<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------
K-III COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2721 13-3647573
(state or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code Number) Identification No.)
</TABLE>
------------------------
745 FIFTH AVENUE
NEW YORK, NEW YORK 10151
(212) 745-0100
(Address, including ZIP Code, and telephone number, including area code.
of Registrant's principal executive office)
--------------------------
ANN M. RIPOSANU, ESQ.
K-III COMMUNICATIONS CORPORATION
745 FIFTH AVENUE
NEW YORK, NEW YORK 10151
(212) 745-0100
(Name, address, including ZIP Code, and telephone number, including area code,
of agent for service)
--------------------------
COPY TO:
GARY I. HOROWITZ, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT/SHARE(1) OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
$9.20 Series F Exchangeable Preferred Stock
Redeemable 2009.......................... 1,250,000 Shares $100 $125,000,000 $37,879
9.20% Class F Subordinated Exchange
Debentures due 2009...................... $125,000,000 None(2) None(2) None(2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) No separate consideration will be received for the 9.20% Class F
Subordinated Exchange Debentures due 2009 issuable upon exchange of the
$9.20 Series F Exchangeable Preferred Stock.
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 22, 1997
PROSPECTUS
, 1997
[LOGO]
K-III COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE
ITS $9.20 SERIES F EXCHANGEABLE PREFERRED STOCK REDEEMABLE 2009 (LIQUIDATION
PREFERENCE $100 PER SHARE) (EXCHANGEABLE AT THE OPTION OF K-III) FOR UP TO
1,250,000 SHARES OF ITS $9.20 SERIES E EXCHANGEABLE PREFERRED STOCK REDEEMABLE
2009 (LIQUIDATION PREFERENCE $100 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 LETTER OF
TRANSMITTAL (THE "LETTER OF TRANSMITTAL") TO EXCHANGE (THE "EXCHANGE
OFFER") ONE SHARE OF ITS $9.20 SERIES F EXCHANGEABLE PREFERRED
STOCK REDEEMABLE 2009, PAR VALUE $.01 PER SHARE, LIQUIDATION
PREFERENCE $100.00 PER SHARE (THE "NEW PREFERRED STOCK"), FOR
EACH OUTSTANDING SHARE OF ITS $9.20 SERIES E EXCHANGEABLE
PREFERRED STOCK REDEEMABLE 2009, PAR VALUE $.01 PER
SHARE, LIQUIDATION PREFERENCE $100.00 PER SHARE
(THE "OLD PREFERRED STOCK"), OF WHICH 1,250,000
SHARES ARE OUTSTANDING. THERE WILL BE NO
CASH PROCEEDS TO K-III FROM THE EXCHANGE
OFFER.
--------------------------------------------------------------------
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 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
PREFERRED STOCK WILL NOT BE ENTITLED TO CERTAIN RIGHTS OF HOLDERS OF THE OLD
PREFERRED STOCK UNDER THE REGISTRATION RIGHTS AGREEMENT (AS DEFINED) WHICH
WILL TERMINATE UPON THE CONSUMMATION OF THE EXCHANGE OFFER. SEE "THE EXCHANGE
OFFER--CONSEQUENCES OF FAILURE TO EXCHANGE." 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 9.20% CLASS
F SUBORDINATED EXCHANGE DEBENTURES DUE 2009 (THE "NEW SUBORDINATED
DEBENTURES"), IN WHOLE BUT NOT IN PART, AT THE OPTION OF K-III. THE FORM
AND TERMS OF THE NEW SUBORDINATED DEBENTURES WILL BE THE SAME AS THE FORM
AND TERMS OF THE 9.20% CLASS E SUBORDINATED EXCHANGE DEBENTURES DUE 2009
(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 "9.20% SUBORDINATED DEBENTURES," AND THE
NEW PREFERRED STOCK AND THE NEW SUBORDINATED DEBENTURES ARE SOMETIMES
REFERRED TO HEREIN COLLECTIVELY AS THE "SECURITIES."
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 PREFERRED STOCK WAS ORIGINALLY ISSUED AND SOLD ON SEPTEMBER 26, 1997 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
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 SET FORTH IN NO-ACTION LETTERS, THE
COMPANY BELIEVES THAT THE NEW PREFERRED STOCK ISSUED PURSUANT TO THE
EXCHANGE OFFER IN EXCHANGE FOR 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 PREFERRED STOCK IS ACQUIRED
IN THE ORDINARY COURSE OF SUCH HOLDER'S BUSINESS, SUCH HOLDERS
HAVE NO ARRANGEMENT WITH ANY PERSON TO PARTICIPATE IN THE
DISTRIBUTION OF SUCH NEW PREFERRED STOCK AND NEITHER SUCH
HOLDERS NOR ANY OTHER PERSON IS ENGAGING IN OR INTENDS TO ENGAGE
IN A DISTRIBUTION OF SUCH 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 OFFER. EACH
BROKER-DEALER THAT RECEIVES NEW PREFERRED STOCK FOR ITS
OWN ACCOUNT PURSUANT TO THE EXCHANGE OFFER MUST
ACKNOWLEDGE THAT IT WILL DELIVER A PROSPECTUS IN
CONNECTION WITH ANY RESALE OF SUCH NEW PREFERRED STOCK.
THE LETTER OF TRANSMITTAL RELATING TO THE EXCHANGE
OFFER STATES 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 NEW PREFERRED STOCK RECEIVED IN
EXCHANGE FOR OLD PREFERRED STOCK WHERE SUCH OLD
PREFERRED STOCK WAS 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 PREFERRED STOCK CONSTITUTES A NEW ISSUE OF SECURITIES WITH NO ESTABLISHED
TRADING MARKET. ANY SHARES OF OLD PREFERRED STOCK NOT TENDERED AND ACCEPTED IN
THE EXCHANGE OFFER WILL REMAIN OUTSTANDING. TO THE EXTENT THAT SHARES OF
OLD PREFERRED STOCK ARE TENDERED AND ACCEPTED IN THE EXCHANGE OFFER, A
HOLDER'S ABILITY TO SELL UNTENDERED SHARES OF OLD PREFERRED STOCK
COULD BE ADVERSELY AFFECTED. NO ASSURANCE CAN BE GIVEN AS TO THE
LIQUIDITY OF THE TRADING MARKET FOR THE PREFERRED STOCK. SEE "RISK
FACTORS--LACK OF PUBLIC MARKET."
K-III WILL ACCEPT FOR EXCHANGE ANY AND ALL SHARES OF OLD PREFERRED STOCK VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED BY K-III IN ITS SOLE DISCRETION (SUCH
DATE AS IT MAY BE SO EXTENDED, THE "EXPIRATION DATE"). TENDERS OF SHARES
OF OLD PREFERRED STOCK MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CUSTOMARY
CONDITIONS. SEE "THE EXCHANGE OFFER."
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 19 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 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 Offer.
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 Citicorp 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
The following documents filed by the Company with the Commission are
incorporated into this Prospectus by reference:
(a) Current Report on Form 8-K dated June 14, 1996;
(b) the Annual Report on Form 10-K for the fiscal year ended December 31,
1996; and
(c) the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997.
All documents filed by the Company pursuant to Section 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 Offer shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this Prospectus shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus or in any subsequently
filed document which also is or is deemed to be incorporated by reference in
this Prospectus modifies or supersedes such statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this 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 , 1997.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information...................................................................................... 2
Incorporation of Certain Documents by Reference............................................................ 2
Summary.................................................................................................... 4
Glossary of Certain Defined Terms.......................................................................... 17
Risk Factors............................................................................................... 19
Use of Proceeds............................................................................................ 21
Capitalization............................................................................................. 22
Selected Financial Information............................................................................. 23
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25
Business................................................................................................... 36
Management................................................................................................. 44
The Exchange Offer......................................................................................... 46
Description of Preferred Stock and 9.20% Subordinated Debentures........................................... 54
Description of Capital Stock of the Company................................................................ 72
Security Ownership of Certain Beneficial Owners and Management............................................. 77
Certain Federal Income Tax Considerations.................................................................. 78
Plan of Distribution....................................................................................... 89
Legal Matters.............................................................................................. 89
Experts.................................................................................................... 89
Unaudited Pro Forma Consolidated Financial Data............................................................ P-1
Index to Financial Statements.............................................................................. F-1
</TABLE>
-------------------
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 Offer 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 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 AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN. UNLESS THE
CONTEXT OTHERWISE INDICATES, THE TERM "COMPANY" OR "K-III" MEANS THE COMBINED
BUSINESS OPERATIONS OF K-III COMMUNICATIONS CORPORATION (AND ITS PREDECESSORS)
AND ITS SUBSIDIARIES. PLEASE REFER TO "GLOSSARY OF CERTAIN DEFINED TERMS" FOR
DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED IN THIS PROSPECTUS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER THE CAPTION
"RISK FACTORS."
THE COMPANY
GENERAL
The Company is the authoritative source for specialized information targeted
to specific high growth segments in the specialty media, education and business
information markets. Most of K-III's products are premier brands with leadership
positions in their specialty niche markets: specialty media (E.G., SEVENTEEN,
SOAP OPERA DIGEST, LOW RIDER, SEW NEWS and TELEPHONY); education (E.G., CHANNEL
ONE NEWS, WEEKLY READER and WESTCOTT); and information (E.G., APARTMENT GUIDE,
WARD'S, THE WORLD ALMANAC and NELSON'S).
The Company has achieved substantial growth through the development of its
franchises, combined with its operating expertise and a successful acquisition
strategy. From 1991 through 1996, net sales have grown at a compound annual rate
of 19%, to $1,374 million. Operating income in 1996 was $86 million compared to
an operating loss of $37 million in 1991 (after deductions for amortization and
depreciation of $191 million in 1996 and $142 million in 1991).
GROWTH STRATEGY
K-III's strategy is to address growing needs in today's information economy.
Technology has created a flood of information. Consequently, management believes
the key role of the media is shifting from making information broadly available
across all audiences to sifting out and qualifying information for the benefit
of specific audiences. The Company's products are authoritative information
sources meeting customers' particular needs in the most beneficial
formats--print, electronic, and multimedia. Its pursuit of this strategy in its
targeted markets has enabled K-III to achieve an average 59% market share across
all products, with 84% ranking number one or two in their markets.
K-III provides authoritative information in six areas that show superior
growth: specialty consumer magazines and technical and trade magazines in the
specialty media segment; classroom learning and workplace learning in the
education segment; and consumer directories and business directories in the
information segment. See "--Business Segments." In each of these six areas, the
Company offers authoritative information products that have a branded presence
and leading market positions.
The Company is taking advantage of fundamental growth trends in these six
markets. The Company's specialty media products take advantage of trends in the
specialty consumer market where advertising growth has outpaced general interest
magazine, broadcast television, radio and newspaper advertising growth since
1989. In classroom and workplace learning, K-III is building on rising
elementary and secondary school enrollments, increased spending on supplementary
educational materials and the rapid growth in outsourced workplace education.
The Company's consumer and business directories are capitalizing on the trend
towards targeted marketing and away from general interest sources such as
newspapers and the increased spending by businesses for information.
The Company seeks to maximize its operating performance by capitalizing on
its leading position in each of these growing markets. Each of K-III's six
growth vehicles has opportunities for expansion through both internal organic
development and product line acquisitions. Organic growth results from both
market expansion and product innovation in conventional and new media formats.
Growth through product line acquisition is made possible by the constant
availability of leading brands for sale in the myriad of niche
4
<PAGE>
markets in K-III's six growth areas. To support this aspect of growth, the
Company has successfully developed a selective and disciplined process of
identifying, evaluating and integrating acquired companies. The primary source
of funds for these product line acquisitions is the cash generated by the
Company's operations, which by their nature have high operating margins and low
capital requirements. Net capital expenditures were $23 million and $29 million,
or 2.2% and 2.1% of net sales, in 1995 and 1996, respectively. Additionally,
cash available for reinvestment is amplified because the Company pays virtually
no income taxes largely as a result of having structured most of its
acquisitions to create tax-deductible amortization of intangible assets.
MANAGEMENT
The Company was founded in 1989 by William F. Reilly, Charles G. McCurdy and
Beverly C. Chell, former members of senior management of Macmillan, Inc.
("Macmillan"), together with Kohlberg Kravis Roberts & Co. L.P. ("KKR"). At
Macmillan, Mr. Reilly served as President and Chief Operating Officer, Mr.
McCurdy served as Vice President--Corporate Finance and Ms. Chell served as Vice
President-- General Counsel. At K-III, they have recruited and developed a cadre
of strong, seasoned operating managers. All of the senior operating managers and
several of the business unit heads worked at Macmillan.
K-III's Chairman and CEO, William F. Reilly, has 28 years of experience in
operations, finance and development. Charles G. McCurdy, President, and Beverly
C. Chell, Vice Chairman and General Counsel, have 15 and 28 years, respectively,
of finance, development and operations related experience. The two Group
Presidents, Jack L. Farnsworth and George Philips, each have over 30 years of
operating experience and over 15 years of experience as CEOs of substantial
operating companies.
The Company's management, including the executives named above, have
invested in excess of $23 million in the Common Stock through September 10,
1997. Assuming the exercise of all stock options, management would have owned
approximately 12%, in the aggregate, of the Company's outstanding Common Stock
as of such date.
BUSINESS SEGMENTS
The Company organizes its business into three operating segments: speciality
media, education and information. These segments accounted for approximately
50%, 27% and 23%, respectively, of K-III's net sales of $1,374 million for the
year ended December 31, 1996.
SPECIALTY MEDIA
The specialty media segment consists of 73 specialty consumer magazines and
63 technical and trade magazines. In 1996, 60% of the Company's specialty
consumer magazines and 56% of its technical and trade magazines were ranked
number one in their respective markets. The Company's specialty consumer
magazines include SOAP OPERA DIGEST, SEVENTEEN, AMERICAN BABY, over 25
automotive magazines and numerous bridal, sewing, crafts and other titles. The
Company's technical and trade titles provide vital information to professionals
in fields such as telecommunications (TELEPHONY and CELLULAR BUSINESS),
agriculture (SOYBEAN DIGEST), transportation (FLEET OWNER) and real estate
(NATIONAL REAL ESTATE INVESTOR).
EDUCATION
The Company is a leading provider of supplementary educational materials and
programming in the United States, targeting both classroom and workplace
learning. Included in the education segment are educational television and video
programming, periodicals and supplementary educational materials for the
classroom, as well as training for professionals in various disciplines. K-III's
best-known brands in the classroom learning area are CHANNEL ONE NEWS and WEEKLY
READER, and in workplace learning, WESTCOTT COMMUNICATIONS. CHANNEL ONE NEWS,
the award-winning daily news broadcast, reaches over eight million
5
<PAGE>
students in approximately 12,000 secondary schools in the United States, more
than any other electronically delivered educational product. WEEKLY READER is
the best-known and highest circulation student newspaper in the United States,
with over 6.8 million subscriptions for elementary school students alone. WEEKLY
READER and its related products are sold in approximately 70% of all elementary
schools and 59% of all secondary schools. In workplace learning, WESTCOTT
COMMUNICATIONS is a leading provider of high quality workplace educational
programming. WESTCOTT COMMUNICATIONS has approximately 20,000 corporate and
institutional subscribers and provides workplace learning to approximately 2.5
million professionals in the healthcare, automotive, financial services,
government, public service and corporate fields. Its production capabilities
enable it to design and produce annually over 3,600 hours of educational content
targeted to over 20 different disciplines, delivered via satellite and video
cassette.
INFORMATION
The Company produces over 140 highly targeted consumer and business
directories, most of which hold dominant positions in their niche markets. The
Company's premier consumer directories include APARTMENT GUIDE, THE WORLD
ALMANAC and such specialty reference products as FACTS ON FILE NEWS SERVICE,
which is used by public and institutional libraries. The Company's leading
business directories include NELSON'S for financial professionals and BACON'S
for public relations professionals. Over 70 consumer directories including
guides and specialized reference products are published by the Company. These
products are distributed nationally in retail outlets and are sold to public and
institutional libraries. The Company is the leading publisher of rental
apartment guides in the United States. The Company has expanded this original
business to include new homes and computer shopping guides, as well as web sites
for all three categories. The Company's business directories target the
financial services, public relations, transportation, musical performance,
credit and collection, construction and global trade industries. Most of the
business directories published by the Company have no competition, and where
competition does exist, in most cases the Company's publication is dominant.
Management believes that the comprehensiveness and quality of its data and the
specialized focus of its publications have prevented others from launching
competing publications or competing effectively.
6
<PAGE>
RECENT DEVELOPMENTS
NON-CORE BUSINESSES BEING SOLD
As a part of its strategy to focus on areas of its business that have the
greatest potential for growth, the Company is in the process of divesting
certain businesses that do not fit within its growth vehicles (the "Non-Core
Businesses"). The Non-Core Businesses are: the DAILY RACING FORM group, which
includes a national daily newspaper covering thoroughbred horseracing and PRO
FOOTBALL WEEKLY; KRAMES COMMUNICATIONS, a leading publisher of patient
information sold to healthcare providers for distribution to patients and other
healthcare users; the KATHARINE GIBBS SCHOOLS, a chain of seven business
schools; NEWBRIDGE COMMUNICATIONS, an operator of book clubs for professionals
and educational continuity programs; NEW WOMAN magazine, a guide for personal
relationships and careers; and STAGEBILL, a performing arts magazine. The
Company has completed the sales of KRAMES, KATHARINE GIBBS and NEW WOMAN. The
proceeds from the sales of the Non-Core Businesses will be used to repay
indebtedness.
The following table presents unaudited combined operating results for the
year ended December 31, 1996 and total assets at December 31, 1996 for the
Non-Core Businesses. There can be no assurance that the remaining Non-Core
Businesses will be divested.
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
Sales, net..................................................................... $ 299,652
Operating loss................................................................. (2,305)
Depreciation and amortization.................................................. 29,410
Total assets................................................................... 350,736
</TABLE>
SHARE REPURCHASES
On September 9, 1997, the Company announced that its board of directors had
authorized a program for the Company to repurchase up to $15 million of its
outstanding Common Stock from time to time in the open market and through
privately negotiated transactions.
On September 16, 1997, the Company purchased a block of 523,000 shares of
Common Stock at a price of $12 1/4 per share. The shares were purchased in the
open market through the New York Stock Exchange. The purchase of these shares
was not part of the share repurchase program described in the preceding
paragraph.
ACQUISITIONS
Through September 16, 1997, the Company completed eleven product-line
acquisitions consisting of classroom learning, workplace learning and
specialized reference products as well as specialty consumer magazines,
technical and trade magazines and apartment guides. The aggregate purchase price
was approximately $179 million.
OFFERING AND REDEMPTION
On September 26, 1997, the Company completed a private offering of 1,250,000
shares of $9.20 Series E Exchangeable Preferred Stock (the "Offering") and
called for redemption all of its Senior Preferred Stock (the "Redemption"). Net
proceeds of the Offering of approximately $121.3 million will be used to redeem
the 4,000,000 outstanding shares of Senior Preferred Stock on November 3, 1997
at a redemption price of $26.45 per share plus accrued and unpaid dividends to
the redemption date and to repay borrowings outstanding under its Bank Credit
Facilities, which amounts may be reborrowed for general corporate purposes
including acquisitions. Until the Redemption, the Company has used the net
proceeds from the Offering to repay borrowings under the Bank Credit Facilities.
7
<PAGE>
[LOGO]
<TABLE>
<CAPTION>
SPECIALTY MEDIA EDUCATION INFORMATION
<S> <C> <C>
SPECIALTY CONSUMER MAGAZINES CLASSROOM LEARNING CONSUMER DIRECTORIES
- -73 Publications -Channel One News -74 Consumer Guides in 28
(including Soap Opera Digest, -Weekly Reader States
Seventeen, American Baby, -Films for the Humanities (including Apartment Guide,
Automobile, Modern Bride, and Sciences MicroTimes and new homes
New York, Chicago, Low Rider, guides)
Sew News and Dog World) -Specialized Reference
Products
(including The World Almanac
and
Facts on File News Service)
TECHNICAL AND TRADE MAGAZINES WORKPLACE LEARNING BUSINESS DIRECTORIES
- -63 Publications -Westcott Communications -70 Specialized Directories
(including Telephony, -Executive Education Network (including Nelson's, Bacon's,
Cellular -Interactive Distance Ward's
Business, Soybean Digest, Training Network Automotive Reports, Aircraft
Fleet Owner, National -18 other product lines Bluebook and Pacific Shipper)
Real Estate Investor and
Transmission and
Distribution)
</TABLE>
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Registration Rights
Agreement; Effect on
Holders.................... The Old Preferred Stock was sold by K-III on September 26,
1997 to Morgan Stanley & Co. Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Salomon Brothers
Inc, as the placement agents (the "Placement Agents")
pursuant to a Placement Agreement dated September 22, 1997
between K-III and the Initial Purchasers (the "Placement
Agreement"). The Placement Agents subsequently sold the 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 Placement
Agreement, K-III and the Placement Agents entered into a
Registration Rights Agreement dated as of September 26, 1997
(the "Registration Rights Agreement") which grants the
holders of the Old Preferred Stock certain exchange and
registration rights. This Exchange Offer is intended to
satisfy such rights. Therefore, the holders of the Securi-
ties are not entitled to any exchange or registration rights
with respect thereto. All untendered shares of Old Preferred
Stock will continue to be subject to the restrictions on
transfer described under "The Exchange Offer--Consequences
of Failure to Exchange." To the extent that shares of Old
Preferred Stock are tendered and accepted in the Exchange
Offer, the trading market for untendered shares of Old
Preferred Stock could be adversely affected. See "The
Exchange Offer--Purpose and Effect of the Exchange Offer"
and "--Consequences of Failure to Exchange" and "Risk
Factors--Lack of Public Market."
The Exchange Offer......... One share of New Preferred Stock will be exchanged for each
share of Old Preferred Stock. As of the date hereof, 1,250,000
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 , 1997 unless the
Exchange Offer is 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 Offer is extended.
Conditions to the Exchange
Offers................... The Exchange Offer is not conditioned upon any minimum number
of shares of Old Preferred Stock being tendered for exchange.
However, the Exchange Offer is subject to certain customary
conditions, which may be waived by K-III. See "The Exchange
Offer--Conditions of the Exchange Offer." K-III reserves the
right to terminate the Exchange Offer if any of such
conditions have not been satisfied and to amend the Exchange
Offer at any time prior to the Expiration Date.
Procedures for Tendering
the Old Preferred
Stock.................... See "The Exchange Offer--Procedures for Tendering" and
"--Guaranteed Delivery Procedures."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to the Expiration
Date. See "The Exchange Offer--Withdrawal of Tenders."
Acceptance of the Old Pre-
ferred Stock and Delivery
of the New Preferred
Stock.................... K-III will accept for exchange any and all shares of Old
Preferred Stock which are properly tendered in the Exchange
Offer prior to the Expiration Date. The shares of New
Preferred Stock issued pursuant to the Exchange Offer will
be delivered on the earliest practicable date following the
Expiration Date. See "The Exchange Offer-- Terms of the
Exchange Offer."
Certain Tax
Considerations........... For a discussion of certain federal income tax consequences of
the exchange of the Old Preferred Stock, see "Certain Federal
Income Tax Considerations--Tax Consequences of the Exchange
Offer."
Exchange Agent............. The Bank of New York is serving as the exchange agent (the
"Exchange Agent") in connection with the Exchange Offer.
</TABLE>
TERMS OF THE PREFERRED STOCK AND THE 9.20% SUBORDINATED DEBENTURES
The Exchange Offer applies to 1,250,000 shares of the Old Preferred Stock.
The form and terms of the New Preferred Stock are the same as the form and terms
of the Old Preferred Stock except that 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 Preferred Stock and 9.20%
Subordinated Debentures.
<TABLE>
<S> <C>
THE PREFERRED STOCK
Dividends.................. Cumulative at $9.20 per annum. All dividends are payable
quarterly in cash on February 1, May 1, August 1, and November
1 of each year, commencing February 1, 1998. 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 Series E
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. See "Certain Federal Income Tax
Considerations--Tax Consequences for United States
Holders--Dividends on Series E Preferred Stock."
Liquidation Preference..... $100 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 Certificate
of Designations 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.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Subject to certain exceptions, holders of a majority of the
outstanding Preferred Stock together with any parity
securities issued in the future will have the right, voting
together as a class, to approve certain mergers,
consolidations and sales of assets by the Company. See
"Description of Preferred Stock and 9.20% Subordinated
Debentures--The Preferred Stock--Merger, Consolidation and
Sale of Assets."
Mandatory Redemption....... K-III is required to redeem the Preferred Stock on November 1,
2009 at a redemption price equal to the liquidation preference
plus accrued and unpaid dividends to the redemption date.
Optional Redemption........ Prior to November 1, 2002, the Preferred Stock is redeemable
at the Company's option, in whole or in part, at any time or
from time to time, at a redemption price equal to the sum of
the aggregate liquidation preference of such Preferred Stock
plus accrued and unpaid dividends to the redemption date
plus the Applicable Preferred Stock Make-Whole Premium (as
defined) thereon at the time of redemption. At any time on
or after November 1, 2002, the Preferred Stock is
redeemable, at the option of K-III, in whole or in part,
initially at $104.60 per share, declining ratably to $100
per share on or after November 1, 2004, plus accrued and
unpaid dividends to the redemption date. See "Description of
Preferred Stock and 9.20% Subordinated Debentures--The
Preferred Stock--Optional Redemption."
Optional Redemption Upon
Public Equity Offering... At any time prior to November 1, 2000, K-III may, at its
option, redeem, in whole or in part, up to $60 million of the
aggregate liquidation preference of the Preferred Stock at a
price per share of $109, plus accrued and unpaid dividends
to the redemption date, with the net proceeds of one or more
Public Equity Offerings (as defined), PROVIDED such
redemption occurs within 180 days of such Public Equity
Offering. See "Description of Preferred Stock and 9.20%
Subordinated Debentures--The Preferred Stock--Optional
Redemption."
Ranking.................... The Preferred Stock ranks PARI PASSU with the Series B
Preferred Stock, the Series D Preferred Stock and any Future
Parity Securities (as defined) and senior to all Junior
Securities (as defined). As of September 10, 1997, 1,576,036
shares of Series B Preferred Stock ($157,603,600 aggregate
liquidation preference), which include dividends paid in
kind from time to time thereon to such date, have been
issued and are outstanding and 2,000,000 shares of Series D
Preferred Stock ($200,000,000 aggregate liquidation
preference), have been issued and are outstanding. See
"Description of Capital Stock of the Company." The Company
has agreed in the Certificate of Designations relating to
the Preferred Stock not to issue any other preferred stock
which by its terms is senior to the Series B Preferred
Stock, Series D Preferred Stock and the Preferred Stock. See
"Description of Preferred Stock and 9.20% Subordinated
Debentures--The Preferred Stock--Limitation on Issuance of
Senior Preferred Stock."
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Exchange Feature........... The Preferred Stock is exchangeable on any scheduled dividend
payment date into 9.20% Subordinated Debentures, in whole but
not in part, at the option of K-III. See "Description of
Preferred Stock and 9.20% Subordinated Debentures--The
Preferred Stock--Exchange."
THE 9.20% SUBORDINATED
DEBENTURES
Maturity Date.............. November 1, 2009.
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 9.20% Subordinated Debentures.
Optional Redemption........ Prior to November 1, 2002, the 9.20% Subordinated Debentures
are redeemable at the Company's option, in whole or in part,
at any time or from time to time, at a redemption price
(expressed as a percentage of principal amount) equal to the
sum of the principal amount of such 9.20% Subordinated
Debentures plus the Applicable Debenture Make-Whole Premium
(as defined) thereon at the time of redemption, plus accrued
and unpaid interest to the redemption date. On or after
November 1, 2002, the 9.20% Subordinated Debentures are
redeemable, in whole or in part, at the option of K-III,
initially at 104.60% of their principal amount, declining
ratably to 100% of their principal amount on or after
November 1, 2004, plus accrued and unpaid interest to the
redemption date. See "Description of Preferred Stock and
9.20% Subordinated Debentures--The 9.20% Subordinated
Debentures--Optional Redemption."
Optional Redemption Upon
Public Equity Offering... At any time prior to November 1, 2000, K-III may, at its
option, redeem, in whole or in part, up to $60 million of the
aggregate principal amount of the 9.20% Subordinated
Debentures at 109% 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 9.20%
Subordinated Debentures--The 9.20% Subordinated Deben-
tures--Optional Redemption."
Change of Control.......... In the event of a Change of Control (i) each holder of the
9.20% Subordinated Debentures will have the right to require
K-III to repurchase such holder's 9.20% 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 9.20% 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
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
outstanding Senior Indebtedness to permit the repurchase of
the 9.20% Subordinated Debentures. Because of the
substantial indebtedness of the Company, there can be no
assurance that K-III will have sufficient funds to
repurchase the 9.20% Subordinated Debentures in the event of
a Change of Control. See "Description of Preferred Stock and
9.20% Subordinated Debentures--The 9.20% Subordinated
Debentures--Change of Control."
Ranking.................... The 9.20% Subordinated Debentures (i) will rank PARI PASSU
with the Class B Subordinated Debentures and Class D
Subordinated Debentures, (ii) will be subordinate to all
existing and future Senior Indebtedness of K-III and (iii)
effectively will be subordinate to the creditors, including
trade creditors, of K-III's subsidiaries. As of June 30,
1997, the amount of senior indebtedness, as adjusted
(including indebtedness and other current and non-current
liabilities of K-III's subsidiaries), was approximately
$2,062 million. None of such indebtedness was secured.
Certain Covenants.......... The 9.20% Debenture Indenture contains certain covenants
which, among other things, limit the ability of the Company
(i) to engage in certain mergers, consolidations and sales
of assets, (ii) to engage in certain transactions with
Affiliates (as defined) and (iii) 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 Offer.
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.
13
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present summary consolidated financial data derived
from the Company's audited consolidated financial statements for the years ended
December 31, 1994, 1995 and 1996 and the Company's unaudited condensed
consolidated financial statements for the six months ended June 30, 1996 and
1997. In addition, the following tables present summary consolidated financial
data relating to the Company's unaudited pro forma consolidated operating
results for the year ended December 31, 1996 and the six months ended June 30,
1997 and the Company's unaudited pro forma consolidated balance sheet at June
30, 1997. Such unaudited pro forma consolidated financial data does not give
effect to the divestitures of the Non-Core Businesses.
The summary unaudited pro forma consolidated operating data for the year
ended December 31, 1996 gives effect to the following transactions and events as
if they had occurred on January 1, 1996: (i) the acquisition of the common stock
of Westcott Communications, Inc. which occurred on May 30, 1996 as described in
the Company's Current Report on Form 8-K dated June 14, 1996 incorporated by
reference into this Prospectus (referred to as the "Acquired Business") and (ii)
the offering of the Old Preferred Stock (the "Offering") and the redemption of
the Senior Preferred Stock (the "Redemption"). The summary unaudited pro forma
consolidated operating data for the six months ended June 30, 1997 gives effect
to the Offering and Redemption as if they had occurred on January 1, 1996. The
adjustments to reflect the acquisition of the Acquired Business and the Offering
and Redemption are hereinafter referred to as the "Pro Forma Adjustments." The
summary unaudited pro forma consolidated balance sheet data at June 30, 1997
gives effect to the Offering and Redemption as if they had occurred on June 30,
1997.
The summary unaudited pro forma consolidated financial data does not purport
to represent what the Company's consolidated results of operations or financial
condition 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 results of operations
or financial condition 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 and
the unaudited pro forma consolidated financial statements and the notes thereto
included elsewhere in this Prospectus.
14
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
---------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1996 1997
ACTUAL ACTUAL ACTUAL PRO FORMA(1) ACTUAL ACTUAL
----------- ----------- ----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Sales, net................................ $ 964,648 $ 1,046,329 $ 1,374,449 $ 1,413,930 $ 650,633 $ 721,053
Depreciation and amortization............. 136,866 192,276 190,702 199,713 92,230 82,201
Other charges(2).......................... 15,025 50,114 -- -- -- --
Operating income (loss)(3)................ 10,203 (26,275) 85,901 77,893 30,265 59,996
Interest expense.......................... 78,351 105,837 124,601 136,125 57,597 68,963
Income tax benefit(4)..................... 42,100 59,600 53,300 53,300 -- 1,685
Income (loss) before extraordinary
charge.................................. (29,529) (75,435) 17,597 (1,935) (27,806) (8,846)
Extraordinary charge--extinguishment of
debt(5)................................. (11,874) -- (9,553) (9,553) (7,572) (15,401)
Net income (loss)(3)...................... (41,403) (75,435) 8,044 (11,488) (35,378) (24,247)
Preferred stock dividends................. 25,959 28,978 43,526 43,901 19,248 24,781
Loss applicable to common shareholders.... (67,362) (104,413) (35,482) (55,389) (54,626) (49,028)
LOSS APPLICABLE TO COMMON SHAREHOLDERS PER
COMMON AND COMMON EQUIVALENT
SHARE(3)(6):
Loss before extraordinary charge........ $ (.54) $ (.91) $ (.20) $ (.36) $ (.36) $ (.26)
----------- ----------- ----------- ------------- ----------- -----------
----------- ----------- ----------- ------------- ----------- -----------
Net loss................................ $ (.65) $ (.91) $ (.27) $ (.43) $ (.42) $ (.38)
----------- ----------- ----------- ------------- ----------- -----------
----------- ----------- ----------- ------------- ----------- -----------
Weighted average common and common
equivalent shares outstanding(6)...... 103,642,668 115,077,498 130,007,632 130,007,632 128,645,188 129,201,826
----------- ----------- ----------- ------------- ----------- -----------
----------- ----------- ----------- ------------- ----------- -----------
OTHER DATA:
EBITDA(7)................................. $ 162,094 $ 216,115 $ 276,603 $ 277,606 $ 122,495 $ 142,197
Capital expenditures, net................. 14,184 23,414 28,790 31,078 9,629 14,603
Net cash provided by operating
activities.............................. 64,890 64,062 150,192 151,644 11,115 25,402
Net cash used in investing activities..... (442,126) (318,712) (721,709) (723,997) (653,052) (151,471)
Net cash provided by financing
activities.............................. 383,924 263,644 580,946 580,571 632,407 115,682
Deficiency of earnings to fixed
charges(8)(9)........................... (71,629) (135,035) (35,703) (55,235) (27,806) (10,531)
Deficiency of earnings to fixed charges
and preferred stock dividends(8)(9)..... (97,588) (164,013) (79,229) (99,136) (47,054) (35,312)
Ratio of EBITDA to interest expense....... 2.1x 2.0x 2.2x 2.0x 2.1x 2.1x
Ratio of EBITDA to interest expense and
dividends on preferred stock............ 1.6x 1.6x 1.6x 1.5x 1.6x 1.5x
Leverage ratio(10)........................ 5.4x 4.9x 5.4x 5.4x 5.6x 5.7x
<CAPTION>
<S> <C>
1997
PRO FORMA(1)
-------------
OPERATING DATA:
Sales, net................................ $ 721,053
Depreciation and amortization............. 82,201
Other charges(2).......................... --
Operating income (loss)(3)................ 59,996
Interest expense.......................... 68,477
Income tax benefit(4)..................... 1,685
Income (loss) before extraordinary
charge.................................. (8,360)
Extraordinary charge--extinguishment of
debt(5)................................. (15,401)
Net income (loss)(3)...................... (23,761)
Preferred stock dividends................. 24,969
Loss applicable to common shareholders.... (48,730)
LOSS APPLICABLE TO COMMON SHAREHOLDERS PER
COMMON AND COMMON EQUIVALENT
SHARE(3)(6):
Loss before extraordinary charge........ $ (.26)
-------------
-------------
Net loss................................ $ (.38)
-------------
-------------
Weighted average common and common
equivalent shares outstanding(6)...... 129,201,826
-------------
-------------
OTHER DATA:
EBITDA(7)................................. $ 142,197
Capital expenditures, net................. 14,603
Net cash provided by operating
activities.............................. 25,888
Net cash used in investing activities..... (151,471)
Net cash provided by financing
activities.............................. 115,494
Deficiency of earnings to fixed
charges(8)(9)........................... (10,045)
Deficiency of earnings to fixed charges
and preferred stock dividends(8)(9)..... (35,014)
Ratio of EBITDA to interest expense....... 2.1x
Ratio of EBITDA to interest expense and
dividends on preferred stock............ 1.5x
Leverage ratio(10)........................ 5.6x
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-------------------------
<S> <C> <C>
ACTUAL PRO FORMA(1)
--------- --------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............................................................................ $ 26,268 $ 26,268
Working capital(11).................................................................................. 219,473 219,473
Intangible assets, net............................................................................... 1,631,797 1,631,797
Total assets......................................................................................... 2,563,463 2,563,463
Long-term debt (12).................................................................................. 1,713,057 1,699,524
Exchangeable preferred stock......................................................................... 447,776 470,624
Common stock subject to redemption................................................................... 4,052 4,052
Total shareholders' equity........................................................................... 35,685 26,370
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
15
<PAGE>
(1) The 1996 summary pro forma consolidated financial data reflects the
operating results of the Acquired Business as if such business was acquired
on January 1, 1996. The 1996 pro forma interest expense reflects the
additional borrowings to finance the acquisition at an assumed weighted
average rate of 7.04%. The 1996 and 1997 summary pro forma consolidated
financial data reflects the elimination of the dividends on the Senior
Preferred Stock, the inclusion of dividends on the Preferred Stock and the
net increase in the exchangeable preferred stock as a result of the
Redemption and the Offering. Interest expense, income (loss) before
extraordinary charge, net income (loss), loss applicable to common
shareholders, loss applicable to common shareholders per common and common
equivalent share and long-term debt reflect the reduction in long-term debt
and interest expense as a result of the reduced level of borrowings from the
application of the remainder of the net proceeds from the Offering. Amounts
repaid under the Bank Credit Facilities may be reborrowed for general
corporate purposes, including acquisitions. The reduction in total
shareholders' equity reflects the difference between the carrying value and
redemption value of the Senior Preferred Stock and the payment of accrued
but unpaid dividends upon Redemption.
(2) Represents net provision in 1994 and 1995 for loss on the sales of
businesses and provision in 1995 for restructuring and other costs.
(3) The adoption of a change in method of accounting for advertising costs (the
"Accounting Change") resulted in an increase in operating income (decrease
in operating loss) and an equal decrease in net loss and loss per common and
common equivalent share of approximately $9,800 ($.09 per share), $11,800
($.10 per share) and $2,000 ($.02 per share) for the years ended December
31, 1994, 1995 and 1996, respectively.
(4) At December 31, 1994, 1995, and 1996, management of the Company reviewed
recent operating results for the years then ended and projected future
operating results for the years through December 31, 2002 and determined
that a portion of the net deferred income tax assets at December 31, 1994,
1995 and 1996 would be likely realized. Accordingly, the Company recorded an
income tax benefit of $42,100 in 1994, $59,600 in 1995 and $53,300 in 1996.
At June 30, 1997, the Company had net operating loss carryforwards for
Federal and state income tax purposes ("NOLs") of approximately $750,000
which will be available to reduce future taxable income. In addition to the
NOLs, management estimates that approximately $776,000 of unamortized
goodwill and other intangible assets will be available as deductions from
any future taxable income. For the six months ended June 30, 1997, the
Company recorded an income tax carryback claim of $1,685.
(5) Represents (i) the write-off of unamortized deferred financing costs of
$11,874 and $7,572 for the year ended December 31, 1994 and the six months
ended June 30, 1996, respectively; and (ii) the write-off of unamortized
deferred financing costs and the premium paid on the redemption of the
10 5/8% Senior Notes of $9,553 and $15,401 for the year ended December 31,
1996 and the six months ended June 30, 1997, respectively.
(6) The 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 3 of the notes to the consolidated financial statements
for the years ended December 31, 1994, 1995 and 1996 and Note 8 of the notes
to the unaudited condensed consolidated financial statements for the six
months ended June 30, 1996 and 1997 included elsewhere in 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 income
(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 income (loss) before
income taxes and extraordinary charge plus fixed charges. Fixed charges
consist of interest expense on 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) Income (loss) before income taxes and extraordinary charge 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, net provision for loss on the
sales of businesses, restructuring and other costs and non-cash interest
expense on an acquisition obligation, distribution advance and other current
liability. These non-cash charges totaled $160,778, $241,536 and $192,895
for the years ended December 31, 1994, 1995 and 1996, respectively, and
$97,209 and $87,088 for the six months ended June 30, 1996 and 1997,
respectively. The pro forma non-cash charges totaled $201,906 for the year
ended December 31, 1996 and $87,088 for the six months ended June 30, 1997.
Adjusted to eliminate such non-cash charges, earnings would have exceeded
fixed charges and fixed charges plus cash preferred stock dividends by
approximately $89,149 and $77,649, $106,501 and $95,001 and $157,192 and
$130,248 for the years ended December 31, 1994, 1995 and 1996, respectively,
and $69,403 and $58,209 and $76,557 and $56,227 for the six months ended
June 30, 1996 and 1997, respectively. On a pro forma basis and after
eliminating such non-cash charges, earnings would have exceeded fixed
charges and fixed charges plus cash preferred stock dividends by $146,671
and $119,352 for the year ended December 31, 1996, respectively, and $77,043
and $56,525 for the six months ended June 30, 1997, respectively.
(10) The leverage ratio on an actual and pro forma basis represents the ratio of
consolidated debt (which includes total indebtedness, deferred purchase
price liabilities, outstanding letters of credit, capitalized lease
obligations and the principal amount outstanding under the acquisition
obligation) to EBITDA, as defined in the Company's credit agreements, for
the twelve months ended December 31, 1994, 1995, 1996 and for the twelve
months ended June 30, 1996 and 1997.
(11) Includes current maturities of long-term debt and assets held for sale as
of June 30, 1997.
(12) Excludes current maturities of long-term debt.
16
<PAGE>
GLOSSARY OF CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
8 1/2% Senior Notes.................... The $300,000,000 principal amount of 8 1/2% Senior
Notes due 2006 issued by K-III.
10 1/4% Senior Notes................... The $100,000,000 principal amount of 10 1/4% Senior
Notes due 2004 issued by K-III.
9.20% Debenture Indenture.............. The Indenture governing the Old Subordinated
Debentures and, upon exchange, the New
Subordinated Debentures.
9.20% Subordinated Debentures.......... The collective reference to the Old Subordinated
Debentures and the New Subordinated Debentures.
Bank Credit Facilities................. The $1.4 billion credit facilities with The Chase
Manhattan Bank, The Bank of New York, Bankers Trust
Company and The Bank of Nova Scotia, as agents.
Credit Facilities...................... The collective reference to the Bank Credit
Facilities and the New Credit Facility.
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.
Class D Debenture Indenture............ The Indenture governing the Class D Subordinated
Debentures, if and when issued.
Class D Subordinated Debentures........ The 10% Subordinated Exchange Debentures due 2008,
issuable upon exchange of the Series D Preferred
Stock.
Common Stock........................... The common stock, par value $.01 per share, of
K-III.
Debenture Exchange Offer............... The offer by K-III to holders of Old Subordinated
Debentures to exchange the same for the New
Subordinated Debentures.
Exchange Offer......................... The offer by K-III to holders of the Old Preferred
Stock to exchange the same for the New Preferred
Stock.
New Credit Facility.................... The $150 million credit facility with The Chase
Manhattan Bank, The Bank of New York, Bankers Trust
Company and The Bank of Nova Scotia, as agents.
New Preferred Stock.................... The 1,250,000 shares of Series F Exchangeable
Preferred Stock Redeemable 2009, par value $.01 per
share, liquidation preference $100 per share,
being exchanged hereby for the Old Preferred
Stock.
New Subordinated Debentures............ The 9.20% Class F Subordinated Exchange Debentures
due 2009 issuable upon exchange of the New
Preferred Stock.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
Old Preferred Stock.................... The 1,250,000 shares of outstanding $9.20 Series E
Exchangeable Preferred Stock Redeemable 2009, par
value $.01 per share, liquidation preference $100
per share.
Old Subordinated Debentures............ The 9.20% Subordinated Exchange Debentures due
2009, issuable upon exchange of the Old Preferred
Stock.
Preferred Stock........................ The collective reference to the Old Preferred Stock
and the New Preferred Stock.
Securities............................. The collective reference to the New Preferred Stock
and the New Subordinated Debentures, if and when
issued.
Senior Note Indentures................. The collective reference to the indentures
governing the Senior Notes.
Senior Notes........................... The collective reference to the 8 1/2% Senior Notes
and the 10 1/4% Senior 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 which
were redeemed with the net proceeds of the
Offering.
Series B Preferred Stock............... The 1,576,036 Shares of $11.625 Series B
Exchangeable Preferred Stock Redeemable 2005, par
value $.01 per share, liquidation preference
$100.00 per share, plus dividends which are paid
in kind from time to time thereon.
Series D Preferred Stock............... The 2,000,000 Shares of $10.000 Series D
Exchangeable Preferred Stock Redeemable 2008, par
value $.01 per share, liquidation preference
$100.00 per share.
Subordinated Debenture Indentures...... The collective reference to the Exchange Debenture
Indenture, the Class B Debenture Indenture, the
Class D Debenture Indenture and the 9.20%
Debenture Indenture.
Subordinated Debentures................ The collective reference to the Exchange
Debentures, Class B Subordinated Debentures, the
Class D Subordinated Debentures and the 9.20%
Subordinated Debentures.
</TABLE>
18
<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. CERTAIN INFORMATION INCLUDED IN
OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS UNDER THIS SECTION AND UNDER
THE CAPTIONS "SUMMARY--GROWTH STRATEGY," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE
INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AND IS SUBJECT TO THE SAFE HARBOR
CREATED BY THAT ACT. THERE ARE SEVERAL IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING
STATEMENTS CONTAINED IN SUCH DISCUSSIONS. ADDITIONAL INFORMATION ON THE RISK
FACTORS WHICH COULD AFFECT THE COMPANY'S FINANCIAL RESULTS IS INCLUDED IN THIS
PROSPECTUS AND IN OTHER DOCUMENTS INCORPORATED BY REFERENCE HEREIN.
SUBSTANTIAL INDEBTEDNESS
The Company has substantial indebtedness. At June 30, 1997, the Company had
a ratio of consolidated debt to total equity (including all preferred stock and
Common Stock subject to redemption) of 3.5 to 1. At June 30, 1997, on a pro
forma basis, the Company would have had a ratio of consolidated debt to total
equity (including all preferred stock and Common Stock subject to redemption) of
3.4 to 1. See "Capitalization" and "Selected Financial Information." The
indebtedness of the Company requires a substantial portion of the Company's cash
flow to be dedicated to the payment of principal and interest on indebtedness,
thereby reducing funds available for capital expenditures and future business
opportunities.
At June 30, 1997, borrowings under the Credit Facilities, on a pro forma
basis, were approximately $1,252.4 million. Such borrowings bear interest at
floating rates. Increases in interest rates on indebtedness under the Credit
Facilities would increase the Company's interest payment obligations and could
have an adverse effect on the Company.
The agreements governing the Company's indebtedness 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. 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DEFICIENCIES OF EARNINGS TO COVER FIXED CHARGES AND FIXED CHARGES PLUS PREFERRED
STOCK DIVIDENDS
The Company's earnings are inadequate to cover fixed charges and fixed
charges plus preferred stock dividends on a pro forma basis by $55.2 million and
$99.1 million, respectively, for the year ended December 31, 1996 and $10.0
million and $35.0 million, respectively, for the six months ended June 30, 1997.
Fixed charges consist of interest expense on 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 and amortization) of approximately
$201.9 million for the year ended December 31, 1996 and $87.1 million for the
six months ended June 30, 1997. Adjusted to eliminate these pro forma non-cash
charges, earnings would have exceeded fixed charges and fixed charges plus cash
preferred stock dividends, on a pro forma basis, by approximately $146.7 million
and $119.4 million, respectively, for the year ended December 31, 1996 and $77.0
million and $56.5 million, respectively, for the six months ended June 30, 1997.
19
<PAGE>
ACCELERATION OF CREDIT FACILITIES 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 Facilities 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 Facilities 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
Facilities. The final stated maturity of indebtedness under the Credit
Facilities and the Senior Notes, and Class B Subordinated Debentures, if issued,
and Class D Subordinated Debentures, if issued, is earlier than the final stated
maturity of the Preferred Stock. Any default under the documents governing the
indebtedness of the Company could have a significant adverse effect on the
market value of the Preferred Stock.
LOSSES AFTER AMORTIZATION OF INTANGIBLES AND EXCESS PURCHASE PRICE
The Company had a loss applicable to common shareholders for the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997 of $67.4
million, $104.4 million and $35.5 million and $49.0 million, respectively.
Included in the loss for such periods are the amortization of intangible assets
and excess of purchase price over net assets acquired and other in the aggregate
amounts of $120.7 million, $166.5 million and $152.5 million and $64.0 million
for 1994, 1995 and 1996 and the six months ended June 30, 1997, respectively.
There can be no assurance that the Company will have net income applicable
to common shareholders in the future.
SUBORDINATION OF PREFERRED STOCK AND 9.20% 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, Series D Preferred Stock and any
preferred stock of K-III which by its terms is on parity with or junior to the
Preferred Stock).
The 9.20% Subordinated Debentures will rank PARI PASSU with the Class B
Subordinated Debentures and Class D Subordinated Debentures, if any, but will be
subordinated to all existing and future senior indebtedness of the Company,
including the Senior Notes and the obligations of the Company under the Credit
Facilities. In addition, the 9.20% 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
9.20% Subordinated Debentures only after all Senior Notes, obligations under the
Credit Facilities and other senior indebtedness of K-III have been paid in full.
The 9.20% Debenture Indenture will not prohibit the incurrence by K-III of
additional indebtedness that is senior to or PARI PASSU with the 9.20%
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 9.20%
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 Facilities and Senior Note Indentures and trade
payables and advances of such subsidiaries. The amount of senior indebtedness,
as adjusted (including indebtedness and other current and non-current
liabilities of K-III's subsidiaries) as of June 30, 1997 is approximately $2,062
million. None of such indebtedness was secured.
20
<PAGE>
CONTROL BY KKR
Approximately 76% of the shares of Common Stock (on a fully diluted basis)
is 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 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.
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 began to rise around mid-year
1994 and continued to rise more dramatically in 1995 and early 1996. In
particular, the Company's average purchase price for paper increased 8.4% in
1996 over 1995. Paper price increases may have an adverse effect on the
Company's future results but the Company has in the past been able to implement
measures to offset such increases. Postage for product distribution and direct
mail solicitations is also a significant expense of the Company. The Company
uses the U.S. Postal Service for distribution of many of its products and
marketing materials. Postage costs increase periodically and can be expected to
increase in the future. No assurances can be given that the Company can pass
such cost increases through to its customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of Inflation."
LACK OF PUBLIC MARKET
The Preferred Stock constitutes a new issue of securities with no
established trading market. In addition, because the Exchange Offer is not
conditioned upon any minimum number of shares of Old Preferred Stock being
tendered for exchange, the number of shares of New Preferred Stock issued could
be quite small, which could have an adverse effect on the liquidity of the New
Preferred Stock. Also, to the extent that shares of Old Preferred Stock are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered shares of Old Preferred Stock could be adversely affected. Therefore,
no assurance can be given as to the liquidity of the trading market for the
Preferred Stock.
USE OF PROCEEDS
There will be no cash proceeds to K-III from the Exchange Offer.
21
<PAGE>
CAPITALIZATION
The following table sets forth, at June 30, 1997 (i) the actual cash and
cash equivalents and the consolidated capitalization of the Company, and (ii)
the pro forma cash and cash equivalents and the consolidated capitalization of
the Company which gives effect to the Offering and the application of the
estimated net proceeds therefrom to redeem the Senior Preferred Stock and repay
certain borrowings under the Credit Facilities." The information below should be
read in conjunction with the Company's historical consolidated financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------
<S> <C> <C>
ACTUAL PRO FORMA
------------ ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................. $ 26,268 $ 26,268
------------ ------------
------------ ------------
Long-term debt:
Borrowings under Bank Credit Facilities............................................. $ 1,185,982 $ 1,172,449
Borrowings under New Credit Facility................................................ 80,000 80,000
10 1/4% Senior Notes due 2004....................................................... 100,000 100,000
8 1/2% Senior Notes due 2006, net................................................... 298,856 298,856
Acquisition Obligation Payable(1)................................................... 54,219 54,219
------------ ------------
Total indebtedness................................................................ 1,719,057 1,705,524
Less current maturities......................................................... (6,000) (6,000)
------------ ------------
Total long-term debt.............................................................. 1,713,057 1,699,524
$2.875 Senior Exchangeable Preferred Stock............................................ 98,402 --
$11.625 Series B Exchangeable Preferred Stock......................................... 155,122 155,122
$10.000 Series D Exchangeable Preferred Stock......................................... 194,252 194,252
$9.20 Series E Exchangeable Preferred Stock/New Preferred Stock(2).................... -- 121,250
Common stock subject to redemption(3)................................................. 4,052 4,052
Shareholders' equity:
Common stock and additional paid-in capital(4)...................................... 777,439 775,841
Accumulated deficit(5).............................................................. (740,126) (747,843)
Cumulative foreign currency translation adjustments................................. (1,628) (1,628)
------------ ------------
Total shareholders' equity...................................................... 35,685 26,370
------------ ------------
Total capitalization.................................................................. $ 2,200,570 $ 2,200,570
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Represents the present value at June 30, 1997 of the principal and interest
obligations under notes payable issued in connection with the acquisition of
certain specialty consumer magazines and the DAILY RACING FORM.
(2) Represents net proceeds to the Company after deduction of issuance costs.
(3) 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 and the
likelihood of significant resales is considered by management to be remote.
(4) Does not include 12,631,193 shares of Common Stock issuable upon exercise of
stock options, 8,973,763 of which were then exercisable.
(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 other, deferred financing costs, the
write-offs of the unamortized balance of deferred financing costs
(associated with all previous financings), net provision for loss on sales
of businesses and restructuring and other costs in the aggregate amount of
approximately $996,300 at June 30, 1997 net of a non-cash income tax benefit
aggregating $155,000 through June 30, 1997.
22
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected consolidated financial information is derived from the
historical consolidated financial statements of the Company. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996
----------- ----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Sales, net................................. $ 778,224 $ 844,748 $ 964,648 $ 1,046,329 $ 1,374,449 $ 650,633
Depreciation and amortization.............. 171,581 143,267 136,866 192,276 190,702 92,230
Other charges(1)........................... -- 2,644 15,025 50,114 -- --
Operating income (loss)(2)................. (46,230) (7,669) 10,203 (26,275) 85,901 30,265
Interest expense........................... 76,719 74,336 78,351 105,837 124,601 57,597
Income tax benefit(3)...................... 314 -- 42,100 59,600 53,300 --
Income (loss) before extraordinary charge.. (125,528) (86,496) (29,529) (75,435) 17,597 (27,806)
Extraordinary charge-extinguishment of
debt(4).................................. (19,814) -- (11,874) -- (9,553) (7,572)
Net income (loss)(2)....................... (145,342) (86,496) (41,403) (75,435) 8,044 (35,378)
Preferred stock dividends.................. 16,530 22,290 25,959 28,978 43,526 19,248
Loss applicable to common shareholders..... (161,872) (108,786) (67,362) (104,413) (35,482) (54,626)
LOSS APPLICABLE TO COMMON SHAREHOLDERS PER
COMMON AND COMMON EQUIVALENT SHARE(2)(5):
Loss before extraordinary charge......... $ (1.55) $ (1.18) $ (.54) $ (.91) $ (.20) $ (.36)
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
Net loss................................. $ (1.77) $ (1.18) $ (.65) $ (.91) $ (.27) $ (.42)
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
Weighted average common and common
equivalent shares outstanding.......... 91,317,610 92,392,189 103,642,668 115,077,498 130,007,632 128,645,188
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
OTHER DATA:
EBITDA(6).................................. $ 125,351 $ 138,242 $ 162,094 $ 216,115 $ 276,603 $ 122,495
Capital expenditures, net.................. 12,319 11,485 14,184 23,414 28,790 9,629
Net cash provided by operating
activities............................... 16,618 27,072 64,890 64,062 150,192 11,115
Net cash used in investing activities...... (79,725) (95,669) (442,126) (318,712) (721,709) (653,052)
Net cash provided by financing
activities............................... 60,877 63,579 383,924 263,644 580,946 632,407
Deficiency of earnings to fixed
charges(7)(8)............................ (125,842) (86,496) (71,629) (135,035) (35,703) (27,806)
Deficiency of earnings to fixed charges and
preferred stock dividends(7)(8).......... (142,372) (108,786) (97,588) (164,013) (79,229) (47,054)
<CAPTION>
<S> <C>
1997
------------
OPERATING DATA:
Sales, net................................. $ 721,053
Depreciation and amortization.............. 82,201
Other charges(1)........................... --
Operating income (loss)(2)................. 59,996
Interest expense........................... 68,963
Income tax benefit(3)...................... 1,685
Income (loss) before extraordinary charge.. (8,846)
Extraordinary charge-extinguishment of
debt(4).................................. (15,401)
Net income (loss)(2)....................... (24,247)
Preferred stock dividends.................. 24,781
Loss applicable to common shareholders..... (49,028)
LOSS APPLICABLE TO COMMON SHAREHOLDERS PER
COMMON AND COMMON EQUIVALENT SHARE(2)(5):
Loss before extraordinary charge......... $ (.26)
------------
------------
Net loss................................. $ (.38)
------------
------------
Weighted average common and common
equivalent shares outstanding.......... 129,201,826
------------
------------
OTHER DATA:
EBITDA(6).................................. $ 142,197
Capital expenditures, net.................. 14,603
Net cash provided by operating
activities............................... 25,402
Net cash used in investing activities...... (151,471)
Net cash provided by financing
activities............................... 115,682
Deficiency of earnings to fixed
charges(7)(8)............................ (10,531)
Deficiency of earnings to fixed charges and
preferred stock dividends(7)(8).......... (35,312)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 16,562 $ 11,544 $ 18,232 $ 27,226 $ 36,655
Working capital (deficiency)(9)............. 1,189 3,605 1,338 (56,560) (44,705)
Intangible assets, gross.................... 1,276,123 1,343,482 1,656,590 1,996,564 2,649,805
Less accumulated amortization........... 383,784 504,538 602,542 762,393 896,824
----------- ----------- ------------ ------------ ------------
Intangible assets, net...................... 892,339 838,944 1,054,048 1,234,171 1,752,981
Total assets................................ 1,197,896 1,166,502 1,589,692 1,881,416 2,552,215
Long-term debt(10).......................... 704,802 661,297 1,034,689 1,134,916 1,565,686
Exchangeable preferred stock................ 97,171 202,453 216,229 231,606 442,729
Common stock subject to redemption.......... 16,746 25,287 16,552 28,022 5,957
Shareholders' equity:
Convertible preferred stock............. 78,797 -- -- -- --
Common stock............................ 853 947 1,053 1,259 1,283
Additional paid-in capital.............. 421,926 488,541 572,940 748,194 772,642
Accumulated deficit..................... (375,055) (483,841) (551,203) (655,616) (691,098)
Cumulative foreign currency translation
adjustments........................... (222) (1,220) (1,324) (1,275) (1,270)
----------- ----------- ------------ ------------ ------------
Total shareholders' equity.................. $ 126,299 $ 4,427 $ 21,466 $ 92,562 $ 81,557
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
<CAPTION>
AT
JUNE 30,
1997
-----------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 26,268
Working capital (deficiency)(9)............. 219,473
Intangible assets, gross.................... 2,293,699
Less accumulated amortization........... 661,902
-----------
Intangible assets, net...................... 1,631,797
Total assets................................ 2,563,463
Long-term debt(10).......................... 1,713,057
Exchangeable preferred stock................ 447,776
Common stock subject to redemption.......... 4,052
Shareholders' equity:
Convertible preferred stock............. --
Common stock............................ 1,289
Additional paid-in capital.............. 776,150
Accumulated deficit..................... (740,126)
Cumulative foreign currency translation
adjustments........................... (1,628)
-----------
Total shareholders' equity.................. $ 35,685
-----------
-----------
</TABLE>
(FOOTNOTES ON THE FOLLOWING PAGE)
23
<PAGE>
(1) Represents provision for write-down of real estate no longer utilized in
1993, net provision for loss on the sales of businesses in 1994 and 1995 and
provision for restructuring and other costs in 1995.
(2) The adoption of the Accounting Change resulted in an increase in operating
income (decrease in operating loss) and an equal decrease in net loss and
loss per common and common equivalent share of approximately $9,800 ($.09
per share), $11,800 ($.10 per share) and $2,000 ($.02 per share) for the
years ended December 31, 1994, 1995 and 1996, respectively.
(3) The income tax benefit in 1992 reflects the reversal of an overprovision for
Canadian income taxes. At December 31, 1994, 1995 and 1996, management of
the Company reviewed recent operating results for the years then ended and
projected future operating results for the years through December 31, 2002
and determined that a portion of the net deferred income tax assets at
December 31, 1994, 1995 and 1996 would likely be realized. Accordingly, the
Company recorded an income tax benefit of $42,100 in 1994, $59,600 in 1995
and $53,300 in 1996. At June 30, 1997, the Company had NOLs of approximately
$750,000 which will be available to reduce future taxable income. In
addition to the NOLs, management estimates that approximately $776,000 of
unamortized goodwill and other intangible assets will be available as
deductions from any future taxable income. For the six months ended June 30,
1997, the Company recorded an income tax carryback claim of $1,685.
(4) Represents (i) the write-off of unamortized deferred financing costs of
$19,814, $11,874 and $7,572 for the years ended December 31, 1992 and 1994
and the six months ended June 30, 1996, respectively; and (ii) the write-off
of unamortized deferred financing costs and the premium paid on the
redemption of the 10 5/8% Senior Notes of $9,553 and $15,401 for the year
ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
(5) 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 3 of the notes to the audited consolidated financial statements and
Note 8 of the notes to the unaudited condensed consolidated financial
statements for the six months ended June 30, 1996 and 1997 included
elsewhere in this Prospectus.
(6) 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 income
(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.
(7) The deficiency of earnings to fixed charges consists of loss before income
taxes and extraordinary charge plus fixed charges. Fixed charges consist of
interest expense on 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.
(8) Income (loss) before income taxes and extraordinary charge 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, provision for write-down of
real estate no longer utilized, net provision for loss on the sales of
businesses, restructuring and other costs, non-cash interest expense on an
acquisition obligation, distribution advance and other current liability,
and non-cash preferred stock dividend requirements. These non-cash charges
totaled $182,603, $157,964, $160,778, $241,536 and $192,895 for the years
ended December 31, 1992, 1993, 1994, 1995 and 1996, respectively and $97,209
and $87,088 for the six months ended June 30, 1996 and 1997, respectively.
Adjusted to eliminate these non-cash charges, earnings would have exceeded
fixed charges and fixed charges plus cash preferred stock dividends by
approximately $56,761 and $48,616 for 1992, $71,468 and $59,968 for 1993,
$89,149 and $77,649 for 1994, $106,501 and $95,001 for 1995 and $157,192 and
$130,248 for 1996. Adjusted to eliminate these non-cash charges, earnings
would have exceeded fixed charges and fixed charges plus cash preferred
stock dividends by approximately $69,403 and $58,209 and $76,557 and $56,227
for the six months ended June 30, 1996 and 1997, respectively.
(9) Includes current maturities of long-term debt and assets held for sale as of
December 31, 1994, 1995 and 1996 and June 30, 1997.
(10) Excludes current maturities of long-term debt.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The following discussion of the consolidated financial condition and related
results of operations of the Company should be read in conjunction with the
Company's historical consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
The Company organizes its businesses into three segments: specialty media,
education and information. Additional selected financial data for the Company
organized on the foregoing basis are presented below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
-------------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales, net:
Specialty Media................................ $ 341,782 $ 452,373 $ 684,341 $ 333,647 $ 361,174
Education...................................... 430,134 330,414 376,217 172,294 199,562
Information.................................... 192,732 263,542 313,891 144,692 160,317
---------- ------------ ------------ ---------- ----------
Total.......................................... $ 964,648 $ 1,046,329 $ 1,374,449 $ 650,633 $ 721,053
---------- ------------ ------------ ---------- ----------
---------- ------------ ------------ ---------- ----------
Depreciation, amortization and other charges(1):
Specialty Media................................ $ 53,156 $ 56,682 $ 74,549 $ 37,874 $ 24,508
Education...................................... 46,426 106,492 63,252 26,256 32,329
Information.................................... 51,677 78,513 52,122 27,736 25,620
Corporate...................................... 632 703 779 364 (256)
---------- ------------ ------------ ---------- ----------
Total.......................................... $ 151,891 $ 242,390 $ 190,702 $ 92,230 $ 82,201
---------- ------------ ------------ ---------- ----------
---------- ------------ ------------ ---------- ----------
Operating income (loss):
Specialty Media................................ $ 15,877 $ 32,169 $ 59,693 $ 23,810 $ 45,190
Education...................................... 10,590 (32,024) 15,011 10,037 12,611
Information.................................... (2,307) (8,683) 33,473 6,633 14,649
Corporate...................................... (13,957) (17,737) (22,276) (10,215) (12,454)
---------- ------------ ------------ ---------- ----------
Total.......................................... 10,203 (26,275) 85,901 30,265 59,996
Other income (expense):
Interest expense............................... (78,351) (105,837) (124,601) (57,597) (68,963)
Amortization of deferred financing and
organizational costs......................... (3,080) (3,135) (3,662) (1,867) (1,582)
Other, net..................................... (401) 212 6,659 1,393 18
---------- ------------ ------------ ---------- ----------
Loss before income tax benefit and
extraordinary charge......................... (71,629) (135,035) (35,703) (27,806) (10,531)
Income tax benefit............................. 42,100 59,600 53,300 -- 1,685
Income (loss) before extraordinary charge...... (29,529) (75,435) 17,597 (27,806) (8,846)
Extraordinary charge--extinguishment of debt... (11,874) -- (9,553) (7,572) (15,401)
---------- ------------ ------------ ---------- ----------
Net income (loss).............................. $ (41,403) $ (75,435) $ 8,044 $ (35,378) $ (24,247)
---------- ------------ ------------ ---------- ----------
---------- ------------ ------------ ---------- ----------
</TABLE>
- ------------------------
(1) Other charges includes net provision for loss on the sales of businesses and
provision for restructuring and other costs in 1994 and 1995.
25
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
CONSOLIDATED RESULTS: Consolidated sales increased by 10.8% to $721,053 in
the 1997 period over 1996 due to strong growth in all segments as well as the
impact of acquisitions, in particular Westcott Communications, Inc. ("Westcott")
which added $33,052 to revenue growth. Consolidated operating income was $59,996
in the 1997 period as compared to $30,265 in 1996. This 98.2% improvement was
driven by an increase in sales, the impact of recent acquisitions and a decrease
in amortization expenses and was partially offset by increases in marketing and
selling, distribution, circulation and fulfillment, and editorial expenses.
Paper costs, which in the first six months of 1997 represented approximately 8%
of the Company's total operating costs and expenses, were approximately 15%
lower in the first six months of 1997 versus the same period in 1996. All three
segments experienced declines in paper prices with the greatest impact occurring
in the specialty media segment. As the Company had anticipated, paper prices
have increased moderately during the third quarter of 1997. Interest expense
increased by $11,366 or 19.7% in the 1997 period over 1996 primarily due to the
increased level of borrowings associated with acquisitions. The consolidated
loss before income tax benefit and extraordinary charge decreased by $17,275 to
$10,531 in the first six months of 1997 versus $27,806 in the 1996 period due
primarily to an increase in operating income, offset by an increase in interest
expense. The $7,829 increase in the extraordinary charge reflects the aggregate
premium paid on the redemptions of the Company's 10 5/8% Senior Notes and an
additional write-off of unamortized deferred financing costs.
SPECIALTY MEDIA: The specialty media segment's sales increased by $27,527
or 8.3% in the 1997 period over 1996 due largely to greater advertising and
circulation revenue, particularly at SEVENTEEN, the leading fashion and beauty
magazine in the United States, and SOAP OPERA DIGEST, which has become a weekly
publication and continues to gain market share. Also, strong advertising revenue
growth at the Company's telecommunications trade publications and certain
acquisitions contributed to the increase in sales. Operating income increased by
$21,380 or 89.8% in the 1997 period over 1996. The increase was the result of
the increase in sales and the impact of acquisitions, as well as a decrease in
paper prices.
EDUCATION: The education segment's sales increased by $27,268 or 15.8% in
the 1997 period over 1996. The increase in sales reflected gains at Channel One
and Films for the Humanities and Sciences, along with the addition of Westcott,
which the Company acquired in May 1996, offset by declines at Newbridge
Communications, Inc. ("Newbridge"), which the Company intends to divest by the
end of 1997. The education segment's operating income increased to $12,611 in
the 1997 period as compared to $10,037 in the 1996 period.
INFORMATION: The information segment's sales increased by $15,625 or 10.8%
in the 1997 period over 1996 primarily because of organic growth at both the
Haas Publishing Companies, Inc. ("Haas") advertiser-sponsored apartment guides
and Bacon's as well as acquisitions. The information segment's operating income
increased to $14,649 in the 1997 period as compared to $6,633 in the 1996
period.
1996 COMPARED TO 1995
CONSOLIDATED RESULTS: Consolidated net sales increased by $328,120 or 31.4%
to $1,374,449 in 1996 over 1995 due to internal growth in all three segments as
well as the impact of acquisitions. Specifically, the acquisitions of Cahners
Consumer Magazines ("Cahners"), Westcott and the trade magazines of Argus Inc.
("Argus") added $199,144 to net sales growth.
Consolidated operating income was $85,901 in 1996 compared to an operating
loss of $26,275 in 1995. This improvement was driven by the increase in sales,
the impact of recent acquisitions and the effect of several one-time,
principally non-cash charges totalling $68,072 in the second quarter of 1995.
The increase occurred despite an 8.4% increase in the Company's average purchase
price for paper in 1996 and the effect of the required adoption of a new method
of accounting for advertising costs (the "Accounting Change"), which K-III
adopted on July 1, 1994. The Accounting Change had a $8,343 net positive impact
26
<PAGE>
on operating income in the first six months of 1995 versus 1996, predominantly
within the education segment. In periods subsequent to June 30, 1996, the
comparative effects of the adoption of the Accounting Change are not material.
The increase in corporate expenses resulted predominantly from growth in
corporate service requirements.
Interest expense increased by $18,764 or 17.7% in 1996 over 1995 primarily
due to the increased level of borrowings associated with acquisitions.
The Company reported an income tax benefit of $53,300 in 1996 compared to
$59,600 in 1995 associated with the partial recognition of NOLs and other
deferred income tax assets. At the end of each year, the Company reviews its
recent operating results and projected future operating results and for 1996
determined that there should be sufficient future taxable income and that a
portion of the net deferred income tax assets would likely be realized. Such
future taxable income is determined principally from management's projection of
future operating results in conjunction with scheduled reductions in intangible
asset amortization expense. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. Such reductions in
taxable income could occur as the result of many external factors including but
not limited to increased paper and postage costs and rates of interests. The
$9,553 increase in the extraordinary charge reflects the aggregate premium paid
on the redemptions of the Company's 10 5/8% Senior Notes due 2002 (the "10 5/8%
Senior Notes") and the write-off of unamortized deferred financing costs. The
Company reported consolidated net income of $8,044 in 1996 versus a consolidated
net loss of $75,435 in 1995.
SPECIALTY MEDIA: The specialty media segment's net sales increased by
$231,968 or 51.3% in 1996 over 1995 due to growth of existing properties as well
as the impact of the Cahners and Argus acquisitions. The increases at the
existing properties were primarily due to the double-digit organic revenue
growth at the specialty consumer magazines led by SEVENTEEN, SOAP OPERA DIGEST,
TRUCKIN' and CRAFTS. The full year effect of Argus, acquired in December 1995,
and Cahners, acquired in January 1996, contributed $51,459 and $95,397
respectively to the 1996 sales growth. Operating profit increased by $27,524 or
85.6% in 1996 over 1995. The increase was the result of an increase in net sales
partially offset by a 14.1% increase in average paper prices for magazine
operations in 1996 over 1995.
EDUCATION: The education segment's net sales increased by $45,803 or 13.9%
in 1996 over 1995. Increases at Weekly Reader Corporation ("Weekly Reader"),
Films for the Humanities and Sciences and Krames Communications Incorporated
("Krames"), and the addition of Westcott, which contributed $52,288 to the
increase in net sales, offset declines at Newbridge. At Newbridge, the book club
business remained soft, but performance indicators improved from year ago
levels. The education segment's operating profit increased to $15,011 in 1996 as
compared to an operating loss of $32,024 in 1995. This improvement is primarily
due to the one-time charges in the second quarter of 1995 for a provision for
loss associated with the sale of Newfield Publications, Inc. ("Newfield") and a
restructuring charge at Newbridge. Offsetting those charges, the Accounting
Change had a $8,541 net positive impact on operating profit in the first six
months of 1995 versus 1996.
INFORMATION: The information segment's net sales increased by $50,349 or
19.1% in 1996 over 1995 primarily because of double-digit organic growth at the
apartment guides as well as the impact of recent acquisitions which contributed
$17,600 to the increase in net sales. The information segment's operating profit
increased to $33,473 in 1996 as compared to an operating loss of $8,683 in 1995
due to the increase in sales and a decrease in amortization expense. Goodwill
and intangible asset amortization expense decreased by $24,277 in 1996 over 1995
primarily as a result of an adjustment to the carrying values of goodwill and
other intangible assets totalling $17,958 in the second quarter of 1995.
27
<PAGE>
1995 COMPARED TO 1994
CONSOLIDATED RESULTS: Excluding the results of divested operations,
consolidated net sales increased by $249,420 or 31.3% to $1,046,329 in 1995 over
1994. This increase resulted from growth from existing operations, product
additions and acquisitions of businesses in all three segments. In 1995, the
Company divested Newfield in the education segment and PREMIERE magazine in the
specialty media segment. The Company's statement of consolidated operations
included the results of these businesses in 1994 but not in 1995. Consequently,
reported net sales including divested businesses increased only 8.5% from 1994
to 1995.
In the second quarter of 1995, the Company recorded several one-time,
principally non-cash, charges totalling $68,072. These included a net aggregate
provision for loss on the sales of Newfield and PREMIERE of $35,447;
restructuring and other charges of $14,667 related to a corporate restructuring
at Newbridge and the completion of manufacturing outsourcing at Daily Racing
Form, Inc., and adjustments to the carrying values of K-III Reference
Corporation ("K-III Reference"), goodwill and other intangible assets totalling
$17,958.
Partially offsetting these one-time charges was the impact of the Accounting
Change, which K-III adopted on July 1, 1994. The Accounting Change increased
operating income by approximately $2,000 more in 1995 than 1994. Including the
one-time charges and the effect of the Accounting Change, the consolidated
operating loss was $26,275 in 1995 as compared to consolidated operating profit
of $10,203 in 1994. The increase in the corporate expenses resulted
predominantly from growth in corporate service requirements.
Interest expense increased by $27,486 or 35.1% in 1995 over 1994 primarily
due to the increased level of borrowings associated with acquisitions as well as
higher short-term interest rates.
The Company recorded an income tax benefit of $59,600 in 1995 compared to
$42,100 in 1994, associated with the partial recognition of NOLs and other net
deferred income tax assets. As a result of the refinancing during the second
quarter of 1994, an extraordinary charge of $11,874 was recorded representing
the write-off of unamortized deferred financing costs related to the previous
bank financing. The consolidated net loss increased by $34,032 in 1995 over 1994
mainly due to the one-time charges.
SPECIALTY MEDIA: The specialty media segment's sales increased by $110,591
or 32.4% in 1995 over 1994 due to a 32.0% increase in advertising revenue and a
31.4% increase in subscription revenue including the effect of the acquisitions
of PJS Publications, Inc., the Maclean Hunter division of Rogers Communications,
Inc. and McMullen & Yee Publishing, Inc. which contributed $40,665, $29,386 and
$21,357, respectively, to the increase in net sales, offset by the elimination
of the revenues of PREMIERE. Excluding the effects of acquisitions and
divestitures, technical and trade magazine advertising pages and rates rose 3.7%
and 5.0%, respectively, and specialty consumer magazine advertising pages and
rates rose 3.2% and 3.3%, respectively, in 1995 over 1994. Despite an average
24% increase in paper costs in addition to the Accounting Change impact which
was $2,000 less favorable in 1995 than in 1994 the specialty media segment's
operating profit increased by $16,292 in 1995 over 1994.
EDUCATION: Excluding the results of Newfield, the education segment's net
sales increased 17.5% over 1994, reflecting growth from product additions and
acquisitions of businesses, primarily Channel One Communications Corporation
("Channel One") which added $52,370 to the net sales growth in 1995. Reported
results, however, included Newfield's sales only in 1994, thus leading to a
reported decline in the education segment's net sales of 23.2%. The Accounting
Change favorably impacted the education segment's earnings by approximately
$4,000 more in 1995 than in 1994; however, it was offset by an increase in
goodwill, intangible and other asset amortization expenses of $15,469 and an
increase in certain one-time charges of $37,377. The education segment reported
an operating loss of $32,024 in 1995 compared to an operating profit of $10,590
in 1994.
28
<PAGE>
INFORMATION: The information segment's net sales increased by $70,810 or
36.7% in 1995 over 1994 primarily as a result of product additions at business
directories, the full year effect of the acquisition of Haas and the subsequent
addition of new markets for its apartment guides. Product additions at K-III
Directory Corporation included the INTERNATIONAL TRADE GUIDE, the U.S. CUSTOM
HOUSE GUIDE and the OFFICIAL EXPORT GUIDE, all acquired in late 1994, as well as
the Machinery Information Division directories acquired in mid-1994. These
product additions contributed approximately $7,000 to the 1995 net sales growth.
The Haas acquisition in mid-1994 resulted in approximately $27,900 of the 1995
net sales growth. Additional markets added to the Haas apartment guides in 1995
included Washington, D.C., Baltimore, MD and Detroit, MI, which contributed
approximately $8,800 to the 1995 net sales growth. The addition of the BACON'S
media relations industry directories, clipping services and mailing services in
mid-1995 added approximately $27,900 to the 1995 net sales growth. Goodwill and
intangible asset amortization expense increased by $21,889 in 1995 over 1994
principally as a result of the adjustments to goodwill and intangible asset
values at K-III Reference. This was the primary cause for an increase in the
information segment's operating loss of $6,376 in 1995 over 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain information regarding the Company's
EBITDA and other net cash flow items:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
EBITDA(1):
Specialty Media............................... $ 69,033 $ 88,851 $ 134,242 $ 61,684 $ 73,384
Education..................................... 57,016 74,468 78,263 36,293 44,940
Information................................... 49,370 69,830 85,595 34,369 36,583
Corporate..................................... (13,325) (17,034) (21,497) (9,851) (12,710)
----------- ----------- ----------- ----------- -----------
Total......................................... $ 162,094 $ 216,115 $ 276,603 $ 122,495 $ 142,197
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities:
Specialty Media............................... $ 62,902 $ 66,601 $ 124,719 $ 31,078 $ 62,529
Education..................................... 43,314 35,963 84,541 8,695 11,567
Information................................... 39,167 73,019 70,022 32,327 30,351
Corporate..................................... (80,493) (111,521) (129,090) (60,985) (79,045)
----------- ----------- ----------- ----------- -----------
Total......................................... $ 64,890 $ 64,062 $ 150,192 $ 11,115 $ 25,402
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities:
Specialty Media............................... $ (20,181) $ (238,731) $ (213,546) $ (194,028) $ (44,905)
Education..................................... (291,501) 6,075 (439,907) (423,487) (62,400)
Information................................... (130,110) (83,632) (66,521) (35,085) (43,510)
Corporate..................................... (334) (2,424) (1,735) (452) (656)
----------- ----------- ----------- ----------- -----------
Total......................................... $ (442,126) $ (318,712) $ (721,709) $ (653,052) $ (151,471)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities:
Specialty Media............................... $ (8,081) $ (5,332) $ (10,372) $ (5,526) $ (1,642)
Education..................................... (2,795) (727) (3,205) (1,606) 53
Information................................... 375 (2,590) (5,633) (2,676) (1,222)
Corporate..................................... 394,425 272,293 600,156 642,215 118,493
----------- ----------- ----------- ----------- -----------
Total......................................... $ 383,924 $ 263,644 $ 580,946 $ 632,407 $ 115,682
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Excess (Deficiency) of Earnings to Fixed
Charges(2):
Specialty Media............................... $ 9,253 $ 26,001 $ 60,883 $ 23,366 $ 47,588
Education..................................... 9,406 (33,615) 13,141 8,946 11,646
Information................................... (7,735) (13,449) 30,278 3,436 7,438
Corporate..................................... (82,553) (113,972) (140,005) (63,554) (77,203)
----------- ----------- ----------- ----------- -----------
Total......................................... $ (71,629) $ (135,035) $ (35,703) $ (27,806) $ (10,531)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Excess (Deficiency) of Earnings to Fixed Charges
and Cash Preferred Stock Dividends(2):
Specialty Media............................... $ 9,253 $ 26,001 $ 60,883 $ 23,366 $ 47,588
Education..................................... 9,406 (33,615) 13,141 8,946 11,646
Information................................... (7,735) (13,449) 30,278 3,436 7,438
Corporate..................................... (108,512) (142,950) (183,531) (82,802) (101,984)
----------- ----------- ----------- ----------- -----------
Total......................................... $ (97,588) $ (164,013) $ (79,229) $ (47,054) $ (35,312)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</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 income
(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
or 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) net provision for loss on
sales of businesses, (iv) restructuring and other costs, and (v) 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 on 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.
Consolidated working capital including current maturities of long-term debt
was $219,473 at June 30, 1997 compared to a working capital deficiency of
$(44,705) at December 31, 1996. Excluding the effect of the reclassification of
net assets held for sale, consolidated working capital deficiency including
current maturities of long-term debt would have been $(28,845) at June 30, 1997
compared to $(69,317) at December 31, 1996. Consolidated working capital
reflects the expensing of editorial and product development costs when incurred
and the recording of deferred revenues as a current liability. Advertising costs
are expensed when the promotional activities occur except for certain
direct-response advertising costs which are capitalized as other non-current
assets and amortized over the estimated period of future benefit.
30
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Consolidated EBITDA increased by $19,702 or 16.1% in the six months ended
June 30, 1997 over 1996 mainly as a result of growth in existing operations, new
product additions and acquisitions of products and businesses. The EBITDA
increase in the specialty media segment was primarily due to strong organic
growth in circulation and advertising revenue as well as savings from paper
price declines. The EBITDA increase in the education segment is largely
attributable to Westcott, which was acquired in the second quarter of 1996. The
EBITDA increase in the information segment came from increases in advertising
revenue at the apartment guides, distribution revenues at the consumer
directories and new CD-ROM products at Bacon's. The net cash provided by
operating activities during the six months ended June 30, 1997, after interest
payments of $67,060, was $25,402. Net cash provided by operating activities
increased by $14,287 during the six months ended June 30, 1997 over 1996 due
primarily to EBITDA growth. Capital expenditures were $14,708 during the 1997
period which was an increase of $4,550 from the 1996 period. Payments for
acquisitions of $142,291 (including certain immaterial purchase price
adjustments relating to previous acquisitions) were made during the first six
months of 1997.
The Company's earnings (defined as pretax income or loss from continuing
operations before extraordinary charge) are inadequate to cover fixed charges
and fixed charges plus preferred stock dividends by $27,806 and $47,054 and
$10,531 and $35,312 for the six-month periods ended June 30, 1996 and 1997,
respectively. Fixed charges consist of interest expense on 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 non-cash
charges (including depreciation and amortization) of approximately $97,209 and
$87,088 for the six-month periods ended June 30, 1996 and 1997, respectively.
Adjusted to eliminate these non-cash charges, earnings would have exceeded fixed
charges and fixed charges plus cash preferred stock dividends by approximately
$69,403 and $58,209 and $76,557 and $56,227 for the six-month periods ended June
30, 1996 and 1997 respectively.
1996 COMPARED TO 1995
Consolidated EBITDA increased by $60,488 or 28% in the year ended December
31, 1996 over 1995 mainly as a result of growth from existing operations, new
product additions and acquisitions of businesses. The net cash provided by
operating activities during the year ended December 31, 1996, after interest
payments of $111,752, was $150,192, an increase of $86,130 over 1995 resulting
mainly from EBITDA growth. Capital expenditures, net of gross proceeds from
sales of assets, were $28,790 during 1996 as compared to $23,414 for 1995. These
expenditures included data processing equipment, televisions, videocassette
recorders, satellite dishes, furniture and leasehold improvements and were
financed with net cash provided from operations. Payments of $700,990 (including
certain immaterial purchase price adjustments relating to previous acquisitions)
were made during the year ended December 31, 1996 for the acquisitions described
in Note 4 to the Company's December 31, 1996 consolidated financial statements.
Net cash used in investing activities increased as a result of increased
acquisition activities, substantially all of which were financed with borrowings
under the then existing credit agreements and funds from operations.
The Company's earnings (defined as pretax income or loss from continuing
operations before extraordinary charge) were inadequate to cover fixed charges
and fixed charges plus preferred stock dividends by $135,035 and $164,013 and
$35,703 and $79,229 for 1995 and 1996, respectively. Fixed charges consist of
interest expense on 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 non-cash charges (including depreciation and
amortization) of approximately $241,536 and $192,895 for the years ended
December 31, 1995 and 1996, respectively. Adjusted to eliminate these non-cash
charges, earnings would have exceeded
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fixed charges and fixed charges plus cash preferred stock dividends by
approximately $106,501 and $95,001 and $157,192 and $130,248 for the years ended
December 31, 1995 and 1996, respectively.
1995 COMPARED TO 1994
Consolidated EBITDA increased by $54,021 or 33.3% in the year ended December
31, 1995 over 1994 mainly as a result of growth from existing operations, new
product additions, acquisitions of businesses and the Accounting Change, which
K-III adopted on July 1, 1994. The net cash provided by operating activities
during the year ended December 31, 1995, after interest payments of $102,040,
was $64,062. Net cash provided by operating activities declined by $828 during
the year ended December 31, 1995 from 1994 due primarily to the EBITDA growth
offset by higher acquisition related interest payments and growth in inventories
and prepaid expenses. Capital expenditures, net of gross proceeds from sales of
assets, were $23,414 during 1995 as compared to $14,184 for 1994. These
expenditures included data processing equipment, televisions, videocassette
recorders, satellite dishes, furniture and leasehold improvements and were
financed with net cash provided by operations. Payments of $353,954 (including
certain immaterial purchase price adjustments relating to previous acquisitions)
were made during the year ended December 31, 1995 for the acquisitions described
in Note 4 to the Company's December 31, 1996 consolidated financial statements.
Net cash used in investing activities decreased as a result of the proceeds from
the sale of Newfield and PREMIERE and the lower cost of the acquisitions in 1995
as compared to the acquisitions in 1994, all of which were financed with
borrowings under existing credit facilities.
The Company's earnings (defined as pretax income or loss from continuing
operations before extraordinary charge) were inadequate to cover fixed charges
and fixed charges plus preferred stock dividends by $71,629 and $97,588 and
$135,035 and $164,013 for 1994 and 1995, respectively. Fixed charges consist of
interest expense on 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 non-cash charges (including depreciation and
amortization) of approximately $160,778 and $241,536 for 1994 and 1995,
respectively. Adjusted to eliminate these non-cash charges, earnings would have
exceeded fixed charges and fixed charges plus cash preferred stock dividends by
approximately $89,149 and $77,649 and $106,501 and $95,001 for 1994 and 1995,
respectively.
NET OPERATING LOSS CARRYFORWARDS
At June 30, 1997, the Company had NOLs of approximately $750,000 which will
be available to reduce future taxable income. In addition, management estimates
that approximately $776,000 of unamortized goodwill and other intangible assets
will be available as deductions from any future taxable income.
FINANCING ARRANGEMENTS
In January 1997, the Company purchased, in aggregate, $20,850 of the 10 5/8%
Senior Notes at a weighted average price of 105%, plus accrued and unpaid
interest from various brokers on the open market. On May 1, 1997, the Company
redeemed the $212,400 remaining principal amount of the 10 5/8% Senior Notes at
104% plus accrued and unpaid interest. The aggregate premium paid and the
write-off of related deferred financing costs are classified as an extraordinary
charge and are recorded at an aggregate value of $15,401 on the accompanying
statement of condensed consolidated operations for the six-month period ended
June 30, 1997. The Company used borrowings under its Credit Facilities to fund
the redemptions of the 10 5/8% Senior Notes.
The write-off of the unamortized deferred financing costs of $7,572 related
to the Company's May 1996 bank refinancing has been reclassified as an
extraordinary charge on the accompanying statements of condensed consolidated
operations for the six-month period ended June 30, 1996 to conform to the 1997
presentation.
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On April 21, 1997, the Company entered into a new 364-day credit facility
with The Chase Manhattan Bank, The Bank of New York, Bankers Trust Company and
The Bank of Nova Scotia, as agents (the "New Credit Facility") which expires
April 20, 1998. Under the terms of the New Credit Facility, the Company has
commitments of $150,000 which can be borrowed in the form of revolving loans.
The proceeds of all revolving loans under the New Credit Facility can be
used for general corporate and working capital purposes of the Company and its
subsidiaries, including, without limitation, the financing of permitted
acquisitions.
The amounts borrowed pursuant to the New Credit Facility bear interest at
rates per annum identical to those in the Bank Credit Facilities at the
Company's option as follows: (i) the higher of (a) the Federal Funds Effective
Rate plus 1/2% and (b) the prime lending rate as in effect from time to time
(the "Base Rate"); plus in each case, an applicable margin of up to 1/8 of 1% as
specified in the New Credit Facility or (ii) the Eurodollar Rate plus an
applicable margin ranging from 1/2% to 1 1/2% as specified in the New Credit
Facility.
Under the New Credit Facility, the Company has agreed to pay commitment fees
equal to 1/8 of 1% per annum on the daily average aggregate unutilized revolving
loan commitment.
As under the Bank Credit Facilities, borrowings under the New Credit
Facility are guaranteed by each of the domestic wholly-owned subsidiaries of the
Company. Such guarantees are full, unconditional and joint and several. The
Company's foreign subsidiaries are not guarantors of the above indebtedness. The
total assets, revenues, income or equity of such foreign subsidiaries, both
individually and on a combined basis, are inconsequential in relation to the
total assets, revenue, income or equity of the Company.
In May 1997, the Company, through its Bank Credit Facilities, solicited
commitments of $150,000 under the Tranche B Revolving Loan Facility ("Tranche B
Facility"). The Company has the right to solicit additional commitments of up to
$100,000 under the Tranche B Facility.
The Company had eight interest rate swap agreements in effect as of
September 10, 1997 with an aggregate notional amount of $800,000. Under these
swap agreements, the Company receives a floating rate of interest based on
three-month LIBOR, which resets quarterly, and pays a fixed rate of interest,
each quarter, for the term of the agreements. As of September 10, 1997, the
weighted average variable rate and weighted average fixed rate were 5.75% and
6.01%, respectively. In addition, in July 1997, the Company entered into four,
three-year and two, four-year interest rate swap agreements, with an aggregate
notional amount of $600,000. Under these new swap agreements, which commence on
January 2, 1998, the Company receives a floating rate of interest based on
three-month LIBOR, which resets quarterly, and the Company pays a fixed rate of
interest, each quarter, for the terms of the respective agreements. The weighted
average fixed rate of interest under these agreements is 6.33%.
Under the Credit Facilities, the Company has total commitments of $1,550,000
and can borrow up to $1,650,000 in the aggregate. As of September 10, 1997,
aggregate borrowings under the Credit Facilities were $1,197,014. As of
September 10, 1997, the amounts borrowed under the Credit Facilities bore
interest at a weighted average variable interest rate of 7.19%. Also, at June
30, 1997, K-III had outstanding $100,000 of 10 1/4% Senior Notes, $300,000 of
8 1/2% Senior Notes, 4,000,000 shares of Senior Preferred Stock, 1,576,036
shares of $11.625 Series B Preferred Stock and 2,000,000 shares of Series D
Preferred Stock. Before May 1, 1998, dividends or interest, as the case may be,
on the Series B Preferred Stock or the Class B Subordinated Debentures may be
paid in cash or by issuing additional shares of the Series B Preferred Stock or
additional Class B Subordinated Debentures, as the case may be. On or after May
1, 1998, such dividends or interest must be paid in cash. The Company has been
paying such dividends in cash since May 1, 1997. See "Description of Capital
Stock of the Company."
The above indebtedness, among other things, limits the ability of the
Company to change the nature of its businesses, incur indebtedness, create
liens, sell assets, engage in mergers, consolidations or transactions with
affiliates, make investments in or loans to certain subsidiaries, issue
guarantees and make
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certain restricted payments. The Company is restricted from declaring or making
dividend payments on its common and preferred stock. Under the Company's most
restrictive debt covenants, the Company must maintain a minimum interest
coverage ratio of 1.8 to 1 and a minimum fixed charge coverage ratio of 1.05 to
1 and its maximum allowable leverage ratio is 6.0 to 1. The Company believes it
is in compliance with the financial and operating covenants of its principal
financing arrangements.
The aggregate mandatory reductions of the commitments under the Credit
Facilities are $150,000 in 1998, $90,000 in 1999, $280,000 per year in 2000
through 2003 with a final reduction or paydown of $190,000 in 2004. The 10 1/4%
Senior Notes mature in June 2004 and the 8 1/2% Senior Notes mature in February
2006. The per annum principal and interest payments relating to an acquisition
obligation are scheduled to be $3,000, $14,333, $21,167, $19,167, and $8,833 to
be made in semi-annual installments in 1997 through 2001, respectively. The
Company's aggregate lease obligations for 1997, 1998 and 1999 are expected to be
approximately $35,000, $32,000 and $28,000, respectively. The Company believes
its liquidity, capital resources and cash flow are sufficient to fund planned
capital expenditures, working capital requirements, interest and principal
payments on its debt, the payment of preferred stock dividends and other
anticipated expenditures for the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS
No. 128 becomes effective for the Company's consolidated financial statements
beginning in the fourth quarter of 1997. SFAS No. 128 will eliminate the
disclosure of primary earnings per share which includes the dilutive effect of
stock options, warrants and other convertible securities ("Common Stock
Equivalents") and instead requires reporting of "basic" earnings per share,
which will exclude Common Stock Equivalents. Additionally, SFAS No. 128 changes
the methodology for fully diluted earnings per share. In the opinion of the
Company's management, it is not anticipated that the adoption of this new
accounting standard will have a material effect on the reported earnings per
share of the Company.
In February 1997, the Financial Accounting Standards Board issued SFAS
No.129, "Disclosure of Information about Capital Structure". SFAS No. 129
becomes effective for the Company's consolidated financial statements beginning
in the fourth quarter of 1997. SFAS No. 129 requires certain disclosures
regarding outstanding securities, preferred stock and redeemable stock. In June
1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which become effective for the Company's
1998 consolidated financial statements. SFAS No. 130 requires the disclosure of
comprehensive income, defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources, in the Company's consolidated financial statements. SFAS No.
131 requires that a public business enterprise report certain financial and
descriptive information about its reportable operating segments. In the opinion
of the Company's management, it is not anticipated that the adoption of these
new accounting standards will have a material effect on the consolidated
financial statements of the Company.
RECENT DEVELOPMENTS
On August 14, 1997, the Company sold NEW WOMAN magazine pursuant to an asset
purchase agreement, and on August 29, 1997, the Company sold KRAMES
COMMUNICATIONS pursuant to a stock purchase agreement. The proceeds from these
divestitures were used to repay outstanding indebtedness. The aggregate
operating results of these divestitures prior to the divestitures were not
material to the consolidated operations of the Company.
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On September 9, 1997, the Company announced that its board of directors had
authorized a program for the Company to repurchase up to $15 million of its
outstanding Common Stock from time to time in the open market and through
privately negotiated transactions.
On September 16, 1997, the Company purchased a block of 523,000 shares of
Common Stock at a price of $12 1/4 per share. The shares were purchased in the
open market through the New York Stock Exchange. The purchase of these shares
was not part of the share repurchase program described in the preceding
paragraph.
Through September 16, 1997, the Company completed eleven product-line
acquisitions consisting of classroom learning, workplace learning and
specialized reference products, as well as specialty consumer magazines,
technical and trade magazines and apartment guides. The aggregate purchase price
was approximately $179,000.
On September 26, 1997, the Company completed a private offering of 1,250,000
shares of $9.20 Series E Exchangeable Preferred Stock (the "Offering") and
called for redemption all of its Senior Preferred Stock (the "Redemption"). Net
proceeds of the Offering of approximately $121,250 will be used to redeem the
4,000,000 outstanding shares of Senior Preferred Stock on November 3, 1997 at a
redemption price of $26.45 per share plus accrued and unpaid dividends to the
redemption date and to repay borrowings outstanding under its Bank Credit
Facilities, which amounts may be reborrowed for general corporate purposes
including acquisitions. Until the Redemption, the Company has used the net
proceeds from the Offering to repay borrowings under the Bank Credit Facilities.
IMPACT OF INFLATION
The impact of inflation was immaterial during 1996 and 1997 with the
exception of paper prices in early 1996. Paper prices declined around mid-year
1996 and continued that trend through the first six months of 1997. Moderate
paper price increases occurred in July 1997 for most of the grades of paper used
by the Company. In the first six months of 1997, paper costs represented
approximately 8% of the Company's total operating costs and expenses. Postage
for product distribution and direct mail solicitations is also a significant
expense of the company. The Company uses the U.S. Postal Service for
distribution of many of its products and marketing materials. Postage costs
increase periodically and can be expected to increase in the future. In the
past, the effects of inflation on operating expenses have substantially been
offset by K-III's ability to increase selling prices. No assurances can be given
that the Company can pass such 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. See "Risk Factors--Effect of Increases in Paper and
Postage Costs."
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BUSINESS
GENERAL
K-III is the authoritative source for specialized information targeted to
specific high growth segments in the specialty media, education, and business
information markets. Most of K-III's products are premier brands with leadership
positions in their specialty niche markets: specialty media (E.G., SEVENTEEN,
SOAP OPERA DIGEST, LOW RIDER, SEW NEWS and TELEPHONY); education (E.G., CHANNEL
ONE NEWS, WEEKLY READER and WESTCOTT COMMUNICATIONS); and information (E.G.,
APARTMENT GUIDE, WARD'S, THE WORLD ALMANAC and BACON'S).
The Company has achieved substantial growth through the development of its
franchises, combined with its operating expertise and successful acquisition
strategy. From 1991 through 1996, net sales have grown at a compound annual rate
of 19% to $1,374 million. Operating income in 1996 was $86 million compared to a
net operating loss of $37 million in 1991 (after deductions for amortization and
depreciation of $191 million in 1996 and $142 million in 1991).
GROWTH STRATEGY
K-III's strategy is to address growing needs in today's information economy.
Technology has created a flood of information. Consequently, management believes
the key role of the media is shifting from making information broadly available
across all audiences to sifting out and qualifying information for the benefit
of specific audiences. The Company's products are authoritative information
sources meeting customers' particular needs in the most beneficial
formats--print, electronic, and multimedia. Its pursuit of this strategy in its
targeted markets has enabled K-III to achieve an average market share across all
products of 59%, with 84% ranking number one or two in their markets.
K-III provides authoritative information in six areas that show superior
growth: specialty consumer magazines and technical and trade magazines in the
specialty media segment; classroom learning and workplace learning in the
education segment; and consumer directories and business directories in the
information segment. In each of these six areas, the Company offers
authoritative information products that have a branded presence and leading
market positions.
The Company is taking advantage of fundamental growth trends in these six
markets. The Company's specialty media products take advantage of trends in the
specialty consumer market where advertising growth has outpaced general interest
magazine, broadcast television, radio and newspaper advertising growth since
1989. In classroom and workplace learning, K-III is building on rising
elementary and secondary school enrollments, increased spending on supplementary
educational materials and the rapid growth in outsourced workplace education.
The Company's consumer and business directories are capitalizing on the trend
towards targeted marketing and away from general interest sources such as
newspapers and the increased spending by businesses for information.
The Company seeks to maximize its operating performance by capitalizing on
its leading position in each of these growing markets. Each of K-III's six
growth vehicles has opportunities for expansion through both internal organic
development and product line acquisitions. Organic growth results from both
market expansion and product innovation in conventional and new media formats.
Growth through product line acquisition is made possible by the constant
availability of leading brands for sale in the myriad of niche markets in
K-III's six growth areas. To support this aspect of growth, the Company has
successfully developed a selective and disciplined process of identifying,
evaluating and integrating acquired companies. The primary source of funds for
these product line acquisitions is the cash generated by the Company's
operations, which by their nature have high operating margins and low capital
requirements. Net capital expenditures were $23 million and $29 million, or 2.2%
and 2.1% of net sales, in 1995 and 1996, respectively. Additionally, cash
available for reinvestment is amplified because the Company pays
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virtually no income taxes largely as a result of having structured most of its
acquisitions to create tax-deductible amortization of intangible assets.
SPECIALTY MEDIA
The specialty media segment consists of 73 specialty consumer magazines and
63 technical and trade magazines. In 1996, 60% of the Company's specialty
consumer magazines and 56% of its technical and trade magazines were ranked
number one in their respective markets. Some of the Company's specialty consumer
magazines include SOAP OPERA DIGEST, SEVENTEEN, NEW YORK, CHICAGO, LOW RIDER and
SEW NEWS, while leading technical and trade publications include TELEPHONY,
FLEET OWNER and NATIONAL REAL ESTATE INVESTOR. Advertising in specialty consumer
magazines grew at a 9.5% compound annual growth rate between 1991 and 1996,
outpacing advertising growth in general interest magazines, radio, broadcast
television and newspapers.
SPECIALTY CONSUMER MAGAZINES
The Company's specialty consumer magazines include SOAP OPERA DIGEST, SOAP
OPERA WEEKLY, SEVENTEEN, AMERICAN BABY, over 25 automotive magazines and
numerous bridal, sewing, crafts and other titles. The principal sources for
specialty consumer magazines' net sales are advertising and circulation. In the
year ended December 31, 1996, approximately 54% of the specialty consumer
magazines' net sales were from advertising, 41% were from circulation and 5%
were from other sources.
SOAP OPERA DIGEST and SOAP OPERA WEEKLY are the leading publications
covering soap operas aired on network television. SOAP OPERA DIGEST, which
focuses on synopsis of episodes, was in 1996 a bi-weekly publication with
average circulation of 1.4 million per week or 36 million copies per year. In
April 1997, SOAP OPERA DIGEST became a weekly publication. SOAP OPERA WEEKLY,
which reports primarily on soap opera news, had average 1996 circulation of
500,000 per week or 26 million copies per year. Both publications 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, SOAP OPERA UPDATE, SOAPS IN DEPTH and SOAP
OPERA NEWS, all of which have substantially lower circulation. SOAP OPERA DIGEST
On-Line, launched in February 1996, has become one of the most utilized magazine
sites on America Online.
SEVENTEEN is the leading fashion and beauty magazine in the U.S. based on
total circulation, with fashion, beauty, boys, talent and lifestyle editorial
targeted to girls aged 12 to 19. In 1996, SEVENTEEN had average monthly
circulation of 2.4 million, an increase of over 250,000 readers over the prior
year. The August 1997 Back to School issue sold over one million copies on the
newsstand, with total sales of 2.8 million. SEVENTEEN's principal competitor is
YM. SEVENTEEN competes for circulation based on the nature and quality of its
editorial.
AMERICAN BABY, a baby care publication distributed monthly to approximately
1.4 million expectant and new parents in 1996, contains articles on all aspects
of pregnancy and baby care. AMERICAN BABY 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 offers several ancillary products including sampling
and couponing programs and a cable television show.
The Company's other specialty consumer magazines include AUTOMOBILE, which
caters to the high-end automotive market, MODERN BRIDE, a guide to bridal
fashions, home furnishings and honeymoons, the city magazines NEW YORK and
CHICAGO, LOW RIDER, the automotive magazine with the highest newsstand
circulation in the United States, SEW NEWS, the premier sewing title, and DOG
WORLD, the leading publication for dog breeders. The Company's automotive titles
are primarily newsstand driven, the sewing and crafts titles are primarily sold
by subscription, and the other titles have significant sales both by
subscription and
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on the newsstand. Subscriptions are obtained using printed advertisements,
direct mail, clearinghouses and subscription cards in each magazine.
Readers value specialty consumer magazines for their editorial content and
also rely on them as a catalog of products in the relevant topic area. This
catalog aspect makes the specialty consumer magazines an important media buy for
advertisers. Advertising sales for the Company's specialty consumer magazines
are generated by a combination of in-house staff and outside advertising firms.
The magazines compete for advertising on the basis of circulation and the niche
markets they serve. Each of the Company's specialty consumer magazines faces
competition in its subject area from a variety of publishers, and competes for
readers on the basis of high quality, targeted editorial, which is provided by
in-house writers and freelance authors.
TECHNICAL AND TRADE MAGAZINES
The Company publishes 63 technical and trade magazines that provide vital
information to professionals in fields such as telecommunications (TELEPHONY and
CELLULAR BUSINESS), agriculture (SOYBEAN DIGEST), transportation (FLEET OWNER)
and real estate (NATIONAL REAL ESTATE INVESTOR). In 1996, 34 of these
publications ranked number one in the fields they serve based on advertising
pages. These magazines are distributed primarily on a "controlled circulation"
basis to members of a targeted industry group and provide career and
business-enhancing technical and tutorial editorial content. Capitalizing on the
centralized circulation, fulfillment, production and other back office services,
new titles can be spun-off from existing titles or acquired and integrated.
During 1996, approximately 83% of the net sales of the technical and trade
titles were generated from advertising. Because each of the technical and trade
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 advertising rates,
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 in-house writers and
freelance authors, well-known in their specific industry niches.
In addition to its technical and trade magazines, the Company sponsors
seminars and trade shows, including LIGHTING DIMENSIONS INTERNATIONAL,
INTERNATIONAL WIRELESS COMMUNICATIONS EXPOSITION and THE SATELLITE EXPOSITIONS
CONFERENCE, serving the advertisers and readers of the corresponding
publications.
During 1996, the specialty media segment also included NEW WOMAN magazine.
See "--General" and "--Non-Core Businesses Being Sold."
EDUCATION
The Company is a leading provider of supplemental educational materials and
programming in the United States, targeting both classroom and workplace
learning. K-III's best-known brands in classroom learning include CHANNEL ONE
and WEEKLY READER, and in workplace learning, WESTCOTT COMMUNICATIONS. Classroom
learning takes advantage of the growth in spending on supplementary educational
materials, up 44% from 1991 to 1995, and the projected increases in elementary
and secondary school enrollments over the next decade (in particular, high
school enrollments are expected to rise 17% between 1995 and 2005). Workplace
learning focuses on the $60 billion training market of which the outsourced
segment is the fastest growing portion, rising 49% between 1991 and 1996.
CLASSROOM LEARNING
The Company operates CHANNEL ONE, WEEKLY READER and FILMS FOR THE HUMANITIES
AND SCIENCES.
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CHANNEL ONE'S news program, CHANNEL ONE NEWS, is the only daily news program
targeted to secondary school students. CHANNEL ONE NEWS broadcasts every school
day via satellite to over eight million students in approximately 12,000
secondary schools in the United States. Established in 1990, CHANNEL ONE
pioneered the delivery of world events and educational programming into
classrooms via satellite. Reaching 40% of the secondary students in the United
States, its award-winning daily news broadcast reaches more students than any
other electronically delivered educational product. CHANNEL ONE NEWS has more
teen viewers than the news programs of ABC, CBS, NBC and CNN combined.
Schools sign up for CHANNEL ONE NEWS under a three-year contract pursuant to
which they agree to show CHANNEL ONE NEWS, in its entirety, at least 90% of all
school days. CHANNEL ONE provides to schools a turnkey system of video cassette
recorders and networked televisions. These products and services are provided to
schools at no charge; sales are generated by two minutes of advertising shown
during the 12-minute daily newscast. All school contracts have come up for
renewal and approximately 99% have been renewed.
CHANNEL ONE NEWS is produced at the Hacienda, CHANNEL ONE'S Los Angeles
studio, using staff anchors and correspondents who report from U.S. and
international locations. CHANNEL ONE has a library of over 1,350 broadcasts
including approximately 190 single subject series, 45 of which have been
released as educational videos under the Hacienda
Productions-Registered Trademark- trademark.
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 over eight million
teenagers each school day. For 1996, approximately 65% of CHANNEL ONE'S
advertising net sales were from contracts having terms of three or more years.
The top five advertisers in 1996 by dollars were PepsiCo, M&M Mars, Nintendo,
Quaker Oats and Reebok, which together accounted for approximately 62% of
advertising net sales, and all of which are under contracts expiring on dates
between 1997 and 2000.
In addition, CHANNEL ONE'S THE CLASSROOM CHANNEL offers a range of
instructional programming to enhance the schools' curriculum. THE CLASSROOM
CHANNEL offers an average of 90 minutes of daily programming at no charge to
schools.
WEEKLY READER is the best-known and highest-circulation student newspaper in
the United States, with over 6.8 million subscriptions for elementary school
students alone. WEEKLY READER and its related products are sold in approximately
70% of all elementary schools and 59% of all secondary schools, and for the
1996-1997 school year had a 56% share of the elementary school market and a 40%
share of the secondary school market.
Eight separate editions of WEEKLY READER, each consisting of 26 issues per
year, are distributed to elementary school students. Each edition is written and
designed for a particular reading and comprehension level 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. Other titles produced and
distributed by WEEKLY READER include SCIENCE SPIN, READ, CURRENT EVENTS, CURRENT
SCIENCE and CURRENT HEALTH. Editorial materials for these publications are
generated by in-house writers and freelance authors. The Company's largest
competitor in these markets is Scholastic Corporation. WEEKLY READER generally
competes on the basis of editorial quality, content and price.
FILMS FOR THE HUMANITIES AND SCIENCES ("FILMS") is the exclusive distributor
of approximately 6,500 educational videos as well as videodiscs, CD-ROMs and
related products that are sold primarily by direct mail to teachers, instructors
and librarians serving grades K to 12 and college markets. FILMS is the largest
distributor of such products to colleges and high schools and competes on the
basis of quality and breadth of the subject matter it markets.
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WORKPLACE LEARNING
WESTCOTT, acquired by the Company in June 1996, is a leading provider of
high quality workplace educational programming. WESTCOTT has approximately
20,000 corporate and institutional subscribers and provides workplace learning
to approximately 2.5 million professionals in the healthcare, automotive,
financial services, government, public service and corporate fields. The
Company's production capabilities enable it to design and produce annually over
3,600 hours of educational content targeted to over 20 different disciplines,
generally delivered via satellite and video cassette.
The Company's leading products include its Executive Education Network
("EXEN") and five health care product lines. EXEN delivers executive education
courses taught by professors from leading business schools including Harvard
University, the University of Texas and the University of Southern California to
corporate and professional clients nationwide. Participants in EXEN interact on
a real-time basis using one-way video, two-way audio and data response keypads.
In the health care field, the Company offers a variety of live programming,
telecourses and other video products, including graduate degree courses, in-
service training and accredited continuing education programming, designed to
reach multiple target audiences within the hospital setting. In addition, the
Company's Interactive Distance Training Network provides customized interactive
programming for corporate, professional and government clients, including Intel,
Ernst & Young and Glaxo. In April 1997 Westcott acquired QWIZ, a software
applications testing and training provider with operations in the United States
and United Kingdom.
WESTCOTT does not have any multi-industry competitors in the workplace
learning market. The Company competes with a number of businesses and
governmental agencies that provide videotaped training material, consulting
services and instruction at seminars, trade shows and conventions, or certain
television programming.
During 1996, the education segment also included KRAMES COMMUNICATIONS, the
KATHARINE GIBBS SCHOOLS and NEWBRIDGE COMMUNICATIONS. See "--General" and
"--Non-Core Businesses Being Sold."
INFORMATION
The Company produces over 140 highly targeted consumer and business
directories, most of which hold dominant positions in their niche markets. The
Company's premier consumer directories include APARTMENT GUIDE, THE WORLD
ALMANAC and such specialty reference products as FACTS ON FILE NEWS SERVICE
which is used by public and institutional libraries. The Company's leading
business directories include NELSON'S for financial professionals and BACON'S
for public relations professionals.
Consumer directories take advantage of the trend toward more targeted
advertising. From 1990 to 1995, organic advertising revenue growth at K-III's
consumer guides has more than tripled growth of newspaper classified
advertising, the medium with which they most directly compete. Business
directories capitalize on the growth in business spending on information which
has increased 8% on a compound annual basis, or 123% from $10.2 billion to $22.7
billion, between 1985 and 1995.
CONSUMER DIRECTORIES
The Company publishes over 70 consumer directories and specialized reference
products. These products are distributed nationally in retail outlets and are
sold to public and institutional libraries. The Company publishes and
distributes consumer guides in three categories: rental apartments, new homes
and computer shopping. The Company's leading reference products include THE
WORLD ALMANAC, FACTS ON FILE NEWS SERVICE and the GARETH STEVENS line of
juvenile reference works.
The Company is the leading publisher of rental apartment guides in the
United States with 62 local versions of its apartment guide directory product,
each of which is published no less than monthly and provides informational
listings about featured apartment communities. These listings are paid for by
apartment community managers, who need to fill vacant apartments, and who
represent 100% of the
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apartment guide net sales. During 1997 the Company has acquired apartment guides
in Nashville, Memphis, Little Rock and Dayton. The Company is the dominant
information provider in apartment guides. The Company's only major competitor,
FOR RENT, is present in 33 of the Company's markets. In those markets, on
average, the Company captured 51% of total 1996 advertising pages, with FOR RENT
capturing 41% of such advertising pages.
In 1996, the Company added new types of consumer directories to its
portfolio with the acquisition of new homes and computer shopping guides. In
1996, the Company acquired new homes guides in Philadelphia, New Jersey,
Raleigh-Durham and Chapel Hill, North Carolina and Atlanta. In November 1996,
the Company acquired MICROTIMES, distributed in Northern and Southern
California. MICROTIMES provides consumers with information on computer products
through paid listings, and also contains informative articles reviewing products
for both the business and home computer shopper.
The Company's DistribuTech Division is the nation's largest distributor of
free publications, including its own consumer directories and over 600 other
titles. DistribuTech manages distribution of free publications to over 19,000
grocery, convenience and drug stores in 62 U.S. cities, as well as universities,
military bases and major employers. The majority of these locations are operated
under exclusive distribution agreements. The Company's consumer directories
typically are displayed in free standing, multi-pocket racks. DistribuTech
generates substantial revenues by leasing additional distribution rack pockets
to other publications that it also distributes. DistribuTech competes on the
basis of price paid to the retail locations and service on the rack program.
The Company has established web sites in all three consumer directory
groups. The Company's WWW.APTGUIDES.COM is the most comprehensive web site in
the multi-family dwelling industry, with over 12,000 communities included in its
on-line database.
THE WORLD ALMANAC is the leading almanac in the English language ranked by
unit sales and data content with over 1.3 million copies of the 1997 edition
sold as of June 30, 1997. The Company also publishes THE WORLD ALMANAC FOR KIDS,
which in its second annual edition sold approximately 300,000 copies. THE WORLD
ALMANAC licenses its content for use on five CD-ROM products and four on-line
services. The Company's World Almanac Education Division sells reference books
to the school and library market by catalog. FACTS ON FILE NEWS SERVICE
publishes subscription products that are also sold to schools and libraries. The
flagship product, WORLD NEWS DIGEST, published weekly, is available in print,
CD-ROM and on-line formats, and has a subscriber base of approximately 7,000.
GARETH STEVENS, a publisher and distributor of juvenile reference works and a
distributor of multi-media products, was acquired by the Company in February
1997. GARETH STEVENS has a title list of approximately 800 titles and its market
focus is North America's primary and secondary school libraries and public
libraries. FUNK & WAGNALLS' NEW ENCYCLOPEDIA licenses its editorial content, for
electronic delivery, to Microsoft Corporation as the textual basis for
Microsoft's ENCARTA CD-ROM product and to The Learning Company for inclusion in
the INFOPEDIA CD-ROM as well as to three other on-line services. The Company
experiences competition for its reference products from other print and
electronic products from a variety of publishers.
BUSINESS DIRECTORIES
The Company publishes over 70 specialized directories, as well as ancillary
products derived from its databases. The Company's business directories target
the financial services, public relations, transportation, musical performance,
credit and collection, construction and global trade industries. The databases
are compiled by an in-house editorial staff, marketed directly to subscribers
and advertisers primarily by an in-house sales staff and distributed
predominantly on a paid subscription basis. NELSON'S is a premier brand name in
the institutional investment industry, providing specialized investment research
and management information through products such as INSTITUTIONAL MARKETPLACE
FOR WINDOWS. The Company's Bacon's Information, Inc. unit publishes MEDIASOURCE,
a CD-ROM directory for public relations and media professionals, as well as
print directories including BACON'S INTERNATIONAL MEDIA DIRECTORY and BACON'S
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BUSINESS MEDIA DIRECTORY. To complement its public relations directories, the
Company operates a periodicals clipping service.
In January 1997 the Company acquired INTELLICHOICE, which provides
comprehensive cost ownership analysis information for cars and trucks sold in
the United States. This information is sold to insurance companies, car
manufacturers, municipalities, libraries and directly to consumers in print,
CD-ROM and on-line formats. WARD'S AUTOMOTIVE REPORTS is recognized as the
authoritative source for industry-wide statistics on automotive production and
sales. In addition, the Company publishes, in print and electronic formats, used
vehicle valuation information. Titles include MARKET REPORTS, MARINE BLUE BOOK
and AIRCRAFT BLUEBOOK. Other databases include THE ELECTRONICS SOURCE BOOK,
AC-U-KWIK, WATERWAY GUIDES and equipment servicing information and manuals.
Most of the business directories published by the Company have no
competition, and where competition does exist, in most cases the Company's
publication is dominant. Competition, where present, is on the basis of price
and quality of data. Management believes that the comprehensiveness and quality
of its data and the specialized focus of its publications have prevented others
from launching competing publications or competing effectively.
During 1996, the information segment also included the DAILY RACING FORM
group. See "--General" and "-- Non-Core Businesses Being Sold."
NEW PRODUCTS AND NEW MEDIA
In 1997, the Company will launch over 50 new products in print, electronic
and multi-media formats, including SEVENTEEN'S COLLEGE ZONE, HORTICULTURE'S
GARDEN STYLE, the trade title WEARABLES BUSINESS and numerous workplace learning
CD-ROMs produced by Westcott. The Company has over 50 web sites, all of which
can be accessed directly as well as via WWW.KIII.COM. New web sites in 1997
include MODERN BRIDE'S web site (WWW.MODERNBRIDE.COM), Intellichoice's web site
(WWW.INTELLICHOICE.COM), and Bacon's web site (WWW.BACONSINFO.COM). The
Company's nationally distributed television programs include CHANNEL ONE'S
ONEZONE, which appears on public television stations nationwide, the SOAP OPERA
DIGEST AWARDS, which appear on network television, and AMERICAN BABY'S THE
HEALTHY KIDS SHOW, which appears on the Family Channel.
NON-CORE BUSINESSES BEING SOLD
As part of its strategy to focus on areas of its business that have the
greatest potential for growth, the Company is in the process of divesting
certain businesses that do not fit within its growth vehicles. The Non-Core
Businesses are: the DAILY RACING FORM group, which includes a national daily
newspaper covering thoroughbred horseracing and PRO FOOTBALL WEEKLY; KRAMES
COMMUNICATIONS, a leading publisher of patient information sold to healthcare
providers for distribution to patients and other healthcare users; the KATHARINE
GIBBS SCHOOLS, a chain of seven business schools; NEWBRIDGE COMMUNICATIONS, an
operator of book clubs for professionals and educational continuity programs;
NEW WOMAN magazine, a guide for personal relationships and careers; and
STAGEBILL, a performing arts magazine. The Company has completed the sales of
KRAMES, KATHARINE GIBBS, and NEW WOMAN.
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. Electronic and video products
generally are created and mastered in-house; with the exception of WESTCOTT
COMMUNICATIONS and FILMS which produce video products in-house, all other
production and duplication of electronic and video products is performed by
third party vendors.
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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 if at some point in the
future paper is in limited supply, the existing arrangements providing for the
supply of paper will be adequate. The Company was able to meet its paper
requirements during 1996. In 1996, approximately 37% and 22% of the Company's
paper purchases were 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 U.S. Postal
Service directly by the printer. Other products are sent from warehouses and
other facilities operated by the Company.
COMPANY ORGANIZATION
K-III was incorporated on November 22, 1991 in the State of Delaware. The
principal executive office of the Company is located at 745 Fifth Avenue, New
York, New York 10151, telephone number (212) 745-0100.
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MANAGEMENT
The following table sets forth the name, age as of October 15, 1997 and
position of the senior management and directors of K-III:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
William F. Reilly.................................... 59 Chairman of the Board and Chief Executive Officer and
Director
Charles G. McCurdy................................... 42 President and Director
Beverly C. Chell..................................... 55 Vice Chairman, General Counsel, Secretary and
Director
Meyer Feldberg....................................... 55 Director
Perry Golkin......................................... 44 Director
Henry R. Kravis...................................... 53 Director
George R. Roberts.................................... 54 Director
Michael T. Tokarz.................................... 47 Director
Jack L. Farnsworth................................... 51 Executive Vice President
George Philips....................................... 66 Vice President
Michaelanne C. Discepolo............................. 44 Vice President
Douglas B. Smith..................................... 37 Vice President and Treasurer
Curtis A. Thompson................................... 46 Vice President and Controller
</TABLE>
Mr. Reilly is Chairman of the Board, Chief Executive Officer and a Director
of K-III and has served in such capacities since November 1991. Mr. Reilly is
also a director of FMC Corporation.
Mr. McCurdy is President and a Director of K-III and has served in such
capacities since November 1991 and was also Treasurer from 1991 to August 1993.
Ms. Chell is Vice Chairman, General Counsel, Secretary and a Director of
K-III. Ms. Chell has served as Vice Chairman, General Counsel and Secretary
since November 1991 and as a Director since March 1992.
Professor Feldberg is Professor and Dean of the Columbia University Graduate
School of Business and has been since 1989. He joined the Board in January 1997.
He is also a director of Federated Department Stores, Inc. and Revlon, Inc.
Mr. Golkin became a Director of K-III in November 1991. He is a General
Partner of KKR Associates and was a General Partner of KKR from January 1, 1995
until January 1, 1996 when he became a member of the limited liability company
which serves as the general partner of KKR. Prior to 1995, Mr. Golkin was an
executive at KKR. He is also a director of Walter Industries, Inc.
Mr. Kravis became a Director of K-III in November 1991. He is a Founding
Partner of KKR and KKR Associates. Effective January 1, 1996, he became a
managing member of the Executive Committee of the limited liability company
which serves as the general partner of KKR. He is also director of Amphenol
Corporation, AutoZone, Inc., Borden Inc., Bruno's Inc., Evenflo & Spalding
Holdings Corporation, Flagstar Companies Inc., Flagstar Corporation, The
Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc., KSL
Recreation Group, Inc., Merit Behavioral Care Corporation, Newquest
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Capital plc, Owens-Illinois Group, Inc., Owens-Illinois, Inc., Safeway, Inc.,
Sotheby's Holdings, Inc., Union Texas Petroleum Holdings, Inc. and World Color
Press, Inc.
Mr. Roberts became a Director of K-III in March 1992. He is a Founding
Partner of KKR and KKR Associates. Effective January 1, 1996 he became a
managing member of the Executive Committee of the limited liability company
which serves as the general partner of KKR. He is also director of Amphenol
Corporation, AutoZone, Inc., Borden Inc., Bruno's, Inc., Evenflo & Spalding
Holdings Corporation, Flagstar Companies Inc., Flagstar Corporation, IDEX
Corporation, KinderCare Learning Centers, Inc., KSL Recreation Group, Inc.,
Merit Behavioral Care Corporation, Newquest Capital plc, Owens-Illinois Group,
Inc., Owens-Illinois, Inc., Safeway Inc., Union Texas Petroleum Holdings, Inc.
and World Color Press, Inc.
Mr. Tokarz became a Director of K-III in November 1991. He is a General
Partner of KKR Associates and was a General Partner of KKR from January 1, 1993
until January 1, 1996 when he became a member of the limited liability company
which serves as the general partner of KKR. Prior to 1993, Mr. Tokarz was an
executive at KKR. He is also a director of Evenflo & Spalding Holdings
Corporation, Flagstar Companies Inc., Flagstar Corporation, IDEX Corporation,
Safeway, Inc. and Walter Industries, Inc.
Mr. Farnsworth has been Executive Vice President of K-III since May 1997,
Vice President of K-III since May 1992, President of K-III Information Group
since May 1992 and President of Westcott Communications, Inc. since June 1996.
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.
Ms. Discepolo is a Vice President of K-III and has served in such capacity
since January 1993. She joined the Company in March 1991 as Director of Human
Resources.
Mr. Smith has been a Vice President of K-III since May 1997 and Treasurer of
K-III since August 1993. Prior to that time 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.
Mr. Thompson is Vice President and Controller of K-III and has served in
such capacities since November 1991.
Messrs. Kravis and Roberts are first cousins.
The By-Laws of K-III provide for a Board of Directors of at least one but
not more than 15 directors. In accordance with the By-Laws, the Board of
Directors has fixed the number of directors at eight. Officers serve at the
discretion of the Board of Directors.
Messrs. Reilly, Kravis, Tokarz and Golkin comprise the Executive Committee
of the Board of Directors and Messrs. Kravis, Tokarz and Golkin comprise the
Compensation Committee of the Board of Directors. The Audit Committee, which
reviews the scope and results of audit and non-audit services performed by the
Company's independent accountants, consists solely of Professor Feldberg.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Preferred Stock was sold by K-III on September 26, 1997 (the
"Closing Date") to the Placement Agents, pursuant to the Placement Agreement.
The Placement Agents subsequently sold 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 Placement
Agreement, K-III and the Placement Agents entered into the Registration Rights
Agreement on September 26, 1997. 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 Offer following the Closing Date, (ii) to use
its reasonable best efforts to cause such registration statement to become
effective under the Securities Act at the earliest possible time thereafter, but
in no event later than 180 days after the Closing Date, and (iii) upon
effectiveness of the registration statement, to commence the Exchange Offer. 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 Placement 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 Offer, holders of shares of Preferred Stock will not have any further
registration rights 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 Preferred Stock could be
adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, K-III will accept any and all shares of Old
Preferred Stock validly tendered and not withdrawn prior to the Expiration Date.
K-III will issue one share of New Preferred Stock in exchange for each share of
Old Preferred Stock, accepted in the Exchange Offer. Holders may tender some or
all of their shares of Old Preferred Stock pursuant to the Exchange Offer.
The form and terms of the New Preferred Stock are the same as the form and
terms of the Old Preferred Stock except that the shares of 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, 1,250,000 shares of Old Preferred Stock
were outstanding. Solely for reasons of administration (and for no other
purpose), K-III has fixed the close of business on , 1997 as the
record date for the Exchange Offer 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 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 Preferred Stock may participate in the Exchange
Offer. There will be no fixed record date for determining registered holders of
the Old Preferred Stock entitled to participate in the Exchange Offer.
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 Exchange Offer.
K-III intends to conduct the Exchange Offer 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 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 Preferred Stock for the purposes of receiving the New
Preferred Stock from K-III.
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<PAGE>
If any tendered 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 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 shares of Old Preferred Stock in the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of shares of Old Preferred Stock pursuant to the Exchange Offer. K-III
will pay all charges and expenses, other than certain applicable taxes, in
connection with the Exchange Offer. See "--Fees and Expenses."
Each broker-dealer that receives New Preferred Stock for its own account in
exchange for Old Preferred Stock, where such New Preferred Stock was 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 Preferred Stock. See "Plan of Distribution."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 12:00 a.m., New York City time, on
, 1997, unless K-III, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, 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 shares of Old Preferred
Stock, (ii) to extend the Exchange Offer, (iii) if any of the conditions set
forth below under "--Conditions of the Exchange Offer" shall not have been
satisfied, to terminate the Exchange Offer, 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 Offer 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 Offer is 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 holder of the Old Preferred Stock, and K-III will
extend the Exchange Offer 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 Offer 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
Offer, K-III shall not have an obligation 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 Old Preferred Stock) of shares of Old Preferred Stock may
tender such shares of Old Preferred Stock in the Exchange Offer. To tender in
the Exchange Offer a holder must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if
required by the Letter of Transmittal and mail or otherwise deliver such Letter
of Transmittal or such facsimile, together with 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).
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<PAGE>
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 SHARES OF OLD PREFERRED STOCK AND THE 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 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 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 shares of Old Preferred Stock by causing such book-entry transfer
facility to transfer such shares of Old Preferred Stock into the Exchange
Agent's account with respect to the shares of Old Preferred Stock in accordance
with the book-entry transfer facility's procedures for such transfer. Although
delivery of 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 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 the 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 shares of Old 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 any shares of Old Preferred Stock listed therein, such 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 shares of Old Preferred Stock.
If the Letter of Transmittal 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.
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All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered 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
shares of Old Preferred Stock not properly tendered or any 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 shares of Old Preferred
Stock. K-III's interpretation of the terms and conditions of the Exchange Offer
(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 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 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
shares of Old Preferred Stock will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any 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 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 Preferred Stock to be acquired by the holder and any
beneficial owner(s) of the Old Preferred Stock ("Beneficial Owner(s)") in
connection with the Exchange Offer 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
Preferred Stock, (iii) the holder and each Beneficial Owner acknowledge and
agree that any person participating in the Exchange Offer for the purpose of
distributing 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 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
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 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 Preferred Stock for its own account must
acknowledge that it will deliver a prospectus in connection with any resale of
such 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 Preferred Stock received in exchange for Old Preferred Stock
where such Old Preferred Stock was 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 shares of Old Preferred Stock and (i) whose
shares of Old Preferred Stock are not immediately available, or (ii) who cannot
deliver their shares of Old Preferred Stock, the 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;
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<PAGE>
(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 shares of Old
Preferred Stock and the number of shares of Old Preferred Stock being tendered,
stating that the tender is being made thereby and guaranteeing that, within
three business days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof) together with the certificate(s) representing the shares of
Old Preferred Stock (or a confirmation of book-entry transfer of such shares of
Old Preferred Stock into the Exchange Agent's account at the book-entry transfer
facility) and any other documents required by the 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 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 three
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 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 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 Offer.
To withdraw a tender of shares of Old Preferred Stock in the Exchange Offer,
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 shares of Old Preferred Stock to be withdrawn (the "Depositor"),
(ii) identify 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 shares of Old Preferred Stock were tendered (including any
required signature guarantees). If 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 shares of Old Preferred
Stock or otherwise comply with the book-entry 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 shares of Old Preferred Stock so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no shares of New Preferred Stock will be issued with respect
thereto unless the shares of Old Preferred Stock so withdrawn are validly
retendered. Properly withdrawn 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 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
Offer, 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 Offer, K-III shall not be
required to accept for exchange, or exchange shares of New Preferred Stock for,
any shares of Old Preferred Stock, and may terminate the Exchange Offer as
provided herein before the acceptance of such shares of Old Preferred Stock, if:
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(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of K-III, might materially impair the ability of
K-III to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer 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 sole judgment of K-III, might materially impair the
ability of K-III to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to K-III; or
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the sole judgment of K-III, might materially impair the
ability of K-III to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to K-III; or
(d) any governmental approval has not been obtained, which approval
K-III shall, in its sole discretion, deem necessary for the consummation of
the Exchange Offer 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 shares of Old Preferred Stock
and return all tendered shares of Old Preferred Stock to the tendering holders,
(ii) extend the Exchange Offer and retain all shares of Old Preferred Stock
tendered prior to the Expiration Date, subject, however, to the rights of
holders to withdraw such shares of Old Preferred Stock (see "--Withdrawal of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all validly tendered 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 Offer
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 Offer 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
Offer. Questions and requests for assistance, request 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:
<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 Receive and Deliver Window
New York, NY 10286-1248 CONFIRM FACSIMILE BY New York, NY 10286
TELEPHONE:
(For Confirmation Only)
(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
Offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the Exchange Offer. K-III, however, will
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<PAGE>
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 Offer will
be paid by K-III and are estimated in the aggregate to be approximately $ .
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 Preferred Stock pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of the Old Preferred Stock
pursuant to the Exchange Offer, 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 taxpayers
or exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The shares of Old Preferred Stock which are not exchanged for shares of New
Preferred Stock pursuant to the Exchange Offer will remain restricted securities
within the meaning of Rule 144 of the Securities Act. Accordingly, such shares
of Old Preferred Stock may be resold only (i) to K-III, its subsidiaries or the
Placement Agents, (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 liquidation preference of securities at the time of
transfer of less than $100,000 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 of Regulation S
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 Preferred Stock could be adversely affected by the
Exchange Offer. Following the consummation of the Exchange Offer, holders of the
Old Preferred Stock will have no further registration rights under the
Registration Rights Agreement.
ACCOUNTING TREATMENT
The carrying value of the Old Preferred Stock is not expected to be
materially different from the fair value of the New Preferred Stock at the time
of the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer associated with the New Preferred
Stock will be reported as a reduction in the carrying value of the New Preferred
Stock. 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 PREFERRED STOCK
With respect to resales of 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 shares of Old Preferred Stock for 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 Preferred Stock, will be allowed
to resell the New Preferred
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Stock to the public without further registration under the Securities Act and
without delivering to the purchasers of the New Preferred Stock a prospectus
that satisfies the requirements of Section 10 thereof. However, if any holder
acquires shares of New Preferred Stock in the Exchange Offer for the purpose of
distributing or participating in a distribution of 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 Preferred Stock for its own account in exchange
for Old Preferred Stock, where such 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 Preferred Stock. See "Plan of Distribution."
As contemplated by the above no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
K-III in the Letter of Transmittal that (i) the holder is not an "affiliate" of
K-III within the meaning of Rule 405 of the Securities Act, (ii) the shares of
New Preferred Stock are to be acquired by the holder in the ordinary course of
business, (iii) the holder is not engaging and does not intend to engage, in the
distribution of the New Preferred Stock, and (iv) the holder acknowledges that
if such holder participates in such Exchange Offer for the purpose of
distributing 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 Preferred Stock and cannot rely on
the above no-action letter; however, holders of the New Preferred Stock will
have no registration rights under the Registration Rights Agreement.
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DESCRIPTION OF PREFERRED STOCK AND 9.20% 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 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 9.20% 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 9.20% Subordinated Debenture Indenture (which relates to
both the Old Subordinated Debentures and the New Subordinated Debentures)
relating thereto.
THE PREFERRED STOCK
GENERAL
1,250,000 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 for issuance 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, the Series D Preferred
Stock and any preferred stock of K-III which by its terms is on parity with or
junior to the Preferred Stock). In addition, creditors and stockholders of
K-III's subsidiaries also have priority over the Preferred Stock with respect to
claims on the assets of such subsidiaries. See "Risk Factors--Subordination of
Preferred Stock and 9.20% 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 and 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, the Series D Preferred Stock and each other series of preferred
stock established by the board of directors of K-III, 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 (collectively,
"Future Parity Securities" and together with the Series B Preferred Stock and
the Series D Preferred Stock, the "Parity Securities"); and (iii) junior to each
other class of capital stock or series of preferred stock established by the
board of directors which expressly provides that it ranks senior to the
Preferred Stock. The Certificate of Designations for the Preferred Stock
provides that, without the affirmative vote or consent of at least a majority of
the then outstanding shares of Preferred Stock, voting together with the holders
of any other then outstanding shares of Parity Securities entitled to vote
thereon, the Company will
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<PAGE>
not issue any other series of preferred stock the terms of which specifically
provide that such series will rank senior to the Series B Preferred Stock, the
Series D Preferred Stock and the Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Senior Securities"), subject to certain exceptions. See "--Limitation on
Issuance of Senior Preferred Stock." The Preferred Stock is subject to the
future issuance of Junior Securities, Parity Securities and Senior Securities.
As of September 10, 1997, 1,576,036 shares of the Series B Preferred Stock
($157,603,600 aggregate liquidation preference), which include dividends paid in
kind from time to time thereon to such date, have been issued and are
outstanding and 2,000,000 shares of the Series D Preferred Stock ($200,000,000
aggregate liquidation preference), have been issued and are outstanding. See
"Description of Capital Stock of the Company."
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 amount equal to $9.20 per
share. 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 New Preferred Stock is exchanged for the Old Preferred Stock.
Dividends on the New Preferred Stock will accrue and 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 February 1, 1998. 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
Prior to November 1, 2002, the Preferred Stock may be redeemed (subject to
contractual and other restrictions with respect thereto and to the legal
availability of funds therefor) at the Company's option, in whole or in part, at
any time or from time to time, at a redemption price equal to the amount of the
aggregate liquidation preference of such Preferred Stock plus an amount equal to
the sum of all accrued and unpaid dividends (including an amount equal to a
prorated dividend from the last payment date to the redemption date) plus the
Applicable Preferred Stock Make-Whole Premium thereon at the time of redemption.
The following definitions are used to determine the Applicable Preferred
Stock Make-Whole Premium:
'Applicable Preferred Stock Make-Whole Premium' means, with respect to a
share of Preferred Stock at any time, the greater of (i) 1.0% of the the
aggregate liquidation preference of such share of Preferred Stock at such time
and (ii) the excess of (A) the present value at such time of the aggregate
liquidation preference plus all dividends accrued and unpaid on such share of
Preferred Stock, computed using a discount rate equal to the Treasury Rate plus
75 basis points, over (B) the aggregate liquidation preference of such share of
Preferred Stock at such time.
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"Average Life to Redemption" means, as of the date of determination, with
respect to any preferred security, the number of years (including any portion
thereof) remaining to the mandatory redemption date thereof.
'Treasury Rate' means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled 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 repayment or, in the case of defeasance, prior to the date of deposit (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 to Redemption of the Preferred Stock; PROVIDED, HOWEVER, that if the
Average Life to Redemption of the Preferred Stock 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.
At any time on or after November 1, 2002, the Preferred Stock may be
redeemed (subject to contractual and other restrictions with respect thereto and
to the legal availability of funds therefor), in whole or in part, at the option
of K-III, at the redemption prices per share 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):
<TABLE>
<CAPTION>
REDEMPTION
PRICE PER
YEAR SHARE
- ---------------------------------------------------------- --------------
<S> <C>
2002...................................................... $ 104.60
2003...................................................... 102.30
2004 and thereafter....................................... 100.00
</TABLE>
In addition, up to $60 million of the aggregate liquidation preference of
the Preferred Stock may be redeemed at the option of K-III at any time prior to
November 1, 2000 at a price per share of $109, plus accrued and unpaid dividends
to the redemption date, 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 Facilities and the Senior Note Indentures
restrict the ability of K-III to redeem the Preferred Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financing Arrangements."
MANDATORY REDEMPTION
On November 1, 2009, 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
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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 9.20% Subordinated
Debentures. See "--The 9.20% Subordinated Debentures" below for the terms of the
9.20% Subordinated Debentures. Holders of Preferred Stock so exchanged will be
entitled to receive the principal amount of 9.20% 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 prorated dividend from the last dividend payment date to the
exchange date). The 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 9.20% Subordinated
Debentures issuable upon exchange shall be treated as the registered holder or
holders of such 9.20% 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 9.20% 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 9.20% 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 voided 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 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 Facilities and the Senior Note Indentures restrict K-III's
ability to exchange the Preferred Stock for the 9.20% Subordinated Debentures.
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
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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.
Under Delaware law, holders of the Preferred Stock will be 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.
LIMITATION ON ISSUANCE OF SENIOR PREFERRED STOCK
The Certificates of Designations for the Preferred Stock provide that,
without the affirmative vote or consent of the holders of at least a majority of
the then outstanding shares of Preferred Stock, voting together with the holders
of any other then outstanding shares of Parity Securities entitled to vote
thereon, the Company will not issue any other Senior Security; PROVIDED that the
Company does not need the approval of such holders to issue shares of Senior
Securities the proceeds of which are used to redeem or repurchase all shares of
the then outstanding Preferred Stock and any other Parity Securities entitled to
vote thereon.
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 and Series D 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
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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.
The description above includes a phrase relating to the merger,
consolidation or transfer of "all or substantially all" of the assets of the
Company. Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law.
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for the Preferred
Stock.
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THE 9.20% SUBORDINATED DEBENTURES
GENERAL
The 9.20% Subordinated Debentures will, if and when issued, be issued under
the 9.20% Debenture Indenture, to be dated as of the date of first issuance (the
"Exchange Date") of the 9.20% Subordinated Debentures, between K-III and The
Bank of New York (the "Subordinated Debenture Trustee"). The terms of the 9.20%
Subordinated Debentures include those stated in the 9.20% Debenture Indenture
and those made part of the 9.20% Debenture Indenture by reference to the Trust
Indenture Act. The 9.20% Subordinated Debentures are subject to all such terms,
and holders of the 9.20% Subordinated Debentures are referred to the 9.20%
Debenture Indenture and the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act") for a statement thereof. A copy of the proposed form of the
9.20% Debenture Indenture is filed as an exhibit to the Registration statement
of which this Propectus is a part. The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." Other
capitalized terms used in this summary but not defined in this Prospectus shall
have the meanings given to them in the 9.20% Debenture Indenture.
The 9.20% Subordinated Debentures will be issued in registered form, without
coupons, only in principal amounts of $1,000 and integral multiples thereof. The
9.20% Subordinated Debentures will represent general unsecured obligations of
K-III, and holders of the 9.20% Subordinated Debentures will rank junior in
right of payment to holders of Senior Indebtedness. The 9.20% Subordinated
Debentures are limited in aggregate principal amount to $125,000,000.
Each 9.20% Subordinated Debenture will mature on November 1, 2009 and will
bear interest from the date of issuance at the rate of 9.20% 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 9.20% 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 9.20% 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 9.20% Subordinated Debentures at their respective
addresses set forth in the register of holders of the 9.20% Subordinated
Debentures. Until otherwise designated by K-III, the office maintained by K-III
for such purpose shall be the office of the Subordinated Debenture Trustee.
RANKING
The right to payment of principal and interest on the 9.20% 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 Facilities,
and the Senior Note Indentures, 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 9.20% 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 9.20% Subordinated
Debentures, even though such obligations do not constitute Senior Indebtedness.
The amount of as adjusted senior indebtedness (including indebtedness and
other current and non-current liabilities of K-III's subsidiaries) as of June
30, 1997 was approximately $2,062 million. None of
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such indebtedness was secured. See "Risk Factors--Subordination of Preferred
Stock and 9.20% Subordinated Debentures; Holding Company Structure."
The 9.20% Debenture Indenture provides that no payment of principal of or
interest on the 9.20% Subordinated Debentures, whether pursuant to the terms of
the 9.20% 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 9.20% 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
9.20% 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 9.20% Subordinated Debentures.
OPTIONAL REDEMPTION
Prior to November 1, 2002, the 9.20% Subordinated Debentures will be
redeemable at the Company's option, in whole or in part, at any time or from
time to time, at a redemption price (expressed as a percentage of principal
amount) equal to the sum of the principal amount of such 9.20% Subordinated
Debentures plus the Applicable Debenture Make-Whole Premium thereon at the time
of redemption (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date).
The following definitions are used to determine the Applicable Debenture
Make-Whole Premium:
'Applicable Debenture Make-Whole Premium' means, with respect to a 9.20%
Subordinated Debenture at any time, the greater of (i) 1.0% of the principal
amount of such 9.20% Subordinated Debenture at such time and (ii) the excess of
(A) the present value at such time of the principal amount plus all interest
payments due on such 9.20% Subordinated Debenture, computed using a discount
rate equal to the Treasury Rate plus 75 basis points, over (B) the principal
amount of such 9.20% Subordinated Debentures at such time.
'Treasury Rate' means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled 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 repayment (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 to Stated Maturity of the 9.20% Subordinated Debentures,
PROVIDED, HOWEVER, that if the average life to Stated Maturity of the 9.20%
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.
On or after November 1, 2002, the 9.20% 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
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unpaid interest thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning November 1 of the years indicated below.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------- -----------
<S> <C>
2002.......................................................... 104.60%
2003.......................................................... 102.30
2004 and thereafter........................................... 100.00
</TABLE>
In addition, at any time prior to November 1, 2000, up to $60 million of the
9.20% Subordinated Debentures may be redeemed at a redemption price of 109% 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 Credit Facilities and the Senior Note Indentures restrict the redemption
or prepayment of the 9.20% Subordinated Debentures.
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 9.20% 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 9.20% 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 9.20% Debenture Indenture
there will also be a Change of Control under the Class B Debenture Indenture,
the Class D 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, Class B Subordinated Debentures, Class D
Subordinated Debentures or 9.20% Subordinated Debentures indebtedness under the
Credit Facilities will be accelerated. Within the later of 40 days following any
Change of Control and the date that the conditions set forth in the penultimate
sentence 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 9.20% Debenture Indenture and that all 9.20%
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 9.20% 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 9.20% 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
9.20% Subordinated Debentures purchased pursuant to a Change of Control Offer
will be required to surrender the 9.20% Subordinated Debentures, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the 9.20%
Subordinated Debenture completed, to the Paying Agent (as defined in the 9.20%
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 9.20% Subordinated Debentures delivered for purchase, and a
statement that such holder is withdrawing his election to have such 9.20%
Subordinated Debentures purchased; and (7) that holders whose 9.20% Subordinated
Debentures are being purchased only in part may be issued new 9.20% Subordinated
Debentures equal in principal amount to the unpurchased portion of the 9.20%
Subordinated Debentures surrendered; PROVIDED that each 9.20% Subordinated
Debenture purchased and each such new 9.20% 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
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repurchase the 9.20% 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 9.20% Subordinated Debentures. If any fee is paid
to the holders of Senior Indebtedness in connection with obtaining their consent
to the repurchase of the 9.20% Subordinated Debentures, K-III shall pay the
holders of the 9.20% Subordinated Debentures a fee equal to the principal amount
of the 9.20% 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 9.20% 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 9.20%
Subordinated Debentures or portions thereof so tendered and (3) deliver or cause
to be delivered to the Subordinated Debenture Trustee, 9.20% Subordinated
Debentures so accepted together with an officers' certificate stating the 9.20%
Subordinated Debentures or portions thereof tendered to K-III. The Paying Agent
shall promptly mail to each holder of 9.20% Subordinated Debentures so accepted,
payment in an amount equal to the purchase price for such 9.20% Subordinated
Debentures, and the Subordinated Debenture Trustee shall promptly authenticate
and mail to such holder a new 9.20% Subordinated Debenture equal in principal
amount to any unpurchased portion of the 9.20% Subordinated Debentures
surrendered; PROVIDED that each such new 9.20% 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 9.20% 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 9.20% 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 Change of Control Premium.
"Applicable Change of Control Premium" with respect to a 9.20% Subordinated
Debenture is defined as the greater of (i) 1.0% of the then outstanding
principal amount of such 9.20% Subordinated Debenture and (ii) the excess of (A)
the present value of the required interest and principal payments due on such
9.20% Subordinated Debenture, computed using a discount rate equal to the
Treasury Rate plus 75 basis points, over (B) the then outstanding principal
amount of such 9.20% Subordinated Debenture.
SELECTION AND NOTICE
If less than all of the 9.20% Subordinated Debentures are to be redeemed at
any time, selection of the 9.20% 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 9.20%
Subordinated Debentures are listed or, if the 9.20% 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 9.20% 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 9.20% Subordinated Debentures to be redeemed at its registered
address. If any 9.20% Subordinated Debenture is to be redeemed in part only, the
notice of redemption that relates to such 9.20% Subordinated Debenture shall
state the portion of the principal amount thereof to be redeemed. A new 9.20%
Subordinated Debenture in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original 9.20% Subordinated Debenture. On and after the redemption date,
interest ceases to accrue on 9.20% Subordinated Debentures or portions of them
called for redemption.
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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 9.20% Debenture Indenture shall
have occurred and be continuing or will occur as a consequence thereof.
"Restricted Subsidiary" for purposes of the 9.20% 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 9.20% 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 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
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Restricted Payments not prohibited by the RESTRICTED PAYMENTS covenant in the
Senior Note Indentures, Series B Debenture Indenture or the Series D 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 9.20% Subordinated Debentures and the 9.20% Debenture Indenture;
(ii) immediately after giving effect to such transaction, no Default and no
Event of Default under the 9.20% 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 9.20% 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
September 22, 1997 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 9.20% 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 9.20% 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 9.20%
Subordinated Debentures.
EVENTS OF DEFAULT AND REMEDIES THEREOF
The 9.20% Debenture Indenture will provide that each of the following will
constitute an "Event of Default" with respect to the 9.20% Subordinated
Debentures: (i) the failure to make any payment of interest on any of the 9.20%
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 9.20% 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 9.20% 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 9.20% Debenture Indenture or the
9.20% 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 9.20% 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
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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 9.20% 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 9.20% 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 9.20% 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 9.20% Subordinated Debentures then outstanding, by
written notice to K-III and to the agents under the Credit Facilities and the
trustees under the Senior Note Indentures (and to the Subordinated Debenture
Trustee if such notice is given by the holders of 9.20% Subordinated Debentures)
may, and the Subordinated Debenture Trustee at the request of such holders of
9.20% Subordinated Debentures shall, declare all unpaid principal of, premium,
if any, and accrued interest on the 9.20% Subordinated Debentures to be due and
payable upon the first to occur of an acceleration under any of the Credit
Facilities or any of the Senior Notes 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
9.20% 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 9.20% Subordinated Debentures by written
notice to the Subordinated Debenture Trustee may rescind an acceleration and its
consequences upon conditions provided in the 9.20% Debenture Indenture. Subject
to certain restrictions set forth in the 9.20% Debenture Indenture, the holders
of at least 51% in principal amount of the outstanding 9.20% 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 9.20% Subordinated
Debentures), except a continuing Default or Event of Default in the payment of
principal of, premium, if any, or interest on, such 9.20% Subordinated
Debentures (including, without limitation, pursuant to any mandatory or optional
redemption obligation under the 9.20% 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 9.20% Subordinated Debentures may not pursue any
remedy with respect to the 9.20% Debenture Indenture or the 9.20% Subordinated
Debentures unless: (1) the holder gives to the Subordinated Debenture Trustee
written notice of a continuing Event of Default; (2) the holders of at least 51%
in principal amount of such 9.20% 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 9.20% Subordinated Debentures do not give the
Subordinated Debenture Trustee a direction which is inconsistent with the
request.
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K-III is required to deliver to the Subordinated Debenture Trustee annually
a statement regarding compliance with the Class E 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 9.20%
Subordinated Debentures or the 9.20% Debenture Indenture or for any claim based
on, in respect of, or by reason of, such obligations of their creations. Each
holder of the 9.20% Subordinated Debentures by accepting a 9.20% Subordinated
Debenture waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the 9.20% 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 9.20% DEBENTURE INDENTURE AND THE 9.20%
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 9.20% Subordinated Debentures or the date of
redemption of all the outstanding 9.20% 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 9.20% Subordinated
Debentures and all interest due thereon to maturity or redemption, and if such
deposit does not violate the subordination provisions of the 9.20% Debenture
Indenture, the 9.20% Debenture Indenture shall cease to be of further effect as
to all outstanding 9.20% Subordinated Debentures (except, among other things, as
to (i) remaining rights of registration of transfer, substitution and exchange
of 9.20% Subordinated Debentures, (ii) rights of holders to receive payment of
principal of and interest on the 9.20% Subordinated Debentures, and (iii) the
rights, obligations and immunities of the Subordinated Debenture Trustee).
The Credit Facilities and the Senior Note Indentures restrict K-III from
defeasing the 9.20% Subordinated Debentures.
TRANSFER AND EXCHANGE
A holder may transfer or exchange 9.20% Subordinated Debentures in
accordance with the 9.20% 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
9.20% Debenture Indenture. K-III is not required to transfer or exchange any
9.20% Subordinated Debentures selected for redemption. Also, K-III is not
required to transfer or exchange any 9.20% Subordinated Debentures for a period
of 15 days before a selection of 9.20% Subordinated Debentures to be redeemed.
The registered holder of a 9.20% Subordinated Debenture will be treated as
its owner for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the 9.20% Debenture
Indenture or the 9.20% Subordinated Debentures may be amended or supplemented
with the written consent of the holders of at least 51% in principal amount of
the 9.20% Subordinated Debentures then outstanding (including consents obtained
in connection with a tender offer or exchange offer for 9.20% Subordinated
Debentures), and any existing default under or compliance with any provision of
the 9.20% Debenture Indenture
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or the 9.20% Subordinated Debentures may be waived with the consent of the
holders of 51% in principal amount of the then outstanding 9.20% Subordinated
Debentures (including waivers obtained in connection with a tender offer or
exchange offer for 9.20% Subordinated Debentures).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any 9.20% Subordinated Debentures held by a non-consenting
holder of 9.20% Subordinated Debentures) (i) reduce the principal amount of
9.20% Subordinated Debentures whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any 9.20% Subordinated Debenture or alter the provisions with respect to the
redemption price in connection with repurchases of 9.20% Subordinated Debentures
upon a Change of Control or otherwise, (iii) reduce the rate of or change the
time for payments of interest on any 9.20% Subordinated Debenture, (iv) waive a
Default or Event of Default in the payment of the principal of, or premium, if
any, or interest on 9.20% Subordinated Debentures or that resulted from a
failure to comply with the CHANGE OF CONTROL covenant (except a rescission of
acceleration of the 9.20% Subordinated Debentures by the holders of at least 51%
in aggregate principal amount of the 9.20% Subordinated Debentures), (v) make
any 9.20% Subordinated Debenture payable in money other than that stated in the
9.20% Debenture Indenture, (vi) make any change in the subordination provisions
of the 9.20% Debenture Indenture that adversely affects the rights of any 9.20%
Subordinated Debenture holder, (vii) make any change in the provisions of the
9.20% Debenture Indenture relating to waivers of past defaults or the rights of
holders of 9.20% Subordinated Debentures to receive payments of principal of or
interest on the 9.20% Subordinated Debentures, (viii) waive a redemption payment
with respect to any 9.20% Subordinated Debenture or (ix) make any change in the
foregoing.
Notwithstanding the foregoing, without the consent of any holder of the
9.20% Subordinated Debentures, K-III and the Subordinated Debenture Trustee may
amend or supplement the 9.20% Debenture Indenture or 9.20% Subordinated
Debentures to cure any ambiguity, defect or inconsistency, to provide for
uncertificated 9.20% Subordinated Debentures in addition to or in place of
certificated 9.20% Subordinated Debentures, to provide for the assumption of
K-III's obligations to holders of the 9.20% 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 9.20% Subordinated
Debentures or that does not adversely affect the legal rights under the 9.20%
Debenture Indenture of any such holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the 9.20%
Debenture Indenture under the Trust Indenture Act.
CONCERNING THE SUBORDINATED DEBENTURE TRUSTEE
The 9.20% 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 9.20%
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. The 9.20%
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 9.20% Debenture Indenture at the request of any of the holders of the
9.20% Subordinated Debentures, unless they shall have offered to the
Subordinated Debenture Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
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The Bank of New York is the trustee under the indenture relating to the
8 1/2% Senior Notes and the Class D Debenture Indenture and a lender and an
agent under the Credit Facilities.
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 & Co.
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 9.20% Debenture
Indenture. Reference is made to the 9.20% 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.
"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).
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"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 9.20% 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 Class E
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 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
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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 Offering Memorandum may obtain a copy of the 9.20%
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 THE COMPANY
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 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 September 10, 1997,
1,576,036 of such shares were issued and outstanding, which include paid in kind
dividends as of such date. Pursuant to the Certificate of Designations for the
Series D Preferred Stock, two million shares of Series D Preferred Stock,
liquidation preference $100 per share, have been authorized for issuance. Of
these authorized shares, all have been issued and are outstanding.
THE COMMON STOCK
As of September 10, 1997, 129,454,940 shares of Common Stock were issued and
outstanding, and 12,404,969 shares were issuable upon exercise of outstanding
options, 9,187,269 of which were exercisable as of September 10, 1997 (which
options, if exercised in full, would generate aggregate proceeds to the Company
of $51,666,850).
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-Ill'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
Facilities and public debt instruments 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.
The Certificate of Incorporation of the Company provides that, except as
provided by the DGCL, directors of the Company shall not be personally liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duties as a director. That provision does not exonerate the directors from
liability under federal securities laws, and has no effect on any non-monetary
remedies that may be available to the Company or its stockholders. The By-Laws
of the Company provide for indemnification of the officers and directors of the
Company to the full extent permitted by applicable law.
The Company's By-Laws provide for additional notice requirements for
stockholder nominations and proposals at annual or special meetings of the
Company. At annual meetings, stockholders will be entitled
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to submit nominations for directors or other proposals only upon written notice
to the Company not less than 60 days, nor more than 90 days, prior to the annual
meeting.
SECTION 203 OF THE DELAWARE LAW
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the date
of the business combination, the transaction is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock, or (iii) on or
after such date the business combination is approved by the board and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. A "business combination" includes
mergers, asset sales, and other transactions resulting in a financial benefit to
the stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock.
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 September 10, 1997, 1,576,036 shares of the Series B Preferred Stock
($157.6 million 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 Series D Preferred Stock and Preferred
Stock issued hereby and senior to the Common Stock. The Company intends to amend
the Certificate of Designations relating to the Series B Preferred Stock to
provide that, without the affirmative vote of at least a majority of the then
outstanding shares of Series B Preferred Stock, voting together with the holders
of any other then outstanding shares of Parity Securities entitled to vote
thereon, the Company will not issue any other Senior Securities; PROVIDED that
the Company does not need the approval of such holders to issue shares of Senior
Securities the proceeds of which are used to redeem or repurchase all shares of
the then outstanding Series B Preferred Stock and any other Parity Securities
entitled to vote thereon.
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 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 cash or 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 105.8% of liquidation value for the
twelve months commencing February 1, 1998 to 100.0% 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). The Credit Facilities, the
Senior Note Indentures, the Exchange Debenture Indenture and the Senior
Preferred Stock restrict the ability of K-III to redeem the Series B Preferred
Stock.
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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 Class B 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 Credit
Facilities, the indenture relating to 10 1/4% Senior Notes, the Exchange
Debenture Indenture and the Senior Preferred Stock restrict the ability of K-III
to exchange the Series B Preferred Stock for the Class B Preferred Stock.
THE SERIES D PREFERRED STOCK
The holders of Series D 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 D Preferred Stock are fully paid and nonassessable.
The Series D Preferred Stock has an aggregate liquidation preference of
$200,000,000.
RANK. The Series D 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 Series B Preferred Stock and the Preferred
Stock offered hereby and senior to the Common Stock. The Company
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intends to amend the Certificate of Designations relating to the Series D
Preferred Stock to provide that, without the affirmative vote of at least a
majority of the then outstanding shares of Series D Preferred Stock, voting
together with the holders of any other then outstanding shares of Parity
Securities entitled to vote thereon, the Company will not issue any other Senior
Securities; PROVIDED that the Company does not need the approval of such holders
to issue shares of Senior Securities the proceeds of which are used to redeem or
repurchase all shares of the then outstanding Series D Preferred Stock and any
other Parity Securities entitled to vote thereon.
DIVIDENDS. The holders of the shares of Series D 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 10%.
Such dividends are payable quarterly in arrears on each February 1, May 1,
August 1 and November 1. Dividends on shares of the Series D 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 February 1, 2001, from any source of funds legally available therefor, in
whole or in part, any or all of the shares of Series D Preferred Stock at
redemption prices declining ratably from 105.0% of liquidation value for the
twelve months commencing February 1, 2001 to 100.0% on and after February 1,
2006, 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). The Credit Facilities, the
Senior Note Indentures, the Exchange Debenture Indenture and the Senior
Preferred Stock restrict the ability to redeem the Series D Preferred Stock.
In addition, up to $100,000,000 of the Series D Preferred Stock may be
redeemed at any time on or before February 1, 1999 at a price of 110.0%, plus
accrued and unpaid dividends out of the net proceeds of one or more public
equity offerings of Common Stock, provided such redemption occurs within 180
days of such equity public offering.
MANDATORY REDEMPTION. The Series D 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 February 1, 2008 at a price
equal to the liquidation preference thereof plus all accumulated dividends to
the date of redemption.
VOTING RIGHTS. Holders of the Series D 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 D Preferred Stock.
Such Certificate of Designations provides that in the event that dividends on
the Series D 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 D 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 Series D 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 D Preferred Stock and Series E Preferred Stock
offered hereby (together with any outstanding shares of Future Parity Securities
entitled to vote thereon), voting together as one 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 D 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,
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limitations or restrictions thereon, that the Series D 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 K-III (as defined in its Certificate of Incorporation) immediately
prior to such transaction and (b) the Consolidated Net Worth of the Company on
January 24, 1996.
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 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.
EXCHANGE. K-III may, at its option, out of any source of funds legally
available therefor, on any scheduled dividend payment date, issue Class D
Subordinated Debentures in exchange for the Series D Preferred Stock, in whole
but not in part provided that the Senior Preferred Stock is no longer
outstanding on the exchange date. Holders of Series D Preferred Stock so
exchanged will be entitled to receive the principal amount of Class D
Subordinated Debentures equal to $100 for each $100 of liquidation preference of
Series D 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 D Subordinated
Debentures may be issued so long as any Senior Preferred Stock remains
outstanding. The Credit Facilities, the indenture relating to the 10 1/4% Senior
Notes, the Exchange Debenture Indenture and the Senior Preferred Stock restrict
the ability of K-III to exchange the Series D Preferred Stock for Class D
Subordinated Debentures.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 10, 1997 by (i) each beneficial
owner of more than five percent of the Company's outstanding Common Stock, (ii)
each of the Company's directors, (iii) certain of the Company's executive
officers named in the table under "Management" and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
NAME OWNED(1) PERCENTAGE
- --------------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
KKR Associates(3)
9 West 57th Street
New York, New York 10019............................................................. 106,886,265 82.6%
William F. Reilly(2)(4)................................................................ 4,591,653 3.5
Charles G. McCurdy(2)(5)............................................................... 2,366,612 1.8
Beverly C. Chell(2).................................................................... 2,036,357 1.6
Jack L. Farnsworth(2).................................................................. 340,300 *
Henry R. Kravis(3)..................................................................... -- --
Meyer Feldberg......................................................................... 6,250 *
Perry Golkin(3)........................................................................ 3,000 *
George R. Roberts(3)................................................................... -- --
Michael T. Tokarz(3)................................................................... 5,000 *
All Directors and executive officers as a group (13 persons)........................... 9,744,597 7.1
</TABLE>
- ------------------------
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such person
has the right to acquire within 60 days after such date. For purposes of
computing the percentage of outstanding shares held by each person or group
of persons named above on a given date, any security which such person or
persons has the right to acquire within 60 days after such date is deemed to
be outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage of ownership of any other person.
(2) Of the shares shown as owned, 3,042,960, 1,949,798, 1,622,484 and 266,800
for Messrs. Reilly and McCurdy, Ms. Chell, and Mr. Farnsworth, respectively,
consist of options which were either exercisable on September 10, 1997 or
become exercisable within 60 days thereafter.
(3) Shares of Common Stock shown as owned by KKR Associates are owned of record
by MA Associates, L.P., FP Associates, L.P., Magazine Associates, L.P.,
Publishing Associates, L.P., Channel One Associates, L.P. and KKR Partners
II, L.P., of which KKR Associates is the sole general partner and as to
which it possesses sole voting and investment power. Messrs. Kravis,
Roberts, Tokarz and Golkin (directors of K-III) and Robert I. MacDonnell,
Paul E. Raether, Michael W. Michelson, James H. Greene, Edward A. Gilhuly,
Clifton S. Robbins and Scott M. Stuart, as the general partners of KKR
Associates, may be deemed to share beneficial ownership of the shares shown
as beneficially owned by KKR Associates. Such persons disclaim beneficial
ownership of such shares.
(4) Disclaims beneficial ownership of 200,000 of such shares.
(5) Disclaims beneficial ownership of 160,000 of such shares.
* Less than one percent.
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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 Preferred Stock and the 9.20% Subordinated
Debentures. Except where noted, it deals only with Preferred Stock and 9.20%
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, tax-exempt entities, life insurance
companies, persons holding Preferred Stock and 9.20% 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. The discussion
assumes that the 9.20% Subordinated Debentures will be treated as debt for
United States federal income tax purposes. However, no assurance can be given in
this regard since the characterization of the 9.20% Subordinated Debentures will
be determined based on the facts in existence at the time they are issued, so
that they might constitute equity for United States federal income tax purposes
in which case the consequences described below would differ. 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, SERIES E PREFERRED STOCK OR CLASS E SUBORDINATED DEBENTURES.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
As used herein, a "United States Holder" means a holder that is (i) a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust which
is subject to the supervision of a court within the United States and the
control of a United States person as described in section 7701(a)(30) of the
Code. 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
that 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, mid-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
(although as described above distributions on the Stock
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may not qualify as dividends). There are, however, many exceptions and
restrictions relating to the availability of such dividends-received deduction.
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,
as recently modified, requires that, in order to be eligible for the dividends-
received deduction, a corporate United States Holder must generally hold the
shares of Stock for a 46-day minimum holding period during the 90 day period
beginning on the date which is 45 days before the date on which such share
becomes ex-dividend with respect to such dividend. 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 Stock.
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 includes any amount treated as a dividend in the
case of a redemption that is non-pro rata as to all stockholders or in partial
liquidation of the Company or treated as a dividend because the holding of
options was deemed to be stock ownership under the constructive stock ownership
rules of Section 318(a)(4) of the Code, 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 from the sale or exchange of the stock
and under recently enacted legislation, will be recognized at the time when the
extraordinary dividend is paid. 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 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 the adjusted current earnings of the corporation
(as defined in Section 56 of the
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Code) over the alternative minimum taxable income (determined without regard to
the adjustments for determining adjusted current earnings 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 optional rights of
redemption by the Company at prices 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 9.20% Subordinated Debentures--Original
Issue Discount") if, based on all of the facts and circumstances, the optional
redemptions are 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 redemptions are more than likely not to
occur, constructive dividend treatment will not result if the redemption premium
does not exceed a de minimis amount or is in the nature of a penalty for
premature redemption. The Company intends to take the position that the
existence of the Company's optional redemption rights does not result in a
constructive distribution to the United States Holders.
REDEMPTION AND EXCHANGE FOR 9.20% SUBORDINATED DEBENTURES
As discussed above, this discussion assumes that the 9.20% Subordinated
Debentures are treated as debt for United States federal income tax purposes. A
redemption of shares of the Preferred Stock for cash or an exchange of the
Preferred Stock for 9.20% Subordinated Debentures (or 9.20% 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. If the United States Holder owns
stock of the Company, actually or constructively following a redemption or
exchange, the United States Holder's tax consequences could differ, and the
entire redemption or exchange proceeds could be taxable as a dividend.
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
9.20% Subordinated Debentures, the amount realized on receipt of the 9.20%
Subordinated Debenture would be equal to the "issue price" of the 9.20%
Subordinated Debenture. Thus, the amount realized on the exchange will be equal
to the issue price of the 9.20% Subordinated Debentures plus any cash received
on the exchange (other than cash received with respect to declared dividends).
The issue price of a 9.20% Subordinated Debenture would be equal to (i) its fair
market value as of the exchange date if the 9.20% Subordinated Debentures are
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
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traded on an established securities market during the 60 day period ending 30
days after the exchange date but the Subordinated Debentures are not. If neither
the Preferred Stock nor the 9.20% Subordinated Debentures are so traded, the
issue price of the 9.20% 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 9.20%
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
9.20% 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 9.20% Subordinated
Debentures, discounted at the applicable federal rate. It cannot be determined
at the present time whether the Preferred Stock or the 9.20% Subordinated
Debentures will be, at the relevant time, traded on an established securities
market within the meaning of the OID Regulations.
Depending upon a United States Holder's particular circumstances, the tax
consequences of holding 9.20% 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 9.20% Subordinated Debentures may
be issued with OID.
PAYMENTS OF INTEREST ON 9.20% SUBORDINATED DEBENTURES
Except as set forth below, interest on a 9.20% Subordinated Debenture will
generally be taxable to a United States Holder as ordinary income.
ORIGINAL ISSUE DISCOUNT
9.20% 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 9.20%
Subordinated Debentures issued with OID will be subject to special tax
accounting rules, as described in greater detail below. Holders of 9.20%
Subordinated Debentures issued with OID 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 9.20% Subordinated
Debentures generally will not be required to include separately in income cash
payments received on 9.20% Subordinated Debentures issued with OID to the extent
such payments do not constitute qualified stated interest (as defined below).
Subordinated Debentures issued with OID will be referred to as "Original Issue
Discount Debentures." If any 9.20% 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 9.20% SUBORDINATED DEBENTURES.
A 9.20% Subordinated Debenture with an "issue price" (determined as
explained above--see "Redemption and Exchange for 9.20% Subordinated
Debentures") that is less than its stated redemption price at maturity (the sum
of all payments to be made on the 9.20% 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 9.20% Subordinated Debentures, (i) all interest payments on
any 9.20% Subordinated Debenture issued will be qualified stated interest, (ii)
the stated redemption price at maturity of any 9.20% Subordinated Debenture will
be equal to its principal amount and (iii) any 9.20% Subordinated Debenture will
therefore be issued with OID only to the extent its principal amount exceeds its
issue price (provided that such excess is not de minimis).
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In the case of a 9.20% 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 9.20% Subordinated Debentures are
made in proportion to the stated principal amount of the 9.20% Subordinated
Debenture. Any amount of de minimis OID that has been included in income will
generally be treated as capital gain.
The 9.20% 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 options 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 9.20%
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 9.20% Subordinated Debenture, and may not be revoked without the consent of
the Internal Revenue Service (the "IRS").
MARKET DISCOUNT ON RESALE OF 9.20% SUBORDINATED DEBENTURES
If a United States Holder purchases a 9.20% 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
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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 9.20% 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 9.20%
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
9.20% 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 9.20% 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 9.20% Subordinated
Debenture, unless the United States Holder elects to accrue on a constant
interest method. A United States Holder of a 9.20% 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 9.20% Subordinated Debenture that is
issued with OID 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 9.20% Subordinated
Debenture after the purchase date other than payments of qualified stated
interest will be considered to have purchased such 9.20% 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 9.20% 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 9.20% Subordinated
Debentures or at the time a subsequent United States Holder purchases 9.20%
Subordinated Debentures, the United States Holder's tax basis in any such 9.20%
Subordinated Debenture exceeds the sum of all amounts payable on the 9.20%
Subordinated Debenture 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 9.20% Subordinated Debenture 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 9.20% Subordinated Debenture. Bond premium on
a 9.20% 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 9.20% Subordinated Debenture. 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.
Proposed Treasury regulations issued on June 27, 1996 would clarify the
treatment of bond premium. Among the provisions contained in the proposed
regulations is a provision that generally provides that premium may be amortized
to offset interest income only as a United States Holder takes the qualified
stated interest into account under the holder's regular accounting method.
Moreover, the proposed Treasury regulations generally provide that in the case
of instruments that provide for alternative payment schedules, bond premium is
calculated by assuming that both the issuer and the holder will exercise or not
exercise options in a manner that maximizes the holder's yield. If adopted, the
regulations would be effective for debt instruments acquired on or after the
date 60 days after the date final regulations are published in the Federal
Register. However, if a United States Holder elects to amortize bond premium
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for the taxable year containing such effective date, the proposed Treasury
regulations would apply to all the United States Holder's debt instruments held
on or after the first day of that taxable year.
REDEMPTION, SALE OR EXCHANGE OF 9.20% SUBORDINATED DEBENTURES
The adjusted tax basis of a United States Holder who received 9.20%
Subordinated Debentures in exchange for Preferred Stock will, in general, be
equal to the issue price of such 9.20% 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 9.20%
Subordinated Debentures other than qualified stated interest. Upon the
redemption, sale, exchange or retirement of a 9.20% 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 9.20% Subordinated Debenture. Such gain or loss will
be capital gain or loss. Under recently enacted legislation, capital gains of
individuals derived in respect of capital assets held for more than one year are
eligible for reduced rates of taxation which may vary depending upon the holding
period of such capital assets. Prospective investors should consult their own
tax advisors with respect to the tax consequences of the new legislation. 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 would 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 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 9.20% Subordinated Debentures and
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Preferred Stock made to United States Holders other than certain exempt
recipients (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) the Company will withhold United
States federal income tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty on distributions paid to a Non-United States
Holder of Preferred Stock. 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 currently
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. Such proposed regulations are proposed to be effective
for payments made after December 31, 1998. 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 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 9.20% 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 9.20% 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 9.20% Subordinated Debenture is described in section
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881(c)(3)(A) of the Code and (iv) the beneficial owner satisfies the statement
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 9.20% Subordinated Debenture, or a financial institution holding the
9.20% 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 9.20% 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. Under
proposed Treasury regulations not currently in effect, the statement requirement
referred to in (a) (iv) above may be satisfied with other documentary evidence
for interests paid after December 31, 1998 with respect to an offshore account
or through certain foreign intermediaries.
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 9.20% Subordinated
Debenture provides the Company or its paying agent, as the case may be, with a
properly executed (1) IRS Form 1001 (or successor form) claiming an exemption
from withholding under the benefit of an applicable tax treaty or (2) IRS Form
4224 (or successor form) stating that interest paid on the 9.20% 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 9.20%
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 9.20%
Subordinated Debenture will be included in such foreign corporation's earnings
and profits.
SALE, EXCHANGE, REDEMPTION OR OTHER DISPOSITION OF 9.20% 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 9.20% Subordinated Debentures or Preferred
Stock, including an exchange of Preferred Stock for 9.20% 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 9.20% 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 believes that it has not been, is not and will
not become a "U.S. real property holding corporation" for United States federal
income tax purposes.
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.
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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 source 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 9.20% 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 9.20% 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
9.20% 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 9.20%
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 9.20% 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 9.20% 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 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 9.20%
Subordinated Debenture or Preferred Stock paid to the beneficial owner of a
9.20% 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 9.20% Subordinated Debenture or Preferred
Stock will be subject to both backup withholding and information reporting
unless the beneficial owner provides the statement
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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 OFFER
The exchange of Old Preferred Stock for New Preferred Stock will not
constitute a taxable transaction to Holders for federal income tax purposes.
Consequently, no gain or loss will be recognized by Holders upon receipt of the
New Preferred Stock, the holding period of the New Preferred Stock will include
the holding period of the Old Preferred Stock and the basis of the New Preferred
Stock will be the same as the basis of the Old Preferred Stock immediately
before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD PREFERRED STOCK FOR
NEW PREFERRED STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Preferred Stock for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such 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 Preferred Stock received in
exchange for Old Preferred Stock where such 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 no receive any proceeds from any sale of New Preferred
Stock by broker-dealers. New Preferred Stock received by broker-dealers for
their own account pursuant to the Exchange Offer 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 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
Preferred Stock. Any broker-dealer that resells New Preferred Stock that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such 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 Preferred Stock and any commissions or
concessions received by any such persons may be 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 Offer and will indemnify the holders of 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 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 of K-III Communications Corporation
and subsidiaries as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996 included in this Prospectus and the
related financial statement schedules included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Westcott Communications, Inc.
appearing in K-III Communications Corporation's Current Report (Form 8-K) dated
June 14, 1996 for the years ended December 31, 1995 and 1994, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon the
authority of such firm as experts in accounting and auditing.
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma statement of consolidated operations for the year
ended December 31, 1996 gives effect to the following transactions and events as
if they had occurred on January 1, 1996: (i) 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 (referred to as the "Acquired
Business") and (ii) the offering of the Old Preferred Stock (the "Offering") and
the redemption of the Senior Preferred Stock (the "Redemption"). The unaudited
pro forma statement of consolidated operations for the six months ended June 30,
1997 gives effect to the Offering and Redemption as if they had occurred on
January 1, 1996. The adjustments to reflect the acquisition of the Acquired
Business and the Offering and Redemption are hereinafter referred to as the "Pro
Forma Adjustments." The unaudited pro forma consolidated balance sheet as of
June 30, 1997 gives effect to the Offering and Redemption as if they had
occurred on June 30, 1997.
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 the notes thereto included elsewhere in this
Prospectus.
P-1
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------
OFFERING/ PRO FORMA
HISTORICAL REDEMPTION(1) CONSOLIDATED
---------- ------------- --------------
<S> <C> <C> <C>
Sales, net:
Specialty Media...................................................... $ 361,174 $ $ 361,174
Education............................................................ 199,562 199,562
Information.......................................................... 160,317 160,317
---------- --------------
Total sales, net....................................................... 721,053 721,053
Operating costs and expenses:
Cost of goods sold................................................... 159,663 159,663
Marketing and selling................................................ 138,718 138,718
Distribution, circulation and fulfillment............................ 127,249 127,249
Editorial............................................................ 59,677 59,677
Other general expenses............................................... 80,839 80,839
Corporate administrative expenses.................................... 12,710 12,710
Depreciation and amortization of prepublication costs, property and
equipment.......................................................... 18,224 18,224
Amortization of intangible assets, excess of purchase price over net
assets acquired and other.......................................... 63,977 63,977
---------- --------------
Operating income....................................................... 59,996 59,996
Other income (expense):
Interest expense..................................................... (68,963) 486 (68,477)
Amortization of deferred financing costs............................. (1,582) (1,582)
Other, net........................................................... 18 18
---------- ----- --------------
Income (loss) before income tax benefit and extraordinary charge(3).... (10,531) 486 (10,045)
Income tax benefit--carryback claim.................................... 1,685 1,685
---------- ----- --------------
Income (loss) before extraordinary charge.............................. (8,846) 486 (8,360)
Extraordinary charge--extinguishment of debt........................... (15,401) (15,401)
---------- ----- --------------
Net income (loss)...................................................... (24,247) 486 (23,761)
Preferred stock dividends:
Non-cash............................................................. (4,451) (4,451)
Cash................................................................. (20,330) (188) (20,518)
---------- ----- --------------
Income (loss) applicable to common shareholders........................ $ (49,028) $ 298 $ (48,730)
---------- ----- --------------
---------- ----- --------------
Pro forma loss applicable to common shareholders per common share(4):
Loss before extraordinary charge..................................... $ (.26)
Extraordinary charge................................................. $ (.12)
--------------
Net income (loss).................................................... $ (.38)
--------------
--------------
Pro forma weighted average common shares outstanding(4)................ 129,201,826
--------------
--------------
Ratio of earnings to fixed charges(3)(5)............................... --
--------------
--------------
Ratio of earnings to fixed charges and preferred stock
dividends(3)(5)...................................................... --
--------------
--------------
</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, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
ACQUIRED OFFERING/ PRO FORMA
HISTORICAL BUSINESS(2) REDEMPTION(1) CONSOLIDATED
------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Sales, net:
Specialty Media.................................... $ 684,341 $ $ $ 684,341
Education.......................................... 376,217 39,481 415,698
Information........................................ 313,891 313,891
------------- ----------- --------------
Total sales, net..................................... 1,374,449 39,481 1,413,930
Operating costs and expenses:
Cost of goods sold................................. 337,065 8,152 345,217
Marketing and selling.............................. 249,301 11,052 260,353
Distribution, circulation and fulfillment.......... 230,533 5,965 236,498
Editorial.......................................... 104,484 1,851 106,335
Other general expenses............................. 154,966 11,458 166,424
Corporate administrative expenses.................. 21,497 21,497
Depreciation and amortization of prepublication
costs, property and equipment.................... 38,233 1,582 39,815
Amortization of intangible assets, excess of
purchase price over net assets acquired and
other............................................ 152,469 7,429 159,898
------------- ----------- --------------
Operating income (loss).............................. 85,901 (8,008) 77,893
Other income (expense):
Interest expense................................... (124,601) (12,482) 958 (136,125)
Amortization of deferred financing costs........... (3,662) (3,662)
Other, net......................................... 6,659 6,659
------------- ----------- ------------- --------------
Income (loss) before income tax benefit and
extraordinary charge(3)............................ (35,703) (20,490) 958 (55,235)
Income tax benefit................................... 53,300 53,300
------------- ----------- ------------- --------------
Income (loss) before extraordinary charge............ 17,597 (20,490) 958 (1,935)
Extraordinary charge--extinguishment of debt......... (9,553) (9,553)
------------- ----------- ------------- --------------
Net income (loss).................................... 8,044 (20,490) 958 (11,488)
Preferred stock dividends:
Non-cash........................................... (16,582) (16,582)
Cash............................................... (26,944) (375) (27,319)
------------- ----------- ------------- --------------
Income (loss) applicable to common shareholders...... $ (35,482) $ (20,490) $ 583 $ (55,389)
------------- ----------- ------------- --------------
------------- ----------- ------------- --------------
Pro forma loss applicable to common shareholders per
common and common equivalent share (4):
Loss before extraordinary charge................... $ (.36)
Extraordinary charge............................... (.07)
--------------
--------------
Net income (loss).................................. $ (.43)
--------------
--------------
</TABLE>
P-3
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C> <C>
Pro forma weighted average common and common
equivalent shares outstanding(4)................... 130,007,632
--------------
--------------
Ratio of earnings to fixed charges(3)(5)............. --
--------------
--------------
Ratio or earnings to fixed charges and preferred
stock dividends(3)(5).............................. --
--------------
--------------
</TABLE>
See notes to unaudited pro forma consolidated financial data.
P-4
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------
OFFERING/
HISTORICAL REDEMPTION(1) PRO FORMA
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 26,268 $ $ 26,268
Accounts receivable, net............................................ 172,597 172,597
Inventories, net.................................................... 27,711 27,711
Net assets held for sale............................................ 274,736 274,736
Prepaid expenses and other.......................................... 49,226 49,226
------------ ------------
Total current assets.............................................. 550,538 550,538
Property and equipment, net........................................... 100,394 100,394
Other intangible assets, net.......................................... 668,712 668,712
Excess of purchase price over net assets acquired, net................ 963,085 963,085
Deferred income tax asset, net........................................ 176,200 176,200
Other non-current assets.............................................. 104,534 104,534
------------ ------------
$ 2,563,463 $ 2,563,463
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 58,971 $ $ 58,971
Accrued interest payable............................................ 23,026 23,026
Accrued expenses and other.......................................... 115,567 115,567
Deferred revenues................................................... 127,501 127,501
Current maturities of long-term debt................................ 6,000 6,000
------------ ------------
Total current liabilities......................................... 331,065 331,065
------------ ------------
Long-term debt........................................................ 1,713,057 (13,533) 1,699,524
------------ ------------- ------------
Other non-current liabilities......................................... 31,828 31,828
------------ ------------
Exchangeable preferred stock.......................................... 447,776 22,848 470,624
------------ ------------- ------------
Common stock subject to redemption.................................... 4,052 4,052
------------ ------------
Shareholders' equity:
Common stock........................................................ 1,289 1,289
Additional paid-in capital.......................................... 776,150 (1,598) 774,552
Accumulated deficit................................................. (740,126) (7,717) (747,843)
Cumulative foreign currency translation adjustments................. (1,628) (1,628)
------------ ------------- ------------
Total shareholders' equity........................................ 35,685 (9,315) 26,370
------------ ------------- ------------
$ 2,563,463 $ -- $ 2,563,463
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See notes to unaudited pro forma consolidated financial data.
P-5
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLARS IN THOUSANDS)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) Reflects the elimination of the dividends on the Senior Preferred Stock, the
inclusion of dividends on the Series E Preferred Stock and the net increase
in the exchangeable preferred stock as a result of the Redemption and
Offering. Interest expense, income (loss) before extraordinary charge, net
income (loss), income (loss) applicable to common shareholders, income
(loss) applicable to common shareholders per common and common equivalent
share and long-term debt reflect the reduction in long-term debt and
interest expense as a result of the reduced level of borrowings under the
Bank Credit Facilities from the application of the remainder of the net
proceeds from the Offering. Amounts repaid under the Bank Credit Facilities
may be reborrowed for general corporate purposes, including acquisitions.
The reduction in total shareholders' equity reflects the difference between
the carrying value and redemption value of the Senior Preferred Stock and
the payment of accrued but unpaid dividends upon Redemption.
(2) Reflects the operating results of Westcott as if it was acquired on January
1, 1996. The pro forma interest expense adjustment reflects the additional
borrowings to finance the acquisition at an assumed weighted average rate of
7.04% for the year ended December 31, 1996.
(3) Income (loss) before income taxes and extraordinary charge 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, non-cash interest expense on
an acquisition obligation, distribution advance and other current liability.
These pro forma non-cash charges totaled approximately $87,088 for the six
months ended June 30, 1997 and $201,906 for the year ended December 31,
1996. Adjusted to eliminate such pro forma non-cash charges, earnings would
have exceed fixed charges and fixed charges plus cash preferred stock
dividends by approximately $77,043 and $56,525 for the six months ended June
30, 1997, respectively, and $146,671 and $119,352 for the year ended
December 31, 1996, respectively.
(4) Pro forma loss applicable to common shareholders per common and common
equivalent share for the six months ended June 30, 1997 and the year ended
December 31, 1996 was computed using the weighted average number of common
and common equivalent shares outstanding during the respective period. The
weighted average number of common and common equivalent shares outstanding
includes incremental shares for nonqualified options granted to purchase
Common Stock. Such incremental shares were determined utilizing the treasury
stock method. Pro forma loss applicable to common shareholders per common
and common equivalent share assuming full dilution is not presented because
it is antidilutive.
P-6
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
Condensed Statements of Consolidated Operations (unaudited) for the Six Months Ended
June 30, 1996 and 1997............................................................. F-2
Condensed Consolidated Balance Sheet (unaudited) as of June 30, 1997................. F-3
Condensed Statements of Consolidated Cash Flows (unaudited) for the Six Months Ended
June 30, 1996 and 1997............................................................. F-4
Notes to Condensed Consolidated Financial Statements (unaudited)..................... F-5
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND
1996
Report of Independent Auditors--Deloitte & Touche LLP................................ F-11
Statements of Consolidated Operations for the Years Ended
December 31, 1994, 1995 and 1996................................................... F-12
Consolidated Balance Sheets as of December 31, 1995 and 1996......................... F-13
Statements of Shareholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996................................................... F-14
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996................................................... F-16
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1994, 1995 and 1996................................................... F-17
</TABLE>
F-1
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Sales, net:
Specialty Media.................................................................. $ 333,647 $ 361,174
Education........................................................................ 172,294 199,562
Information...................................................................... 144,692 160,317
------------- -------------
Total sales, net................................................................... 650,633 721,053
Operating costs and expenses:
Cost of goods sold............................................................... 166,461 159,663
Marketing and selling............................................................ 122,143 138,718
Distribution, circulation and fulfillment........................................ 110,052 127,249
Editorial........................................................................ 47,089 59,677
Other general expenses........................................................... 72,542 80,839
Corporate administrative expenses................................................ 9,851 12,710
Depreciation and amortization of prepublication costs, property and equipment.... 16,653 18,224
Amortization of intangible assets, excess of purchase price over net assets
acquired and other............................................................. 75,577 63,977
------------- -------------
Operating income................................................................... 30,265 59,996
Other income (expense):
Interest expense................................................................. (57,597) (68,963)
Amortization of deferred financing costs......................................... (1,867) (1,582)
Other, net....................................................................... 1,393 18
------------- -------------
Loss before income tax benefit and extraordinary charge............................ (27,806) (10,531)
Income tax benefit--carryback claim................................................ -- 1,685
------------- -------------
Loss before extraordinary charge................................................... (27,806) (8,846)
Extraordinary charge--extinguishment of debt....................................... (7,572) (15,401)
------------- -------------
Net loss........................................................................... (35,378) (24,247)
Preferred stock dividends:
Non-cash......................................................................... (8,054) (4,451)
Cash............................................................................. (11,194) (20,330)
------------- -------------
Loss applicable to common shareholders............................................. $ (54,626) $ (49,028)
------------- -------------
------------- -------------
Loss applicable to common shareholders per common share:
Loss before extraordinary charge................................................... $ (.36) $ (.26)
Extraordinary charge............................................................... (.06) (.12)
------------- -------------
Net loss........................................................................... $ (.42) $ (.38)
------------- -------------
------------- -------------
Weighted average common shares outstanding......................................... 128,645,188 129,201,826
------------- -------------
------------- -------------
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1997
(DOLLARS IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
--------------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 26,268
Accounts receivable, net............................................................ 172,597
Inventories, net.................................................................... 27,711
Net assets held for sale............................................................ 274,736
Prepaid expenses and other.......................................................... 49,226
-----------
Total current assets.............................................................. 550,538
Property and equipment, net........................................................... 100,394
Other intangible assets, net.......................................................... 668,712
Excess of purchase price over net assets acquired, net................................ 963,085
Deferred income tax asset, net........................................................ 176,200
Other non-current assets.............................................................. 104,534
-----------
$ 2,563,463
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 58,971
Accrued interest payable............................................................ 23,026
Accrued expenses and other.......................................................... 115,567
Deferred revenues................................................................... 127,501
Current maturities of long-term debt................................................ 6,000
-----------
Total current liabilities......................................................... 331,065
-----------
Long-term debt........................................................................ 1,713,057
-----------
Other non-current liabilities......................................................... 31,828
-----------
Exchangeable preferred stock.......................................................... 447,776
-----------
Common stock subject to redemption ($.01 par value, 443,470 shares outstanding)....... 4,052
-----------
Shareholders' equity:
Common stock ($.01 par value, 128,895,484 shares outstanding)....................... 1,289
Additional paid-in capital.......................................................... 776,150
Accumulated deficit................................................................. (740,126)
Cumulative foreign currency translation adjustments................................. (1,628)
-----------
Total shareholders' equity........................................................ 35,685
-----------
$ 2,563,463
-----------
-----------
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
<S> <C> <C>
1996 1997
----------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................................................. $ (35,378) $ (24,247)
Adjustments to reconcile net loss to net cash provided by operating activities:
Extraordinary charge--extinguishment of debt........................................ 7,572 15,401
Depreciation, amortization and other................................................ 94,097 83,783
Accretion of discount on acquisition obligation, distribution advance and other..... 3,112 3,305
Other, net.......................................................................... (1,391) (177)
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable, net.......................................................... 3,883 22,515
Inventories, net.................................................................. 14,814 1,130
Prepaid expenses and other........................................................ (13,159) (11,333)
Increase (Decrease) in:
Accounts payable.................................................................. (23,892) (29,085)
Accrued interest payable.......................................................... 11,509 876
Accrued expenses and other........................................................ (26,356) (16,185)
Deferred revenues................................................................. (22,750) (18,737)
Other non-current liabilities..................................................... (946) (1,844)
----------- ----------
Net cash provided by operating activities......................................... 11,115 25,402
----------- ----------
INVESTING ACTIVITIES:
Additions to property, equipment and other............................................ (10,158) (14,708)
Proceeds from sales of property, equipment and other.................................. 529 105
Proceeds from sales of businesses and other........................................... 6,013 5,423
Payments for businesses acquired...................................................... (649,436) (142,291)
----------- ----------
Net cash used in investing activities............................................. (653,052) (151,471)
----------- ----------
FINANCING ACTIVITIES:
Borrowings under credit agreements.................................................... 1,619,324 523,930
Repayments of borrowings under credit agreements...................................... (1,153,000) (142,950)
Repayment of Chase Term Loan.......................................................... (150,000) --
Repayment of BONY Term Loan........................................................... (150,000) --
Proceeds from issuance of 8 1/2% Senior Notes, net of discount........................ 298,734 --
Repayment of acquisition obligation................................................... (3,000) (3,000)
Proceeds from issuance of common stock, net of redemptions............................ 2,652 2,203
Proceeds from the issuance of Series C (exchanged into Series D) Preferred Stock, net
of issuance costs................................................................... 193,720 --
Redemptions of 10 5/8% Senior Notes................................................... -- (242,787)
Dividends paid to preferred shareholders.............................................. (11,194) (20,330)
Deferred financing costs paid......................................................... (14,362) (1,617)
Other................................................................................. (467) 233
----------- ----------
Net cash provided by financing activities......................................... 632,407 115,682
----------- ----------
Decrease in cash and cash equivalents................................................... (9,530) (10,387)
Cash and cash equivalents, beginning of period.......................................... 27,226 36,655
----------- ----------
Cash and cash equivalents, end of period................................................ $ 17,696 $ 26,268
----------- ----------
----------- ----------
Supplemental information:
Cash interest paid.................................................................... $ 44,697 $ 67,060
----------- ----------
----------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
K-III Communications Corporation, together with its subsidiaries, is
collectively referred to as "K-III" or the "Company". In the opinion of the
Company's management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior year financial statements
to conform to the classification used in the current period. The operating
results for the six-month period ended June 30 are not necessarily indicative of
the results that may be expected for a full year.
The Company's operations have been organized into three business segments:
specialty media, education and information.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS
No. 128 becomes effective for the Company's consolidated financial statements
beginning in the fourth quarter of 1997. SFAS No. 128 will eliminate disclosure
of primary earnings per share, which includes the dilutive effect of stock
options, warrants and other convertible securities ("Common Stock Equivalents"),
and instead requires reporting of "basic" earnings per share, which excludes
Common Stock Equivalents. Additionally, SFAS No. 128 changes the methodology for
fully dilutive earnings per share. In the opinion of the Company's management,
it is not anticipated that the adoption of this new accounting standard will
have a material effect on the reported earnings per share of the Company.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure". SFAS No. 129 becomes
effective for the Company's consolidated financial statements beginning in the
fourth quarter of 1997. SFAS No. 129 requires certain disclosures regarding
outstanding securities, preferred stock and redeemable stock. In June 1997, the
Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which become effective for the Company's
1998 consolidated financial statements. SFAS No. 130 requires the disclosure of
comprehensive income, defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources, in the Company's consolidated financial statements. SFAS No.
131 requires that a public business enterprise report certain financial and
descriptive information about its reportable operating segments. In the opinion
of the Company's management, it is not anticipated that the adoption of these
new accounting standards will have a material effect on the consolidated
financial statements of the Company.
2. ACQUISITIONS
During the six-month period ended June 30, 1997, the Company completed
several acquisitions which were financed through borrowings under the Company's
credit agreements. Cash payments for these acquisitions on an aggregate basis
was $142,291 (net of liabilities assumed of approximately $19,955) and includes
certain immaterial purchase price adjustments related to prior year
acquisitions. The excess purchase price over net assets acquired was
approximately $72,937.
The preliminary purchase cost allocations for the 1997 acquisitions are
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 condensed consolidated balance sheet at
F-5
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
2. ACQUISITIONS (CONTINUED)
June 30, 1997; however, the changes are not expected to have a material effect
on the consolidated financial statements of the Company.
These acquisitions have all been accounted for by the purchase method. The
financial statements include the operating results of these acquisitions
subsequent to their respective dates of acquisition. If the foregoing
acquisitions had occurred on January 1, 1996, they would not have had a material
impact on the results of operations for the six-month periods ended June 30,
1996 and 1997.
3. NET ASSETS HELD FOR SALE
On March 11, 1997, the Company announced its intention to divest the
following four non-core business units: Daily Racing Form Inc. (including
Pro-Football Weekly), Newbridge Communications, Inc. (excluding Films for the
Humanities and Sciences), NEW WOMAN magazine and Krames Communications
Incorporated. Subsequent to March 11, 1997, the Company decided to sell
STAGEBILL. These planned divestitures, (collectively, the "Remaining Non-Core
Units"), are part of the Company's plan to focus on six key growth vehicles in
markets that have dynamic growth opportunities. The Company expects to complete
the sales of the Remaining Non-Core Units in 1997. The net assets of the
Remaining Non-Core Units have been classified under the caption net assets held
for sale and are recorded at their aggregate carrying value of $274,736 on the
accompanying condensed consolidated balance sheet at June 30, 1997. The
operating results of the Remaining Non-Core Units are included in the
accompanying statements of condensed consolidated operations for the six-month
periods ended June 30, 1996 and 1997. Total sales for the Remaining Non-Core
Units were $136,755 and $125,654 for the six-month periods ended June 30, 1996
and 1997, respectively. Operating (loss) income for the Remaining Non-Core Units
was $(5,488) and $6,621 for the six-month periods ended June 30, 1996 and 1997,
respectively. (See Note 9--Subsequent Events).
4. DIVESTITURE
In September 1996, the Company decided to divest Katharine Gibbs Schools,
Inc. ("Katharine Gibbs"). On May 30, 1997, the Company sold Katharine Gibbs
pursuant to a stock purchase agreement and received a portion of the purchase
price. The sale is subject to certain regulatory approvals and is expected to be
completed by the end of 1997. The operating results of Katharine Gibbs prior to
the divestiture are not material to the consolidated operations of the Company
and are included in the accompanying statements of condensed consolidated
operations for the six-month periods ended June 30, 1996 and 1997. The proceeds
from the sale approximate the Company's carrying value of Katharine Gibbs.
F-6
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
---------
<S> <C>
Finished Goods................................................................. $ 12,570
Work in Process................................................................ 2,433
Raw Materials.................................................................. 15,501
---------
30,504
Less allowance for obsolescence................................................ 2,793
---------
$ 27,711
---------
---------
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
------------
<S> <C>
Borrowings under Bank Credit Facilities..................................... $ 1,185,982
Borrowings under New Credit Facility........................................ 80,000
8 1/2% Senior Notes due 2006, net........................................... 298,856
10 1/4% Senior Notes due, 2004.............................................. 100,000
------------
Total....................................................................... 1,664,838
Acquisition obligation payable.............................................. 54,219
------------
1,719,057
Less current portion........................................................ 6,000
------------
$ 1,713,057
------------
------------
</TABLE>
In January 1997, the Company purchased, in aggregate, $20,850 of the 10 5/8%
Senior Notes at a weighted average price of 105%, plus accrued and unpaid
interest from various brokers on the open market. On May 1, 1997, the Company
redeemed the $212,400 remaining principal amount of the 10 5/8% Senior Notes at
104% plus accrued and unpaid interest. The aggregate premium paid and the
write-off of related deferred financing costs are classified as an extraordinary
charge and are recorded at an aggregate value of $15,401 on the accompanying
statement of condensed consolidated operations for the six-month period ended
June 30, 1997.
The write-off of the unamortized deferred financing costs of $7,572 related
to the Company's May 1996 bank debt refinancing has been reclassified as an
extraordinary charge on the accompanying statement of condensed consolidated
operations for the six-month period ended June 30, 1996 to conform to the 1997
presentation.
On April 21, 1997, the Company entered into a new 364-day credit facility
with The Bank of New York, Bankers Trust Company, The Bank of Nova Scotia and
The Chase Manhattan Bank as agents (the "New Credit Facility") which expires
April 20, 1998. Under the terms of the New Credit Facility, the Company has
commitments of $150,000 which can be borrowed in the form of revolving loans.
F-7
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The proceeds of all revolving loans under the New Credit Facility can be
used for general corporate and working capital purposes of the Company and its
subsidiaries, including, without limitation, the financing of permitted
acquisitions.
The amounts borrowed pursuant to the New Credit Facility bear interest at
rates per annum identical to those in the Bank Credit Facilities at the
Company's option as follows: (i) the higher of (a) the Federal Funds Effective
Rate plus 1/2% and (b) the prime lending rate as in effect from time to time
(the "Base Rate"); plus in each case, an applicable margin of up to 1/8 of 1% as
specified in the New Credit Facility or (ii) the Eurodollar Rate plus an
applicable margin ranging from 1/2% to 1 1/2% as specified in the New Credit
Facility.
Under the New Credit Facility, the Company has agreed to pay commitment fees
equal to 1/8 of 1% per annum on the daily average aggregate unutilized revolving
loan commitment.
The covenants in the New Credit Facility are identical to those in the Bank
Credit Facilities and, among other things, limit the ability of the Company to
change the nature of its businesses, incur certain indebtedness, create liens,
sell assets, engage in mergers, consolidations or transactions with affiliates,
make investments in or loans to certain subsidiaries, make guarantees and make
certain restricted payments. The Company is also prohibited from declaring or
making dividend payments on the common stock in excess of $25,000 per annum,
unless the fixed charge coverage ratio, interest coverage ratio and leverage
ratio are at certain levels as specified in the New Credit Facility.
As under the Bank Credit Facilities, borrowings under the New Credit
Facility are guaranteed by each of the domestic wholly-owned subsidiaries of the
Company. Such guarantees are full, unconditional and joint and several. The
Company's foreign subsidiaries are not guarantors of the above indebtedness. The
total assets, revenues, income or equity of such foreign subsidiaries, both
individually and on a combined basis, are inconsequential in relation to the
total assets, revenue, income or equity of the Company.
In May 1997, the Company, through its Bank Credit Facilities, solicited
commitments of $150,000 under the Tranche B Revolving Loan Facility ("Tranche B
Facility"). The Company has the right to solicit additional commitments of up to
$100,000 under the Tranche B Facility. As of June 30, 1997, $150,000 was
outstanding under the Tranche B Facility.
The commitments under the Tranche B Facility are subject to mandatory
reductions semi-annually on June 30 and December 31 with the first reduction on
June 30, 1999 and the final reduction on June 30, 2004. The mandatory reductions
for the Tranche B Facility loan commitments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1999........................................................................ $ 15,000
2000........................................................................ 30,000
2001........................................................................ 30,000
2002........................................................................ 30,000
2003........................................................................ 30,000
2004........................................................................ 15,000
------------
$ 150,000
------------
------------
</TABLE>
F-8
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
7. EXCHANGEABLE PREFERRED STOCK
Exchangeable Preferred Stock consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997
----------
<S> <C>
$2.875 Senior Exchangeable Preferred Stock.................................... $ 98,402
$11.625 Series B Exchangeable Preferred Stock................................. 155,122
$10.000 Series D Exchangeable Preferred Stock................................. 194,252
----------
$ 447,776
----------
----------
</TABLE>
$2.875 SENIOR EXCHANGEABLE PREFERRED STOCK
The Company authorized 4,000,000 shares of $.01 par value Senior Preferred
Stock, all of which was issued and outstanding at June 30, 1997. The liquidation
and redemption value at June 30, 1997 was $100,000.
$11.625 SERIES B EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,000,000 shares of $.01 par value Series B Preferred
Stock, 1,576,036 shares of which were issued and outstanding at June 30, 1997.
The liquidation and redemption value at June 30, 1997 was $157,604.
Commencing in the second quarter of 1997, the Company elected to satisfy its
Series B Exchangeable Preferred Stock dividend requirements in cash.
$10.000 SERIES D EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,000,000 shares of $.01 par value Series D Preferred
Stock, all of which was issued and outstanding at June 30, 1997. The liquidation
and redemption value at June 30, 1997 was $200,000.
8. LOSS PER COMMON SHARE
Loss per common share for the six-month periods ended June 30, 1996 and 1997
was computed using the weighted average number of common stock shares
outstanding during each period. The effect of the assumed exercise of
non-qualified stock options is not included because the effect is anti-dilutive.
Loss per common share assuming full dilution is not presented because such
calculation is antidilutive.
9. SUBSEQUENT EVENTS
On August 14, 1997, the Company sold NEW WOMAN magazine pursuant to an asset
purchase agreement, and on August 29, 1997, the Company sold Krames
Communications Incorporated pursuant to a stock purchase agreement. The proceeds
from these divestitures were used to repay outstanding indebtedness. The
aggregate operating results of these divestitures prior to the divestitures were
not material to the consolidated operations of the Company.
F-9
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
9. SUBSEQUENT EVENTS (CONTINUED)
On September 9, 1997, the Company announced that its board of directors had
authorized a program for the Company to repurchase up to $15 million of its
outstanding Common Stock from time to time in the open market and through
privately negotiated transactions.
On September 16, 1997, the Company purchased a block of 523,000 shares of
Common Stock at a price of $12 1/4 per Share. The Shares were purchased in the
open market through the New York Stock Exchange. The purchase of these shares
was not part of the share repurchase program described in the preceding
paragraph.
On September 26, 1997, the Company completed a private offering of 1,250,00
shares of $9.20 Series E Exchangeable Preferred Stock (the "Offering") and
called for redemption all of its Senior Preferred Stock (the "Redemption"). Net
proceeds of the Offering of approximately $121,300 will be used to redeem the
4,000,000 outstanding shares of Senior Preferred Stock on November 3, 1997 at a
redemption price of $26.45 per share plus accrued and unpaid dividends to the
redemption date and to repay borrowings outstanding under its Bank Credit
Facilities, which amounts may be reborrowed for general corporate purposes
including acquisition. Until the Redemption, the Company used the net proceeds
from the Offering to repay borrowings under the Bank Credit Facilities.
From July 1 to September 16, 1997, the Company completed four product-line
acquisitions in specialty consumer magazines, technical and trade magazines and
apartment guides for an aggregate purchase price of approximately $46,000.
In July 1997, the Company entered into four, three-year and two, four-year
interest rate swap agreements, with an aggregate notional amount of $600,000.
Under these new swap agreements, which commence on January 2, 1998, the Company
receives a floating rate of interest based on three-month LIBOR, which resets
quarterly, and the Company pays a fixed rate of interest, each quarter, for the
terms of the respective agreements. The weighted average fixed rate of interest
under these agreements is 6.33%.
F-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
K-III Communications Corporation
New York, New York:
We have audited the accompanying consolidated balance sheets of K-III
Communications Corporation and subsidiaries as of December 31, 1995 and 1996,
and the related statements of consolidated operations, shareholders' equity and
consolidated cash flows for each of the three years in the period ended December
31, 1996. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries at
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for advertising costs to conform with Statement
of Position 93-7--"Reporting on Advertising Costs" of the American Institute of
Certified Public Accountants in 1994.
DELOITTE & TOUCHE LLP
New York, New York
January 29, 1997
(September 26, 1997 as to Note 26)
F-11
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
NOTES 1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales, net:
Specialty Media....................................... $ 341,782 $ 452,373 $ 684,341
Education............................................. 430,134 330,414 376,217
Information........................................... 192,732 263,542 313,891
-------------- -------------- --------------
Total sales, net........................................ 964,648 1,046,329 1,374,449
Operating costs and expenses:
Cost of goods sold.................................... 206,390 251,347 337,065
Marketing and selling................................. 197,379 177,167 249,301
Distribution, circulation and fulfillment............. 180,962 188,147 230,533
Editorial............................................. 64,235 73,703 104,484
Other general expenses................................ 140,263 122,816 154,966
Corporate administrative expenses..................... 13,325 17,034 21,497
Depreciation and amortization of prepublication costs,
property and equipment.............................. 11 16,190 25,761 38,233
Provision for loss on the sales of businesses, net.... 6 15,025 35,447 --
Restructuring and other costs......................... 7 -- 14,667 --
Amortization of intangible assets, excess of purchase
price over net assets acquired and other............ 8, 12 120,676 166,515 152,469
-------------- -------------- --------------
Operating income (loss)................................. 10,203 (26,275) 85,901
Other income (expense):
Interest expense...................................... (78,351) (105,837) (124,601)
Amortization of deferred financing and organizational
costs............................................... 13 (3,080) (3,135) (3,662)
Other, net............................................ 6 (401) 212 6,659
-------------- -------------- --------------
Loss before income tax benefit and extraordinary
charge................................................ (71,629) (135,035) (35,703)
Income tax benefit...................................... 16 42,100 59,600 53,300
-------------- -------------- --------------
Income (loss) before extraordinary charge............... (29,529) (75,435) 17,597
Extraordinary charge--extinguishment of debt............ (11,874) -- (9,553)
-------------- -------------- --------------
Net income (loss)....................................... (41,403) (75,435) 8,044
Preferred stock dividends:
Non-cash.............................................. (14,459) (17,478) (16,582)
Cash.................................................. (11,500) (11,500) (26,944)
-------------- -------------- --------------
Loss applicable to common shareholders.................. $ (67,362) $ (104,413) $ (35,482)
-------------- -------------- --------------
-------------- -------------- --------------
Loss applicable to common shareholders per common and
common equivalent share: 3
Loss before extraordinary charge...................... $ (.54) $ (.91) $ (.20)
Extraordinary charge.................................. (.11) -- (.07)
-------------- -------------- --------------
Net income (loss)..................................... $ (.65) $ (.91) $ (.27)
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average common and common equivalent shares
outstanding........................................... 3 103,642,668 115,077,498 130,007,632
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
NOTES 1995 1996
------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 27,226 $ 36,655
Accounts receivable, net.............................................. 9 173,771 233,603
Inventories, net...................................................... 10 70,844 52,743
Net assets held for sale.............................................. 5 5,253 18,684
Prepaid expenses and other............................................ 26,732 34,834
------------ ------------
Total current assets.............................................. 303,826 376,519
Property and equipment, net............................................. 11 112,013 122,823
Other intangible assets, net............................................ 12 699,617 781,316
Excess of purchase price over net assets acquired, net.................. 12 534,554 971,665
Deferred income tax asset, net.......................................... 16 113,800 176,200
Other non-current assets................................................ 13 117,606 123,692
------------ ------------
$ 1,881,416 $ 2,552,215
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 90,414 $ 107,258
Accrued interest payable.............................................. 9,326 22,150
Accrued expenses and other............................................ 14 125,967 140,959
Deferred revenues..................................................... 128,679 144,857
Current maturities of long-term debt.................................. 15 6,000 6,000
------------ ------------
Total current liabilities......................................... 360,386 421,224
------------ ------------
Long-term debt.......................................................... 15, 26 1,134,916 1,565,686
------------ ------------
Other non-current liabilities........................................... 33,924 35,062
------------ ------------
Commitments and contingencies 22
Exchangeable preferred stock (aggregated liquidation and redemption
values of $236,571 and $453,153 at December 31, 1995 and 1996,
respectively)......................................................... 17 231,606 442,729
------------ ------------
Common stock subject to redemption ($.01 par value, 2,406,513 shares and
643,310 shares outstanding at December 31, 1995 and 1996,
respectively)......................................................... 18 28,022 5,957
------------ ------------
Shareholders' equity:
Common stock ($.01 par value, 250,000,000 shares authorized;
125,921,221 shares and 128,349,045 shares outstanding at December
31, 1995 and 1996, respectively).................................... 18 1,259 1,283
Additional paid-in capital............................................ 18 748,194 772,642
Accumulated deficit................................................... 19 (655,616) (691,098)
Cumulative foreign currency translation adjustments................... (1,275) (1,270)
------------ ------------
Total shareholders' equity........................................ 92,562 81,557
------------ ------------
$ 1,881,416 $ 2,552,215
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1994..................................................................
Issuances of common stock, net of issuance costs............................................
Expiration of redemption feature on common stock subject to redemption......................
$11.625 Series B Exchangeable Preferred Stock-dividends in kind.............................
$2.875 Senior Exchangeable Preferred Stock--cash dividends..................................
Old Preferred Stock--dividends in kind......................................................
Accretion of differences between carrying value and redemption value of:
$2.875 Senior Exchangeable Preferred Stock..............................................
$11.625 Series B Exchangeable Preferred Stock...........................................
Cumulative foreign currency translation adjustments.........................................
Net loss....................................................................................
Balance at December 31, 1994................................................................
Issuances of common stock, net of issuance costs............................................
Expiration of redemption feature on common stock subject to redemption......................
$11.625 Series B Exchangeable Preferred Stock--dividends in kind............................
$2.875 Senior Exchangeable Preferred Stock--cash dividends..................................
Old Preferred Stock--dividends in kind......................................................
Accretion of differences between carrying value and redemption value of:
$2.875 Senior Exchangeable Preferred Stock..............................................
$11.625 Series B Exchangeable Preferred Stock...........................................
Common stock subject to redemption......................................................
Cumulative foreign currency translation adjustments.........................................
Net loss....................................................................................
Balance at December 31, 1995................................................................
Issuances of common stock, net of issuance costs............................................
Expiration of redemption feature on common stock subject to redemption......................
$11.625 Series B Exchangeable Preferred Stock--dividends in kind............................
$2.875 Senior Exchangeable Preferred Stock--cash dividends..................................
$10.00 Series D Exchangeable Preferred Stock--cash dividends................................
Reduction (accretion) of differences between carrying value and redemption value of:
$2.875 Senior Exchangeable Preferred Stock..............................................
$11.625 Series B Exchangeable Preferred Stock...........................................
$10.00 Series D Exchangeable Preferred Stock............................................
Common stock subject to redemption......................................................
Cumulative foreign currency translation adjustments.........................................
Net income..................................................................................
Balance at December 31, 1996................................................................
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
- ------------------------ PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENTS TOTAL
- ------------- --------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
94,705,557 $ 947 $ 488,541 $ (483,841) $ (1,220) $ 4,427
9,381,250 94 74,956 75,050
1,251,002 12 10,033 10,045
(13,185) (13,185)
(11,500) (11,500)
(1,274) (1,274)
(273) (273)
(317) (317)
(104) (104)
(41,403) (41,403)
- ------------- --------- ---------- ------------ ----------- -----------
105,337,809 1,053 572,940 (551,203) (1,324) 21,466
20,435,782 204 184,964 185,168
147,630 2 807 809
(14,787) (14,787)
(11,500) (11,500)
(2,691) (2,691)
(273) (273)
(317) (317)
(9,927) (9,927)
49 49
(75,435) (75,435)
- ------------- --------- ---------- ------------ ----------- -----------
125,921,221 1,259 748,194 (655,616) (1,275) 92,562
681,890 7 3,440 3,447
1,745,934 17 21,213 21,230
(16,582) (16,582)
(11,500) (11,500)
(15,444) (15,444)
(273) (273)
(317) (317)
(500) (500)
885 885
5 5
8,044 8,044
- ------------- --------- ---------- ------------ ----------- -----------
128,349,045 $ 1,283 $ 772,642 $ (691,098) $ (1,270) $ 81,557
- ------------- --------- ---------- ------------ ----------- -----------
- ------------- --------- ---------- ------------ ----------- -----------
</TABLE>
F-15
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- --------- ----------
<CAPTION>
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................... $ (41,403) $ (75,435) $ 8,044
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, amortization and other...................................... 139,946 195,411 194,364
Provision for loss on the sales of businesses, net........................ 15,025 35,447 --
Accretion of discount on acquisition obligation, distribution advance and
other................................................................... 9,617 8,147 6,398
Extraordinary charge-extinguishment of debt............................... 11,874 -- 9,553
Income tax benefit........................................................ (42,100) (59,600) (53,300)
Other, net................................................................ 177 (122) (6,213)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net.................................................. (2,510) (2,525) (24,692)
Inventories, net.......................................................... 1,329 (23,630) 24,531
Prepaid expenses and other................................................ (14,367) (13,127) (598)
Increase (decrease) in:
Accounts payable.......................................................... 5,971 6,742 5,807
Accrued interest payable.................................................. 877 1,131 12,824
Accrued expenses and other................................................ (13,492) (26,857) (12,674)
Deferred revenues......................................................... (4,984) 16,971 (11,201)
Other non-current liabilities............................................. (1,070) 1,509 (2,651)
---------- --------- ----------
Net cash provided by operating activities................................. 64,890 64,062 150,192
---------- --------- ----------
INVESTING ACTIVITIES:
Additions to property, equipment and other.................................. (16,118) (25,179) (29,661)
Proceeds from sales of businesses........................................... -- 58,656 8,071
Proceeds from sales of property, equipment and other........................ 1,934 1,765 871
Payments for businesses acquired............................................ (427,942) (353,954) (700,990)
---------- --------- ----------
Net cash used in investing activities..................................... (442,126) (318,712) (721,709)
---------- --------- ----------
FINANCING ACTIVITIES:
Borrowings under credit agreements.......................................... 766,329 622,459 1,683,787
Repayments of borrowings under credit agreements............................ (678,800) (522,500) (1,384,800)
Proceeds from issuance of 8 1/2% Senior Notes, net of discount.............. -- -- 298,734
Payments of acquisition obligation.......................................... (6,000) (6,000) (6,000)
Payments of floating rate indebtedness...................................... -- -- (150,000)
Proceeds from issuance of common stock, net of redemptions.................. 76,360 187,520 3,498
Proceeds from issuance of 10 1/4% Senior Notes.............................. 100,000 -- --
Borrowings under BONY Term Loan............................................. 150,000 -- --
Proceeds from issuance of Old Preferred Stock............................... 75,050 50,000 --
Proceeds from issuance of Series C (exchanged into Series D) Preferred
Stock, net of issuance costs.............................................. -- -- 193,451
Redemption of Old Preferred Stock........................................... (76,324) (52,691) --
Purchases of 10 5/8% Senior Notes........................................... -- -- (17,655)
Dividends paid to preferred shareholders.................................... (11,500) (11,500) (26,944)
Deferred financing costs paid............................................... (10,842) (3,204) (13,132)
Other....................................................................... (349) (440) 7
---------- --------- ----------
Net cash provided by financing activities................................. 383,924 263,644 580,946
---------- --------- ----------
Increase in cash and cash equivalents......................................... 6,688 8,994 9,429
Cash and cash equivalents, beginning of period................................ 11,544 18,232 27,226
---------- --------- ----------
Cash and cash equivalents, end of period...................................... $ 18,232 $ 27,226 $ 36,655
---------- --------- ----------
---------- --------- ----------
SUPPLEMENTAL INFORMATION:
Businesses acquired:
Fair value of assets acquired............................................. $ 517,412 $ 429,810 $ 779,192
Liabilities assumed....................................................... 89,470 75,856 78,202
---------- --------- ----------
Cash paid for businesses acquired......................................... $ 427,942 $ 353,954 $ 700,990
---------- --------- ----------
---------- --------- ----------
Interest paid............................................................... $ 71,395 $ 102,040 $ 111,752
---------- --------- ----------
---------- --------- ----------
Non-cash investing and financing activities:
Asset acquired under a capital lease obligation........................... $ -- $ 11,738 $ --
---------- --------- ----------
---------- --------- ----------
Preferred stock dividends in kind......................................... $ 14,459 $ 17,478 $ 16,582
---------- --------- ----------
---------- --------- ----------
Accretion in carrying value of preferred stock............................ $ 590 $ 590 $ 1,090
---------- --------- ----------
---------- --------- ----------
Accretion (reduction) in carrying value of common stock subject to
redemption.............................................................. $ -- $ 9,927 $ (885)
---------- --------- ----------
---------- --------- ----------
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
K-III Communications Corporation (which together with its subsidiaries is
herein referred to as either "K-III" or the "Company" unless the context implies
otherwise) is the authoritative source for specialized information to targeted
markets. The Company's three business segments are education, information and
specialty media. The specialty media segment has in prior years been referred to
as the media segment, but the Company believes that the use of specialty media
is more descriptive of the underlying businesses. The education segment includes
Channel One, Westcott, Weekly Reader, Newbridge, Krames and Katharine Gibbs.
This segment specializes in providing educational materials to the classroom and
workplace learning markets. The information segment includes K-III Reference,
K-III Directory, Haas, Bacon's, a portion of Intertec, Nelson and Daily Racing
Form. The information segment produces consumer and business directories in a
variety of formats for decision makers in business, professional and special
interest consumer markets. The information is compiled and sold through
reference works, newspapers, CD-ROMs, almanacs and directories. The specialty
media segment includes K-III Magazines, PJS, McMullen Argus and the majority of
Intertec. The specialty media segment is concentrated primarily on specialty
consumer magazines, and technical and trade magazines.
2. CHANGE IN METHOD OF ACCOUNTING FOR ADVERTISING COSTS
Effective July 1, 1994, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 93-7, "Reporting on
Advertising Costs" (the "SOP").
Under the Company's previous accounting policy, general advertising costs
were expensed as incurred; promotional and subscription acquisition costs were
capitalized prior to the launching of a direct marketing or subscription
acquisition campaign and then expensed when the promotional materials were
mailed or displayed. In compliance with the new SOP, the Company now expenses
advertising costs the first time the advertising takes place, except for
direct-response advertising qualifying for capitalization under the SOP which is
capitalized and amortized over its expected period of future benefit. Direct-
response advertising consists of product promotional mailings, catalogues,
telemarketing and subscription promotions. The capitalized costs of advertising
are amortized using a ratio of current period revenues to total current and
estimated future period revenues. The amortization periods range from 6 months
to 2 years subsequent to the promotional event. Amortization of direct-response
advertising costs is included in marketing and circulation expenses on the
accompanying statements of consolidated operations. The adoption of this new
accounting method resulted in a decrease in the net loss of approximately $9,800
($.09 per share), $11,800 ($.10 per share) and $2,000 ($.02 per share) for the
years ended December 31, 1994, 1995 and 1996, respectively. At December 31,
1994, 1995 and 1996, $16,895, $25,408 and $28,452 of advertising costs,
respectively, were reported as net assets and included in other non-current
assets on the accompanying consolidated balance sheets. Advertising expense was
approximately $100,357, $88,176 and $100,687, during the years ended December
31, 1994, 1995 and 1996, respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of K-III and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts of
assets, liabilities, revenues and expenses reported in the consolidated
financial statements.
F-17
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Significant accounting estimates used include estimates for sales returns
and allowances and estimates for the realization of deferred tax assets.
Management has exercised reasonableness in deriving these estimates. However,
actual results may differ.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the presentation used in the current
period.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of this new accounting standard did not have a
material effect on the results of operations of the Company.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). This Statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
The Company has elected to continue to account for its employee stock
compensation plans under APB No. 25. Pro forma disclosures of net income (loss)
and loss per common and common equivalent share, as if the fair value based
method of accounting defined in SFAS No. 123 had been applied, are presented in
Note 18.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" which becomes effective for the Company's 1997
consolidated financial statements beginning in the fourth quarter of 1997. SFAS
No. 128 will eliminate the disclosure of primary earnings per share which
includes the dilutive effect of stock options, warrants and other convertible
securities ("Common Stock Equivalents") and instead requires reporting of
"basic" earnings per share, which will exclude Common Stock Equivalents.
Additionally, SFAS No. 128 changes the methodology for fully diluted earnings
per share. In the opinion of the Company's management, it is not anticipated
that the adoption of this new accounting standard will have a material effect on
the reported earnings per share of the Company.
CASH AND CASH EQUIVALENTS. Management considers all highly liquid
instruments purchased with an original maturity of 90 days or less to be cash
equivalents.
INVENTORIES. Inventories, including paper, purchased manuscripts,
photographs and art, are valued at the lower of cost or market principally on a
first-in, first-out ("FIFO") basis and include the value of inventory for which
a provision for estimated sales returns has been made.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation of property and
equipment, and the amortization of leasehold improvements are provided at rates
based on the estimated useful lives or lease terms, if shorter, using primarily
the straight-line method. Improvements are capitalized while maintenance and
repairs are expensed as incurred.
EDITORIAL AND PRODUCT DEVELOPMENT COSTS. Editorial costs and product
development costs are generally expensed as incurred. Product development costs
include the cost of artwork, graphics, prepress, plates and photography for new
products.
F-18
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING AND SUBSCRIPTION ACQUISITION COSTS. Advertising and
subscription acquisition costs are expensed the first time the advertising takes
place, except for direct-response advertising, the primary purpose of which is
to elicit sales from customers who can be shown to have responded specifically
to the advertising and that results in probable future economic benefits. These
direct-response advertising costs are reported as assets and amortized over the
estimated period of future benefit. Prior to July 1, 1994, direct-response
advertising costs were capitalized prior to launching a direct marketing or
subscription acquisition campaign and were expensed when the promotional
materials were mailed (see Note 2).
DEFERRED FINANCING COSTS. Deferred financing costs are being amortized by
the straight-line method over the terms of the related indebtedness.
DEFERRED WIRING AND INSTALLATION COSTS. Wiring and installation costs
incurred by Channel One and Westcott have been capitalized and are being
amortized by the straight-line method over 15 and five years, respectively, the
related estimated useful life.
$2.875 SENIOR EXCHANGEABLE PREFERRED STOCK ("SENIOR PREFERRED STOCK"),
$11.625 SERIES B EXCHANGEABLE PREFERRED STOCK ("SERIES B PREFERRED STOCK") and
the $10.00 SERIES D EXCHANGEABLE PREFERRED STOCK ("SERIES D PREFERRED
STOCK"). The Senior Preferred Stock, Series B Preferred Stock and Series D
Preferred Stock are stated at fair value on the date of issuance less issuance
costs. The difference between their carrying values and their redemption values
is being amortized (using the interest method) by periodic charges to additional
paid-in capital.
COMMON STOCK SUBJECT TO REDEMPTION. The common stock subject to redemption
is stated at redemption value which at December 31, 1995 and 1996, is equal to
quoted market value. The difference between the carrying value of such stock and
its redemption value is recorded by periodic charges to additional paid-in
capital.
COMPUTER SOFTWARE. Computer software costs are expensed as incurred.
INTEREST RATE SWAP AGREEMENTS. The Company's interest rate swap agreements
are designated and effective as modifications to existing debt obligations to
reduce the impact of changes in the interest rates on its floating rate
borrowings and, accordingly, are accounted for using the settlement method of
accounting. The differentials to be paid or received under the interest rate
swap agreements are accrued as interest rates change and are recognized as
adjustments to interest expense. The Company considers swap terms including the
reference rate, payment and maturity dates and the notional amount in
determining if an interest rate swap agreement is effective at modifying an
existing debt obligation. If the criteria for designation are no longer met or
the underlying instrument matures or is extinguished, the Company will account
for outstanding swap agreements at fair market value and any resulting gain or
loss will be recognized as other income or expense. Any gains or losses upon
early termination of the agreements will be deferred and amortized over the
shorter of the remaining life of the hedged existing debt obligation or the
original life of the interest rate swap agreement.
PURCHASE ACCOUNTING. With respect to the acquisitions, the total purchase
price has been allocated to the tangible and intangible assets and liabilities
based on their respective fair values.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED AND INTANGIBLE
ASSETS. Intangible assets are being amortized using both accelerated and
straight-line methods over periods ranging from 1/4 of 1 year to 40 years. The
excess of purchase price over net assets acquired is being amortized on a
straight-line basis over 40 years. The recoverability of the carrying values of
the excess of the purchase price over the net assets
F-19
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acquired and intangible assets is evaluated quarterly to determine if an
impairment in value has occurred. An impairment in value will be considered to
have occurred when it is determined that the undiscounted future operating cash
flows generated by the acquired businesses are not sufficient to recover the
carrying values of such intangible assets. If it has been determined that an
impairment in value has occurred, the excess of the purchase price over the net
assets acquired and intangible assets would be written down to an amount which
will be equivalent to the present value of the future operating cash flows to be
generated by the acquired businesses.
REVENUE RECOGNITION. Advertising revenues for all consumer magazines are
recognized as income at the on-sale date, net of provisions for estimated
rebates, adjustments and discounts. Other advertising revenues are generally
recognized based on the publications' cover dates. Newsstand sales are
recognized as income at the on-sale date for all publications, net of provisions
for estimated returns. Subscriptions are recorded as deferred revenue when
received and recognized as income over the term of the subscription. Westcott
subscription and broadcast fees for satellite and videotape network services are
recognized in the month services are rendered. Sales of books and other items
are recognized as revenue principally upon shipment, net of an allowance for
returns which is provided based on sales. Distribution costs charged to
customers are recognized as revenue when the related product is shipped. Tuition
is recorded as deferred revenue when received and recognized ratably as income
over the length of the school term. Channel One advertising revenue, net of
commissions, is recognized as advertisements are aired on the program. Certain
advertisers are guaranteed a minimum number of viewers per advertisement shown;
the revenue recognized is based on the actual viewers delivered not to exceed
the original contract value.
FOREIGN CURRENCY. Gains and losses on foreign currency transactions, which
are not significant, have been included in other, net. The effects of
translation of foreign currency financial statements into U.S. dollars are
included in the cumulative foreign currency translation adjustments account in
shareholders' equity.
LOSS PER COMMON AND COMMON EQUIVALENT SHARE. Loss per common and common
equivalent share for the years ended December 31, 1994, 1995 and 1996 was
computed using the weighted average number of common and common equivalent
shares outstanding during each year. The weighted average number of common and
common equivalent shares outstanding during 1994 and 1995 (for the quarters
prior to the initial filing of the registration statement), 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 at a purchase price
below $10.00 per share; and during the fourth quarters of 1994, 1995 and 1996,
the weighted average of common and common equivalent shares includes incremental
shares for non-qualified stock options granted to purchase common stock
(collectively, the "Incremental Shares"). Such Incremental Shares were
determined utilizing the treasury stock method. Loss per common share assuming
full dilution is not presented because such calculation is antidilutive.
RECLASSIFICATION. The write-off of unamortized deferred financing costs of
$11,874 in 1994 and the premium paid on the redemption of the 10 5/8% Senior
Notes and the write-off of unamortized deferred financing costs of $9,553 in
1996 have been reclassified as an extraordinary charge on the accompanying
statements of consolidated operations.
F-20
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. ACQUISITIONS
The Company acquired certain net assets or stock of:
1994--Channel One, which produces and distributes a daily advertising
supported television news show for secondary school students and associated
video programming; a publisher of directories of residential apartments
available to rent; a producer and distributor of privately sponsored
supplemental educational materials; and Katharine Gibbs Schools, a network of
seven post-secondary career schools. In addition to the aforementioned, the
Company completed several other smaller acquisitions during 1994.
1995--a publisher of 13 specialty consumer magazine titles serving the
sewing, crafts, woodworking and shooting sports areas; a publisher of 11 trade
magazines in the mining, printing and packaging industries, a specialty consumer
magazine, 15 truck and automobile price guides and three marketing and sales
oriented magazines; an information provider for the public relations industry; a
publisher of 21 specialty consumer magazines serving the automobile, truck,
motorcycle and watercraft areas; a publisher of specialty consumer magazines
serving the automotive area; and a publisher of trade magazines and directories
and an operator of trade shows. In addition to the aforementioned, the Company
completed several other smaller acquisitions during 1995.
1996--Cahners Consumer Magazines, a publisher of specialty consumer
magazines including AMERICAN BABY, MODERN BRIDE, SAIL and POWER & MOTORYACHT,
along with 20 related properties and Westcott which utilizes various multi-media
technologies to provide workplace 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. In addition to the aforementioned, the Company
completed several other smaller acquisitions during 1996.
The acquisitions have been accounted for by the purchase method. The
preliminary purchase cost allocations for the above-mentioned acquisitions are
subject to adjustment when additional information concerning asset and liability
valuations are obtained. The final asset and liability fair values may differ
from those set forth in the accompanying consolidated balance sheet at December
31, 1996; however, the changes are not expected to have a material effect on the
consolidated financial position of the Company. The consolidated financial
statements include the operating results of these acquisitions subsequent to
their respective dates of acquisition. The foregoing acquisitions, except for
Channel One, Cahners and Westcott, if they had occurred on January 1 of the year
prior to acquisition, would not have had a material impact on the results of
operations.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisitions of Channel One, Cahners and
Westcott had taken place on January 1, 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------ ------------ ------------
Sales, net.................................................... $ 1,194,673 $ 1,238,254 $ 1,413,930
Operating income (loss)....................................... 14,861 (12,563) 82,100
Income (loss) before extraordinary charge..................... (72,814) (106,012) 1,314
Loss applicable to common shareholders before extraordinary
charge...................................................... (98,773) (134,990) (42,212)
Loss per common and common equivalent share before
extraordinary charge........................................ (.95) (1.17) (.32)
</TABLE>
F-21
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. NET ASSETS HELD FOR SALE
In 1995, the Company decided to sell, as of the acquisition date, certain
technical and trade magazines which were originally acquired as part of a larger
acquisition (see Note 6). During September 1996, the Company decided to divest
Katharine Gibbs and expects to complete the sale in 1997. The net assets of
these operations were recorded at net realizable value and have been classified
as a current asset in net assets held for sale on the accompanying consolidated
balance sheets.
6. DIVESTITURES
In June 1995, the Company sold certain newly acquired technical and trade
magazines and PREMIERE and on July 28, 1995, the Company sold Newfield. In
connection with these sales, the Company has received aggregate cash proceeds of
$58,656 and has recorded amounts due from buyer of approximately $5,000 on the
accompanying consolidated balance sheets at December 31, 1995 and 1996. In
connection with these sales, the Company recorded net aggregate provisions for
loss on the sales of businesses of $15,025 for the year ended December 31, 1994
and $35,447 for the year ended December 31, 1995.
During the second quarter of 1996, the Company completed the sale of certain
technical and trade magazines. The differences between the proceeds received and
the carrying values of the assets held for sale were treated as adjustments to
the excess of purchase price over net assets acquired related to the retained
businesses. In addition, during the second quarter of 1996, the Company sold a
monthly tabloid targeted to electronic design engineers for consideration of a
motion picture and television production magazine and cash proceeds. During the
fourth quarter of 1996, the Company completed the sale of the Kits and Leaflets
Division of PJS and certain specialty consumer magazines. In connection with
these sales, the Company received aggregate cash proceeds of approximately
$8,100 and recorded a net gain on sale of businesses of approximately $5,800.
7. RESTRUCTURING AND OTHER COSTS
In the second quarter of 1995, the Company recorded charges of $14,667
related to a corporate restructuring effort at Newbridge, its professional book
club business, and the completion of a manufacturing outsourcing effort at Daily
Racing Form. Included in the restructuring charge of $7,272 are employee
separation costs of $1,287, litigation matters of $3,349, a write-down of
inventory and other assets of $2,086 related to the exit of a product line at
Newbridge and costs associated with the termination of a real estate lease which
is no longer needed in the operations of Daily Racing Form of $550. Included in
the other costs of $7,395 are costs incurred and associated with the correction
of customer and accounting systems and write-down of certain assets. During 1994
and early 1995, the Company experienced certain operational problems at
Newbridge relating to periodic mailings which described its then current product
offerings. These operational problems resulted in higher than normal levels of
bad debts and returns. In addition, Newbridge implemented a new customer
information processing system which inadvertently suppressed a number of
customer and product offering mailings resulting in lower than anticipated
demand for certain products and a corresponding increase in obsolete inventory.
Subsequently, the operational and new system problems were corrected. Based on
information which was then available, appropriate provisions for inventory
obsolescence of approximately $500 and for bad debts of approximately $2,500
were recorded in the first quarter of 1995. Expenses associated with the outside
consultants and systems corrections of approximately $1,400 were recorded in the
second quarter of 1995. Additional obsolescence provisions of approximately
$2,000 and bad debt provisions of approximately $1,000 were identified and
recorded in the second quarter of 1995. Approximately $4,100 of the
restructuring and other charges were paid in cash in 1995 and at December 31,
1995, approximately $2,600 of these charges is
F-22
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. RESTRUCTURING AND OTHER COSTS (CONTINUED)
included in accrued liabilities. Approximately $1,200 of the restructuring and
other charges were paid in cash in 1996 and at December 31, 1996, $1,400 of
these charges is included in accrued liabilities, which is expected to be paid
in 1997.
8. ADJUSTMENTS TO THE CARRYING VALUES OF LONG-LIVED ASSETS
In accordance with its accounting policy, during 1995, the Company recorded
aggregate write-downs of $17,958 and $5,786 to the carrying values of the
identifiable intangible assets and goodwill of K-III Reference and a product
line of Newbridge, respectively. These adjustments are included in amortization
of intangible assets, excess of purchase price over net assets acquired and
other on the accompanying statement of consolidated operations for the year
ended December 31, 1995 and affect the operating results of the information and
education segments.
9. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
Accounts receivable................................................... $ 211,150 $ 273,119
Less: Allowance for doubtful accounts................................. 14,364 15,418
Allowance for returns and rebates................................. 23,015 24,098
---------- ----------
$ 173,771 $ 233,603
---------- ----------
---------- ----------
</TABLE>
10. INVENTORIES, NET
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Finished goods.......................................................... $ 49,026 $ 41,497
Work in process......................................................... 969 2,111
Raw materials........................................................... 27,978 17,838
--------- ---------
77,973 61,446
Less: allowance for obsolescence........................................ 7,129 8,703
--------- ---------
$ 70,844 $ 52,743
--------- ---------
--------- ---------
</TABLE>
F-23
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. PROPERTY AND EQUIPMENT, NET
Property and equipment, including that held under capital leases, consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
RANGE OF LIVES ----------------------
(YEARS) 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
Land.................................................. -- $ 2,043 $ 2,022
Buildings and improvements............................ 1-40 19,296 24,219
Furniture and fixtures................................ 4-10 19,387 26,027
Machinery and equipment............................... 2-9 65,187 94,091
School equipment...................................... 10 54,625 55,860
Other................................................. 3-7 1,232 2,401
---------- ----------
161,770 204,620
Less: accumulated depreciation and amortization....... 49,757 81,797
---------- ----------
$ 112,013 $ 122,823
---------- ----------
---------- ----------
</TABLE>
Included in machinery and equipment above is an asset which was acquired
under a capital lease in the amount of $11,738 with accumulated amortization of
$434 and $1,739 at December 31, 1995 and 1996, respectively (see Note 22).
12. INTANGIBLE ASSETS AND EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED, NET
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
RANGE OF LIVES --------------------------
(YEARS) 1995 1996
--------------- ------------ ------------
<S> <C> <C> <C>
Trademarks........................................ 40 $ 416,524 $ 448,490
Membership, subscriber and customer lists......... 2-20 435,960 504,951
Non-compete agreements............................ 1-10 217,101 227,312
Trademark license agreements...................... 2-15 17,500 17,500
Copyrights........................................ 12-20 47,849 47,849
Video library..................................... 1-7 14,835 14,837
Databases......................................... 4-12 128,468 121,377
Advertiser lists.................................. .25-15 80,577 133,850
Distribution agreements........................... 1-7 15,336 15,336
Other............................................. 1.5-15 20,971 63,875
------------ ------------
1,395,121 1,595,377
Less: accumulated amortization.................... 695,504 814,061
------------ ------------
$ 699,617 $ 781,316
------------ ------------
------------ ------------
</TABLE>
The excess of the purchase price over the fair value of the net assets
acquired is net of accumulated amortization of $66,889 and $82,763,
respectively, at December 31, 1995 and 1996.
F-24
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
<CAPTION>
<S> <C> <C>
Deferred financing costs, net......................................... $ 19,711 $ 22,814
Deferred wiring and installation costs, net........................... 62,937 58,086
Direct-response advertising costs, net (see Note 2)................... 25,408 28,452
Prepublication and programming costs, net............................. 3,821 6,506
Other................................................................. 5,729 7,834
---------- ----------
$ 117,606 $ 123,692
---------- ----------
---------- ----------
</TABLE>
The deferred financing costs are net of accumulated amortization of $8,139
and $9,794 at December 31, 1995 and 1996, respectively. The deferred wiring and
installation costs are net of accumulated amortization of $7,163 and $12,850 at
December 31, 1995 and 1996, respectively. Direct-response advertising costs are
net of accumulated amortization of $29,569 and $70,661 at December 31, 1995 and
1996, respectively. Prepublication and programming costs are net of accumulated
amortization of $4,121 and $4,852 at December 31, 1995 and 1996, respectively.
14. ACCRUED EXPENSES AND OTHER
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
<CAPTION>
<S> <C> <C>
Payroll, commissions and related employee benefits.................... $ 43,482 $ 40,553
Systems costs......................................................... 5,661 2,991
Rent and lease liabilities............................................ 10,027 13,502
Retail display costs and allowances................................... 10,723 8,263
Promotion costs....................................................... 2,032 2,663
Royalties............................................................. 8,067 8,362
Circulation costs..................................................... 3,382 5,420
Professional fees..................................................... 2,566 4,408
Taxes................................................................. 6,778 17,162
Customer advances..................................................... 3,031 2,482
Other................................................................. 30,218 35,153
---------- ----------
$ 125,967 $ 140,959
---------- ----------
---------- ----------
</TABLE>
F-25
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
<CAPTION>
<S> <C> <C>
Borrowings under Revolving Credit Agreement....................... $ 435,988 $ --
Borrowings under Bank Credit Facilities........................... -- 884,992
BONY Term Loan.................................................... 150,000 --
Chase Term Loan................................................... 150,000 --
10 5/8% Senior Notes due 2002..................................... 250,000 233,250
10 1/4% Senior Notes due 2004..................................... 100,000 100,000
8 1/2% Senior Notes due 2006..................................... -- 298,811
------------ ------------
1,085,988 1,517,053
Acquisition obligation payable.................................... 54,928 54,633
------------ ------------
1,140,916 1,571,686
Less: current maturities of long-term debt........................ 6,000 6,000
------------ ------------
$ 1,134,916 $ 1,565,686
------------ ------------
------------ ------------
</TABLE>
On May 31, 1996, the Company replaced its existing credit facilities under
the Revolving Credit Agreement, BONY Term Loan and the Chase Term Loan through
which the Company could borrow $970,000 in the aggregate with new credit
facilities with The Chase Manhattan Bank, the Bank of New York, Bankers Trust
Company and the Bank of Nova Scotia as agents (the "Bank Credit Facilities").
Under the Bank Credit Facilities, the Company has commitments of $1,250,000 and
can borrow up to $1,500,000 in the aggregate. The Company used approximately
$910,000 of the proceeds from the Bank Credit Facilities to repay borrowings
under the previously existing credit facilities and to pay certain related fees
and expenses.
The Bank Credit Facilities are comprised of a $750,000 Tranche A Revolving
Loan Commitment ("Tranche A Loan Commitment"), a $250,000 Term Loan ("Term
Loan") and an additional $250,000 Revolving Loan Commitment, ("Revolver/Term
Loan"). In addition, the Company has the right to solicit commitments of up to
$250,000 under the Tranche B Revolving Loan Facility ("Tranche B Facility"). The
Tranche A Loan Commitment may be utilized through the incurrence of Tranche A
revolving credit loans, swingline loans which may not exceed $40,000 in total,
Canadian dollar loans which may not exceed the Canadian dollar equivalent of
$40,000 in total or the issuance of letters of credit which may not exceed
$40,000. The Revolver/Term Loan may be utilized through the incurrence of
revolving credit loans. If the Company establishes commitments under the Tranche
B Facility, the Tranche B Facility may be utilized through the incurrence of
Tranche B revolving credit loans. The proceeds of the Bank Credit Facilities may
be used for general corporate and working capital purposes as well as to finance
certain future acquisitions.
The commitments under the Tranche A Loan Commitment and the Tranche B
Facility are subject to mandatory reductions semi-annually on June 30 and
December 31 with the first reduction on June 30, 1999
F-26
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LONG-TERM DEBT (CONTINUED)
and the final reduction on June 30, 2004. The mandatory reductions for the
Tranche A Loan Commitment are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1999............................................................................ $ 75,000
2000............................................................................ 150,000
2001............................................................................ 150,000
2002............................................................................ 150,000
2003............................................................................ 150,000
2004............................................................................ 75,000
------------
$ 750,000
------------
------------
</TABLE>
The mandatory reductions for the Tranche B Facility are based on defined
percentages of the total Tranche B Facility. To the extent that the total
revolving credit loans outstanding exceed the reduced commitment amount, these
loans must be paid down to equal or less than the reduced commitment amount.
However, if the total revolving credit loans outstanding do not exceed the
reduced commitment amount, then there is no requirement to pay down any of the
revolving credit loans.
The principal amount of the Term Loan will be repaid semi-annually on June
30 and December 31 each year, with an initial payment of $25,000 on June 30,
2000, installments of $25,000 on each payment date thereafter through December
31, 2003 and a final payment of $50,000 on June 30, 2004.
As of December 31, 1996, the borrowings under the Bank Credit Facilities
consist of the $634,992 under the Tranche A Loan Commitment and $250,000 under
the Term Loan.
If the Company incurs indebtedness under the Revolver/Term Loan, the
revolving loans outstanding will automatically convert to term loans on May 23,
1997 and will mature on June 30, 2004. If the Company exercises that right, then
the term loans will be repaid according to the same installment schedule as
stated for the Term Loan above. If the Company does not incur indebtedness prior
to May 23, 1997, the Revolver/ Term Loan will expire.
The amounts borrowed (other than swingline loans) pursuant to the Bank
Credit Facilities bear interest at the following rates per annum, at the
Company's option: (i) the higher of (a) the Federal Funds Effective Rate as
published by the Federal Reserve Bank of New York plus 0.5% and (b) the prime
commercial lending rate announced by the Agent from time to time (the "Base
Rate"); plus, in each case, an applicable margin of up to 1/8 of 1% as specified
in the Bank Credit Facilities or (ii) the Eurodollar Rate plus an applicable
margin ranging from 1/2 of 1% to 1 1/2% as specified in the Bank Credit
Facilities. All swingline loans bear interest at the Base Rate plus the
applicable margin of up to 1/8 of 1% as specified in the Bank Credit Facilities.
During 1995, the weighted average interest rates on the Revolving Credit
Agreement, BONY Term Loan and Chase Term Loan, were 7.28%, 7.94% and 7.48%,
respectively. During 1996, the weighted average interest rate on the Revolving
Credit Agreement, BONY Term Loan, Chase Term Loan and Bank Credit Facilities
were 7.04%, 7.50%, 6.94% and 7.07%. The interest rate on the borrowings under
the Revolving Credit Agreement outstanding at December 31, 1995 ranged from
6.75% to 7.44%. The interest rate on the BONY Term Loan outstanding at December
31, 1995 was 7.81% and the interest rate on the Chase Term Loan outstanding at
December 31, 1995 was 7.63%. Interest rates on the borrowings under the Bank
Credit Facilities outstanding at December 31, 1996 ranged from 7.00% to 7.13%.
F-27
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LONG-TERM DEBT (CONTINUED)
The Company has agreed to pay commitment fees equal to 3/8 of 1% per annum
on the daily average unused commitment of Tranche A Loan Commitment and Tranche
B Facility, certain fees with respect to the issuance of letters of credit and
an annual administration fee. The Company has agreed to pay a commitment fee of
1/8 of 1% per annum on the daily average unused commitment of the $250,000
revolving credit under the Revolver/Term Loan.
10 5/8% SENIOR NOTES. Interest on the 10 5/8% Senior Notes is payable
semi-annually at the annual rate of 10 5/8%. The 10 5/8% Senior Notes mature on
May 1, 2002. The 10 5/8% Senior Notes may not be redeemed prior to May 1, 1997
other than in connection with a change of control; however, a sinking fund
payment on May 1, 2001 is required to retire 50% of the 10 5/8% Senior Notes
prior to maturity. On May 1, 1997 and thereafter, the 10 5/8% Senior Notes are
redeemable at prices ranging from 104% with annual reductions to 100% in 2000
plus accrued and unpaid interest. During November and December 1996, the Company
purchased $16,750 of the 10 5/8% Senior Notes at a premium of 105.4% plus
accrued interest from various brokers on the open market (see Note 26).
10 1/4% SENIOR NOTES. The annual interest rate of 10 1/4% is payable
semi-annually in June and December. The 10 1/4% Senior Notes mature on June 1,
2004, with no sinking fund. The 10 1/4% Senior Notes are redeemable on or after
June 1, 1999; however, 35% of the aggregate principal amount of the 10 1/4%
Senior Notes may be redeemed at a price of 109 1/4% plus accrued and unpaid
interest on or prior to June 1, 1997 with net proceeds of a public equity
offering. In addition, upon a change of control, the Company may redeem the
10 1/4% Senior Notes. Beginning in 1999 and thereafter, the 10 1/4% Senior Notes
are redeemable at prices ranging from 104.95% with annual reductions to 100% in
2002 plus accrued and unpaid interest.
8 1/2% SENIOR NOTES. On January 24, 1996, the Company completed a private
offering of $300,000 of 8 1/2% Senior Notes. The 8 1/2% Senior Notes were issued
at 99.578% with related issuance costs of approximately $7,000. On August 21,
1996, the Company exchanged its 8 1/2% Senior Notes ("Old Notes") for a new
series of $300,000 8 1/2% Senior Notes due 2006 ("New Notes"). The New Notes
have been registered under the Securities Act of 1933. The New Notes mature on
February 1, 2006, with no sinking fund. Interest on the New Notes is payable
semi-annually in February and August at the annual rate of 8 1/2%. The New Notes
may not be redeemed prior to February 1, 2001 other than in connection with a
change of control. Beginning in 2001 and thereafter, the New Notes are
redeemable in whole or in part, at the option of the Company, at prices ranging
from 104.25% with annual reductions to 100% in 2003 plus accrued and unpaid
interest. Net proceeds from the Old Notes of approximately $293,000 were
primarily used to pay down borrowings under the Revolving Credit Agreement.
The 10 5/8% Senior Notes, 10 1/4% Senior Notes and 8 1/2% Senior Notes
(together referred to as the "Senior Notes"), and the Credit Facilities, all
rank senior in right of payment to all subordinated indebtedness of K-III
Communications Corporation (a holding company).
The above indebtedness, among other things, limits the ability of the
Company to change the nature of its businesses, incur indebtedness, create
liens, sell assets, engage in mergers, consolidations or transactions with
affiliates, make investments in or loans to certain subsidiaries, make
guarantees and certain restricted payments. The Company is restricted from
declaring or making dividend payments on its common and preferred stock. Under
the Company's most restrictive debt covenants, the Company must maintain a
minimum interest coverage ratio of 1.8 to 1 and a minimum fixed charge coverage
ratio of 1.05 to 1. The Company's maximum allowable leverage ratio is 6.0 to 1.
The Company believes it is in compliance with the financial and operating
covenants of its principal financing arrangements. Borrowings
F-28
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. LONG-TERM DEBT (CONTINUED)
under the above indebtedness are guaranteed by each of the domestic wholly-owned
subsidiaries of the Company. Such guarantees are full, unconditional and joint
and several. The separate financial statements of the domestic subsidiaries are
not presented because the Company believes the separate financial statements
would not be material to the shareholders and potential investors. The Company's
foreign subsidiaries are not guarantors of the above indebtedness. The total
assets, revenues, income or equity of such foreign subsidiaries, both
individually and on a combined basis, are inconsequential in relation to the
total assets, revenues, income or equity of the Company.
ACQUISITION OBLIGATION. In connection with the acquisition of certain of
the Company's specialty consumer magazine operations and Daily Racing Form, an
obligation was recorded equivalent to the present value of the principal and
interest payments of the notes payable in the amount of $54,928 at December 31,
1995 and $54,633 at December 31, 1996. The interest rate used in calculating the
present value was 13%, which represents management's estimate of the prevailing
market rate of interest for such obligation at the time of the acquisition.
Principal and interest amounts aggregating $69,500 will be repaid from June 1997
through June 2001.
INTEREST RATE SWAP AGREEMENTS. In May 1995, the Company entered into two,
three-year interest rate swap agreements with an aggregate notional amount of
$200,000. Under these swap agreements, the Company receives a floating rate of
interest based on three-month LIBOR, which resets quarterly, and pays a fixed
rate of interest which increases each year during the terms of the respective
agreements. The weighted average variable rate and weighted average fixed rate
were 6.0% and 6.05%, respectively, in 1995 and 5.5% and 6.2%, respectively, in
1996. Also, in May 1995, the Company entered into a three-year interest rate cap
agreement. As a result of this transaction, the Company currently has the right
to receive payments based on a notional principal amount of $100,000 to the
extent that three-month LIBOR exceeds 7.75% in year one, 8.75% in year two and
9.75% in year three of the agreement. Any interest differential to be received
will be recognized as an adjustment to interest expense. The interest rate cap
fee is recognized as an adjustment to interest expense over the life of the
interest rate cap agreement.
In the fourth quarter of 1996, the Company entered into six, one-year
interest rate swap agreements with an aggregate notional amount of $600,000.
Under these new swap agreements, the Company receives a floating rate of
interest based on three-month LIBOR, which resets quarterly, and pays a fixed
rate of interest, each quarter, for the term of the agreements. As of December
31, 1996, the weighted average variable rate and weighted average fixed rate
were 5.5% and 5.8%, respectively.
The net interest differential, charged to interest expense in 1994, 1995 and
1996 was $4,258, $539 and $1,943, respectively. The Company is exposed to credit
risk in the event of nonperformance by counterparties to its interest rate swap
and cap agreements. Credit risk is limited by entering into such agreements with
primary dealers only; therefore, the Company does not anticipate that
nonperformance by counterparties will occur. Notwithstanding this, the Company's
treasury department monitors counterparty credit ratings at least quarterly
through reviewing independent credit agency reports. Both current and potential
exposure are evaluated, as necessary, by obtaining replacement cost information
from alternative dealers. Potential loss to the Company from credit risk on
these agreements is limited to amounts receivable, if any.
F-29
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. INCOME TAXES
At December 31, 1996, the Company had aggregate net operating loss
carryforwards for Federal and state income tax purposes ("NOLs") of
approximately $713,000 which will be available to reduce future taxable income.
The utilization of such NOLs is subject to certain limitations under Federal
income tax laws. In certain instances, such NOLs may only be used to reduce
future taxable income of the respective company which generated the NOL. The
NOLs are scheduled to expire in the following years:
<TABLE>
<S> <C>
2003.............................................................. $ 24,900
2004.............................................................. 60,300
2005.............................................................. 121,800
2006.............................................................. 93,400
2007.............................................................. 82,700
2008.............................................................. 83,700
2009.............................................................. 68,900
2010.............................................................. 156,100
2011.............................................................. 21,200
---------
$ 713,000
---------
---------
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------
<S> <C> <C> <C>
FEDERAL STATE TOTAL
---------- --------- ----------
<CAPTION>
<S> <C> <C> <C>
DEFERRED INCOME TAX ASSETS:
Difference between book and tax basis of inventory............................. $ 4,878 $ 1,429 $ 6,307
Difference between book and tax basis of accrued expenses and other............ 19,991 5,856 25,847
Reserves not currently deductible.............................................. 12,872 3,771 16,643
Difference between book and tax basis of other intangible assets............... 18,875 5,530 24,405
Operating loss carryforwards................................................... 168,310 49,309 217,619
---------- --------- ----------
Total.......................................................................... 224,926 65,895 290,821
---------- --------- ----------
DEFERRED INCOME TAX LIABILITIES:
Difference between book and tax basis of other intangible assets............... 24,515 7,182 31,697
Difference between book and tax basis of property and equipment................ 964 283 1,247
Other.......................................................................... 7,783 2,280 10,063
---------- --------- ----------
Total.......................................................................... 33,262 9,745 43,007
---------- --------- ----------
Net deferred income tax assets................................................. 191,664 56,150 247,814
Less: Valuation allowances..................................................... 103,649 30,365 134,014
---------- --------- ----------
Net............................................................................ $ 88,015 $ 25,785 $ 113,800
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-30
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
<S> <C> <C> <C>
FEDERAL STATE TOTAL
---------- --------- ----------
<CAPTION>
<S> <C> <C> <C>
DEFERRED INCOME TAX ASSETS:
Difference between book and tax basis of inventory............................. $ 3,550 $ 1,041 $ 4,591
Difference between book and tax basis of accrued expenses and other............ 18,583 5,444 24,027
Reserves not currently deductible.............................................. 2,277 667 2,944
Difference between book and tax basis of other intangible assets............... 31,043 9,094 40,137
Operating loss carryforwards................................................... 192,267 56,326 248,593
---------- --------- ----------
Total.......................................................................... 247,720 72,572 320,292
---------- --------- ----------
DEFERRED INCOME TAX LIABILITIES:
Difference between book and tax basis of other intangible assets............... 32,612 9,554 42,166
Difference between book and tax basis of property and equipment................ 11,382 3,335 14,717
Other.......................................................................... 9,757 2,858 12,615
---------- --------- ----------
Total.......................................................................... 53,751 15,747 69,498
---------- --------- ----------
Net deferred income tax assets................................................. 193,969 56,825 250,794
Less: Valuation allowances..................................................... 57,692 16,902 74,594
---------- --------- ----------
Net............................................................................ $ 136,277 $ 39,923 $ 176,200
---------- --------- ----------
---------- --------- ----------
</TABLE>
At December 31, 1994, 1995 and 1996, management of the Company reviewed
recent operating results and projected future operating results. At the end of
each of the respective years, management determined that a portion of the net
deferred income tax assets would likely be realized. Accordingly, in 1994, the
Company reduced the valuation allowances by $46,100 and recorded an income tax
benefit of $42,100 ($32,600 and $9,500 related to Federal and state income tax
benefits, respectively) and a reduction of the excess of purchase price over net
assets acquired of $4,000; in 1995, the Company reduced the valuation allowances
by $67,700 and recorded an income tax benefit of $59,600 ($46,100 and $13,500
related to Federal and state income tax benefits, respectively) and a reduction
of the excess of purchase price over net assets acquired of $8,100; and in 1996,
the Company reduced the valuation allowances by $62,400 and recorded an income
tax benefit of $53,300 ($41,200 and $12,100 related to Federal and state income
tax benefits, respectively) and a reduction of the excess of purchase price over
net assets acquired of $9,100. The amount of the net deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. During
1994, 1995 and 1996, after the reduction in the valuation allowances discussed
above, there were net decreases in the valuation allowances of approximately
$13,800, $1,404 and $59,420 respectively.
A portion of the valuation allowances in the amount of approximately $30,200
at December 31, 1996 relates to net deferred tax assets which were recorded in
accounting for the acquisitions of various entities. The recognition of such
amount in future years will be allocated to reduce the excess of the purchase
price over the net assets acquired and other non-current intangible assets.
F-31
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. EXCHANGEABLE PREFERRED STOCK
Exchangeable Preferred Stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
---------- ----------
<S> <C> <C>
$2.875 Senior Exchangeable Preferred Stock................................................ $ 97,992 $ 98,266
$11.625 Series B Exchangeable Preferred Stock............................................. 133,614 150,513
$10.000 Series D Exchangeable Preferred Stock............................................. -- 193,950
---------- ----------
$ 231,606 $ 442,729
---------- ----------
---------- ----------
</TABLE>
$2.875 SENIOR EXCHANGEABLE PREFERRED STOCK
The Company authorized 4,000,000 shares of $.01 par value Senior Preferred
Stock, all of which was issued and outstanding at December 31, 1995 and 1996.
The liquidation and redemption value at December 31, 1995 and 1996 was $100,000.
Annual dividends of $2.875 per share on the Senior Preferred Stock are
cumulative and payable quarterly. Cash dividends of $11,500 have been paid
during each of the years 1994, 1995 and 1996. The Senior Preferred Stock may be
redeemed at the option of the Company, in whole or in part, at any time on or
after May 1, 1997 at redemption prices set at 105.8% in 1997 with annual
reductions to 100% in 2002 plus accrued and unpaid dividends to the date of
redemption. The Company is required to redeem 50% of the Senior Preferred Stock
on each of May 1, 2003 and May 1, 2004 at the liquidation preference of $25 per
share plus accrued and unpaid dividends. Upon any voluntary or involuntary
liquidation, the Senior Preferred Stock has a liquidation preference of $25 per
share plus accrued and unpaid dividends. The Senior Preferred Stock is
exchangeable, in whole but not in part, at the option of the Company, on any
scheduled dividend payment date for 11 1/2% Subordinated Debentures due 2004.
The Senior Preferred Stock is recorded on the accompanying consolidated balance
sheets at the aggregate redemption value (net of issuance costs) of $97,992 and
$98,266 at December 31, 1995 and 1996, respectively.
$11.625 SERIES B EXCHANGEABLE PREFERRED STOCK
The Company authorized 2,000,000 shares of $.01 par value Series B Preferred
Stock, 1,365,707 shares and 1,531,526 shares of which were issued and
outstanding at December 31, 1995 and 1996, respectively. The liquidation and
redemption value at December 31, 1995 and 1996 was $136,571 and $153,153,
respectively. Annual dividends of $11.625 per share on the Series B Preferred
Stock are cumulative and payable quarterly in cash or by issuing additional
shares of the Series B Preferred Stock. On and after May 1, 1998, dividends must
be paid in cash. On or after February 1, 1998, the Series B Preferred Stock may
be redeemed in whole or in part, at the option of the Company, at specified
redemption prices plus accrued and unpaid dividends. The Company is required to
redeem the Series B Preferred Stock on May 1, 2005 at a redemption price equal
to the liquidation preference of $100 per share, plus accrued and unpaid
dividends. The Series B Preferred Stock is exchangeable at the option of the
Company on or after an initial public offering of the Company's common stock for
its 11 5/8% Class B Subordinated Exchange Debentures due 2005 provided no shares
of the Senior Preferred Stock are then outstanding. Such debentures are
subordinate to all existing and future liabilities and obligations of the
Company and its subsidiaries. The Series B Preferred Stock is recorded on the
accompanying consolidated balance sheets at the aggregate redemption value (net
of issuance costs) of $133,614 and $150,513 at December 31, 1995 and 1996,
respectively.
F-32
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. EXCHANGEABLE PREFERRED STOCK (CONTINUED)
$10.00 SERIES D EXCHANGEABLE PREFERRED STOCK
On January 24, 1996, the Company completed a private offering of 2,000,000
shares of $.01 par value, $10 Series C Exchangeable Preferred Stock ("Series C
Preferred Stock") at $100 per share. Annual dividends of $10 per share on the
Series C Preferred Stock were cumulative and payable quarterly, in cash,
commencing May 1, 1996. On August 21, 1996, the Company exchanged the Series C
Preferred Stock for 2,000,000 shares of $.01 par value, Series D Preferred
Stock. Dividend payment terms of the Series D Preferred Stock are the same as
the terms of the Series C Preferred Stock. The Series D Preferred Stock has been
registered under the Securities Act of 1933. The liquidation and redemption
value at December 31, 1996 was $200,000. On and after February 1, 2001, the
Series D Preferred Stock may be redeemed in whole or in part, at the option of
the Company, at specified redemption prices plus accrued and unpaid dividends.
The Company is required to redeem the Series D Preferred Stock on February 1,
2008 at a redemption price equal to the liquidation preference of $100 per
share, plus accrued and unpaid dividends. The Series D Preferred Stock is
exchangeable in whole but not in part, at the option of the Company, on any
scheduled dividend payment date into 10% Class D Subordinated Exchange
Debentures due 2008 provided that no shares of the Senior Preferred Stock are
outstanding on the date of exchange. Net proceeds from the Series C Preferred
Stock offering of approximately $193,000 were primarily used to pay down
borrowings under the Revolving Credit Agreement. The Series D Preferred Stock is
recorded on the accompanying consolidated balance sheets at the aggregate
redemption value (net of issuance costs) of $193,950 at December 31, 1996.
18. COMMON STOCK
In October 1995, the Company increased the authorized number of shares of
common stock by 50,000,000 shares to 250,000,000 shares. During November 1995,
the Company completed public offerings of 17,250,000 shares of common stock at a
price of $10.00 per share. Proceeds from this initial public offering, net of
commissions and other related expenses of approximately $9,500, were
approximately $163,000. The Company used the net proceeds from this initial
public offering to repay borrowings outstanding under its Revolving Credit
Agreement, which could be reborrowed for general corporate purposes including
acquisitions (see Note 15).
STOCK PURCHASE AND OPTION PLAN. The K-III Stock Purchase and Option Plan
(the "Plan") authorizes sales of shares of common stock and grants of incentive
awards in the forms of, among other things, stock options to key employees and
other persons with a unique relationship with the Company. The stock options are
granted with exercise prices at quoted market value at time of issuance. For the
purpose of determining fair value prior to November 1995, it was recognized that
the Company's common stock was not readily saleable to third parties at that
time, and therefore, was valued at a discount to a publicly-traded common stock.
The common stock issued and redeemed is included in the table of the activity of
the common stock subject to redemption.
COMMON STOCK SUBJECT TO REDEMPTION. Under the following circumstances,
employees have the right to resell their shares of common stock to the Company:
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,
F-33
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. COMMON STOCK (CONTINUED)
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.
The following summarizes the activity of the common stock subject to
redemption:
<TABLE>
<CAPTION>
SHARES AMOUNT
----------- ----------
<S> <C> <C>
Balance at January 1, 1994.............................................................. 3,185,946 $ 25,488
Acquisitions of common stock held by management......................................... (27,436) (169)
Issuances of common stock............................................................... 244,672 1,943
Expiration of redemption feature........................................................ (1,251,002) (10,045)
----------- ----------
Balance at December 31, 1994............................................................ 2,152,180 17,217
Acquisitions of common stock held by management......................................... (57,031) (430)
Issuances of common stock............................................................... 458,994 3,274
Expiration of redemption feature........................................................ (147,630) (809)
Accretion in carrying value............................................................. -- 9,927
----------- ----------
Balance at December 31, 1995............................................................ 2,406,513 29,179
Acquisitions of common stock held by management......................................... (17,269) (148)
Expiration of redemption feature........................................................ (1,745,934) (21,230)
Reduction in carrying value............................................................. -- (885)
----------- ----------
Balance at December 31, 1996............................................................ 643,310 $ 6,916
----------- ----------
----------- ----------
</TABLE>
The redemption values of the common stock subject to redemption of $29,179
and $6,916 at December 31, 1995 and 1996, respectively, were based on a
repurchase price of $12.125 per share and $10.750 per share which are the quoted
market values at December 31, 1995 and 1996, respectively. Common stock subject
to redemption is recorded on the accompanying consolidated balance sheets net of
the amounts of notes receivable from employees (related to common stock
issuances) outstanding of $1,157 and $959 at December 31, 1995 and 1996,
respectively.
ACCOUNTING FOR EMPLOYEE STOCK BASED COMPENSATION The K-III Stock Purchase
and Option Plan has authorized the grant of options to management personnel for
up to 25,000,000 shares of the Company's common stock. The options are
exercisable at the rate of 20% per year over a five-year period commencing on
the effective date of the grant; however, some optionees have received credit
for periods of employment with the Company and its predecessors and subsidiaries
prior to the date the options were granted. All options granted pursuant to the
Plan will expire no later than ten years from the date the option was granted.
F-34
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. COMMON STOCK (CONTINUED)
A summary of the status of the Company's fixed stock option plan as of
December 31, 1994, 1995 and 1996, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------------------- ------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVG. AVG.
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE PRICE OPTIONS PRICE PRICE OPTIONS PRICE
--------- ------------- ----------- --------- ------------- ----------- --------- -------------
Outstanding--
beginning of
year............... 8,865,297 $5.00-$7.00 $ 5.05 9,610,447 $5.00-$8.00 $ 5.31 12,326,087 $5.00-$8.00
Granted............ 850,000 $ 8.00 $ 8.00 3,139,325 $ 8.00 $ 8.00 1,830,400 1$0.00-$11.94
Exercised.......... (13,872) $ 5.00 $ 5.00 (193,401) $5.00-$8.00 $ 5.19 (681,890) $5.00-$8.00
Forfeited.......... (90,978) $5.00-$8.00 $ 5.26 (230,284) $5.00-$8.00 $ 6.28 (263,385) $5.00-$8.00
--------- --------- ---------
Outstanding--end of
the year........... 9,610,447 $5.00-$8.00 $ 5.31 12,326,087 $5.00-$8.00 $ 5.98 13,211,212 $5.00-$11.94
--------- --------- ---------
--------- --------- ---------
Exercisable at end of
the year........... 5,701,789 $5.00-$7.00 $ 5.02 7,269,817 $5.00-$8.00 $ 5.18 8,707,528 $5.00-$8.00
--------- --------- ---------
--------- --------- ---------
<CAPTION>
<S> <C>
WEIGHTED
AVG.
EXERCISE
PRICE
-----------
Outstanding--
beginning of
year............... $ 5.98
Granted............ $ 11.12
Exercised.......... $ 5.36
Forfeited.......... $ 7.69
Outstanding--end of
the year........... $ 6.69
Exercisable at end of
the year........... $ 5.38
</TABLE>
The weighted-average fair value per option for options granted in 1995 and
1996 was $3.06 and $4.13, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED
RANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE
- --------------- ----------- ----------------------- ---------------
<S> <C> <C> <C>
$5.00-$5.44 7,638,282 5 $ 5.00
$7.00 155,400 6 $ 7.00
$8.00 3,588,730 8 $ 8.00
$10.00-$11.94 1,828,800 9 $ 11.13
-----------
13,211,212 6 $ 6.69
-----------
-----------
</TABLE>
SFAS No. 123 provides for a fair-value based method of accounting for
employee options and measures compensation expense using an option valuation
model that takes into account, as of the grant date, the exercise price and
expected life of the option, the current price of the underlying stock and its
expected volatility, expected dividends on the stock, and the risk-free interest
rate for the expected term of the option. The Company has elected to continue
accounting for employee stock-based compensation under APB No. 25 and related
interpretations. Under APB No. 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.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model for options granted in 1995 and 1996. The
following weighted-average assumptions were used for 1995 and 1996,
respectively: risk-free interest rates of 6.34% and 6.36%, dividend yields of
0.0% and 0.0%, volatility factors of the expected market price of the Company's
F-35
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. COMMON STOCK (CONTINUED)
common stock of 22.59% and 20.83%; and a weighted-average expected life of the
option of 6 years. The estimated fair value of options granted during 1995 and
1996 was $9,592 and $7,560, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Pro forma net income (loss).................................................................. $ (76,388) $ 5,738
Pro forma loss applicable to common shareholders............................................. $(105,366) $ (37,788)
Pro forma loss per common and common equivalent share........................................ $ (.92) $ (.29)
</TABLE>
The Company had reserved 20,837,921 shares of common stock for future
issuances in connection with the plan at December 31, 1996.
19. ACCUMULATED DEFICIT
The accumulated deficit of $691,098 at December 31, 1996 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 write-offs of the unamortized balance of deferred financing costs
(associated with all previous financings), the restructuring and other costs and
the net provision on sales of businesses in the aggregate amount of
approximately $924,900 which is net of the non-cash income tax benefits
aggregating $155,000 through December 31, 1996.
F-36
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and the estimated fair values of the Company's
financial instruments for which it is practicable to estimate fair value are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1995 1996
---------------------- ----------------------
<CAPTION>
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
10 5/8% Senior Notes............................................. $ 250,000 $ 267,950 $ 233,250 $ 260,950
10 1/4% Senior Notes............................................. 100,000 107,720 100,000 105,400
8 1/2% Senior Notes.............................................. -- -- 298,811 291,750
Acquisition Obligation........................................... 54,928 52,604 54,633 55,339
Senior Preferred Stock........................................... 97,992 109,000 98,266 107,500
Series B Preferred Stock......................................... 133,614 135,888 150,513 154,684
Series D Preferred Stock......................................... -- -- 193,950 196,000
Interest Rate Swap Agreements.................................... 449 5,057 982 3,531
Purchased Interest Rate Cap Agreement............................ (274) (2) (159) (2)
</TABLE>
The bracketed amounts above represent assets.
The fair values of the senior notes and preferred stocks were determined
based on the quoted market prices and the fair value of the acquisition
obligation was estimated using discounted cash flow analysis, based on current
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the interest rate swap agreements was determined using discounted
cash flow models.
For instruments including cash and cash equivalents, accounts receivable and
accounts payable, the carrying amount approximates fair value because of the
short maturity of these instruments. The fair value of floating-rate long-term
debt approximates carrying value because these instruments re-price frequently
at current market prices.
21. RETIREMENT PLANS
Substantially all of the Company's employees are eligible to participate in
defined contribution plans. The expense recognized for all of these plans was
$3,693 in 1994, $5,245 in 1995 and $5,432 in 1996.
In addition, the employees at K-III Magazines and the non-union employees at
Daily Racing Form are eligible to participate in the K-III Pension Plan
("Pension Plan") which is a non-contributory defined benefit pension plan. The
benefits to be paid under the Pension Plan are based on years of service and
compensation amounts for the highest consecutive five years of service in the
most current ten years. The Pension Plan is funded by means of contributions by
the Company to the plan's trust. The pension funding policy is consistent with
the funding requirements of U.S. Federal and other governmental laws and
regulations. Plan assets consist primarily of fixed income, equity and other
short-term investments.
F-37
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21. RETIREMENT PLANS (CONTINUED)
The components of the net periodic pension cost of the Pension Plan for the
years ended December 31, 1994, 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost......................................................................... $ 761 $ 755 $ 1,203
Interest cost........................................................................ 491 581 769
Actual investment (gain) or loss on plan assets...................................... 20 (812) (610)
Net amortization and deferral........................................................ 16 774 462
--------- --------- ---------
Net periodic pension cost............................................................ $ 1,288 $ 1,298 $ 1,824
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following is a reconciliation of the funded status of the Pension Plan:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested................................................................. $ (3,700) $ (6,342)
Non-vested............................................................. (400) (617)
--------- ---------
Accumulated benefit obligation........................................... (4,100) (6,959)
Additional liability based on projected compensation levels.............. (4,841) (5,118)
--------- ---------
Projected benefit obligation............................................. (8,941) (12,077)
Plan assets at fair value................................................ 4,273 5,473
--------- ---------
Projected benefit obligation in excess of plan assets.................... (4,668) (6,604)
Unrecognized net loss (gain)............................................. (1,011) 172
Obligation recorded at acquisition date.................................. 3,135 2,861
--------- ---------
Accrued pension cost..................................................... $ (2,544) $ (3,571)
--------- ---------
--------- ---------
</TABLE>
The obligation recorded at the acquisition date of K-III Magazines and Daily
Racing Form is the excess of the projected benefit obligation over the plan
assets at the date of acquisition which is included in other non-current
liabilities. The weighted average discount rate and the weighted average rate of
compensation increases used in determining the actuarial present value of the
projected benefit obligation were 4.0% and 7.5% for 1995 and 1996, respectively.
The weighted average expected long-term rate of return on plan assets was 8.5%
for 1995 and 1996.
F-38
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
22. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. Total rent expense under operating leases was $23,996, $24,409
and $31,561 for the years ended December 31, 1994, 1995 and 1996, respectively.
Certain leases are subject to escalation clauses and certain leases contain
renewal options. Minimum rental commitments under noncancellable operating
leases are approximately as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997............................................................... $ 33,040
1998............................................................... 29,762
1999............................................................... 25,565
2000............................................................... 23,546
2001............................................................... 18,510
Thereafter......................................................... 52,340
----------
$ 182,763
----------
----------
</TABLE>
Future minimum lease payments under a capital lease (see Note 11) are
approximately as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997............................................................... $ 1,980
1998............................................................... 1,980
1999............................................................... 1,980
2000............................................................... 1,980
2001............................................................... 1,980
Thereafter......................................................... 5,275
--------
15,175
Less: amount representing interest................................. 4,593
--------
Present value of net minimum lease payments........................ 10,582
Less: current portion.............................................. 969
--------
Long-term obligations (included in other non-current
liabilities)..................................................... $ 9,613
--------
--------
</TABLE>
CONTINGENCIES. The Company is involved in ordinary and routine litigation
incidental to its business. In the opinion of management, there is no pending
legal proceeding that would have a material adverse affect on the consolidated
financial statements of the Company.
At December 31, 1996, the Company had letters of credit outstanding of
approximately $4,850.
23. RELATED PARTY TRANSACTIONS
During each of the years ended December 31, 1994, 1995 and 1996, the Company
paid $1,000 in administrative and other fees to Kohlberg Kravis Roberts & Co.
("KKR"), an affiliated party, and an aggregate of $180, in directors' fees to
certain partners of KKR. In addition, in connection with the Channel One
acquisition, the Company paid $2,500 in investment advisory fees to KKR. On
September 30, 1994, in order to finance the Channel One acquisition, the Company
issued 1,501 shares of Series C Preferred Stock ("Old Preferred Stock") at
$50,000 per share and 9,381,250 shares of common stock at
F-39
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
23. RELATED PARTY TRANSACTIONS (CONTINUED)
$8.00 per share, which was the fair value at such date, to partnerships
affiliated with KKR. Gross proceeds of $150,100 were received from these
issuances. Dividends were payable at the higher of 11 3/4% and the interest
rates associated with United States Treasury bills and notes plus applicable
margins. The Old Preferred Stock was redeemed on November 21, 1994 for $76,324
which represented a redemption price of $50,000 per share plus the accumulated
and unpaid dividends of $1,274.
On March 1, 1995, 3,125,000 shares of common stock were issued to a
partnership affiliated with KKR at $8.00 per share which was the fair value per
share at such date. On March 1, 1995, pursuant to the related certificate of
designations, 2,500 shares of Old Preferred Stock were authorized for issuance
and 1,000 shares were issued to partnerships affiliated with KKR at $50,000 per
share, which was the liquidation value per share at such date. The proceeds from
both issuances were used to pay down the borrowings under the Revolving Credit
Agreement. On August 3, 1995, the Company redeemed all 1,054 shares then
outstanding (which included dividends accrued through redemption date) of the
Old Preferred Stock at $50,000 per share for a total of $52,691. This
transaction was financed with borrowings under the Revolving Credit Agreement
(see Note 15).
24. UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1995:
Sales, net...................................... $238,664 $257,228 $265,604 $284,833 $1,046,329
Operating income (loss)......................... 4,663 (50,491) 13,130 6,423 (26,275)
Net income (loss)............................... (20,701) (78,929) (14,635) 38,830 (75,435)
Income (loss) applicable to common
shareholders.................................. (27,115) (87,009) (22,386) 32,097 (104,413)
Earnings (loss) per common and common equivalent
share......................................... $(.25) $(.78) $(.20) $.25 $(.91)
Weighted average common and common equivalent
shares outstanding............................ 109,622,179 111,371,697 110,909,810 128,406,304 115,077,498
FOR THE YEAR ENDED DECEMBER 31, 1996:
Sales, net...................................... $314,953 $335,680 $344,418 $379,398 $1,374,449
Operating income................................ 6,985 23,280 18,519 37,117 85,901
Income (loss) before extraordinary charge....... (20,740) (7,066) (11,895) 57,298 17,597
Extraordinary charge--extinguishment of debt.... -- (7,572) -- (1,981) (9,553)
Net income (loss)............................... (20,740) (14,638) (11,895) 55,317 8,044
Income (loss) applicable to common
shareholders.................................. (27,584) (27,041) (23,973) 43,116 (35,482)
Loss applicable to common shareholders per
common and common equivalent share:
Income (loss) before extraordinary charge..... $(.21) $(.15) $(.19) $.34 $(.20)
Net income (loss)............................. $(.21) $(.21) $(.19) $.32 $(.27)
Weighted average common and common equivalent
shares outstanding............................ 128,502,847 128,787,528 128,874,002 133,866,152 130,007,632
</TABLE>
F-40
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
24. UNAUDITED QUARTERLY FINANCIAL INFORMATION (CONTINUED)
The change in method of accounting for advertising costs resulted in a
decrease to operating loss or increase to operating income and a decrease to net
loss of approximately $16,000, $1,000 and $300 in the first, second and third
quarters of 1995, respectively. This accounting change decreased operating
income and net income by approximately $5,500 in the fourth quarter of 1995.
During the second quarter of 1995, the Company recorded a provision for loss on
the sales of businesses in the amount of $35,447, an aggregate write-down of
$17,958 of the carrying values of the identifiable intangible assets and
goodwill of K-III Reference and restructuring and other costs in the amount of
$14,667. In addition, in the fourth quarter of 1995, the Company recognized
income tax benefits of $59,600 and recorded a provision to write-off $5,786 of
goodwill related to a product line of Newbridge. In the fourth quarter of 1995,
the Company recorded certain catch-up adjustments to the amortization of
identifiable intangible assets and goodwill due to the receipt of independent
appraisal reports for intangible assets. For all quarters presented prior to the
initial filing of the registration statement for the November 1995 initial
public offering, the weighted average number of common stock shares outstanding
include Incremental Shares as described in Note 3.
As a result of previous bank refinancings, the Company recorded on
extraordinary charge for the write-off of $7,572 and $625 of unamortized
deferred financings costs in the second and fourth quarter of 1996,
respectively. The Company recorded an extraordinary charge for the write-off of
additional unamortized deferred financing costs and the premium paid on the
redemption of the 10 5/8% Senior Notes of $1,356 in the fourth quarter of 1996.
In addition, in the fourth quarter of 1996, the Company recognized income tax
benefits of $53,300. In the fourth quarter of 1996, the Company recorded certain
catch-up adjustments to the amortization of identifiable intangible assets and
goodwill due to the receipt of independent appraisal reports for intangible
assets.
F-41
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
25. BUSINESS SEGMENT INFORMATION
The Company's operations have been classified into three business segments:
specialty media, education and information (see Note 1). Summarized financial
information by business segment as of December 31, 1994, 1995 and 1996 and for
each of the years then ended is set forth below:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
SALES, NET:
Specialty Media.................................... $ 341,782 $ 452,373 $ 684,341
Education.......................................... 430,134 330,414 376,217
Information........................................ 192,732 263,542 313,891
----------- ----------- -----------
Total.............................................. $ 964,648 $ 1,046,329 $ 1,374,449
----------- ----------- -----------
----------- ----------- -----------
OPERATING INCOME (LOSS):
Specialty Media.................................... $ 15,877 $ 32,169 $ 59,693
Education.......................................... 10,590 (32,024) 15,011
Information........................................ (2,307) (8,683) 33,473
Corporate.......................................... (13,957) (17,737) (22,276)
----------- ----------- -----------
Total.............................................. $ 10,203 $ (26,275) $ 85,901
----------- ----------- -----------
----------- ----------- -----------
TOTAL ASSETS:
Specialty Media.................................... $ 464,626 $ 723,711 $ 908,374
Education.......................................... 613,897 547,587 939,947
Information........................................ 462,861 499,418 531,771
Corporate.......................................... 48,308 110,700 172,123
----------- ----------- -----------
Total.............................................. $ 1,589,692 $ 1,881,416 $ 2,552,215
----------- ----------- -----------
----------- ----------- -----------
DEPRECIATION, AMORTIZATION AND OTHER (1):
Specialty Media.................................... $ 54,571 $ 58,100 $ 76,281
Education.......................................... 47,258 107,284 64,228
Information........................................ 52,497 79,435 53,091
Corporate.......................................... 645 706 764
----------- ----------- -----------
Total.............................................. $ 154,971 $ 245,525 $ 194,364
----------- ----------- -----------
----------- ----------- -----------
CAPITAL EXPENDITURES:
Specialty Media.................................... $ 2,839 $ 5,737 $ 9,107
Education.......................................... 8,768 10,896 14,471
Information........................................ 4,133 6,119 4,343
Corporate.......................................... 378 2,427 1,740
----------- ----------- -----------
Total.............................................. $ 16,118 $ 25,179 $ 29,661
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- --------------------------
(1) Other includes net provision for loss on the sales of businesses, provision
for restructuring and other costs and amortization of deferred financing and
organizational costs.
There were no significant intersegment sales or transfers during 1994, 1995
and 1996. Operating income (loss) by business segment excludes interest income
and interest expense. Corporate assets consist primarily of cash, receivables,
property and equipment and the net deferred income tax asset. Depreciation,
amortization and other does not include the write-off of unamortized deferred
financing costs of $11,874 in 1994 and the premium paid on the repurchase of the
10 5/8% Senior Notes and the write-off of unamortized deferred financing costs
of $9,553 in 1996 but it does include the net provision for loss on sale of a
business of $15,025 in 1994, the net provision for loss on sales of businesses
of $35,447 in 1995 and provision for restructuring and other costs of $14,667 in
1995.
F-42
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
25. BUSINESS SEGMENT INFORMATION (CONTINUED)
The adoption of a change in method of accounting for advertising costs
resulted in an increase in operating income in 1994 for the specialty media and
education segments of approximately $3,300 ($.03 per share) and $6,500 ($.06 per
share), respectively. This change in method of accounting for advertising costs
resulted in a decrease in operating loss in 1995 for the education and
information segments of approximately $10,500 ($.09 per share) and $200,
respectively, and an increase in operating income in 1995 for the specialty
media segment of approximately $1,100 ($.01 per share) (see Note 2). In 1996,
the change in method of accounting for advertising costs was immaterial for the
education and information segments and resulted in an increase in operating
income of approximately $1,700 ($.01 per share) for the specialty media segment.
26. SUBSEQUENT EVENTS
Through September 16, 1997, the Company completed eleven product-line
acquisitions consisting of classroom learning, workplace learning, specialized
reference products, as well as specialty consumer magazines, technical and trade
magazines and apartment guides. The aggregate purchase price was approximately
$179,000.
As a part of its strategy to focus on areas of its business that have the
greatest potential for growth, the Company intends to divest certain businesses
that do not fit within its growth vehicles. Those businesses are: the DAILY
RACING FORM group which includes a national daily newspaper covering
thoroughbred horseracing and PRO FOOTBALL WEEKLY; KRAMES COMMUNICATIONS, a
leading publisher of patient information sold to healthcare providers for
distribution to patients and other healthcare users; the KATHARINE GIBBS
SCHOOLS, a chain of seven business schools; NEWBRIDGE COMMUNICATIONS, the
largest book club organization for professionals in the United States and the
largest provider of educational continuity programs in the United States; NEW
WOMAN magazine, a guide for personal relationships and careers; and STAGEBILL, a
performing arts magazine. The proceeds of these sales will be used to repay
indebtedness. These businesses represented approximately 22% of 1996 net sales
of the Company. The unaudited combined operating results for the years ended
December 31, 1994, 1995 and 1996 and total assets and liabilities at December
31, 1996 of these business units are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales, net................................................ $ 310,688 $ 307,121 $ 299,652
---------- ---------- ----------
---------- ---------- ----------
Operating income (loss)................................... $ 6,379 $ (18,186) $ (2,305)
---------- ---------- ----------
---------- ---------- ----------
Total assets (1).......................................... $ 350,736
----------
----------
Total liabilities......................................... $ 80,760
----------
----------
</TABLE>
- ------------------------
(1) At December 31, 1996, KATHARINE GIBBS SCHOOLS is reflected as an asset held
for sale in the accompanying consolidated balance sheet.
In January 1997, the Company purchased, in aggregate, $20,850 of the 10 5/8%
Senior Notes at a weighted average price of 105% of the outstanding principal
plus accrued and unpaid interest, from various brokers on the open market. In
March 1997, the Company called for redemption all of its outstanding 10 5/8%
Senior Notes. On May 1, 1997, the Company redeemed the $212,400 remaining
principal amount of the 10 5/8% Senior Notes, at 104%, plus accrued and unpaid
interest.
On April 21, 1997, the Company entered into a new 364-day credit facility
with The Bank of New York, Bankers Trust Company, The Bank of Nova Scotia and
The Chase Manhattan Bank as agents (the "New Credit Facility") which expires
April 20, 1998. Under the terms of the New Credit Facility, the Company has
commitments of $150,000 which can be borrowed in the form of revolving loans.
The proceeds of all revolving loans under the New Credit Facility can be used
for general corporate and
F-43
<PAGE>
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
26. SUBSEQUENT EVENTS (CONTINUED)
working capital purposes of the Company and its subsidiaries, including, without
limitation, the financing of permitted acquisitions.
The amounts borrowed pursuant to the New Credit Facility bear interest at
rates per annum identical to those in the Bank Credit Facilities at the
Company's option as follows: (i) the higher of (a) the Federal Funds Effective
Rate plus 1/2% and (b) the prime lending rate as in effect from time to time
(the "Base Rate"); plus in each case, an applicable margin of up to 1/8 of 1% as
specified in the New Credit Facility or (ii) the Eurodollar Rate plus an
applicable margin ranging from 1/2% to 1 1/2% as specified in the New Credit
Facility.
Under the New Credit Facility, the Company has agreed to pay commitment fees
equal to 1/8 of 1% per annum on the daily average aggregate unutilized revolving
loan commitment.
In May 1997, the Company, through its Bank Credit Facilities, solicited
commitments of $150,000 under the Tranche B Facility. The Company has the right
to solicit additional commitments of up to $100,000 under the Tranche B
Facility. The commitments under the Tranche B Facility are subject to mandatory
reductions semi-annually on June 30 and December 31 with the first reduction on
June 30, 1999 and the final reduction on June 30, 2004.
On May 30, 1997, the Company sold Katharine Gibbs pursuant to a stock
purchase agreement and received a portion of the purchase price. The sale is
subject to certain regulatory approvals and is expected to be completed by the
end of 1997.
In July 1997, the Company entered into four, three-year and two, four-year
interest rate swap agreements, with an aggregate notional amount of $600,000.
Under these new swap agreements, which commence on January 2, 1998, the Company
receives a floating rate of interest based on three-month LIBOR, which resets
quarterly, and the Company pays a fixed rate of interest, each quarter, for the
terms of the respective agreements. The weighted average fixed rate of interest
under these agreements is 6.33%.
On August 14, 1997, the Company sold NEW WOMAN magazine pursuant to an asset
purchase agreement, and on August 29, 1997, the Company sold KRAMES
COMMUNICATIONS pursuant to a stock purchase agreement. The proceeds from these
divestitures were used to repay outstanding indebtedness. The aggregate
operating results of these divestitures prior to the divestitures were not
material to the consolidated operations of the Company.
On September 9, 1997, the Company announced that its board of directors had
authorized a program for the Company to repurchase up to $15 million of its
outstanding Common Stock from time to time in the open market and through
privately negotiated transactions.
On September 16, 1997, the Company purchased a block of 523,000 shares of
Common Stock at a price of $12 1/4 per share. The shares were purchased in the
open market through the New York Stock Exchange. The purchase of these shares
was not part of the share repurchase program described in the preceding
paragraph.
On September 26, 1997, the Company completed a private offering of 1,250,000
shares of $9.20 Series E Exchangeable Preferred Stock (the "Offering") and
called for redemption all of its Senior Preferred Stock (the "Redemption"). Net
proceeds of the Offering of approximately $121,250 will be used to redeem the
4,000,000 outstanding shares of Senior Preferred Stock on November 3, 1997 at a
redemption price of $26.45 per share plus accrued and unpaid dividends to the
redemption date and to repay borrowings outstanding under its Bank Credit
Facilities, which amounts may be reborrowed for general corporate purposes
including acquisitions. Until the Redemption, the Company has used the net
proceeds from the Offering to repay borrowings under the Bank Credit Facilities.
F-44
<PAGE>
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
BY MAIL: BY FACSIMILE TRANSMISSION: BY HAND OR
OVERNIGHT
COURIER:
Tender & Exchange (For Eligible Institutions Tender &
Department Only) Exchange
P.O. Box 11248 (212) 815-6213 Department
Church Street Station 101 Braclay
New York, NY 10286-1248 CONFIRM FACSIMILE BY Street
TELEPHONE: Receive and
(For Confirmation Only) Deliver Window
(800) 507-9357 New York, NY
10286
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
K-III is a Delaware Corporation. Reference is made to Section 102(b)(7) of
the Delaware General Corporation Law (the "DGCL"), which enables a corporation
in its original certificate of incorporation or an amendment thereto to
eliminate or limit the personal liability of a director for violations of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchase or
redemptions) or (iv) for any transaction from which a director derived an
improper personal benefit.
Reference also is made to Section 145 of the DGCL, which provides that a
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer, director,
employee or agent of such corporation or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorney's fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer, director, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interest and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses that such officer or
director actually and reasonably incurred.
Article 8 of the Certificate of Incorporation of K-III provides that except
as provided under the DGCL, directors of K-III shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duties as a director. Article 4 of the By-laws of K-III provides for
indemnification of the officers and directors of K-III to the full extent
permitted by applicable law and provides for the advancement of expenses.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
4.1 --Form of 9.20% Subordinated Debenture Indenture (including form of note).
*4.2 --Form of Certificate of Designations for the New Preferred Stock.
5 --Opinion of Simpson Thacher & Bartlett regarding the legality of the securities
being registered.
8 --Opinion of Simpson Thacher & Bartlett regarding the material United States Federal
income tax consequences to holders of the securities being registered.
12 --Statement regarding computation of ratio of earnings to fixed charges.
23.1 --Consent of Deloitte & Touche LLP.
23.2 --Consent of Simpson Thacher & Bartlett (included in their opinion filed as Exhibit
5).
23.3 --Consent of Ernst & Young LLP.
24 --Powers of Attorney (included on signature pages hereto).
*25.1 --Form T-1, Statement of Eligibility and Qualification under the Trust Indenture Act
of 1939, of The Bank of New York, as Trustee for the 9.20% Subordinated Debentures.
*99.1 --Form of Letter of Transmittal and related documents to be used in connection with
the Exchange Offer.
*99.2 --Form of Notice of Guaranteed Delivery.
99.3 --Form of Exchange Agent Agreement between The Bank of New York and K-III.
99.4 --Registration Rights Agreement dated as of September 26, 1997, among K-III and the
Placement Agents.
</TABLE>
- ------------------------
* To be filed by Amendment
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
K-III Communications Corporation and Subsidiaries
For the Year Ended December 31, 1994................................................. S-1
For the Year Ended December 31, 1995................................................. S-2
For the Year Ended December 31, 1996................................................. S-3
Independent Auditors' Report on Schedules -- Deloitte & Touche LLP..................... S-4
</TABLE>
All Schedules, except those set forth above have been omitted since the
information required to be submitted has been included in the Consolidated
Financial Statements or Notes thereto or has been omitted as not applicable or
not required.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales of the
registered securities are being made, a post-effective amendment to this
registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in the volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low and high and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent
II-2
<PAGE>
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change in such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
the the initial BONA FIDE offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on October 22, 1997.
<TABLE>
<S> <C> <C>
K-III COMMUNICATIONS CORPORATION
By: /S/ BEVERLY C. CHELL
-----------------------------------------
(Beverly C. Chell)
VICE CHAIRMAN AND SECRETARY
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Beverly C. Chell and Charles G. McCurdy, and each
of them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his or her
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on October 22, 1997.
NAME TITLE
- ------------------------------ --------------------------
Chairman, Chief Executive
/S/ WILLIAM F. REILLY Officer and Director
- ------------------------------ (Principal Executive
(William F. Reilly) Officer)
/S/ CHARLES G. MCCURDY President and Director
- ------------------------------ (Principal Financial
(Charles G. McCurdy) Officer)
/S/ BEVERLY C. CHELL
- ------------------------------ Vice Chairman, Secretary
(Beverly C. Chell) and Director
/S/ CURTIS A. THOMPSON Vice President and
- ------------------------------ Controller (Principal
(Curtis A. Thompson) Accounting Officer)
- ------------------------------ Director
(Meyer Feldberg)
- ------------------------------ Director
(Henry R. Kravis)
- ------------------------------ Director
(George R. Roberts)
/S/ MICHAEL T. TOKARZ
- ------------------------------ Director
(Michael T. Tokarz)
/S/ PERRY GOLKIN
- ------------------------------ Director
(Perry Golkin)
II-4
<PAGE>
SCHEDULE II
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Accounts receivable
Allowance for doubtful accounts....... $ 28,137 $ 46,686T $ 1,686(2) $ (45,537 (3) $ 13,482
$ 1,736(1) $ (19,226 (4)
Allowance for sales returns and
rebates............................. $ 30,421 $ 142,268T $ 35(2) $ (143,644 (3) $ 23,543
495(1) $ (6,032 (4)
Inventory
Allowance for obsolescence............ $ 8,320 $ 4,519T $ 207(2) $ (4,708 (3) $ 5,138
$ 327(1) $ (3,527 (4)
Accumulated amortization
Goodwill.............................. $ 20,942 $ 9,419 -- $ (1,049 (4) $ 29,312
Other intangibles..................... $ 483,596 $ 109,752 -- $ (20,118 (4) $ 573,230
Deferred financing costs.............. $ 5,990 $ 3,080 -- $ (4,066 (3) $ 5,004
Deferred wiring and installation
costs............................... -- $ 1,505 -- $ (92 (3) $ 1,413
Prepublication and programming
costs............................... $ 4,675 $ 2,099 -- $ (42 (3) $ 6,732
Direct-response advertising costs....... -- $ 5,251 -- $ (2,125 (4) $ 3,126
</TABLE>
- ------------------------
Notes:
(1) Increases in related valuation account result from acquisitions.
(2) Increases in related valuation account result from the recovery of amounts
previously written off.
(3) Deductions from related valuation account result from write-offs and actual
returns.
(4) Deductions from related valuation account result from reclassifications and
write-offs related to net assets held for sale.
S-1
<PAGE>
SCHEDULE II
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------ ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Accounts receivable $ 1,195(1) $ (20,526)(3) $ 14,364
Allowance for doubtful accounts......... $ 13,482 $ 19,276T $ 937(2)
Allowance for sales returns and $ 663(2) $ (82,072)(3) $ 23,015
rebates............................... $ 23,543 $ 80,859T 22(2)
Inventory
$ 622(1) $ (1,463)(3) $ 7,129
Allowance for obsolescence.............. $ 5,138 $ 2,662T $ 170(2)
Accumulated amortization
Goodwill................................ $ 29,312 $ 37,572 $ 5(2) -- $ 66,889
Other intangibles....................... $ 573,230 $ 122,609 -- $ (335)(3) $ 695,504
Deferred financing costs................ $ 5,004 $ 3,135 -- -- $ 8,139
Deferred wiring and installation
costs................................. $ 1,413 $ 6,334 -- $ (584)(3) $ 7,163
Prepublication and programming costs.... $ 6,732 $ 1,954 -- $ (4,565)(3) $ 4,121
Direct-response advertising costs......... $ 3,126 $ 28,774 -- $ (2,331)(3) $ 29,569
</TABLE>
- ------------------------
Notes:
(1) Increases in related valuation account result from acquisitions.
(2) Increases in related valuation account result from the recovery of amounts
previously written off.
(3) Deductions from related valuation account result from write-offs and actual
returns.
S-2
<PAGE>
SCHEDULE II
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------- ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Accounts receivable
Allowance for doubtful accounts....... $ 14,364 $ 21,438l $ 62(1) $ (21,069 (3) $ 15,418
m $ 970(2)
n $ (347)(4)
Allowance for sales return and
rebates............................. $ 23,015 $ 79,819 $ -- $ (78,736 (3) $ 24,098
Inventory
Allowance for obsolescence............ $ 7,129 $ 4,423 $ 279(2) $ (3,128 (3) $ 8,703
Accumulated amortization
Goodwill.............................. $ 66,889 $ 23,576 $ (640)(4) $ (7,062 (3) $ 82,763
Other intangibles..................... $ 695,504 $ 122,140 $ (2,932)(4) $ (651 (3) $ 814,061
Deferred financing costs.............. $ 8,139 $ 3,662 -- $ (2,007 (3) $ 9,794
Deferred wiring and installation
costs............................... $ 7,163 $ 6,753 -- $ (1,066 (3) $ 12,850
Prepublication and programming
costs............................... $ 4,121 $ 2,847 -- $ (2,116 (3) $ 4,852
Direct-response advertising costs..... $ 29,569 $ 41,481 -- $ (389 (3) $ 70,661
</TABLE>
- ------------------------
Notes:
(1) Increases in related valuation account result from acquisitions.
(2) Increases in related valuation account result from the recovery of amounts
previously written off.
(3) Deductions from related valuation account result from write-offs and actual
returns.
(4) Deductions from related valuation account result from reclassifications and
write-offs related to net assets held for sale.
S-3
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Shareholders and Board of Directors of
K-III Communications Corporation
New York, New York:
We have audited the consolidated balance sheets of K-III Communications
Corporation and subsidiaries as of December 31, 1995 and 1996, and the related
statements of consolidated operations, consolidated cash flows and shareholders'
equity for each of the three years in the period ended December 31, 1996, and
have issued our report thereon dated January 29, 1997 (September 26, 1997 as to
Note 26) (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedules of K-III Communications Corporation
and subsidiaries, listed in Item 21. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
January 29, 1997
(September 26, 1997 as to Note 26)
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT
- --------------- -------------------------------------------------------------------------------------------------
<C> <S>
4.1 --Form of 9.20% Subordinated Debenture Indenture (including form of note).
*4.2 --Form of Certificate of Designations for the New Preferred Stock.
5 --Opinion of Simpson Thacher & Bartlett regarding the legality of the securities being
registered.
8 --Opinion of Simpson Thacher & Bartlett regarding the material United States Federal income tax
consequences to holders of the securities being registered.
12 --Statement regarding computation of ratio of earnings to fixed charges.
23.1 --Consent of Deloitte & Touche LLP.
23.2 --Consent of Simpson Thacher & Bartlett (included in their opinion filed as Exhibit 5).
23.3 --Consent of Ernst & Young LLP.
24 --Powers of Attorney (included on signature pages hereto).
*25.1 --Form T-1, Statement of Eligibility and Qualification under the Trust Indenture Act of 1939, of
The Bank of New York, as Trustee for the 9.20% Subordinated Debentures.
*99.1 --Form of Letter of Transmittal and related documents to be used in connection with the Exchange
Offer.
*99.2 --Form of Notice of Guaranteed Delivery.
99.3 --Form of Exchange Agent Agreement between The Bank of New York and K-III.
99.4 --Registration Rights Agreement, dated as of September 26, 1997, among K-111 and the Placement
Agents.
</TABLE>
* To be filed by Amendment
<PAGE>
Exhibit 4.1
================================================================================
K-III COMMUNICATIONS CORPORATION
$125,000,000
Form of 9.20% Subordinated Exchange Debentures due 2009
Class E and Class F
_____________
INDENTURE
Dated as of _______ __, ____
_____________
THE BANK OF NEW YORK
Subordinated Debenture Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
----------- -----------------
310(a)(1). . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2). . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3). . . . . . . . . . . . . . . . . . . . . . . N.A.
(a)(4). . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . 7.08;7.10;
(b) . . . . . . . . . . . . . . . . . . . . . . . . 11.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . N.A.
311(a) . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . N.A.
312(a) . . . . . . . . . . . . . . . . . . . . . . . . 2.05
(b) . . . . . . . . . . . . . . . . . . . . . . . . 11.03
(c) . . . . . . . . . . . . . . . . . . . . . . . . 11.03
313(a) . . . . . . . . . . . . . . . . . . . . . . . . 7.06
(b)(1). . . . . . . . . . . . . . . . . . . . . . . N.A.
(b)(2). . . . . . . . . . . . . . . . . . . . . . . 7.06
(c) . . . . . . . . . . . . . . . . . . . . . . . . 7.06;11.02
(d) . . . . . . . . . . . . . . . . . . . . . . . . 7.06
314(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.03;11.02
(b) . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(c)(1). . . . . . . . . . . . . . . . . . . . . . . 11.04
(c)(2). . . . . . . . . . . . . . . . . . . . . . . 11.04
(c)(3). . . . . . . . . . . . . . . . . . . . . . . N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . . 11.05
(f) . . . . . . . . . . . . . . . . . . . . . . . . N.A.
315(a) . . . . . . . . . . . . . . . . . . . . . . . . 7.01(2)
(b) . . . . . . . . . . . . . . . . . . . . . . . . 7.05;11.02
(c) . . . . . . . . . . . . . . . . . . . . . . . . 7.01(1)
(d) . . . . . . . . . . . . . . . . . . . . . . . . 7.01(3)
(e) . . . . . . . . . . . . . . . . . . . . . . . . 6.11
316(a)(last sentence). . . . . . . . . . . . . . . . . 2.09
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . 6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . 6.04
(a)(2). . . . . . . . . . . . . . . . . . . . . . . N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . 6.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . 9.04
317(a)(1). . . . . . . . . . . . . . . . . . . . . . . 6.08
(a)(2). . . . . . . . . . . . . . . . . . . . . . . 6.09
(b) . . . . . . . . . . . . . . . . . . . . . . . . 2.04
318(a) . . . . . . . . . . . . . . . . . . . . . . . . 11.01
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01 DEFINITIONS............................................... 1
SECTION 1.02 OTHER DEFINITIONS......................................... 8
SECTION 1.03 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT......... 8
SECTION 1.04 RULES OF CONSTRUCTION..................................... 9
ARTICLE 2
THE SECURITIES
SECTION 2.01 FORM AND DATING........................................... 9
SECTION 2.02 EXECUTION AND AUTHENTICATION.............................. 10
SECTION 2.03 REGISTRAR AND PAYING AGENT................................ 11
SECTION 2.04 PAYING AGENT TO HOLD MONEY IN TRUST....................... 11
SECTION 2.05 HOLDER LISTS.............................................. 12
SECTION 2.06 TRANSFER AND EXCHANGE..................................... 12
SECTION 2.07 REPLACEMENT SECURITIES.................................... 23
SECTION 2.08 OUTSTANDING SECURITIES.................................... 23
SECTION 2.09 TREASURY SECURITIES....................................... 24
SECTION 2.10 TEMPORARY SECURITIES...................................... 24
SECTION 2.11 CANCELLATION.............................................. 24
SECTION 2.12 DEFAULTED INTEREST........................................ 24
SECTION 2.13 CUSIP NUMBERS............................................. 24
ARTICLE 3
OPTIONAL REDEMPTION, OPTIONAL REDEMPTION UPON CHANGE OF
CONTROL AND
SECTION 3.01 NOTICES TO SUBORDINATED DEBENTURE TRUSTEE................. 25
SECTION 3.02 SELECTION OF SECURITIES TO BE REDEEMED.................... 25
SECTION 3.03 NOTICES TO HOLDERS........................................ 26
SECTION 3.04 EFFECT OF NOTICE OF REDEMPTION............................ 26
SECTION 3.05 DEPOSIT OF REDEMPTION PRICE OR PURCHASE PRICE............. 27
SECTION 3.06 SECURITIES REDEEMED IN PART............................... 27
SECTION 3.07 OPTIONAL REDEMPTION....................................... 27
SECTION 3.08 OPTIONAL REDEMPTION UPON CHANGE OF CONTROL................ 28
ARTICLE 4
COVENANTS
SECTION 4.01 PAYMENT OF SECURITIES..................................... 28
SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY........................... 28
SECTION 4.03 SEC REPORTS; FINANCIAL STATEMENTS......................... 29
SECTION 4.04 COMPLIANCE CERTIFICATE.................................... 30
SECTION 4.05 COMPLIANCE WITH LAWS, TAXES............................... 30
i
<PAGE>
Page
SECTION 4.06 STAY, EXTENSION AND USURY LAWS............................ 31
SECTION 4.07 LIMITATIONS ON RESTRICTED PAYMENTS........................ 31
SECTION 4.08 CHANGE OF CONTROL......................................... 31
SECTION 4.09 TRANSACTIONS WITH AFFILIATES.............................. 33
SECTION 4.10 CORPORATE EXISTENCE....................................... 33
SECTION 4.11 RULE 144A INFORMATION REQUIREMENT......................... 34
ARTICLE 5
SUCCESSORS
SECTION 5.01 MERGER, CONSOLIDATION, OR SALE OF ASSETS.................. 34
SECTION 5.02 SUCCESSOR CORPORATION SUBSTITUTED......................... 34
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01 EVENTS OF DEFAULT......................................... 35
SECTION 6.02 ACCELERATION.............................................. 36
SECTION 6.03 OTHER REMEDIES............................................ 37
SECTION 6.04 WAIVER OF PAST DEFAULTS................................... 37
SECTION 6.05 CONTROL BY MAJORITY....................................... 37
SECTION 6.06 LIMITATIONS ON SUITS...................................... 37
SECTION 6.07 RIGHTS OF HOLDERS TO RECEIVE PAYMENT...................... 38
SECTION 6.08 COLLECTION SUIT BY SUBORDINATED DEBENTURE TRUSTEE......... 38
SECTION 6.09 SUBORDINATED DEBENTURE TRUSTEE MAY FILE PROOFS OF
CLAIM..................................................... 38
SECTION 6.10 PRIORITIES................................................ 39
SECTION 6.11 UNDERTAKING FOR COSTS..................................... 39
ARTICLE 7
SUBORDINATED DEBENTURE TRUSTEE
SECTION 7.01 DUTIES OF SUBORDINATED DEBENTURE TRUSTEE.................. 39
SECTION 7.02 RIGHTS OF SUBORDINATED DEBENTURE TRUSTEE.................. 41
SECTION 7.03 INDIVIDUAL RIGHTS OF SUBORDINATED DEBENTURE TRUSTEE....... 41
SECTION 7.04 SUBORDINATED DEBENTURE TRUSTEE'S DISCLAIMER............... 41
SECTION 7.05 NOTICE OF DEFAULTS........................................ 41
SECTION 7.06 REPORTS BY SUBORDINATED DEBENTURE TRUSTEE TO HOLDERS...... 42
SECTION 7.07 COMPENSATION AND INDEMNITY................................ 42
SECTION 7.08 REPLACEMENT OF SUBORDINATED DEBENTURE TRUSTEE............. 43
SECTION 7.09 SUCCESSOR SUBORDINATED DEBENTURE TRUSTEE BY MERGER, ETC... 44
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION............................. 44
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY......... 44
ARTICLE 8
DISCHARGE OF INDENTURE
SECTION 8.01 TERMINATION OF COMPANY'S OBLIGATIONS...................... 44
SECTION 8.02 APPLICATION OF TRUST MONEY................................ 46
ii
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Page
SECTION 8.03 REPAYMENT TO COMPANY...................................... 46
SECTION 8.04 REINSTATEMENT............................................. 46
ARTICLE 9
AMENDMENTS
SECTION 9.01 WITHOUT CONSENT OF HOLDERS................................ 47
SECTION 9.02 WITH CONSENT OF HOLDERS................................... 47
SECTION 9.03 COMPLIANCE WITH TRUST INDENTURE ACT....................... 48
SECTION 9.04 REVOCATION AND EFFECT OF CONSENTS......................... 48
SECTION 9.05 NOTATION ON OR EXCHANGE OF SECURITIES..................... 49
SECTION 9.06 SUBORDINATED DEBENTURE TRUSTEE TO SIGN AMENDMENTS, ETC.... 49
ARTICLE 10
SUBORDINATION
SECTION 10.01 AGREEMENT TO SUBORDINATE................................. 50
SECTION 10.02 CERTAIN DEFINITIONS...................................... 50
SECTION 10.03 LIQUIDATION; DISSOLUTION; BANKRUPTCY..................... 50
SECTION 10.04 DEFAULT ON SENIOR DEBT................................... 51
SECTION 10.05 ACCELERATION OF SECURITIES............................... 51
SECTION 10.06 WHEN DISTRIBUTION MUST BE PAID OVER...................... 51
SECTION 10.07 NOTICE BY COMPANY........................................ 52
SECTION 10.08 SUBROGATION.............................................. 52
SECTION 10.09 RELATIVE RIGHTS.......................................... 52
SECTION 10.10 SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY............. 52
SECTION 10.11 DISTRIBUTION OR NOTICE TO REPRESENTATIVE................. 53
SECTION 10.12 RIGHTS OF SUBORDINATED DEBENTURE TRUSTEE AND PAYING
AGENT.................................................... 53
SECTION 10.13 AUTHORIZATION TO EFFECT SUBORDINATION.................... 53
ARTICLE 11
MISCELLANEOUS
SECTION 11.01 TRUST INDENTURE ACT CONTROLS............................. 53
SECTION 11.02 NOTICES.................................................. 54
SECTION 11.03 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.............. 55
SECTION 11.04 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT....... 55
SECTION 11.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION............ 56
SECTION 11.06 RULES BY SUBORDINATED DEBENTURE TRUSTEE AND AGENTS....... 56
SECTION 11.07 LEGAL HOLIDAYS........................................... 56
SECTION 11.08 NO RECOURSE AGAINST OTHERS............................... 56
SECTION 11.09 GOVERNING LAW............................................ 56
SECTION 11.10 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS............ 57
SECTION 11.11 SUCCESSORS............................................... 57
SECTION 11.12 SEVERABILITY............................................. 57
SECTION 11.13 COUNTERPART ORIGINALS.................................... 57
SECTION 11.14 SUBORDINATED DEBENTURE TRUSTEE AS PAYING AGENT AND
REGISTRAR................................................ 57
SECTION 11.15 TABLE OF CONTENTS, HEADINGS, ETC......................... 57
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SECTION 11.16 THE BANK OF NEW YORK NOT ACTING IN INDIVIDUAL CAPACITY... 57
SECTION 11.17 ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED
SECURITIES............................................... 57
SIGNATURES ................................................................ 47
Exhibit A Form of Security................................................ A-1
Exhibit B Certificate to be Delivered Upon Exchange or Registration of
Transfer of Securities.......................................... B-1
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INDENTURE dated as of _______ __, ____, between K-III Communications
Corporation, a Delaware corporation, and The Bank of New York, a New York
banking corporation, (the "Subordinated Debenture Trustee").
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders (as defined below) of 9.20%
Class E Subordinated Exchange Debentures due 2009 and 9.20% Class F Subordinated
Debentures due 2009 (collectively, the "Securities") issued by the Company (as
defined below):
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01 DEFINITIONS
"144A GLOBAL NOTE" means the global note in the form of Exhibit A-1
hereto bearing the Global Note Legend and the Private Placement Legend and
deposited with and registered in the name of the Depositary or its nominee that
will be issued in a denomination equal to the outstanding principal amount of
the Securities sold in reliance on Rule 144A.
"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.
"AGENT" means any Registrar or Paying Agent.
"APPLICABLE DEBENTURE MAKE-WHOLE PREMIUM" means, with respect to a
Security at any time, the greater of (i) 1.0% of the principal amount of such
Security at such time and (ii) the excess of (A) the present value at such time
of the principal amount plus all interest payments due on such Security,
computed using a discount rate equal to the Treasury Rate plus 75 basis points,
over (B) the principal amount of such Security at such time.
"APPLICABLE CHANGE OF CONTROL PREMIUM" with respect to any Security is
defined as the greater of (i) 1.0% of the then outstanding principal amount
thereof and (ii) the excess of (A) the present value of the required interest
and principal payments due thereon, computed using a discount rate equal to the
Treasury Rate plus 75 basis points, over (B) the then outstanding principal
amount of thereof.
"APPLICABLE PROCEDURES" means, with respect to any transfer or
exchange of or for beneficial interests in any Global Note, the rules and
procedures of the Depositary, Euroclear and Cedel that apply to such transfer or
exchange.
"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.
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"BANKRUPTCY LAW" means Title 11 of the U.S. Code or any similar
federal or state law for the relief of debtors.
"BOARD OF DIRECTORS" means the Board of Directors of the Company or
any authorized committee of the Board of Directors of the Company.
"BUSINESS DAY" means any day other than a Legal Holiday (as defined
below).
"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 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.
"CEDEL" means Cedel Bank, societe anonyme.
"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 the Company and (B) the
total voting power of the then outstanding voting stock of the Company
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 the Company's Board of Directors (together with any new directors
whose election by the Company's Board of Directors or whose nomination for
election by the Company'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.
"CLASS B SUBORDINATED EXCHANGE DEBENTURES" means the 115/8% Class B
Subordinated Exchange Debentures due 2005.
"CLASS D SUBORDINATED EXCHANGE DEBENTURES" means the 10% Class D
Subordinated Exchange Debentures due 2008.
"CLASS E SUBORDINATED EXCHANGE DEBENTURES" means the 9.20% Class E
Subordinated Exchange Debentures due 2009 described above and issued under this
Indenture.
"CLASS F SUBORDINATED EXCHANGE DEBENTURES" means the 9.20% Class F
Subordinated Exchange Debentures due 2009 that may be issued in the Exchange
Offer.
"COMMON STOCK" means the common stock, par value $.01 per share, of
the Company.
"COMPANY" means (i) K-III Communications Corporation, a Delaware
corporation and (ii) any successor of K-III Communications Corporation pursuant
to Article 5 hereof.
"CONSOLIDATED NET WORTH" means, for purposes of this 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 Company and
its Subsidiaries on a consolidated basis, less amounts attributable to
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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.
"CORPORATE TRUST OFFICE OF THE SUBORDINATED DEBENTURE TRUSTEE" shall
be at either the address of the Subordinated Debenture Trustee specified in
Section 11.02 or such other address as the Subordinated Debenture Trustee may
give notice to the Company.
"CREDIT FACILITIES" means, collectively, the $1.4 billion credit
facilities and the $150 million credit facility with The Chase Manhattan Bank,
The Bank of New York, Bankers Trust Company and The Bank of Nova Scotia, as
agents, 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.
"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.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
"DEFINITIVE NOTE" means a certificated Note registered in the name of
the Holder thereof and issued in accordance with Section 2.06 hereof, in the
form of Exhibit A-1 hereto except that such Note shall not bear the Global Note
Legend and shall not have the "Schedule of Exchanges of Interests in the Global
Note" attached thereto.
"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.
"DEPOSITARY" means, with respect to the Securities issuable or issued
in whole or in part in global form, the Person specified in Section 2.03 hereof
as the Depositary with respect to the Securities, and any and all successors
thereto appointed as depositary hereunder and having become such pursuant to the
applicable provision of this Indenture.
"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).
"EUROCLEAR" means Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear system.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE DEBENTURES" means the 111/2% Exchange Debentures due 2004 of
the Company issued under the Exchange Debenture Indenture.
"EXCHANGE DEBENTURE INDENTURE" means that certain Indenture to be
dated as of the date of first issuance of the Exchange Debentures, between the
Company and Chemical Bank, as Trustee, as amended or modified from time to time.
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"EXCHANGE OFFER" means the offer which may be made by the Company
pursuant to the Registration Rights Agreement to exchange Class F Subordinated
Exchange Debentures for then outstanding Class E Subordinated Exchange
Debentures.
"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 this Indenture.
"GLOBAL NOTES" means, individually and collectively, each of the
Restricted Global Notes and the Unrestricted Global Notes, in the form of
Exhibit A-1 hereto issued in accordance with Section 2.01, 2.06(b)(iv),
2.06(d)(ii) or 2.06(f) hereof.
"GLOBAL NOTE LEGEND" means the legend set forth in Section
2.06(g)(ii), which is required to be placed on all Global Notes issued under
this Indenture.
"HOLDER" means a Person in whose name a Security is registered.
"INDEBTEDNESS" of any Person means 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 this
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 Indebtedness
secured. For the purpose of determining the aggregate Indebtedness of the
Company and its Restricted Subsidiaries, such Indebtedness shall exclude the
Indebtedness of any Unrestricted Subsidiary of the Company or any Unrestricted
Subsidiary of a Restricted Subsidiary.
"INDENTURE" means this Indenture as amended from time to time.
4
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"INDIRECT PARTICIPANT" means a Person who holds a beneficial interest
in a Global Note through a Participant.
"INSTITUTIONAL ACCREDITED INVESTOR" means an institution that is an
"accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act.
"INTEREST PAYMENT DATE" has the meaning assigned to such term in the
Security.
"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.
"KKR" means Kohlberg Kravis Roberts & Co., L.P.
"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).
"LETTER OF TRANSMITTAL" means the letter of transmittal to be prepared
by the Company and sent to all Holders of the Securities for use by such Holders
in connection with the Exchange Offer.
"LIQUIDATED DAMAGES" means all unpaid liquidated damages owing by the
Company pursuant to Section 5 of the Registration Rights Agreement.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICERS" means the President, the Treasurer, any Assistant
Treasurer, Controller, Secretary or any Vice President of the Company, as
applicable.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers,
one of whom must be the Company's principal executive officer, principal
financial officer or principal accounting officer.
"OPINION OF COUNSEL" means a written opinion prepared in accordance
with Section 11.05 hereof, from legal counsel who is acceptable to the
Subordinated Debenture Trustee. The counsel may be an employee of or counsel to
the Company, if applicable, or the Subordinated Debenture Trustee.
"PARTICIPANT" means, with respect to DTC, Euroclear or Cedel, a Person
who has an account with DTC, Euroclear or Cedel, respectively (and, with respect
to DTC, shall include Euroclear and Cedel).
"PERSON" means any individual, corporation, partnership, joint
venture, incorporated or unincorporated association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
"PLACEMENT AGENTS" means Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Salomon Brothers Inc.
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"PRIVATE PLACEMENT LEGEND" means the legend set forth in Section
2.06(g)(i) to be placed on all Securities issued under this Indenture except
where otherwise permitted by the provisions of this Indenture.
"PUBLIC EQUITY OFFERING" means an underwritten public offering of
primary shares of the Company's common stock (or any other class of common stock
hereinafter duly authorized by the Company) pursuant to a registration statement
(other than a registration statement on form S-8 or S-4 or successor forms)
filed with the SEC in accordance with the Securities Act.
"REDEEMABLE STOCK" means any Equity Interest issued after September
22, 1997 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
Securities), or upon the happening of any event, matures or is mandatorily
redeemable, in whole or in part, prior to the stated maturity of the Securities,
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 Securities.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement dated September 26, 1997, between the Placement Agents and the
Company, as such agreement may be amended, modified or supplemented from time to
time.
"REGULATION S PERMANENT GLOBAL NOTE" means a permanent Global Note in
the form of Exhibit A-1 hereto bearing the Global Note Legend and the Private
Placement Legend and deposited with or on behalf of and registered in the name
of the Depositary or its nominee, issued in a denomination equal to the
outstanding principal amount of the Regulation S Temporary Global Note upon
expiration of the Restricted Period.
"REGULATION S TEMPORARY GLOBAL NOTE" means a temporary global Note in
the form of Exhibit A-2 hereto bearing the Private Placement Legend and
deposited with or on behalf of and registered in the name of the Depositary or
its nominee, issued in a denomination equal to the outstanding principal amount
of the Securities initially sold in reliance on Rule 903 of Regulation S.
"RESTRICTED DEFINITIVE NOTE" means a Definitive Note bearing the
Private Placement Legend.
"RESTRICTED GLOBAL NOTE" means a Global Note bearing the Private
Placement Legend.
"RESTRICTED PERIOD" means the 40-day restricted period as defined in
Regulation S.
"RESTRICTED SUBSIDIARY" means, for the purposes of this Indenture, a
Subsidiary of the Company 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.
"SEC" means the Securities and Exchange Commission.
"SECURITIES" means the Securities described above issued under this
Indenture.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"81/2% SENIOR NOTES" means the 81/2% Senior Notes due 2006 of the
Company issued under the 81/2% Senior Note Indenture.
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"81/2% SENIOR NOTE INDENTURE" means that certain Indenture dated as of
January 24, 1996, among the Company, the corporations listed on Schedule I
thereto and The Bank of New York, as Trustee, as amended or modified from time
to time.
"101/4% SENIOR NOTES" means the 101/4% Senior Notes due 2004 of the
Company issued under the 101/4% Senior Note Indenture.
"101/4% SENIOR NOTE INDENTURE" means that certain Indenture dated as
of May 31, 1994, among the Company, the corporations listed on Schedule I
thereto and Bankers Trust Company, as Trustee, as amended or modified from time
to time.
"SENIOR NOTES" means the 81/2% Senior Notes and the 101/4% Senior
Notes.
"SENIOR NOTE INDENTURES" means the 81/2% Senior Note Indenture and the
101/4% Senior Note Indenture.
"SUBORDINATED DEBENTURE TRUSTEE" means the party named as such above
until a successor replaces it in accordance with the applicable provisions of
this Indenture and thereafter means the successor serving hereunder.
"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.
"TIA" means the Trust Indenture Act of 1939, as amended (15 U.S.C.
Sections 77aaa-77bbbb).
"TRANSFER RESTRICTED SECURITIES" means Securities that bear or are
required to bear the legend set forth in Section 2.06(b) hereof.
"TREASURY RATE," for the purposes of this 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 Securities; PROVIDED that if the Average Life of the Securities 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.
"TRUST OFFICER" means any officer or assistant officer of the
Subordinated Debenture Trustee assigned by the Subordinated Debenture Trustee to
administer this Indenture.
"UNRESTRICTED GLOBAL NOTE" means a permanent Global Note in the form
of Exhibit A-1 attached hereto that bears the Global Note Legend and that has
the "Schedule of Exchanges of Interests in the Global Note" attached thereto,
and that is deposited with or on behalf of and registered in the name of the
Depositary, representing a series of Securities that do not bear the Private
Placement Legend.
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"UNRESTRICTED DEFINITIVE NOTE" means one or more Definitive Notes that
do not bear and are not required to bear the Private Placement Legend.
"UNRESTRICTED SUBSIDIARY" means, for the purposes of this Indenture,
(i) any Subsidiary of the Company 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 the Company (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 the Company 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 the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary.
"U.S. GOVERNMENT OBLIGATIONS" means direct noncallable obligations of
or guaranteed by the United States of America.
SECTION 1.02 OTHER DEFINITIONS
Defined in
Term Section
---- -------
"Affiliate Transaction". . . . . . . . 4.09
"Change of Control Offer". . . . . . . 4.08
"Change of Control Payment". . . . . . 4.08
"Change of Control Payment Date" . . . 4.08
"Legal Holiday". . . . . . . . . . . . 11.07
"Paying Agent" . . . . . . . . . . . . 2.03
"Registrar". . . . . . . . . . . . . . 2.03
"Representative" . . . . . . . . . . . 10.02
"Restricted Payments". . . . . . . . . 4.07
"Senior Debt". . . . . . . . . . . . . 10.02
"Successor". . . . . . . . . . . . . . 5.01
SECTION 1.03 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"INDENTURE SECURITIES" means the Security;
"INDENTURE SECURITY HOLDER" means a Holder;
"INDENTURE TO BE QUALIFIED" means this Indenture;
"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Subordinated
Debenture Trustee;
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"OBLIGOR" on the Security means the Company, any other obligor upon
the Security or any successor obligor upon the Security.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
SECTION 1.04 RULES OF CONSTRUCTION
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural
include the singular; and
(5) provisions apply to successive events and transactions.
ARTICLE 2
THE SECURITIES
SECTION 2.01 FORM AND DATING
The Class E Subordinated Exchange Debentures and the Subordinated
Debenture Trustee's certificate of authentication shall be substantially in the
form of Exhibit A-1 to this Indenture. The Class F Subordinated Exchange
Debentures shall be substantially in the form of Exhibit A-1 to this Indenture
but shall not include the Private Placement Legend. The Securities may have
notations, legends or endorsements required by law, stock exchange rules or
usage. Each Security shall be dated the date of its authentication. The
Securities shall be in denominations of $1,000 and integral multiples thereof;
PROVIDED, HOWEVER, that in connection with the payment of interest with respect
to the Securities in additional Securities and the original issuance of
Securities hereunder in exchange for shares of the Company's 9.20% Series E
Exchangeable Preferred Stock Redeemable 2009, the Company shall pay any amount
remaining after issuance of Securities in denominations of $1,000 and/or
integral multiples thereof, in cash.
The terms and provisions contained in the Securities shall constitute,
and are hereby expressly made, a part of this Indenture and, to the extent
applicable, the Company and the Subordinated Debenture Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby. However, to the extent any provision of the
Security conflicts with the express provisions of this Indenture, the provisions
of this Indenture shall govern and be controlling.
The Securities issued in global form shall be substantially in the
form of Exhibits A-1 or A-2 attached hereto (including the Global Note Legend
and the "Schedule of Exchanges in the Global Note" attached thereto). The
Securities issued in definitive form shall be substantially in the form of
Exhibit A-1 attached hereto (but without the Global Note Legend and without the
"Schedule of Exchanges of Interests
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in the Global Note" attached thereto). Each Global Note shall represent such of
the outstanding Securities as shall be specified therein and each shall provide
that it shall represent the aggregate principal amount of outstanding Securities
from time to time endorsed thereon and that the aggregate principal amount of
outstanding Securities represented thereby may from time to time be reduced or
increased, as appropriate, to reflect exchanges and redemptions. Any
endorsement of a Global Note to reflect the amount of any increase or decrease
in the aggregate principal amount of outstanding Securities represented thereby
shall be made by the Subordinated Debenture Trustee, in accordance with
instructions given by the Holder thereof as required by Section 2.06 hereof.
The Securities offered and sold in reliance on Regulation S shall be
issued initially in the form of the Regulation S Temporary Global Note, which
shall be deposited on behalf of the purchasers of the Securities represented
thereby with the Subordinated Debenture Trustee, at its New York office, as
custodian for the Depositary, and registered in the name of the Depositary or
the nominee of the Depositary for the accounts of designated agents holding on
behalf of Euroclear or Cedel, duly executed by the Company and authenticated by
the Subordinated Debenture Trustee as hereinafter provided. The Restricted
Period shall be terminated upon the receipt by the Subordinated Debenture
Trustee of (i) a written certificate from the Depositary, together with copies
of certificates from Euroclear and Cedel certifying that they have received
certification of non-United States beneficial ownership of 100% of the aggregate
principal amount of the Regulation S Temporary Global Note (except to the extent
of any beneficial owners thereof who acquired an interest therein during the
Restricted Period pursuant to another exemption from registration under the
Securities Act and who will take delivery of a beneficial ownership interest in
a 144A Global Note bearing a Private Placement Legend, all as contemplated by
Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the Company.
Following the termination of the Restricted Period, beneficial interests in the
Regulation S Temporary Global Note shall be exchanged for beneficial interests
in Regulation S Permanent Global Notes pursuant to the Applicable Procedures.
Simultaneously with the authentication of Regulation S Permanent Global Notes,
the Subordinated Debenture Trustee shall cancel the Regulation S Temporary
Global Note. The aggregate principal amount of the Regulation S Temporary
Global Note and the Regulation S Permanent Global Notes may from time to time be
increased or decreased by adjustments made on the records of the Subordinated
Debenture Trustee and the Depositary or its nominee, as the case may be, in
connection with transfers of interest as hereinafter provided.
The Securities offered and sold to Institutional Accredited Investors
shall be issued in definitive forM only. In no event shall Institutional
Accredited Investors hold the Securities in global form.
The provisions of the "Operating Procedures of the Euroclear System"
and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and
Conditions of Cedel Bank" and "Customer Handbook" of Cedel shall be applicable
to transfers of beneficial interests in the Regulation S Temporary Global Note
and the Regulation S Permanent Global Notes that are held by the Participants
through Euroclear or Cedel Bank.
SECTION 2.02 EXECUTION AND AUTHENTICATION
Two Officers shall sign the Securities for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Securities
and may be in facsimile form.
If an Officer whose signature is on a Security no longer holds that
office at the time the Security is authenticated, the Security shall
nevertheless be valid.
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A Security shall not be valid until authenticated by the manual
signature of the Subordinated Debenture Trustee. Such signature shall be
conclusive evidence that the Security has been authenticated under this
Indenture.
The Subordinated Debenture Trustee shall authenticate Securities for
original issue up to the aggregate principal amount stated in paragraph 4 of the
Securities, upon a written order of the Company signed by an Officer to a Trust
Officer of the Subordinated Debenture Trustee. The aggregate principal amount
of Securities outstanding at any time may not exceed such amount except as
provided in Section 2.07 hereof.
The Subordinated Debenture Trustee may appoint an authenticating agent
acceptable to the Company to authenticate Securities. An authenticating agent
may authenticate Securities whenever the Subordinated Debenture Trustee may do
so. Each reference in this Indenture to authentication by the Subordinated
Debenture Trustee includes authentication by such agent. An authenticating
agent has the same rights as an Agent to deal with the Company or an Affiliate
of the Company.
SECTION 2.03 REGISTRAR AND PAYING AGENT
The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange ("Registrar") and an
office or agency where Securities may be presented for payment ("Paying
Agent"). The Registrar shall keep a register of the Securities and of their
transfer and exchange. The Company may appoint one or more co-registrars and
one or more additional paying agents. The term "Registrar" includes any
co-registrar and the term "Paying Agent" includes any additional paying agent.
The Company may change any Paying Agent or Registrar without notice to any
Holder. The Company shall notify the Subordinated Debenture Trustee in writing
of the name and address of any Agent not a party to this Indenture. If the
Company fails to appoint or maintain another entity as Registrar or Paying
Agent, the Subordinated Debenture Trustee shall act as such. The Company or any
of its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company ("DTC") to
act as Depositary with respect to the Global Notes.
The Company initially appoints the Subordinated Debenture Trustee to
act as the Registrar and Paying Agent and to act as Note Custodian with respect
to the Global Notes.
SECTION 2.04 PAYING AGENT TO HOLD MONEY IN TRUST
The Company shall require each Paying Agent other than the
Subordinated Debenture Trustee to agree in writing that the Paying Agent will
hold in trust for the benefit of Holders or the Subordinated Debenture Trustee
all money held by the Paying Agent for the payment of principal, premium or
Liquidated Damages, if any, or interest on the Securities, and will notify the
Subordinated Debenture Trustee of any default by the Company in making any such
payment. While any such default continues, the Subordinated Debenture Trustee
may require a Paying Agent to pay all money held by it to the Subordinated
Debenture Trustee. The Company at any time may require a Paying Agent to pay
all money held by it to the Subordinated Debenture Trustee. Upon payment over
to the Subordinated Debenture Trustee, the Paying Agent (if other than the
Company or a Subsidiary) shall have no further liability for the money. If the
Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a
separate trust fund for the benefit of the Holders all money held by it as
Paying Agent.
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SECTION 2.05 HOLDER LISTS
The Subordinated Debenture Trustee shall preserve in as current a form
as is reasonably practicable the most recent list available to it of the names
and addresses of Holders and shall otherwise comply with TIA Section 312(a).
If the Subordinated Debenture Trustee is not the Registrar, the Company shall
furnish to the Subordinated Debenture Trustee at least seven Business Days
before each Interest Payment Date and, at such other times as the Subordinated
Debenture Trustee may request in writing, a list in such form and as of such
date as the Subordinated Debenture Trustee may reasonably require of the names
and addresses of Holders, and the Company shall otherwise comply with
TIA Section 312(a).
SECTION 2.06 TRANSFER AND EXCHANGE
(a) TRANSFER AND EXCHANGE OF GLOBAL NOTES. A Global Note may not be
transferred as a whole except by the Depositary to a nominee of the
Depositary, by a nominee of the Depositary to the Depositary or to
another nominee of the Depositary, or by the Depositary or any such
nominee to a successor Depositary or a nominee of such successor
Depositary. All Global Notes will be exchanged by the Company for
Definitive Notes if (i) the Company delivers to the Subordinated
Debenture Trustee notice from the Depositary that it is unwilling or
unable to continue to act as Depositary or that it is no longer a
clearing agency registered under the Exchange Act and, in either case,
a successor Depositary is not appointed by the Company within 90 days
after the date of such notice from the Depositary or (ii) the Company
in its sole discretion determines that the Global Notes (in whole but
not in part) should be exchanged for Definitive Notes and delivers a
written notice to such effect to the Subordinated Debenture Trustee;
PROVIDED that in no event shall the Regulation S Temporary Global Note
be exchanged by the Company for Definitive Notes prior to (x) the
expiration of the Restricted Period and (y) the receipt by the
Registrar of any certificates required pursuant to Rule 903 under the
Securities Act. Upon the occurrence of either of the preceding events
in (i) or (ii) above, Definitive Notes shall be issued in such names
as the Depositary shall instruct the Subordinated Debenture Trustee.
Global Notes also may be exchanged or replaced, in whole or in part,
as provided in Sections 2.07 and 2.11 hereof. Every Security
authenticated and delivered in exchange for, or in lieu of, a Global
Note or any portion thereof, pursuant to Section 2.07 or 2.11 hereof,
shall be authenticated and delivered in the form of, and shall be, a
Global Note. A Global Note may not be exchanged for another Security
other than as provided in this Section 2.06(a), however, beneficial
interests in a Global Note may be transferred and exchanged as
provided in Section 2.06(b), (c) or (f) hereof.
(b) TRANSFER AND EXCHANGE OF BENEFICIAL INTERESTS IN THE GLOBAL
NOTES. The transfer and exchange of beneficial interests in the
Global Notes shall be effected through the Depositary, in accordance
with the provisions of this Indenture and the Applicable Procedures.
Beneficial interests in the Restricted Global Notes shall be subject
to restrictions on transfer comparable to those set forth herein to
the extent required by the Securities Act. Transfers of beneficial
interests in the Global Notes also shall require compliance with
either subparagraph (i) or (ii) below, as applicable, as well as one
or more of the other following subparagraphs as applicable:
(i) TRANSFER OF BENEFICIAL INTERESTS IN THE SAME GLOBAL NOTE.
Beneficial interests in any Restricted Global Note may be transferred to
Persons who take delivery thereof in the form of a beneficial interest in
the same Restricted Global Note in accordance with the transfer
restrictions set forth in the Private Placement Legend; PROVIDED, HOWEVER,
that prior to the expiration of the Restricted Period transfers of
beneficial interests in the Regulation S Temporary Global Note may
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not be made to a U.S. Person or for the account or benefit of a U.S. Person
(other than a Placement Agent). Beneficial interests in any Unrestricted
Global Note may be transferred only to Persons who take delivery thereof in
the form of a beneficial interest in an Unrestricted Global Note. No
written orders or instructions shall be required to be delivered to the
Registrar to effect the transfers described in this Section 2.06(b)(i).
(ii) ALL OTHER TRANSFERS AND EXCHANGES OF BENEFICIAL INTERESTS IN
GLOBAL NOTES. In connection with all transfers and exchanges of beneficial
interests (other than a transfer of a beneficial interest in a Global Note
to a Person who takes delivery thereof in the form of a beneficial interest
in the same Global Note), the transferor of such beneficial interest must
deliver to the Registrar either (A) (1) a written order from a Participant
or an Indirect Participant given to the Depositary in accordance with the
Applicable Procedures directing the Depositary to credit or cause to be
credited a beneficial interest in another Global Note in an amount equal to
the beneficial interest to be transferred or exchanged and (2) instructions
given in accordance with the Applicable Procedures containing information
regarding the Participant account to be credited with such increase or (B)
(1) a written order from a Participant or an Indirect Participant given to
the Depositary in accordance with the Applicable Procedures directing the
Depositary to cause to be issued a Definitive Note in an amount equal to
the beneficial interest to be transferred or exchanged and (2) instructions
given by the Depositary to the Registrar containing information regarding
the Person in whose name such Definitive Note shall be registered to effect
the transfer or exchange referred to in (1) above; PROVIDED that in no
event shall Definitive Notes be issued upon the transfer or exchange of
beneficial interests in the Regulation S Temporary Global Note prior to (x)
the expiration of the Restricted Period and (y) the receipt by the
Registrar of any certificates required pursuant to Rule 903 under the
Securities Act. Upon an Exchange Offer by the Company in accordance with
Section 2.06(f) hereof, the requirements of this Section 2.06(b)(ii) shall
be deemed to have been satisfied upon receipt by the Registrar of the
instructions contained in the Letter of Transmittal delivered by the Holder
of such beneficial interests in the Restricted Global Notes. Upon
satisfaction of all of the requirements for transfer or exchange of
beneficial interests in Global Notes contained in this Indenture, the
Securities and otherwise applicable under the Securities Act, the
Subordinated Debenture Trustee shall adjust the principal amount of the
relevant Global Note(s) pursuant to Section 2.06(h) hereof.
(iii) TRANSFER OF BENEFICIAL INTERESTS TO ANOTHER RESTRICTED GLOBAL
NOTE. A beneficial interest in any Restricted Global Note may be
transferred to a Person who takes delivery thereof in the form of a
beneficial interest in another Restricted Global Note if the transfer
complies with the requirements of clause (ii) above and the Registrar
receives the following:
(A) if the transferee will take delivery in the form of a
beneficial interest in the 144A Global Note, then the transferor must
deliver a certificate in the form of Exhibit B hereto, including the
certifications in item (1) thereof; and
(B) if the transferee will take delivery in the form of a
beneficial interest in the Regulation S Temporary Global Note or the
Regulation S Permanent Global Note, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the
certifications in item (2) thereof;
(iv) TRANSFER AND EXCHANGE OF BENEFICIAL INTERESTS IN A RESTRICTED
GLOBAL NOTE FOR BENEFICIAL INTERESTS IN THE UNRESTRICTED GLOBAL NOTE. A
beneficial interest in any Restricted Global Note may be exchanged by any
holder thereof for a beneficial interest in an Unrestricted Global Note or
transferred to a Person who takes delivery thereof in the form of a
beneficial interest in an
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Unrestricted Global Note if the exchange or transfer complies with the
requirements of clause (ii) above and:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the holder of the beneficial interest to be transferred, in the
case of an exchange, or the transferee, in the case of a transfer, is
not (1) a broker-dealer, (2) a Person participating in the
distribution of the Class F Subordinated Indentures or (3) a Person
who is an affiliate (as defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest
for a beneficial interest in an Unrestricted Global Note, a
certificate from such holder in the form of Exhibit C hereto,
including the certifications in item (1)(a) thereof;
(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial interest
to a Person who shall take delivery thereof in the form of a
beneficial interest in an Unrestricted Global Note, a certificate from
such holder in the form of Exhibit B hereto, including the
certifications in item (4) thereof; and
(3) in each such case set forth in this subparagraph (D),
an Opinion of Counsel in form reasonably acceptable to the Registrar
to the effect that such exchange or transfer is in compliance with the
Securities Act and that the restrictions on transfer contained herein
and in the Private Placement Legend are not required in order to
maintain compliance with the Securities Act.
If any such transfer is effected pursuant to subparagraph (B) or
(D) above at a time when an Unrestricted Global Note has not yet been
issued, the Company shall issue and, upon receipt of an authentication
order in accordance with Section 2.02 hereof, the Subordinated Debenture
Trustee shall authenticate one or more Unrestricted Global Notes in an
aggregate principal amount equal to the principal amount of beneficial
interests transferred pursuant to subparagraph (B) or (D) above.
Beneficial interests in an Unrestricted Global Note cannot be
exchanged for, or transferred to Persons who take delivery thereof in the
form of, a beneficial interest in a Restricted Global Note.
(c) TRANSFER OR EXCHANGE OF BENEFICIAL INTERESTS FOR DEFINITIVE
NOTES.
(i) If any holder of a beneficial interest in a Restricted Global
Note proposes to exchange such beneficial interest for a Definitive Note or
to transfer such beneficial interest to a Person who takes delivery thereof
in the form of a Definitive Note, then, upon receipt by the Registrar of
the following documentation:
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(A) if the holder of such beneficial interest in a Restricted
Global Note proposes to exchange such beneficial interest for a
Definitive Note, a certificate from such holder in the form of Exhibit
C hereto, including the certifications in item (2)(a) thereof;
(B) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications
in item (1) thereof;
(C) if such beneficial interest is being transferred to a
Non-U.S. Person in an offshore transaction in accordance with Rule 903
or Rule 904 under the Securities Act, a certificate to the effect set
forth in Exhibit B hereto, including the certifications in item (2)
thereof;
(D) if such beneficial interest is being transferred pursuant to
an exemption from the registration requirements of the Securities Act
in accordance with Rule 144 under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications
in item (3)(a) thereof;
(E) if such beneficial interest is being transferred to an
Institutional Accredited Investor in reliance on an exemption from the
registration requirements of the Securities Act other than those
listed in subparagraphs (B) through (D) above, a certificate to the
effect set forth in Exhibit B hereto, including the certifications,
certificates and Opinion of Counsel required by item (3) thereof, if
applicable;
(F) if such beneficial interest is being transferred to the
Company or any of its Subsidiaries, a certificate to the effect set
forth in Exhibit B hereto, including the certifications in item (3)(b)
thereof; or
(G) if such beneficial interest is being transferred pursuant to
an effective registration statement under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including the
certifications in item (3)(c) thereof,
the Subordinated Debenture Trustee shall cause the aggregate principal
amount of the applicable Global Note to be reduced accordingly pursuant to
Section 2.06(h) hereof, and the Company shall execute and the Subordinated
Debenture Trustee shall authenticate and make available for delivery to the
Person designated in the instructions a Definitive Note in the appropriate
principal amount. Any Definitive Note issued in exchange for a beneficial
interest in a Restricted Global Note pursuant to this Section 2.06(c) shall
be registered in such name or names and in such authorized denomination or
denominations as the holder of such beneficial interest shall instruct the
Registrar through instructions from the Depositary and the Participant or
Indirect Participant. The Subordinated Debenture Trustee shall make
available for delivery such Definitive Notes to the Persons in whose names
such Notes are so registered. Any Definitive Note issued in exchange for a
beneficial interest in a Restricted Global Note pursuant to this Section
2.06(c)(i) shall bear the Private Placement Legend and shall be subject to
all restrictions on transfer contained therein.
(ii) Notwithstanding Sections 2.06(c)(i)(A) and (C) hereof, a
beneficial interest in the Regulation S Temporary Global Note may not be
(A) exchanged for a Definitive Note prior to (x) the expiration of the
Restricted Period and (y) the receipt by the Registrar of any certificates
required pursuant to Rule 903(c)(3)(B) under the Securities Act or (B)
transferred to a Person who takes delivery thereof in the form of a
Definitive Note prior to the conditions set forth in clause (A) above or
unless the
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transfer is pursuant to an exemption from the registration requirements of
the Securities Act other than Rule 903 or Rule 904.
(iii) If any holder of a beneficial interest in an Unrestricted
Global Note proposes to exchange such beneficial interest for a Definitive
Note or to transfer such beneficial interest to a Person who takes delivery
thereof in the form of a Definitive Note, then, upon satisfaction of the
conditions set forth in Section 2.06(b)(ii) hereof, the Subordinated
Debenture Trustee shall cause the aggregate principal amount of the
applicable Global Note to be reduced accordingly pursuant to Section
2.06(h) hereof, and the Company shall execute and the Subordinated
Debenture Trustee shall authenticate and make available for delivery to the
Person designated in the instructions a Definitive Note in the appropriate
principal amount. Any Definitive Note issued in exchange for a beneficial
interest pursuant to this Section 2.06(c)(iii) shall be registered in such
name or names and in such authorized denomination or denominations as the
holder of such beneficial interest shall instruct the Registrar through
instructions from the Depositary and the Participant or Indirect
Participant. The Subordinated Debenture Trustee shall make available for
delivery such Definitive Notes to the Persons in whose names such Notes are
so registered. Any Definitive Note issued in exchange for a beneficial
interest pursuant to this section 2.06(c)(iii) shall not bear the Private
Placement Legend. A beneficial interest in an Unrestricted Global Note
cannot be exchanged for a Definitive Note bearing the Private Placement
Legend or transferred to a Person who takes delivery thereof in the form of
a Definitive Note bearing the Private Placement Legend.
(d) TRANSFER AND EXCHANGE OF DEFINITIVE NOTES FOR BENEFICIAL
INTERESTS.
(i) If any Holder of a Restricted Definitive Note proposes to
exchange such Note for a beneficial interest in a Restricted Global Note or
to transfer such Definitive Notes to a Person who takes delivery thereof in
the form of a beneficial interest in a Restricted Global Note, then, upon
receipt by the Registrar of the following documentation:
(A) if the Holder of such Restricted Definitive Note proposes to
exchange such Note for a beneficial interest in a Restricted Global
Note, a certificate from such Holder in the form of Exhibit C hereto,
including the certifications in item (2)(b) thereof;
(B) if such Definitive Note is being transferred to a QIB in
accordance with Rule 144A under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications
in item (1) thereof;
(C) if such Definitive Note is being transferred to a Non-U.S.
Person in an offshore transaction in accordance with Rule 903 or Rule
904 under the Securities Act, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (2) thereof;
(D) if such Definitive Note is being transferred pursuant to an
exemption from the registration requirements of the Securities Act in
accordance with Rule 144 under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications
in item (3)(a) thereof;
(E) if such Definitive Note is being transferred to the Company
or any of its Subsidiaries, a certificate to the effect set forth in
Exhibit B hereto, including the certifications in item (3)(b) thereof;
or
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(F) if such Definitive Note is being transferred pursuant to an
effective registration statement under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including the
certifications in item (3)(c) thereof,
the Subordinated Debenture Trustee shall cancel the Definitive Note,
increase or cause to be increased the aggregate principal amount of, in the
case of clause (A) above, the appropriate Restricted Global Note, in the
case of clause (B) above, the 144A Global Note, in the case of clause (C)
above, the Regulation S Global Note.
(ii) A Holder of a Restricted Definitive Note may exchange such Note
for a beneficial interest in an Unrestricted Global Note or transfer such
Restricted Definitive Note to a Person who takes delivery thereof in the
form of a beneficial interest in an Unrestricted Global Note only if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the Holder, in the case of an exchange, or the transferee, in the
case of a transfer, is not (1) a broker-dealer, (2) a Person
participating in the distribution of the Exchange Notes or (3) a
Person who is an affiliate (as defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Definitive Notes proposes to
exchange such Notes for a beneficial interest in the Unrestricted
Global Note, a certificate from such Holder in the form of Exhibit C
hereto, including the certifications in item (1)(c) thereof;
(2) if the Holder of such Definitive Notes proposes to
transfer such Notes to a Person who shall take delivery thereof in the
form of a beneficial interest in the Unrestricted Global Note, a
certificate from such Holder in the form of Exhibit B hereto,
including the certifications in item (4) thereof; and
(3) in each such case set forth in this subparagraph (D),
an Opinion of Counsel in form reasonably acceptable to the Company to
the effect that such exchange or transfer is in compliance with the
Securities Act, that the restrictions on transfer contained herein and
in the Private Placement Legend are not required in order to maintain
compliance with the Securities Act, and such Definitive Notes are
being exchanged or transferred in compliance with any applicable blue
sky securities laws of any State of the United States.
Upon satisfaction of the conditions of any of the subparagraphs in this
Section 2.06(d)(ii), the Subordinated Debenture Trustee shall cancel the
Definitive Notes and increase or cause to be increased the aggregate
principal amount of the Unrestricted Global Note.
(iii) A Holder of an Unrestricted Definitive Note may exchange
such Note for a beneficial interest in an Unrestricted Global Note or
transfer such Definitive Notes to a Person who takes
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delivery thereof in the form of a beneficial interest in an Unrestricted
Global Note at any time. Upon receipt of a request for such an exchange or
transfer, the Subordinated Debenture Trustee shall cancel the applicable
Unrestricted Definitive Note and increase or cause to be increased the
aggregate principal amount of one of the Unrestricted Global Notes.
If any such exchange or transfer from a Definitive Note to a
beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Note has not yet been issued,
the Company shall issue and, upon receipt of an authentication order in
accordance with Section 2.02 hereof, the Subordinated Debenture Trustee shall
authenticate one or more Unrestricted Global Notes in an aggregate principal
amount equal to the principal amount of beneficial interests transferred
pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above.
(e) TRANSFER AND EXCHANGE OF DEFINITIVE NOTES FOR DEFINITIVE NOTES.
Upon request by a Holder of Definitive Notes and such Holder's compliance with
the provisions of this Section 2.06(e), the Registrar shall register the
transfer or exchange of Definitive Notes. Prior to such registration of
transfer or exchange, the requesting Holder shall present or surrender to the
Registrar the Definitive Notes duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Registrar duly executed by
such Holder or by his attorney, duly authorized in writing. In addition, the
requesting Holder shall provide any additional certifications, documents and
information, as applicable, pursuant to the provisions of this Section 2.06(e).
(i) Restricted Definitive Notes may be transferred to and registered
in the name of Persons who take delivery thereof if the Registrar receives
the following:
(A) if the transfer will be made pursuant to Rule 144A under the
Securities Act, then the transferor must deliver a certificate in the
form of Exhibit B hereto, including the certifications in item (1)
thereof;
(B) if the transfer will be made pursuant to Rule 903 or Rule
904, then the transferor must deliver a certificate in the form of
Exhibit B hereto, including the certifications in item (2) thereof;
and
(C) if the transfer will be made pursuant to any other exemption
from the registration requirements of the Securities Act, then the
transferor must deliver (x) a certificate in the form of Exhibit B
hereto, including the certifications, certificates and Opinion of
Counsel required by item (3) thereof, if applicable.
(ii) Any Restricted Definitive Note may be exchanged by the Holder
thereof for an Unrestricted Definitive Note or transferred to a Person or
Persons who take delivery thereof in the form of an Unrestricted Definitive
Note if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the Holder, in the case of an exchange, or the transferee, in the
case of a transfer, is not (1) a broker-dealer, (2) a Person
participating in the distribution of the Exchange Notes or (3) a
Person who is an affiliate (as defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
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(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Restricted Definitive Notes
proposes to exchange such Notes for an Unrestricted Definitive Note, a
certificate from such Holder in the form of Exhibit C hereto,
including the certifications in item (1)(a) thereof;
(2) if the Holder of such Restricted Definitive Notes
proposes to transfer such Notes to a Person who shall take delivery
thereof in the form of an Unrestricted Definitive Note, a certificate
from such Holder in the form of Exhibit B hereto, including the
certifications in item (4) thereof; and
(3) in each such case set forth in this subparagraph (D),
an Opinion of Counsel in form reasonably acceptable to the Company to
the effect that such exchange or transfer is in compliance with the
Securities Act, that the restrictions on transfer contained herein and
in the Private Placement Legend are not required in order to maintain
compliance with the Securities Act, and such Restricted Definitive
Note is being exchanged or transferred in compliance with any
applicable blue sky securities laws of any State of the United States.
(iii) A Holder of Unrestricted Definitive Notes may transfer such
Notes to a Person who takes delivery thereof in the form of an Unrestricted
Definitive Note. Upon receipt of a request for such a transfer, the
Registrar shall register the Unrestricted Definitive Notes pursuant to the
instructions from the Holder thereof. Unrestricted Definitive Notes cannot
be exchanged for or transferred to Persons who take delivery thereof in the
form of a Restricted Definitive Note.
(f) EXCHANGE OFFER. Upon the occurrence of the Exchange Offer in
accordance with the Registration Rights Agreement, the Company shall issue and,
upon receipt of an authentication order in accordance with Section 2.02, the
Subordinated Debenture Trustee shall authenticate (i) one or more Unrestricted
Global Notes in an aggregate principal amount equal to the principal amount of
the beneficial interests in the Restricted Global Notes tendered for acceptance
by persons that are not (x) broker-dealers, (y) Persons participating in the
distribution of the Exchange Notes or (z) Persons who are affiliates (as defined
in Rule 144) of the Company and accepted for exchange in the Exchange Offer and
(ii) Definitive Notes in an aggregate principal amount equal to the principal
amount of the Restricted Definitive Notes accepted for exchange in the Exchange
Offer. Concurrent with the issuance of such Notes, the Subordinated Debenture
Trustee shall cause the aggregate principal amount of the applicable Restricted
Global Notes to be reduced accordingly, and the Company shall execute and the
Subordinated Debenture Trustee shall authenticate and make available for
delivery to the Persons designated by the Holders of Definitive Notes so
accepted Definitive Notes in the appropriate principal amount.
(g) LEGENDS. The following legends shall appear on the face of all
Global Notes and Definitive Notes issued under this Indenture unless
specifically stated otherwise in the applicable provisions of this Indenture.
(i) PRIVATE PLACEMENT LEGEND.
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(A) Except as permitted by subparagraph (b) below, each Global
Note and each Definitive Note (and all Notes issued in exchange
therefor or substitution thereof) shall bear the legend in
substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR
TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH
IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN
"INSTITUTIONAL ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1),
(2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN
"INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON
AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT
IT WILL NOT, WITHIN TWO YEARS AFTER THE LATER OF THE DATE OF ORIGINAL
ISSUANCE OF THIS SECURITY AND THE LAST DATE ON WHICH THE COMPANY OR
ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF SUCH SECURITY (THE
"RESALE RESTRICTION TERMINATION DATE"), RESELL OR OTHERWISE TRANSFER
THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF OR
MORGAN STANLEY & CO. INCORPORATED, MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED, OR SALOMON BROTHERS INC, (B) INSIDE THE UNITED
STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A
UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT PRIOR TO SUCH TRANSFER,
FURNISHES TO THE COMPANY 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 THE COMPANY) AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE
LIQUIDATION PREFERENCE OF SECURITIES AT THE TIME OF TRANSFER OF LESS
THAN $100,000 AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT
SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE
THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE
904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE) OR (F) 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 (3)
AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND IN
CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN TWO YEARS AFTER
THE RESALE RESTRICTION TERMINATION DATE. IF THE PROPOSED TRANSFEREE
IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO
SUCH TRANSFER, FURNISH TO THE COMPANY SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS MAY REASONABLY BE REQUIRED TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. EACH PURCHASER ACKNOWLEDGES THAT THE COMPANY
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RESERVES THE RIGHT PRIOR TO ANY OFFER, SALE OR OTHER TRANSFER PRIOR TO THE
RESALE RESTRICTION TERMINATION DATE PURSUANT TO CLAUSES (D) OR (E) ABOVE TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND OTHER
INFORMATION SATISFACTORY TO THE COMPANY. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS
GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT."
(B) Notwithstanding the foregoing, any Global Note or Definitive
Note issued pursuant to subparagraphs (b)(iv), (c)(ii), (c)(iii),
(d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.06 (and
all Notes issued in exchange therefor or substitution thereof) shall
not bear the Private Placement Legend.
(ii) GLOBAL NOTE LEGEND. Each Global Note shall bear a legend in
substantially the following form:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE
BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO
ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE SUBORDINATED
DEBENTURE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.06 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY
BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF
THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE
SUBORDINATED DEBENTURE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION
2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY."
(iii) REGULATION S TEMPORARY GLOBAL NOTE LEGEND. The Regulation S
Temporary Global Note shall bear a legend in substantially the following
form:
"THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND
THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED
NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER
THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY
GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON."
(h) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL NOTES. At such time as
all beneficial interests in a particular Global Note have been exchanged for
Definitive Notes or a particular Global Note has been redeemed, repurchased or
cancelled in whole and not in part, each such Global Note shall be returned to
or retained and cancelled by the Subordinated Debenture Trustee in accordance
with Section 2.11 hereof. At any time prior to such cancellation, if any
beneficial interest in a Global Note is exchanged for or transferred to a Person
who will take delivery thereof in the form of a beneficial interest in another
Global Note or for Definitive Notes, the principal amount of Notes represented
by such Global Note shall be reduced accordingly and an endorsement shall be
made on such Global Note, by the Subordinated Debenture Trustee or by the
Depositary at the direction of the Subordinated Debenture Trustee, to reflect
such reduction; and if the beneficial interest is being exchanged for or
transferred to a Person who will
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take delivery thereof in the form of a beneficial interest in another Global
Note, such other Global Note shall be increased accordingly and an endorsement
shall be made on such Global Note, by the Subordinated Debenture Trustee or by
the Depositary at the direction of the Subordinated Debenture Trustee, to
reflect such increase.
(I) GENERAL PROVISIONS RELATING TO TRANSFERS AND EXCHANGES.
(i) To permit registrations of transfers and exchanges, the Company
shall execute and the Subordinated Debenture Trustee shall authenticate
Global Notes and Definitive Notes upon the Company's order or at the
Registrar's request.
(ii) No service charge shall be made to a holder of a beneficial
interest in a Global Note or to a Holder of a Definitive Note for any
registration of transfer or exchange, but the Company may require payment
of a sum sufficient to cover any transfer tax or similar governmental
charge payable in connection therewith (other than any such transfer taxes
or similar governmental charge payable upon exchange or transfer pursuant
to Sections 2.10, 3.06, 4.08, and 9.05 hereof).
(iii) The Registrar shall not be required to register the transfer of
or exchange any Security selected for redemption in whole or in part,
except the unredeemed portion of any Security being redeemed in part.
(iv) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive Notes
shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Global Notes
or Definitive Notes surrendered upon such registration of transfer or
exchange.
(v) The Company shall not be required (A) to issue, to register the
transfer of or to exchange Securities during a period beginning at the
opening of business 15 days before the day of mailing of a notice of
redemption under Section 3.02 hereof and ending at the close of business on
the day of selection, (B) to register the transfer of or to exchange any
Security so selected for redemption in whole or in part, except the
unredeemed portion of any Security being redeemed in part or (C) to
register the transfer of or to exchange a Security between a record date
and the next succeeding Interest Payment Date.
(vi) Prior to due presentment for the registration of a transfer of
any Security, the Subordinated Debenture Trustee, any Agent and the Company
may deem and treat the Person in whose name any Security is registered as
the absolute owner of such Security for the purpose of receiving payment of
principal of and interest on such Securities and for all other purposes,
and none of the Subordinated Debenture Trustee, any Agent or the Company
shall be affected by notice to the contrary.
(vii) The Subordinated Debenture Trustee shall authenticate Global
Notes and Definitive Notes in accordance with the provisions of Section
2.02 hereof.
(viii) All certifications, certificates and Opinions of Counsel
required to be submitted to the Registrar pursuant to this Section 2.06 to
effect a transfer or exchange may be submitted by facsimile.
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SECTION 2.07 REPLACEMENT SECURITIES
If any mutilated Security is surrendered to the Subordinated Debenture
Trustee, or the Company and the Subordinated Debenture Trustee receive evidence
to their satisfaction of the destruction, loss or theft of any Security, the
Company shall issue and the Subordinated Debenture Trustee, upon the written
order of the Company signed by an Officer, shall authenticate a replacement
Security if the Subordinated Debenture Trustee's requirements are met. An
indemnity bond must be supplied by the Holder that is sufficient in the judgment
of the Subordinated Debenture Trustee and the Company to protect the Company,
the Subordinated Debenture Trustee, any Agent or any authenticating agent from
any loss which any of them may suffer if a Security is replaced. The Company
may charge for its expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company
and shall be entitled to all benefits of this Indenture equally and
proportionately with all other Securities duly issued hereunder.
SECTION 2.08 OUTSTANDING SECURITIES
The Securities outstanding at any time are all the Securities
authenticated by the Subordinated Debenture Trustee except for those cancelled
by it, those delivered to it for cancellation and those described in this
Section as not outstanding.
If a Security is replaced pursuant to Section 2.07 hereof, it ceases
to be outstanding unless the Subordinated Debenture Trustee receives proof
satisfactory to it that the replaced Security is held by a BONA FIDE purchaser.
If the principal amount of any Security is considered paid under
Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary or an
Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay Securities payable on that date, then on and after that date
such Securities shall be deemed to be no longer outstanding and shall cease to
accrue interest.
Except as set forth in Section 2.09 hereof, a Security does not cease
to be outstanding because the Company or an Affiliate holds the Security.
SECTION 2.09 TREASURY SECURITIES
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company, or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company, shall
be considered as though not outstanding, except that for the purposes of
determining whether the Subordinated Debenture Trustee shall be protected in
relying on any such direction, waiver or consent, only Securities which a Trust
Officer of the Subordinated Debenture Trustee knows are so owned shall be so
disregarded.
SECTION 2.10 TEMPORARY SECURITIES
Until definitive Securities are ready for delivery, the Company may
prepare and the Subordinated Debenture Trustee shall authenticate temporary
securities upon a written order of the Company signed by an Officer and
delivered or caused to be delivered to a Trust Officer. Temporary Securities
shall be
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substantially in the form of definitive Securities but may have variations that
the Company considers appropriate for temporary Securities. Without
unreasonable delay, the Company shall prepare and the Subordinated Debenture
Trustee shall authenticate definitive Securities in exchange for temporary
Securities.
Holders of temporary Securities shall be entitled to all benefits of
this Indenture.
SECTION 2.11 CANCELLATION
The Company at any time may deliver Securities to the Subordinated
Debenture Trustee for cancellation. The Registrar and Paying Agent shall
forward to the Subordinated Debenture Trustee any Securities surrendered to them
for registration of transfer, exchange or payment. The Subordinated Debenture
Trustee and no one else shall cancel all Securities surrendered for registration
of transfer, exchange, payment, replacement or cancellation. The Company may
not issue new Securities to replace Securities that it has paid or that have
been delivered to the Subordinated Debenture Trustee for cancellation.
SECTION 2.12 DEFAULTED INTEREST
If the Company defaults in a payment of interest on the Securities, it
shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to the Persons who are
Holders on a subsequent special record date, in each case at the rate provided
in the Securities and in Section 4.01 hereof. The Company shall, with the
consent of the Subordinated Debenture Trustee, fix each such special record date
and payment date. At least 15 days before the record date, the Company (or the
Subordinated Debenture Trustee, in the name of and at the expense of the
Company) shall mail to Holders a notice that states the special record date, the
related payment date and the amount of such interest to be paid.
SECTION 2.13 CUSIP NUMBERS
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Subordinated Debenture Trustee shall use
"CUSIP" numbers in notices of redemption as a convenience to Holders; PROVIDED
that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Securities or as contained
in any notice of redemption and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers. The Company will
promptly notify the Subordinated Debenture Trustee of any change in the "CUSIP"
numbers.
ARTICLE 3
OPTIONAL REDEMPTION, OPTIONAL REDEMPTION UPON CHANGE OF
CONTROL AND OPTIONAL REDEMPTION UPON A PUBLIC EQUITY OFFERING
SECTION 3.01 NOTICES TO SUBORDINATED DEBENTURE TRUSTEE
(a) If the Company elects to redeem Securities pursuant to the
optional redemption provisions of Section 3.07 hereof, it shall
furnish to the Subordinated Debenture Trustee, at least 45 days but
not more than 60 days before a redemption date, an Officers'
Certificate stating that such redemption shall occur pursuant to
Section 3.07 hereof and stating the redemption date, the principal
amount of Securities to be redeemed and the redemption price.
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(b) If the Company elects to redeem Securities pursuant to the
provisions of Section 3.08 hereof, it shall furnish to the
Subordinated Debenture Trustee, at least 45 days but not more than 60
days before the redemption date, an Officers' Certificate stating that
a Change of Control has occurred, the date of such Change of Control
and that such redemption shall occur pursuant to Section 3.08 hereof,
and further stating the principal amount of Securities to be redeemed,
the redemption price of such Securities and the intended redemption
date.
SECTION 3.02 SELECTION OF SECURITIES TO BE REDEEMED
If less than all of the Securities are to be redeemed at any time,
selection of the Securities 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 Securities are listed, or, if the
Securities 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 Securities of $1,000 or less shall be
redeemed in part. The Subordinated Debenture Trustee may select for redemption
any portion (equal to $1,000 or any integral multiple thereof) of the principal
of Securities that have denominations larger than $1,000. Except as provided in
the preceding sentence, provisions of this Indenture that apply to Securities
called for redemption also apply to portions of Securities called for
redemption.
The Subordinated Debenture Trustee shall promptly notify the Company
in writing of the Securities selected for redemption and, in the case of any
Security selected for partial redemption, the principal amount thereof to be
redeemed. The particular Securities to be redeemed shall be selected, unless
otherwise provided herein, not less than 30 nor more than 60 days prior to the
redemption date by the Subordinated Debenture Trustee from the outstanding
Securities not previously called for redemption.
SECTION 3.03 NOTICES TO HOLDERS
(a) If the Company elects to redeem Securities pursuant to either
Section 3.07 or 3.08 hereof, notice of redemption shall be mailed by
first class mail at least 30 days but not more than 60 days before the
redemption date to each Holder of Securities that are to be redeemed
at its registered address.
The notice shall identify the Securities to be redeemed (including
CUSIP number) and shall state:
(1) the redemption date;
(2) the redemption price;
(3) if any Security is being redeemed in part, the portion of
the principal amount of such Security to be redeemed and that,
after the redemption date, upon surrender of such Security, a new
Security or Securities in principal amount equal to the
unredeemed portion will be issued;
(4) the name and address of the Paying Agent;
(5) that Securities called for redemption must be surrendered to
the Paying Agent at the address specified in such notice to
collect the redemption price;
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(6) that interest on Securities or portions of them called for
redemption ceases to accrue on and after the redemption date;
(7) the paragraph of the Securities pursuant to which the
Securities are being redeemed; and
(8) the aggregate principal amount of Securities that are being
redeemed.
(b) At the Company's request, the Subordinated Debenture Trustee
shall give the notice required in Section 3.03(a) hereof in the
Company's name and at its expense and setting forth the information to
be stated in such notice as provided in Section 3.03(a) hereof.
SECTION 3.04 EFFECT OF NOTICE OF REDEMPTION
Once notice of redemption is mailed (after the Subordinated Debenture
Trustee has received the notice provided for in Section 3.01 hereof), Securities
called for redemption become due and payable on the redemption date at the
redemption price and shall cease to bear interest from and after the redemption
date (unless the Company shall fail to make payment of the redemption price or
accrued interest on the redemption date). Upon surrender to the Paying Agent,
such Securities shall be paid at the redemption price, plus premium and
Liquidated Damages, if any, plus accrued interest, if any, to the redemption
date, but interest installments whose maturity is on or prior to the redemption
date and Liquidated Damages which become payable on or prior to the redemption
date will be payable to the Holder of record at the close of business on the
relevant record dates referred to in the Securities.
SECTION 3.05 DEPOSIT OF REDEMPTION PRICE OR PURCHASE PRICE
One Business Day prior to the redemption date, the Company shall
deposit with the Subordinated Debenture Trustee or with the Paying Agent money
(in same-day funds) sufficient to pay the redemption price of, premium and
Liquidated Damages, if any, and accrued interest on, all Securities to be
redeemed on that date other than Securities or portions thereof called for
redemption on that date which previously have been delivered by the Company to
the Subordinated Debenture Trustee for cancellation. The Subordinated Debenture
Trustee or the Paying Agent shall return to the Company any such money not
required for that purpose.
If the Company complies with the preceding paragraph, interest on the
Securities or portions thereof to be redeemed, whether or not such Securities
are presented for payment, will cease to accrue on the applicable redemption
date. If any Security called for redemption shall not be so paid upon surrender
for redemption because of the failure of the Company to comply with the
preceding paragraph, then interest will be paid on the unpaid principal from the
redemption date until such principal is paid and on any interest not paid on
such unpaid principal, in each case, at the rate provided in the Securities and
in Section 4.01 hereof.
SECTION 3.06 SECURITIES REDEEMED IN PART
Upon surrender of a Security that is redeemed in part, the Company
shall issue and the Subordinated Debenture Trustee shall authenticate for the
Holder at the expense of the Company a new Security equal in principal amount to
the unredeemed portion of the Security surrendered.
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SECTION 3.07 OPTIONAL REDEMPTION
Except as otherwise provided herein, prior to November 1, 2002, the
Company may not redeem the Securities, in whole or in part. At any time on or
after November 1, 2002, the Company may redeem all or any of the Securities, in
whole or in part, at a redemption price equal to a percentage of the principal
amount thereof, as set forth in the immediately succeeding paragraph, plus
Liquidated Damages, if any, plus accrued and unpaid interest to the redemption
date.
The redemption price as a percentage of the principal amount shall be
as follows, if the Securities are redeemed during the 12 month period beginning
November 1 of the following years:
YEAR PERCENTAGE
---- ----------
2002..................................... 104.60%
2003..................................... 102.30
2004 and thereafter...................... 100.00
Notwithstanding the foregoing:
(1) prior to November 1, 2002, the Company may redeem the Securities,
in whole or in part, at any time or from time to time, at a redemption
price (expressed as a percentage of principal amount) equal to the sum
of the principal amount of such Securities plus the Applicable
Debenture Make-Whole Premium thereon at the time of redemption
(subject to the right of holders of record on the relevant record date
to receive interest due on the relevant interest payment date);
(2) at any time prior to November 1, 2000, the Company may redeem up
to $60.0 million of the Securities at a redemption price of 109% of
the principal amount thereof, plus accrued and unpaid interest to the
redemption date, out of the net proceeds of one or more Public Equity
Offerings, PROVIDED that any such redemption shall occur within 180
days of such Public Equity Offering; and
(3) upon the occurrence at any time of a Change in Control, the
Securities will be redeemable, at the option of the Company, in whole
or in part, pursuant to the provisions of Section 3.08 hereof.
Any redemption pursuant to this Section 3.07 shall be made, to the
extent applicable, pursuant to the provisions of Sections 3.01 through 3.06
hereof.
SECTION 3.08 OPTIONAL REDEMPTION UPON CHANGE OF CONTROL
In addition to any redemption pursuant to Section 3.07 hereof, the
Securities will be redeemable, at the option of the Company, in whole or in
part, at any time within 160 days after a Change of Control at a redemption
price equal to the sum of the then outstanding principal amount thereof plus
Liquidated Damages, if any, plus accrued and unpaid interest, if any, to the
redemption date plus the Applicable Change of Control Premium.
ARTICLE 4
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COVENANTS
SECTION 4.01 PAYMENT OF SECURITIES
The Company shall pay the principal of and interest on the Securities
on the dates and in the manner provided in the Securities, and shall pay
Liquidated Damages, if any, on the dates and in the manner provided in the
Registration Rights Agreement. Principal and interest shall be considered paid
on the date due if the Paying Agent, other than the Company or a Subsidiary of
the Company, holds on that date money deposited by the Company in available
funds and designated for and sufficient to pay all principal and interest then
due.
The Company shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue principal and premium, if
any, at the same rate per annum on the Securities to the extent lawful; it shall
pay interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest (without regard to any
applicable grace period) at the same rate to the extent lawful.
SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY
The Company shall maintain, in the Borough of Manhattan, The City of
New York, an office or agency (which may be an office of the Subordinated
Debenture Trustee or the Registrar) where Securities may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Company in respect of the Securities and this Indenture may be served. The
Company shall give prompt written notice to the Subordinated Debenture Trustee
of the location, and any change in the location, of such office or agency. If
at any time the Company shall fail to maintain any such required office or
agency or shall fail to furnish the Subordinated Debenture Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the Corporate Trust Office of the Subordinated Debenture Trustee.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
PROVIDED, HOWEVER, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York for such purposes. The Company shall
give prompt written notice to the Subordinated Debenture Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
The Company hereby designates the Corporate Trust Office of the
Subordinated Debenture Trustee as one such office or agency of the Company in
accordance with Section 2.03 hereof.
SECTION 4.03 SEC REPORTS; FINANCIAL STATEMENTS
(a) The Company shall file with the Subordinated Debenture Trustee,
within 15 days after it files the same with the SEC, copies of the
annual reports and the information, documents and other reports (or
copies of such portions of any of the foregoing as the SEC may by
rules and regulations prescribe) that the Company is required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If
the Company is not subject to the requirements of such Section 13 or
15(d), the Company shall file with the Subordinated Debenture Trustee,
within 15 days after it would have been required to file the same with
the SEC, financial statements,
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including any notes thereto (and with respect to annual reports, an
auditors' report by a firm of established national reputation), and a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," both comparable to that which the Company
would have been required to include in such annual reports,
information, documents or other reports if the Company had been
subject to the requirements of such Section 13 or 15(d). The Company
shall also comply with the other provisions of TIA Section 314(a).
(b) If the Company is required to furnish annual or quarterly reports
to its stockholders pursuant to the Exchange Act, the Company shall
cause any annual report furnished to its stockholders generally and
any quarterly or other financial reports furnished by it to its
stockholders generally to be filed with the Subordinated Debenture
Trustee and mailed to the Holders at their addresses appearing in the
register of Securities maintained by the Registrar. If the Company is
not required to furnish annual or quarterly reports to its
stockholders pursuant to the Exchange Act, so long as at least 5% of
the original principal amount of the Securities remain outstanding,
the Company shall cause its financial statements referred to in
Section 4.03(a) hereof, including any notes thereto (and with respect
to annual reports, an auditors' report by a firm of established
national reputation), and a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" to be so mailed to the
Holders within 90 days after the end of each of the Company's fiscal
years and within 60 days after the end of each of the Company's first
three fiscal quarters. As of the date hereof, the Company's fiscal
year ends on December 31.
Delivery of such reports, information and documents to the
Subordinated Debenture Trustee is for informational purposes only and
the Subordinated Debenture Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the
Company's compliance with any of its covenants hereunder (as to which
the Subordinated Debenture Trustee is entitled to rely exclusively on
Officers' Certificates).
SECTION 4.04 COMPLIANCE CERTIFICATE
(a) The Company shall deliver to the Subordinated Debenture Trustee,
within 120 days after the end of each fiscal year of the Company, an
Officers' Certificate stating that a review of the activities of the
Company and its Subsidiaries during the preceding fiscal year has been
made under the supervision of the signing Officers with a view to
determining whether the Company has kept, observed, performed and
fulfilled its obligations under this Indenture, and further stating,
as to each such Officer signing such certificate, that to the best of
his knowledge the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in
default in the performance or observance of any of the terms,
provisions and conditions hereof (or, if a Default or Event of Default
shall have occurred, describing all such Defaults or Events of Default
of which he may have knowledge and what action the Company is taking
or proposes to take with respect thereto) and that to the best of his
knowledge no event has occurred and remains in existence by reason of
which payments on account of the principal of or interest, if any, on
the Securities are prohibited or, if such event has occurred, a
description of the event and what action the Company is taking or
proposes to take with respect thereto.
(b) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the year-end
financial statements delivered pursuant to
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Section 4.03 hereof shall be accompanied by a written statement of the
Company's independent public accountants (who shall be a firm of
established national reputation) that in making the examination
necessary for certification of such financial statements nothing has
come to their attention that would lead them to believe that the
Company has violated any provisions of Articles 4 or 5 of this
Indenture or, if any such violation has occurred, specifying the
nature and period of existence thereof, it being understood that such
accountants shall not be liable directly or indirectly to any Person
for any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Securities are
outstanding, (i) deliver to the Subordinated Debenture Trustee,
forthwith upon any Officer becoming aware of any Default or Event of
Default under this Indenture, an Officers' Certificate specifying such
Default or Event of Default and what action the Company is taking or
proposes to take with respect thereto and (ii) promptly notify the
Subordinated Debenture Trustee of any Change of Control.
SECTION 4.05 COMPLIANCE WITH LAWS, TAXES
The Company shall, and shall cause each of its Subsidiaries to, comply
with all statutes, laws, ordinances, or government rules and regulations to
which it is subject, noncompliance with which would materially adversely affect
the business, earnings, properties, assets or condition, financial or otherwise,
of the Company and its Subsidiaries taken as a whole.
The Company shall, and shall cause each of its Subsidiaries to, pay
prior to delinquency all taxes, assessments, and governmental levies except as
contested in good faith and by appropriate proceedings.
SECTION 4.06 STAY, EXTENSION AND USURY LAWS
The Company covenants (to the extent that it may lawfully do so) that
it shall not at any time insist upon, plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, that may affect the Company's
obligation to pay the Securities; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
insofar as such law applies to the Securities, and covenants that it shall not,
by resort to any such law, hinder, delay or impede the execution of any power
herein granted to the Subordinated Debenture Trustee, but will suffer and permit
the execution of every such power as though no such law has been enacted.
SECTION 4.07 LIMITATIONS ON RESTRICTED PAYMENTS
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make
any distribution on account of the Company's or any of its Restricted
Subsidiaries' Capital Stock or other Equity Interests (other than (A) dividends
or distributions payable in Equity Interests of the Company or such Restricted
Subsidiary or (B) dividends or distributions payable to the Company or any of
its Restricted Subsidiaries) or (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of the Company or any Restricted
Subsidiary (other than any such Equity Interests owned by the Company 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 Securities shall
have occurred and be continuing or shall occur as a consequence thereof.
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SECTION 4.08 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 Securities 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 Securities plus accrued and
unpaid interest, if any, to the date of purchase (the "Change of Control
Payment"). Prior to the mailing of the notice to holders provided for in the
paragraph below, the Company hereby covenants (i) (A) to repay in full all
Obligations under the Credit Facilities or to offer to repay in full all such
Obligations and to repay the Obligations of each lender who has accepted such
offer or (B) to obtain the requisite consent under the Credit Facilities to
permit the repurchase of Securities pursuant to the Change of Control Offer;
(ii) (A) to commence an offer (the "Exchange Debenture Offer") to repurchase all
and to purchase (upon termination of the Exchange Debenture Offer) all Exchange
Debentures tendered pursuant to such offer or (B) to obtain the requisite
consent under the Exchange Debenture Indenture to permit the repurchase of
Securities pursuant to the Change of Control Offer and (iii) with respect to all
other Senior Debt (as defined below) to (A) repay such Senior Debt to the extent
required by the terms thereof to permit repurchase of the Securities pursuant to
the Change of Control Offer or (B) to obtain the requisite consents, if any,
under all agreements governing all such Senior Debt to permit the repurchase of
Securities pursuant to the Change of Control Offer. In no event shall the
Company be required to offer to repurchase or repurchase the Securities unless
it shall have either repaid the outstanding Senior Debt to the extent required
by the terms thereof or obtained the requisite consents thereunder, if any, to
permit the repurchase of the Securities pursuant to the Change of Control Offer.
Within the later of (a) 40 days following any Change of Control and
(b) the date that the foregoing conditions are satisfied, the Company shall mail
a notice to each Holder stating:
(1) that the Change of Control Offer is being made pursuant to this
Section 4.08 and that all Securities 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 Security not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Payment, all Securities 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 of their Securities purchased
pursuant to a Change of Control Offer will be required to surrender
the Securities, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Security completed, to the 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,
facsimile transmission or letter setting forth the name of the Holder,
the principal amount of the Securities delivered for purchase, and a
statement that such Holder is withdrawing his election to have such
Securities purchased; and
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(7) that Holders whose Securities are being purchased only in part
will be issued new Securities equal in principal amount to the
unpurchased portion of the Securities surrendered; PROVIDED that each
Security purchased and each such new Security issued by the Company
shall be in a principal amount of $1,000 or integral multiples
thereof.
The Change of Control Offer shall be deemed to have commenced upon mailing of
the notice described in this paragraph and shall terminate 20 Business Days
after its commencement, unless a longer offering period is required by law. If
the Change of Control Payment Date is on or after an interest payment record
date and on or before the related interest payment date, any accrued interest
will be paid to the person in whose name a Security is registered at the close
of business on such record date, and no additional interest will be payable to
Holders who tender Securities pursuant to the Change of Control Offer.
On the Change of Control Payment Date, the Company shall, to the
extent lawful, (1) accept for payment Securities 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 Securities or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Subordinated Debenture Trustee, the Securities so accepted together with an
Officers' Certificate stating the Securities or portions thereof tendered to the
Company. The Paying Agent shall promptly mail to each holder of Securities so
accepted, payment in an amount equal to the purchase price for such Securities,
and the Subordinated Debenture Trustee shall promptly authenticate and make
available for delivery to such holder a new Security equal in principal amount
to any unpurchased portion of the Securities surrendered; PROVIDED that each
such new Security shall be in a principal amount of $1,000 or integral multiples
thereof. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
SECTION 4.09 TRANSACTIONS WITH AFFILIATES
Neither the Company nor any of its Restricted Subsidiaries shall 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 the Company or any of its Restricted
Subsidiaries or (ii) any Affiliate of the Company or any of its Restricted
Subsidiaries (each an "Affiliate Transaction"), except on terms that are no less
favorable to the Company 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 the Company or any of its Restricted Subsidiaries shall be deemed
to be on terms that are no less favorable to the Company 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) the Company 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 the Company or such Restricted Subsidiary from a financial point of view
or (b) a disinterested majority of the Board of Directors of the Company 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 the Company
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
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practices for the rendering of financial advice and services in connection with
acquisitions, dispositions and financings by the Company and its Subsidiaries,
(iii) the payment of reasonable and customary regular fees to directors of the
Company and its Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries, (iv) loans to officers, directors and employees of the
Company 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 the Company and its Subsidiaries, (v) any Restricted Payments (as
defined in the referent indenture) not prohibited by the RESTRICTED PAYMENTS
covenant in the Senior Note Indentures, the Exchange Debenture Indenture, the
Class B Debenture Indenture or the Class D Debenture Indenture, or any
Investment (as defined in the referent indenture) not prohibited by the
INVESTMENTS IN UNRESTRICTED SUBSIDIARIES covenant in the Senior Note Indentures,
(vi) transactions between or among any of the Company and its Restricted
Subsidiaries or (vii) allocation of corporate overhead to Unrestricted
Subsidiaries on a basis no less favorable to the Company than such allocations
to Restricted Subsidiaries.
SECTION 4.10 CORPORATE EXISTENCE.
Subject to Article 5 hereof, the Company shall do or cause to be done
all things necessary to preserve and keep in full force and effect its corporate
existence and the corporate, partnership or other existence of each Restricted
Subsidiary in accordance with the respective organizational documents of each
Restricted Subsidiary and the rights (charter and statutory), licenses and
franchises of the Company and its Restricted Subsidiaries; PROVIDED that the
Company shall not be required to preserve any such right, license or franchise,
or the corporate, partnership or other existence of any Restricted Subsidiary,
if the Board of Directors shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and its
Restricted Subsidiaries taken as a whole and that the loss thereof is not
adverse in any material respect to the Holders.
SECTION 4.11 RULE 144A INFORMATION REQUIREMENT.
The Company will furnish to the Holders or beneficial holders of the
Securities and prospective purchasers of the Securities designated by the
holders of Transfer Restricted Securities, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act
until such time as the Company consummates the Exchange Offer or has registered
the Securities for resale under the Securities Act.
ARTICLE 5
SUCCESSORS
SECTION 5.01 MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Company 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:
(1) the Company shall be the continuing Person, or the Person (if
other than the Company) formed by such consolidation or into which the
Company is merged or to which the properties and assets of the Company
are transferred (collectively the "Successor") 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
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to the Subordinated Debenture Trustee, in form satisfactory to the
Subordinated Debenture Trustee, all the obligations of the Company
under the Securities and this Indenture;
(2) immediately after giving effect to such transaction, no Default
and no Event of Default under this Indenture shall have occurred and
be continuing; and
(3) 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 the Company immediately
prior to such transaction; and
(4) the Company has delivered an Officers' Certificate and an Opinion
of Counsel relating to such transaction.
SECTION 5.02 SUCCESSOR CORPORATION SUBSTITUTED
Upon any consolidation or merger, or any sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company or
any assignment of its obligations under this Indenture or the Securities in
accordance with Section 5.01 hereof, the successor formed by such consolidation
or into or with which the Company is merged or to which such sale, lease,
conveyance or other disposition or assignment is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such Successor has been named as the
Company herein and the predecessor Company, in the case of a sale, lease,
conveyance or other disposition or assignment, shall be released from all
obligations under this Indenture and the Securities.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01 EVENTS OF DEFAULT
An "EVENT OF DEFAULT" occurs if:
(1) the Company fails to make any payment of interest or Liquidated
Damages on any Security when the same shall become due and payable and
such default continues for a period of 30 days and for five days after
written notice of such default is given to the Company by the Holders
of at least 51% in principal amount of the Securities following the
expiration of such 30-day period;
(2) the Company fails to make any payment of the principal of or
premium on any Security when the same shall become due and payable,
whether at maturity or upon acceleration, redemption or otherwise, and
such default continues for a period of ten days;
(3) the Company fails to comply with any of its other agreements or
covenants in, or provisions of, the Securities or this Indenture and
such failure continues for the period and after the notice specified
below;
(4) an event of 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 money borrowed by the Company or any of
its Restricted Subsidiaries (or the payment of which is guaranteed by
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the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee is now existing or thereafter created in the
future, if as a result of such event of default the maturity of such
Indebtedness has been accelerated prior to its express maturity and
the principal amount of such Indebtedness is $22.5 million or more or
the principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness the maturity of which as been
accelerated, aggregates $45 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, or the acceleration of which
is rescinded, within 60 days after such declaration;
(5) the Company, or any of the Restricted Subsidiaries pursuant to or
within the meaning of any Bankruptcy Law:
(a) commences a voluntary case,
(b) consents to the entry of an order for relief against it in
an involuntary case,
(c) consents to the appointment of a Custodian of it or for all
or substantially all of its property, or
(d) makes a general assignment for the benefit of its creditors;
or
(6) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(a) is for relief against the Company, or any of its Restricted
Subsidiaries as debtor in an involuntary case,
(b) appoints a Custodian of the Company, or any of its
Restricted Subsidiaries or a Custodian for all or substantially
all of the property of the Company, or any of its Restricted
Subsidiaries, or
(c) orders the liquidation of the Company, or any of its
Restricted Subsidiaries, and the order or decree remains unstayed
and in effect for 60 days.
The Company is required pursuant to Section 4.04(a) hereof to deliver
to the Subordinated Debenture Trustee annually a statement regarding compliance
with the provisions of this Indenture, and the Company is required pursuant to
Section 4.04(c) hereof 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. The Subordinated Debenture Trustee shall not be
deemed to know of a Default unless a Trust Officer has actual knowledge of such
Default or receives written notice of such Default with specific reference to
such Default.
In the case of any Event of Default pursuant to the provisions of this
Section 6.01 occurring by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding payment
of the premium, if any, which the Company would have had to pay if the Company
then had elected to redeem the Securities pursuant to Section 3.07 hereof, an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law, anything contained in this Indenture or in the
Securities to the contrary notwithstanding.
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A Default under clause (3) is not an Event of Default until the
Subordinated Debenture Trustee notifies the Company, or the Holders of at least
51% in principal amount of the then outstanding Securities notify the Company
and the Subordinated Debenture Trustee in writing, of the Default and the
Company does not cure the Default within 60 days after receipt of the notice.
The notice must specify the Default, demand that it be remedied and state that
the notice is a "Notice of Default."
SECTION 6.02 ACCELERATION
If an Event of Default (other than an Event of Default with respect to
the Company specified in clauses (5) and (6) of Section 6.01 hereof) occurs and
is continuing, the Subordinated Debenture Trustee or the Holders of at least 51%
in principal amount of the then outstanding Securities, by written notice to the
Company and to the agents under the Credit Facilities, 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) may, and
the Subordinated Debenture Trustee at the request of such Holders shall, declare
all unpaid principal of, premium and Liquidated Damages, if any, and accrued
interest on the Securities to be due and payable upon the first to occur of an
acceleration under any of the Credit Facilities, any of the Senior Notes or
Exchange Debentures or 15 Business Days after receipt by the Company, such agent
and such trustees of such written notice to the extent that the Event of Default
is continuing. If an Event of Default with respect to the Company specified in
clause (5) or (6) of Section 6.01 hereof occurs, all unpaid principal of,
premium and Liquidated Damages, if any, and accrued interest on the Securities
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 aggregate
principal amount of the then outstanding Securities by written notice to the
Subordinated Debenture Trustee may rescind an acceleration and its consequences
if the rescission would not conflict with any judgment or decree and if all
existing Events of Default (except nonpayment of principal, premium and
Liquidated Damages, if any, or interest on the Securities that has become due
solely as a result of such acceleration) have been cured or waived.
In the event that the maturity of the Securities is accelerated
pursuant to this Section 6.02, 100% of the principal amount thereof and premium
and Liquidated Damages, if any, and accrued interest to the date of payment
shall become due and payable.
SECTION 6.03 OTHER REMEDIES
If an Event of Default occurs and is continuing, the Subordinated
Debenture Trustee may pursue any available remedy to collect the payment of
principal, premium and Liquidated Damages, if any, or interest then due on the
Securities or to enforce the performance of any provision of the Securities or
this Indenture.
The Subordinated Debenture Trustee may maintain a proceeding even if
it does not possess any of the Securities or does not produce any of them in the
proceeding. A delay or omission by the Subordinated Debenture Trustee or any
Holder in exercising any right or remedy accruing upon an Event of Default shall
not impair the right or remedy or constitute a waiver of or acquiescence in the
Event of Default. All remedies are cumulative to the extent permitted by law.
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SECTION 6.04 WAIVER OF PAST DEFAULTS
The Holders of at least 51% in principal amount of the then
outstanding Securities 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 Securities),
except a continuing Default or Event of Default in the payment of the principal
of, premium or Liquidated Damages, if any, or interest on, such Security
(including, without limitation, pursuant to any mandatory or optional redemption
obligation hereunder) or that resulted from the failure to comply with
Section 4.08 hereof. Upon any such waiver, such Default shall cease to exist,
and any Event of Default arising therefrom shall be deemed to have been cured
for every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
SECTION 6.05 CONTROL BY MAJORITY
The Holders of at least 51% in principal amount of the then
outstanding Securities may direct the time, method and place of conducting any
proceeding for any remedy available to the Subordinated Debenture Trustee or
exercising any trust or power conferred on it. However, the Subordinated
Debenture Trustee may refuse to follow any direction that conflicts with law or
this Indenture, that the Subordinated Debenture Trustee determines may be unduly
prejudicial to the rights of other Holders, or that may involve the Subordinated
Debenture Trustee in personal liability.
SECTION 6.06 LIMITATIONS ON SUITS
A Holder may not pursue a remedy with respect to this Indenture or the
Securities unless:
(1) the Holder gives to the Subordinated Debenture Trustee written
notice of a continuing Event of Default;
(2) the Holders of at least 51% in principal amount of the then
outstanding Securities 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 (including, without limitation, fees
and expenses of counsel);
(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 then outstanding Securities do not give the
Subordinated Debenture Trustee a direction which is inconsistent with the
request.
A Holder may not use this Indenture to prejudice the rights of another Holder or
to obtain a preference or priority over another Holder.
SECTION 6.07 RIGHTS OF HOLDERS TO RECEIVE PAYMENT
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Security to receive payment of principal of, premium and
Liquidated Damages, if any, and interest on the Security,
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on or after the respective due dates expressed in the Security or the
Registration Rights Agreement, as the case may be, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of the Holder.
SECTION 6.08 COLLECTION SUIT BY SUBORDINATED DEBENTURE TRUSTEE
If an Event of Default specified in Section 6.01(1), (2) or (3) (with
respect to the Company's obligations under Section 4.08 hereof) hereof occurs
and is continuing, the Subordinated Debenture Trustee is authorized to recover
judgment in its own name and as trustee of an express trust against the Company
for the amount of principal, premium and Liquidated Damages, if any, and
interest remaining unpaid on the Securities, determined in accordance with
Section 6.02 hereof and interest on overdue principal, premium, if any, and, to
the extent lawful, interest, and such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Subordinated Debenture
Trustee, its agents and counsel.
SECTION 6.09 SUBORDINATED DEBENTURE TRUSTEE MAY FILE PROOFS OF CLAIM
The Subordinated Debenture Trustee is authorized to file such proofs
of claim and other papers or documents as may be necessary or advisable in order
to have the claims of the Subordinated Debenture Trustee (including any claim
for the reasonable compensation, expenses, disbursements and advances of the
Subordinated Debenture Trustee, its agents and counsel) and the Holders allowed
in any judicial proceedings relative to the Company, its creditors or its
property and shall be entitled and empowered to collect, receive and distribute
any money or other property payable or deliverable on any such claims and any
Custodian in any such judicial proceeding is hereby authorized by each Holder to
make such payments to the Subordinated Debenture Trustee, and in the event that
the Subordinated Debenture Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Subordinated Debenture Trustee any amount
due to it for the reasonable compensation, expenses, disbursements and advances
of the Subordinated Debenture Trustee, its agents and counsel, and any other
amounts due the Subordinated Debenture Trustee under Section 7.07 hereof. To
the extent that the payment of any such compensation, expenses, disbursements
and advances of the Subordinated Debenture Trustee, its agents and counsel, and
any other amounts due the Subordinated Debenture Trustee under Section 7.07
hereof out of the estate in any such proceeding, shall be denied for any reason,
payment of the same shall be secured by a Lien on, and shall be paid out of, any
and all distributions, dividends, money, securities and other properties which
the Holders of the Securities may be entitled to receive in such proceeding
whether in liquidation or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the
Subordinated Debenture Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Securities or the rights of any Holder thereof, or to
authorize the Subordinated Debenture Trustee to vote in respect of the claim of
any Holder in any such proceeding.
SECTION 6.10 PRIORITIES
If the Subordinated Debenture Trustee collects any money pursuant to
this Article 6, it shall pay out the money in the following order:
FIRST: to the Subordinated Debenture Trustee for amounts due under
Section 7.07 hereof;
SECOND: subject to Article 10 hereof, to Holders for amounts due and
unpaid on the Securities for principal, premium and Liquidated
Damages, if any, and interest, ratably, without preference
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or priority of any kind, according to the amounts due and payable on
the Securities for principal, premium and Liquidated Damages, if any,
and interest, respectively; and
THIRD: to the Company.
The Subordinated Debenture Trustee may fix a record date and payment
date for any payment to Holders pursuant to this Article 6.
SECTION 6.11 UNDERTAKING FOR COSTS
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Subordinated Debenture Trustee for any
action taken or omitted by it as a Subordinated Debenture Trustee, a court in
its discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees and expenses,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section 6.11
does not apply to a suit by the Subordinated Debenture Trustee, a suit by a
Holder pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in
principal amount of the then outstanding Securities.
ARTICLE 7
SUBORDINATED DEBENTURE TRUSTEE
SECTION 7.01 DUTIES OF SUBORDINATED DEBENTURE TRUSTEE
(1) If an Event of Default has occurred and is continuing, the
Subordinated Debenture Trustee shall exercise such of the rights and
powers vested in it by this Indenture, and use the same degree of care
and skill in such exercise, as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
(2) Except during the continuance of an Event of Default:
(a) the Subordinated Debenture Trustee need perform only those
duties that are specifically set forth in this Indenture and no
others, and no implied covenants or obligations shall be read
into this Indenture against the Subordinated Debenture Trustee;
and
(b) in the absence of bad faith on its part, the Subordinated
Debenture Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein,
upon certificates or opinions furnished to the Subordinated
Debenture Trustee and conforming to the requirements of this
Indenture. However, in the case of any such certificates or
opinions which by any provision hereof are specifically required
to be furnished to the Subordinated Debenture Trustee, the
Subordinated Debenture Trustee shall be under a duty to examine
the same to determine whether or not they conform to the
requirements of this Indenture (but need not confirm or
investigate the accuracy of mathematical calculations or other
facts stated therein).
(3) The Subordinated Debenture Trustee may not be relieved from
liability for its own negligent action, its own negligent failure to
act, or its own willful misconduct, except that:
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(a) this paragraph does not limit the effect of paragraph (2) of
this Section 7.01;
(b) the Subordinated Debenture Trustee shall not be liable for
any error of judgment made in good faith by a Trust Officer,
unless it is proved that the Subordinated Debenture Trustee was
negligent in ascertaining the pertinent facts; and
(c) the Subordinated Debenture Trustee shall not be liable with
respect to any action it takes or omits to take in good faith in
accordance with a direction received by it pursuant to Section
6.05 hereof.
(4) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Subordinated Debenture
Trustee is subject to paragraphs (1), (2) and (3) of this Section
7.01.
(5) No provision of this Indenture shall require the Subordinated
Debenture Trustee to expend or risk its own funds or incur any
liability. The Subordinated Debenture Trustee is not obligated to
perform any duty or exercise any right or power under this Indenture
at the request of the Holders of the Securities unless it receives an
offer from such Holders of security and indemnity satisfactory to it
against any loss, liability or expense (including, without limitation,
fees of counsel).
(6) The Subordinated Debenture Trustee shall not be liable for
interest on any money received by it except as the Subordinated
Debenture Trustee may agree in writing with the Company. Money held
in trust by the Subordinated Debenture Trustee need not be segregated
from other funds except to the extent required by law.
SECTION 7.02 RIGHTS OF SUBORDINATED DEBENTURE TRUSTEE
(1) The Subordinated Debenture Trustee may rely on any document
believed by it to be genuine and to have been signed or presented by
the proper Person. The Subordinated Debenture Trustee need not
investigate any fact or matter stated in the document.
(2) Before the Subordinated Debenture Trustee acts or refrains from
acting, it may require an Officers' Certificate or an Opinion of
Counsel or both. The Subordinated Debenture Trustee shall not be
liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The
Subordinated Debenture Trustee may consult with counsel of its
selection and the advice of such counsel or any Opinion of Counsel
shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder and in reliance
thereon.
(3) The Subordinated Debenture Trustee may act through agents and
shall not be responsible for the misconduct or negligence of any
agent, attorney, custodian or nominee appointed with due care.
(4) The Subordinated Debenture Trustee shall not be liable for any
action it takes or omits to take in good faith which it believes to be
authorized or within its rights or powers conferred upon it by this
Indenture.
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(5) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be
sufficient if signed by an Officer of the Company.
SECTION 7.03 INDIVIDUAL RIGHTS OF SUBORDINATED DEBENTURE TRUSTEE
The Subordinated Debenture Trustee in its individual or any other
capacity may become the owner or pledgee of Securities and may otherwise deal
with the Company or any of its Affiliates with the same rights it would have if
it were not Subordinated Debenture Trustee. Any Agent may do the same with like
rights. However, the Subordinated Debenture Trustee is subject to Sections 7.10
and 7.11 hereof.
SECTION 7.04 SUBORDINATED DEBENTURE TRUSTEE'S DISCLAIMER
The Subordinated Debenture Trustee makes no representation as to the
validity or adequacy of this Indenture or the Securities; it shall not be
accountable for the Company's use of the proceeds from the Securities or any
money paid to the Company or upon the Company's direction under any provision
hereof; it shall not be responsible for the use or application of any money
received by any Paying Agent other than the Subordinated Debenture Trustee; and
it shall not be responsible for any statement or recital herein or any statement
in the Securities other than its certificate of authentication.
SECTION 7.05 NOTICE OF DEFAULTS
If a Default or Event of Default occurs and is continuing and if it is
actually known to a Trust Officer of the Subordinated Debenture Trustee, the
Subordinated Debenture Trustee shall mail to each Holder a 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 payment of principal of,
premium and Liquidated Damages, if any, or interest on any Security or that
resulted from a failure to comply with Section 4.08 hereof, the Subordinated
Debenture Trustee may withhold the notice if and so long as a committee of its
Trust Officers determines in good faith that withholding the notice is in the
interests of Holders.
SECTION 7.06 REPORTS BY SUBORDINATED DEBENTURE TRUSTEE TO HOLDERS
Within 60 days after each June 1 beginning with the first June 1 to
occur after the date of this Indenture, the Subordinated Debenture Trustee shall
mail to Holders a brief report dated as of such reporting date that complies
with TIA Section 313(a) (but if no event described in TIA Section 313(a) has
occurred within the twelve months preceding the reporting date, no report need
be transmitted). The Subordinated Debenture Trustee also shall comply with TIA
Section 313(b). The Subordinated Debenture Trustee shall also transmit by mail
all reports as required by TIA Section 313(c).
A copy of each report at the time of its mailing to Holders shall be
filed with the SEC and each stock exchange on which the Securities are listed.
The Company shall promptly notify the Subordinated Debenture Trustee when the
Securities are listed on any stock exchange and when such Securities become
delisted on any such exchange.
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SECTION 7.07 COMPENSATION AND INDEMNITY
The Company shall pay to the Subordinated Debenture Trustee from time
to time such compensation as shall be agreed in writing between the Company and
the Subordinated Debenture Trustee for its acceptance of this Indenture and
services hereunder. The Subordinated Debenture Trustee's compensation shall not
be limited by any law relating to compensation of a trustee of an express trust.
The Company shall reimburse the Subordinated Debenture Trustee upon request for
all reasonable disbursements, advances and expenses incurred by it. Such
expenses shall include the reasonable compensation, disbursements and expenses
of the Subordinated Debenture Trustee's agents and counsel.
The Company shall indemnify and hold harmless each of the Subordinated
Debenture Trustee and any predecessor Subordinated Debenture Trustee and its
directors, officers, employees and agents against any and all loss, liability,
damage, claim or expense (including, without limitation, fees and expenses of
counsel) incurred by it arising out of or in connection with the acceptance or
administration of its duties under this Indenture including, without limitation,
costs and expenses of defending itself against any claim or liability in
connection with the exercise or performance of its powers and duties hereunder,
except as set forth in the next paragraph. The Subordinated Debenture Trustee
shall notify the Company promptly of any claim for which it may seek indemnity.
The Company shall defend the claim and the Subordinated Debenture Trustee shall
cooperate in the defense. The Subordinated Debenture Trustee may have separate
counsel and the Company shall pay the reasonable fees and expenses of such
counsel. The Company need not pay for any settlement made without its consent,
which consent shall not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any
loss or liability incurred by the Subordinated Debenture Trustee through its
negligence or bad faith.
To secure the Company's payment obligations in this Section 7.07, the
Subordinated Debenture Trustee shall have a Lien prior to the Securities on all
money or property held or collected by the Subordinated Debenture Trustee,
except that held in trust to pay principal, premium and Liquidated Damages, if
any, and interest on particular Securities. Such Lien shall survive the
satisfaction and discharge of the Indenture.
When the Subordinated Debenture Trustee incurs expenses or renders
services after an Event of Default specified in Section 6.01(5) or (6) hereof
occurs, the expenses and the compensation for the services are intended to
constitute expenses of administration under any Bankruptcy Law.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 7.08 REPLACEMENT OF SUBORDINATED DEBENTURE TRUSTEE
The Subordinated Debenture Trustee may resign and be discharged from
the trust hereby created by so notifying the Company. The Holders of a majority
in principal amount of the then outstanding Securities may remove the
Subordinated Debenture Trustee by so notifying the Subordinated Debenture
Trustee and the Company. The Company may remove the Subordinated Debenture
Trustee if:
(1) the Subordinated Debenture Trustee fails to comply with Section
7.10 hereof;
(2) the Subordinated Debenture Trustee is adjudged a bankrupt or an
insolvent or an order for relief is entered with respect to the
Subordinated Debenture Trustee under any Bankruptcy Law;
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(3) a Custodian or public officer takes charge of the Subordinated
Debenture Trustee or its property; or
(4) the Subordinated Debenture Trustee becomes incapable of acting.
Notwithstanding the foregoing, a resignation or removal of the Subordinated
Debenture Trustee and appointment of a successor Subordinated Debenture Trustee
shall become effective only upon the successor Subordinated Debenture Trustee's
acceptance of appointment as provided in this Section 7.08, and thereafter the
Subordinated Debenture Trustee shall have no liability for any acts or omission
of any successor Trustee.
If the Subordinated Debenture Trustee resigns or is removed or if a
vacancy exists in the office of Subordinated Debenture Trustee for any reason,
the Company shall promptly appoint a successor Subordinated Debenture Trustee.
If a successor Subordinated Debenture Trustee does not take office
within 30 days after the retiring Subordinated Debenture Trustee resigns or is
removed, the retiring Subordinated Debenture Trustee, the Company or the Holders
of at least 10% in principal amount of the then outstanding Securities may
petition, at the expense of the Company, any court of competent jurisdiction for
the appointment of a successor Subordinated Debenture Trustee.
If the Subordinated Debenture Trustee fails to comply with
Section 7.10 hereof, any Holder may petition any court of competent jurisdiction
for the removal of the Subordinated Debenture Trustee and the appointment of a
successor Subordinated Debenture Trustee.
A successor Subordinated Debenture Trustee shall deliver a written
acceptance of its appointment to the retiring Subordinated Debenture Trustee and
to the Company. Thereupon the resignation or removal of the retiring
Subordinated Debenture Trustee shall become effective, and the successor
Subordinated Debenture Trustee shall have all the rights, powers and duties of
the Subordinated Debenture Trustee under this Indenture. The successor
Subordinated Debenture Trustee shall mail a notice of its succession to
Holders. The retiring Subordinated Debenture Trustee shall promptly transfer
all property held by it as Subordinated Debenture Trustee to the successor
Subordinated Debenture Trustee, subject to the Lien provided for in Section 7.07
hereof. Notwithstanding replacement of the Subordinated Debenture Trustee
pursuant to this Section 7.08, the Company's obligations under Section 7.07
hereof shall continue for the benefit of the retiring Subordinated Debenture
Trustee.
SECTION 7.09 SUCCESSOR SUBORDINATED DEBENTURE TRUSTEE BY MERGER, ETC.
Subject to Section 7.10 hereof, if the Subordinated Debenture Trustee
consolidates, merges or converts into, or transfers all or substantially all of
its corporate trust business to, another corporation or national banking
association, the successor entity without any further act shall be the successor
Subordinated Debenture Trustee. In case any Securities have been authenticated,
but not delivered, by the Subordinated Debenture Trustee then in office, any
succession by merger, conversion or consolidation of such authenticating trustee
may adopt such authentication and deliver the Securities so authenticated with
the same effect as if such successor trustee had itself authenticated such
Securities.
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION
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There shall at all times be a Subordinated Debenture Trustee hereunder
which shall be a corporation organized and doing business under the laws of the
United States of America, any state thereof or the District of Columbia
authorized under such laws to exercise corporate trust power, shall be subject
to supervision or examination by federal or state (or the District of Columbia)
authority and shall have a combined capital and surplus of at least $50 million
as set forth in its most recent published annual report of condition.
This Indenture shall always have a Subordinated Debenture Trustee who
satisfies the requirements of TIA Section 310(a)(1). The Subordinated
Debenture Trustee is subject to TIA Section 310(b).
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY
The Subordinated Debenture Trustee is subject to TIA Section 311(a),
excluding therefrom any creditor relationship listed in TIA Section 311(b). A
Subordinated Debenture Trustee who has resigned or been removed shall be subject
to TIA Section 311(a) to the extent indicated therein.
ARTICLE 8
DISCHARGE OF INDENTURE
SECTION 8.01 TERMINATION OF COMPANY'S OBLIGATIONS
This Indenture shall cease to be of further effect (except that the
Company's obligations under Section 7.07 hereof and the Subordinated Debenture
Trustee's and Paying Agent's obligations under Section 8.03 hereof shall
survive) when all outstanding Securities theretofore authenticated and issued
have been delivered (other than destroyed, lost or stolen Securities that have
been replaced or paid) to the Subordinated Debenture Trustee for cancellation
and the Company has paid all sums payable hereunder. In addition, the Company
may terminate all of its obligations under this Indenture if:
(1) the Company irrevocably deposits, or causes to be deposited, in
trust with the Subordinated Debenture Trustee or the Paying Agent or,
at the option of the Subordinated Debenture Trustee, with a trustee
satisfactory to the Subordinated Debenture Trustee and the Company
under the terms of an irrevocable trust agreement in form and
substance satisfactory to the Subordinated Debenture Trustee, money or
U.S. Government Obligations in an amount sufficient (without
reinvestment thereof) to pay principal, premium and Liquidated
Damages, if any, and interest on the Securities to maturity or
redemption, as the case may be, as such amounts become due, and to pay
all other sums payable by it hereunder, and such deposit, when made,
does not violate the provisions of Article 10 hereof; PROVIDED that
(i) the trustee of the irrevocable trust shall have been irrevocably
instructed to pay such money or the proceeds of such U.S. Government
Obligations to the Subordinated Debenture Trustee and (ii) the
Subordinated Debenture Trustee shall have been irrevocably instructed
to apply such money or the proceeds of such U.S. Government
Obligations to the payment of said principal, premium and Liquidated
Damages, if any, and interest on the Securities;
(2) the Company delivers to the Subordinated Debenture Trustee an
Officers' Certificate stating that all conditions precedent to
satisfaction and discharge of this Indenture have been complied with,
and delivers an Opinion of Counsel to the same effect;
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(3) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit; and
(4) the Company shall have delivered to the Subordinated Debenture
Trustee an Opinion of Counsel from nationally recognized counsel
acceptable to the Subordinated Debenture Trustee or a tax ruling from
the Internal Revenue Service to the effect that the Holders of the
Securities will not recognize income, gain or loss for federal income
tax purposes as a result of the Company's exercise of its option under
this Section 8.01 and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have
been the case if such option had not been exercised.
In such event, this Indenture shall cease to be of further effect, except that
the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 4.01, 4.06,
7.07, 7.08 and 8.04 hereof and the Company's, the Subordinated Debenture
Trustee's and the Paying Agent's obligations in Section 8.03, and the
Subordinated Debenture Trustee's rights under Article 7 hereof, shall survive
until the Securities are no longer outstanding. Thereafter, only the Company's
obligations in Section 7.07 hereof and the Subordinated Debenture Trustee's and
the Paying Agent's obligations in Section 8.03 hereof shall survive.
After such irrevocable deposit made pursuant to this Section 8.01 and
satisfaction of the other conditions set forth herein, the Subordinated
Debenture Trustee upon request shall acknowledge in writing the discharge of the
Company's obligations under this Indenture except for those surviving
obligations specified above.
In order to have money available on a payment date to pay principal or
interest on the Securities, the U.S. Government Obligations shall be payable as
to principal or interest on or before such payment date in such amounts as will
provide the necessary money. U.S. Government Obligations shall not be callable
at the issuer's option.
SECTION 8.02 APPLICATION OF TRUST MONEY; MISCELLANEOUS PROVISIONS
The Subordinated Debenture Trustee or a trustee satisfactory to the
Subordinated Debenture Trustee and the Company shall hold in trust money or U.S.
Government Obligations deposited with it pursuant to Section 8.01 hereof. It
shall apply the deposited money and the money from U.S. Government Obligations
through the Paying Agent and in accordance with this Indenture to the payment of
principal of and interest on the Securities.
The Company shall pay and indemnify the Subordinated Debenture Trustee
against any tax, fee or other charge imposed on or assessed against the U.S.
Government Obligations deposited pursuant to Section 8.01 or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the Securities.
SECTION 8.03 REPAYMENT TO COMPANY
The Subordinated Debenture Trustee and the Paying Agent shall promptly
pay to the Company upon written request any excess money or securities held by
them at any time.
The Subordinated Debenture Trustee and the Paying Agent shall pay to
the Company upon written request any money held by them for the payment of
principal or interest that remains unclaimed for two years after the date upon
which such payment shall have become due; PROVIDED that the Company
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shall have either caused notice of such payment to be mailed to each Holder
entitled thereto no less than 30 days prior to such repayment or within such
period shall have published such notice in a financial newspaper of widespread
circulation published in The City of New York. After payment to the Company,
Holders entitled to the money must look to the Company for payment as general
creditors unless an applicable abandoned property law designates another Person,
and all liability of the Subordinated Debenture Trustee and such Paying Agent
with respect to such money shall cease.
SECTION 8.04 REINSTATEMENT
If the Subordinated Debenture Trustee or Paying Agent is unable to
apply any money or U.S. Government Obligations in accordance with Section 8.01
hereof by reason of any legal proceeding or by reason of any order or judgment
of any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, the Company's obligations under this Indenture and
the Securities shall be revived and reinstated as though no deposit had occurred
pursuant to Section 8.01 hereof until such time as the Subordinated Debenture
Trustee or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with Section 8.01 hereof; PROVIDED that if the Company
has made any payment of interest on or principal of any Securities because of
the reinstatement of its obligations, the Company shall be subrogated to the
rights of the Holders of such Securities to receive such payment from the money
or U.S. Government Obligations held by the Subordinated Debenture Trustee or
Paying Agent.
ARTICLE 9
AMENDMENTS
SECTION 9.01 WITHOUT CONSENT OF HOLDERS
Without the consent of any Holder of Securities the Company and the
Subordinated Debenture Trustee may amend or supplement this Indenture or the
Securities:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Securities in addition to or in
place of certificated Securities;
(3) to comply with Section 5.01 hereof;
(4) to make any change that would provide any additional rights or
benefits to the Holders or that does not adversely affect the rights
hereunder of any Holder; or
(5) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA.
Upon the request of the Company, accompanied by a resolution of the
Board of Directors authorizing the execution of any such supplemental indenture,
and upon receipt by the Subordinated Debenture Trustee of the documents
described in Section 9.06 hereof, the Subordinated Debenture Trustee shall join
with the Company in the execution of any supplemental indenture authorized or
permitted by the terms of this Indenture and make any further appropriate
agreements and stipulations that may be therein contained, but the Subordinated
Debenture Trustee shall not be obligated to enter into any supplemental
indenture that affects its own rights, duties or immunities under this Indenture
or otherwise.
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After an amendment or waiver under this Section 9.01 becomes effective, the
Company shall mail to the Holders of each Security affected thereby a notice
briefly describing the amendment or waiver. Any failure of the Company to mail
such notice, or any defect therein, shall not, however, in any way impair or
affect the validity of any such supplemental indenture.
SECTION 9.02 WITH CONSENT OF HOLDERS
Except as provided below in this Section 9.02, this Indenture or the
Securities may be amended or supplemented with the written consent (including
consents obtained in connection with a tender offer or exchange offer for
Securities) of the Holders of at least 51% in principal amount of the then
outstanding Securities.
Upon the request of the Company, accompanied by a resolution of the
Board of Directors authorizing the execution of any such supplemental indenture,
and upon the filing with the Subordinated Debenture Trustee of evidence of the
consent of the Holders as aforesaid, and upon receipt by the Subordinated
Debenture Trustee of the documents described in Section 9.06 hereof, the
Subordinated Debenture Trustee shall join with the Company in the execution of
such supplemental indenture unless such supplemental indenture affects the
Subordinated Debenture Trustee's own rights, duties or immunities under this
Indenture or otherwise, in which case the Subordinated Debenture Trustee may in
its discretion, but shall not be obligated to, enter into such supplemental
indenture.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment or waiver,
but it shall be sufficient if such consent approves the substance thereof.
The Holders of 51% in principal amount of the Securities then
outstanding may waive compliance in a particular instance by the Company with
any provision of this Indenture or the Securities (including waivers obtained in
connection with a tender offer or an exchange offer for Securities) or any
existing default. However, without the consent of each Holder affected, an
amendment or waiver under this Section may not (with respect to any Securities
held by a non-consenting Holder):
(1) reduce the principal amount of Securities whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any
Security or alter the provisions with respect to the redemption price
in connection with repurchases under Sections 3.07, 3.08 or 4.08
hereof;
(3) reduce the rate of or change the time for payment of interest on
any Security;
(4) waive a Default or Event of Default in the payment of the
principal of, or premium or Liquidated Damages, if any, or interest on
Securities or that resulted from a failure to comply with Section 4.08
hereof (except a rescission of acceleration of the Securities as
provided in Section 6.02 hereof);
(5) make any Security payable in money other than that stated in the
Security;
(6) make any change in Article 10 hereof that adversely affects the
rights of any Holder;
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(7) make any change in Section 6.04 or 6.07 hereof or in this
sentence of this Section 9.02; or
(8) waive a redemption payment with respect to any Security.
The right of any Holder to participate in any consent required or
sought pursuant to any provision of this Indenture (and the obligation of the
Company to obtain any such consent otherwise required from such Holder) may be
subject to the requirement that such Holder shall have been the Holder of record
of any Securities with respect to which such consent is required or sought as of
a date identified by the Subordinated Debenture Trustee in a notice furnished to
Holders in accordance with the terms of this Indenture.
SECTION 9.03 COMPLIANCE WITH TRUST INDENTURE ACT
Every amendment to this Indenture or the Securities shall comply in
form and substance with the TIA as then in effect.
SECTION 9.04 REVOCATION AND EFFECT OF CONSENTS
Until an amendment (which includes any supplement) or waiver becomes
effective, a consent to it by a Holder of a Security is a continuing consent by
the Holder and every subsequent Holder of a Security or portion of a Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent is not made on any Security. However, any such Holder
or subsequent Holder may revoke the consent as to his or her Security or portion
of a Security if the Subordinated Debenture Trustee receives written notice of
revocation before the date the amendment or waiver becomes effective. An
amendment or waiver becomes effective in accordance with its terms and
thereafter binds every Holder.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment or
waiver. If a record date is fixed, then notwithstanding the provisions of the
immediately preceding paragraph, those Persons who were Holders at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to consent to such amendment or waiver or to revoke any consent
previously given, whether or not such Persons continue to be Holders after such
record date. No consent shall be valid or effective for more than 90 days after
such record date unless consents from Holders of the principal amount of
Securities required hereunder for such amendment or waiver to be effective shall
have also been given and not revoked within such 90-day period.
After an amendment or waiver becomes effective it shall bind every
Holder, unless it is of the type described in any of clauses (1) through (8) of
Section 9.02 hereof. In such case, the amendment or waiver shall bind each
Holder of a Security who has consented to it and every subsequent Holder of a
Security that evidences the same debt as the consenting Holder's Security.
SECTION 9.05 NOTATION ON OR EXCHANGE OF SECURITIES
If an amendment, supplement or waiver changes the terms of a Security,
the Subordinated Debenture Trustee may require the Holder of the Security to
deliver it to the Subordinated Debenture Trustee. The Subordinated Debenture
Trustee may place an appropriate notation about the changed terms and return it
to the Holder and the Subordinated Debenture Trustee may place an appropriate
notation on any Security thereafter authenticated. Alternatively, if the
Company or Subordinated Debenture Trustee
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so determines, the Company in exchange for all Securities shall issue and the
Subordinated Debenture Trustee shall authenticate new Securities that reflect
the changed terms.
SECTION 9.06 SUBORDINATED DEBENTURE TRUSTEE TO SIGN AMENDMENTS, ETC.
The Subordinated Debenture Trustee shall sign any amendment or
supplemental indenture authorized pursuant to this Article 9 if the amendment
does not adversely affect the rights, duties, liabilities or immunities of the
Subordinated Debenture Trustee. If it does, the Subordinated Debenture Trustee
may, but need not, sign it. In signing or refusing to sign such amendment or
supplemental indenture, the Subordinated Debenture Trustee shall be entitled to
receive and, subject to Section 7.01 hereof, shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel as conclusive evidence
that such amendment or supplemental indenture is authorized or permitted by this
Indenture, that it is not inconsistent herewith, and that it will be valid and
binding upon the Company in accordance with its terms.
ARTICLE 10
SUBORDINATION
SECTION 10.01 AGREEMENT TO SUBORDINATE
The Company agrees, and each Holder by accepting a Security agrees,
that the indebtedness evidenced by the Security is subordinated in right of
payment, to the extent and in the manner provided in this Article 10, to the
prior payment in full of all "Senior Debt" (as defined below) and that the
subordination is for the benefit of the holders of Senior Debt. The
Indebtedness evidenced by the Security shall be PARI PASSU with the Series B
Subordinated Debentures and the Series D Subordinated Debentures.
SECTION 10.02 CERTAIN DEFINITIONS
"Representative" means (i) with respect to the Credit Facilities, the
Agents (as defined therein) and (ii) with respect to any other Senior Debt, the
indenture trustee or other trustee, agent or representative for such Senior
Debt.
"Senior Debt" means all present and future Indebtedness created,
assumed, incurred or guaranteed by the Company (and all renewals, extensions and
refundings thereof), other than any such Indebtedness which by the terms of the
instrument or agreement creating or evidencing the same is not senior in right
of payment to the Securities, PROVIDED that (i) in no event shall Senior Debt
include any Indebtedness of the Company to (a) any of its Subsidiaries or
(b) any trade creditors incurred for the purchase of goods or materials or for
services obtained in the ordinary course of business and (ii) Senior Debt in all
events shall include all Indebtedness incurred under the Credit Facilities, all
Indebtedness incurred under the Senior Note Indentures and all Indebtedness
incurred under the Exchange Debenture Indenture.
A distribution may consist of cash, securities or other property, by
set-off or otherwise.
For the purposes of this Article 10, Obligations with respect to
Senior Debt shall not be deemed to have been paid in full unless the holders
thereof shall have received payment in full in cash.
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SECTION 10.03 LIQUIDATION; DISSOLUTION; BANKRUPTCY
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property or in
an assignment for the benefit of creditors or any marshalling of the assets and
liabilities of the Company:
(1) holders of Senior Debt shall be entitled to receive payment in
full of all Obligations with respect to the Senior Debt (including
interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt whether or not such interest
is an allowed claim enforceable against the Company in any such
bankruptcy, reorganization, insolvency, receivership or similar
proceeding) before Holders shall be entitled to receive any payment of
any Obligations with respect to the Securities; and
(2) until all Obligations with respect to Senior Debt (as provided in
subsection (1) of this Section 10.03) are paid in full, any
distribution to which Holders would be entitled but for this Article
10 shall be made to holders of Senior Debt, as their interests may
appear.
SECTION 10.04 DEFAULT ON SENIOR DEBT
No direct or indirect payment or distribution by or on behalf of the
Company of principal of, premium, if any, or interest on the Securities, whether
pursuant to the terms of the Securities or otherwise, may be made (i) if a
default of any Obligations to the holders of Senior Debt 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 Debt 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
Debt has occurred or (iii) upon the maturity of any Senior Debt, prior to the
payment of all Obligations with respect to Senior Debt that is then due and
payable. In addition, upon the acceleration of the Securities prior to their
stated maturity, holders of the Senior Debt shall receive payment in full before
any payment shall be made to Holders of the Securities.
SECTION 10.05 ACCELERATION OF SECURITIES
If payment of the Securities is accelerated because of an Event of
Default, the Company shall promptly notify the Representatives of Senior Debt of
the acceleration.
SECTION 10.06 WHEN DISTRIBUTION MUST BE PAID OVER
In the event that the Subordinated Debenture Trustee or any Holder
receives any payment of any Obligations (other than, in the case of the
Subordinated Debenture Trustee, fees, expenses and all other amounts payable
pursuant to Section 7.07 hereof) with respect to the Securities at a time when
such payment is prohibited by Section 10.04 hereof, then and in such event (but
with respect to the Subordinated Debenture Trustee, subject to the provisions of
Section 10.12 hereof) such payment shall be held by the Subordinated Debenture
Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith
over and delivered, upon written request, to, the holders of Senior Debt as
their interests may appear or their Representative under the indenture or other
agreement (if any) pursuant to which Senior Debt may have been issued, as their
respective interests may appear, for application to the payment of all
Obligations due to the holders of Senior Debt remaining unpaid to the extent
necessary to pay such
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Obligations in full in accordance with their terms, after giving effect to any
concurrent payment or distribution to or for the holders of Senior Debt.
If a distribution is made to the Subordinated Debenture Trustee or any
Holder (other than, in the case of the Subordinated Debenture Trustee, fees,
expenses and all other amounts payable pursuant to Section 7.07 hereof) that
because of this Article 10 should not have been made to it, the Subordinated
Debenture Trustee (subject to the provision of Section 10.12 hereof) or such
Holder who receives the distribution shall hold it in trust for the benefit of,
and, upon written request, pay it over to, the holders of Senior Debt as their
interests may appear, or their Representative under the indenture or other
agreement (if any) pursuant to which Senior Debt may have been issued, as their
respective interests may appear, for application to the payment of all
Obligations due to the holders of Senior Debt remaining unpaid to the extent
necessary to pay such Obligations in full in accordance with their terms, after
giving effect to any concurrent payment or distribution to or for the holders of
Senior Debt.
With respect to the holders of Senior Debt, the Subordinated Debenture
Trustee undertakes to perform only such obligations on the part of the
Subordinated Debenture Trustee as are specifically set forth in this Article 10,
and no implied covenants or obligations with respect to the holders of Senior
Debt shall be read into this Indenture against the Subordinated Debenture
Trustee. The Subordinated Debenture Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt, and shall not be liable to any
such holders if the Subordinated Debenture Trustee shall pay over or distribute
to or on behalf of Holders or the Company or any other Person money or assets to
which any holders of Senior Debt shall be entitled by virtue of this Article 10,
unless such payment or distribution is made as a result of the willful
misconduct or gross negligence of the Subordinated Debenture Trustee.
SECTION 10.07 NOTICE BY COMPANY
The Company shall promptly notify the Subordinated Debenture Trustee
and the Paying Agent of any facts known to the Company that would cause a
payment of any Obligations with respect to the Securities to violate this
Article 10, but failure to give such notice shall not affect the subordination
of the Securities to the Senior Debt provided in this Article 10.
SECTION 10.08 SUBROGATION
After all Obligations with respect to all Senior Debt are paid in full
and until the Securities are paid in full, Holders shall be subrogated (equally
and ratably with all other Indebtedness ranking PARI PASSU with the Securities)
to the rights of holders of Senior Debt to receive distributions applicable to
Senior Debt to the extent that distributions otherwise payable to the Holders
have been applied to the payment of Senior Debt. A distribution made under this
Article 10 to holders of Senior Debt which otherwise would have been made to
Holders is not, as between the Company and Holders, a payment by the Company on
the Securities.
SECTION 10.09 RELATIVE RIGHTS
This Article 10 defines the relative rights of Holders and holders of
Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and the Holders, the obligation of
the Company, which is absolute and unconditional, to pay principal of,
premium and Liquidated Damages, if any, and interest on the Securities
in accordance with their terms;
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(2) affect the relative rights of the Holders and creditors of the
Company other than their rights in relation to holders of Senior Debt;
or
(3) prevent the Subordinated Debenture Trustee or any Holder from
exercising its available remedies upon a Default or Event of Default,
subject to the rights of holders and owners of Senior Debt to receive
distributions and payments otherwise payable to Holders.
If the Company fails because of this Article 10 to pay principal of,
premium or Liquidated Damages, if any, or interest on a Security on the due
date, the failure is still a Default or Event of Default.
SECTION 10.10 SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY
No right of any holder of Senior Debt to enforce the subordination of
the indebtedness evidenced by the Securities shall be impaired by any act or
failure to act by the Company or by its failure to comply with this Indenture.
SECTION 10.11 DISTRIBUTION OR NOTICE TO REPRESENTATIVE
Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
Representative.
Upon any payment or distribution of assets of the Company referred to
in this Article 10, the Subordinated Debenture Trustee and the Holders shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Subordinated Debenture Trustee or to the Holders for the purpose of ascertaining
the Persons entitled to participate in such distribution, the holders of the
Senior Debt and other Indebtedness of the Company, the amount thereof or payable
thereon, the amount or amounts paid or distributed thereon and all other facts
pertinent thereto or to this Article 10.
SECTION 10.12 RIGHTS OF SUBORDINATED DEBENTURE TRUSTEE AND PAYING AGENT
Notwithstanding the provisions of this Article 10 or any other
provisions of this Indenture, the Subordinated Debenture Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment or distribution by the Subordinated Debenture Trustee, or
the taking of any action by the Subordinated Debenture Trustee, and the
Subordinated Debenture Trustee and the Paying Agent may continue to make
payments on the Securities unless it shall have received at its Corporate Trust
Office at least three Business Days prior to the date of such payment written
notice of facts that would cause the payment of any Obligations with respect to
the Securities to violate this Article 10. Only the Company, a Representative
of Senior Debt or a holder of an issue of Senior Debt that has no Representative
may give the notice. Nothing in this Article 10 shall impair the claims of, or
payments to, the Subordinated Debenture Trustee under or pursuant to
Section 7.07 hereof. Except as set forth in the immediately preceding sentence,
nothing in this Section 10.12 shall limit the rights of holders of Senior Debt
to recover payments as contemplated by Section 10.06 hereof.
The Subordinated Debenture Trustee in its individual or any other
capacity may hold Senior Debt with the same rights it would have if it were not
Subordinated Debenture Trustee. Any Agent may do the same with like rights.
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SECTION 10.13 AUTHORIZATION TO EFFECT SUBORDINATION
Each Holder of a Security by its acceptance thereof authorizes and
directs the Subordinated Debenture Trustee on its behalf to take such action as
may be necessary or appropriate to effectuate the subordination as provided in
this Article 10 and appoints the Subordinated Debenture Trustee his
attorney-in-fact for any and all such purposes.
ARTICLE 11
MISCELLANEOUS
SECTION 11.01 TRUST INDENTURE ACT CONTROLS
If any provision of this Indenture limits, qualifies or conflicts with
another provision which is required to be included herein by any of Sections 310
to 317 inclusive of the TIA, such required provisions shall control.
SECTION 11.02 NOTICES
Any notice or communication to the Company, the Subordinated Debenture
Trustee, or the agents under the Credit Facilities, is duly given if in writing
and delivered in person or mailed by first-class mail (registered or certified,
return receipt requested), telecopier or overnight air courier guaranteeing
next day delivery, to the other's address:
If to the Company:
K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
Attention: General Counsel
Telecopier No.: (212) 745-0199
With a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Gary I. Horowitz, Esq.
Telecopier No.: (212) 455-2502
If to the Subordinated Debenture Trustee:
The Bank of New York
101 Barclay Street -- 21W
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Telecopier No.: (212) 815-5915/5917
If to the agents under the Credit Facilities:
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The Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza
New York, New York 10081
Attention: William K. Luby
Telecopier No.: (212) 552-1159
The Bank of New York
101 Barclay Street
New York, New York 10286
Attention: James Dimino
Telecopier No.: (212) 815-4038
If to the Exchange Debenture Trustee:
Chemical Bank
450 West 33rd Street
New York, New York 10001
Attention: Vice President Corporate Trust Administration -
15th Floor
Telecopier No.: (212) 613-7799/7800
The Company, the Subordinated Debenture Trustee, the agents under the
Credit Facilities, the Outstanding Note Trustee and the Exchange Debenture
Trustee by notice to the others may designate additional or different addresses
for subsequent notices or communications.
All notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first-class
mail, to the Holder's address shown on the register kept by the Registrar.
Failure to mail a notice or communication to a Holder or any defect in it shall
not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it shall
mail a copy to the Subordinated Debenture Trustee and each Agent at the same
time.
SECTION 11.03 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Securities.
The Company, the Subordinated Debenture Trustee, the Registrar and anyone else
shall have the protection of TIA Section 312(c).
SECTION 11.04 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT
Upon any request or application by the Company to the Subordinated
Debenture Trustee to take any action under this Indenture, the Company shall
furnish to the Subordinated Debenture Trustee:
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(1) an Officers' Certificate (which shall include the statements set
forth in Section 11.05 hereof) stating that, in the opinion of the
signers, all conditions precedent and covenants, if any, provided for
in this Indenture relating to the proposed action have been complied
with; and
(2) an Opinion of Counsel (which shall include the statements set
forth in Section 11.05 hereof) stating that, in the opinion of such
counsel, all such conditions precedent and covenants have been
complied with.
SECTION 11.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section 314(a)(4)) shall include:
(1) a statement that the Person making such certificate or opinion
has read and understands such covenant or condition;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether or not, in the opinion of such Person,
such condition or covenant has been complied with; PROVIDED that with
respect to matters of fact Opinions of Counsel may rely on an
Officers' Certificate or certificates of public officials.
SECTION 11.06 RULES BY SUBORDINATED DEBENTURE TRUSTEE AND AGENTS
The Subordinated Debenture Trustee may make reasonable rules for
action by or at a meeting of Holders. The Registrar or Paying Agent may make
reasonable rules and set reasonable requirements for its functions.
SECTION 11.07 LEGAL HOLIDAYS
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions in The City of New York or at a place of payment are authorized or
obligated by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
SECTION 11.08 NO RECOURSE AGAINST OTHERS
No director, officer, employee, incorporator or shareholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Securities or this Indenture or for any claim based on, in respect of,
or by reason of, such obligations of their creation. Each Holder of the
Securities by accepting a Security waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Security.
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SECTION 11.09 GOVERNING LAW
This Indenture and the Securities shall be governed by and construed
in accordance with the laws of the State of New York, without regard to
principles of conflicts of law.
SECTION 11.10 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
SECTION 11.11 SUCCESSORS
All agreements of the Company in this Indenture and the Securities
shall bind its successor. All agreements of the Subordinated Debenture Trustee
in this Indenture shall bind its successor.
SECTION 11.12 SEVERABILITY
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 11.13 COUNTERPART ORIGINALS
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
SECTION 11.14 SUBORDINATED DEBENTURE TRUSTEE AS PAYING AGENT AND REGISTRAR
The Company initially appoints the Subordinated Debenture Trustee as
Paying Agent and Registrar.
SECTION 11.15 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions hereof.
SECTION 11.16 THE BANK OF NEW YORK NOT ACTING IN INDIVIDUAL CAPACITY
Notwithstanding anything to the contrary contained herein, this
Indenture has been accepted by The Bank of New York not in its individual
capacity but solely as Trustee and in no event shall The Bank of New York have
any liability for the representations, warranties, covenants, agreements or
other obligations of the Company herein or in any of the certificates, notices
or agreements delivered by the Company pursuant hereto, as to all of which
recourse shall be had solely to the assets of the Company, and under no
circumstances shall The Bank of New York be personally liable for the payment of
any indebtedness or expenses of the Company.
SECTION 11.17 ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES
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In addition to the rights provided to Holders of Securities under the
Indenture, Holders of Transfer Restricted Securities shall have all the rights
set forth in the Registration Rights Agreement.
[Signatures on Next Page]
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SIGNATURES
K-III COMMUNICATIONS CORPORATION
Dated as of , By:
---------------------------------------
Name:
Title:
THE BANK OF NEW YORK,
as Subordinated Debenture Trustee
Dated as of , By:
---------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A-1
(Face of Note)
================================================================================
CUSIP/CINS ____________
9.20% [Series E] [Series F] Subordinated Exchange Debentures due 2009
No. ___ $__________
K-III COMMUNICATIONS CORPORATION
promises to pay to _________________________________________________
or registered assigns,
the principal sum of ________________________________________________
Dollars on November 1, 2009.
INTEREST PAYMENT DATES: February 1, May 1, August 1 and November 1
RECORD DATES: January 15, April 15, July 15 and October 15
K-III COMMUNICATIONS CORPORATION
By:
-----------------------------
Name:
Title:
Dated: _______________, 199__
(SEAL)
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
THE BANK OF NEW YORK,
as Subordinated Debenture Trustee
By:
-------------------------------------
Authorized Signatory
================================================================================
A1-1
<PAGE>
(Back of Note)
9.20% [Series E] [Series F] Subordinated Exchange Debentures due 2009
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE SUBORDINATED DEBENTURE TRUSTEE MAY MAKE SUCH NOTATIONS
HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS
GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION
2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE
SUBORDINATED DEBENTURE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE
INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY
WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B)
IT IS AN "INSTITUTIONAL ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2),
(3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE
SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN TWO YEARS AFTER THE LATER OF
THE DATE OF ORIGINAL ISSUANCE OF THIS SECURITY AND THE LAST DATE ON WHICH THE
COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF SUCH SECURITY (THE
"RESALE RESTRICTION TERMINATION DATE"), RESELL OR OTHERWISE TRANSFER THIS
SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF OR MORGAN STANLEY &
CO. INCORPORATED, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, OR SALOMON
BROTHERS INC, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES
TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT PRIOR TO SUCH TRANSFER, FURNISHES
TO THE COMPANY 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 THE COMPANY) AND IF SUCH TRANSFER IS IN RESPECT OF
AN AGGREGATE LIQUIDATION PREFERENCE OF SECURITIES AT THE TIME OF TRANSFER OF
LESS THAN $100,000 AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH
TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES
IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (F) 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 (3) AGREES THAT
IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND IN CONNECTION WITH ANY TRANSFER OF
THIS SECURITY WITHIN TWO YEARS AFTER THE RESALE RESTRICTION TERMINATION DATE.
IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER
MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE COMPANY SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS MAY REASONABLY BE REQUIRED TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO
A1-2
<PAGE>
AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. EACH PURCHASER ACKNOWLEDGES THAT THE
COMPANY RESERVES THE RIGHT PRIOR TO ANY OFFER, SALE OR OTHER TRANSFER PRIOR TO
THE RESALE RESTRICTION TERMINATION DATE PURSUANT TO CLAUSES (D) OR (E) ABOVE TO
REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND OTHER
INFORMATION SATISFACTORY TO THE COMPANY. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM
BY REGULATION S UNDER THE SECURITIES ACT.
CAPITALIZED TERMS USED HEREIN SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN
THE INDENTURE REFERRED TO BELOW UNLESS OTHERWISE INDICATED.
1. INTEREST. K-III Communications Corporation, a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at 9.20% per annum from ________________, 199__ until maturity and shall pay the
Liquidated Damages, if any, payable pursuant to Section 5 of the Registration
Rights Agreement referred to below. The Company will pay interest and
Liquidated Damages, if any, quarterly on February 1, May 1, August 1 and
November 1 of each year, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of issuance; PROVIDED that if there
is no existing Default in the payment of interest, and if this Note is
authenticated between a record date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date; PROVIDED, FURTHER, that the first Interest
Payment Date shall be _____________, 199__. The Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue principal and premium, if any, from time to time on demand at the rate
per annum on the Notes then in effect; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest and Liquidated Damages, if any (without regard to any
applicable grace periods) from time to time on demand at the same rate to the
extent lawful. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except
defaulted interest) and Liquidated Damages, if any, to the Persons who are
registered Holders of Notes at the close of business on January 15, April 15,
July 15 and October 15 next preceding the Interest Payment Date, even if such
Notes are cancelled after such record date and on or before such Interest
Payment Date, except as provided in Section 2.12 of the Indenture with respect
to defaulted interest. The Notes will be payable as to principal, premium and
Liquidated Damages, if any, and interest at the office or agency of the Company
maintained for such purpose within or without the City and State of New York,
or, at the option of the Company, payment of interest and Liquidated Damages, if
any, may be made by check mailed to the Holders at their addresses set forth in
the register of Holders, and provided that payment by wire transfer of
immediately available funds will be required with respect to principal of and
interest, premium and Liquidated Damages, if any, on all Global Notes and all
other Notes the Holders of which shall have provided wire transfer instructions
to the Company or the Paying Agent. Such payment shall be in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the
Subordinated Debenture Trustee under the Indenture, will act as Paying Agent and
Registrar. The Company may change any
A1-3
<PAGE>
Paying Agent or Registrar without notice to any Holder. The Company or any of
its Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated as of
____________, 199__ ("Indenture") between the Company and the Subordinated
Debenture Trustee. The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The Notes are subject
to all such terms, and Holders are referred to the Indenture and such Act for a
statement of such terms. To the extent any provision of this Note conflicts
with the express provisions of the Indenture, the provisions of the Indenture
shall govern and be controlling. The Notes are obligations of the Company
limited to $125 million in aggregate principal amount, plus amounts, if any,
issued to pay Liquidated Damages on outstanding Notes as set forth in Paragraph
2 hereof.
5. SUBORDINATION. The Company's payment of the principal of, premium and
Liquidated Damages, if any, and interest on the Notes is subordinated to the
prior payment in full of the Company's Senior Debt. Each Holder of Notes by his
acceptance hereof covenants and agrees that all payments of the principal of,
premium and Liquidated Damages, if any, and interest on the Notes by the Company
shall be subordinated in accordance with the provisions of Article 10 of the
Indenture, and each Holder accepts and agrees to be bound by such provisions.
6. OPTIONAL REDEMPTION.
On and after November 1, 2002 and on and after a Change of Control of
the Company, the Notes will be subject to redemption at the option of the
Company, 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
November 1 of the years indicated below.
YEAR PERCENTAGE
---- ----------
2002..................................... 104.60%
2003..................................... 102.30
2004 and thereafter...................... 100.00
Notwithstanding the foregoing:
(1) prior to November 1, 2002, the Company may redeem the Securities,
in whole or in part, at any time or from time to time, at a redemption
price (expressed as a percentage of principal amount) equal to the sum
of the principal amount of such Securities plus the Applicable
Debenture Make-Whole Premium thereon at the time of redemption
(subject to the right of holders of record on the relevant record date
to receive interest due on the relevant interest payment date);
(2) at any time prior to November 1, 2000, the Company may redeem up
to $60.0 million of the Securities at a redemption price of 109% of
the principal amount thereof, plus accrued and unpaid interest to the
redemption date, out of the net proceeds of one or more Public Equity
Offerings, PROVIDED that any such redemption shall occur within 180
days of such Public Equity Offering; and
A1-4
<PAGE>
(3) upon the occurrence at any time of a Change in Control, the
Securities will be redeemable, at the option of the Company, in whole
or in part, pursuant to the provisions of Section 3.08 of the
Indenture.
7. MANDATORY OFFERS TO REPURCHASE; MANDATORY REDEMPTION.
Subject to repayment of all then outstanding Senior Debt (to the
extent required by the terms thereof) or receipt by the Company of all consents
with respect thereto required to permit such an offer, following the occurrence
of any Change of Control, the Company will be required to offer (a "Change of
Control Offer") to purchase all outstanding Notes at a purchase price equal to
101% of the aggregate principal amount of such Notes, plus Liquidated Damages
and accrued and unpaid interest, if any, to the date of purchase (the "Change of
Control Payment"), in each case in accordance with and to the extent provided in
the Indenture. The Change of Control Offer shall remain open for a period of 20
Business Days after its commencement unless a longer offering period is required
by law. No earlier than 30 days nor later than 40 days after the notice of the
Change of Control Offer has been mailed (the "Change of Control Payment Date"),
the Company shall deposit, to the extent lawful, with the Paying Agent an amount
equal to the Change of Control Payment in respect of all Notes or portions
thereof tendered by Holders. The Paying Agent shall promptly mail or deliver
payment for all Notes tendered in the Change of Control Offer.
A Holder of Notes may tender or refrain from tendering all or any
portion of his Notes at his discretion by completing the form entitled "OPTION
OF HOLDER TO ELECT PURCHASE" appearing on this Note. Any portion of Notes
tendered must be in integral multiples of $1,000.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed by
first class mail at least 30 days but not more than 60 days before the
redemption date to each Holder whose Notes are to be redeemed at its registered
address. Notes in denominations larger than $1,000 may be redeemed in part but
only in integral multiples of $1,000, unless all of the Notes held by a Holder
are to be redeemed. On and after the redemption date interest ceases to accrue
on Notes or portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000; PROVIDED, HOWEVER, that in connection with the payment of interest with
respect to the Notes in additional Notes and the original issuance of Notes
hereunder in exchange for shares of the Company's Series E Exchangeable
Preferred Stock, the Company shall pay any amount not in denominations of $1,000
and/or integral multiples thereof, in cash. The transfer of Notes may be
registered and Notes may be exchanged as provided in the 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 Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, it need not
exchange or register the transfer of any Notes for a period of 15 days before
the mailing of a notice of redemption or during the period between a record date
and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be
treated as its owner for all purposes.
11. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Indenture or the Notes may be amended or supplemented and any existing Default
under, or compliance with any provision of, the
A1-5
<PAGE>
Indenture may be waived with the written consent of the Holders of at least 51%
in principal amount of the Notes then outstanding (including consents obtained
in connection with a tender offer or exchange offer for Notes). Without the
consent of any Holder, the Company and the Subordinated Debenture Trustee may
amend or supplement the 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 comply with Section 5.01 of the Indenture; to make any
change that would provide any additional rights or benefits to the Holders or
that does not adversely affect the rights under the Indenture of any Holder; or
to comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the TIA.
Without the consent of each Holder affected, an amendment or waiver
may not (with respect to any Notes held by a non-consenting Holder): (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 connection with repurchases under Sections 3.07, 3.08 or 4.08 of the
Indenture; (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 the
principal of, premium or Liquidated Damages, if any, or interest on Notes or
that resulted from a failure to comply with Section 4.08 of the Indenture,
(except a rescission of acceleration of the Notes by Holders of at least 51% in
aggregate principal amount of the Notes); (v) make any Note payable in money
other than that stated in the Note; (vi) make any change in Article 10 of the
Indenture that adversely affects the rights of any Holder; (vii) make any change
in Section 6.04 or 6.07 of the Indenture or the last sentence of the fourth
paragraph of Section 9.02 of the Indenture; or (viii) waive a redemption payment
with respect to any Note.
The right of any Holder to participate in any consent required or
sought pursuant to any provision of the Indenture (and the obligation of the
Company to obtain any such consent otherwise required from such Holder) may be
subject to the requirement that such Holder shall have been the Holder of record
of any Notes with respect to which such consent is required or sought as of a
date identified by the Subordinated Debenture Trustee in a notice furnished to
Holders in accordance with the terms of this Indenture.
12. DEFAULTS AND REMEDIES. Events of Default include: default in
payment of interest or Liquidated Damages on any Note for 30 days and for five
days after written notice of such default is given to the Company by the Holders
of at least 51% in principal amount of any Note following the expiration of such
30-day period; default in payment of the principal or premium of the Notes at
maturity or upon acceleration, redemption or otherwise, and such default
continues for a period of ten days; failure by the Company for 60 days after
written notice to it from the Trustee, or after written notice to it and the
Trustee from Holders of at least 51% in principal amount of the then outstanding
Notes, to comply with any of its other agreements in the Indenture or the Notes;
certain defaults under other Indebtedness; and certain events of bankruptcy or
insolvency. If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 51% in principal amount of the then outstanding Notes by
written notice to the Company, to the agent under the Credit Facilities, the
trustees under the Senior Notes and the Exchange Debenture Trustee (and to the
Trustee if such notice is given by the Holders) may, and the Trustee at the
request of the Holders shall, declare all of the Notes to be immediately due and
payable for an amount equal to 100% of the principal amount of the Notes plus
premium and Liquidated Damages, if any, and accrued interest to the date of
payment upon the first to occur of an acceleration under the Credit Facilities,
the Senior Notes or the Exchange Debentures or 15 Business Days after receipt by
the Company, such agent and such trustees of such written notice to the extent
such Event of Default is continuing, except that in the case of an Event of
Default arising from certain events of bankruptcy or
A1-6
<PAGE>
insolvency, all outstanding Notes shall become due and payable immediately
without further action or notice. Holders may not enforce the Indenture or the
Notes except as provided in the Indenture. The Trustee may require indemnity
satisfactory to it before it enforces the Indenture or the Notes. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders notice of any continuing Default or Event
of Default (except a Default or Event of Default in payment of principal,
premium or Liquidated Damages, if any, or interest or that resulted from a
failure to comply with Section 4.08 of the Indenture) if and so long as a
committee of its Trust Officers determines in good faith that withholding notice
is in their interests. The Company must furnish an annual compliance
certificate to the Trustee.
13. SUBORDINATED DEBENTURE TRUSTEE DEALINGS WITH COMPANY. The
Subordinated Debenture Trustee, in its individual or any other capacity, may
make loans to, accept deposits from, and perform services for the Company or its
Affiliates, and may otherwise deal with the Company or its Affiliates, as if it
were not Subordinated Debenture Trustee.
14. NO RECOURSE AGAINST OTHERS. 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 or the Indenture or for any
claim based on, in respect of, or by reason of, such obligations of 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.
15. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Subordinated Debenture Trustee or an
authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED NOTES. In
addition to the rights provided to Holders of Notes under the Indenture, Holders
of Transfer Restricted Notes shall have all the rights set forth in the
Registration Rights Agreement.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to:
K-III COMMUNICATIONS CORPORATION
745 Fifth Avenue
New York, New York 10151
Attention: Treasurer
A1-7
<PAGE>
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint ________________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date: ______________________
Your Signature:
---------------------------------------------
(Sign exactly as your name appears on the
face of this Note)
Signature Guarantee.
A1-8
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.08 of the Indenture, check the box below:
/ / Section 4.08
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.08 of the Indenture, state the amount you elect to
have purchased: $___________
Date: Your Signature:
------------------- -----------------------------------
(Sign exactly as your name appears
on the Note)
Tax Identification No.:
---------------------------
Signature Guarantee.
A1-9
<PAGE>
SCHEDULE OF EXCHANGES FOR DEFINITIVE DEBENTURES
The following exchanges of a part of this Global Note for Definitive
Notes have been made:
<TABLE>
<CAPTION>
Principal Amount of this Signature of
Amount of decrease in Amount of increase in Global Note authorized signatory
Principal Amount of Principal Amount of following such decrease of Trustee or Note
Date of Exchange this Global Note this Global Note (or increase) Custodian
- ---------------- --------------------- --------------------- -------------------------- --------------------
<S> <C> <C> <C> <C>
</TABLE>
A1-10
<PAGE>
[EXHIBIT A-2]
(Face of Regulation S Temporary Global Note)
================================================================================
CUSIP/CINS __________
9.20% [SERIES E] [SERIES F] SUBORDINATED EXCHANGE DEBENTURES DUE 2009
NO. ___ $__________
K-III COMMUNICATIONS CORPORATION
PROMISES TO PAY TO ____________________________________________________
OR REGISTERED ASSIGNS,
THE PRINCIPAL SUM OF ___________________________________________________
DOLLARS ON NOVEMBER 1, 2009.
INTEREST PAYMENT DATES: FEBRUARY 1, MAY 1, AUGUST 1 AND NOVEMBER 1
RECORD DATES: JANUARY 15, APRIL 15, JULY 15 AND OCTOBER 15
K-III COMMUNICATIONS CORPORATION
BY:
------------------------------
NAME:
TITLE:
[(SEAL)]
DATED: _______________, 199__
THIS IS ONE OF THE GLOBAL
NOTES REFERRED TO IN THE
WITHIN-MENTIONED INDENTURE:
THE BANK OF NEW YORK,
AS SUBORDINATED DEBENTURE TRUSTEE
BY:
-------------------------------
AUTHORIZED SIGNATORY
================================================================================
A2-1
<PAGE>
(BACK OF REGULATION S TEMPORARY GLOBAL NOTE)
___% [SERIES E] [SERIES F] SUBORDINATED EXCHANGE DEBENTURE DUE 2009
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS
SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE
BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED
TO RECEIVE PAYMENT OF INTEREST HEREON.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B)
IT IS AN "INSTITUTIONAL ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2),
(3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE
SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN TWO YEARS AFTER THE LATER OF
THE DATE OF ORIGINAL ISSUANCE OF THIS SECURITY AND THE LAST DATE ON WHICH THE
COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF SUCH SECURITY (THE
"RESALE RESTRICTION TERMINATION DATE"), RESELL OR OTHERWISE TRANSFER THIS
SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF OR MORGAN STANLEY &
CO. INCORPORATED, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, OR SALOMON
BROTHERS INC, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES
TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT PRIOR TO SUCH TRANSFER, FURNISHES
TO THE COMPANY 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 THE COMPANY) AND IF SUCH TRANSFER IS IN RESPECT OF
AN AGGREGATE LIQUIDATION PREFERENCE OF SECURITIES AT THE TIME OF TRANSFER OF
LESS THAN $100,000 AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH
TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES
IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(E) PURSUANT TO
A2-2
<PAGE>
THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT
(IF AVAILABLE) OR (F) 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 (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN TWO YEARS
AFTER THE RESALE RESTRICTION TERMINATION DATE. IF THE PROPOSED TRANSFEREE IS AN
INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION
AS MAY REASONABLY BE REQUIRED TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. EACH PURCHASER ACKNOWLEDGES
THAT THE COMPANY RESERVES THE RIGHT PRIOR TO ANY OFFER, SALE OR OTHER TRANSFER
PRIOR TO THE RESALE RESTRICTION TERMINATION DATE PURSUANT TO CLAUSES (D) OR (E)
ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND OTHER
INFORMATION SATISFACTORY TO THE COMPANY. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM
BY REGULATION S UNDER THE SECURITIES ACT.
CAPITALIZED TERMS USED HEREIN SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN
THE INDENTURE REFERRED TO BELOW UNLESS OTHERWISE INDICATED.
1. INTEREST. K-III Communications Corporation, a Delaware corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at ___% per annum from ________________, 199__ until maturity and shall pay the
Liquidated Damages, if any, payable pursuant to Section 5 of the Registration
Rights Agreement referred to below. The Company will pay interest and
Liquidated Damages, if any, quarterly on February 1, May 1, August 1 and
November 1 of each year, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of issuance; PROVIDED that if there
is no existing Default in the payment of interest, and if this Note is
authenticated between a record date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date; PROVIDED, FURTHER, that the first Interest
Payment Date shall be _____________, 199__. The Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue principal and premium, if any, from time to time on demand at the rate
per annum on the Notes then in effect; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest and Liquidated Damages, if any (without regard to any
applicable grace periods) from time to time on demand at the same rate to the
extent lawful. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
Until this Regulation S Temporary Global Note is exchanged for one or more
Regulation S Permanent Global Notes, the Holder hereof shall not be entitled to
receive payments of interest hereon; until so exchanged in full, this Regulation
S Temporary Global Note shall in all other respects be entitled to the same
benefits as other Subordinated Exchange Debentures under this Indenture.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes (except
defaulted interest) and Liquidated Damages, if any, to the Persons who are
registered Holders of Notes at the close of business on January 15, April 15,
July 15 and October 15 next preceding the Interest Payment Date, even if such
Notes are cancelled after such record date and on or before such Interest
Payment Date, except as provided in Section 2.12 of the Indenture with respect
to defaulted interest. The Notes will be payable
A2-3
<PAGE>
as to principal, premium and Liquidated Damages, if any, and interest at the
office or agency of the Company maintained for such purpose within or without
the City and State of New York, or, at the option of the Company, payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
Holders at their addresses set forth in the register of Holders, and provided
that payment by wire transfer of immediately available funds will be required
with respect to principal of and interest, premium and Liquidated Damages, if
any, on all Global Notes and all other Notes the Holders of which shall have
provided wire transfer instructions to the Company or the Paying Agent. Such
payment shall be in such coin or currency of the United States of America as at
the time of payment is legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the
Subordinated Debenture Trustee under the Indenture, will act as Paying Agent and
Registrar. The Company may change any Paying Agent or Registrar without notice
to any Holder. The Company or any of its Subsidiaries may act in any such
capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated as of
____________, 199__ ("Indenture") between the Company and the Subordinated
Debenture Trustee. The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (15 U.S. Code Sections 77aaa-77bbbb). The Notes are subject
to all such terms, and Holders are referred to the Indenture and such Act for a
statement of such terms. To the extent any provision of this Note conflicts
with the express provisions of the Indenture, the provisions of the Indenture
shall govern and be controlling. The Notes are obligations of the Company
limited to $125 million in aggregate principal amount, plus amounts, if any,
issued to pay Liquidated Damages on outstanding Notes as set forth in Paragraph
2 hereof.
5. SUBORDINATION. The Company's payment of the principal of, premium and
Liquidated Damages, if any, and interest on the Notes is subordinated to the
prior payment in full of the Company's Senior Debt. Each Holder of Notes by his
acceptance hereof covenants and agrees that all payments of the principal of,
premium and Liquidated Damages, if any, and interest on the Notes by the Company
shall be subordinated in accordance with the provisions of Article 10 of the
Indenture, and each Holder accepts and agrees to be bound by such provisions.
6. OPTIONAL REDEMPTION.
On and after November 1, 2002 and on and after a Change of Control of
the Company, the Notes will be subject to redemption at the option of the
Company, 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
November 1 of the years indicated below.
YEAR PERCENTAGE
---- ----------
2002........................... 104.60%
2003........................... 102.30
2004 and thereafter............ 100.00
Notwithstanding the foregoing:
A2-4
<PAGE>
(1) prior to November 1, 2002, the Company may redeem the Securities,
in whole or in part, at any time or from time to time, at a redemption
price (expressed as a percentage of principal amount) equal to the sum
of the principal amount of such Securities plus the Applicable
Debenture Make-Whole Premium thereon at the time of redemption
(subject to the right of holders of record on the relevant record date
to receive interest due on the relevant interest payment date);
(2) at any time prior to November 1, 2000, the Company may redeem up
to $60.0 million of the Securities at a redemption price of 109% of
the principal amount thereof, plus accrued and unpaid interest to the
redemption date, out of the net proceeds of one or more Public Equity
Offerings, PROVIDED that any such redemption shall occur within 180
days of such Public Equity Offering; and
(3) upon the occurrence at any time of a Change in Control, the
Securities will be redeemable, at the option of the Company, in whole
or in part, pursuant to the provisions of Section 3.08 hereof.
7. MANDATORY OFFERS TO REPURCHASE; MANDATORY REDEMPTION.
of Control Offer") to purchase all outstanding Notes at a purchase price equal
to 101% of the aggregate principal amount of such Notes, plus Liquidated Damages
and accrued and unpaid interest, if any, to the date of purchase (the "Change of
Control Payment"), in each case in accordance with and to the extent provided in
the Indenture. The Change of Control Offer shall remain open for a period of 20
Business Days after its commencement unless a longer offering period is required
by law. No earlier than 30 days nor later than 40 days after the notice of the
Change of Control Offer has been mailed (the "Change of Control Payment Date"),
the Company shall deposit, to the extent lawful, with the Paying Agent an amount
equal to the Change of Control Payment in respect of all Notes or portions
thereof tendered by Holders. The Paying Agent shall promptly mail or deliver
payment for all Notes tendered in the Change of Control Offer.
A Holder of Notes may tender or refrain from tendering all or any
portion of his Notes at his discretion by completing the form entitled "OPTION
OF HOLDER TO ELECT PURCHASE" appearing on this Note. Any portion of Notes
tendered must be in integral multiples of $1,000.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed by
first class mail at least 30 days but not more than 60 days before the
redemption date to each Holder whose Notes are to be redeemed at its registered
address. Notes in denominations larger than $1,000 may be redeemed in part but
only in integral multiples of $1,000, unless all of the Notes held by a Holder
are to be redeemed. On and after the redemption date interest ceases to accrue
on Notes or portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000; PROVIDED, HOWEVER, that in connection with the payment of interest with
respect to the Notes in additional Notes and the original issuance of Notes
hereunder in exchange for shares of the Company's Series A Exchangeable
Preferred Stock, the Company shall pay any amount not in denominations of $1,000
and/or integral multiples thereof, in cash. The transfer of Notes may be
registered and Notes may be exchanged as provided in the 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 Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of
A2-5
<PAGE>
any Note being redeemed in part. Also, it need not exchange or register the
transfer of any Note for a period of 15 days before the mailing of a notice of
redemption or during the period between a record date and the corresponding
Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be
treated as its owner for all purposes.
11. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Indenture or the Notes may be amended or supplemented and any existing Default
under, or compliance with any provision of, the Indenture may be waived with the
written consent of the Holders of at least 51% in principal amount of the Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Notes). Without the consent of any Holder, the Company
and the Subordinated Debenture Trustee may amend or supplement the 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 comply
with Section 5.01 of the Indenture; to make any change that would provide any
additional rights or benefits to the Holders or that does not adversely affect
the rights under the Indenture of any Holder; or to comply with requirements of
the SEC in order to effect or maintain the qualification of the Indenture under
the TIA.
Without the consent of each Holder affected, an amendment or waiver
may not (with respect to any Notes held by a non-consenting Holder): (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 connection with repurchases under Sections 3.07, 3.08 or 4.08 of the
Indenture; (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 the
principal of, premium or Liquidated Damages, if any, or interest on Notes or
that resulted from a failure to comply with Section 4.08 of the Indenture,
(except a rescission of acceleration of the Notes by Holders of at least 51% in
aggregate principal amount of the Notes); (v) make any Note payable in money
other than that stated in the Note; (vi) make any change in Article 10 of the
Indenture that adversely affects the rights of any Holder; (vii) make any change
in Section 6.04 or 6.07 of the Indenture or the last sentence of the fourth
paragraph of Section 9.02 of the Indenture; or (viii) waive a redemption payment
with respect to any Note.
The right of any Holder to participate in any consent required or
sought pursuant to any provision of the Indenture (and the obligation of the
Company to obtain any such consent otherwise required from such Holder) may be
subject to the requirement that such Holder shall have been the Holder of record
of any Notes with respect to which such consent is required or sought as of a
date identified by the Subordinated Debenture Trustee in a notice furnished to
Holders in accordance with the terms of this Indenture.
12. DEFAULTS AND REMEDIES. Events of Default include: default in
payment of interest or Liquidated Damages on any Note for 30 days and for five
days after written notice of such default is given to the Company by the Holders
of at least 51% in principal amount of any Note following the expiration of such
30-day period; default in payment of the principal or premium of the Notes at
maturity or upon acceleration, redemption or otherwise, and such default
continues for a period of ten days; failure by the Company for 60 days after
written notice to it from the Trustee, or after written notice to it and the
Trustee from Holders of at least 51% in principal amount of the then outstanding
Notes, to comply with any of its other agreements in the Indenture or the Notes;
certain defaults under other Indebtedness; and certain events of bankruptcy or
insolvency. If an Event of Default occurs and is continuing, the Trustee
A2-6
<PAGE>
or the Holders of at least 51% in principal amount of the then outstanding Notes
by written notice to the Company, to the agent under the Credit Facilities, the
trustees under the Senior Notes and the Exchange Debenture Trustee (and to the
Trustee if such notice is given by the Holders) may, and the Trustee at the
request of the Holders shall, declare all of the Notes to be immediately due and
payable for an amount equal to 100% of the principal amount of the Notes plus
premium and Liquidated Damages, if any, and accrued interest to the date of
payment upon the first to occur of an acceleration under the Credit Facilities,
the Senior Notes or the Exchange Debentures or 15 Business Days after receipt by
the Company, such agent and such trustees of such written notice to the extent
such Event of Default is continuing, except that in the case of an Event of
Default arising from certain events of bankruptcy or insolvency, all outstanding
Notes shall become due and payable immediately without further action or
notice. Holders may not enforce the Indenture or the Notes except as provided
in the Indenture. The Trustee may require indemnity satisfactory to it before
it enforces the Indenture or the Notes. Subject to certain limitations, Holders
of a majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders notice of any continuing Default or Event of Default (except a Default
or Event of Default in payment of principal, premium or Liquidated Damages, if
any, or interest or that resulted from a failure to comply with Section 4.08 of
the Indenture) if and so long as a committee of its Trust Officers determines in
good faith that withholding notice is in their interests. The Company must
furnish an annual compliance certificate to the Trustee.
13. SUBORDINATED DEBENTURE TRUSTEE DEALINGS WITH COMPANY. The
Subordinated Debenture Trustee, in its individual or any other capacity, may
make loans to, accept deposits from, and perform services for the Company or its
Affiliates, and may otherwise deal with the Company or its Affiliates, as if it
were not Subordinated Debenture Trustee.
14. NO RECOURSE AGAINST OTHERS. 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 or the Indenture or for any
claim based on, in respect of, or by reason of, such obligations of 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.
15. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Subordinated Debenture Trustee or an
authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED NOTES. In
addition to the rights provided to Holders of Notes under the Indenture, Holders
of Transfer Restricted Notes shall have all the rights set forth in the
Registration Rights Agreement.
A2-7
<PAGE>
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to:
K-III COMMUNICATIONS CORPORATION
745 Fifth Avenue
New York, New York 10151
Attention: Treasurer
A2-8
<PAGE>
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint ________________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date: ______________________
Your Signature:
---------------------------------------------
(Sign exactly as your name appears on the
face of this Note)
Signature Guarantee.
A2-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.08 of the Indenture, check the box below:
/ / Section 4.08
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.08 of the Indenture, state the amount you elect to
have purchased: $___________
Date: Your Signature:
------------------- -----------------------------------
(Sign exactly as your name appears
on the Note)
Tax Identification No.:
---------------------------
Signature Guarantee.
A2-10
<PAGE>
SCHEDULE OF EXCHANGES FOR DEFINITIVE DEBENTURES
The following exchanges of a part of this Global Note for Definitive
Notes have been made:
<TABLE>
<CAPTION>
Principal Amount of this Signature of
Amount of decrease in Amount of increase in Global Note authorized signatory
Principal Amount of Principal Amount of following such decrease of Trustee or Note
Date of Exchange this Global Note this Global Note (or increase) Custodian
- ---------------- --------------------- --------------------- -------------------------- --------------------
<S> <C> <C> <C> <C>
</TABLE>
A2-11
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
The Bank of New York
101 Barclay Street
New York, New York 10286
Re: 9.20% SUBORDINATED EXCHANGE DEBENTURES DUE 2009
Reference is hereby made to the Indenture, dated as of
___________________ (the "INDENTURE"), between K-III Communications Corporation,
as issuer (the "COMPANY"), and The Bank of New York, as trustee. Capitalized
terms used but not defined herein shall have the meanings given to them in the
Indenture.
______________, (the "TRANSFEROR") owns and proposes to transfer the
Note[s] or interest in such Note[s] specified in Annex A hereto, in the
principal amount of $___________ in such Note[s] or interests (the "TRANSFER"),
to __________ (the "TRANSFEREE"), as further specified in Annex A hereto. In
connection with the Transfer, the Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. / / CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE
144A GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO RULE 144A. The Transfer is
being effected pursuant to and in accordance with Rule 144A under the United
States Securities Act of 1933, as amended (the "SECURITIES ACT"), and,
accordingly, the Transferor hereby further certifies that the beneficial
interest or Definitive Note is being transferred to a Person that the Transferor
reasonably believed and believes is purchasing the beneficial interest or
Definitive Note for its own account, or for one or more accounts with respect to
which such Person exercises sole investment discretion, and such Person and each
such account is a "qualified institutional buyer" within the meaning of Rule
144A in a transaction meeting the requirements of Rule 144A and such Transfer is
in compliance with any applicable blue sky securities laws of any state of the
United States. Upon consummation of the proposed Transfer in accordance with
the terms of the Indenture, the transferred beneficial interest or Definitive
Note will be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the 144A Global Note and/or the Definitive Note and
in the Indenture and the Securities Act.
2. / / CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE
TEMPORARY REGULATION S GLOBAL NOTE, THE REGULATION S GLOBAL NOTE OR A DEFINITIVE
NOTE PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and
in accordance with Rule 903 or Rule 904 under the Securities Act and,
accordingly, the Transferor hereby further certifies that (i) the Transfer is
not being made to a person in the United States and (x) at the time the buy
order was originated, the Transferee was outside the United States or such
Transferor and any Person acting on its behalf reasonably believed and believes
that the Transferee was outside the United States or (y) the transaction was
executed in, on or through the facilities of a designated offshore securities
market and neither such Transferor nor any Person acting on
B-1
<PAGE>
its behalf knows that the transaction was prearranged with a buyer in the United
States, (ii) no directed selling efforts have been made in contravention of the
requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities
Act and, (iii) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act and (iv) if the proposed
transfer is being made prior to the expiration of the Restricted Period, the
transfer is not being made to a U.S. Person or for the account or benefit of a
U.S. Person (other than an Placement Agent). Upon consummation of the proposed
transfer in accordance with the terms of the Indenture, the transferred
beneficial interest or Definitive Note will be subject to the restrictions on
Transfer enumerated in the Private Placement Legend printed on the Regulation S
Global Note, the Temporary Regulation S Global Note and/or the Definitive Note
and in the Indenture and the Securities Act.
3. / / CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL
INTEREST IN A DEFINITIVE NOTE PURSUANT TO ANY PROVISION OF THE SECURITIES ACT
OTHER THAN RULE 144A OR REGULATION S. The Transfer is being effected in
compliance with the transfer restrictions applicable to beneficial interests in
Restricted Global Notes and Restricted Definitive Notes and pursuant to and in
accordance with the Securities Act and any applicable blue sky securities laws
of any state of the United States, and accordingly the Transferor hereby further
certifies that (check one):
(a) / / such Transfer is being effected pursuant to and in accordance
with Rule 144 under the Securities Act;
or
(b) / / such Transfer is being effected to the Company or a subsidiary
thereof;
or
(c) / / such Transfer is being effected pursuant to an effective
registration statement under the Securities Act and in compliance with the
prospectus delivery requirements of the Securities Act;
or
(d) / / such Transfer is being effected to an Institutional Accredited
Investor and pursuant to an exemption from the registration requirements of the
Securities Act other than Rule 144A, Rule 144 or Rule 904, and the Transferor
hereby further certifies that the Transfer complies with the transfer
restrictions applicable to Restricted Definitive Notes and the requirements of
the exemption claimed, which certification is supported by (1) a certificate
executed by the Transferee in the form of Exhibit D to the Indenture and (2) if
such Transfer is in respect of a principal amount of Notes at the time of
transfer of less than $100,000, an Opinion of Counsel provided by the Transferor
or the Transferee (a copy of which the Transferor has attached to this
certification), to the effect that such Transfer is in compliance with the
Securities Act. Upon consummation of the proposed transfer in accordance with
the terms of the Indenture, the transferred Definitive Note will be subject to
the restrictions on transfer enumerated in the Private Placement Legend printed
on Definitive Notes and in the Indenture and the Securities Act.
4. / / CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN AN
UNRESTRICTED GLOBAL NOTE OR OF AN UNRESTRICTED DEFINITIVE NOTE.
(a) / / CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The Transfer is
being effected pursuant to and in accordance with Rule 144 under the Securities
Act and in compliance with the transfer
B-2
<PAGE>
restrictions contained in the Indenture and any applicable blue sky securities
laws of any state of the United States and (ii) the restrictions on transfer
contained in the Indenture and the Private Placement Legend are not required in
order to maintain compliance with the Securities Act. Upon consummation of the
proposed Transfer in accordance with the terms of the Indenture, the transferred
beneficial interest or Definitive Note will no longer be subject to the
restrictions on transfer enumerated in the Private Placement Legend printed on
the Restricted Global Notes, on Restricted Definitive Notes and in the
Indenture.
(b) / / CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The Transfer
is being effected pursuant to and in accordance with Rule 903 or Rule 904 under
the Securities Act and in compliance with the transfer restrictions contained in
the Indenture and any applicable blue sky securities laws of any state of the
United States and (ii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will no longer be subject to the restrictions on
transfer enumerated in the Private Placement Legend printed on the Restricted
Global Notes, on Restricted Definitive Notes and in the Indenture.
(c) / / CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The
Transfer is being effected pursuant to and in compliance with an exemption from
the registration requirements of the Securities Act other than Rule 144, Rule
903 or Rule 904 and in compliance with the transfer restrictions contained in
the Indenture and any applicable blue sky securities laws of any State of the
United States and (ii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will not be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes or Restricted Definitive Notes and in the Indenture.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company.
----------------------------------
[Insert Name of Transferor]
By:
-------------------------------
Name:
Title:
Dated:________________, ____
B-3
<PAGE>
ANNEX A TO CERTIFICATE OF TRANSFER
1. The Transferor owns and proposes to transfer the following:
[CHECK ONE OF (a) OR (b)]
(a) / / a beneficial interest in the:
(i) / / 144A Global Note (CUSIP _______), or
(ii) / / Regulation S Global Note (CUSIP ________), or
(b) / / a Restricted Definitive Note.
2. After the Transfer the Transferee will hold:
[CHECK ONE]
(a) / / a beneficial interest in the:
(i) / / 144A Global Note (CUSIP _________), or
(ii) / / Regulation S Global Note (CUSIP ________), or
(iii) / / Unrestricted Global Note (CUSIP ________); or
(b) / / a Restricted Definitive Note; or
(c) / / an Unrestricted Definitive Note,
in accordance with the terms of the Indenture.
B-4
<PAGE>
EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
The Bank of New York
101 Barclay Street
New York, New York 10286
Re: 9.20% SUBORDINATED EXCHANGE DEBENTURES DUE 2009
(CUSIP ______________________)
Reference is hereby made to the Indenture, dated as of
______________________ (the "INDENTURE"), between K-III Communications
Corporation, as issuer (the "COMPANY"), and The Bank of New York, as trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.
______________ , (the "OWNER") owns and proposes to exchange the
Note[s] or interest in such Note[s] specified herein, in the principal amount of
$____________ in such Note[s] or interests (the "EXCHANGE"). In connection with
the Exchange, the Owner hereby certifies that:
1. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN A
RESTRICTED GLOBAL NOTE FOR UNRESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS
IN AN UNRESTRICTED GLOBAL NOTE
(a) / / CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In
connection with the Exchange of the Owner's beneficial interest in a Restricted
Global Note for a beneficial interest in an Unrestricted Global Note in an equal
principal amount, the Owner hereby certifies (i) the beneficial interest is
being acquired for the Owner's own account without transfer, (ii) such Exchange
has been effected in compliance with the transfer restrictions applicable to the
Global Notes and pursuant to and in accordance with the United States Securities
Act of 1933, as amended (the "SECURITIES ACT"), (iii) the restrictions on
transfer contained in the Indenture and the Private Placement Legend are not
required in order to maintain compliance with the Securities Act and (iv) the
beneficial interest in an Unrestricted Global Note is being acquired in
compliance with any applicable blue sky securities laws of any state of the
United States.
(b) / / CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
GLOBAL NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Exchange of
the Owner's beneficial interest in a Restricted Global Note for an Unrestricted
Definitive Note, the Owner hereby certifies (i) the Definitive Note is being
acquired for the Owner's own account without transfer, (ii) such Exchange has
been effected in compliance with the transfer restrictions applicable to the
Restricted Global Notes and pursuant to and in accordance with the Securities
Act, (iii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act and (iv) the Definitive Note is being acquired in compliance
with any applicable blue sky securities laws of any state of the United States.
C-1
<PAGE>
(c) / / CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the
Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an
Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest
is being acquired for the Owner's own account without transfer, (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to Restricted Definitive Notes and pursuant to and in accordance with
the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the beneficial interest is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(d) / / CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
UNRESTRICTED DEFINITIVE NOTE. In connection with the Owner's Exchange of a
Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby
certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's
own account without transfer, (ii) such Exchange has been effected in compliance
with the transfer restrictions applicable to Restricted Definitive Notes and
pursuant to and in accordance with the Securities Act, (iii) the restrictions on
transfer contained in the Indenture and the Private Placement Legend are not
required in order to maintain compliance with the Securities Act and (iv) the
Unrestricted Definitive Note is being acquired in compliance with any applicable
blue sky securities laws of any state of the United States.
2. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN
RESTRICTED GLOBAL NOTES FOR RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS
IN RESTRICTED GLOBAL NOTES
(a) / / CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
GLOBAL NOTE TO RESTRICTED DEFINITIVE NOTE. In connection with the Exchange of
the Owner's beneficial interest in a Restricted Global Note for a Restricted
Definitive Note with an equal principal amount, the Owner hereby certifies that
the Restricted Definitive Note is being acquired for the Owner's own account
without transfer. Upon consummation of the proposed Exchange in accordance with
the terms of the Indenture, the Restricted Definitive Note issued will continue
to be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the Restricted Definitive Note and in the Indenture
and the Securities Act.
(b) / / CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
BENEFICIAL INTEREST IN A RESTRICTED GLOBAL NOTE. In connection with the
Exchange of the Owner's Restricted Definitive Note for a beneficial interest in
the [CHECK ONE] / / 144A Global Note, / / Regulation S Global Note with an equal
principal amount, the Owner hereby certifies (i) the beneficial interest is
being acquired for the Owner's own account without transfer and (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to the Restricted Global Notes and pursuant to and in accordance with
the Securities Act, and in compliance with any applicable blue sky securities
laws of any state of the United States. Upon consummation of the proposed
Exchange in accordance with the terms of the Indenture, the beneficial interest
issued will be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the relevant Restricted Global Note and in the
Indenture and the Securities Act.
C-2
<PAGE>
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company.
-----------------------------------------
[Insert Name of Owner]
By:
--------------------------------------
Name:
Title:
Dated: ______________, ____
C-3
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
The Bank of New York
101 Barclay Street
New York, New York 10286
Re: 9.20% SUBORDINATED EXCHANGE DEBENTURES DUE 2009
Reference is hereby made to the Indenture, dated as of
___________________ (the "INDENTURE"), between K-III Communications Corporation,
as issuer (the "COMPANY"), and The Bank of New York, as trustee. Capitalized
terms used but not defined herein shall have the meanings given to them in the
Indenture.
In connection with our proposed purchase of $____________ aggregate
principal amount of:
(a) / / a beneficial interest in a Global Note, or
(b) / / a Definitive Note,
we confirm that:
1. We understand that any subsequent transfer of the Notes or any
interest therein is subject to certain restrictions and conditions set forth in
the Indenture and the undersigned agrees to be bound by, and not to resell,
pledge or otherwise transfer the Notes or any interest therein except in
compliance with, such restrictions and conditions and the United States
Securities Act of 1933, as amended (the "SECURITIES ACT").
2. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes and any interest therein
may not be offered or sold except as permitted in the following sentence. We
agree, on our own behalf and on behalf of any accounts for which we are acting
as hereinafter stated, that if we should sell the Notes or any interest therein,
we will do so only (A) to the Company or any subsidiary thereof, (B) in
accordance with Rule 144A under the Securities Act to a "qualified institutional
buyer" (as defined therein), (C) to an institutional "accredited investor" (as
defined below) that, prior to such transfer, furnishes (or has furnished on its
behalf by a U.S. broker-dealer) to you and to the Company a signed letter
substantially in the form of this letter and, if such transfer is in respect of
a principal amount of Notes, at the time of transfer of less than $100,000, an
Opinion of Counsel in form reasonably acceptable to the Company to the effect
that such transfer is in compliance with the Securities Act, (D) outside the
United States in accordance with Rule 904 of Regulation S under the Securities
Act, (E) pursuant to the provisions of Rule 144 under the Securities Act
D-1
<PAGE>
or (F) pursuant to an effective registration statement under the Securities Act,
and we further agree to provide to any person purchasing the Definitive Note or
beneficial interest in a Global Note from us in a transaction meeting the
requirements of clauses (A) through (E) of this paragraph a notice advising such
purchaser that resales thereof are restricted as stated herein.
3. We understand that, on any proposed resale of the Notes or
beneficial interest therein, we will be required to furnish to you and the
Company such certifications, legal opinions and other information as you and the
Company may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Notes purchased by
us will bear a legend to the foregoing effect.
4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Notes, and we and
any accounts for which we are acting are each able to bear the economic risk of
our or its investment.
5. We are acquiring the Notes or beneficial interest therein
purchased by us for our own account or for one or more accounts (each of which
is an institutional "accredited investor") as to each of which we exercise sole
investment discretion and we are acquiring the Notes for investment purposes and
not with a view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act or other applicable securities law.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
------------------------------------------
[Insert Name of Accredited Investor]
By:
----------------------------------------
Name:
Title:
Dated: ______________, ____
D-1
<PAGE>
EXHIBIT 5
SIMPSON THACHER & BARTLETT
A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORATIONS
425 LEXINGTON AVENUE
NEW YORK, N.Y. 10017-3954
(212) 455-2000
FAX: (212) 455-2502
October 22, 1997
K-III Communications Corporation
745 Fifth Avenue
New York, NY 10151
Dear Sirs:
We have acted as counsel to K-III Communications Corporation, a
Delaware corporation (the "Company"), in connection with the preparation and
filing by the Company with the Securities and Exchange Commission of a
Registration Statement on Form S-4 filed on the date hereof (as amended, the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to (i) up to 1,250,000 shares of $9.20 Series F Exchangeable
Preferred Stock, par value $.01 per share and liquidation value $100 per
share, of the Company (the "Preferred Stock") to be issued in exchange for
the Company's $9.20 Series E Exchangeable Preferred Stock (the "Old Preferred
Stock"), and (ii) up to $125,000,000 in aggregate principal amount of the
Company's 9.20% Class F Subordinated Debentures due 2009 (the "Subordinated
Debentures") issuable, at the Company's option, in exchange for the Preferred
Stock, all as described in the Registration Statement.
<PAGE>
K-III Communications
Corporation -2- October 22, 1997
The Preferred Stock will be issued pursuant to the provisions of the
Certificate of Incorporation of the Company, as amended, and the certificate
of designations for the Preferred Stock (the "Certificate of Designations"),
a form of which has been filed as an exhibit to the Registration Statement.
The Subordinated Debentures, if and when issued, will be issued under an
indenture, a form of which has been filed as an exhibit to the Registration
Statement (the "Indenture"), to be entered into between the Company and The
Bank of New York, as trustee (the "Trustee").
We have reviewed the corporate action of the Company in connection
with the proposed issuance and exchange of the Preferred Stock for the Old
Preferred Stock and have examined, and have relied as to matters of fact
upon, originals or copies, certified or otherwise identified to our
satisfaction, of such corporate records, agreements, documents and other
instruments and such certificates or comparable documents of public officials
and of officers and representatives of the Company, and have made such other
and further investigations, as we have deemed relevant and necessary as a
basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as
<PAGE>
K-III Communications
Corporation -3- October 22, 1997
certified or photostatic copies, and the authenticity of the originals of
such latter documents.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that:
1. The Preferred Stock has been duly authorized and, when the
Certificate of Designations is filed with the Secretary of State of the
State of Delaware in accordance with Section 103 of the Delaware General
Corporation Law, and upon delivery of the Preferred Stock in exchange for
the Old Preferred Stock in accordance with the terms of the Prospectus
included in the Registration Statement, the Preferred Stock will be validly
issued, fully paid and nonassessable.
2. The Subordinated Debentures have been duly authorized and, upon
execution and delivery of the Indenture by the Company and the Trustee and
upon issuance and execution of the Subordinated Debentures by the Company,
due authentication of the Subordinated Debentures by the Trustee and
delivery of the Subordinated Debentures against receipt of shares of
Preferred Stock surrendered in exchange therefor in accordance with the
terms of the Indenture and the Certificate of Designations, the
Subordinated Debentures will constitute valid and legally binding
obligations of the Company enforceable against the Company in accordance
with their terms and entitled to the benefits of the Indenture.
Our opinion set forth in paragraph 2 above is subject to the effects
of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and other similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity or
at law) and an implied covenant of good faith and fair dealing.
<PAGE>
K-III Communications
Corporation -4- October 22, 1997
We are members of the Bar of the State of New York, and we do not
express any opinion herein concerning any law other than the law of the State
of New York and the Delaware General Corporation Law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus included therein.
This opinion letter is rendered to you in connection with the above
described transactions. This opinion letter may not be relied upon by you
for any other purpose, or relied upon by, or furnished to, any other person,
firm or corporation without our prior written consent.
Very truly yours,
/s/ Simpson Thacher & Bartlett
SIMPSON THACHER & BARTLETT
<PAGE>
EXHIBIT 8
SIMPSON THACHER & BARTLETT
A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORATIONS
425 LEXINGTON AVENUE
NEW YORK, N.Y. 10017-3954
(212) 455-2000
FAX: (212) 455-2502
October 22, 1997
K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
Ladies and Gentlemen:
We have acted as special counsel for K-III Communications
Corporation, a Delaware corporation (the "Company"), in connection with the
preparation and filing by the Company of a Registration Statement on Form S-4
(the "Registration Statement") filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to (i) up to 1,250,000 shares of
$9.20 Series F Exchangeable Preferred Stock, par value $.01 per share and
liquidation value $100 per share (the "Preferred Stock") to be issued by the
Company in exchange for up to 1,250,000 shares of $9.20 Series E Exchangeable
Preferred Stock, par value $.01 per share and liquidation value $100 per
share (the "Old Preferred Stock"), and (ii) up to $125,000,000 aggregate
principal amount of the Company's $9.20 Class F Subordinated Debentures due
2009 ("the Subordinated Debentures"), issuable, at the Company's option, in
exchange for the Preferred Stock, all as described in the Registration
Statement.
<PAGE>
K-III Communications -2- October 22, 1997
Corporation
We have examined the Registration Statement and the proposed form of
the Indenture to be dated as of the date of first issuance of the
Subordinated Debentures (the "Debenture Indenture") between the Company and
The Bank of New York, as Trustee (the "Debenture Trustee"), which has been
filed with the Commission as an Exhibit to the Registration Statement. In
addition, we have examined, and have relied as to matters of fact upon, the
originals or copies, certified or otherwise identified to our satisfaction,
of such corporate records, agreements, documents and other instruments and
such certificates or comparable documents of public officials and of officers
and representatives of the Company, and have made such other and further
investigations, as we have deemed relevant and necessary as a basis for the
opinion hereinafter set forth.
In such examination, we have assumed that the Debenture Indenture
will be duly authorized, executed and delivered by the Debenture Trustee. In
addition, we have assumed the genuineness of all signatures, the legal
capacity of natural persons, the authenticity of all documents submitted to
us as originals and the conformity to original documents of all documents
submitted to us as certified or photostatic copies, and the authenticity of
the originals of such latter documents. We have also assumed that the
Debenture Indenture as executed and delivered by the parties thereto will be
in the form of the draft which has been filed with the Commission as an
Exhibit to the Registration Statement.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we hereby advise you that, in our opinion, the
statements set forth in the
<PAGE>
K-III Communications -3- October 22, 1997
Corporation
Registration Statement under the caption "Certain Federal Income Tax
Considerations," insofar as they purport to constitute summaries of matters
of United States federal income tax law and regulations or legal conclusions
with respect thereto, constitute accurate summaries of the matters described
therein in all material respects.
We are members of the Bar of the State of New York and we do not
express any opinion herein concerning any law other than the law of the State
of New York and the federal law of the United States. This opinion is
rendered to you solely in connection with the above-described transaction and
may not be relied upon for any other purpose without our prior written
consent.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus included therein.
Very truly yours,
/s/ Simpson Thacher & Bartlett
SIMPSON THACHER & BARTLETT
<PAGE>
EXHIBIT 12
PAGE 1 OF 2
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
DEFICIENCY OF EARNINGS TO FIXED CHARGES AND
DEFICIENCY OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, 1994, 1995 AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------ ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1996 1997 1997
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA ACTUAL ACTUAL PRO FORMA
--------- --------- --------- --------- --------- ----------- --------- --------- -----------
Earnings before fixed
charges:
Net income (loss)......... ($145,342) $ (86,496) $ (41,403) $ (75,435) $ 8,044 $ (11,488) $ (35,378) $ (24,247) $ (23,761)
Income tax benefit........ (314) -- (42,100) (59,600) (53,300) (53,300) -- (1,685) (1,685)
Extraordinary charge...... 19,814 -- 11,874 -- 9,553 9,553 7,572 15,401 15,401
--------- --------- --------- --------- --------- ----------- --------- --------- -----------
Loss from continuing
operations before income
tax benefit and
extraordinary charge...... (125,842) (86,496) (71,629) (135,035) (35,703) (55,235) (27,806) (10,531) (10,045)
Interest expense and
amortization of deferred
financing and
organizational costs...... 80,104 77,856 81,431 108,972 128,263 139,787 59,464 70,545 70,059
Interest portion of rental
expenses.................. 5,158 5,838 7,991 8,129 10,510 10,510 5,319 5,951 5,951
--------- --------- --------- --------- --------- ----------- --------- --------- -----------
Earnings (loss) before fixed
charges................... (40,580) (2,802) 17,793 (17,934) 103,070 95,062 36,977 65,965 65,965
--------- --------- --------- --------- --------- ----------- --------- --------- -----------
Fixed charges:
Interest expense and
amortization of deferred
financing and
organizational costs.... 80,104 77,856 81,431 108,972 128,263 139,787 59,464 70,545 70,059
Interest portion of rental
expenses................ 5,158 5,838 7,991 8,129 10,510 10,510 5,319 5,951 5,951
--------- --------- --------- --------- --------- ----------- --------- --------- -----------
Total fixed charges... 85,262 83,694 89,422 117,101 138,773 150,297 64,783 76,496 76,010
Deficiency of earnings to
fixed charges............. (125,842) (86,496) (71,629) (135,035) (35,703) (55,235) (27,806) (10,531) (10,045)
Preferred stock dividends... (16,530) (22,290) (25,959) (28,978) (43,526) (43,901) (19,248) (24,781) (24,969)
--------- --------- --------- --------- --------- ----------- --------- --------- -----------
Deficiency of earnings to
fixed charges and
preferred stock
dividends................. $(142,372) $(108,786) $ (97,588) $(164,013) $ (79,229) $ (99,136) $ (47,054) $ (35,312) $ (35,014)
--------- --------- --------- --------- --------- ----------- --------- --------- -----------
--------- --------- --------- --------- --------- ----------- --------- --------- -----------
</TABLE>
<PAGE>
EXHIBIT 12
PAGE 2 OF 2
K-III COMMUNICATIONS CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION AND
PROVISION FOR ONE-TIME CHARGES TO INTEREST EXPENSE AND RATIO OF EARNINGS BEFORE
INTEREST, TAXES, DEPRECIATION, AMORTIZATION AND PROVISION FOR ONE-TIME CHARGES
TO INTEREST EXPENSE AND DIVIDENDS ON PREFERRED STOCK
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, 1994, 1995 AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1996 1997
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA ACTUAL ACTUAL
--------- --------- --------- --------- --------- ----------- --------- ---------
Earnings before interest,
taxes, depreciation,
amortization and provision
for one-time charges........ $ 125,351 $ 138,242 $ 162,094 $ 216,115 $ 276,603 $ 277,606 $ 122,495 $ 142,197
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Interest expense.............. $ 76,719 $ 74,336 $ 78,351 $ 105,837 $ 124,601 $ 136,125 $ 57,597 $ 68,963
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Ratio of earnings before
interest, taxes,
depreciation, amortization
and provision for one-time
charges to interest
expense..................... 1.6x 1.9x 2.1x 2.0x 2.2x 2.0x 2.1x 2.1x
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Earnings before interest,
taxes, depreciation,
amortization and provision
for one-time charges........ $ 125,351 $ 138,242 $ 162,094 $ 216,115 $ 276,603 $ 277,606 $ 122,495 $ 142,197
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Interest expense.............. 76,719 74,336 78,351 105,837 124,601 136,125 57,597 68,963
Dividends on preferred
stock....................... 16,530 22,290 25,959 28,978 43,526 43,901 19,248 24,781
--------- --------- --------- --------- --------- ----------- --------- ---------
Interest expenses plus
dividends on preferred
stock....................... $ 93,249 $ 96,626 $ 104,310 $ 134,815 $ 168,127 $ 180,026 $ 76,845 $ 93,744
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Ratio of earnings before
interest, taxes,
depreciation, amortization
and provision for one-time
charges to interest expense
and dividends on preferred
stock....................... 1.3x 1.4x 1.6x 1.6x 1.6x 1.5x 1.6x 1.5x
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
<CAPTION>
<S> <C>
1997
PRO FORMA
-----------
Earnings before interest,
taxes, depreciation,
amortization and provision
for one-time charges........ $ 142,197
-----------
-----------
Interest expense.............. $ 68,477
-----------
-----------
Ratio of earnings before
interest, taxes,
depreciation, amortization
and provision for one-time
charges to interest
expense..................... 2.1x
-----------
-----------
Earnings before interest,
taxes, depreciation,
amortization and provision
for one-time charges........ $ 142,197
-----------
-----------
Interest expense.............. 68,477
Dividends on preferred
stock....................... 24,969
-----------
Interest expenses plus
dividends on preferred
stock....................... $ 93,446
-----------
-----------
Ratio of earnings before
interest, taxes,
depreciation, amortization
and provision for one-time
charges to interest expense
and dividends on preferred
stock....................... 1.5x
-----------
-----------
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
K-III Communications Corporation:
We consent to the use in this Registration Statement of K-III Communications
Corporation on Form S-4 of our report dated January 29, 1997 (September 26, 1997
as to Note 26), appearing in the Prospectus, which is part of this Registration
Statement, and of our report dated January 29, 1997 (September 26, 1997 as to
Note 26) relating to the financial statement schedules appearing elsewhere in
this Registration Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
October 20, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in the
Registration Statement (Form S-4) and the related Prospectus of K-III
Communications Corporation dated on or about October 20, 1997 for the
registration of 1,250,000 shares of its Series F Exchangeable Preferred Stock
and $125,000,000 of its Class F Subordinated Exchange Debentures and to the
incorporation by reference therein of our report dated February 16, 1996, with
respect to the consolidated financial statements of Westcott Communications,
Inc. included in K-III Communications Corporation's Current Report on Form 8-K
dated June 14, 1996, both filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
October 20, 1997
<PAGE>
EXHIBIT 99.3
FORM OF EXCHANGE AGENCY AGREEMENT
The Bank of New York
101 Barclay Street-12W
New York, New York 10286
Attention: Corporate Trust Administration
Dear Sirs:
K-III Communications Corporation (the "Company"), a Delaware
corporation, proposes to offer to exchange (the "Exchange Offer") one share of
its $9.20 Series F Exchangeable Preferred Stock, par value $.01 per share,
liquidation preference $100.00 per share (the "New Preferred Stock"), which will
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), for each outstanding share of its $9.20 Series E Exchangeable
Preferred Stock, par value $.01 per share, liquidation preference $100.00 per
share (the "Old Preferred Stock") of which 1,250,000 shares are outstanding.
The Exchange Offer will commence on , 1997 and will expire
at 12:00 a.m., New York City time, on , 1997, unless the Company
extends the offer by notice to you.
1. APPOINTMENT AS EXCHANGE AGENT. Subject to your acceptance
hereof, the Company appoints you as the Exchange Agent for the purposes and
upon the terms and conditions set forth herein. In this connection, the
Company has enclosed the Exchange Documents (as defined below) and certified
copies of resolutions of the Company's Board of Directors approving the
Exchange Offer and authorizing the officers of the Company to enter into this
Agreement and to carry out the transactions contemplated by the Exchange
Offer.
2. COMPENSATION. The Company hereby agrees to pay you a fee for
your services hereunder as previously agreed to with you.
3. RECEIPT OF TENDERS. You shall receive all tenders of the Old
Preferred Stock and determine whether each such tender has been made in
accordance with the procedures set forth in the Prospectus relating to the
Exchange Offer dated , 1997 (the "Prospectus") and the Letter of
Transmittal described therein (the "Letter of Transmittal"), subject to the
right of the Company to determine the validity of any tender, as described in
the Prospectus.
<PAGE>
2
You shall segregate all tenders which are in accordance with the
procedures set forth in the Prospectus and the Letter of Transmittal from those
which are not ("Defective Deposits"). Upon consultation with the Company or its
representatives, you shall use your best efforts to cause holders who effected
any Defective Deposit to cure such Defective Deposit.
You will hold all items which are deposited for tender with you after
12:00 a.m., New York City time, on the date the Exchange Offer expires pending
further instructions from an officer of the Company.
4. EXCHANGE DOCUMENTS. At the request of the Company you shall
furnish copies of any or all of the Prospectus, the Letter of Transmittal and
the Notice of Guaranteed Delivery (collectively, the "Exchange Documents")
promptly to any person designated in such request. All mailings under this
Section shall be by first class mail, postage prepaid, unless otherwise
specified in such request. The Company will furnish you with such additional
copies of the Exchange Documents as you may request to fulfill your obligations
under this Section.
5. NOTIFICATION OF CHANGES IN THE EXCHANGE OFFER. At the request of
the Company, you shall notify tendering holders of the Old Preferred Stock in
the event of any rescission or modification of the Exchange Offer. In the event
of any such rescission, you will return all tendered Old Preferred Stock to the
persons entitled thereto, at the request of the Company.
6. DELIVERY OF NEW PREFERRED STOCK. As soon as practicable after
, 1997 and after each period of extension of the Exchange Offer, you shall
complete and countersign the certificates for New Preferred Stock to which
holders who have tendered their New Preferred Stock are entitled, and deliver
the New Preferred Stock in the manner requested in the Letter of Transmittal
relating to a valid tender, but only upon receipt by you of oral or written
notice from Ann M. Riposanu of the Company of acceptance by the Company of such
Old Preferred Stock for exchange. The New Preferred Stock shall be registered
as set forth in the Letter of Transmittal and delivered to the address specified
in each such Letter of Transmittal.
You shall have no obligation to deliver any certificates for New
Preferred Stock unless the Company has ordered you as Registrar and Transfer
Agent for the New Preferred Stock, to countersign such New Preferred Stock
certificates and you have received New Preferred Stock certificates sufficient
to make deliveries thereof.
7. RETURN OF OLD PREFERRED STOCK. Subject to Section 3, you shall
return, in accordance with the Letter of Transmittal, any Old Preferred Stock
not validly tendered.
<PAGE>
3
8. LIMITED LIABILITY OF EXCHANGE AGENT. As Exchange Agent you:
(a) shall have no duties or obligations other than those specifically
set forth herein;
(b) will not be required to and will make no representations and have
no responsibilities as to the validity, sufficiency, value or genuineness
of (i) any Old Preferred Stock, any Exchange Documents deposited with you,
or any New Preferred Stock delivered by you pursuant to the Exchange Offer
or (ii) any signatures or endorsements, other than your own;
(c) shall not be obligated to take any action hereunder that might in
your judgment involve any expense or liability unless you have been
furnished with reasonable indemnity;
(d) shall not be liable for any action taken or omitted by you, or
any action suffered by you to be taken or omitted, without negligence,
misconduct or bad faith on your part, in connection with this Agreement or
your compliance with the instructions set forth herein or with any written
or oral instructions delivered to you pursuant hereto, and may rely on, and
shall be protected in acting on, any certificate, instrument, opinion,
notice, letter, telegram or other document, or any security, delivered to
you and reasonably believed by you to be genuine and to have been signed by
a proper party or parties;
(e) may rely on, and shall be protected in acting on, the written or
oral instructions, with respect to any matter relating to your duties as
Exchange Agent, of any officer of the Company; and
(f) may consult counsel satisfactory to you (including counsel for
the Company) and the advice of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by you hereunder in good faith and in accordance with such advice
of such counsel.
9. INDEMNIFICATION OF EXCHANGE AGENT. The Company agrees to
reimburse you for, to indemnify you against and hold you harmless from all
liability, cost or expense (including reasonable counsel fees and expenses) that
may be paid, incurred or suffered by you or to which you may become subject
without
<PAGE>
4
negligence, wilful misconduct or bad faith on your part, arising out of or in
connection with this Agreement.
10. NOTICES. Except as otherwise expressly provided herein, all
notices and other communications hereunder shall be in writing, shall be
delivered by hand or first class mail, postage prepaid, shall be deemed given
when received and shall be sent to the addresses listed below or to such other
addresses as the addressee shall designate from time to time by notice:
Company: K-III Communications Corporation
745 Fifth Avenue
New York, New York 10151
Attention: Ann M. Riposanu
Exchange The Bank of New York
Agent: 101 Barclay Street-12W
New York, New York 10286
Attention: Corporate Trust Administration
11. AMENDMENT, MODIFICATION. This Agreement may not be modified,
amended or supplemented without an express written agreement executed by the
parties hereto.
12. GOVERNING LAW; BENEFIT OF AGREEMENT. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of New
York. This Agreement shall inure solely to the benefit of, and the obligations
created hereby shall be binding upon, the successors of the parties hereto. No
other person shall acquire or have any rights under or by virtue of this
Agreement.
If the foregoing is in accordance with your understanding, would you
please indicate your agreement by signing and returning the enclosed copy of
this letter to the Company.
Very truly yours,
K-III COMMUNICATIONS CORPORATION
By______________________________
Title:
Agreed to this ____ day of
, 1997
THE BANK OF NEW YORK
By__________________________
Title:
<PAGE>
EXHIBIT 99.4
CONFORMED COPY
- -------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated as of September 26, 1997
by and among
K-III Communications Corporation
and
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Salomon Brothers Inc
- -------------------------------------------------------------------------------
<PAGE>
This Registration Rights Agreement (this "Agreement") is made and
entered into as of September 26, 1997, by and between K-III Communications
Corporation, a Delaware corporation (the "Company") and Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon
Brothers Inc (collectively, the "Placement Agents"), who have purchased
1,250,000 shares of the Company's $9.20 Series E Exchangeable Preferred Stock
Redeemable 2009 (the "Series E Preferred Stock") pursuant to the Placement
Agreement (as defined below).
This Agreement is made pursuant to the Placement Agreement, dated
September 22, 1997 (the "Placement Agreement"), by and between the Company and
the Placement Agents. In order to induce the Placement Agents to purchase the
Series E Preferred Stock, the Company has agreed to provide the registration
rights set forth in this Agreement. The execution and delivery of this
Agreement is a condition to the obligations of the Placement Agents set forth in
Section 4 of the Placement Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
144A Offer: The transactions in which the Placement Agents propose
to sell the Series E Preferred Stock to certain "qualified institutional buyers"
(as such term is defined in Rule 144A under the Act) and "institutional
accredited investors" (as such term is defined in Regulation D under the Act)
and in "offshore transactions" (as such term is defined in Regulation S under
the Act) pursuant to the Offering Memorandum.
Act: The Securities Act of 1933, as amended.
Advice: As defined in Section 6(b) hereof.
Applicable Effectiveness Percent: As defined in Section 5 hereof.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in The Borough of Manhattan,
The City of New York, New York are authorized or obligated by law or executive
order to close.
Class E Subordinated Debentures: The 9.20% Class E Subordinated
Debentures due 2009 of the Company issuable in exchange for the Series E
Preferred Stock.
Class F Subordinated Debentures: The 9.20% Class F Subordinated
Debentures due 2009 of the Company issuable in exchange for the Series F
Preferred Stock or, in connection with a Registered Exchange Offer for the Class
E Subordinated Debentures and containing terms identical to the Class E
Subordinated Debentures (except that if issued in connection with a Registered
Exchange Offer, interest thereon shall accrue from the Exchange Offer
Consummation Date and except that such securities shall bear no legend and shall
be free from restrictions on transfer).
Closing Date: The date on which the Series E Preferred Stock is first
sold by the Placement Agents pursuant to the 144A Offer.
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Commission: The Securities and Exchange Commission.
Consummate: A Registered Exchange Offer shall be deemed "Consummated"
for purposes of this Agreement upon the occurrence of (i) the filing and
effectiveness under the Act of a Registration Statement relating to the Series F
Preferred Stock or Class F Subordinated Debentures, as applicable, to be issued
in the Registered Exchange Offer, (ii) the maintenance of such Registration
Statement continuously effective for a period of not less than the minimum
period required under applicable federal and state securities laws (provided
that in no event shall such Registered Exchange Offer remain open and the
Registration Statement relating thereto remain continuously effective, in each
case, for less than 20 business days), and (iii) the delivery by the Company to
(A) the transfer agent for the Series F Preferred Stock of the same number of
shares of Series F Preferred Stock as the number of shares of Series E Preferred
Stock tendered by holders thereof pursuant to the Registered Exchange Offer, or
(B) the registrar under the Subordinated Debenture Indenture of Class F
Subordinated Debentures in the same aggregate principal amount as the aggregate
principal amount of Class E Subordinated Debentures tendered by Holders thereof
pursuant to the Registered Exchange Offer.
Dividend Payment Date: As defined in the Certificate of Designations
relating to the Series E Preferred Stock.
Effectiveness Target Date: As defined in Section 5 hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Offer Consummation Date: The date on which the Registered
Exchange Offer is Consummated.
Exchange Offer Effective Date: The date on which the Registration
Statement relating to the Registered Exchange Offer becomes effective.
Exchange Offer Registration Statement: As defined in Section 3
hereof.
Holder: As defined in Section 2(b) hereof.
Indemnified Party: As defined in Section 8 hereof.
Interest Payment Date: As defined in the Subordinated Debenture
Indenture, for the Subordinated Debentures.
NASD: National Association of Securities Dealers, Inc.
Offering Memorandum: The offering memorandum, dated September 22,
1997 and all amendments and supplements thereto, relating to the Preferred Stock
prepared by the Company pursuant to the Placement Agreement.
Payment Date: Each Dividend Payment Date and each Interest Payment
Date.
Person: An individual, partnership, joint venture, corporation,
trust, estate or unincorporated organization, or a government or agency or
political subdivision thereof.
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Placement Agents: Morgan Stanley & Co. Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Salomon Brothers Inc.
Placement Agreement: The Placement Agreement, dated September 22,
1997, by and among the Company and the Placement Agents pursuant to which the
Placement Agents purchased 1,250,000 shares of the Company's Series E Preferred
Stock.
Preferred Stock: The Series E Preferred Stock and the Series F
Preferred Stock.
Prospectus: The prospectus included in a Registration Statement, as
amended or supplemented by any prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material, if any,
incorporated by reference into such Prospectus.
Record Holder: (i) With respect to any Payment Date occurring prior
to the date on which the Series E Preferred Stock is exchanged for Class E
Subordinated Debentures, each Person who was a Holder of Series E Preferred
Stock on the record date with respect to the Dividend Payment Date on which such
Payment Date shall occur, or, if no record date was set with respect to such
Dividend Payment Date, the date 15 days prior to such Dividend Payment Date; and
(ii) with respect to any Payment Date occurring after the date on which the
Series E Preferred Stock is exchanged for Class E Subordinated Debentures, each
Person who was a Holder of Class E Subordinated Debentures on the record date
with respect to the Interest Payment Date on which such Payment Date shall
occur.
Registered Exchange Offer: The registration by the Company under the
Act of the Series F Preferred Stock or, if the Series E Preferred Stock has been
exchanged for Class E Subordinated Debentures, Class F Subordinated Debentures
pursuant to a Registration Statement pursuant to which the Company offers the
holders of all outstanding Transfer Restricted Securities the opportunity to
exchange all such outstanding Transfer Restricted Securities held by such Holder
for Series F Preferred Stock or Class F Subordinated Debentures, as applicable,
in an aggregate number of shares or principal amount, as applicable, equal to
the aggregate number of shares or principal amount, as applicable, of the
Transfer Restricted Securities tendered in such exchange offer by such Holders.
Registration Statement: Any registration statement of the Company
relating to (a) an offering of Series F Preferred Stock or, if the Series E
Preferred Stock has been exchanged for Class E Subordinated Debentures, Class F
Subordinated Debentures, pursuant to a Registered Exchange Offer or (b) the
registration for resale of Transfer Restricted Securities pursuant to the Shelf
Registration Statement, which is filed pursuant to the provisions of this
Agreement, including the Prospectus included therein, all amendments and
supplements thereto (including post-effective amendments) and all exhibits and
material incorporated by reference therein.
Series E Preferred Stock: The $9.20 Series E Exchangeable Preferred
Stock Redeemable 2009, par value $.01 per share, of the Company with a
liquidation preference of $100 per share.
Series F Preferred Stock: The $9.20 Series F Exchangeable Preferred
Stock Redeemable 2009, par value $.01 per share, of the Company, issuable in
connection with the Registered Exchange Offer and containing terms identical to
the Series E Preferred Stock (except that dividends thereon will accrue from the
Exchange Offer Consummation Date and except that such securities shall bear no
legend and shall be free from restrictions on transfer).
Shelf Registration Statement: As defined in Section 4 hereof.
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Subordinated Debentures: The Class E Subordinated Debentures and the
Class F Subordinated Debentures.
Subordinated Debenture Indenture: The Indenture between the Company
and the trustee referred to therein pursuant to which the Subordinated
Debentures are issued.
Subordinated Debenture Trustee: The trustee referred to in the
Subordinated Debenture Indenture.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb)
as in effect on the date of the Indenture.
Transfer Restricted Securities: Each share of Series E Preferred
Stock and, if the Company has elected to exchange such Series E Preferred Stock,
each Class E Subordinated Debenture issued in exchange therefor, until the
earlier to occur of (a) the Exchange Offer Consummation Date, (b) the date on
which such Preferred Stock or Subordinated Debentures, as applicable, have been
effectively registered under the Act and disposed of in accordance with a
Registration Statement and (c) the date on which such Preferred Stock or
Subordinated Debentures, as applicable, are distributed to the public pursuant
to Rule 144 under the Act.
Underwriter(s): The underwriter(s) participating in any Underwritten
Offering referred to in Section 6(b)(xii) and party to the underwriting
agreement referred to in such section.
Underwritten Registration or Underwritten Offering: A registration in
which securities of the Company are sold to an Underwriter for reoffering to the
public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities entitled to the
benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. A Person is deemed to
be a holder of Transfer Restricted Securities (each, a "Holder") whenever such
Person is the registered owner of Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
(a) If, in the reasonable opinion of the Company after consultation
with counsel, (i) the Registered Exchange Offer shall then be permissible under
applicable law and (ii) a Registration Statement (the "Exchange Offer
Registration Statement") with respect to the Series F Preferred Stock or Class F
Subordinated Debentures, as applicable, can be filed after the initial sale of
Series E Preferred Stock pursuant hereto, the Company shall (a) cause to be
filed with the Commission after the Closing Date a Registration Statement under
the Act relating to the Series F Preferred Stock or Class F Subordinated
Debentures, as applicable, (b) use its reasonable best efforts to cause such
Exchange Offer Registration Statement to become effective at the earliest
possible time thereafter, (c) in connection with the foregoing, (1) file all
pre-effective amendments to such Exchange Offer Registration Statement as may be
necessary in order to cause such Exchange Offer Registration Statement to become
effective, (2) if applicable, a post-effective amendment to such Exchange Offer
Registration Statement pursuant to Rule 430A under
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the Act, and (3) use its reasonable best efforts to cause all necessary filings
in connection with the registration and qualification of the Series F Preferred
Stock or Class F Subordinated Debentures, as applicable, to be registered under
the Blue Sky laws of such jurisdictions as are necessary to permit Consummation
of the Registered Exchange Offer, and (d) upon the effectiveness of such
Exchange Offer Registration Statement, commence the Registered Exchange Offer.
The Registered Exchange Offer shall be on the appropriate form permitting
registration of the Series F Preferred Stock or Class F Subordinated Debentures,
as applicable, to be offered in exchange for the Transfer Restricted Securities.
(b) The Company shall cause the Exchange Offer Registration Statement
to be continuously effective for a period of not less than the minimum period
required under applicable federal and state securities laws to Consummate the
Registered Exchange Offer; provided, however, that in no event shall such period
be less than 20 Business Days. The Company shall cause the Registered Exchange
Offer to comply with all applicable federal and state securities laws. No
securities other than the Series F Preferred Stock or Class F Subordinated
Debentures, as applicable, shall be included in the Registration Statement
relating to the Registered Exchange Offer. The Company shall use its reasonable
best efforts to cause the Registered Exchange Offer to be Consummated on the
earliest practicable date after the Exchange Offer Effective Date.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If the Company is not required to file a
Registration Statement with respect to the Registered Exchange Offer pursuant to
Section 3(a) hereof, then pursuant to Rule 415 under the Act, the Company shall
file a "shelf" registration statement (the "Shelf Registration Statement")
relating to all then outstanding Transfer Restricted Securities, the holders of
which shall have provided the information required pursuant to Section 6(a)(i)
and (ii) hereof within the time specified in such section, and shall use its
reasonable best efforts to cause such Shelf Registration Statement to become
effective as promptly as practicable thereafter. Subject to the proviso
contained in Section 6(b)(x), the Company shall use its reasonable best efforts
to keep such Shelf Registration Statement continuously effective and to prevent
the happening of any event described in Section 6(b)(iv)(D) hereof for a period
of two years following the date on which such Shelf Registration Statement
becomes effective under the Act (as may be extended pursuant to Section 6
hereof) or shorter period terminating when all Transfer Restricted Securities
either (i) have been sold pursuant to the Shelf Registration Statement or (ii)
have ceased to be Transfer Restricted Securities pursuant to clause (c) of the
definition of Transfer Restricted Securities.
Subject to the proviso contained in Section 6(b)(x), upon the
occurrence of any event that would cause the Shelf Registration Statement (i) to
contain a material misstatement or omission or (ii) not to be effective and
usable for resale of Transfer Restricted Securities during the period that such
Shelf Registration Statement is required to be effective and usable, the Company
shall promptly file an amendment to the Shelf Registration Statement, in the
case of clause (i), correcting any such misstatement or omission, and in the
case of clauses (i) and (ii), use its reasonable best efforts to cause such
amendment to be declared effective and such Shelf Registration Statement to
become usable as soon as practicable thereafter.
(b) Restrictions on Sale of certain Securities by Others. The
Company agrees to use reasonable best efforts to cause each holder of its
privately placed debt securities (if the Holders effect an Underwritten Offer
with respect to the Subordinated Debentures) or preferred stock (if the Holders
effect an Underwritten Offer with respect to the Preferred Stock), and its
securities convertible into or
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exchangeable or exercisable for any such debt security or preferred stock, as
applicable, purchased from the Company at any time on or after the date of this
Agreement to agree not to effect any public sale or distribution of any such
securities during the 10 day period prior to and during the 60-day period
beginning on the closing date of each Underwritten Offer made pursuant to the
Shelf Registration Statement, including a sale pursuant to Rule 144 under the
Act (except as part of such Underwritten Registration).
SECTION 5. LIQUIDATED DAMAGES
If written notice that the applicable Registration Statement has been
declared effective shall not have been given on or before 180 days following the
Closing Date (the "Effectiveness Target Date"), then, commencing on the first
Payment Date following the 181st day after the Closing Date and on each Payment
Date thereafter until the applicable Registration Statement has been declared
effective, the Company shall pay to each Record Holder an amount, as liquidated
damages, equal to the product of (i) the aggregate liquidation preference of
all shares of Preferred Stock (or, if the Preferred Stock has been exchanged for
Subordinated Debentures, the aggregate principal amount of all such Subordinated
Debentures) constituting Transfer Restricted Securities and (ii) the "Applicable
Effectiveness Percent," which shall accrue from and after the 181st day after
the Closing Date. For purposes hereof, the "Applicable Effectiveness Percent"
shall be one-half of one percent (0.50%) per annum for each of the days
immediately succeeding the 181st day following the Closing Date until the
applicable Registration Statement has been declared effective.
SECTION 6. REGISTRATION PROCEDURES
(a) In connection with the Registered Exchange Offer (if required to
be made pursuant to Section 3(a) hereof):
(i) As a condition to its participation in the Registered
Exchange Offer pursuant to the terms of this Agreement, each Holder of
Transfer Restricted Securities shall be required to furnish, upon the
request of the Company, within 15 Business Days thereafter, such
information regarding such Holder and such Holder's intentions in
connection with the Series F Preferred Stock or Class F Subordinated
Debentures, as applicable, to be received in the Registered Exchange Offer
as the Company may from time to time reasonably request in writing. Each
such Holder shall be required to furnish to the Company all information
required to be disclosed in order to make the information previously
furnished to the Company by such Holder not materially misleading.
(ii) As a condition to its participation in the Registered
Exchange Offer pursuant to the terms of this Agreement, each Holder of
Transfer Restricted Securities shall be required to furnish, upon the
request of the Company, prior to the Consummation thereof a written
representation to the Company that it is not engaged in, and does not
intend to engage in, a distribution of the Series F Preferred Stock or
Class F Subordinated Debentures, as applicable, to be received in the
Registered Exchange Offer and that it is acquiring the Series F Preferred
Stock or Class F Subordinated Debentures, as applicable, in its ordinary
course of business and shall otherwise cooperate in the Company's
preparations for the Registered Exchange Offer. Each Holder shall
acknowledge that any such Holder using the Registered Exchange Offer to
participate in a distribution of the securities to be acquired in the
Registered Exchange Offer (x) could not
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rely on the position of the Commission enunciated in Exxon Capital Holdings
Corporation (available April 13, 1989) or similar no-action letters, (y)
must comply with registration and prospectus delivery requirements of the
Act in connection with a secondary resale transaction and (z) that such a
secondary resale transaction should be covered by an effective registration
statement containing the selling security holder information required by
Item 507 of Regulation S-K.
(iii) If the Registered Exchange Offer relates to the
Subordinated Debentures, the Company shall cause the Subordinated Debenture
Indenture to be qualified under the TIA not later than the effective date
of the first Registration Statement relating to the Registered Exchange
Offer; and, in connection therewith, will cooperate with the Subordinated
Debenture Trustee and the holders of the Class E Subordinated Debentures to
effect such changes to the Subordinated Debenture Indenture as may be
required for such Indenture to be so qualified in accordance with the terms
of the TIA; and will execute, and use its reasonable best efforts to cause
such Subordinated Debenture Trustee to execute, all documents as may be
required to effect such changes and all other forms and documents required
to be filed with the Commission to enable such Indenture to be so qualified
in a timely manner.
(b) In connection with the Shelf Registration Statement, the Company
will use its reasonable best efforts to effect such registration, to permit the
sale of the Transfer Restricted Securities being sold in accordance with the
intended method or methods of distribution thereof and, pursuant thereto, the
Company will as expeditiously as possible:
(i) prepare and file with the Commission, as soon as
practicable, a Registration Statement relating to the registration on any
appropriate form under the Act, cooperate and assist in any filings
required to be made with the NASD and use its reasonable best efforts to
cause such Shelf Registration Statement to become effective and approved by
such governmental agencies or authorities as may be necessary to enable the
selling Holders to consummate the disposition of such Transfer Restricted
Securities; provided that before filing a Shelf Registration Statement or
any Prospectus, or any amendments or supplements thereto, including
documents incorporated by reference after the initial filing of the Shelf
Registration Statement, the Company will furnish to the Holders and the
underwriter(s), if any, copies of all such documents proposed to be filed
prior to the filing thereof and shall make the Company's representative
available for discussion of such documents.
(ii) prepare and file with the Commission such amendments and
post-effective amendments to the Shelf Registration Statement as may be
necessary to keep the Shelf Registration Statement effective for the
applicable period set forth in Section 3 hereof, or such shorter period
which will terminate when all Transfer Restricted Securities covered by
such Shelf Registration Statement have been sold; cause the Prospectus to
be supplemented by any required Prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 under the Act, and to comply
fully with the applicable provisions of Rules 424 and 430A under the Act in
a timely manner; and comply with the provisions of the Act with respect to
the disposition of all securities covered by such Shelf Registration
Statement during the applicable period in accordance with the intended
method or methods of distribution by the sellers thereof set forth in such
Shelf Registration Statement or supplement to the Prospectus.
(iii) if requested by the Holders of Transfer Restricted
Securities being sold in an Underwritten Offering conducted pursuant to an
Underwriting Agreement referred to in
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Section 6(b)(xii) or the Underwriter(s) thereof, promptly incorporate in a
Prospectus supplement or post-effective amendment such information as such
Underwriter(s) and the Holders of Transfer Restricted Securities being sold
agree should be included therein relating to the plan of distribution of
the Transfer Restricted Securities, including, without limitation,
information with respect to the number of shares of Preferred Stock and
principal amount of Subordinated Debentures being sold to such
Underwriter(s), the purchase price being paid therefor and with respect to
any other terms of the offering of the Transfer Restricted Securities to be
sold in such offering; and make all required filings of such Prospectus
supplement or post-effective amendment as soon as practicable after the
Company is notified of the matters to be incorporated in such Prospectus
supplement or post-effective amendment.
(iv) advise the Underwriter(s), if any, and selling Holders
promptly and, if requested by such Persons, to confirm such advice in
writing, (A) when the Shelf Registration Statement or any post-effective
amendment thereto, has become effective, (B) of any request by the
Commission for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information relating
thereto, (C) if at any time the representations and warranties of the
Company contemplated by paragraph (xii)(A) below cease to be true and
correct, (D) of the existence of any fact and the happening of any event
that makes any statement of a material fact made in the Registration
Statement, the Prospectus, any amendment or supplement thereto, or any
document incorporated by reference therein untrue, or that requires the
making of any additions to or changes in the Registration Statement or the
Prospectus in order to make the statements therein not misleading and (E)
of the receipt by the Company of any stop order from the Commission
suspending the effectiveness of the Registration Statement, and any order
issued by any state securities commission or other regulatory authority
suspending the qualification or exemption from qualification of such
Transfer Restricted Securities under state securities or Blue Sky laws. If
at any time the Company shall receive any such stop order suspending the
effectiveness of the Registration Statement, or any such order from a state
securities commission or other regulatory authority, the Company shall use
its reasonable best efforts to obtain the withdrawal or lifting of such
order at the earliest possible time.
(v) promptly prior to the filing of any document that is to be
incorporated by reference into the Shelf Registration Statement or the
Prospectus (after initial filing of the Shelf Registration Statement),
provide copies of such document to the selling Holders and to the managing
Underwriter(s), if any, and make the Company's representative(s) available
for discussion of such document.
(vi) furnish to each selling Holder and each of the
Underwriter(s), if any, without charge, at least one signed copy of the
Registration Statement, as first filed with the Commission, and of each
amendment thereto, including all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by
reference).
(vii) deliver to each selling Holder and each of the
Underwriter(s), if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement
thereto as such Persons may reasonably request; the Company consents to the
use of the Prospectus and any amendment or supplement thereto by each of
the selling Holders and each of the Underwriter(s), if any, in connection
with the offering and the sale of the Transfer Restricted Securities
covered by the Prospectus or any amendment or supplement thereto.
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(viii) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the Underwriter(s), if any,
and their respective counsel in connection with the registration and
qualification of the Transfer Restricted Securities under the securities or
Blue Sky laws of such jurisdictions as the selling Holders or
Underwriter(s) may request and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of
the Transfer Restricted Securities covered by the Shelf Registration
Statement; provided, however, that the Company shall not be required to
register or qualify as a foreign corporation where it is not then so
qualified or to take any action that would subject it to the service of
process in suits or to taxation, other than as to matters and transactions
relating to the Shelf Registration Statement, in any jurisdiction where it
is not now so subject.
(ix) cooperate with the selling Holders and the Underwriter(s),
if any, to facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold and not bearing any
restrictive legends; and enable such Transfer Restricted Securities to be
in such denominations and registered in such names as the Holders or the
Underwriter(s), if any, may request at least two Business Days prior to any
sale of Transfer Restricted Securities made by such Underwriter(s);
(x) if any fact or event contemplated by Section 6(b)(iv)(D)
above shall exist or have occurred, prepare a supplement or post-effective
amendment to the Registration Statement or related Prospectus or any
document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of Transfer
Restricted Securities, the Prospectus, as amended or supplemented, will not
contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading;
provided, however, that the Company shall not be required to comply with
this Section 6(b)(x) if, and only for so long as: (i) the Company shall be
engaged in a transaction; (ii) (A) such transaction is required to be
disclosed in the Registration Statement, the related Prospectus, or any
amendment or supplement thereto, or the failure by the Company to disclose
such transaction in the Registration Statement or related Prospectus, or
any amendment or supplement thereto, as then amended or supplemented, would
cause such Registration Statement, Prospectus or amendment or supplement
thereto, to contain an untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements therein not
misleading, in the light of the circumstances under which they were made;
(B) information regarding the existence of such transaction has not then
been publicly disclosed by or on behalf of the Company; and (C) the Company
determines, in its reasonable judgment, that disclosure of such transaction
would have a material adverse effect (1) on the business, condition
(financial or other), results of operations or properties of the Company
and its subsidiaries, taken as a whole, or (2) on the consummation of such
transaction and (iii) the Company notifies the Holders promptly after
making the determination set forth in clause (ii).
(xi) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of Exchange Offer Registration
Statement or the Shelf Registration Statement;
(xii) enter into such customary agreements (including an
underwriting agreement in form reasonably satisfactory to the Company) and
take all such other actions in connection therewith as may be requested by
the Holders of a majority of the outstanding shares (or principal amount,
as the case may be) of the Transfer Restricted Securities or the managing
Underwriter(s) in order to expedite or facilitate the disposition of the
Transfer Restricted Securities
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pursuant to the Shelf Registration and, in connection with any such
underwriting agreement entered into by the Company, (A) make such
representations and warranties to the Holders and the Underwriter(s), in
form, substance and scope as are customarily made by issuers to
Underwriters in primary underwritten offerings and covering matters
including, but not limited to, those set forth in the Placement Agreement;
(B) obtain opinions of counsel to the Company and updates thereof (which
counsel and opinions (in form, scope and substance) shall be reasonably
satisfactory to the Underwriter(s) and the Holders of the Transfer
Restricted Securities being sold) addressed to each selling Holder and the
Underwriter(s) covering the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be
reasonably requested by such Holders and Underwriters; (C) obtain "cold
comfort" letters and updates thereof from the Company's independent
certified public accountants addressed to the Underwriters and use its
reasonable best efforts to obtain such "cold comfort" letters addressed to
the Holders of Transfer Restricted Securities, such letters to be in
customary form and covering matters of the type customarily covered in
"cold comfort" letters by Underwriters in connection with primary
underwritten offerings; (D) set forth in full or incorporate by reference
in the underwriting agreement the indemnification provisions and procedures
of Section 8 hereof with respect to all parties to be indemnified pursuant
to said Section; and (E) deliver such documents and certificates as may be
reasonably requested by the Holders of the Transfer Restricted Securities
being sold or the underwriter(s) of such Underwritten Offering to evidence
compliance with clause (A) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by
the Company pursuant to this clause (xii). The above shall be done at each
closing under such underwriting or similar agreement, as and to the extent
required thereunder. Notwithstanding the foregoing, in no event shall any
Holder be entitled to participate in an Underwritten Registration unless
Holders of Preferred Stock the aggregate liquidation preference of which
equals or exceeds $25 million (or, if the Preferred Stock has been
exchanged for Subordinated Debentures, the principal amount of which equals
or exceeds $25 million) shall first notify the Company of their intent to
retain an Underwriter for such purpose pursuant to Section 11 hereof.
(xiii) make available at reasonable times for inspection by
the Holders of the Transfer Restricted Securities, any Underwriter
participating in an Underwritten Offering pursuant to such Shelf
Registration Statement and any attorney or accountant retained by such
selling Holders or any of the Underwriters (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Company as shall be requested by any such
Inspector in connection with such Shelf Registration Statement subsequent
to the filing thereof and prior to its effectiveness; provided, however,
that any Records which the Company determines, in good faith, to be
confidential and which it notifies the Inspectors in writing are
confidential shall not be disclosed to any Inspector unless (i) such
Inspector signs a confidentiality agreement reasonably satisfactory to the
Company or (ii) the release of such Records is ordered pursuant to a
subpoena or other court order or is otherwise required by law. Each Holder
agrees that it will, promptly after learning that disclosure of such
Records is sought by a court having jurisdiction, give notice to the
Company and allow the Company to undertake appropriate action to prevent
disclosure of such Records (it being understood, however, that, in no
event, shall any Holder be required to violate any such subpoena, court
order or applicable law as a result of the Company's actions to prevent
such disclosure).
(xiv) otherwise use its reasonable best efforts to comply
with all applicable rules and regulations of the Commission, and make
generally available to its security holders as soon as practicable a
consolidated earnings statement (which need not be audited) for the
twelve-month
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period (A) commencing at the end of any fiscal quarter in which Transfer
Restricted Securities are sold to the Underwriters in a firm or best
efforts Underwritten Offering or (B) if not sold to the Underwriters in
such an offering, beginning with the first month of the Company's first
fiscal quarter commencing after the effective date of the Shelf
Registration Statement.
(xv) cause the Subordinated Debenture Indenture to be qualified
under the TIA, and, in connection therewith, cooperate with the
Subordinated Debenture Trustee and the Holders to effect such changes to
such Indenture as may be required for such Indentures to be so qualified in
accordance with the terms of the TIA; and execute and use its reasonable
best efforts to cause such Subordinated Debenture Trustee to execute, all
documents as may be required to effect such changes and all other forms and
documents required to be filed with the Commission to enable such Indenture
to be so qualified in a timely manner.
Each Holder as to which any Shelf Registration Statement is being
effected shall furnish promptly to the Company all information required to be
disclosed in order to make the information previously furnished to the Company
by such Holder not materially misleading.
Upon receipt of any notice from the Company of the existence of any
fact of the kind described in Section 6(b)(iv)(D) hereof, each Holder will
forthwith discontinue disposition of Transfer Restricted Securities until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 6(b)(x) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the Prospectus may be resumed, and has
received copies of any additional or supplemental filings which are incorporated
by reference in the Prospectus. If so directed by the Company, each Holder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Transfer Restricted Securities current at the time of receipt of
such notice. In the event the Company shall give any such notice, the time
period regarding the effectiveness of the Registration Statement set forth in
Section 4(a) hereof shall be extended by the number of days during the period
from and including the date of the giving of such Advice to and including the
date when each selling Holder covered by such Registration Statement shall have
received the copies of the supplemented or amended Prospectus contemplated by
Section 6(b)(x) hereof.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or
compliance with this Agreement will be borne by the Company, regardless of
whether a Registration Statement becomes effective, including without limitation
all: (i) registration and filing fees and expenses (including filings made with
the NASD (including, if applicable, the fees and expenses of any "qualified
independent underwriter" and its counsel, as may be required by the rules and
regulations of the NASD)); (ii) fees and expenses of compliance with federal
securities and state Blue Sky or securities laws; (iii) expenses of printing
(including printing certificates for the Preferred Stock, Subordinated
Debentures and Prospectuses), messenger and delivery services and telephone;
(iv) reasonable fees and disbursements of counsel for the Company and the
Holders of the Transfer Restricted Securities; (v) all application and filing
fees in connection with listing the Preferred Stock and the Subordinated
Debentures on a national securities exchange or automated quotation system
pursuant to the requirements hereof; and (vi) reasonable fees and disbursements
of independent certified public accountants of the Company (including the
expenses of any special audit and "cold comfort" letters required by or incident
to such performance).
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The Company will, in any event, bear its internal expenses (including,
without limitation, all salaries and expense of its officers and employees
performing legal or accounting duties), the expenses of any annual audit, rating
agency fees and the fees and expenses of any Person, including special experts,
retained by the Company.
(b) In connection with the Shelf Registration Statement, the Company
will reimburse the Holders of Transfer Restricted Securities being tendered or
registered for the reasonable fees and disbursements of Latham & Watkins, as
counsel to such Holders. Notwithstanding the provisions of this Section 7, each
Holder shall pay all registration expenses to the extent required by applicable
law.
SECTION 8. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each Holder of
Transfer Restricted Securities and each person, if any, who controls such Holder
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, or is under common control with or is controlled by such
Holder from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
by any Holder of Transfer Restricted Securities or any such controlling person
or person who is under common control with, or is controlled by such Holder, in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
either Memorandum (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except (i) insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Holder of
Transfer Restricted Securities furnished to the Company in writing by such
Holder expressly for use therein and (ii) that the foregoing indemnity with
respect to any untrue statement contained in or omission from a Memorandum shall
not inure to the benefit of any Holder of Transfer Restricted Securities (or any
person controlling, under common control with, or controlled by, such Holder)
from whom the person asserting any such loss, claim, damage or liability
purchased any of the Securities which are the subject thereof if such person was
not sent or given a copy of the Memorandum (or the Memorandum as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person and the untrue statement contained in or omission from
such Memorandum was contained in the Memorandum (or the Memorandum as amended or
supplemented).
(b) Each Holder of Transfer Restricted Securities agrees, severally
and not jointly, to indemnify and hold harmless each of the Company, its
directors, its officers and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Holder, but only with reference to information relating to such Holder
furnished to the Company in writing by such Holder expressly for use in either
Memorandum or any amendments or supplements thereto.
(c) In case any proceeding (including without limitation any
governmental investigation) shall be instituted involving any person in respect
of which indemnity may be sought pursuant to either paragraph (a) or (b) above,
such person (the "Indemnified Party") shall promptly notify the person against
whom such indemnity may be sought (the "Indemnifying Party") in writing and the
Indemnifying Party, upon request of the Indemnified Party, shall retain counsel
reasonably satisfactory to the Indemnified Party to represent the Indemnified
Party and any others the Indemnifying Party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any
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such proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the Indemnifying Party
shall not, in respect of the legal expenses of any Indemnified Party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to paragraph (a) above and by the Company in the
case of parties indemnified pursuant to paragraph (b) above. The Indemnifying
Party shall not be liable for any settlement of any proceeding effected without
its written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the Indemnifying Party agrees to indemnify the
Indemnified Party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the immediately preceding sentence, if
at any time an Indemnified Party shall have requested an Indemnifying Party to
reimburse the Indemnified Party for fees and expenses of counsel as contemplated
by the second and third sentences of this paragraph, the Indemnifying Party
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than 60
days after receipt by such Indemnifying Party of the aforesaid request and (ii)
such Indemnifying Party shall not have reimbursed the Indemnified Party in
accordance with such request prior to the date of such settlement. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending or threatened proceeding in respect
of which any Indemnified Party is or could have been a party and indemnity could
have been sought hereunder by such Indemnified Party, unless such settlement
includes an unconditional release of such Indemnified Party from all liability
on claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in paragraph (a)
or (b) of this Section 8 is unavailable to an Indemnified Party or insufficient
in respect of any losses, claims, damages or liabilities referred to therein,
then each Indemnifying Party under such paragraph, in lieu of indemnifying such
Indemnified Party thereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Holders of Transfer
Restricted Securities on the other hand, from their sale of the Transfer
Restricted Securities or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, on the one hand, and of the Holders of Transfer
Restricted Securities, on the other hand, in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative fault of the
Company and the Holders of Transfer Restricted Securities on the other hand,
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Holders of Transfer Restricted Securities and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) The Company and the Holders of Transfer Restricted Securities
agree that it would not be just or equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation or by any other method of
allocation that does not take account of the equitable considerations referred
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to in paragraph (d) above. The amount paid or payable by an Indemnified Party
as a result of the losses, claims, damages and liabilities referred to in
paragraph (d) above shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Holder of Transfer
Restricted Securities shall be required to contribute any amount in excess of
the amount by which the total price at which the Securities resold by it in the
initial placement of such Securities were offered to investors exceeds the
amount of any damages that such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
remedies provided for in this Section 8 are not exclusive and shall not limit
any rights or remedies which may otherwise be available to any Indemnified Party
at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 8 and the representations and warranties of the Company contained in
this Agreement shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Holder of Transfer Restricted Securities or any person controlling
any Holder of Transfer Restricted Securities or by or on behalf of the Company,
its officers or directors or any person controlling the Company and (iii)
acceptance of and payment for any of the Securities. The remedies provided for
in this Section 8 are not exclusive and shall not limit any rights or remedies
that may otherwise be available to any Indemnified Party at law or equity.
SECTION 9. RULE 144A
The Company hereby agrees with each Holder, for so long as any of the
Series E Preferred Stock or Class E Subordinated Debentures remain outstanding
and during any period in which the Company is not subject to Section 13 or 15(d)
of the Exchange Act, to make available to any Placement Agent or beneficial
owner of such Transfer Restricted Securities in connection with any sale thereof
and any prospective purchaser of such Transfer Restricted Securities from such
Placement Agent or beneficial owner, the information required by Rule 144A(d)(4)
under the Act.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration hereunder
unless such Holder (a) agrees to sell such Holder's Transfer Restricted
Securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements and (b) completes
and executes the related underwriting agreement and all questionnaires, powers
of attorney, indemnities, and other documents required under the terms of such
underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
Subject to Section 6(b)(xii) hereof, the Holders of Transfer
Restricted Securities covered by the Shelf Registration Statement who desire to
do so may sell such Transfer Restricted Securities in an Underwritten Offering.
The Underwriter(s) that will administer said offerings will be selected by the
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Holders of a majority of the outstanding shares or the aggregate principal
amount, as applicable, of the Transfer Restricted Securities included in such
Underwritten Offering.
SECTION 12. MISCELLANEOUS
(a) Remedies. Each Holder, in addition to being entitled to exercise
all rights provided herein, in the Subordinated Debenture Indenture, in the
Placement Agreement and granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement. The
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of the provisions of this Agreement
and hereby agrees to waive the defense in any action for specific performance
that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not on or after the
date of this Agreement enter into any agreement with respect to its securities
that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. The rights granted to the
Holders hereunder do not in any way conflict with and are not inconsistent with
the rights granted to the holders of the Company's securities under any
agreements of the Company in effect on the date hereof.
(c) Amendments and Waivers. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to or departures
from the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of, in the case of Preferred Stock, the
outstanding shares and, in the case of Subordinated Debentures, the then
outstanding aggregate principal amount, in each case, that are Transfer
Restricted Securities.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of
the transfer agent for the Preferred Stock or the Registrar for the
Subordinated Debentures, as applicable, with a copy to the transfer agent
or the Registrar; and
(ii) if to the Company, to K-III Communications Corporation, 745
Fifth Avenue, New York, New York, 10151, Attention: Beverly Chell, with a
copy to Simpson Thacher & Bartlett at 425 Lexington Avenue, New York, New
York, 10017, Attention: Gary I. Horowitz.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next Business Day, if timely delivered to an air courier guaranteeing overnight
delivery.
From and after the date on which the Preferred Stock is exchanged for
Subordinated Debentures, copies of all such notices, demands or other
communications shall be concurrently delivered by the Person giving the same to
the trustee under the Subordinated Debenture Indenture at the address specified
therein.
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(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment hereof, subsequent Holders of Transfer Restricted Securities;
provided, however, that this Agreement shall not inure to the benefit of or be
binding upon a successor or assign of a Holder unless and to the extent such
successor or assign acquired Transfer Restricted Securities from such Holder.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(i) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(j) Entire Agreement. This Agreement together with the other
Operative Documents (as defined in the Placement Agreement) is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Transfer Restricted Securities. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
K-III Communications Corporation
By: /s/ Beverly C. Chell
--------------------------------
Name: Beverly C. Chell
Title: Vice Chairman
CONFIRMED AND ACCEPTED,
as of the date first written above
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Salomon Brothers Inc
By: MORGAN STANLEY & CO. INCORPORATED
By: /s/ Francis B. Barker
------------------------------------
Name: Francis B. Barker
Title: Principal
