 (3,092)(12) 33,038
---------- ----------- ----------- ------------
$2.875 Senior Exchangeable Preferred Stock.... 98,060 98,060
---------- ----------- ----------- ------------
$11.625 Series B Exchangeable Preferred
Stock........................................ 137,663 137,663
---------- ----------- ----------- ------------
$10.00 Series C Exchangeable Preferred
Stock........................................ 193,807 193,807
---------- ----------- ----------- ------------
Common stock subject to redemption............ 25,340 25,340
---------- ----------- ----------- ------------
Shareholders' equity
Common stock................................. 1,263 198 (198)(12) 1,263
Additional paid-in capital................... 752,017 74,089 (74,089)(12) 752,017
Retained earnings (accumulated deficit)...... (683,200) 30,909 (30,909)(12) (683,200)
Less treasury shares at cost: 45,920
shares...................................... (156) 156(12) --
Cumulative foreign currency translation
adjustments................................. (1,283) (1,283)
---------- ----------- ----------- ------------
Total shareholders' equity............... 68,797 105,040 (105,040) 68,797
---------- ----------- ----------- ------------
$2,088,966 $ 129,405 $ 353,416 $2,571,787
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
</TABLE>
See notes to unaudited pro forma consolidated financial data.
P-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) Reflects the operating results of the Acquired Businesses as if such
businesses were acquired on January 1, 1995. For those acquisitions for
which asset appraisals have not yet been finalized, pro forma amortization
expense approximates the estimated amortization under straight-line and
accelerated methods over the life of the intangible assets. The pro forma
interest expense adjustment reflects the additional borrowings to finance
the acquisitions at an assumed weighted average rate of 7.17% for the three
months ended March 31, 1996 and 7.28% for the year ended December 31, 1995.
(2) Reflects the Offerings as if they had occurred on January 1, 1995 and the
use of the proceeds to pay down borrowings under the Old Revolving Credit
Agreement. The pro forma interest expense adjustment reflects the interest
expense on the Old Notes at 8.50% and the reduction of borrowing levels at
an assumed weighted average rate of 7.17% for the three months ended March
31, 1996 and 7.28% for the year ended December 31, 1995. The pro forma
amortization of deferred financing costs adjustment reflects the
amortization of the deferred financing costs related to the Old Notes over
the ten-year term. The pro forma preferred stock dividend adjustment
reflects a dividend rate of 10.00% on the Old Preferred Stock.
(3) The calculation of the pro forma income (loss) applicable to common
shareholders includes non-cash charges for depreciation and amortization of
property and equipment, prepublication costs, intangible assets, excess of
purchase price over net assets acquired and deferred financing costs,
restructuring and other costs, non-cash interest expense on an acquisition
obligation, distribution advance, original issue discount and other current
liability, and non-cash preferred stock dividend requirements. These pro
forma non-cash charges totaled $64,174 for the three months ended March 31,
1996 and $327,510 for the year ended December 31, 1995.
(4) Pro forma loss per common and common equivalent share for the year ended
December 31, 1995 was computed using the weighted average number of Common
Stock shares outstanding during the year assuming that the issuance of the
17,250,000 shares of Common Stock in the Initial Public Offering occurred
on January 1, 1995. The weighted average number of Common Stock shares
outstanding during 1995 (for the quarters prior to the initial filing of
the registration statement for the Initial Public Offering) 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 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.
Pro forma loss per common share assuming full dilution is not presented
because such calculation is antidilutive.
(5) The pro forma ratio of earnings to fixed charges consists of loss before
income taxes plus fixed charges divided by fixed charges. Loss before
income taxes includes (i) depreciation and amortization of prepublication
costs, deferred financing costs, property and equipment, intangible assets
and excess of purchase price over net assets acquired, (ii) interest
expense, (iii) restructuring and other costs and (iv) that portion of
operating rental expense that represents interest. Prepublication costs
include editorial, artwork, composition and printing plate costs incurred
prior to publication date. Fixed charges consist of interest expense
associated with long-term debt and other non-current obligations (including
current maturities of long-term debt), amortization of deferred financing
costs and that portion of operating rental expense that represents
interest.
(6) The Company's pro forma earnings would have been inadequate to cover pro
forma fixed charges and pro forma fixed charges plus preferred stock
dividends by $34,661 and $46,505, respectively,
P-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA--(CONTINUED)
(DOLLARS IN THOUSANDS)
for the three months ended March 31, 1996 and by $168,218 and $214,505,
respectively, for the year ended December 31, 1995. Adjusted to eliminate
the non-cash charges in Note 3 above, such pro forma earnings would have
exceeded pro forma fixed charges and pro forma fixed charges plus preferred
stock cash dividend requirements by $25,544 and $17,669, respectively, for
the three months ended March 31, 1996 and by $144,505 and $113,005,
respectively, for the year ended December 31, 1995.
(7) Reflects the elimination of the net provision for the loss on the sales of
the Divested Businesses as if such businesses were divested on January 1,
1995. The pro forma interest expense adjustment assumes the use of proceeds
from such divestitures to pay down borrowings under the Old Revolving
Credit Agreement, and the related reduction of interest expense at an
assumed weighted average rate of 7.28% for the year ended December 31,
1995.
(8) Reflects the redemption of old preferred stock and elimination of related
dividends as if such redemption occurred on January 1, 1995 through
borrowings under the Old Revolving Credit Agreement. The pro forma interest
expense adjustment reflects the additional borrowings to fund the
redemption at an assumed weighted average rate of 7.28% for the year ended
December 31, 1995.
(9) Reflects the use of proceeds from the Company's Initial Public Offering of
Common Stock to pay down borrowings under the Old Revolving Credit
Agreement. The pro forma interest expense adjustment reflects the reduction
of borrowing levels at an assumed weighted average rate of 7.28% for the
year ended December 31, 1995.
(10) To record the additional borrowings to finance the acquisition of Westcott.
(11) To record the acquisition of the common stock of Westcott.
(12) To eliminate Westcott's historical equity and allocate the purchase price
of Westcott based on the estimated fair values of the assets acquired and
liabilities assumed. The following is a summary of the estimated purchase
price allocation related to the Westcott acquisition:
Total purchase price............................................ $445,000
Less: estimated fair value of assets and liabilities assumed.... 49,099
Less: estimated fair value of identifiable other intangible
assets......................................................... 197,950
---------
Excess of purchase price over the fair value of the net assets
acquired....................................................... $197,951
---------
---------
The excess of the purchase price over the net assets acquired and the
identifiable other intangible assets will be amortized using both straight-line
and accelerated amortization methods with useful lives generally ranging
from 1 to 40 years, in accordance with K-III's accounting policies. The
identifiable other intangible assets consist of the estimated fair values
allocated to trademarks, video library, subscriber and customer lists,
non-compete agreements and other. The allocation of the purchase price is
subject to adjustment 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 unaudited pro forma
consolidated balance sheet; however, the changes are not expected to have a
material effect on the consolidated financial position of the Company.
P-6
<PAGE>
THE BANK OF NEW YORK
AS EXCHANGE AGENT FOR THE NOTES
<TABLE>
<CAPTION>
By Mail: By Facsimile Transmission: By Hand or Overnight Courier:
<S> <C> <C>
Reorganization Section (212) 571-3080 Reorganization Section
101 Barclay Street--7 East Confirm by Telephone: 101 Barclay Street--7 East
New York, NY 10286 (212) 815-2742 New York, NY 10286
Attention: Henry Lopez Attention: Henry Lopez
</TABLE>
AS EXCHANGE AGENT FOR THE PREFERRED STOCK
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission: By Hand or Overnight Courier:
Tender & Exchange (For Eligible Institutions Tender & Exchange
Department Only) Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station Confirm Facsimile by Telephone: Receive and Deliver Window
New York, NY 10286-1248 (For Confirmation Only) New York, NY 10286
(800) 507-9357
</TABLE>
