<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20579
----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 17, 1996
--------------------
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)
<PAGE> 2
Item 2. Disposition or Acquisition of Assets.
-------------------------------------
(A) Acquisition of Minnesota Educational Computing Corporation (MECC). Pursuant
to the terms of the previously reported Agreement and Plan of Merger dated as of
October 30, 1995 (the "Merger Agreement") by and among SoftKey International
Inc., a Delaware corporation (the "Company"), SchoolCo Inc., a Minnesota
corporation and a wholly owned subsidiary of the Company ("SchoolCo"), and
Minnesota Educational Computing Corporation (MECC), a Minnesota corporation
("MECC"), on May 17, 1996, SchoolCo merged with and into MECC (the "Merger"),
with MECC surviving the Merger (the "Surviving Corporation"). At the effective
time of the Merger (the "Effective Time"), the separate existence of SchoolCo
ceased, and MECC became a wholly owned subsidiary of the Company. At the
Effective Time: (a) each common share, par value $.01 per share, of MECC ("MECC
Common Shares") outstanding immediately prior thereto (other than shares held by
MECC as treasury shares or by the Company or SchoolCo and other than shares as
to which dissenters' rights were or will be properly asserted under the
Minnesota Business Corporation Act) was converted into the right to receive
1.14286 shares of common stock, par value $.01 per share, of the Company
("Company Common Stock"); and (b) each common share, par value $.01 per share,
of SchoolCo outstanding immediately prior thereto was converted into one common
share, par value $.01 per share, of the Surviving Corporation. In the Merger,
each option to purchase MECC Common Shares ("MECC Option") outstanding
immediately prior to the Effective Time was assumed by the Company and converted
into an option to purchase a number of shares of Company Common Stock ("Company
Option") equal to the product of 1.14286 and the number of MECC Common Shares
formerly subject to such MECC Option, at an exercise price equal to the exercise
price of such MECC Option divided by 1.14286. The Company expects to issue
approximately 10,411,700 shares of Company Common Stock in connection with the
Merger, including shares issuable pursuant to MECC Options which are being
converted into Company Options.
The foregoing description of the terms and provisions of the Merger
Agreement is qualified in its entirety by reference to the Merger Agreement,
together with the respective exhibits thereto, listed as Exhibit 2.1 hereto,
which was filed as Exhibit 10.22 to the Quarterly Report on Form 10-Q of the
Company for
2
<PAGE> 3
the quarterly period ended September 30, 1995, and is hereby incorporated by
reference herein.
(b) Assets constituting plant, equipment or other physical property acquired by
the Company in the Merger were used by MECC in the development, marketing and
sale of software products for use on personal computers. The Company currently
intends to use these assets in the same manner in which they were used prior to
the Company's acquisition of MECC.
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(a) Financial Statements of Business Acquired. The following financial
statements of MECC are filed herewith as Exhibit 99.2 hereto:
Independent auditors' report
Balance Sheets at March 31, 1994 and 1995 and December 31, 1995
(Unaudited)
Statements of Operations for the Years Ended March 31, 1993, 1994
and 1995 and for the Nine Months Ended December 31, 1994 and
1995 (Unaudited)
Statements of Cash Flows for the Years Ended March 31, 1993, 1994
and 1995 and for the Nine Months Ended December 31, 1994 and
1995 (Unaudited)
Statements of Shareholders' (Deficiency) Equity for the Years
Ended March 31, 1993, 1994 and 1995 and for the Nine Months
Ended December 31, 1995 (Unaudited)
Notes to Financial Statements
(b) Pro Forma Financial Information. Pro forma combined condensed
consolidated financial information at March 31, 1996 and for the
year ended December 31, 1995 and the quarter ended March 31, 1996
is filed herewith as Exhibit 99.3 hereto.
The unaudited pro forma combined condensed consolidated financial
statements give effect to the Merger under the purchase method of accounting.
The unaudited pro forma combined condensed consolidated balance sheet combines
the Company's unaudited balance sheet and MECC's unaudited balance sheet at
March 31, 1996, as if
3
<PAGE> 4
the Merger occurred on March 31, 1996. The unaudited pro forma combined
condensed consolidated statement of operations for the year ended December 31,
1995 combines the historical results of operations of the Company, MECC,
Compton's NewMedia Inc. and Compton's Learning Company (which the Company
acquired in December 1995), The Learning Company ("TLC") (which the Company
acquired in December 1995) and tewi Verlag GmbH (which the Company acquired in
July 1995) for the year ended December 31, 1995, as if each of (i) the
Merger, (ii) the foregoing acquisitions, (iii) the Company's October 23, 1995
issuance of $350 million principal amount of 5 1/2% Convertible Notes Due 2000
and (iv) the Company's December 28, 1995 issuance to Tribune Company of $150
million principal amount 5 1/2% Senior Convertible/Exchangeable Notes Due 2000
in connection with the acquisition of TLC had occurred at the beginning of such
period. The unaudited pro forma combined condensed consolidated statement of
operations for the quarter ended March 31, 1996 combines the historical results
of operations of the Company and MECC as if the acquisition occurred at the
beginning of such period. The unaudited pro forma combined condensed
consolidated statement of operations for the year ended December 31, 1995
combines the pro forma results of the Company for the year ended December 31,
1995 and the results of MECC for the twelve months ended December 31, 1995. For
ease of reference, as used herein, the Company's year ended January 6, 1996
(and all other dates tied to such date) is referred to as the year ended
December 31, 1995 and the quarterly period ended April 6, 1996 (and all other
dates tied to such date) is referred to as the quarter ended March 31, 1996.
The unaudited pro forma combined condensed consolidated financial
statements do not reflect cost savings and synergies which might be achieved
from the Merger. The unaudited pro forma combined condensed consolidated
financial statements do not purport to be indicative of the operating results or
financial position that would have been achieved had the Merger been effected
for the periods indicated or the results or financial position which may be
obtained in the future.
The unaudited pro forma combined condensed consolidated financial
statements are based on and should be read in conjunction with the audited
consolidated financial statements of the Company, including the notes thereto,
which are included in the Company's Annual Report on Form 10-K for the year
ended January 6, 1996 and the unaudited consolidated financial statements of the
Company which are included in the Company's Quarterly Report on Form 10-Q for
the quarter ended April 6, 1996 and the audited and unaudited financial
statements of MECC, including the notes thereto, which are included as Exhibit
99.2 hereto.
4
<PAGE> 5
(c) Exhibits.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger dated as of October 30, 1995 by
and among SoftKey International Inc., SchoolCo Inc. and
Minnesota Educational Computing Corporation (MECC).(1)
99.1 Form of Press Release issued by the Company dated May 17,
1996.
99.2 Financial Statements of Minnesota Educational Computing
Corporation (MECC).
99.3 Pro Forma Combined Condensed Consolidated Financial
Statements of SoftKey International Inc.
- ----------
(1) Incorporated by reference to Exhibit 10.22 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995.
5
<PAGE> 6
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/ Neal S. Winneg
-----------------------------
Neal S. Winneg
Vice President
Date: May 21, 1996
6
<PAGE> 7
Exhibit Index
-------------
Exhibit Sequential
No. Description Page No.
- ------- ----------- --------
2.1 Agreement and Plan of Merger dated
as of October 30, 1995 by and among
SoftKey International Inc.,
SchoolCo Inc. and Minnesota Educa-
tional Computing Corporation
(MECC).(1)
99.1 Form of Press Release issued by the
Company dated May 17, 1996.
99.2 Financial Statements of Minnesota
Educational Computing Corporation
(MECC).
99.3 Pro Forma Combined Condensed Con-
solidated Financial Statements of
SoftKey International Inc.
- ----------
(1) Incorporated by reference to Exhibit 10.22 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995.
7
<PAGE> 1
EXHIBIT 99.1
NEWS
FOR IMMEDIATE RELEASE
- ---------------------
Press Investor
Contact: Stacy Pena Relations: John Suske Don Anderson
SoftKey International SoftKey MECC
(510) 713-6011 International (612) 569-1513
[email protected] (617) 494-5816 [email protected]
[email protected]
SOFTKEY INTERNATIONAL COMPLETES MERGER OF
MINNESOTA EDUCATIONAL COMPUTING CORPORATION
CAMBRIDGE, MASS. - MAY 17, 1996 - SoftKey International Inc. (Nasdaq: SKEY) and
Minnesota Educational Computing Corporation (MECC) (Nasdaq: MECC) today
announced the completion of SoftKey's acquisition of MECC through a merger of
MECC and a wholly owned subsidiary of SoftKey. The transaction was approved
yesterday by the stockholders of SoftKey and MECC at each company's respective
special meeting of stockholders.
In the merger each outstanding MECC common share was converted into the right to
receive 1.14286 shares of SoftKey common stock. As of the record date of March
20, 1996 there were 8,043,286 MECC common shares outstanding. The transaction is
structured as a tax-free reorganization for federal income tax purposes and as a
purchase for accounting purposes.
"With the completion of the MECC merger, SoftKey is now one of the largest
educational software publishers in the world, offering the most comprehensive
line of top quality educational software across all age ranges and nearly every
subject area" said Michael Perik, Chairman and CEO of SoftKey. "The Learning
Company, Compton's and MECC brands and products, which are very complementary
to one another, are highly regarded in both the home and school markets. SoftKey
is committed to serving the needs of families and schools with these strong,
premium product lines."
"MECC is very pleased to be an integral part of SoftKey", said Dale LaFrenz,
President and CEO of MECC. "The broad and deep range of SoftKey products,
coupled with its outstanding distribution, position the company well. MECC
looks forward to playing a significant role in SoftKey's future."
Mr. LaFrenz and Charles Palmer, Chairman of the Board of Directors of MECC, are
expected to join SoftKey's Board of Directors.
- more -
<PAGE> 2
The closing of this transaction completes a process which began on October 30,
1995 when SoftKey and MECC announced a definitive merger agreement. This was
followed by SoftKey's December 1995 acquisitions of The Learning Company, and of
Compton's NewMedia Inc. and Compton's Learning Company from the Tribune Company.
"The closing of the acquisition of MECC is the culmination of SoftKey's
strategic initiative to become the premier publisher of high quality consumer
software" said Mr. Perik.
Minnesota Educational Computing Corporation (MECC), based in Minneapolis, is a
leading developer, publisher and distributor of fun, high-quality, educational
software for use by children in the school and at home. MECC's products are
designed principally for children ages 5 to 18, or in grades kindergarten
through 12. MECC has been developing educational software and providing
technology solutions for the classroom needs of teachers and children since
1973. MECC was acquired by North American Business Development, a Chicago and
Fort Lauderdale based buy-out fund, in 1991 and became a public company in 1994.
SoftKey International Inc. develops, publishes and markets more than 500
consumer software titles in the education, productivity, reference and lifestyle
categories, targeted at the home and school users. According to the PC Data
Annual Report, SoftKey is the number one publisher of consumer CD-ROM software
by unit sales. SoftKey's products are sold in more than 23,000 stores across 40
countries through multiple distribution channels including retail, direct mail,
OEM, school sales and more.
SoftKey's product offerings include The Learning System from The Learning
Company (including the popular Reader Rabbit[Registered Trademark] family of
products) and Learn To Speak[Trademark] series, and such top-selling titles as
Compton's[Registered Trademark] Interactive Encyclopedia, the Calendar
Creator[Trademark] family, BodyWorks[Registered Trademark] 5.0, American
Heritage[Registered Trademark] Dictionary Series, KeyCard[Trademark] Complete,
Mosby's Medical Encyclopedia[Trademark] and the Platinum[Trademark] and
KeyKids[Trademark] jewel case lines.
#####
All trademarks and registered trademarks are the properties of SoftKey.
2
<PAGE> 1
Exhibit 99.2
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Independent auditors' report................................................................. F-2
Balance Sheets at March 31, 1994 and 1995 and December 31, 1995 (Unaudited).................. F-3
Statements of Operations for the Years Ended March 31, 1993, 1994 and 1995 and for the Nine
Months Ended December 31, 1994 and 1995 (Unaudited)....................................... F-4
Statements of Cash Flows for the Years Ended March 31, 1993, 1994 and 1995 and for the Nine
Months Ended December 31, 1994 and 1995 (Unaudited)....................................... F-5
Statements of Shareholders' (Deficiency) Equity for the Years Ended March 31, 1993, 1994 and
1995 and for the Nine Months Ended December 31, 1995 (Unaudited).......................... F-6
Notes to Financial Statements................................................................ F-7
</TABLE>
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Minnesota Educational Computing Corporation (MECC)
Minneapolis, Minnesota
We have audited the balance sheets of Minnesota Educational Computing
Corporation (MECC) as of March 31, 1994 and 1995 and the related statements of
operations, shareholders' (deficiency) equity and cash flows for each of the
three years in the period ended March 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Minnesota Educational Computing Corporation
(MECC) as of March 31, 1994 and 1995 and the results of its operations and its
cash flows for each of the three years in the period ended March 31, 1995, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
May 24, 1995
(June 30, 1995 as to the second paragraph of Note 4)
F-2
<PAGE> 3
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
<TABLE>
BALANCE SHEETS
<CAPTION>
MARCH 31,
------------------------- DECEMBER 31,
1994 1995 1995
---- ---- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $12,600,365 $15,462,786 $21,214,365
Accounts receivable (net of the allowance for doubtful
accounts and returns of $500,678, $1,320,839 and
$1,235,655, respectively).............................. 3,074,673 4,055,052 8,974,500
Inventories............................................... 871,542 1,333,005 1,952,007
Prepaid expenses.......................................... 9,409 22,439 81,108
Deferred income taxes (Note 8)............................ 300,000 580,000 770,000
----------- ----------- -----------
Total current assets............................... 16,855,989 21,453,282 32,991,980
PROPERTY AND EQUIPMENT, Net (Note 2)............................. 2,553,359 2,666,874 3,236,804
INTANGIBLES, Net:
Capitalized software development costs.................... 481,318 263,809 326,081
Acquired software......................................... 40,199 140,425 741,745
Noncompete agreement...................................... 118,000
Other 16,500
----------- ----------- -----------
Total intangibles, net............................. 656,017 404,234 1,067,826
----------- ----------- -----------
TOTAL ASSETS....................................... $20,065,365 $24,524,390 $37,296,610
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,223,392 $ 1,301,739 $ 2,805,513
Deferred revenue.......................................... 21,079 8,664 8,774
Accrued salaries, bonuses, and employee benefits.......... 844,942 981,729 954,016
Other accrued liabilities................................. 4,596 160,294 51,778
Income taxes payable...................................... 50,000 407,748 1,142,159
Obligations under capital leases (Note 3)................. 23,647
Deferred lease incentives (Note 3)........................ 120,254 133,112 143,777
----------- ----------- -----------
Total current liabilities.......................... 2,287,910 2,993,286 5,106,017
DEFERRED INCOME TAXES (Note 8)................................... 210,000 160,000 160,000
DEFERRED LEASE INCENTIVES (Note 3)............................... 581,210 448,098 337,596
CONTINGENCIES AND COMMITMENTS
(Notes 1 and 3)..............................................
SERIES A REDEEMABLE PREFERRED SHARES--par
value $5.00; authorized 1,000,000; none issued and
outstanding .................................................
SHAREHOLDERS' EQUITY:
Undesignated preferred shares--par value $5.00; authorized
9,000,000; none issued and outstanding.................
Common shares--par value $0.01; authorized 20,000,000;
issued and outstanding--7,688,937, 7,753,679 and
8,033,957, respectively (Note 4)....................... 76,889 77,537 80,340
Additional paid-in capital................................ 19,425,429 19,554,211 25,978,618
Unearned compensation on stock options.................... (46,240)
(Deficit) retained earnings............................... (2,469,833) 1,291,258 5,634,039
----------- ----------- -----------
Total shareholders' equity......................... 16,986,245 20,923,006 31,692,997
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.......................................... $20,065,365 $24,524,390 $37,296,610
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 4
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
--------------------------------------------- -----------------------
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUE........................... $18,021,440 $21,681,158 $28,046,430 $20,996,783 $26,765,964
COST OF SALES......................... 4,811,290 4,857,763 5,685,521 4,261,815 5,346,199
----------- ----------- ----------- ----------- -----------
Gross margin................... 13,210,150 16,823,395 22,360,909 16,734,968 21,419,765
OPERATING EXPENSES:
Marketing...................... 6,665,363 7,457,434 9,665,574 6,771,762 8,693,982
Product development............ 4,612,419 5,144,914 5,477,550 3,903,923 4,867,718
General and administrative..... 2,120,702 1,970,231 2,593,337 1,686,868 2,031,150
Merger-related................. 302,000
Amortization of acquisition-
related intangibles (Note 1) 137,762 206,186 134,500 134,500
----------- ----------- ----------- ----------- -----------
Total operating expenses 13,536,246 14,778,765 17,870,961 12,497,053 15,894,850
----------- ----------- ----------- ----------- -----------
OPERATING (LOSS) INCOME............... (326,096) 2,044,630 4,489,948 4,237,915 5,524,915
INTEREST (EXPENSE)
INCOME (Notes 5 and 6)............ (165,169) (174,465) 575,189 375,199 769,366
----------- ----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE
TAXES............................. (491,265) 1,870,165 5,065,137 4,613,114 6,294,281
PROVISION FOR INCOME
TAXES (Note 8).................... 6,000 10,000 1,270,000 1,243,000 1,951,500
----------- ----------- ----------- ----------- -----------
NET (LOSS) INCOME..................... $ (497,265) $ 1,860,165 $ 3,795,137 $ 3,370,114 $ 4,342,781
=========== =========== =========== =========== ===========
NET (LOSS) INCOME
APPLICABLE TO COMMON
SHAREHOLDERS...................... $ (977,265) $ 1,388,165 $ 3,795,137 $ 3,370,114 $ 4,342,781
=========== =========== =========== =========== ===========
NET (LOSS) INCOME PER
COMMON AND COMMON
EQUIVALENT SHARE
(Note 1).......................... $ (0.19) $ 0.26 $ 0.46 $ 0.41 $ 0.50
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING (Note 1).............. 5,193,827 5,421,434 8,224,662 8,227,976 8,636,764
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 5
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
FISCAL YEARS ENDED
MARCH 31,
----------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ....................................... $(497,265) $ 1,860,165 $ 3,795,137
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation ....................................... 519,239 645,170 788,879
Amortization of:
Capitalized software development costs ........... 227,352 422,102 479,123
Acquired software ................................ 9,000 68,801 341,774
Acquisition-related intangibles .................. 137,762 206,186 134,500
Tax benefit from exercise of stock options ......... 76,000
Deferred income taxes .............................. (90,000) (330,000)
Compensation expense--common stock options ......... 11,560 12,440
Deferred lease incentives .......................... (143,672) (108,670) (120,254)
Loss on sale of equipment .......................... 1,771 903 33,414
Cash provided (used) due to changes in:
Accounts receivable .............................. (99,028) (1,037,636) (980,379)
Inventories ...................................... 80,914 15,089 (461,463)
Prepaid expenses ................................. 38,731 (5,461) (13,030)
Accounts payable ................................. 76,303 (171,995) 78,347
Other liabilities ................................ 173,216 (63,154) 280,070
Income taxes payable ............................. 50,000 357,748
--------- ----------- -----------
Net cash provided by operating
activities............................. 524,323 1,803,060 4,472,306
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................... (608,738) (747,712) (952,972)
Proceeds from sale of equipment ......................... 583 13,541 17,164
Capitalization of software development costs ............ (218,186) (643,748) (261,614)
Acquired software ....................................... (40,000) (78,000) (442,000)
--------- ----------- -----------
Net cash used in investing activities ... (866,341) (1,455,919) (1,639,422)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to related party ............. 975,000 490,000
Payments on note payable to related party ............... (700,000) (1,265,000)
Proceeds from note payable to bank ...................... 1,890,000
Payments on note payable to bank ........................ (1,890,000)
Payments on capital lease obligations ................... (94,687) (29,403) (23,647)
Payment of preferred shares dividend .................... (1,552,000)
Proceeds from issuance of common shares ................. 6,250 14,455,089 53,465
Payments for repurchase of common shares ................ (37,000) (9,041) (281)
--------- ----------- -----------
Net cash provided (used) by financing
activities ............................ 149,563 12,089,645 29,537
--------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................ (192,455) 12,436,786 2,862,421
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .................................... 356,034 163,579 12,600,365
--------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 163,579 $12,600,365 $15,462,786
========= =========== ===========
<CAPTION>
Nine Months Ended
December 31,
------------------
1994 1995
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ....................................... $ 3,370,114 $ 4,342,781
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation ....................................... 578,945 746,505
Amortization of:
Capitalized software development costs ........... 365,886 277,208
Acquired software ................................ 239,008 162,180
Acquisition-related intangibles .................. 134,500
Tax benefit from exercise of stock options ......... 782,400
Deferred income taxes .............................. (190,000)
Compensation expense--common stock options ......... 8,670
Deferred lease incentives .......................... (90,203) (99,837)
Loss on sale of equipment .......................... 8,101 3,028
Cash provided (used) due to changes in:
Accounts receivable .............................. (2,117,730) (4,919,448)
Inventories ...................................... (403,793) (619,002)
Prepaid expenses ................................. (4,356) (58,669)
Accounts payable ................................. 115,535 1,503,774
Other liabilities ................................ (167,438) (136,119)
Income taxes payable ............................. 381,992 734,411
----------- -----------
Net cash provided by operating
activities............................. 2,419,231 2,529,212
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................... (831,092) (1,319,463)
Proceeds from sale of equipment
Capitalization of software development costs ............ (215,464) (339,480)
Acquired software ....................................... (442,000) (763,500)
----------- -----------
Net cash used in investing activities ... (1,488,556) (2,422,443)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to related party
Payments on note payable to related party
Proceeds from note payable to bank
Payments on note payable to bank
Payments on capital lease obligations ................... (23,647)
Payment of preferred shares dividend
Proceeds from issuance of common shares ................. 12,195 5,645,259
Payments for repurchase of common shares ................ (281) (449)
----------- -----------
Net cash provided (used) by financing
activities ............................ (11,733) 5,644,810
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................ 918,942 5,751,579
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .................................... 12,600,365 15,462,786
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $13,519,307 $21,214,365
=========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 6
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
<TABLE>
STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
<CAPTION>
UNEARNED
COMPENSA-
COMMON SHARES ADDITIONAL TION
---------------------- PAID-IN ON STOCK
NUMBER AMOUNT CAPITAL OPTIONS
------ ------ ---------- ---------
<S> <C> <C> <C> <C>
Balance (Deficit) at March 31, 1992 ............. 4,942,875 $ 49,429
Issuance of shares on exercise of stock
options ................................. 5,250 52 $ 6,198
Shares acquired ........................... (84,000) (840) (6,198)
Net loss ..................................
Preferred shares dividend (Note 4) ........
----------- ----------- ----------- --------
Balance (Deficit) at March 31, 1993 ............. 4,864,125 48,641
Issuance of shares:
Initial public offering, less issuance
costs of $1,826,873 (Note 4) ...... 2,123,550 21,235 14,432,442
Exchange of redeemable preferred
stock in conjunction with initial
public offering (Note 4) .......... 701,262 7,013 4,992,987
On exercise of stock options ......... 5,471 55 1,357
Shares acquired ........................... (5,471) (55) (1,357)
Common stock options granted .............. $(57,800)
Common stock options vested ............... 11,560
Net income ................................
Preferred shares dividend (Note 4)
----------- ----------- ----------- --------
Balance at March 31, 1994 ....................... 7,688,937 76,889 19,425,429 (46,240)
Issuance of shares on exercise of stock
options, including related tax benefits . 64,848 649 128,816
Shares acquired ........................... (106) (1) (34)
Common stock options vested ............... 12,440
Common stock options canceled ............. 33,800
Net income ................................
----------- ----------- ----------- --------
Balance at March 31, 1995 ....................... 7,753,679 77,537 19,554,211
Issuance of shares-secondary public
offering, less issuance costs of $640,141
(unaudited) ............................. 200,000 2,000 5,557,859
Issuance of shares on exercise of stock
options, including related tax benefits
(unaudited) ............................. 80,291 803 866,997
Shares acquired (unaudited) ............... (13) (449)
Net income (unaudited) ....................
----------- ----------- ----------- --------
Balance at December 31, 1995 (unaudited) ........ 8,033,957 $ 80,340 $25,978,618 $
=========== =========== =========== ========
<CAPTION>
TOTAL
(DEFICIT) SHAREHOLDERS'
RETAINED (DEFICIENCY)
EARNINGS EQUITY
--------- -------------
Balance (Deficit) at March 31, 1992.................. $(2,900,942) $(2,851,513)
Issuance of shares on exercise of stock
options...................................... 6,250
Shares acquired................................ (29,962) (37,000)
Net loss...................................... (497,265) (497,265)
Preferred shares dividend (Note 4)............ (480,000) (480,000)
----------- -----------
Balance (Deficit) at March 31, 1993.................. (3,908,169) (3,859,528)
Issuance of shares:
Initial public offering, less issuance
costs of $1,826,873 (Note 4)........... 14,453,677
Exchange of redeemable preferred
stock in conjunction with initial
public offering (Note 4)............... 5,000,000
On exercise of stock options.............. 1,412
Shares acquired................................ (7,629) (9,041)
Common stock options granted.................. 57,800
Common stock options vested................... 11,560
Net income.................................... 1,860,165 1,860,165
Preferred shares dividend (Note 4)............ (472,000) (472,000)
----------- -----------
Balance at March 31, 1994............................ (2,469,833) 16,986,245
Issuance of shares on exercise of stock
options, including related tax benefits...... 129,465
Shares acquired................................ (246) (281)
Common stock options vested................... 12,440
Common stock options canceled................. (33,800)
Net income.................................... 3,795,137 3,795,137
----------- -----------
Balance at March 31, 1995............................ 1,291,258 20,923,006
Issuance of shares-secondary public
offering, less issuance costs of $640,141
(unaudited).................................. 5,559,859
Issuance of shares on exercise of stock
options, including related tax benefits
(unaudited).................................. 867,800
Shares acquired (unaudited).................... (449)
Net income (unaudited)........................ 4,342,781 4,342,781
----------- -----------
Balance at December 31, 1995 (unaudited)............. $ 5,634,039 $31,692,997
=========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 7
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS
FISCAL YEARS ENDED MARCH 31, 1993, 1994 AND 1995
AND NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Minnesota Educational Computing Corporation (MECC) (the "Company"), is a
developer and publisher of educational software for the school and home markets.
The Company provides educational software and related services to a diverse
group of primarily domestic customers, with a concentration of revenue from
school districts across the United States. School market sales accounted for
63%, 57% and 53% of total revenue in fiscal years 1993, 1994 and 1995,
respectively and 55% and 40% of total revenue for the nine months ended December
31, 1994 and 1995, respectively. Sales to one customer were 10% of total sales
during fiscal year 1993.
Unaudited Financial Statements--The financial statements as of December 31,
1995 and for the nine months ended December 31, 1994 and 1995 are unaudited. In
the opinion of management, such unaudited financial statements include all
adjustments, consisting of only normal, recurring accruals, necessary for a fair
presentation thereof. The results of operations for any interim period are not
necessarily indicative of the results for the year.
Net Revenue--Revenues from product sales are recognized when the products
are shipped, because, generally, no post-shipment obligations remain
outstanding. Deferred revenue is recorded for the portion of membership
(including MathKeys) sales related to unshipped products. The Company currently
maintains a stock-balancing policy which allows distributors and retailers to
return products according to negotiated terms or pursuant to any promotional
terms which may be in effect. The Company also accepts returns of defective,
shelf-worn and damaged products at any time in accordance with negotiated terms.
The Company does not have any other significant product return or warranty
programs. The Company provides an allowance for estimated returns at the time of
product shipment. The Company has a volume incentive rebate policy which it
offers to certain customers. The rebate is based upon a percentage of a sales
goal which is specific to each customer and is recorded at the time of product
shipment.
Cost of Sales--Cost of sales includes all costs associated with the
manufacture and assembly of the Company's products, including packaging,
warehousing and shipping, as well as royalties paid to co-developers, including
amortization of prepaid royalties, and amortization of capitalized software
development costs and acquired software. In the fiscal years ended March 31,
1993, 1994 and 1995 amortization of capitalized software development costs was
$227,352, $422,102 and $479,123, and amortization of acquired software/prepaid
royalties was $9,000, $68,801 and $341,774, respectively and for the nine months
ended December 31, 1994 and 1995 capitalized software development costs were
$365,886 and $277,208, respectively, and amortization of acquired
software/prepaid royalties was $239,008 and $162,180, respectively.
Concentrations of Credit Risks--The Company's cash and cash equivalents
consist of U.S. Treasury Bills, commercial paper and cash. The majority of these
investments are not specifically insured. The Company has not experienced any
losses on these investments.
The Company also grants credit to customers in the ordinary course of
business. Concentrations of credit risk with respect to trade receivables are
limited due to the number of customers and their geographic dispersion.
F-7
<PAGE> 8
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Inventories--Inventories are stated at the lower of cost or realizable
value, calculated by using the average cost method (which approximates the
first-in, first-out cost method) of inventory valuation. Inventories consist of
software components, primarily manuals, CD-ROM and disks, ready for assembly or
assembled. The Company records a provision each period for identified
slow-moving or obsolete inventory items. The allowance for obsolete and
overstock inventory was $141,434 and $91,000 at March 31, 1994 and 1995,
respectively, and was $88,000 at December 31, 1995.
Acquired Software--The Company enters into contracts to have products
developed by external software developers which involve expenditures to external
developers. To the extent the Company acquires completed software from external
developers or makes expenditures to external developers for development on
products after they have reached technological feasibility, the expenditures are
capitalized and recorded as an asset under acquired software. To the extent the
expenditures for development to external developers are made prior to the
product reaching technological feasibility, they are expensed. Amortization of
acquired software is expensed as part of cost of sales based on the revenue
generated by the product.
Property and Equipment--Property and equipment, which consists principally
of computer and office equipment, purchased application software, furniture and
office partitions, is carried at cost and is depreciated using the straight-line
method over the estimated useful lives of the property.
Intangible Assets--Intangible assets include capitalized software
development costs, acquired software and various other intangible assets
purchased at acquisition, including software, a noncompete agreement, a prepaid
royalty and goodwill. Capitalized software development costs, acquired software
and software purchased at acquisition are amortized on a product-by-product
basis based on the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported. Amortization starts when the product is available for
general release to customers. The noncompete agreement and goodwill are
amortized using the straight-line method. Accumulated amortization of
capitalized software development costs was $853,558, $1,332,681 and $1,609,889
at March 31, 1994 and 1995 and December 31, 1995, respectively. Accumulated
amortization of acquired software was $77,801, $419,575 and $581,755 at March
31, 1994 and 1995 and December 31, 1995, respectively. Accumulated amortization
of acquisition-related intangibles was $568,082 at March 31, 1994 and $702,582
at March 31, 1995, at which time acquisition-related intangibles were fully
amortized. Estimated useful lives of the intangibles are as follows:
Capitalized software development costs... 1--2 years
Acquired software........................ 1--2 years
Acquisition-related intangibles.......... 4 years
F-8
<PAGE> 9
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
The amortization of the acquisition-related intangibles consisted of the
following:
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED MARCH 31, ENDED
---------------------------- DECEMBER
1993 1994 1995 31, 1994
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Amortization of acquisition-related intangibles:
Noncompete agreement .................... $100,000 $157,000 $118,000 $118,000
Other ................................... 37,762 49,186 16,500 16,500
-------- -------- -------- --------
Total ............................. $137,762 $206,186 $134,500 $134,500
======== ======== ======== ========
</TABLE>
Management of the Company periodically reviews the carrying value of its
intangible assets for potential impairment by comparing the carrying value of
these assets with their related, expected future net cash flows. Should the sum
of the related, expected future net cash flows be less than the carrying value,
management would determine whether an impairment loss should be recognized. An
impairment loss would be measured by the amount by which the carrying value of
the asset exceeds the fair value of the asset. To date, management has
determined that no impairment of these assets exists.
Capitalized Software Development Costs and Product Development
Expenses--Product development costs are capitalized as incurred in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86. Total product
development costs capitalized by the Company were $218,186, $643,748, and
$261,614 for the years ended March 31, 1993, 1994 and 1995, respectively, and
$215,464 and $339,480 for the nine months ended December 31, 1994 and 1995,
respectively.
Capitalization of software development costs begins upon the establishment
of technological feasibility. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
revenue, estimated economic life, and changes in software and hardware
technologies.
Income Taxes--The Company records income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes", which requires the use of the liability
method of accounting for deferred income taxes (see Note 8).
Income taxes are deferred for all temporary differences between the
financial statement and tax basis of assets and liabilities. Deferred taxes are
recorded using the enacted tax rates scheduled by tax law to be in effect when
the temporary differences are expected to be settled or realized. Deferred tax
assets are reduced by a valuation allowance to the extent that the assets may
not be realizable.
Cash Equivalents--The Company considers investments with original
maturities of three months or less to be cash equivalents.
Supplemental Cash Flow Information--The Company paid interest of $75,593,
$64,972 and $727 for the years ended March 31, 1993, 1994 and 1995,
respectively, and $1,000 and $0 for the nine months ended December 31, 1994 and
1995, respectively. Interest received for the years ended March 31, 1993, 1994
and 1995 was $8,046,
F-9
<PAGE> 10
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
$10,591 and $523,369, respectively, and for the nine months ended December 31,
1994 and 1995 was $310,000 and $801,000, respectively. Income taxes paid by the
Company were $2,800, $51,729 and $1,166,340 for the years ended March 31, 1993,
1994 and 1995, respectively, and $861,000 and $623,000 for the nine months ended
December 31, 1994 and 1995, respectively.
Net (Loss) Income Per Common and Common Equivalent Share--The net (loss)
income per common and common equivalent share is based on the weighted average
number of common and common equivalent shares outstanding during the period.
Assuming the preferred shares, as discussed in Note 4, were exchanged for common
shares on April 1, 1992, supplementary net (loss) income per common and common
equivalent share would have been $(0.08) and $0.30 for the fiscal years ended
March 31, 1993 and 1994, respectively.
Reclassifications--Certain reclassifications have been made to the 1993 and
1994 financial statements in 1995. Such reclassifications had no effect on net
(loss) income or shareholders' equity.
2. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment is summarized as follows:
<CAPTION>
MARCH 31,
ESTIMATED ---------------------- DECEMBER 31,
LIFE 1994 1995 1995
-------------- ---- ---- ------------
<S> <C> <C> <C> <C>
Computer equipment........... 5 years $2,329,917 $3,000,683 $3,783,507
Purchased software........... 3 years 30,932 30,932 65,585
Office equipment and fixtures 5-7 years 1,363,632 1,400,969 1,754,375
Automobiles.................. 3 years 13,700
Machinery and equipment...... 5 years 355,053 375,494 415,645
Leasehold improvements....... 5 years 31,707 104,391 199,800
---------- ---------- ----------
4,124,941 4,912,469 6,218,912
Less accumulated depreciation 1,571,582 2,245,595 2,982,108
---------- ---------- ----------
Property and equipment, net.. $2,553,359 $2,666,874 $3,236,804
========== ========== ==========
</TABLE>
The net book value of equipment under capital leases was $48,679 at March
31, 1994.
3. LEASES
The Company has both operating and capital leases, the latter being for
office equipment that expired in fiscal year 1995. The noncancelable operating
leases are for office and materials management facilities. Rent expense was
$440,480, $507,032 and $533,540 for the years ended March 31, 1993, 1994 and
1995, respectively, and $393,954 and $433,364 for the nine months ended December
31, 1994 and 1995, respectively.
F-10
<PAGE> 11
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company entered into an operating lease agreement for office space on
June 1, 1991 which has a term of seven years and six months. The Company
received cash incentives in conjunction with this lease agreement. In addition,
the Company was not required to make lease payments for the first six months
under the lease agreement. These lease incentives were deferred and are being
amortized on a straight-line basis over the lease term and are excluded from the
minimum lease payments shown below. The Company has options for space expansion
and an option to extend the term of the lease for two additional periods of
three years each.
In 1991, the Company entered into a lease agreement for a materials
management center with a term of seven years. The agreement contains an option
for space expansion and a one-time option to extend the term of the lease for
three years. The agreement also provides for a right of cancellation for a fee,
two years prior to lease expiration.
On September 19, 1995, the Company entered into an operating lease
agreement for 2,583 square feet of satellite office space in Bellevue,
Washington, at a basic annual rate of $19 per square foot. The term of the lease
is three years with a one-time option to extend the term for another three years
and options for space expansion.
<TABLE>
At March 31, 1995, minimum lease payments under all noncancelable operating
lease agreements are as follows:
<S> <C>
Fiscal 1996................. $ 729,071
Fiscal 1997................. 733,716
Fiscal 1998................. 629,702
Fiscal 1999................. 469,596
----------
Total minimum lease payments $2,562,085
==========
</TABLE>
4. SHAREHOLDERS' EQUITY
Secondary Public Offering--On August 21, 1995, 3,340,000 Common Shares were
sold in a secondary public offering. Of the total shares, 200,000 shares were
sold by the Company and 3,140,000 shares were sold by Selling Shareholders at
$31.00 per share. Net proceeds to the Company were approximately $5,560,000,
after deducting offering costs, including underwriting commissions, of
approximately $640,000.
Common Stock Split--On June 5, 1995, the Company's Board of Directors
approved a 3-for-2 stock split in the form of a 50% stock dividend effective
June 30, 1995. All share and per share amounts in the financial statements have
been restated to reflect the split.
Merger--On May 16, 1996, the Company's stockholders approved the Agreement
and Plan of Merger dated as of October 30, 1995 by and among the Company,
SoftKey International Inc. (SoftKey) and SchoolCo Inc., a wholly-owned
subsidiary of SoftKey (SchoolCo), pursuant to which, on May 17, 1996, SchoolCo
was merged with and into the Company with the Company surviving the merger as a
wholly-owned subsidiary of SoftKey, and each of the Company's Common Shares was
converted into the right to receive 1.14286 shares of SoftKey common stock.
Initial Public Offering--On March 25, 1994, the Company sold 2,123,550
common shares at $7.67 per share in an initial public offering. Net proceeds
were $14,453,677, after deducting offering costs of $1,826,873.
F-11
<PAGE> 12
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
During 1991, the Company issued 1,000,000 Series A preferred shares $5 par
value per share (10,000,000 shares authorized) to the North American Fund II,
L.P. (the "Fund") for $5,000,000. The general partner and manager of the Fund is
North American Business Development Company, L.C. The principals of this general
partner are members of the Company's Board of Directors. In connection with the
Company's initial public offering, all the redeemable preferred shares were
exchanged for 701,262 common shares and all dividends in arrears were paid.
Stock Option Plans--In 1991, under the MECC 1991 Restricted Stock and
Nonqualified Option Plan (the "1991 Plan"), the Company granted stock purchase
awards and issued 480,375 common shares for $22,875 ($0.0476 per share) to
certain officers of the Company. Under the terms of the 1991 Plan, the officers
become vested in the shares ratably over a service period or upon a change in
control of the Company otherwise than pursuant to a public offering of the
Company's common shares.
The Company has also granted stock options to certain officers and
employees under the 1991 Plan (as amended to be consolidated with another
nonqualified stock option plan adopted by the Company in 1991) to purchase
898,508 common shares for exercise prices ranging between $.0476 to $9.50 per
share. Under the terms of the 1991 Plan, the options become exercisable
according to a vesting schedule, in general, over a six-year period or upon a
change in control otherwise than pursuant to a public offering of the Company's
common shares. The 1991 Plan expired in November, 1994.
The 1995 Stock Incentive Plan (the "1995 Plan") has been approved by the
Board of Directors and the Company's shareholders. The aggregate number of
shares that could be issued under the 1995 Plan, as amended, is 900,000 shares
of Common Stock. The 1995 Plan gives discretion to the Compensation Committee of
the Board of Directors to grant unqualified stock options and incentive stock
options, in accordance with such vesting schedules and other terms that the
Compensation Committee deems appropriate.
F-12
<PAGE> 13
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
The following summarizes the activity for the plans:
<CAPTION>
NUMBER OF SHARES
UNDER OPTION PLANS OPTION PRICE PER SHARE
--------------------- ----------------------
1991 1995
---- ----
<S> <C> <C> <C>
Outstanding at March 31, 1992..... 522,113 $ .0476 -- $ 1.1905
Granted.................... 54,075 $1.4286
Exercised and repurchased.. (5,250) $1.1905
Canceled................... (97,020) $ .0476 -- $ 1.4286
--------
Outstanding at March 31, 1993..... 473,918 $ .0476 -- $ 1.4286
Granted.................... 185,220 $1.4286 -- $ 2.1429
Exercised and repurchased.. (5,471) $ .0476 -- $ 1.1905
Canceled................... (27,768) $ .0476 -- $ 1.4286
--------
Outstanding at March 31, 1994..... 625,899 $ .0476 -- $ 2.1429
Granted.................... 91,530 449,250 $ 7.00 -- $11.6667
Exercised.................. (64,848) $ .0476 -- $ 1.7238
Canceled................... (108,622) (37,500) $ .0476 -- $11.6667
-------- ------- ------- --------
Outstanding at March 31, 1995..... 543,959 411,750 $ .0476 -- $11.6667
Granted................... 275,657 $ 15.50 -- $ 28.75
Exercised.................. (80,291) $ .0476 -- $ 8.50
Canceled................... (14,462) (3,685) $ .0476 -- $ 28.00
-------- ------- ------- --------
Outstanding at December 31, 1995.. 449,206 683,722 $ .0476 -- $ 28.75
======== ======= ======= ========
</TABLE>
Options to purchase 38,037, 104,700 and 151,929 shares at March 31, 1993,
1994 and 1995, respectively, were exercisable and the weighted average option
price per share for outstanding options at March 31, 1995 was $6.2246. Options
to purchase 276,288 shares at December 31, 1995 were exercisable and the
weighted average option price per share was $6.1205.
The exercise of nonqualified stock options result in a tax deduction for
the Company equivalent to taxable income recognized by the optionee. For
financial reporting purposes, the tax effect of this deduction is accounted for
as a credit to additional paid-in capital rather than as a reduction in income
tax expense. The options exercised in fiscal 1995 and the nine months ended
December 31, 1995 resulted in a tax benefit to the Company of approximately
$76,000 and $782,400, respectively.
5. RELATED PARTY TRANSACTIONS
Through April 1993, the Company borrowed monies from the Fund under demand
notes bearing interest at prime rate plus one quarter percent per annum.
Interest expense on this debt was $64,000 for fiscal year 1993. The maximum
amount outstanding, the average amount outstanding, and the weighted average
interest rate was $1,475,000, $1,082,877, and 6.63%, respectively, for the year
ended March 31, 1993 and $775,000, $16,986, and
F-13
<PAGE> 14
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6.5%, respectively, for the year ended March 31, 1994. In April 1993, the
Company established a line of credit (see Note 6) and drew on the line to repay
these demand notes.
6. LINE OF CREDIT
In April 1993, the Company established a $1,500,000 bank line of credit.
The bank line of credit was amended in September 1993 to increase the line of
credit to $2,000,000, and again in December 1994 to decrease the line of credit
to $1,000,000. The line of credit expires on October 31, 1996. Interest on the
outstanding borrowings under the line is the reference rate (9.0% at March 31,
1995). The line of credit is secured by the assets of the Company, including
receivables, inventory, and property. At March 31, 1994 and 1995 and December
31, 1995, the Company had no outstanding borrowings under this line of credit.
The covenants of the line credit require the Company to maintain a specific
capital base and maintain certain debt to net worth and current ratios. The
covenants also restrict the Company from expending more than $1,100,000 per
fiscal year for the purchase of fixed assets, or more than $1,700,000 for
purchase or redemption of any shares of its stock (except for redemptions under
the Plan (see Note 4) which may not exceed $300,000), or paying any dividends or
making distribution to shareholders of any assets. The maximum amount
outstanding, the average amount outstanding, and the weighted average interest
rate for the year ended March 31, 1994 was $1,980,000, $1,542,247 and 7.0%,
respectively.
7. EMPLOYEE BENEFIT PLANS
The Company established a defined contribution savings plan in fiscal year
1992 covering substantially all employees who meet eligibility requirements.
Expense under this plan is based on a percentage of each participant's
compensation, and was $182,377, $221,440 and $240,248 for the years ended March
31, 1993, 1994 and 1995, respectively, and $189,760 and $221,379 for the nine
months ended December 31, 1994 and 1995, respectively. Beginning April 1, 1995,
the Company commenced making matching contributions in its Common Shares. The
Company may also make discretionary contributions to the plan; however, no
discretionary contributions have been made.
The Company has employment agreements with certain officers that require
the Company to pay those officers' salary and benefits for up to 12 and 18
months (24 to 36 months under certain change in control circumstances) if the
Company terminates that officer's employment other than because of disability or
for cause (as defined).
F-14
<PAGE> 15
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
8. INCOME TAXES
<TABLE>
Temporary differences and tax carryforwards comprising the net deferred
taxes shown on the balance sheets are as follows:
<CAPTION>
MARCH 31, DECEMBER 31,
-----------------------
1994 1995 1995
---- ---- ------------
<S> <C> <C> <C>
Current Deferred Tax Asset:
Allowance for doubtful accounts and returns............... $ 185,000 $ 480,000 $ 670,000
Inventory................................................. 62,000 48,000 60,000
Prepaid expenses.......................................... 12,000 52,000 40,000
Accruals for employee compensation........................ 41,000
--------- --------- ---------
Total current deferred tax asset.................... $ 300,000 $ 580,000 $ 770,000
========= ========= =========
Noncurrent Deferred Tax Liability:
Accelerated depreciation for tax purposes................. $(239,000) $(240,000) $(285,000)
Capitalized intangible costs.............................. 14,000 125,000 125,000
Other..................................................... 15,000
Tax loss and tax credit carryforwards..................... 720,000 275,000
Valuation allowance....................................... (720,000) (320,000)
--------- --------- ---------
Total noncurrent deferred tax liability............. $(210,000) $(160,000) $(160,000)
========= ========= =========
</TABLE>
At March 31, 1995, the Company has available research and experimental
credits of approximately $220,000 which expire from 2009 to 2011. The Company
also has available alternative minimum tax credit carryforwards of approximately
$55,000 for federal tax purposes; this federal credit can be carried forward
indefinitely.
F-15
<PAGE> 16
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
NOTES TO FINANCIAL STATEMENTS - (CONCLUDED)
<TABLE>
The provisions for income taxes consisted of the following:
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------ -----------------------
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current:
Federal....... $ 90,000 $1,590,000 $1,234,000 $2,121,500
State......... $6,000 10,000 10,000 9,000 20,000
------ -------- ---------- ---------- ----------
6,000 100,000 1,600,000 1,243,000 2,141,500
Deferred:
Federal....... (90,000) (330,000) (190,000)
-------- ---------- ----------
$6,000 $ 10,000 $1,270,000 $1,243,000 $1,951,500
====== ======== ========== ========== ==========
</TABLE>
<TABLE>
The Company's income tax expense differs from the amount computed by
applying the federal income tax rate (34% for the year ended March 31, 1993 and
35% for all periods subsequent to March 31, 1993), to net (loss) income before
taxes as follows:
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
--------------------------------------- ------------------------
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statutory rate applied to (loss)
income before taxes.......... $(169,000) $ 655,000 $1,773,000 $1,615,000 $2,203,000
State income taxes, net......... (25,000) 41,000 (20,000)
Tax credits..................... (389,000) (165,000) (120,000) (100,000)
Valuation allowance adjustment.. 111,000 (341,000) (400,000) (330,000) (320,000)
Nondeductible expenses and
other........................ 89,000 44,000 82,000 78,000 168,500
--------- --------- ---------- ---------- ----------
$ 6,000 $ 10,000 $1,270,000 $1,243,000 $1,951,500
========= ========= ========== ========== ==========
</TABLE>
F-16
<PAGE> 1
Exhibit 99.3
<TABLE>
SOFTKEY INTERNATIONAL INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(in thousands)
(unaudited)
<CAPTION> MECC
Including
Pro Forma Combined
SoftKey Adjustments Pro Forma
------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and
cash equivalents $ 77,479 $ 21,837 $ 99,316
Accounts receivable, net 45,069 5,923 50,992
Inventories 16,683 1,749 18,432
Other current assets 19,943 888 20,831
-------- -------- ----------
159,174 30,397 189,571
Property and equipment, net 19,657 3,206 22,863
Goodwill and other assets, net 642,009 225,612(a) 867,621
-------- -------- ----------
820,840 259,215 1,080,055
======== ======== ==========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable and
accrued liabilities $ 51,303 $ 2,837 $ 54,140
Merger related accruals 30,180 14,800(a) 44,980
Current portion of long-
term obligations 1,002 -- 1,002
Revolving line of credit 25,000 -- 25,000
Other current liabilities 265 636 901
-------- -------- ----------
107,750 18,273 126,023
Long-term obligations 500,000 500,000
Deferred Income taxes 58,684 160 58,844
Other long-term obligations 2,351 301 2,652
-------- -------- ----------
561,035 461 561,496
Stockholders' equity 152,055 240,481(a) 392,536
-------- -------- ----------
$820,840 $259,215 $1,080,055
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
<PAGE> 2
SOFTKEY INTERNATIONAL INC.
<TABLE>
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<CAPTION>
SoftKey The Learning Company Compton's tewi Pro Forma
(pre-acquisition) (pre-acquisition) (pre-acquisition) Adjustments
---------- ---------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES $ 167,042 $60,698 $23,204 $ 3,720 $ --
----------- ------ ------- ------- ----------
COSTS AND EXPENSES:
Costs of production 53,070 13,217 12,874 5,161 --
Sales, marketing
and support 38,370 16,545 11,392 1,439 --
General and
administrative 20,813 8,324 9,559 709 --
Amortization and
merger related charges 103,172 -- 2,039 -- 321,830(b)
Research and
development 12,487 11,738 1,244 -- --
----------- ------ ------- ------- ----------
227,912 49,824 37,108 7,309 321,830
----------- ------ ------- ------- ----------
OPERATING
INCOME(LOSS) (60,870) 10,874 (13,904) (3,589) (321,830)
OTHER INCOME
(EXPENSE), net 705 686 (856) (54) (23,319)(c)
----------- ------ ------- ------- ----------
INCOME (LOSS)
BEFORE TAXES (60,165) 11,560 (14,760) (3,643) (345,149)
----------- ------ ------- ------- ----------
PROVISION (BENEFIT)
FOR INCOME TAXES 5,795 4,162 (5,134) -- (35,037)
----------- ------ ------- ------- ----------
NET INCOME (LOSS) $ (65,960) $7,398 $(9,626) $(3,643) $ (310,112)
=========== ====== ======= ======= ==========
NET INCOME (LOSS)
PER SHARE-
FULLY DILUTED $ (2.65)
===========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING-FULLY
DILUTED 24,855,000 4,632,000(d)
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
SoftKey, The Learning MECC Pro Forma Combined
Company, Compton's Adjustments Pro Forma
and tewi Combined
------------------ ------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 254,664 $33,815 $ -- $ 288,479
----------- ------- ---------- -----------
COSTS AND EXPENSES:
Costs of production 84,322 6,769 -- 91,091
Sales, marketing
and support 67,746 11,588 -- 79,334
General and
administrative 39,405 2,937 -- 42,342
Amortization and
merger related charges 427,041 302 112,196(b) 539,539
Research and
development 25,469 6,442 -- 31,911
----------- ------- ---------- -----------
643,983 28,038 112,196 784,217
----------- ------- ---------- -----------
OPERATING
INCOME(LOSS) (389,319) 5,777 (112,196) (495,738)
OTHER INCOME
(EXPENSE), net (22,838) 969 -- (21,869)
----------- ------- ---------- -----------
INCOME (LOSS)
BEFORE TAXES (412,157) 6,746 (112,196) (517,607)
----------- ------- ---------- -----------
PROVISION (BENEFIT)
FOR INCOME TAXES (30,214) 1,978 -- (28,236)
----------- ------- ---------- -----------
NET INCOME (LOSS) $ (381,943) $ 4,768 $ (112,196) $ (489,371)
=========== ======= ========== ===========
NET INCOME (LOSS)
PER SHARE-
FULLY DILUTED $ (12.95) $ (12.66)
=========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING-FULLY
DILUTED 29,487,000 9,174,000(d) 38,661,000
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of
these pro forma combined condensed consolidated
financial statements.
<PAGE> 3
<TABLE>
SOFTKEY INTERNATIONAL INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1996
(in thousands, except share and per share data)
(unaudited)
<CAPTION>
MECC
Including
Pro Forma Combined
SOFTKEY Adjustments Pro Forma
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 71,133 $ 6,051 $ 77,184
----------- ---------- -----------
COSTS AND EXPENSES:
Costs of production 20,455 1,632 22,087
Sales, marketing
and support 15,380 3,014 18,394
General and
administrative 6,862 708 7,570
Amortization and
merger related
charges 90,512 28,503(b) 119,015
Research and
development 7,897 1,867 9,764
----------- ---------- -----------
141,106 35,724 176,830
----------- ---------- -----------
OPERATING
INCOME (LOSS) (69,973) (29,673) (99,646)
OTHER INCOME
(EXPENSE), net (6,348) 268 (6,080)
----------- ---------- -----------
INCOME (LOSS)
BEFORE TAXES (76,321) (29,405) (105,726)
----------- ---------- -----------
PROVISION (BENEFIT) FOR
INCOME TAXES -- (421) (421)
----------- ------- -----------
NET INCOME (LOSS) $ (76,321) $ (28,984) $ (105,305)
=========== ========== ===========
NET INCOME (LOSS)
PER SHARE-FULLY
DILUTED $ (2.32) $ (2.50)
=========== ============
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING-FULLY
DILUTED 32,874,000 9,174,000(d) 42,048,000
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
<PAGE> 4
SOFTKEY INTERNATIONAL INC.
NOTES TO PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(unaudited)
A. PRO FORMA BASIS OF PRESENTATION AND ADJUSTMENTS
On May 17, 1996, pursuant to the previously announced Agreement and
Plan of Merger, dated as of October 30, 1995 (the "Merger Agreement"), by and
among SoftKey International Inc. ("SoftKey"), SchoolCo Inc., a wholly owned
subsidiary of SoftKey ("SchoolCo"), and Minnesota Educational Computing
Corporation (MECC) ("MECC"), a publisher and distributor of high quality
educational software for children, SchoolCo was merged with and into MECC (the
"Merger"), with MECC surviving the Merger as a wholly owned subsidiary of
SoftKey. Pursuant to the Merger Agreement, at the effective time of the Merger
(the "Effective Time"), each share of common stock, par value $.01 per share,
of MECC ("MECC Common Shares") outstanding immediately prior to the Effective
Time, was converted into the right to receive 1.14286 shares of common stock,
par value $.01 per share, of SoftKey ("SoftKey Common Stock"). The total
estimated purchase price, including other consideration and costs, is
approximately $260,000 (based on the market value of SoftKey Common Stock at
the time the parties reached agreement regarding the framework of a plan to
implement SoftKey's strategic plan with respect to the integration of the
operations of MECC and other acquired businesses of SoftKey into those of
SoftKey). The transaction will be accounted for as a purchase.
On December 28, 1995, SoftKey purchased Compton's NewMedia, Inc. and
Compton's Learning Company (collectively, "Compton's"), developers and
publishers of educational multimedia titles and each a wholly owned subsidiary
of Tribune Company, in exchange for a total of 5,052,697 shares of SoftKey
Common Stock (which included 587,036 shares issued to settle $14,000 of
intercompany debt to Tribune Company) and executed a promissory, which note
was, in accordance with its terms, settled as of April 5, 1996 by the issuance
of approximately 158,099 shares of Softkey Common Stock, note to Tribune
Company for $3,000 for cancellation of intercompany indebtedness, which note
was, in accordance with its terms, settled as of April 5, 1996 by the issuance
of approximately 158,099 shares of SoftKey Common Stock. Total purchase
price was $104,394, including transaction costs, deferred income taxes related
to identifiable intangible assets acquired, settlement of certain intercompany
debt to Tribune Company and assumption of net liabilities of Compton's. The
transaction was accounted for as a purchase.
On December 22, 1995, SoftKey acquired approximately a 95% interest in The
Learning Company ("TLC"), a leading developer of educational software products
for use at home and school, as the first step in a two-step, all cash
transaction resulting in SoftKey owning, effective as of December 27, 1995, the
entire equity interest of TLC. Under the terms of the merger agreement between
SoftKey and TLC, SoftKey purchased all of the outstanding shares of TLC for
total consideration of $684,066, including estimated transaction and other
related costs, value of stock options acquired and deferred income taxes related
to identifiable intangible assets acquired. These shares represent all of TLC
shares outstanding, including vested stock options, as of December 27, 1995.
Approximately 1.1 million
<PAGE> 5
unvested stock options of TLC were converted into options to purchase 3,123,000
shares of SoftKey Common Stock, based on the merger consideration of $67.50
per share, and were vested on January 26, 1996.
In addition, on December 28, 1995, SoftKey announced that Tribune
Company had made a strategic $150,000 investment in SoftKey in connection with
SoftKey's acquisition of TLC. Tribune Company's investment is in the form of
$150,000 principal amount of 5 1/2% Senior Convertible/Exchangeable Notes Due
2000. The notes are either convertible into SoftKey Common Stock at a
conversion price of $53 per share or exchangeable for shares of a newly
designated series of preferred stock of SoftKey which is itself convertible
into SoftKey Common Stock.
On July 21, 1995, SoftKey acquired tewi Verlag GmbH, a distributor of
CD-ROM software and computer-related books, located in Munich, Germany ("tewi").
The purchase price was settled by a combination of cash and issuance of common
stock. SoftKey issued 99,045 shares of SoftKey Common Stock valued at $3,640 and
may issue additional shares of SoftKey Common Stock to a former shareholder of
tewi pursuant to an earn-out agreement. SoftKey paid cash consideration of
$12,688 for tewi. The additional shares issuable under the earn-out agreement
have been treated as contingent consideration and will be recorded as goodwill
if and when certain future conditions are met.
The pro forma combined condensed consolidated balance sheet includes
the financial statements of SoftKey and MECC at March 31, 1996, as if the
acquisition had occurred on March 31, 1996.
The pro forma combined condensed consolidated statement of operations
for the year ended December 31, 1995 sets forth the results of operations for
the year ended December 31, 1995, as if the acquisition of MECC, Compton's,
tewi and TLC by SoftKey had occurred at the beginning of such period. The
pro forma combined condensed consolidated statement of operations for the
quarter ended March 31, 1996 sets forth results of operations for the quarter
ended March 31, 1996 as if the acquisition of MECC had occurred at the
beginning of such period.
The pro forma combined condensed consolidated financial statements are
intended for information purposes and are not necessarily indicative of the
future consolidated financial position or future results of operations of the
combined entity. These combined condensed consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in SoftKey's Current Reports on Form 8-K/A dated October 4, 1995 and
January 25, 1996, SoftKey's Annual Report on Form 10-K for the year ended
January 6, 1996 and SoftKey's Quarterly Report on Form 10-Q for the quarter
ended April 6, 1996, MECC's financial statements for the year ended March 31,
1995 and for the nine month period ended December 31, 1995, TLC's Annual Report
on Form 10-K for the year ended June 30, 1995, as amended by Form 10-K/A dated
November 7, 1995, and TLC's Quarterly Report on Form 10-Q for the three month
period ended September 30, 1995.
<PAGE> 6
B. PRO FORMA ADJUSTMENTS TO PRO FORMA COMBINED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(a) The pro forma combined condensed consolidated balance sheet reflects the
purchase of MECC, as if the transaction had occurred as of March 31, 1996. The
pro forma adjustment to reflect the excess purchase price over the estimated
fair value of net assets of $224,392 for MECC is reflected in goodwill and
other assets. The ultimate allocation of the purchase price for each of the
acquisitions to the net assets acquired, goodwill, other intangible assets and
a charge for incomplete technology is subject to final determination of
their respective fair values. Approximately $14,800 has been included in the
purchase price related to estimated transaction related costs, including
investment banking and legal fees, related out-of-pocket expenses and
restructuring costs.
(b) The pro forma combined condensed consolidated statement of operations
for the year ended December 31, 1995 has been prepared assuming the acquisitions
of MECC, Compton's, TLC and tewi were consummated at the beginning of the fiscal
year ended December 31, 1995. The pro forma combined condensed consolidated
statement of operations for the quarter ended March 31, 1996 has been prepared
assuming the acquisition of MECC was consummated at the beginning of such
quarter. Pro forma adjustments for each of the acquisitions reflect the
amortization of the identifiable intangible assets acquired and goodwill related
to TLC, Compton's and tewi over the estimated useful life of two years on a
straight-line basis. Pro forma adjustments also include amortization of the
excess purchase price over the estimated fair value of the net assets acquired
of MECC over the estimated useful life of two years on a straight-line basis.
Pro forma adjustments include amortization and merger related charges of $28,049
for the quarter ended March 31, 1996. Any allocation of the purchase price to
the fair value of incomplete technology related to MECC could result in a
material charge to operations and a corresponding reduction in the amounts to be
amortized. There were no intercorporate transactions that required elimination.
SoftKey has performed an evaluation of the estimated period of benefit
and the estimated useful life of goodwill and other identifiable intangible
assets acquired in and resulting from the acquisition of MECC, tewi, TLC and
Compton's based upon the following factors. The consumer software industry has
recently undergone significant change evidenced by increased competition,
changes in technology platforms, the increase of on-line and Internet usage,
reductions in product life cycles and a rapidly changing demand preference of
its customer base. These factors limit SoftKey's ability to predict the degree
of success of future performance beyond a short period of time. SoftKey also
intends to implement or is in the process of a corporate restructuring of the
businesses acquired that will result in closure of certain facilities,
reduction in personnel and consolidation of practices. There is no guarantee
that the Company will be successful in this restructuring. These uncertainties
and factors are reflected in the period of time that SoftKey can reasonably
estimate for the estimated useful life of goodwill and other identifiable
intangible assets. Accordingly, SoftKey has determined that estimated useful
life of goodwill to be two years and certain other intangible assets to be in
the range of two to seven years.
<PAGE> 7
(c) The adjustment for $27,500 represents the related interest cost
associated with the issuance of the October Notes and the Tribune Notes
described below.
On October 23, 1995 SoftKey issued $350,000 5 1/2% Senior Convertible Notes
Due 2000 (the "October Notes"). The pro forma combined consolidated statements
of operations include the interest expense associated with the October Notes as
if the issuance occurred at the beginning of the period indicated. Interest
income associated with the proceeds from the October Notes which would
substantially offset the interest expense is not included in the pro forma
statements of operations. Transaction related costs of $11,625 for investment
banker fees, accounting and legal fees, and other various transaction costs
have been deferred and are being amortized over the term of the October Notes.
On December 28, 1995, Tribune Company made a $150,000 strategic
investment in SoftKey in the form of $150,000 principal amount of 5 1/2% Senior
Convertible/Exchangeable Notes Due 2000 (the "Tribune Notes"). The pro forma
combined condensed consolidated statements of operations include the interest
expense associated with the Tribune Notes as if the issuance occurred at the
beginning of the period indicated. Transaction related costs of $1,000 for
accounting and legal fees, and other various transaction costs have been
deferred and are being amortized over the term of the Tribune Notes.
(d) The pro forma combined condensed consolidated statement of operations
for the year ended December 31, 1995 includes an adjustment to add back the
common stock equivalents in the fully diluted earnings per share computation as
the combined entity is in a loss position, and therefore the inclusion of common
stock equivalents would be antidilutive.
In connection with acquisition of Compton's, SoftKey repaid $14,000 of
intercompany debt to Tribune Company by issuing 587,036 additional shares of
SoftKey Common Stock and executed a promissory note to Tribune Company for
$3,000 related to cancellation of intercompany debt, which note was, in
accordance with its terms, settled as of April 5, 1996 by the issuance of
approximately 158,099 shares of SoftKey Common Stock to Tribune Company.
The pro forma share adjustments include, among other things, the issuance
of 4,465,661 shares of SoftKey Common Stock for the acquisition of Compton's,
and approximately 9,174,000 shares for the acquisition of MECC.
