-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzhH3Dv4S4A61vGjdpWvMvslUQnX6C7B8kI7tE/SUv24OdxgvfWPS8MDQA//8L1g IB4cp+VnasXB0oP3ZQf6kw== 0000950134-97-004227.txt : 19970526 0000950134-97-004227.hdr.sgml : 19970526 ACCESSION NUMBER: 0000950134-97-004227 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970522 ITEM INFORMATION: Other events FILED AS OF DATE: 19970523 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARTE HANKS COMMUNICATIONS INC CENTRAL INDEX KEY: 0000045919 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PUBLISHING [2741] IRS NUMBER: 741677284 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07120 FILM NUMBER: 97613661 BUSINESS ADDRESS: STREET 1: 200 CONCORD PLAZA DR STE 800 CITY: SAN ANTONIO STATE: TX ZIP: 78216 BUSINESS PHONE: 2108299000 FORMER COMPANY: FORMER CONFORMED NAME: HARTE HANKS NEWSPAPERS INC DATE OF NAME CHANGE: 19771010 8-K 1 FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20459 ----------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): May 22, 1997 (May 16, 1997) Harte-Hanks Communications, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-7120 74-1677284 - -------------- ------------ ------------------- State or Other (Commission (IRS Employer Jurisdiction of File Number) Identification No.) Incorporation 200 Concord Plaze Drive, San Antonio, Texas 78216 --------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (210) 829-9000 -------------- 2 ITEM 5. OTHER EVENTS On May 16, 1997, Harte-Hanks Communications, Inc. (the "Company") entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") to sell to the E.W. Scripps Company ("Scripps") the Company's newspaper operations and KENS-TV, the CBS Affiliate for San Antonio. The Merger Agreement calls for a "Morris Trust" transaction. Immediately prior to the sale of Scripps, the Company will spin-off to its stockholders a new holding company bearing the Company name and comprising its direct marketing and shopper businesses. The Company has the right to terminate the Morris Trust form of transaction at any time through December 31, 1997 through December 31, 1997, in which case Scripps, pursuant to an Acquisition Agreement entered into by the Company and Scripps, dated as of May 16, 1997 (the "Acquisition Agreement") would acquire the Company's newspaper operations, KENS-TV and KENS-AM directly for a cash price of $775 million. If the tax status of Morris Trust transactions remains unclear at December 31, 1997, the parties will terminate the Morris Trust transaction and proceed with the cash transaction. However, if it is clear at December 31, 1997 that the Morris Trust transactions can be done, the parties will terminate the cash transaction and proceed with the Morris Trust transaction. The Registrant's press release dated May 19, 1997, which more fully describes the above events, is attached hereto as Exhibit 20.1, and is incorporated in its entirety herein by reference. See "Index to Exhibits." 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized. Date: May 22, 1997 HARTE-HANKS COMMUNICATIONS, INC. By: /s/ DONALD R. CREWS -------------------------------------- Name: Donald R. Crews, Senior Vice-President Legal 3 4 INDEX TO EXHIBITS
Sequentially Description of Exhibit Numbered Page ---------------------- ------------- 2.1 Agreement and plan of Merger and Reorganization, -- dated as of May 16, 1997, by and between The E.W. Scripps Company and Harte-Hanks Communications, Inc. 2.2 Acquisition Agreement, dated as of May 16, 1997, by -- and between the E.W. Scripps Compamy and Harte-Hanks Communications, Inc. 21.2 Press release dated May 19, 1997 --
4 EX-2.1 2 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION DATED AS OF MAY 16, 1997 BY AND BETWEEN THE E. W. SCRIPPS COMPANY AND HARTE-HANKS COMMUNICATIONS, INC. 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER Section 1.1 The Merger ....................................................... 1 Section 1.2 Effective Time of the Merger ..................................... 2 Section 1.3 Closing .......................................................... 2 Section 1.4 Effects of the Merger ............................................ 2 Section 1.5 Constituent Documents ............................................ 2 Section 1.6 Directors ........................................................ 2 Section 1.7 Officers ......................................................... 3 ARTICLE II CONVERSION OF SECURITIES Section 2.1 Conversion of Capital Stock ...................................... 3 Section 2.2 Exchange of Certificates ......................................... 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 3.1 Organization .................................................... 6 Section 3.2 Capitalization .................................................. 7 Section 3.3 Authority ....................................................... 7 Section 3.4 Consents and Approvals; No Violations ........................... 7 Section 3.5 SEC Reports and Financial Statements ............................ 8 Section 3.6 Information in Disclosure Documents and Registration Statements ..................................... 9 Section 3.7 Retained Business ............................................... 9 Section 3.8 Litigation ...................................................... 10 Section 3.9 Employee Benefits ............................................... 11 Section 3.10 Absence of Certain Changes or Events ............................ 12 Section 3.11 No Violation of Law ............................................. 12 Section 3.12 Taxes ........................................................... 12 Section 3.13 Environmental Matters ........................................... 14 Section 3.14 Material Contracts .............................................. 15 Section 3.15 Brokers or Finders .............................................. 15 Section 3.16 State Takeover Statutes ......................................... 15 Section 3.17 Opinion of Financial Advisor .................................... 15 Section 3.18 Title to Assets ................................................. 15
i 3 Section 3.19 Employees ........................................................ 15 Section 3.20 Insurance ........................................................ 16 Section 3.21 FCC Licenses ..................................................... 16 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB Section 4.1 Organization ..................................................... 16 Section 4.2 Capitalization ................................................... 17 Section 4.3 Authority ........................................................ 17 Section 4.4 Consents and Approvals; No Violations ............................ 18 Section 4.5 SEC Reports and Financial Statements ............................. 18 Section 4.6 Information in Disclosure Documents and Registration Statements .. 19 Section 4.7 Litigation ....................................................... 19 Section 4.8 Absence of Certain Changes or Events ............................. 19 Section 4.9 No Violation of Law .............................................. 19 Section 4.10 Environmental Matters ............................................ 20 Section 4.11 Unwanted Businesses .............................................. 20 Section 4.12 Purchases of Company Stock ....................................... 20 Section 4.13 Brokers or Finders ............................................... 20 ARTICLE V COVENANTS PENDING THE EFFECTIVE TIME Section 5.1 Covenants of the Company with Respect to the Retained Business ... 20 Section 5.2 Covenants of the Company ......................................... 23 Section 5.3 Covenants of Buyer ............................................... 23 Section 5.4 Control of the Company Stations .................................. 25 ARTICLE VI ADDITIONAL AGREEMENTS Section 6.1 Reasonable Efforts ............................................... 25 Section 6.2 Access to Information ............................................ 25 Section 6.3 Stockholders Meetings ............................................ 26 Section 6.4 Legal Conditions to Distribution and Merger ...................... 26 Section 6.5 Stock Exchange Listing ........................................... 27 Section 6.6 Company Severance Obligations .................................... 27 Section 6.7 Employee Matters; Company Stock Plans ............................ 27 Section 6.8 Fees and Expenses ................................................ 28
ii 4 Section 6.9 No Solicitations ................................................. 28 Section 6.10 Distribution ..................................................... 29 Section 6.11 Tax-Free Nature of Transactions .................................. 29 Section 6.12 Closing Balance Sheet ............................................ 30 Section 6.13 Comfort Letters .................................................. 31 Section 6.14 Notification ..................................................... 31 ARTICLE VII CONDITIONS Section 7.1 Conditions to Each Party's Obligation to Effect the Merger ........ 31 Section 7.2 Conditions of Obligations of Buyer ................................ 33 Section 7.3 Conditions of Obligations of the Company .......................... 34 ARTICLE VIII TERMINATION AND AMENDMENT Section 8.1 Termination ....................................................... 35 Section 8.2 Termination Intent Notice; Top Up Rights .......................... 37 Section 8.3 Effect of Termination ............................................. 37 Section 8.4 Termination Fee ................................................... 37 Section 8.5 Expense Reimbursement ............................................. 37 Section 8.6 Amendment ......................................................... 37 Section 8.7 Extension; Waiver ................................................. 38 ARTICLE IX MISCELLANEOUS Section 9.1 Nonsurvival of Representations and Warranties .................... 38 Section 9.2 Notices .......................................................... 38 Section 9.3 Interpretation ................................................... 39 Section 9.4 Counterparts ..................................................... 39 Section 9.5 Entire Agreement; No Third-Party Beneficiaries ................... 39 Section 9.6 Governing Law .................................................... 40 Section 9.7 Specific Performance ............................................. 40 Section 9.8 Publicity ........................................................ 40 Section 9.9 Assignment ....................................................... 40 Section 9.10 Attorney-Client Privilege; Work Product .......................... 40 Section 9.11 Market Repurchase Program ........................................ 41 Section 9.12 Further Assurances ............................................... 41 Section 9.13 Voting Agreement ................................................. 41
iii 5 ANNEXES AND EXHIBITS Annex I - Distribution Agreement Exhibit A - Retained Business Financial Statements Exhibit B - Television Financial Statements Exhibit C - Newspaper Financial Statements Exhibit D - Noncompetition Agreement Exhibit E - Voting Agreement iv 6 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of May 16, 1997, by and between THE E. W. SCRIPPS COMPANY, an Ohio corporation ("Buyer") and HARTE-HANKS COMMUNICATIONS, INC., a Delaware corporation (the "Company"). WHEREAS, Buyer desires to acquire the Company's newspaper, television and radio businesses but does not wish to acquire the other businesses conducted or to be conducted by the Company; WHEREAS, the Board of Directors of the Company has approved a plan of distribution embodied in the form of a draft agreement attached hereto as Annex I, as may be amended pursuant to the provisions of Section 6.10 hereof (the "Distribution Agreement"), which will be entered into prior to the Effective Time (as defined in Section 1.2) pursuant to which all of the Company's assets, other than those used primarily in the Retained Business (as defined in Section 3.7), will be contributed to a wholly owned subsidiary of the Company ("Newco") (such contributions, together with all other intercompany transfers of assets, and other actions described in Article IV of the Distribution Agreement, the "Transfer") and shares of capital stock of Newco will be distributed (the "Distribution") on a pro rata basis to the stockholders of the Company as provided in the Distribution Agreement in order to divest the Company of the businesses and operations that Buyer is unwilling to acquire; WHEREAS, the respective Boards of Directors of Buyer and the Company have determined that, following the Distribution, the merger of the Company with and into Buyer (the "Merger") with Buyer surviving as the surviving corporation would be advantageous and beneficial to their respective corporations and stockholders; and WHEREAS, for federal income tax purposes, it is intended that (i) the Distribution shall qualify as a distribution to which Section 355(a) of the Internal Revenue Code of 1986, as amended (the "Code"), applies and (ii) the Merger shall qualify as a reorganization under Section 368(a) of the Code, and this Agreement is intended to be and is adopted as a plan of reorganization. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I THE MERGER Section 1.1 The Merger. Upon the terms and subject to the conditions hereof, the Delaware General Corporation Law (the "Delaware Act") and the Ohio General Corporation Law (the "Ohio Act"), at the Effective Time, the Company and Buyer shall consummate the Merger 1 7 pursuant to which (i) the Company shall be merged with and into Buyer, (ii) the separate corporate existence of the Company shall thereupon cease, (iii) Buyer shall be the surviving corporation in the Merger (the "Surviving Corporation") and shall continue to be governed by the laws of the State of Ohio and (iv) the corporate existence of Buyer with its properties, rights, privileges, powers and franchises shall continue unaffected by the Merger. Section 1.2 Effective Time of the Merger. Upon the terms and subject to the conditions hereof, as soon as practicable on or after the Closing Date (as defined in Section 1.3) (i) a certificate of merger (the "Certificate of Merger") shall be duly prepared, executed and acknowledged by Buyer and thereafter delivered to the Secretary of State of the State of Delaware, for filing, as provided in the Delaware Act and (ii) certificate of merger (the "Certificate of Merger") shall be prepared, executed and acknowledged by Buyer and thereafter delivered to the Secretary of State of the State of Ohio, for filing, as provided in the Ohio Act. The Merger shall become effective immediately following the Distribution, upon the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and the Certificate of Merger with the Secretary of State of the State of Ohio or at such time thereafter as is provided in the Certificate of Merger (the "Effective Time"). Section 1.3 Closing. The closing of the Merger (the "Closing") will take place at 10:00 a.m. on a date to be specified by the parties, which shall be no later than the second business day after satisfaction or waiver of the conditions set forth in Article VII hereof, at the offices of Hughes & Luce L.L.P., 1717 Main Street, Dallas, Texas 75201, unless another date or place is agreed to in writing by the parties hereto. The date and time at which the Closing occurs is referred to herein as the "Closing Date." Section 1.4 Effects of the Merger. The Merger shall have the effects set forth in the Delaware Act and the Ohio Act. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company shall become the debts, liabilities and duties of the Surviving Corporation. Section 1.5 Constituent Documents. (a) The Articles of Incorporation of Buyer in effect at the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until amended in accordance with the Ohio Act. (b) The Code of Regulations of Buyer in effect at the Effective Time shall be the Code of Regulations of the Surviving Corporation until amended in accordance with the Ohio Act. Section 1.6 Directors. The directors of Buyer at the Effective Time shall continue as the directors of the Surviving Corporation, each to hold office from the Effective Time in accordance with the Articles of Incorporation and Code of Regulations of the Surviving Corporation and until his or her successor is duly elected and qualified. 2 8 Section 1.7 Officers. The officers of Buyer at the Effective Time shall continue as the officers of the Surviving Corporation, each to hold office from the Effective Time in accordance with the Articles of Incorporation and Code of Regulations of the Surviving Corporation and until his or her successor is duly appointed and qualified. ARTICLE II CONVERSION OF SECURITIES Section 2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holders of any shares of Common Stock, $1.00 par value, of the Company (the "Company Common Stock") or the holders of any Class A Common Shares, $.01 par value ("Buyer Common Stock"), or Common Voting Shares, $.01 par value ("Buyer Voting Stock"), of Buyer: (a) Cancellation of Treasury Stock and Buyer-Owned Stock. All shares of Company Common Stock that are owned by the Company and any shares of Company Common Stock owned by Buyer or any wholly-owned Subsidiary (as hereinafter defined) of Buyer shall be canceled and retired and shall cease to exist and no stock of Buyer or other consideration shall be delivered in exchange therefor. As used in this Agreement, the word "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships the general partnership interests of which held by such party and any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) securities or other interests having by their terms a majority of the outstanding voting power with respect to such corporation or other organization are directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. (b) Exchange Ratio for Company Common Stock. Subject to Section 2.2(e), each issued and outstanding share of Company Common Stock (other than shares to be canceled in accordance with Section 2.1(a)) shall be converted into the right to receive the Merger Consideration Per Share in fully paid and nonassessable Buyer Common Stock. The "Merger Consideration Per Share" shall mean the Merger Consideration divided by the Effective Time Outstanding Shares, rounded to the nearest one ten-thousandth of a share. The term "Merger Consideration" shall mean that number of shares of Buyer Common Stock equal to (x) $425 million plus the Debt Factor divided by (y) the Average Buyer Price. The term "Debt Factor" shall be an amount equal to 90% of the amount by which the principal amount of the Bank Indebtedness (as defined in Section 7.2(e)) outstanding as of the Effective Time is less than $200,000,000. The term "Average Buyer Price" shall mean the average closing price of Buyer Common Stock on the New York Stock Exchange (the "NYSE") for fifteen trading days selected by lot out of the forty trading days ending on and including the third trading day prior to the Closing Date (the "Random Trading Days"). The Random Trading Days shall be selected by lot 3 9 by the Company and Buyer at 5:00 p.m. Dallas time on the third trading day prior to the Closing Date. The term "Effective Time Outstanding Shares" shall mean the number of shares of Company Common Stock outstanding as of the Effective Time as certified to Buyer by the Company's transfer agent. At the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the shares of Buyer Common Stock and any cash in lieu of fractional shares of Buyer Common Stock to be issued or paid in consideration therefor upon the surrender of such certificate in accordance with Section 2.2, without interest. (c) Notwithstanding anything to the contrary contained herein, but subject to Section 8.2 hereof, in the event that the Average Buyer Price of Buyer Common Stock is less than $32.72 (the "Minimum Price"), then solely for the purposes of calculating the Merger Consideration Per Share, the Average Buyer Price of Buyer Common Stock will be deemed to be the Minimum Price, and in the event that the Average Buyer Price of Buyer Common Stock is greater than $40.00 (the "Maximum Price"), then solely for the purposes of calculating the Merger Consideration Per Share, the Average Buyer Price of Buyer Common Stock will be deemed the Maximum Price. Section 2.2 Exchange of Certificates. (a) Exchange Agent. Prior to the Effective Time, Buyer shall deposit with Fifth Third Bancorp, Cincinnati, Ohio, or such other bank or trust company designated by Buyer (and reasonably acceptable to the Company) (the "Exchange Agent"), for the benefit of the holders of shares of Company Common Stock, for exchange in accordance with this Article II through the Exchange Agent, certificates representing the shares of Buyer Common Stock issuable pursuant to Section 2.1 in exchange for outstanding shares of Company Common Stock, together with cash to be paid in lieu of fractional shares (such shares of Buyer Common Stock, together with any dividends or distributions with respect thereto contemplated by Section 2.2(c) and cash in lieu of fractional shares, being hereinafter referred to as the "Exchange Fund"). (b) Exchange Procedures. As soon as practicable after the Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates") whose shares were converted pursuant to Section 2.1 into the right to receive shares of Buyer Common Stock (i) a letter of transmittal (which shall be in such form and have such provisions as Buyer and the Company may reasonably specify) and (ii) instructions for surrendering the Certificates in exchange for certificates representing shares of Buyer Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Buyer, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Buyer Common Stock which such holder has the right to receive pursuant to the provisions of this Article II and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records 4 10 of the Company, a certificate representing the proper number of shares of Buyer Common Stock may be issued to a transferee if the Certificate representing such Company Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender a certificate representing shares of Buyer Common Stock and cash in lieu of any fractional shares of Buyer Common Stock as contemplated by this Section 2.2. (c) Distributions with Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Buyer Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Buyer Common Stock which such holder is entitled to receive upon the surrender thereof in accordance with this Section 2.2, and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.2(e) until the holder of record of such Certificate shall so surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Buyer Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of any fractional share of Buyer Common Stock to which such holder is entitled pursuant to Section 2.2(e) and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Buyer Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to such surrender and a payment date subsequent to surrender payable with respect to such whole shares of Buyer Common Stock. (d) No Further Ownership Rights in Company Common Stock. All shares of Buyer Common Stock issued upon the surrender for exchange of shares of Company Common Stock in accordance with the terms hereof (including any cash paid pursuant to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article II. (e) No Fractional Shares. No certificate or scrip representing fractional shares of Buyer Common Stock shall be issued upon the surrender for exchange of Certificates, and such fractional share interests will not entitle the owner thereof to vote or to any rights of a stockholder of Buyer. In lieu of any such fractional shares, each holder of Company Common Stock who would otherwise have been entitled to a fraction of a share of Buyer Common Stock upon surrender of Certificates for exchange will be entitled to receive a cash payment in lieu of such fractional share in an amount equal to such fraction multiplied by the Average Buyer Price. 5 11 (f) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the stockholders of the Company for six months after the Effective Time shall be delivered to Buyer, upon demand, and any stockholders of the Company who have not theretofore complied with this Article II shall thereafter look only to Buyer for payment of their claim for Buyer Common Stock, any cash in lieu of fractional shares of Buyer Common Stock and any dividends or distributions with respect to Buyer Common Stock. (g) No Liability. Buyer shall not be liable to any holder of shares of Company Common Stock or Buyer Common Stock, as the case may be, for such shares (or dividends or distributions with respect thereto) or cash for payment in lieu of fractional shares delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Buyer as follows: Section 3.1 Organization. As used in this Agreement, any reference to the Company and its Subsidiaries means the Company and each of its Subsidiaries; any reference to Newco and its Subsidiaries means Newco at the time of the Distribution and those entities that at or immediately prior to the Distribution will be direct or indirect Subsidiaries of or merged with or liquidated into Newco; and references to Subsidiaries of Newco mean those entities that at or immediately prior to the Distribution will be direct or indirect Subsidiaries of or merged with or liquidated into Newco. Each of the Company and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on the Retained Business taken as a whole. The Company and each of its Subsidiaries are duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by them or the nature of the business conducted by them makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not in the aggregate have a material adverse effect on the Retained Business (as defined in Section 3.7) taken as a whole or on the ability of the Company and its Subsidiaries to consummate the transactions contemplated hereby. True, accurate and complete copies of the Company's Certificate of Incorporation and bylaws, including all amendments thereto, have heretofore been delivered to Buyer. As used in this Agreement, any reference to any event, change or effect having a material adverse effect on or with respect to the Retained Business or an entity (or group of entities taken as a whole) means that such event, change or effect is materially adverse to the business, properties, assets, results of operations or financial condition of the Retained Business or such entity (or, if with respect thereto, of such group of entities taken as a whole). 6 12 Section 3.2 Capitalization. The authorized capital stock of the Company consists of: (i) 125,000,000 shares of Company Common Stock of which, as of March 17, 1997, 37,217,807 shares were issued and outstanding, and (ii) 1,000,000 shares of preferred stock, par value $1.00 per share (the "Company Preferred Stock"), of which, as of the date hereof, no shares are issued or outstanding. As of the date hereof, 4,425,338 shares of Company Common Stock were reserved for issuance upon exercise of outstanding stock options pursuant to the Company's 1984 and 1991 Stock Option Plans and the stock option plans of DiMark, Inc., and for issuance under the Company's 1994 Employee Stock Purchase Plan (collectively the "Company Stock Plans"). All the outstanding shares of the Company's capital stock are, and all shares which may be issued pursuant to the Company Stock Plans will be, when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and non-assessable and free of any preemptive rights in respect thereof. Except as set forth above or in Section 3.2 of the Company Disclosure Schedule, as of the date hereof, there are no existing options, warrants, calls, subscriptions or other rights or other agreements, commitments, understandings or restrictions of any character binding on the Company or any of its Subsidiaries with respect to the issued or unissued capital stock of the Company or any of its Subsidiaries. Except as set forth in Section 3.2 of the Company Disclosure Schedule, there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries. Section 3.3 Authority. The Company has the requisite corporate power and authority to execute and deliver this Agreement and the Distribution Agreement and to consummate the transactions contemplated hereby and thereby other than, with respect to the Merger and the Distribution, the approval and adoption of this Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of Company Common Stock and, with respect to the Distribution, the declaration of the Distribution by the Company's Board of Directors. The execution, delivery and performance of this Agreement and the Distribution Agreement by the Company and the consummation by the Company of the Distribution and the Merger and of the other transactions contemplated hereby and thereby have been duly authorized by the Company's Board of Directors, and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or the Distribution Agreement or for the Company to consummate the transactions so contemplated hereby or thereby other than, with respect to the Merger and the Distribution, the approval and adoption of this Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of Company Common Stock and, with respect to the Distribution, declaration of the Distribution by the Company's Board of Directors. This Agreement has been duly executed and delivered by the Company and, assuming this Agreement constitutes a valid and binding obligation of Buyer, constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. Prior to the Distribution, the Distribution Agreement will be duly executed and delivered by each of the Company and Newco and upon such execution and delivery will constitute a valid and binding obligation of each of the Company and Newco, enforceable against each of them in accordance with its terms. Section 3.4 Consents and Approvals; No Violations. Except (a) as set forth in Section 3.4 of the Company Disclosure Schedule, (b) for filings, permits, authorizations, 7 13 consents and approvals as may be required under, and other applicable requirements of, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended (the "Securities Act"), the NYSE, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Communications Act of 1934, as amended (the "FCC Act"), filings under state securities or "blue sky" laws, the filing with the Secretary of State of the State of Delaware of the Certificate of Merger and the filing with the Secretary of State of the State of Ohio of the Certificate of Merger and (c) as may be necessary as a result of any facts or circumstances relating solely to Buyer or any of its Subsidiaries, none of the execution, delivery or performance of this Agreement or the Distribution Agreement by the Company or the consummation by the Company of the transactions contemplated hereby or thereby and compliance by the Company with any of the provisions hereof or thereof will (i) conflict with or result in any breach of any provisions of the charters or bylaws of the Company or of any of its Subsidiaries, (ii) require any filing by the Company or any of its Subsidiaries with, or any permit, authorization, consent or approval to be obtained by the Company or any of its Subsidiaries of, any court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority or agency (a "Governmental Entity"), (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument, obligation or commitment to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound ("Contracts") or result in the creation of any lien upon any of the property or assets of the Company or its Subsidiaries or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its Subsidiaries, except, in the case of clause (ii), (iii) or (iv), for failures to file or obtain, violations, breaches, defaults or liens which would not have a material adverse effect on the Retained Business taken as a whole or the ability of the Company to consummate the transactions contemplated hereby. The Company has no knowledge of any facts or circumstances relating to the Company or any of its Subsidiaries that, individually or in the aggregate, would prevent any necessary approval of the transactions contemplated by this Agreement under the FCC Act. Section 3.5 SEC Reports and Financial Statements. The Company has timely filed with the Securities and Exchange Commission (the "SEC"), and has heretofore made available to Buyer true and complete copies of, all periodic reports required to be filed by it since December 31, 1994 under the Exchange Act (as such documents have been amended since the time of their filing, together with all such periodic reports to be filed from the date hereof to the Effective Time, collectively, the "Company SEC Documents"). The Company SEC Documents, including without limitation any financial statements or schedules included therein, at the time filed, (a) did not or will not, as the case may be, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied or will comply, as the case may be, in all material respects with the applicable requirements of the Exchange Act. The consolidated financial statements of the Company included in the Company SEC Documents (including the notes and schedules thereto, the "Company Financial Statements") comply as to form in all material respects with applicable 8 14 accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) and fairly present in all material respects (subject, in the case of the unaudited financial statements, to normal audit and year-end adjustments) the consolidated financial position of the Company and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended. Section 3.6 Information in Disclosure Documents and Registration Statements. None of the information supplied or to be supplied by the Company or its representatives for inclusion or incorporation by reference in (i) the registration statement on Form S-4 to be filed with the SEC by Buyer in connection with the issuance of shares of Buyer Common Stock in the Merger (the "S-4") will, at the time such registration statement becomes effective under the Securities Act and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (ii) the joint proxy statement relating to the meetings of each of the Company's and Buyer's stockholders to be held in connection with the Merger (the "Proxy Statement") will, at the date mailed to the Company's and Buyer's stockholders and at the time of each of the meetings of the Company's and Buyer's stockholders to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder, except that no representation is made by the Company with respect to statements made therein based on information supplied by Buyer for inclusion in the Proxy Statement or with respect to information concerning Buyer or any of its Subsidiaries incorporated by reference in the Proxy Statement. Section 3.7 Retained Business. (a) Attached hereto as Exhibit A is an unaudited pro forma consolidated balance sheet of the Retained Business of the Company and its Subsidiaries at December 31, 1996 (including certain explanatory notes thereto, the "Retained Business Balance Sheet") and an unaudited pro forma consolidated statement of operations for the Retained Business of the Company and its Subsidiaries for the year ended December 31, 1996 (including certain explanatory notes thereto, the "Retained Business Income Statement" and, together with the Retained Business Balance Sheet, the "Retained Business Financial Statements"). The "Retained Business" means and includes the assets, liabilities, capital stock and interests reflected on the Retained Business Balance Sheet, as such assets and liabilities may have changed since the date of the Retained Business Balance Sheet, but in any event shall include all of the Company's direct and indirect right, title and interest (including minority interests) in the assets used primarily in, and all of the Company's liabilities and obligations (accrued, absolute, contingent, undisclosed or otherwise) which are primarily related to or have arisen or will arise from, the Company's newspaper, television and radio businesses, including the ownership and operation of 9 15 the newspapers listed in Section 3.7 of the Company Disclosure Schedule, KENS-TV and KENS-AM (except for those assets and liabilities identified in Section 3.7 of the Company Disclosure Schedule under the headings "Excluded Assets" and "Excluded Liabilities," which shall not be included in the Retained Business and which are referred to herein as the "Excluded Assets" and "Excluded Liabilities"). The Retained Business shall include the following entities: Independent Publishing Company, Harte-Hanks Community Newspapers, Inc., Harte-Hanks Television, Inc. and a 50% interest in Tall Tower, Inc. (b) The Retained Business Financial Statements have been prepared in accordance with generally accepted accounting principles on a basis consistent with the Company Financial Statements, and, except as set forth in Section 3.7 of the Company Disclosure Schedule, fairly present in all material respects (subject to normal audit adjustments) the consolidated financial position of the Company and its Subsidiaries as at the date thereof, after giving pro forma effect to the Distribution (assuming the Distribution occurred on December 31, 1996), and the consolidated results of their operations for the one-year period then ended, after giving pro forma effect to the Distribution (assuming the Distribution occurred on January 1, 1996). (c) Attached hereto as Exhibits B and C are the audited balance sheets as of December 31, 1996 and December 31, 1995, and the related statement of operations and cash flows for the three years ended December 31, 1996 and the accompanying notes for the Company's television and radio operations and newspaper operations, respectively (collectively the "Division Financial Statements"). (d) The Division Financial Statements have been prepared in accordance with generally accepted accounting principles on a basis consistent with the Company Financial Statements, and, except as set forth in Section 3.7 of the Company Disclosure Schedule, fairly present in all material respects the financial position of the Company's television and radio operations and newspaper operations, respectively, as at the dates thereof, and the results of their respective operations for the periods then ended. (e) At the Effective Time, except for the Excluded Assets and as contemplated by this Agreement or the Distribution Agreement, neither Newco nor any of its Subsidiaries will own or have rights to use any of the assets or property, whether tangible, intangible or mixed, which are necessary for the conduct of the Retained Business as conducted on the date hereof. Except as set forth in Section 3.7 of the Company Disclosure Schedule, at the Effective Time neither Newco nor any of its Subsidiaries will be a party to any material agreement or arrangement with the Surviving Corporation or any of its Subsidiaries (other than the Distribution Agreement and any agreements contemplated by the Distribution Agreement, including the Tax Disaffiliation Agreement and the Employee Benefits Agreement). Section 3.8 Litigation. Except as disclosed in the Company SEC Documents filed prior to the date hereof or as set forth in Section 3.8 of the Company Disclosure Schedule, there is no suit, action, proceeding or investigation relating to the Retained Business pending or, to the knowledge of the Company, threatened, against the Company or any of its Subsidiaries before 10 16 any Governmental Entity which, individually or in the aggregate, is reasonably likely to have a material adverse effect on the Retained Business taken as a whole or the ability of the Company to consummate the transactions contemplated hereby. Except as disclosed in the Company SEC Documents filed prior to the date hereof or as set forth in Section 3.8 of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is subject to any outstanding order, writ, injunction or decree relating to the Retained Business which, individually or in the aggregate, is reasonably likely to have a material adverse effect on the Retained Business taken as a whole or a material adverse effect on the ability of the Company to consummate the transactions contemplated hereby. Section 3.9 Employee Benefits. (a) Section 3.9 of the Company Disclosure Schedule contains a list of all "employee benefit plans" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other material benefit plans, programs, agreements and arrangements (the "Benefit Plans"), which cover employees or former employees of the Company and its Subsidiaries who are or were employed in the Retained Business (the "Employees"). True and complete copies of all Benefit Plans, any trust instruments and/or insurance contracts, if any, forming a part of any such plans, and all amendments thereto; current summary plan descriptions; where applicable, the most current determination letter received from the Internal Revenue Service (the "Service"); and where applicable, annual reports, financial statements and actuarial reports for the last plan year, which fairly and accurately reflect the financial condition of the plans have been made available to Buyer. (b) The Benefit Plans are in compliance with ERISA, the Code and all other applicable laws in all material respects. Each Benefit Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Service, and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter. Neither the Company nor any of its Subsidiaries or any ERISA Affiliate (as defined below) has contributed or been required to contribute to any Multiemployer Plan (as defined in ERISA) with respect to any Employees. (c) No liability under Subtitle C or D of Title IV of ERISA has been incurred by the Company or any Subsidiary with respect to any ongoing, frozen or terminated Pension Plan, currently or formerly maintained by any of them, or the Pension Plan of any entity which is or has been considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate") which would have a material adverse effect on the Retained Business taken as a whole. (d) All contributions required to be made or accrued as of December 31, 1996 under the terms of any Benefit Plan for which the Surviving Corporation or any of its Subsidiaries may have liability have been timely made or have been reflected on the Retained Business Balance Sheet. Neither any Pension Plan nor any single-employer plan of an ERISA 11 17 Affiliate has incurred an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA in an amount which would have a material adverse effect on the Retained Business taken as a whole. Neither the Company nor any of its Subsidiaries has provided, or is required to provide, security to any Pension Plan pursuant to Section 401(a)(29) of the Code. (e) Neither the Company nor any of its Subsidiaries has any obligations for retiree health and life benefits for Employees or former Employees under any Benefit Plan, except as set forth in Section 3.9 of the Company Disclosure Schedule or as required by Part 6 of Title I of ERISA. Section 3.10 Absence of Certain Changes or Events. Except as set forth in Section 3.10 of the Company Disclosure Schedule, since December 31, 1996, the Company and its Subsidiaries have conducted the Retained Business only in the ordinary course consistent with past practice, and there has not been any change or development, or combination of changes or developments (other than changes relating to or arising from legislative or regulatory changes or developments generally affecting the newspaper or broadcasting industries or general economic conditions in the United States), which individually or in the aggregate have had or are reasonably likely to have a material adverse effect on the Retained Business taken as a whole. Section 3.11 No Violation of Law. Except as disclosed in the Company SEC Documents as filed prior to the date hereof or as set forth in Section 3.11 of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries is in violation of, or, to the knowledge of the Company, is under investigation with respect to or has been given notice or been charged by any Governmental Entity with any violation of, any law, statute, order, rule, regulation or judgment of any Governmental Entity, except for violations which, in the aggregate, would not have a material adverse effect on the Retained Business taken as a whole. The Company and its Subsidiaries have all permits, licenses, franchises and other governmental authorizations, consents and approvals necessary to conduct the Retained Business as presently conducted, except for any such permits, licenses, franchises or other governmental authorizations, consents and approvals the failure of which to have would not have a material adverse effect on the Retained Business taken as a whole. Section 3.12 Taxes. (a) Except as disclosed in the Company Financial Statements for the year ended December 31, 1996 or as set forth in Section 3.12 of the Company Disclosure Schedule: (i) the Company, its Subsidiaries and the consolidated group (the "Group") of which the Company and/or its Subsidiaries are members have (A) duly filed with the appropriate governmental authorities all Tax Returns (as hereinafter defined) required to be filed by them on or prior to the Effective Time, other than those Tax Returns the failure of which to file would not have a material adverse effect on the entity required to file such Tax Return, and such Tax Returns are true, correct and complete in all material respects, and (B) duly paid in full or made provision in accordance with 12 18 generally accepted accounting principles for the payment of all Taxes (as hereinafter defined) due with respect to periods ending on or prior to the Closing Date; (ii) all monies which any member of the Group has been required by law to withhold from employees or other contractors with respect to payments made or periods ending on or before the Closing Date have been withheld and timely paid to the appropriate governmental authority; (iii) as of the date hereof, the Tax Returns for the Company, its Subsidiaries and/or any member of the Group are not currently the subject of any audit, investigation or proceeding by the Service or, to the Company's, any Subsidiary's or the Group's knowledge, any state or local taxing authority, and the Company, its Subsidiaries and/or any member of the Group have not received any written notice of deficiency or assessment from any taxing authority with respect to liabilities for material Taxes of the Company, its Subsidiaries and/or any member of the Group which have not been paid or finally settled, other than audits, deficiencies or assessments disclosed in Section 3.12 of the Company Disclosure Schedule which are being contested in good faith through appropriate proceedings; and (iv) the consolidated federal income tax return of the Group has been audited through December 31, 1990 and no waiver of any statute of limitations in respect of Taxes or any extension of time with respect to a Tax assessment or deficiency granted by the Company or any of its Subsidiaries is currently in effect. (b) There are no "deferred intercompany transactions" or "excess loss accounts" (both as defined in treasury regulations) between (i) the Company and any Subsidiary of the Company or (ii) Newco (or any member of the Newco Group) and the Company (or any Subsidiary of the Company), except for "deferred intercompany transactions" with aggregate deferred gain of less than three hundred thousand dollars ($300,000). (c) "Taxes" means all taxes, charges, fees, levies, imposts, duties or other assessments, including, without limitation, income, gross receipts, estimated taxes, excise, personal property, real property, sales, ad valorem, value-added, leasing, withholding, social security, workers' compensation, unemployment insurance, occupation, use, service, service use, license, stamp, payroll, employment, windfall profit, environmental, alternative or add-on minimum tax, franchise, transfer and recording taxes, fees and charges, imposed by the United States or any state, local, or foreign governmental authority whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable or imposed on or with respect to any such taxes, charges, fees, levies, imposts, duties or other assessments. "Tax Return" means any return, report or other document or information required to be supplied to a taxing authority in connection with Taxes. 13 19 (d) Except as provided in Section 3.12 of the Company Disclosure Schedule, neither the Company, any of its Subsidiaries nor any member of the Group (i) has filed a consent pursuant to Section 341(f) of the Code nor agreed to have Section 341(f)(2) apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f) of the Code) owned by a member of the Group, (ii) has agreed, or is required, to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise that will affect the liability of the Group for Taxes, (iii) has made an election, or is required, to treat any asset of the Group as owned by another person pursuant to the provisions of former Section 168(f)(8) of the Code, (iv) is now or has ever been a party to any agreement, contract, arrangement, or plan that would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code, (v) has participated in an international boycott as defined in Section 999 of the Code, (vi) is now or has ever been a "foreign person" within the meaning of Section 1445(b)(2) of the Code, (vii) has made any of the foregoing elections or is required to apply any of the foregoing rules under any comparable state or local tax provision. After the date hereof, no extension of the period of limitation will be made without the written consent of Buyer, or (viii) is now or has ever been a United States real property holding company within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Section 3.13 Environmental Matters. (a) Except as disclosed in the Company SEC Documents as filed prior to the date hereof or as set forth in Section 3.13 of the Company Disclosure Schedule and except for such matters that, individually or in the aggregate, would not have a material adverse effect on the Retained Business taken as a whole, (i) to the knowledge of the Company, the Retained Business of the Company and its Subsidiaries is in compliance in all material respects with all applicable Environmental Laws (as hereinafter defined); (ii) to the knowledge of the Company, the properties included in the Retained Business and presently owned or operated by the Company or its Subsidiaries (the "Company Properties") do not contain any Hazardous Substance (as hereinafter defined) other than as permitted under applicable Environmental Laws; (iii) neither the Company nor any of its Subsidiaries has since December 31, 1994 received any claims, notices, demand letters, lawsuits or requests for information from any Governmental Entity or any private third party alleging that the Retained Business is in violation of, or liable under, any Environmental Laws; and (iv) none of the Company, its Subsidiaries or the Company Properties is subject to any court order, administrative order or decree relating to the Retained Business arising under any Environmental Law. (b) "Environmental Law" means any applicable Federal, state or local law, regulation, permit, judgment or agreement with any Governmental Entity, relating to (x) the protection, preservation or restoration of the environment or to human health or safety, or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances. "Hazardous Substance" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law. 14 20 Section 3.14 Material Contracts. Section 3.14 of the Company Disclosure Schedule identifies any Contract included in the Retained Business to which the Company or any of its Subsidiaries is a party or by which any of its assets or operations may be bound that is (i) a loan or similar agreement or indebtedness evidenced by a note or other instrument, or any direct or indirect guarantee of indebtedness of any other person, in excess of $1,000,000; (ii) any Contract that expressly limits the right to terminate the Contract without penalty upon less than one year's notice and such Contract provides for future payments in excess of $250,000 within the next twelve (12) months from the date hereof; (iii) a network affiliation agreement; (iv) an employment or severance agreement providing for payments in excess of $100,000 to any employee; and (v) any Contract related to capital expenditures, which provides for future payments in excess of $500,000 within the next twelve (12) months from the date hereof. Except as set forth in Section 3.14 of the Company Disclosure Schedule (i) each of the Contracts set forth on Schedule 3.14 is in full force and effect, except where the failure to be in full force and effect would not have a material adverse effect on the Retained Business taken as a whole and (ii) there are no existing defaults by the Company or such Subsidiary thereunder which default would result in a material adverse effect on the Retained Business taken as a whole. Section 3.15 Brokers or Finders. Neither the Company nor any of its Subsidiaries has any liability to any agent, broker, investment banker, financial advisor or other firm or person for any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement except Donaldson, Lufkin & Jenrette Securities Corporation, whose fees and expenses, as previously disclosed to Buyer, will be paid by the Company in accordance with the Company's agreement with such firm. Section 3.16 State Takeover Statutes. The provisions of Section 203 of the Delaware Act will not apply to the Merger, the Distribution or any of the other transactions contemplated hereby, and to the Company's knowledge, no other state takeover statute or similar statute or regulation applies to the Merger, the Distribution, or any of the other transactions contemplated hereby. Section 3.17 Opinion of Financial Advisor. The Company has received the opinion of Donaldson, Lufkin & Jenrette Securities Corporation to the effect that, as of the date of such opinion, the terms of the Distribution and Merger, taken together, are fair, from a financial point of view, to the holders of common stock of the Company. Section 3.18 Title to Assets. Except as set forth in Section 3.18 of the Company Disclosure Schedule, the Company owns all of the material assets included in the Retained Business free and clear of any liens, claims, security interests or encumbrances that, individually or in the aggregate, are reasonably likely to have a material adverse effect on the Retained Business taken as a whole. Section 3.19 Employees. With respect to the Retained Business, neither the Company nor any of its Subsidiaries is a party to, or is bound by, any collective bargaining agreement or other contract with a labor union, nor is the Company or any of its Subsidiaries the subject of any proceeding or organizing activity seeking to compel it or such Subsidiary to bargain with any 15 21 labor union as to wages and conditions of employment, nor is there any strike, labor dispute, slow down or stoppage involving the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened that, individually or in the aggregate, are reasonably likely to have a material adverse effect on the Retained Business taken as a whole. Section 3.20 Insurance. Set forth in Section 3.20 of the Company Disclosure Schedule is a schedule of the insurance coverage (including policy limits, coverage layers, and named insureds) maintained by the Company on the assets, properties, premises, operations and personnel of the Retained Business. Section 3.21 FCC Licenses. The Company has provided Buyer with a complete list of the FCC Licenses held or controlled by the Company or any of its Subsidiaries. Except as does not materially jeopardize the operation by the Company or the applicable Subsidiary of any of the Company Stations to which the FCC Licenses apply or as set forth in Section 3.21 of the Company Disclosure Schedule: (i) the Company and those of its Subsidiaries that are required to hold FCC Licenses, or that control FCC Licenses, are qualified to hold such FCC Licenses or to control such FCC Licenses, as the case may be; (ii) the Company and those of its Subsidiaries that are required to hold FCC Licenses hold such FCC Licenses; (iii) the Company is not aware of any facts or circumstances relating to the Company or any of its subsidiaries that would prevent the FCC's granting the requisite consent to the FCC Form 315 Transfer of Control Application to be filed with respect to the Merger (the "FCC Application"), except that the Company has filed a renewal application with the FCC relating to KENS-AM, which renewal application may delay the granting of the FCC Application; (iv) each Company Station is in material compliance with all FCC Licenses held by it; and (v) there is not pending or, to the knowledge of the Company, threatened any application, petition, objection or other pleading with the FCC or other Governmental Entity which challenges the validity of, or any rights of the holder under, any FCC License held by the Company or one of its Subsidiaries, except for rule making or similar proceedings of general applicability to persons engaged in substantially the same business conducted by the Company Stations. As used herein, the term "Company Station" shall mean KENS-TV and KENS-AM and the term "FCC License" shall mean any permit, license, waiver or authorization that a person is required by the FCC to hold in connection with the operation of its business. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Company as follows: Section 4.1 Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on Buyer 16 22 and its Subsidiaries taken as a whole. Buyer and each of its Subsidiaries are duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by them or the nature of the business conducted by them makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not in the aggregate have a material adverse effect on Buyer and its Subsidiaries taken as a whole or on the ability of Buyer to consummate the transactions contemplated hereby. True, accurate and complete copies of Buyer's Articles of Incorporation and Code of Regulations, including all amendments thereto, have heretofore been delivered to the Company. Section 4.2 Capitalization. As of the date hereof, the authorized and outstanding capital stock of Buyer consists of: (i) 120 million shares of Buyer Common Stock authorized, of which 61,639,561 shares are outstanding, (ii) 30 million shares of Buyer Voting Stock authorized, of which 19,333,711 shares are outstanding and (iii) 25 million shares of serial preferred stock, par value $.01 per share authorized, none of which are outstanding. All the outstanding shares of Buyer's capital stock are, and all shares of Buyer Common Stock which are to be issued pursuant to the Merger will be when issued in accordance with the terms hereof, duly authorized, validly issued, fully paid and nonassessable and free of any preemptive rights in respect thereto. Except for Buyer Common Stock issuable to directors, officers and employees pursuant to Buyer stock option and other benefit plans and except for this Agreement, there are no existing options, warrants, calls, subscriptions or other rights or other agreements, commitments, understandings or restrictions of any character relating to the issued or unissued capital stock of Buyer or any of its Subsidiaries. Since December 31, 1996, no material number of shares of Buyer Common Stock have been issued except issuances of shares reserved for issuance as described above. Section 4.3 Authority. Buyer has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby (other than, with respect to the Merger and if required by the Ohio Act or the rules and regulations of the NYSE, the approval of the issuance of shares of Buyer Common Stock pursuant to this Agreement by an affirmative vote of the holders of at least a majority of the shares of Buyer Voting Stock present, in person or by proxy, and entitled to vote at the meeting of Buyer's stockholders referred to in Section 6.3(b) for which a quorum exists). The execution, delivery and performance of this Agreement by Buyer and the consummation by Buyer of the Merger and the other transactions contemplated hereby have been duly authorized by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer are necessary to authorize this Agreement or for Buyer to consummate the transactions so contemplated (other than, with respect to the Merger and if required by the Ohio Act or the rules and regulations of the NYSE, the approval of the issuance of shares of Buyer Common Stock pursuant to this Agreement by an affirmative vote of the holders of at least a majority of the shares of Buyer Voting Stock present, in person or by proxy, and entitled to vote at the meeting of Buyer's stockholders referred to in Section 6.3(b) for which a quorum exists). This Agreement has been duly executed and delivered by Buyer, and, assuming this Agreement constitutes a valid and binding obligation of the Company, constitutes a valid and binding obligation of Buyer, enforceable against it in accordance with its terms. 17 23 Section 4.4 Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, the HSR Act, the FCC Act, the NYSE, filings under state securities or "blue sky" laws, the filing with the Secretary of State of the State of Delaware of the Certificate of Merger and the filing with the Secretary of State of the State of Ohio of the Certificate of Merger and as may be necessary as a result of any facts or circumstances relating solely to the Company and its Subsidiaries, neither the execution, delivery or performance of this Agreement by Buyer nor the consummation by Buyer of the transactions contemplated hereby nor compliance by Buyer with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the respective charter or bylaws of Buyer , (ii) require any filing by Buyer or its Subsidiaries with, or permit, authorization, consent or approval to be obtained by Buyer or its Subsidiaries of, any Governmental Entity, (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contract to which Buyer or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (iv) violate any order, writ, injunction, decree, statute, ordinance, rule or regulation applicable to Buyer or any of its Subsidiaries, except, in the case of clause (ii), (iii) or (iv), for failures to file or obtain, violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on Buyer or the ability of Buyer to consummate the transactions contemplated hereby. Buyer has no knowledge of any facts or circumstances relating to Buyer or any of its Subsidiaries, that, individually or in the aggregate, would prevent any necessary approval of the transactions contemplated by this Agreement under the FCC Act. Buyer is legally and financially qualified and, to Buyer's knowledge, otherwise qualified to hold, or control the entities which hold or will hold, the FCC Licenses currently held or controlled by the Company or to be held by Buyer or any person under their control after the Effective Time, and are not aware of any facts or circumstances that might prevent or delay prompt consent to or waivers for the FCC Application. Section 4.5 SEC Reports and Financial Statements. Each of Buyer and its Subsidiaries has timely filed with the SEC and has heretofore made available to the Company true and complete copies of all periodic reports required to be filed by it since December 31, 1994 under the Exchange Act (as such documents have been amended since the time of their filing, together with all such periodic reports to be filed from the date hereof to the Effective Time, collectively, the "Buyer SEC Documents"). The Buyer SEC Documents, including without limitation any financial statements or schedules included therein, at the time filed, (a) did not or will not, as the case may be, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied or will comply, as the case may be, in all material respects with the applicable requirements of the Exchange Act. The consolidated financial statements of Buyer included in the Buyer SEC Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during 18 24 the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited financial statements, as permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of the unaudited statements, to normal audit and year-end adjustments) the consolidated financial position of Buyer and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended. Section 4.6 Information in Disclosure Documents and Registration Statements. None of the information supplied by Buyer or its representatives for inclusion or incorporation by reference in (i) the S-4 will, at the time the S-4 becomes effective under the Securities Act and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (ii) the Proxy Statement will, at the date mailed to each of the Company's and Buyer's stockholders and at the time of each of the meetings of the Company's and Buyer's stockholders to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The S-4 and the Proxy Statement will comply as to form in all material respects with the provisions of the Securities Act and the rules and regulations thereunder, except that no representation is made by Buyer with respect to statements made therein based on information supplied by the Company for inclusion in the S-4 and the Proxy Statement or with respect to information concerning the Company incorporated by reference in the S-4 and the Proxy Statement. Section 4.7 Litigation. Except as disclosed in the Buyer SEC Documents filed prior to the date of this Agreement, there is no suit, action, proceeding or investigation pending or, to the knowledge of Buyer, threatened, against Buyer or any of its Subsidiaries before any Governmental Entity which, individually or in the aggregate, might reasonably be expected to have a material adverse effect on Buyer and its Subsidiaries taken as a whole or a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. Except as disclosed in the Buyer SEC Documents filed prior to the date of this Agreement, neither Buyer nor any of its Subsidiaries is subject to any outstanding order, writ, injunction or decree which, individually or in the aggregate, might reasonably be expected to have a material adverse effect on Buyer and its Subsidiaries taken as a whole or a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Section 4.8 Absence of Certain Changes or Events. Since December 31, 1996, there has not been any change or development, or combination of changes or developments (other than changes relating to or arising from legislative or regulatory changes or developments generally affecting the newspaper or broadcasting industries or general economic conditions in the United States) which individually or in the aggregate have had or are reasonably likely to have a material adverse effect on Buyer and its Subsidiaries taken as a whole. Section 4.9 No Violation of Law. Except as disclosed in the Buyer SEC Documents as filed prior to the date hereof, neither Buyer nor any of its Subsidiaries is in violation of, or, to the knowledge of Buyer, is under investigation with respect to or has been given notice or been 19 25 charged by any Governmental Entity with any violation of, any law, statute, order, rule, regulation or judgment of any Governmental Entity, except for violations which, in the aggregate, do not have a material adverse effect on the Buyer and its Subsidiaries taken as a whole. Buyer and its Subsidiaries have all permits, licenses, franchises and other governmental authorizations, consents and approvals necessary to conduct their businesses as presently conducted, except for any such permits, licenses, franchises or other governmental authorizations, consents and approvals the failure of which to have would not have a material adverse effect on Buyer and its Subsidiaries taken as a whole. Section 4.10 Environmental Matters. Except as disclosed in the Buyer SEC Documents as filed prior to the date hereof, except for such matters that, individually or in the aggregate, would not have a material adverse effect on Buyer and its Subsidiaries taken as a whole, (i) Buyer and its Subsidiaries are in compliance in all material respects with all applicable Environmental Laws; (ii) to the knowledge of Buyer, the properties presently owned or operated by Buyer or its Subsidiaries (the "Buyer Properties") do not contain any Hazardous Substance other than as permitted under applicable Environmental Laws; (iii) neither Buyer nor any of its Subsidiaries has, since December 31, 1994, received any claims, notices, demand letters, lawsuits or requests for information from any Governmental Entity or any private third party alleging that Buyer is in violation of, or liable under, any Environmental Laws; and (iv) none of Buyer, its Subsidiaries or the Buyer Properties is subject to any court order, administrative order or decree arising under any Environmental Law. Section 4.11 Unwanted Businesses. Buyer is unwilling to consummate the Merger unless the Company has divested itself of all of the Company's assets and Newco has assumed all of the Company's liabilities, other than those relating to the Retained Business. Section 4.12 Purchases of Company Stock. Neither Buyer nor any of its Subsidiaries has acquired any shares of capital stock of the Company since December 31, 1995. Section 4.13 Brokers or Finders. Neither Buyer nor any of its Subsidiaries has any liability to any agent, broker, investment banker, financial advisor or other firm or person for any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement. ARTICLE V COVENANTS PENDING THE EFFECTIVE TIME Section 5.1 Covenants of the Company with Respect to the Retained Business. During the period from the date of this Agreement and continuing until the Effective Time, the Company agrees as to itself and its Subsidiaries that except (i) for the Distribution and the other transactions, actions or events provided for in the Distribution Agreement, including the Employee Benefits Agreement, (ii) as contemplated or permitted by this Agreement, (iii) as set 20 26 forth in Section 5.1 of the Company Disclosure Schedule or (iv) to the extent that Buyer shall otherwise consent in writing (which consent will not be unreasonably withheld or delayed): (a) Ordinary Course. The Company and its Subsidiaries shall carry on the Retained Business in the usual, regular and ordinary course consistent with past practice and use all reasonable efforts to preserve intact the present business organization, keep available, consistent with past practice, the services of the present officers and employees and preserve the relationships with customers, suppliers and others having business dealings with the Retained Business, it being understood, however, that (i) certain employees of the Retained Business will also be engaged in activities for Newco and its Subsidiaries and certain officers of the Company will resign at the time of the Distribution and will serve as officers of Newco, and (ii) the failure of any employees of the Retained Business to remain employees of the Retained Business or become employees of Buyer or any Subsidiary of Buyer shall not constitute a breach of this covenant. Without limiting the foregoing, except as set forth in Section 5.1 of the Company Disclosure Schedule and except for "like kind" replacements and repairs of equipment, the Company will not make or enter into any contracts, commitments or agreements obligating the Company to make any capital expenditures primarily relating to, or arising from, the Retained Business in excess of $5,000,000, in the aggregate. (b) Dividends; Changes in Stock. The Company shall not (i) declare or pay any dividends (including dividends in Company Common Stock) on or make other distributions in respect of any of its capital stock (including such a distribution or dividend made in connection with a recapitalization, reclassification, merger, consolidation, reorganization or similar transaction), except for regular quarterly cash dividends consistent with amounts currently paid and the Distribution, (ii) split (including a reverse stock split), combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) other than pursuant to the Company's previously announced stock repurchase program, repurchase, redeem or otherwise acquire, or permit any Subsidiary to repurchase, redeem or otherwise acquire, any shares of capital stock of the Company or any of its Subsidiaries. (c) Issuance of Securities. The Company shall not, nor shall the Company permit any of its Subsidiaries included in the Retained Business to, issue, transfer or sell, or authorize or propose or agree to the issuance, transfer or sale of, any shares of its capital stock of any class, any other equity interests or any securities convertible into, or any rights, warrants, calls, subscriptions, options or other rights or agreements, commitments or understandings to acquire, any such shares, equity interests or convertible securities, other than (i) the issuance of shares of Company Common Stock pursuant to Company Stock Plans or the other agreements referred to in Section 3.2 of the Company Disclosure Schedule, (ii) issuances by a wholly owned Subsidiary of its capital stock to its parent and (iii) the granting of stock options or stock grants to employees of the Company other than the Retained Employees (as defined in Section 6.7) and to Retained Employees first employed after the date hereof. 21 27 (d) Governing Documents. The Company shall not amend its Certificate of Incorporation or bylaws in a manner adverse to Buyer or otherwise inconsistent with the transactions contemplated hereby. (e) Indebtedness. The Company shall not, nor shall it permit any of its Subsidiaries to, incur (which shall not be deemed to include (i) entering into credit agreements, lines of credit or similar arrangements until borrowings are made under such arrangements or (ii) refinancings of existing indebtedness) any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of the Company or any of its Subsidiaries or guarantee any such obligations of others other than (x) in the ordinary course of business consistent with past practice, (y) pursuant to existing credit or guaranty agreements or (z) indebtedness incurred solely by, or that will be assumed and become the obligation solely of Newco or any of its Subsidiaries at the Time of Distribution (as defined in the Distribution Agreement). (f) Changes to Benefit Plans. Except as would not materially increase the costs of the Retained Business and except for changes required to comply with applicable law, the Company shall not, nor shall it permit any of its Subsidiaries (other than Newco and its Subsidiaries) to, (i) enter into, adopt, amend (except as may be required by law and except for immaterial amendments) or terminate any Benefit Plan or any agreement, arrangement, plan or policy between the Company or any such Subsidiary and one or more of its directors, officers or Employees or (ii) except for normal increases in the ordinary course of business consistent with past practice and the payment of bonuses and other consideration to employees in the aggregate not to exceed the amount set forth in Section 5.1 of the Company Disclosure Schedule, increase in any manner the compensation or fringe benefits of any director, officer or Employee or pay any benefit to any director, officer or Employee not required by any plan or arrangement as in effect as of the date hereof or enter into any contract, agreement, commitment or arrangement to do any of the foregoing; provided that the foregoing shall not prohibit the Company from hiring and paying new employees in the ordinary course of business consistent with past practice. (g) Filings. The Company shall promptly provide Buyer (or its counsel) copies of all filings (other than those portions of filings under the HSR Act which Buyer has no reasonable interest in obtaining in connection with the Merger) made by the Company with any Federal, state or foreign Governmental Entity in connection with this Agreement, the Distribution Agreement and the transactions contemplated hereby and thereby. (h) Accounting Policies and Procedures. The Company will not and will not permit any of its Subsidiaries to change any of its accounting principles, policies or procedures, except as may be required by generally accepted accounting principles. (i) Newco. The Company shall (i) abide and cause Newco to abide by their respective obligations under the Distribution Agreement, Tax Disaffiliation Agreement and Employee Benefits Agreement and (ii) not terminate or amend, or waive compliance with any obligations under, the Distribution Agreement, Tax Disaffiliation Agreement or Employee Benefits Agreement in any manner adverse to Buyer. 22 28 (j) Sale of Assets. The Company shall not sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, any of the assets included in the Retained Business, except for dispositions of inventories and equipment in the ordinary course of the Retained Business and consistent with past practice. Section 5.2 Covenants of the Company. During the period from the date of this Agreement and continuing to the Effective Time, the Company agrees as to itself and its Subsidiaries that the Company shall not, and shall not permit any of its Subsidiaries to, take any action, including, without limitation, with respect to the terms of the Certificate of Incorporation or bylaws of Newco, that would or is reasonably likely to result in any of the conditions to the Merger set forth in Article VII not being satisfied or that would materially impair the ability of the Company to consummate the Distribution in accordance with the terms of the Distribution Agreement or the Merger in accordance with the terms hereof or would materially delay such consummation, and the Company shall promptly advise Buyer orally and in writing of any change in, or event with respect to, the business or operations of the Company and its Subsidiaries having, or which insofar as can reasonably be foreseen, could have, a material adverse effect on the Retained Business. Section 5.3 Covenants of Buyer. During the period from the date of this Agreement and continuing until the Effective Time, Buyer agrees as to itself and its Subsidiaries that except (i) as contemplated or permitted by this Agreement or (ii) to the extent that the Company shall otherwise consent in writing (which consent will not be unreasonably withheld or delayed): (a) Ordinary Course. Buyer and its Subsidiaries shall carry on their businesses in the usual, regular and ordinary course consistent with past practice and use all reasonable efforts to preserve intact the present business organization, keep available, consistent with past practice, the services of the present officers and employees and preserve the relationships with customers, suppliers and others having business dealings with them. (b) Dividends; Changes in Stock. Buyer shall not (i) declare or pay any dividends (including dividends in Buyer Common Stock) on or make other distributions in respect of any of its capital stock (including such a distribution or dividend made in connection with a recapitalization, reclassification, merger, consolidation, reorganization or similar transaction), except for regular quarterly cash dividends, (ii) split (including a reverse split), combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) repurchase, redeem or otherwise acquire, or permit any Subsidiary to repurchase, redeem or otherwise acquire, any shares of capital stock of Buyer, except for shares repurchased by Buyer pursuant to its Market Repurchase Program as defined herein. (c) Issuance of Securities. Buyer shall not, nor shall Buyer permit any of its Subsidiaries to, issue, transfer or sell, or authorize or propose or agree to the issuance, transfer or sale of, any shares of its capital stock of any class, any other equity interests or any securities 23 29 convertible into, or any rights, warrants, calls, subscriptions, options or other rights or agreements, commitments or understandings to acquire, any such shares, equity interests or convertible securities, other than (i) the issuance of shares of Buyer Common Stock upon the exercise of stock options or stock grants pursuant to existing employee benefit plans, (ii) issuances by a wholly owned Subsidiary of its capital stock to its parent, (iii) issuances of Buyer Common Stock not exceeding twenty percent (20%) of the outstanding shares, and (iv) the issuance of Buyer Common Stock upon the exercise of the option granted to The Edward W. Scripps Trust (the "Trust") pursuant to the Stock Option Agreement between Buyer and the Trust dated the date hereof, a copy of which has been furnished to the Company. (d) Governing Documents. Buyer shall not amend its Articles of Incorporation or Code of Regulations in a manner adverse to the Company or otherwise inconsistent with the transactions contemplated hereby. (e) Indebtedness. Buyer shall not, nor shall it permit any of its Subsidiaries to, incur (which shall not be deemed to include (i) entering into credit agreements, lines of credit or similar arrangements until borrowings are made under such arrangements or (ii) refinancings of existing indebtedness) any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of Buyer or any of its Subsidiaries or guarantee any such obligations of others other than (x) in the ordinary course of business consistent with past practice, (y) pursuant to existing credit or guaranty agreements or (z) additional indebtedness not to exceed $1 billion in the aggregate. (f) Filings. Buyer shall promptly provide the Company (or its counsel) copies of all filings (other than those portions of filings under the HSR Act which the Company has no reasonable interest in obtaining in connection with the Merger) made by Buyer with any Federal, state or foreign Governmental Entity in connection with this Agreement and the transactions contemplated hereby and thereby. (g) Accounting Policies and Procedures. Buyer will not and will not permit any of its Subsidiaries to change any of its accounting principles, policies or procedures, except as may be required by generally accepted accounting principles. (h) Cooperation. Buyer shall not take, nor permit any of its Subsidiaries to take, any action that would or is reasonably likely to result in any of the conditions to the Merger set forth in Article VII not being satisfied or that would materially impair the ability of Buyer to consummate the Merger in accordance with the terms hereof or materially delay such consummation, and Buyer shall promptly advise the Company orally and in writing of any change in, or event with respect to, the business or operations of Buyer having, or which, insofar as can reasonably be foreseen, could have, a material adverse effect on Buyer and its Subsidiaries taken as a whole. (i) Securities Act Compliance. As soon as practicable after the date of the meeting of the stockholders of the Company to be called in accordance with Section 6.3(a) 24 30 hereof, the Company will identify to Buyer all persons who are reasonably believed by the Company to be, at the time of the stockholders meeting, "affiliates" of the Company as that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act ("Rule 145 Affiliates"). The Company will use its reasonable best efforts to obtain a written agreement in form and substance satisfactory to Buyer from each person identified as a possible Rule 145 Affiliate and will deliver such written agreements as soon as practicable after the meeting of the stockholders of the Company. Buyer may place appropriate legends on the certificates evidencing the shares of Buyer Common Stock to be received by Rule 145 Affiliates and issue appropriate stop transfer orders to the Buyer's transfer agent. Section 5.4 Control of the Company Stations. Prior to the Effective Time, control of the Company's television and radio broadcast operations, along with all of the Company's other operations, shall remain with the Company. The Company and Buyer acknowledge and agree that neither Buyer nor any of its employees, agents or representatives, directly or indirectly, shall, or have any right to, control, direct or otherwise supervise, or attempt to control, direct or otherwise supervise, such broadcast and other operations, it being understood that supervision of all programs, equipment, operations and other activities of such broadcast and other operations shall be the sole responsibility, and at all times prior to the Effective Time remain within the complete control and discretion, of the Company, subject to the terms of Sections 5.1 and 5.2. ARTICLE VI ADDITIONAL AGREEMENTS Section 6.1 Reasonable Efforts. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement including, without limitation, (i) the prompt preparation and filing with the SEC of the S-4 and the Proxy Statement, (ii) such actions as may be required to have the S-4 declared effective under the Securities Act and to have the Proxy Statement cleared by the SEC, in each case as promptly as practicable, including by consulting with each other as to, and responding promptly to, any SEC comments with respect thereto, (iii) the prompt preparation and filing of all necessary documents under the HSR Act and FCC Act including (but not limited to) any required waiver of the FCC one to a market rule, (iv) such actions as may be required to have the applicable waiting period under the HSR Act expire or terminate as promptly as practicable, including by consulting with each other as to, and responding promptly to any comments or requests for information with respect thereto, (v) such actions as may be required to be taken under applicable state securities or "blue sky" laws in connection with the issuance of shares of Buyer Common Stock contemplated hereby, and (vi) the distribution of the prospectus constituting a part of the S-4 and the Proxy Statement to stockholders of the Company. Each party shall promptly consult with the other and provide any necessary information with respect to all filings made by such party with any Governmental Entity in connection with this Agreement and the transactions contemplated hereby. 25 31 Section 6.2 Access to Information. Upon reasonable notice, each of the Company and Buyer shall (and shall cause its Subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of the other party, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records (with respect to the Company, to the extent relating to the Retained Business), and, during such period, each of the Company and Buyer shall (and shall cause each of their respective Subsidiaries to) furnish promptly to the other (a) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal securities laws and (b) all other information concerning its business, properties and personnel (with respect to the Company, to the extent related to the Retained Business) as such other party may reasonably request. After the Effective Time, upon reasonable notice, Buyer and its Subsidiaries shall afford to the officers, employees, accountants, counsel and other representatives of Newco access, during normal business hours, to the Surviving Corporation's and its Subsidiaries' books and records which Newco may reasonably request in order to complete tax filings or for other legitimate business purposes. Unless otherwise required by law, the parties will hold any information made available pursuant to this Section 6.2 which is nonpublic in confidence in accordance with the confidentiality agreement, dated March 11, 1997 (the "Confidentiality Agreement"), between Buyer and the Company. Section 6.3 Stockholders Meetings. (a) The Company shall call a meeting of its stockholders to be held as promptly as practicable for the purpose of voting upon the approval and adoption of this Agreement. The Company will, through its Board of Directors, recommend to its stockholders approval and adoption of this Agreement and, if the Company determines such approval to be necessary or appropriate, the Distribution and shall use all reasonable efforts to hold such meeting as soon as practicable after the date hereof; provided, however, that the Board of Directors of the Company may fail to make such a recommendation, or withdraw, modify or change any such recommendation if it determines after receiving the advice of outside counsel that making such recommendation, or that the failure to withdraw, modify or change its recommendation, would be inconsistent with its fiduciary duties under applicable law. (b) If required by the Ohio Act or the rules and regulations of the NYSE, Buyer shall call a meeting of its stockholders to be held as promptly as practicable for the purpose of voting upon the approval of the issuance of shares of Buyer Common Stock pursuant to this Agreement. Buyer will, through its Board of Directors, recommend to its stockholders such approval and shall use all reasonable efforts to hold such meeting as soon as practicable after the date hereof. Section 6.4 Legal Conditions to Distribution and Merger. Each of the Company and Buyer will use all reasonable efforts to comply promptly with all legal requirements which may be imposed on it or its respective Subsidiaries with respect to the Distribution and the Merger (which actions shall include, without limitation, furnishing all information required under the HSR Act and the FCC Act and will promptly cooperate with and furnish information to each 26 32 other in connection with any such requirements imposed upon any of them or any of their respective Subsidiaries in connection with the Distribution or the Merger). Subject to the terms and conditions hereof, each of the Company and Buyer will, and will cause its Subsidiaries to, promptly use all reasonable efforts to obtain (and will consult and cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party, required to be obtained or made by such party in connection with the Distribution or the Merger or the taking of any action contemplated thereby or by this Agreement or the Distribution Agreement. Section 6.5 Stock Exchange Listing. Buyer shall use all reasonable efforts to cause the shares of Buyer Common Stock to be issued in the Merger to be approved for listing on the NYSE, subject to official notice of issuance, prior to the Closing Date. Section 6.6 Company Severance Obligations. Subject to the proviso in the following sentence, the Company will pay or Newco will assume any transaction bonus arising out of the transactions contemplated by this Agreement pursuant to any contract, agreement or arrangement of which the Company or any of its Subsidiaries is a party, including, without limitation, payments pursuant to the agreements listed in Section 6.6 of the Company Disclosure Schedule. In no event shall Buyer or any of its Subsidiaries be responsible for any such payments, or be under any obligation to honor or assume any such obligations; provided, however, Buyer shall assume and retain, with respect to the Retained Employees (as defined in Section 6.7), any and all severance obligations that arise due to (i) the Merger being a "Change of Control" under the Severance Agreements for Retained Employees specified in Section 6.6 of the Company Disclosure Schedule and (ii) events or actions occurring after the Effective Time. Section 6.7 Employee Matters; Company Stock Plans. (a) The Company and Buyer agree that Buyer will immediately after the Effective Time and for at least one year thereafter, permit the employees of the Retained Business who will remain in the employ of the Surviving Corporation or one of its Subsidiaries after the Effective Time (collectively, the "Retained Employees") (i) to participate in a group health plan of Buyer, or one of its Subsidiaries in which similarly situated employees of Buyer participate, in accordance with the terms of the plan and, to waive any pre-existing condition clause or waiting period requirement in such group health plan and to give credit for deductible amounts paid by a Retained Employee during the current deductible year of such group health plan while employed by the Company; provided, however, that Buyer will be in compliance with this clause (i) if Buyer assumes the current group health contracts of the Company and its Subsidiaries to the extent applicable to the Retained Employees; (ii) to participate in and receive credit for vesting and eligibility purposes under tax qualified retirement plans of Buyer or any of its Subsidiaries in which similarly situated employees of Buyer participate, for which they are otherwise eligible for their service with the Company, to the extent permitted by applicable tax-qualification requirements; (iii) to participate in other benefit plans of Buyer which are offered to similarly situated employees; and (iv) to participate in stock option programs and stock purchase programs of Buyer which are offered to similarly situated employees. 27 33 (b) Prior to the Effective Time, each outstanding option to purchase shares of Company Common Stock (a "Company Option") held by a Retained Employee under the Company Stock Plans, whether vested or unvested, exercisable or nonexercisable, shall be eliminated as an obligation of the Company. The Surviving Corporation and Buyer shall have no obligation or responsibility whatsoever with respect to any Company Options. (c) All of the Retained Employees of Seller will become employees of Buyer as of the Closing Date; however, nothing in this Agreement shall be construed to require Buyer or the Company to continue the employment of any Retained Employee for any period of time, or, except as required by Section 6.7(a) above, to offer any particular type or level of benefits to any employee. Nothing in this Agreement shall prevent Buyer or the Company from disciplining or terminating any Retained Employee or from amending or terminating any benefit plans at any time. Section 6.8 Fees and Expenses. Subject to the Distribution Agreement, whether or not the Merger is consummated and except as otherwise provided herein, all fees, costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses; provided, however, that Buyer and the Company shall each pay one-half of (i) the printing costs incurred with respect to the S-4 and the Proxy Statement, (ii) the filing fee required under the HSR Act and (iii) any filing fee required by the FCC to file the FCC Application. Section 6.9 No Solicitations. The Company will immediately cease any existing discussions or negotiations conducted prior to the date hereof with respect to any merger, consolidation, business combination, sale of a significant amount of assets outside of the ordinary course of business, sale of shares of capital stock outside of the ordinary course of business, tender or exchange offer, spin-off, recapitalization or similar transaction involving the sale of the Company or any of its Subsidiaries or divisions but excluding those potential transactions set forth in Section 6.9 of the Company Disclosure Schedule (an "Acquisition Transaction"). The Company, its Subsidiaries and their respective directors and officers shall not, and its or its Subsidiaries' affiliates, representatives and agents shall not, directly or indirectly, solicit any person, entity or group concerning any Acquisition Transaction (other than the transactions contemplated by this Agreement); provided that the Company may (i) furnish information or enter into negotiations to the extent the Company's Board of Directors determines after receiving the advice of outside counsel that the failure to do so would be inconsistent with its fiduciary duties under applicable law; and (ii) recommend to its stockholders a bona fide transaction or combination of transactions that the Board of Directors determines after consulting with its legal and other advisors is more favorable, from a financial point of view, to the stockholders of the Company than the Distribution and the Merger (a "Higher Proposal"), so long as the Board of Directors, after receiving advice from outside counsel, determines that recommendation of such transaction or combination of transactions may be required for the Board of Directors to act in a manner consistent with its fiduciary duties under applicable law. The Company will furnish to Buyer a true and correct copy of any Higher Proposal. 28 34 Section 6.10 Distribution. Prior to the Closing, the Company will enter into the Distribution Agreement in the form attached hereto, with such changes as the Company and Newco shall agree and which are not adverse to Buyer, and cause Newco to enter into the Distribution Agreement and the Company will take all action necessary to effect the Distribution pursuant to the terms of the Distribution Agreement. Section 6.11 Tax-Free Nature of Transactions. (a) Each party agrees to report the Transfer as one or more tax-free transactions under one or more of Section 332, 351 or 368(a) of the Code, the Distribution as a tax-free distribution under Section 355 of the Code and the Merger as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code on all Tax Returns and other filings, and take no position inconsistent therewith, except to the extent Newco has Agreed To Pay Taxes resulting from the Transfer or the Distribution. Each of the Company and Buyer shall not, and shall not permit any of its Subsidiaries to, take or cause or permit to be taken, any action that would disqualify the Distribution as a tax-free distribution under Section 355 of the Code, disqualify the Transfer as one or more tax-free transactions under one or more of Section 332, 351 or 368(a) of the Code, or disqualify the Merger as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, except for actions resulting in, or consistent with, Taxes Newco has Agreed To Pay. For purposes of this Agreement, the Distribution Agreement and the Tax Disaffiliation Agreement (as defined in the Distribution Agreement), Newco has "Agreed To Pay" or "Agrees To Pay" or will "Agree To Pay" an amount of Taxes if (i) the aggregate amount of all such Taxes Newco agrees to pay pursuant to such Agreements is less than fifty million dollars ($50,000,000) and Newco agrees to pay such Taxes in writing, or if (ii) the aggregate amount of all such Taxes Newco agrees to pay pursuant to such Agreements is greater than or equal to fifty million dollars ($50,000,000) and less than or equal to one hundred and fifty million dollars ($150,000,000), and either (A) Newco delivers to Buyer evidence of payment of all such Taxes to the appropriate tax authority on or prior to the Closing Date in a form reasonably acceptable to Buyer, or (B) only with the consent of Buyer, Newco contributes the amount of all such Taxes to an escrow account on or prior to the Closing Date, such escrow account to provide that interest thereon is to be payable to Newco and otherwise to be in a form and subject to terms and conditions reasonably acceptable to Buyer, or Newco provides a letter of credit or similar instrument as security for the payment of all such Taxes in a form, and from a financial institution, reasonably acceptable to Buyer. Newco cannot Agree To Pay Taxes in an aggregate amount greater than one hundred and fifty million dollars ($150,000,000). (b) The Company shall, as promptly as practicable after the date hereof, prepare and submit to the Service a request for an advance letter ruling from the Service that the transactions contemplated by the Distribution Agreement will qualify as one or more tax-free transactions under one or more of Sections 332, 351 and 368(a)(1)(D) of the Code and a tax-free distribution under Section 355 of the Code. Such request shall be true and correct in all material respects, and all facts material to the ruling shall be disclosed in such request. The Company shall afford Buyer with a reasonable opportunity to review and comment on such request prior to its submission to the Service, and such request as filed shall be reasonably acceptable to Buyer. The Company shall provide Buyer with copies of all materials submitted to the Service. Buyer shall participate in all meetings and conferences with Service personnel, whether telephonically 29 35 or in person, and shall reasonably cooperate in good faith with the Company in seeking to obtain such ruling. Section 6.12 Closing Balance Sheet. (a) No later than 45 days after the Effective Date, Newco shall deliver to Buyer a consolidated balance sheet for the Retained Business at the Effective Date after giving effect to the Distribution (but not to the Merger) (the "Closing Balance Sheet"). The Closing Balance Sheet shall be prepared in accordance with generally accepted accounting principles on a basis consistent with the Company Financial Statements (except that the Closing Balance Sheet (i) will not include any assets or liabilities that have been transferred to or assumed by Newco pursuant to the Distribution Agreement, including without limitation liabilities or reserves in respect of Continuing Claims (as defined in the Distribution Agreement), (ii) will reflect all film contracts as long-term assets and all film contract payables as long-term liabilities, and (iii) will not reflect as current liabilities the Bank Indebtedness (as defined in Section 7.2(e), or the Severance Agreements for Retained Employees specified in Section 6.6). To the extent that the net working capital (current assets less current liabilities) of the Retained Business as shown on the Closing Balance Sheet is more or less than the amount estimated by the chief financial officer of the Company as the net working capital as of the Effective Date pursuant to Section 7.2(e), Buyer shall pay to Newco, or Newco shall pay to Buyer, the amount of such excess or shortfall, respectively, in cash within five days of the earlier to occur of (i) acceptance by Buyer or (ii) the Neutral Auditors' determination. (b) After receipt of the Closing Balance Sheet, Buyer shall have 20 days to review the Closing Balance Sheet, together with the workpapers used in the preparation thereof. The parties agree that representatives of Buyer and Newco shall be given access to all work papers, books, records and other information related to the preparation of the Closing Balance Sheet to the extent required to complete their review of the Closing Balance Sheet. Buyer may dispute items reflected on the Closing Date Balance Sheet only on the basis that such amounts were not arrived at in accordance with the consistent application of accounting principles used in the preparation of the Company Financial Statements. Unless Buyer delivers written notice to Newco on or prior to the 20th day after Buyer's receipt of the Closing Balance Sheet specifying in reasonable detail all disputed items and the basis therefor, Buyer shall be deemed to have accepted and agreed to the Closing Balance Sheet. If Buyer so notifies Newco of its objection to the Closing Balance Sheet, Buyer and Newco shall, within 30 days following such notice (the "Resolution Period"), attempt to resolve their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive. (c) If at the conclusion of the Resolution Period there remain amounts in dispute pursuant to paragraph (b) of this Section 6.12, then all amounts remaining in dispute shall be submitted to a firm of nationally recognized independent public accountants who shall not have had a material relationship with Buyer, Newco, or the Company within the past two years (the "Neutral Auditors") and who shall be selected by mutual agreement of Buyer and Newco within 10 days after the expiration of the Resolution Period. Each party agrees to execute, if requested by the Neutral Auditors, a reasonable engagement letter. All fees and expenses 30 36 relating to the work, if any, to be performed by the Neutral Auditors shall be borne equally by Buyer and Newco. The Neutral Auditors shall act as an arbitrator to determine, based solely on presentations by Buyer and Newco, and not by independent review or audit, only those issues still in dispute. The Neutral Auditors' determination shall be made within 30 days of their selection, shall be set forth in a written statement delivered to Buyer and Newco and shall be final, binding and conclusive. Section 6.13 Comfort Letters. (a) The Company shall use all reasonable efforts to cause KPMG Peat Marwick LLP, the Company's independent public accountants, to deliver a letter dated as of the date of the Proxy Statement, and addressed to itself and Buyer and their respective Boards of Directors, in form and substance reasonably satisfactory to Buyer, and customary in scope and substance for agreed-upon procedures letters delivered by independent public accountants in connection with registration statements and proxy statements similar to the S-4 and the Proxy Statement. (b) Buyer shall use all reasonable efforts to cause Deloitte & Touche LLP, the Buyer's independent public accountants, to deliver a letter dated as of the date of the Proxy Statement, and addressed to itself and the Company and their respective Boards of Directors, in form and substance reasonably satisfactory to the Company, and customary in scope and substance for agreed-upon procedures letters delivered by independent public accountants in connection with registration statements and proxy statements similar to the S-4 and the Proxy Statement. 6.14 Notification. Each party hereto shall, in the event of, or promptly after obtaining knowledge of, the occurrence or threatened occurrence of any fact or circumstance that would cause or constitute a material breach of any of its representations and warranties set forth herein, give notice thereof to the other party and shall use its reasonable efforts to prevent or remedy such breach. ARTICLE VII CONDITIONS Section 7.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of the parties to effect the Merger are subject to the satisfaction, on or prior to the Closing Date, of the following conditions: (a) Stockholder Approvals. This Agreement shall have been approved and adopted by (i) the affirmative vote of the holders of at least a majority of the outstanding shares of Company Common Stock and (ii) if required by the Ohio Act or the rules and regulations of the NYSE, the affirmative vote of the holders of at least a majority of the shares of Buyer Voting Stock present, in person or by proxy, and entitled to vote at the meeting of stockholders of Buyer referred to in Section 6.3(b) for which a quorum exists. 31 37 (b) Stock Exchange Listing. The shares of Buyer Common Stock issuable to the Company's stockholders pursuant to this Agreement shall have been authorized for listing on the NYSE, upon official notice of issuance. (c) Other Approvals. Other than the filing of the Certificate of Merger and the Articles of Merger provided for by Section 1.2, all authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity or other public or private third party, the failure of which to obtain would have a material adverse effect on Buyer and its Subsidiaries, in each case taken as a whole, shall have been filed, occurred or been obtained. Buyer shall have received all state securities or "blue sky" permits and other authorizations necessary to issue the Buyer Common Stock pursuant to this Agreement. (d) Registration Statement. The S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceeding by the SEC seeking a stop order. (e) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or the Distribution shall be in effect (each party agreeing to use all reasonable efforts to have any such order reversed or injunction lifted). (f) HSR and FCC Approvals. Any applicable waiting period under the HSR Act shall have expired or been terminated and the FCC Application shall have been approved by the FCC as defined herein. "FCC Approval" means action by the FCC or its staff granting consent to the transfer of control of the FCC Licenses to Buyer which, except as may be waived in writing by Buyer in its sole discretion, has not been reserved, stayed, enjoined, set aside, annulled or suspended; with respect to which no timely request for stay, petition for reconsideration or appeal of sua sponte action of the FCC with comparable effect is pending; and as to which the time for filing any such request, petition or appeal or for the taking of any such sua sponte action by the FCC has expired; provided further that, the FCC Approval shall include grant of a waiver of Section 73.3555(c) of the rules, the one-to-a-market rule (if necessary under the rules then in effect), permitting common ownership of Station KENS-TV and KENS-AM. (g) Consummation of the Distribution. The Distribution shall have become effective in accordance with the Distribution Agreement. (h) No Adverse Tax Development. Each of the Buyer and the Company shall have determined, after considering the advice of independent tax counsel, that there has not occurred any Adverse Tax Development (as defined below) after April 1, 1997 that may or will result in Taxes imposed on the Company, Newco and/or any of their respective Subsidiaries or stockholders in respect of the Transfer, the Distribution or the Merger, excluding Taxes Newco has Agreed To Pay (as defined in Section 6.11(a)). For purposes of this Section 7.1(h), an "Adverse Tax Development" shall mean the enactment of any legislation; the passage of any bill 32 38 by either House of the U.S. Congress; the approval of any legislation by either the Ways and Means Committee of the U.S. House of Representatives or the Finance Committee of the U.S. Senate; any introduction of legislation by the Chairman of such Ways and Means Committee and/or the Chairman of such Finance Committee or any joint statement of an intention to introduce legislation; and any announcement or notice by the Internal Revenue Service or the Department of the Treasury, including the issuance of any ruling or the proposal or adoption of any regulation. Section 7.2 Conditions of Obligations of Buyer. The obligations of Buyer to effect the Merger are subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived by Buyer: (a) Representations and Warranties. The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date, except to the extent such representations and warranties speak as of an earlier date (in which case, such representations and warranties shall be true and correct in all material respects as of such earlier date) and except as otherwise contemplated by this Agreement, and Buyer shall have received a certificate signed on behalf of the Company by the chief executive officer or the chief financial officer of the Company to such effect. (b) Performance of Obligations of the Company. The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement and the Distribution Agreement at or prior to the Closing Date, and Buyer shall have received a certificate signed on behalf of the Company by the chief executive officer or the chief financial officer of the Company to such effect. (c) Merger Opinion of Tax Counsel. Buyer shall have received the opinion of Baker & Hostetler LLP to the effect that the Merger qualifies as a tax-free reorganization within the meaning of Section 368(a) of the Code. (d) Letter Ruling or Spin-Off Opinion of Tax Counsel. Either (i) the Company shall have received a letter ruling from the Service as contemplated in Section 6.11(b) in form and substance satisfactory to Buyer or, with the Buyer's consent, Buyer shall have received the opinion of Hughes & Luce, L.L.P., to the effect that the Transfer qualifies as one or more tax-free transactions under one or more of Sections 332, 351, and 368(a)(1)(D) of the Code and that the Distribution qualifies as a tax-free distribution under Section 355 of the Code, or (ii) both (A) the Company shall have received a letter ruling from the Service or, with the Buyer's consent, Buyer shall have received the opinion of Hughes & Luce, L.L.P., to the effect that the Transfer qualifies as one or more tax-free transactions under one or more of Sections 332, 351, and 368(a)(1)(D) of the Code and that the Distribution qualifies as a tax-free distribution under Section 355 of the Code, except for certain Taxes identified in such ruling or opinion as payable by the Company, Newco and/or either of their Subsidiaries ("Specified Taxes"), and (B) all of the Specified Taxes are Taxes that Newco Agrees To Pay (as defined in Section 6.11(a)). 33 39 (e) Indebtedness of the Retained Business; Working Capital Adjustment. As of the Effective Time, the Retained Business shall have no outstanding indebtedness for borrowed money, other than the Bank Indebtedness; the chief financial officer of the Company shall have estimated the net working capital of the Retained Business (which shall be calculated on a basis consistent with the provisions of Section 6.13) as of the Effective Date and, in satisfaction of the Company's obligation under Section 4.1(c) of the Distribution Agreement, the Buyer shall have paid to Newco by wire transfer in immediately available funds the amount so estimated. The term "Bank Indebtedness" shall mean Indebtedness under the Third Amended and Restated Loan Agreement dated May 19, 1993, as amended, with Toronto-Dominion Bank, as Agent or any bank credit agreement used to refinance such Loan Agreement. The amount of the Bank Indebtedness shall be equal to two hundred million dollars ($200,000,000), provided, however, that if two hundred million dollars ($200,000,000) of Bank Indebtedness would cause Newco or the Company to incur a Tax liability arising with respect to the Transfer, the Distribution, or the Merger and a lesser amount of Bank Indebtedness would result in no such Tax liability, then the Bank Indebtedness shall be equal to the maximum such lesser amount. (f) Company Options. At the Effective Time, all Company Options, including Company Options held by Retained Employees, shall have been terminated or exchanged for Newco Options or shall have been fully assumed by Newco. (g) Agreed to Pay. If Newco agreed in writing pursuant to Section 8.1(i) to Agree To Pay any Taxes, then Newco shall have fulfilled such agreement. Section 7.3 Conditions of Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction of the following conditions, on or prior to the Closing Date, unless waived by the Company: (a) Representations and Warranties. The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date, except to the extent such representations and warranties speak as of an earlier date (in which case, such representations and warranties shall be true and correct in all material respects as of such earlier date) and except as otherwise contemplated by this Agreement, and the Company shall have received a certificate signed on behalf of Buyer by the chief executive officer or chief financial officer of Buyer to such effect. (b) Performance of Obligations of Buyer. Buyer shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed on behalf of Buyer by the chief executive officer or chief financial officer of Buyer to such effect. (c) Merger Opinion of Tax Counsel. The Company shall have received an opinion of Hughes & Luce, L.L.P. to the effect that the Merger qualifies as a tax-free reorganization within the meaning of Section 368(a) of the Code. 34 40 (d) Letter Ruling or Spin-Off Opinion of Tax Counsel. Either (i) the Company shall have received a letter ruling from the Service satisfactory to the Company, or, with the Company's consent, an opinion of Hughes & Luce, L.L.P., to the effect that the Transfer qualifies as one or more tax-free transactions under one or more of Sections 332, 351, and 368(a)(1)(D) of the Code and that the Distribution qualifies as a tax-free distribution under Section 355 of the Code, or (ii) both (A) the Company shall have received a letter ruling from the Service or, with the Company's consent, Company shall have received the opinion of Hughes & Luce, L.L.P., to the effect that the Transfer qualifies as one or more tax-free transactions under one or more of Sections 332, 351, and 368(a)(1)(D) of the Code and that the Distribution qualifies as a tax-free distribution under Section 355 of the Code, except for certain Taxes identified in such ruling or opinion as payable by the Company, Newco and/or either of their Subsidiaries ("Specified Taxes"), and (B) all of the Specified Taxes are Taxes that Newco Agrees To Pay (as defined in Section 6.11(a)). (e) Indebtedness. Newco and its Subsidiaries shall have been fully released from any and all liability under the Bank Indebtedness as of the Effective Date. ARTICLE VIII TERMINATION AND AMENDMENT Section 8.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger and this Agreement by the stockholders of the Company or, if applicable, Buyer: (a) by mutual consent of Buyer and the Company; (b) by either Buyer or the Company if the Merger shall not have been consummated before April 30, 1998 (unless the failure to so consummate the Merger by such date shall be due to the action or failure to act of the party seeking to terminate this Agreement); (c) by Buyer, upon a material breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue in any material respect, in either case such that the conditions set forth in Section 7.2(a) or Section 7.2(b) of this Agreement, as the case may be, would be incapable of being satisfied by April 30, 1998; provided, that in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section 8.1(c) if such willful breach shall not have been remedied within ten (10) days after receipt by the Company of written notice from Buyer specifying the nature of such willful breach and requesting that it be remedied; (d) by the Company, upon a material breach of any representation, warranty, covenant or agreement on the part of Buyer set forth in this Agreement, or if any representation or warranty of Buyer shall have become untrue in any material respect, in either case such that 35 41 the conditions set forth in Section 7.3(a) or Section 7.3(b) of this Agreement, as the case may be, would be incapable of being satisfied by April 30, 1998; or provided, that in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section 8.1(d) if such willful breach shall not have been remedied within ten (10) days after receipt by Buyer of written notice from the Company, specifying the nature of such willful breach and requesting that it be remedied; (e) by Buyer if (i) the Company's stockholders do not approve the Merger and this Agreement at the meeting required under Section 6.3(a) hereof, (ii) Buyer's stockholders do not approve the issuance of shares of Buyer Common Stock pursuant to this Agreement at the meeting contemplated under Section 6.3(b) if such meeting is required or (iii) the Company withdraws, amends or modifies in a manner adverse to Buyer its favorable recommendation of the Merger; (f) by the Company if (i) the Company's stockholders do not approve the Merger and this Agreement at the meeting required under Section 6.3(a) hereof, (ii) Buyer's stockholders do not approve the issuance of shares of Buyer Common Stock pursuant to this Agreement at the meeting contemplated under Section 6.3(b) if such meeting is required, or (iii) the Company has received a Higher Proposal that it advises Buyer in writing the Company wishes to accept and the Board of Directors determines, after receiving advice from outside counsel, that such acceptance may be required for the Board of Directors of the Company to act in a manner consistent with its fiduciary duties; (g) by the Company at any time prior to December 31, 1997 to pursue the Acquisition Agreement dated as of May 16, 1997 between Buyer and the Company; or (h) by the Company in accordance with and subject to Section 8.2 hereof: (i) automatically, without any action by either Buyer or the Company, at 6:00 p.m. Eastern Time, on December 31, 1997 if either (A) Pending Legislation (as defined below) is still pending and has not been enacted into law; or (B) legislation has been enacted on or before 6:00 p.m. Eastern Time on December 31, 1997 which would impose Taxes, excluding Taxes Newco has agreed in writing to Agree To Pay (as defined in Section 6.11(a)), on the Company, Newco and/or any of their respective Subsidiaries or stockholders as a result of the Transfer, the Distribution or the Merger. For purposes of this Section 8.1(i), "Pending Legislation" shall mean H.R. 1365 or S. 612, as modified or amended, their successors, or substitutes in substantially the same form, and any other legislation passed by either House of the U.S. Congress or approved by either the Ways and Means Committee of the U.S. House of Representatives and/or the Finance Committee of the U.S. Senate, any other legislation introduced after April 1, 1997 by the Chairman of such Ways and Means Committee and/or the Chairman of such Finance Committee or considered by either such Committee in hearings or mark-up after April 1, 1997, any joint announcement after April 1, 1997 by the Chairman of such Ways and Means Committee and/or the Chairman of such Finance Committee of an intention to introduce legislation which, if enacted, would impose Taxes, excluding Taxes Newco has agreed in writing to Agree To Pay (as defined in Section 6.11(a)) on the Company, Newco and/or any of 36 42 their respective Subsidiaries or stockholders as a result of the Transfer, the Distribution or the Merger, and upon such termination Buyer and the Company shall proceed with the transaction contemplated by the Acquisition Agreement dated as of May 16, 1997 between Buyer and the Company. Section 8.2 Termination Intent Notice; Top Up Rights. If the Average Buyer Price is less than the Minimum Price, the Company shall have the right to give notice to Buyer (the "Termination Intent Notice") that the Company intends to terminate this Agreement. The Termination Intent Notice shall be delivered to Buyer in writing at the location where the Closing is to take place no later than 3:00 p.m. Dallas time on the business day prior to the Closing Date (the "Pre-Closing Date"). If the Company delivers a Termination Intent Notice, Buyer shall have the right to give notice to the Company (the "Top-Up Notice") that Buyer elects to (notwithstanding Section 2.1(d)) calculate the Merger Consideration Per Share using the Average Buyer Price rather than the Minimum Price. The Top-Up Notice shall be delivered in person to the Company at the location where the Closing is to take place no later than 8:00 p.m. Dallas time on the Pre-Closing Date. If Buyer has not delivered a Top-Up Notice by the above deadline, this Agreement shall terminate without further action by any of the parties. If Buyer delivers the Top-Up Notice, the Per Share Merger Consideration shall be calculated using the Average Buyer Price rather than the Minimum Price. Section 8.3 Effect of Termination. In the event of a termination of this Agreement by either the Company or Buyer as provided in Section 8.1 or Section 8.2, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Buyer or the Company or their affiliates or respective officers or directors, other than pursuant to the provisions of Section 8.4 and Section 8.5; provided, however, that any such termination shall not relieve any party from liability for willful breach of this Agreement or from its obligations under the Confidentiality Agreement. Section 8.4 Termination Fee. If Buyer terminates this Agreement pursuant to Section 8.1(e)(iii) or the Company terminates this Agreement pursuant to 8.1(f)(iii), the Company will pay to Buyer within three business days of such termination, a fee, in cash, of $12 million. Such fee shall be the exclusive remedy of Buyer for the transactions contemplated hereby upon termination of this Agreement pursuant to Section 8.1(e)(iii) or Section 8.1(f)(iii) and shall be deemed inclusive of expenses incurred by Buyer. Upon the payment of the $12 million to Buyer in accordance with this Section 8.4, the Company shall have no further liability with respect to the transactions contemplated hereby. Section 8.5 Expense Reimbursement. If Buyer terminates this Agreement pursuant to Section 8.1(c) as a result of a willful breach by the Company or pursuant to Section 8.1(e)(i), the Company will pay to Buyer within three business days of such termination an amount equal to Buyer's documented reasonable expenses up to a maximum of $3 million. Section 8.6 Amendment. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after 37 43 approval of the matters presented in connection with the Merger by the stockholders of the Company or of Buyer; provided that (i) after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval and (ii) after the Effective Time, this Agreement may be amended only with the written consent of Newco. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 8.7 Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by the respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions contained here. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. ARTICLE IX MISCELLANEOUS Section 9.1 Nonsurvival of Representations and Warranties. None of the representations or warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 9.1 shall not limit any other covenant or agreement of the parties set forth in this Agreement or in any instrument delivered pursuant to the terms hereof. Section 9.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given on the date delivered if delivered personally (including by reputable overnight courier), on the date transmitted if sent by facsimile (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Buyer, to The E. W. Scripps Company 312 Walnut Street, 28th Floor Cincinnati, Ohio 45202 Attn: M. Denise Kuprionis, Secretary Telecopy: 513-977-3024 Confirmation: 513-977-3835 38 44 with a copy to Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114 Attn: William Appleton, Esq. Telecopy: 216-696-0740 Confirmation: 216-621-0200 and (b) if to the Company, to Harte-Hanks Communications, Inc. 200 Concord Plaza Drive San Antonio, Texas 78216 Attn: Donald R. Crews Facsimile: 210/829-9403 Confirmation: 210/829-9000 with a copy to Hughes & Luce, L.L.P. 1717 Main Street, Suite 2800 Dallas, Texas 75201 Attn: Alan J. Bogdanow Facsimile: (214) 939-6100 Confirmation: (214) 939-5500 Section 9.3 Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. Section 9.4 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when a counterpart has been signed by each of the parties and delivered to each of the other parties, it being under stood that all parties need not sign the same counterpart. Section 9.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement (including the documents and the instruments referred to herein, including the Distribution Agreement) and the Confidentiality Agreement (a) constitute the entire agreement and supersede 39 45 all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof, and (b) except as provided in Section 6.6 and Section 6.7, are not intended to confer upon any person other than the parties hereto and thereto any rights or remedies hereunder or thereunder; provided that after the Effective Time, Newco may enforce the obligations of Buyer or the Company under this Agreement. Section 9.6 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware without regard to any applicable conflicts-of-law principles except to the extent that the laws of the State of Ohio mandatorily apply. Section 9.7 Specific Performance. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. Section 9.8 Publicity. Except as otherwise required by law or the rules of the NYSE, for so long as this Agreement is in effect and then with as much advance notice to the other party as is practicable under the circumstances, neither the Company nor Buyer shall, or shall permit any of its Subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld or delayed. Section 9.9 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Buyer may assign, in its sole discretion, any or all of its rights hereunder to any direct or indirect wholly owned Subsidiary of Buyer, and after the Effective Time, Newco shall be entitled to enforce the obligations of Buyer and the Company pursuant to this Agreement (including the documents and instruments referred to herein) and the Confidentiality Agreement. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Section 9.10 Attorney-Client Privilege; Work Product. Anything herein or in the Distribution Agreement notwithstanding, the transactions contemplated hereby and by the Distribution Agreement shall not be deemed to transfer to Buyer or the Surviving Corporation any right to waive, nor shall they be deemed to waive, any attorney-client privilege between the Company, the present officers and directors of the Company or Newco and their legal counsel with respect to legal advice concerning the transactions contemplated hereby and by the Distribution Agreement, in either case concerning privileged communications (or work product related thereto) at any time prior to the Closing Date. Buyer and the Surviving Corporation and their successors and assigns shall not be entitled to waive or have access, nor shall they attempt to waive or seek access, to any privileged communication (or work product related thereto) between the Company, the present officers and directors of the Company or Newco and their 40 46 legal counsel relating to the Merger or the Distribution or matters relating to Newco, its subsidiaries and their respective businesses. Section 9.11 Market Repurchase Program. Notwithstanding any other provision of this Agreement, the Company acknowledges that (i) Buyer shall have the right to announce a market repurchase program (the "Market Repurchase Program") pursuant to which it may purchase at such times and on such terms as it determines appropriate a then-indicated amount of common stock of Buyer and (ii) Buyer has no obligation to make any such purchases. Buyer agrees not to make purchases during the Random Trading Days. Section 9.12 Further Assurances. Subject to the terms and conditions hereof and, as applicable, of the Distribution Agreement, the Company and Buyer will, and will cause their respective Subsidiaries to, do such additional things as are necessary or proper to carry out and effectuate the intent of this Agreement or any part hereof or the transactions contemplated hereby. Section 9.13 Voting Agreement. Upon execution of this Agreement, the Buyer shall cause the Edward W. Scripps Trust, and the Company shall cause each of the Andrew B. Shelton Revocable Trust, Houston H. Harte, Edward H. Harte and Larry Franklin to execute and deliver a Voting Agreement in substantially the form attached as Exhibit E to this Agreement. IN WITNESS WHEREOF, Buyer and the Company have caused this Agreement and Plan of Merger and Reorganization to be signed by their respective officers thereunto duly authorized as of the date first written above. THE E. W. SCRIPPS COMPANY By: /s/ CRAIG C. STANDEN ------------------------------------- Name: Craig C. Standen Title: Senior Vice-President, Corporate Development HARTE-HANKS COMMUNICATIONS, INC. By: /s/ DONALD R. CREWS ------------------------------------- Name: Donald R. Crews Title: Senior Vice-President, Legal 41 47 Annex I AGREEMENT AND PLAN OF DISTRIBUTION AGREEMENT AND PLAN OF DISTRIBUTION, dated as of ___________ _, 1997 (this "Distribution Agreement"), by and between HARTE-HANKS COMMUNICATIONS, INC., a Delaware corporation (the "Company") and [NEWCO], a Delaware corporation and a wholly owned subsidiary of the Company ("Newco"). RECITALS A. The Merger Transaction. The Company and The E. W. Scripps Company, an Ohio corporation ("Buyer") have entered into an Agreement and Plan of Merger and Reorganization, dated as of May ___, 1997 (the "Merger Agreement"), providing for the Merger (as defined in the Merger Agreement) of the Company with and into Buyer, with Buyer as the surviving corporation. B. The Spin-Off. Immediately prior to the Effective Time (as defined in Section 1.2 of the Merger Agreement), subject to the satisfaction or waiver of the conditions set forth in Article VI of this Distribution Agreement, the Board of Directors of the Company expects to distribute all of the then-outstanding shares of Common Stock, par value $________ per share, of Newco ("Newco Common Stock") as a dividend to the holders of Common Stock, $1.00 par value, of the Company ("Company Common Stock"), on a pro rata basis (the "Spin-Off"). C. Purpose. The purpose of the Spin-Off is to make possible the Merger by divesting the Company of the businesses and operations conducted or to be conducted by Newco, which Buyer is unwilling to acquire. This Distribution Agreement sets forth or provides for certain agreements between the Company and Newco in consideration of the separation of their ownership. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Distribution Agreement, the following terms shall have the following respective meanings (capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Merger Agreement): 1 48 "Action" shall mean any suit, claim, action, arbitration, inquiry, proceeding or investigation by or before any court, arbitral tribunal, administrative agency or commission or other governmental, regulatory or administrative agency or commission. "Company Group" shall mean the Company and its Subsidiaries, other than the Newco Group. "Continuing Claims" means all Actions against the Company or any member of the Company Group that arise from facts or events occurring prior to the Time of Distribution relating to bodily injury, property damage or worker's compensation and that would fall under the Company's automobile, general liability, or worker's compensation coverage. "Continuing Claims Costs" means all liabilities to third parties, costs and expenses resulting from the Continuing Claims that are not paid to or for the account of claimants or the Company by insurance or by any other third party (other than Affiliates of the Company). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean, with respect to any asset or property, the sale value that would be obtained in an arms length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. "Governmental Authorization" shall mean any permit, approval, license or authorization issued by a Governmental Entity. "Indemnified Loss" shall mean, with respect to any claim by an Indemnified Party for indemnification pursuant to Article V hereof, any and all losses, Liabilities, claims, damages, obligations, payments, costs and expenses (including, without limitation, the costs and expenses of any and all Actions, demands, assessments, judgments, settlements and compromises relating thereto and reasonable costs of investigation and attorneys' fees and expenses in connection therewith) suffered by such Indemnified Party with respect to such claim. "Initial Group" shall mean the Company and its Subsidiaries determined prior to giving effect to the transfers and transactions contemplated by Section 4.1 hereof. "Liabilities" shall mean, with respect to any party, except as otherwise provided herein, any and all debts, liabilities, commitments and obligations of such party, whether fixed, absolute, accrued, matured or unmatured, liquidated or unliquidated, contingent, asserted or unasserted, known or unknown, whenever or however arising reflected on a balance sheet (or in the notes thereto) or otherwise, including, without limitation, those arising under any law, rule, regulation, 2 49 Action, order or consent decree of any governmental entity or any judgment of any court of any kind or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. "Newco Group" shall mean Newco and its Subsidiaries determined after giving effect to the transfers and transactions contemplated by Section 4.1 and Section 4.2 hereof. "Registration Statement" shall mean a registration statement on Form S-l to effect the registration of Newco Common Stock pursuant to the Securities Act and related registration statement on Form 8-A to effect the registration of Newco Common Stock under the Exchange Act. "Securities Act" shall mean the Securities Act of 1933, as amended. "Time of Distribution" shall mean the time as of which the Spin-Off is effective as set forth in Section 2.3 hereof. "Transfer Agent" shall mean [Bank of Boston], the transfer agent for the Company Common Stock. ARTICLE II CAPITALIZATION OF NEWCO; MECHANICS OF SPIN-OFF 2.1 Capitalization of Newco. The authorized capital stock of Newco currently consists of __________ shares of Newco Common Stock, all of which are issued and outstanding and owned beneficially and of record by the Company. 2.2 Mechanics of Spin-Off. (a) The Spin-Off shall be effected by the distribution to each holder of record of Company Common Stock, as of the close of the stock transfer books on the record date designated by or pursuant to the authorization of the Board of Directors of the Company (the "Record Date"), of certificates representing [one] share of Newco Common Stock multiplied by the number of shares of Company Common Stock held by such holder, provided that no fractional shares of Newco Common Stock shall be distributed. (b) In the event a holder of Company Common Stock holds of record on the Record Date a number of shares of Company Common Stock such that, but for the proviso in Section 2.2(a) hereof, a fractional share of Newco Common Stock would be distributed to such holder, the Transfer Agent shall distribute to such holder certificates representing the number of shares of Newco Common Stock to which such holder is entitled after excluding from that number the fractional amount. No certificate or scrip representing fractional shares of Newco Common 3 50 Stock shall be issued in the Spin-Off in lieu of any such fractional shares, each holder of Company Common Stock who would otherwise have been entitled to a fraction of a share of Newco Common Stock will be entitled to receive a cash payment in lieu of such fractional share in an amount equal to such fraction multiplied by the Average Newco Price. The term "Average Newco Price" shall mean the average of the closing prices of Newco Common Stock on the New York Stock Exchange Composite Transactions Reporting System, as reported by The Wall Street Journal for the five trading days following the Time of Distribution. 2.3 Timing of Spin-Off. Prior to the Effective Time, the Board of Directors of the Company shall formally declare the dividend constituting the Spin-Off, which declaration shall be subject to the satisfaction or waiver of the conditions set forth in Article VI of this Distribution Agreement, and pay such dividend by delivery of certificates for Newco Common Stock to the Transfer Agent for delivery to the holders entitled thereto. The Spin-Off shall be deemed to be effective upon notification immediately prior to the Effective Time by the Company to the Transfer Agent that such conditions have been satisfied or waived and that the Transfer Agent is authorized to proceed with the distribution (the "Time of Distribution"). 2.4 Registration and Listing. Prior to the Time of Distribution: (a) The parties shall take such actions regarding the Registration Statement and Proxy Statement (as defined in the Merger Agreement), as is provided in the Merger Agreement to be taken with respect to the S-4 (as defined therein) and the Proxy Statement, respectively. After the Registration Statement becomes effective, the Company shall cause the final Prospectus which is part of the Registration Statement to be delivered to all holders of record of Company Common Stock on the Record Date. (b) The parties hereto shall use reasonable efforts to take all such action as may be necessary or appropriate under state securities and blue sky laws in connection with the transactions contemplated by this Agreement. (c) Newco shall prepare, file and seek to make effective, an application for the listing of the Newco Common Stock on the New York Stock Exchange, subject to official notice of issuance. (d) The parties hereto shall cooperate in preparing, filing with the Securities and Exchange Commission and causing to become effective any registration statements or amendments thereto which are necessary or appropriate in order to effect the transactions contemplated hereby or to reflect the establishment of, or amendments to, any employee benefit plans contemplated hereby requiring registration under the Securities Act. 4 51 ARTICLE III TAX MATTERS Prior to the Time of Distribution, Newco and the Company shall enter into an agreement relating to past and future tax sharing and certain issues associated therewith in substantially the form attached hereto as Exhibit A (the "Tax Disaffiliation Agreement"). ARTICLE IV CERTAIN TRANSACTIONS 4.1 Transactions Relating to Spin-Off. (a) Prior to the Time of Distribution, subject to the satisfaction or waiver of the conditions set forth in Article VI of this Distribution Agreement, the Company shall transfer, assign and convey to Newco as a capital contribution all of the capital stock of the following companies that is owned by the Company: (i) HARTE-HANKS DATA TECHNOLOGIES, INC. Harte-Hanks PTY, Limited Harte-Hanks do Brazil Consultoria Harte-Hanks Limited Information for Marketing, Ltd. (ii) HARTE-HANKS DIRECT MARKETING/BALTIMORE, INC. (iii) DIRECT MARKET CONCEPTS, INC. (iv) HARTE-HANKS DIRECT, INC. (v) HARTE-HANKS DIRECT MARKETING/FULLERTON, INC. (vi) HTS, INC. (vii) HARTE-HANKS RESPONSE MANAGEMENT/BOSTON, INC. (viii) HARTE-HANKS DIRECT MARKETING/CINCINNATI, INC. (ix) NSO, INC. (x) HARTE-HANKS DIRECT MARKETING/DALLAS, INC. (xi) HARTE-HANKS MARKET RESEARCH, INC. (xii) SELECT MARKETING, INC. (xiii) MARKETING COMMUNICATIONS, INC. (xiv) DIMARK, INC. MARS Graphic Services, Inc. DiMark Marketing, Inc. ProDirect Response Corp. H&R Communications, Inc. DMK, Inc. (xv) THE FLYER PUBLISHING CORPORATION 5 52 (xvi) HARTE-HANKS SHOPPERS, INC. (xvii) NORTHERN COMPRINT, CO. (xviii) PENNYSAVER PUBLICATIONS, INC. (xix) POTPOURRI SHOPPER, INC. (xx) SOUTHERN COMPRINT, INC. (xxi) HARTE-HANKS RESPONSE MANAGEMENT CALL CENTERS, INC. (xxii) HARTE-HANKS STOCK PLAN, INC. (b) In addition to the transfers referred to above, prior to the Time of Distribution, the Company shall, or shall cause its Subsidiaries to, transfer, assign and convey to Newco, as a capital contribution, all other assets of the Company which are not primarily related to the Retained Business, including, but not limited to, the following assets: (i) all assets of the Company and its Subsidiaries located in the San Antonio, Texas corporate headquarters office (other than books and records of the Company to the extent that they do not relate to the business of Newco); (ii) all cash and cash equivalents (including marketable securities); (iii) receivables from employees of the Company (other than Retained Employees); (iv) interest receivables on investments; (v) prepaid insurance deposits and premiums; (vi) software of the Company; (vii) stock of peer group companies; (viii) life insurance policies on executives; (ix) prepaid taxes and tax refunds; and (x) any other items included as "Excluded Assets" on Schedule 3.7 of the Merger Agreement to the extent not already covered in this Section 4.1(b). (c) In addition to the transfers referred to in (a) and (b) above, the Company agrees as a capital contribution to transfer and assign to Newco an amount of cash equal to the net working capital of the Retained Business as of the Effective Time (to be paid in accordance with the procedures set forth in Sections 6.12 and 7.2(e) of the Merger Agreement). 6 53 (d) Prior to the Time of Distribution, or as soon as reasonably practicable thereafter, (i) Newco shall (and, if applicable, shall cause any other Person over which it has legal or effective direct or indirect control to) duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Company Group all transferable Governmental Authorizations that relate to the Retained Business but which are held in the name of any member of the Newco Group, or any of their employees, officers, directors, stockholders or agents; and (ii) the Company shall (and, if applicable, shall cause any other Person over which it has legal or effective direct or indirect control to) duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Newco Group all transferable Governmental Authorizations that relate to the business of the Initial Group other than the Retained Business (the "Newco Business") but which are held in the name of any member of the Company Group or any of their employees, officers, directors, stockholders or agents. (e) Prior to the Time of Distribution, or as soon as reasonably practicable thereafter, and subject to the limitations set forth in this paragraph (e), (i) Newco shall (and, if applicable, shall cause any of the other members of the Newco Group over which it has legal or effective direct or indirect control to), assign, transfer and convey to the Company (or such other member of the Company Group as the Company shall direct) all of its (or such other member of the Newco Group's) right, title and interest in and to any and all Contracts that relate exclusively to the Retained Business or any member of the Company Group; and (ii) the Company shall (and, if applicable, shall cause any of the other members of the Company Group over which it has legal or effective direct or indirect control to), assign, transfer and convey to Newco (or such other member of the Newco Group as Newco shall direct) all of its (or such other member of the Company Group's) right, title and interest in and to any and all Contracts that relate exclusively to the Newco Business or any member of the Newco Group; and (iii) any Contract to which any party hereto (or any other member of such party's Group) is a party that inures to the benefit of the Retained Business and the Newco Business shall be assigned in part, at the expense and risk of the assignee, so that each party (or such other member of such party's Group) shall be entitled to the rights and benefits inuring to its Business under such contract. The assignee of any Contract assigned, in whole or in part, hereunder (an "Assignee") shall, as a condition to such assignment, assume and agree to pay, perform, and fully discharge all obligations of the assignor under such Contract (whether such obligations arose or were incurred prior to, on or subsequent to the Time of Distribution and irrespective of whether such obligations have been asserted as of the Time of Distribution) or, in the case of a partial assignment under clause (iii) above, such Assignee's related portion of such obligations as determined in accordance with the terms of the relevant Contract, where determinable on the face thereof, and otherwise as determined in accordance with the practice of the parties prior to the Time of Distribution. Furthermore, the Assignee shall use its commercially reasonable efforts to cause the assignor of such Contract to be released from its obligations under the assigned Contracts. 7 54 Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an agreement to assign any Contract, in whole or in part, or any rights thereunder if the agreement to assign or attempt to assign, without the consent of a third party, would constitute a breach thereof or in any way adversely affect the rights of the Assignee thereof until such consent is obtained. (f) From and after the transfers referred to in paragraphs (a) through (e) above, each of the Company and its Subsidiaries, on the one hand, and Newco and its Subsidiaries, on the other hand, shall have no liability to the other as a result of the transactions occurring prior to the date of such transfer other than pursuant to the provisions hereof and the other agreements referred to herein. 4.2 Transfer of Liabilities. (a) The parties further agree that, except as otherwise provided in this Distribution Agreement, the Merger Agreement, the Employee Benefits Agreement (defined below) or the Tax Disaffiliation Agreement, at or prior to the Time of Distribution Newco shall assume all Liabilities of the Company and the Newco Group, other than Liabilities to the extent arising out of, based upon, or resulting from the operation of the business of, or to the extent relating to, the Retained Business (the "Newco Assumed Liabilities"), and the Company shall retain all Liabilities (whether arising before or after the Time of Distribution) to the extent arising out of, based upon, or resulting from the operation of, or to the extent relating to, the Retained Business (the "Company Assumed Liabilities"). Notwithstanding the foregoing, for purposes of this Section 4.2, Company Assumed Liabilities shall be deemed to include, but not be limited to, the liabilities reflected on the Retained Business Balance Sheet. (b) Notwithstanding any provisions to the contrary in this Agreement or the other agreements referred to in Section 4.2(a) above, Newco acknowledges that the Newco Assumed Liabilities shall include (and the Company Assumed Liabilities shall not include) any or all Liabilities arising out of (i) any Action based on any alleged violation by the Company or its affiliates of any of the provisions of the Exchange Act or the Securities Act or any corresponding statute (other than any such alleged violations for statements or omissions based on information provided by Buyer for inclusion in the Registration Statement or Proxy Statement); (ii) any Action based on any alleged breach of fiduciary duty by the Board of Directors of the Company occurring prior to the Merger; (iii) any stockholder derivative suit or other similar Actions arising out of events or circumstances occurring prior to the Merger; or (iv) any claim for indemnification by officers, directors, employees or agents of the Company arising out of events or circumstances occurring prior to the Merger. 4.3 Method of Transfer. The parties hereto agree that (a) the contribution and transfer of assets contemplated pursuant to Section 4.1 hereof shall be effected by delivery by the 8 55 Company to Newco of (i) with respect to those assets which are evidenced by capital stock certificates or similar instruments, certificates duly endorsed in blank or accompanied by stock powers or other instruments of assignment executed in blank and (ii) with respect to all other assets, such good and sufficient instruments of contribution, transfer and delivery in form and substance reasonably satisfactory to Buyer, the Company and Newco, as shall be necessary to vest in Newco all of the rights, title and interest of the Company Group in and to such assets, and (b) the assumption of the Newco Assumed Liabilities contemplated pursuant to Section 4.2 hereof shall be effected by delivery by Newco to the Company of such good and sufficient instruments of assumption, in form and substance reasonably satisfactory to the Company and Newco, as shall be necessary for the assumption by Newco of the Newco Assumed Liabilities. 4.4 Further Assurances. The parties agree that if, after the Time of Distribution, either party holds assets or Liabilities which by the terms hereof or of the Merger Agreement were intended to be assigned and transferred to, or retained by, the other party, such party shall promptly assign and transfer or cause to be assigned and transferred such assets or Liabilities to the other party and such other party shall promptly accept such assignment and transfer of the asset or Liability. 4.5 Use of Names. (a) Following the Time of Distribution, the Company Group shall have the sole and exclusive ownership of and right to use, as between the Company Group on the one hand, and the Newco Group on the other hand, each of the names, trademarks, trade names and other proprietary rights set forth in Schedule 4.5 (the "Retained Proprietary Name Rights"). Following the Time of Distribution, the Newco Group shall have the sole and exclusive ownership of and right to use, as between the Newco Group on the one hand, and the Company Group on the other hand, all names, trade marks, trade names, service marks and other proprietary rights owned or used by the Initial Group immediately prior to the Time of Distribution other than the Retained Proprietary Name Rights (the "Newco Proprietary Name Rights"). The Newco Proprietary Name Rights include, without limitation, the name "Harte-Hanks " and derivatives thereof. (b) Following the Time of Distribution, (i) the Company shall, and shall cause its Subsidiaries and other affiliates to, take all action necessary to cease using, and change as promptly as practicable (including by amending any charter documents), any corporate or other names which are the same as or confusingly similar to any of the Newco Proprietary Name Rights, and (ii) Newco shall, and shall cause its Subsidiaries and other affiliates to, take all action necessary to cease using, and change as promptly as practicable (including by amending any charter documents), any corporate or other names which are the same as or confusingly similar to any of the Retained Proprietary Name Rights. 4.6 Assignment of Contracts and Permits. Notwithstanding any other provision hereof or of the Merger Agreement, in connection with any Contract or any Governmental 9 56 Authorization held by the Company which is to be transferred or assigned to Newco and which, as a matter of law or by its terms, is (i) not assignable, or (ii) not assignable without the prior approval or consent of the issuer thereof or the other party or parties thereto (collectively "Non-Assignable Rights") the Company shall: (a) apply for and use all reasonable efforts to obtain all consents or approvals contemplated by the Contracts or Governmental Authorizations, in form and substance satisfactory to Newco; (b) cooperate with Newco in any reasonable and lawful arrangements designed to provide the benefits and burdens of such Non-Assignable Rights to Newco, including holding any such Non-Assignable Rights in trust for Newco or acting as agent for Newco; (c) enforce any rights of the Company arising from such Non-Assignable Rights against the issuer thereof or the other party or parties thereto; (d) take all such actions and do, or cause to be done, all such things at the request of Newco as shall reasonably be necessary and proper in order that the value of any Non-Assignable Rights shall be preserved and shall inure to the benefit of Newco; and (e) pay over to Newco all monies or other assets collected by or paid to the Company in respect of such Non-Assignable Rights. Newco shall reimburse the Company for all reasonably incurred payments, costs and expenses made, incurred or suffered in performing the Company's obligations as requested by Newco under this Section 4.6. If the Company is unable to lawfully provide the benefit of any Governmental Authorization to Newco, it shall not, at any time, use such Governmental Authorization for its own purposes or assign or provide the benefit of such Governmental Authorization to any other party. 4.7 Intercompany Balances. All amounts owing between the Company Group, on the one hand, and the Newco Group, on the other hand, other than amounts arising in the ordinary course of business for the purchase of goods or services in commercial transactions, shall be eliminated in full (without any payment to either party) at or prior to the Time of Distribution. 4.8 No Representations or Warranties; Consents. (a) Each of the Company and Newco understands and agrees that neither is, in this Agreement or in any other agreement or document contemplated by this Agreement (including the Employee Benefits Agreement and the Tax Disaffiliation Agreement) or otherwise, making any representation or warranty whatsoever, including without limitation, any representation or warranty: 10 57 (i) as to the value or freedom from encumbrance of, or any other matter concerning, any assets of such party; or (ii) as to the legal sufficiency to convey title to any asset as of the execution, delivery and filing of this Agreement, the Employee Benefits Agreement and the Tax Disaffiliation Agreement or any other document, including, without limitation, any conveyancing or assumption document. (b) Each party hereto further understands and agrees that there are no warranties, express or implied, as to the merchantability or fitness of any of the assets either transferred to or retained by the Company Group or the Newco Group, as the case may be, pursuant to the Transfer and the other terms and provisions of this Agreement, the Employee Benefits Agreement and the Tax Disaffiliation Agreement or any conveyancing or assumption document, and all such assets which are so transferred will be transferred on an "AS IS, WHERE IS" basis, and the party to which any such assets are transferred hereunder, or which retains assets hereunder, shall bear the economic and legal risk that any conveyances of such assets shall prove to be insufficient or that the title of such party or any other member of its respective Group to any such assets shall be other than good and marketable and free from encumbrances. (c) Each of the Company and Newco acknowledges, for itself and on behalf of each other member of its respective Group, that: (i) the Company and the other members of the Company Group have disclosed, and Newco has knowledge of, all matters pertaining to the assets and properties to be conveyed to Newco or any member of the Newco Group and the liabilities to be assigned to Newco or any member of the Newco Group pursuant to the Transfer or otherwise pursuant to the other terms of this Agreement to the same extent that the Company and the other members of the Company Group have knowledge of such matters; and (ii) such knowledge constitutes notice and disclosure of such matters. Newco waives, to the fullest extent permitted by law, for itself and for each other member of its Group, any and all claims or causes of action which any of them may have arising out of such matters or the failure of any conveyancing or assumption document to describe or refer to, or provide notice of, any such matters. (d) Each of the Company and Newco understands and agrees that no party hereto is, in this Agreement or in any other agreement or document contemplated by this Agreement, the Employee Benefits Agreement and the Tax Disaffiliation Agreement or otherwise, representing or warranting in any way that the obtaining of any consents or approvals, 11 58 the execution and delivery of any amendatory agreements and the making of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable agreements or the requirements of any or all applicable Laws. Each of the Company and Newco further agrees and understands that the party to which any assets are transferred as contemplated by the Transfer or the other provisions of this Agreement shall bear the economic and legal risk that any necessary consents or approvals are not obtained, that any necessary amendatory agreements are not executed and delivered or that any requirements of Laws are not complied with. (e) Notwithstanding the provisions of 4.8(d) above, the Company and Newco shall (and shall cause each other member of its respective Group over which it has direct or indirect legal or effective control to) use commercially reasonable efforts to obtain all consents and approvals, to enter into all amendatory agreements and to make all filings and applications which may be reasonably required for the consummation of the transactions contemplated by this Agreement and shall take all such further reasonable actions as shall be reasonably necessary to preserve for each of the Company and the Newco Group, to the greatest extent feasible, the economic and operational benefits of the allocation of assets and liabilities contemplated by this Agreement. In case at any time after the Time of Distribution any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall take all such necessary or desirable action. ARTICLE V CERTAIN COVENANTS 5.1 Indemnity as between Newco and the Company from Assumed Liabilities and Certain Litigation. (a) Effective upon the Spin-Off, Newco agrees to indemnify and hold the Company, its affiliates, successors and assigns and the officers, directors, employees, agents, advisors and representatives of any of them, harmless from and against any and all Indemnified Losses arising out of or related to the Newco Assumed Liabilities. Effective upon the Spin-Off, the Company agrees to indemnify and hold Newco, its affiliates, successors and assigns and the officers, directors, employees, agents and representatives of any of them, harmless from and against any and all Indemnified Losses arising out of or related to the Company Assumed Liabilities. If either of the foregoing indemnities is unavailable for any reason, the parties shall contribute in respect of any such loss, claim, damage or Liability on an equitable basis. (b) Newco shall indemnify from and after the Time of Distribution the Company and its Subsidiaries against all Indemnified Losses in connection with any Action pending at or arising after the Time of Distribution that relates primarily to the Company or the Retained Business prior to or at the later of the Time of Distribution or the Effective Time ("Pre-Distribution Actions"). The Company shall indemnify after the later of the Time of Distribution 12 59 or the Effective Time Newco and its Subsidiaries against all Indemnified Losses in connection with any Action arising after the Time of Distribution that relates primarily to the Company or the Retained Business after the Time of Distribution ("Post-Distribution Actions"). (c) Each of the Company and Newco shall indemnify, defend and hold harmless the other party in the manner provided in Section 5.3, and each of such other party's affiliates, successors, assigns, officers, directors, employees, agents, advisors and representatives, from and against Indemnified Losses arising out of or resulting from each Action over which such indemnifying party has authority and control pursuant to Section 5.2 hereof. (d) Notwithstanding any other provision of this Agreement to the contrary and except with respect to the Tax Losses (as defined below): (i) Newco will not be liable to the Company and its Subsidiaries for any Indemnified Losses pursuant to Section 5.1(b) except to the extent that the aggregate amount of Indemnified Losses thereunder exceeds $2,500,000; (ii) the total aggregate liability of Newco for all Indemnified Losses that may arise under Section 5.1(b) will not exceed $50,000,000; and (iii) any claims for Indemnified Losses pursuant to Section 5.1(b) can only be made in respect of Pre-Distribution Actions actually filed or commenced on or prior to eighteen months after the Closing Date. Notwithstanding any other provision of this Agreement to the contrary, Newco's liability for Indemnified Losses pursuant to Section 5.1(b) for Taxes ("Tax Losses") shall be without limit in dollar amount (although still subject to Section 5.1(d)(i)) and claims for Tax Losses pursuant hereto may be made at any time. (e) Notwithstanding the foregoing provisions, Newco shall indemnify from and after the Time of Distribution the Company and its Subsidiaries against any Indemnified Loss pursuant to Section 5.1(b) resulting directly from (i) claims by Retained Employees (as defined in Section 5.6 below) under the Retained Welfare Plans (as defined in the Employee Benefits and Compensation Agreement) that were incurred but unpaid prior to the Time of Distribution, but only to the extent such claims exceed (A) the insurance coverage and trust assets available to cover such claims, plus (B) the amounts reserved on the Closing Balance Sheet with respect to such claims; and (ii) any claims by Retained Employees resulting solely from (A) the failure of the Company or Newco to accelerate the exercisability of such Retained Employees' outstanding options under the Company Stock Plans (as defined in the Employee Benefits and Compensation Agreement) or (B) the lapse or cancellation of such options. 5.2 Right to Control Actions. Following the Time of Distribution, (a) upon acknowledgment of its liability for the matter in question, the Company shall have exclusive authority and control over the investigation, prosecution, defense and appeal of all Post-Distribution Actions and all Actions relating primarily to the Company Assumed Liabilities (each, a "Retained Action"), and may settle or compromise, or consent to the entry of any judgment with respect to, any such Action without the consent of Newco, and (b) upon acknowledgment of its liability for the matter in question, Newco shall have exclusive authority 13 60 and control over the investigation, prosecution, defense and appeal of all Pre-Distribution Actions and all Actions relating primarily to the Newco Assumed Liabilities (each, a "Newco Action"), and may settle or compromise, or consent to the entry of any judgment with respect to, any such Action without the consent of the Company; provided that neither the Company nor Newco (nor any of their respective Subsidiaries) may settle or compromise, or consent to the entry of any judgment with respect to, any such Action without the prior written consent of the other party if such settlement, compromise or consent to such judgment (i) includes any form of injunctive relief binding upon such other party or (ii) does not include as an unconditional term thereof the giving by the claimant or plaintiff to such other party which is subject to such Action (and any related party of such other party subject to such Action) of a full and final release from all liability in respect of such claim or litigation. 5.3 Procedure for Third Party Indemnification. (a) If a party entitled to be indemnified hereunder (an "Indemnified Party") shall receive notice of the assertion by a person who is not a party to this Agreement of any claim or of the commencement by any such person of any Action (a "Third Party Claim") with respect to which a party hereto is obligated to provide indemnification (an "Indemnifying Party"), such Indemnified Party shall give such Indemnifying Party prompt notice thereof after becoming aware of such Third Party Claim; provided that the failure of any Indemnitee to give notice as provided in this Section 5.3 shall not relieve the related Indemnifying Party of its obligations under this Article V, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice. Such notice shall describe the Third Party Claim in reasonable detail, and, if practicable, shall indicate the estimated amount of the Indemnified Loss that has been or may be sustained by such Indemnified Party. (b) An Indemnifying Party may elect to defend, at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any Third Party Claim. If an Indemnifying Party elects to defend a Third Party Claim, it shall, within 30 days of notice of such Third Party Claim (or sooner, if the nature of such Third Party Claim so requires), notify the related Indemnified Party of its intent to do so and acknowledge its liability therefor, and such Indemnified Party shall cooperate in the defense of such Third Party Claim. After notice from an Indemnifying Party to an Indemnified Party of its election to assume the defense of a Third Party Claim, such Indemnifying Party shall not be liable to such Indemnified Party under this Article V for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof; provided that if, under applicable standards of professional conduct (as advised by counsel to the Indemnifying Party), a conflict on any significant issue between such Indemnified Party and such Indemnifying Party or between any two or more Indemnified Parties may exist in respect of such claim, then the Indemnifying Party shall pay the reasonable fees and expenses of one such additional counsel as may be required to be retained in light of such conflict. If an Indemnifying Party elects not to defend against a Third Party Claim, or fails to notify an Indemnified Party of its election as provided in this Section 5.3 within the time period 14 61 specified, such Indemnified Party may defend, compromise and settle such Third Party Claim. Notwithstanding the foregoing, (i) neither an Indemnifying Party nor an Indemnified Party, as the party controlling the defense of a Third Party Claim, may compromise or settle any claim or consent to the entry of any judgment for other than monetary damages without the prior written consent of the other; provided that (upon reasonable notice thereof) consent to compromise or settlement or the entry of a judgment shall not be unreasonably withheld or delayed, and (ii) no Indemnifying Party shall consent to the entry of any judgment or enter into any compromise or settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party and all other Indemnified Parties, as the case may be, subject to such Third Party Claim of a full and final release from all liability in respect of such claim or litigation. 5.4 Adjustment for Insurance and Taxes. The amount which either Newco or the Company is required to pay to, for or on behalf of the other pursuant to Section 5.1 and the amount which an Indemnifying Party is required to pay to, for or on behalf of any Indemnified Party pursuant to Section 5.3, shall be adjusted (including, without limitation, retroactively) (i) by any insurance proceeds actually recovered by or on behalf of the Company, Newco or the Indemnified Party, as the case may be, in reduction of the related Indemnified Loss or Third Party Claim and (ii)(A) reduced by the present value of the amount of any Tax savings resulting from any tax benefit to the Company, Newco or the Indemnified Party, as the case may be as a result of the Indemnified Loss or Third Party Claim, and (B) increased by the present value of the amount of any Tax due with respect to the indemnification payment itself. Amounts required to be paid, as so adjusted, are hereafter sometimes called an "Indemnity Payment." If the Company, Newco or the Indemnified Party, as the case may be, shall have received or shall have had paid on its behalf an Indemnity Payment in respect of an Indemnified Loss or Third Party Claim and shall subsequently receive insurance proceeds in respect of such Indemnified Loss or Third Party Claim, or realize any net tax benefit (as computed in clause (ii) above) as a result of such Indemnified Loss or Third Party Claim, then the Company, Newco or the Indemnified Party, as the case may be, shall pay to Newco, the Company or the Indemnifying Party, as the case may be, the amount of such insurance proceeds or net tax benefit, or if lesser, the amount of the Indemnity Payment. 5.5 Mutual Release, Etc. Effective at the Time of Distribution and except as otherwise specifically set forth in this Distribution Agreement, the Company releases and forever discharges Newco, and its officers, directors, agents, affiliates, record and beneficial security holders (including, without limitation, trustees and beneficiaries of trusts holding such securities), advisors and representatives, of and from all debts, demands, actions, causes of action, suits, accounts, covenants, contracts, agreements, damages, and any and all claims, demands and Liabilities whatsoever of every name and nature, both in law and in equity, against Newco or any of its assigns, which the Company or the Company Group has or ever had, which arise out of or relate to events, circumstances or actions prior to the Time of Distribution; 15 62 provided, however, that the foregoing general release shall not apply to this Distribution Agreement or the transactions contemplated hereby and shall not affect the Company's right to enforce this Distribution Agreement, the Merger Agreement, the Tax Disaffiliation Agreement, the Employee Benefits Agreement or any other agreement contemplated hereby in accordance with its terms. Effective at the Time of Distribution and except as otherwise specifically set forth in this Distribution Agreement, Newco releases and forever discharges the Company and its officers, directors, agents, affiliates, record and beneficial security holders (including, without limitation, trustees and beneficiaries of trusts holding such securities), advisors and representatives, of and from all debts, demands, actions, causes of action, suits, accounts, covenants, contracts, agreements, damages, and any and all claims, demands and Liabilities whatsoever of every name and nature, both in law and in equity, against the Company or any of its assigns, which Newco has or ever had, which arise out of or relate to events, circumstances or actions prior to the Time of Distribution; provided, however, that the foregoing general release shall not apply to this Distribution Agreement or the transactions contemplated hereby and shall not affect Newco's right to enforce this Distribution Agreement, the Merger Agreement, the Tax Disaffiliation Agreement, the Employee Benefits Agreement or any other agreement contemplated hereby in accordance with its terms. 5.6 Transfer of Employees. With respect to the past, present, active or inactive employees of the Retained Business, and their dependents and beneficiaries (collectively, the "Retained Employees"), except as specifically provided in this Distribution Agreement, the Company shall retain the liabilities and obligations provided in Article II of the Employee Benefits Agreement. Effective as of the Time of Distribution, the Company and Newco shall cooperate to transfer to the employ of Newco, each person employed by the Company, other than the Retained Employees (such employees and any other persons who become employees of the Newco Group immediately after the Time of Distribution shall be hereinafter referred to as the "Transferred Employees"). With respect to the Transferred Employees and all other past, present, active or inactive employees of the Initial Group (or their beneficiaries), other than the Retained Employees, Newco shall assume the liabilities and obligations provided in Article II of the Employee Benefits Agreement. 5.7 Certain Employee Benefit Plans. Prior to the Time of Distribution, Newco and the Company shall enter into an agreement relating to the parties' responsibilities with respect to certain employee benefit liabilities and obligations in substantially the form attached hereto as Exhibit B (the "Employee Benefits Agreement"). 5.8 Insurance. (a) Prior to the Time of Distribution the Company shall transfer and assign to Newco all of the Company's insurance policies other than (i) subject to Section 5.9, any policy which relates solely to the Retained Business and (ii) any policy that constitutes a Non-Assignable Right. 16 63 (b) In the event that any policy constitutes a Non-Assignable Right, it is the intent of the parties that the Newco Group, to the fullest extent possible, receive benefit of any coverage under any such insurance policy. The Company agrees to keep such policy in effect during the remaining term of the policy and to refrain from taking any actions (other than making a claim) which may affect the Newco Group's entitlement to benefits of, or coverage under, such policy. (c) With respect to policies which are subject to a retrospective premium adjustment, (i) in the event such policies are assigned to the Newco Group pursuant to this Agreement, the Company agrees that it shall reimburse Newco Group for the amount of any premium adjustment resulting from or attributable to the Retained Business and (ii) in the event such policies are not assigned to Newco pursuant to this Agreement, Newco agrees that it shall reimburse the Company for the amount of any premium adjustment resulting from or attributable to the Newco Group. (d) The Company and Newco agree to cooperate with each other with respect to the processing of any claims which are covered by any insurance policy in existence prior to the Time of Distribution. Without limiting the generality of the foregoing, Newco shall have the right to process and pursue any claim for insurance (including negotiating with the company issuing the insurance policy) in connection with any liability of the Newco Group including any Newco Action, regardless of whether the insurance policy under which such claim is made is transferred pursuant to Section 5.8(a), and the Company shall have the right, subject to Section 5.9, to process and pursue any claim for insurance (including negotiating with the company issuing the insurance policy) in connection with any liability of the Company Group including any Retained Action, regardless of whether the insurance policy under which such claim is made is transferred pursuant to Section 5.8(a). 5.9 Defense and Payment of Certain Claims. (a) The Company and Newco undertake and agree that, after the Time of Distribution, and in the name and on behalf of the Company, Newco will (i) conduct, or cause to be conducted, the administration and defense of the Continuing Claims, and (ii) pay or cause to be paid, as may be necessary and appropriate, Continuing Claims Costs. In connection with the foregoing, and independent of the provisions of Section 5.1 hereof, Newco hereby agrees to indemnify and hold the Company and its directors, officers, employees, agents and Affiliates harmless from all liability to third parties asserting Continuing Claims. (b) In consideration for the undertaking and agreement of Newco set forth in this Section 5.9 and the other consideration provided for in this Agreement the Company agrees, that: (i) subject to the obligations of Newco and the Company after the Time of Distribution under this Section 5.9, at all times after the Time of Distribution, Newco will have the sole and exclusive right to conduct, or cause to be conducted, and, whether through insurance 17 64 carriers or otherwise, the administration and defense of all Continuing Claims as provided above; provided, however, that (i) the Company will be entitled to monitor, at its own expense, and with any counsel selected by it, the administration and defense of all material Continuing Claims by Newco and (ii) the Company may, in its sole and absolute discretion, at any time and from time to time in respect of any Continuing Claim, elect to terminate Newco's rights to conduct or cause to be conducted the administration and defense thereof by giving notice in writing to Newco of such election, whereupon such rights by Newco will automatically terminate and Newco will automatically be deemed released from any further liability or obligation under this Section 5.9 in respect of the Continuing Claims as to which the Company has terminated Newco's rights and obligations (a "Discontinued Claim"). Notwithstanding any provision of this Agreement to the contrary, any Liabilities, costs of expenses resulting from or in connection with a Discontinued Claim that are incurred or paid subsequent to Newco's receipt of the Company's election to terminate Newco's rights and obligations with respect thereto will not thereafter be deemed or treated as a Continuing Claims Cost for purposes of this Section 5.9. If the Company terminates Newco's rights with respect to the administration and defense of a Discontinued Claim, Newco will make commercially reasonable efforts to change counsel of record and otherwise fully vest in the Company the full and sole right and power to conduct the administration and defense of such Discontinued Claim; (ii) at all times after the Time of Distribution, the Company will give notice, within 5 business days, to Newco of the assertion or commencement of any Action which would be a Continuing Claim, but no failure to give such notice will relieve Newco from their obligations provided above (except to the extent that Newco has suffered actual prejudice thereby). Further, Newco will have a period of 30 days from the receipt of notice of any Action in which to investigate such Action and to determine whether to execute an acknowledgment of claim; provided, however, in the event that the Company takes any action believed by Newco to be reasonable with respect to such Action before the end of such 30-day period, such action will not relieve Newco from its obligations provided above; and provided, further that the Company has provided Newco with prior written notification of such Action to the extent practicable; (iii) The Company will provide or make available to Newco and its representatives, all records, materials and personnel of the Company reasonably required by Newco or its representatives for use in the conduct of the administration and defense of the Continuing Claims and, further, the Company will cooperate fully with Newco and its representatives in the conduct of the administration and defense of the Continuing Claims; (iv) The Company will maintain all books, records, materials and files of the Company existing as of the Time of Distribution and relating to any of the Continuing Claims for a period of ten years following the Time of Distribution; 18 65 (v) The Company will not take any action that would impair or invalidate the insurance under which any of the Continuing Claims are or may be covered that are in existence at the Time of Distribution. For purposes of this Section 5.9, all references to the representatives of Newco will include the attorneys and insurance carriers of Newco and its Affiliates as well as the personnel of Newco and its Affiliates; and (vi) Newco will retain, and the Company agrees to assign to Newco, any and all insurance claims, insurance receivables and all other benefits (including premium refunds) arising under any and all insurance policies covering the Continuing Claims for which Newco is liable or obligated under this Section 5.9. With respect to the Continuing Claims, the Company will not have any obligation to make a claim under any insurance policy procured by the Company after the Time of Distribution; any such insurance policy will expressly negate or waive any right of subrogation with respect to any contractual rights against Newco or any Affiliate of Newco or any insurance carrier of Newco relating to the Continuing Claims. ARTICLE VI CONDITIONS The obligations of the Company and Newco to consummate the Spin-Off shall be subject to the fulfillment of each of the following conditions: 6.1 Tax Disaffiliation Agreement; Employee Benefits Agreement. The Tax Disaffiliation Agreement and the Employee Benefits Agreement, substantially in the forms of Exhibit A and Exhibit B hereto, respectively, shall have been executed and delivered by each of the Company and Newco. 6.2 Certain Transactions. All of the transactions or obligations contemplated by Section 2.4 and Article IV hereof to be consummated or performed at or prior to the Time of Distribution shall have been successfully consummated or so performed. 6.3 Conditions to Merger Satisfied. Each condition to the closing of the Merger set forth in Article VII of the Merger Agreement, other than the condition to each party's obligations set forth in Section 7.1(f) thereof as to the consummation of the transactions contemplated by this Distribution Agreement, shall have been satisfied or waived. 6.4 Registration Statement. The Registration Statement shall be effective under the Securities Act and shall not be the subject of any stop order or proceeding by the SEC seeking a stop order. 19 66 6.5 Stock Exchange Listing. The shares of Newco Common Stock issuable pursuant to this Agreement shall have been authorized for listing on the New York Stock Exchange, upon official notice of issuance. 6.6. Stockholder Approval. The Spin-Off shall have been approved by the affirmative vote of the holders of at least a majority of the outstanding shares of Company Common Stock. 6.7 Other Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity or other public or private entity the failure of which to obtain would have a material adverse effect on either the Newco Group taken as a whole or the Company Group taken as a whole, shall have been filed, occurred, or been obtained. 6.8 No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Spin-Off shall be in effect (each party agreeing to use all reasonable efforts to have any such order reversed or injunction lifted). 6.9 Letter Ruling or Spin-Off Opinion of Tax Counsel. Either (i) the Company shall have received a letter ruling from the Service or an opinion of Hughes & Luce, L.L.P. satisfactory to the Company and Newco to the effect that the Transfer qualifies as one or more tax-free transactions under one or more of Sections 332, 351, and 368(a)(1)(D) of the Code and that the Spin-Off qualifies as a tax-free distribution under Section 355 of the Code, or (ii) both (A) the Company and Newco shall have received the opinion of Hughes & Luce, L.L.P. to the effect that the Transfer qualifies as one or more tax-free transactions under one or more of Sections 332, 351 and 368(a)(1)(D) of the Code and that the Spin- Off qualifies as a tax-free distribution under Section 355 of the Code, except for certain Taxes identified in such opinion as payable by the Company, Newco and/or either of their Subsidiaries ("Specified Taxes"), and (B) all the Specified Taxes are Taxes that Newco Agrees To Pay. ARTICLE VII ACCESS TO INFORMATION AND SERVICES 7.1 Provision of Corporate Records. Except as provided in the following sentence, at the Time of Distribution, the Company shall deliver to Newco all corporate books and records which are corporate records of the Initial Group which relate primarily to the Newco Group, the assets of the Newco Group or the Newco Assumed Liabilities, including, without limitation, original corporate minute books, stock ledgers and certificates and corporate seals of each 20 67 corporation the capital stock of which is included in the assets of the Newco Group, and all active agreements, active litigation files and government filings. 7.2 Access to Information. From and after the Time of Distribution (i) the Company shall afford to Newco and its authorized accountants, counsel and other designated representatives reasonable access (including, without limitation, using reasonable efforts to give access to persons or firms possessing Information (as defined below)) and duplicating rights during normal business hours to all records, books, contracts, instruments, computer data and other data and information (collectively, "Information") within the Company's possession relating to the Company Group, the assets of the Company Group or the Company Assumed Liabilities, insofar as such access is reasonably required by Newco, and (ii) Newco shall afford to the Company and its authorized accountants, counsel and other designated representatives reasonable access (including, without limitation, using reasonable efforts to give access to persons or firms possessing Information) and duplicating rights during normal business hours to all Information within Newco's possession relating to the Newco Group, the assets of the Newco Group or the Newco Assumed Liabilities, insofar as such access is reasonably required by the Company. Information may be requested under this Section 7.2 for, without limitation, audit, accounting, claims, litigation and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations. 7.3 Production of Witnesses. From and after the Time of Distribution, each party shall use reasonable efforts to make available to the other party, upon written request, its officers, directors, employees and agents as witnesses to the extent that any such person may reasonably be required in connection with any legal, administrative or other proceedings in which the requesting party may from time to time be involved. 7.4 Retention of Records. Except as otherwise required by law or agreed to in writing, Newco and the Company shall each retain, for a period of at least seven years following the Time of Distribution, all significant Information relating to (i) in the case of Newco, the Company Group and (ii) in the case of the Company, the Newco Group. Notwithstanding the foregoing, either Newco or the Company may destroy or otherwise dispose of any of such Information at any time, provided that, prior to such destruction or disposal (a) Newco or the Company, as the case may be, shall provide no less than 90 or more than 120 days' prior written notice to the other party, specifying the Information proposed to be destroyed or disposed of and (b) if the other party shall request in writing prior to the scheduled date for such destruction or disposal that any of the Information proposed to be destroyed or disposed of be delivered to the other party, Newco or the Company, as the case may be, shall promptly arrange for the delivery of such of the Information as was requested, at the expense of the requesting party. 7.5 Confidentiality. Each party shall hold, and shall cause its officers, employees, agents, consultants and advisors to hold, in strict confidence, unless compelled to disclose by 21 68 judicial or administrative process or by other requirements of law or in order to comply with the terms of a binding stock exchange listing application or agreement or applicable stock exchange rules, all non-public Information concerning the other party furnished it by such other party or its representatives or otherwise in its possession (except to the extent that such Information can be shown to have been (a) available to such party on a nonconfidential basis prior to its disclosure by the other party, (b) in the public domain through no fault of such party or (c) later lawfully acquired from other sources by the party to which it was furnished), and each party shall not release or disclose such Information to any other person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors who have a need to know such Information and who agree to be bound by the provisions of this Section 7.5. ARTICLE VIII MISCELLANEOUS AND GENERAL 8.1 Modification or Amendment. The parties hereto may modify or amend this Distribution Agreement by written agreement executed and delivered by authorized officers of the respective parties. 8.2 Counterparts. For the convenience of the parties hereto, this Distribution Agreement may be executed in separate counterparts, each such counterpart being deemed to be an original instrument, and which counterparts shall together constitute the same agreement. 8.3 Governing Law. This Distribution Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to its conflicts of law principles. 8.4 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered by facsimile (upon confirmation of receipt) or personally, (ii) on the first business day following the date of dispatch if delivered by Federal Express or other reputable next-day courier service or (iii) on the third business day following the date of mailing if delivered by registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice. 22 69 If to the Company: c/o The E. W. Scripps Company 312 Walnut Street, 28th Floor Cincinnati, Ohio 45202 Attention: M. Denise Kuprionis, Secretary Telecopy: Confirmation: with a copy to: Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114 Attention: Telecopy: Confirmation: If to Newco: c/o [Newco] 200 Concord Plaza Drive San Antonio, Texas 78216 Attn: Donald R. Crews Telecopy: 210/829-9403 Confirmation: 210-829-9135 with a copy to: Hughes & Luce, L.L.P. 1717 Main Street; Suite 2800 Dallas, Texas 75201 Attn: Alan J. Bogdanow Telecopy: 214/939-6100 Confirmation: 214/939-5588 8.5 Captions. All Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Distribution Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 23 70 8.6 Assignment. Nothing contained in this Distribution Agreement or the agreements referred to herein (except as otherwise expressly set forth therein) is intended to confer on any person or entity other than the parties hereto and their respective successors and permitted assigns any benefit, rights or remedies under or by reason of this Distribution Agreement and such other agreements, except that the provisions of Sections 5.1 and 5.2 hereof shall inure to the benefit of the persons referred to therein. 8.7 Further Assurances. Subject to the terms and conditions hereof and, as applicable, of the Merger Agreement, Newco and the Company will, and will cause their respective Subsidiaries to, do such additional things as are necessary or proper to carry out and effectuate the intent of this Distribution Agreement or any part hereof or the transactions contemplated hereby. 8.8 Attorney-Client Privilege; Work Product. Anything herein or in the Merger Agreement notwithstanding, the transactions contemplated hereby and by the Merger Agreement shall not be deemed to transfer to or vest in the Company Group (or the surviving corporation in the Merger) any right to waive, nor shall they be deemed to waive, any attorney-client privilege between the Newco Group and its legal counsel, with respect to legal advice concerning the business or operations of the Newco Group including, without limitation, the Newco Liabilities or the transactions contemplated hereby and by the Merger Agreement, in either case, concerning privileged communications (or work product related thereto) at any time prior to the Closing Date (as defined in the Merger Agreement). The Company (and the surviving corporation in the Merger) shall assign to Newco the Company's rights (if any) to any attorney-client privilege with respect to legal advice concerning the business or operations of the Newco Group including, without limitation, the Newco Liabilities or the transactions contemplated hereby and by the Merger Agreement concerning privileged communications (or work product related thereto) at any time prior to the Closing Date. The Company Group (and the surviving corporation in the Merger) and their successors and assigns shall not be entitled to waive or have access, nor shall they attempt to waive or seek access, to any privileged communications (or work product related thereto) between the Newco Group and its legal counsel with respect to legal advice concerning the business or operations of the Newco Group, including the Newco Liabilities or the transactions contemplated hereby. 8.9 No Third-Party Beneficiaries. Except as provided in Section 5.1 hereof, this Agreement, including the Tax Disaffiliation Agreement and the Employee Benefits Agreement, are not intended to confer upon any person other than the parties hereto and thereto any rights or remedies hereunder or thereunder 24 71 8.10 Conflict with Other Agreements. In the event of any conflict between this Agreement and the Tax Disaffiliation Agreement or the Employee Benefits Agreement, the Tax Disaffiliation Agreement or the Employee Benefits Agreement, as the case may be, shall control. IN WITNESS WHEREOF, this Distribution Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first hereinabove written. HARTE-HANKS COMMUNICATIONS, INC. By: ------------------------------------ Name: Title: [NEWCO] By: ------------------------------------ Name: Title: 25 72 Exhibit A to the Distribution Agreement TAX DISAFFILIATION AGREEMENT TAX DISAFFILIATION AGREEMENT dated as of [ ], 199[ ] by and between HARTE-HANKS COMMUNICATIONS, INC., a Delaware corporation (the "Company"), NEWCO, a Delaware corporation and a wholly owned subsidiary of the Company ("Newco"), and THE E.W. SCRIPPS COMPANY, an Ohio corporation ("Buyer"). RECITALS A. Company is the common parent of an affiliated group of corporations (the "Company Group") within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the members of the affiliated group have heretofore joined in filing consolidated Federal income tax returns. B. Company expects, pursuant to the Agreement and Plan of Distribution dated as of [ ], 199[ ] (the "Distribution Agreement") by and between Company and Newco, to spin-off its interest in certain assets to its shareholders. In furtherance of this decision, among other things (and as more fully set forth in the Distribution Agreement) (i) Company intends to transfer the stock of certain subsidiaries and certain of its assets to Newco as set forth in Article IV of the Distribution Agreement (together with all other intercompany transfers of assets, and other actions described in such Article IV, the "Transfer") and (ii) Company intends to distribute on the Distribution Date (as hereinafter defined) pro rata to the holders of its Common Stock all of the outstanding shares of the Common Stock of Newco (the "Distribution"). C. Immediately after the Distribution, the Company will merge with and into Buyer with Buyer surviving (the "Merger"), as contemplated by the Agreement and Plan of Merger and Reorganization dated as of May _____, 1997 (the "Merger Agreement") by and among Company and Buyer, in connection with which the holders of the Common Stock of Company will receive Common Stock of Buyer. D. Company and Buyer intend the Merger to be a tax-free reorganization under Section 368 (a)(1)(A) of the Code. E. Company and Newco intend the Distribution to be a tax-free transaction to which Section 355(a) of the Code applies, after which neither Newco nor any of its Subsidiaries (as hereinafter defined) will be a member of the Company affiliated group for Federal income tax purposes. F. Company and Newco desire on behalf of themselves, their subsidiaries and their successors to set forth their rights and obligations with respect to Taxes (as hereinafter defined) due for periods before and after the Distribution. NOW, THEREFORE, the parties hereto agree as follows: 1 73 ARTICLE I DEFINITIONS For the purposes of this Agreement, 1.1 "Buyer" shall have the meaning set forth on page 1 of this Agreement. 1.2 "Code" shall have the meaning set forth on page 1 of this Agreement. 1.3 "Company" shall have the meaning set forth on page 1 of this Agreement. 1.4 "Company Group" shall have the meaning set forth on page 1 of this Agreement. 1.5 "Disqualifying Disposition" shall mean a disposition (as defined in Section 424(c) of the Code) by any person of (i) Incentive Stock after the Distribution Date and during the period described in Section 422(a)(1) of the Code, or (ii) Stock Purchase Plan Stock after the Distribution Date and during the period described in Section 423(a)(1) of the Code. 1.6 "Distribution" shall have the meaning set forth on page 1 of this Agreement. 1.7 "Distribution Agreement" shall have the meaning set forth on page 1 of this Agreement. 1.8 "Distribution Date" shall mean the last day on which, due to the distribution of the shares of Newco Common Stock to the holders of the Common Stock of Company, Newco could be considered a member of the affiliated group of which Company is the common parent. 1.9 "Final Determination" shall mean with respect to any issue (1) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final and not subject to further appeal, (2) a closing agreement entered into under Section 7121 of the Code or any other binding settlement agreement (whether or not with the Internal Revenue Service) entered into in connection with or in contemplation of an administrative or judicial proceeding, or (3) the completion of the highest level of administrative proceedings if a judicial contest is not or is no longer available. 1.10 "Incentive Stock" shall mean any Company stock that was received as a result of the exercise of an incentive stock option on or before the Distribution Date, and any Newco stock or Buyer stock received as a result of owning such Company stock. 1.11 "Indemnitee" shall have the meaning set forth in Section 4.2. 1.12 "Indemnitor" shall have the meaning set forth in Section 4.2. 2 74 1.13 "Merger" shall have the meaning set forth on page 1 of this Agreement. 1.14 "Merger Agreement" shall have the meaning set forth on page 1 of this Agreement. 1.15 "Newco" shall have the meaning set forth on page 1 of this Agreement. 1.16 "Newco Group" shall mean, for any period, Newco and its Subsidiaries. 1.17 "Payor" shall have the meaning set forth in Section 2.5. 1.18 "Payee" shall have the meaning set forth in Section 2.5. 1.19 "Period After Distribution" shall mean any taxable year or other taxable period beginning after the Distribution Date and, in the case of any taxable year or other taxable period that begins before and ends after the Distribution Date, that part of the taxable year or other taxable period that begins after the close of the Distribution Date. 1.20 "Period Before Distribution" shall mean any taxable year or other taxable period that ends on or before the Distribution Date and, in the case of any taxable year or other taxable period that begins before and ends after the Distribution Date, that part of the taxable year or other taxable period through the close of the Distribution Date. 1.21 "Retained Group" shall mean, for any period, Company and its Subsidiaries. 1.22 "Stock Purchase Plan Stock" shall mean any Company stock that was received in connection with an employee stock purchase plan (within the meaning of Section 423 of the Code) on or before the Distribution Date, and any Newco stock or Buyer stock received as a result of owning such Company stock. 1.23 "Subsidiary" of an entity (the "first entity") shall mean a current or former corporation, partnership, joint venture or other business entity (the "second entity") where 50% or more of the outstanding equity or voting power of such second entity is owned directly or indirectly by the first entity. In determining whether a Subsidiary is a Subsidiary of Newco or Company for any period, Newco shall not be considered a Subsidiary of Company, and any Subsidiary of Newco shall be considered a Subsidiary of Newco, not Company, for such period. Notwithstanding the foregoing, any corporation whose shares are transferred pursuant to Article IV of the Distribution Agreement, or that is a Subsidiary of such corporation, shall be considered a Subsidiary of the corporation to which its shares are transferred for all periods. 1.24 "Taxes" means all taxes, charges, fees, levies, imposts, duties or other assessments, including, without limitation, income, gross receipts, estimated taxes, excise, personal property, real property, sales, ad valorem, value- added, leasing, withholding, social security, workers' compensation, unemployment insurance, occupation, use, service, service use, 3 75 license, stamp, payroll, employment, windfall profit, environmental, alternative or add-on minimum tax, franchise, transfer and recording taxes, fees and charges, imposed by the United States or any state, local, or foreign governmental authority whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable or imposed on or with respect to any such taxes, charges, fees, levies, imposts, duties or other assessments. 1.25 "Tax Benefit" shall mean for any taxable period the excess of (i) the hypothetical Tax liability of the taxpayer for the taxable period calculated as if a Disqualifying Disposition had not occurred but with all other facts unchanged, over (ii) the actual Tax liability of the taxpayer for the taxable period, calculated taking into account the Disqualifying Disposition (treating a Tax Refund as a negative Tax liability for purposes of such calculation). 1.26 "Tax Refund" shall mean a refund of Taxes (including a reduction in Taxes as a result of any credit or any offset against Taxes) reduced (but not below zero) by any net increase in Taxes by the recipient (or its affiliate) thereof as a result of the receipt thereof. 1.27 "Tax Returns" shall mean all returns, reports or other documents or information to be filed or that may be filed for any period with any Taxing authority (whether domestic or foreign) in connection with any Tax or Taxes (whether domestic or foreign). 1.28 "Transfer" shall have the meaning set forth on page 1 of this Agreement. 1.29 "Underpayment Rate" shall mean the rate specified under Section 6621(a)(2) of the Code. ARTICLE II TAX RETURNS, TAX PAYMENTS AND EVENT OF LOSS 2.1 Obligation to File Tax Returns. Newco shall timely file (or cause to be filed) all Tax Returns that (a) are filed on a consolidated, combined or unitary basis, (b) include Newco or any of its Subsidiaries and Company or any of its Subsidiaries, and (c) are required to be filed (i) for any Period Before Distribution or (ii) for any taxable year or period of the Company that begins before and ends after the Distribution Date, provided, however, that the Company shall prepare in accordance with past practice of the Company and deliver to Newco (or cause to be prepared and delivered to Newco) 45 days prior to the due dates of such Tax Returns pro forma Tax Returns with respect to members of the Retained Group. Newco shall have sole discretion to take or not take a position in and with respect to any filed Tax Return which Newco is required to file or cause to be filed hereunder; provided, however, that all such Tax Returns shall be consistent with the position that the Transfer is one or more tax-free transactions under one or more Section 332, 351 or 368(a) of the Code, the Distribution is a tax-free transaction under Section 355 of the Code, and the Merger is a tax-free reorganization under Section 368(a)(1)(A) of the Code, except for Taxes resulting from the Transfer or the Distribution that Newco has Agreed To Pay (as defined in Section 6.11(a) of the Merger Agreement). Company shall timely 4 76 file (or cause to be filed) any other Tax Return with respect to the Retained Group, and Newco shall timely file (or cause to be filed) any other Tax Return with respect to the Newco Group. Each such Tax Return shall be consistent with the position that the Distribution is a tax-free transaction under Section 355 of the Code and the Merger is a tax-free reorganization under Section 368(a)(1)(A) of the Code, except for Taxes resulting from the Transfer or the Distribution that Newco has Agreed To Pay (as defined in Section 6.11(a) of the Merger Agreement). 2.2 Obligation to Remit Taxes. Company and Newco shall each remit or cause to be remitted any Taxes due in respect of any Tax for which it is required to file a Tax Return and shall be entitled to reimbursement for such payments only to the extent provided in Article II. 2.3 Certain Tax Sharing Obligations and Prior Agreements. (a) Except as provided in Section 2.3(b) hereof, Newco shall be liable for and shall hold the Retained Group harmless on an after tax basis against (i) any liability attributable to any member of the Retained Group for Taxes attributable to a Period Before Distribution, including any such Tax liability asserted against any member of the Retained Group under the provisions of Treas. Reg. 1.1502-6(a) that impose several liability on members of an affiliated group of corporations that files consolidated returns, or similar provisions of any foreign, state or local law, (ii) any liability attributable to any member of the Retained Group for Taxes resulting from the Distribution or the Merger, and (iii) any liability attributable to any member of the Newco Group for Taxes, regardless of whether attributable to a Period Before Distribution or a Period After Distribution, including any liability asserted against any member of the Newco Group under the provisions of Treas. Reg. 1.1502-6(a) that impose several liability on members of an affiliated group of corporations that files consolidated returns, or similar provisions of any foreign, state or local law. Newco shall be entitled to any Tax Refund which is attributable to both an entity and a taxable year or taxable period for which Newco has liability hereunder. (b) Company shall be liable for and Company and Buyer shall hold the Newco Group harmless on an after tax basis against (i) any liability attributable to any member of the Retained Group for Taxes attributable to a Period After Distribution and (ii) notwithstanding anything to the contrary herein, any Tax liability attributable to any member of the Newco Group or the Company Group (including, without limitation, any such liability resulting from the Transfer, the Distribution or the Merger) arising out of or resulting directly or indirectly from the breach of any of the representations, warranties or covenants of Buyer set forth in the Merger Agreement, the Distribution Agreement, or this Agreement. Company shall be entitled to any Tax Refund which is attributable to both an entity and a taxable year or taxable period for which Company has liability hereunder. (c) Each party agrees to report the Transfer as one or more tax-free transactions under one or more of Section 332, 351 or 368(a) of the Code, the Distribution as a tax-free distribution under Section 355 of the Code and the Merger as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code on all Tax Returns and other filings, and take no position inconsistent therewith, except for Taxes resulting from the Transfer or the Distribution that 5 77 Newco has Agreed To Pay (as defined in Section 6.11(a) of the Merger Agreement). Buyer and Newco shall not, and shall not permit any of its Subsidiaries to, take or cause or permit to be taken, any action that would disqualify the Distribution as a tax-free distribution under Section 355 of the Code, disqualify the Transfer as a tax-free transaction under Section 332, 351 or 368(a) of the Code, or disqualify the Merger as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, except for actions resulting in, or consistent with, Taxes Newco has Agreed To Pay (as defined in Section 6.11(a) of the Merger Agreement). (d) Except as set forth in this Section 2.3 and in consideration of the mutual indemnities and other obligations of this Agreement, any and all existing tax sharing agreements and prior practices regarding Taxes and their payment, allocation, or sharing between any member of the Retained Group and any member of the Newco Group shall be terminated with respect to the Newco Group as of the Distribution Date. (e) Buyer's Market Repurchase Program will continue in effect after the Effective Time and Buyer intends to continue to purchase Buyer Common Stock from time to time in the public market; however, Buyer represents and warrants to Newco that it has no plan or intention to reacquire more than fifty percent (50%) of the specific shares of Buyer Common Stock to be issued in the Merger to the Company's stockholders and that it will not enter into any agreement or understanding for the direct or indirect purchase of the specific shares of Buyer Common Stock to be issued in the Merger to the Company's stockholders. 2.4 Period that includes the Distribution Date. (a) To the extent permitted by law or administrative practice, the taxable year of the Company Group shall be treated as closing at the close of business on the Distribution Date. The parties agree that the taxable year of the Company Group will close for federal income tax purposes at that time, and further agree that one of the Tax Returns to be filed by Newco pursuant to Section 2.1 of this Agreement is the consolidated federal income Tax Return of the Company Group for the tax year beginning January 1, 1997 and ending at the close of business on the Distribution Date, that such tax year is a Period Before Distribution under this Agreement, and that such Tax Return properly does, and will, include all transactions occurring through and including the Distribution Date, including the Transfer, the Distribution and the Merger. (b) If it is necessary for purposes of this Agreement to determine the income tax liability of any member of the Newco Group or of the Retained Group for a taxable year that begins on or before and ends after the Distribution Date and is not treated under Section 2.4(a) as closing at the close of the Distribution Date, the determination shall be made by assuming that such member of the Newco Group or of the Retained Group had a taxable year that ended at the close of the Distribution Date, except that exemptions, allowances or deductions that are calculated on an annual basis shall be apportioned on a per diem basis. 2.5 Payments. To the extent that a party owes money (the "Payor") to another party (the "Payee") pursuant to this Article II, the Payor shall pay the Payee, no later than 15 days prior to the due date of the relevant Tax Return or estimated Tax Return or 15 days after the Payor 6 78 receives the Payee's calculations, whichever occurs last, the amount for which the Payor is required to indemnify the Payee under this Article II. The payee shall submit the Payee's calculations of the amount required to be paid pursuant to this Article II, showing such calculations in sufficient detail so as to permit the Payor to understand the calculations. The Payor shall have the right to disagree with such calculations. Any dispute regarding such calculations shall be resolved in accordance with Article VII of this Agreement. 2.6 Interest. Any payment required by this Agreement which is not made on or before the date provided hereunder shall bear interest after such date at the Underpayment Rate. 2.7 Tax Refund Claims. Newco shall be permitted to file at Newco's sole expense, and the Company and its Subsidiaries shall reasonably cooperate (including signing any Company Tax Return that Newco prepares and executing and delivering powers of attorney in favor of persons designated by Newco) with Newco in connection with, any claims for a Tax Refund to which Newco is entitled pursuant to this Article II or any other provision of this Agreement. Newco shall reimburse the Company for any reasonable out-of-pocket costs and expenses incurred by any member of the Company Group in connection with such cooperation. The Company shall be permitted to file at the Company's sole expense, and Newco shall reasonably cooperate (including signing any Newco Tax Return that the Company prepares and executing and delivering powers of attorney in favor of persons designated by the Company) with the Company in connection with, any claims for a Tax Refund to which the Company is entitled pursuant to this Article II or any other provision of this Agreement. The Company shall reimburse Newco for any reasonable out-of-pocket costs and expenses incurred by any member of the Newco Group in connection with such cooperation. 2.8 Disqualifying Dispositions. (a) In the event that the Company claims a post-Distribution Date Tax deduction in respect of a Disqualifying Disposition, the Company shall pay to Newco the amount of any Tax Benefit received by the Buyer or the Company as a result of such deduction. Any such payment to be made by the Company shall be due ten (10) days after the later of (i) the expiration of the federal income tax statute of limitations for assessing Tax deficiencies against the Company for the tax year in which such deduction is claimed, or (ii) the date of the Final Determination or dispute regarding the Company's or Scripps' Tax liability with respect to such tax year if the dispute involves deductions for Disqualifying Dispositions. (b) Buyer agrees to claim, or to cause the Company to claim, post-Distribution Date Tax deductions in respect of Disqualifying Dispositions if there is a reasonable basis for such deductions. ARTICLE III CARRYBACKS 7 79 Without the prior consent of Newco, no member of the Retained Group shall carry back any net operating loss from a Period After Distribution to a Period Before Distribution. In addition, no member of the Retained Group shall carry back any other Tax attribute from a Period After Distribution to a Period Before Distribution without the consent of Newco, which consent shall not be withheld unless such carryback shall cause material detriment or damage to Newco. ARTICLE IV TAX AUDITS 4.1 General. Except as provided in Section 4.2, each of Newco and Company shall have sole responsibility for all audits or other proceedings with respect to Tax Returns that it is required to file under Section 2.1. 4.2 Indemnified Claims. Company or Newco shall promptly notify the other in writing of any proposed adjustment to a Tax Return that may result in liability, or entitlement to refund, of the other party (the "Indemnitor") under this Agreement. The Indemnitor shall have the sole right to contest the proposed adjustment and to employ counsel of its choice at its expense. The Indemnitor shall provide the other party (the "Indemnitee") with information concerning the proposed adjustments and shall permit the Indemnitee to participate in the proceeding at the Indemnitee's expense. 4.3 Payment of Audit Assessments. The obligation for payment or entitlement to refund of the Indemnitor shall be limited to the net increase or net decrease in tax liability resulting (for all past and future periods) from a change in tax treatment required by a Final Determination. The obligation or entitlement of the Indemnitor shall be adjusted to reflect the present value of the increase and/or decrease in future tax liabilities of the Indemnitee resulting from the change in tax treatment using, with respect to tax periods prior to the date of such Final Determination, the highest marginal tax rate of the applicable taxing jurisdiction known to be applicable to the entities, tax periods and items involved, and with respect to tax periods thereafter, using the highest marginal tax rate of the applicable taxing jurisdiction in effect as of the date of such Final Determination with respect to the entities and items involved, and using a discount rate equal to the Underpayment Rate in effect as of the date of such Final Determination. ARTICLE V COOPERATION Company and Newco shall (and shall cause the members of the Company Group and the Newco Group, as the case may be to) cooperate with each other in the filing of any Tax Returns and the conduct of any audit or other proceeding and each shall execute and deliver such powers of attorney and make available such other documents and employees as are necessary to carry out the intent of this Agreement. Each party agrees to notify the other party of any audit adjustments 8 80 which do not result in Tax liability but can be reasonably expected to affect Tax Returns of the other party, or any of its Subsidiaries, for a Period After Distribution. Each party agrees to treat the Distribution for all income tax purposes as a tax-free spin-off pursuant to Section 355(a) of the Code, except for Taxes resulting from the Distribution that Newco has Agreed to Pay, unless and until there has been a Final Determination that the Distribution is not a tax- free spin-off under Section 355(a) of the Code. ARTICLE VI RETENTION OF RECORDS; ACCESS The Retained Group and the Newco Group shall (a) until the expiration of the relevant statute of limitations, retain records, documents, accounting data and other information (including computer data) necessary for the preparation and filing of all Tax Returns in respect of Taxes of the retained Group or the Newco Group or for the audit of such Tax Returns; and (b) give to the other party reasonable access to such records, documents, accounting data and other information (including computer data) and to its personnel (insuring their cooperation) and premises, for the purpose of the review or audit of such returns to the extent relevant to an obligation or liability of a party under this Agreement. Within thirty days following the filing of each of the Company's final consolidated or combined Tax Returns for Periods Before Distribution, Newco shall furnish Buyer with (i) copies of the relevant portion of such Tax Returns that relate to the Retained Group and (ii) information concerning (a) the tax basis of the assets of the Retained Group as of the Distribution Date, (b) the earnings and profits of each member of the Retained Group as of the Distribution Date, (c) the Company's tax basis in its subsidiaries as of the Closing Date, (d) the net operating loss carryover, investment tax credit carryover, alternative minimum tax carryover and capital loss carryover, if any, available to Buyer and the Retained Group as of the Closing Date and (e) all elections with respect to Taxes in effect for the Retained Group. Prior to destroying any records, documents, data or other information in accordance with this Article, the party wishing to destroy such items will give the other party a reasonable opportunity to obtain such items (at such other party's expense). ARTICLE VII DISPUTES If the parties disagree as to the calculation of any Tax or the amount of (but not liability for) any payment to be made under this Agreement, the parties shall cooperate in good faith to resolve any such dispute, and any agreed-upon amount shall be paid to the appropriate party. If the parties are unable to resolve any such dispute within 15 days thereafter, such dispute shall be resolved by a nationally recognized accounting firm acceptable to both company and Newco. The decision of such firm shall be final and binding. The fees and expenses incurred in connection with such decision shall be borne equally by Company and Newco. Following the decision of such accounting firm, the parties shall each take (or cause to be taken) any action that is necessary or appropriate to implement such decision, including, without limitation, the prompt payment of underpayments or overpayments, with interest calculated on such overpayments and 9 81 underpayments at the Underpayment Rate from the date such payment was due (the due date of payments governed by Section 2.5 of this Agreement shall be the date a payment is due thereunder assuming the party does not dispute the amount owed) through the date such underpayment or overpayment is paid or refunded. ARTICLE VII TERMINATION OF LIABILITIES Notwithstanding any other provision in this Agreement, any liabilities determined under this Agreement shall not terminate any earlier than the expiration of the applicable statute of limitation for such liability. All other representations, warranties and covenants under this Agreement shall survive indefinitely. ARTICLE IX MISCELLANEOUS PROVISIONS 9.1 Notices and Governing Law. All notices required or permitted to be given pursuant to this Agreement shall be given, and the applicable law governing the interpretation of this Agreement shall be determined, by the applicable provisions of the Distribution Agreement. 9.2 Treatment of Payments. The parties hereto shall treat any payments made pursuant to the terms of this Agreement as a capital transaction for all tax purposes, except to the extent such payments represent interest paid pursuant to Section 2.6 9.3 Binding Effect; No Assignment; Third Party Beneficiaries. This Agreement shall be binding on, and shall inure to the benefit of, the parties and their respective successors and assigns, including Buyer. Company and Newco hereby guarantee the performance of all actions, agreements and obligations provided for under this Agreement of each member of the Retained Group and the Newco Group, respectively. Company and Newco shall, upon the written request of the other, cause any of their respective Subsidiaries to execute this Agreement. Company or Newco shall not assign any of its rights or delegate any of its duties under this Agreement without the prior written consent of the other party. No person (including, without limitation, any employee of a party or any stockholder of a party) shall be, or shall be deemed to be, a third party beneficiary of this Agreement. 9.4 Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties concerning the subject matter hereof and supersedes all prior agreements, whether or not written, concerning such subject matter. This Agreement may not be amended except by an agreement in writing, signed by the parties. 9.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which shall constitute together the same document. 10 82 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. HARTE-HANKS COMMUNICATIONS, INC. By: ------------------------------- Name: Title: [NEWCO] By: ------------------------------- Name: Title: THE E. W. SCRIPPS COMPANY By: ------------------------------- Name: Title: 11 83 Exhibit B to the Distribution Agreement EMPLOYEE BENEFITS AND COMPENSATION AGREEMENT BETWEEN HARTE-HANKS COMMUNICATIONS, INC. AND [NEWCO] DATED _____________, 1997 84 EMPLOYEE BENEFITS AND COMPENSATION AGREEMENT This Agreement dated as of ______________, 1997 between Harte-Hanks Communications, Inc., (the "Company"), a Delaware corporation with offices at San Antonio, Texas and [Newco] ("Newco"), a Delaware corporation with offices at San Antonio, Texas governs the rights and obligations of the Company and Newco with respect to compensation and benefits of the employees, former employees, and their respective dependents, of each of the Company and Newco in connection with the transaction effected by the Distribution, as described below. The term, the Company, when used in this Agreement shall not be construed to include Newco where such construction would have the effect of negating any obligation of Newco hereunder. The term, Newco, when used shall not be construed to include the Company where such construction would have the effect of negating any obligation of the Company hereunder. RECITALS WHEREAS, the Company, The E.W. Scripps Company, an Ohio corporation ("Buyer") and E.W.S. Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Buyer ("Sub"), have entered into an Agreement and Plan of Merger and Reorganization, dated as of ______________, 1997 (the "Merger Agreement"), providing for the Merger (as defined in the Merger Agreement) of Sub with and into the Company with the Company as the surviving corporation; and WHEREAS, pursuant to the terms of that certain Agreement and Plan of Distribution dated as of _________, 1997 (the "Distribution Agreement"), including the satisfaction or waiver of the conditions set forth in Article VI of the Distribution Agreement, immediately prior to the Effective Time (as defined in Section 1.2 of the Merger Agreement), the Board of Directors expects to distribute all of the then-outstanding shares of Common Stock, par value $___ per share, of Newco ("Newco Common Stock") as a dividend to the holders of Common Stock, par value $1.00 per share, of the Company ("Company Common Stock"), on a pro rata basis (the "Spin-off"); and WHEREAS, the purpose of the Spin-off is to make possible the Merger by divesting the Company of the businesses and operations conducted or to be conducted by Newco, which Buyer is unwilling to acquire; and WHEREAS, the Distribution Agreement sets forth or provides for certain agreements between the Company and Newco in consideration of the separation of their ownership, including this Employee Benefits and Compensation Agreement. NOW, THEREFORE, in consideration of the premises and the mutual promises contained in this Agreement, the Distribution Agreement and in the other agreements and instruments provided for in such agreement, the parties hereto agree as follows: B-2 85 ARTICLE I DEFINITIONS "Company Stock Plans" means the Company's 1984 and 1991 Stock Option Plans, the Company's 1994 Employee Stock Purchase Plan, and the outstanding stock options originally issued by DiMark, Inc. and previously assumed by the Company. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Retained Welfare Plans" means the benefit plans, contracts, agreements and arrangements listed on Schedule "A" hereto. "Retained Employees" has the meaning given in Section 5.6 of the Distribution Agreement. "Transferred Employee" means each person currently employed by the Company or its subsidiaries in the Newco Business. "Transferred Welfare Plans" means the benefit plans, contracts, agreements and arrangements listed on Schedule "B" hereto. Any capitalized terms not otherwise defined herein, shall have the meaning set forth in the Distribution Agreement or the Merger Agreement. ARTICLE II SALARY, WAGES, PAYROLL AND RELATED BENEFITS 2.1 Prior to the Time of Distribution, the Company and Newco shall cooperate to transfer each Transferred Employee to the employ of Newco effective as of the Time of Distribution. 2.2 With respect to the Transferred Employees and any former employees of the Newco Business, and any of their dependents or beneficiaries, Newco shall assume any liabilities and obligations with respect to (or with respect to insured benefits, shall assume any responsibility of the employer or plan sponsor with respect to the insurance arrangement), and continue to be responsible for, any liabilities and obligations in respect of salary, wages, bonuses, benefits, severance pay, salary continuation, COBRA continuation, unpaid and unused vacation benefits accrued and earned prior to the Time of Distribution, other terms and conditions of employment, and similar obligations relating to the continued employment, or the termination or alleged termination of such Transferred Employees' or such former employees' employment with the B-3 86 Newco Group or Newco Business, including, without limitation, by reason of consummation of the transactions contemplated in the Distribution Agreement or the Merger Agreement or otherwise, and neither the Company nor any member of the Company Group shall assume such liability. 2.3 With respect to Retained Employees, except as specifically provided in this Agreement and in Section 6.6 of the Merger Agreement, the Company shall retain any liabilities and obligations with respect to, (or with respect to insured benefits, shall assume any responsibility of the employer or plan sponsor with respect to the insurance arrangement) and continue to be responsible for, any liabilities and obligations whatsoever in connection with claims made by or on behalf of such persons in respect of salary, wages, bonuses, benefits, severance pay, salary continuation, COBRA continuation, unpaid and unused vacation benefits accrued and earned prior to the Time of Distribution, other terms and conditions of employment, and similar obligations relating to the continued employment and the termination or alleged termination of such persons' employment with the Company Group by reason of the consummation of the transactions contemplated in the Distribution Agreement or the Merger Agreement or otherwise, and neither Newco nor any member of the Newco Group shall assume such liability. Notwithstanding anything to the contrary in the foregoing, with respect to Retained Employees who as of the Time of Distribution are former employees of the Retained Business, or are not actively at work, the Company shall retain liability only for (1) any leave entitlements, reemployment obligations, reinstatement rights, or related rights, under applicable law, including, without limitation, the Family and Medical Leave Act of 1993, the Uniformed Services Employment and Reemployment Rights Act of 1994, workers' compensation laws, or similar laws, and (2) any rights, benefits or entitlements under the Retained Welfare Plans, including, without limitation, health care continuation pursuant to Part 6 of Title I of ERISA. 2.4 Notwithstanding anything to the contrary herein, nothing in this Agreement shall be construed as a guarantee of employment or modification of employment at will by Newco or the Company. Except as expressly provided otherwise herein, nothing in this Agreement shall prevent Newco or the Company from amending or terminating any benefit plans at any time, or from modifying terms and conditions of employment at any time. ARTICLE III COMPANY STOCK PLANS 3.1 Prior to the Time of the Distribution, the Company and Newco shall (i) cooperate to amend the Company Stock Plans as may be necessary to provide for the assumption of such plans by Newco to the extent set forth in Sections 3.2 and 3.4 below, and (ii) take such other steps (consistent with applicable law and the terms of such affected plans) as may be necessary to prevent the consummation of the transactions contemplated by this Agreement, the Distribution Agreement and Merger Agreement (including the transfer of employment of any Transferred Employee) from causing, resulting in or being treated as a termination of employment or a change of control with respect to Transferred Employees who are participants in the Company Stock Plans. B-4 87 3.2 Effective as of the Time of Distribution, (i) Newco shall assume the Company Stock Plans with respect to the participants in such plans who are Transferred Employees or former employees of the Newco Business and hold Company Options (as defined below) as of the Time of Distribution (the "Newco Optionees); and (ii) each outstanding option to purchase shares of Company Common Stock (a "Company Option") under the Company Stock Plans, whether vested or unvested, exercisable or unexercisable, that was granted to a person who, immediately after the Time of Distribution, is a Newco Optionee, shall, subject to any required consent of the holder of such Company Option, be exchanged for an option (a "Newco Option") to purchase the number of shares of Newco Common Stock equal to the product of (1) the quotient of (x) the fair market value of a share of Company Common Stock, and (y) the fair market value of a share of Newco Common Stock (the "Conversion Ratio") and (2) the number of shares of Company Common Stock that the holder of such option would have been entitled to receive had such holder exercised such option in full immediately prior to the Time of Distribution (not taking into account whether or not such option was in fact exercisable) (rounded to the nearest whole share). The per share exercise price of the Newco Option shall equal the per share exercise price of such Company Option divided by the Conversion Ratio (rounded to the nearest cent). The Newco Option shall be subject to the same terms and conditions (including the vesting schedule) as the Company Option; provided, however, that the Newco Option shall be exercisable only for Newco Common Stock, and provided further that, in the case of any Company Stock Option to which Section 421 of the Internal Revenue Code of 1986, as amended (the "Code") applies by reason of its qualification under any Sections 422-424 of the Code ("incentive stock options"), the option price, the number of shares purchasable pursuant to such option and the terms and conditions of exercise of such option shall be determined in order to comply with Section 424(a) of the Code. For purposes of this Section 3.2, the fair market value of the Company Common Stock shall be equal to the greater of (x) the average of the closing prices of Company Common Stock on the New York Stock Exchange (the "NYSE") Composite Transactions Reporting Systems, as reported by The Wall Street Journal, for the ten (10) trading days immediately preceding the date that the Company Common Stock commences trading on an ex-dividend basis (with respect to the Distribution) or (y) the sum of (A) the average of the closing prices of the Company Common Stock for the period from the ex- dividend date (with respect to the Distribution) to the Time of Distribution and (B) the average of the closing prices of the Newco Common Stock on the NYSE Composite Transactions Reporting System, as reported by The Wall Street Journal, for the ten (10) trading days following the tenth trading day after the Time of Distribution (the "Newco Average Price"). The fair market value of a share of Newco Common Stock shall be equal to the Newco Average Price. 3.3 With respect to Retained Employees, the Company shall take such actions as it deems appropriate to cause any Retained Employees' Company Options that are not exercised as of the Time of Distribution to be cancelled or lapse no later than the Effective Time. 3.4 The Company shall have no liability with respect to any Company Stock Plans, including, without limitation, 1994 Employee Stock Purchase Plan ("ESPP") subsequent to the Time of Distribution. The Retained Employees shall cease participating in the ESPP as of the Time of Distribution. Newco shall assume all obligations with respect to the ESPP and shall cause any uninvested payroll deduction contributions of Retained Employees to be distributed to such Retained Employees subsequent to the Time of Distribution. B-5 88 ARTICLE IV NON-TAX-QUALIFIED BENEFIT PLANS 4.1 Prior to the Time of the Distribution, the Company and Newco shall (i) cooperate to amend the Harte-Hanks Communications, Inc. Pension Restoration Plan and the Harte-Hanks Deferred Compensation Plan for Management Bonuses as may be necessary to provide for the assumption of such Plans by Newco as set forth in Section 4.2 below, (ii) provide that Retained Employees shall cease to accrue benefits under the plans as of the Time of Distribution, and (iii) take such other steps (consistent with applicable law and the terms of the affected plan) as may be necessary to prevent the consummation of the transactions contemplated by this Agreement, the Distribution Agreement and the Merger Agreement (including the transfer of employment of any Transferred Employee) from causing, resulting in or being treated as a termination of employment or a change of control with respect to Transferred Employees who are participants in such plans. 4.2 Effective as of the Time of Distribution, the Harte- Hanks Communications, Inc. Pension Restoration Plan and the Harte-Hanks Deferred Compensation Plan for Management Bonuses shall be transferred from the Company to Newco and Newco shall assume such plans and (i) succeed the Company as the plan sponsor, plan administrator, employer or other party under such plans and any agreements related thereto and be vested with any and all of the powers, duties, rights and privileges of such plan sponsor, plan administrator, employer or other party thereunder; and (ii) assume and agree to perform and discharge all of the duties and obligations of the employer, sponsor and/or plan administrator thereunder and to pay, and be solely responsible for all of the liabilities and obligations of any kind (whether absolute, accrued, contingent or otherwise) of the employer, sponsor and/or plan administrator thereunder in respect of, arising under or required to be performed with respect to the Transferred Employees and Retained Employees under such plans. The benefits of any Retained Employees under such plans, calculated as of the Time of Distribution, shall become fully vested and non-forfeitable as of the time of Distribution, irrespective of their age or service. ARTICLE V EMPLOYEE WELFARE BENEFIT PLANS 5.1 Prior to the Time of the Distribution, the Company and Newco shall (i) cooperate to amend the Transferred Welfare Plans, as may be necessary to provide for the assumption by Newco of the liabilities with respect to such plans in accordance with the provisions set forth below, (ii) provide that Retained Employees shall cease to participate in the Transferred Welfare Plans as of the Time of Distribution, and (iii) take such other steps (consistent with applicable law and the terms of the affected plan) as may be necessary to prevent the consummation of the transactions contemplated by this Agreement, the Distribution Agreement and the Merger Agreement (including the transfer of employment of any Transferred Employee) from causing, B-6 89 resulting in or being treated as a termination of employment with respect to Transferred Employees who are participants in such plans. 5.2 Effective as of the Time of Distribution, Newco shall assume the Transferred Welfare Plans and honor or cause its insurance carriers to honor, in accordance with the terms of such plans, all claims for benefits incurred by (i) Transferred Employees (or their dependents or beneficiaries) under such plans at any time; (ii) former or inactive employees of the Newco Business (or their dependents or beneficiaries) at any time; or (iii) former employees of units divested prior to the Time of Distribution (or their dependents or beneficiaries) at any time; without interruption as a result of the transactions contemplated by this Agreement, the Distribution Agreement or the Merger Agreement and the Company shall be relieved of and shall not assume such liability. In addition, with respect to the fully insured Transferred Welfare Plans that are identified as such on Schedule "B" hereto, the insurance carriers shall continue to honor in accordance with the terms of the plans, all claims incurred by reason of accident, death or disability prior to the Time of Distribution, including claims incurred by Retained Employees or their dependents or beneficiaries. As soon as administratively possible after the Time of Distribution, the Company shall transfer all assets of the Transferred Welfare Plans (including funds for any contributions or premiums due from the Company or any subsidiaries of the Company which have accrued or been received or that have been deducted from payroll as of the Time of Distribution) to Newco or the plan, as appropriate. 5.3 Effective as of the Time of Distribution, the Company shall remain liable for, and shall honor or cause its insurance carriers to honor any claims incurred prior thereto or thereafter by Retained Employees with respect to benefits under any Retained Welfare Plan, subject to indemnification pursuant to Section 5.2(e) of the Distribution Agreement. ARTICLE VI TAX-QUALIFIED DEFINED CONTRIBUTION PLANS 6.1 Prior to the Time of the Distribution, the Company and Newco shall (i) cooperate to amend the Harte-Hanks Investment Plus (the "401(k) Plan") as may be necessary to provide for the assumption of such plan by Newco and the spin-off of plan assets and liabilities to Buyer's plan as set forth below, (ii) provide that the Retained Employees will cease to participate in the 401(k) Plan as of the Time of Distribution, and (iii) take such other steps (consistent with applicable law and the terms of the plan) as may be necessary to prevent the consummation of the transactions contemplated by this Agreement, the Distribution Agreement and the Merger Agreement (including the transfer of employment of any Transferred Employee) from causing, resulting in or being treated as a termination of employment with respect to the Transferred Employees who are participants in the 401(k) Plan. 6.2 Effective as of the Time of Distribution, the 401(k) Plan and any related service provider agreements shall be transferred from the Company to Newco, and the Company shall transfer its control over the related trust to Newco and shall transfer to the 401(k) Plan's trust all B-7 90 plan assets it holds (including funds for any contributions or participant loan repayments which have accrued or that have been deducted from payroll as of the Time of Distribution) and Newco shall assume such plan and any related service provider agreements and (i) succeed the Company as the plan sponsor, plan administrator, employer or other party under such plan and any agreements related thereto and be vested with any and all of the powers, duties, rights and privileges of such plan sponsor, plan administrator, employer or other party thereunder, and (ii) assume and agree to perform and discharge all of the duties and obligations of the employer, sponsor and/or plan administrator thereunder and to pay and be solely responsible for all of the liabilities and obligations of any kind (whether absolute, accrued, contingent or otherwise) of the employer, sponsor and/or plan administrator thereunder in respect of, arising under or required to be performed under the 401(k) Plan. 6.3 As soon as practicable following the Time of Distribution Newco shall cause the 401(k) Plan accounts of the Retained Employees to be transferred to The E.W. Scripps Company Retirement and Investment Plan ("Buyer's Plan") in accordance with Section 208 of ERISA. The amounts to be transferred to Buyer's Plan ("Spinoff Amounts") shall be adjusted for investment earnings, gains, or losses in accordance with the 401(k) Plan's valuation procedures, through a date as close as reasonably practicable to the date of transfer. The Company shall cause Buyer's Plan to comply with applicable tax-qualification and ERISA requirements with respect to the Spinoff Amounts. Subsequent to the Time of Distribution and prior to the transfer of the Spinoff Amounts, the Company will cooperate with Newco to cause payroll deductions for loan repayments by Retained Employees under the 401(k) Plan to continue and to remit such payments to the 401(k) Plan as frequently as possible. If any participating Retained Employees have outstanding loan obligations to the 401(k) Plan as of the date of transfer of the Spinoff Amounts, such obligations shall be transferred to Buyer's Plan as part of the Spinoff Amount. After the transfer of the Spinoff Amount, Buyer's Plan shall be responsible for the administration, investment and payment of the Retained Employees' accounts and neither the 401(k) Plan nor Newco shall have any further liability with respect thereto. 6.4 The DiMark 401(k) Plan, the Mars Graphics Systems 401(k) Plan and the MCI 401(k) Plan (collectively the "Direct Marketing 401(k)'s") shall remain the responsibility of Newco and/or DiMark, Inc., Mars Graphic Services, Inc., and Marketing Communications, Inc., respectively, (which corporations are to become wholly owned first or second tier subsidiaries of Newco prior to the Time of Distribution). If necessary, on request of the Company, Newco shall cause any additional reasonable steps to be taken to insure that the Company is not liable or obligated as employer, plan sponsor or plan administrator with respect to the Direct Marketing 401(k)'s after the Time of Distribution. ARTICLE VII TAX-QUALIFIED DEFINED BENEFIT PLANS 7.1 Prior to the Time of the Distribution, the Company and Newco shall (i) cooperate to amend the Harte-Hanks Communications, Inc. Pension Plan as may be necessary to provide B-8 91 for the assumption of such plan by Newco as set forth below, (ii) provide that the Retained Employees will cease to accrue benefits under such plan as of the Time of Distribution and (iii) take such other steps (consistent with applicable law and the terms of the plan) as may be necessary to prevent the consummation of the transactions contemplated by this Agreement, the Distribution Agreement and the Merger Agreement (including the transfer of employment of any Transferred Employee to Newco) from causing, resulting in or being treated as a termination of employment or a change of control with respect to the Transferred Employees who are participants in such plan. 7.2 Effective as of the Time of Distribution, each Retained Employee's accrued benefit under the Harte-Hanks Communications, Inc. Pension Plan shall become fully vested and non-forfeitable without regard to such Retained Employee's length of service. Effective as of the Time of Distribution, the Company shall transfer to Newco, and Newco shall assume the Harte-Hanks Communications, Inc. Pension Plan and any related service provider contracts, and the Company shall transfer to Newco its control over the related trust and shall transfer to such trust funds for any contributions or premiums due from the Company or subsidiaries of the Company which have accrued as of the Time of Distribution. In connection with such transfer and assumption Newco shall (i) succeed the Company as the plan sponsor, plan administrator, employer or other party under such plan and any agreements related thereto and be vested with any and all of the powers, duties, rights and privileges of such plan sponsor, plan administrator, employer or other party thereunder, and (ii) assume and agree to perform and discharge all of the duties and obligations of the employer, sponsor or plan administrator thereunder and to pay, and be solely responsible for all of the liabilities and obligations of any kind (whether absolute, accrued, contingent or otherwise) of the employer, sponsor and/or plan administrator thereunder in respect of, arising under or required to be performed with respect to the Retained Employees and the Transferred Employees under such plan. ARTICLE VIII RETAINED EMPLOYEES 8.1 Rights. The rights of Retained Employees with respect to the periods following the Time of Distribution will be governed by the Merger Agreement. ARTICLE IX MISCELLANEOUS 9.1 Governing Law. This Agreement and the transactions contemplated hereby shall be construed in accordance with and governed by the internal laws of the State of Delaware. 9.2 Entire Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof, superseding all negotiations, prior B-9 92 discussions and prior agreements. To the extent a subject is specifically covered in this Agreement and to the extent any other agreement is in conflict herewith, this Agreement, if more specific, shall control. 9.3 Parties In Interest. Neither party may assign its right or delegate any of its duties under this Agreement without prior written consent of the other. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Nothing contained in this Agreement, express or implied, is intended to confer upon any third party any benefits, rights or remedies. 9.4 Effectiveness. This Agreement shall become effective at the Time of Distribution and may be terminated by the parties at any time prior thereto by written agreement. 9.5 Reformation and Severabilty. If any provision of this Agreement shall be held to be invalid, unenforceable or illegal in any jurisdiction under any circumstances for any reason, (i) such provision shall be reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal and preserve the original intent of the parties, or (ii) if such provision cannot be so reformed, such provision shall be severed from this Agreement. Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances. Neither such holding nor such reformation or severance shall affect or impair the legality, validity or enforceability of any other provision of this Agreement to the extent that such other provision is not itself actually in conflict with any applicable law. 9.6 Titles and Headings. All titles and headings have been inserted solely for the convenience of the parties and are not intended to be a part of this Agreement or to affect its meaning or interpretation. 9.7 No Reliance. No third party is entitled to rely on any of the representations, warranties and agreements of the parties contained in this Agreement. The parties assume no liability to any third party because of any reliance on the representation, warranties and agreements of the parties contained in this Agreement. B-10 93 IN WITNESS WHEREOF the Parties have caused this Agreement to be executed by their duly authorized officers as of this ____ day of ______________, 1997. HARTE-HANKS COMMUNICATIONS, INC. By: ------------------------------------------- Title: -------------------------------------- [NEWCO] By: ------------------------------------------- Title: -------------------------------------- B-11 94 SCHEDULE A RETAINED WELFARE PLANS 1. ABILENE REPORTER-NEWS Medical Plans PPO: Continental Life & Accident Company HMO: FirstCare (Southeast Health Alliances) Dental Plan - See Footnote 1 Vision Plan - See Footnote 2 2. SAN ANGELO STANDARD-TIMES Medical Plans HMO: Blue Cross/Blue Shield of Texas HMO Blue, South West Texas HMO: NYLCare Health Plans of Southwest, Inc. Dental Plan - See Footnote 1 Vision Plan - See Footnote 2 3. WICHITA FALLS TIMES & RECORD-NEWS Medical Plan PPO: Blue Cross Blue Shield of Texas, Inc. Blue Choice Managed Health Care Plan Dental Plan- See Footnote 1 Vision Plan - See Footnote 2 4. HARTE-HANKS COMMUNITY NEWSPAPERS, INC. Medical Plan POS, HMO: Prudential Health Care Dental Plan - See Footnote 1 B-12 95 5. CORPUS CHRISTI CALLER-TIMES Medical and Dental Plans PPO, HMO, Dental: Corpus Christi Caller-Times Comprehensive Major Medical Health Care Plan Section 125 Plan: Corpus Christi Caller-Times Health Benefit Plan ASO Agreement: South Texas Health Care Alliance Claims Administrator: Group Administrators San Antonio, Inc. Excess Loss Insurance: TransAmerica Occidental Life Insurance Co. (specific and aggregate) Welfare Trust: Trust Agreement and Declaration of Corpus Christi Caller Times Health Benefit Plan, effective January 1, 1994. 6. ANDERSON INDEPENDENT MAIL (INDEPENDENT PUBLISHING COMPANY) Medical Plan PPO: Independent Publishing Medical Plan ASO Agreement: Health First Dental Plan: Health Source Excess Loss Insurance: TransAmerica Occidental Life Insurance Co. (specific and aggregate) Term Life and AD&D: Provident Life & Accident 7. KENS-TV5 Medical Plan HMO, PPO: Prudential Health Care Plan, Inc. See Footnote 3 HMO: Pacificare of Texas, Inc. Dental Plan: See Footnote 1 B-13 96 8. Various Employee Assistance Programs and Educational Assistance Plans maintained by Retained Business units. Footnotes: 1. Harte-Hanks Communications, Inc. offers dental coverage through Delta Insurance Company for this unit and others. The contract with DDIC will be a Retained Welfare Plan, and various Newco Business units that now also receive dental benefits through this contract will establish a separate contract with DDIC. 2. Harte-Hanks Communications, Inc. offers vision coverage through Vision Service Plan, Inc. for this unit and others. The contract with VSP will be a Retained Welfare Plan and various Newco Business units that now receive vision benefits through this contract will establish a separate contract with VSP. 3. Harte-Hanks Communications, Inc. offers medical coverage through Prudential Health Care Plan, Inc. for this and another unit. The contract with Prudential will be a Retained Welfare Plan and another Newco Business unit that now receives medical benefits through this contract will establish a separate contract with Prudential. B-14 97 SCHEDULE B TRANSFERRED WELFARE PLANS PLANS 1. Basic Life and AD&D Pan American Life Insurance Co.* 2. Supplemental Life: Standard Insurance Company* Philadelphia Life Insurance Co., prior to 1993* 3. Supplemental AD&D: Cigna* 4. Medical: See Footnote 3 to Schedule A 5. Dental: See Footnote 1 to Schedule A 6. Vision: See Footnote 2 to Schedule A 7. Long Term Disability: UNUM Insurance Co.* Mutual of Omaha, 1992-1993* Paul Revere, 1994-1995* 8. Harte-Hanks Communications, Inc. Salary Continuation Plan - Effective November 1, 1995 9. Harte-Hanks Severance Pay Plan 10. Harte-Hanks Flexible Benefits Plan (Section 125); provided that "Transferred Welfare Plans" does not include any portion of this Plan relating to medical, dental or vision plans or contracts to the extent they are part of a Retained Welfare Plan. 11. Business Travel/Blanket Accident Cigna Group Insurance* (Life Insurance Company of North America) 12. Retiree medical and life obligations, including without limitation, those described in Section 3.9 of the Company Disclosure Schedule. 13. Various Employee Assistance Programs and Eductional Assistance Plans maintained by Transferred Business units. ____________________ * Plans marked with an asterisk are fully insured plans as described in Section 5.2 of the Employee Benefits and Compensation Agreement. B-2 98 Exhibit A to the Merger Agreement RETAINED BUSINESS FINANCIAL STATEMENTS See Exhibits B and C to the Merger Agreement 99 EXHIBIT B TO MERGER AGREEMENT [KPMG LOGO] HARTE HANKS TELEVISION FINANCIAL STATEMENTS 100 [KPMG PEAT MARWICK LLP LOGO] INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Harte-Hanks Communications, Inc.: We have audited the accompanying balance sheets of Harte-Hanks Television as of December 31, 1996 and 1995, and the related statements of operations and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of Harte-Hanks Communications, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements were prepared on the basis of presentation described in note A, and include the assets, liabilities, revenues and expenses of Harte-Hanks Television. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harte-Hanks Television as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, pursuant to the basis of presentation described in note A, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP San Antonio, Texas April 14, 1997 101 HARTE-HANKS TELEVISION BALANCE SHEETS
- --------------------------------------------------------------------------------- DECEMBER 31, IN THOUSANDS 1996 1995 - --------------------------------------------------------------------------------- ASSETS Current assets Cash $ 228 $ 338 Accounts receivable (less allowance for doubtful accounts of $67 in 1996 and $47 in 1995) 5,146 5,208 Inventory 29 30 Prepaid expense 261 237 Film contracts 1,517 1,203 Other current assets 188 191 -------- ------- Total current assets 7,369 7,207 -------- ------- Property, plant and equipment Land 354 354 Buildings and improvements 6,169 6,169 Equipment and furniture 11,701 10,939 -------- ------- 18,224 17,462 Less accumulated depreciation 10,621 9,537 -------- ------- 7,603 7,925 Construction and equipment installations in progress 67 0 -------- ------- Net property, plant and equipment 7,670 7,925 -------- ------- Intangible and other assets Goodwill (less accumulated amortization of $21,481 in 1996 and $19,733 in 1995) 48,575 50,323 Receivable from Harte-Hanks Communications, Inc. 34,251 27,665 Film contracts 2,187 1,275 Other assets 232 176 -------- ------- Total intangible and other assets 85,245 79,439 -------- ------- Total assets $100,284 $94,571 ======== ======= LIABILITIES AND EQUITY Current liabilities Accounts payable $ 685 $ 632 Accrued payroll and related expenses 727 653 Film contract payable 1,581 1,145 Other current liabilities 37 369 -------- ------- Total current liabilities 3,030 2,799 -------- ------- Film contract payable 1,488 985 Deferred income tax liability 1,841 1,780 Other long term liabilities 489 532 -------- ------- Total liabilities 6,848 6,096 -------- ------- Equity 93,436 88,475 -------- ------- Total liabilities and equity $100,284 $94,571 ======== =======
See Notes to Financial Statements 102 HARTE-HANKS TELEVISION STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - -------------------------------------------------------------------------------- Revenues $ 26,100 $ 25,132 $28,629 Operating expenses Payroll 8,361 8,008 8,624 Production and distribution 1,739 2,040 2,864 Advertising, selling, general and administrative 2,880 2,848 2,800 Depreciation 1,044 1,066 1,041 Film amortization 1,347 2,224 2,746 Goodwill amortization 1,748 1,748 1,748 -------- -------- ------- 17,119 17,934 19,823 -------- -------- ------- Operating income 8,981 7,198 8,806 Other expenses (income) Interest expense 20 26 26 Other, net -- (85) -- -------- -------- ------- 20 (59) 26 -------- -------- ------- Income before income taxes 8,961 7,257 8,780 Income tax expense 4,000 3,366 3,954 -------- -------- ------- Net income $ 4,961 $ 3,891 $ 4,826 ======== ======== =======
See Notes to Financial Statements 103 HARTE-HANKS TELEVISION STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 4,961 $ 3,891 $ 4,826 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,044 1,066 1,041 Goodwill amortization 1,748 1,748 1,748 Amortization of option related compensation 93 163 131 Film amortization 1,347 2,224 2,746 Deferred income taxes 37 42 (10) Other, net -- (85) -- Changes in operating assets and liabilities: Decrease in accounts receivable, net 62 677 52 Decrease (increase) in inventory 1 6 (6) Decrease (increase) in prepaid expenses and other current assets 61 (59) 99 Increase (decrease) in accounts payable 53 (324) 329 (Decrease) in other accrued expenses and other liabilities (312) (291) (100) Other, net (258) (114) 15 ------- ------- -------- Net cash provided by operating activities 8,837 8,944 10,871 ------- ------- -------- Cash Flows from Investing Activities Purchases of property, plant and equipment (789) (1,060) (883) Proceeds from the sale of property, plant and equipment -- 123 142 Payments on film contracts (1,572) (1,817) (2,123) ------- ------- -------- Net cash (used in) investing activities (2,361) (2,754) (2,864) ------- ------- -------- Cash Flows from Financing Activities Distributions to Harte-Hanks Communications, Inc. including payments for income taxes (6,586) (6,406) (7,874) ------- ------- -------- Net increase (decrease) in cash (110) (216) 133 Cash at beginning of period 338 554 421 ------- ------- -------- Cash at end of period $ 228 $ 338 $ 554 ======= ======= ========
See Notes to Financial Statements 104 Harte-Hanks Television Notes to Financial Statements NOTE A -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements present the financial position of Harte-Hanks Television (the "Company"). The financial statements exclude all assets, liabilities, revenues and expenses of Harte-Hanks Communications, Inc. and its subsidiaries other than assets, liabilities, revenues and expenses of its television business. The financial statements have been prepared as if the television business had operated as an independent, stand alone entity for all periods presented. Except as described below, such financial statements have been prepared using the historical basis of accounting and include the assets, liabilities, revenues, expenses and income taxes of Harte-Hanks' television business. These financial statements do not include any liabilities or disclosure related to the Company's employee benefit plans other than as disclosed in note C. However, the cost of all employee benefit plans which relate to employees of Harte-Hanks Television is included in these financial statements. Direct expenses incurred by Harte-Hanks Communications, Inc. on behalf of the Company are identified and allocated to the Company based on the actual costs incurred. Any remaining indirect expenses incurred by Harte-Hanks Communications, Inc. have not been allocated to the Company because they have been insignificant. Management believes that this method of allocation is reasonable and that such costs would not be materially different if they had been incurred with unaffiliated third parties. Certain prior year amounts have been reclassified for comparative purposes. TELEVISION REVENUES Television revenues are presented net of advertising agency commissions. INVENTORY Inventory, consisting primarily of film and television tubes, is stated at the lower of cost (first-in, first-out method) or market. 1 (Continued) 105 Harte-Hanks Television Notes to Financial Statements PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Depreciation of buildings and equipment is computed generally on the straight-line method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of estimated useful lives are: Buildings and improvements 10 to 40 years Equipment and furniture 4 to 20 years
GOODWILL Goodwill is stated on the basis of cost, adjusted as discussed below, and is amortized on a straight-line basis over 40-year periods. The Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that unamortized goodwill and the net book value of long-lived assets will not be recovered, net goodwill is adjusted to an amount consistent with projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. FILM CONTRACTS Film contract rights represent agreements with film syndicators for television program material. The capitalized costs of film rights and related liabilities are recorded when the licensed period begins and the film rights are available for use. The cost is amortized over the expected number of telecasts. The portions of the cost to be amortized within one year and after one year are reflected in the consolidated balance sheets as current and noncurrent assets, respectively. The payments under these contracts due within one year and after one year are classified as current and noncurrent liabilities. INCOME TAXES Income taxes are calculated using the asset and liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes are recognized for the tax consequences resulting from "temporary differences" by applying enacted statutory tax rates applicable to future years. These "temporary differences" are associated with differences between the financial and the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income. 2 (Continued) 106 Harte-Hanks Television Notes to Financial Statements USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - INCOME TAXES The components of income tax expense are as follows:
- ------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - ------------------------------------------------------------------------------- Current Federal $3,607 $3,025 $ 3,580 State and local 356 299 384 ------ ------ ------- Total current $3,963 $3,324 $ 3,964 ====== ====== ======= Deferred Federal $ 33 $ 37 $ (9) State and local 4 5 (1) ------ ------ ------- Total deferred $ 37 $ 42 $ (10) ====== ====== =======
The differences between total income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:
- ---------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - ---------------------------------------------------------------------------------------- Computed expected income tax expense $3,136 35% $2,540 35% $3,073 35% Effect of goodwill amortization 605 7% 605 8% 605 7% Net effect of state income taxes 234 3% 198 3% 249 3% Other, net 25 -- 23 -- 27 -- ------------------------------------------------------------- Income tax expense for the period $4,000 45% $3,366 46% $3,954 45% =============================================================
3 (Continued) 107 Harte-Hanks Television Notes to Financial Statements The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
- -------------------------------------------------------------------------- DECEMBER 31, IN THOUSANDS 1996 1995 - -------------------------------------------------------------------------- Deferred tax assets: Accrued vacation pay $ 109 $ 99 Accrued stock option liability 167 157 Accounts receivable, net 23 16 ------- ------- Total gross deferred tax assets 299 272 ------- ------- Deferred tax liabilities: Property, plant and equipment (1,805) (1,756) State income tax (123) (120) Other, net (36) (24) ------- ------- Total gross deferred tax liabilities (1,964) (1,900) ------- ------- Net deferred tax liability $(1,665) $(1,628) ======= =======
The net deferred tax liability is recorded both as a current deferred income tax benefit and as other long term liabilities based upon the classification of the related temporary difference. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, recoverable taxes paid, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income, the reversal of existing deferred tax liabilities and projections for future taxable income over the periods which the deferred tax assets are deductible at December 31, 1996, management believes it is more likely than not the Company will realize the benefits of these deductible differences. 4 (Continued) 108 Harte-Hanks Television Notes to Financial Statements NOTE C -- EMPLOYEE BENEFIT PLANS Harte-Hanks Communications, Inc. maintains a defined benefit pension plan for which most of Harte-Hanks Television employees are eligible. Benefits are based on years of service and the employee's compensation for the five highest consecutive years of salary during the last ten years of service. Benefits vest to the participants upon completion of five years of service or upon reaching age 65, whichever is earlier. Harte-Hanks' policy is to accrue as expense an amount computed by its actuary and to fund at least the minimum amount required by ERISA. In 1994, the Harte-Hanks Communications, Inc. adopted a non-qualified, supplemental pension plan covering certain Harte-Hanks Television employees, which provides for incremental pension payments so that total pension payments equal amounts that would have been payable from the principal pension plan if it were not for limitations imposed by income tax regulation. In determining the 1996, 1995 and 1994 actuarial present value of benefit obligations, discount rates of 73/4%, 71/4% and 8% were used, respectively. The assumed annual rate of increase in future compensation levels was 4%, and the expected long term rate of return on plan assets was 10%. Pension expense for the years ended December 31, 1996, 1995 and 1994 was $183, $176 and $201, respectively. Harte-Hanks Communications, Inc. also sponsors a 401(k) plan which provides employees of Harte-Hanks Television with additional income upon retirement. The Company matches a portion of employees' voluntary before-tax contributions. Employees are fully vested in their own contributions and vest in the Company's matching contributions upon three years of service. Contributions made during the years ended December 31, 1996, 1995 and 1994 were $36, $40 and $42, respectively. The 1994 Harte-Hanks Communications, Inc. Employee Stock Purchase Plan provides for a total of 450,000 shares to be sold to participating employees at all Harte-Hanks subsidiaries at 85% of the fair market value at specified quarterly investment dates. At December 31, 1996, 1995 and 1994, Harte-Hanks Television had $21, $18 and $17, respectively recorded as a liability for amounts withheld by the Company to be used for the purchase of Harte-Hanks Communications, Inc. shares in the subsequent January. All costs related to the above described plans are recorded in the Harte-Hanks Television financial statements to the extent that these costs relate to the employees of Harte-Hanks Television. 5 (Continued) 109 Harte-Hanks Television Notes to Financial Statements NOTE D -- EQUITY A summary of changes in equity is as follows:
----------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 1994 ----------------------------------- Beginning balance $88,475 $84,584 $79,758 Net earnings 4,961 3,891 4,826 ------- ------- ------- Ending balance $93,436 $88,475 $84,584 ======= ======= =======
NOTE E -- STOCK OPTION PLANS 1984 PLAN In 1984, Harte-Hanks Communications, Inc. adopted a Stock Option Plan ("1984 Plan") pursuant to which it issued to officers and key employees options to purchase shares of common stock at prices equal to the market price on the grant date. Market price was determined by the Board of Directors for purposes of granting stock options and making repurchase offers. Options granted under the 1984 Plan become exercisable five years after date of grant. At December 31, 1996, 1995 and 1994, options held by employees of Harte-Hanks Television to purchase 37,500 shares, 37,500 shares and 52,500 shares, respectively, were outstanding under the 1984 Plan, with exercise prices ranging from $3.33 to $6.67 per share. No additional options will be granted under the 1984 Plan. 1991 PLAN Harte-Hanks Communications, Inc. adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which it may issue to officers and key employees options to purchase up to 3,000,000 shares of common stock. Options have been granted to certain employees of the Company at prices equal to the market price on the grant date ("market price options") and at prices below market price ("performance options"). As of December 31, 1996, 1995 and 1994, market price options, held by employees of Harte-Hanks Television, to purchase 175,000 shares, 159,750 shares and 132,750 shares, respectively, were outstanding with exercise prices ranging from $6.67 to $20.50 per share. Market price options become exercisable after the fifth anniversary of their date of grant. 6 (Continued) 110 Harte-Hanks Television Notes to Financial Statements At December 31, 1996, 1995 and 1994 performance options held by employees of Harte-Hanks Television to purchase 49,200 shares, 52,200 shares and 45,450 shares, respectively, were outstanding with exercise prices ranging from $0.67 to $2.00 per share. The performance options become exercisable after the third anniversary of their date of grant, and the extent to which they become exercisable at that time depends upon the extent to which Harte-Hanks Communications, Inc. achieves certain goals which are established at the time the options are granted. That portion of the performance options which does not become exercisable on the third anniversary of the date of grant becomes exercisable after the ninth anniversary of the date of grant. Compensation expense of $93, $163 and $131 was recognized by Harte-Hanks Television for the performance options held by employees of Harte-Hanks Television for the years ended December 31, 1996, 1995 and 1994, respectively. The following summarizes stock option plans activity:
- ------------------------------------------------------------- Number Weighted Average of Shares Option Price - ------------------------------------------------------------- Options outstanding at January 1, 1994 236,250 $ 5.24 Granted 23,700 9.91 Exercised (29,250) 4.49 ------- Options outstanding at December 31, 1994 230,700 5.82 Granted 33,750 10.40 Exercised (15,000) 5.00 ------- Options outstanding at December 31, 1995 249,450 6.49 Granted 22,500 18.03 Exercised (5,250) 0.67 Cancelled (5,000) 11.78 ------- OPTIONS OUTSTANDING AT DECEMBER 31, 1996 261,700 7.50 ------- EXERCISABLE AT DECEMBER 31, 1996 102,000 4.55 -------
7 (Continued) 111 Harte-Hanks Television Notes to Financial Statements The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation." Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. The Company does recognize compensation expense for options whose market price of the underlying stock exceeds the exercise price on the date of grant under the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted under SFAS No. 123. Had compensation expense for the Company's options been determined based on the fair value at the grant date for awards in 1996 and 1995, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below.
- ----------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1996 1995 - ----------------------------------------------------------------------------------- Net income - as reported $4,961 $3,891 Net income - proforma 4,925 3,877
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:
- -------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 - -------------------------------------------------------------------------------------- Expected dividends yield 0.3% 0.3% Expected stock price volatility 22.1% 21.3% Risk-free interest rate 6.4% 6.4% Expected life of options 3-10 years 3-10 years
The weighted-average fair value of market price options granted during 1996 and 1995 was $7.00 and $5.52, respectively. The weighted-average fair value and exercise price of performance options was $14.35 and $1.11 in 1996, and $12.15 and $0.67 in 1995, respectively. NOTE F -- FAIR VALUE OF FINANCIAL INSTRUMENTS Because of their maturities and/or interest rates, the Company's financial instruments have a fair value approximating their carrying value. These instruments include accounts receivable, trade and film payables, and miscellaneous notes receivable and payable. 8 (Continued) 112 Harte-Hanks Television Notes to Financial Statements NOTE G -- COMMITMENTS AND CONTINGENCIES The Company has pending claims incurred in the normal course of business which, in the opinion of management, and legal counsel, can be disposed of without material effect on the accompanying financial statements. NOTE H -- LEASES The Company leases certain real estate and equipment under various operating leases. Most of the leases contain renewal options for varying periods of time. The total rent expense under all operating leases was $320, $307 and $302 for the years ended December 31, 1996, 1995 and 1994, respectively. The future minimum rental commitments for all non-cancelable operating leases with terms in excess of one year as of December 31, 1996 are as follows:
In thousands - ------------------------------------------------------- 1997 $ 140 1998 78 1999 26 2000 6 - ------------------------------------------------------- Total $ 250 - -------------------------------------------------------
9 (Continued) 113 EXHIBIT C TO MERGER AGREEMENT HARTE HANKS NEWSPAPERS FINANCIAL STATEMENTS 114 [KPMG LETTERHEAD] INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Harte-Hanks Communications, Inc.: We have audited the accompanying balance sheets of Harte-Hanks Newspapers as of December 31, 1996 and 1995, and the related statements of operations and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of Harte-Hanks Communications, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements were prepared on the basis of presentation described in note A, and include the assets, liabilities, revenues and expenses of Harte-Hanks Newspapers. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harte-Hanks Newspapers as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, pursuant to the basis of presentation described in note A, in conformity with generally accepted accounting principles. San Antonio, Texas April 14, 1997 /s/ KPMG Peat Marwick LLP 115 HARTE-HANKS NEWSPAPERS BALANCE SHEETS
- --------------------------------------------------------------------------------------------- DECEMBER 31, IN THOUSANDS 1996 1995 - --------------------------------------------------------------------------------------------- ASSETS Current assets Cash $ 2,498 $ 1,257 Accounts receivable (less allowance for doubtful accounts of $808 in 1996 and $776 in 1995) 14,903 13,679 Inventory 4,679 8,698 Prepaid expense 852 628 Other current assets 1,391 1,402 ------- ------- Total current assets 24,323 25,664 ------- ------- Property, plant and equipment Land 4,381 4,381 Buildings and improvements 18,640 18,341 Equipment and furniture 51,496 52,124 ------- ------- 74,517 74,846 Less accumulated depreciation 41,664 40,728 ------- ------- 32,853 34,118 Construction and equipment installations in progress 170 243 ------- ------- Net property, plant and equipment 33,023 34,361 ------- ------- Intangible and other assets Goodwill (less accumulated amortization of $58,746 in 1996 and $54,109 in 1995) 128,661 133,298 Receivable from Harte-Hanks Communications, Inc. 122,980 99,204 Other assets 79 56 ------- ------- Total intangible and other assets 251,720 232,558 ------- ------- Total assets $309,066 $292,583 ======= ======= LIABILITIES AND EQUITY Accounts payable $ 2,532 $ 2,861 Accrued payroll and related expenses 3,590 3,456 Customer deposits 3,567 3,667 Other current liabilities 1,874 1,760 ------- ------- Total current liabilities 11,563 11,744 ------- ------- Deferred income tax liability 5,546 5,315 Other long term liabilities 1,083 931 ------- ------- Total liabilities 18,192 17,990 ------- ------- Equity 290,874 274,593 ------- ------- Total liabilities and equity $309,066 $292,583 ======== =========
See Notes to Financial Statements 116 HARTE-HANKS NEWSPAPERS STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - --------------------------------------------------------------------------------------------- Revenues $124,313 $117,744 $110,949 -------- -------- -------- Operating expenses Payroll 41,023 40,547 40,800 Production and distribution 32,170 29,091 24,852 Advertising, selling, general and administrative 13,302 12,684 12,520 Depreciation 3,927 3,735 3,438 Goodwill amortization 4,637 4,637 4,637 -------- -------- -------- 95,059 90,694 86,247 -------- -------- -------- Operating income 29,254 27,050 24,702 Other expenses (income) (32) 116 192 -------- -------- -------- Income before income taxes 29,286 26,934 24,510 Income tax expense 13,005 12,091 11,160 -------- -------- -------- Net income $ 16,281 $ 14,843 $ 13,350 ======== ======== ========
See Notes to Financial Statements 117 HARTE-HANKS NEWSPAPERS STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 16,281 $ 14,843 $ 13,350 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,927 3,735 3,438 Goodwill amortization 4,637 4,637 4,637 Amortization of option related compensation 217 274 315 Deferred income taxes 211 346 (201) Other, net (55) 116 192 Changes in operating assets and liabilities: Increase in accounts receivable, net (1,224) (473) (1,177) Decrease (increase) in inventory 4,019 (2,908) (3,155) Decrease (increase) in prepaid expenses and other current assets (173) (149) 222 Increase (decrease) in accounts payable (330) (44) 446 Increase in other accrued expenses and other liabilities 128 643 589 Other, net (65) (341) (158) -------- ------- -------- Net cash provided by operating activities 27,573 20,679 18,498 -------- ------- -------- Cash Flows from Investing Activities Purchases of property, plant and equipment (2,826) (3,544) (4,258) Proceeds from the sale of property, plant and equipment 270 187 193 -------- ------- -------- Net cash (used in) investing activities (2,556) (3,357) (4,065) -------- ------- -------- Cash Flows from Financing Activities Distributions to Harte-Hanks Communications, Inc., including payments for income taxes (23,776) (17,007) (14,308) -------- -------- -------- Net increase in cash 1,241 315 125 Cash at beginning of period 1,257 942 817 -------- -------- -------- Cash at end of period $ 2,498 $ 1,257 $ 942 ======== ======== ========
See Notes to Financial Statements 118 Harte-Hanks Newspapers Notes to Financial Statements NOTE A -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements present the financial position of Harte-Hanks Newspapers (the "Company"). The financial statements exclude all assets, liabilities, revenues and expenses of Harte-Hanks Communications, Inc. and its subsidiaries other than assets, liabilities, revenues and expenses of its newspapers business. The financial statements have been prepared as if the newspapers business had operated as an independent, stand alone entity for all periods presented. Except as described below, such financial statements have been prepared using the historical basis of accounting and include the assets, liabilities, revenues, expenses and income taxes of Harte-Hanks' newspapers business. In March 1995, Harte-Hanks Communications, Inc. sold its suburban Boston community newspapers. As these newspapers ceased to be a part of Harte-Hanks Newspapers in 1995, their assets, liabilities, revenues and expenses have been excluded from these financial statements. In addition, all related gain on divestiture as well as tax assets/liabilities which resulted from this transaction, have been excluded from these financial statements for all years presented. These financial statements do not include any liabilities or disclosure related to the Company's employee benefit plans other than as disclosed in note C. However, the cost of all employee benefit plans which relate to employees of Harte-Hanks Newspapers is included in these financial statements. Intercompany balances and transactions have been eliminated. Direct expenses incurred by Harte-Hanks Communications, Inc. on behalf of the Company are identified and allocated to the Company based on the actual costs incurred. Any remaining indirect expenses incurred by Harte-Hanks Communications, Inc. have not been allocated to the Company because they have been insignificant. Management believes that this method of allocation is reasonable and that such costs would not be materially different if they had been incurred with unaffiliated third parties. Certain prior year amounts have been reclassified for comparative purposes. INVENTORY Inventory, consisting primarily of newsprint and other operating supplies, is stated at the lower of cost (first-in, first-out method) or market. 1 (Continued) 119 Harte-Hanks Newspapers Notes to Financial Statements PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Depreciation of buildings and equipment is computed generally on the straight-line method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of estimated useful lives are: Buildings and improvements 10 to 40 years Equipment and furniture 4 to 20 years GOODWILL Goodwill is stated on the basis of cost, adjusted as discussed below, and is amortized on a straight-line basis over 40- year periods. For each of its investments, the Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that unamortized goodwill and the net book value of long-lived assets will not be recovered, net goodwill is adjusted to an amount consistent with projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. INCOME TAXES Income taxes are calculated using the asset and liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes are recognized for the tax consequences resulting from "temporary differences" by applying enacted statutory tax rates applicable to future years. These "temporary differences" are associated with differences between the financial and the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2 (Continued) 120 Harte-Hanks Newspapers Notes to Financial Statements NOTE B - INCOME TAXES The components of income tax expense are as follows:
- ----------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - ----------------------------------------------------------------------------------- Current Federal $11,254 $10,324 $10,003 State and local 1,540 1,421 1,357 ------- ------- ------- Total current $12,794 $11,745 $11,360 ======= ======= ======= Deferred Federal $ 188 $ 307 $ (178) State and local 23 39 (22) ------- ------- ------- Total deferred $ 211 $ 346 $ (200) ======== ======= =======
The differences between total income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:
- ------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- Computed expected income tax expense $10,251 35% $9,427 35% $8,579 35% Effect of goodwill amortization 1,622 6% 1,6226 6% 1,622 7% Net effect of state income taxes 1,016 3% 949 4% 867 4% Other, net 116 - 93 - 92 - --------------------------------------------------------------- Income tax expense for the period $13,005 44% $12,091 45% $11,160 46% ===============================================================
(Continued) 3 121 Harte-Hanks Newspapers Notes to Financial Statements The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
- -------------------------------------------------------------------------- DECEMBER 31, IN THOUSANDS 1996 1995 - -------------------------------------------------------------------------- Deferred tax assets: Accrued vacation pay $ 472 $ 503 Accrued stock option liability 371 326 Accounts receivable, net 283 272 Other, net 18 9 ------- ------- Total gross deferred tax assets 1,144 1,110 ------- ------- Deferred tax liabilities: State income tax (352) (337) Property, plant and equipment (5,546) (5,315) ------- ------- Total gross deferred tax liabilities (5,898) (5,652) ------- ------- Net deferred tax liability $(4,754) $(4,542) ======= =======
The net deferred tax liability is recorded both as a current deferred income tax benefit and as other long term liabilities based upon the classification of the related temporary difference. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, recoverable taxes paid, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income, the reversal of existing deferred tax liabilities and projections for future taxable income over the periods which the deferred tax assets are deductible at December 31, 1996, management believes it is more likely than not the Company will realize the benefits of these deductible differences. NOTE C -- EMPLOYEE BENEFIT PLANS Harte-Hanks Communications, Inc. maintains a defined benefit pension plan for which most of Harte-Hanks Newspapers employees are eligible. Benefits are based on years of service and the employee's compensation for the five highest consecutive years of salary during the last ten years of service. Benefits vest to the participants upon completion of five years of service or upon reaching age 65, whichever is earlier. Harte-Hanks' policy is (Continued) 4 122 Harte-Hanks Newspapers Notes to Financial Statements to accrue as expense an amount computed by its actuary and to fund at least the minimum amount required by ERISA. In 1994, the Harte-Hanks Communications, Inc. adopted a non-qualified, supplemental pension plan covering certain Harte- Hanks Newspapers employees, which provides for incremental pension payments so that total pension payments equal amounts that would have been payable from the principal pension plan if it were not for limitations imposed by income tax regulation. In determining the 1996, 1995 and 1994 actuarial present value of benefit obligations, discount rates of 73/4%, 71/4% and 8% were used, respectively. The assumed annual rate of increase in future compensation levels was 4%, and the expected long term rate of return on plan assets was 10%. Pension expense for the years ended December 31, 1996, 1995 and 1994 was $828, $823 and $789, respectively. Harte-Hanks Communications, Inc. also sponsors a 401(k) plan which provides employees of Harte-Hanks Newspapers with additional income upon retirement. The Company matches a portion of employees' voluntary before-tax contributions. Employees are fully vested in their own contributions and vest in the Company's matching contributions upon three years of service. Contributions made during the years ended December 31, 1996, 1995 and 1994 were $199, $205 and $167, respectively. The 1994 Harte-Hanks Communications, Inc. Employee Stock Purchase Plan provides for a total of 450,000 shares to be sold to participating employees at all Harte-Hanks subsidiaries at 85% of the fair market value at specified quarterly investment dates. At December 31, 1996, 1995 and 1994, Harte-Hanks Newspapers had $71, $71 and $69, respectively recorded as a liability for amounts withheld by the Company to be used for the purchase of Harte-Hanks Communications, Inc. shares in the subsequent January. All costs related to the above described plans are recorded in the Harte-Hanks Newspapers financial statements to the extent that these costs relate to the employees of Harte-Hanks Newspapers. (Continued) 5 123 Harte-Hanks Newspapers Notes to Financial Statements NOTE D -- EQUITY A summary of changes in equity is as follows:
------------------------------------------- YEARS ENDED DECEMBER 31, 1996 1995 1994 ------------------------------------------- Beginning balance $274,593 $259,750 $246,400 Net earnings. 16,281 14,843 13,350 -------- -------- -------- Ending balance $290,874 $274,593 $259,750 ======== ======== ========
NOTE E -- STOCK OPTION PLANS 1984 PLAN In 1984, Harte-Hanks Communications, Inc. adopted a Stock Option Plan ("1984 Plan") pursuant to which it issued to officers and key employees options to purchase shares of common stock at prices equal to the market price on the grant date. Market price was determined by the Board of Directors for purposes of granting stock options and making repurchase offers. Options granted under the 1984 Plan become exercisable five years after date of grant. At December 31, 1996, 1995 and 1994, options held by employees of Harte-Hanks Newspapers to purchase 96,800 shares, 107,400 shares and 149,400 shares, respectively, were outstanding under the 1984 Plan, with exercise prices ranging from $3.33 to $6.67 per share. No additional options will be granted under the 1984 Plan. 1991 PLAN Harte-Hanks Communications, Inc. adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which it may issue to officers and key employees options to purchase up to 3,000,000 shares of common stock. Options have been granted to certain employees of the Company at prices equal to the market price on the grant date ("market price options") and at prices below market price ("performance options"). As of December 31, 1996, 1995 and 1994, market price options held by employees of Harte-Hanks Newspapers to purchase 302,075 shares, 258,675 shares and 235,200 shares, respectively, were outstanding with exercise prices ranging from $6.67 to $25.38 per share. Market price options become exercisable after the fifth anniversary of their date of grant. At December 31, 1996, 1995 and 1994 performance options to purchase 110,300 shares, 107,100 shares and 116,850 shares, respectively, were outstanding with exercise prices ranging from $0.67 to $2.00 per share. The performance options become exercisable after the third anniversary of their date of grant, and the extent to which they become exercisable at that time depends upon the extent to which Harte-Hanks Communications, Inc. achieves certain goals which are established at the time the options are granted. That portion of the performance options which does not become exercisable on the third (Continued) 6 124 anniversary of the date of grant becomes exercisable after the ninth anniversary of the date of grant. Compensation expense of $217, $274 and $315 was recognized by Harte-Hanks Newspapers for the performance options held by employees of Harte-Hanks Newspapers for the years ended December 31, 1996, 1995 and 1994, respectively. The following summarizes stock option plans activity:
- -------------------------------------------------------------------------------------- Number Weighted Average of Shares OptionsPrice - -------------------------------------------------------------------------------------- Options outstanding at January 1, 1994 507,000 $ 4 .95 Granted 34,950 7 .92 Exercised (40,500) 3 .04 -------- Options outstanding at December 31, 1994 501,450 5 .30 Granted 59,100 10.34 Exercised (60,750) 4 .28 Cancelled (26,625) 7 .47 ------- Options outstanding at December 31, 1995 473,175 5 .94 Granted 67,450 18.40 Exercised (18,100) 4 .19 Cancelled (13,350) 11.93 ------- OPTIONS OUTSTANDING AT DECEMBER 31, 1996 509,175 7 .51 ======= EXERCISABLE AT DECEMBER 31, 1996 207,050 4 .18 =======
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. The Company does recognize compensation expense for options whose market price of the underlying stock exceeds the exercise price on the date of grant under the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted under SFAS No. 123. 7 125 Harte-Hanks Newspapers Notes to Financial Statements Had compensation expense for the Company's options been determined based on the fair value at the grant date for awards in 1996 and 1995, the Company's net income would have been reduced to the proforma amounts indicated below.
- ----------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1996 1995 - ----------------------------------------------------------------------------------- Net income - as reported $ 16,281 $ 14,843 Net income - proforma 16,190 14,816
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:
- ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 - ----------------------------------------------------------------------------------------- Expected dividends yield 0.3% 0.3% Expected stock price volatility 22.1% 21.3% Risk-free interest rate 6.4% 6.4% Expected life of options 3-10 years 3-10 years
The weighted-average fair value of market price options granted during 1996 and 1995 was $7.64 and $5.52, respectively. The weighted-average fair value and exercise price of performance options was $15.01 and $1.25 in 1996, and $12.15 and $0.67 in 1995, respectively. NOTE F -- FAIR VALUE OF FINANCIAL INSTRUMENTS Because of their maturities and/or interest rates, the Company's financial instruments have a fair value approximating their carrying value. These instruments include accounts receivable, trade payables, and miscellaneous notes receivable and payable. NOTE G -- COMMITMENTS AND CONTINGENCIES The Company has pending claims incurred in the normal course of business which, in the opinion of management, and legal counsel, can be disposed of without material effect on the accompanying financial statements. NOTE H -- LEASES The Company leases certain real estate and equipment under various operating leases. Most of the leases contain renewal options for varying periods of time. The total rent (Continued) 8 126 Harte-Hanks Newspapers Notes to Financial Statements expense under all operating leases was $1,054, $994 and $806 for the years ended December 31, 1996, 1995 and 1994, respectively. The future minimum rental commitments for all non-cancellable operating leases with terms in excess of one year as of December 31, 1996 are as follows:
IN THOUSANDS - --------------------------------------- 1997 $ 812 1998 726 1999 556 2000 409 2001 244 After 2001 207 -------------------------------------- TOTAL $ 2,954 --------------------------------------
(Continued) 9 127 EXHIBIT D TO THE MERGER AGREEMENT NONCOMPETITION AGREEMENT This Noncompetition Agreement (this "Agreement"), dated as of ________________, 1997, is made by and among The E.W. Scripps Company, an Ohio corporation (the "Parent"), E.W.S. Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Parent (the "Sub"), Harte-Hanks Communications, Inc., a Delaware corporation (the "Company") and [NEWCO], a Delaware corporation and a wholly owned subsidiary of the Company ("Newco"). RECITALS WHEREAS, the Parent, Sub and Company are parties to that certain Agreement and Plan of Merger and Reorganization dated as of May ___, 1997 (the "Merger Agreement") which, among other things, provides for the Merger of Sub with and into the Company, with the Company as the surviving corporation (the "Surviving Corporation"); WHEREAS, immediately prior to the Merger, pursuant to the terms of the Agreement and Plan of Distribution (this and other capitalized terms used and not defined herein shall have the meanings given to such terms in the Merger Agreement), the Company will distribute certain businesses and operations to Newco which Parent is unwilling to acquire (the "Distribution"); and WHEREAS, the Distribution is one step in a series of transactions as a result of which (i) Parent will acquire the television and radio broadcasting and non-shopper newspaper publishing businesses of the Company and its Television and Newspaper Subsidiaries (the "TV/Newspaper Business") by merging the Sub with and into the Company, and (ii) Newco will acquire and conduct all other businesses previously conducted by the Company and its Subsidiaries. NOW, THEREFORE, in consideration of the foregoing and the agreements set forth below, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I NONCOMPETITION COVENANTS 1.1 Noncompetition Covenants. Newco acknowledges that (i) it, on its own and through the Company and its Subsidiaries and their respective officers, employees and other representatives, has specialized knowledge and experience in the operation of television and radio broadcasting stations and non-shopper newspaper publishing businesses (the "Restricted Business"), (ii) its reputation and contacts within the Restricted Business and those of the Company and its Subsidiaries are considered of great value to Parent and the Company, and (iii) if such knowledge, experience, reputation or contacts were used to compete with Parent and the 128 Surviving Corporation, serious harm to Parent and the Surviving Corporation could result. Thus, Newco agrees that, for a period of five (5) years after the Closing Date, neither it nor any of its Subsidiaries shall, directly or indirectly, on its own behalf or in the service or on behalf of others: (1) actively solicit for employment (including as an independent contractor but excluding general solicitations of employment), interfere with or endeavor to entice away any person who at any time on or after May ___, 1997, was an officer or employee of the Company or any of its Subsidiaries engaged on behalf of the Company in the TV/Newspaper Business and whom the Parent or the Surviving Corporation employs effective upon the Closing; (2) own, manage, operate, finance, join, control, participate or assist in the ownership, management, operation, financing or control of, or be connected as a stockholder, partner, principal, agent, representative, consultant or otherwise with, any business or enterprise engaged in the Restricted Business in the Restricted Area (a "Restricted Party"); or (3) use or permit the Company's or Newco's name to be used in connection with any business or enterprise engaged in the Restricted Business in the Restricted Area; provided, however, that the provisions of this Section 1.1 shall not be construed to prohibit (i) the ownership by Newco or any Subsidiary of Newco, as a passive investor, of not more than 5% of any class of securities registered pursuant to the Exchange Act of any corporation which is engaged in the Restricted Business, or passive investments in partnerships or joint ventures representing not more than 5% of any class of any equity interests therein or (ii) Newco or its Subsidiaries from having a Restricted Party as an investor in any business, other than a Restricted Business, in which Newco or its Subsidiaries own an interest. For purposes hereof, the term "Restricted Area" means the geographic areas served by the TV/Newspaper Business at the date hereof. 1.2 Reasonableness of Covenants, etc. In the event that the provisions of Section 1.1 should ever be adjudicated to exceed the time, geographic or service limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic or service limitations permitted by applicable law. Newco agrees that its covenants set forth in Section 1.1 (the "Noncompetition Covenants") are appropriate and reasonable when considered in light of the nature and extent of the Restricted Business and the transactions contemplated in connection with the Merger Agreement, including, without limitation, the distribution of certain businesses and operations to Newco by the Company pursuant to the Agreement and Plan of Distribution. Without limiting the generality of the foregoing, Newco specifically agrees that prohibitions on the active solicitation, interference or enticement of officers, directors, employees or agents of the Parent or any of its Subsidiaries, as set forth in Section 1.1, are appropriate and reasonable in all respects. Newco agrees that the Noncompetition Covenants are of the essence of this Agreement and the Merger Agreement, that each such Noncompetition Covenant is reasonable and necessary to protect and preserve the interests and properties of the Parent and its Subsidiaries and the Restricted Business of the Parent and its Subsidiaries; that irreparable loss and damage will be suffered by the Parent should Newco or any of its Subsidiaries breach any such Noncompetition Covenant; that each of such covenants is separate, distinct and severable not only from the other of such covenants but also from the other and remaining provisions of this Agreement and the Merger Agreement; that the -2- 129 unenforceability of all or any of the Noncompetition Covenants shall not affect the validity or enforceability of any other such covenants; that, in addition to other remedies available to it, the Parent shall be entitled to both temporary and permanent injunctions to prevent a breach or contemplated breach by Newco of any of the Noncompetition Covenants, and that Newco hereby waives any requirements for the posting of a bond or any other security by the Parent in connection therewith. 1.3 Specific Performance; Other Remedies. Newco recognizes that the Noncompetition Covenants are unique and, accordingly, the Parent shall, in addition to such other remedies as may be available to it at law or in equity, have the right to enforce its rights under Section 1.1 by actions for injunctive relief and specific performance to the extent permitted by law. ARTICLE 2 MISCELLANEOUS 2.1 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the specific subject matter thereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the specific subject matter hereof. 2.2 Governing Law. This Agreement shall governed by and construed in accordance with the laws of the State of Ohio regardless of conflict of law principles. 2.3 Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 2.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by telecopy with answerback, by express or overnight mail delivery by a nationally recognized air courier (delivery charges prepaid) or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: if to the Parent or the Company: The E.W. Scripps Company 312 Walnut Street, 28th Floor Cincinnati, Ohio 45202 Attention: M. Denise Kuprionis, Secretary -3- 130 with a copy to: Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114 Attention: William Appleton, Esq. if to Newco: c/o [Newco] 200 Concord Plaza Drive San Antonio, Texas 78216 Attn: Donald R. Crews with a copy to: Hughes & Luce, L.L.P. 1717 Main Street, Suite 2800 Dallas, Texas 75201 Attn: Alan J. Bogdanow or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or communication delivered in person shall be deemed effective on delivery. Any notice or communication sent by telecopy or by air courier shall be deemed effective on the first business day at the place at which such notice or communication is received following the day on which such notice or communication was sent. Any notice or communication sent by registered or certified mail shall be deemed effective on the fifth business day at the place from which such notice or communication was mailed following the day in which such notice or communication was mailed. 2.5 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement except for Section 2.7 and 2.8 (which are intended to be for the benefit of the Persons provided for therein, and may be enforced by such Persons). 2.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 2.7 Personal Liability. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect stockholder of any party hereto or any officer, director, employee, agent, representative or investor of any party hereto. -4- 131 2.8 Binding Effect; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, including the Company as the surviving corporation in the Merger. This Agreement may not be assigned by any party hereto. 2.9 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of all the parties. 2.10 Legal Fees; Costs. If any party hereto institutes any action or proceeding to enforce any provision of this Agreement, the prevailing party therein shall be entitled to receive from the losing party reasonable attorneys' fees and costs incurred in such action or proceeding, whether or not such action or proceeding is prosecuted to judgment. 2.11 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. THE E. W. SCRIPPS COMPANY By: ------------------------------------ Name: Title: E.W.S. ACQUISITION CORP. By: ------------------------------------ Name: Title: -5- 132 HARTE-HANKS COMMUNICATIONS, INC. By: ------------------------------------ Name: Title: [NEWCO] By: ------------------------------------ Name: Title: -6- 133 EXHIBIT E VOTING AGREEMENT This Voting Agreement dated as of May __, 1997 (this "Agreement"), is by and among The E. W. Scripps Company, an Ohio corporation ("Buyer"), Harte-Hanks Communications, Inc., a Delaware corporation (the "Company"), The Edward W. Scripps Trust (the "Trust") and Houston H. Harte, the Andrew B. Shelton Revocable Trust, Edward H. Harte and Larry Franklin (collectively the "Company Major Stockholders"). WHEREAS, the Trust owns 16,040,000 shares of the Buyer's Common Voting Stock, $.01 par value per share ("Buyer Common Voting Stock"), and 32,610,000 shares of the Buyer's Class A Common Stock, $.01 par value per share ("Buyer Class A Common Stock") (all shares of Buyer Common Voting Stock and Buyer Class A Common Stock now owned and which may hereafter be acquired by the Trust prior to the termination of this Agreement shall be referred to herein as the "Buyer Shares"); WHEREAS, the Company Major Stockholders own in the aggregate approximately 13,551,900 shares or approximately 36.4% of the Company's Common Stock, $1.00 par value (all shares of such Stock now owned and which may hereafter be acquired by the Company Major Stockholders prior to the termination of this Agreement shall be referred to herein as the "Company Shares"); WHEREAS, the Company and Buyer are entering into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), which provides, among other things, that the Company will merge with and into Buyer pursuant to the Merger (this and other capitalized terms used and not defined herein shall have the meanings given to such terms in the Merger Agreement); WHEREAS, it was a condition to the willingness of the Buyer to enter into the Merger Agreement that the Company Major Stockholders agree, and in order to induce the Company to enter into the Merger Agreement, the Company Major Stockholders agreed, to enter into this Agreement; WHEREAS, it was a condition to the willingness of the Company to enter into the Merger Agreement that the Trust agree, and in order to induce the Company to enter into the Merger Agreement, the Trust agreed to enter into this Agreement; and NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1 134 ARTICLE 1 VOTING OF BUYER SHARES AND COMPANY SHARES SECTION 1.1. VOTING AGREEMENT. (a) Each Company Major Stockholder hereby agrees that during the time this Agreement is in effect, at any meeting of the stockholders of the Company, however called, and in any action by consent of the stockholders of the Company, such Company Major Stockholder shall vote his or its Company Shares: (i) in favor of the Merger, the Merger Agreement (as amended from time to time) and the Distribution, (ii) against any proposal for any recapitalization, merger, sale of assets or other business combinations between the Company and any person or entity other than Buyer, or any other action or agreement, that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or that would result in any of the conditions to the obligations of the Company under the Merger Agreement not being fulfilled, and (iii) in favor of any other matter relating to the consummation of the Merger Agreement and the Distribution. The Company Major Stockholders acknowledge receipt and review of a copy of the Merger Agreement. (b) The Trust hereby agrees that during the time this Agreement is in effect, at any meeting of the stockholders of Buyer, however called, and in any action by consent of the stockholders of Buyer, the Trust shall vote its Buyer Shares (i) in favor of the Merger and the Merger Agreement (as amended from time to time), (ii) against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of Buyer under the Merger Agreement or that would result in any of the conditions to the obligations of Buyer under the Merger Agreement not being fulfilled and (iii) in favor of any other matter relating to the consummation of the Merger. The Trust acknowledges receipt and review of a copy of the Merger Agreement. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY MAJOR STOCKHOLDERS The Company Major Stockholders each hereby represent and warrant to the Buyer as follows: SECTION 2.1. AUTHORITY RELATIVE TO THIS AGREEMENT. Such Company Major Stockholder has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by such Company Major Stockholder and, assuming the due authorization, execution and delivery hereof by each other party hereto, constitutes a legal, valid and binding obligation of such Company Major Stockholder enforceable against such Company Major Stockholder in accordance with its terms, except (x) as the same may be limited by applicable bankruptcy, insolvency, moratorium or similar laws of general application relating to or affecting creditors' rights, including without 2 135 limitation, the effect of statutory or other laws regarding fraudulent conveyance and preferential transfers, and (y) for the limitations imposed by general principles of equity. The Company Major Stockholder which is a trust (the "Shelton Trust") has provided Buyer evidence of its authority to enter into this Agreement. SECTION 2.2. NO CONFLICT. (a) The execution and delivery of this Agreement by such Company Major Stockholder do not, and the performance of this Agreement by such Company Major Stockholder shall not, (i) in the case of the Shelton Trust, conflict with or violate any trust agreement governing it, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to such Company Major Stockholder or by which the Company Shares owned by it are bound or affected or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the Company Shares owned by him or it pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which such Company Major Stockholder is a party or by which such Company Major Stockholder or the Company Shares owned by it are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts. violations, breaches, defaults or other occurrences which would not prevent or delay the performance by such Company Major Stockholder of its obligations under this Agreement. (b) The execution and delivery of this Agreement by such Company Major Stockholder do not, and the performance of this Agreement by such Company Major Stockholder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any federal, state, local or foreign regulatory body, except (i) where the failure to obtain such consents, approvals. authorizations or permits, or to make such filings or notifications, would not prevent or delay the performance by such Company Major Stockholder of his or its obligations under this Agreement or (ii) filings with the SEC under the Exchange Act. SECTION 2.3. TITLE TO THE COMPANY SHARES. Such Company Major Stockholder is the owner of the Company Shares owned by it free and clear of all Liens (as defined in Section 3.3) whatsoever. Such Company Major Stockholder has sole voting power with respect to the Company Shares owned by it or has the power to direct the voting of such Company Shares. Such Company Major Stockholder has not appointed or granted any proxy, which appointment or grant is still effective, with respect to the Company Shares owned by it. The person executing this Agreement on behalf of the Shelton Trust has the power to direct the voting of such Trust's Company Shares. 3 136 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE TRUST The Trust hereby represents and warrants to the Company as follows: SECTION 3.1. AUTHORITY RELATIVE TO THIS AGREEMENT. The Trust has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Trust and, assuming the due authorization, execution and delivery hereof by each other party hereto, constitutes a legal, valid and binding obligation of the Trust (and the trustees of the Trust in their capacities as such), enforceable against the Trust in accordance with its terms, except (x) as the same may be limited by applicable bankruptcy, insolvency, moratorium or similar laws of general application relating to or affecting creditors' rights, including without limitation, the effect of statutory or other laws regarding fraudulent conveyance and preferential transfers, and (y) for the limitations imposed by general principles of equity. The Trust has allowed the Company to review a complete copy of the trust agreement establishing the Trust and provided the Company evidence of its authority to enter into this Agreement. The Company agrees to hold the contents of such trust agreement in complete confidence. SECTION 3.2. NO CONFLICT. (a) The execution and delivery of this Agreement by the Trust do not, and the performance of this Agreement by the Trust will not (i) conflict with or violate the trust agreement establishing the Trust, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Trust or by which the Trust's Buyer Shares are bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the Trust's Buyer Shares pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Trust is a party or by which the Trust or the Trust's Buyer Shares are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would not prevent or delay the performance by the Trust of the Trust's obligations under this Agreement. (b) The execution and delivery of this Agreement by the Trust do not, and the performance of this Agreement by the Trust will not, require any consent, approval, authorization or permit of, or filing with or notification to, any federal, state, local or foreign regulatory body, except (i) filings with the SEC under the Exchange Act and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay the performance by the Trust of the Trust's obligations under this Agreement. 4 137 SECTION 3.3. TITLE TO THE BUYER SHARES. The Trust is the owner of the Buyer Shares, free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on voting rights, charges and other encumbrances (collectively, "Liens") of any nature whatsoever. The Trust has not appointed or granted any proxy, which appointment or grant is still effective, with respect to the Buyer Shares. The Trust has sole voting power with respect to the Buyer Shares, and the person executing this Agreement on behalf of the Trust has the power to direct the voting of the Buyer Shares. ARTICLE 4 COVENANTS OF THE COMPANY MAJOR STOCKHOLDERS SECTION 4.1. NO INCONSISTENT AGREEMENT. Each Company Major Stockholder hereby covenants and agrees that, except as contemplated by this Agreement, such Stockholder shall not enter into any voting agreement or grant a proxy or power of attorney with respect to its Company Shares which is inconsistent with this Agreement. SECTION 4.2. TRANSFER OF TITLE. Each Company Major Stockholder hereby covenants and agrees that such Stockholder shall not transfer ownership of any of its or his Company Shares unless (i) the transferee agrees in writing to be bound by the terms and conditions of this Agreement or (ii) such transfer of ownership together with all other such transfers by the other Company Major Stockholders does not exceed in the aggregate 1% of the Company Common Stock outstanding. Nothing else contained in this Agreement shall be construed to prohibit any transfer permitted by this Section 4.2. ARTICLE 5 COVENANTS OF THE TRUST SECTION 5.1. NO INCONSISTENT AGREEMENT. The Trust hereby covenants and agrees that, except as otherwise contemplated by this Agreement, the Trust shall not enter into any voting agreement or grant a proxy or power of attorney with respect to the Trust's Buyer Shares which is inconsistent with this Agreement. SECTION 5.2. TRANSFER OF TITLE. The Trust hereby covenants and agrees that the Trust shall not transfer ownership of any of its Buyer Shares unless (i) the transferee agrees in writing to be bound by the terms and conditions of this Agreement or (ii) such transfer of ownership will not affect the Trust's ability to approve of the Merger and the other Transactions with respect to which the Trust may be entitled to vote without regard to the vote of the other stockholders of the Buyer. Nothing else contained in this Agreement shall be construed to prohibit any transfer permitted by this Section 5.2. 5 138 ARTICLE 6 MISCELLANEOUS SECTION 6 1. TERMINATION. This Agreement shall terminate on the earliest to occur of (i) the date of consummation of the Merger, (ii) the date which is one year from the date hereof, and (iii) the date of the termination of the Merger Agreement. SECTION 6.2. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. SECTION 6.3. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. SECTION 6.4. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by all the parties hereto. SECTION 6.5. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. SECTION 6.6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of (i) in the case of the Trust's obligations, the State of Ohio, and (ii) in the case of the Company Major Stockholders' obligations, the State of Delaware, regardless of the laws that might otherwise govern under principles of conflicts of law applicable hereto. SECTION 6.7. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. SECTION 6.8. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. SECTION 6.9. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by telecopy with answerback, by express or overnight mail delivered by a nationally recognized air courier (delivery charges prepaid) or by registered or certified mail (postage prepaid, return receipt 6 139 requested) to the respective parties as follows: (i) if to the Company Major Stockholders or the Company, to the address specified in clause (b) of Section 9.2 of the Merger Agreement, (ii) if to the Trust, to it at 312 Walnut Street, 28th Floor, Cincinnati, Ohio, attention: Donald E. Meihaus, Secretary-Treasurer, and (iii) if to Buyer, to it at 312 Walnut Street, 28th Floor, Cincinnati, Ohio, attention: M. Denise Kuprionis, Secretary, or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or communication delivered in person shall be deemed effective on delivery. Any notice or communication sent by telecopy or by air courier shall be deemed effective on the first business day at the place at which such notice or communication is received following the day on which such notice or communication was sent. Any notice or communication sent by registered or certified mail shall be deemed effective on the fifth business day at the place from which such notice or communication was mailed following the day on which such notice or communication was mailed. SECTION 6.10. ASSIGNMENTS. This Agreement shall not be assigned by operation of law or otherwise. SECTION 6.11. PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day first written above. THE E. W. SCRIPPS COMPANY By: ------------------------------------ Name: Craig C. Standen Title: Senior Vice President, Corporate Development THE EDWARD W. SCRIPPS TRUST By: ------------------------------------ Name: Charles E. Scripps Title: Trustee 7 140 HARTE-HANKS COMMUNICATIONS, INC. By: ------------------------------------ Name: Donald R. Crews Title: Senior Vice President, Legal THE ANDREW B. SHELTON REVOCABLE TRUST By: ------------------------------------ Name: David L. Copeland Title: Trustee --------------------------------------- HOUSTON H. HARTE --------------------------------------- EDWARD H. HARTE --------------------------------------- LARRY FRANKLIN 8 EX-2.2 3 ACQUISITION AGREEMENT 1 EXHIBIT 2.2 ACQUISITION AGREEMENT DATED AS OF MAY 16, 1997 BY AND BETWEEN THE E. W. SCRIPPS COMPANY AND HARTE-HANKS COMMUNICATIONS, INC. 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I PURCHASE AND SALE OF SHARES Section 1.1 Sale of Acquired Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.3 Purchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.4 Purchase Price Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II CLOSING Section 2.1 Time and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 2.2 Delivery by Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 2.3 Delivery by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Section 3.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.3 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.4 Consents and Approvals; No Violations . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.5 Acquired Business Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.7 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.8 Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.9 No Violation of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 3.11 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 3.12 Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.13 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.14 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.15 Condition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.16 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 3.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 3.18 FCC Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
i 3 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Section 4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 4.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 4.3 Consents and Approvals; No Violations . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 4.4 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 4.5 No Violation of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.6 Sufficient Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.7 Purchase for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.8 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 4.9 Investigations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE V COVENANTS PENDING THE CLOSING Section 5.1 Covenants of Seller with Respect to the Acquired Business . . . . . . . . . . . . . . . 15 Section 5.2 Covenants of Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 5.3 Covenants of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 5.4 Control of the Seller Stations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VI ADDITIONAL AGREEMENTS Section 6.1 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.2 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 6.3 Legal Conditions to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 6.4 Use of Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 6.5 Intercompany Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 6.6 Employee Matters; Seller Stock Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 6.7 Defense and Payment of Certain Claims . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 6.8 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 6.9 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 6.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 6.11 Sales and Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 6.12 Assignment of Contracts and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 6.13 Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 6.14 Indemnity Relating to Certain Litigation; and Certain Benefits Liabilities . . . . . . . 26
ii 4 ARTICLE VII CONDITIONS Section 7.1 Conditions to Each Party's Obligation to Effect the Closing . . . . . . . . . . . . . . 28 Section 7.2 Conditions of Obligations of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 7.3 Conditions of Obligations of Seller . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VIII TERMINATION AND AMENDMENT Section 8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 8.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 8.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE IX MISCELLANEOUS Section 9.1 Nonsurvival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . 31 Section 9.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 9.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 9.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 9.5 Entire Agreement; No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . 32 Section 9.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 9.7 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 9.8 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 9.9 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 9.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
iii 5 SCHEDULES AND EXHIBITS Seller Disclosure Schedule Exhibit A - Noncompetition Agreement Exhibit B - Television Financial Statements Exhibit C - Newspaper Financial Statements
iv 6 ACQUISITION AGREEMENT ACQUISITION AGREEMENT (this "Agreement"), dated as of May 16, 1997, by and between THE E. W. SCRIPPS COMPANY, an Ohio corporation ("Buyer"), and HARTE-HANKS COMMUNICATION'S, INC., a Delaware corporation ("Seller"). WHEREAS, Buyer and Seller have entered into an Agreement and Plan of Reorganization dated as of May 16, 1997 (the "Merger Agreement") providing for the merger (the "Merger") of Seller into Buyer after Seller shall have effected the Distribution (as defined in the Merger Agreement); WHEREAS, in the event that the Merger Agreement is terminated, Buyer desires to purchase, and Seller desires to sell, substantially all of Seller's newspaper, television and radio operations, on the terms and subject to the conditions contained in this Agreement; NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF BUSINESS Section 1.1 Sale of Acquired Business. Upon the terms and subject to the conditions hereof, at the closing of the transactions contemplated hereby (the "Closing"), Seller will sell and assign to Buyer, and Buyer will purchase and acquire from Seller, the Acquired Business. The "Acquired Business" means and includes the assets, liabilities, capital stock and interests reflected on the Acquired Business Balance Sheet (as defined in Section 3.5), as such assets and liabilities may have changed since the date of the Acquired Business Balance Sheet, but in any event shall include all of Seller's direct and indirect right, title and interest in the assets used primarily in, and all of Seller's liabilities and obligations (accrued, absolute, contingent, undisclosed or otherwise) which are primarily related to or have arisen or will arise from Seller's newspaper, television and radio businesses, including the ownership and operation of the newspapers listed in Section 1.1 of the Seller Disclosure Schedule, KENS-TV and KENS-AM. The Acquired Business shall include the following Subsidiaries of Seller (individually, a "Acquired Subsidiary" and collectively, the "Acquired Subsidiaries"): Independent Publishing Company, a South Carolina corporation ("IPC"), Harte-Hanks Community Newspapers, Inc., a Texas corporation ("Community Newspapers"), and Harte-Hanks Television, Inc., a Delaware corporation ("HHTV"). As used in this Agreement, the word "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships the general partnership interests of which held by such party and any Subsidiary of such party do not have a majority of the voting interest in such partnership) or (ii) securities or 1 7 other interests having by their terms a majority of the outstanding voting power with respect to such corporation or other organization are directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. Section 1.2 Purchase Price. The total consideration (the "Purchase Price") for the Acquired Business will be the sum of $775 million, plus or minus the positive or negative amount of net working capital (current assets less current liabilities) of the Acquired Business estimated by the chief financial officer of Seller as the net working capital as of the Closing Date pursuant to Section 7.2(c) (the "Cash Payment"), plus Buyer's assumption of Seller's liabilities included in the Acquired Business, plus or minus the adjustment amount calculated pursuant to Section 1.3. At the Closing, Buyer will pay the Cash Payment to Seller by wire transfer of immediately available funds. Section 1.3 Purchase Price Adjustment. (a) No later than 45 days after the Closing Date, Seller shall deliver to Buyer a balance sheet of the Acquired Business at the Closing Date (the "Closing Balance Sheet"). The Closing Balance Sheet shall be prepared in accordance with generally accepted accounting principles on a basis consistent with the Acquired Business Financial Statements (as defined below), except that the Closing Balance Sheet will not include (i) any liabilities or reserves in respect of Continuing Claims (as defined below), (ii) will reflect all film contracts as long term assets and all film contract payables as long term liabilities and (iii) will not reflect as current liabilities the severance obligations for Employees referenced in Section 6.6(a) below. To the extent that the net working capital (current assets less current liabilities) of the Acquired Business as shown on the Closing Balance Sheet is more or less than the amount estimated by the chief financial officer of Seller as the net working capital as of the Closing Date pursuant to Section 7.2(c), Buyer shall pay to Seller, or Seller shall pay to Buyer, the amount of such excess or shortfall, respectively, by wire transfer of immediately available funds within five days of the earlier to occur of (i) acceptance by Buyer or (ii) the Neutral Auditors' determination. (b) After receipt of the Closing Balance Sheet, Buyer shall have 20 days to review the Closing Balance Sheet, together with the workpapers used in the preparation thereof. Representatives of Buyer and Seller shall be given access to all work papers, books, records and other information related to the preparation of the Closing Balance Sheet to the extent required to complete their review of the Closing Balance Sheet. Buyer may dispute items reflected on the Closing Date Balance Sheet only on the basis that such amounts were not arrived at in accordance with the consistent application of accounting principles used in the preparation of the Acquired Business Financial Statements. Unless Buyer delivers written notice to Seller on or prior to the 20th day after Buyer's receipt of the Closing Balance Sheet specifying in reasonable detail all disputed items and the basis therefor, Buyer shall be deemed to have accepted and agreed to the Closing Balance Sheet. If Buyer so notifies Seller of its objection to the Closing Balance Sheet, Buyer and Seller shall, within 30 days following such notice (the "Resolution Period"), attempt to resolve their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive. 2 8 (c) If at the conclusion of the Resolution Period there remain amounts in dispute pursuant to paragraph (b) of this Section 1.3, then all amounts remaining in dispute shall be submitted to a firm of nationally recognized independent public accountants who shall not have had a material relationship with Buyer or Seller within the past two years (the "Neutral Auditors") and who shall be selected by mutual agreement of Buyer and Seller within 10 days after the expiration of the Resolution Period. Each party agrees to execute, if requested by the Neutral Auditors, a reasonable engagement letter. All fees and expenses relating to the work, if any, to be performed by the Neutral Auditors shall be borne equally by Buyer and Seller. The Neutral Auditors shall act as an arbitrator to determine, based solely on presentations by Buyer and Seller, and not by independent review or audit, only those issues still in dispute. The Neutral Auditors' determination shall be made within 30 days of their selection, shall be set forth in a written statement delivered to Buyer and Seller and shall be final, binding and conclusive. (d) "Continuing Claims" means all suits, claims, actions, arbitrations, inquiries, proceedings or investigations by or before any court, arbitral tribunal, administrative agency or commission or other governmental, regulatory or administrative agency or commission against Seller or any of the Acquired Subsidiaries that arise from facts or events occurring prior to the Closing Date relating to bodily injury, property damage or worker's compensation and that would fall under Seller's automobile, general liability, or worker's compensation coverage. Section 1.4 Purchase Price Allocation. The Purchase Price will be allocated among the Shares and assets of Seller constituting the remainder of the Acquired Business as agreed by Seller and Buyer on or prior to Closing. Except as otherwise provided in Section 6.10(b) in the event a Section 338(h)(10) election is made, Buyer and Seller will, not later than 90 days after the Closing, execute and cause to be filed Forms 8594 under Internal Revenue Code of 1986, as amended (the "Code") reflecting such allocation. Upon any adjustment to the Purchase Price under Section 1.3, Buyer and Seller will each execute additional Forms 8594, if necessary. ARTICLE II CLOSING Section 2.1 Time and Place. On the terms and subject to the conditions of this Agreement, the Closing will take place at the offices of Seller's outside counsel, Hughes & Luce, L.L.P., located at 1717 Main Street, Suite 2800, Dallas, Texas 75201 at 10:00 a.m. local time on the third business day following the date on which the last remaining condition set forth in Article VII has been satisfied or waived, or at such other time and place as the parties hereto agree upon in writing (the "Closing Date"). 3 9 Section 2.2 Delivery by Seller. At the Closing, Seller will deliver to Buyer the following: (a) Certificates representing all of the issued and outstanding shares of capital stock in IPC, Community Newspapers and HHTV (collectively, the "Shares"), endorsed in blank or together with duly executed stock transfer powers in favor of Buyer; (b) A receipt for the Cash Payment; (c) A bill of sale and assignment, in form reasonably acceptable to Buyer, conveying to Buyer all of the assets included in the Acquired Business that are owned by Seller, together with certificates of title with respect to motor vehicles; (d) Instruments of assignment, in form reasonably acceptable to Buyer, assigning to Buyer all of Seller's rights under the Contracts (as defined below) to which Seller is a party, and Seller shall have obtained all necessary consents to such assignments other than consents which the failure to obtain will not have a material adverse effect on the Acquired Business taken as a whole; (e) A good and sufficient deed, in form reasonably acceptable to Buyer, conveying a good and clear record and marketable title to all of the real property owned by Seller and included in the Acquired Business; (f) the Noncompetition Agreement in the form attached here to as Exhibit A; and (g) Each of the other documents and instruments required to be delivered under the terms of this Agreement. Section 2.3 Delivery by Buyer. At the Closing, Buyer will deliver to Seller the following: (a) The Cash Payment, in the manner required in Section 1.2; (b) A receipt for the delivery of the Shares; (c) An instrument of assumption of liabilities, in form reasonably acceptable to Seller, covering those liabilities of Seller included in the Acquired Business; (d) the Noncompetition Agreement in the form attached hereto as Exhibit A; and (e) Each of the other documents and instruments required to be delivered under the terms of this Agreement. 4 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as follows: Section 3.1 Organization. Each of Seller and the Acquired Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and Seller and each Acquired Subsidiary has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on the Acquired Business taken as a whole. Seller and the Acquired Subsidiaries are each duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by them or the nature of the business conducted by them makes such qualification or licensing necessary, except where the failure to be so qualified or licensed and in good standing would not in the aggregate have a material adverse effect on the Acquired Business taken as a whole or on the ability of Seller to consummate the transactions contemplated hereby. True, accurate and complete copies of the charters and bylaws, including all amendments thereto, of the Acquired Subsidiaries have heretofore been delivered to Buyer. As used in this Agreement, any reference to any event, change or effect having a material adverse effect on or with respect to the Acquired Business taken as a whole or an entity (or group of entities taken as a whole) means that such event, change or effect is materially adverse to the business, properties, assets, results of operations or financial condition of the Acquired Business or such entity (or, if with respect thereto, of such group of entities taken as a whole). Section 3.2 Capitalization. The authorized capital stock of IPC consists of 150 shares of common stock, $100.00 par value per share, all of which shares are issued and outstanding and owned by Seller. The authorized capital stock of Community Newspapers consists of 6,000 shares of common stock, no par value per share, all of which shares are issued and outstanding and owned by Seller. The authorized capital stock of HHTV consists of 1,000 shares of common stock, $1.00 par value per share, all of which shares are issued and outstanding and owned by Seller. All the Shares are duly authorized, validly issued, fully paid and non-assessable and free of any preemptive rights in respect thereof. There are no existing options, warrants, calls, subscriptions or other rights or other agreements, commitments, understandings or restrictions of any character binding on any of the Acquired Subsidiaries with respect to the issued or unissued capital stock of any of the Acquired Subsidiaries. There are no outstanding contractual obligations of any of the Acquired Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of any of the Acquired Subsidiaries. Upon the sale of the Shares to Buyer at the Closing, Buyer will acquire the entire legal and beneficial ownership in all of the Shares, free and clear of any liens, claims, security interests or encumbrances. Section 3.3 Authority. Seller has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. 5 11 The execution, delivery and performance of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby have been duly authorized by Seller's Board of Directors, and no other corporate proceedings on the part of Seller are necessary to authorize this Agreement or for Seller to consummate the transactions so contemplated hereby. This Agreement has been duly executed and delivered by Seller and, assuming this Agreement constitutes a valid and binding obligation of Buyer, constitutes a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms. Section 3.4 Consents and Approvals; No Violations. Except (a) as set forth in Section 3.4 of the Seller Disclosure Schedule, (b) for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the Communications Act of 1934, as amended (the "FCC Act"), and (c) as may be necessary as a result of any facts or circumstances relating solely to Buyer or any of its Subsidiaries, none of the execution, delivery or performance of this Agreement by Seller or the consummation by Seller of the transactions contemplated hereby and compliance by Seller with any of the provisions hereof will (i) conflict with or result in any breach of any provisions of the charters or bylaws of Seller or of any of the Acquired Subsidiaries, (ii) require any filing by Seller or any of the Acquired Subsidiaries with, or any permit, authorization, consent or approval to be obtained by Seller or any of the Acquired Subsidiaries of, any court, arbitral tribunal, administrative agency or commission or other governmental or other regulatory authority or agency (a "Governmental Entity"), (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument, obligation or commitment to which Seller or any of the Acquired Subsidiaries is a party or by which any of them or any of their properties or assets may be bound ("Contracts") or result in the creation of any lien upon any of the property or assets of the Acquired Business, or (iv) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Seller or any of the Acquired Subsidiaries, except, in the case of clause (ii), (iii) or (iv), for failures to file or obtain, violations, breaches, defaults or liens which would not have a material adverse effect on the Acquired Business taken as a whole or the ability of Seller to consummate the transactions contemplated hereby. The Seller has no knowledge of any facts or circumstances relating to the Seller or any of its Acquired Subsidiaries that, individually or in the aggregate, would prevent any necessary approval of the transactions contemplated by this Agreement under the FCC Act. Section 3.5 Acquired Business Financial Statements. Attached hereto as Exhibits B and C are the audited balance sheets (the "Acquired Business Balance Sheets") of the Acquired Business as of December 31, 1996 ( the "Balance Sheet Date") and December 31, 1995, and the related statement of operations and cash flows for the three years ended December 31, 1996 and the accompanying notes for the Seller's television and radio operations and newspaper operations, respectively (together with the Acquired Business Balance Sheets, the "Acquired Business Financial Statements"). The Acquired Business Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied, and, 6 12 except as set forth in Section 3.5 of the Seller Disclosure Schedule, fairly present in all material respects the financial position of the Acquired Business as at the dates thereof, and the results of its operations for the periods then ended. After the Closing, except as otherwise contemplated by this Agreement, neither Seller nor any of its other Subsidiaries will own or have rights to use any of the assets or property, whether tangible, intangible or mixed, which are necessary for the conduct of the Acquired Business as conducted on the date hereof. Section 3.6 Litigation. Except as disclosed in the Acquired Business Financial Statements or as set forth in Section 3.6 of the Seller Disclosure Schedule, there is no suit, action, proceeding or investigation relating to the Acquired Business pending or, to the knowledge of Seller, threatened, against Seller or any of the Acquired Subsidiaries before any Governmental Entity which, individually or in the aggregate, is reasonably likely to have a material adverse effect on the Acquired Business taken as a whole or the ability of Seller to consummate the transactions contemplated hereby. Except as set forth in Section 3.6 of the Seller Disclosure Schedule, neither Seller nor any of the Acquired Subsidiaries is subject to any outstanding order, writ, injunction or decree relating to the Acquired Business which, individually or in the aggregate, is reasonably likely to have a material adverse effect on the Acquired Business taken as a whole or a material adverse effect on the ability of Seller to consummate the transactions contemplated hereby. Section 3.7 Employee Benefits. (a) Section 3.7 of the Seller Disclosure Schedule contains a list of all "employee benefit plans" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other material benefit plans, programs, agreements and arrangements (the "Benefit Plans"), which cover employees or former employees of Seller and the Acquired Subsidiaries who are or were employed in the Acquired Business (the "Employees"). True and complete copies of all Benefit Plans, any trust instruments and/or insurance contracts, if any, forming a part of any such plans, and all amendments thereto; current summary plan descriptions; where applicable, the most current determination letter received from the Internal Revenue Service (the "Service"); and where applicable, annual reports, financial statements and actuarial reports for the last plan year, which fairly and accurately reflect the financial condition of the plans have been made available to Buyer. (b) All Benefit Plans are in compliance with ERISA, the Code, and all other applicable laws in all material respects. Each Benefit Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Service, and Seller is not aware of any circumstances likely to result in revocation of any such favorable determination letter. Neither Seller, the Acquired Subsidiaries nor any ERISA Affiliate (as defined below) has contributed or been required to contribute to any Multiemployer Plan (as defined in ERISA) with respect to any Employees. 7 13 (c) No liability under Subtitle C or D of Title IV of ERISA has been incurred by Seller or any of the Acquired Subsidiaries with respect to any ongoing, frozen or terminated Pension Plan, currently or formerly maintained by any of them, or the Pension Plan of any entity which is or has been considered one employer with Seller or any of the Acquired Subsidiaries, as the case may be, under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate") which would have a material adverse effect on the Acquired Business taken as a whole. (d) All contributions required to be made or accrued as of the Balance Sheet Date under the terms of any Benefit Plan for which Seller or any of the Acquired Subsidiaries may have liability have been timely made or have been reflected on the Acquired Business Balance Sheet. Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has incurred an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA in an amount which would have a material adverse effect on the Acquired Business taken as a whole. Neither Seller nor any of the Acquired Subsidiaries has provided, or is required to provide, security to any Pension Plan pursuant to Section 401(a)(29) of the Code. (e) Neither Seller nor any of the Acquired Subsidiaries has any obligations for retiree health and life benefits for Employees or former Employees under any Benefit Plan, except as set forth in Section 3.7 of the Seller Disclosure Schedule or as required by Part 6 of Title I of ERISA. Section 3.8 Absence of Certain Changes or Events. Except as set forth in Section 3.8 of the Seller Disclosure Schedule, since the Balance Sheet Date, the Acquired Business has been conducted only in the ordinary course consistent with past practice, and there has not been any change or development, or combination of changes or developments (other than changes relating to or arising from legislative or regulatory changes, developments generally affecting the newspaper or broadcasting industries or general economic conditions in the United States), which individually or in the aggregate have had or are reasonably likely to have a material adverse effect on the Acquired Business taken as a whole. Section 3.9 No Violation of Law. Except as disclosed in the Acquired Business Financial Statements or as set forth in Section 3.9 of the Seller Disclosure Schedule, neither Seller nor any of the Acquired Subsidiaries is in violation of, or, to the knowledge of Seller, under investigation with respect to or has been given notice or been charged by any Governmental Entity with any violation of, any law, statute, order, rule, regulation or judgment of any Governmental Entity, except for violations which, in the aggregate, would not have a material adverse effect on the Acquired Business taken as a whole. Seller and the Acquired Subsidiaries have all permits, licenses, franchises and other governmental authorizations, consents and approvals necessary to conduct the Acquired Business as presently conducted, except for any such permits, licenses, franchises or other governmental authorizations, consents and approvals the failure of which to have would not have a material adverse effect on the Acquired Business taken as a whole. 8 14 Section 3.10 Taxes. (a) Except as disclosed in the Acquired Business Financial Statements or as set forth in Section 3.10 of the Seller Disclosure Schedule: (i) Seller, the Acquired Subsidiaries and the consolidated group (the "Group") of which Seller and/or the Acquired Subsidiaries are members, have (A) duly filed with the appropriate governmental authorities all Tax Returns (as hereinafter defined) required to be filed by them on or prior to the Closing Date, other than those Tax Returns the failure of which to file would not have a material adverse effect on the entity required to file such Tax Return, and such Tax Returns are true, correct and complete in all material respects, and (B) duly paid in full or made provision in accordance with generally accepted accounting principles for the payment of all Taxes (as hereinafter defined) due with respect to periods ending on or prior to the Closing Date; (ii) all monies which Seller, the Acquired Subsidiaries or any member of the Group has been required by law to withhold from employees or other contractors with respect to payments made or periods ending on or before the Closing Date have been withheld and timely paid to the appropriate governmental authority; (iii) as of the date hereof, the Tax Returns for Seller, the Acquired Subsidiaries and/or any member of the Group are not currently the subject of any audit, investigation or proceeding by the Service or, to Seller's, any Acquired Subsidiary's or the Group's knowledge, any state or local taxing authority, and Seller, the Acquired Subsidiaries and/or any member of the Group have not received any written notice of deficiency or assessment from any taxing authority with respect to liabilities for material Taxes of Seller, the Acquired Subsidiaries and/or any member of the Group which have not been paid or finally settled, other than audits, deficiencies or assessments disclosed in Section 3.10 of the Seller Disclosure Schedule which are being contested in good faith through appropriate proceedings; and (iv) the consolidated federal income tax return of the Group has been audited through December 31, 1990 and no waiver of any statute of limitations in respect of Taxes or any extension of time with respect to a Tax assessment or deficiency granted by Seller, any of the Acquired Subsidiaries and/or any member of the Group is currently in effect. (b) "Taxes" means all taxes, charges, fees, levies, imposts, duties or other assessments, including, without limitation, income, gross receipts, estimated taxes, excise, personal property, real property, sales, ad valorem, value-added, leasing, withholding, social security, workers compensation, unemployment insurance, occupation, use, service, service use, license, stamp, payroll, employment, windfall profit, environmental, alternative or add-on minimum tax, franchise, transfer and recording taxes, fees and charges, imposed by the United States or any state, local, or foreign governmental authority whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, 9 15 fines, penalties or additional amounts attributable or imposed on or with respect to any such taxes, charges, fees, levies, imposts, duties or other assessments. "Tax Return" means any return, report or other document or information required to be supplied to a taxing authority in connection with Taxes. (c) Except as provided in Section 3.10 of the Seller Disclosure Schedule, neither Seller, any Acquired Subsidiary, nor any member of the Group (i) has filed a consent pursuant to Section 341(f) of the Code nor agreed to have Section 341(f)(2) apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f) of the Code) owned by a member of the Group, (ii) has agreed, or is required, to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise that will affect the liability of the Group for Taxes, (iii) has made an election, or is required, to treat any asset of the Group as owned by another person pursuant to the provisions of former Section 168(f)(8) of the Code, (iv) is now or has ever been a party to any agreement, contract, arrangement, or plan that would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code, (v) has participated in an international boycott as defined in Section 999 of the Code, (vi) is now or has ever been a "foreign person" within the meaning of Section 1445(b)(2) of the Code, or (vii) has made any of the foregoing elections or is required to apply any of the foregoing rules under any comparable state or local tax provision. After the date hereof, no election with respect to Taxes or extension of the period of limitation will be made without the written consent of Buyer. Section 3.11 Environmental Matters. (a) Except as disclosed in the Acquired Business Financial Statements or as set forth in Section 3.11 of the Seller Disclosure Schedule and except for such matters that, individually or in the aggregate, would not have a material adverse effect on the Acquired Business taken as a whole, (i) to the knowledge of Seller, the Acquired Business is in compliance in all material respects with all applicable Environmental Laws (as hereinafter defined); (ii) to the knowledge of Seller, the properties included in the Acquired Business and presently owned or operated by Seller or the Acquired Subsidiaries (the "Acquired Properties") do not contain any Hazardous Substance (as hereinafter defined) other than as permitted under applicable Environmental Laws; (iii) neither Seller nor any of the Acquired Subsidiaries has since December 31, 1994 received any claims, notices, demand letters, lawsuits or requests for information from any Governmental Entity or any private third party alleging that the Acquired Business is in violation of, or liable under, any Environmental Laws; and (iv) none of Seller, the Acquired Subsidiaries or the Acquired Properties is subject to any court order, administrative order or decree relating to the Acquired Business arising under any Environmental Law. (b) "Environmental Law" means any applicable Federal, state or local law, regulation, permit, judgment or agreement with any Governmental Entity, relating to (x) the protection, preservation or restoration of the environment or to human health or safety, or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances. "Hazardous 10 16 Substance" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law. Section 3.12 Material Contracts. Section 3.12 of the Seller Disclosure Schedule identifies any Contract included in the Acquired Business to which Seller or any of the Acquired Subsidiaries is a party or by which any of its assets or operations may be bound as of the date of this Agreement that is (i) a loan or similar agreement or indebtedness evidenced by a note or other instrument, or any direct or indirect guarantee of indebtedness of any other person, in excess of $1,000,000; (ii) any Contract that expressly limits the right to terminate the Contract without penalty upon less than one year's notice and such Contract provides for future payments in excess of $250,000 within the next twelve (12) months from the date hereof; (iii) a network affiliation agreement; (iv) an employment or severance agreement providing for payments in excess of $100,000 to any Employee; and (v) any Contract related to capital expenditures, which provides for future payments in excess of $500,000 within the next twelve (12) months from the date hereof. Except as set forth in Section 3.12 of the Seller Disclosure Schedule (i) each of the Contracts set forth on Section 3.12 of the Seller Disclosure Schedule is in full force and effect, except where the failure to be in full force and effect would not have a material adverse effect on the Acquired Business taken as a whole and (ii) there are no existing defaults by Seller or any Acquired Subsidiary thereunder which default would result in a material adverse effect on the Acquired Business taken as a whole. Section 3.13 Brokers or Finders. Neither Seller nor any of the Acquired Subsidiaries has any liability to any agent, broker, investment banker, financial advisor or other firm or person for any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement except Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), whose fees and expenses, as previously disclosed to Buyer, will be paid by Seller in accordance with Seller's agreement with such firm. Section 3.14 Title to Assets. Except as set forth in Section 3.14 of the Seller Disclosure Schedule, Seller and the Acquired Subsidiaries own all of the material assets of the Acquired Business free and clear of any liens, claims, security interests or encumbrances that, individually or in the aggregate, are reasonably likely to have a material adverse effect on the Acquired Business taken as a whole. Section 3.15 Condition of Assets. All of the material assets of the Acquired Business are in good operating condition and repair, ordinary wear and tear excepted. Section 3.16 Employees. With respect to the Acquired Business, neither Seller nor any Acquired Subsidiary is a party to, or is bound by, any collective bargaining agreement or other contract with a labor union, nor is Seller or any of the Acquired Subsidiaries the subject of any proceeding or organizing activity seeking to compel it to bargain with any labor union as to wages and conditions of employment, nor is there any strike, labor dispute, slow down or stoppage involving Seller or any of the Acquired Subsidiaries pending or, to the knowledge of Seller, threatened that, individually or in the aggregate, are reasonably likely to have a material adverse effect on the Acquired Business taken as a whole. 11 17 Section 3.17 Insurance. Set forth in Section 3.17 of the Seller Disclosure Schedule is a schedule of the insurance coverage (including policy limits, coverage layers, and named insureds) maintained by Seller on the assets, properties, premises, operations and personnel of the Acquired Business. Section 3.18 FCC Licenses. The Seller has provided Buyer with a complete list of the FCC Licenses held or controlled by the Seller, Tall Tower, Inc. or any of the Acquired Subsidiaries. Except as does not materially jeopardize the operation by the Seller or the applicable Acquired Subsidiary of any of the Seller Stations to which the FCC Licenses apply or as set forth in Section 3.18 of the Seller Disclosure Schedule: (i) the Seller and those of its Acquired Subsidiaries that are required to hold FCC Licenses, or that control FCC Licenses, are qualified to hold such FCC Licenses or to control such FCC Licenses, as the case may be; (ii) the Seller and those of its Acquired Subsidiaries that are required to hold FCC Licenses hold such FCC Licenses; (iii) the Seller is not aware of any facts or circumstances relating to the Seller or any of its Acquired Subsidiaries that would prevent the FCC's granting the requisite consent to the FCC Form 315 Transfer of Control Application to be filed (the "FCC Application"), except that the Seller has filed a renewal application with the FCC relating to KENS-AM, which renewal application may delay the granting of the FCC Application; (iv) each Seller Station is in material compliance with all FCC Licenses held by it; and (v) there is not pending or, to the knowledge of the Seller, threatened any application, petition, objection or other pleading with the FCC or other Governmental Entity which challenges the validity of, or any rights of the holder under, any FCC License held by the Seller or one of its Acquired Subsidiaries, except for rule making or similar proceedings of general applicability to persons engaged in substantially the same business conducted by the Seller Stations. As used herein, the term "Seller Station" shall mean KENS-TV and KENS-AM and the term "FCC License" shall mean any permit, license, waiver or authorization that a person is required by the FCC to hold in connection with the operation of its business. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: Section 4.1 Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Buyer is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good 12 18 standing would not in the aggregate have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Section 4.2 Authority. Buyer have the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Buyer and the consummation by Buyer of the purchase of the Shares and of the other transactions contemplated hereby have been duly authorized by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer is necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by Buyer and, assuming this Agreement constitutes a valid and binding obligation of Seller, constitutes a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. Section 4.3 Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of the Exchange Act, the HSR Act and the FCC Act, and as may be necessary as a result of any facts or circumstances relating solely to Seller and its Subsidiaries, neither the execution, delivery or performance of this Agreement by Buyer nor the consummation by Buyer of the transactions contemplated hereby nor compliance by Buyer with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the respective charter or bylaws of Buyer, (ii) require any filing by Buyer or its Subsidiaries with, or permit, authorization, consent or approval to be obtained by Buyer or its Subsidiaries of, any Governmental Entity, (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contract to which Buyer or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (iv) violate any order, writ, injunction, decree, statute, ordinance, rule or regulation applicable to Buyer or any of its Subsidiaries, except, in the case of clause (ii), (iii) or (iv), for failures to file or obtain, violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Section 4.4 Litigation. There is no suit, action, proceeding or investigation pending or, to the knowledge of Buyer, threatened, against Buyer or any of its Subsidiaries before any Governmental Entity which, individually or in the aggregate, might reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. Neither Buyer nor any of its Subsidiaries is subject to any outstanding order, writ, injunction or decree which, individually or in the aggregate, might reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Buyer has no knowledge of any facts or circumstances relating to Buyer or any of its Subsidiaries, that, individually or in the aggregate, would prevent any necessary approval of the transactions contemplated by this Agreement under the FCC Act. Buyer is legally and financially qualified and, to Buyer's knowledge, otherwise qualified to hold, or control the entities which hold or will hold, the FCC Licenses currently held or controlled by the Seller or to be held by Buyer, or any person under their control after the Closing Date, and 13 19 are not aware of any facts or circumstances that might prevent or delay prompt consent to or waivers for the FCC Application. Section 4.5 No Violation of Law. Neither Buyer nor any of its Subsidiaries is in violation of, or, to the knowledge of Buyer, is under investigation with respect to or has been given notice or been charged by any Governmental Entity with any violation of, any law, statute, order, rule, regulation or judgment of any Governmental Entity, except for violations which, in the aggregate, do not have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Buyer and its Subsidiaries have all permits, licenses, franchises and other governmental authorizations, consents and approvals necessary to conduct their businesses as presently conducted, except for any such permits, licenses, franchises or other governmental authorizations, consents and approvals the failure of which to have would not have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Section 4.6 Sufficient Funds. Buyer has, on the date hereof, the financial capability to purchase the Acquired Business on the terms and subject to the conditions set forth in this Agreement, and will have such capability on the Closing Date. Section 4.7 Purchase for Investment. Buyer is acquiring the Shares for its own account for investment purposes and not with a view to or for resale in connection with any distribution thereof within the meaning of the Securities Act of 1933, as amended. Buyer will refrain from transferring or otherwise disposing of the Shares, or any interest therein, in such a manner as to violate any securities laws. Section 4.8 Brokers or Finders. Neither Buyer nor any of its Subsidiaries has any liability to any agent, broker, investment banker, financial advisor or other firm or person for any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement. Section 4.9 Investigations. Buyer is an informed and sophisticated participant in the transactions contemplated by this Agreement and has been advised by persons experienced in the evaluation and purchase of enterprises such as the Acquired Business, and along with such persons has undertaken such investigation, and has been provided with and have evaluated such documents and information, as Buyer and its advisors have deemed necessary to enable them to make an informed and intelligent decision with respect to the execution, delivery and performance of this Agreement. Anything herein to the contrary notwithstanding, Buyer acknowledges that Buyer is acquiring the Acquired Business without any representation or warranty, express or implied, by Seller or any of its affiliates except as expressly set forth herein. In furtherance of the foregoing, and not in limitation thereof, Buyer acknowledges that neither Seller nor any of its advisors, including, without limitation, DLJ, nor any of their respective affiliates or representatives have made any representation or warranty (express or implied) with respect to, and Buyer is not relying upon, (i) the information set forth in the Confidential Memorandum provided to Buyer relating to the Acquired Business, (ii) any other information 14 20 provided to Buyer pursuant to the Confidentiality Agreement (as defined below), or (iii) any financial projection or forecast delivered to Buyer with respect to the revenues, profitability, cash flow, capital expenditures, or other financial or operating aspect that may arise from the operation of the Acquired Business either before or after the Closing Date. With respect to any projection or forecast delivered by or on behalf of the Seller to Buyer, Buyer acknowledges that (i) there are uncertainties inherent in attempting to make such projections and forecasts, (ii) Buyer is familiar with such uncertainties, (iii) Buyer is taking full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts furnished to Buyer and (iv) Buyer will not have a claim against either Seller or any of its advisors including, without limitation, DLJ, or any of their respective affiliates with respect to such projections or forecasts or with respect to any related matter. ARTICLE V COVENANTS PENDING THE CLOSING Section 5.1 Covenants of Seller with Respect to the Acquired Business. During the period from the date of this Agreement and continuing until the Closing Date, Seller agrees that, except (i) as contemplated or permitted by this Agreement, (ii) as set forth in Section 5.1 of the Seller Disclosure Schedule, or (iii) to the extent that Buyer shall otherwise consent in writing (which consent will not be unreasonably withheld or delayed): (a) Ordinary Course. Seller and the Acquired Subsidiaries shall carry on the Acquired Business in the usual, regular and ordinary course consistent with past practice and use all reasonable efforts to preserve intact the present business organization, keep available, consistent with past practice, the services of the present officers and employees and preserve the relationships with customers, suppliers and others having business dealings with the Acquired Business, it being understood, however, that the failure of any Employees to remain employees of the Acquired Business or become employees of Buyer or any Subsidiary of Buyer shall not constitute a breach of this covenant. (b) Changes in Stock. Seller will not permit the Acquired Subsidiaries to split (including a reverse stock split), combine or reclassify any of their capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of their capital stock. (c) Issuance of Securities. Seller shall not permit any of the Acquired Subsidiaries to, issue, transfer or sell, or authorize or propose or agree to the issuance, transfer or sale of, any shares of their capital stock of any class, any other equity interests or any securities convertible into, or any rights, warrants, calls, subscriptions, options or other rights or agreements, commitments or understandings to acquire, any such shares, equity interests or convertible securities, other than issuances by a wholly owned Subsidiary of its capital stock to its parent. 15 21 (d) Governing Documents. None of the Acquired Subsidiaries will amend their charters or bylaws in a manner adverse to Buyer or otherwise inconsistent with the transactions contemplated hereby. (e) Indebtedness. Seller shall not permit any of the Acquired Subsidiaries to incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of any of the Acquired Subsidiaries or guarantee any such obligations of others other than in the ordinary course of business consistent with past practice. (f) Changes to Benefit Plans. Except as would not materially increase the costs of the Acquired Business and except for changes required to comply with applicable law, Seller shall not, nor shall it permit any of the Acquired Subsidiaries to, (i) enter into, adopt, amend (except as may be required by law and except for immaterial amendments) or terminate any Benefit Plan or any agreement, arrangement, plan or policy between Seller or any such Acquired Subsidiary and one or more of its directors, officers or Employees or (ii) except for normal increases in the ordinary course of business consistent with past practice and the payment of bonuses and other consideration to Employees in the aggregate not to exceed the amount set forth in Section 5.1 of the Seller Disclosure Schedule, increase in any manner the compensation or fringe benefits of any director, officer or Employee or pay any benefit to any director, officer or Employee not required by any plan or arrangement as in effect as of the date hereof or enter into any contract, agreement, commitment or arrangement to do any of the foregoing; provided that the foregoing shall not prohibit Seller or the Acquired Subsidiaries from hiring and paying new employees in the ordinary course of business consistent with past practice. (g) Filings. Seller shall promptly provide Buyer (or its counsel) copies of all filings (other than those portions of filings under the HSR Act which Buyer has no reasonable interest in obtaining in connection with the acquisition of the Acquired Business) made by Seller with any Federal, state or foreign Governmental Entity in connection with this Agreement and the transactions contemplated hereby. (h) Accounting Policies and Procedures. Seller will not and will not permit any of the Acquired Subsidiaries to change any of its accounting principles, policies or procedures with regard to the Acquired Business, except as may be required by generally accepted accounting principles. (i) Sale of Assets. Seller will not and will not permit any of the Acquired Subsidiaries to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, any of the assets included in the Acquired Business, except for dispositions of inventories and equipment in the ordinary course of business and consistent with past practice. Section 5.2 Covenants of Seller. During the period from the date of this Agreement and continuing to the Closing Date, Seller agrees that Seller will not and will not permit the Acquired Subsidiaries to take any action that would or is reasonably likely to result in any of the 16 22 conditions to the Closing set forth in Article VII not being satisfied or that would materially impair the ability of Seller to consummate the transactions contemplated herein in accordance with the terms hereof or would materially delay such consummation, and Seller shall promptly advise Buyer orally and in writing of any change in, or event with respect to, the business or operations of Seller having, or which insofar as can reasonably be foreseen, could have, a material adverse effect on the ability of Seller to consummate the transactions contemplated hereby. Section 5.3 Covenants of Buyer. During the period from the date of this Agreement and continuing until the Closing Date, Buyer agrees that except (i) as contemplated or permitted by this Agreement or (ii) to the extent that Seller shall otherwise consent in writing (which consent will not be unreasonably withheld or delayed): (a) Filings. Buyer shall promptly provide Seller (or its counsel) copies of all filings (other than those portions of filings under the HSR Act which Seller has no reasonable interest in obtaining in connection with the acquisition of the Acquired Business) made by Buyer with any Federal, state or foreign Governmental Entity in connection with this Agreement and the transactions contemplated hereby. (b) Cooperation. Buyer shall not take any action that would or is reasonably likely to result in any of the conditions to the Closing set forth in Article VII not being satisfied or that would materially impair the ability of Buyer to consummate the transactions contemplated herein in accordance with the terms hereof or materially delay such consummation, and Buyer shall promptly advise Seller orally and in writing of any change in, or event with respect to, the business or operations of Buyer having, or which, insofar as can reasonably be foreseen, could have, a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Section 5.4 Control of the Seller Stations. Prior to the Closing Date, control of the Seller's television and radio broadcasting operations, along with all of the Seller's other operations, shall remain with Seller. Seller and Buyer acknowledge and agree that neither Buyer nor any of its employees, agents or representatives, directly or indirectly, shall, or have any right to, control, direct or otherwise supervise, or attempt to control, direct or otherwise supervise, such broadcast and other operations, it being understood that supervision of all programs, equipment, operations and other activities of such broadcast and other operations shall be the sole responsibility, and at all times prior to the Closing Date remain within the complete control and discretion, of the Seller, subject to the terms of Sections 5.1 and 5.2. ARTICLE VI ADDITIONAL AGREEMENTS Section 6.1 Reasonable Efforts. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be 17 23 taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement including, without limitation, (i) the prompt preparation and filing of all necessary documents under the HSR Act and the FCC Act including (but not limited to) any required waiver of the FCC one-to-a-market rule, and (ii) such actions as may be required to have the applicable waiting period under the HSR Act expire or terminate as promptly as practicable, including by consulting with each other as to, and responding promptly to any comments or requests for information with respect thereto. Each party shall promptly consult with the other and provide any necessary information with respect to all filings made by such party with any Governmental Entity in connection with this Agreement and the transactions contemplated hereby. Section 6.2 Access to Information. Upon reasonable notice, Seller shall (and shall cause each of the Acquired Subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of Buyer, access, during normal business hours during the period prior to the Closing Date, to all of the properties, books, contracts, commitments and records relating to the Acquired Business, and, during such period, Seller shall (and shall cause the Acquired Subsidiaries to) furnish promptly to Buyer all other information concerning the business, properties and personnel of the Acquired Business as Buyer may reasonably request. After the Closing Date, upon reasonable notice, Buyer shall cause the Acquired Subsidiaries to afford to the officers, employees, accountants, counsel and other representatives of Seller access, during normal business hours, to the Acquired Subsidiaries' books and records which Seller may reasonably request in order to complete tax filings or for other legitimate business purposes. Unless otherwise required by law, the parties will hold any information made available pursuant to this Section 6.2 which is nonpublic in confidence in accordance with the confidentiality agreement, dated March 11, 1997 (the "Confidentiality Agreement"), between Buyer and Seller. Section 6.3 Legal Conditions to Purchase. Each of Seller and Buyer will use all reasonable efforts to comply promptly with all legal requirements which may be imposed on it or its respective Subsidiaries with respect to the purchase of the Acquired Business by Buyer (which actions shall include, without limitation, furnishing all information required under the HSR Act and the FCC Act and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their respective Subsidiaries in connection with the purchase of the Acquired Business by Buyer). Subject to the terms and conditions hereof, each of Seller and Buyer will, and will cause its respective Subsidiaries to, promptly use all reasonable efforts to obtain (and will consult and cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party, required to be obtained or made by such party in connection with the purchase of the Acquired Business by Buyer or the taking of any action contemplated by this Agreement. Section 6.4 Use of Names. (a) Following the Closing Date, Seller shall have the sole and exclusive ownership of and right to use, as between Buyer and the Acquired Subsidiaries on the one hand, and the Seller on the other hand, each of the names, trademarks, trade names and other proprietary rights set forth in Section 6.4 of the Seller Disclosure Schedule (the "Acquired 18 24 Proprietary Name Rights"). The Acquired Proprietary Name Rights include, without limitation, the name "Harte-Hanks" and derivatives thereof. (b) Following the Closing Date, Buyer shall, and shall cause the Acquired Subsidiaries and other affiliates to, take all action necessary to cease using, and change as promptly as practicable (including by amending any charter documents), any corporate or other names which are the same as or confusing similar to any of the Acquired Proprietary Name Rights. Section 6.5 Intercompany Balances. All amounts owing between the Acquired Subsidiaries, on the one hand, and Seller and its other Subsidiaries, on the other hand, other than amounts arising in the ordinary course of business for the purchase of goods or services in commercial transactions, shall be eliminated in full (without any payment to either party) at or prior to the Closing Date. Section 6.6 Employee Matters; Seller Stock Plans. (a) Buyer and the Acquired Subsidiaries shall assume and retain, with respect to the Employees, any and all severance obligations that arise due to (i) the purchase of the Acquired Business by Buyer being deemed a "Change of Control" under the severance agreements for Employees specified in Section 6.6 of the Seller Disclosure Schedule, (ii) events or actions occurring as a result of the transactions consummated on the Closing Date, subject to the provisions of Section 6.14 below, and (iii) events or actions occurring after the Closing Date. (b) Seller and Buyer agree that Buyer will, immediately after the Closing Date and for at least one year thereafter, permit the Employees (i) to participate in a group health plan of Buyer, or one of its Subsidiaries in which similarly situated employees of Buyer participate, in accordance with the terms of the plan and, to waive any pre- existing condition clause or waiting period requirement in such group health plan and to give credit for deductible amounts paid by an Employee during the current deductible year of such group health plan while employed by Seller or any of the Acquired Subsidiaries; provided, however, that Buyer will be in compliance with this clause (i) regarding Employees employed by Seller or the Acquired Subsidiaries if it assumes the current group health contracts of Seller or the Acquired Subsidiaries relating to the Employees; (ii) to participate in and receive credit, for vesting and eligibility purposes, under tax qualified retirement plans of Buyer or any of its Subsidiaries in which similarly situated employees of Buyer participate, for which they are otherwise eligible, for their service with Seller or any of the Acquired Subsidiaries, to the extent permitted by applicable tax-qualification requirements; (iii) to participate in other benefit plans of Buyer which are offered to similarly situated employees and (iv) to participate in stock option programs and stock purchase programs of Buyer which are offered to similarly situated employees. (c) Effective as of the Closing Date, the Employees shall cease to be eligible to participate in the Benefit Plans, shall no longer accrue benefits under the Benefit Plans, and shall not be eligible under the Benefit Plans for payment of claims incurred thereafter, except to the extent Buyer has assumed and continued any such Benefit Plan with the consent of Seller. 19 25 (d) Notwithstanding any contrary provisions of this Agreement, (i) Seller shall remain liable for any and all obligations arising under or relating to the Benefit Plans (except as otherwise provided in Schedule 6.6 of the Seller Disclosure Schedule), and (ii) with respect to Employees who as of the Closing Date are former employees of the Acquired Business, or are not actively at work, the Buyer shall assume liability only for (1) any leave entitlements, reemployment obligations, reinstatement rights, or related rights, under applicable law, including, without limitation, the Family and Medical Leave Act of 1993, the Uniformed Services Employment and Reemployment Rights Act of 1994, workers' compensation laws, or similar laws, and (2) any rights, benefits or entitlements under the Acquired Welfare Plans listed on Schedule 6.6, including, without limitation, health care continuation pursuant to Part 6 of Title I of ERISA. (e) Each outstanding option (a "Seller Option") to purchase shares of Seller's common stock held by an Employee under any stock option plan of Seller, whether vested or unvested, exercisable or unexerciseable, shall remain the responsibility of Seller; and Buyer shall have no obligation or responsibility whatsoever with respect to any Seller Options. (f) All of the Employees of the Acquired Business will become Employees of Buyer as of the Closing Date; however, nothing in this Agreement shall be construed to require Buyer or the Acquired Subsidiaries to continue the employment of any Employee for any period of time, or, except as required by Section 6.6(b) above, to offer any particular type or level of benefits to any employee. Nothing in this Agreement shall prevent Buyer or the Acquired Subsidiaries from disciplining or terminating any Employee or from amending or terminating any benefit plans at any time. Section 6.7 Defense and Payment of Certain Claims. (a) The parties hereto undertake and agree that, after the Closing Date, and in the name and on behalf of Buyer and the Acquired Subsidiaries, Seller will assume all of the Continuing Claims and, in connection therewith, will (i) conduct, or cause to be conducted, the administration and defense of the Continuing Claims, and (iii) pay or cause to be paid, as may be necessary and appropriate, all liabilities to third parties, cost and expenses resulting from the Continuing Claims that are not paid to or for the account of claimants or Buyer or the Acquired Subsidiaries by insurance or by any third party ("Continuing Claims Costs"). In connection with the foregoing, Seller hereby agrees to indemnify and hold Buyer and its directors, officers, employees, agents and affiliates harmless from all liability to third parties asserting Continuing Claims. (b) In consideration for the undertaking and agreement of Seller set forth in this Section 6.7 and the other consideration provided for in this Agreement, Buyer agrees, that: (i) subject to the obligations of Seller and Buyer after the Closing Date under this Section 6.7, at all times after the Closing Date, Seller will have the sole and exclusive right to conduct, or cause to be conducted, and, whether through insurance carriers or otherwise, the administration and defense of all Continuing Claims as provided above; provided, however, that (i) Buyer will be entitled to monitor, at its own expense, and with any counsel 20 26 selected by it, the administration and defense of all material Continuing Claims by Seller and (ii) Buyer may, in its sole and absolute discretion, at any time and from time to time in respect of any Continuing Claim, elect to terminate Seller's rights to conduct or cause to be conducted the administration and defense thereof by giving notice in writing to Seller of such election, whereupon such rights by Seller will automatically terminate and Seller will automatically be deemed released from any further liability or obligation under this Section 6.7 in respect of the Continuing Claims as to which Buyer has terminated Seller's rights and obligations (a "Discontinued Claim"). Notwithstanding any provision of this Agreement to the contrary, any liabilities, costs or expenses resulting from or in connection with a Discontinued Claim that are incurred or paid subsequent to Seller's receipt of Buyer's election to terminate Seller's rights and obligations with respect thereto will not thereafter be deemed or treated as Continuing Claims Costs for purposes of this Section 6.7. If Buyer terminates Seller's rights with respect to the administration and defense of a Discontinued Claim, Seller will make commercially reasonable efforts to change counsel of record and otherwise fully vest in Buyer or the appropriate Acquired Subsidiary the full and sole right and power to conduct the administration and defense of such Discontinued Claim; (ii) at all times after the Closing Date, Buyer will give notice, within five business days, to Seller of the assertion or commencement of any action which would be a Continuing Claim, but no failure to give such notice will relieve Seller from its obligations provided above (except to the extent that Seller has suffered actual prejudice thereby). Further, Seller will have a period of 30 days from the receipt of notice of any such action which to investigate such action and to determine whether to execute an acknowledgment of claim; provided, however, in the event that Buyer or any of the Acquired Subsidiaries take any action believed to be reasonable with respect to such action before the end of such 30-day period, such action will not relieve Seller from its obligations provided above; and provided, further that Buyer has provided Seller with prior written notification of such action to the extent practicable; (iii) Buyer and the Acquired Subsidiaries will provide or make available to Seller and its representatives, all records, materials and personnel of the Acquired Business reasonably required by Seller or its representatives for use in the conduct of the administration and defense of the Continuing Claims and, further, Buyer and the Acquired Subsidiaries will cooperate fully with Seller and its representatives in the conduct of the administration and defense of the Continuing Claims; (iv) Buyer and the Acquired Subsidiaries will maintain all books, records, materials and files of the Acquired Business existing as of the Closing Date and relating to any of the Continuing Claims for a period of ten years following the Closing Date; (v) Neither Buyer nor any of the Acquired Subsidiaries will take any action that would impair or invalidate the insurance under which any of the Continuing Claims are or may be covered that are in existence at the Closing Date. For purposes of this Section 6.7, all references to the representatives of Seller will include the attorneys and insurance carriers of Seller and its affiliates as well as the personnel of Seller and its affiliates; and 21 27 (vi) Seller will retain, and Buyer, on behalf of the Acquired Subsidiaries, agrees to assign to Seller, any and all insurance claims, insurance receivables and all other benefits (including premium refunds) arising under any and all insurance policies covering the Continuing Claims for which Seller is liable or obligated under this Section 6.7. With respect to the Continuing Claims, Buyer will not have any obligation to make a claim under any insurance policy procured by Buyer after the Closing Date; any such insurance policy will expressly negate or waive any right of subrogation with respect to any contractual rights against Seller or any affiliate of Seller or any insurance carrier of Seller relating to the Continuing Claims. Section 6.8 Insurance. Buyer agrees and acknowledges that the insurance policies listed on Section 3.16 of the Seller Disclosure Schedule are maintained by Seller and that immediately after the Closing, the Acquired Subsidiaries will no longer be designated insureds thereunder and, except to benefit Seller with respect to Continuing Claims assumed by Seller, such insurance policies will cease to insure any of the business, operations, assets, or affairs of the Acquired Business. Section 6.9 Fees and Expenses. Whether or not the transactions contemplated herein are consummated and except as otherwise provided herein, all fees, costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses; provided, however, that Seller and Buyer shall each pay one-half of (i) the filing fee required under the HSR Act and (ii) any filing fee required by the FCC to file FCC applications. Section 6.10 Taxes. (a) Apportionment of Taxes Between Pre-Closing and Post-Closing Tax Periods. In order to apportion appropriately any Taxes relating to any taxable year or any other period that is treated as a taxable year (a "Tax Period") that includes (but that would not, but for this Section 6.10, close on) the Closing Date, the parties hereto will, unless specifically prohibited by applicable law, elect with the relevant taxing authority to treat for all purposes the Closing Date as the last day of a taxable period of the Acquired Subsidiaries, and such Tax Period will be treated as a Short Tax Period and a Pre-Closing Tax Period for purposes of this Agreement. In any case in which applicable law specifically prohibits any of the Acquired Subsidiaries from treating the Closing Date as the last day of a Short Tax Period, then for purposes of this Agreement, the portion of such Taxes that is attributable to the operations of such Acquired Subsidiary for such Interim Tax Period will be the Income Tax that would be due with respect to the Interim Tax Period if such Interim Tax Period were a Short Tax Period. "Short Tax Period" means any Tax Period ending on the Closing Date. "Interim Tax Period" means, with respect to any Taxes imposed on the Acquired Subsidiaries on a periodic basis for which the Closing Date is not the last day of a Short Tax Period, the period of time beginning on the first day of the actual Tax Period that includes (but does not end on) the Closing Date and ending on the Closing Date. "Pre-Closing Tax Period" means any Tax Period, Short Tax Period or Interim Tax Period ending on or before the Closing Date. 22 28 (b) Section 338 Election. At Buyer's option, Seller will join with Buyer (or any of its wholly- owned subsidiaries) in making an election (or elections) under Section 338(h)(10) and Treasury Regulation Section 1.338(h)(10)-1 of the Code, and any corresponding elections permitted under state, local or foreign law, with respect to the purchase and sale of the Shares. The Purchase Price will be allocated among the assets of the Acquired Subsidiaries as agreed to by Seller and Buyer prior to the Closing. Seller and Buyer will exchange completed copies of Internal Revenue Service Form 8023-A, required schedules thereto, and any similar state, local or foreign forms or schedules, executed by the Seller, as soon as practicable after the Closing Date. Seller and Buyer agree that as a result of the election under Section 338(h)(10), the deemed asset sale resulting from the Section 338(h)(10) election must be included in the final Short Tax Period. In any case where applicable law specifically prohibits any of the Acquired Subsidiaries from treating the Closing Date as the last day of a Short Tax Period, then for purposes of this Agreement, the portion of such Tax that is attributable to the operations of such Acquired Subsidiaries for such Interim Tax Period will be the Tax that would be due with respect to the Interim Tax Period if such Interim Tax Period were a Short Tax Period. The Seller will not, and will not permit any of the Acquired Subsidiaries to, take, cause or permit to be taken any action that would disqualify the sale of the Shares as a deemed asset sale under Section 338(h)(10) and Treasury Regulation Section 1.338(h)-(10)(a). (c) Preparation and Filing of Income Tax Returns. Seller will be responsible, at its expense, for the preparation and filing of all Tax Returns for all Tax periods ending prior to the Closing Date and for any Short Tax Period. Seller will prepare such Tax Returns in a manner consistent with prior years and will, in respect of such Tax Returns, determine the income, gain, expenses, losses, deductions and credits of the Acquired Subsidiaries in a manner consistent with prior practice. The results of operations of the Acquired Subsidiaries from the first day of the taxable year through the Closing Date will be included in Seller's consolidated federal income Tax Return and in any consolidated, combined or unitary income Tax Returns required to be filed by Seller after the Closing Date. The results of operations of the Acquired Subsidiaries from the first day of the taxable year through the Closing Date will be included in any separate Tax Returns filed by the Acquired Subsidiaries after the Closing Date; provided, however, that Seller will prepare (without cost to Buyer or the Acquired Subsidiaries) all such separate Tax Returns for any Short Tax Period (but not for any Tax Period which includes or ends after the Closing Date) and submit them to Buyer, and Buyer will have all such separate Tax Returns appropriately executed and filed on a timely basis. With respect to any Tax Return to be prepared by Seller, Buyer will, and will cause the Acquired Subsidiaries to, provide to Seller information in a manner consistent with past practice for use in preparation of such Tax Returns, in each case, no later than 60 days after the relevant Tax Period ends. Notwithstanding the foregoing, Buyer will be responsible for preparing and filing all Tax Returns of the Acquired Subsidiaries for Tax Periods not ending on or before the Closing Date, even if such Tax Returns cover Tax Periods prior to the Closing Date. (d) Cooperation. Seller, on the one hand, and Buyer, on the other hand, will, and will cause the Acquired Subsidiaries to, provide each other with such assistance as may reasonably be requested by them in connection with the preparation of any Tax Return, any Tax audit or other examination by any Governmental Entity, or any judicial or administrative 23 29 proceedings related to liability for Taxes. Seller, on the one hand, and Buyer, on the other hand, will, and will cause the Acquired Subsidiaries to, retain and provide each other with any records or information which may be relevant to such preparation, audit, examination, proceeding or determination. Such assistance will include making employees available on a mutually convenient basis to provide and explain such records and information and will include providing copies of any relevant Tax Returns and supporting work schedules. The party requesting assistance hereunder will reimburse the other for reasonable out-of-pocket expenses incurred in providing such assistance. (e) Refund Claims. Seller will provide Buyer and the Acquired Subsidiaries with such assistance as they may reasonably request to prepare any refund claim attributable to the carryback of any tax losses or tax credits incurred by Buyer or the Acquired Subsidiaries in any Post-Closing Tax Period to any consolidated, combined or unitary income Tax Return of Seller or to any separate Tax Return of any of the Acquired Subsidiaries for any Pre-Closing Tax Period, and Seller will receive and retain the amount of any resulting refunds together with any interest thereon upon receipt by any party hereto. "Post-Closing Tax Period" means any Tax Period that begins after the Closing Date and, with respect to any Tax Period beginning before and ending after the Closing Date, the portion of such Tax Period commencing on the day following the Closing Date. (f) Tax Sharing Agreements. Any and all Tax (or similar) agreements, arrangements or undertaking among Seller and the Acquired Subsidiaries or the Group or any member of the Group and the Company that relate to any liability of the Acquired Subsidiaries for the Taxes of Seller, the Group or any member of the Group will terminate as of the Closing Date and any rights or obligations resulting from such agreements will be eliminated as of the Closing Date. (g) Notice of Audit. If, in connection with any examination, investigation, audit or other proceeding concerning any Tax Return covering the operations of any of the Acquired Subsidiaries on or before the Closing Date, Seller, on the one hand, or Buyer or such Acquired Subsidiary, on the other hand, receives from any Governmental Entity a notice of deficiency, a proposed adjustment, an assertion of claim or a demand concerning the Tax Period covered by such Tax Return, Seller will notify Buyer and such Acquired Subsidiary (if received by Seller) and Buyer will notify Seller (if received by Buyer or such Acquired Subsidiary), as the case may be, in writing promptly (and in any case within 20 days) (i) of its receipt of same and (ii) upon learning of any examination, investigation, audit or other proceeding relating to same. (h) Audits Controlled by Seller. Seller will, at its own expense, have the sole and exclusive right, power and authority to negotiate, resolve, settle or contest any such notice of deficiency, proposed adjustment or assertion of claim or demand, and to represent and act for and on behalf of the Acquired Subsidiaries in connection with any such examination, investigation, audit or other proceeding related thereto, including refund claims relating to any Tax Return of the Acquired Subsidiaries, for Tax Periods ending on or before the Closing Date. Seller will keep Buyer informed of the progress thereof and consult with Buyer in good faith in connection therewith. Notwithstanding the first sentence of this Section 6.10(h), Seller agrees that it will 24 30 not, and that it will not permit its Acquired Subsidiaries to, resolve, settle, compromise or abandon any issue or claim without the prior written consent of Buyer if such action would materially and adversely affect the Taxes of Buyer or the Acquired Subsidiaries with respect to any Post-Closing Tax Period. Such consent will not be unreasonably withheld. (i) Audits Controlled by Buyer. Buyer will, at its own expense, have the sole and exclusive right, power and authority to negotiate, resolve, settle or contest any such notice of deficiency, proposed adjustment or assertion of claim or demand, and to represent and act for and on behalf of the Acquired Subsidiaries in connection with any such examination, investigation, audit or other proceeding of any Tax Return of Buyer or the Acquired Subsidiaries for Tax Periods ending after the Closing Date. In the event that any such examination, investigation, audit or other proceeding could affect Tax Returns of the Acquired Subsidiaries for Tax Periods ending on or before the Closing Date, Buyer will keep, and will cause the Acquired Subsidiaries to keep, Seller informed of the progress of any such proceedings and will consult, and will cause the Acquired Subsidiaries to consult, with Seller in good faith in connection therewith. Notwithstanding the first sentence of this Section 6.10(i), to the extent that Seller has indemnified Buyer and the Acquired Subsidiaries with respect to any such notice of deficiency, proposed adjustment or assertion or claim or demand herein, Buyer will not, and will not permit the Acquired Subsidiaries to, resolve, settle, compromise, or abandon any issue or claim without the prior written consent of Seller if such action would materially and adversely affect the Taxes of Seller for any Tax Period. Such consent will not be unreasonably withheld, and will not be necessary to the extent that Buyer notifies Seller that Buyer will forego any obligation of Seller to indemnify Buyer against the effects of any such settlement. Section 6.11 Sales and Transfer Taxes. Buyer will be responsible for and pay all sales and use Taxes, duties, and transfer fees applicable to the transactions contemplated herein. Section 6.12 Assignment of Contracts and Permits. Notwithstanding any other provision hereof, in connection with any Contract identified on Section 3.12 of the Seller Disclosure Schedule or any permit, approval, license or authorization issued by a Governmental Entity (each a "Governmental Authorization") held by Seller or the Acquired Subsidiaries which relates exclusively to the Acquired Business and which, as a matter of law or by its terms, is (i) not assignable, or (ii) not assignable without the prior approval or consent of the issuer thereof or the other party or parties thereto (collectively "Non-Assignable Rights"), Seller shall: (a) apply for and use all reasonable efforts to obtain all consents or approvals contemplated by the Contracts or Governmental Authorizations, in form and substance satisfactory to Buyer; (b) cooperate with Buyer in any reasonable and lawful arrangements designed to provide the benefits and burdens of such Non-Assignable Rights to Buyer, including holding any such Non-Assignable Rights in trust for Buyer or acting as agent for Buyer; (c) enforce any rights of Seller arising from such Non-Assignable Rights against the issuer thereof or the other party or parties thereto; 25 31 (d) take all such actions and do, or cause to be done, all such things at the request of Buyer as shall reasonably be necessary and proper in order that the value of any Non-Assignable Rights shall be preserved and shall inure to the benefit of Buyer; and (e) pay over to Buyer all monies or other assets collected by or paid to Seller in respect of such Non-Assignable Rights. Buyer shall reimburse Seller for all reasonably incurred payments, costs and expenses made, incurred or suffered in performing Seller's obligations as requested by Buyer under this Section 6.12. If Seller is unable to lawfully provide the benefit of any Governmental Authorization to Buyer, it shall not, at any time, use such Governmental Authorization for its own purposes or assign or provide the benefit of such Governmental Authorization to any other party. 6.13 Notification. Each party hereto shall, in the event of, or promptly after obtaining knowledge of, the occurrence or threatened occurrence of any fact or circumstance that would cause or constitute a material breach of any of its representations and warranties set forth herein, give notice thereof to the other party and shall use its reasonable efforts to prevent or remedy such breach. 6.14 Indemnity Relating to Certain Litigation and Certain Benefits Liabilities. (a) Seller shall indemnify from and after the Closing Date (i) Buyer and its subsidiaries against all losses in connection with any suit, action, proceeding or investigation pending at or arising after the Closing Date that relates to the Company or any of its subsidiaries prior to the Closing Date ("Indemnifiable Claim") and (ii) any person who was an officer, director, partner or employee of the Company or any of its subsidiaries against all losses in connection with any Indemnifiable Claim. (b) If a party entitled to be indemnified hereunder (an "Indemnified Party") shall receive notice of the assertion by a person who is not a party to this Agreement of an Indemnifiable Claim, such Indemnified Party shall give Seller prompt notice thereof after becoming aware of such Indemnifiable Claim; provided, however, that the failure of the Indemnified Party to give notice as provided in this Section 6.14(b) shall not relieve Seller of its obligations under Section 6.14(a), except to the extent that Seller is actually prejudiced by such failure to give notice. Such notice shall describe the Indemnifiable Claim in reasonable detail, and, if practicable, shall indicate the estimated amount of the loss sustained by Indemnified Party. (c) Seller may elect to defend, at its own expense and by its own counsel, any Indemnifiable Claim. If Seller elects to defend an Indemnifiable Claim, it shall, within 30 days of notice of such Indemnifiable Claim (or sooner, if the nature of such Indemnifiable Claim so requires), notify the related Indemnified Party of its intent to do so and acknowledge its liability therefor, and such Indemnified Party shall cooperate in the defense of such Indemnifiable Claim. After notice from Seller to an Indemnified Party of its election to assume the defense of an 26 32 Indemnifiable Claim, Seller shall not be liable to such Indemnified Party under this Section 6.14 for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof; provided, however, that if, under applicable standards of professional conduct (as advised by counsel to Seller), a conflict on any significant issue between such Indemnified Party and Seller or between any two or more Indemnified Parties may exist in respect of such claim, then Seller shall pay the reasonable fees and expenses of one such additional counsel as may be required to be Acquired in light of such conflict. If Seller elects not to defend against an Indemnifiable Claim, or fails to notify an Indemnified Party of its election as provided in this Section 6.14 within the time period specified, such Indemnified Party may defend, compromise and settle such Indemnifiable Claim. Notwithstanding the foregoing, (i) neither Seller nor an Indemnified Party, as the party controlling the defense of an Indemnifiable Claim, may compromise or settle any claim or consent to the entry of any judgment for other than monetary damages without the prior written consent of the other; provided that (upon reasonable notice thereof) consent to compromise or settlement or the entry of a judgment shall not be unreasonably withheld or delayed, and (ii) Seller shall not consent to the entry of any judgment or enter into any compromise or settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party and all other Indemnified Parties, as the case may be, subject to such Indemnifiable Claim of a full and final release from all liability in respect of such claim or litigation. (d) Notwithstanding any other provision of this Agreement to the contrary, and except with respect to Tax Losses (as defined below): (i) Seller will not be liable to any Indemnified Party for any Losses pursuant to this Section 6.14 or otherwise except to the extent that the aggregate amount of Losses indemnified thereunder exceeds $2,500,000; (ii) the total aggregate liability of Seller Losses that may arise under this Section 6.14 or otherwise will not exceed $50,000,000; and (iii) any claims for Losses pursuant to this Section 6.14 or otherwise can only be made in respect of Indemnifiable Claims actually filed or commenced on or prior to eighteen months after the Closing Date. Notwithstanding any other provision of this Agreement to the contrary, Seller's liability for Losses relating to Indemnifiable Claims for Taxes ("Tax Losses") shall be without limit in dollar amount (although still subject to Section 6.14(d)(i)) and claims for Tax Losses pursuant hereto may be made at any time. (e) Notwithstanding the foregoing provisions, Seller shall indemnify, from and after the Closing Date, Buyer or any of its Subsidiaries against any Indemnifiable Claim resulting directly from (i) claims by Employees under the Acquired Welfare Plans that were incurred but unpaid prior to the Closing Date, but only to the extent such claims exceed (A) the insurance coverage and trust assets available to cover such claims, plus (B) the amounts reserved on the Closing Balance Sheet with respect to such claims; and (ii) any claims by Employees resulting solely from (A) the failure of Seller to accelerate the exercisability of such Employees' outstanding options under the Company Stock Plans (as defined in the Merger Agreement) or (B) the lapse or cancellation of such options. 27 33 ARTICLE VII CONDITIONS Section 7.1 Conditions to Each Party's Obligation to Effect the Closing. The respective obligations of the parties to effect the transactions contemplated herein are subject to the satisfaction, on or prior to the Closing Date, of the following conditions: (a) Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity or other public or private third party, the failure of which to obtain would have a material adverse effect on the Acquired Business as a whole or the ability of Buyer to own the Shares or the assets included in the Acquired Business or to operate the Acquired Business, shall have been filed, occurred or been obtained. (b) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the transactions contemplated herein shall be in effect (each party agreeing to use all reasonable efforts to have any such order reversed or injunction lifted). (c) HSR and FCC Approvals. Any applicable waiting period under the HSR Act shall have expired or been terminated and the FCC Application shall have been approved by the FCC. As used herein, "FCC Approval" means action by the FCC or its staff granting consent to the transfer of control of the FCC Licenses to Buyer which, except as may be waived in writing by Buyer in its sole discretion, has not been reserved, stayed, enjoined, set aside, annulled or suspended; with respect to which no timely request for stay, petition for reconsideration or appeal of sua sponte action of the FCC with comparable effect is pending; and as to which the time for filing any such request, petition or appeal or for the taking of any such sua sponte action by the FCC has expired; provided further that, the FCC Approval shall include grant of a waiver of Section 73.3555(c) of the rules, the one-to-a-market rule (if necessary under the rules then in effect), permitting common ownership of Station KENS-TV and KENS-AM. (d) Termination of Merger Agreement. The Merger Agreement shall have been terminated in accordance with its terms. Section 7.2 Conditions of Obligations of Buyer. The obligations of Buyer to effect the transactions contemplated herein are subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived by Buyer: (a) Representations and Warranties. The representations and warranties of Seller contained herein shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date, except to the extent such representations and warranties speak as of an earlier date (in which case, such representations and warranties shall be true and correct in all material respects as of such earlier date) and except as otherwise 28 34 contemplated by this Agreement, and Buyer shall have received a certificate signed on behalf of Seller by the chief executive officer or the chief financial officer of Seller to such effect. (b) Performance of Obligations of Seller. Seller shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Buyer shall have received a certificate signed on behalf of Seller by the chief executive officer or the chief financial officer of Seller to such effect. (c) Working Capital at Closing. Buyer shall have received a certificate signed on behalf of Seller by the chief financial officer of Seller setting forth the estimated net working capital of the Acquired Business (which shall be calculated on a basis consistent with the provisions of Section 1.3) as of the Closing Date. Section 7.3 Conditions of Obligations of Seller. The obligation of Seller to effect the transactions contemplated herein is subject to the satisfaction of the following conditions, on or prior to the Closing Date, unless waived by Seller: (a) Representations and Warranties. The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date, except to the extent such representations and warranties speak as of an earlier date (in which case, such representations and warranties shall be true and correct in all material respects as of such earlier date) and except as otherwise contemplated by this Agreement, and Seller shall have received a certificate signed on behalf of Buyer by the chief executive officer or the chief financial officer of Buyer to such effect. (b) Performance of Obligations of Buyer. Buyer shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and Seller shall have received a certificate signed on behalf of Buyer by the chief executive officer or the chief financial officer of Buyer to such effect. ARTICLE VIII TERMINATION AND AMENDMENT Section 8.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by mutual consent of Buyer and Seller, it being understood that without limiting the generality of the foregoing, the consummation of the Merger shall constitute the mutual consent of Buyer and Seller to the termination of this Agreement; 29 35 (b) by either Buyer or Seller if the Closing shall not have been consummated before April 30, 1998 (unless the failure to so consummate the Closing by such date shall be due to the action or failure to act of the party seeking to terminate this Agreement); (c) by Buyer, upon a material breach of any representation, warranty, covenant or agreement on the part of Seller set forth in this Agreement, or if any representation or warranty of Seller shall have become untrue in any material respect, in either case such that the conditions set forth in Section 7.2(a) or Section 7.2(b) of this Agreement, as the case may be, would be incapable of being satisfied by April 30, 1998; provided, that in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section 8.1(c) if such willful breach shall not have been remedied within ten (10) days after receipt by Seller of written notice from Buyer specifying the nature of such willful breach and requesting that it be remedied; (d) by Seller, upon a material breach of any representation, warranty, covenant or agreement on the part of Buyer set forth in this Agreement, or if any representation or warranty of Buyer shall have become untrue in any material respect, in either case such that the conditions set forth in Section 7.3(a) or Section 7.3(b) of this Agreement, as the case may be, would be incapable of being satisfied by April 30, 1998; or provided, that in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section 8.1(d) if such willful breach shall not have been remedied within ten (10) days after receipt by Buyer of written notice from Seller, specifying the nature of such willful breach and requesting that it be remedied; or (e) automatically, without any action by either Buyer or Seller, at 12:01 a.m. Eastern Time on January 1, 1998, so long as the Merger Agreement has not been terminated. Section 8.2 Effect of Termination. In the event of a termination of this Agreement by either Seller or Buyer as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Buyer or Seller or their affiliates or respective officers or directors; provided, however, that any such termination shall not relieve any party from liability for willful breach of this Agreement or from its obligations under the Confidentiality Agreement. Section 8.3 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 8.4 Extension; Waiver. At any time prior to the Closing Date, the parties hereto, by action taken or authorized by the respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions contained here. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. 30 36 ARTICLE IX MISCELLANEOUS Section 9.1 Nonsurvival of Representations and Warranties. None of the representations or warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Closing Date. This Section 9.1 shall not limit any other covenant or agreement of the parties set forth in this Agreement or in any instrument delivered pursuant to the terms hereof. Section 9.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given on the date delivered if delivered personally (including by reputable overnight courier), on the date transmitted if sent by facsimile (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Buyer, to The E. W. Scripps Company 312 Walnut Street, 28th Floor Cincinnati, Ohio 45202 Attn: M. Denise Kuprionis, Secretary Facsimile: Confirmation: with a copy to Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114 Attn: William Appleton, Esq. Facsimile: Confirmation: Attn: Facsimile: Confirmation: 31 37 and (b) if to Seller, to Harte-Hanks Communications, Inc. 200 Concord Plaza Drive San Antonio, Texas 78216 Attn: Donald R. Crews Facsimile: 210/829-9403 Confirmation: 210/829-9000 with a copy to Hughes & Luce, L.L.P. 1717 Main Street, Suite 2800 Dallas, Texas 75201 Attn: Alan J. Bogdanow Facsimile: 214/939-6100 Confirmation: 214/939-5500 Section 9.3 Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. Section 9.4 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when a counterpart has been signed by each of the parties and delivered to each of the other parties, it being under stood that all parties need not sign the same counterpart. Section 9.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement (including the documents and the instruments referred to herein) and the Confidentiality Agreement (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof, and (b) except as provided in Section 6.6, are not intended to confer upon any person other than the parties hereto and thereto any rights or remedies hereunder or thereunder. Section 9.6 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Texas without regard to any applicable conflicts-of-law principles. 32 38 Section 9.7 Specific Performance. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. Section 9.8 Publicity. Except as otherwise required by law or the rules of the New York Stock Exchange, Inc., for so long as this Agreement is in effect and then with as much advance notice to the other party as is practicable under the circumstances, neither Seller nor Buyer shall, or shall permit any of its Subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld or delayed. Section 9.9 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Buyer may assign, in its sole discretion, any or all of its rights hereunder to any direct or indirect wholly owned Subsidiary of Buyer. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Section 9.10 Further Assurances. Subject to the terms and conditions hereof, Seller and Buyer will, and will cause their respective Subsidiaries to, do such additional things as are necessary or proper to carry out and effectuate the intent of this Agreement or any part hereof or the transactions contemplated hereby. IN WITNESS WHEREOF, Buyer and Seller have caused this Acquisition Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. THE E. W. SCRIPPS COMPANY By:/s/ CRAIG C. STANDEN ------------------------------------------ Name: Craig C. Standen Title: Senior Vice President, Corporate Development HARTE-HANKS COMMUNICATIONS, INC. By: /s/ DONALD R. CREWS ------------------------------------------ Name: Donald R. Crews Title: Senior Vice President, Legal 33 39 EXHIBIT A TO THE ACQUISITION AGREEMENT NONCOMPETITION AGREEMENT This Noncompetition Agreement (this "Agreement"), dated as of ________________, 1997, is made by and among The E.W. Scripps Company, an Ohio corporation (the "Parent"), E.W.S. Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Parent (the "Sub"), Harte-Hanks Communications, Inc., a Delaware corporation (the "Company") and [NEWCO], a Delaware corporation and a wholly owned subsidiary of the Company ("Newco"). RECITALS WHEREAS, the Parent, Sub and Company are parties to that certain Agreement and Plan of Merger and Reorganization dated as of May ___, 1997 (the "Merger Agreement") which, among other things, provides for the Merger of Sub with and into the Company, with the Company as the surviving corporation (the "Surviving Corporation"); WHEREAS, immediately prior to the Merger, pursuant to the terms of the Agreement and Plan of Distribution (this and other capitalized terms used and not defined herein shall have the meanings given to such terms in the Merger Agreement), the Company will distribute certain businesses and operations to Newco which Parent is unwilling to acquire (the "Distribution"); and WHEREAS, the Distribution is one step in a series of transactions as a result of which (i) Parent will acquire the television and radio broadcasting and non-shopper newspaper publishing businesses of the Company and its Television and Newspaper Subsidiaries (the "TV/Newspaper Business") by merging the Sub with and into the Company, and (ii) Newco will acquire and conduct all other businesses previously conducted by the Company and its Subsidiaries. NOW, THEREFORE, in consideration of the foregoing and the agreements set forth below, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I NONCOMPETITION COVENANTS 1.1 Noncompetition Covenants. Newco acknowledges that (i) it, on its own and through the Company and its Subsidiaries and their respective officers, employees and other representatives, has specialized knowledge and experience in the operation of television and radio broadcasting stations and non-shopper newspaper publishing businesses (the "Restricted Business"), (ii) its reputation and contacts within the Restricted Business and those of the Company and its Subsidiaries are considered of great value to Parent and the Company, and (iii) if such knowledge, experience, reputation or contacts were used to compete with Parent and the 40 Surviving Corporation, serious harm to Parent and the Surviving Corporation could result. Thus, Newco agrees that, for a period of five (5) years after the Closing Date, neither it nor any of its Subsidiaries shall, directly or indirectly, on its own behalf or in the service or on behalf of others: (1) actively solicit for employment (including as an independent contractor but excluding general solicitations of employment), interfere with or endeavor to entice away any person who at any time on or after May ___, 1997, was an officer or employee of the Company or any of its Subsidiaries engaged on behalf of the Company in the TV/Newspaper Business and whom the Parent or the Surviving Corporation employs effective upon the Closing; (2) own, manage, operate, finance, join, control, participate or assist in the ownership, management, operation, financing or control of, or be connected as a stockholder, partner, principal, agent, representative, consultant or otherwise with, any business or enterprise engaged in the Restricted Business in the Restricted Area (a "Restricted Party"); or (3) use or permit the Company's or Newco's name to be used in connection with any business or enterprise engaged in the Restricted Business in the Restricted Area; provided, however, that the provisions of this Section 1.1 shall not be construed to prohibit (i) the ownership by Newco or any Subsidiary of Newco, as a passive investor, of not more than 5% of any class of securities registered pursuant to the Exchange Act of any corporation which is engaged in the Restricted Business, or passive investments in partnerships or joint ventures representing not more than 5% of any class of any equity interests therein or (ii) Newco or its Subsidiaries from having a Restricted Party as an investor in any business, other than a Restricted Business, in which Newco or its Subsidiaries own an interest. For purposes hereof, the term "Restricted Area" means the geographic areas served by the TV/Newspaper Business at the date hereof. 1.2 Reasonableness of Covenants, etc. In the event that the provisions of Section 1.1 should ever be adjudicated to exceed the time, geographic or service limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic or service limitations permitted by applicable law. Newco agrees that its covenants set forth in Section 1.1 (the "Noncompetition Covenants") are appropriate and reasonable when considered in light of the nature and extent of the Restricted Business and the transactions contemplated in connection with the Merger Agreement, including, without limitation, the distribution of certain businesses and operations to Newco by the Company pursuant to the Agreement and Plan of Distribution. Without limiting the generality of the foregoing, Newco specifically agrees that prohibitions on the active solicitation, interference or enticement of officers, directors, employees or agents of the Parent or any of its Subsidiaries, as set forth in Section 1.1, are appropriate and reasonable in all respects. Newco agrees that the Noncompetition Covenants are of the essence of this Agreement and the Merger Agreement, that each such Noncompetition Covenant is reasonable and necessary to protect and preserve the interests and properties of the Parent and its Subsidiaries and the Restricted Business of the Parent and its Subsidiaries; that irreparable loss and damage will be suffered by the Parent should Newco or any of its Subsidiaries breach any such Noncompetition Covenant; that each of such covenants is separate, distinct and severable not only from the other of such covenants but also from the other and remaining provisions of this Agreement and the Merger Agreement; that the -2- 41 unenforceability of all or any of the Noncompetition Covenants shall not affect the validity or enforceability of any other such covenants; that, in addition to other remedies available to it, the Parent shall be entitled to both temporary and permanent injunctions to prevent a breach or contemplated breach by Newco of any of the Noncompetition Covenants, and that Newco hereby waives any requirements for the posting of a bond or any other security by the Parent in connection therewith. 1.3 Specific Performance; Other Remedies. Newco recognizes that the Noncompetition Covenants are unique and, accordingly, the Parent shall, in addition to such other remedies as may be available to it at law or in equity, have the right to enforce its rights under Section 1.1 by actions for injunctive relief and specific performance to the extent permitted by law. ARTICLE 2 MISCELLANEOUS 2.1 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the specific subject matter thereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the specific subject matter hereof. 2.2 Governing Law. This Agreement shall governed by and construed in accordance with the laws of the State of Ohio regardless of conflict of law principles. 2.3 Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 2.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by telecopy with answerback, by express or overnight mail delivery by a nationally recognized air courier (delivery charges prepaid) or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: if to the Parent or the Company: The E.W. Scripps Company 312 Walnut Street, 28th Floor Cincinnati, Ohio 45202 Attention: M. Denise Kuprionis, Secretary -3- 42 with a copy to: Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114 Attention: William Appleton, Esq. if to Newco: c/o [Newco] 200 Concord Plaza Drive San Antonio, Texas 78216 Attn: Donald R. Crews with a copy to: Hughes & Luce, L.L.P. 1717 Main Street, Suite 2800 Dallas, Texas 75201 Attn: Alan J. Bogdanow or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or communication delivered in person shall be deemed effective on delivery. Any notice or communication sent by telecopy or by air courier shall be deemed effective on the first business day at the place at which such notice or communication is received following the day on which such notice or communication was sent. Any notice or communication sent by registered or certified mail shall be deemed effective on the fifth business day at the place from which such notice or communication was mailed following the day in which such notice or communication was mailed. 2.5 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement except for Section 2.7 and 2.8 (which are intended to be for the benefit of the Persons provided for therein, and may be enforced by such Persons). 2.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 2.7 Personal Liability. This Agreement shall not create or be deemed to create or permit any personal liability or obligation on the part of any direct or indirect stockholder of any party hereto or any officer, director, employee, agent, representative or investor of any party hereto. -4- 43 2.8 Binding Effect; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives and successors, including the Company as the surviving corporation in the Merger. This Agreement may not be assigned by any party hereto. 2.9 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of all the parties. 2.10 Legal Fees; Costs. If any party hereto institutes any action or proceeding to enforce any provision of this Agreement, the prevailing party therein shall be entitled to receive from the losing party reasonable attorneys' fees and costs incurred in such action or proceeding, whether or not such action or proceeding is prosecuted to judgment. 2.11 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. THE E. W. SCRIPPS COMPANY By: ------------------------------------ Name: Title: E.W.S. ACQUISITION CORP. By: ------------------------------------ Name: Title: -5- 44 HARTE-HANKS COMMUNICATIONS, INC. By: ------------------------------------ Name: Title: [NEWCO] By: ------------------------------------ Name: Title: -6- 45 EXHIBIT B TO ACQUISITION AGREEMENT KPMG The Global Leader HARTE HANKS TELEVISION FINANCIAL STATEMENTS 46 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Harte-Hanks Communications, Inc.: We have audited the accompanying balance sheets of Harte-Hanks Television as of December 31, 1996 and 1995, and the related statements of operations and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of Harte-Hanks Communications, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements were prepared on the basis of presentation described in note A, and include the assets, liabilities, revenues and expenses of Harte-Hanks Television. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harte-Hanks Television as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, pursuant to the basis of presentation described in note A, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP San Antonio, Texas April 14, 1997 47 HARTE-HANKS TELEVISION BALANCE SHEETS
- -------------------------------------------------------------------------------- DECEMBER 31, IN THOUSANDS 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current assets Cash $ 228 $ 338 Accounts receivable (less allowance for doubtful accounts of $67 in 1996 and $47 in 1995) 5,146 5,208 Inventory 29 30 Prepaid expense 261 237 Film contracts 1,517 1,203 Other current assets 188 191 -------- ------- Total current assets 7,369 7,207 -------- ------- Property, plant and equipment Land 354 354 Buildings and improvements 6,169 6,169 Equipment and furniture 11,701 10,939 -------- ------- 18,224 17,462 Less accumulated depreciation 10,621 9,537 -------- ------- 7,603 7,925 Construction and equipment installations in progress 67 0 -------- ------- Net property, plant and equipment 7,670 7,925 -------- ------- Intangible and other assets Goodwill (less accumulated amortization of $21,481 in 1996 and $19,733 in 1995) 48,575 50,323 Receivable from Harte-Hanks Communications, Inc. 34,251 27,665 Film contracts 2,187 1,275 Other assets 232 176 -------- ------- Total intangible and other assets 85,245 79,439 -------- ------- Total assets $100,284 $94,571 ======== ======= LIABILITIES AND EQUITY Current liabilities Accounts payable $685 $632 Accrued payroll and related expenses 727 653 Film contract payable 1,581 1,145 Other current liabilities 37 369 -------- ------- Total current liabilities 3,030 2,799 -------- ------- Film contract payable 1,488 985 Deferred income tax liability 1,841 1,780 Other long term liabilities 489 532 -------- ------- Total liabilities 6,848 6,096 -------- ------- Equity 93,436 88,475 -------- ------- Total liabilities and equity $100,284 $94,571 ======== =======
See Notes to Financial Statements 48 HARTE-HANKS TELEVISION STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Revenues $26,100 $25,132 $28,629 ------- ------- ------- Operating expenses Payroll 8,361 8,008 8,624 Production and distribution 1,739 2,040 2,864 Advertising, selling, general and administrative 2,880 2,848 2,800 Depreciation 1,044 1,066 1,041 Film amortization 1,347 2,224 2,746 Goodwill amortization 1,748 1,748 1,748 ------- ------- ------- 17,119 17,934 19,823 ------- ------- ------- Operating income 8,981 7,198 8,806 Other expenses (income) Interest expense 20 26 26 Other, net - (85) - ------- ------- ------- 20 (59) 26 ------- ------- ------- Income before income taxes 8,961 7,257 8,780 Income tax expense 4,000 3,366 3,954 ------- ------- ------- Net income $ 4,961 $ 3,891 $ 4,826 ======= ======= =======
See Notes to Financial Statements 49 HARTE-HANKS TELEVISION STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net income $4,961 $3,891 $ 4,826 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,044 1,066 1,041 Goodwill amortization 1,748 1,748 1,748 Amortization of option related compensation 93 163 131 Film amortization 1,347 2,224 2,746 Deferred income taxes 37 42 (10) Other, net - (85) - Changes in operating assets and liabilities: Decrease in accounts receivable, net 62 677 52 Decrease (increase) in inventory 1 6 (6) Decrease (increase) in prepaid expenses and other current assets 61 (59) 99 Increase (decrease) in accounts payable 53 (324) 329 (Decrease) in other accrued expenses and other liabilities (312) (291) (100) Other, net (258) (114) 15 ------ ------ ------- Net cash provided by operating activities $8,837 $8,944 $10,871 ------ ------ ------- Cash Flows from Investing Activities Purchases of property, plant and equipment (789) (1,060) (883) Proceeds from the sale of property, plant and equipment - 123 142 Payments on film contracts (1,572) (1,817) (2,123) ------ ------ ------ Net cash (used in) investing activities (2,361) (2,754) (2,864) ------ ------ ------ Cash Flows from Financing Activities Distributions to Harte-Hanks Communications, Inc. including payments for income taxes (6,586) (6,406) (7,874) ------ ------ ------ Net increase (decrease) in cash (110) (216) 133 Cash at beginning of period 338 554 421 ------ ------ ------- Cash at end of period $ 228 $ 338 $ 554 ====== ====== =======
50 Harte-Hanks Television Notes to Financial Statements NOTE A -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements present the financial position of Harte-Hanks Television (the "Company"). The financial statements exclude all assets, liabilities, revenues and expenses of Harte-Hanks Communications, Inc. and its subsidiaries other than assets, liabilities, revenues and expenses of its television business. The financial statements have been prepared as if the television business had operated as an independent, stand alone entity for all periods presented. Except as described below, such financial statements have been prepared using the historical basis of accounting and include the assets, liabilities, revenues, expenses and income taxes of Harte-Hanks' television business. These financial statements do not include any liabilities or disclosure related to the Company's employee benefit plans other than as disclosed in note C. However, the cost of all employee benefit plans which relate to employees of Harte-Hanks Television is included in these financial statements. Direct expenses incurred by Harte- Hanks Communications, Inc. on behalf of the Company are identified and allocated to the Company based on the actual costs incurred. Any remaining indirect expenses incurred by Harte-Hanks Communications, Inc. have not been allocated to the Company because they have been insignificant. Management believes that this method of allocation is reasonable and that such costs would not be materially different if they had been incurred with unaffiliated third parties. Certain prior year amounts have been reclassified for comparative purposes. TELEVISION REVENUES Television revenues are presented net of advertising agency commissions. INVENTORY Inventory, consisting primarily of film and television tubes, is stated at the lower of cost (first-in, first-out method) or market. 1 (Continued) 51 Harte-Hanks Television Notes to Financial Statements PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Depreciation of buildings and equipment is computed generally on the straight-line method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of estimated useful lives are: Buildings and improvements 10 to 40 years Equipment and furniture 4 to 20 years
GOODWILL Goodwill is stated on the basis of cost, adjusted as discussed below, and is amortized on a straight-line basis over 40- year periods. The Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that unamortized goodwill and the net book value of long-lived assets will not be recovered, net goodwill is adjusted to an amount consistent with projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. FILM CONTRACTS Film contract rights represent agreements with film syndicators for television program material. The capitalized costs of film rights and related liabilities are recorded when the licensed period begins and the film rights are available for use. The cost is amortized over the expected number of telecasts. The portions of the cost to be amortized within one year and after one year are reflected in the consolidated balance sheets as current and noncurrent assets, respectively. The payments under these contracts due within one year and after one year are classified as current and noncurrent liabilities. INCOME TAXES Income taxes are calculated using the asset and liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes are recognized for the tax consequences resulting from "temporary differences" by applying enacted statutory tax rates applicable to future years. These "temporary differences" are associated with differences between the financial and the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income. 2 (Continued) 52 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - INCOME TAXES The components of income tax expense are as follows:
- ----------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Current Federal $3,607 $3,025 $3,580 State and local 356 299 384 ------ ------ ------ Total current $3,963 $3,324 $3,964 ====== ====== ====== Deferred Federal $ 33 $ 37 $ (9) State and local 4 5 (1) ------ ------ ------ Total deferred $ 37 $ 42 $ (10) ====== ====== ======
The differences between total income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:
- ----------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Computed expected income tax expense $3,136 35% $2,650 35% $3,073 35% Effect of goodwill amortization 605 7% 605 8% 605 7% Net effect of state income taxes 234 3% 198 3% 249 3% Other net 25 - 23 - 27 - Income tax expense -------------------------------------------------------------- for the period $4,000 45% $ $3,366 46% $3,954 45% ==============================================================
3 (Continued) 53 Harte-Hanks Television Notes to Financial Statements The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
- -------------------------------------------------------------------------------- DECEMBER 31, IN THOUSANDS 1996 1995 - -------------------------------------------------------------------------------- Deferred tax assets: Accrued vacation pay $ 109 $ 99 Accrued stock option liability 167 157 Accounts receivable, net 23 16 ------- ------- Total gross deferred tax assets 299 272 ------- ------- Deferred tax liabilities: Property, plant and equipment (1,805) $(1,756) State income tax (123) (120) Other, net (36) (24) ------- ------- Total gross deferred tax liabilities (1,964) 1,900) ------- ------- Net deferred tax liability $(1,665) $ 1,628) ======= =======
The net deferred tax liability is recorded both as a current deferred income tax benefit and as other long term liabilities based upon the classification of the related temporary difference. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, recoverable taxes paid, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income, the reversal of existing deferred tax liabilities and projections for future taxable income over the periods which the deferred tax assets are deductible at December 31, 1996, management believes it is more likely than not the Company will realize the benefits of these deductible differences. 4 (Continued) 54 Harte-Hanks Television Notes to Financial Statements NOTE C -- EMPLOYEE BENEFIT PLANS Harte-Hanks Communications, Inc. maintains a defined benefit pension plan for which most of Harte-Hanks Television employees are eligible. Benefits are based on years of service and the employeeGs compensation for the five highest consecutive years of salary during the last ten years of service. Benefits vest to the participants upon completion of five years of service or upon reaching age 65, whichever is earlier. Harte-HanksG policy is to accrue as expense an amount computed by its actuary and to fund at least the minimum amount required by ERISA. In 1994, the Harte-Hanks Communications, Inc. adopted a non-qualified, supplemental pension plan covering certain Harte- Hanks Television employees, which provides for incremental pension payments so that total pension payments equal amounts that would have been payable from the principal pension plan if it were not for limitations imposed by income tax regulation. In determining the 1996, 1995 and 1994 actuarial present value of benefit obligations, discount rates of 73/4%, 71/4% and 8% were used, respectively. The assumed annual rate of increase in future compensation levels was 4%, and the expected long term rate of return on plan assets was 10%. Pension expense for the years ended December 31, 1996, 1995 and 1994 was $183, $176 and $201, respectively. Harte-Hanks Communications, Inc. also sponsors a 401(k) plan which provides employees of Harte-Hanks Television with additional income upon retirement. The Company matches a portion of employees' voluntary before-tax contributions. Employees are fully vested in their own contributions and vest in the Company's matching contributions upon three years of service. Contributions made during the years ended December 31, 1996, 1995 and 1994 were $36, $40 and $42, respectively. The 1994 Harte-Hanks Communications, Inc. Employee Stock Purchase Plan provides for a total of 450,000 shares to be sold to participating employees at all Harte-Hanks subsidiaries at 85% of the fair market value at specified quarterly investment dates. At December 31, 1996, 1995 and 1994, Harte-Hanks Television had $21, $18 and $17, respectively recorded as a liability for amounts withheld by the Company to be used for the purchase of Harte-Hanks Communications, Inc. shares in the subsequent January. All costs related to the above described plans are recorded in the Harte-Hanks Television financial statements to the extent that these costs relate to the employees of Harte-Hanks Television. 5 (Continued) 55 Harte-Hanks Television Notes to Financial Statements NOTE D -- EQUITY A summary of changes in equity is as follows:
-------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 1994 -------------------------------------------------------- Beginning balance $88,475 $84,584 $79,758 Net earnings 4,961 3,891 4,826 ------- ------- ------- Ending balance $93,436 $88,475 $84,584 ======= ======= =======
NOTE E -- STOCK OPTION PLANS 1984 PLAN In 1984, Harte-Hanks Communications, Inc. adopted a Stock Option Plan ("1984 Plan") pursuant to which it issued to officers and key employees options to purchase shares of common stock at prices equal to the market price on the grant date. Market price was determined by the Board of Directors for purposes of granting stock options and making repurchase offers. Options granted under the 1984 Plan become exercisable five years after date of grant. At December 31, 1996, 1995 and 1994, options held by employees of Harte-Hanks Television to purchase 37,500 shares, 37,500 shares and 52,500 shares, respectively, were outstanding under the 1984 Plan, with exercise prices ranging from $3.33 to $6.67 per share. No additional options will be granted under the 1984 Plan. 1991 PLAN Harte-Hanks Communications, Inc. adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which it may issue to officers and key employees options to purchase up to 3,000,000 shares of common stock. Options have been granted to certain employees of the Company at prices equal to the market price on the grant date ("market price options") and at prices below market price ("performance options"). As of December 31, 1996, 1995 and 1994, market price options, held by employees of Harte-Hanks Television, to purchase 175,000 shares, 159,750 shares and 132,750 shares, respectively, were outstanding with exercise prices ranging from $6.67 to $20.50 per share. Mark price options become exercisable after the fifth anniversary of their date of grant. 6 (Continued) 56 Harte-Hanks Television Notes to Financial Statements At December 31, 1996, 1995 and 1994 performance options held by employees of Harte-Hanks Television to purchase 49,200 shares, 52,200 shares and 45,450 shares, respectively, were outstanding with exercise prices ranging from $0.67 to $2.00 per share. The performance options become exercisable after the third anniversary of their date of grant, and the extent to which they become exercisable at that time depends upon the extent to which Harte-Hanks Communications, Inc. achieves certain goals which are established at the time the options are granted. That portion of the performance options which does not become exercisable on the third anniversary of the date of grant becomes exercisable after the ninth anniversary of the date of grant. Compensation expense of $93, $163 and $131 was recognized by Harte-Hanks Television for the performance options held by employees of Harte-Hanks Television for the years ended December 31, 1996, 1995 and 1994, respectively. The following summarizes stock option plans activity:
- --------------------------------------------------------------------------------- Number Weighted Average of Shares Option Price - --------------------------------------------------------------------------------- Options outstanding at January 1, 1994 236,250 $5 .24 Granted 23,700 9 .91 Exercised (29,250) 4 .49 ------- Options outstanding at December 31, 1994 230,700 5 .82 Granted 33,750 10.40 Exercised (15,000) 5.00 ------- Options outstanding at December 31, 1995 249,450 6.49 Granted 22,500 18.03 Exercised (5,250) 0.67 Cancelled (5,000) 11.78 ------- OPTIONS OUTSTANDING AT DECEMBER 31, 1996 261,700 7 .50 ======= EXERCISABLE AT DECEMBER 31, 1996 102,000 4 .55 =======
7 57 Harte-Hanks Television Notes to Financial Statements The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123,"Accounting For Stock-Based Compensation." Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. The Company does recognize compensation expense for options whose market price of the underlying stock exceeds the exercise price on the date of grant under the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted under SFAS No. 123. Had compensation expense for the Company's options been determined based on the fair value at the grant date for awards in 1996 and 1995, the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below.
- ----------------------------------------------------------------- YEAR ENDED DECEMBER 31, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1996 1995 - ----------------------------------------------------------------- Net income - as reported $4,961 $3,891 Net income - proforma 4,925 3,877
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:
- ----------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 - ----------------------------------------------------------------- Expected dividends yield 0.3% 0.3% Expected stock price volatility 22.1% 21.3% Risk-free interest rate 6.4% 6.4% Expected life of options 3-10 years 3-10 years
The weighted-average fair value of market price options granted during 1996 and 1995 was $7.00 and $5.52, respectively. The weighted-average fair value and exercise price of performance options was $14.35 and $1.11 in 1996, and $12.15 and $0.67 in 1995, respectively. NOTE F -- FAIR VALUE OF FINANCIAL INSTRUMENTS Because of their maturities and/or interest rates, the Company's financial instruments have a fair value approximating their carrying value. These instruments include accounts receivable, trade and film payables, and miscellaneous notes receivable and payable. 8 (Continued) 58 Harte-Hanks Television Notes to Financial Statements NOTE G -- COMMITMENTS AND CONTINGENCIES The Company has pending claims incurred in the normal course of business which, in the opinion of management, and legal counsel, can be disposed of without material effect on the accompanying financial statements. NOTE H -- LEASES The Company leases certain real estate and equipment under various operating leases. Most of the leases contain renewal options for varying periods of time. the total rent expense under all operating leases was $320, $307 and $302 for the years ended December 31, 1996, 1995 and 1994, respectively. The future minimum rental commitments for all non-cancelable operating leases with terms in excess of one year as of December 31, 1996 are as follows:
In thousands - ------------------------------------------- 1997 $140 1998 78 1999 26 2000 6 - ------------------------------------------- Total $250 - -------------------------------------------
9 (Continued) 59 EXHIBIT C TO ACQUISITION AGREEMENT HARTE HANKS NEWSPAPERS FINANCIAL STATEMENTS 60 [KPMG PEAT MARWICK LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Harte-Hanks Communications, Inc.: We have audited the accompanying balance sheets of Harte-Hanks Newspapers as of December 31, 1996 and 1995, and the related statements of operations and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of Harte-Hanks Communications, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements were prepared on the basis of presentation described in note A, and include the assets, liabilities, revenues and expenses of Harte-Hanks Newspapers. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harte-Hanks Newspapers as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, pursuant to the basis of presentation described in note A, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP San Antonio, Texas April 14, 1997 61 HARTE-HANKS NEWSPAPERS BALANCE SHEETS
DECEMBER 31, IN THOUSANDS 1996 1995 ----------- ----------- ASSETS Current assets Cash $ 2,498 $ 1,257 Accounts receivable (less allowance for doubtful accounts of $808 in 1996 and $776 in 1995) 14,903 13,679 Inventory 4,679 8,698 Prepaid expense 852 628 Other current assets 1,391 1,402 ----------- ----------- Total current assets 24,323 25,664 ----------- ----------- Property, plant and equipment Land 4,381 4,381 Buildings and improvements 18,640 18,341 Equipment and furniture 51,496 52,124 ----------- ----------- 74,517 74,846 Less accumulated depreciation 41,664 40,728 ----------- ----------- 32,853 34,118 Construction and equipment installations in progress 170 243 ----------- ----------- Net property, plant and equipment 33,023 34,361 ----------- ----------- Intangible and other assets Goodwill (less accumulated amortization of $58,746 in 1996 and $54,109 in 1995) 128,661 133,298 Receivable from Harte-Hanks Communications, Inc. 122,980 99,204 Other assets 79 56 ----------- ----------- Total intangible and other assets 251,720 232,558 ----------- ----------- Total assets $ 309,066 $ 292,583 =========== =========== LIABILITIES AND EQUITY Accounts payable $ 2,532 $ 2,861 Accrued payroll and related expenses 3,590 3,456 Customer deposits 3,567 3,667 Other current liabilities 1,874 1,760 ----------- ----------- Total current liabilities 11,563 11,744 ----------- ----------- Deferred income tax liability 5,546 5,315 Other long term liabilities 1,083 931 ----------- ----------- Total liabilities 18,192 17,990 ----------- ----------- Equity 290,874 274,593 ----------- ----------- Total liabilities and equity $ 309,066 $ 292,583 =========== ===========
See Notes to Financial Statements 62 HARTE-HANKS NEWSPAPERS STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 --------- --------- --------- Revenues $ 124,313 $ 117,744 $ 110,949 --------- --------- --------- Operating expenses Payroll 41,023 40,547 40,800 Production and distribution 32,170 29,091 24,852 Advertising, selling, general and administrative 13,302 12,684 12,520 Depreciation 3,927 3,735 3,438 Goodwill amortization 4,637 4,637 4,637 --------- --------- --------- 95,059 90,694 86,247 --------- --------- --------- Operating income 29,254 27,050 24,702 Other expenses (income) (32) 116 192 --------- --------- --------- Income before income taxes 29,286 26,934 24,510 Income tax expense 13,005 12,091 11,160 --------- --------- --------- Net income $ 16,281 $ 14,843 $ 13,350 ========= ========= =========
See Notes to Financial Statements 63 HARTE-HANKS NEWSPAPERS STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 -------- -------- -------- Cash Flows from Operating Activities Net income $ 16,281 $ 14,843 $ 13,350 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,927 3,735 3,438 Goodwill amortization 4,637 4,637 4,637 Amortization of option related compensation 217 274 315 Deferred income taxes 211 346 (201) Other, net (55) 116 192 Changes in operating assets and liabilities: Increase in accounts receivable, net (1,224) (473) (1,177) Decrease (increase) in inventory 4,019 (2,908) (3,155) Decrease (increase) in prepaid expenses and other current assets (173) (149) 222 Increase (decrease) in accounts payable (330) (44) 446 Increase in other accrued expenses and other liabilities 128 643 589 Other, net (65) (341) (158) -------- -------- -------- Net cash provided by operating activities 27,573 20,679 18,498 -------- -------- -------- Cash Flows from Investing Activities Purchases of property, plant and equipment (2,826) (3,544) (4,258) Proceeds from the sale of property, plant and equipment 270 187 193 -------- -------- -------- Net cash (used in) investing activities (2,556) (3,357) (4,065) -------- -------- -------- Cash Flows from Financing Activities Distributions to Harte-Hanks Communications, Inc., including payments for income taxes (23,776) (17,007) (14,308) -------- -------- -------- Net increase in cash 1,241 315 125 Cash at beginning of period 1,257 942 817 -------- -------- -------- Cash at end of period $ 2,498 $ 1,257 $ 942 ======== ======== ========
See Notes to Financial Statements 64 Harte-Hanks Newspapers Notes to Financial Statements NOTE A -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements present the financial position of Harte-Hanks Newspapers (the "Company"). The financial statements exclude all assets, liabilities, revenues and expenses of Harte-Hanks Communications, Inc. and its subsidiaries other than assets, liabilities, revenues and expenses of its newspapers business. The financial statements have been prepared as if the newspapers business had operated as an independent, stand alone entity for all periods presented. Except as described below, such financial statements have been prepared using the historical basis of accounting and include the assets, liabilities, revenues, expenses and income taxes of Harte-Hanks' newspapers business. In March 1995, Harte-Hanks Communications, Inc. sold its suburban Boston community newspapers. As these newspapers ceased to be a part of Harte-Hanks Newspapers in 1995, their assets, liabilities, revenues and expenses have been excluded from these financial statements. In addition, all related gain on divestiture as well as tax assets/liabilities which resulted from this transaction, have been excluded from these financial statements for all years presented. These financial statements do not include any liabilities or disclosure related to the Company's employee benefit plans other than as disclosed in note C. However, the cost of all employee benefit plans which relate to employees of Harte-Hanks Newspapers is included in these financial statements. Intercompany balances and transactions have been eliminated. Direct expenses incurred by Harte-Hanks Communications, Inc. on behalf of the Company are identified and allocated to the Company based on the actual costs incurred. Any remaining indirect expenses incurred by Harte-Hanks Communications, Inc. have not been allocated to the Company because they have been insignificant. Management believes that this method of allocation is reasonable and that such costs would not be materially different if they had been incurred with unaffiliated third parties. Certain prior year amounts have been reclassified for comparative purposes. INVENTORY Inventory, consisting primarily of newsprint and other operating supplies, is stated at the lower of cost (first-in, first-out method) or market. 1 65 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Depreciation of buildings and equipment is computed generally on the straight-line method at rates calculated to amortize the cost of the assets over their useful lives. The general ranges of estimated useful lives are: Buildings and improvements 10 to 40 years Equipment and furniture 4 to 20 years
GOODWILL Goodwill is stated on the basis of cost, adjusted as discussed below, and is amortized on a straight-line basis over 40-year periods. For each of its investments, the Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future cash flows over the remaining amortization period. If projected undiscounted future cash flows indicate that unamortized goodwill and the net book value of long-lived assets will not be recovered, net goodwill is adjusted to an amount consistent with projected discounted future cash flows. Cash flow projections are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. INCOME TAXES Income taxes are calculated using the asset and liability method required by Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes are recognized for the tax consequences resulting from "temporary differences" by applying enacted statutory tax rates applicable to future years. These "temporary differences" are associated with differences between the financial and the tax basis of existing assets and liabilities. Under SFAS No. 109, a statutory change in tax rates will be recognized immediately in deferred taxes and income. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2 66 NOTE B - INCOME TAXES The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 --------- --------- --------- Current Federal $ 11,254 $ 10,324 $ 10,003 State and local 1,540 1,421 1,357 --------- --------- --------- Total current $ 12,794 $ 11,745 $ 11,360 ========= ========= ========= Deferred Federal $ 188 $ 307 $ (178) State and local 23 39 (22) --------- --------- --------- Total deferred $ 211 $ 346 $ (200) ========= ========= =========
The differences between total income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:
YEAR ENDED DECEMBER 31, IN THOUSANDS 1996 1995 1994 ------- ------- ------- Computed expected income tax expense $10,251 35% $ 9,427 35% $ 8,579 35% Effect of goodwill amortization 1,622 6% 1,622 6% 1,622 7% Net effect of state income taxes 1,016 3% 949 4% 867 4% Other, net 116 -- 93 -- 92 -- ------- -- ------- -- ------- -- Income tax expense for the period $13,005 44% $12,091 45% $11,160 46% ======= == ======= == ======= ==
3 67 Harte-Hanks Newspapers Notes to Financial Statements The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
DECEMBER 31, IN THOUSANDS 1996 1995 --------- --------- Deferred tax assets: Accrued vacation pay $ 472 $ 503 Accrued stock option liability 371 326 Accounts receivable, net 283 272 Other, net 18 9 --------- --------- Total gross deferred tax assets 1,144 1,110 --------- --------- Deferred tax liabilities: State income tax (352) (337) Property, plant and equipment (5,546) (5,315) --------- --------- Total gross deferred tax liabilities (5,898) (5,652) --------- --------- Net deferred tax liability $ (4,754) $ (4,542) ========= =========
The net deferred tax liability is recorded both as a current deferred income tax benefit and as other long term liabilities based upon the classification of the related temporary difference. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, recoverable taxes paid, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income, the reversal of existing deferred tax liabilities and projections for future taxable income over the periods which the deferred tax assets are deductible at December 31, 1996, management believes it is more likely than not the Company will realize the benefits of these deductible differences. NOTE C -- EMPLOYEE BENEFIT PLANS Harte-Hanks Communications, Inc. maintains a defined benefit pension plan for which most of Harte-Hanks Newspapers employees are eligible. Benefits are based on years of service and the employee's compensation for the five highest consecutive years of salary during the last ten years of service. Benefits vest to the participants upon completion of five years of service or upon reaching age 65, whichever is earlier. Harte-Hanks' policy is 4 68 Harte-Hanks Newspapers Notes to Financial Statements to accrue as expense an amount computed by its actuary and to fund at least the minimum amount required by ERISA. In 1994, the Harte-Hanks Communications, Inc. adopted a non-qualified, supplemental pension plan covering certain Harte-Hanks Newspapers employees, which provides for incremental pension payments so that total pension payments equal amounts that would have been payable from the principal pension plan if it were not for limitations imposed by income tax regulation. In determining the 1996, 1995 and 1994 actuarial present value of benefit obligations, discount rates of 73/4%, 71/4% and 8% were used, respectively. The assumed annual rate of increase in future compensation levels was 4%, and the expected long term rate of return on plan assets was 10%. Pension expense for the years ended December 31, 1996, 1995 and 1994 was $828, $823 and $789, respectively. Harte-Hanks Communications, Inc. also sponsors a 401(k) plan which provides employees of Harte-Hanks Newspapers with additional income upon retirement. The Company matches a portion of employees' voluntary before-tax contributions. Employees are fully vested in their own contributions and vest in the Company's matching contributions upon three years of service. Contributions made during the years ended December 31, 1996, 1995 and 1994 were $199, $205 and $167, respectively. The 1994 Harte-Hanks Communications, Inc. Employee Stock Purchase Plan provides for a total of 450,000 shares to be sold to participating employees at all Harte-Hanks subsidiaries at 85% of the fair market value at specified quarterly investment dates. At December 31, 1996, 1995 and 1994, Harte-Hanks Newspapers had $71, $71 and $69, respectively recorded as a liability for amounts withheld by the Company to be used for the purchase of Harte-Hanks Communications, Inc. shares in the subsequent January. All costs related to the above described plans are recorded in the Harte-Hanks Newspapers financial statements to the extent that these costs relate to the employees of Harte-Hanks Newspapers. 5 (Continued) 69 NOTE D -- EQUITY A summary of changes in equity is as follows:
YEARS ENDED DECEMBER 31, 1996 1995 1994 -------- -------- -------- Beginning balance $274,593 259,750 $246,400 Net earnings 16,281 14,843 13,350 -------- -------- -------- Ending balance $290,874 $274,593 $259,750 ======== ======== ========
NOTE E -- STOCK OPTION PLANS 1984 PLAN In 1984, Harte-Hanks Communications, Inc. adopted a Stock Option Plan ("1984 Plan") pursuant to which it issued to officers and key employees options to purchase shares of common stock at prices equal to the market price on the grant date. Market price was determined by the Board of Directors for purposes of granting stock options and making repurchase offers. Options granted under the 1984 Plan become exercisable five years after date of grant. At December 31, 1996, 1995 and 1994, options held by employees of Harte-Hanks Newspapers to purchase 96,800 shares, 107,400 shares and 149,400 shares, respectively, were outstanding under the 1984 Plan, with exercise prices ranging from $3.33 to $6.67 per share. No additional options will be granted under the 1984 Plan. 1991 PLAN Harte-Hanks Communications, Inc. adopted the 1991 Stock Option Plan ("1991 Plan") pursuant to which it may issue to officers and key employees options to purchase up to 3,000,000 shares of common stock. Options have been granted to certain employees of the Company at prices equal to the market price on the grant date ("market price options") and at prices below market price ("performance options"). As of December 31, 1996, 1995 and 1994, market price options held by employees of Harte-Hanks Newspapers to purchase 302,075 shares, 258,675 shares and 235,200 shares, respectively, were outstanding with exercise prices ranging from $6.67 to $25.38 per share. Market price options become exercisable after the fifth anniversary of their date of grant. At December 31, 1996, 1995 and 1994 performance options to purchase 110,300 shares, 107,100 shares and 116,850 shares, respectively, were outstanding with exercise prices ranging from $0.67 to $2.00 per share. The performance options become exercisable after the third anniversary of their date of grant, and the extent to which they become exercisable at that time depends upon the extent to which Harte-Hanks Communications, Inc. achieves certain goals which are established at the time the options are granted. That portion of the performance options which does not become exercisable on the third 6 (Continued) 70 anniversary of the date of grant becomes exercisable after the ninth anniversary of the date of grant. Compensation expense of $217, $274 and $315 was recognized by Harte-Hanks Newspapers for the performance options held by employees of Harte-Hanks Newspapers for the years ended December 31, 1996, 1995 and 1994, respectively. The following summarizes stock option plans activity:
Number Weighted Average of Shares Option Price ------------ ---------------- Options outstanding at January 1, 1994 507,000 $ 4.95 Granted 34,950 7.92 Exercised (40,500) 3.04 ------------ Options outstanding at December 31, 1994 501,450 5.30 Granted 59,100 10.34 Exercised (60,750) 4.28 Cancelled (26,625) 7.47 ------------ Options outstanding at December 31, 1995 473,175 5.94 Granted 67,450 18.40 Exercised (18,100) 4.19 Cancelled (13,350) 11.93 ------------ OPTIONS OUTSTANDING AT DECEMBER 31, 1996 509,175 7.51 ============ EXERCISABLE AT DECEMBER 31, 1996 207,050 4.18 ============
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation expense has been recognized for options granted where the exercise price is equal to the market price of the underlying stock at the date of grant. The Company does recognize compensation expense for options whose market price of the underlying stock exceeds the exercise price on the date of grant under the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted under SFAS No. 123. 7 (Continued) 71 Had compensation expense for the Company's options been determined based on the fair value at the grant date for awards in 1996 and 1995, the Company's net income would have been reduced to the proforma amounts indicated below.
YEAR ENDED DECEMBER 31, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1996 1995 ----------- ----------- Net income - as reported $ 16,281 $ 14,843 Net income - proforma 16,190 14,816
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:
YEAR ENDED DECEMBER 31, 1996 1995 --------- ---------- Expected dividends yield 0.3% 0.3% Expected stock price volatility 22.1% 21.3% Risk-free interest rate 6.4% 6.4% Expected life of options 3-10 years 3-10 years
The weighted-average fair value of market price options granted during 1996 and 1995 was $7.64 and $5.52, respectively. The weighted-average fair value and exercise price of performance options was $15.01 and $1.25 in 1996, and $12.15 and $0.67 in 1995, respectively. NOTE F -- FAIR VALUE OF FINANCIAL INSTRUMENTS Because of their maturities and/or interest rates, the Company's financial instruments have a fair value approximating their carrying value. These instruments include accounts receivable, trade payables, and miscellaneous notes receivable and payable. NOTE G -- COMMITMENTS AND CONTINGENCIES The Company has pending claims incurred in the normal course of business which, in the opinion of management, and legal counsel, can be disposed of without material effect on the accompanying financial statements. NOTE H -- LEASES The Company leases certain real estate and equipment under various operating leases. Most of the leases contain renewal options for varying periods of time. The total rent 8 (Continued) 72 expense under all operating leases was $1,054, $994 and $806 for the years ended December 31, 1996, 1995 and 1994, respectively. The future minimum rental commitments for all non-cancellable operating leases with terms in excess of one year as of December 31, 1996 are as follows:
IN THOUSANDS --------------------------------- 1997 $ 812 1998 726 1999 556 2000 409 2001 244 After 2001 207 --------------------------------- TOTAL $ 2,954 ---------------------------------
9 (Continued) EX-21.1 4 PRESS RELEASE DATED MAY 19, 1997 1 EXHIBIT 21.1 [HARTE-HANKS LOGO] News From Harte-Hanks Communications, Inc. - -------------------------------------------------------------------------------- FOR IMMEDIATE RELEASE: May 19,1997 HARTE-HANKS SIGNS DEFINITIVE AGREEMENT TO SELL ITS NEWSPAPERS AND TV STATION TO E.W. SCRIPPS COMPANY SAN ANTONIO, TX -- Harte-Hanks Communications, Inc. (NYSE:HHS) announced today that it has signed a definitive agreement to sell to the E.W. Scripps Company (NYSE:SSP) its newspaper operations and KENS-TV, the CBS affiliate in San Antonio. The announcement was made by Larry Franklin, president and chief executive officer of Harte-Hanks. Harte-Hanks publishes five daily newspapers in Texas -- the Corpus Christi Caller-Times, Abilene Reporter-News, Wichita Falls Times Record News, San Angelo Standard-Times and Plano Star Courier -- and one in South Carolina, the Anderson Independent-Mail. The company also publishes approximately 25 associated non-daily publications, including community newspapers and supplemental publications. All of the company's newspapers, along with KENS-TV and its radio station KENS-AM, are included in the sale agreement with Scripps. The agreement calls for a Morris Trust form of transaction. Immediately before the sale to Scripps, Harte-Hanks will spin off to its stockholders a new holding company bearing the Harte-Hanks name and comprising its direct marketing and shopper businesses. It is anticipated that Scripps will assume approximately $200 million of Harte-Hanks debt in connection with the transaction, in which case Scripps would issue to Harte-Hanks stockholders in a tax-free exchange Class A common stock of Scripps with a value at closing of $425 million, bringing the transaction's total value to $625 million. In the event that Scripps assumes less debt of Harte-Hanks, the amount of Class A common stock issued by Scripps will increase to a maximum of $605 million if Scripps assumes no debt of Harte-Hanks. The exact number of shares to be issued by Scripps will be determined by the trading price of Scripps shares within a "collar" range of $32.72 and $40.00. Harte-Hanks has the right to terminate the transaction if the Scripps stock is trading below $32.72, subject to Scripps' right to offer sufficient additional shares to restore the value of the transaction. Neither party has the right to terminate the transaction if the Scripps stock is trading above $40.00. Recently, legislation has been introduced which would prevent Morris Trust transactions. The agreement announced today assumes that any final legislation will permit Morris Trust transactions in some form. The parties' motivation in selecting the Morris Trust form of transaction is like that of parties to a typical stock-for-stock tax-free merger, rather than the elimination of debt or a typical cash sale. In fact, the maximum debt that could be involved in this - -------------------------------------------------------------------------------- P.O. BOX 269 SAN ANTONIO, TEXAS 78291-0269 210-829-9000 2 transaction represents less than one-third the value of the total transaction. Furthermore, unlike some Morris Trust transactions, the debt Scripps will assume arose from the ordinary course of Harte-Hanks' operations and was not incurred in contemplation of this transaction. Harte-Hanks has the right to terminate the Morris Trust form of transaction at any time through December 31, 1997, in which case Scripps would acquire the Harte-Hanks newspaper operations, KENS-TV and KENS-AM directly for a cash price of $775 million. If the tax status of Morris Trust transactions remains unclear at December 31, 1997, the parties will call off the Morris Trust transaction and proceed with the cash transaction. However, if it is clear at December 31, 1997 that Morris Trust transactions can be done, the parties will call off the cash transaction and proceed with the Morris Trust transaction. Commenting on the agreement, Franklin said, "We are very pleased to have reached agreement to sell our newspapers and KENS-TV to an outstanding communications company like E.W. Scripps. We have the highest respect for the Scripps organization and believe that our people will have tremendous opportunity to grow and advance in a company like theirs, which is focused primarily on publishing and broadcasting. We are also pleased to have found a single buyer for all our newspapers and television operations and are optimistic about making a Morris Trust transaction work. Although it will be sad to say goodbye to the many talented, dedicated people who have made our newspapers and KENS industry leaders, this transaction will make it possible for Harte-Hanks to focus on our more targeted direct marketing and shopper businesses, which together represent about 75% of our revenues today. We are convinced this is the right decision for all our stakeholders and look forward to closing the transaction by the end of the year." William R. Burleigh, president and chief executive officer of Scripps, said, "This is the kind of deal we've been looking for. For an attractive price, we're going to greatly increase the geographic diversity of our newspaper division through the addition of five mid-sized markets in the vibrant Texas economy, plus one growth market in South Carolina. The television station -- KENS in San Antonio, Texas -- has been one of the industry's strongest franchises for many years. This also puts us back in business with the CBS network, adding some diversity to our current lineup of ABC and NBC stations." The closing is subject to Federal Communications Commission approval and other customary conditions including, in the case of the Morris Trust transaction, the effectiveness of a registration statement with the Securities and Exchange Commission, the approval of Harte-Hanks stockholders, clarification of the tax status of Morris Trust transactions and receipt of a tax ruling from the Internal Revenue Service. Harte-Hanks' financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation, has delivered a fairness opinion to the company's board of directors. Based in San Antonio, Texas, Harte-Hanks owns and operates an international direct marketing company that provides a full range of specialized, coordinated and integrated services including response management/teleservices, database marketing and marketing services. The company also owns and operates shoppers that are zoned into 580 separate editions reaching almost 7 million households in four major markets each week; six daily newspapers and approximately 25 non- daily publications, including community newspapers and supplemental publications; KENS-TV, the CBS affiliate in San Antonio and KENS-AM Radio. 3 Based in Cincinnati, Ohio, the E.W. Scripps Company currently operates television stations in nine markets and newspapers in 16 markets. Through its entertainment division, the company operates United Media, a syndicator and licensor of news features and comics; two television programming companies, Scripps Howard Productions and Cinetel Productions; and a cable television network, Home & Garden Television. ## FOR MORE INFORMATION, CONTACT: LARRY FRANKLIN (210) 829-9105 This release and other information on Harte-Hanks can be found on the World Wide Web at http://www.harte-hanks.com 4 COMPARISON CHART PURCHASE PRICE FOR HARTE-HANKS NEWSPAPERS AND TELEVISION STATION
I. MERGER FOR STOCK EXAMPLE A EXAMPLE B EXAMPLE C ("MORRIS TRUST") Purchase price $625 million $615 million $605 million Debt assumed $200 million $100 million 0 Stock value $425 million $515 million $605 million Shares issued* 10.6M - 13.0M 12.9M - 15.7M 15.1M - 18.5M
* exact number of shares determined by market price for Scripps during period prior to closing, subject to a "collar" price of $32.72 to $40. II. CASH PURCHASE $775 MILLION -----END PRIVACY-ENHANCED MESSAGE-----