EXHIBIT (A)(1)
Offer To Purchase For Cash
All Outstanding Shares of Common Stock
of
CDnow, Inc.
at
$3.00 Net Per Share
by
BINC Acquisition Corp.
a wholly owned subsidiary of
Bertelsmann, Inc.
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THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY
TIME, ON TUESDAY, AUGUST 22, 2000, UNLESS THE OFFER IS EXTENDED.
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THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER A NUMBER OF
SHARES OF COMMON STOCK OF CDNOW, INC. (THE "COMPANY") THAT REPRESENTS, TOGETHER
WITH ANY SHARES BENEFICIALLY OWNED BY BERTELSMANN (OTHER THAN SHARES, IF ANY,
ISSUABLE UPON CONVERSION OF THE CONVERTIBLE LOAN AGREEMENT), AT LEAST A
MAJORITY OF THE THEN OUTSTANDING SHARES ON A DILUTED BASIS (TAKING INTO
CONSIDERATION OPTIONS AND WARRANTS TO ACQUIRE SHARES AT $10 PER SHARE OR LESS
BUT EXCLUDING SHARES, IF ANY, ISSUABLE UPON CONVERSION OF THE CONVERTIBLE LOAN
AGREEMENT) AND (II) THE EXPIRATION OR TERMINATION OF THE APPLICABLE WAITING
PERIOD UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 OR OTHER
APPLICABLE FOREIGN ANTITRUST OR COMPETITION LAWS. THE OFFER IS ALSO SUBJECT TO
OTHER CONDITIONS. SEE "THE OFFER--CONDITIONS TO THE OFFER".
THE BOARD OF DIRECTORS OF THE COMPANY HAS DETERMINED THAT THE OFFER AND
THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S SHAREHOLDERS
AND RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS TENDER THEIR SHARES IN THE
OFFER.
IMPORTANT
If you are a shareholder of CDnow common stock and wish to tender your
shares in the offer, you must (1) complete and sign the Letter of Transmittal
(or a facsimile thereof) in accordance with the instructions in the Letter of
Transmittal and mail or deliver the Letter of Transmittal and all other
required documents to the Depositary (as defined herein) together with
certificates representing the shares tendered or follow the procedure for
book-entry transfer set forth in "The Offer--Procedures for Accepting the Offer
and Tendering Shares", or (2) request your broker, dealer, commercial bank,
trust company or other nominee to effect the transaction for you. If your
shares are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee, you must contact that person if you wish to tender
your Shares.
If you wish to tender your shares and cannot deliver certificates
representing your shares and all other required documents to the Depositary on
or prior to the Expiration Date (as defined herein) or you cannot comply with
the procedures for book-entry transfer on a timely basis, you may tender your
shares pursuant to the guaranteed delivery procedure set forth in "The
Offer--Procedures for Accepting the Offer and Tendering Shares".
Questions and requests for assistance may be directed to the Information
Agent or the Dealer Manager at their respective addresses and telephone numbers
set forth on the back cover of this Offer to Purchase. Additional copies of
this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed
Delivery and other related materials may be obtained from the Information Agent
or the Dealer Manager. You may also contact your broker, dealer, commercial
bank, trust company or other nominee for copies of these documents.
The Dealer Manager for the Offer is:
[Lazard Freres LOGO]
July 26, 2000
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TABLE OF CONTENTS
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Page
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SUMMARY TERM SHEET...........................................................1
INTRODUCTION.................................................................4
THE OFFER....................................................................6
Terms of the Offer.................................................6
Acceptance for Payment and Payment for Shares......................7
Procedures for Accepting the Offer and Tendering Shares............8
Withdrawal Rights.................................................10
Certain United States Federal Income Tax Consequences.............11
Price Range of Shares; Dividends..................................12
Certain Information Concerning the Company........................13
Certain Information Concerning Bertelsmann and Purchaser..........14
Source and Amount of Funds........................................15
Background of the Offer...........................................15
Purpose and Structure of the Offer................................16
Plans for the Company.............................................17
The Merger Agreement..............................................17
The Shareholder Agreement.........................................22
Dissenters' Rights................................................22
The Related Financing.............................................23
Certain Effects of the Offer......................................24
Conditions to the Offer...........................................25
Certain Legal Matters; Regulatory Approvals.......................25
Fees and Expenses.................................................29
Miscellaneous.....................................................30
SCHEDULE I Directors and Executive Officers of Bertelsmann, Purchaser
and Bertelsmann AG..............................................I-1
i
SUMMARY TERM SHEET
Bertelsmann, Inc. ("Bertelsmann"), through its wholly owned subsidiary,
BINC Acquisition Corp. ("BINC"), is offering to purchase all of the outstanding
common stock of CDnow, Inc. ("CDnow") for $3.00 per share in cash. The
following are some of the questions you, as a shareholder of CDnow, may have
and the answers to those questions. We urge you to carefully read the remainder
of this Offer to Purchase and the accompanying Letter of Transmittal because
the information in this summary is not complete and additional important
information is contained in the remainder of this Offer to Purchase and the
Letter of Transmittal.
Who is offering to buy my securities?
We are Bertelsmann, Inc., a Delaware corporation, and through our wholly
owned subsidiary, BINC Acquisition Corp., a Pennsylvania corporation, we are
offering to purchase all of the outstanding common stock of CDnow. BINC was
formed for the purpose of making this tender offer. Both Bertelsmann and BINC
are wholly owned subsidiaries of Bertelsmann AG, a German corporation.
What are the classes and amounts of securities sought in the offer?
We are seeking to purchase all of the outstanding common stock, no par
value, of CDnow.
How much are you offering to pay for my securities and what is the form of
payment? Will I have to pay any fees or commissions?
We are offering to pay the price of $3.00 per share, net to you, in cash.
If you tender your shares to us in the offer, you will not have to pay
brokerage fees, commissions or similar expenses. If you own your shares through
a broker or other nominee, and your broker tenders your shares on your behalf,
your broker or nominee may charge you a fee for doing so. You should consult
your broker or nominee to determine whether any charges will apply.
Do you have the financial resources to make payment?
We will provide BINC with sufficient funds to purchase shares tendered to
us in the offer and to complete the merger which is expected to follow the
successful completion of the offer. It is anticipated that the funds will be
obtained from existing credit facilities or new financing arrangements with
existing financing sources. See "The Offer--Source and Amount of Funds".
Is your financial condition relevant to my decision to tender in the offer?
We do not think our financial condition is relevant to your decision
whether to tender in the offer because the form of payment consists solely of
cash and the offer is not conditioned on our ability to obtain financing. See
"The Offer-- Certain Information Concerning Bertelsmann and Purchaser" and "The
Offer--Source and Amount of Funds".
How long do I have to decide whether to tender in the offer?
You will have at least until 12:00 midnight, New York City time, on
Tuesday, August 22, 2000, to decide whether to tender your shares in the offer,
unless we decide to extend the offer. Further, if you are unable to deliver the
required documents in order to make a valid tender by that time, you may be
able to use the guaranteed delivery procedure described in this Offer to
Purchase. See "The Offer--Terms of the Offer--Expiration Date" and "The Offer--
Procedures for Accepting the Offer and Tendering Shares".
What are the most significant conditions to the offer?
We are not obligated to purchase any shares in the offer unless the number
of shares tendered in the offer, when added to any shares then owned by
Bertelsmann (excluding shares, if any, issuable upon conversion of the
Convertible Loan Agreement) represents at least a majority of the shares of
CDnow outstanding on a diluted basis, taking into consideration options and
warrants to acquire shares at $10 per share or less but excluding shares
issuable to
Bertelsmann upon conversion of the Convertible Loan Agreement. We calculate the
minimum number of shares to be approximately 18,282,466, representing
approximately 55.5% of the presently outstanding shares. In addition, our
obligation to purchase shares in the offer is conditioned upon the expiration
or termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and other applicable foreign antitrust or
competition laws, as well as certain other conditions. See "The
Offer--Conditions to the Offer".
How do I tender my shares?
If you are a record holder, you may tender your shares by delivering the
certificates representing your shares, together with a completed Letter of
Transmittal, to ChaseMellon Shareholder Services, L.L.C., the depositary for
the offer, not later than the time the offer expires. If your shares are held
in street name, you must instruct your nominee to tender the shares. If you are
unable to deliver the required documents to the depositary by the expiration of
the offer, you may get some extra time to do so by having a broker, a bank or
other fiduciary which is a member of the Securities Transfer Agents Medallion
Program or other eligible institution guarantee that the missing items will be
received by the depositary within three Nasdaq National Market trading days.
However, the depositary must receive the missing items within that three day
period. See "The Offer--Procedures for Accepting the Offer and Tendering
Shares".
How do I withdraw previously tendered shares?
To withdraw shares, you must deliver a properly executed written notice of
withdrawal (or a facsimile of one) with the required information to the
depositary while you still have the right to withdraw the shares. See "The
Offer-- Withdrawal Rights".
Until what time can I withdraw previously tendered shares?
You can withdraw shares at any time until the offer has expired. See "The
Offer--Withdrawal Rights".
Is there an agreement governing the offer?
Yes. Bertelsmann, BINC and CDnow have entered into a merger agreement
dated as of July 19, 2000. The merger agreement provides, among other things,
for the terms and conditions of the offer and the merger of BINC into CDnow
following the offer. See "The Offer--The Merger Agreement".
What does the board of directors of CDnow think of the offer?
The board of directors of CDnow has determined that the offer and the
merger are fair to and in the best interests of the shareholders of CDnow, and
recommends that CDnow shareholders tender their shares in the offer. See "The
Offer--Background of the Offer" and "The Offer--The Merger Agreement".
Have any shareholders agreed to tender their shares?
Yes. Jason Olim, president and chief executive officer and a director of
CDnow, and Matthew Olim, a director and Technical Lead of CDnow, have each
agreed to tender their shares in the offer. Jason Olim and Matthew Olim each
own 2,960,025 shares, representing collectively approximately 18% of the
currently outstanding shares. See "The Offer--The Shareholder Agreement".
If a majority of the shares are tendered and accepted for payment, will CDnow
continue as a public company?
No. Following the purchase of the shares in the offer, we expect to
consummate the merger. If the merger takes place, CDnow will be privately
owned. Even if the merger does not take place, if we purchase all the tendered
shares, there may be so few remaining shareholders and publicly held shares
that CDnow's common stock will no longer be eligible to be traded through the
Nasdaq National Market, there may not be a public trading market for CDnow's
stock, and CDnow may cease making filings with the Securities and Exchange
Commission or otherwise cease being required to comply with the rules of the
Securities and Exchange Commission relating to publicly held companies.
2
Will the offer be followed by a merger if all CDnow shares are not tendered in
the offer?
Yes. If the offer is consummated, BINC will be merged into CDnow. If that
merger takes place, Bertelsmann will own all of the shares of CDnow and all
remaining public shareholders (other than shareholders properly exercising
dissenters' rights) will receive $3.00 per share (or any other higher price per
share that is paid in the offer) in cash.
If I decide not to tender, how will the offer affect my shares?
If the merger described above takes place, shareholders (other than those
properly exercising dissenters' rights) not tendering in the offer will receive
the same amount of cash per share that they would have received had they
tendered their shares in the offer. Therefore, if the merger takes place, the
only difference to you between tendering your shares and not tendering your
shares is that if you tender your shares into the offer, you will be paid
earlier and will not have dissenters' rights. However, even if the merger does
not take place, the number of shareholders and shares of CDnow that are still
in the hands of the public may be so small that there no longer will be an
active public trading market (or, possibly, any public trading market) for
CDnow's common stock. Also, as described above, CDnow may cease making filings
with the Securities and Exchange Commission or may no longer be required to
comply with the rules of the Securities and Exchange Commission relating to
publicly held companies.
What is the market value of my shares as of a recent date?
On July 19, 2000, the last full trading day before we announced the merger
agreement with CDnow, the last sale price of CDnow's common stock reported on
the Nasdaq National Market was $2 7/8 per share. On July 25, 2000 the last full
trading day before the date of this offer to purchase, the last sale price of
CDnow's common stock was $2 7/8 per share. We advise you to obtain a recent
quotation for shares of CDnow's common stock in deciding whether to tender your
shares.
Who can I talk to if I have questions about the offer?
You can call MacKenzie Partners, Inc. at (212) 929-5500 (call collect) or
(800) 322-2885 (toll free) or Lazard Freres at (212) 632-6717 (call collect).
MacKenzie Partners, Inc. is acting as the information agent and Lazard Freres
is acting as the dealer manager for our offer.
3
To the Holders of Shares of Common Stock of CDnow, Inc.:
INTRODUCTION
BINC Acquisition Corp. ("Purchaser"), a Pennsylvania corporation and a
wholly owned subsidiary of Bertelsmann, Inc., a Delaware corporation
("Bertelsmann"), hereby offers to purchase all of the outstanding shares of
common stock, no par value (the "Shares"), of CDnow, Inc. ("the Company") at a
price of $3.00 per Share, net to the seller in cash (the "Offer Price"), upon
the terms and subject to the conditions set forth in this Offer to Purchase and
in the related Letter of Transmittal (which, together with any amendments or
supplements thereto, collectively constitute the "Offer").
The Offer is being made pursuant to the Agreement and Plan of Merger dated
as of July 19, 2000 (the "Merger Agreement") among Bertelsmann, Purchaser and
the Company. The Merger Agreement provides that, following completion of the
Offer and the satisfaction or waiver of certain conditions in the Merger
Agreement, Purchaser will be merged into the Company (the "Merger") with the
Company continuing as the surviving corporation (the "Surviving Corporation"),
which will be wholly owned by Bertelsmann. At the effective time of the Merger
(the "Effective Time"), each Share outstanding immediately prior to the
Effective Time (other than Shares owned by Bertelsmann or any of its
subsidiaries or the Company as treasury stock, all of which will be cancelled,
and other than Shares that are held by shareholders, if any, who properly
exercise their dissenters' rights under the Pennsylvania Business Corporation
Law (the "BCL")), will be converted into the right to receive $3.00 (or any
greater per Share price paid in the Offer) in cash, without interest (the
"Merger Consideration"). The Merger Agreement is more fully described in "The
Offer--The Merger Agreement", which also contains a discussion of the treatment
of stock options.
Tendering shareholders who are record owners of their Shares and tender
directly to the Depositary (as defined below) will not be obligated to pay
brokerage fees or commissions or, except as otherwise provided in Instruction 6
of the Letter of Transmittal, stock transfer taxes with respect to the purchase
of Shares by Purchaser pursuant to the Offer. Shareholders who hold their
Shares through a broker or bank should consult such institution as to whether
it charges any service fees. Bertelsmann or Purchaser will pay all charges and
expenses of Lazard Freres & Co. L.L.C. as dealer manager ("Lazard Freres" or
the "Dealer Manager"), ChaseMellon Shareholder Services, L.L.C., as depositary
(the "Depositary"), and MacKenzie Partners, Inc., as information agent (the
"Information Agent"), incurred in connection with the Offer.
The Board of Directors of the Company (the "Company Board") has determined
that the Offer and the Merger are fair to and in the best interests of the
shareholders of CDNOW and recommends that CDnow shareholders tender their
Shares in the Offer.
Allen & Company Incorporated ("Allen & Company"), the Company's financial
advisor, has delivered to the Company Board its written opinion dated July 19,
2000, to the effect that, as of such date and based on and subject to the
matters stated in such opinion, the consideration to be received by holders of
Shares in the offer and the merger pursuant to the Merger Agreement are fair
from a financial point of view to such holders. The full text of Allen &
Company's written opinion, which describes the assumptions made, procedures
followed, matters considered and limitations on the review undertaken, is
included as Annex A to the Company's Solicitation/Recommendation Statement on
Schedule 14D-9 (the "Schedule 14D-9"), which is being mailed to shareholders
concurrently herewith. Shareholders are urged to read the full text of such
opinion carefully in its entirety.
The Company has been advised that all of its directors and executive
officers intend to tender all of their Shares pursuant to the Offer.
The Offer is conditioned upon, among other things, there being validly
tendered and not withdrawn prior to the expiration of the Offer a number of
Shares that, together with any Shares then beneficially owned by Bertelsmann
(excluding Shares, if any, issuable upon conversion of the Convertible Loan
Agreement), represents at least a majority of the then outstanding Shares on a
diluted basis, taking into consideration options and warrants to acquire Shares
at $10 per Share or less but excluding Shares, if any, issuable upon conversion
of the Convertible Loan Agreement (the "Minimum Condition"). The Offer is also
conditioned upon the expiration or
4
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") and other applicable foreign antitrust
or competition laws and the satisfaction of certain other conditions. See "The
Offer--Conditions to the Offer".
The Company has advised Bertelsmann that, on July 19, 2000, 32,961,610
Shares were issued and outstanding and 3,603,320 Shares were subject to
issuance upon the exercise or conversion of options or warrants with an
exercise or conversion price of $10 per share or less. Accordingly, Purchaser
believes that the Minimum Condition would be satisfied if approximately
18,282,466 Shares (or approximately 55.5% of the outstanding Shares) were
validly tendered and not withdrawn prior to the expiration of the Offer.
Pursuant to the CDnow Shareholder Agreement, dated as of July 19, 2000 (the
"Shareholder Agreement"), Jason Olim, president and chief executive officer and
a director of the Company, and Matthew Olim, a director and Technical Lead of
the Company, have each agreed to tender in the Offer all Shares beneficially
owned by them. Jason Olim and Matthew Olim each own 2,960,025 Shares,
representing collectively 18% of the currently outstanding Shares. See "The
Offer--The Shareholder Agreement".
The Merger Agreement provides that upon acceptance for payment of a number
of Shares that satisfies the Minimum Condition, Bertelsmann will be entitled to
designate such number of directors, rounded up to the next whole number, on the
Company Board that equals the product of (1) the total number of directors on
the Company Board and (2) the percentage that the number of Shares beneficially
owned by Bertelsmann bears to the total number of Shares then outstanding. The
Company and Bertelsmann have agreed to use their reasonable best efforts to
cause at least two members of the Company Board who were directors as of the
date of the Merger Agreement and are not employees of the Company to remain
directors of the Company until the Effective Time. See "The Offer--The Merger
Agreement".
The Merger is subject to the satisfaction or waiver of certain conditions,
including, if required, the approval of the Merger Agreement by the Company's
shareholders. If the Minimum Condition is satisfied, Purchaser would have
sufficient voting power to approve the Merger without the affirmative vote of
any other shareholder of the Company. The Company has agreed, if required, to
cause a meeting of its shareholders to be held as promptly as practicable
following consummation of the Offer for the purposes of considering and taking
action upon the approval and adoption of the Merger Agreement. Bertelsmann and
Purchaser have agreed to vote their Shares in favor of the approval and
adoption of the Merger Agreement. See "The Offer--The Merger Agreement".
This Offer to Purchase and the related Letter of Transmittal contain
important information that should be read carefully before any decision is made
with respect to the Offer.
5
THE OFFER
Terms of the Offer
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of such extension or
amendment), Purchaser will accept for payment and pay for all Shares validly
tendered prior to the Expiration Date and not properly withdrawn as permitted
under "The Offer--Withdrawal Rights". The term "Expiration Date" means 12:00
p.m., New York City time, on August 22, 2000, unless Purchaser shall have
extended the period of time for which the Offer is open, in which event the
term "Expiration Date" shall mean the latest time and date at which the Offer,
as so extended by Purchaser, shall expire.
The Offer is conditioned upon the satisfaction of the Minimum Condition
and the other conditions set forth in "The Offer--Conditions to the Offer".
Subject to the provisions of the Merger Agreement, Purchaser may waive any or
all of the conditions to its obligation to purchase Shares pursuant to the
Offer (other than the Minimum Condition). If by the Expiration Date any of the
conditions to the Offer have not been satisfied or waived, Purchaser may elect
to (i) terminate the Offer and return all tendered Shares to tendering
shareholders, (ii) waive all of the unsatisfied conditions (other than the
Minimum Condition) and, subject to any required extension, purchase all Shares
validly tendered by the Expiration Date and not properly withdrawn or (iii)
extend the Offer and, subject to the right of shareholders to withdraw Shares
until the new Expiration Date, retain the Shares that have been tendered until
the expiration of the Offer as extended.
Purchaser will not make any change without the prior written consent of
the Company that (i) decreases the price per Share payable in the Offer, (ii)
reduces the maximum number of Shares to be purchased in the Offer, (iii)
changes the form of consideration to be paid in the Offer, or (iv) imposes
conditions to the Offer in addition to the conditions set forth in "The
Offer--Conditions to the Offer".
Subject to the applicable rules and regulations of the Securities and
Exchange Commission ("SEC") and the provisions of the Merger Agreement,
Purchaser also expressly reserves the right, in its sole discretion, at any
time or from time to time, (i) to terminate the Offer if any of the conditions
set forth in "The Offer--Conditions to the Offer" have not been satisfied and
(ii) to waive any condition to the Offer (other than the Minimum Condition) or
otherwise amend the Offer in any respect, in each case by giving oral or
written notice of such extension, termination, waiver or amendment to the
Depositary and by making a public announcement thereof. If Purchaser accepts
for payment any Shares pursuant to the Offer, it will accept for payment all
Shares validly tendered prior to the Expiration Date and not properly
withdrawn, and will promptly pay for all Shares so accepted for payment.
Any extension, delay, termination, waiver or amendment will be followed as
promptly as practicable by public announcement thereof, such announcement in
the case of an extension to be made no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date,
in accordance with the public announcement requirements of Rule 14e-1(d) under
the Securities and Exchange Act of 1934 (the "Exchange Act"). Subject to
applicable law (including Rules 14d-4(d) and 14d-6(c) under the Exchange Act,
which require that material changes be promptly disseminated to shareholders in
a manner reasonably designed to inform them of such changes) and without
limiting the manner in which Purchaser may choose to make any public
announcement, Purchaser shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by issuing a
press release to the Dow Jones News Service.
If Purchaser is delayed in its acceptance for payment of or payment for
Shares or it is unable to pay for Shares pursuant to the Offer for any reason,
then, without prejudice to Purchaser's rights under the Offer, the Depositary
may retain tendered Shares on behalf of Purchaser, and such Shares may not be
withdrawn except to the extent tendering shareholders are entitled to
withdrawal rights as described herein under "The Offer--Withdrawal Rights".
However, the ability of Purchaser to delay the payment for Shares that
Purchaser has accepted for payment is limited by (i) Rule 14e- 1(c) under the
Exchange Act, which requires that a bidder pay the consideration offered or
return the securities deposited by or on behalf of shareholders promptly after
the termination or withdrawal of such bidder's offer and (ii) the terms of the
Merger Agreement, which require that Purchaser pay for Shares that are tendered
pursuant to the Offer as soon as permitted after the expiration of the Offer.
6
If Purchaser makes a material change in the terms of the Offer or the
information concerning the Offer, or if it waives a material condition of the
Offer, Purchaser will disseminate additional tender offer materials and extend
the Offer to the extent required by Rules 14d-4(d), 14d-6(c) and 14e-1 under
the Exchange Act. If Purchaser changes the price to be paid or the number of
Shares to be purchased in the Offer, the Offer must remain open until the tenth
business day from the date that notice of such change is first published, sent
or given to shareholders. The minimum period during which an offer must remain
open following material changes in the terms of the Offer, other than a change
in price, percentage of securities sought or inclusion of or changes to a
dealer's soliciting fee, will depend upon the facts and circumstances,
including the materiality, of the changes. In the SEC's view, an offer should
remain open for a minimum of five business days from the date the material
change is first published, sent or given to shareholders and, if material
changes are made with respect to information that approaches the significance
of price and share levels, a minimum of 10 business days may be required to
allow for adequate dissemination to shareholders.
The Company has provided Purchaser with the Company's shareholder list and
security position listings for the purpose of disseminating the Offer to
holders of Shares. This Offer to Purchase and the related Letter of Transmittal
will be mailed to record holders of Shares whose names appear on the Company's
shareholder list and will be furnished, for subsequent transmittal to
beneficial owners of Shares, to brokers, dealers, commercial banks, trust
companies and similar persons whose names, or the names of whose nominees,
appear on the shareholder list or, if applicable, who are listed as
participants in a clearing agency's security position listing.
Acceptance for Payment and Payment for Shares
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such
extension or amendment) and the satisfaction or earlier waiver of all the
conditions to the Offer set forth in "The Offer--Conditions to the Offer",
Purchaser will accept for payment and will pay for all Shares validly tendered
prior to the Expiration Date and not properly withdrawn pursuant to the Offer
as soon as it is permitted to do so under applicable law. Subject to the Merger
Agreement and compliance with Rule 14e-1(c) under the Exchange Act, Purchaser
expressly reserves the right to delay payment for Shares in order to comply in
whole or in part with any applicable law. See "The Offer--Certain Legal
Matters; Regulatory Approvals".
In all cases, payment for Shares accepted for payment pursuant to the
Offer will be made only after timely receipt by the Depositary of (1) the
certificates evidencing such Shares (the "Share Certificates") or confirmation
(a "Book-Entry Confirmation") of a book-entry transfer of such Shares into the
Depositary's account at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in "The Offer--Procedures for
Accepting the Offer and Tendering Shares", (2) the Letter of Transmittal (or a
facsimile thereof), properly completed and duly executed, with any required
signature guarantees or, in the case of a book-entry transfer, an Agent's
Message (as defined below) in lieu of the Letter of Transmittal and (3) any
other documents required by the Letter of Transmittal.
For purposes of the Offer, Purchaser will be deemed to have accepted for
payment, and thereby purchased, Shares validly tendered and not properly
withdrawn as, if and when Purchaser gives oral or written notice to the
Depositary of Purchaser's acceptance for payment of such Shares pursuant to the
Offer. Upon the terms and subject to the conditions of the Offer, payment for
Shares accepted for payment pursuant to the Offer will be made by deposit of
the Offer Price therefor with the Depositary, which will act as agent for
tendering shareholders for the purpose of receiving payments from Purchaser and
transmitting such payments to tendering shareholders whose Shares have been
accepted for payment. If, for any reason whatsoever, acceptance for payment of
any Shares tendered pursuant to the Offer is delayed, or Purchaser is unable to
accept for payment Shares tendered pursuant to the Offer, then, without
prejudice to Purchaser's rights under "The Offer--Terms of the Offer", the
Depositary may, nevertheless, on behalf of Purchaser, retain tendered Shares,
and such Shares may not be withdrawn, except to the extent that the tendering
shareholders are entitled to withdrawal rights as described in "The
Offer--Withdrawal Rights" and as otherwise required by Rule 14e-1(c) under the
Exchange Act.
Under no circumstances will interest on the Offer Price for Shares be
paid, regardless of any delay in making such payment.
7
If any tendered Shares are not accepted for payment for any reason
pursuant to the terms and conditions of the Offer, or if Share Certificates are
submitted evidencing more Shares than are tendered, Share Certificates
evidencing unpurchased Shares will be returned, without expense to the
tendering shareholder (or, in the case of Shares tendered by book-entry
transfer into the Depositary's account at the Book-Entry Transfer Facility
pursuant to the procedure set forth in "The Offer--Procedures for Accepting the
Offer and Tendering Shares", such Shares will be credited to an account
maintained at the Book-Entry Transfer Facility), as promptly as practicable
following the expiration or termination of the Offer.
Purchaser reserves the right to transfer or assign, in whole or from time
to time in part, to one or more of its affiliates, the right to purchase all or
any portion of the Shares tendered pursuant to the Offer, but any such
transaction or assignment will not relieve Purchaser of its obligations under
the Offer and will in no way prejudice the rights of tendering shareholders to
receive payment for Shares validly tendered and accepted for payment pursuant
to the Offer.
Procedures for Accepting the Offer and Tendering Shares
Valid Tenders. In order for a shareholder validly to tender Shares
pursuant to the Offer, either (1) the Letter of Transmittal (or a facsimile
thereof), properly completed and duly executed, together with any required
signature guarantees (or, in the case of a book-entry transfer, an Agent's
Message in lieu of the Letter of Transmittal) and any other documents required
by the Letter of Transmittal must be received by the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase and either the
Share Certificates evidencing tendered Shares must be received by the
Depositary at such address or such Shares must be tendered pursuant to the
procedure for book-entry transfer described below and a Book-Entry Confirmation
must be received by the Depositary, in each case prior to the Expiration Date,
or (2) the tendering shareholder must comply with the guaranteed delivery
procedures described below.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Depositary and forming a part of a
Book-Entry Confirmation, that states that the Book-Entry Transfer Facility has
received an express acknowledgment from the participant in the Book-Entry
Transfer Facility tendering the Shares that are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal and that Purchaser may enforce such
agreement against such participant.
Book-Entry Transfer. The Depositary will establish an account with respect
to the Shares at the Book-Entry Transfer Facility for purposes of the Offer
within two business days after the date of this Offer to Purchase. Any
financial institution that is a participant in the system of the Book-Entry
Transfer Facility may make a book-entry delivery of Shares by causing the
Book-Entry Transfer Facility to transfer such Shares into the Depositary's
account at the Book- Entry Transfer Facility in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. However, although delivery of
Shares may be effected through book-entry transfer at the Book-Entry Transfer
Facility, either the Letter of Transmittal (or a facsimile thereof), properly
completed and duly executed, together with any required signature guarantees,
or an Agent's Message in lieu of the Letter of Transmittal, and any other
required documents, must, in any case, be received by the Depositary at one of
its addresses set forth on the back cover of this Offer to Purchase prior to
the Expiration Date, or the tendering shareholder must comply with the
guaranteed delivery procedure described below.
Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Depositary.
Signature Guarantees. No signature guarantee is required on the Letter of
Transmittal (1) if the Letter of Transmittal is signed by the registered holder
of the Shares tendered therewith, unless such holder has completed either the
box entitled "Special Delivery Instructions" or the box entitled "Special
Payment Instructions" on the Letter of Transmittal or (2) if the Shares are
tendered for the account of a firm that is participating in the Security
Transfer Agents Medallion Program (an "Eligible Institution"). In all other
cases, all signatures on a Letter of Transmittal must be guaranteed by an
Eligible Institution. See Instruction 1 of the Letter of Transmittal. If a
Share Certificate is registered in the name of a person or persons other than
the signer of the Letter of Transmittal, or if payment is to be made or
delivered to, or a Share Certificate not accepted for payment or not tendered
is to be issued in the name of, a person other than the registered holder(s),
then the Share Certificate must be endorsed or accompanied by appropriate duly
executed stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear on the Share Certificate, with
8
the signature(s) on such Share Certificate or stock powers guaranteed by an
Eligible Institution as provided in the Letter of Transmittal. See Instructions
1 and 5 of the Letter of Transmittal.
Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to
the Offer and the Share Certificates evidencing such shareholder's Shares are
not immediately available or such shareholder cannot deliver the Share
Certificates and all other required documents to the Depositary prior to the
Expiration Date, or such shareholder cannot complete the procedure for delivery
by book-entry transfer on a timely basis, such Shares may nevertheless be
tendered; provided that all of the following conditions are satisfied:
(1) such tender is made by or through an Eligible Institution;
(2) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by Purchaser, is received
prior to the Expiration Date by the Depositary as provided below; and
(3) the Share Certificates (or a Book-Entry Confirmation) evidencing all
tendered Shares, in proper form for transfer, in each case together
with the Letter of Transmittal (or a facsimile thereof), properly
completed and duly executed, with any required signature guarantees
(or, in the case of a book-entry transfer, an Agent's Message), and
any other documents required by the Letter of Transmittal are
received by the Depositary within three Nasdaq National Market
trading days after the date of execution of such Notice of Guaranteed
Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by facsimile transmission or mailed to the Depositary and must include a
guarantee by an Eligible Institution in the form set forth in the form of
Notice of Guaranteed Delivery made available by Purchaser.
In all cases, Shares will not be deemed validly tendered unless a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) is
received by the Depositary.
The method of delivery of Share Certificates, the Letter of Transmittal
and all other required documents, including delivery through the Book-Entry
Transfer Facility, is at the option and risk of the tendering shareholder, and
the delivery will be deemed made only when actually received by the Depositary
(including, in the case of a book-entry transfer, receipt of a Book-Entry
Confirmation). If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended. In all cases, sufficient time
should be allowed to ensure timely delivery.
Determination of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for payment of any
tender of Shares will be determined by Purchaser in its sole discretion, which
determination shall be final and binding on all parties. Purchaser reserves the
absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance for payment of which may, in the opinion of its
counsel, be unlawful. Purchaser also reserves the absolute right to waive any
defect or irregularity in the tender of any Shares of any particular
shareholder, whether or not similar defects or irregularities are waived in the
case of other shareholders. No tender of Shares will be deemed to have been
validly made until all defects and irregularities have been cured or waived to
the satisfaction of Purchaser. None of Purchaser, the Dealer Manager, the
Depositary, the Information Agent or any other person will be under any duty to
give notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification. Purchaser's interpretation
of the terms and conditions of the Offer (including the Letter of Transmittal
and the instructions thereto) will be final and binding.
Other Requirements. By executing the Letter of Transmittal as set forth
above, a tendering shareholder irrevocably appoints designees of Purchaser as
such shareholder's proxies, each with full power of substitution, in the manner
set forth in the Letter of Transmittal, to the full extent of such
shareholder's rights with respect to the Shares tendered by such shareholder
and accepted for payment by Purchaser (including, with respect to any and all
other Shares or other securities issued or issuable in respect of such Shares
on or after the date of this Offer to Purchase). All such proxies shall be
considered coupled with an interest in the tendered Shares. Such appointment
will be effective when, and only to the extent that, Purchaser accepts such
Shares for payment. Upon such acceptance for payment, all prior proxies given
by such shareholder with respect to such Shares (and such other Shares and
securities) will be revoked without further action, and no subsequent proxies
may be given nor any subsequent written consent executed by such shareholder
(and,
9
if given or executed, will not be deemed to be effective) with respect thereto.
The designees of Purchaser will, with respect to the Shares (and other
securities) for which the appointment is effective, be empowered to exercise
all voting and other rights of such shareholder as they in their sole
discretion may deem proper at any annual or special meeting of the Company's
shareholders or any adjournment or postponement thereof, by written consent in
lieu of any such meeting or otherwise. Purchaser reserves the right to require
that, in order for Shares to be deemed validly tendered, immediately upon
Purchaser's payment for such Shares, Purchaser must be able to exercise full
voting rights with respect to such Shares.
The tender of Shares pursuant to any one of the procedures described above
will constitute the tendering shareholder's acceptance of the Offer, as well as
the tendering shareholder's representation and warranty that such shareholder
has the full power and authority to tender and assign the Shares tendered, as
specified in the Letter of Transmittal. Purchaser's acceptance for payment of
Shares tendered pursuant to the Offer will constitute a binding agreement
between the tendering shareholder and Purchaser upon the terms and subject to
the conditions of the Offer.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT
TO SHAREHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE
OFFER, EACH UNITED STATES HOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH
SHAREHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER OR SOCIAL SECURITY NUMBER
OR CERTIFY THAT SUCH SHAREHOLDER IS NOT SUBJECT TO BACKUP WITHHOLDING BY
COMPLETING THE SUBSTITUTE FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP
WITHHOLDING APPLIES TO A SHAREHOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD
31% OF ANY PAYMENTS MADE TO SUCH SHAREHOLDER. SEE INSTRUCTION 8 OF THE LETTER
OF TRANSMITTAL. IF A SHAREHOLDER IS A NONRESIDENT ALIEN OR FOREIGN ENTITY NOT
SUBJECT TO BACKUP WITHHOLDING, THE SHAREHOLDER IS URGED TO GIVE THE DEPOSITARY
A COMPLETED W-8BEN (CERTIFICATE OF FOREIGN STATUS) PRIOR TO RECEIPT OF PAYMENT.
Withdrawal Rights
Tenders of Shares made pursuant to the Offer may be withdrawn at any time
prior to the Expiration Date. Thereafter, such tenders are irrevocable, except
that they may be withdrawn after September 23, 2000 unless theretofore accepted
for payment as provided in this Offer to Purchase.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Depositary at
one of its addresses set forth on the back cover page of this Offer to
Purchase. Any such notice of withdrawal must specify the name and address of
the person who tendered the Shares to be withdrawn, the number of Shares to be
withdrawn and the name of the registered holder of such Shares, if different
from that of the person who tendered such Shares. If Share Certificates
evidencing Shares to be withdrawn have been delivered or otherwise identified
to the Depositary, then, prior to the physical release of such Share
Certificates, the serial numbers shown on such Share Certificates must be
submitted to the Depositary and the signature(s) on the notice of withdrawal
must be guaranteed by an Eligible Institution, unless such Shares have been
tendered for the account of an Eligible Institution. If Shares have been
tendered pursuant to the procedure for book-entry transfer as set forth in "The
Offer--Procedures for Accepting the Offer and Tendering Shares", any notice of
withdrawal must also specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Shares.
If Purchaser is delayed in its acceptance for payment of Shares or is
unable to accept Shares for payment pursuant to the Offer for any reason, then,
without prejudice to Purchaser's rights under the Offer, the Depositary may,
nevertheless, on behalf of Purchaser, retain tendered Shares, and such Shares
may not be withdrawn except to the extent that tendering shareholders are
entitled to withdrawal rights as described herein.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal will be determined by Purchaser, in its sole
discretion, whose determination will be final and binding. None of Purchaser,
the Dealer Manager, the Depositary, the Information Agent or any other person
will be under duty to give notification of any defects or irregularities in any
notice of withdrawal or incur any liability for failure to give any such
notification.
10
Withdrawals of Shares may not be rescinded. Any Shares properly withdrawn
will thereafter be deemed not to have been validly tendered for purposes of the
Offer. However, withdrawn Shares may be re-tendered at any time prior to the
Expiration Date by following one of the procedures described in "The
Offer--Procedures for Accepting the Offer and Tendering Shares".
Certain United States Federal Income Tax Consequences
This summary of the material United States federal income tax consequences
of the Offer and the Merger is for general information only and is based on the
law as currently in effect. This summary does not discuss all of the tax
consequences that may be relevant to a shareholder in light of its particular
circumstances or to shareholders subject to special rules, such as financial
institutions, broker-dealers, tax-exempt organizations, shareholders that hold
their Shares as part of a straddle or a hedging or conversion transaction and
shareholders who acquired their Shares through the exercise of an employee
stock option or otherwise as compensation.
Shareholders are urged to consult their own tax advisors as to the
particular tax consequences to them of the Offer and the Merger, including the
effect of United States state and local tax laws or foreign tax laws.
A United States holder refers to:
o a citizen or resident of the United States,
o a corporation or other entity created or organized in the United
States or under the laws of the United States or of any political
subdivision of the United States, or
o an estate or trust, the income of which is includible in gross income
for federal income tax purposes regardless of its source.
A Non-United States holder refers to a shareholder that is not a United
States holder.
Tender Offer
United States Holders. The receipt by a United States holder of cash for
Shares pursuant to the Offer will be a taxable transaction under the United
States Internal Revenue Code of 1986, as amended (the "Code"). A tendering
United States holder will generally recognize gain or loss in an amount equal
to the difference between the cash received by the shareholder pursuant to the
Offer and the shareholder's adjusted tax basis in the Shares tendered pursuant
to the Offer. That gain or loss will be a capital gain or loss if the Shares
are a capital asset in the hands of the shareholder, and will be long term
capital gain or loss if the Shares have been held for at least one year.
Shareholders are urged to consult their own tax advisors as to the federal
income tax treatment of a capital gain or loss (including limitations on the
deductibility of a capital loss).
A United States holder that tenders Shares may be subject to backup
withholding at a rate of 31% unless it provides its taxpayer identification
number and certifies that the number is correct or properly certifies that it
is awaiting a taxpayer identification number, or unless an exemption is
demonstrated to apply. See "Procedures for Accepting the Offer and Tendering
Shares--Other Requirements." Backup withholding is not an additional tax.
Amounts so withheld can be refunded or credited against the federal income tax
liability of the shareholder, provided appropriate information is forwarded to
the IRS. A tendering United States holder should complete the Substitute Form
W-9 that is included in the Letter of Transmittal.
Non-United States Holders. A tendering Non-United States holder will
generally not be subject to United States federal income tax on a gain realized
on a disposition of Shares unless:
o the gain is effectively connected with a trade or business in the
United States of that Non-United States holder,
11
o that Non-United States holder is a non-resident alien individual who
holds the Shares as a capital asset and who is present in the United
States for 183 or more days in 2000, or
o that Non-United States holder is subject to tax under the provisions
of the Code on the taxation of United States expatriates.
Information reporting and backup withholding imposed at a rate of 31% may
apply under specified circumstances to cash payments received by a tendering
Non-United States Holder unless it certifies as to its foreign status or
otherwise establishes an exemption. See "The Offer--Procedures for Accepting
the Offer and Tendering Shares--Other Requirements." Backup withholding is not
an additional tax. Amounts so withheld can be refunded or credited against the
federal income tax liability of a Non-United States holder, provided
appropriate information is forwarded to the IRS. To avoid backup withholding, a
tendering Non-United States holder should complete a Form W-8BEN, which may be
obtained from the Depositary.
Merger
The receipt by a United States holder or Non-United States holder of cash
pursuant to the Merger would generally result in federal income tax
consequences similar to those described in the relevant portion of the above
summary. Shareholders that receive cash pursuant to the Merger are urged to
consult their own tax advisors.
Price Range of Shares; Dividends
The Shares are authorized for quotation on the Nasdaq National Market
under the symbol "CDNW." The following table sets forth, for the periods
indicated, the high and low sales prices per Share for the periods indicated.
Share prices are as reported on the Nasdaq National Market based on published
financial sources.
Common Stock
-------------------
High Low
------- -------
1998:
First Quarter (commencing February 10).......$27 1/4 $18 1/4
Second Quarter...............................$39 $16
Third Quarter................................$27 1/2 $ 7
Fourth Quarter...............................$39 1/4 $ 7 1/16
1999:
First Quarter................................$24 15/16 $13 5/8
Second Quarter...............................$22 1/4 $13 1/4
Third Quarter................................$23 17/64 $11 3/8
Fourth Quarter...............................$18 1/8 $ 9 7/8
2000:
First Quarter................................$13 1/4 $ 3 13/32
Second Quarter...............................$ 5 7/16 $ 2 1/32
Third Quarter (through July 25, 2000)........$ 3 1/4 $ 2 1/4
On July 19, 2000, the last full trading day before the public announcement
of the Merger Agreement, the last sale price per Share on the Nasdaq National
Market was $2 7/8. On July 25, 2000, the last full day of trading before the
commencement of the Offer, the last sale price per Share on the Nasdaq National
Market was $2 7/8 per Share. Shareholders are urged to obtain a current market
quotation for the Shares. As of July 24, 2000 there were approximately 340
holders of record of Shares and 32,961,610 outstanding Shares.
The Company has not declared or paid any dividend since its initial public
offering in 1998 and does not anticipate that it will pay any dividends in the
foreseeable future. In addition, pursuant to the Merger Agreement, the Company
has agreed not to declare, set aside or pay any dividends or other distribution
with respect to the Shares.
12
Certain Information Concerning the Company
General. The Company is a Pennsylvania corporation with its principal
offices located at 1005 Virginia Drive, Ft. Washington, PA 19034. The telephone
number of the Company is (215) 619-9900. CDnow, a Pennsylvania corporation, was
incorporated in October 1998.
CDnow is a holding company formed in connection with the merger of CDnow
Online, Inc. and N2K Inc. in 1999. CDnow Online, Inc., now a wholly-owned
subsidiary of CDnow, was incorporated in Pennsylvania in 1994. CDnow is one of
the leading electronic commerce retailers of pre-recorded music, including CDs
and other entertainment related products. CDnow is also a source of
entertainment related content and a focal point of an Internet community for
the exchange of entertainment-related news and information.
Available Information. The Shares are registered under the Exchange Act.
Accordingly, the Company is subject to the informational reporting requirements
of the Exchange Act and, in accordance therewith, is required to file periodic
reports, proxy statements and other information with the SEC relating to its
business, financial condition and other matters. Such reports, proxy statements
and other information can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the SEC's regional offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Information
regarding the public reference facilities may be obtained from the SEC by
telephoning 1-800-SEC-0330. The Company's filings are also available to the
public on the SEC's Internet site (http://www.sec.gov). Copies of such
materials may also be obtained by mail from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
Except as otherwise stated in this Offer to Purchase, the information
concerning the Company contained herein has been taken from or is based upon
reports and other documents on file with the SEC or otherwise publicly
available. Although neither Purchaser nor Bertelsmann has any knowledge that
would indicate that any statements contained herein based upon such reports and
documents are untrue, neither Purchaser nor Bertelsmann takes any
responsibility for the accuracy or completeness of the information contained in
such reports and other documents or for any failure by the Company to disclose
events that may have occurred and may affect the significance or accuracy of
any such information but that are unknown to Purchaser or Bertelsmann.
Certain Projections. The Company does not, as a matter of course, make
public any forecasts as to its future financial performance. However, in
connection with Bertelsmann's review of the transactions contemplated by the
Merger Agreement, the Company provided Bertelsmann with certain projected
financial information concerning the Company. Such information included, among
other things, the Company's projections of total revenues, gross profit,
earnings before interest, taxation and amortization ("EBITA") and net income
for the Company for the years 2000 through 2003. Set forth below is a summary
of such projections. These projections should be read together with the
financial statements of the Company that can be obtained from the SEC as
described above.
Year Ended December 31,
-----------------------------------
2000 2001 2002 2003
-------- ------- ------- -------
(in millions)
Total Revenues................... $ 166.0 $ 238.5 $ 330.3 $ 450.3
Gross Profit..................... $ 33.1 $ 61.4 $ 94.0 $ 131.8
EBITA............................ $ (69.8) $ (34.2) $ (14.5) $ 6.4
Net Income....................... $ (104.4) $ (65.9) $ (17.7) $ 7.7
It is the understanding of Bertelsmann and Purchaser that the projections
were not prepared with a view to public disclosure or compliance with published
guidelines of the SEC or the guidelines established by the American Institute
of Certified Public Accountants regarding projections or forecasts and are
included herein only because such information was provided to Bertelsmann and
Purchaser in connection with their evaluation of a business combination
transaction. These forward-looking statements (as that term is defined in the
Private Securities Litigation Reform Act of 1995) are subject to certain risks
and uncertainties that could cause actual results to differ materially from the
projections. The Company has advised Purchaser and Bertelsmann that its
internal financial forecasts (upon which the projections
13
provided to Bertelsmann and Purchaser were based in part) are, in general,
prepared solely for internal use and capital budgeting and other management
decisions and are subjective in many respects and thus susceptible to
interpretations and periodic revision based on actual experience and business
developments. The projections also reflect numerous assumptions (not all of
which were provided to Bertelsmann and Purchaser), all made by management of
the Company, with respect to industry performance, general business, economic,
market and financial conditions and other matters, all of which are difficult
to predict, many of which are beyond the Company's control, and none of which
were subject to approval by Bertelsmann or Purchaser. Accordingly, there can be
no assurance that the assumptions made in preparing the projections will prove
accurate. It is expected that there will be differences between actual and
projected results, and actual results may be materially greater or less than
those contained in the projections. The inclusion of the projections herein
should not be regarded as an indication that any of Bertelsmann, Purchaser, the
Company or their respective affiliates or representatives considered or
consider the projections to be a reliable prediction of future events, and the
projections should not be relied upon as such. None of Bertelsmann, Purchaser,
the Company or any of their respective affiliates or representatives has made
or makes any representation to any person regarding the ultimate performance of
the Company compared to the information contained in the projections, and none
of them intends to update or otherwise revise the projections to reflect
circumstances existing after the date when made or to reflect the occurrence of
future events even in the event that any or all of the assumptions underlying
the projections are shown to be in error.
Certain Information Concerning Bertelsmann and Purchaser
General. Bertelsmann is a Delaware corporation with its principal offices
located at 1540 Broadway, New York, NY 10036. The telephone number of
Bertelsmann is (212) 782-1000. Bertelsmann is the U.S. holding company for
companies that are principally engaged in the following sectors: book and
magazine production and publishing; printing; music and entertainment; TV, film
and radio; and "new media."
Purchaser is a Pennsylvania corporation with its principal offices located
at 1540 Broadway, New York, NY 10036, c/o Bertelsmann, Inc. The telephone
number of Purchaser is (212) 782-1000. Purchaser is a wholly-owned subsidiary
of Bertelsmann. Purchaser has not carried on any activities other than in
connection with the Merger Agreement.
Each of Bertelsmann and Purchaser are wholly owned subsidiaries of
Bertelsmann AG, a German corporation ("Bertelsmann AG"). Bertelsmann AG is a
German corporation (Aktiengesellschaft) with its principal offices located at
Carl-Bertelsmann-Strasse 270, D-33311 Gutersloh, Germany. The telephone number
of Bertelsmann AG is 011-49-5241-800. It is a holding company for companies
that are principally engaged in the following sectors: book and magazine
production and publishing; printing; music and entertainment; TV, film and
radio; and "new media."
The name, citizenship, business address, business phone number, principal
occupation or employment and five-year employment history for each of the
directors and executive officers of Bertelsmann, Purchaser and Bertelsmann AG
and certain other information are set forth in Schedule I hereto.
Except as described in this Offer to Purchase, (1) none of Bertelsmann,
Purchaser nor, to the best knowledge of Bertelsmann and Purchaser, any of the
persons listed in Schedule I to this Offer to Purchase or any associate or
majority- owned subsidiary of Bertelsmann or Purchaser or any of the persons so
listed beneficially owns or has any right to acquire, directly or indirectly,
any Shares and (2) none of Bertelsmann, Purchaser nor, to the best knowledge of
Bertelsmann and Purchaser, any of the persons or entities referred to above nor
any director, executive officer or subsidiary of any of the foregoing has
effected any transaction in the Shares during the past 60 days.
Except as provided in the Merger Agreement or as otherwise described in
this Offer to Purchase, none of Bertelsmann, Purchaser nor, to the best
knowledge of Bertelsmann and Purchaser, any of the persons listed in Schedule I
to this Offer to Purchase, has any contract, arrangement, understanding or
relationship with any other person with respect to any securities of the
Company, including, but not limited to, any contract, arrangement,
understanding or relationship concerning the transfer or voting of such
securities, finder's fees, joint ventures, loan or option arrangements, puts or
calls, guarantees of loans, guarantees against loss, guarantees of profits,
division of profits or loss or the giving or withholding of proxies.
14
Except as set forth in this Offer to Purchase, none of Bertelsmann,
Purchaser nor, to the best knowledge of Bertelsmann and Purchaser, any of the
persons listed on Schedule I hereto, has had any business relationship or
transaction with the Company or any of its executive officers, directors or
affiliates that is required to be reported under the rules and regulations of
the SEC applicable to the Offer. Except as set forth in this Offer to Purchase,
there have been no contracts, negotiations or transactions between Bertelsmann
or any of its subsidiaries or, to the best knowledge of Bertelsmann, any of the
persons listed in Schedule I to this Offer to Purchase, on the one hand, and
the Company or its affiliates, on the other hand, concerning a merger,
consolidation or acquisition, tender offer or other acquisition of securities,
an election of directors or a sale or other transfer of a material amount of
assets. None of the persons listed in Schedule I has, during the past five
years, been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors). None of the persons listed in Schedule I has, during the
past five years, been a party to any judicial or administrative proceeding
(except for matters that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws.
Source and Amount of Funds
The total amount of funds required by Purchaser to consummate the Offer
and the Merger and to pay related fees and expenses is estimated to be
approximately $152 million. The Offer and the Merger are not conditioned on
obtaining financing. Bertelsmann and Purchaser currently expect to obtain such
funds through one or more credit facilities. As of the date hereof, Bertelsmann
had available unutilized committed long and short-term credit facilities in
excess of $300 million. Bertelsmann and Purchaser have not determined whether
they will obtain the funds to be used to finance the Offer and the Merger from
one or more existing Bertelsmann credit facilities or whether the funds will be
obtained from a new financing arrangement which Bertelsmann may enter into with
an existing financing source.
Background of the Offer
In early April 1999, BMG Music, Inc. a wholly-owned subsidiary of
Bertelsmann AG, and two other parties approached the Company to explore a
possible transaction with the Company. On April 24, 1999, the Company entered
into a confidentiality agreement with BMG Music, Inc. and the two other
parties. Subsequently, the Company, BMG Music Inc. and these other parties held
discussions concerning a possible merger between the Company and Getmusic LLC,
which was and currently is a Delaware limited liability company jointly owned
by BMG Music Inc. and Universal Music Group, Inc. Discussions were held
concerning a possible transaction at various times during the remainder of
April and May. In late May 1999, the parties discontinued their discussions.
In April 2000, following the termination of the Company's merger with
Columbia House, and as part of the Company's search for an investor or merger
partner, Bertelsmann AG was contacted by Allen & Company, financial advisor to
the Company, to inquire as to Bertelsmann AG's interest in making an investment
in or an acquisition of the Company.
In early June, a representative of Lazard Freres, Bertelsmann AG's
financial advisor, contacted Allen & Company to inquire as to whether they
remained interested in pursuing a transaction with Bertelsmann AG.
On June 15, 2000, Bertelsmann AG entered into a confidentiality agreement
with the Company for the purpose of receiving non-public information with
respect to the Company.
On June 16, 2000, the Company made a management presentation to
representatives of Bertelsmann AG and Lazard Freres. Beginning in mid-June,
representatives of Bertelsmann AG, Lazard Freres, KPMG and Davis Polk &
Wardwell, counsel to Bertelsmann AG ("Davis Polk"), conducted certain follow-up
due diligence concerning the Company.
During the week of June 26, 2000, Bertelsmann AG and its advisors began to
consider possible structures for a transaction involving the Company, including
the terms on which Bertelsmann AG would be willing to provide interim financing
to the Company.
15
On June 28, 2000, representatives of Lazard Freres telephoned
representatives of Allen & Company. During that conversation, Lazard Freres
expressed that Bertelsmann AG was considering an acquisition of the Company at
around the market value and, assuming this was acceptable to the Company,
further due diligence and negotiations could take place.
On June 29, 2000, Allen contacted Lazard Freres and indicated that a
transaction at around the market value might be acceptable depending on, among
other things, the terms on which Bertelsmann AG would be prepared to provide
interim financing to the Company pending completion of the acquisition.
Later that day, Lazard Freres delivered to Allen & Company a preliminary
term sheet for the interim financing to be provided to the Company.
During the week of July 3, 2000, representatives of Bertelsmann AG and the
Company held further discussions concerning the terms and level of the proposed
interim financing.
During the week of July 10, 2000, representatives of Bertelsmann AG and
the Company continued their discussions concerning the terms and level of the
proposed interim financing and began discussions of terms of a possible
acquisition of the Company.
During the weekend of July 15-16, 2000, representatives of and advisors to
Bertelsmann AG and the Company entered into discussions and negotiations
concerning the terms of definitive agreements for the acquisition of the
Company and the proposed interim financing.
On July 17, 2000, representatives of and advisors to Bertelsmann AG and
the Company met at the offices of Davis Polk in New York to discuss the terms
of the proposed transaction and related agreements. These discussions and
negotiations continued until late on July 19, 2000.
After the close of trading on the Nasdaq National Market on July 19, 2000,
the Board of Directors of the Company approved the proposed acquisition of the
Company by Bertelsmann, and the parties thereafter executed the definitive
merger, financing and other agreements. Thereafter the Company and Bertelsmann
issued a press release announcing the execution of the definitive agreement.
Purpose and Structure of the Offer
The purpose of the Offer is to acquire control of, and the entire equity
interest in, the Company. The purpose of the Merger is to acquire all
outstanding Shares not tendered and purchased pursuant to the Offer. If the
Offer is successful, Bertelsmann and Purchaser intend to consummate the Merger
as promptly as practicable.
Depending upon the number of Shares purchased by Purchaser pursuant to the
Offer or otherwise, the Company Board may be required to submit the Merger
Agreement to the Company's shareholders for approval at a shareholders' meeting
convened for that purpose in accordance with the BCL. If shareholder approval
is required, the Merger Agreement must be approved by a majority of all votes
cast by shareholders at a meeting at which a quorum is present.
If the Minimum Condition is satisfied, Purchaser will have sufficient
voting power to approve the Merger Agreement at the shareholders' meeting
without the affirmative vote of any other shareholder. If Purchaser acquires at
least 80% of the then outstanding Shares pursuant to the Offer or otherwise,
the Merger may be consummated without a shareholder meeting and without the
approval of the Company's shareholders.
Under the BCL, holders of Shares do not have dissenters' rights in the
Offer but will have dissenters' rights in the Merger.
16
Plans for the Company
Pursuant to the terms of the Merger Agreement, Bertelsmann currently
intends, promptly after consummation of the Offer, to exercise its right under
the Merger Agreement to appoint a number of directors to the Company Board in
proportion to its share ownership. Purchaser currently intends, as soon as
practicable after consummation of the Offer, to consummate the Merger.
Except as otherwise provided herein, it is expected that, initially
following the Merger, the business and operations of the Company will, except
as set forth in this Offer to Purchase, be continued substantially as they are
currently being conducted. Bertelsmann will continue to evaluate the business
and operations of the Company during the pendency of the Offer and after the
consummation of the Offer and the Merger and will take such actions as it deems
appropriate under the circumstances then existing. Bertelsmann intends to seek
additional information about the Company during this period. Thereafter,
Bertelsmann intends to review such information as part of a comprehensive
review of the Company's business, operations, capitalization and management
with a view to optimizing development of the Company's potential in conjunction
with Bertelsmann's business.
Except as described above or elsewhere in this Offer to Purchase,
Purchaser and Bertelsmann have no present plans or proposals that would relate
to or result in (i) any extraordinary corporate transaction involving the
Company or any of its subsidiaries (such as a merger, reorganization or
liquidation), (ii) any purchase, sale or transfer of a material amount of
assets of the Company or any of its subsidiaries, (iii) any change in the
Company Board or management of the Company, (iv) any material change in the
Company's capitalization or dividend policy, (v) any other material change in
the Company's corporate structure or business, (vi) a class of securities of
the Company being delisted from a national securities exchange or ceasing to be
authorized to be quoted in an automated system operated by a national
securities association, (vii) a class of equity securities of the Company being
eligible for termination of registration pursuant to Section 12(g) of the
Exchange Act, (viii) the suspension of the Company's obligation to file reports
under Section 15(d) of the Exchange Act, (ix) the acquisition or disposition of
securities of the Company, or (x) any changes in the Company's governing
instruments that could impede the acquisition of control of the Company.
The Merger Agreement
The following is a summary of the material provisions of the Merger
Agreement, a copy of which is filed as an exhibit to the Tender Offer Statement
on Schedule TO filed by Bertelsmann and Purchaser under the Exchange Act (the
"Schedule TO"). The summary is qualified in its entirety by reference to the
complete text of the Merger Agreement.
The Offer
The Merger Agreement provides for the making of the Offer. The obligation
of Purchaser to accept for payment and pay for Shares tendered pursuant to the
Offer is subject to the satisfaction or waiver of the Minimum Condition and
certain other conditions that are described in "The Offer--Conditions to the
Offer". Pursuant to the Merger Agreement, Purchaser may waive any condition to
the Offer or change any of the terms or conditions of the Offer, except that,
without the prior written consent of the Company, Purchaser may not waive the
Minimum Condition or make any change in the Offer which changes the form of
consideration to be paid or decreases the price per Share or the number of
Shares sought in the Offer or which imposes conditions to the Offer in addition
to those set forth in "The Offer--Conditions to the Offer".
The Merger Agreement provides that promptly upon the purchase of and
payment for Shares pursuant to the Offer, Bertelsmann shall be entitled to
designate such number of directors, rounded up to the next whole number, on the
Company Board that equals the product of (1) the total number of directors on
the Company Board and (2) the percentage that the number of Shares beneficially
owned by Bertelsmann bears to the total number of Shares then outstanding. To
this end, the Company will take all necessary action to cause Bertelsmann's
designees to be elected or appointed to the Company's Board. However, the
Company and Bertelsmann shall use their reasonable best efforts to ensure that
at least two members of the Company's Board who are directors as of the date of
the Merger Agreement and are not employees of the Company shall remain
directors until the Effective Time.
17
Following the election of Bertelsmann's designees to the Company Board any
termination, amendment or waiver of the Merger Agreement by the Company will
require the approval of a majority of the directors of the Company then in
office who are not designees of Bertelsmann or employees of the Company.
The Merger
The Merger Agreement provides that as soon as practicable after the
satisfaction or waiver of each of the conditions to the Merger, Purchaser will
be merged into Company with the Company being the surviving corporation (the
"Surviving Corporation").
If required by the BCL, the Company will call and hold a meeting of its
shareholders (the "Company Shareholder Meeting") promptly following
consummation of the Offer for the purpose of voting upon the approval of the
Merger Agreement. At any such meeting all Shares then owned by Bertelsmann or
Purchaser or any subsidiary of Bertelsmann will be voted in favor of approval
of the Merger Agreement.
Pursuant to the Merger Agreement, each Share outstanding at the Effective
Time (other than Shares owned by Bertelsmann or any of its subsidiaries or by
the Company as treasury stock, all of which will be cancelled, and other than
Shares that are held by shareholders, if any, who properly exercise their
dissenters' rights under the BCL) will be converted into the right to receive
the Merger Consideration. Shareholders who perfect their dissenters' rights
under the BCL will be entitled to the amounts determined pursuant to such
proceedings. See "The Offer--Dissenters' Rights".
Employee and Director Stock Options
At or immediately prior to the Effective Time, each option to purchase
Shares held by any current or former employee or director pursuant to any
compensation plan or arrangement of the Company, whether or not vested or
exercisable, shall be converted into the right to receive upon exercise (and
payment of the exercise price) $3.00 for each Share for which such option is
exercisable. The Company shall pay each holder of any such option with a per
share exercise price of less than $3.00, at or promptly after the Effective
Time, an amount equal to (i) the product of the excess, if any, of $3.00 over
the applicable per Share exercise price and the number of Shares such holder
could have purchased (assuming full vesting of such options) had such holder
exercised such option in full immediately prior to the Effective Time minus
(ii) the amount of any applicable withholding tax.
Representations and Warranties
Pursuant to the Merger Agreement, the Company has made customary
representations and warranties to Bertelsmann and Purchaser, including
representations relating to corporate existence and power; corporate
authorizations; government authorizations; subsidiaries; capitalization; SEC
filings; financial statements; absence of certain changes (including any
material adverse effect on the business, results of operations, assets or
financial condition of the Company); absence of undisclosed material
liabilities; litigation; compliance with laws; employee matters; environmental
matters; taxes; intellectual property; title to properties; and other matters.
Certain of the Company's representations and warranties are qualified as
to "materiality" or "material adverse effect." For these purposes, "material
adverse effect" means a material adverse effect on the business, results of
operations, assets or financial condition of the Company and its subsidiaries,
taken as a whole, provided, however, that the effects relating to (i) the
announcement of the transactions contemplated by the Merger Agreement, or (ii)
changes in the industry in which the Company operates which do not
disproportionately affect the Company shall not be deemed to constitute a
material adverse effect.
Pursuant to the Merger Agreement, Bertelsmann and Purchaser have made
customary representations and warranties to the Company, including
representations relating to their corporate existence and power; corporate
authorizations; and other matters.
18
Covenants
The Merger Agreement contains various covenants of the parties thereto.
Company Conduct of Business Covenants. Prior to the Effective Time and
except as may be agreed in writing by Bertelsmann or as expressly permitted by
the Merger Agreement, the Company and its subsidiaries will conduct business in
the ordinary course consistent with past practices, and the Company will not
and will not permit its subsidiaries to, among other things:
(i) amend its organizational documents;
(ii) make changes in its capital structure;
(iii) make material acquisitions or dispositions;
(iv) pay dividends;
(v) issue additional shares of capital stock or rights to acquire
capital stock or amend the terms of any existing equity securities;
(vi) redeem its capital stock;
(vii) incur additional indebtedness, except borrowings under the
Convertible Loan Agreement (see "The Offer--The Related Financing"
below);
(viii)amend its employee benefit or compensation plans;
(ix) enter into or amend certain material contracts; or
(x) take any action that would cause a representation or warranty to be
untrue in any material respect.
Shareholder Meeting. Unless the BCL does not require a vote of
shareholders, the Company will cause the Company Shareholder Meeting to be duly
called and held as soon as reasonably practicable after consummation of the
Offer for the purpose of voting on the approval and adoption of the Merger
Agreement and the Merger. In connection with such meeting, the Company will use
its reasonable best efforts to obtain the necessary approvals by its
shareholders of the Merger Agreement and the Merger and otherwise comply with
all legal requirements applicable to such meeting.
Recommendations. Except as provided in the next sentence, the Company
Board will recommend that the Company's shareholders tender their shares in the
Offer and vote to approve the Merger. The Company Board shall be permitted to
withdraw, or modify in a manner adverse to Bertelsmann, its recommendation to
its shareholders, and approve or recommend an Acquisition Proposal (as defined
below), if (i) the Company has complied with the terms of the "No Solicitation"
covenant below, (ii) the Company Board, based on the advice of its outside
legal counsel, determines in good faith that failure to take such action would
present a reasonable probability of violating its fiduciary duties under
applicable law and (iii) the Acquisition Proposal is a Superior Proposal.
"Acquisition Proposal" means any offer or proposal for, or any indication of
interest in, a merger or other business combination transaction involving the
acquisition of all or any portion of the equity interest in, or all or a
material portion of the assets of, the Company and its subsidiaries, other than
the transactions contemplated by the Merger Agreement, and "Superior Proposal"
means any Acquisition Proposal (A) involving the acquisition of the entire
equity interest in, or all or substantially all of the assets and liabilities
of, the Company and its subsidiaries and (B) with respect to which the Board of
Directors of the Company (x) determines in good faith that such proposal, if
accepted, is reasonably likely to be consummated, taking into account all
legal, financial, regulatory and other aspects of the proposal and the person
making the proposal and (y) believes in good faith, based on the advice of its
financial advisors, that such proposal would, if consummated, result in a
transaction more favorable to the Company's shareholders from a financial point
of view than the Offer and the Merger.
19
No Solicitation. The Company will not, and will cause its subsidiaries not
to and will use its reasonable best efforts to cause the officers, directors,
employees and other agents and advisors of the Company and its subsidiaries not
to, directly or indirectly, (i) take any action to solicit, initiate or
encourage the submission of any Acquisition Proposal or (ii) furnish any
information or participate in any discussions or negotiations with, any persons
who has made an Acquisition Proposal; provided that the Company may furnish
information to or enter into discussion or negotiations with any person who has
made an unsolicited bona fide written Acquisition Proposal if and only to the
extent that (A) the acceptance for payment of Shares pursuant to the Offer
shall not have occurred, (B) the Board of Directors of the Company, based on
advice of outside legal counsel, determines in good faith that failure to take
such action would present a reasonable probability of violating its fiduciary
duties under applicable law, and (C) prior to taking such action, the Company
(x) provides reasonable notice to Bertelsmann to the effect that it intends to
take such action and (y) receives from such person an executed confidentiality
agreement in reasonably customary form and in any event containing terms at
least as stringent as those contained in the confidentiality agreement dated
June 15, 2000 between Bertelsmann AG and the Company (the "Confidentiality
Agreement"). Prior to providing any information to or entering into discussions
or negotiations with any person in connection with an Acquisition Proposal, the
Company shall notify Bertelsmann of any such Acquisition Proposal (including
the material terms and conditions thereof and the identity of the person making
it) as promptly as practicable after its receipt thereof, and shall thereafter
keep Bertelsmann informed as to the status of any discussion or negotiations
with such third party and any material changes to the terms and conditions of
such Acquisition Proposal, and shall promptly give Bertelsmann a copy of any
information delivered to such person which has not previously been reviewed by
Bertelsmann. The Company will, and will cause its subsidiaries and the
officers, directors, employees and other agents and advisors of the Company and
its subsidiaries to, immediately cease all discussions and negotiations, if
any, that have taken place prior to the date of the Merger Agreement with any
parties with respect to any Acquisition Proposal.
Director and Officer Liability. After the Effective Time, Bertelsmann will
cause the Surviving Corporation to indemnify, to the fullest extent permitted
by applicable law, the present and former officers and directors of the Company
in respect of any claim, liability, loss, damage, judgment, fine, penalty,
amount paid in settlement or compromise, cost or expense (including reasonable
fees and expenses of legal counsel) based on, or arising from any facts or
circumstances occurring at or prior to the Effective Time.
For a period of not less than three years after the Effective Time,
Bertelsmann will, or will cause the Surviving Corporation to maintain in effect
the current officers' and directors' liability insurance maintained by the
Company on the date of the Merger Agreement (provided that Bertelsmann may
substitute therefor policies with reputable and financially sound carriers
having at least the same coverage and amounts, and containing terms and
conditions which are no less advantageous to the persons currently covered by
such policies as the insured) with respect to facts or circumstances occurring
at or prior to the Effective Time to the extent that such liability insurance
can be maintained annually at a cost to Bertelsmann not greater than 150% of
the current annual premium; provided that if such insurance cannot be so
maintained or obtained at such cost, Bertelsmann shall maintain or obtain as
much of such insurance as can be so maintained or obtained at a cost equal to
150% of the current annual premium paid by the Company for such insurance.
The rights of each Indemnified Person under this covenant shall be in
addition to any rights such person may have under the articles of incorporation
or bylaws of the Company or any of its subsidiaries or under the BCL.
Conditions to the Merger
The Merger Agreement provides that the obligations of Bertelsmann,
Purchaser and the Company to consummate the Merger are subject to the
satisfaction of the following conditions:
(a) Purchaser shall have acquired Shares pursuant to the Offer;
(b) no provision of any applicable law or regulation and no judgment,
injunction, order or decree of a court of competent jurisdiction shall
prohibit or enjoin the consummation of the Merger; and
(c) if required, the shareholders of the Company shall have approved
the Merger Agreement.
20
Termination
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (notwithstanding any approval of the
Merger Agreement by the shareholders of the Company):
(a) by mutual written agreement of the Company and Bertelsmann;
(b) by either the Company or Bertelsmann,
(i) if the Offer has not been consummated on or before October
31, 2000, provided that such right to terminate the Merger Agreement
shall not be available to any party whose breach of any provision of
this Agreement results in the failure of the Offer to be consummated
by such time; or
(ii) if consummation of the Offer or the Merger would violate or
be prohibited by any law or regulation or if any injunction,
judgment, order or decree of a court of competent jurisdiction
enjoining the Company, Bertelsmann or Purchaser from consummating the
Offer or the Merger is entered and such injunction, judgment, order
or decree shall become final and nonappealable;
(c) by Bertelsmann, if prior to the purchase of any Shares pursuant
to the Offer,
(i) the Company Board shall have failed to recommend or withdrawn
or materially modified in a manner adverse to Bertelsmann its
adoption or recommendation of the Offer and the Merger or there shall
have been a material breach of any of the provisions described under
"The Offer--The Merger Agreement--Covenants--Recommendations" and
"--No Solicitation";
(ii) the Company shall have entered into, or announced its
intention to enter into, an agreement with respect to a Superior
Proposal; or
(iii) any person or group of persons (other than Bertelsmann)
shall have acquired a majority of the equity interest in, or all or
any material portion of the assets of, the Company and its
subsidiaries; or
(d) by the Company, if prior to purchase of any Shares pursuant to
the Offer,
(i) the Company notifies Bertelsmann in writing that it intends
to enter into an agreement with respect to a Superior Proposal,
provided the Company has complied in all material respects with the
provisions described under "The Offer--The Merger
Agreement--Covenants--Recommendations" and "--No Solicitation";
(ii) Bertelsmann does not make, within four business days after
receipt of the Company's notification, an offer that the board of
directors of the Company determines, in good faith based on the
advice of its financial advisors, is at least as favorable to the
Company's shareholders as the Superior Proposal; and
(iii) prior to or simultaneously with such termination, the
Company makes payment to Bertelsmann of any fees and expenses payable
pursuant to the Merger Agreement.
Fees and Expenses
Except as otherwise specified below, all fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
will be paid by the party incurring such expenses.
If the Merger Agreement is terminated as described in (c) or (d) under
"Termination," the Company will pay Bertelsmann a fee in immediately available
funds equal to $3 million and, upon receipt of documentation, all reasonable
out-of-pocket expenses incurred by Bertelsmann and Purchaser in conjunction
with the Merger Agreement. The
21
Company will also pay Bertelsmann all reasonable out-of-pocket expenses
incurred by Bertelsmann and Purchaser if the conditions to the Offer described
in "The Offer--Conditions to the Offer" below is not met as a result of a
breach by the Company of its representations and warranties set forth in the
Merger Agreement.
Amendment. At any time prior to the Effective Time, the Merger Agreement
may be amended or waived if but only if, such amendment or waiver is in writing
and signed in the case of an amendment by Bertelsmann and the Company and in
the case of a waiver by the party against whom the waiver is to be effective.
The Shareholder Agreement
The following is a summary of the material provisions of the Shareholder
Agreement, a copy of which is filed as an exhibit to the Schedule TO. This
summary is qualified in its entirety by reference to the complete text of the
Shareholder Agreement.
In connection with the execution of the Merger Agreement, Bertelsmann
entered into the Shareholder Agreement with Jason Olim, president and chief
executive officer and a director of the Company, and Matthew Olim, a director
of the Company and Technical Lead (each, a "Shareholder"). During the term of
the Shareholder Agreement, each has agreed to take the following action with
respect to the 2,960,025 Shares beneficially owned by him:
o To tender pursuant to the Offer all of his Shares not later than the
fifth business day after commencement of the Offer, and to not
withdraw such Shares.
o To vote his Shares in favor of the approval and adoption of the
Merger Agreement and all agreements and transactions related thereto
and against (1) any Acquisition Proposal, (2) any reorganization,
recapitalization, liquidation, winding up, or other extraordinary
transaction involving the Company or (3) any corporate action the
consummation of which would frustrate the purposes, or prevent or
delay the consummation, of the transactions contemplated by the
Merger Agreement; each Shareholder has granted to Bertelsmann an
irrevocable proxy to vote or otherwise use such voting power in the
manner contemplated by the foregoing.
o Not to sell, pledge or otherwise dispose of any of his Shares.
Each Shareholder has also agreed not to solicit, initiate or encourage any
Acquisition Proposal or furnish information to or participate in any
discussions or negotiations with any person that has made an Acquisition
Proposal, subject to such Shareholder's fiduciary duties as a member of the
Company Board.
The Shareholder Agreement will terminate upon termination of the Merger
Agreement in accordance with its terms. Accordingly, in the event the Company
terminates the Merger Agreement in connection with a Superior Proposal, the
obligations of the Shareholders under the Shareholder Agreement will terminate
and each Shareholder will be permitted to tender or vote his Subject Shares in
favor of such Superior Proposal.
Dissenters' Rights
If the Merger is consummated, shareholders of the Company may have the
right to dissent from the Merger and to obtain payment of the fair value of
their Shares under the BCL. See "The Offer--Certain Legal Matters." Under the
BCL, dissenting shareholders who comply with the applicable statutory
procedures will be entitled to receive a judicial determination of the fair
value of their Shares and to receive payment of such fair value in cash plus
interest. "Fair value," as used in the BCL, means the fair value of Shares
immediately before the effective time of the Merger, taking into account all
relevant factors, but excluding any appreciation or depreciation in
anticipation of the Merger. Shareholders should recognize that the value so
determined could be higher or lower than the price per Share paid pursuant to
the Offer or the consideration per Share to be paid in the Merger. Moreover,
Purchaser may argue in an appraisal proceeding that, for purposes of such a
proceeding, the fair value of the Shares is less than the price paid in the
Offer or the Merger.
22
The Related Financing
The following is a summary of the material provisions of the Convertible
Loan Agreement and related agreements, copies of which are filed as an exhibit
to the Schedule TO. The summary is qualified in its entirety by reference to
the complete text of such agreements.
The Convertible Loan Agreement
The Facility.
Pursuant to the Convertible Loan Agreement, Bertelsmann has agreed to make
a term loan (the "TW/S Loan") to the Company in an amount of up to
approximately $30 million. The proceeds of the TW/S Loan will be used by the
Company to repay in full all loan outstanding under the loan agreement dated as
of July 12, 1999 between the Company, Sony Music Entertainment Inc and Time
Warner Inc. In addition, pursuant to the Convertible Loan Agreement,
Bertelsmann has agreed to make additional loans ("Working Capital Loans" and,
together with the TW/S Loan, the "Loans") to the Company in an aggregate
principal amount not in excess of $12,000,000 during the period from July 31,
2000 through October 31, 2000. The proceeds of the Working Capital Loans may be
used by the Company only in the ordinary course business and to meet its
ongoing working capital needs of the Company as contemplated by the Company's
business plan. The aggregate principal amount of Working Capital Loans that the
Company may borrow in any four-week period is capped, based on cash flow
projections provided by the Company to Bertelsmann. In addition, Working
Capital Loans are available only if the Company's available cash falls below $3
million.
At the present time, there are no amounts outstanding under the
Convertible Loan Agreement.
Interest Rate. The Loans bear interest at LIBOR plus 3%. Interest is
payable on the Maturity Date (or any earlier date on which the Loans are due
and payable).
Maturity. Bertelsmann's commitment to make Working Capital Loans to the
Company terminates on the earliest of (i) October 31, 2000, (ii) the date of
termination of the Merger Agreement and (iii) the date any other person
acquires control of the Company. On such date, all Loans mature and are
immediately due and payable by the Company. However, if the Merger Agreement is
terminated by the Company as a result of a breach of the terms of the Merger
Agreement by Bertelsmann, then the Loans do not become due and payable until
the sixtieth day after such termination. Bertelsmann is not required to make
any additional Working Capital Loans during this sixty day period.
Conversion
The Loans and any interest thereon are convertible, in whole or in part at
any time on or after the date that is 10 days after the date of dissemination
by the Company of the Schedule 14D-9 to its shareholders, at the option of
Bertelsmann, into Shares at a conversion price of $1.50 per share. Conversion
of the Note for a number of Shares in excess of 19.9% of the total outstanding
Shares is subject to the Company's compliance with the rules of Nasdaq National
Market relating to issuance of common stock (or securities convertible into
common stock) representing 20% or more of the outstanding common stock without
shareholder approval. The Company requested Nasdaq National Market to agree
that the conversion of the Note into more than 19.9% of the outstanding Shares
is, under the circumstances, within an exception under its rules. The
Convertible Loan Agreement provides that in no event is Bertelsmann entitled to
receive more than 49% of the outstanding Shares on a fully diluted basis. In
addition, the Convertible Loan Agreement provides that, with respect to any
vote to be taken by the shareholders of the Company to adopt or reject a
Superior Proposal, Bertelsmann shall vote the Shares it obtains pursuant to the
exercise of its conversion rights in the same proportion as the Shares held by
shareholders other than Bertelsmann are voted in such vote.
The Company has granted Bertelsmann three demand registrations and
unlimited piggy-back registrations with respect to the Shares issuable upon
conversion of the Convertible Loan Agreement.
23
Guarantees and Collateral
All obligations of the Company under the Convertible Loan Agreement
(including the repayment in full of all principal of and interest on the Loans)
are (i) secured by substantially all of the assets of the Company, including
all accounts receivable, equipment, inventory, general intangibles,
intellectual property and investment property of the Company and all capital
stock of each direct domestic subsidiary of the Company and (ii) guaranteed by
all domestic subsidiaries of the Company. Each domestic subsidiary's guarantee
of the Company's obligations under the Convertible Loan Agreement is secured by
substantially all of the assets of such domestic subsidiary, including all
accounts receivable, equipment, inventory, general intangibles, intellectual
property and investment property of such domestic subsidiary, and all capital
stock of each direct domestic subsidiary of such subsidiary.
Certain Effects of the Offer
Market for the Shares. The purchase of Shares pursuant to the Offer will
reduce the number of holders of Shares and the number of Shares that might
otherwise trade publicly, which could adversely affect the liquidity and market
value of the remaining Shares held by shareholders other than Purchaser.
Neither Bertelsmann nor the Purchaser can predict whether the reduction in the
number of Shares that might otherwise trade publicly would have an adverse or
beneficial effect on the market price for, or marketability of, the Shares or
whether such reduction would cause future market prices to be greater or less
than the Offer Price.
Stock Quotation. The Shares are authorized for quotation on the Nasdaq
National Market. According to the published guidelines of the Nasdaq National
Market, the Shares might no longer be eligible for quotation on the Nasdaq
National Market if, among other things, either (i) the number of Shares
publicly held were less than 750,000, there were fewer than 400 holders of
round lots, the aggregate market value of publicly held Shares were less than
$5,000,000, net tangible assets were less than $4,000,000 and there were fewer
than two registered and active market makers for the Shares, or (ii) the number
of Shares publicly held were less than 1,100,000, there were fewer than 400
holders of round lots, the aggregate market value of publicly held Shares were
less than $15,000,000 and either (x) the Company's market capitalization was
less than $50,000,000 or (y) the total assets and total revenue of the Company
for the most recently completed fiscal year or two of the last three most
recently completed fiscal years were less than $50,000,000 and there were fewer
than four registered and active market makers. Shares held directly or
indirectly by directors or officers of the Company or beneficial owners of more
than 10% of the Shares are not considered as being publicly held for this
purpose.
If the Shares were to cease to be quoted on the Nasdaq National Market,
the market for the Shares could be adversely affected. It is possible that the
Shares would be traded or quoted on other securities exchanges (with trades
published by such exchanges), the Nasdaq Stock Market (with quotations
published in the Nasdaq "additional list" or in one of the "local lists") or in
the over-the-counter market. The extent of the public market for the Shares and
the availability of such quotations would, however, depend upon the number of
shareholders and the aggregate market value of the Shares remaining at such
time, the interest in maintaining a market in the Shares on the part of
securities firms, the possible termination of registration of the Shares under
the Exchange Act and other factors.
Margin Regulations. The Shares are currently "margin securities" under the
Regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), which has the effect, among other things, of allowing
brokers to extend credit on the collateral of the Shares. Depending upon
factors similar to those described above regarding the market for the Shares
and stock quotations, it is possible that, following the Offer, the Shares
would no longer constitute "margin securities" for the purposes of the margin
regulations of the Federal Reserve Board and therefore could no longer be used
as collateral for loans made by brokers.
Exchange Act Registration. The Shares are currently registered under the
Exchange Act. Such registration may be terminated upon application of the
Company to the SEC if the Shares are neither listed on a national securities
exchange nor held by 300 or more holders of record. Termination of registration
of the Shares under the Exchange Act would substantially reduce the information
required to be furnished by the Company to its shareholders and to the SEC and
would make certain provisions of the Exchange Act no longer applicable to the
Company, such as the short-swing profit recovery provisions of Section 16(b) of
the Exchange Act, the requirement of furnishing a proxy statement pursuant to
24
Section 14(a) of the Exchange Act in connection with shareholders' meetings and
the related requirement of furnishing an annual report to shareholders and the
requirements of Rule 13e-3 under the Exchange Act with respect to "going
private" transactions. Furthermore, the ability of "affiliates" of the Company
and persons holding "restricted securities" of the Company to dispose of such
securities pursuant to Rule 144 promulgated under the Securities Act of 1933,
as amended, may be impaired or eliminated. If registration of the Shares under
the Exchange Act were terminated, the Shares would no longer be "margin
securities." Bertelsmann and Purchaser currently intend to seek to cause the
Company to terminate the registration of the Shares under the Exchange Act as
soon after consummation of the Offer as the requirements for termination of
registration are met.
Conditions to the Offer
Notwithstanding any other provision of the Offer, Purchaser shall not be
required to accept for payment or pay for any Shares, and may, subject to the
terms of the Merger Agreement, terminate the Offer, if:
(a) at the expiration of the Offer, (A) the Minimum Condition has not
been satisfied, (B) the applicable waiting periods under the HSR Act or
other applicable antitrust or competition laws shall not have expired or
been terminated, (C) all consents and approvals from any governmental
body, agency, official or authority or any other person necessary in order
to consummate the Offer and the Merger shall not have been obtained except
for such consents and approvals that individually or in the aggregate
could not reasonably be expected to have a material adverse effect on the
Company, (D) the representations and warranties of the Company set forth
in the Merger Agreement shall not be true and accurate as of the
expiration of the Offer as though made on or as of such date (except for
those representations and warranties that expressly address matters only
as of a particular date or only with respect to a specific period of time
which need only be true and accurate as of such date or with respect to
such period) or (E) the Company shall have failed to perform or comply in
all material respects with any of its obligations, agreements or covenants
required by the Merger Agreement; or
(b) at any time on or after July 19, 2000 and prior to the acceptance
for payment of Shares, any of the following conditions exist:
(i) there shall be any law, rule, regulation, judgment, order,
injunction or decree enacted, entered, enforced, promulgated or
deemed applicable to the Offer or the Merger, other than the
application to the Offer or the Merger of applicable waiting periods
under the HSR Act, that prohibits the consummation of the Offer, the
Merger or any other transaction contemplated by the Merger Agreement;
or
(ii) the Merger Agreement shall have been terminated in
accordance with its terms.
The foregoing conditions are for the benefit of Bertelsmann and Purchaser
and may, subject to the terms of the Merger Agreement, be waived by Bertelsmann
and Purchaser in whole or in part at any time and from time to time in their
discretion.
Certain Legal Matters; Regulatory Approvals
General. Purchaser is not aware of any pending legal proceeding relating
to the Offer. Except as described in this section, based on its examination of
publicly available information filed by the Company with the SEC and other
publicly available information concerning the Company, Purchaser is not aware
of any governmental license or regulatory permit that appears to be material to
the Company's business that might be adversely affected by Purchaser's
acquisition of Shares as contemplated herein or of any approval or other action
by any governmental, administrative or regulatory authority or agency, domestic
or foreign, that would be required for the acquisition or ownership of Shares
by Purchaser or Bertelsmann as contemplated herein. Should any such approval or
other action be required, Purchaser currently contemplates that, except as
described below under "State Takeover Statutes," such approval or other action
will be sought. While Purchaser does not currently intend to delay acceptance
for payment of Shares tendered pursuant to the Offer pending the outcome of any
such matter (except as described below), there can be no assurance that any
such approval or other action, if needed, would be obtained or would be
obtained without substantial conditions or that if such approvals were not
obtained or such other actions were not taken, adverse consequences might not
result to the
25
Company's business, or certain parts of the Company's business might not have
to be disposed of, any of which could cause Purchaser to elect to terminate the
Offer without the purchase of Shares thereunder under certain conditions. See
"The Offer--Conditions to the Offer".
State Takeover Statutes. A number of states have adopted laws that
purport, to varying degrees, to apply to attempts to acquire corporations that
are incorporated in, or that have substantial assets, shareholders, principal
executive offices or principal places of business or whose business operations
otherwise have substantial economic effects in, such states. The Company,
directly or through subsidiaries, conducts business in a number of states
throughout the United States, some of which have enacted such laws.
In Edgar v. MITE Corp., the Supreme Court of the United States invalidated
on constitutional grounds the Illinois Business Takeover Statute which, as a
matter of state securities law, made takeovers of corporations meeting certain
requirements more difficult. However, in 1987 in CTS Corp. v. Dynamics Corp. of
America, the Supreme Court held that the State of Indiana could, as a matter of
corporate law, constitutionally disqualify a potential acquiror from voting
shares of a target corporation without the prior approval of the remaining
shareholders where, among other things, the corporation is incorporated in, and
has a substantial number of shareholders in, the state. Subsequently, in TLX
Acquisition Corp. v. Telex Corp., a Federal District Court in Oklahoma ruled
that the Oklahoma statutes were unconstitutional insofar as they apply to
corporations incorporated outside Oklahoma in that they would subject such
corporations to inconsistent regulations. Similarly, in Tyson Foods, Inc. v.
McReynolds, a Federal District Court in Tennessee ruled that four Tennessee
takeover statutes were unconstitutional as applied to corporations incorporated
outside Tennessee. This decision was affirmed by the United States Court of
Appeals for the Sixth Circuit.
The Company is incorporated under the laws of Pennsylvania. The
Pennsylvania Takeover Disclosure Law ("PTDL") purports to regulate certain
attempts to acquire a corporation which (1) is organized under the laws of
Pennsylvania or (2) has its principal place of business and substantial assets
located in Pennsylvania. In Crane Co. v. Lam, the United States District Court
for the Eastern District of Pennsylvania preliminarily enjoined, on grounds
arising under the United States Constitution, enforcement of at least the
portion of the PTDL involving the pre-offer waiting period thereunder. Section
8(a) of the PTDL provides an exemption for any offer to purchase securities as
to which the board of directors of the target company recommends acceptance to
its shareholders, if at the time such recommendation is first communicated to
shareholders the offeror files with the Pennsylvania Securities Commission
("PSC") a copy of the Schedule TO and certain other information and materials,
including an undertaking to notify securityholders of the target company that a
notice has been filed with the PSC which contains substantial additional
information about the offering and which is available for inspection at the
PSC's principal office during business hours. The Company's board of directors
has approved the transactions contemplated by the Merger Agreement and
recommended acceptance of the Offer and the Merger to the Company's
securityholders. While reserving and not waiving its right to challenge the
validity of the PTDL or its applicability to the Offer, Purchaser is making a
Section 8(a) filing with the PSC in order to qualify for the exemption from the
PTDL. Additional information about the Offer has been filed with the PSC
pursuant to the PTDL and is available for inspection at the PSC's office at
Eastgate Office Building, 2nd Floor, 1010 North 7th Street, Harrisburg, PA
17102-1410 during business hours.
Chapter 25 of the BCL contains other provisions relating generally to
takeovers and acquisitions of certain publicly owned Pennsylvania corporations
such as the Company that have a class or series of shares entitled to vote
generally in the election of directors registered under the Exchange Act (a
"registered corporation"). The following discussion is a general and highly
abbreviated summary of certain features of Chapter 25, is not intended to be
complete or to address further potentially applicable exceptions or exemptions,
and is qualified in its entirety by reference to the full text of Chapter 25 of
the BCL. The Company is a registered corporation.
In addition to other provisions not applicable to the Offer or the Merger,
Subchapter 25D of the BCL includes provisions requiring approval of a merger of
a registered corporation with an "interested shareholder," by the affirmative
vote of the shareholders entitled to cast at least a majority of the votes that
all shareholders other than the interested shareholder are entitled to cast
with respect to the transaction without counting the votes of the interested
shareholder. This disinterested shareholder approval requirement is not
applicable to a transaction (i) approved by a majority of disinterested
directors, (ii) in which the consideration to be received by shareholders is
not less than the highest amount paid by the interested shareholder in
acquiring his shares, or (iii) effected without submitting the merger to a vote
of
26
shareholders as permitted in Section 1924(b)(1)(ii) of the BCL. The Company has
represented to Bertelsmann and Purchaser that the disinterested shareholder
approval requirement of Subchapter 25D will not be applicable to the Merger.
Subchapter 25E of the BCL provides that, in the event that Purchaser (or a
group of related persons, or any other person or group of related persons) were
to acquire securities representing at least 20% of the voting power of the
Company, in connection with the Offer or otherwise (a "Control Transaction"),
securityholders of the Company would have the right to demand "fair value" of
such securityholders' securities and to be paid such fair value upon compliance
with the requirements of Subchapter 25E. Under Subchapter 25E, "fair value" may
not be less than the highest price per share paid by the controlling person or
group at any time during the 90-day period ending on and including the date of
the Control Transaction, plus an increment, if any, representing any value,
including, without limitation, any proportion of value payable for acquisition
of control of the Company, that may not be reflected in such price. The Company
has opted out of Subchapter 25E in its Restated Articles of Incorporation and
has represented to Bertelsmann and Purchaser that Subchapter 25E is not
applicable to the transactions contemplated by the Merger Agreement,
Shareholder Agreement or Convertible Loan Agreement.
Subchapter 25F of the BCL prohibits under certain circumstances certain
"business combinations," including mergers and sales or pledges of significant
assets, of a registered corporation with an "interested shareholder" for a
period of five years. An "interested shareholder" includes a shareholder who is
the beneficial owner of 20% of the shares entitled to vote in an election of
directors. At the time of the Merger, Purchaser will be an "interested
shareholder" within the meaning of this Subchapter, because of its acquisition
of shares in the tender offer and its beneficial ownership of shares in
connection with the Note. Subchapter 25F provides an exception for a "business
combination" approved by the board of directors prior to the interested
shareholder's share acquisition date, or where the purchase of the shares by
the interested shareholder on the share acquisition date has been approved by
the board of directors prior to the interested shareholder's share acquisition
date. On July 19, 2000, the Company's board of directors approved the merger as
well as the acquisition of shares in the tender Offer and the issuance of the
shares upon conversion of the Note as contemplated by this Subchapter. The
Company has represented to Bertelsmann and Purchaser that Subchapter 25F is not
applicable to the transactions contemplated by the Merger Agreement,
Shareholder Agreement or Convertible Loan Agreement.
Subchapter 25G of the BCL, relating to "control-share acquisitions,"
prevents under certain circumstances the owner of a control-share block of
shares of a registered corporation from voting such shares unless a majority of
both the "disinterested" shares and all voting shares approve such voting
rights. Failure to obtain such approval may result in a forced sale by the
control-share owner of the control-share block to the corporation at a possible
loss. The Company has opted out of Subchapter 25G in its Restated Articles of
Incorporation and has represented to Bertelsmann and Purchaser that Subchapter
25G is not applicable to the transactions contemplated by the Merger Agreement,
Shareholder Agreement or Convertible Loan Agreement.
Subchapter 25H of the BCL, relating to disgorgement by certain controlling
shareholders of a registered corporation following attempts to acquire control,
provides that under certain circumstances any profit realized by a controlling
person from the disposition of shares of the corporation to any person
(including to the corporation under Subchapter 25G or otherwise) will be
recoverable by the corporation. The Company has opted out of Subchapter 25H in
its Restated Articles of Incorporation and has represented to Bertelsmann and
Purchaser that Subchapter 25H is not applicable to the transactions
contemplated by the Merger Agreement, Shareholder Agreement or Convertible Loan
Agreement.
Subchapter 25I of the BCL entitles "eligible employees" of a registered
corporation to a lump sum payment of severance compensation under certain
circumstances if the employee is terminated, other than for willful misconduct,
within 90 days before voting rights lost as a result of a control-share
acquisition are restored by a vote of disinterested shareholders. Subchapter
25J of the BCL provides protection against termination or impairment under
certain circumstances of "covered labor contracts" of a registered corporation
as a result of a "business combination transaction" if the business operation
to which the covered labor contract relates was owned by the registered
corporation at the time voting rights are restored by shareholder vote after a
control-share acquisition. The Company has represented to Bertelsmann and
Purchaser that Subchapters 25I and 25J are not applicable to the transactions
contemplated by the Merger Agreement, Shareholder Agreement or Convertible Loan
Agreement.
27
Section 2504 of the BCL provides that the applicability of Chapter 25 of
the BCL to a registered corporation having a class or series of shares entitled
to vote generally in the election of directors registered under the Exchange
Act or otherwise satisfying the definition of a registered corporation under
Section 2502(l) of the BCL shall terminate immediately upon the termination of
the status of the corporation as a registered corporation. Purchaser intends to
seek to cause the Company to terminate the registration of the shares of Common
Stock under the Exchange Act as soon after consummation of the Offer as the
requirements for termination of the registration of the shares of Common Stock
are met.
Purchaser does not believe that the antitakeover laws and regulations of
any state other than the Commonwealth of Pennsylvania will by their terms apply
to the Offer, and, except as set forth above with respect to the BCL, Purchaser
has not attempted to comply with any state antitakeover statute or regulation.
Purchaser reserves the right to challenge the applicability or validity of any
state law purportedly applicable to the Offer and nothing in this Offer to
Purchase or any action taken in connection with the Offer is intended as a
waiver of such right. If it is asserted that any state antitakeover statute is
applicable to the Offer and an appropriate court does not determine that it is
inapplicable or invalid as applied to the Offer, Purchaser might be required to
file certain information with, or to receive approvals from, the relevant state
authorities, and Purchaser might be unable to accept for payment or pay for
Shares tendered pursuant to the Offer or may be delayed in consummating the
Offer. In such case, Purchaser may not be obligated to accept for payment or
pay for any tendered Shares. See "The Offer--Conditions to the Offer".
United States Antitrust Compliance. Under the HSR Act and the rules that
have been promulgated thereunder by the Federal Trade Commission (the "FTC"),
certain acquisition transactions may not be consummated unless certain
information has been furnished to the Antitrust Division of the Department of
Justice (the "Antitrust Division") and the FTC and certain waiting period
requirements have been satisfied. The purchase of Shares pursuant to the Offer
is subject to such requirements.
Pursuant to the requirements of the HSR Act, Purchaser expects to file a
Notification and Report Form with respect to the Offer and Merger with the
Antitrust Division and the FTC promptly after the date hereof. As a result, the
waiting period applicable to the purchase of Shares pursuant to the Offer is
scheduled to expire at 11:59 p.m., New York City time, 15 days after such
filing. However, prior to such time, the Antitrust Division or the FTC may
extend the waiting period by requesting additional information or documentary
material relevant to the Offer from Purchaser. If such a request is made, the
waiting period will be extended until 11:59 p.m., New York City time, on the
tenth day after substantial compliance by Purchaser with such request.
Thereafter, such waiting period can be extended only by court order.
The Antitrust Division and the FTC scrutinize the legality under the
antitrust laws of transactions such as the acquisition of Shares by Purchaser
pursuant to the Offer. At any time before or after the consummation of any such
transactions, the Antitrust Division or the FTC could take such action under
the antitrust laws of the United States as it deems necessary or desirable in
the public interest, including seeking to enjoin the purchase of Shares
pursuant to the Offer or seeking divestiture of the Shares so acquired or
divestiture of substantial assets of Bertelsmann or the Company. Private
parties (including individual States) may also bring legal actions under the
antitrust laws of the United States. Purchaser does not believe that the
consummation of the Offer will result in a violation of any applicable
antitrust laws. However, there can be no assurance that a challenge to the
Offer on antitrust grounds will not be made, or if such a challenge is made,
what the result will be. See "The Offer--Conditions to the Offer", including
conditions with respect to litigation and certain governmental actions and "The
Offer--The Merger Agreement" for certain termination rights and obligations to
make certain divestitures.
Other Filings. Bertelsmann and its affiliates, as well as the Company,
conduct operations and/or have sales in a number of foreign countries, and
filings will have to be made with foreign governments under their pre-merger
notification statutes.
o Federal Republic of Germany. Under the Act Against Restraints of
Competition of the Federal Republic of Germany (the "German Cartel
Act"), certain transactions may not be consummated unless a
notification has been filed with the German Cartel Office (the
"Cartel Office") and clearance has been obtained. The consummation of
the Offer and the Merger are subject to such requirements.
28
Pursuant to the requirements of the German Cartel Act, Purchaser
expects to file a notification with respect to the Offer and Merger
with the Cartel Office. The waiting period applicable to the purchase
of Shares pursuant to the Offer is scheduled to expire one month
after such filing. However, at the expiration of such time, the
Cartel Office may instead of approving the Merger decide to make
further investigations and, in connection with such further
investigation, may extend the waiting period to a date that is up to
four months from the date of filing.
o Austria. Austrian law provides that certain transactions may not be
consummated unless a premerger notification has been filed with the
Austrian Cartel Court (the "Austrian Cartel Court"). The initial
waiting period applicable to the purchase of Shares pursuant to the
Offer is generally six to seven weeks, unless the Austrian Cartel
Court extends the waiting period based on a request for additional
information or objections to the transaction. If such action is
taken, the waiting period may be extended to a date that is up to
five months from the date of filing. The consummation of the Offer
and the Merger are subject to such requirements.
o Other Jurisdictions. The filing requirements of various jurisdictions
are being analyzed by the parties and, where necessary, the parties
intend to make such filings.
If any waiting period under applicable antitrust or competition law shall
not have expired or been terminated by the Expiration Date, Purchaser may, but
shall not be required to, extend the Expiration Date, or Purchaser may
terminate the Offer. Although Bertelsmann and Purchaser believe that the
acquisition of the Shares pursuant to the Offer would not violate or be
prohibited by applicable foreign antitrust or competition laws, there can be no
assurance that a challenge to the Offer on antitrust or competition grounds
will not be made or, if such a challenge is made, what the outcome will be. If
the consummation or the Offer or the Merger is prohibited by law, rule,
regulation, judgment, injunction or certain similar actions, Purchaser shall
not be obligated to accept for payment or pay for any tendered Shares and may
terminate the Offer. See "The Offer--Conditions to the Offer" for certain
conditions to the Offer, including conditions with respect to litigation and
certain government actions.
Fees and Expenses
Lazard Freres is acting as the Dealer Manager in connection with the Offer
and is acting also as financial advisor to Bertelsmann in connection with
Bertelsmann's proposed acquisition of the Company. Lazard Freres will receive
reasonable and customary compensation for its services relating to the Offer
and to be reimbursed for certain out-of- pocket expenses. Bertelsmann and
Purchaser will indemnify Lazard Freres and certain related persons against
certain liabilities and expenses in connection with its engagement, including
certain liabilities under the federal securities laws.
Bertelsmann and Purchaser have retained MacKenzie Partners, Inc. to be the
Information Agent and ChaseMellon Shareholder Services, L.L.C. to be the
Depositary in connection with the Offer. The Information Agent may contact
holders of Shares by mail, telephone, telecopy, telegraph and personal
interview and may request banks, brokers, dealers and other nominees to forward
materials relating to the Offer to beneficial owners of Shares.
The Information Agent and the Depositary each will receive reasonable and
customary compensation for their respective services in connection with the
Offer, will be reimbursed for reasonable out-of-pocket expenses and will be
indemnified against certain liabilities and expenses in connection therewith,
including certain liabilities under federal securities laws.
Neither of Bertelsmann nor Purchaser will pay any fees or commissions to
any broker or dealer or to any other person (other than to the Dealer Manager,
the Depositary and the Information Agent) in connection with the solicitation
of tenders of Shares pursuant to the Offer. Brokers, dealers, commercial banks
and trust companies will, upon request, be reimbursed by Purchaser for
customary mailing and handling expenses incurred by them in forwarding offering
materials to their customers.
29
Miscellaneous
The Offer is not being made to (nor will tenders be accepted from or on
behalf of) holders of Shares in any jurisdiction in which the making of the
Offer or the acceptance thereof would not be in compliance with the laws of
such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION ON BEHALF OF BERTELSMANN OR PURCHASER NOT CONTAINED HEREIN OR IN
THE LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
Purchaser has filed with the SEC a Tender Offer Statement on Schedule TO
pursuant to Rule 14d-3 of the General Rules and Regulations under the Exchange
Act, together with exhibits furnishing certain additional information with
respect to the Offer, and may file amendments thereto. In addition, the Company
has filed with the SEC a Solicitation/Recommendation Statement on Schedule
14D-9, together with exhibits, pursuant to Rule 14d-9 under the Exchange Act,
setting forth the recommendation of the Company Board with respect to the Offer
and the reasons for such recommendation and furnishing certain additional
related information. A copy of such documents, and any amendments thereto, may
be examined at, and copies may be obtained from, the SEC (but not the regional
offices of the SEC) in the manner set forth under "The Offer--Certain
Information about the Company" and "The Offer--Certain Information about
Bertelsmann and Purchaser.
BINC ACQUISITION CORP.
July 26, 2000
30
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS
1. Directors and Executive Officers of Bertelsmann, Inc. The name,
business address, current principal occupation or employment and five-year
employment history of each director and executive officer of Bertelsmann, Inc.
and certain other information are set forth below. None of the directors and
officers of Bertelsmann, Inc. listed below has, during the past five years, (i)
been convicted in a criminal proceeding or (ii) been a party to any judicial or
administrative proceeding that resulted in a judgement, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws. All directors and officers listed below are
citizens of Germany, unless otherwise indicated. Directors are identified by an
asterisk.
Current Principal Occupation or Employment Period Served
Name and Business Address and Five-Year Employment History Age In Such Office(s)
- ------------------------------------- ------------------------------------------ --- ----------------
Michael Dornemann * President and CEO, BMG Music 54 1987 to 1998
BMG Entertainment Chairman, BMG Music 1989 to date
1540 Broadway Director and Member of the Executive 1988 to date
New York, NY 10036 Committee of the Board of Directors,
Bertelsmann, Inc.
Member of the Executive Board, 1985 to date
Bertelsmann AG
Siegfried Luther * Chief Financial Officer, Bertelsmann AG 55 1990 to date
Bertelsmann AG Director and Member of the Executive 1990 to date
Carl-Bertelsmann Str. 270 Committee of the Board of Directors,
33311 Gutersloh Germany Bertelsmann, Inc.
Chief Financial Officer, Bertelsmann, Inc. 1998 to date
Robert J. Sorrentino *1 Partner, Coopers & Lybrand 46 1994 to 1996
Bertelsmann, Inc. Vice President, Taxes, Bertelsmann, Inc. 1996 to 1997
1540 Broadway Executive Vice President and Chief 1997 to 1998
New York, NY 10036 Operating Officer, Bertelsmann, Inc.
President and CEO, Director and Member 1998 to date
of the Executive Committee of the Board
of Directors, Bertelsmann, Inc.
Aydin S. Caginalp * Partner, Walter Conston Alexander & 49 1984 to date
Walter Conston Alexander & Green, P.C. Green, P.C.
90 Park Avenue Director and Secretary, Bertelsmann, Inc. 1998 to date
New York, NY 10016
Thomas Middelhoff * Member of the Executive Board, 47 1994 to 1998
Bertelsmann AG Bertelsmann AG
Carl-Bertelsmann Str. 270 President and CEO and Chairman of the 1998 to date
33311 Gutersloh Germany Executive Board of Bertelsmann AG
Chairman of the Board, Bertelsmann, Inc. 1998 to date
- --------
1 Citizen of the United States.
I-1
Current Principal Occupation or Employment Period Served
Name and Business Address and Five-Year Employment History Age In Such Office(s)
- ------------------------------------- ------------------------------------------ --- ----------------
Gerd Schulte-Hillen * Deputy Chairman of the Executive Board, 59 1987 to date
Bertelsmann AG Bertelsmann AG
Carl-Bertelsmann Str. 270 Director and Vice Chairman of the Board, 1991 to date
33311 Gutersloh Germany Bertelsmann, Inc.
K. Peter Blobel Executive Vice President and General 52 1995 to date
Bertelsmann AG Auditor, Bertelsmann AG
Carl-Bertelsmann Str. 270 Executive Vice President, Internal Audit, 1998 to date
33311 Gutersloh Germany Bertelsmann, Inc.
Jacqueline Chasey1 Vice President, Legal Affairs and Assistant 48 1994 to date
Bertelsmann, Inc. Secretary, Bertelsmann, Inc.
1540 Broadway
New York, NY 10036
Thomas Coiro1 Vice President, Corporate Benefits, 52 1993 to date
Bertelsmann, Inc. Bertelsmann, Inc.
1540 Broadway
New York, NY 10036
Gert Stuerzebecher Vice President, Corporate Management 41 1994 to 1999
Bertelsmann, Inc. Development, Bertelsmann AG
1540 Broadway Vice President, Corporate Management 1999 to date
New York, NY 10036 Development, Bertelsmann, Inc.
William Tung1 Vice President, Corporate Real Estate 50 1994 to date
Bertelsmann, Inc.
1540 Broadway
New York, NY 10036
Liz Young1 Director, Corporate Liaison and Research 40 1990 to 1997
Bertelsmann, Inc. Group, Mazda (North America), Inc.
1540 Broadway Executive Director, Marketing and 1997 to 1998
New York, NY 10036 Communications, CIBC Oppenheimer
Vice President, Corporate Communications, 1998 to date
Bertelsmann, Inc.
- ---------
1 Citizen of the United States.
I-2
2. Directors and Executive Officers of BINC Acquisition Corp. The name,
business address, current principal occupation or employment and five-year
employment history of each director and executive officer of BINC Acquisition
Corp. and certain other information are set forth below. None of the directors
and officers of BINC Acquisition Corp. listed below has, during the past five
years, (i) been convicted in a criminal proceeding or (ii) been a party to any
judicial or administrative proceeding that resulted in a judgement, decree or
final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws. All directors and officers
listed below are citizens of the United States. Directors are identified by an
asterisk.
Current Principal Occupation or Employment Period Served
Name and Business Address and Five-Year Employment History Age In Such Office(s)
- ------------------------------------- ------------------------------------------ --- ----------------
Jacqueline Chasey * Vice President, Legal Affairs and Assistant 48 1994 to date
Bertelsmann, Inc. Secretary, Bertelsmann, Inc.
1540 Broadway Director and Secretary, BINC Acquisition July 18, 2000 to date
New York, NY 10036 Corp.
Robert J. Sorrentino * Partner, Coopers & Lybrand 46 1994 to 1996
Bertelsmann, Inc. Vice President, Taxes, Bertelsmann, Inc. 1996 to 1997
1540 Broadway Executive Vice President and Chief 1997 to 1998
New York, NY 10036 Operating Officer, Bertelsmann, Inc.
President and CEO, Director and Member 1998 to date
of the Executive Committee of the Board
of Directors, Bertelsmann, Inc.
Director and President, BINC Acquisition July 18, 2000 to date
Corp.
3. Directors and Executive Officers of Bertelsmann AG. The name, business
address, current principal occupation or employment and five-year employment
history of each director and executive officer of Bertelsmann AG and certain
other information are set forth below. None of the directors and officers of
Bertelsmann AG listed below has, during the past five years, (i) been convicted
in a criminal proceeding or (ii) been a party to any judicial or administrative
proceeding that resulted in a judgement, decree or final order enjoining the
person from future violations of, or prohibiting activities subject to, federal
or state securities laws, or a finding of any violation of federal or state
securities laws. All directors and officers listed below are citizens of
Germany, unless otherwise indicated.
Current Principal Occupation or Employment Period Served
Name and Business Address and Five-Year Employment History Age In Such Office(s)
- ------------------------------------- ------------------------------------------ --- ----------------
Hugo Butler CEO and Editor-in-Chief, Neue Zurcher 57 1985 to date
Neue Zurcher Zeitung Zeitung
Chefredaktion Member of the Supervisory Board, 1988 to date
Falkenstrasse 11 Bertelsmann AG
CH - Zurich
Switzerland
Michael Dorenemann President and CEO, BMG Music 54 1987 to 1998
1540 Broadway, 44th Floor Chairman of the Board, BMG Music 1990 to date
New York, NY 10036 Member of the Executive Board, Bertelsmann 1985 to date
AG
Klaus Eierhoff Member of the Executive Board, Karstadt AG 47 1990 to 1998
Bertelsmann AG President and CEO, Bertelsmann Multimedia 1998 to date
Carl-Bertelsmann Str. 270 Group
33311 Gutersloh Member of the Executive Board, Bertelsmann 1998 to date
Germany AG
Michael Hoffman-Becking Partner, Hengeler, Mueller, Weitzel, Wirtz 57 1975 to date
Rechtsanwalte Hengeler, Mueller, Member of the Supervisory Board, 1984 to date
Weitzel, Wirtz Bertelsmann AG
Trinkaustrasse 7
40213 Dusseldorf
Germany
Martin Kohlhaussen Chairman of the Executive Board, 65 1982 to date
Commerzbank AG Commerzbank AG
Kaiserplatz Member of the Supervisory Board, 1996 to date
60261 Frankfurt Bertelsmann AG
Germany
Oswald Lexer1 Chairman of the Works Council, Bertelsmann 50 1994 to date
Bertelsmann Services Group Services Group
An der Autobahn Member of the Supervisory Board, 1998 to date
33311 Gutersloh Bertelsmann AG
Germany
Siegfried Luther Chief Financial Officer and Member of the 55 1990 to date
Bertelsmann AG Executive Board, Bertelsmann AG
Carl-Bertelsmann Str. 270
33311 Gutersloh
Germany
- --------
1 Oswald Lexer is an Austrian citizen.
I-3
Current Principal Occupation or Employment Period Served
Name and Business Address and Five-Year Employment History Age In Such Office(s)
- ------------------------------------- ------------------------------------------ --- ----------------
Thomas Middelhoff Member of the Executive Board, Bertelsmann 47 1994 to 1998
Bertelsmann AG AG
Carl-Bertelsmann Str. 270 President and CEO and Chairman of the 1998 to date
33311 Gutersloh Executive Board, Bertelsmann AG
Germany Chairman of the Board, Bertelsmann, Inc. 1998 to date
Willi Pfannkuche Printer, Mohn Media Mohndruck GmbH 52 1968 to date
Mohn Media Mohndruck GmbH Deputy Chairman, Bertelsmann Corporate 1999 to date
Carl-Bertelsmann Str. 161 M Works Council and Member of the
33311 Gutersloh Supervisory Board, Bertelsmann AG
Germany
Erich Ruppik Chairman of the Bertelsmann Corporate 55 1990 to date
Bertelsmann AG Works Council, Bertelsmann AG
Carl-Bertelsmann Str. 270 Member of the Supervisory Board, 1981 to date
33311 Gutersloh Bertelsmann AG
Germany
Rolf Schmidt-Holtz Head of the Division of Television & 52 1994 to 1997
Bertelsmann AG Film Europe, Bertelsmann AG
Am Herrengraben 3 President and CEO, CLT-UFA S.A. 1997 to 2000
20459 Hamburg Chief Creative Officer and Member of the 2000 to date
Germany Executive Board, Bertelsmann AG
Ronaldo Schmitz Chairman Private Equity, Deutsche Bank AG 61 1991 to date
Deutsche Bank AG Deputy Chairman of the Supervisory Board, 1996 to 1998
Taunusanlage 12 Bertelsmann AG
60262 Frankfurt Member of the Supervisory Board, 1994 to date
Germany Bertelsmann AG
Gerd Schulte-Hillen Deputy Chairman of the Executive Board, 59 1987 to date
Bertelsmann AG Bertelsmann AG
Carl-Bertelsmann Str. 270
33311 Gutersloh
Germany
Uwe Swientek Chairman of the Management Representative 58 1991 to date
Sonopress Produktiengesellschaft Committee, Bertelsmann AG
fur Ton-und Informationstrager Member of the Supervisory Board, 1991 to date
bmH Bertelsmann AG
Carl-Bertelsmann Str. 161F
33311 Gutersloh
Germany
Gunter Thielen Member of the Executive Board, Bertelsmann 57 1985 to date
Bertelsmann AG AG
Carl-Bertelsmann Str. 270 President, Bertelsmann Arvato AG 1985 to date
33311 Gutersloh
Germany
I-4
Current Principal Occupation or Employment Period Served
Name and Business Address and Five-Year Employment History Age In Such Office(s)
- ------------------------------------- ------------------------------------------ --- ----------------
Dieter Vogel Chairman of the Executive Board, Thyssen AG 58 1986 to 1998
Bessener Vogol & Treichel GmbH Chairman of the Supervisory Board, 1991 to 1998
Konigsallee 60 a Bertelsmann AG
40212 Dusseldorf Executive Partner, Bessener Vogel & 1998 to date
Germany Treichel GmbH
Deputy Chairman of the Supervisory Board, 1998 to date
Bertelsmann AG
Heinrich Weiss Chairman of the Management Board, SMS 58 1990 to date
SMS Aktiengesellschaft Aktiengesellschaft
Eduard-Schloemann-Strasse 4 Member of the Supervisory Board, 1991 to date
40237 Dusseldorf Bertelsmann AG
Germany
Frank Wossner Member of the Executive Board, Bertelsmann 59 1989 to date
Bertelsmann AG AG
Carl-Bertelsmann Str. 270 Chairman of the Executive Board,
33311 Gutersloh Bertelsmann Book Munich 1994 to date
Germany
Mark Wossner CEO and Chairman of the Executive Board, 61 1983 to 1998
Bertelsmann Stifung Bertelsmann AG
Carl-Bertelsmann Str. 256 Chairman of the Board, Bertelsmann 1998 to date
33311 Gutersloh Foundation
Germany Chairman of the Supervisory Board, 1998 to date
Bertelsmann AG
Bernd Wrede Chairman of the Executive Board, Hapag- 57 1982 to date
Hapag-Lloyd AG Lloyd AG
Ballindamm 25 Member of the Supervisory Board, 1998 to date
20095 Hamburg Bertelsmann AG
Germany
I-5
Manually signed facsimile copies of the Letter of Transmittal, properly
completed and duly executed, will be accepted. The Letter of Transmittal,
certificates for Shares and any other required documents should be sent or
delivered by each shareholder of the Company or such shareholder's broker,
dealer, commercial bank, trust company or other nominee to the Depositary at
one of the addresses set forth below:
The Depositary for the Offer is:
ChaseMellon Shareholder Services, L.L.C.
By Mail: By Overnight Courier: By Hand:
P.O. Box 3301 85 Challenger Road 120 Broadway, 13th Floor
South Hackensack, NJ 07606 Mail Drop-Reorg New York, NY 10271
Attn: Reorganization Ridgefield Park, NJ 07660 Attn: Reorganization
Department Attn: Reorganization Department
Department
By Facsimile Transmission:
(For Eligible Institutions Only)
(201) 296-4293
Confirm Facsimile by Telephone:
(201) 296-4860
(For Confirmation Only)
Questions or requests for assistance may be directed to the Information
Agent or the Dealer Manager, at the addresses and telephone numbers set forth
below. Additional copies of this Offer to Purchase, the Letter of Transmittal,
the Notice of Guaranteed Delivery and related materials may be obtained from
the Information Agent or the Dealer Manager as set forth below and will be
furnished promptly at Purchaser's expense. shareholders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Offer.
The Information Agent is:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
(212) 929-5500
or
Call Toll Free: (800) 322-2885
The Dealer Manager is:
LAZARD FRERES & CO. LLC
30 Rockefeller Plaza
New York, NY 10020
Call Collect: (212) 632-6717