<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 5, 1996
Commission File Number 0-13069
THE LEARNING COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-2562108
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(Address of Principal Executive Offices)
(617) 494-1200
(Registrant's Telephone Number, Including Area Code)
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes X No
----- ------
As of November 8, 1996, there were 44,166,785 outstanding shares of the
issuer's Common Stock, par value $.01 per share.
1
<PAGE> 2
THE LEARNING COMPANY, INC.
--------------------------
TABLE OF CONTENTS
-----------------
Part I - Financial Information
------------------------------
Page
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 1996 (unaudited) and December 31, 1995................ 3
Condensed Consolidated Statements of
Operations for the Three Months and Nine
Months Ended September 30, 1996 and 1995 (unaudited)................ 4
Condensed Consolidated Statements of
Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 (unaudited)....................... 5
Notes to Condensed Consolidated Financial Statements................ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 10
Part II - Other Information
---------------------------
ITEM 1. Legal Proceedings................................................... 14
ITEM 6. Exhibits and Reports on Form 8-K.................................... 14
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE LEARNING COMPANY, INC.
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $104,476 $ 77,832
Accounts receivable (less allowances for returns
of $9,581 and $6,851, respectively) 61,473 32,402
Inventories 15,760 18,997
Other current assets 19,676 23,627
-------- --------
201,385 152,858
Property and equipment, net 22,194 19,621
Goodwill, net 496,798 580,165
Acquired technology and other intangible assets, net 173,415 147,769
-------- --------
$893,792 $900,413
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 66,721 $ 50,603
Current portion of long-term debt 3,199 4,434
Current portion of related party debt -- 4,314
Merger related accruals 12,808 40,089
Revolving line of credit 25,000 --
Due to The Former Learning Company stockholders 328 25,353
-------- --------
108,056 124,793
-------- --------
LONG-TERM OBLIGATIONS:
Senior Convertible Notes 339,650 350,000
Senior Exchangeable/Convertible Note 150,000 150,000
Other long-term obligations 6,233 3,982
-------- --------
495,883 503,982
-------- --------
DEFERRED INCOME TAXES 96,769 57,119
STOCKHOLDERS' EQUITY 193,084 214,519
-------- --------
$893,792 $900,413
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE> 4
THE LEARNING COMPANY, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 90,055 $ 41,579 $ 237,308 $ 119,408
COSTS AND EXPENSES:
Costs of production 23,095 12,656 63,799 38,563
Sales, marketing and support 17,061 9,425 48,311 27,570
General and administrative 7,044 5,929 20,794 18,284
Research and development 9,710 3,097 26,457 8,764
Amortization and merger related
charges 120,818 -- 373,407 --
----------- ----------- ----------- -----------
177,728 31,107 532,768 93,181
OPERATING INCOME (LOSS) (87,673) 10,472 (295,460) 26,227
INTEREST INCOME (EXPENSE), net (5,506) 1,274 (18,225) 517
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES (93,179) 11,746 (313,685) 26,744
PROVISION FOR INCOME TAXES:
Current 6,774 1,703 14,783 3,906
Deferred (6,774) -- (14,783) --
----------- ----------- ----------- -----------
-- 1,703 -- 3,906
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (93,179) $ 10,043 $ (313,685) $ 22,838
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ (2.08) $ 0.36 $ (8.02) $ 0.83
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 44,798,000 28,266,000 39,124,000 27,447,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
THE LEARNING COMPANY, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1996 1995
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(313,685) $ 22,838
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 321,555 7,938
Charge for purchased research and development 56,688 --
Changes in operating assets and liabilities:
Accounts receivable (34,164) (12,135)
Accounts payable and accruals 6,025 (1,841)
Other 8,823 (17,768)
--------- --------
45,242 (968)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets and other (13,456) (9,027)
Payment of merger related accruals (35,414) --
Payments to stockholders of The Former Learning Company (25,025) --
Acquisitions 21,518 (23,325)
Other -- (1,706)
--------- --------
(52,377) (34,058)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases and long-term debt (6,233) (310)
Repurchase of Senior Convertible Notes (8,350) --
Borrowings (repayments) under line of credit 25,000 (4,666)
Proceeds from issuance of common stock for settlement of
expenses 2,888 --
Proceeds from issuance of common stock related to exercise of
stock options, net 21,435 113,996
Other (764) --
--------- --------
33,976 109,020
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (197) 904
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 26,644 74,898
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 77,832 12,205
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 104,476 $ 87,103
========= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE> 6
THE LEARNING COMPANY, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
-------- ------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued to acquire MECC $220,184 $ --
Common stock issued to acquire tewi -- 3,640
Common stock issued in other acquisitions 15,255 8,481
Increase in APIC due to value of in-the-money employee stock
options acquired in connection with the acquisition of MECC 19,444 --
Common stock issued for settlement of expenses 10,132 --
Common stock issued to settle note payable to related party 3,053 --
Equipment acquired under capital leases 1,262 --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
THE LEARNING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Learning Company, Inc.
(formerly known as SoftKey International Inc.) ("TLC" or the "Company") for the
three and nine months ended September 30, 1996 and 1995 are unaudited and
reflect all adjustments, consisting of normal recurring adjustments, which are,
in the opinion of management, necessary for a fair presentation of the results
for the interim periods. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended January 6, 1996. The results of operations for the three and nine months
ended September 30, 1996 are not necessarily indicative of the results for the
entire year ending December 31, 1996.
Effective October 24, 1996 the Company changed its name from SoftKey
International Inc. to The Learning Company, Inc.
The third quarter reporting period for 1996 ended on October 5, 1996 and the
third quarter reporting period for 1995 ended on September 30, 1995. For clarity
of presentation and comparison, all references to the Year Ended December 31,
1995 relate to the period January 1, 1995 to January 6, 1996. The periods from
January 7, 1996 to October 5, 1996 and from January 1, 1995 to September 30,
1995 are referred to as the "Nine Months Ended September 30, 1996" and the "Nine
Months Ended September 30, 1995," respectively, throughout these financial
statements. The periods from July 2, 1995 to September 30, 1995 and from July 7,
1996 to October 5, 1996 are referred to as the "Third Quarter 1995" and the
"Third Quarter 1996," respectively.
On December 28, 1995, the Company acquired Compton's NewMedia, Inc. and
Compton's Learning Company (collectively, "Compton's") in exchange for a
combination of common stock and the assumption of certain intercompany
indebtedness from Tribune Company. On December 22, 1995, the Company acquired
control of The Learning Company ("The Former Learning Company") for cash. On
July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi") in exchange for a
combination of cash and common stock. Each of these acquisitions was accounted
for using the purchase method of accounting. On August 31, 1995, the Company
acquired Future Vision Holding, Inc. ("Future Vision") for common stock. This
transaction was accounted for using the pooling-of-interests method. Prior
period amounts have been restated to reflect the pooling-of-interests with
Future Vision.
On May 17, 1996, the Company acquired the Minnesota Educational Computing
Corporation (MECC) ("MECC"), in exchange for 9,174,349 shares of common stock.
<TABLE>
The purchase price for MECC was allocated as follows:
<CAPTION>
<S> <C>
Purchase Price (inclusive of value of in-the-money
stock options and deferred income taxes) $283,496
Less: Fair value of net tangible assets 13,990
--------
Excess to allocate 269,506
--------
Less: excess allocated to:
Incomplete technology 56,688
Completed technology and products 88,501
Brands and trademarks
894
--------
146,083
--------
Goodwill $123,423
========
</TABLE>
7
<PAGE> 8
<TABLE>
Summarized pro forma combined results of operations for the Nine Months Ended
September 30, 1996 and the Nine Months Ended September 30, 1995 are shown as if
the transactions had occurred at the beginning of the period presented. Pro
forma adjustments relate primarily to amortization of goodwill and complete
technology and merger related charges. The TLC pro forma results of operations
for the Nine Months Ended September 30, 1995 have been prepared assuming the
acquisitions of The Former Learning Company, Compton's and tewi had occurred at
the beginning of the period and include the charge for MECC purchased incomplete
technology. These pro forma combined results of operations include the
historical results from each of the acquired businesses and do not reflect any
reductions in operating costs derived from consolidation of functional
departments in the companies or the one time charges for purchased incomplete
technology of The Former Learning Company and Compton's. In addition, pro forma
combined operating income (loss) includes pro forma amortization of assets
resulting from purchase accounting of $41,128 and $391,468, respectively, and
pro forma interest on convertible debt of $0 and $20,625, respectively, for the
Nine Months Ended September 30, 1996 and the Nine Months Ended September 30,
1995.
<CAPTION>
MECC
Nine Months Ended Including Pro Forma
September 30, 1996 TLC Adjustments Pro Forma Combined
- --------------------------- ---------------------- ------------------- ------------------
<S> <C> <C> <C>
Revenues $ 237,308 $ 7,800 $ 245,108
Operating loss (295,460) (50,340) (345,800)
Net loss (313,685) (41,030) (354,715)
Net loss per share $ (8.02) $ (8.15)
<CAPTION>
TLC MECC
Nine Months Ended Including Pro Forma Including Pro Forma
September 30, 1995 Adjustments Adjustments Pro Forma Combined
- --------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Revenues $ 183,946 $ 22,163 $ 206,109
Operating loss (290,862) (76,330) (367,192)
Net loss (294,605) (63,010) (357,615)
Net loss per share $ (9.06) $ (8.58)
</TABLE>
On August 12, 1996 the Company acquired Edusoft S.A., an educational software
company located in Paris, France, in exchange for the issuance of 752,275 shares
of common stock. In addition, certain stockholders are eligible to earn
additional purchase price dependent upon future operating results. This
acquisition was accounted for as a purchase. The results of operations were not
material to the Company and, accordingly, pro forma information is not provided
herein.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
The excess cost over the fair value of net assets acquired is recorded as
goodwill and is amortized on a straight-line basis over 2 years, except for the
goodwill associated with the Company's Canadian income tax software business,
which is being amortized on a straight-line basis over its estimated useful life
of 40 years. The cost of identified intangible assets is generally amortized on
a straight-line basis over its estimated useful life of 2 to 7 years. Deferred
financing costs are being amortized on a straight-line basis over the term of
the related debt financing. The carrying value of goodwill and intangible assets
is reviewed on a quarterly and annual basis for the existence of facts or
circumstances both internally and externally that may suggest impairment. To
date no such impairment has occurred. Should there be an impairment in the
future, the Company will measure the amount of the impairment based on
discounted expected future cash flows. The cash flow estimates that will be used
will contain management's best estimates, using appropriate and customary
assumptions and projections at the time.
8
<PAGE> 9
3. LONG-TERM OBLIGATIONS
<TABLE>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Senior Convertible Notes $341,650 $350,000
Related party Senior Convertible/
Exchangeable Notes 150,000 154,314
Capital leases 2,073 1,614
Other 5,359 6,802
-------- --------
499,082 512,730
Less: current portion (3,199) (8,748)
-------- --------
$495,883 $503,982
======== ========
</TABLE>
On April 5, 1996 the Company issued 158,099 shares of common stock in settlement
of $3,000 of related party debt plus accrued interest to Tribune Company, a
stockholder.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended January 6, 1996. All
dollar amounts presented in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are presented in thousands, except
per share amounts.
INTRODUCTION
The Learning Company, Inc. (formerly known as SoftKey International Inc.) ("TLC"
or the "Company") is a leading developer and publisher of high quality consumer
software for PC's, primarily produced on CD-ROM. The Company develops, licenses,
manufactures, distributes and markets a wide range of consumer titles in the
lifestyle, edutainment, productivity, entertainment and education categories. In
addition, the Company develops, markets and distributes income tax software and
provides comprehensive nationwide tax processing for personal, corporate and
trust tax returns in Canada.
On May 17, 1996, the Company acquired the Minnesota Educational Computing
Corporation (MECC) ("MECC") in exchange for common stock. On December 28, 1995,
the Company acquired Compton's NewMedia, Inc. and Compton's Learning Company
(collectively "Compton's") in exchange for a combination of common stock and
cancellation of certain intercompany indebtedness from Tribune Company. On
December 22, 1995, the Company acquired control of The Learning Company ("The
Former Learning Company") for cash. On July 21, 1995 the Company acquired tewi
Verlag GmbH ("tewi") in exchange for a combination of cash and common stock.
Each of these transactions were accounted for as a purchase. Accordingly,
results are combined from the date of the respective merger onwards for the
above transactions. Results (in terms of dollar amounts) for the Three and Nine
Months Ended September 30, 1996 are not directly comparable to the Three and
Nine Months Ended September 30, 1995 because they do not include results from
the purchases. Accordingly, management's discussion and analysis for these
periods is generally based upon a comparison of specified results as a
percentage of total revenues.
On August 31, 1995, TLC acquired all of the outstanding common stock of Future
Vision Holding, Inc. This transaction was accounted for using the
pooling-of-interests method of accounting. Prior period results have been
restated to reflect the pooling-of-interest.
RESULTS OF OPERATIONS
NET INCOME. The Company incurred a net loss of $93,179 ($2.08 per fully
diluted share) on revenues of $90,055 in the Third Quarter 1996 and a net loss
of $313,685 ($8.02 per fully diluted share) on revenues of $237,308 in the Nine
Months Ended September 30, 1996 as compared to net income of $10,043 ($0.36 per
fully diluted share) on revenues of $41,579 in the Third Quarter 1995 and net
income of $22,838 ($0.83 per fully diluted share) on revenues of $119,408 in the
Nine Months Ended September 30, 1995. The increase in revenue is primarily a
result of the acquisitions of The Former Learning Company and Compton's in
December 1995 and MECC in May 1996. The net loss in the Third Quarter 1996 and
Nine Months Ended September 30, 1996 is a result of the effect of the
amortization of goodwill and other merger related costs of $120,818 and
$373,407, respectively.
10
<PAGE> 11
<TABLE>
REVENUES. Revenues by distribution channel for the Third Quarter 1996 as
compared to the Third Quarter 1995 and the Nine Months Ended September 30, 1996
as compared to the Nine Months Ended September 30, 1995 are as follows:
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------- ------------------------------------------
1996 % 1995 % 1996 % 1995 %
------- --- ------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail $50,394 56% $20,430 49% $123,503 52% $ 53,038 45%
OEM 8,113 9% 6,471 16% 21,708 9% 14,341 12%
School 7,722 9% -- -- 17,220 7% -- --
Direct response 8,238 9% 6,190 15% 22,372 9% 19,569 16%
International 14,453 16% 7,115 17% 37,123 16% 15,617 13%
Tax software and services 1,135 1% 1,373 3% 15,382 7% 16,843 14%
------- --- ------- --- -------- --- -------- ---
$90,055 100% $41,579 100% $237,308 100% $119,408 100%
======= === ======= === ======== === ======== ===
</TABLE>
Total revenues increased 117% in the Third Quarter 1996 as compared to Third
Quarter 1995 and 99% for the Nine Months Ended September 30, 1996 as compared to
the Nine Months Ended September 30, 1995 due to several factors, including the
effect of revenues from the acquisitions of The Former Learning Company,
Compton's and MECC and an increase in the sales of the Company's Platinum and
KeyKids "jewel-case only" line of products. Retail revenues increased as a
result of the acquisitions of The Former Learning Company, Compton's and MECC
plus a general increase in sales of consumer software products through retailers
such as Office Depot, K-Mart and OfficeMax. International sales increased
primarily as a result of the acquisition of tewi on July 21, 1995 and an
increase in translated foreign language versions of the Company's products
available for sale. Original equipment manufacturer ("OEM") revenues increased
due to the availability of new product offerings for this channel. Direct
response revenues increased on a dollar basis but decreased as a percentage of
revenues due to the overall increase in revenues resulting from product sales of
the acquired companies which did not formerly participate in the direct mail
channel. Prior to the acquisition of The Former Learning Company and MECC, the
Company did not participate in the school channel. Revenues from the Tax
Division declined for the Nine Months Ended September 30, 1996 as compared to
the Nine Months Ended September 30, 1995 as a result of increased competition in
the Canadian income tax market.
<TABLE>
COSTS AND EXPENSES. The Company's costs and expenses and the respective
percentages of revenues for the Third Quarter 1996 as compared to the Third
Quarter 1995 and the Nine Months Ended September 30, 1996 as compared to the
Nine Months Ended September 30, 1995 are as follows:
<CAPTION>
Three Months ended September 30, Nine Months Ended September 30,
---------------------------------------------- --------------------------------------------------
% of % of % of % of
1996 Revenues 1995 Revenues 1996 Revenues 1995 Revenues
------- -------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Costs of production $23,095 25% $12,656 30% $ 63,799 27% $38,563 33%
Sales, marketing and
support 17,061 19% 9,425 23% 48,311 20% 27,570 23%
Research and
development 9,710 11% 3,097 7% 26,457 11% 8,764 7%
General and
administrative 7,044 8% 5,929 14% 20,794 9% 18,284 15%
------- -- ------- -- -------- -- ------- --
$56,910 63% $31,107 74% $159,361 67% $93,181 78%
======= == ======= == ======== == ======= ==
</TABLE>
Total costs and expenses decreased as a percentage of revenues to 63% and 67% in
the Third Quarter 1996 and in the Nine Months Ended September 30, 1996,
respectively, as compared with 74% and 78% in the Third Quarter 1995 and the
Nine Months Ended September 30, 1995, respectively. This decrease as a
percentage of revenues was caused primarily by the reduction in general and
administrative costs and costs of production as a result of the integration and
centralization of the operations of the acquired companies.
Costs of production includes the cost of manuals, packaging, diskettes,
duplication, assembly and fulfillment charges. In addition, costs of production
includes royalties paid to third-party developers and inventory obsolescence
reserves. Costs of production, as a percentage of revenues, decreased in the
Third Quarter 1996 and the Nine Months Ended September 30, 1996 to 25% and 27%
of revenues, respectively, as compared to 30% and 33% of revenues for the Third
Quarter 1995 and the Nine Months Ended September 30, 1995, respectively. The
decrease in
11
<PAGE> 12
costs of production as a percentage of revenues was caused by reduced prices on
the cost to manufacture product and the impact from The Former Learning Company
and MECC having historically higher gross margin selling products than the
Company prior to these acquisitions, an increase in sales in the OEM, school and
direct response channels, all of which typically enjoy higher gross margins than
the Company's traditional retail box product. As well, the Company has seen an
increase in sales of its Platinum line of products, which, due to the nature of
the packaging in a jewel-case, also generate higher gross margins.
Sales, marketing and support expenses decreased to 19% of revenues in the Third
Quarter 1996 as compared to 23% of revenues in the Third Quarter 1995 and 20% of
revenues in the Nine Months Ended September 30, 1996 as compared to 23% of
revenues in the Nine Months Ended September 30, 1995. The percentage decrease
was a result of the Company reducing both fixed costs and employee headcount of
the combined Company following the acquisitions in 1995 and early 1996.
Research and development costs increased to 11% of revenues for both the Third
Quarter 1996 and Nine Months Ended September 30, 1996, as compared to 7% in both
the Third Quarter 1995 and Nine Months Ended September 30, 1995. The increase is
a result of a higher proportion of internally developed products from The Former
Learning Company, Compton's and MECC than previously from the Company prior to
these acquisitions.
General and administrative expenses decreased to 8% of revenues in the Third
Quarter 1996 as compared to 14% in the Third Quarter 1995 and 9% of revenues in
the Nine Months Ended September 30, 1996 as compared to 15% of revenues in the
Nine Months Ended September 30, 1995. This is primarily the result of the
closure of a Future Vision Holding, Inc. facility in New York and consolidation
of finance and manufacturing functions in Europe. In addition, the percentage of
revenues decrease resulted from a general reduction in overhead costs and
employee headcount following the acquisitions in 1995 and 1996.
During the Third Quarter 1996 and Nine Months Ended September 30, 1996, charges
of $120,818 and $373,407, respectively, resulting from the acquisitions of The
Former Learning Company, Compton's and MECC were incurred. Included in the Nine
Months Ended September 30, 1996 is $56,688 related to a charge for in-process
technology and the remainder relates to amortization of goodwill and acquired
technology related assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased from $77,832 at December 31, 1995 to
$104,476 at September 30, 1996. This increase was attributable to the cash
provided by general operations, cash received from the acquisition of MECC of
$21,481 and proceeds from stock option exercises of $21,435, offset by the
repayment of approximately $35,414 of merger related liabilities and purchases
of equipment and other for $13,456. During the Nine Months Ended September 30,
1996 the Company paid $25,025 of amounts due to the stockholders of The Former
Learning Company. During the Nine Months Ended September 30, 1996 the Company
generated cash from operations of $45,242.
As of November 8, 1996 the Company has outstanding $339,650 principal amount 5
1/2% Senior Convertible Notes due 2000 (the "Senior Convertible Notes") and
$150,000 principal amount 5 1/2% Senior Convertible/Exchangeable Notes due 2000
held by the Tribune Company (the "Tribune Notes"). The Senior Convertible Notes
and Tribune Notes will be redeemable by the Company on or after November 2, 1998
at declining redemption prices.
On August 1, 1996, the Company announced that its Board of Directors authorized
the repurchase by the Company over the next twelve months of up to $50 million
principal amount of its Senior Convertible Notes from time to time in the open
market and privately negotiated transactions. Any purchases would depend on
price, market conditions and other factors. The Company intends to use its
excess cash flow from operations for any such purchases. During the Third
Quarter 1996 Senior Convertible Notes declined by $10,350.
The Company also has in place a revolving line of credit (the "Line"), to
provide for a maximum availability of $50,000. Borrowings under the Line become
due on July 1, 1997 and bear interest at the prime rate (8.25% at September 30,
1996). The Line is subject to certain financial covenants, is secured by a
general security interest in
12
<PAGE> 13
certain operating subsidiaries of the Company and by a pledge of the stock of
certain of its subsidiaries. The Line is guaranteed by the Company. There was
$25,000 drawn on the Line at September 30, 1996.
Income generated by the Company's subsidiaries in certain foreign countries
cannot be repatriated to the Company in the United States without payment of
additional taxes since the Company does not currently receive a U.S. tax credit
with respect to income taxes paid by the Company (including its subsidiaries) in
those foreign countries. The Company also conducts its tax software business in
Canada, which has experienced foreign currency exchange rate fluctuation
relative to the US dollar. In order to mitigate this exposure, from time to time
the Company has purchased foreign exchange options contracts, none of which are
outstanding at September 30, 1996.
Cash flow from operations on a short-term basis is positively impacted by the
seasonality of the income tax software business in the first two quarters of the
calendar year. At the present time, the Company expects that its cash flows from
operations will be sufficient to finance the Company's operations for at least
the next twelve months. Longer-term cash requirements are dictated by a number
of external factors, which include the Company's ability to launch new and
competitive products, the strength of competition in the consumer software
industry and the growth of the home computer market. The Company is continuously
evaluating products and technologies for acquisitions, however, no estimation of
short-term or long-term cash requirements for such acquisitions can be made at
this time.
FUTURE OPERATING RESULTS
Certain of the information contained in this Quarterly Report on Form 10-Q which
are not historical facts may include forward looking statements. The forward
looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward looking statements, including those discussed below or
in the Company's Annual Report on Form 10-K for the fiscal year ended January 6,
1996.
The Company's future operating results are subject to a number of uncertainties,
including its ability to develop and introduce new products, the introduction of
competitive products and general economic conditions. In addition, the Company
expects the level of competition in the consumer software industry will become
more intense and that companies with greater access to capital, new products and
retail shelf space may enter its market. In addition, should competitors of the
Company continue to consolidate, it will increase the risk associated with
channel management and product offerings.
The Company has recently completed the acquisitions of The Former Learning
Company, Compton's and MECC and may plan to seek acquisitions of businesses,
products or technologies in the future that are complementary to its current
business. There can be no assurance that the Company will not encounter
difficulties in integrating these or future businesses, products or
technologies. As a result of the acquisitions in 1995 and the acquisition of
MECC in 1996, the Company will have substantial amounts of non-cash amortization
of goodwill and intangible assets over the next few years. This will result in
substantial operating losses in the future.
The rate of change in the consumer software industry has continued to increase.
As consumers have become more accustomed to purchasing multimedia software the
Company believes they have developed, and will continue to develop, increased
sophistication with respect to the content and quality of their software
purchases, demanding increasingly full featured and content rich programs. In
addition, the development time for new platforms on which the Company's products
run is decreasing, requiring the Company to update or discontinue products at
shorter intervals. The Company also anticipates that the future demand for
on-line and Internet compatible products will increase and it will be required
to continuously re-evaluate its product strategy. The Company continually
assesses and redefines its existing distribution strategy to meet these future
demands. These factors make the Company's future revenue and profitability
increasingly unpredictable.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations is provided pursuant to applicable
regulations of the Securities and Exchange Commission and is not intended to
serve as a basis for projections of future events.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings other than ordinary
routine litigation and arbitration incidental to its business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Amended and Restated Combination Agreement by and among WordStar
International Incorporated, SoftKey Software Products Inc., Spinnaker
Software Corporation and SSC Acquisition Corporation dated as of
August 17, 1993, as amended(1)
2.2 Agreement and Plan of Merger dated November 30, 1995 by among the
Company, Cubsco I Inc., Cubsco II Inc., Tribune Company, Compton's
NewMedia, Inc., and Compton's Learning Company(2)
2.3 SoftKey/TLC Agreement and Plan of Merger dated December 6, 1995 among
the Company, Kidsco Inc. and The Learning Company(2)
2.4 Agreement and Plan of Merger by and among the Company, SchoolCo Inc.
and Minnesota Educational Computing Corporation (MECC) dated as of
October 30, 1995(3)
3.1 Restated Certificate of Incorporation, as amended(4)
3.2 Bylaws of the Company, as amended(4)
4.1 Indenture dated as of October 16, 1995 between the Company and State
Street Bank and Trust Company, as Trustee, for 5 1/2% Senior
Convertible Notes due 2000 (the "Indenture")(3)
4.2 First Supplemental Indenture to the Indenture, dated as of November
22, 1995, by and between the Company and State Street Bank and Trust
Company, as Trustee(5)
4.3 Note Resale Registration Rights Agreement dated as of October 23, 1995
by and between the Company, on the one hand, and the Initial
Purchasers set forth therein, on the other hand (the "Registration
Rights Agreement")(5)
4.4 Letter Agreement dated November 22, 1995 amending the Registration
Rights Agreement(5)
4.5 Form of Securities Resale Registration Rights Agreement by and among
the Company and Tribune Company(6)
4.6 Form of Indenture between the Company and State Street Bank and Trust
Company, as Trustee, for 5 1/2% Senior Convertible/Exchangeable Notes
Due 2000(2)
10.1 Fifth Amendment dated as of October 4, 1996 by and among SoftKey Inc.
and Fleet Bank of Massachusetts, N.A. to Credit Agreement dated as of
September 30, 1994
11.1 Statement Re: Computation of Per Share Earnings
14
<PAGE> 15
- ----------------------
1 Incorporated by reference to schedules included in the Company's
definitive Joint Management Information Circular and Proxy Statement
dated December 27, 1993.
2 Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
3 Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995.
4 Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 6,
1996.
5 Incorporated by reference to exhibits filed with Company's
Registration Statement on Form S-3 (Reg No. 333- 145), filed January
26, 1996.
6 Filed as exhibits to Exhibit 2.2 hereto.
(b) REPORTS ON FORM 8-K
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEARNING COMPANY, INC.
November 11, 1996
/s/ R. Scott Murray
-----------------------------------
R. Scott Murray
Chief Financial Officer
(principal financial and accounting
officer)
16
<PAGE> 17
EXHIBIT INDEX
-------------
EXHIBIT PAGE
NUMBER DESCRIPTION Number
- ------- ----------- ------
2.1 Amended and Restated Combination Agreement by and among
WordStar International Incorporated, SoftKey Software
Products Inc., Spinnaker Software Corporation and SSC
Acquisition Corporation dated as of August 17, 1993, as
amended(1)
2.2 Agreement and Plan of Merger dated November 30, 1995 by
among the Company, Cubsco I Inc., Cubsco II Inc., Tribune
Company, Compton's NewMedia, Inc., and Compton's Learning
Company(2)
2.3 SoftKey/TLC Agreement and Plan of Merger dated December 6,
1995 among the Company, Kidsco Inc. and The Learning
Company(2)
2.4 Agreement and Plan of Merger by and among the Company,
SchoolCo Inc. and Minnesota Educational Computing
Corporation (MECC) dated as of October 30, 1995(3)
3.1 Restated Certificate of Incorporation, as amended(4)
3.2 Bylaws of the Company, as amended(4)
4.1 Indenture dated as of October 16, 1995 between the Company
and State Street Bank and Trust Company, as Trustee, for 5
1/2% Senior Convertible Notes due 2000 (the "Indenture")(3)
4.2 First Supplemental Indenture to the Indenture, dated as of
November 22, 1995, by and between the Company and State
Street Bank and Trust Company, as Trustee(5)
4.3 Note Resale Registration Rights Agreement dated as of
October 23, 1995 by and between the Company, on the one
hand, and the Initial Purchasers set forth therein, on the
other hand (the "Registration Rights Agreement")(5)
4.4 Letter Agreement dated November 22, 1995 amending the
Registration Rights Agreement(5)
4.5 Form of Securities Resale Registration Rights Agreement by
and among the Company and Tribune Company(6)
4.6 Form of Indenture between the Company and State Street Bank
and Trust Company, as Trustee, for 5 1/2% Senior
Convertible/Exchangeable Notes Due 2000(2)
10.1 Fifth Amendment dated as of October 4, 1996 by and among
SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit
Agreement dated as of September 30, 1994
11.1 Statement Re: Computation of Per Share Earnings
- ----------------------
1 Incorporated by reference to schedules included in the Company's
definitive Joint Management Information Circular and Proxy Statement
dated December 27, 1993.
2 Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
3 Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995.
17
<PAGE> 18
4 Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 6,
1996.
5 Incorporated by reference to exhibits filed with Company's
Registration Statement on Form S-3 (Reg No. 333- 145), filed January
26, 1996.
6 Filed as exhibits to Exhibit 2.2 hereto.
18
<PAGE> 1
Exhibit 10.1
------------
FIFTH AMENDMENT TO LOAN DOCUMENTS
---------------------------------
AMENDMENT dated as of October 4, 1996 (the "AMENDMENT") by and among
SOFTKEY INC., a Minnesota corporation ("SOFTKEY"), MINNESOTA EDUCATIONAL
COMPUTING CORPORATION (MECC), a Minnesota corporation ("MECC"), SOFTKEY
MULTIMEDIA INC., a Massachusetts corporation ("MULTIMEDIA"), and THE LEARNING
COMPANY, a Delaware corporation, each referred to hereinafter as a "BORROWER"
and, collectively, as the "BORROWERS", and FLEET NATIONAL BANK, as successor in
interest to Fleet Bank of Massachusetts, N.A. (together with its successors, the
"BANK").
PRELIMINARY STATEMENT
1. SoftKey and its corporate affiliates SchoolCo Inc., a Minnesota
corporation ("SCHOOLCO"), Multimedia and The Learning Company, each a
wholly-owned subsidiary of SoftKey International Inc., a Delaware Corporation
(the "GUARANTOR") (SoftKey and such affiliates being collectively referred to
herein as the "ORIGINAL BORROWERS"), are parties with the Bank to a Credit
Agreement dated as of September 30, 1994, as previously amended by a letter
amendment dated as of December 5, 1994, a Second Amendment to Loan Documents
dated as of May 17, 1995, a Third Amendment to Loan Documents dated as of
December 22, 1995, and a Fourth Amendment to Loan Documents dated as of February
28, 1996 (as so amended and as the same may be amended, supplemented or
otherwise modified from time to time, the "CREDIT AGREEMENT"), pursuant to which
the Bank agreed to make Revolving Line of Credit Loans to SoftKey and the other
Original Borrowers up to a maximum aggregate principal amount of $50,000,000.
Unless otherwise defined herein, capitalized terms used herein shall have the
same respective meanings as set forth in the Credit Agreement.
2. Pursuant to a certain plan of reorganization and merger, SchoolCo has
merged with and into MECC. As a consequence, MECC is the legal successor to
SchoolCo and a wholly-owned subsidiary of the Guarantor.
3. The Bank and the Borrowers wish to amend and waive compliance with
certain provisions of the Credit Agreement and the other Loan Documents on the
terms set forth herein, including, without limitation, by confirming that MECC
has become a co-Borrower with SoftKey, Multimedia and The Learning Company under
the Credit Agreement and the other Loan Documents.
NOW THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
I. Section Amendments to Credit Agreement.
------------------------------
A. Section 1.1 is hereby amended by deleting the date "June 30,
1997" appearing in the fourth line thereof and substituting in lieu thereof the
date "June 30, 1998".
A. Section 1.5 is hereby amended by deleting the date "July 1, 1997"
appearing in the third line thereof and substituting in lieu thereof the date
"July 1, 1998".
<PAGE> 2
A. Section 3.2 is hereby amended by amending and restating the last
sentence thereof to read as follows:
"In order to secure the obligations of the Guarantor under the Guaranty,
the Guarantor shall enter into an amended and restated pledge agreement in
the form previously agreed upon by the Guarantor and the Bank (the "SECOND
AMENDED AND RESTATED PLEDGE AGREEMENT"), pursuant to which the Guarantor
shall pledge to the Bank all the outstanding shares of capital stock of
SoftKey and the New Subsidiaries."
A. Section 6.12(a) is hereby amended by deleting the period at the
end of the first sentence thereof and substituting the following in lieu
thereof:
"; PROVIDED, HOWEVER, that the aforesaid list, description and other
information relating to the intellectual property and products of MECC
shall be provided to the Bank on or before October 4, 1996."
A. Section 6.12(b) is hereby amended by deleting the period at the
end of the first sentence thereof and substituting the following in lieu
thereof:
"; PROVIDED, HOWEVER, that in the case of MECC such action shall be taken
on or before October 4, 1996."
A. Section 6.12(b) is hereby further amended by deleting the phrase
"SCHEDULE B" and substituting in lieu thereof the phrase "SCHEDULE A".
A. Section 6.13(a) is hereby amended by deleting the period
following the date "January 1, 1996" and substituting the following in lieu
thereof:
"; PROVIDED, HOWEVER, that in the case of MECC such action shall be taken
on or before October 4, 1996."
A. Section 7.8 is hereby amended by deleting the word "and" from the
phrase "and (e)" and by deleting the period following the phrase "SCHEDULE A"
and substituting the following in lieu thereof:
"; and (f) subject to the conditions set forth below, payments, not to
exceed $30,000,000 in the aggregate, for the purpose of repurchasing the
Borrower's 5 1/2% Senior Convertible Notes due 2000 (the "SENIOR
CONVERTIBLE NOTES"); PROVIDED, HOWEVER, that (i) any such payments shall be
made only during the fiscal quarters ending October 5, 1996 and January 4,
1997, (ii) the amount of such payments made during the fiscal quarter
ending October 5, 1996 shall not exceed $10,000,000 in the aggregate, (iii)
the amount of such payments made during the fiscal quarter ending January
4, 1997 shall not exceed $20,000,000 in the aggregate, and (iv) in the
event the Borrower makes any such payment during either of the
aforementioned fiscal quarters, it shall at the end of the immediately
succeeding fiscal quarter maintain cash in an amount equal to at least
$50,000,000 plus the aggregate amount of the then outstanding Extensions of
Credit."
A. Section 7.13 is hereby amended by adding the following sentence
at the end thereof:
"For purposes of this Section 7.13, any gains resulting from the repurchase
of Senior Convertible Notes or other Indebtedness of the Borrower shall not
be taken into account for purposes of calculating Adjusted Net Income."
<PAGE> 3
A. Sections 7.14 and 7.15 are hereby amended and restated in their
entirety as follows:
"7.14 LEVERAGE RATIO. In the case of the fiscal quarter ending on January
4, 1997 and each fiscal quarter thereafter, the Borrowers will not permit
the Leverage Ratio to be greater than 3.75 to 1 for the four fiscal
quarters ending with such quarter; PROVIDED, HOWEVER, in the event that the
Tribune Notes are during such fiscal quarter exchanged for preferred stock
(unless the Borrowers furnish evidence reasonably satisfactory to the Bank
in the form of a legal opinion, accountants' letter or otherwise to the
effect that such preferred stock would not be treated as stockholders'
equity but as indebtedness under GAAP or applicable law) in accordance with
the terms thereof, the maximum Leverage Ratio shall be immediately
readjusted to 3.0 to 1.
"7.15 INTEREST COVERAGE RATIO. The Borrowers will not permit the Interest
Coverage Ratio to be less than (a) 3.0 to 1 for the fiscal quarter ending
July 6, 1996, (b) 3.5 to 1 for the fiscal quarter ending October 5, 1996
and (c) in the case of the fiscal quarter ending January 4, 1997 and each
fiscal quarter thereafter, 3.5 to 1 for the four fiscal quarters ending
with such quarter."
A. Section 9 is hereby amended by amending and restating the
definitions of "Borrowers", "Leverage Ratio", "New Subsidiaries" and "Security
Instruments" as follows:
""BORROWERS" shall mean SoftKey and each of the New Subsidiaries."
""LEVERAGE RATIO" means, for any period, the ratio of Funded
Indebtedness less cash in excess of $10 million to Operating Cash
Flow."
""NEW SUBSIDIARIES" shall mean MECC, The Learning Company and
Multimedia."
""SECURITY INSTRUMENTS" shall mean, collectively, the security
agreements executed by SoftKey and the New Subsidiaries, including
without limitation the New Subsidiary Security Agreements, and each
other instrument or agreement that purports to secure the Obligations
of the Borrowers to the Bank."
A. Section 9 is hereby further amended by adding the following
definition of "Senior Convertible Notes":
""SENIOR CONVERTIBLE NOTES" shall have the meaning set forth in
Section 7.8."
A. Section 10.15 is hereby amended by deleting from the first
sentence thereof the phrase "SchoolCo and each New Subsidiary" and substituting
in lieu thereof the phrase "Each New Subsidiary".
A. The Credit Agreement is hereby further amended by replacing the
Schedule appearing as "Schedule B -- Designated Software Products" with the
Schedule appended hereto as SCHEDULE A.
I. Section Amendments to Other Loan Documents.
----------------------------------
A. (a) The definition of "Secured Obligations" in Section 1 of the
Security Agreement dated as of September 30, 1994 between SoftKey and the Bank
(the "SOFTKEY SECURITY AGREEMENT") is hereby amended by deleting the phrase
"SchoolCo Inc.
<PAGE> 4
" and substituting in lieu thereof the phrase "Minnesota Educational Computing
Corporation (MECC)".
(b) The SoftKey Security Agreement is hereby further amended by
making such other changes thereto as may be necessary or appropriate to reflect
the amendment to the definition of "Secured Obligations" set forth in Section
2.1(a) hereof.
(c) Section 1 of the SoftKey Security Agreement is hereby further
amended by adding the following new definition:
""INVESTMENT PROPERTY" means all "investment property" (as
defined in the Uniform Commercial Code as in effect in The Commonwealth of
Massachusetts from time to time), whether now owned or hereafter acquired
by the Company."
(d) Section 3(a) of the SoftKey Security Agreement is hereby
amended by inserting the following new item (iii-a) between existing items (iii)
and (iv) in the list of Collateral set forth therein:
"(iii-a) Investment Property;".
A. (a) The definition of "Borrowers" in Section 1 of the Amended
and Restated Security Agreement dated as of February 28, 1996 between The
Learning Company and the Bank (the "LEARNING COMPANY SECURITY AGREEMENT") is
hereby amended and restated in its entirety as follows:
""BORROWERS" means the Company, SoftKey, Minnesota Educational
Computing Corporation (MECC) and SoftKey Multimedia Inc., together with the
respective successors of the foregoing corporations and any other
corporation or entity that shall in the future become a "Borrower" for
purposes of the Credit Agreement."
(b) The Learning Company Security Agreement is hereby further
amended by making such other changes thereto as may be necessary or appropriate
to reflect the amendment to the definition of "Borrowers" set forth in Section
2.2(a) hereof.
(c) Section 1 of the Learning Company Security Agreement is
hereby further amended by adding the following new definition:
""INVESTMENT PROPERTY" means all "investment property" (as
defined in the Uniform Commercial Code as in effect in The Commonwealth of
Massachusetts from time to time), whether now owned or hereafter acquired
by the Company."
(d) Section 3 of the Learning Company Security Agreement is
hereby amended by inserting the following new item (iii-a) between existing
items (iii) and (iv) in the list of Collateral set forth therein:
"(iii-a) Investment Property;".
A. (a) The definition of "Borrowers" in the Security Agreement
dated as of February 28, 1996 between Multimedia and the Bank (the "MULTIMEDIA
SECURITY AGREEMENT") is hereby amended and restated in its entirety as follows:
""BORROWERS" means the Company, SoftKey, Minnesota Educational
Computing Corporation and The Learning Company, together with the
respective successors of the foregoing corporations and any other
corporation or entity that shall in the future become a "Borrower" for
purposes of the Credit Agreement."
<PAGE> 5
(b) The Multimedia Security Agreement is hereby further amended
by making such other changes thereto as may be necessary or appropriate to
reflect the amendment to the definition of "Borrowers" set forth in Section
2.3(a) hereof.
(c) Section 1 of the Multimedia Security Agreement is hereby
further amended by adding the following new definition:
""INVESTMENT PROPERTY" means all "investment property" (as
defined in the Uniform Commercial Code as in effect in The Commonwealth of
Massachusetts from time to time), whether now owned or hereafter acquired
by the Company."
(d) Section 3 of the Multimedia Security Agreement is hereby
amended by inserting the following new item (iii-a) between existing items (iii)
and (iv) in the list of Collateral set forth therein:
"(iii-a) Investment Property;".
I. Section Conditions of Effectiveness.
----------------------------
This Amendment shall be deemed effective as of October 4, 1996 (the
"EFFECTIVE DATE"), provided that the Bank shall have received the following on
or before such date:
1. two copies of this Amendment executed by each Borrower;
1. the Third Amendment to Guaranty in the form enclosed duly
executed by the Guarantor;
1. an amended and restated promissory note in the form
enclosed duly executed by each Borrower (the "AMENDED NOTE");
1. an amended and restated pledge agreement in the form
enclosed herewith (the "SECOND AMENDED AND RESTATED PLEDGE AGREEMENT") duly
executed by the Guarantor, together with stock certificates representing all the
outstanding shares of capital stock of SoftKey, The Learning Company, Multimedia
and MECC, together with appropriate stock powers executed in blank;
1. the amended and restated security agreement in the form
enclosed herewith (the "MECC SECURITY AGREEMENT") duly executed by MECC,
pursuant to which MECC grants to the Bank a security interest in all its assets,
together with such UCC financing statements as the Bank may request duly
executed by MECC;
1. a certificate of the Secretary or Assistant Secretary of
each of SoftKey, The Learning Company and Multimedia as to resolutions of the
Board of Directors of each such corporation authorizing this Amendment and the
Amended Note;
1. a certificate of the Secretary or Assistant Secretary of
MECC certifying as to (i) the charter and by-laws of MECC; (ii) resolutions of
the Board of Directors of MECC authorizing the transactions and the execution of
the documents contemplated hereby; and (iii) the incumbency and specimen
signatures of the officers of MECC authorized to execute and deliver this
Amendment, the Amended Note, the MECC Security Agreement and any other Loan
Documents;
1. a Certificate of the Secretary or Assistant Secretary of
the Guarantor as to resolutions of the Board of Directors of the Guarantor
authorizing the Second Amended and Restated Pledge Agreement and the the Third
Amendment to Guaranty;
<PAGE> 6
1. opinions of counsel to each of the Borrowers and the
Guarantor in form and substance reasonably acceptable to the Bank; and
1. a certificate of the chief financial officer of SoftKey
to the effect that the acquisition of MECC has been consummated substantially in
accordance with the acquisition terms and conditions previously disclosed to the
Bank and attaching true and complete copies of the operative acquisition
documents.
I. Section Special Covenants And Representations With Regard To The Addition
-----------------------------------------------------------------
Of Mecc As A Co-Borrower.
- ------------------------
A. MECC does hereby assume and agree to perform all of the
obligations of SchoolCo, its corporate predecessor, of whatever kind under and
pursuant to the Credit Agreement and the other Loan Documents to which SchoolCo
was a party. Each of MECC, The Learning Company and Multimedia (the "NEW
SUBSIDIARIES") hereby agrees, jointly and severally with SoftKey, to be bound by
the terms and conditions of the Credit Agreement and shall, for all purposes
thereof, be a "Borrower" thereunder as of the Effective Date.
A. Each of the New Subsidiaries, jointly and severally with
SoftKey, hereby represents, warrants and covenants to the Bank that, after
giving effect to this Amendment and to the transactions contemplated hereby:
1. The execution, delivery and performance by such
New Subsidiary of this Amendment, the Amended Note and the Security
Instruments to which it is a party will directly and indirectly inure to
the benefit of such New Subsidiary, are in pursuit of its business purposes
as an integral part of the business conducted and proposed to be conducted
by SoftKey together with such New Subsidiary and are reasonably necessary
and convenient in connection with the conduct of the business conducted and
proposed to be conducted by it. By virtue of the foregoing, among other
things, each New Subsidiary is receiving at least reasonably equivalent
consideration from the Bank for its obligations undertaken under this
Amendment, the Amended Note and the Security Instruments to which it is a
party.
1. After giving effect to the transactions
contemplated by this Amendment, each New Subsidiary has, and will have
access to, adequate capital for the conduct of its business and the ability
to pay its debts from time to time incurred in connection therewith as such
debts mature.
1. Each New Subsidiary has and, after giving
effect to the transactions contemplated hereby, will have assets having a
fair saleable value in excess of the amount required to pay its probable
liability on its existing debts as they become absolute and matured.
The foregoing representations and warranties shall constitute representations
and warranties of the New Subsidiaries under the Credit Agreement. Each of such
representations and warranties shall survive and not be waived by the execution
and delivery of this Amendment.
I. Section Confirmation Of Representations, Absence Of Default.
---------------------------------------------------
Each Borrower (including without limitation the New Subsidiaries) hereby
confirms that the representations set forth in the Loan Documents (including
without limitation those set forth in Section 6.9 of the Credit Agreement as to
use of proceeds), as amended by this Amendment, are true and correct as of the
date hereof, subject to the exceptions
<PAGE> 7
and further disclosures set forth in SCHEDULE B hereto. Each Borrower hereby
confirms that, except as set forth in Section 6 hereof or in SCHEDULE B hereto,
no Event of Default has occurred and is continuing under the Credit Agreement.
I. Section Waiver of Certain Existing Defaults.
-----------------------------------
The Bank and the Borrowers acknowledge and agree that certain Events of
Default (the "EXISTING DEFAULTS") have occurred and currently exist with respect
to the financial covenants set forth in Section 7.12, Section 7.14 and Section
7.15 of the Credit Agreement as in effect prior to the effectiveness of this
Amendment. The Bank hereby waives, effective upon the Effective Date, the
Existing Defaults, PROVIDED that this waiver shall in no event be deemed to
constitute a waiver with respect to any fiscal period other than the fiscal
period ended April 6, 1996 or with respect to any covenants other than the
financial covenants identified in this Section 6.
I. Section Reference to and Effect on the Credit Agreement and the other Loan
------------------------------------------------------------------
Documents.
- ---------
A. Upon the Effective Date, each reference in the
Credit Agreement to "this Credit Agreement", "hereunder", "hereof", "herein", or
words of like import referring to the Credit Agreement, and each reference in
the Amended Note and each of the other Loan Documents to "the Credit Agreement",
"thereunder", "thereof", "therein", or words of like import referring to the
Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended hereby.
A. Upon the Effective Date, each reference in the
Credit Agreement and the other Loan Documents to the "Borrowers" shall mean and
be a reference to the "Borrowers" or to "each Borrower" as the context may
require, and shall reflect the addition of the MECC as a co-borrower on a joint
and several basis under the Credit Agreement and the other Loan Documents.
A. Except as specifically amended above, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed. Except for the original promissory note and the amended and restated
promissory notes dated as of December 22, 1995 and February 28, 1996, each of
which is superseded by the Amended Note and has been, or will be, marked
"cancelled" and returned to SoftKey, each of the other Loan Documents, as
amended hereby, is in full force and effect and is hereby ratified and
confirmed. Each Borrower (and the Guarantor by its execution of the Third
Amendment to Guaranty) agrees that, as of the date hereof, it has no defenses
against the obligations represented by the Credit Agreement, the Amended Note,
the Guaranty or the other Loan Documents.
A. The amendments and waivers set forth herein (i) do
not constitute a waiver or modification of any term, condition or covenant of
the Credit Agreement, the Amended Note, any other Loan Documents or any of the
instruments or documents referred to by the foregoing documents, other than as
expressly set forth herein, and (ii) shall not prejudice any rights which the
Bank may now or hereafter have under or in connection with the Credit Agreement,
the Amended Note, the other Loan Documents or any of the instruments or
documents referred to therein.
<PAGE> 8
I. Section Cost and Expenses.
-----------------
Each Borrower agrees, jointly and severally, to pay on demand all costs and
expenses of the Bank in connection with the preparation, reproduction, execution
and delivery of this Amendment and any other instruments and documents to be
delivered hereunder, including the reasonable fees and out-of-pocket expenses of
Sullivan & Worcester LLP, special counsel for the Bank with respect thereto.
I. Section Governing Law.
-------------
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
I. Section Counterparts.
------------
This Amendment may be signed in one or more counterparts each of which
shall constitute an original and all of which, when taken together, shall
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be
executed under seal by their respective officers thereunto duly authorized as of
the date first above written.
SOFTKEY INC.
By:
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
MINNESOTA EDUCATIONAL
COMPUTING CORPORATION (MECC)
By:
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
THE LEARNING COMPANY
By:
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
<PAGE> 9
SOFTKEY MULTIMEDIA INC.
By:
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
FLEET NATIONAL BANK, as successor in
interest to Fleet Bank of
Massachusetts, N.A.
By:
------------------------------
Name: Thomas W. Davies
Title: Vice President
<PAGE> 10
SCHEDULE A
SCHEDULE A -- Designated Software Products
------------------------------------------
(Section 6.12 of the Credit Agreement)
<PAGE> 11
SCHEDULE B
Exceptions and Qualifications to Representations
------------------------------------------------
(Section 5 of this Amendment)
[If none, please initial:___________]
<PAGE> 1
EXHIBIT 11.1
THE LEARNING COMPANY, INC.
<TABLE>
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
FULLY DILUTED
Net income (loss) $ (93,179) $ 10,043 $ (313,685) $ 22,838
Weighted average common and Exchangeable Shares
outstanding 44,798,000 26,534,000 39,124,000 25,918,000
Incremental shares calculated by the Treasury -- 1,732,000 -- 1,529,000
Stock Method applied to options, convertible
debentures and warrants issued, using the greater of
the closing and average fair value
----------- ----------- ------------ -----------
Common and common share equivalents outstanding
for purposes of calculating fully diluted
earnings per share 44,798,000 28,266,000 39,124,000 27,447,000
----------- ----------- ----------- -----------
Fully diluted earnings (loss) per share $ (2.08) $ 0.36 $ (8.02) $ 0.83
=========== =========== =========== ===========
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF THE LEARNING COMPANY, INC. AS OF
SEPTEMBER 30, 1996, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH
FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-04-1997
<PERIOD-START> JAN-07-1996
<PERIOD-END> OCT-05-1996
<EXCHANGE-RATE> 1
<CASH> 104,476
<SECURITIES> 0
<RECEIVABLES> 61,473
<ALLOWANCES> 9,581
<INVENTORY> 15,760
<CURRENT-ASSETS> 201,385
<PP&E> 22,194
<DEPRECIATION> 0
<TOTAL-ASSETS> 893,792
<CURRENT-LIABILITIES> 108,056
<BONDS> 489,650
<COMMON> 484
0
0
<OTHER-SE> 192,600
<TOTAL-LIABILITY-AND-EQUITY> 893,792
<SALES> 237,308
<TOTAL-REVENUES> 237,308
<CGS> 63,799
<TOTAL-COSTS> 63,799
<OTHER-EXPENSES> 468,969
<LOSS-PROVISION> 21,426
<INTEREST-EXPENSE> 18,225
<INCOME-PRETAX> (313,685)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (313,685)
<EPS-PRIMARY> (8.02)
<EPS-DILUTED> (8.02)
</TABLE>
