<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1995
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SOFTKEY INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2562108
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Identification
Organization) No.)
</TABLE>
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 494-1200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------
NEAL S. WINNEG
VICE PRESIDENT AND GENERAL COUNSEL
SOFTKEY INTERNATIONAL INC.
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 494-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
LOUIS A. GOODMAN MARK G. BORDEN
SKADDEN, ARPS, SLATE, MEAGHER & FLOM HALE AND DORR
ONE BEACON STREET 60 STATE STREET
BOSTON, MASSACHUSETTS 02108 BOSTON, MASSACHUSETTS 02109
(617) 573-4800 (617) 526-6000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this form is filed to register additional securities for an offering pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: / / 33-
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / / 33-
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
<TABLE>
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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Common Stock, par value $.01 per
share................................. 2,787,651 shares $23.69 $66,039,452.19 $22,772.23
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<FN>
(1) Includes 363,607 shares which may be purchased by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended, based on the
average of the high and low prices per share of the Registrant's Common
Stock reported on the Nasdaq National Market on June 2, 1995.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 9, 1995
2,424,044 SHARES
[LOGO]
COMMON STOCK
Of the 2,424,044 shares of Common Stock being offered hereby, 2,000,000 are
being sold by SoftKey International Inc. (the "Company" or "SoftKey") and
424,044 shares are being sold by the Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SKEY." On June 8, 1995, the last reported sale price of the Common
Stock on the Nasdaq National Market was $24.875 per share. See "Price Range of
Common Stock."
SEE "RISK FACTORS" ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
=======================================================================================================
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders
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<S> <C> <C> <C> <C>
Per Share.......................... $ $ $ $
Total(3)........................... $ $ $ $
=======================================================================================================
<FN>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $650,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 363,607 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . See
"Underwriting."
</TABLE>
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about June , 1995.
------------------------
MONTGOMERY SECURITIES
ADAMS, HARKNESS & HILL, INC.
CS FIRST BOSTON
June , 1995
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
Regional Offices at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates.
In addition, material filed by the Company can be inspected at the offices of
The Nasdaq Stock Market, Reports Section, 1735 K Street N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with any amendments or supplements thereto and any other
registration statements for the same offering, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities to be issued under this Prospectus. This Prospectus
omits certain of the information contained in the Registration Statement and the
exhibits and schedules thereto in accordance with the rules and regulations of
the Commission. For further information regarding the Company and the shares of
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits and schedules filed therewith, which may be inspected without
charge at the office of the Commission at 450 Fifth Street N.W., Washington,
D.C. 20549 and copies of which may be obtained from the Commission at prescribed
rates. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report on Form 10-K of the Company for the fiscal year ended
December 31, 1994, the Current Report on Form 8-K of the Company dated February
10, 1995, the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 and the description of the Common Stock contained in the
Company's registration statement filed pursuant to Section 12(g) of the Exchange
Act, including any amendment or reports filed for the purpose of updating such
description filed by the Company, all of which are on file with the Commission,
are incorporated in this Prospectus by reference and made a part hereof.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of the shares of Common Stock hereunder shall be deemed to be incorporated
herein by reference and shall be a part hereof from the date of the filing of
such documents. Any statements contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or replaced
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or replaces such statement. Any such
statement so modified or replaced shall not be deemed, except as so modified or
replaced, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a Prospectus is delivered, upon written or oral
request of such person, a copy of the documents incorporated by reference
herein, other than exhibits to such documents not specifically incorporated by
reference. Such requests should be directed to SoftKey International Inc., One
Athenaeum Street, Cambridge, Massachusetts 02142, Attention: Secretary
(telephone: (617) 494-1200).
------------------------
On January 27, 1994, the Company changed its fiscal year end to the 52 or
53 weeks ending nearest December 31. For clarity of presentation herein, all
references to the "Year Ended December 31, 1994" relate to the period January 2,
1994 to December 31, 1994; all references to December 31, 1993 relate to
balances as of January 1, 1994; and the period from July 4, 1993 to January 1,
1994 is referred to as the "Transition Period ended December 31, 1993" or the
"Transition Period." The first quarter reporting period for 1995 ended on April
1, 1995 and the first quarter reporting period for 1994 ended on April 2, 1994.
For clarity of presentation and comparison, the periods from January 1, 1995 to
April 1, 1995 and from January 2, 1994 to April 2, 1994 are referred to as the
"Three Months ended March 31, 1995" or the "First Quarter 1995" and "Three
Months ended March 31, 1994" or the "First Quarter 1994," respectively.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND OTHER SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE
ACT. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the documents,
financial statements and notes thereto and other information incorporated by
reference herein. Unless otherwise noted, all share information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
SoftKey is a leading developer and publisher of value-priced, high-quality,
consumer software for personal computers ("PCs"), primarily produced on CD-ROM.
The Company currently offers over 250 software titles in consumer-oriented
categories, including lifestyle, edutainment, productivity, entertainment and
education. The Company's products include titles such as: Calendar Creator,
Sports Illustrated Swimsuit Calendar, Time Almanac, BodyWorks 4.0, The American
Heritage Talking Dictionary, PC Paintbrush and Key 3D Design Center.
The consumer software market has grown significantly over the past few
years as a result of several major trends. These trends include the increasing
installed base of PCs in the home, the improved multimedia capabilities of PCs
and the increasing demand for a greater number of value-priced software
applications in order to take full advantage of these multimedia capabilities.
In addition, consumers are exposed to software purchase opportunities from a
wide variety of sources and with increased frequency.
SoftKey's strategy is to develop, license and acquire a broad range of
quality software products with significant unit-volume potential at the lowest
possible cost and to continuously introduce these new products through a wide
variety of established and emerging distribution channels worldwide, including
retail channels, direct mail and original equipment manufacturers ("OEMs").
Other key elements of this strategy include focusing on high growth consumer
software, broadly distributing to the consumer market at various price points,
building strong relationships with retail channels, acquiring complementary
products, technologies and businesses and enhancing brand awareness and loyalty.
The Company has relationships with over 40 national retailers and direct
distributors controlling over 15,000 individual storefronts, including the
retailers and distributors responsible for most of the nation's software sales.
Such retailers include CompUSA, Staples and Office Depot. SoftKey has a database
of over 3 million end-users and has mailed over 17.5 million pieces of targeted
direct mail in the past twelve months. SoftKey's OEM strategy is to assist OEMs
to differentiate their product lines at retail and to introduce the SoftKey
brand to new hardware buyers. The Company's OEMs include IBM, Apple, Compaq,
Hewlett Packard and Dell.
SoftKey develops and publishes products through internal development and
licensing agreements with outside developers. The Company's internal product
development efforts are designed to result in efficient and timely product
introductions by focusing on "core code" development. Where possible, the
Company specifies, develops and manages (or purchases) one base of source code
from which many products are created. The Company supplements its development
efforts through product acquisitions and royalty-bearing licenses.
<TABLE>
THE OFFERING
<S> <C>
Common Stock offered by the Company................... 2,000,000 shares
Common Stock offered by the Selling Stockholders...... 424,044 shares
Common Stock to be outstanding after the Offering..... 21,828,626 shares(1)
Use of Proceeds....................................... For acquisitions and strategic alliances, to reduce
existing indebtedness and for working capital and
other corporate purposes
Nasdaq National Market Symbol......................... SKEY
<FN>
- ---------------
(1) Based upon shares of Common Stock outstanding as of June 2, 1995. Excludes
4,193,955 shares of Common Stock reserved for issuance pursuant to the
exercise of outstanding options and warrants and 2,183,439 additional shares
reserved for issuance upon exchange of the Exchangeable Shares (as
hereinafter defined). The Exchangeable Shares may be exchanged for Common
Stock on a one-for-one basis. See "Description of Capital Stock -- Special
Voting Share."
</TABLE>
3
<PAGE> 5
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED
TRANSITION
YEAR ENDED JUNE 30, PERIOD ENDED YEAR ENDED MARCH 31,
---------------------- DECEMBER 31, DECEMBER 31, -------------------
1992 1993 1993 1994 1994 1995
-------- -------- ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues........................................... $119,518 $109,704 $ 41,645 $121,287 $35,304 $41,004
Operating income (loss)............................ (599) (56,981) (69,057) 25,741 8,480 12,134
Net income (loss).................................. (4,983) (57,250) (73,258) 21,145 6,291 10,019
Fully diluted net income (loss) per share.......... $ (0.47) $ (4.36) $ (5.01) $ 1.04 $ 0.33 $ 0.45
Shares used in computing fully diluted net income
(loss) per share................................. 10,502 13,129 14,618 21,115 19,986 22,376
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995
----------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
<S> <C> <C>
BALANCE SHEET INFORMATION:
Working capital......................................................................................... $ 32,757 $ 72,818
Total assets............................................................................................ 100,536 139,597
Total long-term obligations, less current portion(2).................................................... 19,362 11,662
Total stockholders' equity.............................................................................. 57,245 105,006
<FN>
- ---------------
(1) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company, at an assumed public offering price of $24.875 per
share, after deducting the estimated underwriting discount and estimated
offering expenses, the proceeds from the exercise of 110,080 options by a
Selling Stockholder, and the application of the net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
(2) Includes deferred income taxes of $4,323,000.
</TABLE>
------------------------
The Company was created through a combination of three corporations. On
February 4, 1994, the Company (which was then known as WordStar International
Incorporated ("WordStar")) completed a three-way business combination
transaction (the "Three-Party Combination") with SoftKey Software Products Inc.,
an Ontario corporation ("Former SoftKey"), and Spinnaker Software Corporation, a
Minnesota corporation ("Spinnaker"). Effective February 4, 1994, the Company
changed its name to SoftKey International Inc.
The Company is incorporated in Delaware. Its principal executive offices
are located at One Athenaeum Street, Cambridge, Massachusetts 02142, and its
telephone number is (617) 494-1200. "SoftKey" and all of the Company's logos and
product names are trademarks of the Company.
4
<PAGE> 6
RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
presented in this Prospectus and in the documents incorporated by reference
herein.
INTENSE COMPETITIVE ENVIRONMENT
The PC consumer software industry is intensely competitive and is
characterized by rapid changes in technology and customer requirements. The
changing nature of the consumer software industry and rapidly changing demand
for products make it difficult to predict the future success of the Company in
the business of producing packaged software products for the retail market. The
Company competes for retail shelf space and general consumer awareness with a
number of companies that market software products. The Company encounters
competition from both established companies, including the largest companies in
the industry, and new companies that may develop comparable products. A number
of the Company's competitors and potential competitors possess significantly
greater capital, marketing resources and brand recognition than the Company.
Rapid changes in technology, product obsolescence and advances in computer
software and hardware require the Company to develop or acquire new products and
to enhance its existing products on a timely basis.
Many large companies with sophisticated product marketing and technical
abilities and financial resources that do not presently compete with the Company
may enter the PC software market. Such companies could rapidly become
significant additional competitors of the Company. To the extent that
competitors achieve either a performance, price or distribution advantage, the
Company could be adversely affected.
Microsoft Corporation is the dominant supplier of computer operating
systems and frequently coordinates its operating system marketing efforts with
those for its applications software. Competition in Microsoft's Windows
application segment from major software publishers is intensifying, and the
"competitive upgrade" price discounting among the major firms is eroding the
traditional pricing structures that had previously existed in the software
industry. Competitive pressures have resulted in price reductions throughout the
industry with the result that industry wide operating margins may be adversely
affected.
There is no assurance that the Company will have the resources required to
respond to market or technological changes or to compete successfully in the
future.
INTENSE COMPETITION FOR DISTRIBUTION CHANNELS
The Company competes with other companies for access to retail shelf space
and inclusion in OEM sales programs. Competition in this aspect of the industry
is intense, and the type and number of channels is increasing to include
non-traditional software retailers such as book, music, video, magazine, toy,
gift, convenience, drug and grocery store chains.
The traditional channels of distribution in the software industry have
experienced increasing concentration during the past several years, in
particular with respect to PC chain stores and software distributors. With the
increasing concentration in the traditional channels of distribution, the
Company's customers have increased strength in negotiating favorable terms of
sale, including price discounts and product return policies. There can be no
assurance that the Company will be able to continue to have access to sufficient
retail marketing distribution channels or obtain adequate distribution for all
of its products in the future. Accordingly, such concentration may have an
adverse effect in the future on the profitability of the Company's operations.
Regardless of the retail strategy chosen by the Company, the retail
channels of distribution available for products will be subject to rapid changes
as retailers and distributors enter and exit the software market segments or
alter their product inventory preferences. In addition, other types of retail
outlets and methods of product distribution may become important in the future.
These new methods may also include delivery of
5
<PAGE> 7
software using on-line services or the Internet. It is critical to the success
of the Company that as these changes occur it maintain access to those channels
of distribution offering software in its market segments.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
Software companies must continue to develop or acquire new products or
upgrade existing products on a timely basis to sustain revenues and profitable
operations. One factor contributing to the short life span of PC software has
been rapid technological change. Software companies must continue to create or
acquire innovative new products reflecting technological changes in hardware and
software and translate current products into newly accepted hardware and
software formats, in order to gain and maintain a viable market for their
products. PC hardware, in particular, is steadily advancing in power and
function, expanding the market for increasingly complex and flexible software
products. This has also resulted in longer periods necessary for research and
development of new products and a greater degree of unpredictability in the time
necessary to develop products. Furthermore, the rapid changes in the market and
the increasing number of new products available to consumers have increased the
degree of consumer acceptance risk with respect to any specific title that the
Company may publish. It is expected that this trend will continue and may become
more pronounced in the future.
The Company has in the past focused primarily on the productivity,
lifestyle and edutainment product categories. These product categories have a
lower development cost and are not considered as "hit" driven as the high-end,
16-bit and 32-bit entertainment and games software category (including the Sega,
Nintendo and 3DO platforms) and the high-end, PC-based CD-ROM game category.
Additionally, the high-end entertainment and games category requires higher
development and marketing costs and a higher cost of goods sold than the
Company's traditional software business, is dominated by a number of very large
competitors and is subject to rapid change in consumer preference. Should the
Company substantially increase its presence in the high-end entertainment and
games industry segment, it will experience these additional risks and
competitive pressures.
The Company's rights to license many of its software products are
non-exclusive and, generally, of limited duration, and there is no assurance the
Company will be able to continue to obtain new products from developers or to
maintain or expand its market share in the event that a competitor offers the
same or similar software products. If the Company is unable to develop or
acquire new products in a timely manner as revenues decrease from products
reaching the end of their natural life cycle, the Company's results of
operations will be adversely affected.
SIGNIFICANT PRICE REDUCTIONS IN PERSONAL COMPUTER SOFTWARE
Recently, several major publishers of PC software have significantly
reduced the prices of their products with the goal of gaining greater market
share, to the extent that at least one company (which is not a competitor of
SoftKey) distributed its product at no cost (except what it represented as
shipping and handling charges) in order to gain market share upon its entrance
into a new market. The retail prices of many of the Company's products and those
of its predecessors have declined, and the Company has introduced new lines of
lower-priced software products. There can be no assurance that such price
reductions or new product lines will result in an increase in unit sales volume
or that prices will not continue to decline in the future. Such a decline would
lead to a decrease in the revenues from, and gross margin on, sales of such
products in the future and could result in lower cash flow or operating margins.
RISK OF INTERNATIONAL OPERATIONS
The Company derived approximately 11% of its revenues in the Year Ended
December 31, 1994 from sales occurring outside North America. These revenues are
subject to the risks normally associated with international operations,
including currency conversion risks, limitations (including taxes) on the
repatriation of earnings, slower and more difficult accounts receivable
collection, greater difficulty and expense in administering business abroad,
complications in complying with foreign laws and the necessity of obtaining
requisite export licenses, which on occasion may be delayed or difficult to
obtain. In addition, while U.S.
6
<PAGE> 8
copyright law, international conventions and international treaties may provide
meaningful protection against unauthorized duplication of software, the laws of
foreign jurisdictions may not protect the Company's proprietary rights to the
same extent as the laws of the United States. Software piracy has been, and can
be expected to be, a persistent problem for participants in the "shrinkwrap"
software industry, including the Company. These problems are particularly acute
in certain international markets such as South America, the Middle East, the
Pacific Rim and the Far East.
DEPENDENCE ON MAJOR SUPPLIER
All duplication, assembly and fulfillment, with certain exceptions
(including CD-ROMs and products reproduced by OEMs), for all of the Company's
U.S. products are provided by one supplier, R.R. Donnelley & Sons Company
("Donnelley") at facilities in Crawfordsville, Indiana. Any interruption in
Donnelley's manufacturing, assembly and fulfillment services could have a
material adverse impact on the Company's business. The Company's agreement with
Donnelley expires in April 1997, and there can be no assurance that such
agreement will be renewed or that the terms of any renewal will be the same as
those currently in effect. Although the Company believes that suitable
alternative suppliers exist, there can be no assurance that any termination or
modification of the agreement with Donnelley would not result in a short-term
business interruption for the Company.
MANAGEMENT OF GROWTH
The Company is currently experiencing a period of rapid growth that could
place a strain on the Company's financial, management and other resources in the
future. The Company's ability to continue to manage its growth effectively will
require it to continue to improve its operational, financial and management
information systems and to continue to attract, train, motivate, manage and
retain key employees. If the Company's management becomes unable to manage
growth effectively, the Company's business, operating results and financial
condition could be adversely affected.
DEPENDENCE ON CONTINUED PERSONAL COMPUTER SALES
The success of the Company is dependent upon the continuing use of PCs in
the consumer market. A general decrease in unit sales of PCs could adversely
affect the Company's future results of operations.
HISTORY OF OPERATING LOSSES
A variety of factors may cause period-to-period fluctuations in the
Company's operating results, including integration of operations resulting from
acquisitions of companies, products or technologies, revenues and expenses
related to the introduction of new products or new versions of existing
products, changes in selling prices, delays in purchases in anticipation of
upgrades to existing products, currency fluctuations, dealer and distributor
order patterns, general economic trends or a slowdown of PC sales and
seasonality of customer buying patterns. Historical operating results of the
Company and its predecessors cannot be relied upon as indicative of the future
performance of the Company. On an historical basis, the Company incurred net
losses of $4,983,000 for the year ended June 30, 1992, $57,250,000 for the year
ended June 30, 1993 and $73,258,000 for the Transition Period ended December 31,
1993. The Company had net income of $21,145,000 for the Year Ended December 31,
1994 and $10,019,000 for the Three Months ended March 31, 1995. There can be no
assurance that the Company will continue to be profitable in the future.
LIQUIDITY AND CAPITAL RESOURCES
The expansion of the Company's current business involves significant
financial risk and capital investment. There is no assurance that financing will
be available in the future to meet the needs of the Company for additional
investment capital.
7
<PAGE> 9
VOLATILITY OF STOCK PRICE AND DEPTH OF TRADING MARKET
The Common Stock trades on the Nasdaq National Market. The market price of
the Common Stock, like the shares of many other high technology companies, has
been and may continue to be volatile. Recently, the stock market in general and
the shares of personal computer software companies in particular have
experienced significant price fluctuations. These broad market and industry
fluctuations may adversely affect the market price of the Common Stock. Factors
such as quarterly fluctuations in results of operations, the announcement of
technological innovations, the introduction of new products by the Company or
its competitors and general conditions in the computer hardware and software
industries may have a significant impact on the market price of the Common
Stock.
LEGAL PROCEEDINGS
The Company is a party to various actions and proceedings incident to its
normal business operations. The Company believes that the outcome of such
litigation will not have a material adverse effect on its business, financial
condition or results of operations.
8
<PAGE> 10
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by it hereby are estimated to be $46,612,500 ($55,204,988
if the Underwriters' over-allotment option is exercised in full) based on an
assumed public offering price of $24.875 per share after deduction of the
estimated underwriting discount and related offering expenses. The Company will
not receive any of the proceeds from the sale of shares of Common Stock by the
Selling Stockholders.
The Company intends to use a significant portion of the net proceeds of the
offering for acquisitions and strategic alliances. There are currently no
understandings, agreements or commitments with respect to any such transactions.
SoftKey and its management have an established history of acquisitions and
strategic alliances, and the Company actively explores strategic opportunities
for the acquisition of product, technology and distribution; however, there can
be no assurance that the Company will be able to identify or consummate any
acquisitions or enter into any strategic alliances in the foreseeable future.
The Company intends to use approximately $8,700,000 of the net proceeds of
the offering to reduce outstanding indebtedness. Of this amount, the Company
anticipates using approximately $7,700,000 to reduce outstanding indebtedness
under the revolving line of credit of SoftKey Inc., a wholly owned subsidiary of
the Company. Amounts outstanding under this facility are due on July 1, 1997 and
bear interest at the prime rate (9.0% at March 31, 1995), payable monthly. In
addition, the Company intends to use approximately $1,000,000 of the net
proceeds of the offering to prepay indebtedness due on February 4, 1996 under an
outstanding term note. Interest under the term note accrues at the Adjusted
Applicable Federal Rate (5.7% at March 31, 1995).
The Company intends to use the balance of the net proceeds of the offering
to fund working capital requirements and for other corporate purposes. Pending
such uses, the net proceeds of the offering will be placed in short-term
investments, including interest-bearing bank accounts or invested in United
States government securities or other interest-bearing, investment-grade
securities.
<TABLE>
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the Nasdaq National Market under the symbol
SKEY. The following table sets forth for the periods indicated the high and low
sale prices for the Common Stock as reported on the Nasdaq National Market.
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1994
First Quarter (from February 4, 1994)................................ $14 $ 9 3/4
Second Quarter....................................................... 14 5/8 9 3/4
Third Quarter........................................................ 15 1/8 11 1/2
Fourth Quarter....................................................... 27 1/4 14 5/8
1995
First Quarter........................................................ 29 1/8 22
Second Quarter (through June 8, 1995)................................ 28 1/4 21
</TABLE>
On June 8, 1995, the last reported sale price of the Common Stock on the
Nasdaq National Market was $24.875 per share. As of March 20, 1995, there were
approximately 1,380 holders of record of the shares of outstanding Common Stock.
DIVIDEND POLICY
The Company does not currently pay cash dividends on its Common Stock and
does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future.
9
<PAGE> 11
<TABLE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1995 and as adjusted to reflect (i) the sale of 2,000,000 shares of Common
Stock by the Company at an assumed public offering price of $24.875 per share,
after deducting the estimated underwriting discount and estimated offering
expenses, and the application of the proceeds therefrom, and (ii) the exercise
of options and the exchange of Exchangeable Shares by certain Selling
Stockholders in connection therewith. This table should be read in conjunction
with the Consolidated Financial Statements of the Company, including the related
notes thereto, appearing elsewhere in this Prospectus.
<CAPTION>
MARCH 31, 1995
-------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt.................................... $ 2,920 $ 1,920
========= =========
Long-term debt, less current portion................................. $ 8,838(1) $ 1,138
--------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value --
Authorized -- 24,500,000 shares(2)
Issued and outstanding -- 19,281,551 shares; 21,493,064 shares, as
adjusted........................................................... $ 193 $ 215
Special voting stock, (represents Exchangeable Shares that are
exchangeable into 2,361,422 shares of Common Stock; 2,259,989
shares, as adjusted) --
Authorized and Issued -- 1 share(2)................................ -- --
Additional paid-in capital........................................... 199,103 246,650
Accumulated deficit.................................................. (132,773) (132,773)
Cumulative translation adjustment.................................... (9,278) (9,278)
--------- -----------
Total stockholders' equity......................................... 57,245 104,814
--------- -----------
Total capitalization............................................ $ 66,083 $ 105,952
========= =========
<FN>
---------------
(1) Includes capital lease obligations totaling $1,138,000 and a revolving line
of credit of $7,700,000. Excludes accrued minimum royalties of $2,260,000,
deferred income taxes of $4,323,000 and other long-term obligations of
$3,941,000.
(2) As of June 2, 1995, the Company's authorized Common Stock totalled
60,000,000 shares. As of June 2, 1995, the Company had reserved 4,193,955
shares of Common Stock for issuance pursuant to the exercise of outstanding
options and warrants and 2,183,439 additional shares for issuance upon
exchange of the Exchangeable Shares outstanding at such date. See
"Description of Capital Stock -- Special Voting Share."
</TABLE>
10
<PAGE> 12
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the two years
in the period ended June 30, 1993, the Transition Period Ended December 31, 1993
and the Year Ended December 31, 1994 and as of June 30, 1992 and 1993, December
31, 1993 and 1994 are derived from the Company's consolidated financial
statements appearing elsewhere herein, which have been audited. See "Experts."
The selected consolidated financial data presented below for the Three Months
ended March 31, 1994 and 1995 and as of March 31, 1995, is unaudited, but has
been prepared on the same basis as the Company's audited consolidated financial
statements and, in the opinion of the Company's management, contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. Financial information for the interim periods presented is
not necessarily indicative of financial information to be anticipated for the
full fiscal year. The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto, included elsewhere in this Prospectus.
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED THREE MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31,
-------------------- ------------ ------------ ------------------
1992 1993 1993 1994 1994 1995
-------- -------- ---------- ---------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues................................ $119,518 $109,704 $ 41,645 $121,287 $35,304 $41,004
Cost of revenues........................ 48,038 49,993 27,748 39,085 12,410 12,461
-------- -------- ---------- ---------- -------- -------
Gross margin............................ 71,480 59,711 13,897 82,202 22,894 28,543
-------- -------- ---------- ---------- -------- -------
Sales, marketing and support............ 38,746 38,014 19,322 27,274 6,499 8,714
General and administrative.............. 22,060 24,278 15,598 22,444 5,963 5,391
Research and development................ 5,685 8,198 2,563 6,696 1,952 2,304
Purchased research and development...... -- 19,051 -- -- -- --
Merger and reorganization costs......... 1,390 20,962 38,944 1,079 -- --
Provision for (gain) product lines sold
or discontinued....................... 4,198 2,989 710 (778) -- --
Provisions (reversals) for litigation... -- 3,200 5,817 (254) -- --
-------- -------- ---------- ---------- -------- -------
Total operating expenses............ 72,079 116,692 82,954 56,461 14,414 16,409
-------- -------- ---------- ---------- -------- -------
Operating income (loss)................. (599) (56,981) (69,057) 25,741 8,480 12,134
Other income (expense).................. (1,496) (166) (744) (535) (255) (347)
-------- -------- ---------- ---------- -------- -------
Income (loss) before taxes.............. (2,095) (57,147) (69,801) 25,206 8,225 11,787
Provision for income taxes.............. 2,888 103 3,457 4,061 1,934 1,768
-------- -------- ---------- ---------- -------- -------
Net income (loss)....................... $ (4,983) $(57,250) $(73,258) $ 21,145 $ 6,291 $10,019
========= ========= =========== ========== ======== ========
Fully diluted net income (loss) per
share................................. $ (0.47) $ (4.36) $ (5.01) $ 1.04 $ 0.33 $ 0.45
========= ========= =========== ========== ======== ========
Shares used in computing fully diluted
net income (loss) per share........... 10,502 13,129 14,618 21,115 19,986 22,376
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, MARCH 31,
----------------------- ---------------------- ---------
1992 1993 1993 1994 1995
-------- -------- -------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working capital....................... $ 42,222 $ 23,052 $(17,602) $15,521 $ 32,757
Total assets.......................... 132,862 128,474 79,334 90,815 100,536
Total long-term obligations, less
current portion(1).................. 23,449 30,248 24,687 21,859 19,362
Total stockholders' equity
(deficit)........................... 87,049 61,933 (8,632) 37,485 57,245
<FN>
- ---------------
(1) Includes deferred income taxes.
</TABLE>
11
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto, included elsewhere in
this report. All dollar amounts presented in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are presented in
thousands, except share and per share amounts.
FIRST QUARTER 1995 AS COMPARED TO FIRST QUARTER 1994
INTRODUCTION
SoftKey International Inc. (the "Company") is a developer and a publisher
of consumer software for use with personal computers. The Company develops,
licenses, manufactures, distributes and markets a wide range of productivity,
lifestyle, education/entertainment and organizational software for individual,
home and small business users. SoftKey develops and publishes titles on both
magnetic disk and CD-ROM. In addition, the Company develops, markets and
distributes income tax software and provides comprehensive nationwide tax
processing for personal, corporate and trust tax returns in Canada.
The Company was created through a recent combination of three corporations.
On February 4, 1994 the Company (which was then known as WordStar International
Incorporated), completed a three-way business combination transaction (the
"Three-Party Combination") with SoftKey Software Products Inc. and Spinnaker
Software Corporation. The Three-Party Combination was accounted for as a
pooling-of-interests. Effective February 4, 1994, the Company changed its name
to SoftKey International Inc.
RESULTS OF OPERATIONS
Net Income. The Company generated net income of $10,019 ( $0.45 per fully
diluted share) on revenues of $41,004 in First Quarter 1995 as compared to net
income of $6,291 ($0.33 per fully diluted share) on revenues of $35,304 in First
Quarter 1994. The increase is a result of several factors, including increases
in revenues and gross margins, reductions in operating expenses as a percentage
of revenue and the introduction of new product offerings.
<TABLE>
Revenues
Revenues by channel for the Company for the First Quarter are as follows:
<CAPTION>
THREE MONTHS ENDED MARCH 31
-------------------------------
1995 % 1994 %
------- --- ------- ---
<S> <C> <C> <C> <C>
Retail................................................. $15,257 37% $ 8,856 25%
OEM.................................................... 2,964 7 3,396 10
Catalog................................................ -- -- 2,891 8
Direct Mail............................................ 6,768 17 3,652 10
International.......................................... 4,069 10 2,952 8
Tax Software and Services.............................. 11,946 29 11,736 33
Lansa Software......................................... -- -- 1,821 6%
------- --- ------- ---
$41,004 100% $35,304 100%
======= === ======= ===
</TABLE>
Total Revenues increased 16% in First Quarter 1995 over First Quarter 1994.
The growth in the retail channel resulted from new product offerings in First
Quarter 1995 and from a larger number of retail distribution outlets carrying
the Company's products. International sales continued to increase primarily as a
result of the availability of newly translated foreign language versions of
English language products and the continued shift to Windows-based applications
on CD-ROM. Tax software sales and services experienced increased revenue growth
in Canadian dollar terms due to growth in the Canadian computerized tax
preparation market as a whole. However, this volume increase was offset by the
impact of the lower foreign exchange rate of the Canadian dollar. Original
Equipment Manufacturer ("OEM") revenues declined slightly
12
<PAGE> 14
due to pricing pressures compared to First Quarter 1994. Direct mail revenues
increased due to an increase in the frequency of product mailings and growth in
the number of registered product end users. Revenues for First Quarter 1994
include $2,891 of revenues from the Company's Power Up catalog operation, which
was closed in 1994 and $1,821 of revenues from the Company's subsidiary, Lansa
USA, Inc. ("Lansa"), which was sold by the Company on September 30, 1994.
Cost of Revenues. Cost of revenues includes the cost of manuals,
packaging, diskettes, duplication, assembly and fulfillment charges. In
addition, cost of revenues includes royalties paid to third-party developers,
inventory obsolescence reserves and amortization of capitalized software
development costs. Gross margins for First Quarter 1995 increased to 70% as
compared to 65% for First Quarter 1994. The improvement in the First Quarter
1995 is due primarily to the higher percentage of CD-ROM based sales and direct
mail sales. Cost of revenues were also lower on a percentage basis in First
Quarter 1995 over First Quarter 1994 due to the closing of the Power Up catalog
operation and the sale of the Lansa operation, each of which generated lower
gross margins than the Company's current operations.
<TABLE>
Operating Expenses. The Company's operating expenses and the respective
percentages of revenues for First Quarter 1995 as compared to First Quarter 1994
are as follows:
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
% OF % OF
1995 REVENUES 1994 REVENUES
------- -------- ------- --------
<S> <C> <C> <C> <C>
Sales, marketing and support................ $ 8,714 21% $ 6,499 18%
General and administrative.................. 5,391 13 5,963 17
Research and development.................... 2,304 6 1,952 6
------- -- ------- --
$16,409 40% $14,414 41%
======= == ======= ==
</TABLE>
Total operating expenses decreased as a percentage of revenues to 40% in
First Quarter 1995 compared with 41% in First Quarter 1994. This decrease is
primarily the result of reductions in redundant and obsolete operating
infrastructure since the Three-Party Combination, closures of the Power Up
catalog operations and the sale of Lansa.
Sales, marketing and support expenses increased to 21% of revenues in First
Quarter 1995 compared to 18% of revenues in First Quarter 1994. The increase in
these expenses as a percentage of revenues is attributed primarily to the costs
associated with increased direct mail revenues and expansion of retail channel
sales.
General and administrative expenses decreased to 13% of revenues in First
Quarter 1995 compared to 17% of revenues in First Quarter 1994. This decrease is
principally attributable to a reduction in the number of employees as a result
of closure of the Power Up catalog operation and facilities in Barbados and
Marina del Rey, California and the sale of Lansa.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Three-Party Combination, the Company has completed a
restructuring program, which included reductions in operating costs, that has
improved the Company's liquidity position. The Company's working capital
increased from $15,521 at December 31, 1994 to $32,757 at March 31, 1995.
During First Quarter 1995, the Company has continued to further its
manufacturing relationship with R.R. Donnelley & Sons ("Donnelley"), the
supplier of a majority of the Company's manufacturing and fulfillment services,
such that Donnelley now provides turn-key manufacturing and fulfillment services
to the Company. The Company anticipates that as the number of product offerings
increases the Company's ability to supply sufficient product to its customers on
a timely basis will become increasingly important to its business. The Company
expects that its future inventory levels will continue to expand as the number
of product offerings expands and new channels of distribution are established.
Cash and cash equivalents increased from $12,205 at December 31, 1994 to
$18,623 at March 31, 1995. This increase is attributed primarily to cash
generated from operations and cash received from the exercise of employee stock
options.
13
<PAGE> 15
On September 30, 1994, SoftKey Inc., a wholly owned subsidiary of the
Company, obtained a revolving line of credit, as amended (the "Line"), to
provide for a maximum availability of $20,000, subject to eligible accounts
receivable limits. Borrowings under the Line become due on July 1, 1997 and bear
interest at the prime rate. The Line is subject to certain financial covenants,
is secured by a general security interest in the assets of SoftKey Inc. and
certain other subsidiaries of the Company and is guaranteed by the Company. As
of March 31, 1995, the principal amount outstanding under the Line was $7,700.
Income generated by the Company's subsidiaries in certain foreign countries
cannot be repatriated to the Company in the United States without payment of
additional taxes since the Company does not currently receive a U. S. tax credit
with respect to income taxes paid by the Company (including its subsidiaries) in
those foreign countries. The Company also conducts its tax software business in
Canada, which has experienced foreign currency exchange rate fluctuation. In
order to mitigate this exposure, the Company has purchased a Cdn $2,000 180 day
foreign exchange option contract expiring July 28, 1995.
Cash flow from operations on a short-term basis is positively impacted by
the seasonality of the income tax software business in the first two quarters of
the calendar year. At the present time, the Company expects that its cash flows
from operations will be sufficient to finance the Company's operations for at
least the next twelve months. Longer term cash requirements are dictated by a
number of external factors, which include the Company's ability to launch new
and competitive products, the strength of competition in the consumer software
industry and the growth of the home computer market. The Company is continuously
evaluating products and technologies for acquisitions, and although no
estimation of short-term or long-term cash requirements for such acquisitions
can be made at this time, the Company may seek to raise additional funds for
these acquisitions or in anticipation of possible acquisitions.
FUTURE OPERATING RESULTS
The Company's future operating results are subject to a number of
uncertainties, including its ability to develop and introduce new products, the
introduction of competitive products and general economic conditions. The
Company may plan to seek acquisitions of businesses, products or technologies in
the future that are complementary to the current business. There can be no
assurance that the Company will not encounter difficulties in integrating any
such business or technology.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations is provided pursuant to applicable
regulations of the Securities and Exchange Commission and is not intended to
serve as a basis for projections of future events.
FISCAL PERIOD TO PERIOD COMPARISONS
GENERAL
Business Combination
On February 4, 1994, the Company completed the Three-Party Combination
between Former SoftKey, WordStar and Spinnaker. The Three-Party Combination was
accounted for using the pooling-of-interests method of accounting. A 1-for-10
reverse stock split also took effect on February 4, 1994 and has been
retroactively reflected in this Prospectus and the related consolidated
financial statements.
On June 15, 1994 and July 5, 1994, the Company acquired all of the
outstanding common stock of Aris Multimedia Entertainment, Inc. ("Aris") and
Compact Publishing, Inc. ("Compact"), respectively, in exchange for the issuance
of a total of 872,229 shares of Common Stock. These transactions have been
accounted for using the pooling-of-interests method of accounting. On September
13, 1994, the Company acquired all of the outstanding common stock of Software
Marketing Corporation ("SMC") for the issuance of an aggregate of 602,257 shares
of Common Stock in and in connection with a stock-for-stock merger transaction,
116,995 of which were subsequently repurchased by the Company. This transaction
has been accounted for as a purchase.
The consolidated financial statements for years prior to the Year Ended
December 31, 1994 of the Company included in this Prospectus are restated to
reflect the Three-Party Combination, which was
14
<PAGE> 16
consummated on February 4, 1994, but do not include the results and balances of
Aris and Compact as they were determined to be immaterial to the consolidated
financial statements for those periods. See "Consolidated Financial
Statements -- Note 2 -- Three-Party Combination" for further discussion.
Fiscal Periods
On January 27, 1994, the Company changed its fiscal year end to the 52 or
53 weeks ending nearest December 31. For clarity of presentation herein, all
references to the Year Ended December 31, 1994 relate to the period January 2,
1994 to December 31, 1994; all references to December 31, 1993 relate to
balances as of January 1, 1994; and the period from July 4, 1993 to January 1,
1994 is referred to as the "Transition Period Ended December 31, 1993" or the
"Transition Period."
Former SoftKey previously used the fiscal year end of January 31 for
financial reporting purposes. Former SoftKey's results of operations for the
twelve month periods ended July 31, 1993 and 1992 have been combined with those
of Spinnaker and WordStar for the years ended June 30, 1993 and 1992,
respectively. Former SoftKey's results of operations for the six months ended
December 31, 1993 have been combined with those of Spinnaker and WordStar. The
duplication in the Transition Period Ended December 31, 1993 of Former SoftKey's
net loss of $595 for the one month period ended July 31, 1993 has been
eliminated by a credit to accumulated deficit in the Transition Period Ended
December 31, 1993.
Period-to-Period Comparisons
A variety of factors may cause period-to-period fluctuations in the
Company's operating results, including the integration of operations resulting
from acquisitions of companies, revenues and expenses related to the
introduction of new products or new versions of existing products, delays in
customer purchases in anticipation of upgrades to existing products, currency
fluctuations, dealer and distributor order patterns and seasonality of buying
patterns of customers. Historical operating results are not indicative of future
operating results and performance. This is particularly true of historical data
presented herein, which results from the combination of Former SoftKey,
Spinnaker and WordStar in the Three-Party Combination.
<TABLE>
Summary of Results
The following table summarizes the audited results of operations of the
Company for the periods shown. Reference is made to the Consolidated Financial
Statements included in this report on which the following table is based.
<CAPTION>
TRANSITION PERIOD YEARS ENDED
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1994 1993 1993 1992
------------ ----------------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................... $121,287 $ 41,645 $109,704 $119,518
Operating income (loss)................ 25,741 (69,057) (56,981) (599)
Net income (loss)...................... 21,145 (73,258) (57,250) (4,983)
Net income (loss) per share (fully
diluted)............................. 1.04 (5.01) (4.36) (.47)
</TABLE>
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO THE
TRANSITION PERIOD
ENDED DECEMBER 31, 1993
Results of operations for the Year Ended December 31, 1994 include amounts
for a twelve month period while results for the Transition Period Ended December
31, 1993 include amounts for a six month period. Results (in terms of dollar
amounts) for these periods are not directly comparable. Accordingly,
management's discussion and analysis for these periods is generally based upon a
comparison of specified results as a percentage of total revenues.
15
<PAGE> 17
<TABLE>
Revenues
Revenues by geographic region for the Year Ended December 31, 1994 and
Transition Period Ended December 31, 1993 are as follows:
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED
DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL
1994 REVENUES 1993 REVENUES
------------ ---------- -------------- ----------
<S> <C> <C> <C> <C>
North America............................ $108,772 90% $ 36,051 87%
Europe................................... 11,422 9 4,296 10
Other.................................... 1,093 1 1,298 3
------------ --- -------------- ---
Total............................... $121,287 100% $ 41,645 100%
========== ======== =========== ========
</TABLE>
Revenues in absolute dollars have increased during the Year Ended December
31, 1994 by a total of $72,721 as compared to the Transition Period Ended
December 31, 1993 because the Transition Period included only six months as
compared to twelve months in the Year Ended December 31, 1994. A greater than
proportional increase in absolute revenue dollars earned has occurred primarily
due to benefits achieved as a result of the Three-Party Combination. The
increase in percentage of total revenues earned in North America is primarily
due to the synergies achieved as a result of the Three-Party Combination. These
synergies included increases in direct mail, OEM and international revenues
achieved as a result of combining the operations of the three companies and
creating distribution channels that did not previously exist in each separate
company operating individually prior to the Three-Party Combination. In
addition, the acquisitions of Aris, Compact and SMC added to the North American
revenue base in the Year Ended December 31, 1994 as compared to the Transition
Period. Revenues also increased in the Year Ended December 31, 1994 as a result
of the Company's new marketing strategy to increase product launches. During
1994, the Company introduced 75 new products plus the new Platinum rack which
holds a maximum of 40 titles. During 1994, the Power Up catalog operation was
closed. Revenues from the catalog operation totaled $3,176 in the Year Ended
December 31, 1994 as compared to $8,465 in the Transition Period. Revenues in
the Year Ended December 31, 1994 included $18,138 from the Company's income tax
software sales and processing operation in Canada as compared to $4,771 in the
Transition Period. The majority of revenues from sales of income tax software
and related services in Canada occur in the first six months of the year to
correspond with the income tax filing requirement period.
Revenues in Europe as a percentage of total revenues decreased from 10% to
9% in the Year Ended December 31, 1994 as compared to the Transition Period. The
decrease is primarily due to the decline of DOS-based consumer product sales in
Europe and a decline in the Company's revenues from the sale of word-processing
software products due to a higher level of competition.
Revenues in other geographic regions include those in Latin America, the
Pacific Rim and Barbados. Revenues in the Pacific Rim decreased as a percentage
of total revenues due to closure of the Company's office in Singapore. This
decline was partially offset by an increase in revenues as a percentage of total
revenues in Japan due to increased customer demand for consumer software
products.
The Company expects that its future revenue growth will depend on its
ability to introduce new products to the marketplace and the rate of
proliferation of personal computers into the home market. Unit pricing will be
affected by the extent of competition in the consumer software industry, which
is expected to increase. In addition, the Company's ability to maintain products
for new platforms and introduce titles into new distribution channels will
impact future revenues and growth rates. In this regard, the Company considers
revenues to be unpredictable.
Gross Margin
Gross margins as a percentage of revenues increased to 68% in the Year
Ended December 31, 1994 from 33% in the Transition Period Ended December 31,
1993. The increase in gross margins during the Year Ended December 31, 1994 is
primarily due to a lower revenue base in the Transition Period caused by higher
16
<PAGE> 18
provision for product returns as a percentage of sales. The increase in gross
margins as a percentage of revenues also results from an increase in CD-ROM
based and higher OEM sales and solo direct mail sales, which have higher gross
margins than traditional retail magnetic disk based product sales. In addition,
gross margins improved due to the closing of the Power Up catalog operations in
1994, which generated lower gross margins due to the inclusion of distributed
products in the catalog. Gross margins in the Year Ended December 31, 1994 as a
percentage of revenues were also higher due to the seasonal nature of sales from
income tax software and related services that occur primarily in the first six
months of the calendar year.
Cost of revenues are comprised of, among other things, the cost of product
documentation, packaging and disks. Other items included in cost of revenues are
royalties to third party developers, reserves for obsolete inventory and
amortization of capitalized software development costs.
Future gross margin percentages will depend on the cost of manufacture. The
Company expects costs of revenue to decline and resulting gross margins to
improve in the foreseeable future. The expectation is based upon current pricing
trends for items such as disks. It is also expected that CD-ROM based product
sales will become a larger portion of the Company's sales mix. CD-ROM production
costs are currently lower than magnetic media production costs. The Company has
consolidated its manufacturing operations at R.R. Donnelley & Sons Company in
Crawfordsville, Indiana in order to take advantage of economies of scale
benefits.
<TABLE>
Operating Expenses
Operating expenses and their respective percentages of revenues for the
Year Ended December 31, 1994 and the Transition Period Ended December 31, 1993
are as follows:
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED
DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL
1994 REVENUES 1993 REVENUES
------------ ---------- -------------- ----------
<S> <C> <C> <C> <C>
Sales, marketing and support............. $ 27,274 23% $ 19,322 46%
General and administrative............... 22,444 19 15,598 37
Research and development................. 6,696 6 2,563 6
Merger and reorganization costs.......... 1,079 1 38,944 94
Provision for (gain on) product lines
sold or discontinued................... (778) (1) 710 2
Provision (reversal) for litigation...... (254) (1) 5,817 14
---------- -------- ----------- --------
$ 56,461 47% $ 82,954 199%
========== ======== =========== ========
</TABLE>
Sales, marketing and support and general and administrative expenses
decreased as a percentage of revenues primarily due to a reduction in operating
expenses during the Year Ended December 31, 1994 associated with cost reduction
measurements undertaken by management as a result of the Three-Party Combination
and changes implemented in connection with the acquisitions of Aris, Compact and
SMC. The cost reduction program included a reduction in employee workforce from
a total of 650 employees to 450 employees, the reduction in the number of
facilities from 25 to 11 locations and savings generated from the consolidation
of sales and marketing activities. The Company also consolidated its five
separate technical support operations that existed prior to the Three-Party
Combination into one facility in Marietta, Georgia.
17
<PAGE> 19
<TABLE>
Merger and reorganization costs have decreased to $1,079 in the Year Ended
December 31, 1994 from $38,944 in the Transition Period Ended December 31, 1993.
The merger and reorganization costs in the Year Ended December 31, 1994 relate
to the acquisition of Aris and Compact and the closing of the Barbados facility,
whereas the merger and reorganization costs in the Transition Period relate to
the Three-Party Combination costs. Merger and reorganization costs were expensed
as incurred or were recorded when it became probable that the transaction would
occur and the expense could be reasonably estimated. Merger and reorganization
costs consist of the following:
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
Write-down of intangible assets............................ $ -- $22,893
Professional fees and other transaction costs.............. 636 8,705
Employee severance......................................... 163 4,429
Termination of leases...................................... 98 1,533
Write-down of inventories and fixed assets................. -- 362
Other...................................................... 182 1,022
------ -------
Total................................................. $1,079 $38,944
====== =======
</TABLE>
Professional fees in 1994 were for investment banking, accounting and legal
fees incurred in connection with the acquisitions of Aris and Compact. These
costs were substantially paid prior to December 31, 1994. Severance costs in
1994 relate to termination of employees in connection with the acquisitions of
Aris and Compact and the closing of the Barbados facility. The employee
terminations were substantially in the areas of product development and sales
and marketing. A total of 20 employees were terminated in the Year Ended
December 31, 1994. At December 31, 1994, $54 of severance costs remained to be
paid to the employees in accordance with the terminations. The remaining
employee severance payments are expected to be paid prior to December 31, 1995.
During the Transition Period Ended December 31, 1993, in connection with
the Three-Party Combination, the Company recorded write-downs of intangible
assets of $22,893 due to a change in the consumer software marketing strategy of
the Company. The Company decided to approach consumer software distribution
through fixturing, specialty shelf space and direct merchandising and marketing
with the retailer and customer. The new marketing strategy focused on new
products, and an increase in the number of available offerings of consumer
software and recognized a reduction in product shelf life. The Company has also
reduced its dependence on predominantly internally developed products, and its
new product introduction strategy includes a higher number of products
originating from its external developer relationships through licensing
contracts. As a result of the new marketing strategy, the Company decided to
phase out certain brands (primarily the PFS: brand) and recorded expenses of
$14,811 in the Transition Period Ended December 31, 1993 related to write-downs
of capitalized software development costs, prepaid royalties, trademarks and
technology rights. The Company's Power Up catalog operation was closed. As a
result, the Company recorded an expense of $4,205 in the Transition Period Ended
December 31, 1993 to reflect a write-down to net realizable value of certain
trademarks and mailing lists. The Company also recorded an expense of $3,877 in
the Transition Period Ended December 31, 1993 to record a write-down to net
realizable value of a license held by LANSA USA, INC. ("Lansa").
Professional fees and other transaction costs in the Transition Period
Ended December 31, 1993 relate primarily to investment banking, legal and
accounting fees in connection with the Three-Party Combination and have been
paid at December 31, 1994. The amount accrued at December 31, 1993 of $5,954
includes $1,781 which was paid through the issuance of 129,555 shares of Common
Stock.
Employee severance in the Transition Period relates to employee
terminations in connection with the Three-Party Combination primarily in the
areas of product development, technical support, customer service, finance and
administration. Substantially all employee terminations were completed through
December 31, 1994 and $3,866 of the $4,833 severance accrued for at December 31,
1993 has been paid at December 31, 1994 in accordance with the Company's plan.
The remaining severance amounts will be substantially paid before December 31,
1995 in accordance with the severance contract terms.
18
<PAGE> 20
Lease termination costs in the Transition Period represent costs associated
with the closure of the Power Up catalog operations and the shutdown of the
manufacturing facility in Charlestown, MA in connection with the consolidation
of the Company's production facilities. In addition, offices were vacated in
Toronto, Boca Raton, Novato and San Mateo. These facilities were consolidated
into one central location in Cambridge, MA. The amount accrued at December 31,
1993 for lease termination costs was $2,254, of which $1,341 has been paid
through December 31, 1994. The balance is expected to be substantially paid
before December 31, 1995 in accordance with lease terms.
In connection with the consolidation of the facilities in the Three-Party
Combination described above, the Company also recorded write-downs of certain
fixed assets to net realizable value totaling $320 in the Transition Period
Ended December 31, 1993 as they were no longer used in the ongoing operations of
the Company.
In the Year Ended December 31, 1994, the Company sold its Lansa operations
to Insight Business Consultants Inc. ("Insight"), a company of which an
executive officer of the Company is the majority shareholder, in exchange for
$650, which was paid by the forgiveness of $250 of amounts payable to Insight by
the Company and $400 as a note receivable to be paid evenly over an eight month
period (the "Note"). As of December 31, 1994, the Company has collected a total
of $175 on the Note. In connection with the sale of Lansa, the Company has
recognized a gain of $778 in the Year Ended December 31, 1994.
In the Transition Period Ended December 31, 1993, the Company sold the
EasyTax product line for net proceeds of $2,700 and recorded a loss on
disposition of $710.
During the Year Ended December 31, 1994, the Company settled a judgment
issued by the Supreme Court of Australia commenced by Perfect Information Pty.
Limited. A reserve of $3,658 had been recorded to reflect the original amount of
the judgment and related legal fees. In August 1994, the Company reached a
revised settlement agreement with the plaintiff and agreed to pay a total of
$2,400 in four equal installments. Accordingly, a reversal of the overaccrual of
$1,096 was recorded in the Year Ended December 31, 1994.
During the Year Ended December 31, 1994, the Company entered into a
settlement agreement with Computer Associates ("CA") an action, captioned
Parson's Technology Inc. v. Computer Associates, which alleged that CA's tax
preparation software package, CA-Simply Tax (previously known as EasyTax),
infringed upon certain of Parson's copyrights. The Company has expensed a total
of $900, net of insurance proceeds, in 1994 related to the CA settlement.
The provision for litigation of $5,817 in the Transition Period Ended
December 31, 1993 relates to a settlement award of $2,617, which includes legal
fees, made by the American Arbitration Association on December 3, 1993 in
connection with a claim made against Spinnaker on April 27, 1992 by Software
Publishing Corporation, which has been subsequently paid, and a settlement with
a distributor in Chapter 11 bankruptcy proceedings which had filed a motion for
authority to assume certain purchase orders issued to the Company, for which the
Company recorded a provision of $3,200 for the settlement and related legal
fees. The settlement of $3,200 includes $495 which was settled by the issuance
of 40,825 shares of Common Stock.
Other Income (Expense)
Other expense decreased to $535 in the Year Ended December 31, 1994 from
$744 in the Transition Period Ended December 31, 1993 primarily due to lower
interest expense as a result of the conversion of the $3,000 term debt due to
Phemus Corporation ("Phemus"), a stockholder, into equity in February 1994 and
the conversion of Cdn$12,650 convertible debentures into equity in September and
October 1994.
RESULTS OF OPERATIONS -- TRANSITION PERIOD ENDED DECEMBER 31, 1993 AS COMPARED
TO YEAR ENDED JUNE 30, 1993
Results of operations for the Transition Period Ended December 31, 1993
include amounts for a six month period, while results for the Year Ended June
30, 1993 include amounts for a twelve month period. Results (in terms of dollar
amounts) for these periods are not directly comparable. Accordingly, manage-
19
<PAGE> 21
ment's discussion and analysis for these periods is generally based upon a
comparison of specified results as a percentage of total revenues.
<TABLE>
Revenues
Revenues by geographic region for the Transition Period Ended December 31,
1993 and the Year Ended June 30, 1993 are as follows:
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
DECEMBER 31, % OF TOTAL JUNE 30, % OF TOTAL
1993 REVENUES 1993 REVENUES
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
North America............................... $ 36,051 87% $ 94,214 86%
Europe...................................... 4,296 10 8,901 8
Other....................................... 1,298 3 6,589 6
-------- --- -------- ---
Total.................................. $ 41,645 100% $109,704 100%
======== === ======== ===
</TABLE>
Revenues in the Transition Period Ended December 31, 1993 are lower due to
the seasonal nature of revenues from income tax software and related services
and an increase in provision for returns. The Company recorded provisions for
returns and allowances of $15,424 in the Transition Period Ended December 31,
1993 as compared to $5,205 in the Year Ended June 30, 1993. The increase in
provision relates primarily to returns related to discontinued products,
specific customer situations and known returns in the retail channel. The
majority of revenues from sales of income tax software and related services
occur in the first six months of the calendar year to correspond with the income
tax filing requirement period. Revenues for the Transition Period Ended December
31, 1993 are also lower due to the disposition of Insight, in May 1993. This
decrease is partially offset by the inclusion of results of the Power Up catalog
operation for the entire Transition Period Ended December 31, 1993 as compared
to the inclusion of such results for a limited period following the acquisition
(March 29, 1993) in the Year Ended June 30, 1993.
European revenues increased as a percentage of total revenues in the
Transition Period Ended December 31, 1993 as compared to the Year Ended June 30,
1993 due to an increase in sales in the OEM market, primarily in Italy. Revenues
in other geographic regions include those in Latin America, the Pacific Rim and
Barbados. Revenues in the Pacific Rim declined due to closure of the Company's
office in Singapore. This decline was partially offset by an increase in
revenues in Japan due to increased customer demand for consumer software
products.
Gross Margin
Gross margins as a percentage of revenues decreased to 33% in the
Transition Period Ended December 31, 1993 from 54% in the Year Ended June 30,
1993. The decrease in percentage of revenues results primarily from lower
revenues due to increased provisions for returns and the fact that revenues from
the sale of income tax software, which have a higher gross margin than the rest
of the Company's operations, seasonally occur in the first six months of the
calendar year, as described above. Revenues from the Power Up catalog operation,
which has a lower gross margin than the rest of the Company's operations, were
included for the entire Transition Period Ended December 31, 1993 as compared to
the inclusion of such revenues for a limited period under purchase accounting
following the acquisition (March 29, 1993) in the Year Ended June 30, 1993. In
addition, amortization of capitalized software development costs decreased due
to the write-downs in prior periods to reflect a reduction to estimated net
realizable value.
Costs of revenues are comprised of, among other things, the costs of
product documentation, packaging and disks. Other items included in cost of
revenues are royalties to third-party developers, reserves for obsolete
inventory and amortization of capitalized software development costs.
20
<PAGE> 22
<TABLE>
Operating Expenses
Operating expenses and their respective percentages of revenues for the
Transition Period Ended December 31, 1993 and the Year Ended June 30, 1993 are
as follows:
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
DECEMBER 31, % OF TOTAL JUNE 30, % OF TOTAL
1993 REVENUES 1993 REVENUES
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales, marketing and support................ $ 19,322 46% $ 38,014 35%
General and administrative.................. 15,598 37 24,278 22
Research and development.................... 2,563 6 8,198 7
Purchased research and development.......... -- -- 19,051 17
Merger and reorganization costs............. 38,944 94 20,962 19
Provision for product lines sold or
discontinued.............................. 710 2 2,989 3
Provision for litigation.................... 5,817 14 3,200 3
-------- --- -------- ---
Total.................................. $ 82,954 199% $116,692 106%
======== === ======== ===
</TABLE>
Sales, marketing and support and general and administrative expenses
increased as a percentage of revenues due primarily to lower net revenues due to
higher provisions for returns, and to lower income tax software revenues during
the Transition Period Ended December 31, 1993, reflecting the seasonality of
income tax software and related service revenues. The inclusion of results of
the Power Up catalog operation for the entire Transition Period Ended December
31, 1993, as compared to the inclusion of such results from March 29, 1993
through June 30, 1993, also attributed to the increased costs as a percentage of
revenues as the catalog operations have higher sales and marketing costs as a
percentage of revenues.
Research and development costs decreased as a percentage of revenues to 6%
in the Transition Period from 7% in the Year Ended June 30, 1993. The decrease
is primarily due to a reduction in development activities at the Novato,
California facility due to its closure and reduced development expenditures on
DOS-based titles (including without limitation WordStar word processing
products).
The charge of $19,051 for purchased research and development during the
Year Ended June 30, 1993 relates to the purchase of in-process technology for
$14,051 by Spinnaker in connection with its acquisition of Power Up and the
purchase by Former SoftKey of certain CD-ROM and other products under or
proposed for development for $5,000.
<TABLE>
Merger and reorganization costs increased to $38,944 in the Transition
Period from $20,962 in the Year Ended June 30, 1993. Merger costs in the
Transition Period Ended December 31, 1993 include costs which were probable and
reasonably estimated at December 31, 1993 and related to the Three-Party
Combination. Merger and reorganization costs consist of the following:
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1993 1993
------------- ----------
<S> <C> <C>
Write-down of intangible assets............................ $ 22,893 $ 6,474
Professional fees and other transaction costs.............. 8,705 3,424
Employee severance......................................... 4,429 3,975
Termination of leases...................................... 1,533 2,792
Write-down of inventories and fixed assets................. 362 2,296
Other...................................................... 1,022 2,001
-------- --------
Total................................................. $ 38,944 $ 20,962
======== ========
</TABLE>
During the Transition Period Ended December 31, 1993, in connection with
the Three-Party Combination, the Company recorded write-downs of intangible
assets of $22,893 due to a change in the consumer software marketing strategy of
the Company. The Company decided to approach consumer software
21
<PAGE> 23
distribution through fixturing, specialty shelf space and direct merchandising
and marketing with the retailer and customer. The new marketing strategy focuses
on new products, and an increase in the number of available offerings of
consumer software and recognizes a reduction in product shelf life. The Company
has also reduced its dependence on predominantly internally developed products,
and its new product introduction strategy includes a higher number of products
originating from its external developer relationships through licensing
contracts. As a result of the new marketing strategy, the Company decided to
phase out certain brands (primarily the PFS: brand) and recorded expenses of
$14,811 in the Transition Period Ended December 31, 1993 related to write-downs
of capitalized software development costs, prepaid royalties, trademarks and
technology rights. The Company's Power Up catalog operation was discontinued. As
a result, the Company recorded an expense of $4,205 in the Transition Period
Ended December 31, 1993 to reflect a write-down to net realizable value of
certain trademarks and mailing lists. The Company also recorded an expense of
$3,877 in the Transition Period Ended December 31, 1993 to record a write-down
to net realizable value of the Lansa license.
Professional fees and other transaction costs relate primarily to
investment banking, legal and accounting fees in connection with the Three-Party
Combination. The amount accrued at December 31, 1993 of $5,954 includes $1,781
which was paid through the issuance of 129,555 shares of Common Stock.
Employee severance relates to employee terminations primarily in the areas
of product development, technical support, customer service, finance and
administration. Substantially all employee terminations were completed through
December 31, 1994 and $3,866 of the $4,833 severance accrued for at December 31,
1993 has been paid in accordance with the Company's plan. The remaining
severance amounts will be substantially paid before December 31, 1995 in
accordance with the severance contract terms.
Lease termination costs represent costs associated with the closure of the
Power Up catalog operations and the shutdown of the manufacturing facility in
Charlestown, MA in connection with the consolidation of the Company's production
facilities. In addition, offices were vacated in Toronto, Boca Raton, Novato and
San Mateo. These facilities were consolidated into one central location in
Cambridge, MA. The amount accrued at December 31, 1993 for lease termination
costs was $2,254, of which $1,341 has been paid through December 31, 1994, and
the balance is expected to be substantially paid before December 31, 1995 in
accordance with lease terms.
In connection with the consolidation of the facilities described above, the
Company also recorded write-downs of certain fixed assets to net realizable
value totaling $320 and $2,296 in the Transition Period Ended December 31, 1993
and in the Year Ended June 30, 1993, respectively, as they were no longer used
in the ongoing operations of the Company.
In the Year Ended June 30, 1993, the Company recorded a total of $20,962 of
merger and reorganization costs. These costs related to the write-down of
intangible assets to net realizable value of $6,474 in connection with the
acquisition of ZSoft and the disposal of the operations of Insight. In addition,
legal and professional fees and other transaction costs of $3,424 related
primarily to the Three-Party Combination and employee severance related to staff
reductions at the Company's Novato, California, European, Boca Raton, Florida
and Insight operations of $3,975 were recorded. The Company also recorded a
provision for termination of various leases in connection with facility closures
as a result of the Three-Party Combination, settlement of lease commitments for
unoccupied space which has no planned future use and settlement of lease
commitments in connection with the disposal of the Insight operations of $2,792,
the write-down of $2,296 for certain discontinued products and other
merger-related costs of $2,001 related to the acquisition of ZSoft and the
Three-Party Combination.
In the Transition Period Ended December 31, 1993, the Company sold the
EasyTax product line for net proceeds of $2,700 and recorded a loss on
disposition of $710. In the Year Ended June 30, 1993, the provision for product
lines sold or discontinued relates to the write-down of assets, primarily
capitalized software, and employee severance related to winding down the
corporate information products business.
The provision for litigation of $5,817 in the Transition Period Ended
December 31, 1993 relates to a settlement award of $2,617, which includes legal
fees, made by the American Arbitration Association on
22
<PAGE> 24
December 3, 1993 in connection with a claim made against Spinnaker on April 27,
1992 by Software Publishing Corporation, which has been subsequently paid, and a
settlement with a distributor in Chapter 11 bankruptcy proceedings which had
filed a motion for authority to assume certain purchase orders issued to the
Company, for which the Company recorded a provision of $3,200 for the settlement
and related legal fees. The settlement of $3,200 includes $495 which was settled
by the issuance of 40,825 shares of Common Stock. The provision for litigation
of $3,200 in the Year Ended June 30, 1993 relates to a judgment entered against
WordStar in May 1993 in the Superior Court in Australia in a lawsuit commenced
by Perfect Information Pty Limited, which was settled in August 1994.
Other Income (Expense).
Other expense increased to $744 in the Transition Period Ended December 31,
1993 from $166 in the Year Ended June 30, 1993 primarily due to lower interest
income resulting from lower average cash balances during the period.
RESULTS OF OPERATIONS -- YEAR ENDED JUNE 30, 1993 AS COMPARED TO YEAR ENDED JUNE
30, 1992
<TABLE>
Revenues
Revenues by geographic region for the Year Ended June 30, 1993 and the Year
Ended June 30, 1992 are as follows:
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, % OF TOTAL JUNE 30, % OF TOTAL
1993 REVENUES 1992 REVENUES
----------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
North America............................ $ 94,214 86% $ 94,057 79%
Europe................................... 8,901 8 16,605 14
Other.................................... 6,589 6 8,856 7
-------- ---- -------- ----
Total............................... $109,704 100% $119,518 100%
======== ==== ======== ====
</TABLE>
Revenues in North America in the Year Ended June 30, 1993 as compared to
the Year Ended June 30, 1992 remained relatively constant in absolute dollars.
North American revenues during the Year Ended June 30, 1993 include revenues of
$6,700 resulting from the acquisition of the Power Up catalog operation on March
29, 1993. These revenues were offset by lower word processing product revenues
due to continued shrinkage in the DOS-based word processing market and
significant pricing pressures from competition. In addition, the decline was
further accented due to a decline in corporate information products from $2,398
in the Year Ended June 30, 1992 to $660 in the Year Ended June 30, 1993.
Revenues in Europe declined $7,704 in the Year Ended June 30, 1993 as
compared to the Year Ended June 30, 1992. The Company believes that this decline
in revenues was caused by the economic recessions occurring in Germany, Spain,
France and Italy, significant price pressure from competition and a decline in
the DOS-based applications market due to a global expansion of Windows-based
applications.
Revenues in other geographic regions declined $2,267 in the Year Ended June
30, 1993 as compared to the Year Ended June 30, 1992 due to declines in revenues
in Japan and the Pacific Rim, increased competition and reduced selling prices.
In addition, certain competitors launched aggressive pricing strategies and
expansion plans throughout the Pacific Rim in the Year Ended June 30, 1993.
Gross Margin
Gross margin as a percentage of revenues decreased to 54% in the Year Ended
June 30, 1993 from 60% in the Year Ended June 30, 1992. The decrease is due to
several factors, including increased volume and price protection allowances,
reductions in unit selling prices of consumer software due to increased
competition, special sales arrangements to sell older versions of products at
reduced prices and the impact of fixed priced component costs. Further, gross
margins resulting from Power Up catalog revenues, occurring after the
acquisition on March 29, 1993, are lower than gross margins achieved in other
parts of the Company's business. In addition, the inclusion of increased
amortization of capitalized software in cost of sales caused a
23
<PAGE> 25
decline in gross margins. Gross margins also declined as a result of lower
licensing revenues in the Year Ended June 30, 1993 as compared to the Year Ended
June 30, 1992. These factors were partially offset by lower fulfillment costs
resulting from economies of scale.
<TABLE>
Operating Expenses
Operating expenses and their respective percentages of revenues for the
Year Ended June 30, 1993 and the Year Ended June 30, 1992 are as follows:
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, % OF TOTAL JUNE 30, % OF TOTAL
1993 REVENUES 1992 REVENUES
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Sales, marketing and support................ $ 38,014 35% $38,746 32%
General and administrative.................. 24,278 22 22,060 18
Research and development.................... 8,198 7 5,685 5
Purchased research and development.......... 19,051 17 -- --
Merger and reorganization costs............. 20,962 19 1,390 1
Provision for product lines sold or
discontinued.............................. 2,989 3 4,198 4
Provision for litigation.................... 3,200 3 -- --
--------- --- ------- --
Total $ 116,692 106% $72,079 60%
========= === ======= ==
</TABLE>
Sales, marketing and support expenses increased to 35% of revenues in the
Year Ended June 30, 1993 from 32% of revenues in the Year Ended June 30, 1992,
primarily due to increased expenditures as a percentage of revenues on
co-operative and media advertising and listing fees paid in connection with the
retail software business, together with additional sales and marketing costs
associated with the introduction of the Company's Lansa case tool software in
July 1992. Further, the acquisition of Power Up in 1993 resulted in additional
sales, marketing and support costs because catalog businesses typically require
higher marketing and creative design related costs. Revenue declines in certain
consumer titles (including the WordStar word-processing products) also caused an
increase in marketing and support costs as a percentage of revenues due to the
fixed nature of certain of these costs.
General and administrative expenses increased to 22% of revenues in the
Year Ended June 30, 1993 from 18% of revenues in the Year Ended June 30, 1992.
The increase is primarily due to incremental general and administrative costs
from the Power Up catalog operation and the inclusion of the Lansa case tool
operations for a full year as compared to one month in the prior year. In
addition, general and administrative expenses increased due to additional
amortization of intangible assets associated with the acquisition of Power Up
and the acquisition of the Lansa case tool product rights and related license.
These expenses also include the write-down of $893 related to the unamortized
balance of goodwill associated with the acquisition of Springboard Software,
Inc., which was determined to have no continuing value as its product line had
been disposed of. These expenses were partially offset by cost reductions due to
reductions in workforce and office closings in Australia, Malaysia, Singapore,
Hong Kong, France and Bloomington, Indiana. These reductions were designed to
offset the decline in revenues from the WordStar line of products. However,
despite these cost reductions, a faster than expected decline of revenues from
DOS-based WordStar products resulted in an overall increase in general and
administrative costs as a percentage of revenues.
Research and development costs increased to 7% of revenues in the Year
Ended June 30, 1993 from 5% in the Year Ended June 30, 1992. The increase is
related primarily to additional expenditures on the Power Up line of products
and additional expenditures on the PFS: and ZSoft lines of products in 1993.
The charge of $19,051 for purchased research and development during the
Year Ended June 30, 1993 relates to the purchase of in-process technology for
$14,051 by Spinnaker in connection with its acquisition of Power Up and the
purchase by SoftKey Software of certain CD-ROM and other products under or
proposed for development for $5,000.
24
<PAGE> 26
In the Year Ended June 30, 1993, the Company recorded a total of $20,962
related to merger and reorganization costs. These costs related to the
write-down of intangible assets to net realizable value of $6,474 in connection
with the merger with ZSoft and the disposal of the operations of Insight. In
addition, legal and professional fees and other transaction costs of $3,424
related to the Three-Party Combination and employee severance related to staff
reductions at the Novato, California, European, Boca Raton, Florida and Insight
operations of $3,975 were recorded. The Company also recorded a provision for
termination of various leases in connection with facility closures in connection
with the Three-Party Combination, settlement of lease commitments for unoccupied
space which has no planned future use and settlement of lease commitments in
connection with the disposal of the Insight operations of $2,792, the write-down
of $2,296 for certain discontinued products and other merger-related costs of
$2,001 related to the merger of the Company with ZSoft and the Three-Party
Combination. Merger and reorganization expenses of $1,390 in the Year Ended June
30, 1992 include costs of workforce reduction of $675 and a write-down of
discontinued inventory of $715.
Other Income (Expense)
Other expense decreased to $166 in the Year Ended June 30, 1993 from $1,496
in the Year Ended June 30, 1992 due to an increase in interest income resulting
from higher cash balances available for investment.
25
<PAGE> 27
BUSINESS
SoftKey is a leading developer and publisher of value-priced, high-quality,
consumer software for PCs, primarily produced on CD-ROM. The Company currently
offers over 250 software titles in the principal consumer-oriented categories,
including lifestyle, edutainment, productivity, entertainment and education. The
Company's products include titles such as: Calendar Creator, Sports Illustrated
Swimsuit Calendar, Time Almanac, BodyWorks, The American Heritage Dictionary, PC
Paintbrush and Key 3D Design Center.
SoftKey's strategy is to develop, license and acquire a broad range of
quality software products with significant unit-volume potential at the lowest
possible cost and to continuously introduce these new products through a wide
variety of established and emerging distribution channels worldwide, including
retail channels, direct mail and OEMs. The Company has relationships with over
40 national retailers and direct distributors controlling over 15,000 individual
storefronts, including the retailers and distributors responsible for most of
the nation's software sales.
INDUSTRY BACKGROUND
The consumer software market has grown significantly over the past few
years as a result of several major trends. These trends include: the increasing
installed base of PCs in the home, the improved multimedia capabilities of PCs
and the increasing demand for a greater number of value-priced software
applications in order to take full advantage of these multimedia capabilities.
In addition, consumers are exposed to software purchase opportunities from a
wide variety of sources and with increased frequency.
According to Dataquest Incorporated, 1994 PC unit sales worldwide exceeded
10 million and are expected to grow to 23 million in 1997. Based on recent
estimates, 31% of households in the United States have PCs; 30% of this
installed base is equipped with CD-ROM drives. Declining prices, improved
performance, expanded memory and enhanced multimedia capabilities have been the
main drivers of this growth. Current multimedia capabilities are facilitated by
CD-ROM technology (which facilitates increased data storage and faster data
access as compared to traditional magnetic media diskettes) and include enhanced
graphics, video and sound, greater interactivity and richer content. These
capabilities are particularly relevant to the lifestyle, entertainment,
education and edutainment segments of the consumer software market, as specific
software purchases within these segments are largely driven by their content,
appearance and degree of interactivity.
The Company believes that while home PCs historically have served as a
productivity tool which employed a few applications such as word processing and
spreadsheets, multimedia PC owners will use multimedia PCs as general purpose
tools and as a source of home entertainment capable of a broad range of
functionality. This functionality includes traditional and new productivity
applications as well as reference, creativity, entertainment and communication
applications. In order to take advantage of this broad range of functionality,
the Company believes that multimedia PC users are purchasing more software
products than traditional PC users. The increasing installed base of multimedia
PCs, together with the advanced multimedia capabilities and increased
functionality of these PCs, have both allowed and motivated software developers
to produce, and consumers to use, more engaging software which fully exploits
the improved functionality of multimedia PCs. Independent research studies
estimate that sales of consumer CD-ROM software are expected to grow from $605
million in 1994 to $1.9 billion in 1997.
The increased demand by individual consumers for a larger, broader
selection of software applications has resulted in a strong demand for products
at lower price points. In particular, demand for software products in the
lifestyle, edutainment, entertainment and education categories has been
significant. This demand for more and varied software at lower price points is
changing the nature of the typical consumer software purchase. While consumers
historically purchased few applications and generally did so only with
significant forethought and analysis, the Company believes that more consumers
today are purchasing a variety of value-priced software products on an impulse
basis, similar to that for music CDs. As a result of this trend, the Company
believes value-priced software, particularly in the lifestyle, edutainment,
entertainment and education categories, is and will continue to be the highest
growth segment of the consumer software market.
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The demand for a large number and broad spectrum of value-priced software
products is also having significant impact on consumer software distribution.
The distribution of consumer software has expanded beyond traditional software
retailers and computer stores to include general mass merchandisers. As this
trend continues, it will become increasingly important for software developers
and publishers to create significant brand name recognition, establish strong
retail relationships and consistently publish value-oriented, high-quality
software providing significant sell-through opportunities for retailers of all
kinds.
STRATEGY
SoftKey's objective is to be the leading worldwide provider of
value-priced, high-quality, consumer software for PCs, primarily produced on
CD-ROM. Accordingly, SoftKey's strategy is to develop, license and acquire a
broad range of quality software products with significant unit-volume potential
at the lowest possible cost and to continuously introduce these new products
through a wide variety of established and emerging distribution channels
worldwide, including retail channels, direct mail and OEMs. Key elements of this
strategy include:
Focusing on High-Growth Consumer Software Categories. The Company believes
that the highest growth segments of the consumer software market over the past
twelve months have been lifestyle, edutainment, entertainment and education. The
Company believes that as the installed base of multimedia PCs with CD-ROMs
grows, these segments will continue to exhibit the highest growth. SoftKey
intends to continue to concentrate its publishing and development efforts on
lifestyle, edutainment, entertainment and education products in order to further
solidify its established position in these segments and fully exploit the
highest growth components of the consumer software market.
Broadly Distributing to the Consumer Market at Various Price Points. The
Company believes that actively managing a broad distribution strategy and
offering quality products across a variety of price points will maximize
consumers' exposure to, and potential purchases of, SoftKey's products. The
Company markets its products worldwide through traditional software retail
channels, direct mail and OEMs as well as through emerging consumer software
distribution channels such as book, music, drug and grocery store chains.
SoftKey currently has relationships with over 40 national retailers and direct
distributors controlling over 15,000 individual retail storefronts, including
the retailers and distributors responsible for most of the nation's software
sales. Such retailers include CompUSA, Staples and Office Depot.
Continuously Introducing Large Volumes of New Titles with Shorter Lead
Times and at Lower Costs. SoftKey believes that the consumer segment of the
software market is beginning to be driven by dynamics similar to those in the
music CD and book industries. The Company believes that in order to compete
effectively, successful companies will ultimately need to publish large numbers
of successful titles and introduce them to the market rapidly. SoftKey's product
development strategy is to develop and acquire products in high-growth
categories for rapid release and maintain development cycles that result in
ongoing upgrades and product rotations in short periods of time. This practice
of publishing a large number of titles in a broad range of categories and
refreshing those titles on an ongoing basis effectively reduces the Company's
dependence on any one "hit" title. To minimize product development costs,
SoftKey's core development team focuses its efforts on developing proprietary
products through enhancements, modifications and upgrades of acquired brand name
products. SoftKey uses a shared code philosophy, which allows it to develop
multiple products at different price points and for different branding
strategies using the same core code. For example, SoftKey has published
successful titles rapidly by combining well-recognized, third-party brands (such
as Time, Sports Illustrated, American Heritage, Muppets and CNN) with readily
available, quality technology and content. This strategy enables SoftKey to
maximize product line profitability by leveraging successful "core" products.
The Company also attempts to minimize fixed development costs by generally
paying outside developer/authors royalties based on net sales proceeds from its
licensed products.
Building Strong Relationships with Retail Channels. SoftKey's retail
distribution strategy is to foster strong direct relationships with large
retailers through a broad product offering, actively assisting in channel
management and innovative merchandising. Over 75% of SoftKey's revenues in the
First Quarter 1995 from retail channels are derived from direct buying
relationships with its customers. These direct relationships have
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been the result of an established history of developing and publishing a wide
range of products and actively working with retailers to understand consumer
purchasing behavior and trends. Retailers routinely share sell-through data with
SoftKey, providing the Company with the ability to proactively tailor its
product offerings, modify distribution tactics and optimize product marketing,
merchandising, promotion and mix for specific retail channels and stores. The
Company sponsors merchandising programs and provides for electronic data
interface ("EDI") with most major accounts. The Company intends to continue to
build its relationships with the retail channels in an effort to further
entrench these strategic relationships and create a barrier to entry for
potential new retail channel entrants.
Acquiring Complementary Products, Technologies and Businesses. The Company
believes the consumer software industry will continue to consolidate. Developers
and publishers compete to achieve critical mass and leverage established and new
distribution channels. The current SoftKey results from a business combination
of three formerly independent software publishers in February 1994 and has
established and enhanced its multimedia division through the subsequent
acquisitions of Aris, Compact and SMC. SoftKey intends to actively explore
additional product-driven and technology-driven acquisition opportunities
consistent with the Company's overall publishing strategy.
Enhancing Brand Awareness and Loyalty. The Company believes that its
utilization of brand names and its focus on developing and publishing
value-priced, high-quality, consumer software will result in increased SoftKey
brand recognition, further differentiate the Company's products from those of
its competitors and continue to generate customer loyalty. SoftKey employs brand
names such as Sports Illustrated Swimsuit Calendar and Time Almanac and easily
identifiable packaging, which the Company believes creates brand awareness and
enhances customer loyalty.
PRODUCTS
SoftKey develops and publishes software products in a broad range of
consumer-oriented categories, including lifestyle, edutainment, productivity,
entertainment and education. SoftKey's product strategy is to continuously
introduce and offer its value-priced, high-quality, consumer software products
through multiple channels and at multiple price points. Currently, the Company's
product lines contain over 250 titles on a variety of platforms, including DOS,
Windows and Macintosh. In the Three Months ended March 31, 1995, the Company's
percentage of CD-ROM sales from its retail publishing business increased to over
80% of retail publishing revenues. SoftKey's product offerings are offered under
the Premium, Key, Platinum and Instant lines, among others.
Premium. SoftKey's Premium product line is the Company's most
full-featured line with product pricing at retail generally ranging from $29.95
to $49.95. The Premium products have distinctive, oversized packaging that
includes a "book flap" on the front sleeve or box. These products are designed
to be less impulse purchase driven than the Company's other product lines.
Products in the Premium line are often co-branded with recognizable consumer
brand names and include: Time Almanac, The American Heritage Talking Dictionary,
The Sports Illustrated Swimsuit Calendar, BodyWorks 4.0, Mosby's Medical
Encyclopedia and The Muppets Calendar. The Premium product line currently
includes over 50 titles.
Key. SoftKey's Key product line is the Company's other "boxed" line with
product pricing at retail from $19.95 to $29.95. The Key line's established
history and familiar packaging distinguishes this brand within the value priced
content and application market segment. The Key product line currently contains
over 35 titles and includes: KeyCAD Complete, Key Travel Map, Key Mega Clip Art
7000, Key Home Gourmet and KeyFonts Pro, among others.
Platinum. In December 1994, SoftKey became the first consumer software
company to introduce a jewel-case only format software offering generally sold
at retail for $12.99. SoftKey's Platinum products are designed for impulse
purchases and are sold on a rack that can range from 16 to 80 facings. The
Platinum line products and merchandising strategy are specifically designed for
the retail channel to optimize gross margins per square foot. SoftKey currently
offers a broad selection of over 60 titles within this product line and actively
manages product mix and stock rotation for its direct retail relationships to
maximize sell-through potential. The Platinum line includes titles in various
consumer-oriented categories, including games, lifestyle (for,
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among others, cooking and gardening enthusiasts), education, reference and
productivity (for generating labels, resumes and calendars and for other
applications).
Other Product Lines. Instant titles are products based upon the
code-sharing philosophy at SoftKey and, in many cases, use the same core code as
Premium titles, modified with respect to the number and kind of features being
offered. Instant products are sold at retail for $19.95 and include Instant
Resume, Instant Calendar, Instant Fonts, Instant Labels and Instant Address
Book. SoftKey also publishes very low-priced, shareware software packaged
individually and bundled under the Titanium Seal brand, which retails for $5.99
each. Individual products retail for between $1.99 and $4.99 each. The Company's
offerings also include the Power Pack line of products which include three
topically related software titles on one CD-ROM disk and sell at retail for
$14.99 and the One-Stop CD Series, a single package of up to eleven CD-ROMs
which offers a variety of low-cost software titles at retail for up to $29.95.
As is the case with SoftKey's higher-priced products, all of the Company's
low-priced products have been carefully evaluated and tested by the Company to
ensure high quality and user enjoyment.
Tax. In Canada, SoftKey is the leading supplier of tax software products
and services. Large and small accounting firms, corporations and small
businesses in Canada rely on SoftKey to develop and update software products for
all aspects of tax preparation. SoftKey has also made significant inroads into
the home tax market for preparation of individual tax returns. The Company
intends to continue to create additional and enhanced tax software products for
the Canadian marketplace by leveraging its core complementary areas of
expertise. The Company's tax business has several significant competitive
advantages in the Canadian tax software market. Its capital investments in
recent years have placed the Company at the forefront of new tax and EDI
software development. Moreover, the Company's market presence positions it to
take advantage of the increasing demand for home tax products driven by the
increase in consumer ownership of PCs. For the Year Ended December 31, 1994, the
sale of tax software and related services in Canada represented 15% of net
revenues of the Company.
SALES AND MARKETING
The Company distributes its consumer software products through retail
channels, direct mail and OEMs within the United States and through
international channels.
Retail Channels. SoftKey has relationships with over 40 national retailers
and direct distributors controlling over 15,000 individual storefronts where
most of the nation's software sales occur. SoftKey's retail distribution
strategy is to foster strong direct relationships with large retailers through a
broad product offering, actively assisting in channel management and innovative
merchandising. The Company's dealer sales channel consists of traditional PC
hardware and software retail stores, including national and regional chains and
superstores. Increasingly, the Company sells its products to office superstores
such as Staples, electronic superstores such as Circuit City and Best Buy and
mass merchants such as K-Mart and Sears. The Company recently entered into an
agreement with Warner Publisher Services, Inc., a Time Warner company which
distributes to more than 100,000 retail outlets (including supermarkets, drug
stores and airport terminals) and is one of the largest distributors of
magazines, books and comics in the United States. In addition, the Company sells
to distributors in the United States and Canada such as Ingram Micro Inc.
Direct Mail. SoftKey's database of over 3 million end-users provides many
cross-mailing opportunities. The Company mailed over 17.5 million pieces of
targeted direct mail in the past twelve months. The Company typically utilizes
targeted customer mailings highlighting specific products. Prior to a full
mailing, the Company conducts test mailings at different price points and
marketing approaches in order to maximize response rates from its customers. The
Company also sells its products through direct mailings to end-users who are not
part of the installed user base using rented mailing lists. SoftKey's direct
mail efforts also include supplying products for the Company's catalog reseller
customers, such as MicroWarehouse, Paper Direct, PC Connection and Global.
Original Equipment Manufacturers. The objective of SoftKey's OEM strategy
is to assist OEMs to differentiate their product lines at retail and to
introduce the SoftKey brand to new hardware buyers. The Company licenses its
software products to OEMs (including IBM, Apple, Compaq, Hewlett Packard and
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Dell), which typically purchase the Company's products in higher volumes and at
lower prices than retail stores and distributors. The costs incurred by the
Company for OEM sales are reduced because in many cases the products are
duplicated by the OEMs and sold without packaging or, in some instances,
documentation.
International. The Company believes that the international consumer
software markets are rapidly growing as a result of trends similar to those
driving the United States market. The Company intends to enhance its established
presence in these international markets, leveraging SoftKey's development and
distribution expertise as these markets continue to emerge. The Company operates
subsidiaries outside of North America in Germany, Ireland, the United Kingdom
and Japan. In addition to having distributors in those countries where it has
subsidiaries, the Company has distributors in major European, Latin American and
Pacific Rim countries, as well as in South Africa. The Company's subsidiary in
Ireland generally coordinates manufacturing and distribution for all of the
Company's sales in Europe and the Pacific Rim. Generally, retail stores outside
North America are more reliant on distributors than retail stores in North
America. As distribution environments differ from country to country, the
Company tailors its distribution strategy accordingly.
PRODUCT DEVELOPMENT
SoftKey develops and publishes products through internal development as
well as licensing. Through this dual strategy approach, the Company is able to
introduce new products while minimizing research and development costs.
Internal Product Development. The Company's internal product development
efforts are designed to result in efficient and timely product introductions by
focusing on "core code" development. Where possible, the Company specifies,
develops and manages (or purchases) one base of source code from which many
products are created. Using one base of source code permits the Company to
maximize programming efficiency because the investment of time and capital in
developing the base source code is shared among multiple products and additional
programming time is minimized. As a result, production schedules are more
predictable and development costs are lower since the underlying code for new
programs has previously been tested and debugged and the software already
documented.
In certain instances, the Company's internally developed products contain
components that have been developed by outside developers or authors and are
licensed by the Company. SoftKey pays these outside developer/authors a royalty
based on a percentage of net sales. The Company expects that, particularly with
respect to multimedia products, it will increasingly develop products which
contain content licensed from third parties.
The Company maintains research and development facilities and personnel in
Cambridge, Massachusetts. In addition, a number of the Company's multimedia
titles have been developed through its wholly owned subsidiaries, Aris and
Compact. The Company's development efforts include product development,
documentation and testing as well as the translation of certain of its products
into foreign languages. Among the Company's current products that were developed
internally are Calendar Creator, Time Almanac, The American Heritage Reference
Dictionary, PC Paintbrush, MPC Wizard and PhotoFinish.
Licensed Products. The Company supplements its development efforts by
acquiring the rights to products on either an exclusive or non-exclusive basis,
both through the purchase of products and under royalty-bearing licenses.
Generally, the Company's license agreements provide for the payment of royalties
based on a percentage of the Company's net sales proceeds of such products.
The products typically are repackaged under the Company's proprietary
labels and sold through its distribution channels. The advantage of this
distribution method to the outside software developers is that the Company is
generally able to provide a significantly greater volume of sales than the
software developer would be able to command itself. The Company leverages its
broad distribution strength and reputation for successfully publishing products
to attract outside developer/authors and further enhance its relationships with
the software development community. Retail and direct mail marketers benefit
from this arrangement by having convenient access to a wide range of products
offered by the Company.
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The Company's licensing of fully developed products allows for efficiencies
because the cost of developing is borne by the licensor. Licensing also reduces
the financial risk to the Company from a product that is not well-accepted by
customers since the Company generally pays royalties based on actual sales.
Among the Company's current products that have been licensed from third
parties are KeyCad Complete, Key 3D Design Center, Key Travel Map, the Key Kids
line and Key Org Chart.
Both internally developed and licensed products under development are
extensively tested by the Company's quality assurance department before being
released for production. The department tests for bugs, functionality,
ease-of-use and compatibility with the many popular PC configurations that are
available to consumers.
PRODUCTION
SoftKey strives to minimize production costs, driving costs down as unit
volumes and the rate of new title introductions increase through process
efficiencies and economies of scale. Production of the Company's products
involves the duplication of diskettes or CD-ROMs and assembly of the diskettes,
user manuals and other purchased components. In April 1994, in order to reduce
its fixed product costs and minimize variable cost, the Company entered into a
three-year agreement with Donnelley pursuant to which Donnelley provides all
duplication, assembly and fulfillment, with certain specified exceptions
(including CD-ROMs and products reproduced by OEMs), for all of the Company's
existing U.S. products at Donnelley's plant in Crawfordsville, Indiana. All
CD-ROM duplication is provided by other third-party vendors. The Company
believes that its existing production capacity is sufficient to handle
anticipated increases in volume and titles into the foreseeable future. The
Company is also in the process of securing alternative production capacity from
Donnelley in the event that the Crawfordsville plant suffers unforeseen
production interruptions. Duplication of diskettes and assembly of the Company's
international products take place at the Company's facilities in Dublin,
Ireland.
TECHNICAL SUPPORT
The Company provides a variety of technical support services to dealers,
distributors, corporations and end users. Users of the Company's products
currently receive free telephone support for the life of the product (until the
next version is released or manufacturing of the product is discontinued). This
support is provided by the Company's Technical Support Center in Marietta,
Georgia. The Company currently has 37 full-time employees in Technical Support.
COMPETITION
The consumer software market is highly competitive and is characterized by
rapid changes in technology, customer requirements and the strategic direction
of major PC hardware manufacturers and operating environment developers.
Competition has intensified recently with increased emphasis on lower prices,
brand recognition, higher demand for product diversification, end-user
advertising and distribution channel merchandising. The Company's competitors
vary in size from small companies with limited resources to large corporations
with substantially greater resources and with similar or greater research,
development and marketing capability. New opportunities for shifts in
competitive position are occurring with the commercial success of Windows-based
applications. Price reductions, with their attendant reduced gross margins, have
become a significant competitive factor in the consumer software market. Should
competitive pressures in the industry increase in the future, consumer software
companies, including the Company, may have to increase their spending on sales,
marketing and development or product royalties as a percentage of revenues,
resulting in lower profit margins for individual companies and the industry.
The Company has experienced, and continues to experience, competition for
retail shelf space and general consumer awareness from products offered by other
vendors. The competition is particularly intense in the retail distribution
channel. There can be no assurance that software or hardware manufacturers will
not market products that may adversely affect the Company's revenues and income.
Principal competitive factors in the consumer software market include features
and functions, product reliability, price/performance
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characteristics, integration of functions, name and brand recognition,
availability and quality of support and service, ease of learning, installation
and use on a range of hardware and software platforms.
The Company also competes with other companies in the business and
professional applications software market for distributors, dealers and other
channels of product distribution. In addition to the factors listed above, the
principal considerations for distributors and dealers in determining which
products to stock or offer include profit margins and resulting price to
customers, product support, service, availability of product supply, volume of
new product introduction, credit terms and sales and marketing programs. In the
international marketplace, an additional factor is the ability to introduce
localized products to new and developing countries.
In both the professional and home income tax preparation markets, there are
relatively few barriers to entry for competitors. In Canada, there are numerous
companies offering tax preparation software products for both the professional
and home user. As a result, there is significant price competition in this
market. Currently, the Company's tax products are generally designed to run on
DOS and Windows operating systems, with certain professional packages running on
the Macintosh system. The demand for and ability to develop successful packages
to run in the Windows operating environment may affect the success of such
products. In both the professional and home income tax markets, there is a large
degree of product loyalty because of the ability to update previously entered
information (rather than re-entering all information on a new product) and
familiarity with the product's features.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of trade secret, copyright, trademark
and other proprietary rights laws and license agreements to protect its rights
to its software products and related documentation. Under existing laws of the
United States and most foreign countries, many software applications cannot be
patented. The Company does not have any patents. United States copyright law,
international conventions and international treaties, however, may not provide
meaningful protection against unauthorized duplication of the Company's
software. The Company generally licenses its externally developed products
rather than transferring title and has relied on contractual arrangements with
recipients and users of its products to establish certain proprietary rights and
to maintain confidentiality of those products protected by trade secret law.
Consistent with standard industry practice, the Company's products generally are
licensed pursuant to "shrink-wrap" licenses that are not signed by the licensee.
The enforceability of such licenses has not been conclusively determined.
The Company has registered numerous trademarks in the United States and
Canada, and a small number in other countries, for title or components of its
products and has trademark registrations pending in the United States and other
countries for various new products.
Policing unauthorized use of a broadly disseminated product such as PC
software is very difficult. Software piracy can be expected to be a persistent
problem for the "shrink-wrap" software industry. These problems are particularly
acute in certain international markets such as South America, the Middle East,
the Pacific Rim and the Far East.
The Company periodically receives communications alleging or suggesting
that its products may incorporate material covered by the copyrights, trademarks
or other proprietary rights of third parties. With respect to licensed products,
the Company is generally indemnified against liability on these matters. The
Company's policy is to investigate the factual basis of such communications and
to resolve such matters promptly by enforcing its rights, negotiating licenses
(if necessary) or taking other appropriate actions.
In certain circumstances, litigation may be necessary to enforce the
Company's proprietary rights, to protect copyrights, trademarks and trade
secrets and other intellectual property rights owned by the Company or its
licensors, to defend the Company against claimed infringements of the rights of
others and to determine the scope and validity of the proprietary rights of the
Company and others. Any such litigation, whether with or without merit, could be
costly and a diversion of management's attention, which could have an adverse
effect on the Company's business, operating results or financial condition.
Adverse determinations in litigation relating to any of the Company's products
could result in the loss of the Company's proprietary rights, subject
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the Company to liabilities, require the Company to seek licenses from third
parties or prevent the Company from selling that product.
EMPLOYEES
At June 8, 1995, the Company had approximately 450 employees. The Company
believes that its success is highly dependent on its ability to attract and
retain qualified employees. As necessary, the Company supplements its regular
employees with temporary and contract personnel. No employees are covered by a
collective bargaining agreement, and there have been no work stoppages.
LEGAL PROCEEDINGS
On June 10, 1994, the director of Investigation and Research under the
Competition Act (Canada) (the "Act") commenced an inquiry in Canada under the
non-criminal, reviewable practices provisions of the Act respecting the
activities of the Company's Canadian subsidiary, SoftKey Software Products Inc.,
an Ontario corporation whose predecessor, Former SoftKey, was also called
SoftKey Software Products Inc. ("SoftKey Software"), in the tax preparation
software business in Canada. On June 28, 1994, an order requiring SoftKey
Software, along with other companies in the Canadian tax preparation software
business, to produce certain documents and information respecting the Canadian
tax preparation software industry was issued by the Federal Court of Canada
Trial Division. SoftKey Software has provided the Canadian Bureau of Competition
Policy (the "Bureau") with the documents and information sought by the Bureau
and is continuing to cooperate with the Bureau in its inquiry into the Company's
activities. At this time, no formal application has been made seeking a remedy
under the Act.
FACILITIES
The Company's headquarters are currently located in approximately 71,000
square feet of space in an office building in Cambridge, Massachusetts, where
the Company's executive, administrative, marketing and product development
activities are currently conducted. In addition to its headquarters in
Cambridge, the Company leases approximately 20,000 square feet of office space
in Marietta, Georgia, where the Company's customer service and technical support
activities are principally conducted. The Marietta lease expires in October
1996.
SoftKey Software owns the land and a building with approximately 18,600
square feet of office space in Sherbrooke, Quebec, leases approximately 22,000
square feet of office space in Mississauga, Ontario and leases additional
warehouse and office space in Mississauga, Ontario, Sherbrooke, Quebec and
Calgary, Alberta.
The Company also leases office, manufacturing and warehouse space in Sutton
and London, England, Dublin, Ireland, Munich, Germany and certain other foreign
countries in which it operates. The Company believes that its facilities, in
general, are adequate for its present and currently foreseeable needs.
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MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<S> <C> <C>
Michael J. Perik................... 37 Chairman of the Board and Chief Executive Officer
Kevin O'Leary...................... 40 President and Director
Robert Gagnon...................... 57 Executive Vice President of SoftKey Software and
Director
Peter Hamilton..................... 48 Executive Vice President of Operations
Alexander W. Hoag.................. 37 Executive Vice President, Products and Chief
Technology Officer
David E. Patrick................... 39 Executive Vice President, Worldwide Sales
Edward J. Sattizahn................ 49 Executive Vice President, Marketing
R. Scott Murray.................... 31 Chief Financial Officer
Neal S. Winneg..................... 35 Vice President, General Counsel and Secretary
Michael A. Bell.................... 40 Director
Robert Rubinoff.................... 56 Director
Scott M. Sperling.................. 37 Director
</TABLE>
Michael J. Perik became Chairman of the Board and Chief Executive Officer
of the Company in February 1994. He is also President and a director of SoftKey
Software. Prior to the Three-Party Combination, Mr. Perik had been Chief
Executive Officer and a director of Former SoftKey since 1991. From 1988 until
1991, he was Vice President of Investments of Denbridge Capital Corporation, a
Canadian investment company.
Kevin O'Leary became President and a director of the Company in February
1994. He is a founder of Former SoftKey and, prior to the Three-Party
Combination, was President and a director of Former SoftKey and its predecessors
since 1984.
Robert Gagnon became a director of the Company in February 1994 and has
been a director and Executive Vice President of SoftKey Software since February
1994. Prior to the Three-Party Combination, he had been a director of Former
SoftKey from 1991 and Vice President, Finance, of Informatrix 2000, Inc., a
Canadian predecessor of Former SoftKey from 1987.
Peter Hamilton has been Executive Vice President of Operations of the
Company since April 1994 and is an employee of SoftKey Software. He is also
President of Insight which, from April 1990 to June 1993, constituted a portion
of Former SoftKey's Consulting Division and which was sold to a company owned by
Mr. Hamilton and two other individuals in 1993. Prior to the sale of Insight in
1993, Mr. Hamilton was President of SoftKey Software's Consulting Division from
April 1990. Prior to April 1990, when Former SoftKey acquired Insight, Mr.
Hamilton was a Vice President of Insight.
Alexander W. Hoag became Executive Vice President, Products and Chief
Technology Officer in April 1995. Prior thereto, he had been Senior Vice
President of Products of the Company since the Three-Party Combination. Prior
thereto and since the fall of 1992, Mr. Hoag held various positions with the
Company, including Vice President and General Manager of the ZSoft business unit
and prior positions in Marketing. From the fall of 1991 until the fall of 1992,
Mr. Hoag held business development responsibilities with Software Ventures in
Berkeley, California. Prior thereto, Mr. Hoag was Director of Marketing of Quark
Inc. from 1989 to 1991.
David E. Patrick, became Executive Vice President, Worldwide Sales, in
August 1994. He joined the Company in October 1990 as Vice President of
Marketing, Development and Strategic Planning. In May 1992, he became Executive
Vice President of the Company, and in August 1993, he became Chief Operating
Officer of the Company. From September 1988 to October 1990, Mr. Patrick was
Vice President of World-Wide Sales and Marketing of Sitka Corporation, formerly
Tops, a wholly owned subsidiary of Sun Microsystems.
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Edward J. Sattizahn became Executive Vice President, Marketing in August
1994. Prior thereto, he had been first Director of Marketing and then Vice
President of Direct Marketing after joining the Company in March 1991 in
connection with the Company's acquisition of Lifetree Software, Inc. From 1988
to March 1991, Mr. Sattizahn was President of Lifetree Software, Inc.
R. Scott Murray became Chief Financial Officer in May 1994 after having
joined the Company in February 1994 as Vice President, Corporate Acquisitions.
Prior thereto, Mr. Murray was a manager with Arthur Andersen & Co. in Toronto,
Ontario from September 1985 until February 1994.
Neal S. Winneg joined the Company in April 1994 as Vice President, General
Counsel and Secretary. From 1986 to 1989 and again from 1990 to 1993, Mr. Winneg
was associated with the law firm of Skadden, Arps, Slate, Meagher & Flom. From
1989 to 1990, Mr. Winneg was Vice President and a director of Dimensional Foods
Corporation, a food technology company.
Michael A. Bell became a director of the Company in February 1994. He has
been a director and officer of Monitor Company, Inc., a management consulting
firm, and a group of affiliated companies since 1983.
Robert Rubinoff became a director of the Company in February 1994. Mr.
Rubinoff is also a director of SoftKey Software. Prior to the Three-Party
Combination he had been a director of Former SoftKey and its predecessors from
1987. Since 1986 and 1979, respectively, he has been the President of Inglewood
Holdings Inc. and Daray Holdings Ltd., each of which is a private Canadian
investment firm. Mr. Rubinoff is a director of National Fibretech, Inc., a
Canadian carpet manufacturer, and Place Resources Ltd., a Canadian oil and gas
company, and is also a director of several private corporations.
Scott M. Sperling became a director of the Company in February 1994. He had
been a director of Spinnaker from 1987. Mr. Sperling has been Managing Director
of the Thomas H. Lee Company, a private investment company, since September
1994. Prior thereto, he was Managing Partner of Aeneas Group, Inc., an
investment company and a wholly owned subsidiary of Harvard Management Company,
Inc., where he was an officer from 1984 to September 1994. Mr. Sperling is also
a director of Beacon Properties Corporation, a real estate company, and Kurzweil
Applied Intelligence, Inc., a software company, and is a director of several
private corporations.
35
<PAGE> 37
<TABLE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of June 2, 1995 and after giving effect
to the sale of the shares of Common Stock offered hereby by the Company and the
Selling Stockholders certain information with respect to beneficial ownership
of: (i) the Company's Chief Executive Officer and each of the Company's other
four most highly compensated executive officers whose salary plus bonus exceeded
$100,000 (collectively the "Named Executive Officers"), (ii) each of the
Company's Directors, (iii) all directors and executive officers of the Company
as a group, (iv) each other person (or group of affiliated persons) who is known
by the Company to own beneficially 5% or more of the Company's Common Stock and
(v) each Selling Stockholder.
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED AFTER
OFFERING(2) SHARES TO OFFERING
NAME AND ADDRESS(1) ------------------------ BE SOLD IN ------------------------
OF BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT
- -------------------------------------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND NAMED EXECUTIVE
OFFICERS:
Michael A. Bell....................... 20,000 * -- 20,000 *
Robert Gagnon......................... 362,289(3) 1.8% -- 362,289 1.7%
Kevin O'Leary......................... 535,731(4) 2.7 -- 452,657(5) 2.1
David E. Patrick...................... 31,666 * -- 31,666 *
Michael J. Perik...................... 791,618 3.9 128,439 663,179 3.0
Robert Rubinoff....................... 80,000(6) * -- 80,000 *
Edward J. Sattizahn................... 20,331 * -- 20,331 *
Scott M. Sperling..................... 20,000 * -- 20,000 *
All executive officers and directors
as a group (12 persons)(7).......... 2,259,835 10.8 128,439 2,048,322 8.9
5% STOCKHOLDER:
FMR Corp(8)........................... 1,666,800 8.5 -- 1,666,800
82 Devonshire Street
Boston, MA 02109
ADDITIONAL SELLING STOCKHOLDERS:
1128288 Ontario Inc................... 83,074(5) * 83,074(5) -- --
Michael Bates(9)...................... 239,611 1.2 212,531 27,080 *
<FN>
- ---------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Addresses are given only for beneficial owners of more than 5% of the
outstanding shares of Common Stock.
(2) Unless otherwise noted, the nature of beneficial ownership is sole voting
and/or investment power, except to the extent authority is shared by spouses
under applicable law. Shares of Common Stock not outstanding but deemed
beneficially owned by virtue of the right of a person or group to acquire
them within 60 days are treated as outstanding only for purposes of
determining the number and percent of shares of Common Stock owned by such
person or group.
(3) Includes 240,485 shares of Common Stock issuable upon exchange of
Exchangeable Shares owned of record by a corporation wholly owned by Mr.
Gagnon.
(4) Includes 295,231 shares of Common Stock issuable upon exchange of
Exchangeable Shares owned of record by four corporations wholly owned by Mr.
O'Leary.
(5) As of the date of this Prospectus, Kevin O'Leary beneficially owns an
aggregate of 83,074 shares of Common Stock issuable upon exchange of
Exchangeable Shares owned of record by two corporations directly or
indirectly wholly owned by Mr. O'Leary (the "Quebec Corporations"). Prior to
the sale of the shares offered hereby, Mr. O'Leary will sell (a) all of the
issued and outstanding shares of one of the Quebec Corporations, and (b) all
of the issued and outstanding shares of the sole stockholder of the other
Quebec Corporation, to 1128288 Ontario Inc. (the "Ontario Corporation"), a
corporation wholly owned by John Suske, an investor relations consultant to
the Company. Immediately after the sale of the Quebec Corporations to the
Ontario Corporation and prior to the sale of the shares offered hereby, Mr.
Suske will cause (i) the Quebec Corporations to be wound up and the 83,074
Exchangeable Shares owned of record by them to be distributed to the Ontario
Corporation, (ii) the Ontario Corporation to exchange such Exchangeable
Shares for 83,074 shares of Common Stock, and (iii) the Ontario Corporation
to sell such shares of Common Stock pursuant to this Prospectus.
</TABLE>
36
<PAGE> 38
(6) Includes 60,000 shares of Common Stock issuable upon exchange of
Exchangeable Shares owned by a corporation. Mr. Rubinoff exercises
investment and voting power over these Exchangeable Shares.
(7) See notes (3), (4), (5) and (6) above.
(8) Based upon information contained in a Schedule 13G dated February 13, 1995
filed with the Commission by FMR Corp. (jointly with Fidelity Management and
Research Company, Fidelity Magellan Fund and Edward C. Johnson 3rd, Chairman
of FMR Corp.), FMR has reported that it has sole voting power over 25,000
shares of Common Stock and sole investment power over 1,666,800 shares of
Common Stock.
(9) Until May 31, 1995, Michael Bates was employed by the Company as a Senior
Publisher pursuant to an employment agreement effective as of September 13,
1994. Mr. Bates and the Company have agreed that subsequent to May 31, 1995,
Mr. Bates will source potential products for the Company to license from
outside software developers, for which he will earn a commission.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 60,000,000 shares of
Common Stock, par value $.01 per share, 5,000,000 shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock"), and one share of special voting
stock, par value $1.00 per share (the "Special Voting Share").
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to the rights of holders of
outstanding Preferred Stock, if any, the holders of Common Stock are entitled to
receive such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor. In the event of a liquidation, dissolution,
or winding up of the Company, holders of Common Stock have the right to a
ratable portion of the assets remaining after payment of liabilities subject to
any preferential payments required to be made to holders of outstanding
Preferred Stock, if any. Holders of Common Stock do not have cumulative voting,
preemptive, redemption or conversion rights. All outstanding shares of Common
Stock are, and the shares to be sold in this offering will be, fully paid and
nonassessable. The preferences and rights of holders of shares of Common Stock
may become subject to those of holders of shares of any series of Preferred
Stock which the Company may issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further stockholder
approval, to issue the shares of Preferred Stock in one or more series from time
to time and to fix the powers, designations, preferences, and rights, and the
qualifications, limitations, or restrictions of such preferences and/or rights.
The Company has no current plans to issue any Preferred Stock. While the
issuance of Preferred Stock could provide needed flexibility in connection with
possible acquisitions and other corporate purposes, such issuance could also
make it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company or discourage an attempt to gain control
of the Company.
SPECIAL VOTING SHARE
The Company's sole authorized and outstanding Special Voting Share is held
of record by The R-M Trust Company, as Trustee (the "Trustee"), under a Voting
and Exchange Trust Agreement pursuant to which each holder of Exchangeable
Non-Voting Shares of SoftKey Software (the "Exchangeable Shares"), other than
the Company or any entity controlled by the Company (a "Controlled Entity"), is
entitled to instruct the Trustee to exercise one of the votes attached to the
Special Voting Share for each Exchangeable Share held by such holder. Except as
otherwise required by law or the Company's Restated Certificate of
Incorporation, as amended, the holder of record of the Special Voting Share will
have a number of votes equal to the number of Exchangeable Shares outstanding
from time to time not owned by the Company or any Controlled Entity. The holders
of shares of the Common Stock and the Special Voting Share vote together as
37
<PAGE> 39
a single class on all matters, except as may be required by applicable law. The
holder of the Special Voting Share is entitled to receive dividends. In the
event of any liquidation, dissolution or winding-up of the Company, the holder
of the Special Voting Share will not be entitled to receive any assets of the
Company available for distribution to its stockholders. At such time as the
Special Voting Share has no votes attached to it because there are no
Exchangeable Shares outstanding not owned by the Company or a Controlled Entity,
and there are no shares of stock, debt, options or other agreements of the
Company which could give rise to the issuance of any Exchangeable Shares to any
person (other than the Company or a Controlled Entity), the Special Voting Share
will be cancelled.
The Exchangeable Shares were originally issued to certain holders of common
shares of Former SoftKey in the Three-Party Combination. All Exchangeable Shares
not exchanged for an equivalent number of shares of Common Stock by February 4,
2005 (the "Redemption Date") will be redeemed by SoftKey Software for a price
per share equal to the current market price of a share of Common Stock plus a
cash amount equivalent to the full amount of all unpaid dividends thereon, and
the Special Voting Share will thereupon be cancelled. The Board of Directors of
SoftKey Software may extend the Redemption Date or, if at any time there are
less than 50,000 outstanding Exchangeable Shares (other than Exchangeable Shares
held by the Company or any Controlled Entity, subject to adjustment to reflect
permitted changes to the Exchangeable Shares), accelerate the Redemption Date.
TRANSFER AGENT AND REGISTRAR
The Company has appointed The First National Bank of Boston as transfer
agent and registrar of the Common Stock.
38
<PAGE> 40
<TABLE>
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities, Adams,
Harkness & Hill, Inc. and CS First Boston Corporation (the "Underwriters"), have
severally agreed, subject to the terms and conditions contained in the
underwriting agreement (the "Underwriting Agreement"), to purchase from the
Company and the Selling Stockholders the number of shares of Common Stock
indicated below opposite their respective names at the price to public less the
underwriting discount set forth on the cover page of the Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of the shares if they purchase any.
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities.............................................................
Adams, Harkness & Hill, Inc. .....................................................
CS First Boston Corporation.......................................................
---------
Total........................................................................... 2,424,044
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose initially to offer the Common Stock directly to
the public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow selected dealers a concession of not more than
$ per share, and the Underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other
dealers. After the offering, the offering price and other selling terms may be
changed by the Underwriters. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate maximum of 363,607 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise this
option, the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company's officers and directors and the Selling Stockholders have
agreed that, for a period of 90 days from the date of this Prospectus, they will
not, directly or indirectly, offer to sell, sell, contract to sell or otherwise
sell or dispose of any shares of their Common Stock without the prior written
consent of Montgomery Securities. The Company has agreed not to sell any shares
of Common Stock for a period of 90 days from the date of this Prospectus without
the prior written consent of Montgomery Securities, except that the Company may,
without consent, issue shares of Common Stock upon exercise of stock options
outstanding as of the date of this Prospectus, grant additional options under
the Company's stock option plans consistent with past practices, issue shares of
Common Stock upon conversion, exercise or exchange of securities outstanding as
of the date of this Prospectus that are convertible into shares of Common Stock
and issue shares of Common Stock in business combination transactions accounted
for as poolings of interest.
In connection with this offering, certain Underwriters and selling group
members may engage in passive market-making transactions in the Common Stock on
the Nasdaq National Market immediately prior to the commencement of sales in
this offering, in accordance with Rule 10b-6A under the Exchange Act. Passive
39
<PAGE> 41
market-making consists of displaying bids on the Nasdaq National Market limited
by the bid prices of independent market-makers and purchases limited by such
prices and effected in response to order flow. Net purchases by a passive
market-maker on each day are limited to a specified percentage of the passive
market-maker's average daily trading volume in the Common Stock during a
specified prior period and must be discontinued when such limit is reached.
Passive market-making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
The Company's Common Stock is listed on the Nasdaq National Market under
the symbol "SKEY."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Neal S. Winneg, General Counsel of the Company. Mr. Winneg owns
options to purchase an aggregate of 69,375 shares of Common Stock, which are or
become exercisable in periodic installments through June 1998. Certain legal
matters in connection with the offering will be passed upon for the Underwriters
by Hale and Dorr, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and related schedule of the Company
as of and for the year ended December 31, 1994, included in this Prospectus and
elsewhere in this registration statement have been audited by Coopers & Lybrand
L.L.P., independent public accountants, as set forth in their report thereon
dated March 3, 1995 and included herein in reliance on such report, given on the
authority of that firm as experts in accounting and auditing. The consolidated
financial statements and related schedules of the Company as of December 31,
1993, June 30, 1993 and for the Transition Period from July 4, 1993 to December
31, 1993 and for each of the two years in the period ended June 30, 1993,
included in this Prospectus and elsewhere in this Registration Statement, have
been audited by Arthur Andersen LLP, independent public accountants, as set
forth in their report therein dated January 16, 1995 and included herein. In its
report, Arthur Andersen LLP states that with respect to the consolidated
financial statements and related schedules of WordStar as of June 30, 1993 and
for each of the two years in the period ended June 30, 1993, Spinnaker as of
June 30, 1993 and for the year then ended and Spinnaker as of June 30, 1992 and
for the year then ended, its opinion is based on the reports of other
independent accountants, namely KPMG Peat Marwick LLP, Price Waterhouse LLP and
Deloitte & Touche LLP, respectively. The consolidated financial statements and
related schedules of the Company have been included herein in reliance upon such
reports given upon the authority of those firms as experts in accounting and
auditing. The report of Price Waterhouse LLP on the consolidated financial
statements of Spinnaker as of June 30, 1993 and for the year then ended contains
an explanatory paragraph relating to Spinnaker's ability to continue as a going
concern as described in Note 12 of the consolidated financial statements of
Spinnaker (not included herein). The report of Deloitte & Touche LLP on the
consolidated financial statements of Spinnaker for the year ended June 30, 1992
expresses an unqualified opinion and includes an explanatory paragraph referring
to an uncertainty in connection with an arbitration proceeding referred to in
Note 12 of the consolidated financial statements of Spinnaker (not included
herein).
40
<PAGE> 42
SOFTKEY INTERNATIONAL INC.
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Public Accountants.......................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993 and June 30, 1993..... F-7
Consolidated Statements of Operations for the Year Ended December 31, 1994,
Transition Period Ended December 31, 1993 and the Years Ended June 30, 1993 and
1992............................................................................. F-8
Consolidated Statements of Stockholders' Equity (Deficit) for the Year Ended
December 31, 1994, Transition Period Ended December 31, 1993 and the Years Ended
June 30, 1993
and 1992......................................................................... F-9
Consolidated Statements of Cash Flows for the Year Ended December 31, 1994,
Transition Period Ended December 31, 1993 and the Years Ended June 30, 1993 and
1992............................................................................. F-10
Notes to Consolidated Financial Statements......................................... F-11
Unaudited Condensed Consolidated Balance Sheets as of March 31, 1995 and December
31, 1994......................................................................... F-28
Unaudited Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 1995 and 1994.................................................... F-29
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1995 and 1994.................................................... F-30
Notes to Unaudited Condensed Consolidated Financial Statements..................... F-31
</TABLE>
F-1
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of SoftKey International Inc.:
We have audited the accompanying consolidated balance sheet of SoftKey
International Inc. as of December 31, 1994, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
year ended December 31, 1994. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SoftKey
International Inc. as of December 31, 1994 and the consolidated results of their
operations and cash flows for the year ended December 31, 1994 in conformity
with generally accepted accounting principles.
In connection with our audit of the financial statements referred to above,
we have also audited the related financial statement schedule. In our opinion,
this financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 3, 1995
F-2
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
SoftKey International Inc.:
We have audited the accompanying consolidated balance sheets of SoftKey
International Inc. and subsidiaries (the "Company") as of December 31, 1993 and
June 30, 1993, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the Transition Period from
July 4, 1993 to December 31, 1993 and for each year in the two-year period ended
June 30, 1993. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. As discussed in Notes 1
and 2, SoftKey Software Products Inc., Spinnaker Software Corporation
("Spinnaker") and WordStar International Incorporated ("WordStar") completed a
three-way merger on February 4, 1994 (the "Three-Party Combination") that has
been accounted for as a pooling-of-interests in the accompanying financial
statements. We did not audit the financial statements of Spinnaker or WordStar
as of June 30, 1993, or for any of the years in the two-year period ended June
30, 1993. Such statements are included in the accompanying consolidated
financial statements of SoftKey International Inc. and reflect 38 percent of the
consolidated total assets as of June 30, 1993 and 55 and 67 percent of the
respective consolidated total revenues for the years ended June 30, 1993 and
1992, respectively. The financial statements of Spinnaker and WordStar were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to amounts included for Spinnaker or WordStar, is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of SoftKey International Inc. and
subsidiaries as of December 31, 1993 and June 30, 1993 and the results of their
operations and cash flows for the Transition Period from July 4, 1993 to
December 31, 1993 and for each year in the two-year period ended June 30, 1993,
in conformity with generally accepted accounting principles.
The report of Price Waterhouse LLP on the consolidated financial statements
of Spinnaker as of June 30, 1993 and for the year then ended contains an
explanatory paragraph relating to Spinnaker's ability to continue as a going
concern as described in Note 12 of the consolidated financial statements of
Spinnaker (not included herein). The report of Deloitte & Touche LLP on the
consolidated financial statements of Spinnaker as of June 30, 1992 and for the
year then ended expresses an unqualified opinion and includes an explanatory
paragraph referring to an uncertainty in connection with an arbitration
proceeding referred to in Note 12 of the consolidated financial statements of
Spinnaker (not included herein).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 16, 1995
F-3
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
WordStar International Incorporated:
We have audited the consolidated balance sheet of WordStar International
Incorporated and subsidiaries as of June 30, 1993, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended June 30, 1993 (not presented separately
herein). In connection with our audits of the consolidated financial statements,
we also have audited the related financial statement schedules (not presented
separately herein). These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WordStar
International Incorporated and subsidiaries as of June 30, 1993, and the results
of their operations and their cash flows for each of the years in the two-year
period ended June 30, 1993, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
San Francisco, California
September 13, 1993
F-4
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Spinnaker Software Corporation and Subsidiaries
Cambridge, Massachusetts
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Spinnaker Software
Corporation and subsidiaries for the year ended June 30, 1992. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of the Companies' operations and their cash
flows for the year ended June 30, 1992 in conformity with generally accepted
accounting principles.
As discussed in Note 12 to the consolidated financial statements, the
Company is the defendant in an arbitration proceeding alleging a breach of
rights under a share Registration Rights Agreement. The ultimate outcome of the
arbitration cannot presently be determined. Accordingly, no provision for any
loss that may result upon resolution of this matter has been made in the
accompanying financial statements.
DELOITTE & TOUCHE LLP
September 30, 1992 (Except for Note 12,
for which the date is October 12, 1992)
Boston, Massachusetts
F-5
<PAGE> 47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Spinnaker Software Corporation
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of changes in stockholders' equity and of cash flows
(not presented separately herein) present fairly, in all material respects, the
financial position of Spinnaker Software Corporation and its subsidiaries at
June 30, 1993, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The financial statements referred to above have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has incurred a significant obligation from the
resolution of an arbitration proceeding which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to this
matter are also described in Note 12. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Price Waterhouse LLP
Boston, Massachusetts
September 28, 1993, except as to Note 12,
which is as of December 3, 1993
F-6
<PAGE> 48
SOFTKEY INTERNATIONAL INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1993 1993
------------ ------------ --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 12,205 $ 22,797 $ 27,929
Marketable securities...................................... -- -- 1,400
Accounts receivable, less allowances for returns and
doubtful accounts of $6,744, $16,216, and $8,168,
respectively............................................ 16,745 12,677 20,824
Inventories................................................ 9,795 4,561 5,382
Other current assets....................................... 8,247 5,642 3,810
------------ ------------ --------
46,992 45,677 59,345
------------ ------------ --------
Property and equipment, net.................................. 9,325 6,478 7,871
Goodwill, net................................................ 32,051 24,794 26,999
Other assets, net............................................ 2,447 2,385 34,259
------------ ------------ --------
$ 90,815 $ 79,334 $128,474
========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses...................... $ 22,956 $ 33,686 $ 27,593
Merger and reorganization accruals......................... 1,899 14,155 6,954
Accrual for legal settlements.............................. 1,770 9,417 --
Current portion of long-term obligations................... 1,008 1,471 852
Current portion of related party debt...................... 1,008 900 --
Deferred revenues.......................................... 2,830 3,650 894
------------ ------------ --------
31,471 63,279 36,293
------------ ------------ --------
LONG-TERM OBLIGATIONS:
Revolving line-of-credit................................... 7,700 -- --
Long-term debt............................................. 1,403 10,638 11,611
Deferred income taxes...................................... 4,323 827 613
Other long-term obligations................................ 7,318 7,454 8,174
Related party debt......................................... 1,115 5,768 9,850
------------ ------------ --------
21,859 24,687 30,248
------------ ------------ --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock series B, $0.01 par value -- Authorized,
issued and outstanding -- none at December 31, 1994;
5,176,532 shares at December 31, 1993; and 5,000,000
shares at June 30, 1993................................. -- 52 50
Special voting stock -- Authorized and issued -- one share
representing the voting rights of 4,104,978 outstanding
Exchangeable Shares at December 31, 1994; none at
December 31, 1993 and June 30, 1993 -- -- --
Common stock, $0.01 par value -- Authorized -- 24,500,000
shares; issued and outstanding 16,697,003 shares at
December 31, 1994; 14,768,415 shares at December 31,
1993; and 13,867,926 shares at June 30, 1993............ 167 148 139
Additional paid-in-capital................................. 191,390 162,650 158,240
Accumulated deficit........................................ (142,792) (163,025) (89,550)
Cumulative translation adjustment.......................... (9,651) (8,313) (6,802)
Treasury stock, $0.01 par value, at cost (130,995 shares at
December 31, 1994; 14,000 shares at December 31, 1993,
and June 30, 1993)...................................... (1,629) (144) (144)
------------ ------------ --------
37,485 (8,632) 61,933
------------ ------------ --------
$ 90,815 $ 79,334 $128,474
========== ========== ========
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements)
F-7
<PAGE> 49
SOFTKEY INTERNATIONAL INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
TRANSITION YEARS ENDED
YEAR ENDED PERIOD ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1994 1993 1993 1992
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
REVENUES.................................... $ 121,287 $ 41,645 $109,704 $119,518
COST OF REVENUES............................ 39,085 27,748 49,993 48,038
------------ ------------ -------- --------
GROSS MARGIN................................ 82,202 13,897 59,711 71,480
------------ ------------ -------- --------
OPERATING EXPENSES:
Sales, marketing and support.............. 27,274 19,322 38,014 38,746
General and administrative................ 22,444 15,598 24,278 22,060
Research and development.................. 6,696 2,563 8,198 5,685
Purchased research and development........ -- -- 19,051 --
Merger and reorganization costs........... 1,079 38,944 20,962 1,390
Provision for (gain) product lines sold or
discontinued........................... (778) 710 2,989 4,198
Provisions (reversals) for litigation..... (254) 5,817 3,200 --
------------ ------------ -------- --------
Total operating expenses............... 56,461 82,954 116,692 72,079
------------ ------------ -------- --------
OPERATING INCOME (LOSS)..................... 25,741 (69,057) (56,981) (599)
------------ ------------ -------- --------
OTHER INCOME (EXPENSE):
Interest income........................... 520 639 1,799 927
Interest expense.......................... (1,036) (1,641) (2,296) (2,365)
Other income (expense), net............... (19) 258 331 (58)
------------ ------------ -------- --------
Total other income (expense)........... (535) (744) (166) (1,496)
------------ ------------ -------- --------
INCOME (LOSS) BEFORE TAXES.................. 25,206 (69,801) (57,147) (2,095)
PROVISION FOR INCOME TAXES.................. 4,061 3,457 103 2,888
------------ ------------ -------- --------
NET INCOME (LOSS)........................... $ 21,145 $ (73,258) $(57,250) $ (4,983)
========== ========== ======== ========
NET INCOME (LOSS) PER SHARE:
Primary................................... $ 1.07 $ (5.01) $ (4.36) $ (.47)
Fully Diluted............................. $ 1.04 $ (5.01) $ (4.36) $ (.47)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Primary................................... 19,672,000 14,618,000 13,129,000 10,502,000
Fully Diluted............................. 21,115,000 14,618,000 13,129,000 10,502,000
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements)
F-8
<PAGE> 50
SOFTKEY INTERNATIONAL INC.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<CAPTION>
TOTAL
SERIES A SERIES B COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDERS'
PREFERRED PREFERRED -------------- PAID-IN ACCUMULATED TRANSLATION TREASURY EQUITY
STOCK STOCK SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT STOCK (DEFICIT)
--------- --------- ------ ------ ---------- ----------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE JUNE 30, 1991.......... $ -- $ -- 9,853 $ 98 $ 85,913 $ (27,235) $ (131) $ (144) $ 58,501
Stock issued under exercise of
options and warrants......... -- -- 434 4 3,179 -- -- -- 3,183
Acquisition of Cantax and
others....................... -- -- 82 1 1,329 -- -- -- 1,330
Net proceeds from the sale of
stock........................ -- -- 103 1 1,148 -- -- -- 1,149
Stock issued for warrants...... -- -- 1,800 18 25,393 -- -- -- 25,411
Conversion of debt to common
stock........................ -- -- 376 4 2,953 -- -- -- 2,957
Translation adjustments........ -- -- -- -- -- -- (417) -- (417)
Dividend....................... -- -- -- -- -- (82) -- -- (82)
Net loss....................... -- -- -- -- -- (4,983) -- -- (4,983)
----- ----- ------ ---- -------- ---------- -------- ------ --------
BALANCE JUNE 30, 1992.......... -- -- 12,648 126 119,915 (32,300) (548) (144) 87,049
Stock issued under exercise of
options and warrants......... -- -- 161 2 1,360 -- -- -- 1,362
Stock issued under Lifetree
Software, Inc. and N.B.I.
agreements................... -- -- 38 -- 860 -- -- -- 860
Sale of common stock........... -- -- 573 6 12,116 -- -- -- 12,122
Stock issued for settlement of
expenses..................... -- -- 66 1 1,093 -- -- -- 1,094
Sale of Series B preferred and
common stock................. -- 50 382 4 22,896 -- -- -- 22,950
Translation adjustments........ -- -- -- -- -- -- (6,254) -- (6,254)
Net Loss....................... -- -- -- -- -- (57,250) -- -- (57,250)
----- ----- ------ ---- -------- ---------- -------- ------ --------
BALANCE JUNE 30, 1993.......... -- 50 13,868 139 158,240 (89,550) (6,802) (144) 61,933
Stock issued under exercise of
options and warrants......... -- -- 4 -- 36 -- -- -- 36
Stock issued for settlement of
expenses..................... -- -- 1 -- 27 -- -- -- 27
Exercise of stock warrants..... -- -- 895 9 3,537 -- -- -- 3,546
Preferred dividend............. -- 2 -- -- 810 (812) -- -- --
Translation adjustments........ -- -- -- -- -- -- (1,511) -- (1,511)
Net loss duplicated in
consolidation................ -- -- -- -- -- 595 -- -- 595
Net loss....................... -- -- -- -- -- (73,258) -- -- (73,258)
----- ----- ------ ---- -------- ---------- -------- ------ --------
BALANCE DECEMBER 31, 1993...... -- 52 14,768 148 162,650 (163,025) (8,313) (144) (8,632)
Acquisition of Aris............ -- -- 463 5 5 (230) -- -- (220)
Acquisition of Compact......... -- -- 409 4 848 (382) -- -- 470
Acquisition of SMC............. -- -- 602 6 6,809 -- -- -- 6,815
Spinnaker rights offering and
redemption of Series B
preferred stock.............. -- (52) 2,668 27 25 -- -- -- --
Issuance of Series A preferred
stock upon conversion of
Phemus debt.................. 30 -- -- -- 2,970 -- -- -- 3,000
Preferred dividend............. 3 -- -- -- 297 (300) -- -- --
Conversion of common stock to
Exchangeable Shares.......... -- -- (7,582) (75) 75 -- -- -- --
Conversion of Exchangeable
Shares to common stock....... -- -- 4,156 41 (41) -- -- -- --
Conversion of debt to common
stock........................ -- -- 126 1 9,637 -- -- -- 9,638
Conversion of Series A
preferred stock to common
stock........................ (33) -- 268 3 30 -- -- -- --
Treasury stock purchased....... -- -- -- -- -- -- -- (1,485) (1,485)
Stock issued under exercise of
options and warrants......... -- -- 648 6 5,811 -- -- -- 5,817
Stock issued for settlement of
expenses..................... -- -- 171 1 2,274 -- -- -- 2,275
Translation adjustments........ -- -- -- -- -- -- (1,338) -- (1,338)
Net income..................... -- -- -- -- -- 21,145 -- -- 21,145
----- ----- ------ ---- -------- ---------- -------- ------ --------
BALANCE DECEMBER 31, 1994...... $ -- $ -- 16,697 $167 $191,390 $(142,792) $ (9,651) $(1,629) $ 37,485
===== ===== ====== ==== ======== ========== ======== ====== ========
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements)
F-9
<PAGE> 51
SOFTKEY INTERNATIONAL INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
TRANSITION YEARS ENDED
YEAR ENDED PERIOD ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1994 1993 1993 1992
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................... $ 21,145 $(73,258) $(57,250) $ (4,983)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation, amortization and write-off of intangible assets............ 5,217 34,494 18,528 13,543
Charge for purchased research and development............................ -- -- 19,051 --
Provision for returns and doubtful accounts.............................. 13,744 15,424 5,205 7,498
Provision for product lines sold or discontinued......................... -- 710 2,989 4,198
Loss (gain) on disposition of property and equipment and products........ -- 7 874 144
Other.................................................................... -- 1,128 (1,341) 110
Change in assets and liabilities --
Accounts receivable.................................................... (17,193) (7,290) (1,543) (10,364)
Inventories............................................................ (4,763) 751 1,469 (2,136)
Other current assets................................................... (2,460) (1,487) 78 634
Other assets........................................................... 1,380 757 (1,277) (540)
Accounts payable and accrued expenses.................................. (10,594) 6,208 (2,418) 3,630
Merger and reorganization accruals..................................... (12,256) 7,201 6,954 --
Accrual for legal settlements.......................................... (7,647) 6,367 3,050 --
Deferred revenue....................................................... (820) 2,766 (224) 1,013
Deferred income taxes.................................................. 3,496 -- -- --
Other long-term obligations............................................ 23 134 (318) (280)
-------- -------- -------- --------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES....................... (10,728) (6,088) (6,173) 12,467
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for businesses acquired, net of cash........................... -- -- (17,208) (9,207)
Purchases of property and equipment...................................... (5,514) (1,130) (2,931) (2,845)
Software development costs and purchased technology...................... (1,200) (914) (4,314) (7,028)
Royalty advances......................................................... -- -- (237) (850)
Purchase of marketable securities........................................ -- -- (5,670) (1,275)
Proceeds from sale of marketable securities.............................. -- 1,400 5,245 900
Sale (purchase) of intangible assets..................................... -- 1,967 (3,732) (9,393)
Other.................................................................... -- -- 5 38
-------- -------- -------- --------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES....................... (6,714) 1,323 (28,842) (29,660)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stocks, options and warrants................... 8,852 3,582 36,434 29,743
Redemption of Series B preferred stock................................... (4,660) -- -- --
Sale (repayment) of debentures........................................... (500) -- 500 6,589
Borrowings under term notes and line-of-credit........................... 7,700 3,196 1,900 2,431
Payments on term notes................................................... (2,500) (6,316) (3,258) (5,723)
Payments on capital lease obligations.................................... (904) (138) (385) --
Other.................................................................... -- 62 (290) (97)
-------- -------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 7,988 386 34,901 32,943
-------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH................................ (1,138) (753) (681) 675
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................... (10,592) (5,132) (795) 16,425
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 22,797 27,929 28,724 12,299
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 12,205 $ 22,797 $ 27,929 $ 28,724
======== ======== ======== ========
SUPPLEMENTAL SCHEDULING OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued to purchase SMC...................................... $ 6,815 $ -- $ -- $ --
Common stock issued to N.B.I., Lifetree, Cantax, PFS, Nova and others...... -- -- 860 1,330
Common stock issued for settlement of expenses........................... 2,275 27 1,094 --
Accounts payable converted to long-term debt............................. -- -- 700 --
Conversion of debt to equity............................................. 9,638 700 -- 2,957
Equipment acquired under capital leases.................................. 1,475 60 360 1,269
Common stock issued on conversion of Series A preferred stock............ 3,000 -- -- --
Dividend on Series A preferred stock settled by issuance of common
stock.................................................................. 300 -- -- --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during period for:
Interest............................................................... $ 1,387 $ 1,006 $ 1,568 $ 1,823
Income taxes........................................................... (254) 5,434 2,233 (353)
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements)
F-10
<PAGE> 52
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Business
SoftKey International Inc. (the "Company"), formerly WordStar International
Incorporated ("WordStar"), develops, publishes and markets consumer software.
The Company sells its products through mass merchants, office supply stores,
software specialty stores, distributors, original equipment manufacturers
(OEMs), and to end users through direct mail. The Company also develops and
distributes income tax software products and offers computerized processing of
income tax returns in Canada.
On January 27, 1994, WordStar changed its fiscal year to the 52 or 53 weeks
ending nearest December 31. For clarity of presentation herein, all references
to December 31, 1993 relate to balances as of January 1, 1994, the period from
January 2, 1994 to December 31, 1994 is referred to as the "Year Ended December
31, 1994" and the period from July 4, 1993 to January 1, 1994 is referred to as
the "Transition Period Ended December 31, 1993" or the "Transition Period".
On February 4, 1994, WordStar completed a three-way business combination
transaction (the "Three-Party Combination") with SoftKey Software Products Inc.
("Former SoftKey"), and Spinnaker Software Corporation ("Spinnaker") pursuant to
a combination agreement dated as of August 17, 1993, as amended and restated
(the "Combination Agreement"). WordStar was the surviving corporate entity and
changed its name to SoftKey International Inc., and each of Spinnaker and a
successor by way of amalgamation of Former SoftKey ("SoftKey Software") became
wholly-owned subsidiaries of the Company. The accompanying financial statements,
notes and supplemental schedules have been restated to reflect a 1-for-10
reverse split of the Company's common stock effective February 4, 1994. The
Three-Party Combination was accounted for as a pooling-of-interests.
On June 15, 1994 and July 5, 1994, respectively, the Company acquired Aris
Multimedia Entertainment, Inc. ("Aris") and Compact Publishing, Inc.
("Compact"). Each of these combinations was accounted for using the
pooling-of-interests method. The accompanying financial statements for years
prior to the Year Ended December 31, 1994, do not include amounts related to
Compact or Aris as they were deemed to be immaterial. On September 13, 1994, the
Company acquired all the outstanding capital stock of Software Marketing
Corporation ("SMC"). This transaction has been accounted for using the purchase
method of accounting.
Basis of Presentation
Former SoftKey's balance sheets and statements of operations for the twelve
months ended July 31, 1993 and 1992 have been combined with those of Spinnaker
for the years ended June 30, 1993 and 1992 and those of WordStar for the year
ended July 3, 1993 and June 30, 1992, respectively. The duplication in the
Transition Period of Former SoftKey's net loss for the one month period ended
July 31, 1993 of $595 has been adjusted by a credit to accumulated deficit in
the Transition Period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
amounts and transactions have been eliminated.
Revenue Recognition
Revenues are primarily derived from the sale of software products and
software licensing arrangements. Revenue from the sale of software products is
recognized upon shipment, provided that no significant obligations remain
outstanding and collection of the receivable is probable. Costs related to
insignificant post
F-11
<PAGE> 53
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
shipment technical support and other obligations are accrued. Allowances for
estimated returns are provided at the time of sale. The Company evaluates the
adequacy of allowances for returns and bad debts primarily based upon its
evaluation of historical and expected sales experience and by channel of
distribution. Revenues from royalties pursuant to license arrangements is
recognized as earned based upon performance or product shipments. Deferred
revenues represent payments received prior to completion of the earning process.
Cash Equivalents and Marketable Securities
Cash equivalents are valued at cost, which approximates market value, and
consist principally of commercial paper, bankers acceptances, short-term
government securities and money market accounts. The Company considers all such
investments having original maturities of less than 90 days to be cash
equivalents. Marketable securities are industrial bonds and are valued at cost,
which approximates market value.
<TABLE>
Inventories
Inventories are stated at the lower of weighted average cost or net
realizable value, and include third-party assembly costs, diskettes, manuals and
an allocation of fixed overhead.
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1993 1993
------------ ------------ --------
<S> <C> <C> <C>
Components........................................ $2,475 $1,140 $1,270
Finished goods.................................... 7,320 3,421 4,112
------ ------ ------
$9,795 $4,561 $5,382
====== ====== ======
</TABLE>
<TABLE>
Property and Equipment
Property and equipment are stated at the lower of cost, net of accumulated
depreciation or net realizable value. Depreciation is calculated using
accelerated and straight-line methods over the following useful lives:
<S> <C>
Building............................. 40 years
Computer equipment................... 3-5 years
Furniture and fixtures............... 3-5 years
Leasehold improvements............... Shorter of the life of the lease or
the estimated useful life
</TABLE>
Goodwill
Goodwill represents the excess of purchase price over fair market value of
identifiable assets acquired. Goodwill of $22,920, net of amortization, at
December 31, 1994, arose from the acquisition of the Canadian income tax
software and tax return processing business in 1991 and is being amortized on a
straight-line basis over 40 years. Goodwill of $9,131, net of amortization,
arose as a result of the 1994 acquisition of SMC and is being amortized on a
straight-line basis over 5 years. Goodwill has been presented net of accumulated
amortization of $3,687, $2,502 and $2,322 as of December 31, 1994 and 1993 and
June 30, 1993, respectively. The Company evaluates the carrying value of
goodwill for possible impairment on an annual basis. Such evaluation compares
current and anticipated net income from related operations to the unamortized
goodwill balance and considers operating trends and other relevant factors.
Based upon its most recent analysis, the Company believes that no impairment of
goodwill exists at December 31, 1994.
F-12
<PAGE> 54
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Other Assets
Other assets, as detailed in Note 6, are carried at cost less accumulated
amortization and are accounted for as follows:
Software Development Costs -- Research and development costs are expensed
as incurred. Development costs for new software products and enhancements to
existing software products are expensed as incurred until technological
feasibility has been established. As discussed in Note 15, the Company changed
its marketing strategy in connection with the Three-Party Combination, which
resulted in a significant write-down of capitalized software development costs
during the Transition Period Ended December 31, 1993. Consistent with the
Company's revised marketing strategy, capitalized software development costs are
being amortized on a straight-line basis over the estimated product life,
generally twelve months. During the Years Ended June 30, 1993 and 1992, the
Company had amortized capitalized software development costs generally over
three years or based on the ratio of current revenues to total projected
revenues, whichever was greater.
Customer Lists -- Customer Lists are recorded at the lower of cost or net
realizable value and are amortized on a straight-line basis over their estimated
useful lives of two to five years.
Technology Rights -- Technology Rights are recorded at the lower of cost or
net realizable value and are amortized on a straight-line basis over their
estimated useful lives of two to five years.
Licenses and Source Codes -- Licenses are recorded at the lower of cost or
net realizable value and are amortized over the life of the agreement. Purchased
source codes are recorded at the lower of cost or net realizable value and are
amortized on a straight-line basis over the expected useful life of the code,
generally two to five years.
Income Taxes
Deferred tax liabilities and assets are determined based on the differences
between the financial statement basis and tax basis of assets and liabilities,
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Effective July 4, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109. Prior to this date, the Company followed
Accounting Principles Board Opinion No. 11 for income taxes. There were no
material cumulative effects on the Company's financial statements of adopting
the policy.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated to U.S.
dollars at period end exchange rates. Revenues and expenses are translated using
the average rates during the period. The effects of foreign currency translation
adjustments have been accumulated and are included as a separate component of
stockholders' equity.
Computation of Earnings Per Share
Net income (loss) per share is computed using the weighted average number
of common and dilutive common stock equivalent shares outstanding during the
period. Dilutive common stock equivalent shares consist of convertible
debentures and notes, convertible Series A and Series B preferred stock and
stock options and warrants using the treasury stock method. The computations do
not include common stock equivalents where the effect would be antidilutive.
Primary earnings per share computations differ from fully diluted earnings per
share due to the exclusion of the dilutive effect of convertible debentures and
notes plus the effect of using the average price of the Company's common stock
versus the ending price in the treasury stock computation.
F-13
<PAGE> 55
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) THREE-PARTY COMBINATION
In connection with the Three-Party Combination, each Former SoftKey
stockholder was entitled to receive, for each share held, .36 shares of the
Company's common stock or .36 exchangeable Non-Voting Shares (the "Exchangeable
Shares") of SoftKey Software Products Inc. ("SoftKey Software"), the successor
by amalgamation to Former SoftKey. Upon completion of the Three-Party
Combination, the Company issued Former SoftKey stockholders a total of 1,354,219
shares of common stock and 7,582,498 Exchangeable Shares. The Company also
issued a special voting share (the "Voting Share") which has a number of votes
equal to the number of Exchangeable Shares outstanding. The holder of the Voting
Share is not entitled to dividends and shall vote with the common stockholders
as a single class. The Exchangeable Shares may be exchanged for the Company's
common stock on a one-for-one basis until February 4, 2005, at which time any
outstanding Exchangeable Shares automatically convert to shares of the Company's
common stock. Each share of Spinnaker common stock was converted into .1624
shares of the Company's common stock. In connection with the Three-Party
Combination and the Spinnaker rights offering discussed in Note 11, the Company
issued a total of 5,887,295 shares of common stock to the former Spinnaker
stockholders. In addition, the Company issued 129,555 shares of common stock
valued at $1,781 as payment for certain investment banking fees incurred in
connection with the Three-Party Combination.
<TABLE>
The following information presents the operating results of WordStar,
Spinnaker and Former SoftKey, as previously reported, for the periods preceding
the merger and combined restated operating results to reflect the Three-Party
Combination:
<CAPTION>
FORMER COMBINED
WORDSTAR SPINNAKER SOFTKEY ELIMINATIONS RESTATED
-------- --------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Transition Period
Revenues................. $ 14,881 $ 21,758 $ 8,540 $ (3,534) $ 41,645
Net loss................. (7,369) (34,069) (30,857) (963) (73,258)
Year Ended June 30, 1993
Revenues................. $ 29,967 $ 31,345 $ 50,142 $ (1,750) $109,704
Net loss................. (27,484) (22,648) (5,845) (1,273) (57,250)
Year Ended June 30, 1992
Revenues................. $ 50,100 $ 30,017 $ 39,401 -- $119,518
Net income (loss)........ (7,608) (3,752) 6,377 -- (4,983)
</TABLE>
There were no adjustments to the above separate results to conform the
separate entities in the application of generally accepted accounting
principles.
(3) OTHER ACQUISITIONS AND DISPOSITIONS
Aris Multimedia Entertainment, Inc.
On June 15, 1994, the Company acquired the outstanding capital stock of
Aris in exchange for 462,822 shares of the Company's common stock. This
acquisition has been accounted for as a pooling-of-interests. The accompanying
financial statements for periods prior to the Year Ended December 31, 1994 do
not include amounts for this acquisition as they were deemed to be immaterial.
Compact Publishing Inc.
On July 5, 1994, the Company acquired the outstanding capital stock of
Compact in exchange for 409,407 shares of the Company's common stock. This
acquisition has been accounted for as a pooling-of-interests. The accompanying
financial statements for periods prior to the Year Ended December 31, 1994 do
not include amounts for this acquisition as they were deemed to be immaterial.
F-14
<PAGE> 56
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) OTHER ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
<TABLE>
Software Marketing Corporation
On September 13, 1994, the Company acquired the outstanding capital stock
of SMC in exchange for 602,257 shares of the Company's common stock. Subsequent
to the acquisition, 116,995 shares were repurchased by the Company for $1,485.
The transaction has been accounted for using the purchase method of accounting.
The purchase price was allocated as follows:
<CAPTION>
ESTIMATED
USEFUL
DOLLARS LIFE
------- ---------
<S> <C> <C> <C>
Tangible assets...................................... $ 1,001
Intangible assets:
Mailing list....................................... $ 125 3 years
Non-compete agreement.............................. 420 3 years
Goodwill........................................... 9,610 5 years
------
10,155
Less: liabilities assumed............................ (3,837)
-------
Stock issued and cash paid, including transaction
costs.............................................. $ 7,319
=======
</TABLE>
The amounts allocated to intangible assets are being amortized on a
straight-line basis over their respective estimated useful lives. This
acquisition was deemed to be immaterial for presentation of pro forma
information purposes.
<TABLE>
ZSoft Corporation
In January 1993, the Company issued 441,808 shares of common stock in
connection with the acquisition of ZSoft Corporation ("ZSoft"). The acquisition
was accounted for as a pooling-of-interests. The accompanying financial
information includes the accounts of ZSoft for all periods presented. Revenues
and net losses of the separate companies for the periods preceding the
acquisition are as follows:
<CAPTION>
YEARS ENDED
JUNE 30,
---------------------
1993 1992
-------- --------
<S> <C> <C>
Revenues:
ZSoft........................................................ $ 3,421 $ 8,276
All other entities........................................... 106,283 111,242
-------- --------
The Company.................................................. $109,704 $119,518
-------- --------
Net Loss:
ZSoft........................................................ $ (2,548) $ (2,700)
All other entities........................................... (54,702) (2,283)
-------- --------
The Company.................................................. $(57,250) $ (4,983)
======== ========
</TABLE>
F-15
<PAGE> 57
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) OTHER ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
<TABLE>
Power Up Software Corporation
In March 1993, the Company acquired the outstanding capital stock of Power
Up Software Corporation ("Power Up"). The acquisition was accounted for as a
purchase. The Power Up catalog operation has been closed (see Note 15 -- Merger
and Reorganization Related Costs). The purchase price was allocated as follows:
<S> <C> <C>
Tangible assets.................................................. $ 10,477
Identifiable intangible assets
Mailing lists.................................................. $3,000
Trademarks..................................................... 2,000
Software rights................................................ 1,800
------
6,800
Purchased research and development expensed in 1993.............. 14,051
Less: liabilities assumed........................................ (12,796)
--------
Cash paid and transaction costs.................................. $ 18,532
========
</TABLE>
<TABLE>
The following unaudited pro forma information reflects the combined results
of operations of the Company and Power Up as if the acquisition had occurred on
July 1, 1991, excluding the $14,051 non-recurring charge for purchased research
and development recorded in the Year Ended June 30, 1993:
<CAPTION>
PRO FORMA FOR THE
YEARS ENDED
JUNE 30,
---------------------
1993 1992
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues....................................................... $134,278 $153,618
Net loss....................................................... (43,757) (3,257)
Net loss per share............................................. (3.33) (.31)
</TABLE>
EasyTax Product Line
During 1993, the Company sold the EasyTax product line for net proceeds of
approximately $2,700 and recorded a loss on disposition of $710.
<TABLE>
(4) CHANGE IN FISCAL YEAR
On January 27, 1994, the Company changed its fiscal year to the 52 or 53
weeks ending nearest December 31. For clarity of presentation herein, the
transition period from July 4, 1993 through January 1, 1994 is referred to as
the Transition Period Ended December 31, 1993. For comparative purposes, the
following presents the unaudited results of operations for the six months ended
December 31, 1992:
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Revenues........................................................... $60,076
Net loss........................................................... (9,482)
Net loss per share................................................. (.82)
</TABLE>
F-16
<PAGE> 58
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
(5) PROPERTY AND EQUIPMENT
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1993 1993
------------ ------------ --------
<S> <C> <C> <C>
Building, land and leasehold improvements....... $ 1,084 $ 875 $ 940
Computer equipment.............................. 8,420 12,014 11,100
Furniture and fixtures.......................... 4,905 3,686 5,385
Equipment under capital leases.................. 3,731 2,114 1,848
---------- ---------- --------
18,140 18,689 19,273
Less: accumulated depreciation.................. (8,815) (12,211) (11,402)
---------- ---------- --------
$ 9,325 $ 6,478 $ 7,871
========== ========== ========
</TABLE>
<TABLE>
(6) OTHER ASSETS
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1993 1993
------------ ------------ --------
<S> <C> <C> <C>
Intangible assets:
Software development costs.................... $ 8,798 $ 15,215 $ 17,655
Trademarks and tradenames..................... -- 9,293 12,814
Non-compete agreements........................ 520 -- --
Licenses and source codes..................... -- 4,707 6,639
Customer lists................................ 425 3,000 3,026
Technology rights............................. -- -- 4,962
---------- ----------- --------
Less: Accumulated amortization and 9,743 32,215 45,096
write-downs to net realizable value........... (7,745) (30,338) (16,695)
---------- ---------- --------
1,998 1,877 28,401
Royalty advances.............................. -- -- 1,299
Other......................................... 449 508 4,559
---------- ---------- --------
$ 2,447 $ 2,385 $ 34,259
========== ========== ========
</TABLE>
<TABLE>
(7) OTHER LONG-TERM OBLIGATIONS
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1993 1993
------------ ------------ --------
<S> <C> <C> <C>
Accrued minimum royalties........................ $2,415 $3,752 $4,438
Litigation accrual............................... -- -- 3,050
Merger-and reorganization accruals............... 645 1,400 --
Other............................................ 4,258 2,302 686
---------- ---------- ------
$7,318 $7,454 $8,174
========== ========== ======
</TABLE>
(8) ROYALTY AGREEMENTS
During 1992, the Company amended certain royalty arrangements. The parties
agreed to fix the amount of future royalties and establish a schedule of
specified lump-sum payments in lieu of previously specified royalty payments.
The current portion of the present value of the future payments of $1,172 is
included in current liabilities and the long-term balance of $2,415 is included
in other long-term obligations at December
F-17
<PAGE> 59
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) ROYALTY AGREEMENTS -- (CONTINUED)
31, 1994. The payments due for principal and interest in each fiscal year under
the agreement are as follows: 1995 - $1,492, 1996 - $875, 1997 - $1,000, 1998 -
$750, and 1999 - $253.
(9) REVOLVING LINE-OF-CREDIT
On September 30, 1994, a wholly-owned subsidiary of the Company, SoftKey
Inc., obtained a revolving line-of-credit (the "Line") allowing the Company to
borrow up to $10,000 subject to certain eligible accounts receivable limits.
Borrowings under the Line are due on July 1, 1996 and bear interest at the prime
rate (8.5% at December 31, 1994) payable monthly. The Line is guaranteed by the
Company and secured by a general security interest in the assets of SoftKey Inc.
and of certain of the Company's subsidiaries and is subject to compliance with
certain financial covenants. At December 31, 1994, the Company had used $7,700
of the available borrowing capacity under the Line.
<TABLE>
(10) LONG-TERM DEBT
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1993 1993
------------ ------------ --------
<S> <C> <C> <C>
Convertible debt................................. $ -- $ 10,114 $ 10,367
Obligations under capital leases (Note 12)....... 2,411 1,645 1,564
9% Vendor note................................... -- 350 532
------- -------- --------
2,411 12,109 12,463
Less: current portion............................ (1,008) (1,471) (852)
------- -------- --------
$ 1,403 $ 10,638 $ 11,611
======= ======== ========
</TABLE>
During 1994, the outstanding principal amount of Cdn$12,650 of convertible
debentures were converted into an aggregate of 910,800 Exchangeable Shares. The
$500 principal amount of 4% convertible note, included in convertible debt at
December 31, 1993 and June 30, 1993, was repaid in July, 1994.
<TABLE>
(11) DEBT DUE RELATED PARTY AND PREFERRED STOCK
Debt due related party consists of the following:
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1993 1993
------------ ------------ --------
<S> <C> <C> <C>
14% notes...................................... $ -- $3,000 $3,500
12% note....................................... -- -- 4,527
12% convertible note........................... -- 776 1,400
Term note...................................... 1,928 2,892 --
Accrued interest............................... 195 -- 423
-------- ------ ------
2,123 6,668 9,850
Less: current portion.......................... (1,008) (900) --
-------- ------ ------
$ 1,115 $5,768 $9,850
======== ====== ======
</TABLE>
Related Party Debt and Series A Convertible Preferred Stock
Phemus is affiliated with a major stockholder of the Company. On March 1,
1993, the Company borrowed $1,400 from Phemus pursuant to a 12% note which was
convertible at any time into shares of common stock at $6.16 per share. In
connection with this borrowing, the Company issued a warrant to
F-18
<PAGE> 60
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) DEBT DUE RELATED PARTY AND PREFERRED STOCK -- (CONTINUED)
Phemus for the purchase of up to 56,840 shares of common stock for $6.16 per
share. In August 1993, Phemus converted $700 into 113,680 shares of common stock
and exercised the warrants discussed above. The Company issued a term note in
August 1993 for $2,892 of which $900 was prepaid in October 1994, and the
remainder is payable in two equal annual installments commencing February 4,
1995, bearing interest at the Adjusted Applicable Federal Rate (5.48% at
December 31, 1994). In November 1994, the $776 convertible note was converted
into 126,088 shares of the Company's common stock.
On November 25, 1992, Phemus and the Company agreed to convert $3,000
outstanding under a 14% Credit Agreement into 3,000,000 shares of Series A
convertible preferred stock, subject to stockholder approval. This amount was
classified as long-term debt at June 30, 1993 and December 31, 1993. The
conversion of the debt was effected on February 4, 1994.
In connection with the Three-Party Combination, the Company authorized
5,000,000 shares and issued 3,300,000 shares of Series A convertible preferred
stock, par value $.01 per share (the "New Series A Stock"), in exchange for all
of the then outstanding shares of Series A preferred stock, including the
dividend payable on December 7, 1993. In November 1994, the 3,300,000 shares of
New Series A Stock were converted into 267,960 shares of the Company's common
stock.
Series B Preferred Stock
During 1993, the Company sold 5,000,000 shares of Series B convertible
preferred stock (the "Series B Stock") and 381,640 shares of common stock and
agreed to issue 24,360 supplemental shares of common stock to Phemus for
$23,000, the fair market value of the stock at the time of the transaction. Each
share of Series B Stock was redeemable by the Company for $4.60, plus accrued
dividends, and each share was convertible into .072 shares of the Company's
common stock. Commencing September 30, 1993, the holder of each share was
entitled to a special quarterly dividend of .0175 shares of Series B Stock for
each share of Series B Stock held on such a date. Prior to redemption on
February 4, 1994, total accrued dividends of $812 were settled by issuance of
87,931 shares of common stock.
Concurrent with the Three-Party Combination, the Company effected a rights
offering to the Spinnaker shareholders in satisfaction of its commitment to
Phemus under the Series B Stock Purchase Agreement (the "Series B Agreement").
The rights offering allowed Spinnaker stockholders to purchase a total of
approximately 2,492,000 shares of the Company's unregistered common stock at a
price of $9.24 per share. Phemus committed to purchase one-half of the common
shares offered, plus any common stock not purchased in the rights offering by
other Spinnaker shareholders. Additionally, the Company issued 89,320 additional
shares of common stock to Phemus in exchange for its guarantee to purchase
shares of common stock in the rights offering. The proceeds of the rights
offering were used to redeem the Series B Stock. In connection with the rights
offering, the Company sold 2,073,878 shares of common stock to Phemus and
504,479 shares to other Spinnaker stockholders.
(12) COMMITMENTS AND CONTINGENCIES
Competition Act Inquiry (Canada)
On June 10, 1994, the Director of Investigation and Research under the
Competition Act (Canada) (the "Act") commenced an inquiry in Canada under the
non-criminal, reviewable practices provisions of the Act respecting the
activities of SoftKey Software in the tax preparation software business in
Canada. On June 28, 1994, a court order requiring SoftKey Software, along with
other companies in the Canadian tax preparation software business, to produce
certain documents and information respecting the Canadian tax preparation
software industry was issued by the Federal Court of Canada Trial Division.
SoftKey Software has had discussions with the staff of the Canadian Bureau of
Competition Policy and is currently cooperating to
F-19
<PAGE> 61
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
provide the documents and information specified in the order. At this time no
formal application has been made seeking a remedy under the Act. Management does
not currently expect that the outcome of this inquiry will have a material
adverse effect on the Company.
Other Litigation
The Company is a defendant in various legal actions involving copyright,
breach of contract and various other claims incident to the conduct of its
business. Management does not expect the Company to suffer any material
liability by reason of such actions.
Lease Obligations
The Company leases office facilities and equipment under operating and capital
leases. Rental expense for operating leases was approximately $1,756 for the
Year Ended December 31, 1994, $1,770 for the Transition Period, $4,013 and
$3,410 for the Years Ended June 30, 1993 and 1992, respectively. On January 5,
1995, the Company entered into a new lease for head office facilities in
Cambridge, MA for the period April 1, 1995 to December 31, 2001.
<TABLE>
Future annual payments under capital and operating leases are as follows:
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
1995.................................................... $ 1,164 $ 3,015
1996.................................................... 960 2,727
1997.................................................... 369 2,208
1998.................................................... 124 2,153
1999.................................................... 67 2,087
Thereafter.............................................. -- 4,672
-------- --------
2,684 $ 16,862
========
Less: interest.......................................... (273)
Less: current portion................................... (1,008)
--------
$ 1,403
========
</TABLE>
(13) COMMON STOCK
At December 31, 1994, the Company has reserved for issuance approximately
3,542,981 shares of its common stock related to options and warrants. On
February 4, 1994, the board of directors and stockholders approved a 1-for-10
reverse stock split. All share and per share data have been retroactively
restated to reflect the reverse stock split. In connection with the Three-Party
Combination, the Company reserved at December 31, 1994, 4,104,978 shares of its
common stock for issuance related to the Exchangeable Shares. The Exchangeable
Shares are represented by the one share of Special Voting Stock.
(14) STOCK OPTIONS AND WARRANTS
Stock Option Plans
Long Term Equity Incentive Plan
The Company has a Long Term Equity Incentive Plan (the "LTIP"). The LTIP
allows for incentive stock options, non-qualified stock options and various
other stock awards. Administration of the LTIP is conducted by the Company's
compensation committee. The administrator determines the amount and type of
F-20
<PAGE> 62
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) STOCK OPTIONS AND WARRANTS -- (CONTINUED)
option or award and terms and conditions and vesting schedules of the award or
option. Upon a change of control, as defined, awards and options then
outstanding become fully vested, subject to certain limitations.
As of February 4, 1994, in connection with the Three-Party Combination,
outstanding Spinnaker and Former SoftKey stock options became options to
purchase common stock of the Company under the LTIP, upon terms and conditions
equivalent to those that were applicable to such Spinnaker and Former SoftKey
stock options. On July 28, 1994 the Board of Directors of the Company amended
the LTIP, subject to stockholder approval, to increase the maximum number of
shares of common stock issuable thereunder to 5,000,000. The total number of
shares of common stock reserved and available for issuance under the LTIP at
December 31, 1994 was 5,000,000 shares, 2,000,000 of which remained available
for grant.
Non-Employee Director Stock Option Plan
On April 26, 1994, the Board of Directors approved a non-employee director
stock option plan (the "Non-Employee Director's Plan"). The Non-Employee
Director's Plan provides for an initial grant of 20,000 options at fair market
value to be issued to each non-employee director who first became a director of
the Company after February 1, 1994. The maximum number of common shares issuable
under the Non-Employee Director's Plan is 500,000, of which 380,000 remain
available for grant at December 31, 1994. Options granted to non-employee
directors are 100% exercisable at the time of grant and are exercisable for a
period of 10 years from date of grant.
<TABLE>
The following table summarizes the stock option activity under the LTIP and
the Non-Employee Director Stock Option Plan:
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1992 JUNE 30, 1993
----------------------------- -----------------------------
SHARES PRICE SHARES PRICE
--------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period... 1,130,203 $1.11 - $376.91 1,289,476 $1.11 - $376.91
Granted............................ 721,981 3.85 - 53.75 598,146 8.07 - 36.01
Exercised.......................... (428,713) 1.11 - 20.99 (141,697) 1.11 - 29.49
Canceled........................... (133,995) 1.11 - 53.75 (291,934) 2.28 - 32.33
--------- --------------- --------- ---------------
Outstanding, end of period......... 1,289,476 $1.11 - $376.91 1,453,991 $1.11 - $376.91
========= ============== ========= ===============
</TABLE>
<TABLE>
<CAPTION>
TRANSITION PERIOD ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994
----------------------------- -----------------------------
SHARES PRICE SHARES PRICE
--------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period... 1,453,991 $1.11 - $376.91 1,999,203 $1.11 - $376.91
Granted............................ 633,965 8.47 - 22.34 1,287,707 8.47 - 18.00
Exercised.......................... (3,883) 2.28 - 20.99 (513,078) 1.11 - 21.61
Canceled........................... (84,870) 3.85 - 32.33 (173,852) 1.11 - 376.91
--------- --------------- --------- ---------------
Outstanding, end of period......... 1,999,203 $1.11 - $376.91 2,599,980 $2.39 - $ 32.33
========= ============== ========= ===============
</TABLE>
Options to purchase 2,043,357 shares of common stock were exercisable at
December 31, 1994.
Other Options and Warrants
In January 1993, the Company completed a private placement of 209,820
units, consisting of 209,820 shares of common stock and common stock warrants
resulting in approximately $4,100 in net proceeds. The warrants entitle the
holders to purchase a total of 209,820 shares of common stock at per share of
$23.75. In
F-21
<PAGE> 63
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) STOCK OPTIONS AND WARRANTS -- (CONTINUED)
March 1993, the Company completed a private placement of 270,000 units,
exercisable into 270,000 shares of common stock and common stock warrants
resulting in approximately $6,100 in net proceeds. The warrants entitle the
holders to purchase 270,000 shares of common stock at a per share price of
$25.00 through March 25, 1996. In connection with this transaction, the Company
issued warrants for the purchase of 22,500 shares of common stock at $25.00 per
share for consideration of certain investment banker fees. During 1993, the
Company issued a warrant expiring June 30, 1999 for the purchase of 121,800
shares of common stock at an exercise price of $6.16 per share. In August 1992,
the Company issued warrants to purchase 10,000 shares of common stock at $45.00
per share.
(15) MERGER AND REORGANIZATION RELATED COSTS
In connection with the Three-Party Combination, the Company terminated
approximately 220 employees and closed the WordStar headquarters in Novato, CA;
the Former SoftKey retail operations in Boca Raton, FL; the corporate head
office of Former SoftKey in Toronto, Canada; the manufacturing facility of
Spinnaker in Charlestown, MA and of Former SoftKey in Minneapolis, MN; and the
Power Up catalog operation in San Mateo, CA. During 1994, in connection with the
acquisitions of Aris and Compact, the Company terminated approximately 10
employees, closed the Aris facility and incurred certain investment banking and
professional fees related to the Compact and Aris acquisitions. In addition,
during 1994 the Barbados operations were closed, resulting in the termination of
10 employees.
Merger and reorganization costs were expensed as incurred or were recorded
when it became probable that the transaction would occur and the expense could
be reasonably estimated.
<TABLE>
Merger and Reorganization costs as shown in the accompanying statements of
operations are as follows:
<CAPTION>
TRANSITION YEARS ENDED
YEAR ENDED PERIOD ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ------------------
1994 1993 1993 1992
------------ ------------ ------- ------
<S> <C> <C> <C> <C>
Write-down of intangible assets................ $ -- $22,893 $ 6,474 $ --
Professional fees and other transaction
costs........................................ 636 8,705 3,424 --
Employee severances............................ 163 4,429 3,975 675
Termination of leases.......................... 98 1,533 2,792 --
Write-down of inventories and fixed assets..... -- 362 2,296 715
Other.......................................... 182 1,022 2,001 --
------ ------- ------- ------
$1,079 $38,944 $20,962 $1,390
====== ======= ======= ======
</TABLE>
Merger and reorganization costs in the Year Ended December 31, 1994 related
to the acquisitions of Aris and Compact and the closure of the Barbados
operation. Professional fees in 1994 were for investment banking, accounting and
legal fees incurred in connection with the Aris and Compact transactions. These
costs were substantially paid prior to December 31, 1994. Severance costs relate
to termination of employees occurring in connection with the acquisitions of
Aris and Compact and the closing of the Barbados location. The employee
terminations were substantially in the areas of product development and sales
and marketing. A total of 20 employees were terminated by December 31, 1994. At
December 31, 1994, $54 of severance costs remained to be paid to the employees
in accordance with the severance plan. The remaining employee severance payments
are expected to be paid prior to December 31, 1995.
The charges during the Transition Period and the Year Ended June 30, 1993,
relate to the Three-Party Combination except for $2,038 expensed during the year
ended June 30, 1993, which related to the acquisition of ZSoft. The remaining
accrued liabilities for these costs are $2,544, $15,555, and $6,954 at December
31,
F-22
<PAGE> 64
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) MERGER AND REORGANIZATION RELATED COSTS -- (CONTINUED)
1994, 1993 and June 30, 1993, respectively. Merger and reorganization costs of
$645 and $1,400 at December 31, 1994 and 1993, respectively, relate to amounts
contractually due beyond the next fiscal year and are classified as Other
Long-Term Obligations at year end.
In connection with the Three-Party Combination, the Company decided to
approach consumer software distribution through fixturing, specialty shelf space
and direct merchandising and marketing with the retailer and customer. The new
marketing strategy focused on new products, and an increase in the number of
available offerings of consumer software and recognizes a reduction in product
shelf life. The Company has also reduced its dependence on predominantly
internally-developed products, and its new product introduction strategy
includes a higher number of products originating from its external developer
relationships through licensing contracts and acquisitions. As a result of the
new marketing strategy, the Company decided to phase out certain brands,
primarily the PFS: brand and recorded expenses of $14,811 in the Transition
Period Ended December 31, 1993, related to write-downs of certain intangible
assets, primarily capitalized software development costs, prepaid royalties,
trademarks and technology rights. The Power Up catalog operation was closed and,
as a result, the Company recorded a provision of $4,205 in the Transition Period
Ended December 31, 1993 to reflect the write-down of certain trademarks and
mailing lists to their net realizable value. The Company also recorded an
expense of $3,877 in the Transition Period Ended December 31, 1993 to record the
write-down of the Lansa license to its net realizable.
The employee terminations in the Transition Period were primarily in the
areas of product development, technical support, customer service, finance and
administration. All employee terminations related to the Three-Party Combination
were completed through December 31, 1994, and $3,866 of the $4,833 severance
accrued for at December 31, 1993 has been paid in accordance with the plan. The
remaining severance amounts will be substantially paid before December 31, 1995
in accordance with severance contract terms.
Professional fees and other transaction costs relate primarily to
investment banking, legal and accounting fees in connection with the acquisition
of Aris and Compact in 1994, and the Three-Party Combination during the
Transition Period. The amount accrued at December 31, 1993 of $5,954 includes
$1,781 which was paid through the issuance of 129,555 shares of common stock.
All amounts were paid by December 31, 1994.
Lease termination costs in 1994 relate to the closure of the operations in
Barbados and the office facility in Marina del Rey, CA, the former Aris
headquarters. Lease termination costs in 1993 represent costs associated with
the closure of the Power Up catalog operations and the shutdown of the
manufacturing facility in Charlestown, MA, in connection with the consolidation
of the Company's production facilities. In addition, in the Transition Period,
offices were vacated in Toronto, Boca Raton, Novato, and San Mateo. These
facilities were consolidated in the Transition Period into one central location
in Cambridge, MA. The amount accrued at December 31, 1993 for lease termination
costs was $2,254 of which $1,341 has been paid through December 31, 1994, and
the balance is expected to be substantially settled before December 31, 1995.
In connection with the consolidation of the facilities described above, the
Company also recorded write-downs of certain fixed assets to net realizable
value totaling $320 and $2,296 in the Transition Period Ended December 31, 1993,
and in the Year Ended June 30, 1993, respectively, as they were no longer used
in the ongoing operations of the Company.
F-23
<PAGE> 65
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
(16) INCOME TAXES
The Company's income (loss) before income taxes consists of the following:
<CAPTION>
TRANSITION YEARS ENDED
YEAR ENDED PERIOD ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1994 1993 1993 1992
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
United States............................... $ 13,734 $(39,210) $(46,571) $(10,396)
Foreign..................................... 11,472 (30,591) (10,576) 8,301
-------- -------- -------- --------
$ 25,206 $(69,801) $(57,147) $ (2,095)
======== ======== ======== ========
</TABLE>
<TABLE>
The provision for income taxes consists of the following:
<CAPTION>
TRANSITION YEARS ENDED
YEAR ENDED PERIOD ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------
1994 1993 1993 1992
------------ ------------ ---- ------
<S> <C> <C> <C> <C>
Current income taxes:
Federal................................. $ 70 $ -- $ -- $ (18)
State................................... 50 80 24 175
Foreign................................. -- 3,377 105 2,731
------ ------ ---- ------
$ 120 $3,457 $129 $2,888
------ ------ ---- ------
Deferred income taxes:
Federal................................. $ -- $ -- $ -- $ --
State................................... -- -- -- --
Foreign................................. 3,941 -- (26) --
------ ------ ---- ------
$3,941 $ -- $(26) $ --
------ ------ ---- ------
$4,061 $3,457 $103 $2,888
====== ====== ==== ======
</TABLE>
Deferred taxes result from timing differences in the recognition of certain
items for income tax and financial reporting purposes. The source of these
differences and the tax effects are primarily from tax depreciation and certain
allowances and reserves not deductible in the current period.
<TABLE>
The reconciliation between the Company's income tax benefit (provision) and
that calculated at the statutory federal tax rate is as follows:
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED YEARS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------
1994 1993 1993 1992
------------ ------------ -------- -------
<S> <C> <C> <C> <C>
Tax benefit (provision) at statutory federal
income tax rate (35% in 1994 and 34% in
prior years)............................... $ (8,822) $ 23,843 $ 19,430 $ 712
State income tax............................. (50) (80) (24) (175)
Net foreign earnings taxed at rates different
than federal tax rate...................... 74 (13,461) (3,598) 235
Withholding tax on net foreign income........ -- -- (77) (142)
Utilization of prior year tax benefits....... 4,737 -- -- --
Unrealized income tax benefit (provision).... -- (13,759) (15,834) (3,518)
-------- -------- -------- -------
$ (4,061) $ (3,457) $ (103) $(2,888)
======== ======== ======== =======
</TABLE>
F-24
<PAGE> 66
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) INCOME TAXES -- (CONTINUED)
Effective July 4, 1993, the Company prospectively adopted SFAS No. 109. The
cumulative effect of this change in the method of accounting for income taxes
was not material to the Company's consolidated financial statements.
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<CAPTION>
TRANSITION
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Deferred tax assets:
(Current)
Accounts receivable reserves.......................... $ 4,260 $ 3,556
Other reserves and accruals........................... 1,564 2,467
Restructuring expenditures............................ 575 5,487
Potential litigation costs............................ 450 2,333
Other................................................. 177 431
-------- --------
$ 7,026 $ 14,274
======== ========
(Non-current)
Net operating losses and credits...................... $ 22,755 $ 31,487
Software development.................................. 2,015 4,292
Package design costs.................................. 383 302
Fixed assets.......................................... 377 736
Other................................................. 116 --
Interest.............................................. -- 169
-------- --------
$ 25,646 $ 36,986
======== ========
Total deferred tax asset................................... $ 32,672 $ 51,260
Less: valuation allowance.................................. (32,290) (50,433)
-------- --------
Net deferred tax asset..................................... $ 382 $ 827
======== ========
Deferred tax liability:
(Non-current)
Fixed assets.......................................... $ (205) $ (355)
Foreign taxes......................................... (3,941) --
Debenture costs....................................... (177) (149)
Intangible assets..................................... -- (295)
Leases................................................ -- (28)
-------- --------
Total deferred tax liabilities........................... $ (4,323) $ (827)
======== ========
</TABLE>
The valuation allowance relates to uncertainties surrounding the
recoverability of deferred tax assets. At December 31, 1994, the Company had
worldwide net operating loss carryforwards and other tax benefits of
approximately $100,000 for income tax purposes, expiring from year 1999 through
2009. The utilization of tax loss carryforwards is subject to annual limitations
due to change in control and local country tax regulations.
F-25
<PAGE> 67
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
(17) GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment -- software for use
with microcomputers. The following table presents information concerning the
Company's North American, European and other operations during the Year Ended
December 31, 1994, the Transition Period Ended December 31, 1993 and the years
ended June 30, 1993 and 1992:
<CAPTION>
NORTH
AMERICA EUROPE OTHER ELIMINATIONS CONSOLIDATED
-------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1994
Revenue:
Customers........................ $110,278 $11,422 $ 1,093 $ (1,506) $121,287
Inter-company.................... 3,006 2,172 (60) (5,118) --
-------- ------- -------- --------- --------
Total......................... $113,284 $13,594 $ 1,033 $ (6,624) $121,287
======== ======= ======== ======== ========
Income from Operations............. $ 24,617 $ 1,096 $ 482 $ (454) $ 25,741
======== ======= ======== ======== ========
Identifiable Assets................ $ 89,131 $ 2,801 $ (146) $ (971) $ 90,815
======== ======= ======== ======== ========
TRANSITION PERIOD ENDED
DECEMBER 31, 1993
Revenue:
Customers........................ $ 38,585 $ 4,296 $ 2,298 $ (3,534) $ 41,645
Inter-company...................... 502 1,164 1,994 (3,660) --
-------- ------- -------- --------- --------
Total......................... $ 39,087 $ 5,460 $ 4,292 $ (7,194) $ 41,645
======== ======= ======== ======== ========
Loss from Operations............... $(56,509) $ (901) $(10,799) $ (848) $(69,057)
======== ======= ======== ======== ========
Identifiable Assets................ $ 72,010 $ 1,812 $ 5,407 $ 105 $ 79,334
======== ======= ======== ======== ========
JUNE 30, 1993
Revenue:
Customers........................ $ 94,964 $ 8,901 $ 7,589 $ (1,750) $109,704
Inter-company.................... 3,504 4,231 6,858 (14,593) --
-------- ------- -------- --------- --------
Total......................... $ 98,468 $13,132 $ 14,447 $(16,343) $109,704
======== ======= ======== ======== ========
Income (loss) from Operations...... $(54,010) $(3,995) $ 2,300 (1,276) $(56,981)
======== ======= ======== ======== ========
Identifiable Assets................ $115,970 $ 2,048 $ 6,538 $ 3,918 $128,474
======== ======= ======== ======== ========
JUNE 30, 1992
Revenue:
Customers........................ $ 94,057 $16,605 $ 8,856 $ -- $119,518
Inter-company.................... 178 8,264 679 (9,121) --
-------- ------- -------- --------- --------
Total......................... $ 94,235 $24,869 $ 9,535 $ (9,121) $119,518
======== ======= ======== ======== ========
Income (loss) from Operations...... $ (5,226) $ 1,745 $ 3,082 $ (200) $ (599)
======== ======= ======== ======== ========
Identifiable Assets................ $114,973 $ 6,279 $ 6,018 $ 5,592 $132,862
======== ======= ======== ======== ========
</TABLE>
F-26
<PAGE> 68
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) GEOGRAPHIC INFORMATION -- (CONTINUED)
The Company conducts a portion of its operations outside the United States.
At December 31, 1994, $4,288 of cash and cash equivalents predominantly
denominated in Canadian dollars were subject to currency fluctuations. Sales and
transfers between geographic areas are generally priced at market, less an
allowance for marketing costs. No single customer accounted for greater than 10%
of revenues for any of the periods presented.
(18) OTHER INCOME (EXPENSE)
During 1994, the Company settled a judgment issued by the Supreme Court of
Australia commenced by Perfect Information Pty Limited. A reserve of $3,658 had
been recorded to reflect the original amount of the judgment and related legal
fees. In August 1994, the Company reached a revised settlement agreement with
the plaintiff and agreed to pay a total of $2,400 in four equal installments.
Accordingly, a reversal of the overaccrual of $1,096 was recorded in the Year
Ended December 31, 1994.
On September 30, 1994, the Company sold LANSA USA ("Lansa") to Insight
Business Consultants Inc. ("Insight"), a company of which an executive officer
of the Company is the majority shareholder (See Note 19 -- Related Party
Transactions) in exchange for $650, which was paid through the forgiveness of
$250 of amounts payable to Insight and $400 cash to be received in eight equal
monthly installments. The Company has recognized a gain of $778 in 1994 related
to the sale.
During 1994, the Company entered into a settlement agreement with Computer
Associates ("CA") with respect to an action, captioned Parsons Technology Inc.
v. Computer Associates which alleged that CA's tax preparation software package,
CA-Simply Tax (previously known as EasyTax), infringed upon certain of Parson's
copyrights. As a result of the sale of EasyTax to CA, SoftKey was required to
indemnify CA for any loss it might suffer as a result of the Parson's
litigation. The settlement agreement reached between the Company, CA and Parsons
released the Company from its indemnification commitment in connection with the
Parson's litigation. The Company has expensed a total of $900 in 1994, net of
insurance proceeds, related to this settlement.
(19) RELATED PARTY TRANSACTIONS
Sale of Insight Operation
In May 1993, the Company sold the Insight operations of its consulting
division for $25 to an employee group, while retaining the sales and
distribution rights for Lansa software. The employee group formed a new company,
Insight Business Consultants Inc. ("Insight"), the president and majority
shareholder of which is also an executive officer and stockholder of the
Company. In connection with this sale, the Company recorded $1,101 of
restructuring costs for termination of equipment and facility leases, employee
severance, write-off of certain assets, transaction costs and operating losses
until disposition. During the Year Ended December 31, 1994, the Company paid
Insight $2,337 related to systems development and implementation services
rendered under arms-length terms.
Sale of Lansa
On September 30, 1994, the Company sold its wholly-owned subsidiary Lansa
to Insight in exchange for $650. Accordingly, the Company has recorded a gain on
the sale of $778 in its results for the Year Ended December 31, 1994.
F-27
<PAGE> 69
SOFTKEY INTERNATIONAL INC.
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
MARCH
31, DECEMBER 31,
1995 1994
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalent........................................... $ 18,623 $ 12,205
Accounts receivable, less allowances for returns and doubtful
accounts of $7,588 and $6,744, respectively..................... 23,747 16,745
Inventories........................................................ 9,425 9,795
Other current assets............................................... 4,891 8,247
-------- --------
56,686 46,992
Property and equipment, net.......................................... 9,809 9,325
Goodwill, net........................................................ 31,154 32,051
Other assets......................................................... 2,887 2,447
-------- --------
$100,536 $ 90,815
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities........................... $ 21,009 $ 29,455
Current portion of long-term obligations........................... 2,920 2,016
-------- --------
23,929 31,471
LONG-TERM OBLIGATIONS................................................ 15,039 17,536
DEFERRED INCOME TAXES................................................ 4,323 4,323
-------- --------
43,291 53,330
-------- --------
STOCKHOLDERS' EQUITY................................................. 57,245 37,485
-------- --------
$100,536 $ 90,815
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-28
<PAGE> 70
SOFTKEY INTERNATIONAL INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
REVENUES.......................................................... $ 41,004 $ 35,304
COST OF REVENUES.................................................. 12,461 12,410
----------- -----------
GROSS MARGIN.................................................... 28,543 22,894
----------- -----------
OPERATING EXPENSES:
Sales, marketing and support.................................... 8,714 6,499
General and administrative...................................... 5,391 5,963
Research and development........................................ 2,304 1,952
----------- -----------
16,409 14,414
----------- -----------
OPERATING INCOME.................................................. 12,134 8,480
INTEREST EXPENSE, NET............................................. 347 255
----------- -----------
INCOME BEFORE TAXES............................................... 11,787 8,225
PROVISION FOR INCOME TAXES........................................ 1,768 1,934
----------- -----------
NET INCOME........................................................ $ 10,019 $ 6,291
=========== ===========
NET INCOME PER SHARE.............................................. $ 0.45 $ 0.33
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING..................... 22,376,000 19,986,000
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-29
<PAGE> 71
SOFTKEY INTERNATIONAL INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $10,019 $ 6,291
Adjustments to reconcile net income to net cash used for operating
activities:
Depreciation and amortization....................................... 1,899 783
Changes in operating assets and liabilities:
Accounts receivable............................................... (7,002) (2,836)
Accounts payable and accruals..................................... (5,552) (11,019)
Merger and reorganization related accruals........................ (135) (1,718)
Other............................................................. (514) 3,097
------- -------
(1,285) (5,402)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets, net.......................................... (1,486) (385)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases and long-term debt............. (552) (559)
Redemption of Series B preferred stock................................. -- (4,660)
Issuance of common stock, net.......................................... 9,368 5,470
------- -------
8,816 251
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. 373 57
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................. 6,418 (5,479)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... 12,205 22,797
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................. $18,623 $17,318
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-30
<PAGE> 72
SOFTKEY INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements for the three months ended
March 31, 1995 and 1994 are unaudited and reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1994. The results of operations for
the three months ended March 31, 1995 are not necessarily indicative of the
results for the entire year ending December 31, 1995.
The first quarter reporting period for 1995 ended on April 1, 1995 and the
first quarter reporting period for 1994 ended on April 2, 1994. For clarity of
presentation and comparison, the periods from January 1, 1995 to April 1, 1995
and from January 1, 1994 to April 2, 1994 are referred to as the "Three Months
ended March 31, 1995" or the "First Quarter 1995" and "Three Months ended March
31, 1994" or the "First Quarter 1994," respectively, throughout these financial
statements.
2. GOODWILL
Goodwill represents the excess of purchase price over fair market value of
identifiable assets acquired. The Company evaluates the carrying value of
goodwill for possible impairment on an annual and quarterly basis. Based upon
its most recent analysis, the Company believes that no impairment of goodwill
exists at March 31, 1995.
<TABLE>
3. LONG-TERM OBLIGATIONS
<CAPTION>
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
Revolving line-of-credit...................................... $ 7,700 $ 7,700
Related party debt............................................ 1,928 2,123
Capital leases................................................ 2,130 2,411
Accrued minimum royalties..................................... 2,260 2,415
Other......................................................... 3,941 4,903
--------- ---------
17,959 19,552
Less: current portion......................................... (2,920) (2,016)
--------- ---------
$ 15,039 $17,536
========= =========
</TABLE>
4. COMPUTATION OF EARNINGS PER SHARE
Net income per share is computed using the weighted average number of
common and dilutive common stock equivalent shares outstanding during the
period. Dilutive common stock equivalent shares consist of convertible
debentures and notes, convertible Series A and Series B preferred stock in the
First Quarter 1994 and stock options and warrants using the treasury stock
method in both reporting periods. The computations do not include common stock
equivalents where the effect would not be dilutive. Primary earnings per share
computations do not materially differ from fully diluted earnings per share.
F-31
<PAGE> 73
5. COMMITMENTS AND CONTINGENCIES
Competition Act Inquiry (Canada)
On June 10, 1994, the Director of Investigation and Research under the
Competition Act (Canada) (the "Act") commenced an inquiry in Canada under the
non-criminal, reviewable practices provisions of the Act respecting the
activities of SoftKey Software Products Inc. ("SoftKey Software") in the tax
preparation software business in Canada. On June 28, 1994, a court order
requiring SoftKey Software, along with other companies in the Canadian tax
preparation software business, to produce certain documents and information
respecting the Canadian tax preparation software industry was issued by the
Federal Court of Canada Trial Division. SoftKey Software has had discussions
with the staff of the Canadian Bureau of Competition Policy and is currently
cooperating to provide the documents and information specified in the order. At
this time no formal application has been made seeking remedy under the Act.
Management does not currently expect that the outcome of this inquiry will have
a material adverse effect on the Company.
OTHER LITIGATION
The Company is a defendant in various legal actions involving copyright,
breach of contract and various other claims incident to the conduct of its
business. Management does not expect the Company to suffer any material
liability by reason of such actions.
F-32
<PAGE> 74
===============================================================================
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, any Selling Stockholder or the Underwriters. This
Prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any securities other than the shares of Common Stock to which it relates
or an offer to, or a solicitation of, any person in any jurisdiction where such
an offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of the Company or that
information contained herein is correct as of any time subsequent to the date
hereof.
<TABLE>
--------------------------
TABLE OF CONTENTS
--------------------------
<CAPTION>
Page
----
<S> <C>
Available Information................ 2
Documents Incorporated by
Reference.......................... 2
Prospectus Summary................... 3
Risk Factors......................... 5
Use of Proceeds...................... 9
Price Range of Common Stock.......... 9
Dividend Policy...................... 9
Capitalization....................... 10
Selected Financial Data.............. 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 12
Business............................. 26
Management........................... 34
Principal and Selling Stockholders... 36
Description of Capital Stock......... 37
Underwriting......................... 39
Legal Matters........................ 40
Experts.............................. 40
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
===============================================================================
===============================================================================
2,424,044 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
ADAMS, HARKNESS & HILL, INC.
CS FIRST BOSTON
June , 1995
===============================================================================
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<TABLE>
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the offering (all of which will be borne by
the Company and not the Selling Stockholders), other than underwriting discounts
and fees, are estimated as follows:
<S> <C>
Securities and Exchange Commission Registration Fee............................... $ 22,773
NASD Filing Fee................................................................... 7,104
The Nasdaq Stock Market Listing Fee............................................... 17,500
Printing and Engraving Fees....................................................... 125,000
Legal Fees and Expenses........................................................... 120,000
Accounting Fees and Expenses...................................................... 200,000
State Securities Laws Fees and Expenses........................................... 12,000
Transfer Agent and Registrar's Fees and Expenses.................................. 5,000
Miscellaneous..................................................................... 140,623
--------
Total............................................................................. $650,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Underwriting Agreement (a form of which appears as Exhibit 1.1 hereto)
provides for indemnification of the directors and officers of the Company in
certain circumstances.
Section 102 of the Delaware General Corporation Law, as amended, allows a
corporation to eliminate the personal liability of directors of a corporation to
the corporation or to any of its stockholders for monetary damage for a breach
of his fiduciary duty as a director, except in the case where the director
breached his duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or knowingly violated a law, authorized the payment of a
dividend or approved a stock repurchase in violation of Delaware corporate law
or obtained an improper personal benefit.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at its request in such capacity in another
corporation or business association against expenses (including attorney's
fees), judgements, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 8 of the Company's Restated Certificate of Incorporation provides
for elimination of directors' personal liability and indemnification as follows:
"8. LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
8.1 ELIMINATION OF CERTAIN LIABILITIES OF DIRECTORS. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the directors' duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit. If the Delaware
General Corporation Law is amended after approval by the stockholders of this
Section to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. Any
II-1
<PAGE> 76
repeal or modification of this Section, by the stockholders of the Corporation
shall not adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
8.2 INDEMNIFICATION AND INSURANCE
8.2.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer,
of the Corporation or is or was serving at the request of the Corporation, as a
director, officer, employee, or agent of another corporation or of a
partnership, joint venture, trust, or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee, or
agent or in any other capacity while serving as a director, officer, employee,
or agent, shall be indemnified and held harmless by the Corporation to its
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expense, liability, and loss (including
attorneys' fees, judgments, fines, Employee Retirement Income Security Act of
1974 excise taxes or penalties, and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of his or her heirs,
executors, and administrators; provided, however, that the Corporation shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this Section shall be a contract right
and shall include the right to be paid by the Corporation the expenses incurred
defending any such proceeding in advance of its final disposition: provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
8.2.2 NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
this Restated Certificate, Bylaw, agreement, vote of stockholders, or
disinterested directors or otherwise.
8.2.3 INSURANCE. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee, or agent of the
Corporation or another corporation, partnership, joint venture, trust, or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability, or loss under the Delaware General Corporation Law."
SoftKey has purchased directors' and officers' liability insurance which
would indemnify the directors and officers of SoftKey against damages arising
out of certain kinds of claims which might be made against them based on their
negligent acts or omissions while acting in their capacity as such.
II-2
<PAGE> 77
<TABLE>
ITEM 16. EXHIBITS
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
2.1 Amended and Restated Combination Agreement by and among WordStar International
Incorporated, SoftKey Software Products Inc., Spinnaker Software Corporation and
SSC Acquisition Corporation dated as of August 17, 1993, as amended(1)
5.1 Opinion of Neal S. Winneg regarding legality of securities being registered*
23.1 Written consent of Coopers & Lybrand L.L.P.*
23.2 Written consent of Arthur Andersen LLP*
23.3 Written consent of KPMG Peat Marwick LLP*
23.4 Written consent of Deloitte & Touche LLP*
23.5 Written consent of Price Waterhouse LLP*
23.6 Written consent of Neal S. Winneg (contained in the opinion filed as Exhibit
5.1)
24.1 Power of Attorney (included on the signature page of the Registration Statement)
<FN>
- ---------------
* Filed herewith.
(1) Incorporated by reference to schedules included in the Company's definitive
Joint Management Information Circular and Proxy Statement dated December 27,
1993 (No. 33-73422).
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement; (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the change in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of the Registration Fee" table in the
effective registration statement; (iii) to include any material information
with respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section
II-3
<PAGE> 78
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 and Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim of indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in a successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cambridge, the Commonwealth of Massachusetts on June
9, 1995.
SOFTKEY INTERNATIONAL INC.
By: /s/ MICHAEL J. PERIK
---------------------------------
Michael J. Perik
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated. Each person whose signature appears below hereby
authorizes Neal S. Winneg and R. Scott Murray and each of them, with full power
of substitution, to execute in the name and on behalf of such person any
amendment (including any post-effective amendment) to this Registration
Statement (or any other registration statement for the same offering that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act) and
to file the same, with exhibits thereto, and other documents in connection
therewith, making such changes in this Registration Statement as the person(s)
so acting deems appropriate, and appoints each of such persons, each with full
power of substitution, attorney-in-fact to sign any amendment (including any
post-effective amendment) to this Registration Statement (or any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act) and to file the same, with
exhibits thereto, and other documents in connection therewith.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL J. PERIK Chairman of the Board and June 9, 1995
- ------------------------------------- Chief Executive Office
Michael J. Perik (principal executive officer)
/s/ R. SCOTT MURRAY Chief Financial Officer June 9, 1995
- ------------------------------------- (principal financial and accounting
R. Scott Murray officer)
/s/ KEVIN O'LEARY President and Director June 9, 1995
- -------------------------------------
Kevin O'Leary
/s/ MICHAEL BELL Director June 9, 1995
- -------------------------------------
Michael Bell
/s/ ROBERT GAGNON Director June 9, 1995
- -------------------------------------
Rober Gagnon
/s/ ROBERT RUBINOFF Director June 9, 1995
- -------------------------------------
Robert Rubinoff
/s/ SCOTT M. SPERLING Director June 9, 1995
- -------------------------------------
Scott M. Sperling
</TABLE>
II-5
<PAGE> 80
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------ ----
<C> <S> <C>
1.1 Form of Underwriting Agreement*
2.1 Amended and Restated Combination Agreement by and among WordStar
International Incorporated, SoftKey Software Products Inc., Spinnaker
Software Corporation and SSC Acquisition Corporation dated as of August
17, 1993, as amended(1)
5.1 Opinion of Neal S. Winneg regarding legality of securities being
registered*
23.1 Written consent of Coopers & Lybrand L.L.P.*
23.2 Written consent of Arthur Andersen LLP*
23.3 Written consent of KPMG Peat Marwick LLP*
23.4 Written consent of Deloitte & Touche LLP*
23.5 Written consent of Price Waterhouse LLP*
23.6 Written consent of Neal S. Winneg (contained in the opinion filed as
Exhibit 5.1)
24.1 Power of Attorney (included on the signature page of the Registration
Statement)
<FN>
- ---------------
* Filed herewith.
(1) Incorporated by reference to schedules included in the Company's definitive
Joint Management Information Circular and Proxy Statement dated December 27,
1993 (No. 33-73422).
</TABLE>
<PAGE> 1
EXHIBIT 1.1
Draft 6/9/95
2,424,044 Shares
SOFTKEY INTERNATIONAL INC.
Common Stock
UNDERWRITING AGREEMENT
------------------------
, 1995
----------
MONTGOMERY SECURITIES
ADAMS, HARKNESS & HILL, INC.
CS FIRST BOSTON CORPORATION
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. INTRODUCTORY. SoftKey International Inc., a
Delaware corporation (the "Company"), proposes to issue and sell
2,000,000 shares of its authorized but unissued Common Stock (the
"Common Stock") and certain stockholders of the Company named in
Schedule B annexed hereto (the "Selling Stockholders") propose to
sell an aggregate of 424,044 shares of the Company's issued and
outstanding Common Stock to the several underwriters named in
Schedule A annexed hereto (the "Underwriters"), for whom you are
acting as Representatives. Said aggregate of 2,424,044 shares are
herein called the "Firm Common Shares." In addition, the Company
proposes to grant to the Underwriters an option to purchase up to
363,607 additional shares of Common Stock (the "Optional Common
Shares"), as provided in Section 5 hereof. The Firm Common Shares
and, to the extent such option is exercised, the Optional Common
Shares are hereinafter collectively referred to as the "Common
Shares."
You have advised the Company and the Selling Stockholders
that the Underwriters propose to make a public offering of their
respective portions of the Common Shares on the effective date of
the registration statement hereinafter referred to, or as soon
thereafter as in your judgment is advisable.
<PAGE> 2
The Company and each of the Selling Stockholders hereby
confirm their respective agreements with respect to the purchase
of the Common Shares by the Underwriters as follows:
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the several Underwriters
that:
(a) A registration statement on Form S-3 (File No.
33- ) with respect to the Common Shares has been prepared by
the Company in conformity in all material respects with the
requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such
registration statement an amendment or amendments to such
registration statement, which amendment or amendments have
been or will be similarly prepared. There have been
delivered to you two signed copies of such registration
statement and amendments, together with two copies of each
exhibit filed therewith. Conformed copies of such
registration statement and amendments (but without exhibits)
and of the related preliminary prospectus have been delivered
to you in such reasonable quantities as you have requested
for each of the Underwriters. The Company will next file
with the Commission one of the following: (i) prior to ef-
fectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, or
(ii) a final prospectus in accordance with Rules 430A and
424(b) of the Rules and Regulations. As filed, such amend-
ment and form of final prospectus, or such final prospectus,
shall include all Rule 430A Information (as hereinafter
defined) and, except to the extent that you shall agree in
writing to a modification, shall be in all substantive
respects in the form furnished to you prior to the date and
time that this Agreement was executed and delivered by the
parties hereto, or, to the extent not completed at such date
and time, shall contain only such specific additional
information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company shall have
previously advised you in writing would be included or made
therein.
The term "Registration Statement" as used in this
Agreement shall mean such registration statement at the time
such registration statement becomes effective and, in the
event any post-effective amendment thereto becomes effective
-2-
<PAGE> 3
prior to the First Closing Date (as hereinafter defined),
shall also mean such registration statement as so amended;
provided, however, that such term shall also include all Rule
430A Information deemed to be included in such registration
statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regula-
tions. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph
and any preliminary prospectus included in the Registration
Statement at the time it becomes effective that omits Rule
430A Information. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Common
Shares in the form in which it is first filed with the Com-
mission pursuant to Rule 424(b) of the Rules and Regulations
or, if no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, shall mean the form of final pro-
spectus included in the Registration Statement at the time
such registration statement becomes effective. The term
"Rule 430A Information" means information with respect to the
Common Shares and the offering thereof permitted to be
omitted from the Registration Statement when it becomes ef-
fective pursuant to Rule 430A of the Rules and Regulations.
Any reference herein to any Preliminary Prospectus or the
Prospectus shall be deemed to refer to and include the
documents incorporated by reference therein pursuant to Form
S-3 under the Act, as of the date of such Preliminary Pro-
spectus or Prospectus, as the case may be.
(b) The Commission has not issued any order preventing
or suspending the use of any Preliminary Prospectus, and each
Preliminary Prospectus has conformed in all material respects
to the requirements of the Act and the Rules and Regulations
and, as of its date, has not included any untrue statement of
a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circum-
stances under which they were made, not misleading; and at
the time the Registration Statement becomes effective, and at
all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and
the Prospectus, and any amendments or supplements thereto,
will contain all material statements and information required
to be included therein by the Act and the Rules and Regula-
tions and will in all material respects conform to the re-
quirements of the Act and the Rules and Regulations, and
neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading; provided, however, no
-3-
<PAGE> 4
representation or warranty contained in this subsection 2(b)
shall be applicable to information contained in or omitted
from any Preliminary Prospectus, the Registration Statement,
the Prospectus or any such amendment or supplement in reli-
ance upon and in conformity with written information fur-
nished to the Company by or on behalf of any Underwriter,
directly or through the Representatives, specifically for use
in the preparation thereof. The documents incorporated by
reference in the Prospectus, when they were filed with the
Commission, conformed in all material respects to the re-
quirements of the Exchange Act and the rules and regulations
of the Commission thereunder, and none of such documents
contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity
other than the subsidiaries listed in Exhibit 21 to the An-
nual Report on Form 10-K for the Company's most recent fiscal
year, except those not required to be so listed (such
subsidiaries, as so listed, "Subsidiaries"). The Company and
each of its Subsidiaries have been duly incorporated and are
validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, with
full power and authority (corporate and other) to own and
lease their properties and conduct their respective
businesses as described in the Prospectus; the Company owns
all of the outstanding capital stock of its Subsidiaries free
and clear of all claims, liens, charges and encumbrances; the
Company and each of its Subsidiaries are in possession of and
operating in compliance with all authorizations, licenses,
permits, consents, certificates and orders material to the
conduct of their respective businesses, all of which are
valid and in full force and effect; the Company and each of
its Subsidiaries are duly qualified to do business and in
good standing as foreign corporations in each jurisdiction in
which the ownership or leasing of properties or the conduct
of their respective businesses requires such qualification,
except for jurisdictions in which the failure to so qualify
would not have a material adverse effect upon the Company or
the Subsidiary; and no proceeding has been instituted in any
such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority
or qualification.
(d) The Company had, as of the date set forth in the
Prospectus, an authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the
-4-
<PAGE> 5
Prospectus; the issued and outstanding shares of Common Stock
have been duly authorized and validly issued, are fully paid
and nonassessable, are designated for quotation on the Nasdaq
National Market, have been issued in compliance with all
federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities and conform to
the description thereof contained in the Prospectus. All
issued and outstanding shares of capital stock of each
Subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. Except
as disclosed in or contemplated by the Prospectus, the fi-
nancial statements of the Company, and the related notes
thereto, included in the Prospectus, neither the Company nor
any Subsidiary has outstanding any options to purchase, or
any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its
capital stock or any such options, rights, convertible se-
curities or obligations, other than rights granted under the
stock purchase agreement dated July 14, 1992 between Wordstar
International Incorporated and Elron Electronic Industries
Ltd.
(e) The Common Shares to be sold by the Company have
been duly authorized and, when issued, delivered and paid for
in the manner set forth in this Agreement, will be duly au-
thorized, validly issued, fully paid and nonassessable and
will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to sub-
scribe for or purchase securities exist with respect to the
issuance and sale of the Common Shares by the Company
pursuant to this Agreement. No stockholder of the Company
has any right which has not been satisfied or waived to
require the Company to register the sale of any shares owned
by such stockholder under the Act in the public offering
contemplated by this Agreement. No further approval or
authority of the stockholders or the Board of Directors of
the Company will be required for the transfer and sale of the
Common Shares to be sold by the Selling Stockholders or the
issuance and sale of the Common shares to be sold by the
Company as contemplated herein.
(f) The Company has full legal right, power and au-
thority to enter into this Agreement and perform the trans-
actions contemplated hereby. This Agreement has been duly
authorized, executed and delivered by the Company and con-
stitutes a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
-5-
<PAGE> 6
The making and performance of this Agreement by the Company
and the consummation of the transactions herein contemplated
will not violate any provisions of the certificate of
incorporation, as restated and amended, or bylaws, as currently
in effect, or other organizational documents, of the Company or
any of its Subsidiaries, and will not conflict with, result in
the breach or violation of, or constitute, either by itself or
upon notice or the passage of time or both, a default under
any material agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to
which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries or any of their
respective properties may be bound, any statute or any au-
thorization, judgment, decree, order, rule or regulation of
any court or any regulatory body, administrative agency or
other governmental body applicable to the Company or any of
its Subsidiaries or any of their respective properties. No
consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental
body is required for the execution and delivery of this
Agreement or the consummation of the transactions contem-
plated by this Agreement, except for compliance with the Act,
the Blue Sky laws applicable to the public offering of the
Common Shares by the several Underwriters and the clearance
of such offering with the National Association of Securities
Dealers, Inc. (the "NASD").
(g) Coopers & Lybrand L.L.P., Arthur Andersen LLP, KPMG
Peat Marwick LLP, Price Waterhouse LLP and Deloitte & Touche
LLP, who have expressed their respective opinions with
respect to the financial statements and schedules filed with
the Commission as a part of the Registration Statement and
included in the Prospectus and in the Registration Statement,
are independent accountants as required by the Act and the
Rules and Regulations.
(h) The annual audited financial statements and
schedules of the Company, included in the Registration
Statement and the Prospectus present fairly the financial
position of the Company, as of the respective dates of such
financial statements and schedules, and the results of
operations and changes in financial position of the Company
for the respective periods covered thereby. Such statements,
schedules and related notes have been prepared in accordance
with generally accepted accounting principles applied on a
consistent basis as certified by the independent accountants
named in subsection 2(g). Other than the quarterly financial
statements included in the Registration Statement, no other
financial statements or schedules are required to be included
-6-
<PAGE> 7
in the Registration Statement. The selected financial data
set forth in the Prospectus under the captions "Capitaliza-
tion" and "Selected Financial Data" fairly present the
information set forth therein on the basis stated in the
Registration Statement.
(i) Except as disclosed in the Prospectus, and except
as to defaults which individually or in the aggregate would
not be material to the Company, neither the Company nor any
of its Subsidiaries is in violation or default of any pro-
vision of its certificate of incorporation, as restated and
amended, or bylaws, as currently in effect, or other
organizational documents, or is in breach of or default with
respect to any provision of any agreement, judgment, decree,
order, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which it is a party
or by which it or any of its properties are bound; and there
does not exist any state of facts which constitutes an event
of default on the part of the Company or any such Subsidiary
as defined in such documents or which, with notice or lapse
of time or both, would constitute such an event of default.
(j) There are no contracts or other documents required
to be described in the Registration Statement or to be filed
as exhibits to the Registration Statement by the Act or by
the Rules and Regulations which have not been described or
filed as required. The contracts so described in the Pro-
spectus are in full force and effect on the date hereof; and
neither the Company nor any of its Subsidiaries, nor, to the
best of the Company's knowledge, any other party is in breach
of or default under any of such contracts.
(k) Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company, and
the related notes thereto, included in the Prospectus, there
are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge,
threatened to which the Company or any of its Subsidiaries is
or may be a party or of which property owned or leased by the
Company or any of its Subsidiaries is or may be the subject,
or related to environmental or discrimination matters, which
actions, suits or proceedings might, individually or in the
aggregate, prevent or adversely affect the transactions
contemplated by this Agreement or result in a material
adverse change in the condition (financial or otherwise),
properties, business, results of operations or prospects of
the Company and its Subsidiaries, taken as a whole; and no
labor disturbance by the employees of the Company or any of
its Subsidiaries exists or is imminent which might be
-7-
<PAGE> 8
expected to affect adversely such condition, properties,
business, results of operations or prospects. Neither the
Company nor any of its Subsidiaries is a party or subject to
the provisions of any material injunction, judgment, decree
or order of any court, regulatory body, administrative agency
or other governmental body.
(l) The Company or the applicable Subsidiary has good
and marketable title to all the properties and assets re-
flected as owned in the financial statements hereinabove
described (or elsewhere in the Prospectus), subject to no
lien, mortgage, pledge, charge or encumbrance of any kind
except (i) those, if any, reflected in such financial
statements (or elsewhere in the Prospectus) or (ii) those
which are not material in amount and do not adversely affect
the use made and proposed to be made of such property by the
Company and its Subsidiaries. The Company or the applicable
Subsidiary holds its leased properties under valid and
binding leases, with such exceptions as are not materially
significant in relation to the business of the Company.
Except as disclosed in the Prospectus, the Company owns or
leases all such properties as are necessary to its operations
as now conducted.
(m) Since the respective dates as of which information
is given in the Registration Statement and Prospectus, and
except as described in or specifically contemplated by the
Prospectus: (i) the Company and its Subsidiaries have not
incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material agreement
or other transaction which is not in the ordinary course of
business; (ii) the Company and its Subsidiaries have not
sustained any material loss or interference with their
respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered
by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its capital
stock, and the Company and its Subsidiaries are not in
default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any
change in the Company's capital stock (other than upon the
sale of the Common Shares hereunder and upon the exercise of
options, warrants and the exchange of exchangeable non-voting
shares (the "Exchangeable Shares") described in the
Registration Statement) or indebtedness material to the
Company and its Subsidiaries, taken as a whole (other than in
the ordinary course of business); and (v) there has not been any
material adverse change in the condition (financial or otherwise),
-8-
<PAGE> 9
business, properties, results of operations or prospects of
the Company and its Subsidiaries, taken as a whole.
(n) Except as disclosed in or specifically contemplated
by the Prospectus, the Company and its Subsidiaries have
sufficient trademarks, trade names, patent rights,
copyrights, licenses, approvals and governmental au-
thorizations to conduct their businesses as now conducted;
the expiration of any trademarks, trade names, patent rights,
copyrights, licenses, approvals or governmental
authorizations would not have a material adverse effect on
the condition (financial or otherwise), business or results
of operations of the Company and its Subsidiaries taken as a
whole; and the Company has no knowledge of any material
infringement by it or its Subsidiaries of trademark, trade
name, patent, copyright, licenses, trade secret or other
similar rights of others, and there is no claim being made
against the Company or its Subsidiaries regarding trademark,
trade name, patent, copyright, license, trade secret or other
infringement which could have a material adverse effect on
the condition (financial or otherwise), business or results
of operations of the Company and its Subsidiaries, taken as a
whole.
(o) The Company has not been advised, and has no reason
to believe, that either it or any of its Subsidiaries is not
conducting business in compliance with all applicable laws,
rules and regulations of the jurisdictions in which it is
conducting business, including, without limitation, all ap-
plicable local, state and federal environmental laws and
regulations; except where failure to be so in compliance
would not materially adversely affect the condition (finan-
cial or otherwise), business or results of operations or
prospects of the Company and its Subsidiaries, taken as a
whole.
(p) The Company and its Subsidiaries have filed all
necessary federal, state and foreign income and franchise tax
returns and have paid all taxes shown as due thereon; and the
Company has no knowledge of any tax deficiency which has been
asserted or threatened against the Company or its
Subsidiaries which could materially and adversely affect the
business, operations or properties of the Company and its
Subsidiaries, taken as a whole.
(q) The Company is not an "investment company" within
the meaning of the Investment Company Act of 1940, as
amended.
-9-
<PAGE> 10
(r) The Company has not distributed and will not dis-
tribute prior to the First Closing Date any offering material
in connection with the offering and sale of the Common Shares
other than the Preliminary Prospectus, Prospectus, the
Registration Statement and the other materials permitted by
the Act.
(s) The Company or its Subsidiaries maintains insurance
of the types and in the amounts generally deemed adequate for
its business and the business of its Subsidiaries, including,
but not limited to, insurance covering real and personal
property owned or leased by the Company and its Subsidiaries
against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which
insurance is in full force and effect.
(t) To the knowledge of the Company, neither the
Company nor any of its Subsidiaries has at any time during
the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or
other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws
of the United States of any jurisdiction thereof.
(u) The Company has not taken and will not take, di-
rectly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate
the sale or resale of the Common Shares.
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLING STOCKHOLDERS.
(a) Each of the Selling Stockholders represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has (or upon exercise
of employee stock options or exchange of Exchangeable
Shares, will have), and immediately prior to the First
Closing Date hereinafter mentioned will have, good and
valid title to the Common Shares proposed to be sold by
such Selling Stockholder hereunder on such First Closing
Date and full legal right, power and authority to enter
into this Agreement and to sell, assign, transfer and
deliver such Common Shares hereunder, free and clear of
all voting trust arrangements, liens, encumbrances,
equities, security interests, restrictions and claims
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<PAGE> 11
whatsoever; and upon delivery of and payment for such
Common Shares hereunder, the Underwriters will acquire
good and valid title thereto, free and clear of all
liens, encumbrances, equities, claims, restrictions,
security interests, voting trusts or other defects of
title whatsoever.
(ii) Such Selling Stockholder has executed and
delivered an Irrevocable Power of Attorney and caused to be
executed and delivered on his behalf a Custody Agreement
(hereinafter collectively referred to as the "Stockholders
Agreement") and in connection herewith, such Selling
Stockholder further represents, warrants and agrees that
such Selling Stockholder has deposited in custody, under
the Stockholders Agreement, with the agent named therein
(the "Agent") as custodian, certificates in negotiable
form for the Common Shares to be sold hereunder by such
Selling Stockholder, for the purpose of further delivery
pursuant to this Agreement. Such Selling Stockholder
agrees that the Common Shares to be sold by such Selling
Stockholder as deposited with the Agent are subject to
the interests of the Company and the Underwriters, that
the arrangements made for such custody are to that
extent irrevocable, and that the obligations of such
Selling Stockholder hereunder shall not be terminated,
except as provided in this Agreement or in the
Stockholders Agreement, by any act of such Selling
Stockholder, by operation of law, by the death or
incapacity of such Selling Stockholder or by the
occurrence of any other event. If the Selling
Stockholder should die or become incapacitated, or if
any other event should occur, before the delivery of the
Common Shares hereunder, the documents evidencing Common
Shares then on deposit with the Agent shall be delivered
by the Agent in accordance with the terms and conditions
of this Agreement as if such death, incapacity or other
event had not occurred, regardless of whether or not the
Agent shall have received notice thereof. This
Agreement and the Stockholders Agreement have been duly
executed and delivered by or on behalf of such Selling
Stockholder and the form of such Stockholders Agreement
has been delivered to you.
(iii) The performance of this Agreement and the
Stockholders Agreement and the consummation of the
transactions contemplated hereby and by the Stockholders
Agreement will not result in a breach or violation by
such Selling Stockholder of any of the terms or provi-
sions of, or constitute a default by such Selling
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<PAGE> 12
Stockholder under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement,
lease, franchise, license or other agreement or in-
strument to which such Selling Stockholder is a party or
by which such Selling Stockholder or any of its prop-
erties is bound, any statute, or any judgment, decree,
order, rule or regulation of any court or governmental
agency or body applicable to such Selling Stockholder or
any of its properties.
(iv) Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action de-
signed to or which has constituted or which might rea-
sonably be expected to cause or result in stabilization
or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Common
Shares.
(v) To the extent that any statements or omissions
made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or
supplement thereto are made in reliance upon and in
conformity with written information furnished to the
Company by such Selling Stockholder expressly for use
therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any
further amendments or supplements to the Registration
Statement and the Prospectus will, when they become
effective or are filed with the Commission, as the case
may be, conform in all material respects to the
requirements of the Act and the rules and regulations of
the Commission thereunder and not 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 not misleading.
(vi) Such Selling Stockholder is not aware that any
of the representations and warranties set forth in
Section 2 above is untrue or inaccurate in any material
respect.
(b) Each of the Selling Stockholders agrees with the
Company and the Underwriters not to offer to sell, sell or
contract to sell or otherwise dispose of any shares of Common
Stock or securities convertible into or exchangeable for any
shares of Common Stock, for a period of 90 days after the
first date that any of the Common Shares are released by you
for sale to the public, without the prior written consent of
Montgomery Securities in accordance herewith, which consent
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<PAGE> 13
may be withheld at the sole discretion of Montgomery
Securities.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE UNDER-
WRITERS. The Representatives, on behalf of the several Under-
writers, represent and warrant to the Company and to the Selling
Stockholders that the information set forth (i) on the cover page
of the Prospectus with respect to price, underwriting discounts
and commissions and terms of offering and (ii) under "Underwrit-
ing" in the Prospectus was furnished to the Company by and on
behalf of the Underwriters for use in connection with the prepa-
ration of the Registration Statement and the Prospectus and is
correct in all material respects. The Representatives represent
and warrant that they have been authorized by each of the other
Underwriters as the Representatives to enter into this Agreement
on its behalf and to act for it in the manner herein provided.
SECTION 5. PURCHASE, SALE AND DELIVERY OF COMMON SHARES. On
the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set
forth, (i) the Company agrees to issue and sell to the Under-
writers 2,000,000 of the Firm Common Shares, and (ii) the Selling
Stockholders agree, severally and not jointly, to sell to the
Underwriters in the respective amounts set forth in Schedule B
hereto, an aggregate of 424,044 of the Firm Common Shares. The
Underwriters agree, severally and not jointly, to purchase from
the Company and the Selling Stockholders, respectively, the number
of Firm Common Shares described below. The purchase price per
share to be paid by the several Underwriters to the Company and to
the Selling Stockholders, respectively, shall be $_____ per share.
The obligation of each Underwriter to the Company shall be to
purchase from the Company that number of full shares which (as
nearly as practicable, as determined by you) bears to 2,000,000
the same proportion as the number of shares set forth opposite the
name of such Underwriter in Schedule A hereto bears to the total
number of Firm Common Shares. The obligation of each Underwriter
to the Selling Stockholders shall be to purchase from the Selling
Stockholders that number of full shares which (as nearly as
practicable, as determined by you) bears to 424,044 the same
proportion as the number of shares set forth opposite the name of
such Underwriter in Schedule A hereto bears to the total number of
Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be
purchased by the Underwriters and payment therefor shall be made
at the offices of Montgomery Securities, 600 Montgomery Street,
San Francisco, California (or such other place as may be agreed
upon by the Company and the Representatives) at such time and
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<PAGE> 14
date, not later than the third full business day following the
first date that any of the Common Shares are released by you for
sale to the public, as you shall designate by at least 48 hours
prior notice to the Company (or at such other time and date, not
later than one week after such third full business day as may be
agreed upon by the Company and the Representatives) (the "First
Closing Date"); provided, however, that if the Prospectus is at
any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the
third full business day following the first date that any of the
Common Shares are released by you for sale to the public or the
date that is 48 hours after the date that the Prospectus has been
so recirculated.
Delivery of certificates for the Firm Common Shares shall be
made by or on behalf of the Company and the Selling Stockholders
to you, for the respective accounts of the Underwriters with re-
spect to the Firm Common Shares to be sold by the Company and by
the Selling Stockholders against payment by you, for the accounts
of the several Underwriters, of the purchase price therefor by
certified or official bank checks payable in next day funds to the
order of the Company and of the Agent in proportion to the number
of Firm Common Shares to be sold by the Company and the Selling
Stockholders, respectively. The certificates for the Firm Common
Shares shall be registered in such names and denominations as you
shall have requested at least two full business days prior to the
First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at
a location in New York, New York, as may be designated by you.
Time shall be of the essence, and delivery at the time and place
specified in this Agreement is a further condition to the obli-
gations of the Underwriters.
In addition, on the basis of the representations, warranties
and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option
to the several Underwriters to purchase, severally and not
jointly, up to an aggregate of 363,607 Optional Common Shares at
the purchase price per share to be paid for the Firm Common
Shares, for use solely in covering any over-allotments made by you
for the account of the Underwriters in the sale and distribution
of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 30 days
after the first date that any of the Common Shares are released by
you for sale to the public, upon notice by you to the Company
setting forth the aggregate number of Optional Common Shares as to
which the Underwriters are exercising the option, the names and
denominations in which the certificates for such shares are to be
registered and the time and place at which such certificates will
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<PAGE> 15
be delivered. Such time of delivery (which may not be earlier
than the First Closing Date), being herein referred to as the
"Second Closing Date," shall be determined by you, but, if at any
time other than the First Closing Date, shall not be earlier than
three nor later than five full business days after delivery of
such notice of exercise. The number of Optional Common Shares to
be purchased by each Underwriter shall be determined by multi-
plying the number of Optional Common Shares to be sold by the
Company pursuant to such notice of exercise by a fraction, the
numerator of which is the number of Firm Common Shares to be
purchased by such Underwriter as set forth opposite its name in
Schedule A and the denominator of which is 2,424,044 (subject to
such adjustments to eliminate any fractional share purchases as
you in your discretion may make). Certificates for the Optional
Common Shares will be made available for checking and packaging on
the business day preceding the Second Closing Date at a location
in New York, New York, as may be designated by you. The manner of
payment for and delivery of the Optional Common Shares shall be
the same as for the Firm Common Shares purchased from the Company
as specified in the two preceding paragraphs. At any time before
lapse of the option, you may cancel such option by giving written
notice of such cancellation to the Company. If the option is
cancelled or expires unexercised in whole or in part, the Company
will deregister under the Act the number of Option Shares as to
which the option has not been exercised.
You have advised the Company and the Selling Stockholders
that each Underwriter has authorized you to accept delivery of its
Common Shares, to make payment and to receipt therefor. You,
individually and not as the Representatives of the Underwriters,
may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not
have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Under-
writer, but any such payment shall not relieve such Underwriter
from any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters
propose to make a public offering of their respective portions of
the Common Shares as soon after the effective date of the Regis-
tration Statement as in the judgment of the Representatives is
advisable and at the public offering price set forth on the cover
page of and on the terms set forth in the Prospectus.
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants
and agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not
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<PAGE> 16
effective at the time and date that this Agreement is ex-
ecuted and delivered by the parties hereto, to become ef-
fective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations,
or the filing of the Prospectus is otherwise required under
Rule 424(b) of the Rules and Regulations, the Company will
file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regu-
lations within the time period prescribed and will provide
evidence satisfactory to you of such timely filing. The
Company will promptly advise you in writing (i) of the re-
ceipt of any comments of the Commission, (ii) of any request
of the Commission for amendment of or supplement to the
Registration Statement (either before or after it becomes
effective), any Preliminary Prospectus or the Prospectus or
for additional information, (iii) when the Registration
Statement shall have become effective and (iv) of the issu-
ance by the Commission of any stop order suspending the ef-
fectiveness of the Registration Statement or of the insti-
tution of any proceedings for that purpose. If the Commis-
sion shall enter any such stop order at any time, the Company
will use its best efforts to obtain the lifting of such order
at the earliest possible moment. The Company will not file
any amendment or supplement to the Registration Statement
(either before or after it becomes effective), any Prelimi-
nary Prospectus or the Prospectus of which you have not been
furnished with a copy a reasonable time prior to such filing
or to which you reasonably object or which is not in com-
pliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Com-
mission, promptly upon your request, any amendments or
supplements to the Registration Statement or the Prospectus
which in your judgment may be necessary or advisable to en-
able the several Underwriters to continue the distribution of
the Common Shares and will use its best efforts to cause the
same to become effective as promptly as possible. The Com-
pany will fully and completely comply with the provisions of
Rule 430A of the Rules and Regulations with respect to in-
formation omitted from the Registration Statement in reliance
upon such Rule.
(c) If at any time within the nine-month period re-
ferred to in Section 10(a)(3) of the Act during which a
prospectus relating to the Common Shares is required to be
delivered under the Act any event occurs, as a result of
which the Prospectus, including any amendments or supple-
ments, would include an untrue statement of a material fact,
or omit to state any material fact required to be stated
-16-
<PAGE> 17
therein or necessary to make the statements therein not
misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements, to
comply with the Act or the Rules and Regulations, the Company
will promptly advise you thereof and will promptly prepare
and file with the Commission, at its own expense, an amend-
ment or supplement which will correct such statement or
omission or an amendment or supplement which will effect such
compliance and will use its best efforts to cause the same to
become effective as soon as possible; and, in case any Un-
derwriter is required to deliver a prospectus after such
nine-month period, the Company upon request, but at the ex-
pense of such Underwriter, will promptly prepare such
amendment or amendments to the Registration Statement and
such Prospectus or Prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the
Act.
(d) As soon as practicable, but not later than 45 days
after the end of the first quarter ending after one year
following the "effective date of the Registration Statement"
(as defined in Rule 158(c) of the Rules and Regulations), the
Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a
period of 12 consecutive months beginning after the effective
date of the Registration Statement which will satisfy the
provisions of the last paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by
law to be delivered in connection with sales by an Under-
writer or dealer, the Company, at its expense, but only for
the nine-month period referred to in Section 10(a)(3) of the
Act, will furnish to you and the Selling Stockholders or mail
to your order copies of the Registration Statement, the
Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents, in each case as soon as
available and in such quantities as you and the Selling
Stockholders may request, for the purposes contemplated by
the Act.
(f) The Company shall cooperate with you and your
counsel in order to qualify or register the Common Shares for
sale under (or obtain exemptions from the application of) the
Blue Sky laws of such jurisdictions as you designate, will
comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably
required for the distribution of the Common Shares. The
Company shall not be required to qualify as a foreign cor-
poration or to file a general consent to service of process
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<PAGE> 18
in any such jurisdiction where it is not presently qualified
or where it would be subject to taxation as a foreign cor-
poration. The Company will advise you promptly of the sus-
pension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale
or trading in any jurisdiction or any initiation or threat of
any proceeding for any such purpose, and in the event of the
issuance of any order suspending such qualification, regis-
tration or exemption, the Company, with your cooperation,
will use its best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the
Company will furnish to the Representatives and, upon request
of the Representatives, to each of the other Underwriters:
(i) as soon as practicable after the end of each fiscal year,
copies of the Annual Report of the Company containing the
balance sheet of the Company as of the close of such fiscal
year and statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of the
Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities ex-
change; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders
of its Common Stock.
(h) During the period of 90 days after the first date
that any of the Common Shares are released by you for sale to
the public, without the prior written consent of Montgomery
Securities (which consent may be withheld at the sole
discretion of Montgomery Securities), the Company will not
issue, offer, sell, grant options to purchase or otherwise
dispose of any of the Company's equity securities or any
other securities convertible into or exchangeable with its
Common Stock or other equity security, except that without
consent, the Company may issue shares of Common Stock upon
exercise of stock options outstanding as of the date of the
Prospectus, grant additional options under the Company's
stock option plans consistent with past practices, issue
shares of Common Stock upon conversion, exercise or exchange
of securities outstanding as of the date of the Prospectus
that are convertible into shares of Common Stock and issue shares
of Common Stock in business combinations accounted for as pooling
of interest transactions.
(i) The Company will apply the net proceeds of the sale
of the Common Shares sold by it substantially in accordance
with its statements under the caption "Use of Proceeds" in
the Prospectus.
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<PAGE> 19
(j) The Company will use its best efforts to qualify or
register its Common Stock for sale in non-issuer transactions
under (or obtain exemptions from the application of) the Blue
Sky laws of the State of California (and thereby permit
market making transactions and secondary trading in the
Company's Common Stock in California), will comply with such
Blue Sky laws and will continue such qualifications, regis-
trations and exemptions in effect for a period of five years
after the date hereof.
(k) The Company will use its best efforts to apply
for quotation of the Common Shares on the Nasdaq National Market.
You, on behalf of the Underwriters, may, in your sole dis-
cretion, waive in writing the performance by the Company of any
one or more of the foregoing covenants or extend the time for
their performance.
SECTION 7. PAYMENT OF EXPENSES. Whether or not the trans-
actions contemplated hereunder are consummated or this Agreement
becomes effective or is terminated, the Company and, unless oth-
erwise paid by the Company, the Selling Stockholders agrees to pay
in such proportions as they may agree upon among themselves all
costs, fees and expenses incurred in connection with the perfor-
mance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the
generality of the foregoing, (i) all expenses incident to the
issuance and delivery of the Common Shares (including all printing
and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary issue,
transfer and other stamp taxes in connection with the issuance and
sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel and the Company's independent
accountants, (v) all costs and expenses incurred in connection
with the preparation, printing, filing, shipping and distribution
of the Registration Statement, each Preliminary Prospectus and the
Prospectus (including all exhibits and financial statements) and
all amendments and supplements provided for herein, this Agree-
ment, the Agreement Among Underwriters, the Selected Dealers
Agreement, the Underwriters' Questionnaire, the Underwriters'
Power of Attorney and the Blue Sky memorandum, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of)
all or any part of the Common Shares for offer and sale under the
Blue Sky laws, (vii) the filing fee of the National Association of
Securities Dealers, Inc. and (viii) all other fees, costs and
expenses referred to in Item 14 of the Registration Statement.
The Underwriters may deem the Company to be the primary obligor
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<PAGE> 20
with respect to all costs, fees and expenses to be paid by the
Company and by the Selling Stockholders. Except as provided in
this Section 7, Section 9 and Section 11 hereof, the Underwriters
shall pay all of their own expenses, including the fees and dis-
bursements of their counsel (excluding those relating to quali-
fication, registration or exemption under the Blue Sky laws and
the Blue Sky memorandum referred to above). This Section 7 shall
not affect any agreements relating to the payment of expenses
between the Company and the Selling Stockholders.
SECTION 8. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRIT-
ERS. The obligations of the several Underwriters to purchase and
pay for the Firm Common Shares on the First Closing Date and the
Optional Common Shares on the Second Closing Date shall be subject
to the accuracy of the representations and warranties on the part
of the Company and the Selling Stockholders herein set forth as of
the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the state-
ments of Company officers and the Selling Stockholders made pur-
suant to the provisions hereof, to the performance by the Company
and the Selling Stockholders of their respective obligations
hereunder and to the following additional conditions:
(a) The Registration Statement shall have become ef-
fective not later than 5:00 P.M., Washington, D.C. Time, on
the date of this Agreement, or at such later time as shall
have been consented to by you; if the filing of the Pro-
spectus, or any supplement thereto, is required pursuant to
Rule 424(b) of the Rules and Regulations, the Prospectus
shall have been filed in the manner and within the time pe-
riod required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been
instituted or shall be pending or, to the knowledge of the
Company, the Selling Stockholders or you, shall be contem-
plated by the Commission; and any request of the Commission
for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to
your satisfaction.
(b) You shall be satisfied that since the respective
dates as of which information is given in the Registration
Statement and Prospectus, (i) there shall not have been any
change in the capital stock other than pursuant to the ex-
ercise of outstanding options, warrants and Exchangeable
Shares disclosed in the Prospectus of the Company or any of
its Subsidiaries or any material change in the indebtedness
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<PAGE> 21
(other than in the ordinary course of business) of the Com-
pany or any of its Subsidiaries, (ii) except as set forth or
contemplated by the Registration Statement or the Prospectus,
no material agreement or other transaction shall have been
entered into by the Company or any of its Subsidiaries, which
is not in the ordinary course of business, (iii) no loss or
damage (whether or not insured) to the property of the
Company or any of its Subsidiaries shall have been sustained
which materially and adversely affects the condition
(financial or otherwise), business, results of operations or
prospects of the Company and its Subsidiaries, taken as a
whole, (iv) no legal or governmental action, suit or
proceeding affecting the Company or any of its Subsidiaries
which is material to the Company and its Subsidiaries or
which affects or may affect the transactions contemplated by
this Agreement shall have been instituted or threatened and
(v) there shall not have been any material change in the
condition (financial or otherwise), business, management,
results of operations or prospects of the Company and its
Subsidiaries which makes it impractical or inadvisable in the
judgment of the Representatives to proceed with the public
offering or purchase the Common Shares as contemplated
hereby.
(c) There shall have been furnished to you, as Repre-
sentatives of the Underwriters, on each Closing Date, in form
and substance satisfactory to you, except as otherwise ex-
pressly provided below:
(i)(A) An opinion of Skadden, Arps, Slate, Meagher &
Flom, counsel for the Company, addressed to the
Underwriters and dated the First Closing Date or the
Second Closing Date (in the latter case with respect to
the Company only), as the case may be, to the effect
that:
(1)(a) Such counsel has been orally advised
by the Commission that the Registration Statement
was declared effective under the Act, and, to such
counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or
preventing the use of the Prospectus has been is-
sued and no proceedings for that purpose have been
instituted or are pending or contemplated by the
Commission. Any required filing of the Prospectus
and any supplement thereto pursuant to Rule 424(b)
of the Rules and Regulations has been made in the
manner and within the time period required by such
Rule 424(b);
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<PAGE> 22
(b) The Registration Statement, as of its
effective date, the Prospectus, as of its date, and
each amendment or supplement thereto each appeared
to be appropriately responsive in all material
respects to the requirements of the Act and the
Rules and Regulations, except that in each case
such counsel need express no opinion as to the
financial statements, schedules and other financial
and statistical data included or incorporated by
reference therein or excluded therefrom or as to
the exhibits to the Registration Statement, and
such counsel need not assume any responsibility for
the accuracy, completeness or fairness of the
statements contained in the Registration Statement
or the Prospectus;
(c) To such counsel's knowledge, there are no
leases, contracts, agreements or documents of a
character required to be disclosed in the
Registration Statement or Prospectus or to be filed
as exhibits to the Registration Statement which are
not disclosed or filed, as required;
(d) To such counsel's knowledge, other than
as described or contemplated in the Prospectus,
there are no legal or governmental actions, suits
or proceedings pending or threatened against the
Company which are required to be described in the
Prospectus which are not described as required; and
(e) The documents incorporated by reference
in the Prospectus (except for any financial
statements and schedules included in such documents
as to which such counsel need express no opinion),
when they were filed with the Commission, complied
as to form in all material respects with the re-
quirements of the Exchange Act and the rules and
regulations of the Commission thereunder;
(2) The Company has the requisite corporate
power and authority to enter into this Agreement
and to sell and deliver the Common Shares to be
sold by it to the several Underwriters; this
Agreement has been duly authorized, executed and
delivered by or on behalf of the Company, and is a
valid and binding agreement of the Company
enforceable against the Company in accordance with
its terms, except that enforceability may be
limited by general equitable principles,
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<PAGE> 23
bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally
and except as to those provisions relating to
indemnity or contribution as to which no opinion
need be expressed; and no approval, authorization,
order or consent of any court or governmental
authority or agency is required under the General
Laws of the State of Delaware or the laws of the
Commonwealth of Massachusetts or the United States
of America in connection with the transactions
contemplated by the Company under this Agreement,
except such as have been obtained or made and are in
full force and effect under the Act, such as may be
required under applicable Blue Sky laws in connection
with the purchase and distribution of the Common
Shares by the Underwriters and the clearance of such
offering with the NASD, and such as may be required
under the rules of the Nasdaq National Market;
(3) The execution and delivery of this
Agreement and the consummation of the transactions
herein contemplated will not conflict with, result
in the breach of, or constitute, either by itself
or upon notice or the passage of time or both, a
default under, any material agreement, mortgage, deed
of trust, lease, franchise, license, indenture, permit
or other instrument known to such counsel to which
the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries
or any of its or their property may be bound or
affected, or violate any of the provisions of
the certificate of incorporation or bylaws, or
other organizational documents, of the Company or
any of its Subsidiaries or, so far as is known to
such counsel, violate the Delaware General
Corporation Law or the laws of the Commonwealth of
Massachusetts or the United States of America;
(4) To such counsel's knowledge, no holders
of securities of the Company have rights which have
not been satisfied or waived to the registration of
shares of Common Stock or other securities because
of the filing of the Registration Statement by the
Company or the offering contemplated hereby;
(5) To such counsel's knowledge, this
Agreement and the Stockholders Agreement have been
duly executed and delivered by or on behalf of each
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<PAGE> 24
of the Selling Stockholders; and, to the knowledge
of such counsel, the performance of this Agreement
and the Stockholders Agreement and the consummation
of the transactions herein contemplated by the
Selling Stockholders will not result in a breach
of, or constitute a default under (A) any agreement
or instrument filed as an exhibit to the
Registration Statement or any document incorporated
by reference therein, or (B) any agreement or
instrument known to such counsel to which the
Company is a party; and to such counsel's
knowledge, no approval, authorization, order or
consent of any court, regulatory body, administra-
tive agency or governmental authority or agency is
required under the General Laws of the State of
Delaware or the laws of the Commonwealth of
Massachusetts or United States of America in
connection with transactions contemplated by any of
the Selling Stockholders under this Agreement,
except such as have been obtained and are in full
force and effect under the Act and such as may be
required under the rules of the NASD and applicable
Blue Sky laws;
(6) (A) To such counsel's knowledge,
immediately prior to such Closing Date, each such
Selling Stockholder was the sole registered owner
of the Common Shares to be sold at such Closing
Date by such Selling Stockholder under this
Agreement;
(B) Upon registration of the Common Shares to
be sold by each Selling Stockholder in the name of
the Underwriters in the stock records of the
Company, assuming the Underwriters purchased the
Common Shares in good faith and without notice of
any adverse claim within the meaning of
Section 8-302 of the applicable Uniform Commercial
Code, the Underwriters will have acquired all
rights from each of the Selling Stockholders in the
Common Shares free from any adverse claim, any lien
in favor of the Company and any restrictions on
transfer imposed by the Company; and the owner of
such Common Shares, if other than the Selling
Stockholders, is precluded from asserting against
the Underwriters the ineffectiveness of any
unauthorized endorsement; and
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<PAGE> 25
(7) To such counsel's knowledge, this
Agreement and the Stockholders Agreement are valid
and binding agreements of each of the Selling
Stockholders in accordance with their terms except
that the valid and binding nature of such documents
are subject to general equitable principles,
bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally
and except with respect to those provisions
relating to indemnities or contributions as to
which no opinion need be expressed.
In rendering such opinion, such counsel may rely as
to the matters set forth in paragraphs (4) and (5), on
opinions of other counsel retained by the Selling
Stockholders, as to matters of local law, on opinions of
local counsel, and as to matters of fact, on certifi-
cates of the Selling Stockholders and of officers of the
Company and of governmental officials, in which case
their opinion is to state that they are so doing and
that the Underwriters are justified in relying on such
opinions or certificates and copies of said opinions or
certificates are to be attached to the opinion. Such
counsel shall also include a statement to the effect
that they have participated in conferences with officers
and representatives of the Company, representatives of
the independent accountants for the Company,
representatives of the Underwriters and representatives
of the Underwriters' counsel at which the contents of
the Registration Statement and the Prospectus and
related matters were discussed and, although such
counsel is not passing upon, and does not assume any
responsibility for, the accuracy, completeness or
fairness of the statements contained in the Registration
Statement or the Prospectus and have made no independent
check or verification thereof, on the basis of the
foregoing, no facts have come to such counsel's
attention that have caused them to believe that the
Registration Statement, at the time it became effective,
contained any untrue statement of a material fact or
omitted to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date and as
of the date hereof, contained an untrue statement of a
material fact or omitted to state a material fact
necessary in order to make the statements therein, in
light of the circumstances under which they were made,
not misleading, except that such counsel need not
express any belief with respect to the financial
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<PAGE> 26
statements, schedules and other financial and
statistical data included or incorporated by reference
therein or excluded therefrom or the exhibits to the
Registration Statement.
(B) An opinion of Neal S. Winneg, Vice President
and General Counsel of the Company, addressed to the
Underwriters and dated the First Closing Date or the
Second Closing Date (in the latter case with respect to
the Company only), as the case may be, to the effect
that:
(1) Each of the Company and its Subsidiaries
has been duly incorporated and is validly existing
as a corporation in good standing under the laws of
its jurisdiction of incorporation, is duly quali-
fied to do business as a foreign corporation and is
in good standing in all other jurisdictions where
the ownership or leasing of properties or the
conduct of its business requires such qualifica-
tion, except for jurisdictions in which the failure
to so qualify would not have a material adverse
effect on the Company and its Subsidiaries, taken
as a whole, and the Company has the requisite
corporate power and corporate authority to own its
properties and conduct its business as described in
the Prospectus;
(2) The authorized, issued and outstanding
capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus; all
outstanding shares of Common Stock (including the
Firm Common Shares and any Optional Common Shares)
have been duly and validly issued, are fully paid
and nonassessable, to the knowledge of such counsel
were not issued in violation of or subject to any
preemptive or other similar rights to subscribe for
or purchase any securities, and conform in all
material respects to the description thereof
contained in the Prospectus under the caption
"Description of Capital Stock";
(3) All of the issued and outstanding shares
of the Company's Subsidiaries have been duly and
validly authorized and issued, are fully paid and
nonassessable and are owned beneficially by the
Company free and clear of all liens, encumbrances,
equities, claims, security interests, voting trusts
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<PAGE> 27
or other defects of title whatsoever known to such
counsel;
(4) The certificates evidencing the Common
Shares to be delivered hereunder are in due and
proper form under Delaware law, and when duly
countersigned by the Company's transfer agent and
registrar, and delivered to you or upon your order
against payment of the agreed consideration
therefor in accordance with the provisions of this
Agreement, the Common Shares represented thereby
will be duly authorized and validly issued, fully
paid and nonassessable, will not have been issued
in violation of or subject to any preemptive rights
or other rights to subscribe for or purchase se-
curities and will conform in all respects to the
description thereof contained in the Prospectus;
(5) Except as disclosed in or specifically
contemplated by the Prospectus, to such counsel's
knowledge, there are no outstanding options,
warrants or other rights calling for the issuance
of, and no commitments, plans or arrangements to
issue, any shares of capital stock of the Company
or any security convertible into or exchangeable
for capital stock of the Company;
(6) Such counsel has no reason to believe
that any documents incorporated by reference in the
Prospectus (except for any financial statements and
schedules and other financial data included in such
documents as to which such counsel need express no
opinion), when they were so filed, contained an
untrue statement of a material fact or omitted to
state a material fact necessary in order to make
the statements therein, in the light of the
circumstances under which they were made when such
documents were so filed, not misleading.
(ii) Such opinion or opinions of Hale and Dorr,
counsel for the Underwriters, dated the First Closing
Date or the Second Closing Date, as the case may be,
with respect to the incorporation of the Company, the
sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the
Common Shares, the Registration Statement and the Pro-
spectus and other related matters as you may reasonably
require, and the Company and the Selling Stockholders
shall have furnished to such counsel such documents and
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<PAGE> 28
shall have exhibited to them such papers and records as
they may reasonably request for the purpose of enabling
them to pass upon such matters. In connection with such
opinions, such counsel may rely on representations or
certificates of officers of the Company and governmental
officials.
(iii) A certificate of the Company executed by the
Chairman of the Board or President and the chief fi-
nancial or accounting officer of the Company, dated the
First Closing Date or the Second Closing Date, as the
case may be, to the effect that:
(1) The representations and warranties of the
Company set forth in Section 2 of this Agreement
are true and correct as of the date of this
Agreement and as of the First Closing Date or the
Second Closing Date, as the case may be, and the
Company has complied with all the agreements and
satisfied all the conditions on its part to be
performed or satisfied on or prior to such Closing
Date;
(2) To the knowledge of such officers, the
Commission has not issued any order preventing or
suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the
Registration Statement or any amendment thereto; no
stop order suspending the effectiveness of the
Registration Statement has been issued; and to the
best of the knowledge of the respective signers, no
proceedings for that purpose have been substituted
or are pending or contemplated under the Act;
(3) Each of the respective signers of the
certificate has carefully examined the Registration
Statement and the Prospectus; in his opinion and to
his knowledge, the Registration Statement and the
Prospectus and any amendments or supplements
thereto contain all statements required to be made
therein regarding the Company and its Subsidiaries;
and neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto
includes any untrue statement of a material fact or
omits to state any material fact required to be
stated therein or necessary to make the statements
therein not misleading;
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<PAGE> 29
(4) Since the initial date on which the
Registration Statement was filed, no agreement,
transaction or event has been entered into or has
occurred which should have been set forth in an
amendment to the Registration Statement or in a
supplement to or amendment of any prospectus which
has not been disclosed in such a supplement or
amendment;
(5) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus, and except as disclosed in or
contemplated by the Prospectus, there has not been
any material adverse change or a development in-
volving a material adverse change in the condition
(financial or otherwise), business, properties,
results of operations, management or prospects of
the Company and its Subsidiaries; and no legal or
governmental action, suit or proceeding is pending
or threatened against the Company or any of its
Subsidiaries which is material to the Company and
its Subsidiaries taken as a whole, whether or not
arising from transactions in the ordinary course of
business, or which may adversely affect the
transactions contemplated by this Agreement; since
such dates and except as so disclosed, neither the
Company nor any of its Subsidiaries has entered
into any agreement or other transaction which is
not in the ordinary course of business or which
could result in a material reduction in the future
earnings of the Company or incurred any material
liability or obligation, direct, contingent or
indirect, made any change in its capital stock,
made any material change in its short-term debt or
funded debt or repurchased or otherwise acquired
any of the Company's capital stock; and the Company
has not declared or paid any dividend, or made any
other distribution, upon its outstanding capital
stock payable to stockholders of record on a date
subsequent to the date hereof and prior to the
First Closing Date or Second Closing Date; and
(6) Since the respective dates as of which
information is given in the Registration Statement
and the Prospectus and except as disclosed in or
contemplated by the Prospectus, the Company and its
Subsidiaries have not sustained a material loss or
damage by strike, fire, flood, windstorm, accident
or other calamity (whether or not insured).
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<PAGE> 30
(iv) On the First Closing Date, a certificate,
dated such Closing Date and addressed to you, signed by
or on behalf of each of the Selling Stockholders to the
effect that the representations and warranties of such
Selling Stockholder in this Agreement are true and
correct, as if made at and as of the First Closing Date
and that such Selling Stockholder has complied with all
the agreements and satisfied all the conditions on his
part to be performed or satisfied prior to the First
Closing Date.
(v) On the date before this Agreement is executed
and also on the First Closing Date and the Second
Closing Date a letter addressed to you, as Representa-
tives of the Underwriters, from Coopers & Lybrand L.L.P.
independent accountants, the first one to be dated the
day before the date of this Agreement, the second one to
be dated the First Closing Date and the third one (in
the event of a Second Closing) to be dated the Second
Closing Date, in form and substance satisfactory to you.
(vi) On or before the First Closing Date, letters
from each of the Selling Stockholders, and each director
and executive officer of the Company, in form and
substance satisfactory to you, confirming that for a
period of 90 days after the first date that any of the
Common Shares are released by you for sale to the
public, such person will not directly or indirectly sell
or offer to sell or otherwise dispose of any shares of
Common Stock or any right to acquire such shares without
the prior written consent of Montgomery Securities,
which consent may be withheld at the sole discretion of
Montgomery Securities.
All such opinions, certificates, letters and documents shall
be in compliance with the provisions hereof only if they are
satisfactory to you and to Hale and Dorr, counsel for the Under-
writers. The Company shall furnish you with such manually signed
or conformed copies of such opinions, certificates, letters and
documents as you request. Any certificate signed by any officer
of the Company and delivered to the Representatives or to counsel
for the Underwriters shall be deemed to be a representation and
warranty by the Company to the Underwriters as to the statements
made therein.
If any condition to the Underwriters' obligations hereunder
to be satisfied prior to or at the First Closing Date is not so
satisfied, this Agreement at your election will terminate upon
notification by you as Representatives to the Company and the
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<PAGE> 31
Selling Stockholders without liability on the part of any Under-
writer, the Company or the Selling Stockholders except for the
expenses to be paid or reimbursed by the Company and by the
Selling Stockholders pursuant to Sections 7 and 9 hereof and ex-
cept to the extent provided in Section 11 hereof.
SECTION 9. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. Not-
withstanding any other provisions hereof, if this Agreement shall
be terminated by you pursuant to Section 8, or if the sale to the
Underwriters of the Common Shares at the First Closing is not
consummated because of any refusal, inability or failure on the
part of the Company or the Selling Stockholders to perform any
agreement herein or to comply with any provision hereof, the
Company agrees to reimburse you and the other Underwriters upon
demand for all out-of-pocket expenses that shall have been rea-
sonably incurred by you and them in connection with the proposed
purchase and the sale of the Common Shares, including but not
limited to fees and disbursements of counsel, printing expenses,
travel expenses, postage, telegraph charges and telephone charges
relating directly to the offering contemplated by the Prospectus.
Any such termination shall be without liability of any party to
any other party except that the provisions of this Section, Sec-
tion 7 and Section 11 shall at all times be effective and shall
apply.
SECTION 10. EFFECTIVENESS OF REGISTRATION STATEMENT. You,
the Company and the Selling Stockholders will use your, its and
their best efforts to cause the Registration Statement to become
effective, to prevent the issuance of any stop order suspending
the effectiveness of the Registration Statement and, if such stop
order be issued, to obtain as soon as possible the lifting
thereof.
SECTION 11. INDEMNIFICATION. (a) The Company and each of
the Selling Stockholders, jointly and severally, agrees to in-
demnify and hold harmless each Underwriter and each person, if
any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses,
joint or several, to which such Underwriter or such controlling
person may become subject, under the Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or other federal or
state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such
losses, claims, damages, liabilities or expenses (or actions in
respect thereof as contemplated below) arise out of or are based
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<PAGE> 32
upon any untrue statement or alleged untrue statement of any ma-
terial fact contained in the Registration Statement, any Pre-
liminary Prospectus, the Prospectus, or any amendment or supple-
ment thereto, or arise out of or are based upon the omission or
alleged omission to state in any of them a material fact required
to be stated therein or necessary to make the statements in any of
them not misleading, or arise out of or are based in whole or in
part on any inaccuracy in the representations and warranties of
the Company or the Selling Stockholders contained herein or any
failure of the Company or the Selling Stockholders to perform
their respective obligations hereunder or under law; and will
reimburse each Underwriter and each such controlling person for
any legal and other expenses as such expenses are reasonably in-
curred by such Underwriter or such controlling person in connec-
tion with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action;
provided, however, that neither the Company nor the Selling
Stockholders will be liable in any such case to the extent that
any such loss, claim, damage, liability or expense arises out of
or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration State-
ment, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof;
and provided further, that in no event shall any of the Selling
Stockholders be liable under the provisions of this Section 11 for
any amount in excess of the aggregate amount of proceeds such
Selling Stockholder received from the sale of Common Shares pur-
suant to this Agreement. The Company and the Selling Stockholders
may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to their respective
amounts of such liability for which they each shall be respon-
sible. In addition to its other obligations under this
Section 11(a), the Company and agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, or any inaccuracy
in the representations and warranties of the Company or the
Selling Stockholders herein or failure to perform its obligations
hereunder, all as described in this Section 11(a), it will
reimburse each Underwriter on a quarterly basis for all reasonable
legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the
Company's obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so
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<PAGE> 33
held to have been improper, each Underwriter shall promptly return
it to the Company, together with interest, compounded daily,
determined on the basis of the base lending rate (or other
commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America NT&SA,
San Francisco, California (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter within
30 days of a request for reimbursement, shall bear interest at the
Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which the Company
or the Selling Stockholders may otherwise have.
(b) Each Underwriter will severally indemnify and hold
harmless the Company, each of its directors, each of its officers
who signed the Registration Statement, the Selling Stockholders
and each person, if any, who controls the Company or any Selling
Stockholder within the meaning of the Act, against any losses,
claims, damages, liabilities or expenses to which the Company, or
any such director, officer, Selling Stockholder or controlling
person may become subject, under the Act, the Exchange Act, or
other federal or state statutory law or regulation, or at common
law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written consent of such Un-
derwriter), insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in confor-
mity with the information furnished to the Company pursuant to
Section 4 hereof; and will reimburse the Company, or any such
director, officer, Selling Stockholder or controlling person for
any legal and other expense reasonably incurred by the Company, or
any such director, officer, Selling Stockholder or controlling
person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability,
expense or action. In addition to its other obligations under
this Section 11(b), each Underwriter severally agrees that, as an
interim measure during the pendency of any claim, action, inves-
tigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission,
described in this Section 11(b) which relates to information
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<PAGE> 34
furnished to the Company pursuant to Section 4 hereof, it will
reimburse the Company (and, to the extent applicable, each of-
ficer, director, controlling person or Selling Stockholder) on a
quarterly basis for all reasonable legal or other expenses in-
curred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, not-
withstanding the absence of a judicial determination as to the
propriety and enforceability of the Underwriters' obligation to
reimburse the Company (and, to the extent applicable, each of-
ficer, director, controlling person or Selling Stockholder) for
such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdic-
tion. To the extent that any such interim reimbursement payment
is so held to have been improper, the Company (and, to the extent
applicable, each officer, director, controlling person or Selling
Stockholder) shall promptly return it to the Underwriters together
with interest, compounded daily, determined on the basis of the
Prime Rate. Any such interim reimbursement payments which are not
made to the Company within 30 days of a request for reimbursement,
shall bear interest at the Prime Rate from the date of such re-
quest. This indemnity agreement will be in addition to any li-
ability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party under this Section, notify the
indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement
contained in this Section or to the extent it is not prejudiced as
a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party
seeks or intends to seek indemnity from an indemnifying party, the
indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying
parties similarly notified, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; pro-
vided, however, if the defendants in any such action include both
the indemnified party and the indemnifying party and the indem-
nified party shall have reasonably concluded that there may be a
conflict between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the
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<PAGE> 35
defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to
such indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party
under this Section 11 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defenses in
accordance with the proviso to the next preceding sentence (it
being understood, however, that the indemnifying party shall not
be liable for the expenses of more than one separate counsel,
approved by the Representatives in the case of paragraph (a),
representing the indemnified parties who are parties to such ac-
tion) or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to rep-
resent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying
party.
(d) If the indemnification provided for in this Section 11
is required by its terms but is for any reason held to be un-
available to or otherwise insufficient to hold harmless an in-
demnified party under paragraphs (a), (b) or (c) in respect of any
losses, claims, damages, liabilities or expenses referred to
herein, then each applicable indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a re-
sult of any losses, claims, damages, liabilities or expenses re-
ferred to herein (i) in such proportion as is appropriate to re-
flect the relative benefits received by the Company, the Selling
Stockholders and the Underwriters from the offering of the Common
Shares or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is ap-
propriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company, the
Selling Stockholders and the Underwriters in connection with the
statements or omissions or inaccuracies in the representations and
warranties herein which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The respective relative benefits received by the
Company, the Selling Stockholders and the Underwriters shall be
deemed to be in the same proportion, in the case of the Company
and the Selling Stockholders as the total price paid to the Com-
pany and to the Selling Stockholders, respectively, for the Common
Shares sold by them to the Underwriters (net of underwriting
commissions but before deducting expenses), and in the case of the
Underwriters as the underwriting commissions or discounts received
by them bears to the total of such amounts paid to the Company and
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<PAGE> 36
to the Selling Stockholders and received by the Underwriters as
underwriting commissions or discounts. The relative fault of the
Company, the Selling Stockholders and the Underwriters shall be
determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact or the inaccurate or the
alleged inaccurate representation and/or warranty relates to
information supplied by the Company, the Selling Stockholders or
the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the
limitations set forth in subparagraph (c) of this Section 11, any
legal or other fees or expenses reasonably incurred by such party
in connection with investigating or defending any action or claim.
The provisions set forth in subparagraph (c) of this Section 11
with respect to notice of commencement of any action shall apply
if a claim for contribution is to be made under this subparagraph
(d); provided, however, that no additional notice shall be
required with respect to any action for which notice has been
given under subparagraph (c) for purposes of indemnification. The
Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to
this Section 11 were determined solely by pro rata allocation
(even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions
of this Section 11, no Underwriter shall be required to contribute
any amount in excess of the amount of the total underwriting
commissions received by such Underwriter in connection with the
Common Shares underwritten by it and distributed to the public.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 11 are several in proportion to their
respective underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in
Sections 11(a) and 11(b) hereof, including the amounts of any
requested reimbursement payments and the method of determining
such amounts, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of Governors
of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or
-36-
<PAGE> 37
written notice of intention to arbitrate, therein electing the
arbitration tribunal. In the event the party demanding arbitra-
tion does not make such designation of an arbitration tribunal in
such demand or notice, then the party responding to said demand or
notice is authorized to do so. Such an arbitration would be
limited to the operation of the interim reimbursement provisions
contained in Sections 11(a) and 11(b) hereof and would not resolve
the ultimate propriety or enforceability of the obligation to
reimburse expenses which is created by the provisions of such
Sections 11(a) and 11(b) hereof.
SECTION 12. DEFAULT OF UNDERWRITERS. It shall be a condi-
tion to this Agreement and the obligation of the Company and the
Selling Stockholders to sell and deliver the Common Shares here-
under, and of each Underwriter to purchase the Common Shares in
the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase
and pay for all the Common Shares agreed to be purchased by such
Underwriter hereunder upon tender to the Representatives of all
such shares in accordance with the terms hereof. If any Under-
writer or Underwriters default in their obligations to purchase
Common Shares hereunder on either the First or Second Closing Date
and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase on such
Closing Date does not exceed 10% of the total number of Common
Shares which the Underwriters are obligated to purchase on such
Closing Date, the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereun-
der, to purchase the Common Shares which such defaulting Under-
writers agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate
number of Common Shares with respect to which such default occurs
is more than the above percentage and arrangements satisfactory to
the Representatives and the Company for the purchase of such
Common Shares by other persons are not made within 48 hours after
such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company or the
Selling Stockholders except for the expenses to be paid by the
Company and the Selling Stockholders pursuant to Section 7 hereof
and except to the extent provided in Section 11 hereof.
In the event that Common Shares to which a default relates
are to be purchased by the non-defaulting Underwriters or by an-
other party or parties, the Representatives or the Company shall
have the right to postpone the First or Second Closing Date, as
the case may be, for not more than five business days in order
that the necessary changes in the Registration Statement, Pros-
pectus and any other documents, as well as any other arrangements,
-37-
<PAGE> 38
may be effected. As used in this Agreement, the term "Under-
writer" includes any person substituted for an Underwriter under
this Section. Nothing herein will relieve a defaulting Under-
writer from liability for its default.
SECTION 13. EFFECTIVE DATE. This Agreement shall become
effective immediately as to Sections 7, 9, 11, 14 and 16 and, as
to all other provisions, (i) if at the time of execution of this
Agreement the Registration Statement has not become effective, at
2:00 P.M., California time, on the first full business day fol-
lowing the effectiveness of the Registration Statement, or (ii) if
at the time of execution of this Agreement the Registration
Statement has been declared effective, at 2:00 P.M., California
time, on the first full business day following the date of ex-
ecution of this Agreement; but this Agreement shall nevertheless
become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice
to the Company or by release of any of the Common Shares for sale
to the public. For the purposes of this Section 13, the Common
Shares shall be deemed to have been so released upon the release
for publication of any newspaper advertisement relating to the
Common Shares or upon the release by you of telegrams (i) advising
Underwriters that the Common Shares are released for public of-
fering, or (ii) offering the Common Shares for sale to securities
dealers, whichever may occur first.
SECTION 14. TERMINATION. Without limiting the right to
terminate this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by
notice to you and the Selling Stockholders or by you by no-
tice to the Company and the Selling Stockholders at any time
prior to the time this Agreement shall become effective as to
all its provisions, and any such termination shall be without
liability on the part of the Company or the Selling Stock-
holders to any Underwriter (except for the expenses to be
paid or reimbursed by the Company and the Selling Stock-
holders pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof) or of any Underwriter
to the Company or the Selling Stockholders (except to the
extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior
to the First Closing Date by notice to the Company (i) if
additional material governmental restrictions, not in force
and effect on the date hereof, shall have been imposed upon
trading in securities generally or minimum or maximum prices
shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the
-38-
<PAGE> 39
counter market by the NASD, or trading in securities gener-
ally shall have been suspended on either such Exchange or in
the over the counter market by the NASD, or a general banking
moratorium shall have been established by federal, New York
or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or
any substantial change in political, financial or economic
conditions shall have occurred or shall have accelerated or
escalated to such an extent, as, in the judgment of the
Representatives, to affect adversely the marketability of the
Common Shares, (iii) if any adverse event shall have occurred
or shall exist which makes untrue or incorrect in any mate-
rial respect any statement or information contained in the
Registration Statement or Prospectus or which is not re-
flected in the Registration Statement or Prospectus but
should be reflected therein in order to make the statements
or information contained therein not misleading in any ma-
terial respect, or (iv) if there shall be any action, suit or
proceeding pending or threatened, or there shall have been
any development or prospective development involving par-
ticularly the business or properties or securities of the
Company or any of its Subsidiaries or the transactions con-
templated by this Agreement, which, in the reasonable judg-
ment of the Representatives, may materially and adversely
affect the Company's business or earnings and makes it im-
practicable or inadvisable to offer or sell the Common
Shares. Any termination pursuant to this subsection (b)
shall without liability on the part of any Underwriter to the
Company or the Selling Stockholders or on the part of the
Company or the Selling Stockholders to any Underwriter (ex-
cept for expenses to be paid or reimbursed by the Company and
the Selling Stockholders pursuant to Sections 7 and 9 hereof
and except to the extent provided in Section 11 hereof).
SECTION 15. FAILURE OF THE SELLING STOCKHOLDERS TO SELL
AND DELIVER. If one or more of the Selling Stockholders
shall fail to sell and deliver to the Underwriters the Common
Shares to be sold and delivered by such Selling Stockholders
at the First Closing Date under the terms of this Agreement,
then the Underwriters may at their option, by written notice
from you to the Company and the Selling Stockholders, either
(i) terminate this Agreement without any liability on the
part of any Underwriter or, except as provided in Sections 7,
9 and 11 hereof, the Company or the Selling Stockholders, or
(ii) purchase the shares which the Company and other Selling
Stockholders have agreed to sell and deliver in accordance
with the terms hereof. In the event of a failure by one or
more of the Selling Stockholders to sell and deliver as re-
ferred to in this Section, either you or the Company shall
-39-
<PAGE> 40
have the right to postpone the Closing Date for a period not
exceeding seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any
other documents, as well as any other arrangements, may be
effected.
SECTION 16. REPRESENTATIONS AND INDEMNITIES TO SURVIVE
DELIVERY. The respective indemnities, agreements, repre-
sentations, warranties and other statements of the Company,
of its officers, of the Selling Stockholders and of the
several Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter or
the Company or any of its or their partners, officers or
directors or any controlling person, or the Selling Stock-
holders, as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder and any termi-
nation of this Agreement.
SECTION 17. NOTICES. All communications hereunder
shall be in writing and, if sent to the Representatives shall
be mailed, delivered or telegraphed and confirmed to you at
600 Montgomery Street, San Francisco, California 94111, At-
tention: ____________, with a copy to Mark G. Borden, Esq.
Hale and Dorr, 60 State Street, Boston, Massachusetts, 02109;
and if sent to the Company or the Selling Stockholders shall
be mailed, delivered or telegraphed and confirmed to the
Company at One Athenaeum Street, Cambridge, Massachusetts,
02142, Attention: General Counsel with a copy to Louis A.
Goodman, Esq., Skadden, Arps, Slate, Meagher & Flom, One
Beacon Street, Boston, Massachusetts, 02108. The Company,
the Selling Stockholders or you may change the address for
receipt of communications hereunder by giving notice to the
others.
SECTION 18. SUCCESSORS. This Agreement will inure to
the benefit of and be binding upon the parties hereto, in-
cluding any substitute Underwriters pursuant to Section 12
hereof, and to the benefit of the officers and directors and
controlling persons referred to in Section 11, and in each
case their respective successors, personal representatives
and assigns, and no other person will have any right or ob-
ligation hereunder. No such assignment shall relieve any
party of its obligations hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such
from any of the Underwriters merely by reason of such pur-
chase.
-40-
<PAGE> 41
SECTION 19. REPRESENTATION OF UNDERWRITERS. You will
act as Representatives for the several Underwriters in con-
nection with all dealings hereunder, and any action under or
in respect of this Agreement taken by you jointly or by
Montgomery Securities, as Representatives, will be binding
upon all the Underwriters.
SECTION 20. PARTIAL UNENFORCEABILITY. The invalidity
or unenforceability of any Section, paragraph or provision of
this Agreement shall not affect the validity or enforce-
ability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only
such minor changes) as are necessary to make it valid and
enforceable.
SECTION 21. APPLICABLE LAW. This Agreement shall be
governed by and construed in accordance with the internal
laws (and not the laws pertaining to conflicts of laws) of
the State of California.
SECTION 22. GENERAL. This Agreement constitutes the
entire agreement of the parties to this Agreement and su-
persedes all prior written or oral and all contemporaneous
oral agreements, understandings and negotiations with respect
to the subject matter hereof. This Agreement may be executed
in several counterparts, each one of which shall be an
original, and all of which shall constitute one and the same
document.
In this Agreement, the masculine, feminine and neuter
genders and the singular and the plural include one another.
The section headings in this Agreement are for the conve-
nience of the parties only and will not affect the con-
struction or interpretation of this Agreement. This Agree-
ment may be amended or modified, and the observance of any
term of this Agreement may be waived, only by a writing
signed by the Company, the Selling Stockholders and you.
Any person executing and delivering this Agreement as
Attorney-in-fact for the Selling Stockholders represents by
so doing that he has been duly appointed as Attorney-in-fact
by such Selling Stockholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-
in-fact to take such action. Any action taken under this
Agreement by any of the Attorneys-in-fact will be binding on
all the Selling Stockholders.
-41-
<PAGE> 42
If the foregoing is in accordance with your under-
standing of our agreement, kindly sign and return to us the
enclosed copies hereof, whereupon it will become a binding
agreement among the Company, the Selling Stockholders and the
several Underwriters including you, all in accordance with
its terms.
Very truly yours,
SOFTKEY INTERNATIONAL INC.
By: ______________________________
Chairman and Chief Executive
Officer
SELLING STOCKHOLDERS
By: ______________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
ADAMS, HARKNESS & HILL, INC.
CS FIRST BOSTON CORPORATION
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By MONTGOMERY SECURITIES
By:______________________________
Partner
-42-
<PAGE> 43
Draft 6/9/95
<TABLE>
SCHEDULE A
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
------------------- ---------------
<S> <C>
Montgomery Securities.....................
Adams, Harkness & Hill, Inc...............
CS First Boston Corporation...............
--------
TOTAL..........................
========
</TABLE>
A-1
<PAGE> 44
Draft 6/9/95
<TABLE>
SCHEDULE B
<CAPTION>
Number of Firm
Common Shares to
be Sold by Selling
Name of Selling Stockholder Stockholders
--------------------------- ------------------
<S> <C>
--------
TOTAL..........................
========
</TABLE>
B-1
<PAGE> 1
EXHIBIT 5.1
June 9, 1995
SoftKey International Inc.
One Athenaeum Street
Cambridge, Massachusetts 02142
Re: Public Offering of up to 2,787,651
Shares of the Common Stock of
SoftKey International Inc.
-------------------------------
Ladies and Gentlemen:
I am Vice President and General Counsel of SoftKey International Inc.,
a Delaware corporation (the "Company"), and am issuing this opinion in
connection with the Registration Statement on Form S-3 being filed by the
Company with the Securities and Exchange Commission (the "Commission") on the
date hereof (the "Registration Statement"). The Registration Statement relates
to the registration by the Company under the Securities Act of 1933, as amended
(the "1933 Act"), of up to 2,363,607 shares (the "Company Shares") to be sold by
the Company and 424,044 shares (the "Selling Stockholder Shares") to be sold by
certain selling stockholders of the Company (the "Selling Stockholders") of
common stock of the Company, par value $.01 per share (the "Common Stock").
In this connection and as General Counsel for the Company, I have
examined and am familiar with originals or copies, certified or otherwise
identified to my satisfaction, of the Registration Statement (together with the
form of preliminary prospectus forming a part thereof); the Restated
Certificate of Incorporation of the Company, as amended, and the Bylaws of the
Company, as amended, each as in effect on the date hereof; certain resolutions
adopted by the Board of Directors of the Company relating to the preparation
and filing of the Registration Statement and the registration of the Company
Shares and the Selling Stockholder Shares, the issuance and sale of the Company
Shares by the Company, the original issuance of the Selling Stockholder Shares,
the approval of
<PAGE> 2
the Company's Long Term Equity Incentive Plan (the "LTIP") and form of Award
Agreement for the grant of employee stock options under the LTIP (the "Award
Agreement") and certain related matters; the form of proposed Underwriting
Agreement (the "Underwriting Agreement") among the Company, the Selling
Stockholders and the underwriters named therein (the "Underwriters") filed
as an exhibit to the Registration Statement; letters to certain of the
Selling Stockholders relating to adjustments in the exercise price of certain
employee stock options resulting from business combinations involving the
Company (the "Option Letters"); the Company's definitive Joint Management
Information Circular and Proxy Statement dated December 27, 1993 and related
schedules; the Voting and Exchange Trust Agreement dated as of February 4, 1994
by and among the Company, SoftKey Software Products Inc. ("SoftKey Software")
and The R-M Trust Company; the Support Agreement dated as of February 4, 1994
by and between the Company and SoftKey Software; the form of resolutions to be
adopted by the Offering Committee of the Company's Board of Directors (the
"Offering Committee"); a form of specimen certificate for the Common Stock;
certain agreements, certificates of public officials, certificates of officers
or representatives of the Company or others; and such other documents,
certificates and records as I have deemed necessary or appropriate as a basis
for the opinions set forth herein. In such examination, I have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to me as originals, the conformity to
original documents of all documents submitted to me as certified, conformed or
photostatic copies and the authenticity of the originals of such copies. As to
any facts material to the opinions expressed herein which I have not
independently established or verified, I have relied upon statements and
representations of officers and other representatives of the Company and
others.
I am admitted to the Bar of the Commonwealth of Massachusetts and do
not purport to be an expert on, or express any opinion concerning, any law
other than the substantive law of the Commonwealth of Massachusetts.
Based upon and subject to the foregoing, I am of the opinion that:
1. The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
<PAGE> 3
SoftKey International Inc.
June 9, 1995
Page 3
2. Assuming (a) that the Offering Committee approves the price at
which the Company Shares are sold to the Underwriters pursuant to the
Underwriting Agreement and (b) the conformity of the certificates representing
the Company Shares to the form of the specimen certificate for the Common Stock
examined by me and the due execution and delivery of such certificates, the
Company Shares have been duly authorized for issuance and, when certificates
therefor have been issued, paid for and delivered as contemplated in the
Registration Statement, the Company Shares will be validly issued, fully paid
and nonassessable.
3. Assuming (a) that Selling Stockholder Shares to be issued by the
Company to certain of the Selling Stockholders pursuant to the exercise of
employee stock options granted under the LTIP are acquired by such Selling
Stockholders through the exercise of such options in accordance with the terms
of the Award Agreement and the Option Letters, (b) that Selling Stockholder
Shares to be issued by the Company to certain of the Selling Stockholders
pursuant to the exchange of non-voting exchangeable shares of SoftKey Software
(the "Exchangeable Shares") are acquired by such Selling Stockholders through
the exchange of such Exchangeable Shares in accordance with the terms thereof
and the terms of the Voting and Exchange Trust Agreement and the Support
Agreement and (c) the conformity of the certificates representing the Selling
Stockholder Shares to the form of the specimen certificate for the Common Stock
examined by me and the due execution and delivery of such certificates, the
Selling Stockholder Shares have been duly authorized for issuance, and have
been or will be validly issued, fully paid and nonassessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me under the caption "Legal
Matters" in the prospectus filed as part of the Registration Statement. In
giving such consent, I do not thereby admit that I am in the category of
persons whose consent is required under Section 7 of the 1933 Act or the rules
and regulations of the Commission promulgated thereunder.
This opinion is furnished by me, as counsel to the Company, in
connection with the filing of the Registration Statement and, except as
provided in the immediately preceding paragraph, is not to be used, circulated,
quoted for any other purpose or otherwise referred to or
<PAGE> 4
SoftKey International Inc.
June 9, 1995
Page 4
relied upon by any other person without my express written permission.
Very truly yours,
Neal S. Winneg
General Counsel
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of SoftKey
International Inc. on Form S-3 of our report dated March 3, 1995, on our audit
of the consolidated financial statements and financial statement schedule of
SoftKey International Inc. as of December 31, 1994 and for the year then ended,
which report is included in the Annual Report on Form 10-K. We also consent to
the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 7, 1995
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated January 16, 1995 and to all references to our Firm included in or
made a part of this registration statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
June 7, 1995
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SoftKey International Inc.
(formerly WordStar International Incorporated):
We consent to the use of our report included herein dated September 13,
1993, relating to the consolidated balance sheets of WordStar International
Incorporated and subsidiaries as of June 30, 1993, and their related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended June 30, 1993, and the related
schedule, and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
San Francisco, California
June 7, 1995
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement of SoftKey
International Inc. on Form S-3 of our report dated September 30, 1992 (except
for Note 12, for which the date is October 12, 1992) (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to an
uncertainty in connection with an arbitration proceeding) relating to the
financial statements of Spinnaker Software Corporation (not presented separately
herein) in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 7, 1995
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated September 28, 1993
(except as to Note 12, which is as of December 3, 1993) relating to the
consolidated financial statements of Spinnaker Software Corporation which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Boston, Massachusetts
June 7, 1995
