UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 30, 1996
K-III Communications Corporation
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-11106 13-3647573
- ------------------------------------------------------------------------
(State of Incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
745 Fifth Avenue, New York, New York 10151
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 745-0100
- -----------------------------------------------------------------------
<PAGE>
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) 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 Communications Corporation, a
Delaware corporation (the "Company"), 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 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, the Company completed the merger (the "Merger") of
Acquiror Sub with Westcott. Upon consummation of the Merger, Westcott became a
wholly-owned subsidiary of the Company 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. The funds required for
the acquisition were provided by the Company's revolving credit facility with
The Chase Manhattan Bank, N.A., as agent, and certain other lending
institutions.
In connection with the Merger, three directors of the Company became the
three directors of Westcott. In addition, on June 6, 1996, certain officers of
Westcott were removed and certain employees of the Company were elected to serve
as officers of Westcott.
(b) Certain of the assets of Westcott constitute plant, equipment, and
other physical property utilized in the business of Westcott as previously
described, and the Company intends to continue such use.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of the business acquired.
----------------------------------------------
1. Unaudited Condensed Consolidated Balance Sheet of Westcott at
March 31, 1996 and the Unaudited Condensed Consolidated Statements of Income and
<PAGE>
3
Cash Flows for the three months ended March 31, 1995 and 1996 and the
Unaudited Condensed Consolidated Statement of Shareholders' Equity for the
three months ended March 31, 1996 are attached as pages 4 through 11.
2. Audited Consolidated Balance Sheets of Westcott at December 31,
1994 and 1995 and the Audited Consolidated Statements of Operations,
Shareholders' Equity and Cash Flows for the years ended December 31, 1994 and
1995 and Report of Independent Auditors are attached as pages 12 through 29.
(b) Pro forma financial information.
--------------------------------
1. An introduction to the pro forma financial statements is attached
as page 30.
2. An Unaudited Pro Forma Statement of Consolidated Operations for
the three months ended March 31, 1996 and the year ended December 31, 1995 and
an Unaudited Pro Forma Balance Sheet at March 31, 1996, along with a description
of all pro forma adjustments, are attached as pages 31 through 35.
(c) Exhibits.
---------
(2) Agreement and Plan of Merger, dated as of April 22, 1996, by and
among the Company, K-III Prime Corporation, Acquiror Sub and Westcott
(incorporated by reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).
(23) Consent of Ernst & Young LLP.
<PAGE>
4
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(Unaudited)
<TABLE><CAPTION>
March 31,
1996
___________
<S> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . $ 17,207,550
Accounts receivable (net of allowance for
doubtful accounts of $798,000
at March 31, 1996) . . . . . . . . . . . 23,277,296
Program inventory. . . . . . . . . . . . . 7,769,197
Prepaid commissions. . . . . . . . . . . . 3,238,960
Other current assets . . . . . . . . . . . 4,873,145
___________
Total current assets . . . . . . . . . . 56,366,148
Property and equipment, at cost:
Downlink equipment . . . . . . . . . . . . 34,506,909
Studio equipment . . . . . . . . . . . . . 11,755,304
Office furniture and equipment . . . . . . 14,856,915
Leasehold improvements . . . . . . . . . . 2,638,994
___________
63,758,122
Accumulated depreciation
and amortization . . . . . . . . . . . . (31,709,002)
___________
32,049,120
Other assets:
Equipment inventory. . . . . . . . . . . . 2,168,335
Program inventory. . . . . . . . . . . . . 12,453,117
Goodwill (net of accumulated amortization
of $5,223,000 at March 31, 1996) . . . . 20,068,619
Other intangibles (net of accumulated
amortization of $4,492,000 at
March 31, 1996) . . . . . . . . . . . . . 2,919,501
Other assets. . . . . . . . . . . . . . . . 3,379,694
___________
$129,404,534
____________
____________
</TABLE>
<PAGE>
5
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
<CAPTION>
March 31,
1996
___________
<S> <C>
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $ 1,461,972
Income taxes payable. . . . . . . . . . . . 1,901,549
Accrued liabilities . . . . . . . . . . . . 4,932,008
Deferred income taxes . . . . . . . . . . . 1,426,465
Unearned revenue. . . . . . . . . . . . . . 11,527,450
Current portion of long-term obligations. . 10,000
___________
Total current liabilities . . . . . . . 21,259,444
Long-term obligations . . . . . . . . . . . . 14,298
Deferred income taxes . . . . . . . . . . . . 2,825,260
Minority interest liability . . . . . . . . . 266,082
Shareholders' equity:
Common stock, $.01 par value; 29,000,000
shares authorized; 19,816,325 shares
outstanding at March 31, 1996 . . . . . . 198,163
Additional paid-in capital. . . . . . . . . 74,088,536
Retained earnings . . . . . . . . . . . . . 30,908,895
Less treasury shares at cost; 45,920 shares (156,144)
___________
Total shareholders' equity. . . . . . . 105,039,450
___________
$129,404,534
===========
</TABLE>
See accompanying notes.
<PAGE>
6
<TABLE> WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
____________________________
1995 1996
___________ ____________
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 24,634,153 $ 24,911,915
Cost of revenues:
Programming and production. . . . . . . . 4,955,384 5,947,618
Delivery and transmission . . . . . . . . 3,369,820 3,147,890
Sales and marketing . . . . . . . . . . . 4,769,087 5,733,872
General and administrative. . . . . . . . 2,442,380 2,082,026
Depreciation and amortization . . . . . . 2,904,453 3,006,563
___________ ___________
Total . . . . . . . . . . . . . . . . . 18,441,124 19,917,969
Income from operations . . . . . . . . . . . 6,193,029 4,993,946
Interest expense . . . . . . . . . . . . . . (31,409) (22,619)
Interest income. . . . . . . . . . . . . . . 102,346 195,222
Other income (expense) . . . . . . . . . . . (19,305) 614,040
___________ ___________
Income before income taxes . . . . . . . . . 6,244,661 5,780,589
Provision for income taxes . . . . . . . . . 2,435,418 2,312,236
___________ ___________
Net income available to common shareholders. $ 3,809,243 $ 3,468,353
___________ ___________
___________ ___________
Earnings per common share (Note 2) . . . . . $ .20 $ .18
___________ ___________
___________ ___________
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . 19,530,490 19,760,225
___________ ___________
___________ ___________
</TABLE>
See accompanying notes.
<PAGE>
7
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1996
(Unaudited)
<CAPTION>
Common Stock Additional
______________________ paid-in
Shares Amount capital
___________ _________ __________
<S> <C> <C> <C>
Balance at December 31, 1995 . . . . 19,799,720 $ 197,997 $73,923,710
Issuance of Common Stock under
Employee Stock Purchase Plan . . 5,105 51 65,038
Issuance of Common Stock under
Employee Stock Option Plan and
Non-Employee Stock Option Plan,
including federal income tax
benefit (Note 1) . . . . . . . . 11,500 115 99,788
Net Income . . . . . . . . . . . . . - - -
___________ _________ __________
Balance at March 31, 1996. . . . . . 19,816,325 $ 198,163 $74,088,536
___________ _________ __________
___________ _________ __________
</TABLE>
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1996
(Unaudited)
(CONTINUED)
<CAPTION>
Retained Treasury
earnings shares
___________ ________
<S> <C> <C>
Balance at December 31, 1995. . . . . . . . . $ 27,440,542 $(156,144)
Issuance of Common Stock under
Employee Stock Purchase Plan. . . . . . . - -
Issuance of Common Stock under
Employee Stock Option Plan and
Non-Employee Stock Option Plan,
including federal income tax
benefit (Note 1) . . . . . . . . . . . . - -
Net Income . . . . . . . . . . . . . . . . . 3,468,353 -
___________ ________
Balance at March 31, 1996. . . . . . . . . . $ 30,908,895 $(156,144)
___________ ________
___________ ________
See accompanying notes.
</TABLE>
<PAGE>
8
<TABLE>
WESTCOTT COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months ended March 31,
___________________________
1995 1996
___________ ____________
<S> <C> <C>
Operating activities:
Net income. . . . . . . . . . . . . . . . $ 3,809,243 $ 3,468,353
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . 2,904,453 3,006,563
(Gain) Loss on sale of property
and equipment . . . .. . . . . . . 26,294 (2,040)
(Gain) on marketable equity securities - (612,000)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . 2,092,973 (228,654)
Other current assets and prepaid
commissions . . . . . . . . . . . 207,760 (634,459)
Accounts payable and accrued liabilities (1,251,030) (177,707)
Income taxes payable. . . . . . . . 1,534,422 1,846,636
Unearned revenue. . . . . . . . . . (3,549,719) (896,161)
___________ ___________
Net cash provided by
operating activities. . . . . . . 5,774,396 5,770,531
Investing activities:
Net decrease in investments . . . . . . 625,778 -
Additions to property and equipment . . (773,656) (1,373,485)
Net increase in other assets. . . . . . (589,267) (734,494)
Net additions to program inventory. . . (946,969) (904,426)
Net additions to interest in partnership 15,466 19,487
Proceeds from sale of assets. . . . . . 17,412 2,040
Purchase business combinations, net of
cash acquired (Note 3). . . . . . . . (1,478,548) -
___________ ____________
Net cash used in
investing activities . . . . . . (3,129,784) (2,990,878)
Financing activities:
Payments on short-term debt
and capital leases. . . . . . . . . . (255,024) -
Payments on long-term debt. . . . . . . (191,802) (4,303)
Proceeds from issuance of stock, net. . 86,835 65,089
Proceeds from exercise of stock options 240,687 99,903
___________ ___________
Net cash provided by (used in)
financing activities . . . . . . (119,304) 160,689
Net increase in cash and cash equivalents. 2,525,308 2,940,342
Cash and cash equivalents
at beginning of period. . . . . . . . . 5,815,118 14,267,208
___________ ___________
Cash and cash equivalents at end of period $ 8,340,426 $ 17,207,550
___________ ___________
___________ ___________
Supplemental disclosures of cash flow information
Cash paid during the period:
Interest . . . . . . . . . . . . . . $ 31,409 $ 22,619
Income taxes . . . . . . . . . . . . $ 797,723 $ 440,480
</TABLE>
See accompanying notes.
<PAGE>
9
WESTCOTT COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions
to Form 10-Q and therefore do not include all information and footnotes
necessary for fair presentation of financial position, results of operations,
and cash flows in conformity with generally accepted accounting principles.
Management believes all adjustments necessary for a fair presentation of the
results of the interim period have been made and are of a normal recurring
nature.
In presenting the accompanying unaudited condensed consolidated
financial statements, certain amounts have been reclassified. These
individual reclassifications have not been disclosed as the impact on the
Company's financial statements is not material.
During the first three months of 1996, the Company recognized a federal
income tax benefit of approximately $28,000 resulting from the exercise of
employee stock options. Under generally accepted accounting principles, this
federal income tax benefit is recognized as a deferred tax asset and added to
additional paid-in-capital in the period of the tax deduction.
These unaudited condensed consolidated financial statements and the
notes thereto should be read in conjunction with the Company's most recent
audited financial statements included in its Annual Report on Form 10-K.
2. Earnings per share. Earnings per share are computed based on weighted
average common shares outstanding.
3. Acquisitions. Effective March 1, 1995, the Company acquired all of the
outstanding stock of Lockert Jackson & Associates, Inc. ("Lockert Jackson")
in exchange for a cash payment of $1,500,000 and the assumption of approximately
$2,075,000 of liabilities. In addition, the Company made a one-time payment
of $500,000 in return for five-year non-competition agreements, and will pay
approximately $318,000 of additional purchase price over the next three years.
Lockert Jackson is nationally recognized as a producer and distributor of
"Emergency Medical Update" and "Safety Watch", subscription based emergency
medical and safety video training products. This acquisition was accounted
for as a purchase, and accordingly, the net assets and results of operations
of Lockert Jackson are included in the Company's consolidated financial
statements commencing March 1, 1995.
Effective August 1, 1995, the Company acquired certain assets of Capital
Training Company ("CTC") in exchange for a cash payment of $1,380,000 and
the assumption of approximately $218,000 of liabilities. In addition, the
Company will pay approximately $250,000 of additional purchase price over the
next two years. CTC produces and distributes videotape training products for
the financial services industry. This acquisition was accounted for as a
purchase, and accordingly, the net assets and results of operations of CTC are
included in the Company's consolidated financial statements commencing
August 1, 1995.
4. Long-term Obligations. Effective June 28, 1993, the Company entered into
a two-year revolving credit facility with its bank pursuant to which it may
borrow up to $18,000,000. After the revolver term expires, outstanding amounts
under this facility would be convertible into a four-year term loan. Effective
June 28, 1995, this credit facility was extended for one year to June 28, 1996.
The facility provides a sublimit of $1,000,000 for standby letters of credit. A
commitment fee of one-half of 1% of the unused credit line and an interest rate
of prime, or if lower, an alternate CD rate plus 1 1/2% will be charged.
<PAGE>
10
WESTCOTT COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements -
(Continued)
(Unaudited)
The credit facility contains various restrictive covenants which, among
other things, limit the payment of dividends and require the Company to
maintain certain financial and tangible net worth ratios. The facility is
secured by studio equipment, downlink equipment, other equipment and fixtures,
subsidiary stock and accounts receivable. At March 31, 1996, there were no
amounts borrowed under this facility.
5. Subsequent Events. On April 22, 1996, the Company announced that the
Company, K-III Acquisition Corp. (the "Purchaser"), a Texas corporation, K-III
Prime Corporation ("K-III Prime"), a Delaware corporation, and K-III
Communications Corporation (the "Parent"), a Delaware corporation, entered into
an agreement and Plan of Merger (the "Merger Agreement"), pursuant to which the
Purchaser will commence a tender offer (the "Offer") for all of the outstanding
Common Stock of the Company for $21.50 per share (the "Per Share Amount") in
cash. The Offer will commence no later than April 26, 1996 and will be
conditioned on there being validly tendered that number of shares that, when
added to the shares already owned by the Parent and its direct and indirect
subsidiaries, constitutes a majority of the then Outstanding Shares on a Fully
Diluted Basis (as defined in the Merger Agreement) as well as other customary
conditions, including regulatory approvals. The Offer will be followed by a
merger of the Purchaser with and into the Company upon the approval and
adoption of the Merger Agreement by the affirmative vote of the shareholders of
the Company to the extent required by Texas law. In the Merger, each share of
Common Stock not owned by the Purchaser or its affiliates or by any dissenting
shareholders will be automatically converted into the right to receive the Per
Share Amount in cash.
Immediately prior to the execution of the Merger Agreement, the Company
executed an amendment (the "Amendment") to that certain Rights Agreement dated
January 9, 1996 by and between the Company and KeyCorp Shareholder Services Inc.
(the "Rights Agreement"). The Amendment provides that neither the execution or
delivery of the Merger Agreement or the making of the Offer, in each case in
accordance with the Merger Agreement, shall cause (i) Parent, K-III Prime or the
Purchaser or any of their Affiliates (as defined in the Rights Agreement) or
Associates (as defined in the Rights Agreement) to be an Acquiring Person (as
defined in the Rights Agreement), (ii) a Stock Acquisition Date (as defined in
the Rights Agreement) to occur, or (iii) a Distribution Date (as defined in the
Rights Agreement) to occur in accordance with the terms of the Rights Agreement.
None of the acceptance for payment or payment for shares of Common Stock by the
Purchaser pursuant to the Offer, in each case in accordance with the Merger
Agreement, shall cause (i) Parent, K-III Prime or the Purchaser or any of their
affiliates or associates to be an Acquiring Person, (ii) a Stock Acquisition
Date to occur, or (iii) a Distribution Date to occur in accordance with the
terms of the Rights Agreement; provided, that if, prior to the time that the
Rights have expired, the Merger Agreement is terminated pursuant to its terms,
then the provisions of the Amendment terminate. The Amendment also provides
that the Final Expiration Date (as defined in the Rights Agreement) shall occur
no later than immediately prior to the purchase of the shares pursuant to the
Offer.
On May 30, 1996, the Purchaser acquired 19,363,464 shares of the Company,
which represented approximately 97.9% of the outstanding shares, for a cash
price of $21.50 per share pursuant to the Offer commenced on April 26, 1996.
On May 31, 1996, the Company completed the merger (the "Merger") with the
Purchaser. Upon consummation of the Merger, Westcott became a wholly-owned
subsidiary of K-III Communications Corporation and the shareholders of
Westcott who did not tender their shares became entitled to receive $21.50
per share.
<PAGE>
11
The following table contains information about products and
services offered by the Company.
<TABLE>
<CAPTION>
Current
Markets Offerings Description Medium
_______ _________ ________________ ______
<S> <C> <C> <C>
Government & LETN Law Enforcement Television Network S/V/W
Public FETN Fire & Emergency Television Network S/V
Services American Heat American Heat V
Pulse Pulse V
EMU Emergency Medical Update V
GSTN Government Services Television Network V
Automotive ASTN Automotive Satellite Television Network S
Detroit (WCMI) Custom Programming N/A
Health Care HSTN Health & Sciences Television Network S
AHA American Hospital Association T
WHTG Westcott Healthcare Teleconference Group T
JCSN Joint Commission Satellite Network T
PSYCHNET Sponsored Programming T
LTCN Long Term Care Network S
IMN Custom Programming N/A
FMTN Family Medical Television Network T
Corporate & The CPA Report The CPA Report V
Professional PSTN Professional Security Television Network V
AFTN Accounting & Financial Television Network V
ITS Industrial Training Systems V/C
Tel-A-Train Tel-A-Train V/C
ETC Excellence in Training V
Safety Watch Safety Watch V
ATSN Accounting Television Satellite Network I/S
IDTN Electronic Classroom I/S
EXEN Executive Education Network I/S
Financial BTCC Bankers Training & Consulting Company V/C
Services
Educational TI-IN K-12 Education I/S
</TABLE>
Legend: S = Private Satellite
V = Videotape
T = Teleconferencing
C = Computer Based Training
W = Workstation
I = Interactive Multimedia
N/A = Not Applicable
<PAGE>
12
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders
WESTCOTT COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheets of Westcott
Communications, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Westcott Communications, Inc. at December 31, 1995 and 1994,
and the consolidated results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Dallas, Texas
February 16, 1996
<PAGE>
<TABLE>
13
WESTCOTT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994 and 1995
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $89,705,526 $97,799,007
Cost of revenues:
Programming and production . . . . . . . . . 18,114,266 20,195,087
Delivery and transmission . . . . . . . . . 10,700,851 13,103,291
Sales and marketing . . . . . . . . . . . . . 21,125,727 19,548,245
General and administrative . . . . . . . . . 10,455,921 9,241,298
Depreciation and amortization . . . . . . . . 10,095,601 11,984,044
------------ ------------
Total . . . . . . . . . . . . . . . . . . . 70,492,366 74,071,965
Income from operations . . . . . . . . . . . . . . . . . . 19,213,160 23,727,042
Interest expense . . . . . . . . . . . . . . . . . . . . . (176,761) (120,927)
Interest income . . . . . . . . . . . . . . . . . . . . . 94,247 544,199
Other income (loss) . . . . . . . . . . . . . . . . . . (38,692) 46,548
------------ ------------
Income before income taxes . . . . . . . . . . . . . . . . 19,091,954 24,196,862
Provision for income taxes (Note 5) . . . . . . . . . . . . 7,254,943 9,616,298
------------ ------------
Net income available to common shareholders . . . . . . . . $ 11,837,011 $ 14,580,564
============ ============
Earnings per common share . . . . . . . . . . . . . . . . . $ .61 $ .74
============ ============
Weighted average common and common
equivalent shares outstanding . . . . . . . . . . . . . . 19,379,439 19,643,449
============ ============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
14
WESTCOTT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1995
ASSETS
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 5,815,118 $ 14,267,208
Accounts receivable (net of allowance for
doubtful accounts of $776,000 and $811,000
in 1994 and 1995, respectively) (Note 4) . . . . . . . . . . . . . . . 20,939,216 23,048,642
Program inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 5,843,078 7,784,585
Prepaid commissions . . . . . . . . . . . . . . . . . . . . . . . . . . 2,038,547 2,837,125
Short-term investment . . . . . . . . . . . . . . . . . . . . . . . . . 718,437 -
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,834,796 4,028,521
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 39,189,192 51,966,081
Property and equipment, at cost (Note 4):
Downlink equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 32,267,208 34,161,017
Studio equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,990,730 11,501,503
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . 12,096,651 14,155,697
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . 2,499,308 2,628,201
---------- ----------
57,853,897 62,446,418
Accumulated depreciation and amortization . . . . . . . . . . . . . . . (22,298,155) (29,750,234)
------------ ------------
35,555,742 32,696,184
Other assets:
Equipment inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 2,648,086 1,970,985
Program inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,802,493 11,533,303
Goodwill (net of accumulated amortization of
$3,197,000 and $4,808,000 in 1994 and 1995,
respectively) (Note 3) . . . . . . . . . . . . . . . . . . . . . . . 16,491,866 20,483,469
Other intangibles (net of accumulated amortization of
$3,144,000 and $4,345,000 in 1994 and 1995,
respectively) (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 2,962,745 2,997,307
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,337,180 3,335,908
---------- ----------
$ 108,987,304 $ 124,983,237
============ ============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
15
WESTCOTT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS (continued)
December 31, 1994 and 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,430,582 $ 1,634,416
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . 213,436 54,913
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 4,557,849 4,937,271
Deferred income taxes (Note 5) . . . . . . . . . . . . . . . . . . . . 1,154,962 1,426,465
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,994,796 12,423,611
Current portion of long-term obligations . . . . . . . . . . . . . . . 10,000 10,000
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 23,361,625 20,486,676
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,254 18,601
Deferred income taxes (Note 5) . . . . . . . . . . . . . . . . . . . . . 1,162,672 2,825,260
Minority interest (Note 6) . . . . . . . . . . . . . . . . . . . . . . . 132,940 246,595
Commitments (Note 7)
Shareholders' equity (Notes 3, 4 and 8):
Common stock, $.01 par value; 29,000,000
shares authorized; 19,561,123 and 19,799,720
shares outstanding in 1994 and 1995, respectively . . . . . . . . . . 195,611 197,997
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 71,398,368 73,923,710
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 12,859,978 27,440,542
Less treasury shares at cost; 45,920 shares . . . . . . . . . . . . . . (156,144) (156,144)
------------- -------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 84,297,813 101,406,105
------------- -------------
$ 108,987,304 $ 124,983,237
============= =============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
16
WESTCOTT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1994 and 1995
Preferred Stock Common Stock Additional Retained
---------------------- ---------------------- paid-in earnings Treasury
Shares Amount Shares Amount capital (deficit) shares
--------- ----------- ----------- -------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 . . . . . . . . . - $ - 19,183,531 $191,835 $66,309,922 $1,022,967 $(156,144)
Issuance of common stock under
Employee Stock Purchase Plan (Note 8) . . . - - 33,572 336 444,882 - -
Issuance of common stock under
Employee Stock Option Plan and
Non-Employee Stock Option Plan,
including federal tax benefit (Note 8) . . . - - 244,020 2,440 2,544,564 - -
Issuance of common stock for acquisition of
ETC (Note 3) . . . . . . . . . . . . . . . . - - 100,000 1,000 2,099,000 - -
Net Income . . . . . . . . . . . . . . . . . . - - - - - 11,837,011 -
--------- ----------- ----------- -------- ----------- ------------ ----------
Balance at December 31, 1994 . . . . . . . . . - $ - 19,561,123 $195,611 $71,398,368 $12,859,978 $(156,144)
Issuance of common stock under
Employee Stock Purchase Plan (Note 8) . . . - - 24,402 244 305,632 - -
Issuance of common stock under
Employee Stock Option Plan and
Non-Employee Stock Option Plan,
including federal tax benefit (Note 8) . . . - - 169,150 1,692 1,595,160 - -
Issuance of common stock for acquisition of
ETC (Note 3) . . . . . . . . . . . . . . . . - - 45,045 450 624,550 - -
Net Income . . . . . . . . . . . . . . . . . . - - - - - 14,580,564 -
--------- ----------- ----------- -------- ----------- ------------ ----------
Balance at December 31, 1995 . . . . . . . . . - $ - 19,799,720 $197,997 $73,923,710 $27,440,542 $(156,144)
========= =========== =========== ======== =========== ============ ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
17
WESTCOTT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994 and 1995
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 11,837,011 $ 14,580,564
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 10,095,601 11,984,044
Deferred income taxes . . . . . . . . . . . . . . . . 3,147,331 3,004,681
(Gain) loss on retirement of property and equipment . (10,690) 18,054
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . (3,599,746) (2,013,064)
Investments in trade securities . . . . . . . . . (718,437) 718,437
Other current assets and prepaid commissions . . . (1,210,696) (922,195)
Accounts payable and accrued liabilities . . . . . (2,798,100) (2,970,245)
Income taxes payable . . . . . . . . . . . . . . . 1,125,457 (158,523)
Unearned revenue . . . . . . . . . . . . . . . . . (1,072,081) (3,688,132)
------------ -------------
Net cash provided by operating activities . . . 16,795,650 20,553,621
Investing activities:
Net increase in other assets . . . . . . . . . . . . . . . (1,720,331) (2,039,307)
Additions to property and equipment . . . . . . . . . . . . (12,828,144) (5,317,581)
Net additions to program inventory . . . . . . . . . . . . (4,115,487) (3,478,411)
Net additions to interest in partnership . . . . . . . . . 109,650 113,655
Proceeds from sale of assets . . . . . . . . . . . . . . . 127,171 30,093
Purchase business combinations,
net of cash acquired (Note 3) . . . . . . . . . . . . 10,662 (2,858,548)
------------ -------------
Net cash used in investing activities . . . . . . . . (18,416,479) (13,550,099)
Financing activities:
Payments on short-term debt and capital leases . . . . . . (1,233,091) (255,024)
Payments on long-term debt . . . . . . . . . . . . . . . . (10,715) (199,136)
Proceeds from long-term debt and capital leases . . . . . . 141,992 -
Proceeds from issuance of stock, net (Note 8) . . . . . . . 445,218 305,876
Proceeds from exercise of stock options (Note 8) . . . . . 2,547,004 1,596,852
------------ -------------
Net cash provided by financing activities . . 1,890,408 1,448,568
Net increase in cash and cash equivalents . . . . . . . . . . 269,579 8,452,090
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . 5,545,539 5,815,118
------------ -------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . $ 5,815,118 $ 14,267,208
============ ============
Supplemental disclosures of cash flow information
Cash paid during the year:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 176,761 $ 120,927
Income taxes . . . . . . . . . . . . . . . . . . . . . . $ 1,452,085 $ 6,386,475
</TABLE>
<PAGE>
18
WESTCOTT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31, 1994 and 1995
Noncash investing activity:
In March 1994, the Company issued 100,000 shares of its Common
Stock valued at approximately $2,100,000 and assumed liabilities
of approximately $979,000 in connection with the acquisition of
Excellence in Training Corporation. (See Note 3)
In April 1995, the Company issued an additional 45,045 shares of
its Common Stock valued at approximately $625,000 in connection
with the acquisition of Excellence in Training Corporation. (See
Note 3)
The Company recorded obligations for additional purchase price
and non-competition agreements relating to 1994 purchase
business combinations totaling approximately $1,974,000 in 1994.
See accompanying notes.
<PAGE>
19
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. DESCRIPTION OF COMPANY
Westcott Communications, Inc., a Texas corporation (the "Company"),
educates, trains and informs individuals with common interests in selected
markets by providing value-added products and services using appropriate
communication technologies. Markets that are currently served include
government and public service, automotive, corporate and professional,
healthcare, education, financial services and electronic classroom. The
Company's operations have been conducted primarily within the continental
United States, and sales outside the U.S. to date have not been material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, its wholly owned subsidiaries and its
50% owned investee (Note 6). All significant intercompany transactions and
balances have been eliminated.
Use of Estimates - The preparation of consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with maturities of 90 days or less when purchased to be cash
equivalents.
Revenues - Subscription fees for satellite and videotape network
services are recognized in the month services are rendered. IDTN customers
are generally billed for services rendered upon completion of their
broadcast. First time customers under a "Proof of Concept" contract may be
billed one half of their fee when the contract is signed, with the
remaining portion billed upon completion of the broadcast. Subscription
fees for EXEN customers are billed in the month following the month of
service. Fees for participation are generally billed in the month
following the first class session of each course. Enrollment fees are
billed upon contract signature.
Accounts Receivable - Accounts receivable include subscription fees
billed to satellite network subscribers one month in advance and videotape
subscribers generally billed a year in advance or within one month of
delivery of goods. The base contract fee for IDTN services are generally
recognized in the month that the broadcast occurs. Additional revenues not
covered by the base fee, such as those received for catering services,
temporary viewing sites and additional production services, are recognized
on the percentage-of-completion basis. The subscription fee for EXEN
customers is recognized on a straight-line basis over the life of the
related contract, which is generally one year. Revenue for participation
fees in excess of this subscription fee are recognized in the month that
the course begins. EXEN enrollment fees are recognized in the month the
customer's enrollment is complete. Bad debt expense for the years ended
December 31, 1994 and 1995 was approximately $2,105,000 and $1,423,000,
respectively. A portion of the amount in unearned revenue represents
additional reserve for uncollectible accounts receivable to the
extent the revenue has not been recognized.
Program Inventory - Program inventory represents the unamortized
cost of programs produced for both the satellite and videotape networks.
The cost of these programs has been calculated using the average cost
method. The cost of satellite programs is expensed as airings occur in
ratio to an estimated number of future showings of each program, and are
allocated between current and noncurrent based on the estimated cost of
<PAGE>
20
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
programs to air in the following twelve months. The cost of videotape
inventory is expensed on a straight-line basis over the estimated period of
time that revenues from future sales are estimated to be generated, which
is generally one to five years. The amortization of satellite program
inventory is dependent upon management's estimate of the number of future
airings. Program inventory is reviewed periodically and revised downward
if the usefulness of a program declines.
Goodwill and Other Intangibles - Goodwill is generally amortized
on a straight-line basis over a period of 15 years. Other intangible
assets include noncompete agreements, trademarks and customer agreements
which are amortized using the straight-line method over the lesser of the
period of the agreement or the estimated useful lives which range from 3-7
years.
Investments - At December 31, 1994, investments consist primarily
of equity securities. These securities are classified as trading
securities and are stated at fair market value.
Equipment Inventory - Equipment inventory represents uninstalled
receive site equipment.
Deferred Contract Costs - Certain costs incurred within the
videotape networks to obtain sales contracts are deferred and amortized
using the straight-line method over the period of time that revenues from
these contracts are recognized, which generally ranges from 1-2 years.
Such costs are included in other current assets in the accompanying
financial statements. Amortization of deferred contract costs totaled
approximately $2,728,000 and $1,670,000 in 1994 and 1995, respectively,
and is included in sales and marketing costs in the accompanying financial
statements.
Commission Expense - Commissions for obtaining satellite subscriber
contracts are generally expensed in the month the contract is received,
with the exception of TI-IN satellite subscriber contracts which are
deferred and expensed over the life of the contract which is usually one
school year. Commissions for obtaining EXEN and videotape contracts are
deferred and expensed over the life of the related contract. IDTN
commissions are expensed as the live events occur.
Unearned Revenue - Unearned revenue represents amounts paid by
or billed to customers (with payment due within 30 days) for services to be
delivered in future periods. Unearned revenue is recognized as these
services are delivered.
Depreciation and Amortization - Depreciation of property and
equipment is computed using the straight-line method over estimated useful
lives which range from 3-8 years. Leasehold improvements are amortized
over the shorter of the term of the related lease or their estimated useful
lives.
Income Taxes - Deferred tax assets and liabilities are recorded
based on the difference between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes. In addition,
the current or deferred consequences of a transaction are measured by
applying the provisions of enacted tax laws to determine the amount of
taxes payable currently or in future years.
Stock-based Compensation - The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its
employee stock options, rather than adopting the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation". Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
<PAGE>
21
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Risk Concentration - Financial instruments which potentially
subject the Company to concentrations of credit risk are short-term cash
investments and accounts receivable. The Company places its short-term
cash investments in government securities and investment grade, short-term
bank certificates of deposit. The Company sells subscription and
production services to customers throughout the United States and Canada
associated with the law enforcement, fire and emergency, healthcare,
banking, professional security, corporate, education, accounting and
automotive industries. The Company continuously evaluates the
creditworthiness of its customers' financial condition and generally does
not require collateral. The Company's allowance for doubtful accounts is
based on current market conditions and losses on uncollectible accounts
have consistently been within management's expectations.
Earnings per share - Earnings per share amounts are computed by
dividing net income available to common shareholders by the weighted
average number of common and common equivalent shares outstanding.
Reclassifications - Certain prior year amounts have been
reclassified to conform with the 1995 presentation.
3. ACQUISITIONS
Effective March 1, 1994, the Company acquired all of the
outstanding stock of Excellence in Training Corporation ("ETC") in exchange
for 100,000 shares of the Company's Common Stock valued at approximately
$2,100,000 and the assumption of approximately $979,000 of liabilities. In
addition, the Company entered into an obligation for additional purchase
price and noncompete agreements which are payable through 1996. In April
1995, in accordance with the terms of the obligation for additional
purchase price, the Company issued 45,045 additional shares of its Common
Stock valued at approximately $625,000. ETC distributes instructional and
training video products covering a broad range of business, management and
human resource topics. ETC also produces and markets its own video
products and provides custom video production and training services to
satisfy specific training needs of individual companies and organizations.
This acquisition was accounted for as a purchase, and accordingly, the net
assets and results of operations of ETC are included in the Company's
consolidated financial statements commencing March 1, 1994.
Effective March 1, 1995, the Company acquired all of the
outstanding stock of Lockert Jackson & Associates, Inc. ("Lockert Jackson")
in exchange for a cash payment of $1,500,000 and the assumption of
approximately $2,075,000 of liabilities. In addition, the Company made a
one-time payment of $500,000 in return for five-year non-competition
agreements, and will pay approximately $318,000 of additional purchase
price over the next three years. Lockert Jackson is nationally recognized
as a producer and distributor of "Emergency Medical Update" and "Safety
Watch," subscription based emergency medical and safety video training
products. This acquisition was accounted for as a purchase, and
accordingly, the net assets and results of operations of Lockert Jackson
are included in the Company's financial statements commencing March 1,
1995.
The following pro forma income statement data reflects the pro
forma consolidated results of operations of the Company, ETC and Lockert
Jackson after giving effect to certain purchase related adjustments including
amortization of goodwill, elimination of overhead allocation and related income
tax effects. This pro forma summary does not necessarily reflect the results
of operations as they would have been if the Company, ETC and Lockert Jackson
had constituted a single entity during such period. The pro forma income
statement data for the years ended December 31, 1994 and 1995 are presented
as if the purchase acquisitions occurred on January 1 of the year preceding
the year of acquisition.
<TABLE><CAPTION>
(Unaudited)
-----------------------------------
1994 1995
-------------- --------------
<S> <C> <C>
Revenues . . . . . . . . . . . $ 91,897,000 $ 98,057,000
Net income . . . . . . . . . . . $ 11,984,000 $ 14,775,000
Earnings per share . . . . . . . . . . $ .62 $ .75
</TABLE>
<PAGE>
22
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
4. LONG-TERM OBLIGATIONS
The Company's long-term obligation at December 31, 1994 and 1995
consists of a note payable bearing interest at 7% and maturing through
1997.
Effective June 28, 1993, the Company entered into a two-year revolving
credit facility with its bank pursuant
<PAGE>
23
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
to which it may borrow up to $18,000,000. After the revolver term expires,
outstanding amounts under this facility would be convertible into a four-
year term loan. Effective June 28, 1995, this credit facility was extended
for one year to June 28, 1996. The facility provides a sublimit of
$1,000,000 for standby letters of credit. A commitment fee of one-half of
1% of the unused credit line and an interest rate of prime, or if lower, an
alternate CD rate plus 1 1/2% will be charged.
The credit facility contains various restrictive covenants which, among
other things, limit the payment of cash dividends and require the Company
to maintain certain financial and tangible net worth ratios. The facility
is secured by studio equipment, downlink equipment, other equipment and
fixtures, subsidiary stock and accounts receivable. At December 31, 1995,
there were no amounts borrowed under this facility.
5. INCOME TAXES
Significant components of the provision for income taxes are as
follows:
<TABLE><CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . $3,619,280 $5,784,146
State . . . . . . . . . . . . . . . . . . . . . . . . 488,332 827,471
---------- ----------
Total Current . . . . . . . . . . . . . . . . . . . . 4,107,612 6,611,617
---------- ----------
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . 2,982,718 2,570,987
State . . . . . . . . . . . . . . . . . . . . . . . . 164,613 433,695
---------- ----------
Total Deferred . . . . . . . . . . . . . . . . . . . . 3,147,331 3,004,681
---------- ----------
Total Provision . . . . . . . . . . . . . . . . . . . . . $7,254,943 $9,616,299
========== ==========
The differences between the statutory and effective tax rates on
tax expense are as follows:
1994 1995
---- ----
Computed income tax expense at statutory rate . . . . . . $6,491,264 $8,226,933
State and local taxes, net of federal benefit . . . . . . 430,944 670,254
Nondeductible goodwill amortization . . . . . . . . . . . 459,203 534,336
Interest on tax-free investments . . . . . . . . . . . . (26,817) (4,492)
Other (individual items less than 5% of the
expected tax provision) . . . . . . . . . . . . . . . . (99,651) 189,268
---------- ----------
$7,254,943 $9,616,299
============ =============
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
for the years ended December 31, 1994 and 1995 are as follows:
<PAGE>
</TABLE>
<TABLE>
24
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation . . . . . . . . . . . . . . . . . . $ 3,595,300 $ 5,407,450
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 1,549,179 1,778,030
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . 199,682 302,167
----------- -----------
Total deferred tax liabilities . . . . . . . . . . . $ 5,344,161 $ 7,487,647
Deferred tax assets:
Book over tax amortization . . . . . . . . . . . . . . . . . . 2,031,690 1,546,626
Allowance for bad debts . . . . . . . . . . . . . . . . . . . . 308,091 346,828
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . 3,247 3,509
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . 103,669 120,069
Deferred compensation . . . . . . . . . . . . . . . . . . . . . - 108,132
Net operating loss carryforwards . . . . . . . . . . . . . . . 371,888 722,682
Alternative minimum tax credit carryover . . . . . . . . . . . 97,683 -
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . 110,259 388,076
----------- -----------
Subtotal . . . . . . . . . . . . . . . . . . . . . .
3,026,527 3,235,922
Valuation allowance for deferred tax assets . . . . . . . . . . - -
- -
Total deferred tax assets . . . . . . . . . . . . . . $ 3,026,527 $ 3,235,922
----------- -----------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . $ 2,317,634 $ 4,251,725
=========== ===========
</TABLE>
At December 31, 1995, the Company had a net operating loss
carryforward of approximately $2,064,806. The net operating loss
carryforward is subject to certain limitations under Section 382 of the
Internal Revenue Code, and expires in 2009.
6. INTEREST IN PARTNERSHIP
Effective April 1993, the Company entered into a partnership
agreement to form Government Services Television Network, L.L.P. ("GSTN").
The Company is the sole managing partner of GSTN and holds a 50% interest
in the partnership, with the remaining 50% being held by the Public Parties
Limited Partnership.
The Company believes that its 50% ownership interest in the
partnership, coupled with its sole management authority, is sufficient to
create a majority interest for purposes of applying SFAS No. 94.
Therefore, the Company reports its investment in GSTN under the
consolidation method.
7. COMMITMENTS
The Company negotiated a long-term transponder lease commencing on
September 1, 1991 and extending through January 16, 2002 to provide
transmission services for ASTN, LETN, HSTN, LTCN and FETN. The terms of
this operating lease agreement were renegotiated in 1993 to include
services for TI-IN. In addition, occasional-use time is currently
available to the Company under this agreement.
During 1994, and in accordance with the terms of the transponder
lease agreement, the Company expanded its satellite transponder capacity to
provide transmission for IDTN, EXEN and other teleconferences, resulting in
an increase in the minimum annual lease payments due under this agreement.
<PAGE>
25
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
The Company is committed to certain operating leases for office and
production space as well as satellite transponder capacity. The minimum
annual lease payments due under these agreements are as follows:
<TABLE>
<CAPTION>
Year ending Building Transponder
December 31, leases leases Total
----------- ----------- ------------
<S> <C> <C> <C>
1996 . . . . . . . . . . . . . . . . . . $ 2,550,070 $ 4,440,000 $ 6,990,070
1997 . . . . . . . . . . . . . . . . . . 2,188,508 4,440,000 6,628,508
1998 . . . . . . . . . . . . . . . . . . 1,509,778 4,440,000 5,949,778
1999 . . . . . . . . . . . . . . . . . . 2,400 4,440,000 4,442,400
2000 . . . . . . . . . . . . . . . . . . - 4,440,000 4,440,000
Thereafter . . . . . . . . . . . . . . . - 4,625,000 4,625,000
----------- ------------ ------------
$ 6,250,756 $ 26,825,000 $ 33,075,756
=========== ============ ============
</TABLE>
Lease expense was $7,125,579 and $7,151,288 for the
years ended December 31, 1994 and 1995, respectively.
The Company's subsidiary, TI-IN Acquisition Corp. ("TI-IN"), has an
agreement through August 1996 with the Texas Education Service Center,
Region 20 ("Region 20") whereby TI-IN programming is developed using Region
20 teachers and facilities. The courses developed meet the standards
established by the Texas Educational Agency. Region 20 secures teachers and
develops administrative and instructional support procedures for
transmitting of accredited programming by satellite and cable. The Company
pays $110,094 monthly for these services, a fee which is renegotiated each
September.
<PAGE>
26
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
8. STOCK OPTIONS/EMPLOYEE STOCK PURCHASE PLAN
A total of 3,000,000 shares of Common Stock are reserved for
issuance under the 1989 Stock Option Plan (the "Plan"). All options are
granted to officers and key employees of the Company at prices equal to the
fair market value of the Company's Common Stock on the date of grant, and
expire five years from the date of grant.
Information with respect to options granted is as follows:
<TABLE><CAPTION>
Range of
Number option exercise
of shares prices per share
---------- --------------------
<S> <C> <C>
Outstanding at December 31, 1993 . . . . . . . . . . . . . . . . 1,073,620 $ 2.31 to $ 17.75
==========
1994:
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,095,000 $ 9.25 to $ 24.00
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . (238,020) $ 2.31 to $ 14.00
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . (240,700) $ 2.44 to $ 24.00
----------
Outstanding at December 31, 1994 . . . . . . . . . . . . . . . . 1,689,900 $ 2.44 to $ 23.00
==========
1995:
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,000 $ 13.69 to $ 14.88
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . (153,500) $ 2.44 to $ 14.00
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,750) $ 7.00 to $ 23.00
----------
Outstanding at December 31, 1995 . . . . . . . . . . . . . . . . 1,444,650 $ 2.44 to $ 23.00
==========
</TABLE>
Of the 1,444,650 outstanding stock options, 491,250 were
exercisable at December 31, 1995. Of the total 3,000,000 shares reserved
for issuance under the Plan, 826,506 shares were available for future
option grants at December 31, 1995.
The Company adopted a Nonemployee Stock Option Plan in January 1990
under which nonemployee directors and other persons rendering critical
services to the Company may be granted stock options to purchase Common
Stock. A total of 200,000 shares of Common Stock have been reserved for
issuance under this plan. A total of 82,000 shares were outstanding at
December 31, 1993 at an option exercise price of $2.44 to $12.63 per share.
A total of 4,000 shares were granted in 1994 at $14.875 per share. A total
of 6,000 shares were exercised in 1994 at $2.44 per share, and no options
were canceled. A total of 4,000 shares were granted in 1995 at $15.00 per
share. A total of 16,000 shares were exercised in 1995 at $2.44 per share,
and no options were canceled.
The Company has also adopted an Employee Stock Purchase Plan
("ESPP") which allows Company employees meeting various service criteria,
except certain officers and shareholders, to purchase shares of Common
Stock through payroll deductions. A total of 33,572 shares were purchased in
1994 at a price per share of $9.72 to $19.55. During 1995, a total of 24,402
shares were purchased at a price per share of $11.95 to $13.02. At December 31,
1995, a total of 90,390 shares of Common Stock were reserved for future issuance
under the ESPP.
<PAGE>
27
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
9. DEFINED CONTRIBUTION PLAN
In January 1995, the Company adopted the Westcott Communications
401(k) Employee Savings Plan for the benefit of its employees. This
qualified cash or deferred arrangement meets the requirements as set forth
in Section 401(k) of the Internal Revenue Code, and as such, provides
certain tax benefits to the participating employees.
All employees of the Company who are at least 21 years of age and
who have worked for the Company for at least six months are eligible to
participate in the Plan. Participating employees may contribute from 1% to
15% of their taxable wages as reported on Form W-2. As of December 31,
1995, the Company has made no matching contributions to the Plan on behalf
of its employees. For the fiscal year ended December 31, 1995, the Company
incurred approximately $4,000 in fees for administration of the Plan.
10. RELATED PARTY TRANSACTIONS
The Company's Board of Directors includes two members of management
of Electronic Data Systems Corporation ("EDS"). EDS is a subscriber to
both the ASTN and EXEN networks. EDS paid the Company $5,774,974 and
$5,253,352 for subscription fees to ASTN in 1994 and 1995, respectively.
During 1995, the Company received $296,717 for participation fees to EXEN.
The Company periodically leases a jet aircraft from a corporation
wholly owned by its founder and Chief Executive Officer on terms the
Company believes to be no less favorable to the Company than can be
obtained for such service from unaffiliated parties. The Company paid
$283,591 and $149,783 in 1994,
<PAGE>
28
WESTCOTT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
and 1995, respectively, for use of the jet aircraft and other related
services.
11. SUBSEQUENT EVENTS
On January 9, 1996, the Board of Directors of the Company declared
a dividend of one preferred share purchase right ("Right") for each
outstanding share of the Company's Common Stock. The dividend was payable
to shareholders of record as of the close of business on January 22, 1996.
Each Right entitles the registered holder to purchase one one-hundredth of
a share of the Company's Series A Junior Participating Preferred Stock, par
value $0.01 per share, at a price of $80.00 per one one-hundredth of a
share of Preferred Stock, subject to adjustment. The Rights will be
exercisable only if a person or group of persons acquires beneficial
ownership of 20% or more of the Company's Common Stock or commences a
tender or exchange offer upon consummation of which such person or group
would beneficially own 20% or more of the Company's Common Stock. The
Rights will expire on January 9, 2006. The Company will generally be
entitled to redeem the Rights at $.01 per Right at any time until a 20%
position has been acquired. The description and terms of the Rights are
set forth in a Rights Agreement dated as of January 9, 1996, as the same
may be amended from time to time, between the Company and KeyCorp
Shareholder Services, Inc., as Rights Agent.
<PAGE>
<TABLE>
29
WESTCOTT COMMUNICATIONS, INC.
SELECTED QUARTERLY INFORMATION (UNAUDITED)
(In thousands, except per share amounts)
<CAPTION>
1995
--------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $ 24,634 $ 23,484 $ 24,136 $ 25,545 $ 97,799
Cost of revenues . . . . . . . . . 18,441 17,912 18,466 19,253 74,072
Income from operations . . . . . . 6,193 5,572 5,670 6,292 23,727
Net income . . . . . . . . . . . . 3,809 3,440 3,470 3,862 14,581
Earnings per
share . . . . . . . . . . . . . . .20 .18 .18 .20 .74
<CAPTION>
1994
--------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $ 20,637 $ 22,364 $ 22,182 $ 24,522 $ 89,705
Cost of revenues . . . . . . . . . 15,988 18,313 17,257 18,934 70,492
Income from operations . . . . . . 4,649 4,051 4,925 5,588 19,213
Net income . . . . . . . . . . . . 2,889 2,480 3,031 3,437 11,837
Earnings per share . . . . . . . . .15 .13 .16 .18 .61
</TABLE>
<PAGE>
30
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma statement of consolidated operations for the three
months ended March 31, 1996 gives effect to the acquisition of common stock of
Westcott Communications, Inc. ("Westcott") as if it had occurred on January 1,
1995. The unaudited pro forma statement of consolidated operations for the
year ended December 31, 1995 gives effect to the following transactions as if
they had occurred on January 1, 1995: (i) the acquisition of Westcott and (ii)
the acquisition of certain net assets of Cahners Consumer Magazines Division ( a
division of Reed Elsevier, Inc.) ("Cahners") which occurred on January 2, 1996
and was reported on Form 8-K dated January 2, 1996 as amended by Form 8-K/A
dated March 15, 1996 as filed with the Securities and Exchange Commission. 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.
K-III Communications Corporation ("K-III") believes the accounting used for the
pro forma adjustments provides a reasonable basis on which to present the
unaudited pro forma consolidated financial data. The pro forma statements of
consolidated operations and pro forma consolidated balance sheet
are unaudited and were derived by adjusting the historical consolidated
financial statements of K-III. THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED TO BE INDICATIVE OF K-III'S CONSOLIDATED FINANCIAL POSITION OR RESULTS
OF OPERATIONS HAD THE TRANSACTIONS BEEN CONSUMMATED ON THE DATES ASSUMED AND DO
NOT PROJECT K-III'S CONSOLIDATED FINANCIAL POSITION OR 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 accompanying Westcott financial
statements and notes thereto as well as the K-III historical consolidated
financial statements and notes thereto included in K-III's Annual Report on
Form 10-K for the year ended December 31, 1995 and in K-III's Quarterly Report
on Form 10-Q for the three months ended March 31, 1996 and the Cahners
historical financial statements and notes thereto included in the Form 8-K/A
mentioned above.
<PAGE>
31
<TABLE>
<CAPTION>
K-III COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(dollars in thousands, except per share amount)
Historical
------------------------ Pro Forma Pro Forma
K-III Westcott(1) Adjustments Consolidated
<S> <C> <C> <C> <C>
Sales, net:
Education $ 83,052 $ 24,912 $ (745)(2) $ 107,219
Information 67,854 67,854
Media 164,047 164,047
------------ ------------ ------------ -------------
Total sales, net 314,953 24,912 (745) 339,120
Operating costs and expenses:
Cost of goods sold 83,445 5,948 914 (2) 90,307
Marketing and selling 60,798 5,734 635 (2) 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 36,553 750 9,795 (3) 47,098
------------ ------------ ------------ -------------
Operating income (loss) 6,985 4,994 (12,089) (110)
Other income(expense):
Interest expense (28,051) (23) (7,595)(4) (35,669)
Amortization of deferred financing and organi-
zational costs (900) (900)
Other, net 1,226 809 2,035
------------ ------------ ------------ -------------
Income(loss) before income taxes (20,740) 5,780 (19,684) (34,644)
Income tax provision (2,312) 2,312 (5) --
------------ ------------ ------------ -------------
Net income (loss) (20,740) 3,468 (17,372) (34,644)
Preferred stock dividends:
Non-cash (3,969) (3,969)
Cash (2,875) (2,875)
------------ ------------ ------------ -------------
Income (loss) applicable to common
shareholders $ (27,584) $ 3,468 $ (17,372) $ (41,488)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Pro forma loss per common and common equivalent share $ (.32)
-------------
-------------
Weighted average common and common equivalent shares
outstanding 128,502,847
-------------
-------------
</TABLE>
See notes to unaudited pro forma consolidated financial data.
<PAGE>
32
<TABLE>
<CAPTION>
K-III COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(dollars in thousands, except per share amount)
Historical
--------------------------------------- Pro Forma Pro Forma
K-III Westcott (1) Cahners (6) Adjustments Consolidated
<S> <C> <C> <C> <C> <C>
Sales, net:
Education $ 330,414 $ 97,799 $ $ $ 428,213
Information 263,542 263,542
Media 452,373 94,126 546,499
------------ ------------ ------------ ------------ -------------
Total sales, net 1,046,329 97,799 94,126 1,238,254
Operating costs and expenses:
Cost of goods sold 251,347 20,195 27,837 1,362 (2) 300,741
Marketing and selling 177,167 19,548 13,697 412 (2) 210,824
Distribution, circulation and fulfillment 188,147 13,103 17,552 218,802
Editorial 73,703 6,491 80,194
Other general expenses 122,816 9,242 8,393 (212)(7) 140,239
Corporate administrative expenses 17,034 17,034
Depreciation and amortization of pre-
publication costs, property and equipment 25,761 9,165 212 (7) 35,138
Provision for loss on the sales of
businesses, net 35,447 35,447
Restructuring and other costs 14,667 14,667
Amortization of intangible assets, excess
of purchase price over net assets
acquired and other 166,515 2,819 2,076 71,852 (3) 243,262
------------ ------------ ------------ ------------ -------------
Operating income (loss) (26,275) 23,727 18,080 (73,626) (58,094)
Other income(expense):
Interest expense (105,384) (121) (43,879)(4) (149,384)
Amortization of deferred financing and organi-
zational costs (3,135) (3,135)
Other, net (241) 591 350
------------ ------------ ------------ ------------ -------------
Income(loss) before income taxes (135,035) 24,197 18,080 (117,505) (210,263)
Income tax benefit(provision) 59,600 (9,616) 9,616 (5) 59,600
------------ ------------ ------------ ------------ -------------
Net income (loss) (75,435) 14,581 18,080 (107,889) (150,663)
Preferred stock dividends:
Non-cash (17,478) (17,478)
Cash (11,500) (11,500)
------------ ------------ ------------ ------------ -------------
Income (loss) applicable to common
shareholders $ (104,413) $ 14,581 $ 18,080 $ (107,889) $ (179,641)
------------ ------------ ------------ ------------ -------------
------------ ------------ ------------ ------------ -------------
Pro forma loss per common and common equivalent share $ (1.56)
-------------
-------------
Weighted average common and common equivalent shares
outstanding 115,077,498
-------------
-------------
</TABLE>
See notes to unaudited pro forma consolidated financial data.
<PAGE>
33
<TABLE>
<CAPTION>
K-III COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(dollars in thousands)
Historical
------------------------- Pro Forma Pro Forma
K-III Westcott(1) Adjustments Consolidated
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 32,222 $ 17,208 $ $ 49,430
Accounts receivable, net 201,475 23,277 (745)(2) 224,007
Inventories, net 66,779 7,769 (3,205)(2) 71,343
Net assets held for sale 5,339 5,339
Prepaid expenses and other 28,063 8,112 (5,094)(2) 31,081
---------- --------- ------------ -----------
Total current assets 333,878 56,366 (9,044) 381,200
Property and equipment, net 109,370 32,049 1,020 (2) 142,439
Other intangible assets, net 675,404 2,920 185,030 (8) 863,354
Excess of purchase price over net
assets acquired, net 731,802 20,069 167,882 (8) 919,753
Other non-current assets 238,512 18,001 (11,472)(2) 245,041
---------- --------- ------------ -----------
$2,088,966 $ 129,405 $ 333,416 $ 2,551,787
---------- --------- ------------ -----------
---------- --------- ------------ -----------
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 (8) 150,237
Deferred revenues 135,125 11,527 146,652
Current maturities of long-term debt 6,000 10 (10)(9) 6,000
---------- --------- ------------ -----------
Total current liabilities 363,224 21,259 16,562 401,045
---------- --------- ------------ -----------
Long-term debt 1,169,037 14 (14)(9) 1,594,037
425,000 (9)
---------- --------- ------------ -----------
Other non-current liabilities 33,038 3,092 (3,092)(10) 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)(11) 1,263
Additional paid-in capital 752,017 74,089 (74,089)(11) 752,017
Retained earnings(accumulated deficit) (683,200) 30,909 (30,909)(11) (683,200)
Less treasury shares at cost; 45,920 shares (156) 156 (11) -
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 $ 333,416 $ 2,551,787
---------- --------- ------------ -----------
---------- --------- ------------ -----------
</TABLE>
See notes to unaudited pro forma consolidated financial data.
<PAGE>
34
K-III COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Represents Westcott's historical consolidated financial statements as
of and for the three months ended March 31, 1996 and for the year
ended December 31, 1995.
(2) To adjust Westcott's accounting principles to the accounting
principles used by K-III.
(3) To adjust pro forma amortization expense for intangible assets and
excess of purchase price over net assets acquired relating to the
Westcott and Cahners acquisitions.
(4) To adjust interest expense resulting from the increased level of
borrowings needed to finance the Westcott and Cahners acquisitions at
an assumed weighted average interest rate of 7.17% for the three
months ended March 31, 1996 and 7.28% for the year ended December 31,
1995. The interest rates used represent the weighted average interest
rates on similar borrowings for the same periods.
(5) To eliminate Westcott's historical income tax provisions.
(6) Represents Cahners' historical financial statements for the year ended
December 31, 1995.
<PAGE>
35
(7) To reclassify Cahners' depreciation expense from other general
expenses to depreciation and amortization of prepublication costs,
property and equipment.
(8) To allocate the purchase price of Westcott based on the estimated fair
values of the assets acquired and liabilities assumed. 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 K-III.
(9) To eliminate the current and non-current portions of Westcott's
historical long-term debt and record the additional borrowings used to
finance the acquisition of Westcott.
(10) To eliminate Westcott's historical deferred income taxes and minority
interest liability.
(11) To eliminate Westcott's historical common stock, additional paid-in
capital, retained earnings and treasury stock.
<PAGE>
36
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K-III Communications Corporation
--------------------------------
(Registrant)
Date: June 14, 1996 By: /s/ Beverly C. Chell
-------------------- --------------------------------
Beverly C. Chell, Vice Chairman
and Secretary
<PAGE>
37
EXHIBIT INDEX
-------------
Exhibit No. Page
- ----------- ----
2 Agreement and Plan of Merger, dated
as of April 22, 1996, by and among
the Company, K-III Prime Corporation,
Acquiror Sub and Westcott (incorporated
by reference to Exhibit 10 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996).
23 Consent of Ernst & Young LLP.
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the inclusion in the Current Report on Form 8-K and to the
incorporation by reference in the Registration Statement (Form S-4 No. 333-3691)
and related Prospectus of K-III Communications Corporation for the exchange of
8 1/2% Senior Notes due 2006 for outstanding 8 1/2% Senior Notes due 2006 and
the exchange of Series D Exchangeable Preferred Stock Redeemable 2008 for
outstanding shares of Series C Exchangeable Preferred Stock Redeemable 2008 of
our report dated February 16, 1996, with respect to the consolidated financial
statements of Westcott Communications, Inc., both filed with the Securities
and Exchange Commission.
/s/ Ernst & Young LLP
Dallas, Texas
June 13, 1996
