SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20579
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 30, 1995
SOFTKEY INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-13069 94-2562108
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
ONE ATHENAEUM STREET, CAMBRIDGE, MASSACHUSETTS 02142
(Address of principal executive offices) (Zip Code)
(617) 494 - 1200
Registrant's telephone number, including area code:
N/A
(Former name or former address, if changed since last report)
Total Number of Pages
Exhibit Index Appears on Page
The Form 8-K dated December 29, 1995 of SoftKey
International Inc. is hereby amended by adding the
following to Item 7(a) and 7(c) thereof.
Item 7. Financial Statement, Pro Forma Financial
Information and Exhibits.
(a) The required financial statements for Compton's
NewMedia, Inc. and Compton's Learning Company
(referred to collectively in such statements as
"Compton's New Media Group") are filed herewith
as Exhibit 99.6 hereto.
(c) Exhibits.
Exhibit No. Description
23.1 Written Consent of Price Waterhouse LLP
99.6 Financial Statements of Compton's New
Media Group
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SOFTKEY INTERNATIONAL INC.
By: /s/ R. Scott Murray
R. Scott Murray
Chief Financial Officer
January 25, 1996
Exhibit Index
Exhibit Sequential
No. Description Page No.
23.1 Written Consent of Price Waterhouse
LLP
99.6 Financial Statements of Compton's
New Media Group
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements
on Form S-3 (Nos. 33-59706, 33-72050, 33-73422, 33-63073, and
333-145) and in the Registration Statements on Form S-8 (Nos.
33-75134, 33-92920, 33-92922, 33-61931, and 333-00107) of
SoftKey International Inc. ("SoftKey") of our report dated
January 5, 1996 relating to the combined financial statements
of Compton's New Media Group as of December 25, 1994 and for
the fiscal year then ended, which appears in the Current
Report on Form 8-K/A of SoftKey dated January 25, 1996.
PRICE WATERHOUSE LLP
Chicago, Illinois
January 25, 1996
EXHIBIT 99.6
Report of Independent Accountants
January 5, 1996
To the Stockholder of
Compton's New Media Group
In our opinion, the accompanying combined statement of
financial position and the related combined statements of
operations and changes in accumulated deficit and of cash
flows present fairly, in all material respects, the
financial position of Compton's New Media Group (wholly
owned by Tribune Company) at December 25, 1994, and the
results of its operations and its cash flows for the
fiscal year 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.
PRICE WATERHOUSE LLP
Chicago, Illinois
COMPTON'S NEW MEDIA GROUP
(WHOLLY OWNED BY TRIBUNE COMPANY)
COMBINED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
December 25, September 24,
1994 1995
(unaudited)
ASSETS
Current assets:
Cash $ 675 $ 200
Trade accounts receivable, net of allowances
for sales returns and doubtful accounts of
$5,931 in 1994 and $7,057 in 1995 4,984 398
Income tax receivable from Tribune 958 3,565
Other receivables 361 101
Total receivables 6,303 4,064
Inventories 934 3,004
Prepaid expenses 1,050 2,049
Deferred income taxes 3,729 5,380
Total current assets 12,691 14,697
Property and equipment 5,750 7,081
Accumulated depreciation (1,366) (2,216)
Net property and equipment 4,384 4,865
Capitalized software costs 343 1,994
Intangible assets 46,708 45,148
Other assets - 171
Total assets $64,126 $66,875
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Advances from and interest payable to Tribune $ 6,971 $16,874
Accounts payable 3,633 3,670
Accrued compensation 1,544 546
Accrued royalties 933 255
Other current liabilities 510 2,672
Total current liabilities 13,591 24,017
Accrued compensation 402 372
Deferred income taxes 1,842 1,969
Total liabilities 15,835 26,358
Commitments and contingencies (Note 5)
Stockholder's equity:
Capital stock 58,089 58,089
Accumulated deficit (9,798) (17,572)
Total stockholder's equity 48,291 40,517
Total liabilities and stockholder's equity $64,126 $66,875
The accompanying notes are an integral part of these statements.
COMPTON'S NEW MEDIA GROUP
(WHOLLY OWNED BY TRIBUNE COMPANY)
COMBINED STATEMENTS OF OPERATIONS
AND CHANGES IN ACCUMULATED DEFICIT
(IN THOUSANDS)
For the fiscal For the nine months ended
year ended September 24, September 25,
December 25, 1994 1995 1994
(unaudited)
Operating revenues $42,575 $19,370 $27,944
Cost of revenues 18,860 9,086 13,962
Gross profit 23,715 10,284 13,982
Operating expenses:
Sales and marketing 13,692 9,453 9,253
General and administrative 12,728 7,037 9,666
Research and development 4,032 1,427 3,533
Software development costs 2,308 540 1,674
Amortization of other intangibles 2,080 1,560 1,560
Severance charges 1,657 504 1,657
Depreciation 1,068 1,099 651
Total operating expenses 37,565 21,620 27,994
Operating loss (13,850) (11,336) (14,012)
Interest expense paid to Tribune 196 525 58
Loss before income tax benefit (14,046) (11,861) (14,070)
Income tax benefit 4,821 4,087 4,903
Net loss ($9,225) ($7,774) ($9,167)
Accumulated deficit at beginning
of the period ($ 573) ($9,798) ($ 573)
Net loss for the period (9,225) (7,774) (9,167)
Accumulated deficit at the end
of the period ($9,798) ($17,572) ($9,740)
The accompanying notes are an integral part of these statements.
COMPTON'S NEW MEDIA GROUP
(WHOLLY OWNED BY TRIBUNE COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the fiscal For the nine months ended
year ended September 24, September 25,
December 25, 1994 1995 1994
(unaudited)
Cash flows from operating activities:
Net loss ($9,225) ($7,774) ($9,167)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation 1,068 1,099 651
Amortization and other reductions
of intangibles 4,388 2,100 3,234
Deferred income taxes (964) (1,524) (2,789)
(Increase) decrease in:
Unaffiliated receivables, net 2,692 4,846 6,720
Inventories 1,790 (2,070) 1,560
Prepaid expenses (228) (999) (55)
Increase (decrease) in:
Accounts payable 710 37 (124)
Accrued compensation 1,114 (1,028) 866
Accrued royalties (160) (678) (627)
Other liabilities (688) 2,162 (744)
Net cash provided by (used for)
operating activities 497 (3,829) (475)
Cash flows from investing activities:
Capitalization of computer software costs (2,416) (2,191) (1,639)
Purchases of property and equipment (3,286) (1,696) (2,513)
Disposals of property and equipment - 116 -
Other - (171) -
Net cash used for
investing activities (5,702) (3,942) (4,152)
Cash flows from financing activities:
Net change in amounts payable to and
receivable from Tribune 5,443 7,296 4,536
Net increase (decrease) in cash 238 (475) (91)
Cash at beginning of period 437 675 437
Cash at end of period $ 675 $ 200 $ 346
The accompanying notes are an integral part of these statements.
COMPTON'S NEW MEDIA GROUP
(WHOLLY OWNED BY TRIBUNE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND BASIS OF COMBINATION
Compton's New Media Group ("Compton's") is composed of Compton's NewMedia,
Inc. ("CNM") and Compton's Learning Company ("CLC"). As discussed in
Note 7, CNM and CLC were acquired by SoftKey International Inc. ("SoftKey")
in December 1995. Prior to the acquisition, CNM and CLC were wholly owned
subsidiaries of Tribune Company ("Tribune"). The combined financial
statements also include the financial position and results of operations
of NewMedia Source, Inc. ("NMS"), a wholly owned subsidiary of Tribune,
since it is anticipated that the direct-mail operations of NMS relating
to CNM and CLC products (which, prior to the acquisition described in Note 7
comprised NMS' entire business and operations) will be continued by SoftKey.
Compton's develops, publishes and markets encyclopedia and other software
products for the consumer and education markets. Compton's also publishes
and sells a print version of its encyclopedia. Tribune acquired Compton's
in September 1993 from Encyclopaedia Britannica, Inc.
The accompanying combined financial statements reflect the financial
position, results of operations and cash flows for Compton's for the periods
presented. The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of management's
estimates. Certain corporate general and administrative expenses of Tribune
have been allocated to Compton's (see "Note 3: Related-Party Transactions")
on various bases which, in the opinion of management, are reasonable.
However, such expenses are not necessarily indicative of, and it is not
practicable for management to estimate, the nature and level of expenses
which might have been incurred had Compton's operated as a stand-alone
company.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of Compton's, as summarized below, are
in conformity with generally accepted accounting principles and reflect
practices appropriate to the business in which it operates.
Fiscal year - Compton's fiscal year ends on the last Sunday in December.
The 1994 fiscal year included 52 weeks.
Unaudited interim financial period - The accompanying combined financial
information as of September 24, 1995 and for the nine periods ended
September 24, 1995 and September 25, 1994 is unaudited. The interim
financial statements have been prepared on the same basis as the
accompanying annual financial statements. In the opinion of management,
such interim financial information reflects adjustments consisting only of
normal and recurring adjustments necessary for a fair presentation of such
financial information. The unaudited results of operations for the interim
periods ended September 24, 1995 and September 25, 1994 are not necessarily
indicative of the results of operations to be expected for any other interim
period or for the full year.
Revenue recognition - Compton's recognizes revenue upon product shipment and
title transfer. Subject to certain limitations, Compton's permits customers
to obtain exchanges or return products within certain specified periods of
time. Allowances for estimated returns and pricing discounts are provided
at the time of sale as a reduction of operating revenues. Revenues from
royalties pursuant to license arrangements are recognized as earned based
upon performance or product shipments.
Combined Statements of Cash Flows - For purposes of the Combined Statements
of Cash Flows, all short-term investments with original maturities of three
months or less are considered to be cash equivalents. Information relating
to cash paid for interest and taxes has been omitted since these costs are
charged to Compton's by Tribune through the "Advances from and interest
payable to Tribune" account.
Allowances for sales returns and doubtful accounts - The allowances for
sales returns and doubtful accounts are management's estimates of the
amounts needed to absorb product returns and known and inherent risks
related to Compton's receivables. Compton's evaluates the adequacy of the
allowances primarily based upon historical and expected experience.
Compton's grants credit terms to its customers consistent with normal
industry practices. A significant portion of Compton's receivables relates
to amounts due from retail and discount retail companies.
Inventories - Inventories are stated at the lower of cost (weighted average)
or market (net realizable value) and consist primarily of finished goods.
Property and equipment - Property and equipment (primarily computers, office
equipment and leasehold improvements) are stated at cost. Depreciation is
computed using the straight-line method over the properties' estimated
useful lives, which range from three to ten years, or the lease term, if
shorter. Expenditures for maintenance and repairs are charged to expense.
Intangible assets - Intangible assets represent the excess of cost over the
fair market value of tangible net assets acquired and consisted of the
following at December 25, 1994 (in thousands):
Copyrights $16,800
Goodwill 13,994
Trade names 10,300
Software 5,000
Licensing agreements 3,300
Gross 49,394
Accumulated amortization (2,686)
Net $46,708
Intangible assets are being amortized over various periods ranging
from five to 40 years, with the majority over 40 years. Compton's
periodically evaluates the realizability of the carrying value of
intangibles based on projected future undiscounted cash flows.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The statement, which is effective for financial
statements for fiscal years beginning after December 15, 1995,
requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of any asset may not be recoverable. The statement also requires that
long-lived assets and certain identifiable intangibles to be disposed
of be reported at the lower of carrying amount or fair value less cost
to sell. Compton's plans to adopt the standard during the fiscal year
beginning January 1, 1996. Management believes that the adoption will
not have a material effect on the financial position or the results of
operations of Compton's.
Research and development and 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, after which time costs are capitalized and amortized over
the shorter of the straight-line basis over the estimated product life
(generally, 12 to 36 months) or the ratio of current revenues to total
projected revenues. Compton's evaluates the realizability of
capitalized software amounts periodically and establishes reserves
accordingly.
Fair value of financial instruments - The carrying values of cash,
accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short-term maturities of these
assets and liabilities.
Income taxes - Compton's operations are included in Tribune's
consolidated United States federal and certain state income tax
returns. Based on Tribune's tax-sharing policy, Compton's computes
taxes as if it were filing separate tax returns, except to the extent
that Compton's losses are utilized on a consolidated basis by Tribune.
In such instances, a tax benefit is always recorded by Compton's.
Current income tax payable or receivable is settled with Tribune
through the "Advances from and interest payable to Tribune" account.
NOTE 3: RELATED-PARTY TRANSACTIONS
Compton's participates in Tribune's centralized cash management
program with respect to accounts receivable, accounts payable, payroll
and employee benefits. Tribune also provides Compton's with certain
insurance and administrative services. Charges for these services are
based on allocations of Tribune's actual direct and indirect costs
using varying allocation bases as appropriate (e.g., payroll,
headcount, etc.) designed to estimate the actual cost incurred by
Tribune to render these services to Compton's. Treasury and legal
services provided by Tribune are not allocated to Compton's because
the costs are not significant.
This allocation process is consistent with the methodology used by
Tribune to allocate the cost of similar services provided to its other
business units. The allocated cost of these services are presented in
the "general and administrative" caption of the Combined Statements of
Operations and Changes in Accumulated Deficit and totaled
approximately $125,000 in fiscal 1994. In 1995, Compton's began using
the warehouse and distribution services of another Tribune business
unit, with the costs of these services (approximately $.3 million for
the nine-month period ended September 24, 1995) also allocated.
Advances from Tribune bear interest at eight percent for fiscal 1994
and for the 1995 and 1994 interim periods and have no definitive
repayment terms.
NOTE 4: EMPLOYEE BENEFIT PLANS
Compton's participates in several Tribune-sponsored benefit plans,
including an employee stock ownership plan with annual allocations
based on payroll, an employee share purchase plan and a qualified
savings incentive plan. The savings incentive plan provides for
uniform employer contributions to eligible employees of $.25 for each
$1.00 contributed by participants up to 4 percent of the participants'
compensation. The total 1994 expense related to these plans included
in the Combined Statements of Operations and Changes in Accumulated
Deficit is approximately $.4 million.
Compton's also participates in certain Tribune-sponsored medical and
life insurance plans and certain Compton's employees are participants
in various Tribune incentive and deferred compensation plans.
Compton's post-retirement obligations and expense relating to these
plans were not significant as of and for the fiscal year ended
December 25, 1994.
NOTE 5: COMMITMENTS AND CONTINGENCIES
In 1995, Thomas D. Wallace filed a suit against Compton's, Tribune,
and other named parties in the Central District of California. The
suit stems from the appearance of an allegedly offensive word in
Compton's Interactive Encyclopedia. Although Compton's intends to
vigorously defend itself in this matter, the resolution and the
liability, if any, is not determinable. Compton's is a defendant from
time to time in actions for other matters arising out of its business
operations. Compton's does not believe that any of these matters
presently pending will have a significant adverse effect on its
financial position or results of operations.
Compton's leases certain facilities and equipment under operating
leases expiring at various dates. Future minimum lease payments
(including interest) under noncancelable operating leases in excess of
one year at December 25, 1994 are as follows (in thousands):
1995 $ 593
1996 471
1997 371
1998 89
1999 92
Thereafter 333
$1,949
In fiscal 1994, total expense for all operating leases approximated
$.7 million.
NOTE 6: INCOME TAXES
The fiscal 1994 income tax benefit was composed of $3.8 million that
was currently receivable and $1.0 million that was deferred. The
insignificant difference between income taxes computed at the
United States federal statutory rate and the income tax benefit
reported in the Combined Statements of Operations and Changes in
Accumulated Deficit for the 1994 fiscal year relates primarily to the
non-deductible portion of certain business expenses.
Significant components of Compton's net deferred tax asset as of
December 25, 1994 are as follows (in thousands):
Inventory and receivable allowances $3,497
Accrued employee compensation 404
Other future deductible items 50
Deferred tax assets 3,951
Net intangible assets 1,641
Net properties 342
Other future taxable items 81
Deferred tax liabilities 2,064
Net deferred tax asset $1,887
Because it files a consolidated return with Tribune, Compton's losses
are not available for carryforward.
If Compton's had filed a separate return and had recorded taxes on a
stand-alone basis, the net losses for the 1994 fiscal year and for the
nine-month period ended September 24, 1995 would have been increased
by approximately $4.2 million and $4.1 million, respectively. The
increased net losses result from Compton's inability to recognize the
benefit of its stand-alone losses. The benefit of such stand-alone
loss carryforwards would have been offset by a valuation allowance
established to reflect management's judgment that the benefit for such
stand-alone loss carryforwards was "more likely than not" to be
unrealized.
NOTE 7: SUBSEQUENT EVENT
On December 28, 1995, Tribune sold CNM and CLC to SoftKey for consideration
comprising $120.5 million in SoftKey common stock and a $3 million
promissory note. In addition, concurrent with this transaction, Tribune
agreed to acquire $150 million of SoftKey notes, convertible at $53 per share.
