<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SOFTKEY INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 94-2562108
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 494-1200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
NEAL S. WINNEG
VICE PRESIDENT AND GENERAL COUNSEL
SOFTKEY INTERNATIONAL INC.
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(617) 494-1200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH COPIES TO:
MARGARET A. BROWN, ESQ. CHARLES R. MANZONI, JR., ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM GARDNER, CARTON & DOUGLAS
ONE BEACON STREET QUAKER TOWER, SUITE 3400
BOSTON, MASSACHUSETTS 02108-3194 321 NORTH CLARK STREET
(617) 573-4800 CHICAGO, ILLINOIS 60610-4795
---------------- (312) 644-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
UPON CONSUMMATION OF THE MERGER DESCRIBED HEREIN (THE "MERGER").
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE(3)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share....... 10,500,000 Not Applicable $214,726,691 $74,050
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Based upon the maximum number of shares of Common Stock of SoftKey
International Inc. ("SoftKey") that may be issued in connection with the
Merger.
(2) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act of 1933, as amended (the "Securities
Act") and computed pursuant to Rules 457(f) and (c) under the Securities
Act based on (i) $23.44, the average of the high and low per share prices
of Common Shares of Minnesota Educational Computing Corporation (MECC)
("MECC") on the Nasdaq National Market for April 3, 1996 and (ii) the
maximum number of MECC Common Shares to be acquired by SoftKey in
connection with the Merger.
(3) Pursuant to Rule 457(b) under the Securities Act, $56,800 of the
registration fee is offset by the filing fee previously paid by SoftKey in
connection with the filing of preliminary proxy materials on Schedule 14A
on November 22, 1995. Accordingly, a registration fee of $17,250 is being
paid herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SOFTKEY INTERNATIONAL INC.
CROSS-REFERENCE SHEET
FOR
REGISTRATION STATEMENT ON FORM S-4 AND
JOINT PROXY STATEMENT-PROSPECTUS
<TABLE>
<CAPTION>
CAPTION OR LOCATION IN
FORM S-4 ITEM NUMBER JOINT PROXY STATEMENT-PROSPECTUS
-------------------- --------------------------------
<C> <S>
A. Information About the Transaction
1.Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus....................... Facing Page of Registration Statement;
Outside Front Cover Page of Joint Proxy
Statement-Prospectus
2.Inside Front and Outside Back Cover
Pages of Prospectus.............. Available Information; Incorporation By
Reference; Table Of Contents
3.Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information...................... Summary; Risk Factors
4.Terms of the Transaction........... Summary; The Merger; The Merger--Background
of the Merger; The Merger--SoftKey's
Reasons for the Merger; Recommendation of
the SoftKey Board; The Merger--MECC'S
Reasons for the Merger; Recommendation of
the MECC Board; The Merger--Opinion of
SoftKey's Financial Advisor; The Merger--
Opinion of MECC's Financial Advisor; The
Merger--Certain Federal Income Tax
Consequences of the Merger; The Merger--
Accounting Treatment; The Merger--The
Merger Agreement; Comparison Of Rights Of
Holders Of SoftKey Common Stock And MECC
Common Shares
5.Pro Forma Financial Information.... Summary; Unaudited Pro Forma Combined
Condensed Consolidated Financial
Statements
6.Material Contacts with the Company
Being Acquired................... The Merger--Background of the Merger; The
Merger--Related Agreements
7.Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters........ Not Applicable
8.Interests of Named Experts and The Merger--Opinion of SoftKey's Financial
Counsel.......................... Advisor; The Merger--Opinion of MECC's
Financial Advisor; Legal Opinion
9.Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................. Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CAPTION OR LOCATION IN
FORM S-4 ITEM NUMBER JOINT PROXY STATEMENT-PROSPECTUS
-------------------- --------------------------------
<C> <S>
B. Information About the Registrant
10.Information with Respect to S-3
Registrants...................... Available Information; Incorporation By
Reference
11.Incorporation of Certain
Information by Reference......... Available Information; Incorporation By
Reference
12.Information with Respect to S-2 or
S-3 Registrants.................. Not Applicable
13.Incorporation of Certain
Information by Reference......... Not Applicable
14.Information with Respect to
Registrants Other Than S-3 or S-2
Registrants...................... Not Applicable
C. Information About the Company Being
Acquired
15.Information with Respect to S-3
Companies........................ Available Information; Incorporation By
Reference
16.Information with Respect to S-2 or
S-3 Companies.................... Not Applicable
17.Information with Respect to
Companies Other Than S-3 or S-2
Companies........................ Not Applicable
D. Voting and Management Information
18.Information if Proxies, Consents or
Authorizations are to be
Solicited........................ Outside Front Cover Page of Joint Proxy
Statement-Prospectus; Available
Information; Incorporation By Reference;
Summary; The SoftKey Special Meeting; The
MECC Special Meeting; The Merger--
SoftKey's Reasons for the Merger;
Recommendation of the SoftKey Board; The
Merger--Interests of Certain Persons in
the Merger; The Merger--Dissenters'
Rights; The Merger--The Merger Agreement--
Related Agreements--Employment Agreements;
Management Of Softkey; Ownership Of
SoftKey Common Stock; Certain
Relationships And Related Transactions Of
SoftKey; SoftKey Executive Compensation;
Ownership Of MECC Common Shares; Certain
Relationships And Related Transactions Of
MECC; Management And Additional
Information; Stockholder Proposals for the
1997 Annual Meeting of SoftKey
Stockholders; Shareholder Proposals for
the 1996 Annual Meeting of MECC
Shareholders
19.Information if Proxies, Consents or
Authorizations Are Not to be
Solicited or in an Exchange
Offer............................ Not Applicable
</TABLE>
<PAGE>
SOFTKEY INTERNATIONAL INC.
PROXY STATEMENT-PROSPECTUS
--------------
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
PROXY STATEMENT
--------------
JOINT PROXY STATEMENT-PROSPECTUS
This Joint Proxy Statement-Prospectus (the "Joint Proxy Statement-
Prospectus") is being furnished to stockholders of SoftKey International Inc.,
a Delaware corporation ("SoftKey"), in connection with the solicitation of
proxies by the Board of Directors of SoftKey for use at the special meeting of
stockholders of SoftKey in lieu of an annual meeting to be held on May 16,
1996, at 1:30 p.m., local time, at The Ritz-Carlton, Boston, located at 15
Arlington Street, Boston, Massachusetts (the "SoftKey Special Meeting"), or
any adjournments or postponements thereof. This Joint Proxy Statement-
Prospectus is also being furnished to shareholders of Minnesota Educational
Computing Corporation (MECC), a Minnesota corporation ("MECC"), in connection
with the solicitation of proxies by the Board of Directors of MECC for use at
the special meeting of shareholders of MECC to be held on May 16, 1996, at
9:00 a.m., local time, at MECC's principal offices located at 6160 Summit
Drive North, Minneapolis, Minnesota (the "MECC Special Meeting").
The Joint Proxy Statement-Prospectus describes the terms of the proposed
merger (the "Merger") of SchoolCo Inc. ("Sub"), a Minnesota corporation and a
wholly owned subsidiary of SoftKey, with and into MECC, pursuant to the
Agreement and Plan of Merger dated as of October 30, 1995 (the "Merger
Agreement") by and among SoftKey, Sub and MECC.
Upon the terms and subject to the conditions of the Merger Agreement, at the
effective time of the Merger (the "Effective Time"), among other things, (i)
each issued and outstanding common share, par value $.01 per share, of MECC
("MECC Common Shares") (other than shares to be cancelled in accordance with
clause (ii) below and shares as to which dissenters' rights have been duly
demanded under Minnesota law) will be converted into the right to receive a
number of shares (and cash in lieu of fractional shares) of fully paid and
nonassessable shares of common stock, $.01 par value per share, of SoftKey
("SoftKey Common Stock") equal to the Exchange Ratio (as hereinafter defined),
(ii) all MECC Common Shares that are held by MECC as treasury shares and any
MECC Common Shares owned by SoftKey, Sub or any other wholly owned subsidiary
of SoftKey will be cancelled and retired and shall cease to exist and no stock
of SoftKey or other consideration shall be delivered in exchange therefor and
(iii) Sub will be merged with and into MECC, with MECC surviving the Merger as
a wholly owned subsidiary of SoftKey.
Pursuant to the Merger Agreement, the Exchange Ratio will be determined by
dividing $40 by the volume weighted average of the closing prices for the
SoftKey Common Stock on the Nasdaq National Market (the "NNM") for the twenty
full trading days ending on the third full trading day prior to the Effective
Time (the "Average SoftKey Share Price"), except that if the Average SoftKey
Share Price is equal to or greater than $45 the Exchange Ratio will equal
.88889, and if the Average SoftKey Share Price is equal to or less than $35,
the Exchange Ratio will be 1.14286. The closing price per share of SoftKey
Common Stock on the NNM on April 10, 1996 (the last full trading day for which
closing prices were available at the time of the printing of this Joint Proxy
Statement-Prospectus) was $22.50. If the closing price per share of SoftKey
Common Stock on the closing date of the Merger is $22.50 (and assuming that
the Average SoftKey Share Price is below $35), each MECC Common Share would be
converted in the Merger into 1.14286 shares of SoftKey Common Stock having a
market value, based on such closing price, of $25.71.
At the SoftKey Special Meeting, stockholders of SoftKey will be asked to
consider and vote upon a proposal to approve the issuance of up to 10,500,000
shares of SoftKey Common Stock in connection with the Merger (such number of
shares or any portion thereof are referred to herein as the "Merger Shares").
Approval of such issuance by the stockholders of SoftKey is required by the
rules of the National Association of Securities Dealers, Inc. ("NASD") because
shares of SoftKey Common Stock are traded on the NNM and the number of shares
to be issued in the Merger will exceed 20% of the issued and outstanding
shares of SoftKey Common Stock. Stockholders of SoftKey are not voting upon
approval of the Merger Agreement because such approval is not required under
Delaware law. In addition to the proposal regarding the issuance of the Merger
Shares, at the SoftKey Special Meeting, stockholders of SoftKey will be asked
to consider and vote upon (i) the election of directors, (ii) a proposal to
amend the SoftKey International Inc. Long Term Equity Incentive Plan (the
"LTIP") to increase the number of shares of SoftKey Common Stock authorized to
be issued under the LTIP from 5,450,000 to 7,000,000, (iii) in connection with
the proposals regarding the Merger Shares and the amendment to the LTIP, a
proposal to amend SoftKey's Restated Certificate of Incorporation (the
"SoftKey Charter") to increase the number of authorized shares of SoftKey
Common Stock from 60,000,000 to 120,000,000 and (iv) the selection of Coopers
& Lybrand L.L.P. as independent public accountants for SoftKey for the 1996
fiscal year.
At the MECC Special Meeting, shareholders of MECC will be asked to consider
and vote upon a proposal to approve the Merger Agreement.
This Joint Proxy Statement-Prospectus also serves as a prospectus of SoftKey
under the Securities Act of 1933, as amended, with respect to the Merger
Shares. SEE "RISK FACTORS" ON PAGE 19 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED CAREFULLY BY SHAREHOLDERS OF MECC IN EVALUATING THE
MERGER.
This Joint Proxy Statement-Prospectus and the accompanying forms of proxy
are first being sent to stockholders of SoftKey and shareholders of MECC on or
about April 15, 1996.
--------------
THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT-PROSPECTUS RELATES HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS JOINT PROXY STATEMENT-PROSPECTUS. ANY REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
The date of this Joint Proxy Statement-Prospectus is April 11, 1996.
--------------
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN
THIS JOINT PROXY STATEMENT-PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
JOINT PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS JOINT
PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT- PROSPECTUS
NOR ANY DISTRIBUTION OF SECURITIES PURSUANT TO THIS JOINT PROXY STATEMENT-
PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR INCORPORATED HEREIN BY
REFERENCE OR IN THE AFFAIRS OF SOFTKEY OR MECC SINCE THE DATE OF THIS JOINT
PROXY STATEMENT-PROSPECTUS. THE INFORMATION CONTAINED HEREIN WITH RESPECT TO
SOFTKEY AND ITS SUBSIDIARIES HAS BEEN PROVIDED BY SOFTKEY AND THE INFORMATION
CONTAINED HEREIN WITH RESPECT TO MECC HAS BEEN PROVIDED BY MECC.
AVAILABLE INFORMATION
SoftKey and MECC are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Copies of such reports,
proxy statements and other information may be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
Regional Offices of the SEC: Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials can also be obtained at
prescribed rates from the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549. SoftKey Common Stock and MECC Common
Shares are traded on the NNM. Reports, proxy statements and other information
concerning SoftKey and MECC may be inspected at the offices of the NASD,
Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. SoftKey Common
Stock is also listed and traded on the Toronto Stock Exchange.
SoftKey has filed with the SEC a registration statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the SoftKey
Common Stock to be issued in connection with the Merger. This Joint Proxy
Statement-Prospectus constitutes the prospectus of SoftKey filed as part of
the Registration Statement. The Joint Proxy Statement- Prospectus does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the SEC. The Registration Statement is available for inspection
and copying as set forth above.
INCORPORATION BY REFERENCE
THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SOFTKEY AND MECC HEREBY
UNDERTAKE TO PROVIDE, WITHOUT CHARGE, TO EACH PERSON, INCLUDING ANY BENEFICIAL
OWNER OF SOFTKEY COMMON STOCK OR MECC COMMON SHARES, RESPECTIVELY, TO WHOM A
COPY OF THIS JOINT PROXY STATEMENT-PROSPECTUS HAS BEEN DELIVERED, UPON THE
WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY AND ALL OF THE
DOCUMENTS THAT HAVE BEEN INCORPORATED BY REFERENCE IN SUCH DOCUMENTS, OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED HEREIN BY REFERENCE. REQUESTS FOR SUCH DOCUMENTS SHOULD BE
DIRECTED, IN THE CASE OF DOCUMENTS RELATING TO SOFTKEY OR ANY OF ITS
SUBSIDIARIES, TO SOFTKEY INTERNATIONAL INC., ONE ATHENAEUM STREET, CAMBRIDGE,
MASSACHUSETTS 02142, ATTENTION: SECRETARY (TELEPHONE NUMBER (617) 494-1200)
AND, IN THE CASE OF DOCUMENTS RELATING TO MECC, TO MINNESOTA EDUCATIONAL
COMPUTING CORPORATION (MECC), 6160 SUMMIT DRIVE NORTH, MINNEAPOLIS, MINNESOTA
55430-4003, ATTENTION: CHIEF FINANCIAL OFFICER (TELEPHONE NUMBER (612) 569-
1500). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD
BE MADE BY MAY 6, 1996.
2
<PAGE>
The following documents, which have been filed with the SEC, are hereby
incorporated herein by reference:
(a) SoftKey's Annual Report on Form 10-K for the fiscal year ended January
6, 1996;
(b) SoftKey's Current Reports on Form 8-K/A dated October 4, 1995 and
January 25, 1996;
(c) the description of SoftKey Common Stock set forth in SoftKey's
Registration Statement filed pursuant to Section 12(g) of the Exchange Act,
including any amendment or reports filed for the purpose of updating such
description;
(d) MECC's Annual Report on Form 10-K for the year ended March 31, 1995, as
amended by Amendment No. 1 on Form 10-K/A dated July 26, 1995, Amendment No. 2
on Form 10-K/A dated August 14, 1995 and Amendment No. 3 on Form 10-K/A dated
August 17, 1995;
(e) MECC's Quarterly Reports on Form 10-Q for the quarterly periods ended
June 30, 1995, September 30, 1995 and December 31, 1995;
(f) the description of MECC Common Shares set forth in MECC's Registration
Statement on Form 8-A, File No. 0-23614, filed March 11, 1994, and any
amendment or report filed for the purpose of updating any such description;
(g) TLC's Annual Report on Form 10-K for the fiscal year ended June 30,
1995, as amended by Form 10-K/A dated November 7, 1995; and
(h) TLC's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
All documents filed by SoftKey or MECC pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date hereof and prior to the date of
the Special Meetings, in the case of MECC, or the date on which the offering
terminates, in the case of SoftKey, shall be deemed to be incorporated herein
by reference and to be a part hereof from the date of filing of such
documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Joint Proxy Statement-Prospectus to the extent that a
statement contained herein or any other subsequently filed document that is
deemed to be incorporated herein by reference modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Joint Proxy
Statement-Prospectus.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................................... 2
INCORPORATION BY REFERENCE.................................................. 2
SUMMARY..................................................................... 7
RISK FACTORS................................................................ 19
Intense Competitive Environment........................................... 19
Intense Competition for Distribution Channels............................. 19
Acquisitions, Business Combinations and Strategic Alliances............... 20
Integration of Acquired Businesses; Management of Growth.................. 21
New Products and Rapid Technological Change............................... 22
Competition for Shelf Space and Promotional Support....................... 23
Significant Price Reductions in Personal Computer Software................ 23
Risk of International Operations.......................................... 23
Protection of Proprietary Rights; Risk of Infringement Claims............. 24
Dependence on Major Supplier.............................................. 24
Dependence on Continued Personal Computer Sales........................... 25
History of Operating Losses............................................... 25
Capital Resources......................................................... 25
Volatility of Stock Price and Depth of Trading Market..................... 25
RECENT DEVELOPMENTS......................................................... 25
Acquisition of The Learning Company....................................... 25
Acquisition of Compton's NewMedia, Inc. and Compton's Learning Company.... 26
Acquisition of tewi Verlag GmbH........................................... 26
THE SOFTKEY SPECIAL MEETING................................................. 26
Date, Time and Place...................................................... 26
Purpose of the SoftKey Special Meeting.................................... 26
Record Date............................................................... 27
Required Vote............................................................. 27
Proxies................................................................... 28
Availability of Principal Accountants..................................... 28
THE MECC SPECIAL MEETING.................................................... 29
Date, Time and Place...................................................... 29
Purpose of the MECC Special Meeting....................................... 29
Record Date............................................................... 29
Required Vote............................................................. 29
Proxies................................................................... 30
Availability of Principal Accountants..................................... 31
THE MERGER.................................................................. 32
Background of the Merger.................................................. 32
SoftKey's Reasons for the Merger; Recommendation of the SoftKey Board..... 35
MECC's Reasons for the Merger; Recommendation of the MECC Board........... 37
Opinion of SoftKey's Financial Advisor.................................... 40
Opinion of MECC's Financial Advisor....................................... 45
Closing; Effective Time................................................... 53
Form of the Merger; Merger Consideration.................................. 54
Exchange of Stock Certificates............................................ 54
Interests of Certain Persons in the Merger................................ 55
Certain Federal Income Tax Consequences of the Merger..................... 56
Accounting Treatment...................................................... 58
Regulatory Filings and Approvals.......................................... 58
Restrictions on Sale of Shares by Affiliates.............................. 59
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Quotation of SoftKey Common Stock on the NNM............................. 59
Dissenters' Rights....................................................... 59
Delisting and Deregistration of MECC Common Shares After the Merger...... 61
The Merger Agreement..................................................... 62
Conversion of Shares; Exchange Ratio................................... 62
Representations and Warranties......................................... 62
Conduct of Business Prior to the Effective Time........................ 63
No Other Negotiations.................................................. 64
Indemnification........................................................ 64
MECC Stock Options..................................................... 65
Conditions to Consummation of the Merger............................... 65
Termination and Termination Fee........................................ 66
Extension, Waiver and Amendment........................................ 67
Related Agreements....................................................... 67
Voting Agreement..................................................... 67
Employment Agreements................................................ 68
Distribution Agreement............................................... 69
Operations After the Merger.............................................. 69
INFORMATION CONCERNING SOFTKEY............................................. 69
INFORMATION CONCERNING MECC................................................ 70
COMPARATIVE PER SHARE MARKET PRICE DATA.................................... 71
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS... 72
COMPARISON OF RIGHTS OF HOLDERS OF SOFTKEY COMMON STOCK AND MECC COMMON
SHARES.................................................................... 78
Introduction............................................................. 78
Authorized Capital Stock................................................. 78
Board or Stockholder Approved Preferred Stock............................ 78
Voting Rights............................................................ 79
Number of Directors...................................................... 79
Election of Board of Directors........................................... 79
Vote on Merger, Consolidation or Sale of Substantially All Assets........ 80
Special Meetings of Stockholders......................................... 80
Stockholder Action by Written Consent.................................... 81
Amendment of Certificate or Articles of Incorporation.................... 81
Amendment of By-laws..................................................... 81
Liability and Indemnification of Officers and Directors.................. 82
Payment of Dividends..................................................... 83
Anti-Takeover Protection................................................. 83
Appraisal Rights......................................................... 84
ELECTION OF SOFTKEY DIRECTORS.............................................. 85
MANAGEMENT OF SOFTKEY...................................................... 85
OWNERSHIP OF SOFTKEY COMMON STOCK.......................................... 87
SOFTKEY EXECUTIVE COMPENSATION............................................. 89
Compensation of Directors................................................ 89
The SoftKey Board and its Committees..................................... 89
Compensation Committee Interlocks and Insider Participation.............. 89
Compensation Committee Report............................................ 90
Executive Compensation................................................... 92
Employment and Severance Arrangements.................................... 93
Stock Options Granted in 1995............................................ 94
Option Exercises and Values for 1995..................................... 94
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF SOFTKEY.................. 95
SOFTKEY COMPARATIVE STOCK PERFORMANCE...................................... 96
PROPOSAL TO AMEND THE SOFTKEY INTERNATIONAL INC. LONG TERM EQUITY INCENTIVE
PLAN...................................................................... 97
Approval of the Amendment to the SoftKey International Inc. Long Term
Equity Incentive Plan................................................... 97
Summary of the LTIP...................................................... 98
Federal Income Tax Consequences of the LTIP.............................. 99
PROPOSAL TO AMEND SOFTKEY'S RESTATED CERTIFICATE OF INCORPORATION TO
AUTHORIZE ADDITIONAL SHARES............................................... 101
SELECTION OF SOFTKEY'S INDEPENDENT PUBLIC ACCOUNTANTS...................... 102
OWNERSHIP OF MECC COMMON SHARES............................................ 104
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF MECC..................... 106
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934....... 106
LEGAL OPINION.............................................................. 106
EXPERTS.................................................................... 106
STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING OF SOFTKEY STOCKHOLDERS.. 107
SHAREHOLDER PROPOSALS FOR THE 1996 ANNUAL MEETING OF MECC SHAREHOLDERS..... 107
MANAGEMENT AND ADDITIONAL INFORMATION...................................... 108
</TABLE>
APPENDIX A--Agreement and Plan of Merger by and among SoftKey International
Inc., SchoolCo Inc. and Minnesota Educational Computing Corporation
(MECC) dated as of October 30, 1995
APPENDIX B--Opinion of Bear, Stearns & Co. Inc.
APPENDIX C--Opinion of Allen & Company Incorporated
APPENDIX D--Confirmation of Opinion of Allen & Company Incorporated
APPENDIX E--Voting Agreement dated as of October 30, 1995 between North
American Fund II, L.P. and SoftKey International Inc.
APPENDIX F--Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act Relating to Rights of Dissenting Shareholders
6
<PAGE>
SUMMARY
The following summary is not intended to be complete and is qualified in its
entirety by more detailed information appearing elsewhere in this Joint Proxy
Statement-Prospectus, including the Appendices hereto, or in the documents
incorporated herein by reference. Unless otherwise indicated, (i) all share and
per share data with respect to SoftKey Common Stock included in this Joint
Proxy Statement-Prospectus give effect to a 1-for-10 reverse stock split
effected on February 4, 1994, and all share and per share data with respect to
MECC Common Shares included in this Joint Proxy Statement-Prospectus give
effect to a 3-for-2 stock split effected on June 30, 1995 and (ii) for ease of
reference in this Joint Proxy Statement-Prospectus, the period from January 1,
1995 to January 6, 1996 (SoftKey's fiscal year 1995) is in certain instances
referred to as the "year ended December 31, 1995." Stockholders of SoftKey and
shareholders of MECC are urged to read carefully this Joint Proxy Statement-
Prospectus, including the Appendices hereto, and the documents incorporated
herein by reference, in their entirety.
THE COMPANIES
SOFTKEY INTERNATIONAL INC.
SoftKey International Inc., a Delaware corporation ("SoftKey"), is a
developer and publisher of high-quality consumer software for personal
computers ("PCs"), primarily produced on CD-ROM. SoftKey currently offers over
500 software titles in consumer-oriented categories, including education,
lifestyle, edutainment, productivity, entertainment and, to a lesser extent,
entertainment, in North America. SoftKey distributes additional products
internationally. SoftKey's products include titles such as: Calendar Creator
Plus(TM), Infopedia(TM), Sports Illustrated(R) Swimsuit Calendar, Time Almanac,
BodyWorks (R) 4.0, The American Heritage (R) Talking Dictionary, PC
Paintbrush (R), Leonardo--the Inventor(TM), Key 3D Design Center(TM) and
Compton's Interactive Encyclopedia. As a result of SoftKey's recent acquisition
of The Learning Company ("TLC") (see "Recent Developments--Acquisition of The
Learning Company"), SoftKey added a number of educational products, classified
into several product "families," to its offerings. The mailing address of
SoftKey's principal executive offices is One Athenaeum Street, Cambridge,
Massachusetts 02142, and its telephone number is (617) 494-1200.
SCHOOLCO INC.
SchoolCo Inc., a Minnesota corporation and wholly owned subsidiary of SoftKey
("Sub"), was incorporated in October 1995 for purposes of the transactions
contemplated by the Merger Agreement (as defined below). Sub engages in no
other business. The mailing address of Sub's principal executive offices is c/o
SoftKey International Inc., One Athenaeum Street, Cambridge, Massachusetts
02142, and its telephone number is (617) 494-1200.
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
Minnesota Educational Computing Corporation (MECC), a Minnesota corporation
("MECC" or the "Surviving Corporation"), is a developer, publisher and
distributor of fun, high-quality, educational software for use by children in
the school and at home. MECC's products are principally designed 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. The mailing address of the principal
executive offices of MECC is 6160 Summit Drive North, Minneapolis, Minnesota
55430-4003, and its telephone number is (612) 569-1500.
THE SOFTKEY SPECIAL MEETING
DATE, TIME AND PLACE
The special meeting of stockholders of SoftKey in lieu of an annual meeting
(the "SoftKey Special Meeting") is scheduled to be held on May 16, 1996 at 1:30
p.m., local time, at The Ritz-Carlton, Boston, located at 15 Arlington Street,
Boston, Massachusetts.
7
<PAGE>
PURPOSE
At the SoftKey Special Meeting, the stockholders of SoftKey will be asked to
consider and vote upon a proposal to approve the issuance of up to 10,500,00
shares of common stock, par value $.01 per share, of SoftKey ("SoftKey Common
Stock") (such number of shares or any portion thereof are referred to herein as
the "Merger Shares") pursuant to the Agreement and Plan of Merger, dated as of
October 30, 1995 (the "Merger Agreement"), by and among SoftKey, Sub and MECC
providing for, among other things, the merger of Sub with and into MECC (the
"Merger"), a copy of which is attached as Appendix A to this Joint Proxy
Statement-Prospectus. Approval of such issuance is required by the rules of the
National Association of Securities Dealers, Inc. because shares of SoftKey
Common Stock are traded on the Nasdaq National Market ("NNM") and the number of
shares to be issued in the Merger will exceed 20% of the issued and outstanding
shares of SoftKey Common Stock.
In addition to the proposal regarding the issuance of the Merger Shares, at
the SoftKey Special Meeting, stockholders of SoftKey will be asked to consider
and vote upon (i) the election of directors, (ii) a proposal to amend the
SoftKey International Inc. Long Term Equity Incentive Plan (the "LTIP") to
increase the number of shares of SoftKey Common Stock authorized to be issued
under the LTIP from 5,450,000 to 7,000,000, (iii) in connection with the
proposals regarding the Merger Shares and the amendment to the LTIP, a proposal
to amend SoftKey's Restated Certificate of Incorporation (the "SoftKey
Charter") to increase the number of authorized shares of SoftKey Common Stock
from 60,000,000 to 120,000,000 and (iv) the selection of Coopers & Lybrand
L.L.P. as independent public accountants for SoftKey for the 1996 fiscal year.
RECORD DATE
The Board of Directors of SoftKey (the "SoftKey Board") has fixed the close
of business on March 20, 1996 as the record date (the "SoftKey Record Date")
for the determination of stockholders of SoftKey entitled to notice of and to
vote at the SoftKey Special Meeting. In addition, holders of Exchangeable Non-
Voting Shares of SoftKey Software Products Inc. (the "Exchangeable Shares") of
record at the close of business on the SoftKey Record Date will be entitled to
notice of the SoftKey Special Meeting and to direct the vote of The R-M Trust
Company, the holder as trustee for such persons, of the one outstanding share
of special voting stock of SoftKey, par value $1.00 per share (the "SoftKey
Special Voting Share"). As of the SoftKey Record Date, there were issued and
outstanding 31,848,980 shares of SoftKey Common Stock, and the one SoftKey
Special Voting Share, which share represented votes equal to 1,595,338 shares
of SoftKey Common Stock. For a more complete description of the SoftKey Special
Voting Share, see "The SoftKey Special Meeting--Required Vote."
REQUIRED VOTE
The representation in person or by proxy of at least a majority of the votes
represented by the outstanding shares of SoftKey Common Stock and the SoftKey
Special Voting Share entitled to be cast at the SoftKey Special Meeting is
necessary to establish a quorum for the transaction of business. Abstentions
and broker non-votes will be counted as present or represented for purposes of
determining whether a quorum is present on any matter. The approval of the
issuance of shares of SoftKey Common Stock in the Merger requires the
affirmative vote of a majority of the votes cast at the SoftKey Special Meeting
by the holders of the shares of SoftKey Common Stock and the holder of the
SoftKey Special Voting Share. The approval of all other matters to be
considered and voted upon at the SoftKey Special Meeting requires the
affirmative vote of a majority of the votes represented by the shares of
SoftKey Common Stock and the SoftKey Special Voting Share present in person or
represented by proxy and entitled to vote at the SoftKey Special Meeting,
except for approval of the amendment to the SoftKey Charter, which requires the
affirmative vote of a majority of the votes represented by the outstanding
shares of SoftKey Common Stock and the SoftKey Special Voting Share, whether or
not present or represented by proxy at the SoftKey Special Meeting. As of April
6, 1996, directors and executive officers of
8
<PAGE>
SoftKey and their affiliates had the right to cast votes representing
approximately 1.61% of all votes represented by the issued and outstanding
shares of SoftKey Common Stock and the SoftKey Special Voting Share entitled to
be cast at the SoftKey Special Meeting. See "The SoftKey Special Meeting--
Required Vote."
PROXIES
Shares of SoftKey Common Stock represented by properly executed proxies (or,
in the case of the SoftKey Special Voting Share, properly executed voting
directions) received prior to or at the SoftKey Special Meeting will, unless
such proxies or voting directions shall have been revoked, be voted in
accordance with the instructions indicated therein. If no instructions are
indicated on a properly executed proxy or voting directions, the shares will be
voted FOR approval of each of the proposals listed on such proxy or voting
directions. See "The SoftKey Special Meeting--Proxies."
THE MECC SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting of shareholders of MECC (the "MECC Special Meeting") is
scheduled to be held on May 16, 1996 at 9:00 a.m., local time, at MECC's
principal offices located at 6160 Summit Drive North, Minneapolis, Minnesota.
PURPOSE
At the MECC Special Meeting, the shareholders of MECC will be asked to
consider and vote upon the proposal to approve the Merger Agreement.
RECORD DATE
The Board of Directors of MECC (the "MECC Board") has fixed the close of
business on March 20, 1996 as the record date (the "MECC Record Date") for the
determination of shareholders of MECC entitled to notice of and to vote at the
MECC Special Meeting. As of the MECC Record Date, there were 8,043,286 common
shares, par value $.01 per share, of MECC ("MECC Common Shares") issued and
outstanding.
REQUIRED VOTE
The affirmative vote of the holders of at least a majority of the issued and
outstanding MECC Common Shares entitled to vote at the MECC Special Meeting is
required to approve the Merger Agreement. As of the MECC Record Date, directors
and executive officers of MECC and their affiliates had the right to vote
approximately 20.7% of all issued and outstanding MECC Common Shares entitled
to vote at the MECC Special Meeting. North American Fund II, L.P., a
shareholder of MECC (the "Fund") the principals of the general partner of which
are directors of MECC and which held approximately 18.2% of the MECC Common
Shares outstanding as of the MECC Record Date, is a party to a Voting Agreement
with SoftKey dated as of October 30, 1995 (the "Voting Agreement") pursuant to
which the Fund has agreed, subject to the terms and conditions of the Voting
Agreement, to vote 794,284 MECC Common Shares beneficially owned by it
(representing approximately 9.9% of the MECC Common Shares outstanding as of
the MECC Record Date), in favor of approval of the Merger Agreement. The
obligation of the Fund under the Voting Agreement to vote the 794,284 MECC
Common Shares in favor of approval of the Merger Agreement is conditioned upon
the volume weighted average of the closing prices of SoftKey Common Stock on
the NNM for the twenty full trading days immediately preceding the MECC Special
Meeting (or any adjournment thereof) being at least $30. The Fund has advised
MECC that it intends to vote all of the 1,461,762 MECC Common Shares
beneficially owned by it
9
<PAGE>
(representing approximately 18.2% of the MECC Common Shares outstanding as of
the MECC Record Date), in favor of approval of the Merger Agreement. See "The
MECC Special Meeting--Required Vote" and "The Merger--Related Agreements."
PROXIES
MECC Common Shares represented by properly executed proxies received prior to
or at the MECC Special Meeting will, unless such proxies shall have been
revoked, be voted in accordance with the instructions indicated therein. If no
instructions are indicated on a properly executed proxy, the shares will be
voted FOR approval of the Merger Agreement. See "The MECC Special Meeting--
Proxies."
THE MERGER
CLOSING; EFFECTIVE TIME
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") will take place on the day on which each of certain conditions to
the Merger set forth in the Merger Agreement is satisfied or waived, or on such
other date and at such other time and place as SoftKey and MECC shall agree
(the "Closing Date"). The Merger will become effective upon the filing of the
Articles of Merger with the Office of the Secretary of State of the State of
Minnesota as required by Minnesota law (the "Effective Time"). Such filing will
be made as soon as practicable on or after the Closing Date. See "The Merger--
Closing; Effective Time" and "The Merger--The Merger Agreement--Conditions to
Consummation of the Merger."
FORM OF THE MERGER; MERGER CONSIDERATION
At the Effective Time, Sub will merge with and into MECC and MECC will
survive the Merger as a wholly owned subsidiary of SoftKey.
In addition, at the Effective Time, among other things, (i) each issued and
outstanding common share, par value $.01 per share, of MECC ("MECC Common
Shares") (other than shares to be cancelled in accordance with clause (ii)
below and shares as to which dissenters' rights have been duly demanded under
Minnesota law) will be converted into the right to receive a number of shares
(and cash in lieu of fractional shares) of fully paid and nonassessable shares
of SoftKey Common Stock equal to the result (the "Exchange Ratio") obtained by
dividing $40 by the volume weighted average of the closing prices for SoftKey
Common Stock on the NNM for the twenty full trading days ending on the third
full trading day prior to the Effective Time (the "Average SoftKey Share
Price") (but in no event will the Exchange Ratio be greater than 1.14286 or
less than .88889), and (ii) all MECC Common Shares that are held by MECC as
treasury shares and any MECC Common Shares owned by SoftKey, Sub or any other
wholly owned subsidiary of SoftKey will be cancelled and retired and shall
cease to exist and no stock of SoftKey or other consideration shall be
delivered in exchange therefor. The number of shares of SoftKey Common Stock to
be received by shareholders of MECC in the Merger for each MECC Common Share
held by them will depend on the Average SoftKey Share Price. The closing price
per share of SoftKey Common Stock on the NNM on April 10, 1996 (the last full
trading day for which closing prices were available at the time of the printing
of this Joint Proxy Statement-Prospectus) was $22.50. If the closing price per
share of SoftKey Common Stock on the closing date of the Merger is $22.50 (and
assuming that the Average SoftKey Share Price is below $35), each MECC Common
Share would be converted in the Merger into 1.14286 shares of SoftKey Common
Stock having a market value, based on such closing price, of $25.71. See "The
Merger--Form of the Merger; Merger Consideration."
10
<PAGE>
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Time, The First National Bank of
Boston (the "Exchange Agent") will mail transmittal instructions and a form of
letter of transmittal to each person who was, at the Effective Time, a holder
of record of MECC Common Shares. The transmittal instructions will describe the
procedures for surrendering certificates that prior to the Merger represented
MECC Common Shares ("MECC Certificates") in exchange for certificates
representing shares of SoftKey Common Stock. MECC SHAREHOLDERS SHOULD NOT
SUBMIT THEIR MECC CERTIFICATES FOR EXCHANGE UNLESS AND UNTIL THEY HAVE RECEIVED
THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT. See "The Merger--Exchange of Stock Certificates" and "The
Merger--The Merger Agreement--Conversion of Shares; Exchange Ratio."
CONDITIONS TO THE MERGER
The respective obligations of SoftKey, Sub and MECC to consummate the Merger
are subject to the fulfillment or waiver (where permissible) of certain
conditions set forth in the Merger Agreement. See "The Merger--The Merger
Agreement--Conditions to Consummation of the Merger."
TERMINATION
The Merger Agreement is subject to termination at the option of either
SoftKey or MECC if the Effective Time has not occurred before June 30, 1996,
and prior to such time upon the occurrence of certain events. Under certain
circumstances, if SoftKey or MECC terminates the Merger Agreement, one party
will be required to pay the other party a fee in the amount of $10 million. See
"The Merger--The Merger Agreement--Termination and Termination Fee."
RELATED AGREEMENTS--VOTING AGREEMENT
On October 30, 1995, concurrently with entering into the Merger Agreement,
SoftKey entered into the Voting Agreement with the Fund. The Voting Agreement
was entered into by the Fund as an inducement to SoftKey to enter into the
Merger Agreement.
Pursuant to the Voting Agreement, the Fund has agreed, among other things,
subject to certain conditions set forth in the Voting Agreement, to vote
794,284 MECC Common Shares (constituting 9.9% of the MECC Common Shares issued
and outstanding on October 30, 1995) (a) in favor of the approval and adoption
of the Merger Agreement and the Merger at every meeting of the shareholders of
MECC at which such matters are considered and at every adjournment thereof, and
(b) against any other acquisition or proposed acquisition of MECC (whether by
way of merger, purchase of capital stock, purchase of assets or otherwise). The
obligation of the Fund under the Voting Agreement to vote the 794,284 MECC
Common Shares in favor of approval of the Merger Agreement is conditioned upon
the volume weighted average of the closing prices of SoftKey Common Stock on
the NNM for the twenty full trading days immediately preceding the MECC Special
Meeting (or any adjournment thereof) being at least $30. The Fund has advised
MECC that it intends to vote all of the 1,461,762 MECC Common Shares
beneficially owned by it (representing approximately 18.2% of the MECC Common
Shares outstanding as of the MECC Record Date), in favor of approval of the
Merger Agreement. The foregoing description of the Voting Agreement is
qualified in its entirety by reference to the Voting Agreement, a copy of which
is attached as Appendix E hereto. See "The Merger--Related Agreements" and
Appendix E hereto.
RECOMMENDATION OF THE SOFTKEY BOARD
The SoftKey Board has approved the Merger Agreement and the issuance of the
Merger Shares and unanimously recommends that stockholders of SoftKey vote FOR
approval of such issuance. The SoftKey Board's recommendation is based upon a
number of factors described in this Joint Proxy Statement-Prospectus. See "The
Merger--SoftKey's Reasons for the Merger; Recommendation of the SoftKey Board."
11
<PAGE>
RECOMMENDATION OF THE MECC BOARD
The MECC Board has approved the Merger Agreement and unanimously recommends
that shareholders of MECC vote FOR approval of the Merger Agreement. The MECC
Board's recommendation is based upon a number of factors described in this
Joint Proxy Statement-Prospectus. See "The Merger--MECC's Reasons for the
Merger; Recommendation of the MECC Board."
OPINION OF THE FINANCIAL ADVISOR TO THE SOFTKEY BOARD
Bear, Stearns & Co. Inc., SoftKey's financial advisor ("Bear Stearns"), has
delivered a written opinion to the SoftKey Board to the effect that, based upon
and subject to the conditions set forth in its opinion, as of October 29, 1995,
the Merger is fair, from a financial point of view, to stockholders of SoftKey.
The full text of the Bear Stearns opinion, which sets forth the assumptions
made, matters considered and limitations on the review undertaken, is attached
as Appendix B to this Joint Proxy Statement-Prospectus. SoftKey stockholders
are urged to read the Bear Stearns opinion in its entirety. See "The Merger--
Opinion of SoftKey's Financial Advisor" and Appendix B hereto.
OPINION OF THE FINANCIAL ADVISOR TO THE MECC BOARD
Allen & Company Incorporated, MECC's financial advisor ("Allen & Company"),
has delivered a written opinion to the MECC Board, and a written confirmation
thereof, to the effect that, based upon and subject to the matters set forth in
its opinion and in the confirmation thereof, as of October 30, 1995 and as of
March 6, 1996, respectively, the consideration to be received by the MECC
shareholders in the Merger is fair, from a financial point of view, to such
shareholders. The full texts of the Allen & Company opinion and the
confirmation thereof, which set forth the assumptions made, matters considered
and limitations on the reviews undertaken, are attached as Appendix C and
Appendix D to this Joint Proxy Statement-Prospectus, respectively. MECC
shareholders are urged to read the Allen & Company opinion and the confirmation
thereof in their entirety. See "The Merger--Opinion of MECC's Financial
Advisor" and Appendices C and D hereto.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the MECC Board with respect to the
Merger Agreement, shareholders should be aware that certain members of MECC
management and the MECC Board have certain interests in the Merger that are in
addition to the interests of shareholders of MECC generally. See "The Merger--
Interests of Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
No ruling has been (or will be) sought from the Internal Revenue Service as
to the anticipated federal income tax consequences of the Merger. Consummation
of the Merger is conditioned upon SoftKey's receipt of an opinion of Skadden,
Arps, Slate, Meagher & Flom, counsel to SoftKey, and MECC's receipt of an
opinion from Gardner, Carton & Douglas, counsel to MECC, to the effect that,
based upon certain facts, representations and assumptions, for federal income
tax purposes the Merger will constitute a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended. MECC shareholders are urged
to consult their tax advisors as to the specific tax consequences to them of
the Merger. See "The Merger--Certain Federal Income Tax Consequences of the
Merger."
ACCOUNTING TREATMENT
SoftKey intends to treat the Merger as a "purchase" for accounting and
financial reporting purposes. See "The Merger--Accounting Treatment."
12
<PAGE>
CERTAIN REGULATORY MATTERS
Certain federal and state regulatory requirements must be complied with
before the Merger is consummated.
SoftKey and MECC filed pre-merger Notification and Report Forms and requests
for early termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the rules
and regulations promulgated thereunder, on November 1, 1995. SoftKey's and
MECC's request for early termination of the waiting period under the HSR Act
was granted and such termination became effective on November 24, 1995.
However, at any time before or after the Effective Time, the Federal Trade
Commission, the Antitrust Division of the Department of Justice, any state or a
private person or entity could seek under the antitrust laws, among other
things, to enjoin the Merger. There can be no assurance that a challenge to the
Merger will not be made or that, if such a challenge is made, SoftKey and MECC
will prevail. See "The Merger--Regulatory Filings and Approvals."
Neither SoftKey nor MECC is aware of any other material governmental or
regulatory approval required for consummation of the Merger, other than
compliance with applicable securities laws and filings under the Minnesota
Business Corporation Act (the "MBCA").
RESALE RESTRICTIONS
All shares of SoftKey Common Stock received in connection with the Merger by
shareholders of MECC will be freely transferable, except that shares of SoftKey
Common Stock received by persons who are deemed to be "affiliates" (as such
term is defined for purposes of Rule 145 under the Securities Act of 1933, as
amended) of MECC at the time of the Special Meetings may be resold by such
persons only in certain permitted circumstances. See "The Merger--Restrictions
on Sales of Shares by Affiliates."
DISSENTERS' RIGHTS
Under the MBCA, each holder of MECC Common Shares will be entitled to object
to the Merger and demand payment for such holder's MECC Common Shares. See "The
Merger--Dissenters' Rights" and Appendix F hereto. Holders of SoftKey Common
Stock are not entitled to object to the Merger or to demand payment for their
shares under the Delaware General Corporation Law. See "The Merger--Dissenters'
Rights."
13
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SOFTKEY
The following presents selected consolidated financial data for SoftKey for
the years ended June 30, 1991, 1992 and 1993, the transition period ended
December 31, 1993 and the years ended December 31, 1994 and 1995 and as of June
30, 1991, 1992 and 1993 and December 31, 1993, 1994 and 1995. The balance sheet
data as of June 30, 1991, 1992 and 1993 and as of December 31, 1993, and the
operating data for the years ended June 30, 1991, 1992 and 1993, and the
transition period ended December 31, 1993 were derived from SoftKey's audited
financial statements which are not included or incorporated by reference
herein. The balance sheet data as of December 31, 1994 and 1995 and the
operating data for the years ended December 31, 1994 and 1995 were derived from
SoftKey's audited Consolidated Financial Statements, which are included in
documents incorporated by reference herein. See "Experts." The following
selected financial information should be read in conjunction with both the
Consolidated Financial Statements of SoftKey and the Notes thereto which are
included in documents incorporated by reference in this Joint Proxy Statement-
Prospectus (see "Incorporation By Reference") and with the information
contained herein under the caption "Unaudited Pro Forma Combined Condensed
Consolidated Financial Statements."
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEARS ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
--------------------------- ------------ -----------------
1991 1992 1993 1993 1994 1995
------- -------- -------- ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues................ $76,037 $119,518 $109,704 $ 41,645 $121,287 $167,042
Operating income (loss). (3,847) (599) (56,981) (69,057) 25,741 (60,870)
Net income (loss)....... (6,148) (4,983) (57,250) (73,258) 21,145 (65,960)
Net income (loss) per
share--fully diluted... $ (0.78) $ (0.47) $ (4.36) $ (5.01) $ 1.04 $ (2.65)
Shares used in computing
fully diluted net
income (loss) per
share.................. 7,893 10,502 13,129 14,618 21,115 24,855
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------- --------------------------
1991 1992 1993 1993 1994 1995
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Total assets.............. $89,238 $132,862 $128,474 $79,334 $90,815 $900,413
Total long-term
obligations, less current
portion (1).............. 16,173 23,449 30,248 24,687 21,859 554,947
Total stockholders' equity
(deficit)................ $58,501 $ 87,049 $ 61,933 $ (8,632) $37,485 $214,519
</TABLE>
- --------
(1) Includes deferred income taxes.
14
<PAGE>
SELECTED FINANCIAL DATA OF MECC
The following presents the pro forma statement of operations data for the
year ended March 31, 1991, and the historical statements of operations data for
the years ended March 31, 1992, 1993, 1994 and 1995, and the nine-month periods
ended December 31, 1994 and 1995 of MECC. Also presented are MECC's historical
balance sheet data as of March 31, 1991, 1992, 1993, 1994 and 1995, and
December 31, 1995. The balance sheet data as of March 31, 1991, 1992 and 1993,
and the statement of operations data for the year ended March 31, 1992 were
derived from MECC's audited financial statements which are not included or
incorporated by reference herein. The balance sheet data as of March 31, 1994
and 1995, and the statement of operations data for the years ended March 31,
1993, 1994 and 1995, were derived from MECC's audited financial statements
which are incorporated by reference in this Joint Proxy Statement-Prospectus.
The balance sheet data as of December 31, 1995, and the statement of operations
data for the nine-month periods ended December 31, 1994 and 1995 were derived
from MECC's unaudited financial statements which are incorporated by reference
in this Joint Proxy Statement-Prospectus and which, in the opinion of MECC's
management, contain all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation. Financial information for the
interim periods presented is not necessarily indicative of financial
information anticipated for the full fiscal year. The following selected
financial data should be read in conjunction with the Financial Statements of
MECC and the Notes thereto which are included in documents incorporated by
reference in this Joint Proxy Statement-Prospectus. See "Incorporation By
Reference."
<TABLE>
<CAPTION>
PRO FORMA NINE MONTHS
YEAR ENDED ENDED DECEMBER
MARCH 31, YEARS ENDED MARCH 31, 31,
---------- --------------------------------- ---------------
1991(1) 1992 1993 1994 1995 1994 1995
---------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues................ $13,973 $17,053 $18,021 $21,681 $28,046 $20,997 $26,766
Operating (loss) income. (1,446) 506 (326) 2,045 4,490 4,238 5,525
Net (loss) income....... (1,390) 390 (497) 1,860 3,795 3,370 4,343
Net (loss) income
applicable to common
shareholders........... (1,870) (90) (977) 1,388 3,795 3,370 4,343
Net (loss) income per
share.................. $ (0.37) $ (0.02) $ (0.19) $ 0.26 $ 0.46 $ 0.41 $ 0.50
Shares used in computing
net (loss) income per
share.................. 5,079 5,177 5,194 5,421 8,225 8,228 8,637
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------------------------ ------------
1991 1992 1993 1994 1995 1995
------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
INFORMATION:
Total assets............ $ 4,487 $ 6,451 $ 6,288 $20,065 $24,524 $37,297
Total long-term
obligations, less
current portion(2)..... 148 953 825 791 608 498
Series A redeemable pre-
ferred shares.......... 5,120 5,600 6,080 -- -- --
Total shareholders'
(deficit) equity....... $(2,761) $(2,852) $(3,860) $16,986 $20,923 $31,693
</TABLE>
- --------
(1) On January 3, 1991, MECC was acquired by North American Fund II, L.P. (the
"Fund Acquisition"). Financial information regarding MECC's predecessor and
for the three-month period ended March 31, 1991 and a Pro Forma Statement
of Operations for the twelve-month period ended March 31, 1991, giving
effect to the Fund Acquisition as though it occurred on April 1, 1990, are
included in MECC's 1995 Annual Report on Form 10-K which is incorporated
herein by reference.
(2) Includes deferred income taxes and deferred lease incentives.
15
<PAGE>
SOFTKEY UNAUDITED SELECTED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
DATA(1)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited selected pro forma combined condensed consolidated
financial data give effect to the Merger under the purchase method of
accounting. The unaudited pro forma combined balance sheet data combine
selected data from SoftKey's consolidated balance sheet and selected data from
MECC's unaudited balance sheet at December 31, 1995 as if the Merger occurred
on December 31, 1995. The unaudited pro forma combined statements of operations
data combine selected data from the historical results of operations of
SoftKey, MECC, Compton's NewMedia, Inc. and Compton's Learning Company
(collectively, "Compton's"), The Learning Company ("TLC") and tewi Verlag GmbH
("tewi") for the year ended December 31, 1995, as if each of (i) the Merger,
(ii) the acquisition by SoftKey of Compton's, (iii) the acquisition by SoftKey
of TLC, (iv) the acquisition by SoftKey of tewi, (v) SoftKey's October 23, 1995
issuance of $350 million 5 1/2% Senior Convertible Notes Due 2000 (the "October
Notes") and (vi) the issuance of $150 million principal amount of 5 1/2%
Convertible/Exchangeable Notes Due 2000 (the "Tribune Notes," and together with
the October Notes, the "Notes") to Tribune Company in connection with the
acquisition of TLC by SoftKey had occurred at the beginning of such period. See
"Recent Developments." The unaudited pro forma combined statements of
operations data for the year ended December 31, 1995 combines selected data
from the pro forma results of SoftKey for the year ended December 31, 1995 and
selected data from the results of MECC for the twelve months ended December 31,
1995.
The unaudited selected pro forma combined condensed consolidated financial
data do not reflect cost savings and synergies which might be achieved from the
Merger. The unaudited selected pro forma combined condensed consolidated
financial data 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 selected pro forma combined condensed consolidated financial
data are based on and should be read in conjunction with the audited
consolidated financial statements of SoftKey, the audited and unaudited
financial statements of MECC, the audited and unaudited consolidated financial
statements of TLC, the audited combined financial statements of Compton's and
the audited financial statements of tewi, in each case, including the notes
thereto, which are included in documents incorporated by reference in this
Joint Proxy Statement-Prospectus. See "Incorporation By Reference."
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
REVENUES....................................................... $ 288,479
COSTS AND EXPENSES:
Costs of production........................................... 91,091
Sales, marketing and support.................................. 79,334
General and administrative.................................... 42,342
Amortization and acquisition related costs.................... 539,539
Research and development...................................... 31,911
----------
784,217
----------
OPERATING INCOME (LOSS)........................................ (495,738)
OTHER INCOME (EXPENSE), net.................................... (21,869)
----------
INCOME (LOSS) BEFORE TAXES..................................... (517,607)
BENEFIT FOR INCOME TAXES....................................... (28,236)
----------
NET INCOME (LOSS).............................................. (489,371)
==========
NET INCOME (LOSS) PER SHARE--FULLY DILUTED..................... $ (12.65)
==========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING--FULLY DILUTED.................................... 38,687,000
==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA:
Total assets.................................................. $1,162,102
Long-term obligations, less current portion (2)............... 555,445
Total stockholders' equity.................................... $ 455,804
</TABLE>
- --------
(1) See the unaudited pro forma combined condensed consolidated financial
statements of SoftKey elsewhere in this Joint Proxy Statement-Prospectus.
(2) Includes deferred income taxes and deferred lease incentives.
16
<PAGE>
COMPARATIVE HISTORICAL AND PRO FORMA COMBINED PER SHARE DATA
The following table sets forth (1) historical net income per share from
continuing operations and historical book value per share data of SoftKey, (2)
historical net income per share from continuing operations and historical book
value per share data of MECC, (3) unaudited pro forma combined net income
(loss) per share from continuing operations and unaudited pro forma book value
per share data of SoftKey after giving effect to SoftKey's acquisition of
Compton's, TLC and tewi on a purchase basis and the issuance of the Notes
("SoftKey Pro Forma Combined I"), (4) unaudited pro forma combined net income
(loss) per share from continuing operations and unaudited pro forma book value
per share data of SoftKey after giving effect to SoftKey Pro Forma Combined I
and the Merger on a purchase basis ("SoftKey Pro Forma Combined II") and (5)
unaudited equivalent pro forma combined net income (loss) per share from
continuing operations and unaudited equivalent pro forma combined book value
per share data of MECC based on an Exchange Ratio of 1.14286 shares of SoftKey
Common Stock for each MECC Common Share. The information in the table should be
read in conjunction with the audited consolidated financial statements of
SoftKey, the audited and unaudited financial statements of MECC, the audited
and unaudited consolidated financial statements of TLC, the audited combined
financial statements of Compton's and the audited financial statements of tewi,
in each case, including the notes thereto, which are included in documents
incorporated by reference herein, and the unaudited pro forma combined
condensed consolidated financial statements of SoftKey and the notes thereto
appearing elsewhere in this Joint Proxy Statement-Prospectus. See
"Incorporation By Reference." SoftKey and MECC have not paid any cash dividends
on the SoftKey Common Stock or the MECC Common Shares, respectively.
The unaudited pro forma combined financial data are not necessarily
indicative of the net income (loss) per share from continuing operations or
book value per share that would have been achieved had the Merger been
consummated as of the beginning of the periods presented and should not be
construed as representative of such amounts for any future dates or periods.
<TABLE>
<CAPTION>
MECC
HISTORICAL SOFTKEY SOFTKEY EQUIVALENT
-------------- PRO FORMA PRO FORMA PRO FORMA
SOFTKEY MECC COMBINED I COMBINED II COMBINED(1)
------- ----- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE FROM
CONTINUING
OPERATIONS:
For the year ended December
31,
1995........................ $(2.65) $0.55 $(12.95) $(12.65) $(14.46)
BOOK VALUE PER SHARE(2):
December 31, 1995........... $ 6.71 $3.94 N/A $ 11.07 $ 12.65
</TABLE>
- --------
(1) The unaudited MECC equivalent pro forma combined per share amounts are
calculated by multiplying the SoftKey Pro Forma Combined II per share
amounts by the Exchange Ratio of 1.14286 shares of SoftKey Common Stock for
each MECC Common Share.
(2) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. SoftKey pro forma book value per share is computed by dividing
pro forma stockholders' equity by the pro forma combined number of shares
of SoftKey Common Stock which would have been outstanding had the Merger
been consummated as of the balance sheet date, assuming an Exchange Ratio
of 1.14286 shares of SoftKey Common Stock for each MECC Common Share.
17
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE DATA
SoftKey Common Stock is traded on the NNM under the symbol "SKEY." MECC
Common Shares are traded on the NNM under the symbol "MECC."
The following table sets forth the closing prices per share of SoftKey Common
Stock and MECC Common Shares as reported on the NNM on October 27, 1995, the
business day preceding public announcement of the Merger, and on April 10,
1996, and the equivalent per share prices (as explained below) of MECC Common
Shares on such dates.
<TABLE>
<CAPTION>
SOFTKEY COMMON MECC COMMON EQUIVALENT PER
STOCK SHARES SHARE PRICE
-------------- ----------- --------------
<S> <C> <C> <C>
October 27, 1995...................... $38.125 $21.250 $40.000
April 10, 1996........................ $22.500 $25.250 $25.714
</TABLE>
The equivalent per share price of a MECC Common Share represents the closing
price of a share of SoftKey Common Stock on such date multiplied by the
Exchange Ratio computed as of such date.
Because the market price of SoftKey Common Stock that holders of MECC Common
Shares will receive in the Merger may increase or decrease prior to the Merger,
stockholders are urged to obtain current market quotations.
18
<PAGE>
RISK FACTORS
As a result of the Merger, shareholders of MECC will become stockholders of
SoftKey. In addition to the other information contained in this Joint Proxy
Statement-Prospectus and the appendices hereto, the following risk factors
should be considered carefully in evaluating the Merger.
INTENSE COMPETITIVE ENVIRONMENT
The personal computer ("PC") consumer software industry is intensely
competitive and is characterized by rapid changes in technology and customer
requirements. The changing nature of the consumer software industry and
rapidly changing demand for products make it difficult to predict the future
success of SoftKey in the business of producing packaged software products for
the retail market. SoftKey competes for retail shelf space and general
consumer awareness with a number of companies that market software products.
SoftKey encounters competition from both established companies, including the
largest companies in the industry, and new companies that may develop
comparable products. A number of SoftKey's competitors and potential
competitors possess significantly greater capital, marketing resources and
brand recognition than SoftKey. Rapid changes in technology, product
obsolescence and advances in computer software and hardware require SoftKey to
develop or acquire new products and to enhance its existing products on a
timely basis. SoftKey's marketplace has recently experienced a higher emphasis
on on-line and Internet related services and content tailored for this new
delivery vehicle. To the extent that demand increases for on-line products and
content, the demand for SoftKey's existing products may change and SoftKey's
future performance could be adversely affected.
Many large companies with sophisticated product marketing and technical
abilities and financial resources that do not presently compete with SoftKey
may enter the PC software market. For example, technology companies have begun
to acquire greater access to content, and content-oriented companies have
begun to acquire greater technological capabilities. Competitors in these
areas include Microsoft Corporation ("Microsoft"), Sony, The Walt Disney
Company, Viacom, IBM/Eduquest, Fisher-Price, Jostens, Electronic Arts, Sierra
On-Line, Inc., Davidson & Associates, Mindscape, GT Interactive Software,
Edmark and Broderbund Software, Inc. To the extent that competitors achieve a
performance, price or distribution advantage, SoftKey could be adversely
affected. Consolidation in the consumer software industry creates new, larger
competitors. For example, CUC International, Inc. recently announced proposed
mergers with Sierra On-Line, Inc. and Davidson & Associates. This increased
consolidation of the consumer software market may impact future growth
potential and performance.
Microsoft is the dominant supplier of computer operating systems and
frequently coordinates its operating system marketing efforts with those for
its applications software. Competition in Microsoft's WindowsTM application
segment from major software publishers is intensifying, and the "competitive
upgrade" price discounting among the major firms is eroding the traditional
pricing structures that had previously existed in the software industry.
Microsoft launched the Windows 95 operating system in 1995. As a result,
SoftKey has embarked on a program to transition many of its titles to Windows
95 format. In 1995, Microsoft announced that it was reducing the price of a
number of its common titles from $69.95 to $49.95. Competitive pressures have
resulted in price reductions throughout the industry with the result that
industry-wide operating margins are likely to be adversely affected.
There is no assurance that SoftKey will have the resources required to
respond to market or technological changes or to compete successfully in the
future.
INTENSE COMPETITION FOR DISTRIBUTION CHANNELS
SoftKey competes with other companies for access to retail shelf space and
inclusion in OEM sales programs. Competition in this aspect of the industry is
intense, and the type and number of distribution channels is increasing to
include non-traditional software retailers such as book, music, video,
magazine, toy, gift, convenience, drug and grocery store chains. Additionally,
as technology changes, the type and number of
19
<PAGE>
distribution channels will further change and new types of competitors, such
as cable or telephone companies, are likely to emerge. The current trend
toward deregulation of the telecommunications industry may also impact the
type and number of distribution channels and the competition for those
channels.
The traditional channels of distribution in the software industry have
experienced increasing concentration during the past several years, in
particular with respect to PC chain stores and software distributors. With
increasing concentration in the traditional channels of distribution,
SoftKey's customers have increased leverage in negotiating favorable terms of
sale, including price discounts and product return policies. In addition, a
number of SoftKey's competitors, such as Davidson & Associates (through New
Media Express) and GT Interactive Software, have attempted, with some success,
to enter into exclusive software distribution arrangements with certain retail
outlets. If the occurrence of these exclusive arrangements increases and
SoftKey is not able to offer a competing product line or arrangement,
SoftKey's operating results may be negatively impacted. There can be no
assurance that SoftKey will be able to continue to have access to sufficient
retail marketing distribution channels or obtain adequate distribution for all
of its products in the future. Accordingly, such concentration may have an
adverse effect in the future on the profitability of SoftKey's operations.
Regardless of the retail strategy chosen by SoftKey, the retail channels of
distribution available for products will be subject to rapid changes as
retailers and distributors enter and exit the software market segments or
alter their product inventory preferences. Other types of retail outlets and
methods of product distribution may become important in the future. These new
methods may include delivery of software using on-line services or the
Internet, which will necessitate certain changes in SoftKey's business and
operations, including without limitation addressing operational challenges
such as improving download time for pictures, images and programs, ensuring
proper regulation of content quality and developing sophisticated security for
transmitting payments. Should on-line distribution channels increase, SoftKey
will be required to modify its existing technology basis in order for its
products to be compatible and remain competitive. It is critical to the
success of SoftKey that, as these changes occur, it maintain access to those
channels of distribution offering software in its market segments.
ACQUISITIONS, BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES
SoftKey has historically expanded its business through, among other
strategies, acquisitions, business combinations and strategic alliances.
Moreover, the consumer software industry as a whole has recently experienced
consolidation. SoftKey believes that its customers will in the future demand
that SoftKey offer increasing numbers of titles throughout SoftKey's existing
product categories and, in particular, the education and entertainment
categories. SoftKey believes that in many cases the most efficient means to
acquire such titles or the ability to develop or license such titles is to
enter into acquisitions, business combinations or strategic alliances with
consumer software companies and others.
SoftKey continuously evaluates and considers other businesses of varying
sizes as potential strategic partners and candidates for acquisition (whether
negotiated or non-negotiated) and has engaged in discussions with certain
businesses in pursuit of possible transactions. Certain of these businesses
may be substantial in size compared to SoftKey. Except as otherwise disclosed
in this Joint Proxy Statement-Prospectus, there are currently no
understandings, agreements or commitments with respect to any acquisition,
business combination or strategic alliance. Moreover, there can be no
assurance that SoftKey will enter into any such transaction or, if SoftKey
does identify and consummate such a transaction, that the transaction will
enable SoftKey to achieve its goals.
Acquisitions or business combination transactions that would result in
further expansion of SoftKey's business in the entertainment and educational
product areas may result in a higher degree of product acceptance risk and
longer development cycles for SoftKey's products. In addition, companies that
develop entertainment software (for PC, Sega, Nintendo and 3DO platforms)
typically experience lower gross margins than SoftKey has experienced from its
current operations. Further, should purchase accounting be used by SoftKey for
future acquisitions or business combination transactions (as is being done by
SoftKey in connection with the Merger), such accounting treatment may result
in large, one-time expense charges for in-process research and development
costs and short amortization periods for acquired technology and other
intangible assets acquired in the transaction.
20
<PAGE>
Competition for suitable acquisitions, business combinations and strategic
alliances and the cost of these transactions have recently been increasing.
The future availability of desirable prospects for these transactions in the
computer software industry is uncertain. In addition, assuming that SoftKey is
able to identify appropriate transaction prospects, the execution and
implementation of acquisitions, business combinations and strategic alliances
involves a significant time commitment from senior management and can result
in large restructuring costs. There can be no assurance that suitable
opportunities will be identified, that transactions can be consummated or that
assets, businesses or relationships acquired in such transactions can be
integrated successfully into SoftKey's operations.
As part of its strategy of acquisitions and business combinations, in
December 1995, in a two-step, all cash transaction, SoftKey acquired The
Learning Company, a Delaware corporation and a developer of educational
personal computer software products ("TLC"). See "Recent Developments--
Acquisition of The Learning Company." Also in December 1995, in a stock-for-
stock transaction, SoftKey acquired 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. See "Recent Developments--Acquisition of Compton's NewMedia, Inc. and
Compton's Learning Company." There can be no assurance that SoftKey will be
able to successfully integrate the operations of TLC and Compton's with those
of SoftKey.
Since February 4, 1994, the date of the three-party business combination
among SoftKey Software Products Inc., WordStar International Incorporated and
Spinnaker Software Corporation, SoftKey has issued an aggregate of
approximately 8,023,000 shares of SoftKey Common Stock and $503 million of
notes and other indebtedness in connection with acquisitions and business
combinations. The Indebtedness issued includes $350 million principal amount
of 5 1/2% Senior Convertible unsecured Notes Due 2000 (the "October Notes").
The October Notes will be redeemable by SoftKey on or after November 2, 1998
at declining redemption prices of 102.2% on November 2, 1998, 101.1% on
November 1, 1999 and 100% on or after November 1, 2000. The October Notes are
convertible into SoftKey Common Stock at a price of $53 per share and interest
is payable thereon on May 1 and November 1 of each year. In addition, in
connection with the acquisition of TLC, Tribune Company made a strategic
investment in SoftKey in the form of $150 million principal amount 5 1/2%
Senior Convertible/Exchangeable Notes Due 2000 (the "Tribune Notes," and
together with the October Notes, the "Notes"). The Tribune Notes will be
redeemable by SoftKey on or after November 2, 1998 at declining redemption
prices of 102.2% on November 2, 1998, 101.7% on November 1, 1999 and 100% on
or after November 1, 2000. The Tribune Notes are convertible into SoftKey
Common Stock at a price of $53 per share and interest is payable thereon on
May 1 and November 1 of each year. The Tribune Notes are unsecured and rank
pari passu with the October Notes. Further, in connection with the acquisition
of Compton's, SoftKey issued a note to Tribune Company for $3 million at an
interest rate of 6 1/2% in cancellation of certain intercompany indebtedness
which, in accordance with its terms, was settled as of April 5, 1996 by the
issuance of approximately 158,099 shares of SoftKey Common Stock to Tribune
Company. In the event that all of the Notes are converted into shares of
SoftKey Common Stock in accordance with their terms, Softkey will be obligated
to issue an aggregate of approximately 9,433,963 shares of SoftKey Common
Stock, representing approximately 22.1% of the shares of SoftKey Common Stock
issued and outstanding as of April 6, 1996. Principal payments with respect to
the Notes are expected to be funded from cash generated from operations or a
subsequent equity or debt financing or a combination of the foregoing.
INTEGRATION OF ACQUIRED BUSINESSES; MANAGEMENT OF GROWTH
The integration of SoftKey's and MECC's operations following the Merger will
require the dedication of management resources which will temporarily detract
from attention to the day-to-day business of the combined company. The
combination of the two companies will also require integration of the
companies' product offerings and the coordination of their research and
development and sales and marketing efforts. The difficulties of assimilation,
in particular, the possible loss of key personnel, may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds
21
<PAGE>
and combining two different corporate cultures. The process of combining the
two organizations may cause an interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could have an
adverse effect on the revenues and operating results of the combined company,
at least in the near term. There can be no assurance that the combined entity
will be able to retain its key technical and management personnel or that the
combined entity will realize any of the other anticipated benefits of the
Merger. Both SoftKey and MECC have experienced periods of significant growth.
The combined company's ability to manage its growth effectively will require
it to continue to improve its operational, financial and information
management systems and controls, and to attract, retain, motivate and manage
employees effectively. The failure of the combined company to manage growth in
multiple areas of its business effectively would have a material adverse
effect on its results of operations.
As a result of the acquisitions of TLC and Compton's, SoftKey expects to
reduce certain of its annual operating costs by approximately $7-8 million,
including approximately $3-4 million in cost savings on CD-ROM production,
assembly and fulfillment as a result of increased production volume, a cost
reduction of approximately $2-3 million as a result of pricing concessions and
increased efficiencies related to increased production volume and a cost
savings of approximately $1 million from efficiencies resulting from the
combination of the corporate organizations of SoftKey, TLC and Compton's. The
anticipated cost savings are based in part upon anticipated annual production
of at least 15 million CD-ROMs, as compared to a production of approximately
eight million CD-ROMs in SoftKey's fiscal year ended January 6, 1996.
As a result of the acquisition of each of Compton's and TLC by SoftKey,
SoftKey faces challenges relating to integration of operations which are
similar to those which will be faced by SoftKey following the Merger, and
there can be no assurance that SoftKey will be successful in achieving or
maintaining the foregoing cost savings or integrating the operations of
Compton's or TLC with those of SoftKey.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
SoftKey operates in a highly competitive and technology driven environment.
The consumer software industry is undergoing substantial change and is subject
to a high level of uncertainty. Software companies must continue to develop or
acquire new products or upgrade existing products on a timely basis to sustain
revenues and profitable operations. Factors contributing to the short life
span of PC software have included rapid technological change and an expanded
demand for content-rich products. Software companies must continue to create
or acquire innovative new products reflecting technological changes in
hardware and software and translate current products into newly accepted
hardware and software formats, in order to gain and maintain a viable market
for their products. PC hardware, in particular, is steadily advancing in power
and function, expanding the market for increasingly complex and flexible
software products. This has also resulted in longer periods necessary for
research and development of new products and a greater degree of
unpredictability in the time necessary to develop products. Furthermore, the
rapid changes in the market and the increasing number of new products
available to consumers have increased the degree of consumer acceptance risk
with respect to any specific title that SoftKey may publish. It is expected
that this trend will continue and may become more pronounced in the future.
In the past, SoftKey has focused primarily on the productivity, lifestyle
and edutainment product categories. These product categories have a lower
development cost and are not considered as "hit" driven as the high-end, 16-
bit and 32-bit entertainment and games software category (including products
offered on the Sega, Nintendo and 3DO platforms) and the high-end, PC-based
CD-ROM game category. Additionally, the high-end entertainment and games
category requires higher development and marketing costs and a higher cost of
goods sold than SoftKey's traditional software business, is dominated by a
number of very large competitors and is subject to rapid change in consumer
preference. Should SoftKey substantially increase its presence in the high-end
entertainment and games industry segment, it will experience these additional
risks and competitive pressures.
22
<PAGE>
Similarly, SoftKey's new product-content focus and enhanced presence in the
educational software market will require SoftKey to evaluate and adopt
appropriate development and marketing strategies and methods, which may differ
from those historically employed by SoftKey and subject SoftKey to the risks
and competitive pressures associated with those new strategies.
SoftKey's rights to license many of its software products are non-exclusive
and, generally, of limited duration, and there is no assurance SoftKey will be
able to continue to obtain new products from developers or to maintain or
expand its market share in the event that a competitor offers the same or
similar software products. If SoftKey is unable to develop or acquire new
products in a timely manner as revenues decrease from products reaching the
end of their natural life cycle, SoftKey's results of operations will be
adversely affected.
COMPETITION FOR SHELF SPACE AND PROMOTIONAL SUPPORT
Retailers of SoftKey's products typically have a limited amount of shelf
space and promotional resources, and there is intense competition among high-
quality educational software products for adequate levels of shelf space and
promotional support from retailers. To the extent that the number of consumer
software products and computer platforms increases, this competition for shelf
space may intensify. Due to increased competition for limited shelf space,
retailers and distributors are increasingly in a better position to negotiate
favorable terms of sale, including price discounts and product return
policies, as well as cooperative market development funds. Retailers often
require software publishers to pay fees in exchange for preferred shelf space.
The amounts paid to retailers by software publishers for preferred shelf space
are customarily determined by an arms-length negotiation on a case by case
basis, and there is no general formula or industry standard for determining
such fees. Amounts typically paid by SoftKey for shelf space, cooperative
advertising, promotional costs and market developments funds represent
approximately 4-5% of gross sales. There can be no assurance that such
retailers will continue to purchase SoftKey's products, provide SoftKey's
products with adequate levels and quality of shelf space or continue to
participate with SoftKey in cooperative advertising, promotional or market
development arrangements.
SIGNIFICANT PRICE REDUCTIONS IN PERSONAL COMPUTER SOFTWARE
Recently, several major publishers of PC software have significantly reduced
the prices of their products with the goal of gaining greater market share, to
the extent that at least one company (which is not a competitor of SoftKey)
distributed its product at no cost (except what it represented as shipping and
handling charges) in order to gain market share upon its entrance into a new
market. The retail and wholesale prices of many of SoftKey's products have
declined and SoftKey has introduced new lines of lower-priced software
products. There can be no assurance that such price reductions or new product
lines will result in an increase in unit sales volume or that prices will not
continue to decline in the future. Such a decline would lead to a decrease in
the revenues from, and gross margins on, sales of such products in the future
and could result in lower cash flow or operating margins.
RISK OF INTERNATIONAL OPERATIONS
SoftKey derived approximately 15% of its revenues in the year ended January
6, 1996 from sales occurring outside North America. SoftKey's international
revenues increased by 96% in 1995 as compared to 1994. This increase was
driven by both the acquisition of tewi Verlag GmbH, a German company, on July
21, 1995 and increased penetration of personal computers in Europe, which in
turn caused an increase in demand for and sales of consumer software products.
These revenues are subject to the risks normally associated with international
operations, including currency conversion risks, limitations (including taxes)
on the repatriation of earnings, slower and more difficult accounts receivable
collection, greater difficulty and expense in administering business abroad,
complications in complying with foreign laws and the necessity of obtaining
requisite export licenses, which on occasion may be delayed or difficult to
obtain. In addition, while U.S. copyright law, international conventions and
international treaties may provide meaningful protection against unauthorized
duplication of software, the laws of foreign jurisdictions may not protect
SoftKey's proprietary rights to the same extent as the
23
<PAGE>
laws of the United States. Software piracy has been, and can be expected to
be, a persistent problem for participants in the "shrink-wrap" software
industry, including SoftKey. These problems are particularly acute in certain
international markets such as South America, the Middle East, the Pacific Rim
and the Far East.
PROTECTION OF PROPRIETARY RIGHTS; RISK OF INFRINGEMENT CLAIMS
SoftKey relies on a combination of trade secret, copyright, trademark and
other proprietary rights laws and license agreements to protect its rights to
its software products and related documentation. SoftKey does not have any
patents. United States copyright law, international conventions and
international treaties, however, may not provide meaningful protection against
unauthorized duplication of SoftKey's software. SoftKey generally licenses its
externally developed products rather than transferring title and has relied on
contractual arrangements with recipients and users of its products to
establish certain proprietary rights and to maintain confidentiality of those
products protected by trade secret law. Consistent with standard industry
practice, SoftKey's products generally are licensed pursuant to "shrink-wrap"
licenses that are not signed by the licensee. The enforceability of such
licenses has not been conclusively determined. SoftKey's products do not
contain any mechanisms to prevent or inhibit unauthorized copying.
SoftKey has registered numerous trademarks in the United States and Canada,
and a small number in other countries, for titles or components of its
products and has trademark registrations pending in the United States and
other countries for various new products.
Policing unauthorized use of a broadly disseminated product such as PC
software is very difficult. Software piracy can be expected to be a persistent
problem for the "shrink-wrap" software industry. These problems are
particularly acute in certain international markets such as South America, the
Middle East, the Pacific Rim and the Far East.
SoftKey periodically receives communications alleging or suggesting that its
products may incorporate material covered by the copyrights, trademarks or
other proprietary rights of third parties. With the increased use of music and
animation in CD-ROM products and the increased number of software products on
the market generally, SoftKey is likely to experience an increase in the
number of infringement claims asserted against it in the future. With respect
to licensed products, SoftKey is generally indemnified against liability on
these matters. SoftKey's policy is to investigate the factual basis of such
communications and to resolve such matters promptly by enforcing its rights,
negotiating licenses (if necessary) or taking other appropriate actions.
In certain circumstances, litigation may be necessary to enforce SoftKey's
proprietary rights, to protect copyrights, trademarks and trade secrets and
other intellectual property rights owned by SoftKey or its licensors, to
defend SoftKey against claimed infringements of the rights of others and to
determine the scope and validity of the proprietary rights of SoftKey and
others. Any such litigation, whether with or without merit, could be costly
and a diversion of management's attention, which could have an adverse effect
on SoftKey's business, operating results or financial condition. Adverse
determinations in litigation relating to any of SoftKey's products could
result in the loss of SoftKey's proprietary rights, subject SoftKey to
liabilities, require SoftKey to seek licenses from third parties or prevent
SoftKey from selling that product.
DEPENDENCE ON MAJOR SUPPLIER
All duplication, assembly and fulfillment, with certain exceptions
(including CD-ROMs and products reproduced by OEMs), for all of SoftKey's U.S.
products are provided by one supplier, Stream International Inc., formerly
known as the Global Software Services business unit of R.R. Donnelley & Sons
Company ("Stream"), at facilities in Crawfordsville, Indiana. Any interruption
in Stream's manufacturing, assembly and fulfillment services could have a
material adverse impact on SoftKey's business. SoftKey's agreement with Stream
expires in April 1997, and there can be no assurance that such agreement will
be renewed or that the terms of any renewal will be the same as those
currently in effect. Although SoftKey believes that suitable alternative
suppliers exist, there can be no assurance that any termination or
modification of the agreement with Stream would not result in a short-term
business interruption for SoftKey.
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DEPENDENCE ON CONTINUED PERSONAL COMPUTER SALES
The success of SoftKey is dependent upon the continuing use of PCs, and
especially multimedia PCs, in the consumer and school market. A general
decrease in unit sales of PCs or a shift to an alternative means of delivery
could adversely affect SoftKey's future results of operations.
HISTORY OF OPERATING LOSSES
A variety of factors may cause period-to-period fluctuations in SoftKey's
operating results, including integration of operations resulting from
acquisitions of companies, products or technologies, revenues and expenses
related to the introduction of new products or new versions of existing
products, changes in selling prices, delays in purchases in anticipation of
upgrades to existing products, currency fluctuations, dealer and distributor
order patterns, general economic trends or a slowdown of PC sales and
seasonality of customer buying patterns. Historical operating results of
SoftKey and its predecessors cannot be relied upon as indicative of the future
performance of SoftKey. On an historical basis, SoftKey incurred net losses of
$57,250,000 for the year ended June 30, 1993 and $73,258,000 for the
transition period from July 4, 1993 to January 1, 1994 and $65,960,000 for the
year ended January 6, 1996 (after amortization of $18,229,000 of goodwill).
SoftKey had net income of $21,145,000 for the year ended December 31, 1994.
There can be no assurance that SoftKey will be profitable in the future.
SoftKey expects to treat a portion of the purchase price of MECC as in-process
research and development costs (which are expensed at the time of the
acquisition), a portion as purchased technology (which SoftKey has a policy of
amortizing over a one to two year period), and the remainder as goodwill
(which is expected to be amortized over a period of two years). This treatment
of the purchase price for accounting purposes is expected to result in
substantial losses for SoftKey.
CAPITAL RESOURCES
The expansion of SoftKey's current business involves significant financial
risk and capital investment. There is no assurance that capital will be
available in the future to meet the needs of SoftKey for additional
investment.
VOLATILITY OF STOCK PRICE AND DEPTH OF TRADING MARKET
SoftKey Common Stock trades on the Nasdaq National Market ("NNM"). The
market price of the SoftKey Common Stock, like the shares of many other high
technology companies, has been and may continue to be volatile. Recently, the
stock market in general and the shares of PC software companies in particular
have experienced significant price fluctuations. These broad market and
industry fluctuations may adversely affect the market price of the SoftKey
Common Stock. Factors such as quarterly fluctuations in results of operations,
the announcement of technological innovations, the introduction of new
products by SoftKey or its competitors and general conditions in the computer
hardware and software industries may have a significant impact on the market
price of the SoftKey Common Stock. There can be no assurance as to the effect
of the consummation or failure to consummate the Merger on the market price of
SoftKey Common Stock.
RECENT DEVELOPMENTS
ACQUISITION OF THE LEARNING COMPANY
As part of its strategy of acquisitions and business combination
transactions, on December 22, 1995, SoftKey acquired approximately a 95%
interest in TLC, 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. The total consideration for the transaction was
approximately $684,066,000, including estimated transaction costs, value of
stock options assumed and deferred income taxes related to certain
identifiable intangible assets acquired. There can be no assurance that
SoftKey will be able to successfully integrate TLC's operations with those of
SoftKey.
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On December 22, 1995, SoftKey announced that, in connection with its
acquisition of TLC, it had completed the sale to Tribune Company of $150
million principal amount of 5 1/2% Senior Convertible/ Exchangeable Notes Due
2000. These 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.
ACQUISITION OF COMPTON'S NEWMEDIA, INC. AND COMPTON'S LEARNING COMPANY
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 and in connection with the acquisition, SoftKey issued
a total of 5,052,697 shares of common stock, which included 587,036 shares to
settle $14,000,000 of intercompany debt to Tribune Company, and executed a
promissory note to Tribune Company for $3,000,000 for cancellation of the
remaining 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 to Tribune Company. The total purchase price
was $104,394,000, including estimated transaction costs, settlement of certain
intercompany debt to Tribune Company, deferred income taxes related to certain
identifiable assets acquired and assumption of the fair value of the net
liabilities of Compton's. The transaction was accounted for as a purchase.
There can be no assurance that SoftKey will be able to successfully integrate
the operations of Compton's with those of SoftKey.
Compton's NewMedia, Inc. is a leading developer, publisher and international
distributor of interactive multimedia CD-ROM software in the areas of
reference, including "Compton's Interactive Encyclopedia" and related
education, entertainment and lifestyle titles. Compton's Learning Company owns
or maintains rights to the content used in products of Compton's NewMedia,
Inc.
ACQUISITION OF TEWI VERLAG GMBH
On July 21, 1995, SoftKey acquired tewi Verlag GmbH, a publisher and
distributor of CD-ROM software and computer-related books, located in Munich,
Germany ("tewi"), in exchange for $12,688,000 in cash and 99,045 shares of
SoftKey Common Stock valued at $3,640,000. One of the former shareholders of
tewi is eligible to receive additional consideration for the purchase of his
tewi shares, up to a maximum of DM1,080,000 (the "Earn-Out Amount") in each of
fiscal 1996 and 1997, based upon achievement of certain revenue and
profitability goals. Any Earn-Out Amount will be settled annually in shares of
SoftKey Common Stock, the number of which will be determined based on a
volume-weighted average of the closing stock price following the closing of
each fiscal year.
THE SOFTKEY SPECIAL MEETING
DATE, TIME AND PLACE
The special meeting of the stockholders of SoftKey in lieu of an annual
meeting (the "SoftKey Special Meeting") is scheduled to be held on May 16,
1996, at 1:30 p.m., local time, at The Ritz-Carlton, Boston, located at 15
Arlington Street, Boston, Massachusetts.
PURPOSE OF THE SOFTKEY SPECIAL MEETING
At the SoftKey Special Meeting, the stockholders of SoftKey will be asked to
consider and vote upon a proposal to approve the issuance of up to 10,500,000
shares of SoftKey Common Stock in the Merger (such shares or any portion
thereof are referred to herein as the "Merger Shares"). In addition to the
proposal regarding the issuance of the Merger Shares, at the SoftKey Special
Meeting stockholders of SoftKey will be asked to consider and vote upon (i)
the election of directors, (ii) a proposal to amend the SoftKey International
Inc. Long Term Equity Incentive Plan (the "LTIP") to increase the number of
shares of SoftKey Common Stock
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authorized to be issued under the LTIP from 5,450,000 to 7,000,000, (iii) in
connection with the proposals regarding the Merger Shares and the amendment to
the LTIP, a proposal to amend SoftKey's Restated Certificate of Incorporation
(the "SoftKey Charter") to increase the number of authorized shares of SoftKey
Common Stock from 60,000,000 to 120,000,000 and (iv) the selection of Coopers
& Lybrand L.L.P. as independent public accountants for SoftKey for the 1996
fiscal year.
RECORD DATE
The Board of Directors of SoftKey (the "SoftKey Board") has fixed the close
of business on March 20, 1996 as the record date (the "SoftKey Record Date")
for the determination of holders of SoftKey Common Stock entitled to notice of
and to vote at the SoftKey Special Meeting. In addition, holders of
Exchangeable Non-Voting Shares (the "Exchangeable Shares") of SoftKey Software
Products Inc., an Ontario corporation ("SoftKey Software") all of the voting
securities of which are owned by SoftKey, of record at the close of business
on the SoftKey Record Date will be entitled to notice of the SoftKey Special
Meeting and to direct the vote of The R-M Trust Company, the holder as trustee
for such persons, of the one outstanding share of special voting stock of
SoftKey, par value $1.00 per share (the "SoftKey Special Voting Share"). As of
the SoftKey Record Date, there were issued and outstanding 31,848,980 shares
of SoftKey Common Stock, which were held by approximately 1,455 holders of
record, and the one SoftKey Special Voting Share, which share represented
1,595,338 votes entitled to be cast at the SoftKey Special Meeting.
REQUIRED VOTE
The representation in person or by proxy of at least a majority of the votes
represented by the outstanding shares of SoftKey Common Stock and the SoftKey
Special Voting Share entitled to be cast at the SoftKey Special Meeting is
necessary to establish a quorum for the transaction of business. Abstentions
and broker non-votes will be counted as present or represented for purposes of
determining whether a quorum is present on any matter. The approval of the
issuance of shares of SoftKey Common Stock in the Merger requires the
affirmative vote of a majority of the votes cast at the SoftKey Special
Meeting by the holders of the shares of SoftKey Common Stock and the holder of
the SoftKey Special Voting Share. The approval of all other matters to be
considered and voted upon at the SoftKey Special Meeting (except the amendment
to the SoftKey Charter) requires the affirmative vote of a majority of the
votes represented by the shares of SoftKey Common Stock and the SoftKey
Special Voting Share present in person or represented by proxy and entitled to
vote at the SoftKey Special Meeting. The approval of the amendment to the
SoftKey Charter requires the affirmative vote of a majority of the votes
represented by the outstanding shares of SoftKey Common Stock and the SoftKey
Special Voting Share, whether or not present or represented by proxy at the
SoftKey Special Meeting.
Holders of record of SoftKey Common Stock on the SoftKey Record Date are
entitled to cast one vote on each proposal to be presented to stockholders of
SoftKey at the SoftKey Special Meeting, and The R-M Trust Company, as the
holder of record of the Special Voting Share, is entitled to cast 1,595,308
votes with respect to each such proposal. That number of votes represents the
number of Exchangeable Shares that were outstanding on the SoftKey Record Date
(other than Exchangeable Shares held by SoftKey, its subsidiaries or any
entity controlled by SoftKey, if any). The Exchangeable Shares are
exchangeable on a one-for-one basis for SoftKey Common Stock. The Exchangeable
Shares were originally issued to certain holders of common shares of a
predecessor corporation to SoftKey Software which was also called SoftKey
Software Products Inc. ("Former SoftKey").
The Special Voting Share has been issued to The R-M Trust Company, as
trustee (the "Trustee"), under a Voting and Exchange Trust Agreement pursuant
to which each holder of an Exchangeable Share (other than SoftKey, its
subsidiaries or any entity controlled by SoftKey) is entitled to instruct the
Trustee to exercise one of the votes attached to the SoftKey Special Voting
Share for each Exchangeable Share held by such holder.
The SoftKey Common Stock and the SoftKey Special Voting Share vote as a
single class and, except as set forth above, are identical in all respects
with respect to matters subject to the vote of SoftKey stockholders.
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As of April 6, 1996, directors and executive officers of SoftKey and their
affiliates had the right to cast votes representing approximately 1.62% of all
votes represented by the issued and outstanding shares of SoftKey Common Stock
and the SoftKey Special Voting Share. Such persons have indicated to SoftKey
that they intend to cast all of such votes in favor of each of the proposals
listed on the proxy.
PROXIES
All shares of SoftKey Common Stock represented by properly executed proxies
(or, in the case of the SoftKey Special Voting Share, properly executed voting
directions) received prior to or at the SoftKey Special Meeting and not
revoked will be voted in accordance with the instructions indicated therein.
Properly executed proxies (or voting directions) which do not contain voting
instructions will be voted FOR approval of each of the proposals listed on
such proxy or voting directions. Stockholders are urged to mark the box on the
proxy to indicate how their shares are to be voted.
If an executed proxy (or voting directions) is returned and the stockholder
has abstained from voting on a matter listed on the proxy, the shares
represented by such proxy (or voting directions) will be considered present at
the meeting for purposes of determining a quorum and for purposes of
calculating the vote, but will not be considered to have been voted in favor
of approval of such matter. If an executed proxy (or voting directions) is
returned by a broker holding shares of SoftKey Common Stock or Exchangeable
Shares in street name which indicates that the broker does not have
discretionary authority as to certain shares to vote on any matter (a so-
called "broker non-vote"), such shares will be considered present at the
meeting for purposes of determining the presence of a quorum and of
calculating the vote, but will not be considered to have been voted in favor
of approval of such matters. Because approval of the proposals listed on the
proxy (except the proposal relating to the issuance of the Merger Shares)
requires the affirmative vote of at least a majority of the votes represented
by the shares of SoftKey Common Stock and the SoftKey Special Voting Share
present in person or represented by proxy and entitled to vote at the SoftKey
Special Meeting, and because approval of the amendment to the SoftKey Charter
requires the affirmative vote of at least a majority of the votes represented
by the shares of SoftKey Common Stock outstanding and the SoftKey Special
Voting Share entitled to vote at the SoftKey Special Meeting, whether or not
present in person or represented by proxy at the SoftKey Special Meeting,
abstentions and broker non-votes will have the same effect as a vote against
approval of such proposals.
It is not expected that any matter other than those referred to herein will
be brought before the SoftKey Special Meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in accordance with
their judgment with respect to such matters, unless authority to do so is
withheld in the proxy. Shares represented by proxies which have been voted
AGAINST approval of the issuance of the Merger Shares will not be voted in
respect of any motion made for adjournment of the SoftKey Special Meeting for
purposes of soliciting additional votes to approve such issuance.
Any SoftKey stockholder who executes and returns a proxy (or voting
directions) may revoke such proxy (or voting directions) at any time before it
is voted by (i) notifying in writing the Secretary of SoftKey at One Athenaeum
Street, Cambridge, Massachusetts 02142, (ii) granting a subsequent proxy (or
voting directions) or (iii) appearing in person and voting at the SoftKey
Special Meeting. Attendance at the SoftKey Special Meeting will not in and of
itself constitute revocation of a proxy (or voting directions).
Of the expenses incurred in connection with the printing and mailing of this
Joint Proxy Statement- Prospectus, 60% will be borne by SoftKey and 40% will
be borne by MECC. SoftKey has retained D.F. King & Co., Inc. ("D.F. King") at
an estimated cost of $10,000 plus reimbursement of expenses, to assist in the
solicitation of proxies by telephone and by mail. SoftKey and D.F. King will
also request banks, brokers, and other intermediaries holding shares
beneficially owned by others to send this Joint Proxy Statement-Prospectus to
and obtain proxies from such beneficial owners and will reimburse such holders
for their reasonable expenses in so doing.
AVAILABILITY OF PRINCIPAL ACCOUNTANTS
Representatives of Coopers & Lybrand L.L.P., principal accountants to
SoftKey, will be present at the SoftKey Special Meeting, will have the
opportunity to make a statement should they desire to do so and are expected
to be available to respond to appropriate questions.
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THE MECC SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting of the shareholders of MECC (the "MECC Special Meeting")
is scheduled to be held on May 16, 1996 at 9:00 a.m., local time, at MECC's
principal offices located at 6160 Summit Drive North, Minneapolis, Minnesota.
PURPOSE OF THE MECC SPECIAL MEETING
At the MECC Special Meeting, the holders of common shares, par value $.01
per share, of MECC ("MECC Common Shares") will be asked to consider and vote
upon a proposal to approve the Merger Agreement, pursuant to which, among
other things, Sub will merge with and into MECC and MECC will survive the
Merger as a wholly owned subsidiary of SoftKey. Upon the terms and subject to
the conditions of the Merger Agreement, at the effective time of the Merger,
among other things, (i) each issued and outstanding MECC Common Share (other
than shares to be cancelled in accordance with clause (ii) below and shares as
to which dissenters' rights have been duly demanded under Minnesota law) will
be converted into the right to receive a number of shares (and cash in lieu of
fractional shares) of fully paid and nonassessable shares of SoftKey Common
Stock equal to the result (the "Exchange Ratio") obtained by dividing $40 by
the volume weighted average of the closing prices for the SoftKey Common Stock
on the NNM for the twenty full trading days ending on the third full trading
day prior to the Effective Time (the "Average SoftKey Share Price"), except
that if the Average SoftKey Share Price is equal to or greater than $45 the
Exchange Ratio will equal .88889, and if the Average SoftKey Share Price is
equal to or less than $35, the Exchange Ratio will be 1.14286, (ii) all MECC
Common Shares that are held by MECC as treasury shares and any MECC Common
Shares owned by SoftKey, Sub or any other wholly owned subsidiary of SoftKey
will be cancelled and retired and shall cease to exist and no stock of SoftKey
or other consideration shall be delivered in exchange therefor, and (iii) Sub
will be merged with and into MECC, with MECC surviving the Merger as a wholly
owned subsidiary of SoftKey. The number of shares of SoftKey Common Stock to
be received by shareholders of MECC in the Merger for each MECC Common Share
held by them will depend on the Average SoftKey Share Price. The closing price
per share of SoftKey Common Stock on the NNM on April 10, 1996 (the last full
trading day for which closing prices were available at the time of the
printing of this Joint Proxy Statement-Prospectus) was $22.50. If the closing
price per share of SoftKey Common Stock on the closing date of the Merger is
$22.50 (and assuming that the Average SoftKey Share Price is below $35), each
MECC Common Share would be converted in the Merger into 1.14286 shares of
SoftKey Common Stock having a market value, based on such closing price, of
$25.71. As indicated above, MECC shareholders will receive cash in lieu of any
fractional shares of SoftKey Common Stock which would otherwise be issuable as
a result of the Merger. As of the date of this Proxy Statement-Prospectus,
neither SoftKey nor any wholly owned subsidiary of SoftKey owns any MECC
Common Shares.
RECORD DATE
The Board of Directors of MECC (the "MECC Board") has fixed the close of
business on March 20, 1996 as the record date (the "MECC Record Date") for the
determination of holders of MECC Common Shares entitled to notice of and to
vote at the MECC Special Meeting. On the MECC Record Date, there were
8,043,286 MECC Common Shares issued and outstanding and held by approximately
69 holders of record.
REQUIRED VOTE
A majority of the outstanding MECC Common Shares entitled to vote at the
MECC Special Meeting must be present, either in person or by proxy to
constitute a quorum at the MECC Special Meeting. Under the Minnesota Business
Corporation Act (the "MBCA"), the affirmative vote of at least a majority of
the MECC Common Shares issued and outstanding and entitled to vote at the MECC
Special Meeting is required to approve the Merger Agreement.
Since approval of the Merger Agreement requires the affirmative vote of a
majority of all outstanding MECC Common Shares, whether or not such MECC
Common Shares are voted at the MECC Special Meeting,
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abstentions, failures to vote and broker non-votes will have the same effect
as votes against approval of the Merger Agreement for purposes of determining
whether the requisite majority has been obtained.
As of the MECC Record Date, directors and executive officers of MECC and
their affiliates had the right to vote approximately 20.7% of all issued and
outstanding MECC Common Shares entitled to vote at the MECC Special Meeting.
North American Fund II, L.P., a shareholder of MECC (the "Fund") the
principals of the general partner of which are directors of MECC and which
held approximately 18.2% of the MECC Common Shares outstanding as of the MECC
Record Date, is a party to a Voting Agreement dated as of October 30, 1995
(the "Voting Agreement") with SoftKey pursuant to which the Fund has agreed,
subject to the terms and conditions of the Voting Agreement, to vote 794,284
MECC Common Shares beneficially owned by it (representing approximately 9.9%
of the MECC Common Shares outstanding as of the MECC Record Date), in favor of
approval of the Merger Agreement. The obligation of the Fund under the Voting
Agreement to vote the 794,284 MECC Common Shares in favor of approval of the
Merger Agreement is conditioned upon the volume weighted average of the
closing prices of SoftKey Common Stock on the NNM for the twenty full trading
days immediately preceding the MECC Special Meeting (or any adjournment
thereof) being at least $30. The Fund has advised MECC that it intends to vote
all of the 1,461,762 MECC Common Shares beneficially owned by it (representing
approximately 18.2% of the MECC Common Shares outstanding as of the MECC
Record Date), in favor of approval of the Merger Agreement. See "The Merger--
Related Agreements." Holders of record of MECC Common Shares on the MECC
Record Date are entitled to one vote per share on each proposal to be
presented to shareholders at the MECC Special Meeting.
A MECC shareholder who has voted in favor of the Merger Agreement may be
deemed to have ratified the terms of the Merger Agreement, including the
fairness thereof, and, accordingly, may be precluded from challenging the
fairness of the Merger Agreement in a subsequent legal proceeding. Moreover,
since dissenters' rights are available to shareholders of MECC who comply with
the Minnesota statutory provisions discussed below under the caption "The
Merger--Dissenters' Rights," the MBCA provides that a shareholder of MECC
(whether or not such shareholder votes for or against the Merger Agreement, or
fails to vote, abstains or exercises dissenters' rights with respect to the
Merger Agreement) has no right at law or in equity to set aside the approval
of the Merger Agreement or the consummation of the Merger, except if such
approval or consummation is fraudulent with respect to such shareholder or
MECC. Accordingly, MECC may use a shareholder's vote with respect to the
Merger Agreement as a defense to a subsequent challenge to the Merger.
PROXIES
All MECC Common Shares represented by properly executed proxies received
prior to or at the MECC Special Meeting and not revoked will be voted in
accordance with the instructions indicated in such proxies. Properly executed
proxies which do not contain voting instructions will be voted FOR approval of
the Merger Agreement. Shareholders are urged to mark the box on the proxy to
indicate how their shares are to be voted.
If an executed proxy is returned and the shareholder has abstained from
voting on approval of the Merger Agreement, the MECC Common Shares represented
by such proxy will be considered present at the meeting for purposes of
determining a quorum and for purposes of calculating the vote, but will not be
considered to have been voted in favor of approval of the Merger Agreement. If
an executed proxy is returned by a broker holding MECC Common Shares in street
name which indicates that the broker does not have discretionary authority as
to certain shares to vote on any matter (a so-called "broker non-vote"), such
shares will not be considered present at the meeting for purposes of
determining the presence of a quorum and of calculating the vote and will not
be considered to have been voted in favor of approval of the Merger Agreement.
Because approval of the Merger Agreement requires the affirmative vote of at
least a majority of the MECC Common Shares issued and outstanding and entitled
to vote at the MECC Special Meeting, abstentions and broker non-votes will
have the same effect as a vote against approval of the Merger Agreement.
It is not expected that any matter other than those referred to herein will
be brought before the MECC Special Meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in
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accordance with their judgment with respect to such matters, unless authority
to do so is withheld in the proxy. Shares represented by proxies which have
been voted AGAINST approval of the Merger Agreement will not be voted in
respect of any motion made for adjournment of the MECC Special Meeting for
purposes of soliciting additional votes to approve the Merger Agreement.
Any MECC shareholder who executes and returns a proxy may revoke such proxy
at any time before it is voted by (i) notifying in writing the Secretary of
MECC at 6160 Summit Drive North, Minneapolis, Minnesota 55430-4003, (ii)
granting a subsequent proxy or (iii) appearing in person and voting at the
MECC Special Meeting. Attendance at the MECC Special Meeting will not in and
of itself constitute revocation of a proxy.
The expenses incurred in connection with the printing and mailing of this
Joint Proxy Statement-Prospectus will be borne 60% by SoftKey and 40% by MECC.
MECC will request banks, brokers, and other intermediaries holding shares
beneficially owned by others to send this Joint Proxy Statement-Prospectus to
and obtain proxies from such beneficial owners and will reimburse such holders
for their reasonable expenses in so doing. The original solicitation of
proxies by mail may be supplemented by telephone, telegram and personal
solicitation by officers and other regular employees of MECC.
AVAILABILITY OF PRINCIPAL ACCOUNTANTS
Representatives of Deloitte & Touche LLP, principal accountants to MECC,
will be present at the MECC Special Meeting, will have the opportunity to make
a statement should they desire to do so and are expected to be available to
respond to appropriate questions.
MECC SHAREHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR
PROXIES. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK
CERTIFICATES FOR MECC COMMON SHARES WILL BE MAILED AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE TIME OF THE MERGER.
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THE MERGER
This section of the Joint Proxy Statement-Prospectus describes certain
aspects of the proposed Merger, including the Merger Agreement. To the extent
that it relates to the Merger Agreement, the following description does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, which is attached as Appendix A to this Joint Proxy
Statement-Prospectus and is incorporated herein by reference. While SoftKey
and MECC believe that such description covers the material terms of the Merger
Agreement, all stockholders of SoftKey and shareholders of MECC are urged to
read the Merger Agreement in its entirety.
BACKGROUND OF THE MERGER
SoftKey has historically expanded its business through, among other
strategies, acquisitions, business combinations and strategic alliances.
SoftKey continuously evaluates and considers other businesses of varying sizes
as potential strategic partners and candidates for acquisition and has engaged
in discussions with certain businesses in pursuit of possible transactions.
In July 1995, R. Scott Murray, Chief Financial Officer of SoftKey, contacted
Charles L. Palmer, Chairman of the Board of Directors of MECC and a principal
of the Fund, which was then a majority stockholder of MECC, and subsequently,
Robert L. Underwood, a director of MECC and a principal of the Fund, to
discuss the possibility of a combination of SoftKey and MECC. Messrs. Palmer
and Underwood responded that the Fund was not then interested in engaging in
discussions with SoftKey.
In July 1995, the Fund was considering a secondary public offering of a
large portion of its MECC Common Shares to provide liquidity for its partners.
In August 1995, the Fund completed the sale of 3,000,000 MECC Common Shares in
a public offering. As a result, the Fund's ownership of MECC was reduced from
approximately 57% to approximately 18% of the outstanding MECC Common Shares.
Since the Fund no longer owned a majority of the MECC Common Shares, the MECC
Board believed it would be appropriate to have further discussions with
SoftKey to determine whether a transaction between MECC and SoftKey would be
in the best interests of the MECC shareholders. Since 1991, when the Fund
acquired MECC, the Fund and MECC had from time to time considered other
possible strategic alliances and business combinations.
On September 21, 1995, Kevin O'Leary, President of SoftKey, and Mr. Murray
met with Mr. Palmer to explore a possible business combination. On September
25, 1995, Mr. Murray and a representative of SoftKey's independent public
accounting firm participated in a conference call with Mr. Palmer, Dale E.
LaFrenz, President and Chief Executive Officer of MECC, Donald W. Anderson,
Chief Financial Officer of MECC, R. David Bergonia, a director of MECC and a
principal of the Fund, and representatives of MECC's independent public
accounting firm to explore accounting issues in connection with any possible
business combination. On September 29, 1995, Mr. O'Leary and Mr. Murray met
with Mr. LaFrenz to continue to discuss business opportunities for SoftKey and
MECC. At that time, there was no determination on the part of SoftKey to move
forward with respect to a transaction with MECC. On October 17, 1995, SoftKey
and MECC entered into a Confidentiality and Non-Disclosure Agreement pursuant
to which each party agreed to keep confidential certain proprietary
information received from the other party.
Following the completion of SoftKey's private offering of $350 million
principal amount 5 1/2% Senior Convertible Notes Due 2000, SoftKey reassessed
its strategic alternatives in connection with its search for strategic
partners and candidates for acquisition and identified the education category
as the next direction of growth in its business. The identification of the
education category as the next direction of growth for SoftKey's business was
based upon, among other things, the high demand existing in the software
market for education products, the fact that entry into the educational
software segment entailed less risk than, for example, expansion in the
entertainment segment, the fact that gross margins on education products are
better than those obtainable on entertainment products and the fact that
competition in the education segment of the industry was not as intense as in
other segments of the consumer software market. On October 23, 1995, Mr.
O'Leary and Mr. Murray telephoned Mr. Palmer, suggesting that SoftKey and MECC
recommence discussions concerning a
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possible merger or other business combination between SoftKey and MECC.
Messrs. Murray and O'Leary indicated that if a definitive agreement relating
to a business combination between SoftKey and MECC could promptly be entered
into, SoftKey would consider seeking to acquire TLC. Mr. O'Leary suggested
that a prompt conclusion to the discussions between SoftKey and MECC was
required because, among other things, (i) SoftKey would want to have the
expertise of management of MECC in educational software and, in particular,
school distribution channels available to assist SoftKey in the management of
TLC, if SoftKey were to acquire TLC and (ii) TLC had entered into a merger
agreement with Broderbund Software, Inc. (the "TLC/Broderbund Agreement") and
had scheduled a November 9, 1995 meeting of its stockholders for the purpose
of voting on approval of the TLC/Broderbund Agreement.
On October 25, 1995, representatives of SoftKey, including Michael Perik,
Chairman of the Board and Chief Executive Officer, Mr. O'Leary, Mr. Murray and
Neal S. Winneg, Vice President, General Counsel and Secretary of SoftKey, and
representatives of MECC, including Messrs. Palmer, Bergonia, Anderson and
Underwood, together with representatives of Skadden, Arps, Slate, Meagher &
Flom and Bear, Stearns & Co. Inc. ("Bear Stearns"), SoftKey's legal and
financial advisors, respectively, and Gardner, Carton & Douglas and Allen &
Company Incorporated ("Allen & Company"), MECC's legal and financial advisors,
respectively, met to discuss proposed terms of a business combination between
the two companies. The primary focus of the discussions was the potential
price to be paid by SoftKey, particularly with respect to the recent public
offering price of the MECC Common Shares, and the determination of the maximum
and minimum number of shares of SoftKey Common Stock that would be issued to
holders of MECC Common Shares in the Merger. Based on the discussions at the
meeting, the parties agreed to continue to resolve issues between them and to
proceed to negotiate a possible merger agreement. Prior to the meeting,
SoftKey reached an understanding with Bear Stearns, formalized in an
engagement letter dated October 29, 1995, that Bear Stearns would participate
in the negotiations with MECC, advise SoftKey with respect thereto and deliver
its opinion with respect to the fairness of the proposed acquisition of MECC
by SoftKey to the stockholders of SoftKey.
Following the October 25 meetings, representatives of each of MECC and
SoftKey commenced due diligence investigations of the other and continued
negotiations with respect to the Merger Agreement and the transactions
contemplated thereby.
On October 26, 1995, Messrs. LaFrenz and Anderson met with Messrs. Perik,
O'Leary and Murray to discuss the proposed combination of SoftKey and MECC.
That evening, Messrs. Perik, O'Leary and Murray met with Messrs. LaFrenz and
Anderson, Paul Gullickson, Senior Vice President, Business Development and
Operations, and Susan L. Schilling, then Senior Vice President, Development
and Creative Director, to discuss the revenue enhancements and other
synergistic benefits that SoftKey expected to result from the combination of
SoftKey and MECC, in addition to the further benefit to the combined entity
from an acquisition of TLC, as well as development and marketing strategies
for the educational software market. The revenue enhancements and other
synergistic benefits discussed included, among others, an expansion of MECC's
current retail distribution, OEM sales opportunities, expansion of existing
international sales and establishment of a direct mail business, increased
sales through product line extensions and anticipated cost savings through
consolidation of operations and elimination of overlapping cost structures.
On October 27, 1995, the MECC Board held a meeting at which the discussions
with the SoftKey representatives were outlined. The MECC Board, with the
advice of its legal and financial advisors, considered the proposed terms of
the transaction with SoftKey and discussed the issues relating thereto. On
October 29, 1995, the MECC Board met again, together with its legal and
financial advisors, to review in detail the status of the negotiations as to
the Merger Agreement and the transactions contemplated thereby and to further
evaluate the proposed terms thereof.
Also on October 29, 1995, the SoftKey Board met to consider, among other
things, the proposed transactions with MECC. The SoftKey Board reviewed in
detail with the management of SoftKey and SoftKey's legal and financial
advisers the Merger Agreement, the Voting Agreement and the other related
agreements and matters. At this meeting, Bear Stearns delivered its opinion to
the effect that, as of the date of such opinion and
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based upon and subject to the various conditions set forth therein, the Merger
was fair, from a financial point of view, to the stockholders of SoftKey. The
opinion of Bear Stearns is set forth in full on Appendix B to this Joint Proxy
Statement-Prospectus. See "The Merger--Opinion of SoftKey's Financial
Advisor."
After consideration of the presentations of the management of SoftKey, Bear
Stearns and SoftKey's legal advisors, the SoftKey Board unanimously approved
the Merger Agreement and the Voting Agreement and the transactions
contemplated thereby.
On the morning of October 30, 1995, the MECC Board met again, with MECC's
legal and financial advisors present. Allen & Company made a detailed
presentation of the financial aspects of the Merger and delivered its opinion
to the MECC Board that the consideration to be received by the MECC
shareholders in the Merger is fair from a financial point of view. The Opinion
of Allen & Company is set forth in full on Appendix C to this Joint Proxy
Statement-Prospectus. See "The Merger--Opinion of MECC's Financial Advisor."
Following the presentation by Allen & Company and further discussion by the
MECC Board, the MECC Board unanimously approved the Merger Agreement and the
transactions contemplated thereby.
After execution of the Merger Agreement by SoftKey and MECC, SoftKey and
MECC issued a press release announcing the Merger Agreement.
Subsequent to public announcement of the Merger Agreement, the market for
high-tech stocks generally has been subject to significant fluctuations. The
market price for SoftKey Common Stock has also been subject to significant
fluctuations and has ranged from $38.125 per share on October 27, 1995 (the
last business day prior to public announcement of the Merger Agreement) to
$13.625 per share on January 30, 1996.
On January 15, 1996 the Fund learned that one of MECC's other major
shareholders had expressed concern to SoftKey regarding the decline in the
value of consideration to be received by the shareholders of MECC in the
Merger. On February 7, 1996, another major shareholder of MECC was quoted in
the media as saying that it did not intend to vote in favor of the Merger.
During January and February of 1996, the Fund held discussions with
representatives of SoftKey and indicated that the Fund believed that in order
to induce the shareholders of MECC to vote in favor of the Merger, (i) an
implementation plan to help facilitate the accomplishment of SoftKey's
strategic plan would have to be defined, developed and a commitment thereto
would have to be made by the managements of SoftKey and MECC, and (ii) SoftKey
should consider issuing additional consideration to shareholders of MECC in
the Merger. In such discussions, the Fund expressed its view that the focus of
a possible implementation plan should be to realize the anticipated benefits
of the acquisition of TLC and to successfully integrate SoftKey, MECC and TLC
so as to create a leading educational software company. The SoftKey Board met
on February 5, 1996 and, after considering the Fund's proposals, indicated
that it would proceed with the transaction on the terms contemplated by the
Merger Agreement.
On February 19 and 20, 1996, representatives of SoftKey, including, among
others, Messrs. Perik and O'Leary met with representatives of MECC, including,
among others, Messrs. Palmer, LaFrenz and Anderson to discuss SoftKey's plans
to integrate the operations of MECC, TLC and Compton's into those of SoftKey.
At such meetings the participants reached agreement regarding the framework of
a plan to implement SoftKey's strategic plan, including the maintenance of
MECC as a separate business unit of SoftKey with Mr. LaFrenz as its President
and the assignment to certain of MECC's senior management of the primary role
of operating the school sales division for the combined company. MECC and
SoftKey also agreed that the senior management of MECC would continue leading
the development effort for the current MECC software titles and that, where
feasible, certain functions, including manufacturing, consumer sales, finance
and technical support services, would be consolidated.
On the morning of March 8, 1996, the MECC Board met again, with MECC's legal
and financial advisors present, to review its October 30, 1995 determination
to recommend approval of the Merger Agreement by the
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MECC shareholders. Allen & Company made a detailed presentation and delivered
a confirmation, dated as of March 6, 1996, of its opinion dated October 30,
1995 to the MECC Board that the consideration to be received by the MECC
shareholders in the Merger is fair from a financial point of view. The
confirmation of the opinion of Allen & Company is set forth in full on
Appendix D to this Joint Proxy Statement-Prospectus. See "The Merger--Opinion
of MECC's Financial Advisor." Following the presentation by Allen & Company
and further discussion by the MECC Board, the MECC Board unanimously resolved
to recommend approval of the Merger Agreement by the MECC shareholders.
SOFTKEY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE SOFTKEY BOARD
SoftKey believes that the strategic combination of SoftKey and MECC would
create a strong consumer software company with a broad range of titles,
respected brand names, superior distribution system and employees with proven
development talent, which is strengthened by SoftKey's acquisition of
Compton's and TLC. SoftKey has identified substantial revenue enhancements,
cost savings and other synergistic benefits that would result from the
combination of SoftKey and MECC.
The potential significant revenue enhancements include increased sales of
the combined company's products through more retail outlets, an increased
customer base, product line extensions, application of SoftKey's direct
response experience (which involves a selling process where SoftKey does not
go through a retailer but instead markets its products directly to the end
user through such outlets as direct mail, catalog resellers, on-line services
and a home-shopping television network) to MECC's business (which currently
involves only a small amount of such direct response sales) and an expansion
of MECC's minimal OEM business; reduced reliance on distributors with the
resulting avoidance of distributor markdowns in price; increased international
sales through utilization of SoftKey's international presence; and increased
sales of SoftKey products into the school markets.
The anticipated substantial cost savings resulting from the combination of
SoftKey and MECC include reduced costs of goods sold through stronger
purchasing power and the consolidation of internal manufacturing facilities;
reduced sales and marketing costs through reductions in overlapping sales
organizations and marketing programs, realization of economies of scale in
trade allowance programs and consolidation of promotion costs and technical
support costs; and lower general and administrative costs through elimination
of overlapping cost structures and reduction of overhead.
SoftKey also believes that the combined company would have enhanced research
and development capabilities, and would increase the creative, animation and
video element of the combined companies' products using existing expertise at
MECC and utilizing SoftKey's cross platform approach to technology and
engines.
THE SOFTKEY BOARD HAS DETERMINED THE MERGER AND THE ISSUANCE OF THE MERGER
SHARES TO BE IN THE BEST INTERESTS OF SOFTKEY AND ITS STOCKHOLDERS.
ACCORDINGLY, THE SOFTKEY BOARD HAS APPROVED THE MERGER AGREEMENT AND THE
ISSUANCE OF SUCH SHARES AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
SOFTKEY VOTE FOR APPROVAL OF THE ISSUANCE OF THE MERGER SHARES.
In reaching its determination with respect to the Merger and the issuance of
the Merger Shares, the SoftKey Board considered a variety of factors, although
it did not assign any relative or specific weight to the factors considered.
The factors considered by the SoftKey Board included, among others, the
following:
(1) that there is virtually no overlap in the MECC product mix with
SoftKey, which means that the Merger is expected to significantly enhance
SoftKey's shelf space in the retail channel with proprietary brand name
educational titles in math, social studies, geography, language arts and
science;
(2) that MECC has 22 years of experience in the creation of high-quality,
educational software for schools which will provide SoftKey with proven
development talent;
(3) that MECC has a large number of educational software titles that--
once integrated into current platforms, spliced into multiple products and
merchandised into line extensions of existing product offerings--have the
potential to further growth in existing sales channels and to advance
SoftKey's goal to expand its on-line product offerings;
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(4) that SoftKey expects to achieve significant revenue enhancements,
cost savings and other synergistic benefits by combining SoftKey and MECC,
including those revenue enhancements and cost savings described above,
which synergies and cost savings are expected to be increased as a result
of the acquisition by SoftKey of TLC;
(5) that SoftKey expects the Merger to be accretive to SoftKey on an
operating cash flow per share basis;
(6) information regarding the financial position, results of operation
and stock prices of MECC, as well as the prospective financial performance
of SoftKey and MECC on a combined basis;
(7) the oral opinion of Bear Stearns delivered on October 29, 1995,
confirmed by a written opinion as of the same date, that, as of the date of
such opinion, the Merger is fair, from a financial point of view, to the
stockholders of SoftKey, as well as the underlying financial analyses of
Bear Stearns presented in connection therewith; and
(8) a review with the SoftKey Board's outside counsel of the terms of the
Merger Agreement, including the circumstances under which either SoftKey or
MECC can terminate the Merger Agreement (and the fees triggered thereby)
and the closing conditions to the Merger contained therein.
After careful consideration of the foregoing factors and consultation with
its outside financial and legal advisors, the SoftKey Board concluded that the
Merger and the issuance of the Merger Shares is in the best interests of
SoftKey's stockholders. In considering the foregoing factors and in reaching
such conclusion, the SoftKey Board relied on the following:
(1) the presentation of Bear Stearns and its opinion that the Merger is
fair from a financial point of view to the stockholders of SoftKey;
(2) the knowledge of, and ongoing review by, the SoftKey Board as to the
consumer software market and the opportunities and strategies for the
future growth of SoftKey;
(3) the review by management of SoftKey of MECC's business, including its
products, customers and employees, and the evaluation of the potential
synergies resulting from the combination of SoftKey and MECC; and
(4) a presentation by SoftKey's legal counsel summarizing the contractual
terms of the Merger Agreement and the Voting Agreement.
In connection with the presentation of Bear Stearns to the SoftKey Board,
management of SoftKey provided to Bear Stearns certain operating and financial
information relating to SoftKey's and MECC's businessess, including internal
projections of future financial results used for budgeting purposes and
certain projected financial results (the "Projections") prepared by the
management of SoftKey relating to SoftKey and MECC individually and on a
combined basis, utilizing information with respect to MECC furnished to the
management of SoftKey by the management of MECC. The information provided to
Bear Stearns did not include any estimated revenues or operating income before
amortization from the operations of TLC or Compton's, which were acquired by
SoftKey in late December 1995. The Projections included estimates for SoftKey
(assuming consummation of the Merger) of 1996 revenues of $265 million and
operating income before amortization and acquisition-related costs of $89
million. In addition, in connection with the preparation by Allen & Company of
the confirmation, dated March 6, 1996, of its opinion dated October 30, 1995,
SoftKey provided Allen & Company with certain 1996 projected calendar year pro
forma financial statements for the combined company resulting from the Merger
(including TLC and Compton's), which included estimated 1996 earnings per
share ("EPS") of the combined company of a loss of $6.26 per share (or EPS of
$2.13 without giving effect to goodwill and consolidation expenses created by
the Merger but after taking into account anticipated synergies) (the
"Estimates"). SoftKey's current budget (the "Forecast") prepared for internal
budgeting purposes reflects expected 1996 revenues (including TLC and
Compton's), based on the assumptions and estimates utilized in preparing the
Forecast, including the consummation of the Merger, of approximately $350
million. SoftKey does not, as a matter of course, publicly disclose forward-
looking information (such as the Projections, the Estimates or the Forecast)
as to future revenues, earnings or other financial information. SoftKey's
actual results may differ materially from those included in the Projections,
the Estimates and the Forecast.
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Important factors and assumptions that could cause SoftKey's actual results to
differ materially from those included in the forward-looking statements made
herein include the factors which are responsible for period-to-period
fluctuations in SoftKey's operating results generally. These factors include
without limitation the integration of operations resulting from acquisitions
of companies (which would include, assuming consummation of the Merger, the
integration of the operations of MECC into those of SoftKey), delays in
customer purchases in anticipation of upgrades to existing products or release
of competitive products, currency fluctuations, dealer and distributor order
patterns and seasonality of buying patterns of customers and the historic and
recurring pattern of SoftKey sales by which a disproportionate percentage of a
quarter's total sales occur in the last month and weeks of each quarter,
making predictions of revenues and earnings especially difficult and resulting
in substantial risk of variance of actual results from those foregoing at any
time prior to near the quarter close. Additional factors and assumptions that
could generally cause SoftKey's actual results to differ materially from those
included in the forward-looking statements made herein include without
limitation SoftKey's ability to develop and introduce new products or new
versions of existing products, the effects of general economic conditions, the
impact of competitive products and pricing in the consumer software industry,
the sufficiency of SoftKey's production capacity to meet future demand for its
products, SoftKey's ability to keep pace with the evolution of the technology
platforms for which SoftKey develops and produces products and SoftKey's
ability to continue to exploit new channels of distribution for its products.
Other factors and assumptions not identified above were also involved in the
defivation of these forward-looking statements and the failure of such other
assumptions to be realized, as well as other factors, may also cause actual
results to differ materially from those projected. SoftKey assumes no
obligation to update these forward-looking statements to reflect actual
results or changes in factors or assumptions affecting such forward-looking
statements. In light of the significant uncertainties inherent in projections
of any kind, inclusion of the Projections, the Estimates and the Forecast in
the Joint Proxy Statement-Prospectus should not be regarded as a
representation by SoftKey, Bear Stearns, Allen & Company or any other person
that the Projections, the Estimates or the Forecast will be achieved.
INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING INFORMATION CONTAINED IN
THIS JOINT PROXY STATEMENT-PROSPECTUS SHOULD NOT BE REGARDED AS FACT AND
SHOULD NOT BE RELIED UPON AS AN ACCURATE REPRESENTATION OF FUTURE RESULTS. IN
ADDITION, THE PROJECTIONS, THE ESTIMATES AND THE FORECAST WERE NOT PREPARED
WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH THE PUBLISHED GUIDELINES
OF THE SEC OR THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROJECTIONS AND FORECASTS. THE
PROJECTIONS AND THE ESTIMATES ARE INCLUDED IN THIS JOINT PROXY STATEMENT-
PROSPECTUS ONLY BECAUSE SUCH INFORMATION WAS MADE AVAILABLE TO BEAR STEARNS OR
ALLEN & COMPANY BY SOFTKEY. MOREOVER, THE PROJECTIONS, THE ESTIMATES AND THE
FORECAST DO NOT PURPORT TO PRESENT OPERATIONS IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES AND HAVE NOT BEEN AUDITED, COMPILED OR
OTHERWISE EXAMINED BY COOPERS & LYBRAND L.L.P., SOFTKEY'S INDEPENDENT
ACCOUNTANTS, OR BY ANY OTHER INDEPENDENT ACCOUNTANTS. ACCORDINGLY, NONE OF
BEAR STEARNS, ALLEN & COMPANY, SOFTKEY, MECC OR COOPERS & LYBRAND L.L.P. OR
ANY OTHER PARTY ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OR VALIDITY OF THE
PROJECTIONS, THE ESTIMATES OR THE FORECAST.
MECC'S REASONS FOR THE MERGER; RECOMMENDATION OF THE MECC BOARD
At its meeting on October 30, 1995, the MECC Board determined that the
Merger is in the best interests of MECC and its shareholders, approved the
Merger Agreement and determined to recommend approval and adoption of the
Merger Agreement and the Merger by the MECC shareholders. In so voting, MECC's
directors considered a variety of factors, including the factors set forth
below. The MECC Board did not assign relative weights to these factors.
Rather, the MECC Board viewed its determinations and recommendations as being
based on the totality of the information presented and considered by it.
The MECC Board believed that for any business combination involving MECC to
be in the best interests of MECC and its shareholders, the consideration paid
to all shareholders must be fair from a financial point of view and the
combination must not be adverse to MECC's employees generally or to customers
of MECC.
Based on a detailed review of the Merger Agreement and discussion with
management of SoftKey, the MECC Board determined that the Merger Agreement and
the transactions contemplated thereby satisfied these
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criteria. The principal elements of the transactions and other matters that
the MECC Board considered in reaching this conclusion include the following:
(1) The $40 per MECC Common Share consideration contemplated by the
Merger Agreement, which represents a premium of approximately 88.24% over
the closing price per MECC Common Share on October 27, 1995, the last
trading day prior to the public announcement of the Merger.
(2) The terms of the Merger Agreement that are designed to protect,
within certain limits, the value of SoftKey Common Stock to be received by
a holder of MECC Common Shares in the Merger, represented by an exchange
ratio that permits for an adjustment in the number of shares of SoftKey
Common Stock issued for each MECC Common Share in the Merger, as long as
the volume weighted average closing price of a share of SoftKey Common
Stock during the 20 trading days ending on the third trading day prior to
the Effective Time is not less than $35.00 nor more than $45.00 and the
fact that under the Voting Agreement, North American Fund II, L.P. is not
obligated to vote its MECC Common Shares which are subject to the Voting
Agreement in favor of approval and adoption of the Merger Agreement and
Merger if the volume weighted average closing price per share of SoftKey
Common Stock for the 20 trading days immediately preceding the MECC Special
Meeting is less than $30.00.
(3) The fact that the Merger will be treated as a "tax-free
reorganization" for federal income tax purposes, permitting MECC
shareholders to avoid realizing a gain with respect to the receipt of
SoftKey Common Stock in the Merger if such shareholders determine to remain
stockholders in the larger, more diversified company.
(4) The fact that the Merger Agreement, which generally prohibits MECC
from soliciting, or engaging in discussions or negotiating with, any third
party regarding any potential acquisition of MECC, including a merger,
acquisition or exchange of all or any material portion of the assets of, or
equity interest in, MECC, does permit MECC to furnish information to, and
negotiate with, any third party that has submitted a proposal for such an
acquisition, provided that certain conditions are met. See "The Merger--The
Merger Agreement--No Other Negotiations." The MECC Board believes that
these provisions of the Merger Agreement do not unduly restrict the ability
of a third party to make a proposal meeting the applicable conditions
relating to such an acquisition, or the MECC Board's ability to consider
and act upon such a proposal if made.
(5) The strategic fit of MECC with SoftKey, resulting from, among other
things, (i) SoftKey's expansive access to retail distribution channels,
including its strong presence in United States retail outlets, its presence
in international markets, and its direct mail capabilities, (ii)
complementary product lines offered by MECC and SoftKey with virtually no
overlapping products, (iii) the need expressed by SoftKey management to
expand SoftKey's product line to include more proprietary, higher-end
products like those offered by MECC, (iv) the capability of expanding
MECC's product line to include lower-priced educational software products
sold through mass-merchandised distribution channels available to SoftKey
and (v) SoftKey's expressed desire to gain access to the school market
through MECC's well-established position in that market, including the
ability to market certain SoftKey products in that market.
(6) The fact that the MECC Board believes that the Merger will enhance
MECC's ability to compete more effectively, particularly in the retail
market, due to the strategic benefits identified in the immediately
preceding paragraph.
(7) The fact that holders of MECC Common Shares will have the opportunity
to participate in the ownership of a larger, more diversified company,
whose common stock historically has enjoyed a higher volume of trading than
MECC's Common Shares, affording MECC shareholders who are interested in
liquidity the opportunity to own a more liquid security than MECC Common
Shares.
(8) The fact that SoftKey management has indicated that MECC will operate
as a separate subsidiary under the name Minnesota Educational Computing
Corporation and that MECC management will be responsible for managing
MECC's development of educational software and the distribution of such
software through the school channel as a separate business unit of SoftKey.
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(9) The fact that SoftKey management indicated that it would be
interested in soliciting employment agreements from the four existing
executive officers of MECC to ensure that they continue to lead SoftKey's
efforts to expand its educational software business.
(10) The fact that the Merger Agreement provides that any unvested
options held by 18 specified officers or key employees of MECC would vest
immediately upon the termination by SoftKey of such persons' employment
otherwise than for Cause, as defined in the Merger Agreement.
In considering the foregoing factors and in reaching its conclusions with
respect to the Merger Agreement and the Merger, the MECC Board relied on the
following:
(1) the presentation of Allen & Company and its opinion furnished to the
MECC Board that, as of such date, the consideration to be received by MECC
shareholders pursuant to the Merger was fair to the MECC shareholders from
a financial point of view;
(2) the knowledge of, and ongoing review by, the MECC directors of the
business, financial condition and prospects of MECC;
(3) the review of public information concerning SoftKey and the review of
SoftKey's plans and proposals with regard to its expansion in the
educational software market, including a review of SoftKey's proposed
acquisition of TLC;
(4) the knowledge of, and ongoing review by, the MECC directors of the
nature of the educational software industry which has two distinct
distribution channels--the school channel and the retail channel--and the
ability of MECC to improve its access to the retail distribution channel
through SoftKey;
(5) Allen & Company's view that, even though the non-cash charges
expected to be generated by the Merger will result in SoftKey's net income
being substantially reduced or eliminated entirely over the next few years,
the securities market will consider valuation methodologies that
appropriately take into consideration the cash flow and operating income,
before amortization, generated by SoftKey in determining the value of
SoftKey Common Stock; and
(6) a presentation by outside legal counsel to MECC to the MECC Board
summarizing the contractual terms of the proposed transactions and
reviewing the legal standards that should apply to the MECC Board in
consideration of the Merger Agreement and the transactions contemplated
thereby.
On October 27, 1995, the business day preceding public announcement of the
Merger, the closing price per share of SoftKey Common Stock on the NNM was
$38.125, which, if the Average SoftKey Share Price and the closing price per
share of SoftKey Common Stock on the closing date of the Merger were such
price, would result in each MECC Common Share being converted in the Merger
into shares of SoftKey Common Stock having a market value, based on such
closing price, of $40.00. Subsequent to public announcement of the Merger
Agreement, the market for high-tech stocks generally has been subject to
significant fluctuations. The market price for SoftKey Common Stock has also
been subject to significant fluctuations and has ranged from $38.125 per share
on October 27, 1995 (the last business day prior to public announcement of the
Merger Agreement) to $13.625 per share on January 30, 1996 which, if the
Average SoftKey Share Price and the closing price per share of SoftKey Common
Stock on the closing date of the Merger were such price, would result in each
MECC Common Share being converted in the Merger into shares of SoftKey Common
Stock having a market value, based on such closing price, of $15.57. In
addition, during December 1995, SoftKey consummated its acquisitions of
Compton's and TLC, as well as its sale to Tribune Company of $150 million
principal amount of notes. See "Recent Developments."
In view of these developments, the MECC Board determined that it was
appropriate to review its October 30, 1995 determination to recommend approval
of the Merger Agreement by the MECC shareholders. The MECC Board met on March
8, 1996 to conduct such a review, at which meeting Allen & Company made a
presentation to the MECC Board regarding the fairness of the consideration to
be received by MECC shareholders pursuant to the Merger in light of the
developments that had occurred since October 30, 1995. At its meeting on March
8, 1996, the MECC Board determined once again (i) that the Merger is in the
best interests
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of MECC and its shareholders and (ii) to recommend approval of the Merger
Agreement by MECC shareholders. In so voting, MECC's directors considered a
variety of factors. The MECC Board did not assign relative weights to the
factors it considered. Rather, the MECC Board viewed its determinations and
recommendations as being based on the totality of the information presented
and considered by it. The principal elements of the transactions and other
matters that the MECC Board considered in reaching the conclusion that the
Merger Agreement and the transactions contemplated thereby continued to be in
the best interests of MECC and its shareholders, in addition to those factors
enumerated above, include the following:
(1) that, although the closing price per share of SoftKey Common Stock on
March 6, 1996 of $22.50 implied a merger consideration per MECC Common
Share of $25.71, which was considerably lower than the $40.00 per MECC
Common Share consideration considered by the MECC Board at its October 30,
1995 meeting, such consideration represents a premium over what the market
price of a MECC Common Share would reasonably be expected to be on March 6,
1996 if the Merger Agreement were not in effect. This conclusion is based,
in part, on a review and analysis performed by Allen & Company regarding
(i) the significant decline in market prices generally of the common stock
of several comparable software companies since October 27, 1995, the last
trading day prior to the announcement of the Merger and (ii) the current
trading multiples of companies deemed comparable to MECC as applied to
certain financial performance criteria of MECC;
(2) the fact that senior management of SoftKey and MECC had recently met
and reached agreement regarding the framework of a plan to implement
SoftKey's strategic plan, including the integration of SoftKey, MECC, TLC
and Compton's and the maintenance of MECC as a separate business unit of
SoftKey, with Mr. LaFrenz as its President, which will be responsible for
managing the school channel and the development of simulation learning
products of SoftKey; and
(3) the further consolidation in the educational software industry since
October 30, 1995 making it more difficult for MECC to compete effectively
unless it becomes part of a larger organization with greater retail
distribution capabilities than MECC would have as an independent company.
In considering the foregoing factors and in reaching its conclusion at its
March 8, 1996 meeting with respect to the Merger Agreement and the Merger, in
addition to the information upon which it relied at its October 30, 1995
meeting, the MECC Board relied on the following:
(1) the presentation of Allen & Company and its confirmation furnished to
the MECC Board of its opinion dated October 30, 1995 that, as of March 6,
1996, the consideration to be received by MECC shareholders pursuant to the
Merger continues to be fair to the MECC shareholders from a financial point
of view;
(2) a review with senior management of MECC of the status of SoftKey's
implementation of its plan for integrating SoftKey, MECC, TLC and
Compton's;
(3) the knowledge and ongoing review by the MECC directors of the nature
of the educational software industry and the further consolidation
occurring in such industry; and
(4) a presentation to the MECC Board by outside legal counsel to MECC
reviewing the legal standards that should apply to the MECC Board in its
consideration of whether to recommend approval and adoption of the Merger
Agreement and the Merger by the MECC shareholders.
OPINION OF SOFTKEY'S FINANCIAL ADVISOR
SoftKey retained Bear Stearns as its exclusive financial advisor in
connection with SoftKey's proposed acquisition of MECC in accordance with the
terms of an engagement letter between SoftKey and Bear Stearns (the "Bear
Stearns Engagement Letter"). SoftKey did not consider or interview any other
financial advisor candidates in connection with the Merger.
At the October 29, 1995 meeting of the SoftKey Board, Bear Stearns delivered
its opinion to the effect that, as of the date of such opinion and based upon
and subject to the various conditions set forth therein, the Merger was fair,
from a financial point of view, to the stockholders of SoftKey.
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The full text of the written opinion of Bear Stearns, dated October 29,
1995, is attached as Appendix B hereto and is incorporated herein by
reference. SOFTKEY STOCKHOLDERS ARE URGED TO READ THIS OPINION IN ITS ENTIRETY
FOR ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY BEAR
STEARNS IN ARRIVING AT ITS OPINION. THE SUMMARY OF THE OPINION OF BEAR STEARNS
SET FORTH IN THIS JOINT PROXY STATEMENT-PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION, WHICH IS ATTACHED AS
APPENDIX B HERETO.
No limitations were imposed by SoftKey on Bear Stearns with respect to the
investigations made or the procedures followed by Bear Stearns in rendering
its opinion. The opinion of Bear Stearns is directed to the SoftKey Board and
addresses only the fairness of the Merger, from a financial point of view, to
the stockholders of SoftKey and does not constitute a recommendation to any
stockholder of SoftKey as to how such stockholder should vote at the SoftKey
Special Meeting with respect to the issuance of SoftKey Common Stock pursuant
to the Merger Agreement. Bear Stearns' opinion is necessarily based upon the
economic, market and other conditions as in effect on, and the information
made available to it as of, the date of its opinion.
The Exchange Ratio was determined by arm's length negotiation between
SoftKey and MECC after consultation by each of such parties with their
respective financial advisors and was not based on a recommendation by Bear
Stearns, although Bear Stearns evaluated the financial terms of the Merger and
participated in discussions concerning the Exchange Ratio.
In connection with rendering its opinion, Bear Stearns, among other things:
(i) reviewed the Merger Agreement in substantially final form; (ii) reviewed
SoftKey's Annual Reports to Shareholders and Annual Reports on Form 10-K for
the years ended January 1 and December 31, 1994, and its Quarterly Reports on
Form 10-Q for the periods ended March 31 and June 30, 1995; (iii) reviewed
MECC's Annual Reports to Shareholders and Annual Reports on Form 10-K for the
years ended March 31, 1994 and 1995, and its Quarterly Report on Form 10-Q for
the period ended June 30, 1995; (iv) reviewed certain operating and financial
information provided by the management of SoftKey relating to SoftKey's and
MECC's businesses, including internal projections of future financial results
used for budgeting purposes and the Projections prepared by the management of
SoftKey for SoftKey and MECC individually and on a combined basis, which
information and Projections were represented by such management to be based
upon historical results and management's best judgments as to future financial
performance in light of current industry and market conditions relating to
consumer demand, competition, retail channels, technological change and other
factors but which did not include any estimated revenues or operating income
before amortization from the operations of TLC or Compton's, which were
acquired by SoftKey in late December 1995; (v) met with certain members of
SoftKey's senior management to discuss SoftKey's operations, historical
financial statements and future prospects, as well as their views with respect
to the operations, historical financial statements and future prospects of
MECC, and their views of the business, operational and strategic benefits,
potential synergies and other implications of the Merger; (vi) met with
certain members of MECC's senior management to discuss MECC'S operations,
historical financial statements and future prospects, as well as their views
of the business, operational and strategic benefits, potential synergies and
other implications of the Merger; (vii) reviewed the pro forma financial
impact of the Merger on SoftKey; (viii) reviewed the historical stock prices
and trading volumes of SoftKey Common Stock and MECC Common Shares; (ix)
reviewed certain publicly available financial information and stock market
performance data of other publicly-held companies which it deemed generally
comparable to SoftKey and to MECC; (x) reviewed the financial terms of certain
other recent acquisitions of companies which it deemed generally comparable to
MECC; and (xi) conducted such other studies, analyses, inquiries and
investigations as it deemed appropriate.
In the course of its review, Bear Stearns relied upon and assumed, without
independent verification, the accuracy and completeness of all of the
financial and other information provided to it and reviewed for it by SoftKey
and MECC and the reasonableness of the assumptions made by the management of
SoftKey with respect to the Projections. Bear Stearns did not assume any
responsibility for independent verification of the information provided by
SoftKey and MECC and further relied upon the assurances of the managements of
SoftKey and
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MECC that such managements were not aware of any facts that would make the
information provided to Bear Stearns incomplete or misleading. In arriving at
its opinion, Bear Stearns did not perform or obtain any independent appraisal
of the assets of SoftKey or MECC nor was it furnished with any such
appraisals.
In arriving at its opinion dated October 29, 1995, Bear Stearns performed a
variety of financial analyses. The summary of such analyses set forth below
does not purport to be a complete description of the analyses underlying Bear
Stearns' opinion. The preparation of a fairness opinion is a complex process
and is not necessarily susceptible to summary description. Bear Stearns
believes that all of its analyses must be considered together, and that
selecting any one valuation analysis could create an incomplete view of the
processes underlying Bear Stearns' opinion. Moreover, the estimates contained
in such analyses are not necessarily indicative of actual values or predictive
of future results or values, which may be significantly more or less favorable
than those suggested by such analyses. In addition, analyses relating to the
value of businesses or securities do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may
be sold. Furthermore, no opinion is being expressed as to the prices at which
shares of SoftKey Common Stock may trade at any future time.
The following is a brief summary of the analyses performed by Bear Stearns
in connection with its opinion dated October 29, 1995.
Implied Transaction Multiples. Bear Stearns calculated market equity values
for each of SoftKey and MECC of $1.098 billion and $191.7 million,
respectively, based on SoftKey's and MECC's share prices as of October 27,
1995, of $38.125 and $21.25, respectively (the "Current Stock Prices"), and
28.800 million shares of SoftKey Common Stock and 9.023 million shares of MECC
Common Shares, respectively, outstanding on a fully-diluted basis (using the
treasury method, which assumes the use of option proceeds to repurchase
shares). After applying the Exchange Ratio based on the Current Stock Prices
to the market value thus calculated for MECC, Bear Stearns calculated an
implied equity value, after giving effect to the Exchange Ratio, for MECC of
$360.9 million, or $40.00 per MECC share on a fully-diluted basis. Bear
Stearns calculated the enterprise value for SoftKey based on the Current Stock
Prices of $1.025 billion by adjusting the previously calculated market equity
value for SoftKey and adding $339.6 million of SoftKey pro forma debt
outstanding and subtracting $427.5 million of pro forma cash on hand which
includes $340.4 million in net proceeds from the sale of the October Notes.
Bear Stearns also calculated enterprise values for MECC based on the Current
Stock Prices ("MECC Market") and based on the Exchange Ratio (computed using
the Current Stock Prices) ("MECC Transaction") of $170.4 million and $354.4
million for MECC, respectively, by subtracting $21.3 million in cash on hand
from the market equity value for MECC and the implied equity value after
giving effect to the Exchange Ratio (computed using the Current Stock Prices),
respectively. Bear Stearns then calculated financial multiples for each of
SoftKey, MECC Market and MECC Transaction for each of calendar years 1995 and
1996 based on such equity values and enterprise values, utilizing the
Projections including the calculation of equity value as a multiple of
estimated net income (1996 estimated multiples of 20.6x, 33.1x and 62.3x for
SoftKey, MECC Market and MECC Transaction, respectively), enterprise value as
a multiple of estimated revenue (1996 estimated multiples of 5.0x, 4.0x and
8.1x for SoftKey, MECC Market and MECC Transaction, respectively), enterprise
value as a multiple of estimated operating cash flow (1996 estimated multiples
of 14.4x, 15.5x and 31.0x for SoftKey, MECC Market and MECC Transaction,
respectively), and enterprise value as a multiple of estimated operating
income (1996 estimated multiples of 17.0x, 20.3x and 40.4x for SoftKey, MECC
Market and MECC Transaction, respectively).
Comparable Company Analysis. Bear Stearns reviewed and compared certain
actual and estimated financial, operating and market information of MECC with
that of five selected publicly traded companies in each of the personal
computer software industry (Broderbund Software, Inc., Davidson & Associates,
Inc., Edmark Corporation, Intuit Inc. and TLC; referred to herein as the "PC
Software Comparable Companies") and the entertainment software industry
(Acclaim Entertainment, Inc., Electronic Arts Inc., Maxis, Inc., Sierra On-
Line, Inc. and Spectrum Holobyte, Inc. referred to herein as the
"Entertainment Software Comparable Companies" and together with the PC
Software Comparable Companies, the "Comparable Companies") that
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Bear Stearns believed to be comparable in certain relevant respects
(including, but not limited to, size, customer base, product portfolio and
industry niche) to MECC. Bear Stearns calculated certain financial multiples
for each of the Comparable Companies, including stock price to earnings per
share ("P/E") multiples based on 1995 and 1996 EPS estimates (based on
published reports) and enterprise value as a multiple of each of latest twelve
months ("LTM") revenues, operating cash flow and operating income. This
analysis resulted in (i) harmonic means for estimated P/E multiples for 1995
and 1996 of 61.0x and 43.1x, respectively, for the PC Software Comparable
Companies, and 36.4x and 28.4x, respectively, for the Entertainment Software
Comparable Companies, compared to 38.8x and 33.1x, respectively, for MECC
based on the Current Stock Prices, and (ii) harmonic mean multiples of
enterprise value to LTM revenues, LTM operating cash flow and LTM operating
income of 6.43x, 26.2x and 43.0x, respectively, for the PC Software Comparable
Companies, and 3.35x, 21.4x and 26.8x, respectively, for the Entertainment
Software Comparable Companies compared with 5.56x, 24.8x and 33.3x,
respectively, for MECC based on the Current Stock Prices. The harmonic mean is
calculated by using the reciprocal value of the multiples. The harmonic mean
measurement gives weight to equal dollar investments in the securities whose
ratios have been averaged. This analysis also resulted in a range of (i)
estimated P/E multiples for 1995 and 1996 of 152.2x to 36.1x and 69.9x to
27.9x, respectively, for the PC Software Comparable Companies and 69.3x to
19.7x and 46.4x to 16.4x, respectively, for the Entertainment Software
Comparable Companies, and (ii) enterprise value to LTM revenues, LTM operating
cash flow, and LTM operating income of 10.16x to 3.96x, 97.7x to 13.1x and
127.9x to 24.8x, respectively, for the PC Software Comparable Companies, and
9.71x to 1.67x, 66.7x to 9.7x and 114.3x to 10.6x, respectively, for the
Entertainment Software Comparable Companies.
Selected Acquisition Analysis. Bear Stearns also reviewed other transactions
involving the acquisition or proposed acquisition of all or part of certain
companies in each of the personal computer software industry (the "PC Software
Selected Acquisitions") and the consumer software industry (the "Consumer
Software Selected Acquisitions," and together with the PC Software Selected
Acquisitions, the "Selected Acquisitions"). The Selected Acquisitions were
comprised of Lotus Development/IBM ("Lotus Development"), SOFTIMAGE/ Microsoft
Corporation ("SOFTIMAGE"), The Learning Company/Broderbund (proposed) ("The
Learning Company") and The Software Toolworks/Pearson ("Software Toolworks")
and were selected from a universe of 22 acquisitions in the personal computer
software and consumer software industries. Bear Stearns believed the Selected
Acquisitions were the most comparable to the proposed transaction on the basis
of customer base, product portfolio and other market-related considerations.
The Selected Acquisitions dated from 1992 or later; one was a proposed
transaction that had not been consummated. Bear Stearns calculated certain
financial multiples for each of the Selected Acquisitions, including equity
value as a multiple of LTM net income (84.0x for the MECC Transaction and
44.3x, 70.4x and 76.5x for SOFTIMAGE, The Learning Company and Software
Toolworks transactions, respectively) and most recently available book value
(12.2x for the MECC Transaction and 7.0x, 5.3x, 8.0x and 10.6x for Lotus
Development, SOFTIMAGE, The Learning Company and Software Toolworks
transactions, respectively) and implied enterprise value as a multiple of
LTM revenues (11.1x for the MECC Transaction and 3.10x, 4.13x, 8.11x and 3.55x
for Lotus Development, SOFTIMAGE, The Learning Company and Software Toolworks
transactions, respectively), LTM operating cash flow (49.4x for the MECC
Transaction and 26.3x, 18.8x, 38.3x and 33.1x for Lotus Development,
SOFTIMAGE, The Learning Company and Software Toolworks transactions,
respectively) and LTM operating income (66.4x for the MECC Transaction and
131.6x, 21.6x, 46.1x and 54.3x for Lotus Development, SOFTIMAGE, The Learning
Company and Software Toolworks transactions, respectively), in each case, as
of the time of the announcement of the transaction, and compared the resulting
multiples to the implied multiples of the MECC Transaction.
Bear Stearns noted that no company used in the comparable company analysis
summarized above is identical to MECC and no transaction utilized in the above
selected acquisition analysis summarized above is identical to the Merger.
Accordingly, any such analysis of the fairness of the Merger involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the Comparable Companies and the Selected Acquisitions and
other factors that could affect the public trading and acquisition values.
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Relative Contribution Analysis. Bear Stearns analyzed the respective
projected contributions of each of SoftKey and MECC to, among other financial
measures, the pro forma combined revenues and operating income of the two
companies based on the Projections provided by SoftKey for fiscal years 1996
and 1997 assuming completion of the Merger on December 31, 1995, which Bear
Stearns referred to as the "Management Case" (which include certain revenue
increases and certain cost savings anticipated to be derived from the Merger).
Such analysis indicated that MECC would contribute approximately 22.7% and
32.5%, respectively, to the estimated pro forma revenues and operating income
of the combined entity after the Merger for fiscal year 1996 and approximately
22.0% and 32.6%, respectively, to the estimated pro forma revenues and
operating income of the combined entity after the Merger for fiscal year 1997.
Bear Stearns also analyzed similar projected contributions of SoftKey and MECC
to pro forma revenues and operating income for fiscal 1996 and 1997 based on
an Alternative I Case (which included no revenue increases and the same cost
savings as the Management Case) and an Alternative II Case (which included no
revenue enhancements and $2.0 million less in yearly cost savings than the
Management Case).
In all cases, Bear Stearns compared MECC's relative contribution to pro
forma revenues and operating income (excluding, in each instance, purchase
accounting adjustments expected to be made by the management of SoftKey) to
the post-merger entity, to MECC and SoftKey's pro forma ownership of the
combined company based on (i) the Exchange Ratio based on the Current Stock
Prices which indicated ownership levels for SoftKey and MECC of 74.9% and
25.1%, respectively and (ii) a 1.143 exchange ratio, which assumes maximum
dilution to SoftKey which indicated ownership levels for SoftKey and MECC of
73.3% and 26.7%, respectively. Bear Stearns noted that SoftKey's pro forma
ownership of the combined company was less than its relative contribution to
pro forma revenues and greater than SoftKey's relative contribution to pro
forma operating profit based on the Management Case. Bear Stearns also noted
that SoftKey's pro forma ownership of the combined company was less than
SoftKey's relative contribution to pro forma revenues and operating income in
the Alternative I Case and Alternative II Case.
Pro Forma Merger Analysis. Bear Stearns also analyzed certain pro forma
effects of the Merger on the combined entity's estimated EPS for each of the
fiscal years 1996 and 1997 utilizing the Projections and certain pro forma
assumptions provided by the management of SoftKey. The pro forma assumptions
provided by the management of SoftKey assumed that the Merger would result in
immediate revenue enhancements that would increase over time and cost savings
which would be realized as the integration of SoftKey's and MECC's operations
is implemented. Bear Stearns' analysis indicated that the Merger would be $.17
per share and $.22 per share accretive, respectively, in 1996 and 1997. Bear
Stearns noted that the pro forma effects of the Merger are based on an
exchange ratio of 1.143, which assumes maximum dilution to SoftKey, and did
not take into account purchase accounting adjustments expected to be made by
the management of SoftKey, which include adjustments to reflect the
amortization excess purchase price of MECC over the estimated fair value of
MECC's net assets.
Historical Stock Trading Analysis. Bear Stearns reviewed the historical
public trading prices of SoftKey Common Stock and MECC Common Shares for the
period from October 27, 1994 through October 27, 1995, as well as the
historical ratio of the public trading price per share of MECC Common Shares
to the public trading price per share of SoftKey's Common Stock over the same
time period. Such analysis indicated that market prices of SoftKey Common
Stock and MECC Common Shares had highs of $50.25 and $36.25, respectively, and
lows of $18.00 and $9.67, respectively, over the time periods analyzed. Such
analysis also indicated that the ratio of the price per share of MECC Common
Shares to the price per share of SoftKey Common Stock during the period from
July 27, 1995 to October 27, 1995 ranged from 0.841 on August 3, 1995 to 0.521
on October 11, 1995.
Other Analysis. In the course of its analysis for rendering its opinion,
Bear Stearns conducted such other studies, analyses, inquiries and
investigations as it deemed appropriate.
Pursuant to the Bear Stearns Engagement Letter, SoftKey agreed to pay Bear
Stearns a fee of $1,500,000 for rendering its opinion in connection with the
Merger, payable at the time Bear Stearns indicated it was
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prepared to render such opinion. SoftKey has also agreed to pay Bear Stearns
an additional fee, payable upon consummation of the Merger, of $1,000,000.
SoftKey has also agreed to reimburse Bear Stearns for its reasonable out-of-
pocket expenses, including the reasonable fees and expenses of its counsel,
and to indemnify Bear Stearns and certain related persons against certain
liabilities in connection with its engagement, including certain liabilities
under the federal securities laws.
Bear Stearns is an internationally recognized investment banking firm and
was selected as financial advisor to SoftKey in connection with the Merger
because of its experience and expertise in the software industry and its
familiarity with SoftKey. In addition to its assistance to SoftKey since
August 1995 in connection with preliminarily assessing potential acquisitions
and strategic alliances, including acting as financial advisor and Dealer
Manager in connection with SoftKey's offer for TLC, Bear Stearns also acted as
lead underwriter for the October 1995 issuance of the October Notes. As part
of its investment banking business, Bear Stearns regularly is engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
In the ordinary course of its business, Bear Stearns may actively trade the
equity securities of SoftKey and MECC for its own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position
in such securities.
OPINION OF MECC'S FINANCIAL ADVISOR
October 30, 1995 Opinion
At the meeting of the MECC Board on October 30, 1995, Allen & Company
delivered its oral opinion (subsequently confirmed in writing) to the effect
that, as of such date, the consideration to be received by holders of MECC
Common Shares in connection with the Merger was fair to such holders from a
financial point of view.
The full text of the written opinion of Allen & Company, dated October 30,
1995, is set forth as Appendix C to this Joint Proxy Statement-Prospectus and
describes the assumptions made, matters considered and limits on the review
undertaken. MECC shareholders are urged to read the opinion in its entirety.
Allen & Company's opinion is directed only to the fairness, from a financial
point of view, of the consideration which the holders of MECC Common Shares
would receive in the Merger and does not constitute a recommendation of the
Merger over other courses of action that may be available to MECC or
constitute a recommendation to any holder of MECC Common Shares concerning how
such holder should vote with respect to the Merger. The summary of the opinion
of Allen & Company set forth in this Joint Proxy Statement-Prospectus is
qualified in its entirety by reference to the full text of such opinion.
In arriving at its opinion, Allen & Company (i) reviewed the Merger
Agreement and certain related documents; (ii) analyzed certain publicly
available historical business and financial information relating to MECC as
presented in documents filed with the SEC, including MECC's Annual Report to
Shareholders and Annual Report on Form 10-K for its fiscal year ending March
31, 1995 and MECC's Quarterly Report on Form 10-Q for its quarter ended June
30, 1995; (iii) analyzed certain publicly available historical business and
financial information relating to SoftKey as presented in documents filed with
the SEC, including SoftKey's Annual Report to Stockholders and Annual Report
on Form 10-K for its fiscal year ended December 31, 1994 and SoftKey's
Quarterly Report on Form 10-Q for its quarter ended June 30, 1995; (iv)
reviewed a draft of MECC's Quarterly Report on Form 10-Q for its quarter ended
September 30, 1995; (v) analyzed certain internal financial and operating data
concerning MECC and SoftKey prepared by the respective managements of such
companies; (vi) reviewed certain financial forecasts and budgets for MECC and
SoftKey prepared by the respective managements of such companies, which
forecasts and budgets were based upon historical results and management's best
judgments as to future financial performance in light of current industry and
market conditions relating to consumer demand, competition, retail channels,
technological change and other factors; (vii) conducted discussions with
certain members of the senior management of MECC and SoftKey concerning
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their respective businesses, operations and strategic objectives, as well as
the strategic implications and operating efficiencies that might be realized
following the consummation of the Merger; (viii) compared the financial
performance of MECC and SoftKey, and the price and trading activity of MECC
Common Shares and SoftKey Common Stock with that of certain other publicly-
traded companies which Allen & Company considered to be generally comparable
to MECC and SoftKey; (ix) reviewed the trading history of MECC Common Shares
and SoftKey Common Stock, including each company's performance in comparison
to market indices and to selected companies in comparable businesses and the
market reaction to selected public announcements regarding each company; (x)
reviewed the financial terms, to the extent publicly available, of certain
merger and acquisition transactions Allen & Company considered to be
comparable to the Merger; and (xi) performed such other analyses as Allen &
Company considered appropriate.
In connection with its review, Allen & Company assumed and relied on the
accuracy and completeness of the information it reviewed for the purpose of
its opinion and did not assume any responsibility for independent verification
of such information or for any independent valuation or appraisal of the
assets of MECC or SoftKey. With respect to MECC's and SoftKey's financial
forecasts, Allen & Company assumed that they had been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of MECC and SoftKey, respectively, and Allen & Company expressed no
opinion with respect to such forecasts or the assumptions on which they were
based. Allen & Company's opinion was necessarily based upon business, market,
economic and other conditions as they existed on, and could be evaluated as
of, the date of its opinion. Allen & Company's opinion does not imply any
conclusion as to the likely trading range of SoftKey Common Stock following
the consummation of the Merger, which may vary depending on, among other
factors, changes in interests rates, dividend rates, market conditions,
general economic conditions and other factors that generally influence the
price of securities.
The following is a summary of the presentation made by Allen & Company to
the MECC Board at its October 30, 1995 meeting in connection with the
rendering of Allen & Company's fairness opinion.
Transaction Overview and Analysis. Allen & Company presented an overview of
the proposed transaction, noting the strategic fit of combining a leading
software developer, licensor and distributor such as SoftKey with a software
developer and publisher such as MECC. Allen & Company noted that, based upon
its discussions with management of MECC and SoftKey relating to the companies
and the strategic reasons for the Merger, the combination of MECC and SoftKey
would create a leading educational software company with strong distribution
channels. The combined entity would benefit from the ability to expand MECC's
product offering, the potential for cross-marketing of MECC's and SoftKey's
product lines and the creation of a strong base of operations for potential
international expansion. The transaction, structured as a tax-free (for
federal income tax purposes) exchange of stock and accounted for as a
purchase, would permit MECC shareholders the ability to continue their
investment in the combined company resulting from the Merger or, if they
choose, to immediately sell the SoftKey Common Stock received pursuant to the
terms of the Merger Agreement. Allen & Company also noted that the combined
operations of MECC and SoftKey will benefit from the ability to capitalize on
MECC's established reputation in the educational software market and SoftKey's
extensive distribution channels in expanding MECC's product offerings.
Allen & Company noted that the Merger Agreement provides that each
outstanding MECC Common Share will be exchanged in the Merger for shares of
SoftKey Common Stock valued at $40.00 if the Average SoftKey Share Price is
between $35.00 and $45.00 and that the Exchange Ratio is fixed at 1.14286 if
the Average SoftKey Share Price is equal to or less than $35.00 and is fixed
at 0.88889 if the Average SoftKey Stock Price is equal to or greater than
$45.00. Allen & Company noted that based on the October 27, 1995 closing price
of SoftKey Common Stock ($38.12), the per share value of the consideration
payable to the holders of MECC Common Shares was $40.00 (the "October 30 Offer
Level"), an 88.24% premium based on the October 27, 1995 closing sale price of
MECC Common Shares ($21.25). Allen & Company noted that, in its opinion, the
closing sale price per MECC Common Share on October 27, 1995 ($21.25) was a
representative price for such security as of such date, based upon Allen &
Company's review of MECC's historical trading volume, the ownership profile of
MECC shareholders, the effects of the MECC Common Share price of selected
public announcements and the performance of the MECC Common Shares in relation
to general and comparable company market indices.
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Allen & Company also analyzed the total enterprise value (the recent value
of all equity securities plus long-term debt less cash) of MECC as of October
27, 1995 to the total enterprise value based on the October 30 Offer Level.
This analysis indicated an enterprise value of MECC of $162.8 million without
giving effect to the Merger, as compared to $334.8 million based on the
October 30 Offer Level. Allen & Company also compared the total equity value
(the recent value of all equity securities) of MECC as of October 27, 1995 to
the total equity value based on the October 30 Offer Level. This analysis
indicated an equity value of MECC of $184.1 million without giving effect to
the Merger, as compared to $356.1 million based on the October 30 Offer Level.
Allen & Company reviewed the 1996 projected calendar year pro forma
financial statements for the combined company resulting from the Merger before
and after giving effect to anticipated synergies, noting in particular the
estimated 1996 EPS of the combined company without taking into account
anticipated synergies of a loss of $1.76 per share (or EPS of $1.55 without
giving effect to goodwill and consolidation expenses created by the Merger),
as compared to the estimated 1996 EPS after taking into account anticipated
synergies of a loss of $1.44 (or EPS of $1.88 without giving effect to
goodwill and consolidation expenses created by the Merger). Allen & Company
also examined the combined company's pro forma balance sheet at September 30,
1995.
Allen & Company compared the premium of 88.24% payable to holders of MECC
Common Shares based on the October 30 Offer Level to premiums paid in selected
computer software industry transactions, in selected all-stock transactions
and to the original offer by Broderbund to acquire TLC in a business
combination (the "Original TLC Offer"). Allen & Company noted that the
premiums, as compared to the trading prices on the day prior to announcement,
in selected computer software industry transactions averaged 34.9% and ranged
from -5.5% to 138.3%, in selected all-stock transactions averaged 30.1% and
ranged from -24.9% to 181.2% and in the Original TLC Offer was 41.0%. Allen &
Company also analyzed these premium ranges as of one and four weeks prior to
the public announcement of the Merger and such selected transactions. These
analyses indicated that the Merger consideration (based on the October 30
Offer Level) exceeds the average premiums paid in such selected comparable
transactions.
Allen & Company also noted that, while the per share closing price of
SoftKey Common Stock was $38.12 on October 27, 1995, if the Average SoftKey
Share Price is equal to or less than $35.00, the Exchange Ratio is fixed at
1.14286. At such Exchange Ratio, Allen & Company calculated that the market
price of SoftKey Common Stock would have to fall to $18.59 for the value of
the Merger consideration to equal the closing sale price of MECC Common Shares
on October 27, 1995 and thereby eliminate any premium to be paid to holders of
MECC Common Shares in the Merger.
Allen & Company also analyzed the enterprise value represented by the
consideration to be received by the MECC shareholders in the Merger based upon
the closing sale price of MECC Common Shares on October 27, 1995 without
giving effect to the Merger and at the October 30 Offer Level as multiples of
various financial performance criteria, including LTM sales (4.9x at October
27, 1995 and 10.9x at the October 30 Offer Level) and LTM earnings before
interest and taxes ("EBIT") (29.3x at October 27, 1995 and 65.5x at the
October 30 Offer Level) and compared such multiples to multiples of LTM sales
and LTM EBIT for (i) a selected group of directly comparable educational
software companies (Broderbund Software, Inc., Davidson & Associates, Inc.,
Edmark Corporation, TLC, Maxis, Inc. and Sierra On-Line Incorporated; herein
referred to as the "Direct Comparables Group"), (ii) a more universal selected
group of comparable educational and entertainment software companies (Direct
Comparables Group plus Acclaim Entertainment, Inc., Electronic Arts, Inc.,
Expert Software, Inc., Intuit, Inc., SoftKey and Spectrum Holobyte, Inc.;
herein referred to as the "Comparable Universe Group"), (iii) selected
computer software industry transactions, (iv) selected all-stock transactions
and (v) the Original TLC Offer. Allen & Company noted such multiples of
enterprise value to LTM sales and LTM EBIT averaged (i) 8.3x for LTM sales and
71.3x for LTM EBIT for the Direct Comparables Group, (ii) 6.5x for LTM sales
and 56.0x for LTM EBIT for the Comparable Universe Group, (iii) 2.5x for LTM
sales and 15.1x for LTM EBIT for selected computer software industry
transactions, (iv) 2.1x for LTM sales and 13.9x for LTM EBIT for selected all-
stock transactions and (v) 8.4x for LTM sales and 35.9x for LTM EBIT for the
Original
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TLC Offer. Allen & Company identified the companies included in the Direct
Comparables Group based upon operations in the educational software market
which are of similar nature to the operations of MECC, whereas the Comparable
Universe Group included, in addition to the Direct Comparables Group,
companies with a broader software product line, including entertainment
software. In Allen & Company's judgment, the selected companies in such groups
were sufficiently comparable to conduct a comparable company analysis. As a
general trend, the Direct Comparables Group included newer, higher growth
companies whose trading multiples, on average, exceeded those of the other
companies in the Comparable Universe Group. Allen & Company also compared the
equity value represented by the consideration to be received by the MECC
shareholders in the Merger as multiples of various criteria, including LTM net
income and LTM book value and compared such multiples to multiples for the
selected groups of comparable companies and transactions. In performing such
analyses, Allen & Company compared the average, median, high and low multiples
in each of such categories. These analyses indicated that the Merger
consideration based on the October 30 Offer Level results in valuation
multiples which are generally higher than the multiples for both the Direct
Comparables Group and the Comparable Universe Group and in selected all-stock
transactions and in comparable transactions.
Allen & Company also analyzed the relative contribution of SoftKey and MECC
to pro forma revenues and operating income of the combined company based upon
the Projections, before and after giving effect to anticipated synergies
resulting from the Merger. This analysis showed that on a pro forma basis,
before giving effect to anticipated synergies, SoftKey and MECC would account
for approximately 83.2% and 16.8%, respectively, of the combined company's pro
forma revenues and approximately 87.4% and 12.6%, respectively, of the
combined company's pro forma operating income. In addition, Allen & Company
noted that based on the October 30 Offer Level, stockholders of SoftKey and
shareholders of MECC would own on a pro forma basis 74.8% and 25.2%,
respectively, of the combined company's outstanding shares following the
Merger.
Overview of MECC. Allen & Company presented an overview of MECC, focusing
particularly on MECC's established reputation in the educational software
market and its strong product offerings. Allen & Company noted MECC's high
growth prospects in existing markets and in potential new markets through the
addition of new distribution channels.
Allen & Company reviewed MECC's historical and estimated operating results
for the four fiscal years ending March 31, 1996, noting particularly MECC's
estimated EPS for 1996 of $0.62, compared to EPS of $0.46, $0.26 and a loss
per share of $0.19 for its fiscal years ended March 31, 1995, 1994 and 1993,
respectively. In addition, Allen & Company noted a 21.1% increase in MECC's
EPS for the six months ended September 30, 1995, as compared to the
corresponding prior year period. Allen & Company also reviewed MECC's
historical balance sheet at September 30, 1995 and its operating results for
the LTM ended on such date.
Allen & Company reviewed stock price and trading volume data for MECC Common
Shares, noting that MECC's general trading patterns have outperformed those of
the S&P Index of Computer Software Companies and a general market index, which
patterns are consistent with MECC's historical and projected growth rates over
the periods examined. Allen & Company stated that MECC's relatively small
market capitalization may have limited the interest in MECC Common Shares by
some large institutional investors. Allen & Company also compared selected
multiples and other performance criteria derived from the recent price of MECC
Common Shares to multiples and other performance criteria derived from recent
trading prices of the Direct Comparables Group and the Comparable Universe
Group. The multiples compared included enterprise value to LTM revenues (which
was 4.9x for MECC compared to a range of 5.9x to 10.2x for the Direct
Comparables Group and a range of 1.6x to 10.2x for the Comparable Universe
Group), equity value to 1996 estimated earnings (which was 29.5x for MECC
compared to a range of 32.3x to 60.4x for the Direct Comparables Group and a
range of 17.0x to 64.0x for the Comparable Universe Group) and market price to
LTM EPS (which was 41.5x for MECC, which ranked ninth among the 12 companies
in the Comparable Universe Group). Allen & Company identified the companies
included in the Direct Comparables Group based upon operations in the
educational software market which are of a similar nature to the operations of
MECC, whereas the Comparable Universe Group included, in addition to the
Direct Comparables Group, companies with a broader software product line,
including
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entertainment software. In Allen & Company's judgment, the selected companies
in such groups were sufficiently comparable to MECC to conduct a comparable
company analysis. In performing such analyses, Allen & Company compared the
average, median, high and low multiples in each of such categories. The
performance criteria analyzed included gross profit margin (which was 79.8%
for MECC, which ranked first among the 12 companies in the Comparable Universe
Group). These analyses indicated that the closing sale price of the MECC
Common Shares at October 27, 1995 ($21.25) represented market trading
multiples that were within the range of multiples found for selected
comparable educational and entertainment computer software companies.
Overview of SoftKey. Allen & Company presented an overview of SoftKey,
including a description of the wide variety of productivity, lifestyle,
educational and entertainment software distributed by SoftKey. Allen & Company
noted SoftKey's extensive domestic and international distribution channels.
Allen & Company described the financial attributes of SoftKey's business,
including SoftKey's level of net revenues, net income, earnings per share,
EBIT and EBIT margins, and its strategy for growth which includes expanding
its core business, leveraging across divisions, making strategic acquisitions
and expanding internationally.
Allen & Company reviewed SoftKey's historical and estimated operating
results for its three fiscal years ending December 31, 1996. In addition,
Allen & Company noted a 12.4% increase in SoftKey's EPS for the nine months
ended September 30, 1995, as compared to the corresponding prior year period.
Allen & Company also reviewed SoftKey's historical balance sheet and its LTM
operating results as of September 30, 1995, as well as its equity and
enterprise values as of October 27, 1995.
Allen & Company also reviewed stock price and trading volume data for
SoftKey Common Stock, noting that SoftKey's general trading patterns exceeded
those of the S&P Index of Computer Software Companies and a general market
index, which patterns are consistent with SoftKey's historical and projected
growth rates over the periods examined. Allen & Company identified several
companies which have operations in the educational and entertainment software
markets which are of similar nature to the operations of SoftKey (Broderbund,
Davidson & Associates, Inc., Edmark Corporation, TLC, Maxis, Inc., Sierra On-
Line Incorporated, Acclaim Entertainment, Inc., Electronic Arts, Inc., Expert
Software, Inc., Intuit, Inc., MECC and Spectrum Holobyte, Inc., referred to
herein as the "SoftKey Comparable Universe Group"). In Allen & Company's
judgment, the selected companies in the Softkey Comparable Universe Group were
sufficiently comparable to SoftKey to conduct a comparable company analysis.
Allen & Company also compared selected multiples derived from the recent price
of SoftKey Common Stock to multiples derived from recent trading prices of the
companies in the SoftKey Comparable Universe Group. The multiples compared
included enterprise value to LTM Revenues (which was 5.9x for SoftKey compared
to a range of 1.6x to 10.2x for the SoftKey Comparable Universe Group), equity
value to LTM earnings (which was 33.6x for SoftKey compared to a range of
21.2x to 137.6x for the SoftKey Comparable Universe Group) and equity value to
1996 estimated earnings (which was 20.4x for SoftKey compared to a range of
17.0x to 64.0x for the SoftKey Comparable Universe Group). In performing such
analyses, Allen & Company compared the average, median, high and low multiples
in each of such categories. These analyses indicated that the closing per
share price of SoftKey Common Stock on October 27, 1995 ($38.12) represented
market trading multiples that were within the ranges found for the SoftKey
Comparable Universe Group.
At the request of the MECC Board, Allen & Company reviewed certain publicly
available historical business and financial information relating to TLC and
certain financial aspects of the proposed acquisition of TLC by SoftKey based
upon the proposed terms of such transaction communicated by SoftKey to the
MECC Board and Allen & Company, which were based, at such time, on a cash
tender offer for 50.0% of the outstanding shares of common stock of TLC (the
"TLC Transaction"). Allen & Company also compared certain transaction
multiples implied by the value of the proposed consideration to be paid by
SoftKey in the TLC Transaction to transaction multiples implied by the Merger
consideration at the October 30 Offer Level. Allen & Company also reviewed
certain pro forma financial information of the combined company resulting from
the consummation of both the Merger and the TLC Transaction. Based upon the
assumptions utilized by Allen &
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Company, including the realization of anticipated synergies and the
consummation of the Merger and the TLC Transaction, SoftKey's acquisition of
TLC would be accretive before amortization of goodwill and acquisition costs.
Without giving effect to the TLC Transaction, Allen & Company calculated that,
after giving effect to the Merger, the pro forma EPS for 1996 of the combined
MECC/SoftKey entity before giving effect to the amortization of goodwill and
acquisition costs would be $1.88, as compared to pro forma EPS of -$1.44 after
giving effect to such costs. Giving effect to both the Merger and the TLC
Transaction, Allen & Company calculated that the pro forma EPS for 1996 of the
combined MECC/SoftKey/TLC entity before giving effect to the amortization of
goodwill and acquisition costs would be $1.92, as compared to pro forma EPS of
- -$5.70 after giving effect to such costs. Allen & Company noted for the MECC
Board that given the non-cash charges to be generated by the Merger, the
securities market will consider valuation methodologies that appropriately
take into consideration the cash flow and operating income, before
amortization and acquisition costs, generated by SoftKey in determining the
value of SoftKey Common Stock.
March 8, 1996 Confirmation
At the request of the MECC Board, at the meeting of the MECC Board on March
8, 1996, Allen & Company confirmed, as of March 6, 1996, the conclusion set
forth in its opinion of October 30, 1995 (the "Opinion") that the
consideration to be received by the holders of MECC Common Shares in
connection with the Merger was fair to such holders from a financial point of
view.
The full text of the written confirmation of Allen & Company, dated March 6,
1996 (the "Confirmation"), is set forth as Appendix D to this Proxy Statement-
Prospectus and describes the assumptions made, matters considered and limits
on the review undertaken. MECC shareholders are urged to read the Confirmation
in its entirety.
In arriving at its Confirmation, Allen & Company (i) reviewed factual
developments since the date of the Opinion, including without limitation (a)
SoftKey's acquisition of TLC, (b) the investment by Tribune Company
("Tribune") pursuant to which, among other things, Tribune has invested $150
million in SoftKey securities, and (c) SoftKey's acquisition from Tribune of
Compton's; (ii) reviewed the strategic and financial considerations underlying
the Merger, including the formation of a leading educational software company
with strong distribution capabilities and the economic benefits of
consolidation; (iii) reviewed developments in the financial markets since the
date of the Opinion, including (a) the current market valuation and trading
multiples of other publicly-traded educational and entertainment software
companies which Allen & Company considered to be generally comparable to MECC
and SoftKey, (b) the common stock prices and trading volume of SoftKey Common
Stock and MECC Common Shares since the date of the Opinion, (c) the
performance of SoftKey Common Stock and MECC Common Shares compared to other
educational and entertainment software companies, (d) the S&P Computer
Software Index and the S&P 500 since the date of the Opinion and
(e) comparable transactions occurring since the date of the Opinion; (iv)
considered the possible impacts that the failure to consummate the Merger
could have on the price of MECC Common Shares in light of current market
conditions and the current valuations of other publicly-traded educational and
entertainment software companies which Allen & Company considered to be
generally comparable to MECC and SoftKey; (v) reviewed updated pro forma
information provided by management of SoftKey as to pro forma revenues, net
income, earnings per share, EBIT, EBIT margins and anticipated revenue
enhancements and cost savings for the combined SoftKey (including TLC and
Compton's) and MECC for calendar year 1996; and (vi) reviewed the terms and
conditions of the Merger Agreement, the terms of SoftKey's acquisitions of TLC
and Compton's, as well as the terms of Tribune's investment in SoftKey. With
respect to the financial information referred to above, Allen & Company
assumed that it was reasonably prepared on a basis reflecting the best
currently available judgments of the management of SoftKey as to the future
financial performance of SoftKey (including TLC and Compton's) and MECC.
The following is a summary of the presentation made by Allen & Company to
the MECC Board in connection with the rendering of Allen & Company's
Confirmation.
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MECC Valuation Analysis. Allen & Company compared the total enterprise value
of MECC as of October 27, 1995 (the last trading day prior to the public
announcement of the Merger Agreement) to the total enterprise value based on
the October 30 Offer Level and based upon the per share value of the
consideration payable to holders of MECC Common Shares based on the closing
price of SoftKey Common Stock on March 6, 1996 (the "March 6 Offer Level").
Allen & Company noted that because the closing price of SoftKey Common Stock
on March 6, 1996 ($22.50) was below $35.00, the Exchange Ratio, if calculated
as of such date, would be 1.14286, resulting in a March 6 Offer Level of
$25.71. This analysis indicated an enterprise value of MECC of $162.8 million
without giving effect to the Merger, as compared to $334.8 million based on
the October 30 Offer Level and $204.1 million based on the March 6 Offer
Level. Allen & Company also compared the total equity value of MECC as of
October 27, 1995 to the total equity value based on the October 30 Offer Level
and the March 6 Offer Level. This analysis indicated an equity value of MECC
of $184.1 million as of October 27, 1995, as compared to $356.1 million based
on the October 30 Offer Level and $225.3 million based on the March 6 Offer
Level.
Multiple and Premium Analyses. Allen & Company also analyzed the enterprise
value represented by the consideration to be received by the MECC shareholders
in the Merger ($25.71) based upon the March 6 Offer
Level as multiples of various financial performance criteria, including LTM
sales (6.0x) and LTM EBIT (33.5x) and compared such multiples to multiples of
LTM sales and LTM EBIT for (i) selected computer software
industry transactions, (ii) selected all-stock transactions, (iii) the Direct
Comparables Group, excluding TLC, Davidson & Associates, Inc. and Sierra On-
Line, Inc. whose multiples reflected takeover premiums (herein referred to as
the "Updated Direct Comparables Group"), (iv) the Comparable Universe Group
(also excluding TLC, Davidson & Associates, Inc. and Sierra On-Line Inc.,
herein referred to as the "Updated Comparable Universe Group") and (v) certain
specific merger transactions such as SoftKey's acquisitions of TLC and
Compton's and CUC International Inc.'s ("CUC") announced acquisitions of
Davidson & Associates, Inc. and Sierra On-Line Inc. Allen & Company noted such
multiples of enterprise value to LTM sales and LTM EBIT averaged (i) 2.5x for
LTM sales and 16.4x for LTM EBIT for selected computer software industry
transactions, (ii) 2.2x for LTM sales and 14.0x for LTM EBIT for selected all-
stock transactions, (iii) 5.0x for LTM sales and 39.5x for LTM EBIT for the
Updated Direct Comparables Group and (iv) 3.8x for LTM sales and 27.7x for LTM
EBIT for the Updated Comparable Universe Group. Allen & Company also noted
such multiples in SoftKey's acquisitions of TLC (9.5x for LTM sales and 54.0x
for LTM EBIT) and Compton's (3.3x for LTM sales) and CUC's announced
acquisitions of Davidson & Associates, Inc. (7.0x for LTM sales and 55.5x for
LTM EBIT) and Sierra On-Line Incorporated (8.0x for LTM sales and 75.3x for
LTM EBIT), both as of the day prior to the public announcement of such
transactions and based on CUC's closing price as of March 6, 1996. Allen &
Company also compared the equity value represented by the consideration to be
received by the MECC shareholders in the Merger at the March 6 Offer Level as
multiples of various criteria, including LTM net income and LTM book value and
compared such multiples to multiples for the selected groups of comparable
companies and transactions. These analyses indicated that the Merger
consideration based on the March 6 Offer Level results in valuation multiples
which are generally within the range of multiples for selected comparable
companies and in selected all-stock transactions and in comparable
transactions.
Pro Forma Analysis. Allen & Company reviewed the 1996 projected calendar
year pro forma financial statements for the combined company resulting from
the Merger (including TLC and Compton's) based upon information provided by
SoftKey management, noting in particular the Estimates.
Allen & Company also analyzed the relative contribution of SoftKey, MECC,
TLC and Compton's to 1996 calendar year pro forma revenues of the combined
company. This analysis showed that on a pro forma basis, SoftKey (including
TLC and Compton's) and MECC would account for approximately 88.8% and 11.2%,
respectively, of the combined company's pro forma revenues. In addition, Allen
& Company noted that based on the March 6 Offer Level, stockholders of SoftKey
and MECC would own on a pro forma basis 77.8% and 22.2%, respectively, of the
combined company's fully diluted shares following the Merger.
Updated Overview of MECC. Allen & Company reviewed stock price and trading
volume data for MECC Common Shares since October 27, 1995 (the last trading
day prior to the announcement of the Merger) and
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compared it to the trading patterns of the S&P Index of Computer Software
Companies, the S&P 500 and to companies included in the Comparable Universe
Group (other than TLC, which has been acquired by SoftKey). Allen & Company
noted that since October 27, 1995 the S&P Index of Computer Software Companies
and the S&P 500 have increased by 6.7% and 11.1%, respectively, but that on
average the stock price of the companies in the SoftKey Comparable Universe
Group declined 32.1% since such time. Allen & Company also compared selected
multiples derived from the recent price of MECC Common Shares to multiples
derived from recent trading prices of the Direct Comparables Group (other than
TLC) and the Comparable Universe Group (other than TLC). The multiples
compared included enterprise value to LTM revenues (which was 5.7x for MECC
compared to an average of 5.0x for such Updated Direct Comparables Group and
3.8x for such Updated Comparable Universe Group), enterprise value to LTM EBIT
(which was 31.6x for MECC compared to an average of 39.5x for such Updated
Direct Comparables Group and 27.7x for such Updated Comparable Universe Group)
and equity value to 1996 estimated earnings (which was 34.0x for MECC compared
to an average of 28.3x for such Updated Direct Comparables Group and 26.4x for
such Updated Comparable Universe Group).
Allen & Company also analyzed the potential stock trading range of MECC
Common Shares in the absence of the Merger by applying the average trading
multiples derived from the Updated Direct Comparables Group and the Updated
Comparable Universe Group to certain of MECC's performance criteria such as
LTM revenues, LTM operating income and LTM EPS and projected 1996 EPS. Allen &
Company noted that such computations generated an average potential stock
price of MECC Common Shares of $16.12 based upon the average multiples of the
Updated Comparable Universe Group and $21.15 based upon the average multiples
of the Updated Direct Comparable Group. Allen & Company noted that the March 6
Offer Level represented a premium of 59.5% over a potential stock price of
$16.12 and a 21.6% premium over a potential stock price of $21.15.
Updated Overview of SoftKey. Allen & Company also reviewed stock price and
trading volume data for SoftKey Common Stock since October 27, 1995 (the last
trading day prior to the announcement of the Merger) and compared it to the
trading patterns of the S&P Index of Computer Software Companies, the S&P 500
and to companies included in the SoftKey Comparable Universe Group (other than
TLC which has been acquired by SoftKey). Allen & Company noted that since
October 27, 1995 the price of SoftKey Common Stock has declined by 41.0% and
that similarly the stock price of the companies in the SoftKey Comparable
Universe Group declined an average of 31.9% since such time. Allen & Company
also compared selected multiples derived from the recent price of SoftKey
Common Stock to multiples derived from recent trading prices of the SoftKey
Comparable Universe Group. The multiples compared included market price to
each of revenues, EBITDA and EBIT (which was 3.7x, 13.5x and 16.5x,
respectively, for SoftKey and was on average 3.9x, 30.8x and 29.5x,
respectively, for the SoftKey Comparable Universe Group).
No company used in the comparable company analyses summarized above is
identical to MECC or SoftKey, and no transaction used in the comparable
transaction analysis summarized above is identical to the Merger. Accordingly,
any such analysis of the value of the consideration to be received by the
holders of MECC Common Shares pursuant to the Merger involves judgments
concerning differences in the potential financial and operating
characteristics of the comparable companies and transactions and other factors
in relation to the trading and acquisition values of the comparable companies.
The preparation of a fairness opinion is not susceptible to partial analysis
or summary description. Allen & Company believes that its analyses and the
summaries set forth above must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the processes
underlying the analysis set forth in its opinion and its confirmation. Allen &
Company has not indicated that any of the analyses which it performed had a
greater significance than any other.
In determining the appropriate analyses to conduct and when performing those
analyses, Allen & Company made numerous assumptions with respect to industry
performance, general business, financial, market and economic conditions and
other matters, many of which are beyond the control of MECC or SoftKey. For
instance, Allen & Company's analyses and procedures were based on current
valuations and trading multiples of
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educational and entertainment software companies, which could be affected by a
general downturn in the economy or the securities markets. The analyses which
Allen & Company performed are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Allen & Company's analysis of the fairness, from a financial point of view, of
the consideration which the holders of MECC Common Shares would receive
pursuant to the Merger Agreement. The analyses do not purport to be appraisals
or to reflect the prices at which a company might actually be sold or the
prices at which any securities may trade at the present time or at any time in
the future.
Allen & Company's opinion does not constitute a recommendation with respect
to whether any shareholder of MECC should, upon the consummation of the
Merger, continue its investment in the shares of SoftKey Common Stock received
as consideration in the Merger or sell such shares of SoftKey Common Stock
immediately or at any time. Allen & Company did not specifically analyze the
impact on any individual MECC shareholder of continuing its investment in the
SoftKey Common Stock after the Merger because it is believed that MECC
shareholders would make such decision only after careful consideration of
their respective tax consequences affecting such decision.
Allen & Company is a nationally recognized investment banking firm that is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Ms. Nancy B. Peretsman, a Managing Director of Allen & Company, had worked
closely with MECC in connection with MECC's initial public offering in 1994.
At the time she was a managing director of one of the managing underwriters of
that offering. MECC retained Allen & Company based on Ms. Peretsman's
background and understanding of MECC and Allen & Company's reputation as an
investment banking firm with substantial knowledge of, and contacts in, the
publishing, entertainment and media industries. MECC did not consider or
interview any other financial advisor candidates in connection with the
Merger. As a part of its investment banking and securities trading business,
Allen & Company may hold positions in and trade in the securities of MECC from
time to time.
MECC had preliminary discussions with Allen & Company in mid-October 1995
regarding the possibility of Allen & Company serving as a financial advisor to
MECC generally. Based on those discussions, Allen & Company served as MECC's
financial advisor throughout the negotiating process with SoftKey, and
pursuant to an engagement letter dated as of October 29, 1995 (the "Allen &
Company Engagement Letter"), agreed, among other things, to act as MECC's
financial advisor in connection with the Merger and to render an opinion as to
the fairness from a financial point of view of the consideration to be
received by MECC's shareholders pursuant to the Merger. Pursuant to the Allen
& Company Engagement Letter, MECC agreed to pay Allen & Company a fee of
$150,000 upon submission of Allen & Company's fairness opinion to the MECC
Board and $1,850,000 upon consummation of the Merger. Whether or not the
Merger is consummated, MECC has agreed, pursuant to the Allen & Company
Engagement Letter, to reimburse Allen & Company for all its reasonable out-of-
pocket expenses, including the fees and disbursements of its counsel, incurred
in connection with its engagement by MECC and to indemnify Allen & Company
against certain liabilities and expenses in connection with its engagement.
CLOSING; EFFECTIVE TIME
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") will take place on the day on which each of certain conditions to
the Merger (as defined below) set forth in the Merger Agreement is satisfied
or waived, or on such other date and at such other time and place as SoftKey
and MECC shall agree (the "Closing Date"). The Merger will become effective
upon the filing of the Articles of Merger with the Office of the Secretary of
State of the State of Minnesota as required by Minnesota law (the "Effective
Time"). Such filing will be made as soon as practicable on or after the
Closing Date.
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FORM OF THE MERGER; MERGER CONSIDERATION
At the Effective Time, Sub will merge with and into MECC and MECC will
survive the Merger as a wholly owned subsidiary of SoftKey.
In addition, at the Effective Time, among other things, (i) each issued and
outstanding common share, par value $.01 per share, of MECC ("MECC Common
Shares") (other than shares to be cancelled in accordance with clause (ii)
below and shares as to which dissenters' rights have been duly demanded under
Minnesota law) will be converted into the right to receive a number of shares
(and cash in lieu of fractional shares) of fully paid and nonassessable shares
of SoftKey Common Stock equal to the Exchange Ratio, and (ii) all MECC Common
Shares that are held by MECC as treasury shares and any MECC Common Shares
owned by SoftKey, Sub or any other wholly owned subsidiary of SoftKey will be
cancelled and retired and shall cease to exist and no stock of SoftKey or
other consideration shall be delivered in exchange therefor.
As indicated above, no fractional shares of SoftKey Common Stock will be
issued in the Merger. The Merger Agreement provides that, in lieu of any
fractional share, SoftKey will pay to each holder of MECC Common Shares who
otherwise would be entitled to receive a fractional share of SoftKey Common
Stock an amount of cash (without interest) determined by multiplying (i) the
average of the per share closing prices for SoftKey Common Stock on the NNM
for the five trading days immediately preceding the Effective Time, by
(ii) the fractional share interest of SoftKey Common Stock to which such
holder would otherwise be entitled.
A description of the relative rights, privileges and preferences of the
SoftKey Common Stock, including certain material differences between the
rights of holders of MECC Common Shares and SoftKey Common Stock, is set forth
under the caption "Comparison of Rights of Holders of SoftKey Common Stock and
MECC Common Shares."
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Time, The First National Bank of
Boston (the "Exchange Agent") will mail transmittal instructions and a form of
letter of transmittal to each person who was, at the Effective Time, a holder
of record of MECC Common Shares. The transmittal instructions will describe
the procedures for surrendering certificates which prior to the Effective Time
represented MECC Common Shares ("MECC Certificates") in exchange for
certificates representing SoftKey Common Stock ("SoftKey Certificates").
SHAREHOLDERS OF MECC SHOULD NOT SUBMIT THEIR MECC CERTIFICATES FOR EXCHANGE
UNLESS AND UNTIL THEY HAVE RECEIVED THE TRANSMITTAL INSTRUCTIONS AND A FORM OF
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
When a holder of MECC Common Shares delivers his or her MECC Certificates to
the Exchange Agent along with a properly executed letter of transmittal and
any other required documents, such MECC Certificates will be cancelled and
such holder will receive SoftKey Certificates representing the number of full
shares of SoftKey Common Stock to which such holder is entitled under the
Merger Agreement and payment in cash in lieu of any fractional shares of
SoftKey Common Stock which would have been otherwise issuable to such holder
as a result of the Merger. If any SoftKey Certificate is to be issued in a
name other than that in which the corresponding MECC Certificate is
registered, it is a condition to the exchange of the MECC Certificate that the
holder of such certificate comply with applicable transfer requirements and
pay any applicable transfer or other taxes.
Holders of MECC Common Shares will not be entitled to receive any dividends
or other distributions on the SoftKey Common Stock until the Merger has been
consummated and they have surrendered their MECC Certificates in exchange for
SoftKey Certificates. Subject to applicable laws, such dividends and
distributions, if any, which have a record date on or after the Effective Time
and a payment date prior to surrender will be paid upon surrender of the
stockholder's MECC Certificates, and such dividends and distributions, if any,
which have a record date on or after the Effective Time and a payment date
subsequent to such surrender will be paid at the appropriate payment date
following surrender of the holder's MECC Certificates.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the MECC Board with respect to the
Merger and the Merger Agreement, MECC shareholders should be aware that
certain members of MECC's management and the MECC Board have certain interests
in the Merger that are in addition to the interests of shareholders of MECC
generally. The MECC Board was aware of these interests and considered them,
among other matters, in approving the Merger and the Merger Agreement. As of
the date of this Joint Proxy Statement-Prospectus, MECC's executive officers
are as follows: Dale E. LaFrenz (President and Chief Executive Officer),
Donald W. Anderson (Senior Vice President, Finance, Chief Financial Officer
and Secretary) and Paul K. Gullickson (Senior Vice President, Business
Development and Operations). As of the date of this Joint Proxy Statement-
Prospectus, the members of the MECC Board are as follows: Charles L. Palmer,
Mr. LaFrenz, R. David Bergonia, Craig Dougherty and Robert L. Underwood.
Restricted Shares. MECC has outstanding MECC Common Shares that are subject
to restrictions on transfer and risk of forfeiture ("Restricted Shares") which
were previously granted to Mr. LaFrenz and Mr. Anderson under the 1991
Restricted Stock Purchase and Non-Qualified Option Plan (as amended, the "1991
Plan"). Pursuant to "change in control" provisions in the Stock Purchase
Agreements pursuant to which the Restricted Shares were granted (which would
have been triggered by the Merger if the Merger had been consummated prior to
February 20, 1996), upon consummation of the Merger, all forfeiture provisions
applicable to the Restricted Shares will immediately lapse. Since the Merger
will not be consummated prior to February 20, 1996, MECC intends to amend the
Stock Purchase Agreements to provide that all forfeiture provisions applicable
to the Restricted Shares will immediately lapse upon a "change in control,"
regardless of when such "change in control" occurs. As of the date of this
Joint Proxy Statement-Prospectus, Mr. LaFrenz owned 51,975 unvested Restricted
Shares and Mr. Anderson owned 12,600 unvested Restricted Shares.
Stock Options. MECC has granted stock options pursuant to the 1991 Plan and
pursuant to the Amended and Restated 1995 Stock Incentive Plan (the "1995
Plan"). Pursuant to "change in control" provisions contained in the Stock
Option Agreements relating to options granted under the 1991 Plan, each
unvested stock option granted under the 1991 Plan will immediately vest and
become fully exercisable upon a "change in control" (including the Merger)
occurring within five years of the date of grant of such option. Since the
Merger will not be consummated prior to February 20, 1996 (five years from the
grant date of the first options granted under the 1991 Plan), MECC intends to
amend those Stock Option Agreements pursuant to which options were granted
more than five years prior to the date the Merger will be consummated, to
provide that such options will immediately vest and become fully exercisable
upon a "change in control," regardless of when such "change in control"
occurs. As of the date of this Joint Proxy Statement-Prospectus, Mr. LaFrenz
held 17,325 unvested options under the 1991 Plan at a per share exercise price
of $1.19, Mr. Anderson held 16,800 unvested options under the 1991 Plan at an
average per share exercise price of $1.90, Mr. Gullickson held 9,027 unvested
options under the 1991 Plan at an average per share exercise price of $1.60
and Mr. Dougherty held 12,600 unvested options under the 1991 Plan at a per
share exercise price of $1.43. If the closing price per share of SoftKey
Common Stock on the closing date of the Merger is $22.50 (which was the
closing price on April 10, 1996), and assuming that the Average SoftKey Share
Price is below $35 (as it was on April 10, 1996), the value (calculated by
subtracting the exercise price per share from the per share Merger
consideration (given the assumptions described above), and multiplying by the
number of shares subject to the option), on the closing date of the Merger, of
the currently unvested options under the 1991 Plan held by Messrs. LaFrenz,
Anderson, Gullickson and Dougherty would be $424,884, $400,081, $217,680 and
$305,983, respectively.
Under the 1995 Plan, MECC has granted two types of stock options: (i)
options that provide for accelerated vesting upon satisfaction of specified
performance goals ("Performance Options"), and (ii) options that vest 20% on
each of the first through fifth anniversaries of the date of grant ("Time
Options"). Prior to the Effective Time, MECC intends to equitably adjust each
Performance Option to establish performance goals that will more accurately
reflect MECC's performance as a result of extraordinary items in connection
with the Merger, if consented to by the holder thereof. As of the date of this
Joint Proxy Statement-Prospectus, Mr. LaFrenz held 75,000 unvested Performance
Options at a per share exercise price of $11.67 and Mr. Anderson, and Mr.
Gullickson each held 25,000 unvested Performance Options at a per share
exercise price of $11.67. Prior to the
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Effective Time, MECC intends to amend each Time Option to provide that such
options shall vest 33 1/3% on each of the first through third anniversaries of
the date of grant, if such amendment would not result in the holder being
deemed to receive "parachute payments" (as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code")), unless the holder
requested such an amendment notwithstanding such result. As of the date of
this Proxy Statement-Prospectus, Mr. Gullickson held 90,299 Time Options,
79,949 of which were unvested, at an average per share exercise price of
$13.30. If the closing price per share of SoftKey Common Stock on the closing
date of the Merger is $22.50 (which was the closing price on April 10, 1996),
and assuming that the Average SoftKey Share Price is below $35 (as it was on
April 10, 1996), the value (calculated by subtracting the exercise price per
share from the per share Merger consideration (given the assumptions described
above), and multiplying by the number of shares subject to the option), on the
closing date of the Merger, of the currently unvested options under the 1995
Plan held by Messrs. LaFrenz, Anderson and Gullickson would be $1,053,326,
$351,109 and $1,343,624, respectively.
Under the terms of the Merger Agreement, each MECC stock option that is
outstanding immediately prior to the Effective Time shall be converted into an
option (a "New Option") to purchase the number of shares of SoftKey Common
Stock equal to the product of (i) the number of MECC Common Shares subject to
such MECC stock option and (ii) the Exchange Ratio, at a per share exercise
price equal to (x) the per share exercise price of such MECC stock option,
divided by (y) the Exchange Ratio. After the Effective Time, each New Option
shall be exercisable and shall vest upon the same terms and conditions as were
applicable to the related MECC stock option immediately prior to the Effective
Time. In addition, under the terms of the Merger Agreement, SoftKey has agreed
to take all necessary action to provide that upon the termination of
employment of any of certain employees of MECC (including Mr. LaFrenz, Mr.
Anderson and Mr. Gullickson) with SoftKey or any subsidiary of SoftKey, other
than a voluntary termination or a termination for Cause (as defined in the
Merger Agreement), such employee's New Options shall (to the extent not
already vested) become fully vested.
Employment Agreements. It is currently anticipated that MECC will enter into
employment agreements with Mr. LaFrenz, Mr. Anderson, Mr. Gullickson, Gregory
Holey (Vice President, Development of MECC) and David Samuelson (Vice
President, Development and Creative Director of MECC) each of which shall
become effective at the Effective Time. See "The Merger--Related Agreements--
Employment Agreements."
Directorships. SoftKey has indicated to Mr. Palmer and Mr. LaFrenz that, at
the Effective Time, they will be offered positions on the SoftKey Board,
joining the then current seven members of the SoftKey Board.
Indemnification. The Merger Agreement provides that all rights to
indemnification, advancement of litigation expenses and limitation of personal
liability existing in favor of the directors and officers of MECC under the
provisions existing as of the date of the Merger Agreement, in MECC's Articles
of Incorporation or By-Laws shall, with respect to any matter existing or
occurring at or prior to the Effective Time (including the transactions
contemplated by the Merger Agreement), survive the Effective Time, and, as of
the Effective Time, the Surviving Corporation shall assume all obligations of
MECC in respect thereof as to any claim or claims asserted prior to or within
a six-year period immediately after the Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary, based upon current law, is a general discussion of
certain federal income tax consequences of the Merger to SoftKey, MECC and
holders of MECC Common Shares assuming the Merger is consummated as
contemplated herein. This summary is based upon the Code, applicable Treasury
regulations thereunder and administrative rulings and judicial authority as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Any such change could affect the continuing validity of this summary.
This summary applies to holders of MECC Common Shares who hold their MECC
Common Shares as capital assets. This summary does not discuss all aspects of
income taxation that may be relevant to a particular holder of MECC Common
Shares in light of such holder's specific circumstances or to certain types of
holders subject to special treatment under the federal income tax laws (for
example, foreign persons, dealers in securities, banks and other financial
institutions, insurance companies, tax-exempt organizations, and holders who
acquired MECC Common Shares pursuant to the exercise of options or otherwise
as compensation or through a tax-qualified retirement plan), and it does not
discuss any aspect of state, local, foreign or other tax laws.
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No ruling has been (or will be) sought from the Internal Revenue Service as
to the anticipated tax consequences of the Merger. Skadden, Arps, Slate,
Meagher & Flom, counsel to SoftKey, has advised SoftKey and Gardner, Carton &
Douglas, counsel to MECC, has advised MECC, that set forth below are in their
respective opinions the material U.S. federal income tax consequences of the
Merger to SoftKey, MECC and holders of MECC Common Shares assuming the Merger
is consummated as contemplated herein. HOLDERS OF MECC COMMON SHARES SHOULD
CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
The Merger. It is a condition to the consummation of the Merger that SoftKey
receive an opinion of its counsel, Skadden, Arps, Slate, Meagher & Flom, and
that MECC receive an opinion of its counsel, Gardner, Carton & Douglas, that
the Merger, in accordance with the terms of the Merger Agreement, of Sub with
and into MECC, with MECC surviving the Merger as a wholly owned subsidiary of
SoftKey, will constitute a reorganization for federal income tax purposes
within the meaning of Section 368(a) of the Code. The opinions of Skadden,
Arps, Slate, Meagher & Flom and Gardner, Carton & Douglas will be expressly
based upon the accuracy of certain assumptions and truth and accuracy of
certain representations made to such counsel by SoftKey, MECC and certain
holders of MECC Common Shares regarding, among other things, the retention of
a significant continuing equity interest in SoftKey by the historic
shareholders of MECC and the retention by MECC of substantially all of its own
assets and any assets held by Sub. As a reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Code, the Merger will
result in the following general federal income tax consequences:
1. SoftKey, MECC and Sub will not recognize any gain or loss as a result
of the Merger.
2. No gain or loss will be recognized by holders of MECC Common Shares
who exchange their MECC Common Shares for Softkey Common Stock, except with
respect to any cash received by MECC shareholders in lieu of fractional
shares of SoftKey Common Stock.
3. A holder of MECC Common Shares who receives cash in lieu of a
fractional share of SoftKey Common Stock in the Merger generally will be
treated as if the fractional share had been distributed to such holder as
part of the Merger and then redeemed by SoftKey in exchange for the cash
distributed in lieu of the fractional share in a transaction qualifying as
an exchange under Section 302 of the Code. As a result, a holder of MECC
Common Shares generally will recognize capital gain or loss with respect to
the cash payment received in lieu of a fractional share.
4. Each holder's aggregate tax basis in the SoftKey Common Stock received
in the Merger will equal his aggregate tax basis in the MECC Common Shares
exchanged therefor, decreased by the amount of any tax basis allocable to
any fractional share interest for which cash is received.
5. Provided that the MECC Common Shares are held as a capital asset at
the Effective Time, the holding period of SoftKey Common Stock received in
the Merger in exchange therefor will include the holding period of such
MECC Common Shares.
Backup Withholding. To prevent "backup withholding" of federal income tax on
any payments of cash to a holder of MECC Common Shares in the Merger, a holder
of MECC Common Shares must, unless an exception applies under the applicable
law and regulations, provide the payor of such cash with such holder's correct
taxpayer identification number ("TIN") on a Substitute Form W-9 and certify
under penalties of perjury that such number is correct and that such holder is
not subject to backup withholding. A Substitute Form W-9 will be provided to
each holder of MECC Common Shares in the letter of transmittal to be mailed to
each holder after the Effective Time. If the correct TIN and certifications
are not provided, a $50 penalty may be imposed on a holder of MECC Common
Shares by the Internal Revenue Service, and any cash received by such holder
may be subject to backup withholding at a rate of 31%.
Federal Income Tax Consequences to Dissenters. The payment of cash to a
holder of MECC Common Shares who exercises dissenters' rights under the MBCA
with respect to such shares will result in a taxable transaction to such
holder. See "The Merger--Dissenters' Rights." Such payment will be treated as
a
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distribution in redemption of the MECC Common Shares with respect to which
dissenters' rights were exercised and perfected, the consequences of which
will be determined in accordance with Section 302 of the Code.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND IS BASED ON EXISTING LAW AS OF THE DATE OF THIS
JOINT PROXY STATEMENT-PROSPECTUS. SHAREHOLDERS OF MECC ARE URGED TO CONSULT
THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE
MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS).
ACCOUNTING TREATMENT
SoftKey intends to treat the Merger as a "purchase" for accounting and
financial reporting purposes. Purchase accounting requires the acquiror to
determine the purchase price based on the consideration paid in the
acquisition. The fair value of the acquired net tangible assets is recorded by
the acquiror as of the date on which the acquisition is consummated. The
excess of purchase price over net tangible assets acquired is required to be
allocated among identifiable intangible assets. These identifiable intangible
assets may include, among other things, incomplete technology, complete
technology, brands and trademarks, customer lists, employment contracts and
copyrights. Any excess purchase price over the acquired net tangible assets
that is not allocated to identifiable intangible assets is classified as
goodwill. The amounts recorded for intangible assets and goodwill are required
to be amortized by systematic charges to income over the estimated periods of
benefit and estimated useful life. The amortization periods for intangible
assets and goodwill related to the acquisitions of software companies are
typically short due to the effects of obsolescence, competition and technology
changes.
REGULATORY FILINGS AND APPROVALS
Certain federal and state regulatory requirements must be complied with
before the Merger is consummated.
The Merger is subject to the requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and the rules and
regulations thereunder, which provide that certain transactions may not be
consummated until required information and materials have been furnished to
the Antitrust Division of the Department of Justice (the "Antitrust Division")
and the Federal Trade Commission (the "FTC") and certain waiting periods have
expired or been terminated. On November 1, 1995, SoftKey and MECC filed the
required information and materials with the Antitrust Division and the FTC and
requested early termination of the waiting period under the HSR Act. SoftKey's
and MECC's request for early termination of the waiting period under the HSR
Act was granted and such termination became effective on November 24, 1995.
The requirements of the HSR Act will be satisfied if the Merger is consummated
within one year from the termination of the waiting period.
However, the Antitrust Division or the FTC may challenge the Merger on
antitrust grounds either before or after expiration of the waiting period.
Accordingly, at any time before or after the Effective Time, either the
Antitrust Division or the FTC could take such action under the antitrust laws
as it deems necessary or desirable in the public interest, or certain other
persons could take action under the antitrust laws, including seeking to
enjoin the Merger. Additionally, at any time before or after the Effective
Time, notwithstanding that the waiting period under the HSR Act has been
terminated, any state could take such action under the antitrust laws as it
deems necessary or desirable in the public interest. There can be no assurance
that a challenge to the Merger will not be made or that, if such a challenge
is made, SoftKey and MECC will prevail.
Neither SoftKey nor MECC is aware of any other material governmental or
regulatory approval required for consummation of the Merger, other than
compliance with applicable securities law and filings under the MBCA.
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RESTRICTIONS ON SALE OF SHARES BY AFFILIATES
The shares of SoftKey Common Stock to be issued in connection with the
Merger will have been registered under the Securities Act. Such shares will be
freely transferable under the Securities Act of 1933, as amended (the
"Securities Act"), except for shares issued to any person who is deemed to be
an affiliate (as such term is defined for purposes of Rule 145 under the
Securities Act, an "Affiliate") of MECC at the time of the MECC Special
Meeting. Persons who may be deemed to be Affiliates of MECC include
individuals or entities that control, are controlled by, or are under common
control with MECC and may include certain officers and directors of MECC as
well as principal shareholders of MECC. Affiliates may not sell their shares
of SoftKey Common Stock acquired in connection with the Merger except pursuant
to (i) an effective registration statement under the Securities Act covering
the resale of such shares, (ii) paragraph (d) of Rule 145 under the Securities
Act or (iii) any other applicable exemption under the Securities Act. The
registration statement filed by SoftKey under the Securities Act in connection
with the Merger, of which this Joint Proxy Statement-Prospectus forms a part,
does not cover the resale of shares of SoftKey Common Stock to be received by
affiliates of MECC in the Merger.
Pursuant to the Merger Agreement, MECC has agreed that at least 30 days
prior to the Effective Time, MECC will cause to be delivered to SoftKey a
letter identifying all persons who are or will be, at the time of the MECC
Record Date, Affiliates of MECC. MECC is obligated under the Merger Agreement
to use reasonable best efforts to procure written agreements ("Affiliate
Agreements") from such persons containing appropriate representations and
covenants intended to ensure compliance with the Securities Act. SoftKey's
obligations under the Merger Agreement to effect the Merger are conditioned
upon the receipt of an Affiliate Agreement from each Affiliate so identified
by MECC.
QUOTATION OF SOFTKEY COMMON STOCK ON THE NNM
SoftKey has agreed to use its reasonable best efforts to cause the Merger
Shares to be listed for quotation on the NNM.
DISSENTERS' RIGHTS
Sections 302A.471 and 302A.473 of the MBCA entitle any holder of MECC Common
Shares who objects to the Merger, in lieu of receiving the shares of SoftKey
Common Stock to which he or she would otherwise be entitled pursuant to the
Merger Agreement, to dissent from the Merger and obtain payment in cash for
the "fair value" of his or her MECC Common Shares. ANY SHAREHOLDER
CONTEMPLATING THE EXERCISE OF THESE DISSENTERS' RIGHTS SHOULD REVIEW CAREFULLY
THE PROVISIONS OF SECTIONS 302A.471 AND 302A.473 OF THE MBCA (COPIES OF WHICH
ARE ATTACHED AS APPENDIX F TO THIS JOINT PROXY STATEMENT-PROSPECTUS),
PARTICULARLY THE SPECIFIC PROCEDURAL STEPS REQUIRED TO PERFECT SUCH RIGHTS.
SUCH RIGHTS WILL BE LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 302A.473
ARE NOT FULLY AND PRECISELY SATISFIED.
Set forth below (to be read in conjunction with the full text of Section
302A.473 appearing in Appendix F to this Joint Proxy Statement-Prospectus) is
a brief description of the procedures relating to the exercise of dissenters'
rights. The following description does not purport to be a complete statement
of the provisions of Section 302A.473 and is qualified in its entirety by
reference thereto.
Under Section 302A.473, Subd. 3, a shareholder who wishes to exercise
dissenters' rights (a "Dissenter") must file with MECC (at MECC's address,
6160 Summit Drive North, Minneapolis, Minnesota 55430-4003, Attention: Donald
W. Anderson, Secretary), before the vote on the Merger, a written notice of
intent to demand the "fair value" of the MECC Common Shares owned by the
shareholder. IN ADDITION, THE SHAREHOLDER MUST NOT VOTE HIS OR HER SHARES IN
FAVOR OF THE MERGER. A VOTE AGAINST THE MERGER WILL NOT IN ITSELF CONSTITUTE
SUCH A WRITTEN NOTICE AND A FAILURE TO VOTE WILL NOT AFFECT THE VALIDITY OF A
TIMELY WRITTEN NOTICE.
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HOWEVER, THE SUBMISSION OF A BLANK PROXY WILL CONSTITUTE A VOTE IN FAVOR OF
THE MERGER AND A WAIVER OF STATUTORY DISSENTERS' RIGHTS.
If the Merger is approved by the shareholders of MECC, MECC will send to all
Dissenters who filed the necessary notice of intent to demand the fair value
of their shares and who did not vote their shares in favor of the Merger a
notice containing certain information required by Section 302A.473, Subd. 4,
including without limitation (i) the address to which a Dissenter must send a
demand for payment and certificates representing shares in order to obtain
payment for such shares and the date by which they must be received and (ii) a
form to be used to certify the date on which the Dissenter (or the beneficial
owner on whose behalf the Dissenter dissents) acquired such MECC Common Shares
(or an interest in them) and to demand payment. In order to receive the fair
value of the shares under Section 302A.473, a Dissenter must demand payment
and deposit certificates representing the shares within 30 days after such
notice from MECC is given. Under Minnesota law, notice by mail is given by
MECC when deposited in the United States mail. A SHAREHOLDER WHO FAILS TO MAKE
DEMAND FOR PAYMENT AND TO DEPOSIT CERTIFICATES AS REQUIRED BY SECTION
302A.473, SUBD. 4, WILL LOSE THE RIGHT TO RECEIVE THE FAIR VALUE OF HIS OR HER
SHARES UNDER SUCH SECTION NOTWITHSTANDING THE TIMELY FILING OF NOTICE OF
INTENT TO DEMAND PAYMENT UNDER SECTION 302A.473, SUBD. 3.
Except as provided below, if demand for payment and deposit of stock
certificates is duly made by a Dissenter with MECC as required by the notice,
then after the Effective Time or the receipt of the demand, whichever is
later, MECC will pay the Dissenter an amount which MECC estimates to be the
fair value of the Dissenter's MECC Common Shares, with interest, if any. The
MECC estimate of fair value of the MECC Common Shares held by a Dissenter may
be less than, equal to or greater than the value of the shares of SoftKey
Common Stock that would have been issued with respect to such MECC Common
Shares in the Merger if such shareholder had not dissented. For the purpose of
a Dissenter's rights under Section 302A.471 and 302A.473, "fair value" means
the value of the MECC Common Shares immediately before the effective date of
the Merger and "interest" means interest commencing five days after the
effective date of the Merger until the date of payment, calculated at the rate
provided in Minnesota Statutes Section 549.09 (presently 5%). The payment must
be accompanied by MECC's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months prior to the Effective Time and
MECC's latest available interim financial statement and a brief description of
the method used by MECC to compute such estimated payment. If the Dissenter
believes the payment received from MECC is less than the fair value of the
MECC Common Shares, with interest, if any, such Dissenter must give written
notice to MECC of his or her own estimate of the fair value of the MECC Common
Shares, with interest, if any, within 30 days after the date of MECC's
remittance, and must demand payment of the difference between his or her
estimate and MECC's remittance. If the Dissenter fails to give written notice
of such estimate to MECC within the 30-day time period, such Dissenter will be
entitled only to the amount remitted by MECC.
MECC may withhold such remittance with respect to MECC Common Shares for
which the Dissenter demanding payment was not the registered owner (or the
person on whose behalf such Dissenter acts was not the beneficial owner) as of
the first public announcement date of the Merger (the "Public Announcement
Date"). As to each such Dissenter who has validly demanded payment, following
the Effective Time or the receipt of demand, whichever is later, MECC will
mail its estimate of the fair value of such Dissenter's MECC Common Shares and
offer to pay this amount with interest, if any, to the Dissenter upon receipt
of such Dissenter's agreement to accept this amount in full satisfaction. The
estimate and offer must be accompanied by MECC's closing balance sheet and
statement of income for a fiscal year ending not more than 16 months prior to
the Effective Time and MECC's latest available interim financial statement and
a brief description of the method used by MECC to compute such estimate. If
such Dissenter believes that MECC's offer is for less than the fair value of
the MECC Common Shares, with interest, if any, such Dissenter must give
written notice to MECC of his or her own estimate of the fair value of the
MECC Common Shares, with interest, if any, and demand payment of this amount
within 30 days after the mailing of MECC's offer. If the Dissenter fails to
give written notice of such estimate to MECC within the 30-day time period,
such Dissenter will be entitled only to the amount offered by MECC.
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If MECC and the Dissenter (including both a Dissenter who purchased MECC
Common Shares on or prior to the Public Announcement Date and a Dissenter who
purchased MECC Common Shares after the Public Announcement Date who have
complied with their respective demand requirements) cannot settle the
Dissenter's demand within 60 days after MECC receives the Dissenter's estimate
of the fair value of his or her MECC Common Shares, then MECC will file a
petition in a court of competent jurisdiction in Hennepin County, Minnesota,
requesting that the court determine the statutory fair value of MECC Common
Shares with interest, if any. All Dissenters whose demands are not settled
within the applicable 60-day settlement period will be made parties to this
proceeding.
The court will then determine whether each Dissenter in question has fully
complied with the provisions of Section 302A.473, and for all Dissenters who
have fully complied and not forfeited statutory dissenters' rights, will
determine the fair value of the shares, taking into account any and all
factors the court finds relevant (including, without limitation, the
recommendation of any appraisers which may have been appointed by the court),
computed by any method or combination of methods that the court, in its
discretion, sees fit to use, whether or not used by MECC or a Dissenter. The
fair value of the shares as determined by the court is binding on all
shareholders and may be less than, equal to or greater than the value of the
shares of SoftKey Common Stock to be issued in the Merger. Each Dissenter is
entitled to judgment in cash for the amount by which the fair value of the
MECC Common Shares as determined by the court, plus interest, exceeds the
estimated payment previously remitted by MECC to the Dissenter. However, under
the statute, Dissenters are not liable to MECC for the amount, if any, by
which payments remitted by MECC to the Dissenters exceed the fair value of
such shares determined by the court, plus interest. The costs and expenses of
the court proceeding will be assessed against MECC, except that the court may
assess part or all of those costs and expenses against a Dissenter whose
action in demanding payment is found to be arbitrary, vexatious or not in good
faith.
If the court finds that MECC has failed to comply substantially with Section
302A.473, the court also may assess against MECC such fees and expenses, if
any, of attorneys or experts as the court deems equitable. Such fees and
expenses may also be assessed against any person who has acted arbitrarily,
vexatiously or not in good faith in bringing the proceeding, and may be
awarded to a party injured by those actions.
Under Section 302A.471, Subd. 2, a shareholder of MECC may not assert
dissenters' rights with respect to less than all of the MECC Common Shares
registered in the shareholder's name, unless the shareholder dissents with
respect to all shares beneficially owned by another person and discloses the
name and address of such other person. Under Section 302A.471, Subd. 2,
beneficial owners of shares who desire to exercise statutory dissenters'
rights themselves must obtain and submit the registered owner's written
consent at or before the time they file the notice of intent to demand fair
value.
Under Section 302A.471, Subd. 4, a shareholder of MECC has no right at law
or equity to set aside the approval of the Merger Agreement or the
consummation of the Merger, except if such approval or consummation is
fraudulent with respect to such shareholder or MECC.
Holders of shares of SoftKey Common Stock are not entitled to exercise
dissenters' or appraisal rights pursuant to any provision of the DGCL with
regard to the Merger. Pursuant to Section 262 of the DGCL, a stockholder may,
under certain circumstances, dissent and exercise appraisal rights only if a
proposed merger or consolidation is to be submitted for approval by such
stockholders. The holders of SoftKey Common Stock are not being asked to
approve the Merger.
DELISTING AND DEREGISTRATION OF MECC COMMON SHARES AFTER THE MERGER
If the Merger is consummated, the MECC Common Shares will be delisted from
the NNM and will be deregistered under the Exchange Act.
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THE MERGER AGREEMENT
Conversion of Shares; Exchange Ratio
As soon as practicable after the Effective Time, The First National Bank of
Boston, the Exchange Agent, will send a notice and transmittal form, with
instructions, to each holder of MECC Common Shares of record at the Effective
Time advising such holder of the effectiveness of the Merger and of the
procedure for surrendering to the Exchange Agent the MECC Certificates in
exchange for (i) SoftKey Certificates and (ii) cash in lieu of fractional
shares. MECC SHAREHOLDERS SHOULD NOT SEND IN THEIR MECC CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM THE EXCHANGE
AGENT.
Upon surrender to the Exchange Agent of one or more MECC Certificates,
together with a properly completed and signed letter of transmittal, there
will be issued and mailed to the holder thereof a SoftKey Certificate or
Certificates representing the number of whole shares of SoftKey Common Stock
to which such holder is entitled under the Merger Agreement and, where
applicable, a check for the amount of cash payable in lieu of a fractional
share of SoftKey Common Stock (after giving effect to any required tax
withholding). Until surrendered as described above, MECC Certificates will,
after the Effective Time, represent only the right to receive, upon such
surrender, a SoftKey Certificate or Certificates and, if applicable, cash in
lieu of fractional shares, as described above. No dividends or distributions
that are declared on shares of SoftKey Common Stock will be paid to persons
entitled to receive certificates representing shares of SoftKey Common Stock
until such persons surrender their MECC Certificates.
A SoftKey Certificate or a check in lieu of a fractional share will be
issued in a name other than the name in which the surrendered MECC Certificate
was registered only if (i) the MECC Certificate surrendered is properly
endorsed or accompanied by appropriate stock powers and is otherwise in proper
form for transfer, and (ii) the person requesting the issuance of such
certificate or check either pays to the Exchange Agent any transfer or other
taxes required by reason of the issuance of such certificate or check in a
name other than that of the registered holder of the certificate surrendered
or establishes to the satisfaction of the Exchange Agent that such tax has
been paid or is not applicable.
Pursuant to the Merger Agreement, the Exchange Ratio will be determined by
dividing $40 by the volume weighted average of the closing prices for the
SoftKey Common Stock on the NNM for the twenty full trading days ending on the
third full trading day prior to the Effective Time (the "Average SoftKey Share
Price"), except that if the Average SoftKey Share Price is equal to or greater
than $45 the Exchange Ratio will equal .88889, and if the Average SoftKey
Share Price is equal to or less than $35, the Exchange Ratio will be 1.14286.
Representations and Warranties
The Merger Agreement contains various customary representations and
warranties of SoftKey and MECC made to each other relating to, among other
things: (i) each of SoftKey's, Sub's and MECC's organization and similar
corporate matters and the organization and similar corporate matters regarding
subsidiaries of SoftKey; (ii) each of SoftKey's, Sub's and MECC's capital
structure; (iii) authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters; (iv) conflicts
under certificates of incorporation or bylaws, required consents or approvals
and violations of certain instruments or law; (v) documents filed with the SEC
and the accuracy of the information contained therein; (vi) absence of certain
specified material changes, material undisclosed liabilities or material
defaults; (vii) in the case of MECC, (A) absence of material litigation, (B)
certain tax and employee benefit matters and (C) certain intellectual property
matters; (viii) compliance with applicable law; (ix) the accuracy of
information supplied by each of SoftKey and MECC in connection with the
preparation of the Registration Statement and this Joint Proxy Statement-
Prospectus; (x) the receipt of fairness opinions from their respective
financial advisors; (xi) in the case of MECC, that it has not proposed,
adopted, approved or implemented any stockholder rights plan, or authorized
the issuance of any similar dividend or the distribution of any securities to
its stockholders, or entered into any agreement with respect to the foregoing
(any such plan, authorization, dividend, distribution or agreement being
referred to herein as a "Stockholder Rights
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Plan"), which could have the effect of restricting, prohibiting, impeding or
otherwise affecting the consummation of the transactions contemplated by the
Merger Agreement or the Voting Agreement; and (xii) in the case of MECC, the
approval of the Merger Agreement by the MECC Board and the inapplicability of
the provisions of Sections 302A.671 and 302A.673 of the MBCA (concerning
control share acquisitions and business combinations with interested
stockholders) to the transactions contemplated thereby.
Conduct of Business Prior to the Effective Time
The Merger Agreement provides that from the date thereof to the Effective
Time, except as otherwise permitted by the Merger Agreement or agreed to in
writing by SoftKey: (i) MECC will conduct its business in the ordinary and
usual course consistent with past practice, and will use its reasonable
efforts to preserve intact the present business organization, will keep
available the services of its present officers and key employees, will
preserve the goodwill of those having business relationships with it and will
not hire any person as an employee or consultant where such person's annual
compensation would exceed $75,000; and (ii) MECC will not: amend its charter,
bylaws or other organization documents; split, combine or reclassify any
shares of its outstanding capital stock; declare, set aside, or pay any
dividend or other distribution payable in cash, stock or property; directly or
indirectly redeem or otherwise acquire any shares of its capital stock;
authorize for issuance, issue or sell or agree to issue or sell any shares of,
or rights or securities of any kind to acquire, rights or securities
convertible into any shares of, its capital stock (except the issuance or
shares upon the exercise of outstanding options); merge or consolidate with
another entity; acquire or purchase an equity interest in or a substantial
portion of the assets of another organization or enter into any material
contract, except in the ordinary and usual course of business consistent with
past practice; sell or dispose of any of its assets outside the ordinary and
usual course of business and consistent with past practice; incur, assume or
prepay any material indebtedness other than in the ordinary course of business
and consistent with past practice; assume, guarantee or otherwise become
liable or responsible for the obligations of any other persons other than in
the ordinary course of business and consistent with past practice; make any
loans, advances or capital contributions to or investments in any other
person; authorize any capital expenditures in excess of the amounts currently
budgeted; permit any insurance policy naming MECC as a beneficiary or loss
payee to be cancelled or terminated other than in the ordinary course of
business; enter into any contract, commitment or arrangement with respect to
any of the foregoing; adopt, enter into, terminate or amend any benefit plan
or other arrangement for the current or future benefit or welfare of any
director, officer or current or former employee of MECC; increase in any
manner the compensation or fringe benefits of, or pay any bonus to, any
director, officer or employee, except for normal increases in salary
compensation in the ordinary course of business and consistent with past
practice; take any action to fund or in any way secure, or to accelerate or
otherwise remove restrictions with respect to, the payment of compensation or
benefits under any employee plan, agreement, contract, arrangement or other
benefit plan; take any action with respect to, or make any material change in,
its accounting policies or procedures; knowingly take any action which would
jeopardize qualification of the Merger as a reorganization within the meaning
of Section 368(a) of the Code; make any tax elections or settle or compromise
any tax liability or file any income tax return prior to the last day
(including extensions) prescribed by law, in the case of any of the foregoing,
material to the business, financial condition or results of operations of
MECC; or propose, adopt, approve or implement any Stockholder Rights Plan
which could have the effect of restricting, prohibiting, impeding or otherwise
affecting the consummation of the transactions contemplated by the Merger
Agreement or the Voting Agreement.
The Merger Agreement provides that from the date thereof to the Effective
Time, except as otherwise permitted by the Merger Agreement or agreed to in
writing by MECC: (i) SoftKey will conduct its business (and that of its
subsidiaries) in the ordinary and usual course consistent with past practice,
and will use its reasonable efforts to preserve intact the present business
organization, keep available the services of its present officers and key
employees, and preserve the goodwill of those having business relationships
with it; and (ii) SoftKey will not: split, combine or reclassify any shares of
its outstanding capital stock; declare, set aside or pay any dividend or other
distribution payable in cash, stock or property; take any action with respect
to, or make any material change in, its accounting policies or procedures; or
knowingly take any action which would jeopardize qualification of the Merger
as a reorganization within the meaning of Section 368(a) of the Code.
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The Merger Agreement also provides that, from the date thereof until the
Effective Time, Sub will not engage in any activities of any nature except as
contemplated by the Merger Agreement.
No Other Negotiations
The Merger Agreement provides that, upon execution of the Merger Agreement,
MECC was not engaged in or would immediately terminate any discussions with
any third party concerning an Alternative Acquisition (as defined below). The
Merger Agreement provides further that, from and after the date of the Merger
Agreement until the earlier of the Effective Time or the termination of the
Merger Agreement in accordance with its terms, MECC will not, directly or
indirectly, (a) solicit, engage in discussions or negotiate with any person or
take any other action intended or designed to facilitate the efforts of any
person, other than SoftKey, relating to the possible acquisition of MECC
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any material portion of its capital stock or assets (any such
efforts by any such person, including a firm proposal to make such an
acquisition, being referred to herein as an "Alternative Acquisition"), (b)
provide information with respect to MECC to any person, other than SoftKey,
relating to a possible Alternative Acquisition by any person, other than
SoftKey, (c) enter into an agreement with any person, other than SoftKey,
providing for a possible Alternative Acquisition, or (d) make or authorize any
statement, recommendation or solicitation in support of any possible
Alternative Acquisition by any person, other than by SoftKey.
The Merger Agreement provides that, notwithstanding the foregoing, the
restrictions set forth in the Merger Agreement will not prevent the MECC Board
(or its agents pursuant to its instructions) from taking any of the following
actions: (a) furnishing information concerning MECC and its business,
properties and assets to any third party; or (b) negotiating with such third
party concerning an Alternative Acquisition provided that certain events shall
have occurred, including: that such third party shall have made a written
proposal to the MECC Board to consummate an Alternative Acquisition which
proposal meets certain specified criteria, and if consummated, based on the
advice of MECC's investment bankers, the MECC Board determines is financially
more favorable to the shareholders of MECC than the terms of the Merger (a
"Superior Proposal"); that the MECC Board shall have determined, based on the
advice of its investment bankers, that such third party is financially capable
of consummating such Superior Proposal; that the MECC Board shall have
determined, after consultation with its outside legal counsel, that the
fiduciary duties of the MECC Board require MECC to furnish information to and
negotiate with such third party; and SoftKey shall have been notified in
writing of such Superior Proposal, including all of its terms and conditions,
and shall have been given copies of such proposal.
In addition to the foregoing, the Merger Agreement provides that MECC may
not accept or enter into any agreement concerning an Alternative Acquisition
for a period of not less than 48 hours after SoftKey's receipt of a copy of
such proposal of an Alternative Acquisition. Upon compliance with the
foregoing, MECC will be entitled to (i) not recommend or change its
recommendation to the MECC shareholders concerning the Merger; and (ii) enter
into an agreement with such third party concerning an Alternative Acquisition
provided that MECC shall immediately make payment in full to SoftKey of a $10
million termination fee. See "The Merger--The Merger Agreement--Termination
and Termination Fee."
Indemnification
The Merger Agreement provides that all rights to indemnification,
advancement of litigation expenses and limitation of personal liability
existing in favor of the directors and officers of MECC under the provisions
existing as of the date of the Merger Agreement, in MECC's Articles of
Incorporation or By-Laws shall, with respect to any matter existing or
occurring at or prior to the Effective Time (including the transactions
contemplated by the Merger Agreement), survive the Effective Time, and, as of
the Effective Time, the Surviving Corporation shall assume all obligations of
MECC in respect thereof as to any claim or claims asserted prior to or within
a six-year period immediately after the Effective Time.
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MECC Stock Options
MECC has granted stock options pursuant to the 1991 Plan and the 1995 Plan.
Pursuant to "change in control" provisions contained in the Stock Option
Agreements relating to options granted under the 1991 Plan, each unvested
stock option granted under the 1991 Plan will immediately vest and become
fully exercisable upon a "change in control" (which the Merger will be)
occurring within five years of the date of grant of such option. MECC may, but
is under no obligation to, amend the Stock Option Agreements pursuant to which
options were granted more than five years prior to the date the Merger will be
consummated, to provide that such options will immediately vest and become
fully exercisable upon a "change in control," regardless of when such "change
in control" occurs.
Under the 1995 Plan, MECC has granted two types of stock options: (i)
options that provide for accelerated vesting upon satisfaction of specified
performance goals ("Performance Options"); and (ii) options that vest 20% on
each of the first through fifth anniversaries of the date of grant ("Time
Options"). Prior to the Effective Time, MECC may, but is under no obligation
to, if consented to by the holder thereof, (i) equitably adjust each
Performance Option to establish performance goals that will more accurately
reflect MECC's performance as a result of extraordinary items in connection
with the Merger, and (ii) amend each Time Option to provide that such options
shall vest 33 1/3% on each of the first through third anniversaries of the
date of grant of such option.
Under the terms of the Merger Agreement, each MECC stock option that is
outstanding immediately prior to the Effective Time shall be converted into a
New Option to purchase the number of shares of SoftKey Common Stock equal to
the product of (i) the number of MECC Common Shares subject to such MECC stock
option and (ii) the Exchange Ratio, at a per share exercise price equal to (x)
the per share exercise price of such MECC stock option, divided by (y) the
Exchange Ratio. After the Effective Time, each New Option shall be exercisable
and shall vest upon the same terms and conditions as were applicable to the
related MECC stock option immediately prior to the Effective Time. In
addition, under the terms of the Merger Agreement, SoftKey has agreed to take
all necessary action to provide that upon the termination of employment of any
of certain employees of MECC (including Mr. LaFrenz, Mr. Anderson and Mr.
Gullickson) with SoftKey or any subsidiary of SoftKey, other than a voluntary
termination or a termination for Cause (as defined in the Merger Agreement),
such employee's New Options shall (to the extent not already vested) become
fully vested.
Conditions to Consummation of the Merger
The Merger will occur only if the Merger Agreement is approved by the
requisite vote of holders of MECC Common Shares and the issuance of the Merger
Shares is approved by the requisite vote of holders of SoftKey Common Stock.
In addition, consummation of the Merger is subject to the satisfaction or
waiver (to the extent such waiver is permitted by law) of certain other
conditions. A failure of any such condition to be satisfied, if not waived,
would prevent consummation of the Merger.
The obligations of both SoftKey and MECC to consummate the Merger are
subject to satisfaction of the following conditions: (i) any waiting period
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated and no action shall have been instituted and not
withdrawn or terminated by the FTC or the Antitrust Division challenging or
seeking to enjoin the Merger; (ii) no governmental entity (including a federal
or state court) of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which materially restricts, prevents or
prohibits consummation of the Merger or any transaction contemplated by the
Merger Agreement; (iii) all filings with and approvals and consents of any
governmental entity, the failure of which to make or obtain would have a
material adverse effect at or after the effective time of the Merger on either
SoftKey or the Surviving Corporation, shall have been made or obtained; (iv)
the Registration Statement of which this Joint Proxy Statement-Prospectus is a
part shall have become effective under the Securities Act and shall not be
subject to a stop order or proceeding of the SEC seeking a stop order, and
SoftKey shall have received all state securities or "blue sky" permits and
other authorizations necessary to issue the Merger Shares; and (v) the Merger
Shares shall have been approved for listing on the NNM, upon official notice
of issuance.
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In addition to the foregoing conditions, the obligation of SoftKey to
consummate the Merger is subject to satisfaction or waiver of the following
conditions: (i) the representations and warranties of MECC set forth in the
Merger Agreement that are qualified with reference to materiality shall be
true and correct and the representations and warranties that are not so
qualified shall be true and correct in all material respects, in each case as
of the date of the Merger Agreement and, except to the extent such
representations and warranties speak as of an earlier date, as of the
Effective Time, and the aggregate effect of all inaccuracies in the
representations and warranties of MECC set forth in the Merger Agreement does
not and will not have a material adverse effect on the business, operations,
prospects, properties, assets (including intangible assets), liabilities
(including contingent liabilities), condition (financial or other) or results
of operations of MECC; (ii) MECC shall have performed in all material respects
all obligations required to be performed by it under the Merger Agreement at
or prior to the Effective Time; (iii) SoftKey shall have received a
certificate of the Chief Executive Officer or the Chief Financial Officer of
MECC to the effect that the conditions set forth in (i) and (ii) above have
been fulfilled; (iv) SoftKey shall have received from each "affiliate" of MECC
a written agreement whereby such affiliate agrees not to sell, transfer or
otherwise dispose of any shares of SoftKey Common Stock received in the Merger
except in compliance with the requirements of the Securities Act. See "The
Merger--Restrictions on Sale of Shares by Affiliates;" and (v) SoftKey shall
have received an opinion of Skadden, Arps, Slate, Meagher & Flom, counsel to
SoftKey, to the effect that for federal income tax purposes, the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Code.
In addition to the foregoing conditions, the obligation of MECC to
consummate the Merger is subject to satisfaction or waiver of the following
conditions: (i) the representations and warranties of SoftKey set forth in the
Merger Agreement that are qualified with reference to materiality shall be
true and correct and the representations and warranties that are not so
qualified shall be true and correct in all material respects, in each case as
of the date of such agreement and, except to the extent such representations
and warranties speak as of an earlier date, as of the Effective Time, and the
aggregate effect of all inaccuracies in the representations and warranties of
SoftKey set forth in the Merger Agreement does not and will not have a
material adverse effect on the business, operations, prospects, properties,
assets (including intangible assets), liabilities (including contingent
liabilities), condition (financial or other) or results of operations of
SoftKey; (ii) SoftKey shall have performed in all material respects all
obligations required to be performed by it under the Merger Agreement at or
prior to the Effective Time; (iii) MECC shall have received a certificate of
the Chief Executive Officer or the Chief Financial Officer of SoftKey to the
effect that the conditions set forth in (i) and (ii) above have been
fulfilled; and (iv) MECC shall have received an opinion of Gardner, Carton &
Douglas, counsel to MECC, to the effect that for federal income tax purposes,
the Merger will constitute a "reorganization" within the meaning of Section
368(a) of the Code.
Termination and Termination Fee
The Merger Agreement may be terminated at any time before the Merger becomes
effective: (i) by mutual consent of SoftKey and MECC; (ii) by either SoftKey
or MECC if the Merger has not become effective before June 30, 1996 (unless
caused by the action or failure to act of the party seeking to terminate the
Merger Agreement in breach of such party's obligations thereunder); (iii) by
either SoftKey or MECC if any permanent injunction or action by any
governmental entity of competent jurisdiction preventing the consummation of
the Merger has become final and non-appealable; (iv) by either SoftKey or MECC
if there has been a breach of any representation or warranty of the other
party which would have a material adverse affect on that other party or if
there has been a breach in any material respect of any agreement or covenant
to be performed and complied with by that other party under the Merger
Agreement which breach is not curable, or if curable, is not cured within 30
days after written notice of such breach is given to that other party by the
party not in breach; (v) by SoftKey if the MECC Board (x) fails to recommend
approval of the Merger Agreement by the shareholders of MECC or withdraws or
amend or modifies in a manner adverse to SoftKey and Sub its recommendation or
approval in respect of the Merger Agreement, (y) makes any recommendation with
respect to an Alternative Acquisition other than a recommendation to reject
such Alternative Acquisition or (z) takes any action with respect to an
Alternative Acquisition that would be prohibited by the "no solicitation"
provisions of the Merger
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Agreement; or (vi) by MECC if such termination is necessary to allow MECC to
enter into an agreement with respect to a Superior Proposal (subject to prior
payment of the termination fee as described below).
In the event the Merger Agreement is terminated pursuant to any of the
foregoing provisions, the Merger will be deemed abandoned and such termination
will be without liability of any party thereto except for liability for breach
of the Merger Agreement and except as set forth below in the following
paragraph. In the event of such a termination, the provisions of the Merger
Agreement regarding confidentiality and fees and expenses shall survive.
If the Merger Agreement is terminated by SoftKey by reason of the
circumstances described in clause (v) above, or by MECC by reason of the
circumstances described in clause (vi) above, then MECC shall pay to SoftKey
promptly, but in no event later than two business days after such termination,
a fee of $10 million. If (a) the Merger Agreement is terminated by SoftKey by
reason of the circumstances described in clause (iv) above or (b) the Merger
Agreement is terminated by reason of the circumstances described in clause (i)
or (ii) above, and the Merger Agreement shall have failed to receive the
requisite vote of the shareholders of MECC at the meeting of the shareholders
of MECC called to vote thereon, then MECC shall promptly reimburse SoftKey for
all out-of-pocket expenses, up to an amount of $2 million, incurred by SoftKey
in connection with the transactions contemplated by the Merger Agreement. If
(a) the Merger Agreement is terminated by MECC by reason of the circumstances
described in clause (iv) above or (b) the Merger Agreement is terminated by
reason of the circumstances described in clause (i) or (ii) above, and the
issuance of the Merger Shares shall have failed to receive the requisite vote
of the stockholders of SoftKey at the meeting of the stockholders of SoftKey
called to vote thereon, then SoftKey shall promptly reimburse MECC for all
out-of-pocket expenses, up to an amount of $2 million, incurred by MECC in
connection with the transactions contemplated by the Merger Agreement. If the
Merger Agreement is terminated by reason of the circumstances described in
clause (i) or (ii) above and the SoftKey Board (A) withdraws or amends or
modifies in any manner adverse to MECC its recommendation to the SoftKey
stockholders with respect to the Merger Agreement or (B) makes any
recommendation with respect to any proposed acquisition of SoftKey (whether by
way of merger, purchase of capital stock, purchase of assets or otherwise) or
any material portion of SoftKey's capital stock or assets (an "Acquisition
Transaction") other than a recommendation to reject such Acquisition
Transaction and in either such case the stockholders of SoftKey do not approve
the issuance of the Merger Shares, then SoftKey shall promptly, but in no
event later than two business days after the date of such termination, pay to
MECC a fee of $10 million.
Extension, Waiver and Amendment
At any time prior to the Effective Time, SoftKey or MECC may (i) extend the
time for performance of any obligations or other acts of the other under the
Merger Agreement; (ii) waive any inaccuracies in the representations and
warranties of the other contained in the Merger Agreement; or (iii) waive
compliance by the other with any agreements contained in the Merger Agreement
or with any conditions contained therein which may legally be waived.
The Merger Agreement may not be amended except in writing signed by each of
the parties thereto. The Merger Agreement may be amended without the approval
of holders of SoftKey Common Stock or MECC shareholders, except that no such
amendment will be made following approval and adoption of the Merger Agreement
by MECC shareholders if such amendment would require further shareholder
approval under applicable law, unless such further approval has been obtained.
RELATED AGREEMENTS
Voting Agreement
On October 30, 1995, concurrently with entering into the Merger Agreement,
SoftKey entered into a Voting Agreement (the "Voting Agreement") with North
American Fund II, L.P. (the "Fund"). The Voting Agreement was entered into by
the Fund as an inducement to SoftKey to enter into the Merger Agreement.
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Pursuant to the Voting Agreement, the Fund has agreed, among other things,
subject to certain conditions set forth in the Voting Agreement, during the
term of the voting Agreement, to vote 794,284 MECC Common Shares (constituting
9.9% of the MECC Common Shares issued and outstanding on October 30, 1995)
(the "Voting Agreement Shares") (a) in favor of the approval and adoption of
the Merger Agreement and the Merger at every meeting of the shareholders of
MECC at which such matters are considered and at every adjournment thereof,
and (b) against any other acquisition or proposed acquisition of MECC (whether
by way of merger, purchase of capital stock, purchase of assets or otherwise).
The Fund has agreed to deliver to SoftKey upon request immediately prior to
any vote contemplated by clause (a) or (b) above a proxy substantially in the
form attached to the Voting Agreement as Annex A (the "Fund Proxy"), which
Fund Proxy shall be irrevocable during the term of the Voting Agreement to the
extent permitted under Minnesota law and subject to the conditions set forth
in the Voting Agreement.
Pursuant to the Voting Agreement, during the term of the Voting Agreement,
the Fund has agreed not to sell, assign, pledge, transfer or otherwise dispose
of, or grant any proxies with respect to (except for a Fund Proxy or a proxy
which is not inconsistent with the Voting Agreement) any of the Voting
Agreement Shares.
In addition, the Fund has agreed that it will not, nor will it permit any
entity under its control to, deposit any of the Voting Agreement Shares in a
voting trust or subject any of such shares to any arrangement with respect to
the voting of such shares inconsistent with the Voting Agreement.
The Voting Agreement terminates upon the earliest to occur of (i) the
Effective Time, and (ii) the date on which the Merger Agreement is terminated
in accordance with its terms. In addition, the obligation of the Fund to vote
the Voting Agreement Shares in accordance with the terms of the Voting
Agreement and to deliver the Fund Proxy, and the validity of a Fund Proxy
delivered under the Voting Agreement, is conditional on the Parent Price (as
hereinafter defined) being at least $30. The "Parent Price," as used in the
Voting Agreement, refers to the volume weighted average of the closing prices
of SoftKey Common Stock on the NNM for the twenty full trading days
immediately preceding the meeting of the shareholders of MECC (or adjournment
thereof) at which the Merger and the Merger Agreement are considered.
The summary of the Voting Agreement contained herein is qualified in its
entirety by the text of the Voting Agreement, a copy of which is attached as
Appendix E hereto and which is hereby incorporated herein by reference.
Employment Agreements
In connection with the Merger, SoftKey and MECC anticipate that MECC will
enter into employment agreements with Mr. LaFrenz, Mr. Anderson,
Mr. Gullickson, Mr. Holey and Mr. Samuelson each of which would become
effective at the Effective Time. As currently proposed by SoftKey, Mr.
LaFrenz's employment agreement would provide for Mr. LaFrenz to serve as
President of the Surviving Corporation for a four-year term and for, among
other things, an annual base salary of not less than $200,000, the grant to
Mr. LaFrenz of options to purchase 330,000 shares of SoftKey Common Stock at a
per share exercise price equal to the closing price of SoftKey Common Stock as
quoted on the NNM on the closing date of the Merger, and a bonus of up to 50%
of Mr. LaFrenz's base salary, based upon certain financial targets. Mr.
LaFrenz's employment agreement would also provide that if MECC terminates
Mr. LaFrenz's employment with MECC other than for just cause, Mr. LaFrenz will
be entitled to severance payments (in addition to accrued and unpaid salary)
for a period equal to the greater of eighteen months or the balance of the
term of his employment agreement.
As currently proposed by SoftKey, the employment agreements for each of Mr.
Anderson, Mr. Gullickson, Mr. Holey and Mr. Samuelson would be for a three-
year term and provide for them to serve in the capacities of Vice President--
Finance, Vice President--Sales and Marketing, Vice President--Development and
Vice President and Creative Director, respectively, of the Surviving
Corporation. The employment agreements of Mr. Anderson and Mr. Gullickson
would provide for, among other things, an annual base salary of not less than
$150,000, the grant to each of them of options to purchase 100,000 shares of
SoftKey Common Stock, in each
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<PAGE>
case at a per share exercise price equal to the closing price of SoftKey
Common Stock as quoted on the NNM on the closing date of the Merger, and a
bonus of up to 40% of their respective base salaries, based upon certain
financial targets. The employment agreements of Mr. Holey and Mr. Samuelson
would provide for, among other things, an annual base salary of not less than
$125,000, the grant to each of them of options to purchase 75,000 shares of
SoftKey Common Stock, in each case at an exercise price equal to the closing
price of SoftKey Common Stock as quoted on the NNM on the closing date of the
Merger, and a bonus of up to 40% of their respective base salaries, based upon
certain financial targets. The employment agreements of Mr. Anderson,
Mr. Gullickson, Mr. Holey and Mr. Samuelson also would provide that if MECC
terminates the executive's employment with MECC other than for just cause, the
executive will be entitled to severance payments (in addition to accrued and
unpaid salary) for a period equal to the greater of twelve months or the
balance of the term of his or her employment agreement. There can be no
assurance that SoftKey, MECC and the executive officers will be able to agree
on mutually acceptable provisions in the respective employment agreements or
that such agreements will be finalized.
Distribution Agreement
On November 20, 1995, SoftKey announced that it would commence selling
educational software titles on CD-ROM in partnership with MECC. Shipments of
approximately 12 titles began in early 1996. Such arrangement is pursuant to a
distribution agreement arrived at in an arms-length negotiation.
OPERATIONS AFTER THE MERGER
Pursuant to the Merger Agreement, at the Effective Time, the directors of
Sub at the Effective Time will become the directors of the Surviving
Corporation and the officers of MECC at the Effective Time will become the
officers of the Surviving Corporation.
Following the Merger, SoftKey plans to maintain MECC as a separate business
unit of SoftKey, with Mr. LaFrenz as President, which will be responsible for
managing the school channel and the development of simulation learning
products of SoftKey. SoftKey plans to expand MECC's distribution of its
software through SoftKey's direct retail sales force, introduce new
educational software offerings by further developing existing products and
line extensions, introduce MECC's titles into SoftKey's direct response and
OEM sales channels and expand MECC's sales of its international versions of
its titles through SoftKey's existing operations in Germany, the United
Kingdom, France, Ireland and Japan and use its sales agents in Latin America,
Central Europe and the Pacific Rim to increase penetration of the products.
SoftKey plans to consider centralizing certain functions that operate
independently in the two companies. These include manufacturing, sales
operations, marketing and technical support. In addition, SoftKey intends to
conduct an evaluation of existing administrative functions, such as finance,
human resources, information technology, legal and general overhead costs of
both companies and consolidate these functions in SoftKey's existing corporate
headquarters to the extent operationally feasible. The integration of the
operations of SoftKey and MECC will create opportunities for employees of MECC
to compete generally on a merit basis for a broad pool of available positions
within the surviving entity.
Certain executive officers of MECC are expected to enter into employment
arrangements with MECC effective as of the Effective Time. These individuals
are expected to have management positions in the educational business unit of
SoftKey and assist in the integration of the businesses. See "The Merger--
Related Agreements--Employment Agreements."
INFORMATION CONCERNING SOFTKEY
SoftKey International Inc., a Delaware corporation ("SoftKey"), is a
developer and publisher of high-quality consumer software for personal
computers ("PCs"), primarily produced on CD-ROM. SoftKey currently
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<PAGE>
offers over 500 software titles in consumer-oriented categories, including
education, lifestyle, edutainment, reference, productivity and, to a lesser
extent, entertainment, in North America. SoftKey distributes additional
products internationally. SoftKey's premium line of products includes titles
such as: Calendar Creator Plus(TM), Infopedia(TM), Sports Illustrated(R)
Swimsuit Calendar, Time Almanac, BodyWorks(R) 4.0, The American Heritage(R)
Talking Dictionary, Leonardo--the Inventor(TM), PC Paintbrush(R), Key 3D
Design Center(TM) and Compton's Interactive Encyclopedia. SoftKey also
publishes lower priced boxed products under the "Key" brand and a line of
jewel-case only products under the "Platinum" brand. As a result of SoftKey's
recent acquisition of TLC, SoftKey added a number of educational products,
classified into several product "families," to its offerings, including those
in TLC's "Rabbit" family (including the Reader Rabbit series), "Treasure"
family, "Super Solvers" family, "Writing Tools" family, "College Prep" family
and the "Foreign Languages" family. SoftKey publishes school editions of a
number of these products. SoftKey has relationships with over 50 national
retailers and direct distributors with access to over 22,000 individual
storefronts, including the retailers and distributors responsible for most of
the nation's software sales. The mailing address of SoftKey's principal
executive offices is One Athenaeum Street, Cambridge, Massachusetts 02142, and
its telephone number is (617) 494-1200.
SoftKey was created through a combination of three corporations (the "Three-
Party Combination"). On February 4, 1994, SoftKey (which was then known as
WordStar International Incorporated ("WordStar")) completed a three-way
business combination transaction with SoftKey Software Products Inc. ("SoftKey
Software") and Spinnaker Software Corporation ("Spinnaker"). Effective
February 4, 1994, the Company changed its name to SoftKey International Inc.
INFORMATION CONCERNING MECC
Minnesota Educational Computing Corporation (MECC), a Minnesota corporation
("MECC"), is a developer, publisher and distributor of fun, high-quality,
educational software for use by children in the school and at home. MECC's
products are principally designed 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. The mailing address of the principal executive offices of
MECC is 6160 Summit Drive North, Minneapolis, Minnesota 55430-4003, and its
telephone number is (612) 569-1500.
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COMPARATIVE PER SHARE MARKET PRICE DATA
SoftKey Common Stock is traded on the Nasdaq National Market (the "NNM")
under the symbol "SKEY." MECC Common Shares are traded on the NNM under the
symbol "MECC."
The following table sets forth, for the calendar quarters indicated, the
high and low sales prices per share of SoftKey Common Stock and MECC Common
Shares as quoted on the NNM.
<TABLE>
<CAPTION>
SOFTKEY MECC
COMMON STOCK(1) COMMON SHARES(2)
--------------- -----------------
HIGH LOW HIGH LOW
--------------- -------- --------
<S> <C> <C> <C> <C>
1994:
First Quarter............................... 14.375 9.750 9.672 7.328
Second Quarter.............................. 14.625 9.750 7.328 5.328
Third Quarter............................... 15.125 11.500 10.672 5.000
Fourth Quarter.............................. 27.250 14.625 12.000 8.172
1995:
First Quarter............................... 29.125 22.000 15.672 10.422
Second Quarter.............................. 32.125 21.000 24.500 14.672
Third Quarter............................... 51.750 30.375 36.250 23.750
Fourth Quarter.............................. 45.625 20.375 35.250 19.750
1996:
First Quarter............................... 27.750 13.375 30.500 15.250
Second Quarter (through April 10, 1996)..... 23.750 19.375 26.000 21.500
</TABLE>
- --------
(1) Prices of SoftKey Common Stock prior to February 4, 1994 have been
adjusted to reflect a 1-for-10 reverse stock split effected on such date.
(2) Prices of MECC Common Shares prior to June 30, 1995 have been adjusted to
reflect a 3-for-2 stock split effected on such date.
The following table sets forth the closing prices per share of SoftKey
Common Stock and MECC Common Shares as reported on the NNM on October 27,
1995, the business day preceding public announcement of the Merger, and on
April 10, 1996, and the equivalent per share prices (as explained below) of
MECC Common Shares on such dates.
<TABLE>
<CAPTION>
SOFTKEY COMMON MECC COMMON EQUIVALENT PER
STOCK SHARES SHARE PRICE
-------------- ----------- --------------
<S> <C> <C> <C>
October 27, 1995...................... $38.125 $21.250 $40.000
April 10, 1996........................ 22.500 25.250 25.714
</TABLE>
The equivalent per share price of a MECC Common Share represents the closing
price of a share of SoftKey Common Stock on such date multiplied by the
Exchange Ratio computed as of such date.
Because the market price of SoftKey Common Stock that holders of MECC Common
Shares will receive in the Merger may increase or decrease prior to the
Merger, stockholders are urged to obtain current market quotations.
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following 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
SoftKey's consolidated balance sheet and MECC's unaudited balance sheet at
December 31, 1995 as if the Merger occurred on December 31, 1995. The
unaudited pro forma combined condensed consolidated statements of operations
combine the historical results of operations of SoftKey, MECC, Compton's, TLC
and tewi for the year ended December 31, 1995, as if each of (i) the Merger,
(ii) the acquisition by SoftKey of Compton's, (iii) the acquisition by SoftKey
of TLC, (iv) the acquisition by SoftKey of tewi, (v) SoftKey's October 23,
1995 issuance of the October Notes and (vi) the issuance of the Tribune Notes
to Tribune Company in connection with the acquisition of TLC by SoftKey had
occurred at the beginning of such period. See "Recent Developments." The
unaudited pro forma combined condensed consolidated statement of operations
for the year ended December 31, 1995 combines the pro forma results of SoftKey
for the year ended December 31, 1995 and the results of MECC for the twelve
months ended December 31, 1995.
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.
These combined condensed consolidated pro forma statements are based on and
should be read in conjunction with the audited consolidated financial
statements of SoftKey, including the notes thereto, and the audited and
unaudited financial statements of MECC, including the notes thereto, which are
included in documents incorporated by reference in this Joint Proxy Statement-
Prospectus. See "Incorporation By Reference."
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<PAGE>
SOFTKEY INTERNATIONAL INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA COMBINED
SOFTKEY MECC ADJUSTMENTS PRO FORMA
-------- ------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents........... $ 77,832 $21,214 $ -- $ 99,046
Accounts receivable, net............ 32,402 8,975 -- 41,377
Inventories......................... 18,997 1,952 -- 20,949
Other current assets................ 23,627 851 -- 24,478
-------- ------- -------- ----------
152,858 32,992 -- 185,850
Property and equipment, net........... 19,621 3,237 -- 22,858
Goodwill and intangible assets, net... 727,934 1,068 224,392(a) 953,394
-------- ------- -------- ----------
$900,413 $37,297 $224,392 $1,162,102
======== ======= ======== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable and accrued
liabilities........................ $117,022 $ 5,106 $ 14,800(a) $ 136,928
Current portion of long-term
obligations
and other current liabilities...... 13,925 -- -- 13,925
-------- ------- -------- ----------
130,947 5,106 14,800 150,853
Long-term obligations................. 503,982 338 -- 504,320
Deferred income taxes................. 50,965 160 -- 51,125
-------- ------- -------- ----------
554,947 498 -- 555,445
Stockholders' Equity.................. 214,519 31,693 209,592(a) 455,804
-------- ------- -------- ----------
$900,413 $37,297 $224,392 $1,162,102
======== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
73
<PAGE>
SOFTKEY INTERNATIONAL INC.
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SOFTKEY,
THE
THE LEARNING
LEARNING COMPANY,
TEWI COMPANY COMPTON'S COMPTON'S
(PRE- (PRE- (PRE- PRO FORMA AND TEWI PRO FORMA COMBINED
SOFTKEY ACQUISITION) ACQUISITION) ACQUISITION) ADJUSTMENTS COMBINED MECC ADJUSTMENTS PRO FORMA
---------- ------------ ------------ ------------ ----------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES......... $ 167,042 $ 3,720 $60,698 $23,204 $ -- $ 254,664 $33,815 $ -- $ 288,479
COSTS AND
EXPENSES:
Costs of
production..... 53,070 5,161 13,217 12,874 -- 84,322 6,769 -- 91,091
Sales, marketing
and support.... 38,370 1,439 16,545 11,392 -- 67,746 11,588 -- 79,334
General and
administrative. 20,813 709 8,324 9,559 -- 39,405 2,937 -- 42,342
Amortization and
merger related
charges........ 103,172 -- -- 2,039 321,830 (b) 427,041 302 112,196(b) 539,539
Research and
development.... 12,487 -- 11,738 1,244 -- 25,469 6,442 -- 31,911
---------- ------- ------- ------- --------- ---------- ------- --------- ----------
227,912 7,309 49,824 37,108 321,830 643,983 28,038 112,196 784,217
---------- ------- ------- ------- --------- ---------- ------- --------- ----------
OPERATING INCOME
(LOSS).......... (60,870) (3,589) 10,874 (13,904) (321,830) (389,319) 5,777 (112,196) (495,738)
OTHER INCOME
(EXPENSE), net.. 705 (54) 686 (856) (23,319)(c) (22,838) 969 -- (21,869)
---------- ------- ------- ------- --------- ---------- ------- --------- ----------
INCOME (LOSS)
BEFORE TAXES.... (60,165) (3,643) 11,560 (14,760) (345,149) (412,157) 6,746 (112,196) (517,607)
PROVISION
(BENEFIT) FOR
INCOME TAXES.... 5,795 -- 4,162 (5,134) (35,037) (30,214) 1,978 -- (28,236)
---------- ------- ------- ------- --------- ---------- ------- --------- ----------
NET INCOME
(LOSS).......... $ (65,960) $(3,643) $ 7,398 $(9,626) $(310,112) $ (381,943) $ 4,768 $(112,196) $ (489,371)
========== ======= ======= ======= ========= ========== ======= ========= ==========
NET INCOME (LOSS)
PER SHARE--Fully
diluted......... $ (2.65) $ (12.95) $ (12.65)
========== ========== ==========
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING--
Fully diluted... 24,855,000 4,632,000(d) 29,487,000 9,200,000(d) 38,687,000
========== ========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
condensed consolidated financial statements.
74
<PAGE>
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 October 30, 1995, SoftKey International Inc. (the "Company" or "SoftKey")
entered into a definitive merger agreement (the "Merger Agreement") with
Minnesota Educational Computing Corporation (MECC) ("MECC"), a publisher and
distributor of high quality educational software for children, pursuant to
which SoftKey is expected to acquire MECC in exchange for approximately
9,200,000 shares of common stock, par value $.01 per share, of SoftKey
("SoftKey Common Stock") and other consideration and costs with a total
estimated purchase price of 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 ultimate purchase price will be
conditional upon the number of shares of SoftKey Common Stock issued to
acquire MECC (which number could be increased to up to approximately
10,500,000 to the extent that outstanding options to purchase common shares of
MECC, par value $.01 per share, are exercised prior to the effective time of
the Merger (as defined below)), which will be dependent upon the volume-
weighted average of the closing prices for SoftKey Common Stock on the Nasdaq
National Market ("NNM") for the twenty full trading days ending on the third
full trading day prior to the effective time of the merger (the "Merger") of a
wholly owned subsidiary of SoftKey with MECC, as contemplated by the Merger
Agreement. 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 note to
Tribune Company for $3,000 for cancellation of intercompany indebtedness.
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, a leading developer of education 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 The Learning Company. Under the terms of the merger
agreement between SoftKey and TLC, SoftKey purchased all of the outstanding
shares of The Learning Company 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 The Learning Company shares outstanding,
including vested stock options, as of December 27, 1995. Approximately 1.1
million unvested The Learning Company stock options 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 The Learning Company. 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.
75
<PAGE>
SOFTKEY INTERNATIONAL INC.
NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(CONTINUED)
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 December 31, 1995, as if the
acquisition had occurred on December 31, 1995.
The pro forma combined condensed consolidated statements of operations set
forth the results of operations for the year ended December 31, 1995, as if
the acquisition of MECC, Compton's, tewi and The Learning Company by SoftKey
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 and Annual Report on Form 10-K for the year ended January 6,
1996, MECC's Form 10-K for the period ended March 31, 1995 and Form 10-Q for
the nine month period ended December 31, 1995, The Learning Company'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 Form 10-Q for the three month period ended
September 30, 1995.
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 on December 31, 1995. 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 statements of operations
have been prepared assuming the acquisitions of MECC, Compton's, The Learning
Company and tewi were consummated at the beginning of the fiscal year ended
December 31, 1995. Pro forma adjustments for each of the acquisitions reflect
the amortization of the identifiable intangible assets acquired and goodwill
related to The Learning Company and Compton's 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. Any allocation of the purchase price to the fair value of
incomplete technology related to MECC could result in a material charge to
operations at consummation of the transactions 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 and
76
<PAGE>
SOFTKEY INTERNATIONAL INC.
NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(CONTINUED)
completed its evaluation of the estimated useful life of goodwill and other
identifiable intangible assets acquired in and resulting from the acquisition
of The Learning Company 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.
SoftKey is currently in the process of determining the value of the
identifiable intangible assets acquired in the acquisition of MECC.
(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.
The combined condensed consolidated balance sheet reflects SoftKey's
issuance of $350,000 5 1/2% Senior Convertible Notes Due 2000 (the "October
Notes") on October 23, 1995. 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 included in other long-term assets 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
included in other long-term assets and are being amortized over the term of
the Tribune Notes.
(d) The pro forma combined condensed consolidated statements of operations
for the year ended December 31, 1995 include 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.
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 9,200,000 shares for the acquisition of MECC based on the
maximum exchange ratio under the Merger Agreement of 1.14286 shares of SoftKey
Common Stock per MECC Common Share.
77
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF
SOFTKEY COMMON STOCK AND MECC COMMON SHARES
INTRODUCTION
SoftKey is incorporated under the laws of the State of Delaware and MECC is
incorporated under the laws of the State of Minnesota. If the Merger is
consummated, the holders of MECC Common Shares, whose rights as shareholders
are currently governed by Minnesota law, the MECC Articles of Incorporation
(the "MECC Articles"), and the By-Laws of MECC (the "MECC By-Laws"), will,
upon the exchange of their MECC Common Shares pursuant to the Merger
Agreement, become holders of shares of SoftKey Common Stock, and their rights
as such will be governed by Delaware law, by the SoftKey Charter and the
Bylaws of SoftKey (the "SoftKey Bylaws"). The material differences between the
rights of holders of MECC Common Shares and of the rights of holders of
SoftKey Common Stock, resulting from differences in their governing documents
and the application of Minnesota or Delaware law thereto, are summarized
below.
The following summary does not purport to be a complete statement of the
rights of holders of SoftKey Common Stock under applicable Delaware laws, the
SoftKey Charter and the SoftKey Bylaws or a comprehensive comparison with the
rights of the holders of MECC Common Shares under applicable Minnesota laws,
the MECC Articles and the MECC By-Laws, or a complete description of the
specific provisions referred to herein. The identification of specific
differences is not meant to indicate that other equally or more significant
differences do not exist. This summary is qualified in its entirety by
reference to the Delaware General Corporation Law ("DGCL") and the governing
corporate instruments of SoftKey, to the MBCA and the governing corporate
instruments of MECC to which holders of MECC Common Shares are referred. For
information as to how such documents may be obtained, see "Incorporation By
Reference."
AUTHORIZED CAPITAL STOCK
The DGCL requires that a corporation's certificate of incorporation set
forth the total number of shares of all classes of stock which the corporation
has authority to issue and a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof. The SoftKey Charter provides that SoftKey has authority to issue
65,000,001 shares of capital stock, of which 60,000,000 shares are shares of
SoftKey Common Stock, 5,000,000 shares are Preferred Stock, par value $.01 per
share, and one share is designated as Special Voting Stock, par value $1.00
per share. If the proposed amendment to the SoftKey Charter is approved, the
SoftKey Charter will provide SoftKey with the authority to issue 120,000,000
shares of SoftKey Common Stock. See "Proposal to Amend SoftKey's Restated
Certificate of Incorporation to Authorize Additional Shares."
The MBCA requires that a corporation's articles of incorporation set forth
the aggregate number of shares of stock which the corporation has authority to
issue, and, if separate classes or series are to be issued, the articles shall
set forth (or allow the board to establish) the classes or series into which
such stock may be divided and the number of shares of each class which the
corporation is authorized to issue and, if there is more than one class or
series, the relative rights and preferences of each class or series. The MECC
Articles provide that MECC has authority to issue 20,000,000 MECC Common
Shares, and 10,000,000 Preferred Shares, par value $5.00 per share, including
1,000,000 Series A Preferred Shares.
BOARD OR STOCKHOLDER APPROVED PREFERRED STOCK
The DGCL permits a corporation's certificate of incorporation to allow its
board of directors to issue, without stockholder approval, series of preferred
or preference stock and to designate their rights, preferences, privileges and
restrictions. The SoftKey Charter grants such power to the SoftKey Board.
Currently, there are no shares of preferred stock of SoftKey issued or
outstanding; however, in connection with the purchase by Tribune Company of
$150 million principal amount of 5 1/2% Senior Convertible/Exchangeable Notes
Due 2000, SoftKey has designated a new series of preferred stock convertible
into SoftKey Common Stock. See "Recent Developments--Acquisition of The
Learning Company."
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The MBCA permits a corporation's articles of incorporation to allow its
directors to determine the designation of a class or series and to fix the
relative rights and preferences of a class or series of stock. The MECC
Articles grant such power to the MECC Board. Currently, there are no preferred
shares of MECC outstanding.
VOTING RIGHTS
The DGCL states that, unless a corporation's certificate of incorporation
or, with respect to clauses (ii) and (iii) below, the by-laws specify
otherwise, (i) each share of its capital stock is entitled to one vote, (ii) a
majority of voting power of the shares entitled to vote, present in person or
represented by proxy, shall constitute a quorum at a stockholders meeting and
(iii) in all matters other than the election of directors, the affirmative
vote of the majority of the voting power of shares, present in person or
represented by proxy at the meeting and entitled to vote on the subject
matter, shall be the act of the stockholders. The holders of shares of SoftKey
Common Stock are entitled to one vote per share on all matters to be voted on
by the stockholders of SoftKey. In addition, the holders of Exchangeable Non-
Voting Shares of SoftKey Software Products Inc. are entitled to direct the
vote of The R-M Trust Company, the holder as trustee for such persons, of the
one outstanding share of SoftKey's Special Voting Stock on a one vote-per-
Exchangeable Non-Voting Share basis.
The MBCA states that, unless a corporation's articles of incorporation or,
in the case of clause (i) below, the terms of the shares (or, in the case of
clause (ii) below, the corporation's by-laws) specify otherwise, (i) each
share of its capital stock is entitled to one vote, (ii) a majority of voting
power of the shares entitled to vote constitutes a quorum and (iii) action on
a matter (other than matters, such as mergers and sales of substantially all
assets, which require the affirmative vote described below) is approved by the
greater of (a) a majority of the voting power of the shares present and
entitled to vote on such matter or (b) a majority of the voting power of the
minimum number of shares entitled to vote that would constitute a quorum.
Holders of MECC Common Shares are entitled to one vote per share on all
matters as to which stockholders are entitled to vote. The holders of Series A
Preferred Shares are not entitled to vote on any matter as to which holders of
MECC Common Shares are entitled to vote, except as otherwise required by the
MBCA.
NUMBER OF DIRECTORS
Under the DGCL, unless a corporation's certificate of incorporation
specifies the number of directors, such number shall be fixed by, or in the
manner provided in, its by-laws. If a corporation's certificate of
incorporation expressly authorizes its board of directors to amend its by-
laws, its board of directors may change the authorized number of directors by
an amendment to the corporation's by-laws, if fixed therein, or in such manner
as is provided therein. If such certificate of incorporation specifies the
number of directors, the number of directors can only be changed by amending
the certificate of incorporation. The SoftKey Bylaws provide that the number
of members of the board of directors shall consist of not less than six nor
more than 11 directors, such number to be established by the Board of
Directors of SoftKey or its stockholders. The number of directors on the
SoftKey Board is currently seven.
The MBCA provides that the number of directors shall be fixed by or
determined in the manner provided in the articles of incorporation or the by-
laws. The MECC By-Laws state that the Board of Directors has the power to fix
the number of directors from time to time. The MECC Board currently consists
of five members.
ELECTION OF BOARD OF DIRECTORS
The DGCL provides that a corporation's directors shall be elected by a
plurality of the votes of the shares present in person or represented by proxy
at the meeting and entitled to vote on the election of directors. Under the
DGCL, a corporation's certificate of incorporation may provide that
stockholders of a corporation can elect directors by cumulative voting. The
SoftKey Charter does not provide for cumulative voting. See "Comparison of
Rights of Holders of Softkey Common Stock and MECC Common Shares--Voting
Rights."
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The DGCL permits, but does not require, the adoption of a "classified" board
of directors with staggered terms under which part of the board of directors
is elected each year for a maximum term of three years. In general, under the
DGCL, any or all of the directors of a corporation may be removed, with or
without cause, by vote of the holders of a majority of the shares then
entitled to vote at an election of directors, except that the DGCL authorizes
removal of a member of a classified board by the stockholders only for cause.
The SoftKey Charter does not provide for a classified board of directors.
Under the MBCA, the method of election for directors may be imposed by or in
the manner provided in the articles of incorporation or by-laws. The MBCA
provides that unless the articles of incorporation provide otherwise, the
shareholders of a corporation can elect directors by cumulative voting. The
MECC Articles provide that there shall be no cumulative voting.
The MBCA permits, but does not require, a corporation to divide its
directors into classes as provided in its articles of incorporation and by-
laws. In general, under the MBCA any or all of the directors of a corporation
may be removed, with or without cause, by vote of the holders of the
proportion or number of voting power of the shares of the classes or series
the director represents sufficient to elect them, unless the articles of
incorporation or by-laws otherwise provide. The MECC Articles and By-Laws do
not provide for staggered terms for directors and do not modify the statutory
removal provisions.
VOTE ON MERGER, CONSOLIDATION OR SALE OF SUBSTANTIALLY ALL ASSETS
The DGCL generally requires approval of any merger, consolidation or sale of
substantially all the assets of a corporation at a meeting of stockholders by
vote of the holders of a majority of all outstanding shares of the corporation
entitled to vote thereon. The certificate of incorporation of a Delaware
corporation may provide for a greater vote. The SoftKey Charter does not
contain such a provision.
The MBCA also generally requires approval of any merger or sale of
substantially all the assets of a corporation that is not in the usual and
regular course of business by a majority of the voting power of all shares
entitled to vote. Under the MBCA, the articles of incorporation may provide
for a greater vote. The MECC Articles do not contain such a provision.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the DGCL, special stockholder meetings of a corporation may be called
by its board of directors and by any person or persons authorized to do so by
its certificate of incorporation or by-laws. Under the SoftKey Charter and
Bylaws, special meetings of SoftKey's stockholders, for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the SoftKey
Board, the Chairman of the Board or the President or by holders of shares
entitled to cast not less than fifteen percent (15%) of the votes at the
meeting. Written notice of a special meeting shall be given not less than ten
nor more than sixty days before the date on which the meeting is to be held.
Under the MBCA, a special meeting of shareholders may be called by the chief
executive officer, the chief financial officer, two or more directors, the
person or persons authorized by the articles of incorporation or by-laws to
call a special meeting, or upon demand of a shareholder or shareholders
holding ten percent (10%) or more of the voting power of the shares entitled
to vote, except that a special meeting for the purpose of considering any
action to directly or indirectly facilitate or effect a business combination,
including any action to change or otherwise affect the composition of the
board of directors for that purpose, must be called upon demand of a
shareholder or shareholders holding twenty-five percent (25%) or more of the
voting power of the shares entitled to vote. Such shareholders must deliver to
the chief executive officer or the chief financial officer one or more written
demands for the meeting, stating the purpose or purposes for which it is to be
held. The MECC By-Laws state that a special meeting of shareholders may be
called by the President, the Chief Financial Officer, the Chairman, two or
more directors, or holders of at least ten percent (10%) of the outstanding
voting shares. Written notice of a special meeting shall be given not less
than ten days (or in the case involving a
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merger, share exchange or sale, lease or exchange of assets, not less than
fourteen days) nor more than sixty days before the meeting.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Under the DGCL, any action by a corporation's stockholders must be taken at
a meeting of such stockholders, unless a consent in writing setting forth the
action so taken is signed by the stockholders having not less than the minimum
number of votes necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Actions by
written consent, however, may not be taken if otherwise provided for in the
certificate of incorporation. The SoftKey Charter contains no such
prohibition.
The MBCA provides that any action required or permitted to be taken at any
meeting of the shareholders may be taken without a meeting if all shareholders
entitled to vote on the matter consent to the action in writing. The MECC By-
Laws follow the MBCA provision.
AMENDMENT OF CERTIFICATE OR ARTICLES OF INCORPORATION
The DGCL allows amendment of a corporation's certificate of incorporation if
its board of directors adopts a resolution setting forth the amendment
proposed, declaring its advisability, and the stockholders thereafter approve
such proposed amendment either at a special meeting called by the board for
the purpose of approval of such amendment by the stockholders or, if so
directed by the board, at the next annual stockholders' meeting. At any such
meeting, the proposed amendment generally must be approved by a majority of
the outstanding shares entitled to vote. The holders of the outstanding shares
of a class are entitled to vote as a separate class upon a proposed amendment,
whether or not entitled to vote thereon by the certificate of incorporation,
if the amendment would increase or decrease the aggregate number of authorized
shares of such class, increase or decrease the par value of the shares of such
class, or alter or change the powers, preferences, or special rights of the
shares of such class so as to affect them adversely. If any proposed amendment
would alter or change the powers, preferences, or special rights of one or
more series of any class so as to affect them adversely, but not affect the
entire class, then only the shares of the series so affected by the amendment
will be considered a separate class for the purposes of a vote on the
amendment. Under the DGCL, a corporation's certificate of incorporation also
may require, for action by the board or by the holders of any class or series
of voting securities, the vote of a greater number or proportion than is
required by the DGCL and the provision of the certificate of incorporation
requiring such greater vote cannot be altered, amended or repealed except by
such greater vote. The SoftKey Charter does not contain provisions requiring a
vote greater than that specified in the DGCL to amend the SoftKey Charter.
Except as otherwise provided in the MBCA, the MBCA requires shareholder
approval of amendments to a corporation's articles of incorporation. To amend
the articles of incorporation a resolution approved by the affirmative vote of
a majority of the directors present, or proposed by a shareholder or
shareholders holding three percent (3%) or more of the voting power of shares
entitled to vote (and, in the event that the corporation is publicly held,
this provision does not conflict with federal securities laws), that sets
forth the proposed amendment shall be submitted to the shareholders. The
amendment is generally approved by the affirmative vote of the holders of a
majority of the voting power of the shares present and entitled to vote,
except that if the articles of incorporation or the MBCA provide for a greater
number of votes to adopt such an amendment, such greater number shall be
necessary to amend that provision. A separate vote by class or series to
approve an amendment to the articles of incorporation must be held if the
proposed amendment would, among other things, (i) change the rights or
preferences of the shares of the class or series or (ii) change the aggregate
number of authorized shares of the class or series. The MECC Articles do not
contain any provisions regarding amendments which depart from those described
above in the MBCA.
AMENDMENT OF BY-LAWS
Under the DGCL, the power to adopt, amend or repeal a corporation's by-laws
resides with the stockholders entitled to vote thereon, and with the directors
of such corporation if such power is conferred upon the board of
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directors by the certificate of incorporation. The SoftKey Charter authorizes
the SoftKey Board or stockholders at any meeting to make, alter or repeal the
corporation's Bylaws.
Under the MBCA, a corporation's shareholders retain the power to amend the
corporation's by-laws at any time, and the board of directors also has the
power to amend the by-laws, except for certain provisions relating to quorums
of stockholders and certain matters relating to directors. The MECC By-Laws
permit the shareholders or the MECC Board to alter, amend or repeal the MECC
By-Laws.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The DGCL provides that a corporation may limit or eliminate a director's
personal liability for monetary damages to the corporation or its stockholders
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to such corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for paying a
dividend or approving a stock repurchase in violation of Section 174 of the
DGCL, or (iv) for any transaction from which the director derived an improper
personal benefit. The SoftKey Charter so provides.
Under the DGCL, directors and officers as well as other employees and
individuals may be indemnified against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interest of the corporation,
and, with respect to any criminal action or proceeding, if they had no
reasonable cause to believe their conduct was unlawful. The SoftKey Bylaws
provide to directors, officers and legal representatives of SoftKey
indemnification to the full extent provided by law. The SoftKey Charter also
provides that expenses incurred by a person in defending a civil or criminal
action, suit or proceeding by reason of the fact that he or she is a director,
officer, employee or agent may be paid in advance of the final disposition of
such action, suit or proceeding, upon receipt of an undertaking by or on
behalf of such director, officer, employee or agent to repay such amount
unless it shall ultimately be determined that he or she is entitled to be
indemnified by SoftKey as authorized by relevant Delaware law.
The MBCA permits a corporation to eliminate or limit the liability of a
director to the corporation or to its shareholders for monetary damages for
breach of fiduciary duty as a director through a provision in the
corporation's articles of incorporation, except liability for (i) breach of
the director's duty of loyalty, (ii) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) the
payment of unlawful distributions or violations of the Minnesota securities
laws, (iv) any transaction from which the director received an improper
personal benefit or (v) any act or omission occurring prior to the adoption of
the article providing for such limitation of liability. The MECC Articles
provide for such limitation of liability.
Under the MBCA, unless the articles of incorporation or by-laws otherwise
provide, directors as well as officers and employees shall be indemnified
against judgments, penalties, fines, settlements and expenses (including
attorneys' fees) incurred in connection with legal proceedings if (i) they
have not been indemnified by another organization, (ii) they acted in good
faith, (iii) they received no improper personal benefit, (iv) in the case of
any criminal proceeding, they had no reasonable cause to believe their conduct
was unlawful and (v) generally speaking, they reasonably believed their
conduct to be in the corporation's best interest. A corporation shall advance
expenses if (i) the director, officer or other individual furnishes a written
affirmation of his or her good faith belief that he or she has met the
applicable statutory standards for indemnification, (ii) he or she furnishes a
written undertaking to repay such amount if it shall ultimately be determined
that he or she is not entitled to be indemnified by the corporation and (iii)
a determination is made on behalf of the corporation, in the manner provided
in the MBCA, that the facts then known would not preclude indemnification. The
MECC By-Laws provide to directors, officers, employees and agents
indemnification to the full extent provided by the MBCA.
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PAYMENT OF DIVIDENDS
The DGCL permits the payment of dividends and the redemption of shares out
of its surplus. Under the DGCL, if a dividend is paid out of capital surplus,
stockholders need not be so notified, and dividends may in certain cases also
be paid out of net profits for the fiscal year in which declared or out of net
profits for the preceding fiscal year. The holders of SoftKey Common Stock are
entitled to receive, pursuant to the SoftKey Charter, dividends payable either
in cash, in property, or in Shares of Capital Stock. The SoftKey Charter
prohibits the distribution of dividends to holders of Special Voting Stock.
The MBCA permits distributions by a corporation if, after giving effect to
such distribution, the corporation will be able to pay its debts in the
ordinary course of business, unless the articles of incorporation or by-laws
otherwise limit distributions and subject to certain limitations for the
benefit of certain preferred shares. The MECC Articles allow the MECC Board to
pay dividends to holders of MECC Commons Shares out of funds legally
available. The MECC Articles prohibit the payment of dividends on any date to
holders of the issued and outstanding MECC Common Shares if any dividends
accumulated on the Series A Preferred Shares through such date have not been
paid.
ANTI-TAKEOVER PROTECTION
Both Minnesota and Delaware have enacted legislation aimed at regulating
takeovers of certain corporations and protecting shareholders of such
corporations in connection with certain business combinations. Under the MBCA,
if a publicly-held corporation has an interested shareholder (a beneficial
holder of at least 10 percent of the outstanding voting shares, including an
affiliate or associate of the corporation who, within the preceding four
years, was a 10 percent shareholder regardless of such person's present
shareholdings), the corporation is precluded from entering into certain
specified business combinations (including mergers and sales of substantially
all assets) with, or proposed by, or on behalf of, the interested shareholder
(or affiliated or associated persons) for at least four years after the
shareholder acquired its 10 percent stock interest. The four year restriction
does not apply, however, if a committee of the board of directors consisting
of all of its disinterested directors (excluding current officers and
employees of the corporation and persons who were officers or employees of the
corporation within the preceding five years) approved the acquisition of the
10 percent stock interest or the business combination before the date on which
the shareholder acquires its 10 percent interest.
A Minnesota corporation is also subject to the control share acquisition
provisions of the MBCA which, subject to certain exceptions, require the
approval of the holders of a majority of the corporation's voting shares and a
majority of the corporation's voting shares held by disinterested shareholders
before a person purchasing 20 percent or more of the corporation's voting
shares can vote the shares in excess of 20 percent. Similar shareholder
approvals are required at the 33 1/3 percent and majority thresholds.
The MBCA also contains "anti-greenmail" provisions which, under certain
circumstances, restrict the ability of publicly-held corporations to
repurchase shares for more than the market value thereof from a person or
group holding shares constituting five percent or more of the corporation's
voting power if such person or group has beneficially owned such shares for
less than two years.
Finally, the MBCA also contains a fair price provision, which provides that
an offeror may not acquire shares of a publicly-held Minnesota corporation
within two years following the offeror's last purchase of shares pursuant to a
takeover offer with respect to that class, unless the shareholder is afforded,
at the time of the acquisition, a reasonable opportunity to dispose of the
shares to the offeror upon terms substantially equivalent to those provided in
the earlier takeover offer. Share acquisitions covered by the fair price
provision of the MBCA include those made by purchase, exchange, merger,
consolidation, partial or complete liquidation, redemption, reverse stock
split, recapitalization, reorganization, or any other similar transaction. The
MBCA's fair price provision does not apply, however, if the acquisition of
shares is approved by a committee of the board's disinterested directors
before the purchase of any shares by the offeror pursuant to a takeover offer.
Also, for purposes of the fair price provision, certain transactions are
expressly excluded from the definition of a "takeover offer." Such exempted
transactions include (a) repurchase offers by the corporation, unless made in
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response to a hostile takeover bid; (b) tender offers which, if consummated,
including the offeror's other share acquisitions within the preceding 12
months, would not result in the acquisition of more than two percent of a
class of stock; and (c) offers for shares of certain regulated entities,
including insurance companies, financial institutions and public service
utilities.
Although Delaware has not enacted provisions similar to the Minnesota
control share acquisition provisions or "anti-greenmail" provisions contained
in the MBCA, it has enacted provisions that limit certain business
combinations of Delaware corporations (without regard to any nexus with
Delaware) with interested stockholders. Under the DGCL, an interested
stockholder (a stockholder whose beneficial ownership in the corporation is at
least 15 percent of the outstanding voting securities, rather than the 10
percent provided in the MBCA) is precluded from entering into certain business
combinations with the corporation for a period of three years (rather than the
four year restriction provided in the MBCA) following the date on which the
stockholder became an interested stockholder unless, among other exceptions,
prior to such date the board of directors (rather than the committee of
disinterested directors as provided in the MBCA) approves either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder. Unlike the MBCA, the DGCL provides that the business
combination provisions have no effect if (i) the tender offer or other
transaction by which the stockholder became an interested stockholder results
in such stockholder beneficially owning at least 85 percent of the voting
securities of the corporation (exclusive of shares owned by directors who are
also officers and shares owned by certain employee stock option plans), or
(ii) the business combination is approved by the board of directors and two-
thirds of the shares held by stockholders other than the interested
stockholder.
Neither SoftKey nor MECC has opted out of any of the foregoing provisions,
to the extent such an "opt out" is permissible.
APPRAISAL RIGHTS
Under the DGCL, stockholders of corporations being acquired pursuant to a
merger have the right to serve upon the corporation a written demand for
appraisal of their shares when the stockholders receive any form of
consideration for their shares other than (a) shares of the surviving
corporation, (b) shares of any other corporation (i) listed on a national
securities exchange, (ii) designated as a national market system security on
an interdealer quotation system by the National Association of Securities
Dealers, Inc. or (iii) held of record by more than 2,000 shareholders or (c)
cash in lieu of fractional shares or any combination thereof. Stockholders
entitled to appraisal rights subsequently receive cash from the corporation
equal to the value of their shares as established by judicial appraisal.
Corporations may enlarge these statutory rights by including in their
certificate of incorporation a provision allowing appraisal rights in any
merger in which the corporation is a constituent corporation. The SoftKey
Charter contains no such provision.
The MBCA grants shareholders the right to dissent and receive payment of the
fair value of their shares in the event of certain amendments or changes to
the articles of incorporation adversely affecting their shares, or certain
business transactions, including certain mergers. Unless the articles of
incorporation, by-laws or a resolution approved by the board of directors
otherwise provide, this right is not available to a shareholder of the
surviving corporation in a merger if his shares are not entitled to vote on
the merger. The MECC Articles and MECC By-Laws do not modify this limitation
on dissenters' appraisal rights. See "The Merger--Dissenters' Rights" for a
more detailed discussion of dissenter's rights under the MBCA.
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ELECTION OF SOFTKEY DIRECTORS
The SoftKey Board currently consists of seven members. On December 22, 1995,
the SoftKey Board, pursuant to an agreement entered into by SoftKey and
Tribune Company in connection with Tribune Company's purchase of the Tribune
Notes and SoftKey's acquisition of Compton's, voted to increase the number of
directors from six to seven, and appointed James C. Dowdle to fill the vacancy
created by such increase effective December 28, 1995 (upon consummation of
SoftKey's acquisition of Compton's). Mr. Dowdle's nomination for re-election
is pursuant to such agreement. All nominees for election as directors are
incumbent directors. These nominees are, in addition to Mr. Dowdle, Michael A.
Bell, Robert Gagnon, Kevin O'Leary, Michael J. Perik, Robert Rubinoff and
Scott M. Sperling. Each nominee is standing for re-election to serve for the
following year and until his successor is duly elected and qualified or until
his earlier resignation or removal. The name, age and principal occupation of
each nominee, business experience for at least the past five years and certain
other information concerning each nominee has been furnished by the nominee
and is set forth below under "Management of SoftKey."
THE SOFTKEY BOARD RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES NAMED
HEREIN AS DIRECTORS.
SoftKey has indicated to Mr. Palmer and Mr. LaFrenz that, at the Effective
Time, the SoftKey Board will increase the number of directors from seven to
nine and that they will be offered positions on the SoftKey Board to fill the
vacancies created by such increase.
MANAGEMENT OF SOFTKEY
The following table provides information as of the date of this Joint Proxy
Statement-Prospectus with respect to each of SoftKey's directors, director
nominees and executive officers.
DIRECTORS AND DIRECTOR NOMINEES
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael J. Perik............ 38 Chairman of the Board and Chief Executive Officer
Kevin O'Leary............... 41 President and Director
Robert Gagnon............... 58 Executive Vice President of SoftKey Software and Director
Michael A. Bell............. 40 Director
James C. Dowdle............. 62 Director
Robert Rubinoff............. 56 Director
Scott M. Sperling........... 38 Director
OTHER EXECUTIVE OFFICERS
Les Schmidt................. 41 Chief Operating Officer
David E. Patrick............ 40 President, International
R. Scott Murray............. 32 Chief Financial Officer
Neal S. Winneg.............. 35 Vice President, General Counsel and Secretary
</TABLE>
Michael J. Perik became Chairman of the Board and Chief Executive Officer of
SoftKey in February 1994. He is also President and a director of SoftKey
Software. Prior to the Three-Party Combination, Mr. Perik had been Chief
Executive Officer and a director of Former SoftKey since 1991. From 1988 until
1991, he was Vice President of Investments of Denbridge Capital Corporation, a
Canadian investment company.
Kevin O'Leary became President and a director of SoftKey in February 1994.
He is a founder of SoftKey Software and, prior to the Three-Party Combination,
was President and a director of Former SoftKey and its predecessors since
1984.
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Robert Gagnon became a director of SoftKey in February 1994 and has been a
director and Executive Vice President of SoftKey Software since February 1994.
Prior to the Three-Party Combination, he had been a director of Former SoftKey
from 1991 and Vice President, Finance, of Informatrix 2000, Inc., a Canadian
predecessor of Former SoftKey from 1987.
Michael A. Bell became a director of SoftKey in February 1994. He has been a
director and officer of Monitor Company, Inc., a management consulting firm,
and a group of affiliated companies since 1983.
James C. Dowdle became a director of SoftKey in December 1995. He is
Executive Vice President/Media Operations of Tribune Company and has been a
director of Tribune Company since 1985.
Robert Rubinoff became a director of SoftKey in February 1994. Mr. Rubinoff
is also a director of SoftKey Software. Prior to the Three-Party Combination
he had been a director of Former SoftKey and its predecessors from 1987. Since
1986 and 1979, respectively, he has been the President of Inglewood Holdings
Inc. and Daray Holdings Ltd., each of which is a private Canadian investment
firm. Mr. Rubinoff is a director of National Fibretech, Inc., a Canadian
carpet manufacturer, and Place Resources Ltd., a Canadian oil and gas company,
and is also a director of several private corporations.
Scott M. Sperling became a director of SoftKey in February 1994. He had been
a director of Spinnaker from 1987. Mr. Sperling has been Managing Director of
the Thomas H. Lee Company, a private investment company, since September 1994.
Prior thereto, he was Managing Partner of Aeneas Group, Inc., an investment
company and a wholly owned subsidiary of Harvard Management Company, Inc.,
where he was an officer from 1984 to September 1994. Mr. Sperling is also a
director of Beacon Properties Corporation, a real estate company, and Kurzweil
Applied Intelligence, Inc., a software company, Livent, Inc., a theatre
production company, and is a director of several private corporations.
Les Schmidt became Chief Operating Officer of SoftKey in February 1996.
Prior to becoming an officer of SoftKey, from October 1994 until February
1996, Mr. Schmidt served as Chief Operating Officer of TLC. From May 1988 to
October 1994, Mr. Schmidt served as Chief Financial Officer, and Vice
President, Finance, Administration and Operations, and Secretary of TLC. From
January 1987 to May 1988, Mr. Schmidt acted as a director of Finance and
Operations at TLC. Prior to joining TLC, Mr. Schmidt held senior management
positions at Applied Immune Sciences, Inc. and Coopers & Lybrand L.L.P.
David E. Patrick became President, International in February 1996. Prior
thereto, from August 1994 until February 1996, he served as Executive Vice
President, Worldwide Sales. Mr. Patrick joined SoftKey in October 1990 as Vice
President of Marketing, Development and Strategic Planning. In May 1992, he
became Executive Vice President of SoftKey, and in August 1993, he became
Chief Operating Officer of SoftKey. From September 1988 to October 1990, Mr.
Patrick was Vice President of World-Wide Sales and Marketing of Sitka
Corporation, formerly Tops, a wholly owned subsidiary of Sun Microsystems.
R. Scott Murray became Chief Financial Officer in May 1994 after having
joined SoftKey in February 1994 as Vice President, Corporate Acquisitions.
Prior thereto, Mr. Murray was a manager with Arthur Andersen & Co. from
September 1985 until February 1994.
Neal S. Winneg joined SoftKey in April 1994 as Vice President, General
Counsel and Secretary. From 1986 to 1989 and again from 1990 to 1993, Mr.
Winneg was associated with the law firm of Skadden, Arps, Slate, Meagher &
Flom. From 1989 to 1990, Mr. Winneg was Vice President and a director of
Dimensional Foods Corporation, a food technology company.
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<PAGE>
OWNERSHIP OF SOFTKEY COMMON STOCK
The following table sets forth as of April 6, 1996 certain information with
respect to beneficial ownership of: (i) SoftKey's Chief Executive Officer and
each of SoftKey's other four most highly compensated executive officers whose
salary plus bonus exceeded $100,000 in 1995 (collectively the "Named Executive
Officers"), (ii) each of SoftKey's Directors, (iii) all directors and
executive officers of SoftKey as a group and (iv) each other person (or group
of affiliated persons) who is known by SoftKey to own beneficially 5% or more
of the SoftKey Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAME AND ADDRESS(1) OF BENEFICIAL OWNER OWNED(2)
- --------------------------------------- --------------------------
NUMBER PERCENT
----------- ----------
<S> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Michael A. Bell...................................... 38,888 *
James C. Dowdle...................................... 0 0
Robert Gagnon........................................ 362,289(3) 1.12%
Kevin O'Leary........................................ 1,437,657(4) 4.31%
R. Scott Murray...................................... 159,817(5) *
David E. Patrick..................................... 165,001(6) *
Michael J. Perik..................................... 1,677,901(7) 4.96%
Robert Rubinoff...................................... 98,888(8) *
Edward J. Sattizahn.................................. 55,749 *
Scott M. Sperling.................................... 38,888 *
All executive officers and directors as a group (12
persons)............................................ 4,563,160 12.43%
A I M Management Group Inc.
11 Greenway Plaza, Suite 1919
Houston, TX 77046................................... 2,900,083(9) 9.0%
FMR Corp.
82 Devonshire Street
Boston, MA 02109.................................... 2,233,462(10) 7.0%
Putnam Investments, Inc.
One Post Office Square
Boston, MA 02109.................................... 3,723,210(11) 11.6%
Tribune Company
435 North Michigan Avenue
Chicago, IL 60611................................... 7,882,885(12) 22.5%
Metropolitan Life Insurance Company
One Madison Avenue
New York, NY 10010.................................. 1,581,400(13) 4.9%
State Street Research & Management Company
One Financial Center
Boston, MA 02111.................................... 1,581,400(14) 4.9%
</TABLE>
- --------
*Represents less than 1% of the outstanding shares of SoftKey Common Stock.
(1) Addresses are given only for beneficial owners of more than 5% of the
outstanding shares of SoftKey Common Stock.
(2) Unless otherwise noted, the nature of beneficial ownership is sole voting
and/or investment power, except to the extent authority is shared by
spouses under applicable law. Shares of SoftKey Common Stock not
outstanding but deemed beneficially owned by virtue of the right of a
person or group to acquire them within 60 days are treated as outstanding
only for purposes of determining the number and percent of shares of
SoftKey Common Stock owned by such person or group.
(3) Includes 240,485 shares of SoftKey Common Stock issuable upon exchange of
Exchangeable Shares owned of record by a corporation wholly owned by Mr.
Gagnon.
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<PAGE>
(4) Includes 212,158 shares of SoftKey Common Stock issuable upon exchange of
Exchangeable Shares owned of record by a corporation wholly owned by Mr.
O'Leary. Includes 1,000,000 shares of SoftKey Common Stock subject to
options that could become exercisable within 60 days if the market price
of the SoftKey Common Stock reaches certain levels and if a specified
portion of SoftKey's outstanding indebtedness is repaid.
(5) Includes 860 shares of SoftKey Common Stock issuable upon exchange of
Exchangeable Shares owned of record by Mr. Murray. Includes 100,000 shares
of SoftKey Common Stock subject to options that could become exercisable
within 60 days if the market price of the SoftKey Common Stock reaches
certain levels and if a specified portion of SoftKey's outstanding
indebtedness is repaid.
(6) Includes 100,000 shares of SoftKey Common Stock subject to options that
could become execisable within 60 days if the market price of the SoftKey
Common Stock reaches certain levels and if a specified portion of
SoftKey's outstanding indebtedness is repaid.
(7) Includes 3,121 shares of SoftKey Common Stock issuable upon exchange of
Exchangeable Shares owned of record by Mr. Perik. Includes 1,000,000
shares of SoftKey Common Stock subject to options that could become
exercisable within 60 days if the market price of the SoftKey Common Stock
reaches certain levels and if a specified portion of SoftKey's outstanding
indebtedness is repaid.
(8) Includes 60,000 shares of SoftKey Common Stock issuable upon exchange of
Exchangeable Shares owned by a corporation over which Mr. Rubinoff
exercises investment and voting power.
(9) Based upon information contained in a Schedule 13G dated February 12, 1996
filed with the SEC by A I M Management Group Inc. ("A I M"), on behalf of
itself and its wholly owned subsidiaries, A I M Advisors, Inc. and A I M
Capital Management, Inc., A I M has reported that it has shared voting
power and shared dispositive power with respect to all such shares.
(10) Based upon information contained in a Schedule 13G dated February 14,
1996 filed with the SEC by FMR Corp. (jointly with Fidelity Management
and Research Company, Edward C. Johnson 3rd, (Chairman of FMR Corp.), and
Abigail P. Johnson, FMR Corp. has reported that it has sole voting power
over 241,284 shares of SoftKey Common Stock and sole investment power
over 2,233,462 shares of SoftKey Common Stock.
(11) Based upon information contained in a Schedule 13G dated February 12,
1996 filed jointly with the SEC by Putnam Investments, Inc. ("Putnam"),
on behalf of itself and Marsh & McLennan Companies, Inc., Putnam
Investment Management, Inc. and The Putnam Advisory Company, Inc., Putnam
has shared voting power with respect to 254,604 shares and shared
dispositive power with respect to 3,723,210 shares. Assumes 32,145,964
shares outstanding.
(12) Based upon information contained in Amendment No. 1 to Schedule 13D dated
January 8, 1996 filed with the SEC by Tribune Company. Includes 2,830,188
shares issuable to Tribune Company upon conversion of the Tribune Notes.
(13) Based upon information contained in a Schedule 13G dated February 9, 1996
filed with the SEC by Metropolitan Life Insurance Company
("Metropolitan"), Metropolitan has sole voting power with respect to
1,574,300 shares of SoftKey Common Stock and sole investment power with
respect to 1,581,400 shares of SoftKey Common Stock.
(14) Based upon information contained in a Schedule 13G dated February 13,
1996 filed with the SEC by State Street Research & Management Company
("State Street"), State Street has sole voting power with respect to
1,574,300 shares of SoftKey Common Stock and sole investment power with
respect to 1,581,400 shares of SoftKey Common Stock.
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<PAGE>
SOFTKEY EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors receive no fees for their service as directors of SoftKey, but
each director who is not an employee of SoftKey or any affiliate of SoftKey
and was not designated for nomination or appointment to the SoftKey Board by,
or by agreement or arrangement with, any person or entity (other than SoftKey)
(a "Non-Employee Director") received a one-time automatic grant of an option
to purchase 20,000 shares of SoftKey Common Stock (the "Initial Grant")
pursuant to SoftKey's 1994 Non-Employee Director Stock Option Plan (the "1994
Plan"). In addition, on November 28, 1995, each Non-Employee Director received
an additional automatic grant (the "First Continuation Grant") of an option to
purchase 100,000 shares of SoftKey Common Stock. On February 5, 1995, each
Non-Employee Director received a further automatic grant (the "Second
Continuation Grant") of an option to purchase 26,666 shares of SoftKey Common
Stock. Initial Grants vested immediately, and First Continuation Grants and
Second Continuation Grants vest quarterly over a three-year period. The per
share exercise price for an option under the 1994 Plan is equal to 100% of the
fair market value per share on the date of grant. As of January 3, 1996, three
Non-Employee Directors were eligible for, and had been granted, options under
the 1994 Plan. The 1994 Plan was terminated effective February 6, 1996.
Michael Nobrega, a former director of SoftKey, is an officer, director and
shareholder of Pan-Capital Corporation, a private corporation which provided
consulting services to SoftKey in 1995, for which SoftKey has been billed
C$147,260.
THE SOFTKEY BOARD AND ITS COMMITTEES
The SoftKey Board held twelve meetings in 1995. Each director attended 75%
or more of all meetings of the SoftKey Board and the committees on which he
served, except for Mr. Gagnon, who attended 67%, and Mr. Sperling, who
attended 62% of all the meetings. The standing committees of the SoftKey Board
are the Compensation Committee and the Audit Committee.
Compensation Committee. The Compensation Committee of the SoftKey Board
determines the compensation of the President and Chief Executive Officer of
SoftKey and approves the compensation of directors and certain executive
officers of SoftKey. The Compensation Committee also administers SoftKey's
stock option plans. The Compensation Committee's current members are Michael
A. Bell, Robert Rubinoff and Scott M. Sperling. The Compensation Committee did
not meet formally in 1995 but held a number of informal meetings and acted by
unanimous written consent six times in 1995.
Audit Committee. The Audit Committee of the SoftKey Board recommends the
appointment of SoftKey's independent public accountants and reviews and
approves the results, findings and recommendations of audits performed by the
independent public accountants. The Audit Committee also reviews SoftKey's
system of internal accounting controls, the significant accounting policies of
SoftKey as the apply to the consolidated financial statements, the audit fees
to be paid to the independent public accountants and the nature of non-audit
services performed by the independent public accounts. The Audit Committee's
current members are Michael J. Perik, Robert Rubinoff and Scott M. Sperling.
The Audit Committee met once in 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the SoftKey Board, which, among
other things, determines the compensation of the President and Chief Executive
Officer of SoftKey and administers SoftKey's stock option and incentive plans,
are Michael A. Bell, Robert Rubinoff and Scott M. Sperling, none of whom is an
employee of SoftKey or has any direct or indirect material interest in or
relationship to SoftKey, other than their receipt of stock options granted
under the 1994 Plan or, in the case of Mr. Rubinoff, options granted under a
former stock option plan of a predecessor of SoftKey. None of the executive
officers of SoftKey has served on the Board of Directors or compensation
committee of any other entity, any of whose officers served either on the
SoftKey Board or the Compensation Committee.
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<PAGE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee is furnishing the following report to
stockholders on the compensation policies applicable to SoftKey's executive
officers with respect to compensation reported for the year ended January 6,
1996:
Executive Officer Compensation.
The objective of SoftKey's executive compensation program is to attract and
retain key executives critical to the success of SoftKey. To closely align the
interests of such executives with those of SoftKey's stockholders, SoftKey
relies on the use of stock-based compensation plans to comprise a high
proportion of executive officers' total compensation. In addition, SoftKey
uses discretionary bonuses to ensure that an individual's compensation is
directly related to SoftKey's financial and other goals.
Base Salary. Salaries paid to executive officers, other than the President
and Chief Executive Officer, are reviewed annually by the Chief Executive
Officer based upon his assessment of the nature of the position and the
contribution, experience and tenure of the executive officer. At the request
of the Chief Executive Officer, the Compensation Committee reviews any
recommendations of the Chief Executive Officer resulting from such review. The
Compensation Committee is responsible for determining the salaries of the
President and Chief Executive Officer.
Discretionary Bonus. Periodically during the year, the Chief Executive
Officer may grant or recommend the payment of discretionary bonuses to
executive officers (other than himself and the President) based upon his
evaluation of such executive officer's tangible and direct contribution to
SoftKey's performance.
Stock Options. SoftKey believes that the most effective way to align the
interests of executives with those of SoftKey's stockholders is to ensure that
the executive officers hold equity stakes in SoftKey. Accordingly, the
Compensation Committee and management have determined that continued use of
stock options is the best mechanism for long term incentive compensation of
executive officers. The Compensation Committee administers the LTIP, under
which options are granted to executive officers as well as other employees of
SoftKey. Generally, option grants are approved by the Compensation Committee
upon the recommendation of the Chief Executive Officer, who determines the
amount of such grants based upon factors similar to those used to determine
salary and any bonus. Options are granted at fair market value on the date of
grant, have ten-year terms and generally have vesting periods between two and
four years.
Chief Executive and President Compensation.
Michael J. Perik and Kevin O'Leary, the Chief Executive Officer and
President of SoftKey, respectively, are compensated pursuant to employment
agreements. See "SoftKey Executive Compensation--Employment and Severance
Agreements." The terms of such agreements were reviewed by the SoftKey Board
and approved by the Compensation Committee. The base salaries under these
agreements are subject to review by the Compensation Committee annually. In
June 1995, the Compensation Committee granted to each of Mr. Perik and Mr.
O'Leary options under the LTIP to purchase 275,000 shares of SoftKey Common
Stock. The excercisability of these options is subject to both a time-based
vesting schedule as well as the market price of SoftKey Common Stock attaining
certain levels over specified periods. In addition, the Compensation Committee
granted to each of Messrs. Perik and O'Leary options to purchase an additional
200,000 shares of SoftKey Common Stock which were intended as "reload" options
to replace options which were exercised by Messrs. Perik and O'Leary. The
Compensation Committee granted all these options in recognition of Messrs.
Perik's and O'Leary's important contribution to the success of SoftKey and to
further align their interests with those of SoftKey's stockholders. The option
awards were designed to incorporate a number of features to lessen their
immediate value and appeal, while providing a large potential gain if
significant stockholder value is created.
Compliance with Internal Revenue Code Section 162(m).
Section 162(m) of the Code, enacted in 1993, generally disallows a tax
deduction to public companies for compensation over $1 million paid to a
corporation's Chief Executive Officer and four other most highly
90
<PAGE>
compensated executed officers. The Compensation Committee believes that it is
in the best interests of SoftKey's stockholders to comply with the tax law
while still maintaining the goals of SoftKey's executive compensation program,
thereby maximizing the deductibility of SoftKey's executive compensation
payments. SoftKey currently intends to structure grants under future stock
option plans in a manner that complies with this statute.
Michael A. Bell
Robert Rubinoff
Scott M. Sperling
The preceding Compensation Committee Report shall not be deemed filed with
the SEC under the Securities Act or the Exchange Act, and shall not be deemed
incorporated by reference by any general statement incorporating this proxy
statement into any filing under such acts, except to the extent that SoftKey
specifically incorporates this information by reference.
91
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation paid to the Named Executive
Officers for each of the 1995, 1994 and 1993 fiscal years, as well as a six
month transition period resulting from a change in fiscal year ends, for
services rendered in all capacities to SoftKey. Information is furnished for
each fiscal period during which such persons were executive officers. Except
for Mr. Patrick, none of the Named Executive Officers were executive officers
prior to 1994.
1995 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING
OTHER ANNUAL OPTIONS'/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS(#) COMPENSATION
- --------------------------- ---- -------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Perik........ 1995 $300,000 -- -- 475,000 $ 33,847(1)
Chief Executive 1994 200,000 -- -- 535,000 98,059(2)
Officer, Chairman
Kevin O'Leary........... 1995 300,000 -- -- 475,000 4,574(3)
President, Director 1994 200,000 -- -- 1,152 41,796(4)
R. Scott Murray......... 1995 230,000 30,000 -- 100,000 37,260(5)
Chief Financial Officer 1994 123,264 17,000 -- 70,000 45,683(6)
David E. Patrick........ 1995 181,008 -- -- 80,000 109,237(7)
Executive Vice 1994 182,258 85,000 -- 10,000 98,460(8)
President
1993(9) 79,646 96,259 -- 50,000 --
1993 145,288 -- -- -- --
Edward J. Sattizahn..... 1995 220,833 -- -- 80,000 --
Executive Vice 1994 197,640 46,667 28,000(10) 40,000
President --
</TABLE>
- -------
(1) Represents amounts paid to reimburse Mr. Perik for income taxes incurred
as a result of payments for rent and moving expenses which are described
below.
(2) Includes $57,600 for rent of Mr. Perik's apartment in Boston and certain
moving expenses, and $40,459 to reimburse Mr. Perik for income taxes
incurred as a result of such payments for rent and moving expenses.
(3) Represents amounts paid to reimburse Mr. O'Leary for income taxes
incurred as a result of payments for moving expenses which are described
below.
(4) Includes $27,239 for expenses incurred by Mr. O'Leary in connection with
moving his family to the Boston area and $14,557 to reimburse Mr. O'Leary
for income taxes incurred as a result of such payments for moving
expenses.
(5) Reflects amounts paid to reimburse Mr. Murray for income taxes incurred
as a result of payments for moving expenses which are described below.
(6) Includes $34,091 paid to reimburse Mr. Murray for expenses incurred in
connection with moving his family to the Boston area and $11,592 in fees
paid for consulting services provided by Mr. Murray prior to his becoming
an employee of SoftKey.
(7) Represents commissions.
(8) Includes $58,197 for expenses incurred by Mr. Patrick in connection with
moving his family to the Boston area, including reimbursement for a loss
on the sale of his former residence in California, and $40,263 to
reimburse Mr. Patrick for income taxes incurred as a result of such
payments.
(9) Represents compensation for the six month transition period ended
December 31, 1993.
(10) Represents final payment under an earn-out agreement between Mr.
Sattizahn and Wordstar entered into in connection with Wordstar's
acquisition of a software company owned by Mr. Sattizahn.
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<PAGE>
SoftKey did not make any awards during 1995 to any of the Named Executive
Officers under any long-term incentive plan providing compensation intended to
serve as an incentive for performance to occur over a period longer than one
fiscal year, excluding stock options.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
On October 8, 1993, Mr. Patrick entered into a three-year employment
agreement with SoftKey as an Executive Vice President, which provides for,
among other things, an annual base salary of not less than $175,000, the grant
to Mr. Patrick of an option to purchase 50,000 shares of SoftKey Common Stock
at $9.375 per share (the per share fair market value of SoftKey Common Stock
on October 13, 1993, the day of the grant, as adjusted for a subsequent 1-for-
10 reverse stock split), a bonus of $75,000 paid when the agreement became
effective and eligibility for a target bonus of $85,000 per year payable on a
quarterly basis on such terms as the SoftKey Board determines. The agreement
also provides for reimbursement of expenses related to Mr. Patrick's
relocation to SoftKey's headquarters in Cambridge, Massachusetts. Mr.
Patrick's employment agreement also provides that if SoftKey terminates Mr.
Patrick's employment with SoftKey other than for just cause, Mr. Patrick will
be entitled to severance payments (in addition to accrued and unpaid salary)
in an aggregate amount equal to his annual base salary then in effect.
On February 1, 1994, Mr. Murray entered into a three-year employment
agreement with SoftKey as a Vice President, which was amended as of March 1,
1995. Mr. Murray's employment agreement provides for, among other things, an
annual base salary of not less than $170,000, and the grant to Mr. Murray of
an option to purchase 35,000 shares of SoftKey Common Stock at $10.375 per
share (the per share fair market value of SoftKey Common Stock on April 26,
1994, the day of the grant). The agreement also provides for a relocation
allowance of C$45,000 (which amount is to be adjusted to compensate Mr. Murray
for any income taxes related to such allowance), as well as the reimbursement
of certain travel and hotel expenses related to Mr. Murray's relocation to
SoftKey's headquarters in Cambridge, Massachusetts. Mr. Murray's employment
agreement also provides that if SoftKey terminates Mr. Murray's employment
with SoftKey other than for just cause, Mr. Murray will be entitled to
severance payments (in addition to accrued and unpaid salary) in an aggregate
amount equal to two times his annual base salary then in effect, plus the
maximum annual bonus payable under the employment agreement, if any.
On May 27, 1994, Messrs. Perik and O'Leary each entered into employment
agreements with SoftKey, effective as of January 1, 1994 (except as otherwise
set forth therein), which provide for their continued employment by SoftKey in
their present capacities through December 31, 1996. Pursuant to the terms of
his employment agreement, Mr. Perik is entitled to receive an annual base
salary of not less than $205,000. In addition, Mr. Perik is entitled to a
monthly automobile allowance reimbursement of certain specified relocation
expenses and, beginning September 15, 1993 and for a period of one year
thereafter, a monthly housing subsidy. Under Mr. O'Leary's employment
agreement, he is entitled to receive an annual base salary of not less than
$205,000. In addition, Mr. O'Leary is entitled to a monthly automobile
allowance and reimbursement of relocation expenses.
The employment agreements for Messrs. Perik and O'Leary provide (a) for
severance payments (in addition to accrued and unpaid salary) in the event of
termination of employment by SoftKey other than for just cause or by the
executive for good reason in an amount equal to the executive's annual base
salary then in effect plus 1/12 of such amount for each year of employment of
the executive with SoftKey or any predecessor, provided that in no event shall
such amount be less than two times the executive's annual base salary then in
effect, and (b) that SoftKey shall take all action necessary, consistent with
applicable stock option and incentive plans, to permit immediate vesting of
the executive's then outstanding options for the purchase of capital stock of
SoftKey and continued exercise of any such options until the first to occur of
(i) the date five years from termination of the executive's employment
thereunder or (ii) the date on which such options would otherwise expire, in
each such case as if the employment of the executive were not terminated.
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<PAGE>
STOCK OPTIONS GRANTED IN 1995
The following table provides information concerning stock options granted in
1995 to the Named Executive Officers. No SARs were granted to executive
officers in 1995.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
------------------------------------------------ AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM
OPTIONS GRANTED EMPLOYEES PRICE EXPIRATION -------------------
NAME (# OF SHARES) (1) IN 1995 ($/SH) DATE 5%($) 10%($)
- ---- ----------------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Perik........ 200,000(2) 10.13 22.75 6/2/2005 3,472,306 8,224,182
275,000(3) 13.92 22.75 6/2/2000 2,386,569 4,649,922
Kevin O'Leary........... 200,000(2) 10.13 22.75 6/2/2005 3,472,306 8,224,182
275,000(3) 13.92 22.75 6/2/2000 2,386,569 4,649,922
R. Scott Murray......... 100,000(4) 5.06 22.75 6/2/2005 1,736,153 4,112,091
David E. Patrick........ 80,000(4) 4.05 22.75 6/2/2005 1,388,922 3,289,673
Edward J. Sattizahn..... 80,000(4) 4.05 22.75 6/2/2005 1,388,922 3,289,673
</TABLE>
- --------
(1) All options were granted under the LTIP at fair market value on the date
of the grant.
(2) Option was fully exercisable on date of grant.
(3) Option vests (a) as to 137,500 shares, quarterly over a two year period
beginning on September 2, 2000 unless, prior to June 2, 1998 the weighted
average closing price of SoftKey Common Stock as quoted by the NNM for any
twenty consecutive trading days equals or exceeds $30.00 (the "$30.00
Performance Target" (which has occurred)), in which case such option shall
vest on the later of (i) quarterly over a one year period beginning on
September 2, 1996 or (ii) the date the $30.00 Performance Target is
achieved and (b) as to 137,500 shares, quarterly over a two year period
beginning on September 2, 2000 unless, prior to June 2, 1998 the weighted
average closing price of SoftKey Common Stock as quoted by the NNM for any
twenty consecutive trading days equals or exceeds $35.00 (the "$35.00
Performance Target"(which has occurred)), in which case such option shall
vest on the later of (i) quarterly over a one year period beginning on
September 2, 1996 or (ii) the date the $35.00 Performance Target is
achieved.
(4) Option vests quarterly over a three-year period.
OPTION EXERCISES AND VALUES FOR 1995
The following table provides information concerning the aggregate number of
options exercised and the number and value of all unexercised options held by
the Named Executive Officers at January 6, 1996. No Named Executive Officer
currently holds any SARs.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/ IN-THE-MONEY OPTIONS
SHARES SARS AT FISCAL YEAR-END AT FISCAL YEAR-END($)
ACQUIRED ON ------------------------- -------------------------
NAME EXERCISE (#) VALUE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Perik........ 245,080 4,061,983 674,780 275,000 5,581,507 103,125
Kevin O'Leary........... 161,233 2,238,628 225,499 275,000 319,663 103,125
R. Scott Murray......... 40,000 635,000 33,541 96,459 187,656 172,344
David E. Patrick........ 50,000 882,813 45,834 71,666 446,875 71,666
Edward J. Sattizahn..... 47,000 790,328 43,665 81,666 364,809 186,250
</TABLE>
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF SOFTKEY
Peter Hamilton, a former Executive Vice President of SoftKey, is the
President and the owner of a majority of the outstanding capital stock of
Insight Business Consultants Inc. ("Insight"). Insight is a computer services
integration, implementation and support services business which was formerly
owned by SoftKey and which was sold to Mr. Hamilton and two other individuals
in June 1993. During the 1995 fiscal year, SoftKey and its subsidiaries paid
approximately $1,633,000 for fees related to services rendered by Insight in
developing and implementing a management information system covering
substantially all of SoftKey's financial operations. Insight continues to
provide a small amount of such services to SoftKey in the 1996 fiscal year.
On September 30, 1994, SoftKey Software Products of Florida, Inc., an
indirect wholly owned subsidiary of SoftKey, sold all of the outstanding
capital stock of LANSA USA Inc., an Illinois corporation, to Insight for an
aggregate of $650,000 pursuant to a Stock Purchase Agreement dated as of the
same date. Pursuant to the Stock Purchase Agreement, the purchase price was
paid by way of a $250,000 reduction in the amount payable by SoftKey to
Insight in connection with the services rendered by Insight referred to in the
preceding paragraph and by delivery to SoftKey of a promissory note of Insight
in the principal amount of $400,000, payable in eight monthly installments of
$50,000 beginning on October 30, 1994, which were fully paid as of December
31, 1995.
Helen Wright, SoftKey's Director of Investor Relations, is indebted to
SoftKey under a loan agreement entered into on June 30, 1991 between Former
SoftKey and Ms. Wright pursuant to which Former SoftKey loaned Ms. Wright
C$267,000 to assist Ms. Wright in paying the exercise price of certain
employee stock options. As of January 6, 1996, the aggregate principal amount
of the loan outstanding was $203,000. The loan is interest free and payable on
demand. In addition, as of January 6, 1996, Ms. Wright was also indebted to
SoftKey in the principal amount of C$77,500 pursuant to a loan by Former
SoftKey to Ms. Wright for the purchase of common shares of Former SoftKey. The
loan is interest-free and payable on demand. Ms. Wright is Mr. Perik's sister.
Michael Nobrega, a former director of SoftKey, is an officer, director and
shareholder of Pan Capital Corporation, a private corporation which provided
consulting services to SoftKey in 1995. See "SoftKey Executive Compensation--
Compensation of Directors."
In connection with SoftKey's acquisition of Compton's, SoftKey issued a
promissory note to Tribune Company in the principal amount of $3,000,000. In
connection with SoftKey's acquisition of TLC, Tribune Company made a $150
million investment in SoftKey in the form of 5 1/2% Convertible/Exchangeable
Notes Due 2000. James C. Dowdle, a director of SoftKey, is a director and
officer of Tribune Company. See "Recent Developments."
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SOFTKEY COMPARATIVE STOCK PERFORMANCE
The following graph compares the performance of SoftKey Common Stock with
the performance of the Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500 Index") and an industry index (the "Industry Index") over the period
from June 30, 1990. The graph assumes that $100 was invested on June 30, 1990
in each of the SoftKey Common Stock, the S&P 500 Index and the Industry Index,
and that all dividends were reinvested. The Industry Index includes companies
listed on the NNM with the standard industrial code 7372 (Computer and Data
Processing Services). The performance shown in the graph is not necessarily
indicative of future performance.
COMPARISON OF 66 MONTH CUMULATIVE TOTAL
RETURN AMONG SOFTKEY INTERNATIONAL INC.,
THE S&P 500 INDEX AND THE NASDAQ
COMPUTER AND DATA PROCESSING INDEX
SKEY
<TABLE>
<CAPTION>
Cumulative Total Return
---------------------------------------------------------
6/90 6/91 6/92 6/93 12/93 12/94 12/95
<S> <C> <C> <C> <C> <C> <C> <C>
Softkey Intl Inc SKEY 100 306 275 150 118 255 231
S & P 500 1500 100 107 122 138 145 147 203
<CAPTION>
---------------------------------------------------------
6/90 6/91 6/92 6/93 12/93 12/94 11/95
<S> <C> <C> <C> <C> <C> <C> <C>
NASDAQ COMPUTER & DP INAD 100 106 146 186 187 228 352
</TABLE>
The preceding performance graph shall not be deemed filed with the SEC under
the Securities Act or the Exchange Act, and shall not be deemed incorporated
by reference by any general statement incorporating this proxy statement into
any filing under such acts, except to the extent that SoftKey specifically
incorporates this information by reference.
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PROPOSAL TO AMEND THE SOFTKEY INTERNATIONAL INC.
LONG TERM EQUITY INCENTIVE PLAN
APPROVAL OF THE AMENDMENT TO THE SOFTKEY INTERNATIONAL INC. LONG TERM EQUITY
INCENTIVE PLAN
On July 26, 1990, the SoftKey Board adopted the LTIP, which was approved by
the stockholders of SoftKey on October 10, 1990. On May 30, 1991, the
stockholders of SoftKey approved an amendment to the LTIP to increase the
number of shares of SoftKey Common Stock issuable under the LTIP from
2,500,000 to 4,000,000. Subsequently, on January 10, 1993, the stockholders of
SoftKey approved an amendment to the LTIP to increase the number of shares of
SoftKey Common Stock issuable under the LTIP from 4,000,000 to 5,000,000. On
January 27, 1994, in connection with the Three-Party Combination, the
stockholders of SoftKey approved an amendment to the LTIP to give the
administrator of the LTIP discretion to determine the period after
"Termination" (as that term is defined in the LTIP) of employment of a
participant during which the participant may exercise an Option (as defined
below) or other award granted under the LTIP (although not beyond the term of
the Option or other award) and an amendment to increase the number of shares
of SoftKey Common Stock issuable under the LTIP from 5,000,000 to 30,000,000.
Effective immediately after the closing of the Three-Party Combination,
SoftKey effected a one-for-10 reverse stock split of the SoftKey Common Stock,
reducing the number of shares issuable under the LTIP to 3,000,000. On May 25,
1995, the stockholders of SoftKey approved the amendment and restatement of
the LTIP. The amendment and restatement of the LTIP added to the LTIP terms
and provisions which enable Options and awards granted under the LTIP, as
amended and restated, to qualify as performance-based compensation within the
meaning of Section 162(m) of the Code (relating to deduction limitations on
executive compensation). Accordingly, provided such conditions are met (e.g.,
(i) awards are granted with exercise prices no less than the fair market value
of the SoftKey Common Stock as of the date of the grant and (ii) requisite
disclosure is provided to stockholders), compensation attributable to Options
and SARs granted under the LTIP to the chief executive officer and the four
most highly compensated executive officers (other than the chef executive
officer) for whom compensation disclosure is required under the proxy rules
will not be included in calculating amounts subject to the $1 million per year
deduction limit of Section 162(m) of the Code. Additionally, provided certain
conditions are met, other performance-based compensation awarded under the
LTIP may also not be subject to the deduction limit of Section 162(m) of the
Code. In addition to the foregoing, pursuant to the amendment and restatement
of the LTIP, all awards granted thereunder shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts, the
principal place of business of SoftKey. The LTIP was also amended to provide
for the increase in the number of shares of SoftKey Common Stock issuable
under the LTIP from 3,000,000 to 5,000,000.
On June 2, 1995, the SoftKey Board approved an amendment to the LTIP to
increase the number of shares of SoftKey Common Stock issuable under the LTIP
from 5,000,000 to 5,450,000. Such increase did not constitute a material
increase (i.e., more than 10%) in the number of securities which may be issued
under the LTIP and, accordingly, was not subject to stockholder approval.
On February 5, 1996, the SoftKey Board approved an amendment to the LTIP to
increase the number of shares of SoftKey Common Stock issuable under the LTIP
from 5,450,000 to 7,000,000. Of the 5,450,000 shares of SoftKey Common Stock
currently issuable under the LTIP, as of April 6, 1996, 3,433,451 were
reserved for issuance pursuant to previously granted options and none were
available for future grants. SoftKey relies on the use of the LTIP to attract
and retain qualified personnel with the abilities to further SoftKey's
continued growth. SoftKey believes that continued use of stock options is an
important means of providing appropriate incentives to employees of SoftKey
and MECC and other businesses acquired by SoftKey who are necessary for the
future success of SoftKey and for the realization of the potential benefits of
the Merger. As a result of SoftKey's growth, including in connection with the
Merger, SoftKey believes it will require additional shares available for
issuance under the LTIP to effectively motivate its personnel. Accordingly,
the SoftKey Board recommends that the stockholders of SoftKey approve the
amendment to authorize the issuance of an additional 1,550,000 shares of
SoftKey Common Stock under the LTIP. If the stockholders of SoftKey do not
approve the amendment to the LTIP, the amendment will be of no force or
effect.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED
AMENDMENT TO THE SOFTKEY INTERNATIONAL INC. LONG TERM EQUITY INCENTIVE PLAN.
SUMMARY OF THE LTIP
A summary of the terms and provisions of the LTIP and the proposed amendment
thereto is set forth below and is qualified in its entirety by reference to
the full text of the LTIP, as proposed to be amended. Capitalized terms used
and not otherwise defined in this summary have the meanings ascribed to them
in the LTIP.
General. The purpose of the LTIP is to provide selected eligible employees
of and consultants to SoftKey, its subsidiaries and its affiliates an
opportunity to participate in SoftKey's future by offering them long-term,
performance-based and other incentives and equity interests in SoftKey so as
to retain, attract and motivate management personnel. Awards under the LTIP
may be granted to officers and other employees of, and consultants to,
SoftKey, its subsidiaries and its affiliates as the Compensation Committee, in
its sole discretion, may from time to time authorize, based on such factors as
the Compensation Committee deems appropriate, such as merit and seniority.
The LTIP provides for grants to eligible employees and consultants of awards
including (a) options to purchase shares of SoftKey Common Stock ("Options")
at or below the fair market value of such shares at the time such Options are
granted, consisting of (i) options which qualify for special tax treatment
under Section 422 of the Code ("Incentive Stock Options" or "ISOs"), (ii)
NQSOs (i.e., options which do not qualify as ISOs), (iii) Deep Discount
Options (i.e., NQSOs with exercise prices at less than 50% of fair market
value of SoftKey Common Stock on the date of the grant) and (iv) any type of
Option (in each case with or without Stock Appreciation Rights ("SARs")); (b)
SARs, which are rights to receive an amount equal to the increase, between the
date of its grant and the date of its exercise, in the fair market value of
the number of shares of SoftKey Common Stock subject to the SAR; (c) "Stock
Purchase Rights," similar in certain respects to Options, which allow a
grantee to purchase a number of shares of SoftKey Common Stock at a pre-
determined price during a period not to exceed 30 days; and (d) "Performance
Shares," which are equivalent in value to shares of SoftKey Common Stock and
may be awarded based on the extent to which a participant achieves selected
performance objectives over a specified period of time.
The LTIP is administered by the Compensation Committee. The Compensation
Committee has the authority to (x) select the eligible participants to whom
awards under the LTIP shall be granted, (y) determine the nature and extent of
such awards granted and (z) determine the terms and conditions applicable to
such awards. In administering the LTIP, the Compensation Committee may (a)
adopt, alter or repeal administrative rules, guidelines and practices
governing the LTIP, as it deems advisable, (b) interpret the terms and
provisions of the LTIP and (c) adjust performance goals and measurements
applicable to awards to account for (i) continued compliance with applicable
laws, tax regulations and accounting rules, (ii) unusual or extraordinary
items, events or occurrences (including Changes in Control) in order to avoid
windfall or hardship, (iii) material changes in business conditions and (iv)
such other changes as it deems appropriate in the exercise of its discretion.
The Compensation Committee may also amend, alter or discontinue the LTIP as
it deems advisable, provided that any such action which would impair the
rights of a participant under an outstanding award requires such participant's
consent. In addition, to the extent necessary to comply with certain federal
securities and income tax laws including without limitation Section 162(m) of
the Code, stockholder approval is required for any amendment, alteration or
discontinuance of the LTIP by the SoftKey Board where such action would
(i) increase the number of shares of SoftKey Common Stock reserved for
issuance pursuant to awards under the LTIP, (ii) change certain minimum price
terms for Options or Stock Purchase Rights, (iii) change the class of
employees and consultants eligible to participate in the LTIP, (iv) extend the
maximum term of an Option or a Stock Purchase Right exercise period or (v)
materially increase the LTIP benefits accruing to LTIP participants.
The Compensation Committee may also, at any time without stockholder
approval, amend the LTIP and the terms of any outstanding award (a) to
maximize certain federal income tax benefits accorded to awards or (b) to
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comply with federal securities laws, provided that any such amendment with
respect to outstanding awards requires the consent of the participants whose
awards are affected thereby.
Unless earlier terminated by the SoftKey Board, the LTIP will terminate on
July 1, 2000, but any award granted pursuant to the LTIP prior to July 1, 2000
may extend beyond such date, in accordance with its terms.
The LTIP is designed and intended to conform to Section 162(m) of the Code,
Section 422 of the Code (relating to qualifications of Options as ISOs) and
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (relating to
employee benefit plan transactions by "Insiders," within the meaning of such
rule), and should be construed in a manner so as to comply with such Sections
and such Rule, such that (a) in any year during the term of the LTIP
(commencing January 1, 1995), no participant can receive stock-based awards,
including Option, Restricted Stock, Stock Purchase Rights and Performance
Shares relating to shares of SoftKey Common Stock which in the aggregate
exceed 20% of the total number of shares of SoftKey Common Stock authorized
for issuance under the LTIP, as adjusted pursuant to the terms of the LTIP;
(b) in the event of any change in corporate structure affecting the SoftKey
Common Stock, any adjustment in the number and kind of shares reserved for
issuance under the LTIP with respect to ISOs shall be made in accordance with
Section 424 of the Code (which provides guidance on how ISOs may be adjusted
without losing their ISO status under the Code in the event of such a change
or corporate structure); (c) awards of restricted stock to employees subject
to Section 162(m) of the Code (x) shall have restrictions which will lapse
only upon the attainment of certain performance goals related to SoftKey
profitability and (y) shall not exceed in fair market value the lesser of
(i) 100% of such employee's annual base salary and (ii) $500,000; (d) neither
awards of Stock Purchase Rights nor awards of Performance Shares shall be
granted to any employee whom the Compensation Committee determines is likely
to be an employee subject to Section 162(m) of the Code at the end of the
year; and (e) the amount of consideration payable to a participant with
respect to Performance Shares may not exceed the lesser of (x) 50% of a
participant's annual base salary and (y) $500,000; and (2) the LTIP and all
awards shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts, the principal place of business of SoftKey.
Amendment. Pursuant to the amendment to the LTIP proposed to be approved at
the SoftKey Special Meeting, the number of shares of SoftKey Common Stock
reserved and available for issuance pursuant to awards shall be increased from
5,450,000 to 7,000,000.
Plan Benefits. Inasmuch as awards under the LTIP will be granted at the sole
discretion of the Compensation Committee and that performance goal criteria
may vary from year to year and from one plan participant to another, benefits
under the LTIP are not determinable.
FEDERAL INCOME TAX CONSEQUENCES OF THE LTIP
The following discussion is a brief summary of the principal United States
federal income tax consequences under current federal income tax laws relating
to awards under the LTIP. This summary is not intended to be exhaustive and,
among other things, does not describe state, local or foreign income and other
tax consequences.
Nonqualified Stock Options. An optionee will not be subject to tax upon the
grant of an NQSO. Generally, an optionee will realize ordinary income in the
year in which he or she exercises an NQSO in an amount equal to the excess of
the fair market value of the shares of SoftKey Common Stock on the date of
exercise and the exercise price for such shares. Generally, SoftKey will be
entitled to deduct such amount for federal income tax purposes in the year in
which such NQSO was exercised. Upon disposition of the shares acquired upon
exercise of an NQSO, any appreciation or depreciation in the stock value after
the date of exercise will be treated as capital gain or loss to the optionee.
If an optionee pays the exercise price of an NQSO, in whole or in part, with
previously acquired shares of SoftKey Common Stock, this should not affect the
tax treatment of the exercise. Upon such exchange, and except as otherwise
described herein, no gain or loss is recognized upon the delivery of the
previously acquired shares
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of SoftKey Common Stock to SoftKey, and the shares received by the optionee
equal in number to the previously acquired shares exchanged therefor will have
the same basis for gain or loss purposes as the previously acquired shares.
Shares of SoftKey Common Stock received by the optionee in excess of the
number of previously acquired shares will have a basis equal to the fair
market value of such additional shares as of the date ordinary income is
recognized by the optionee.
Incentive Stock Options. No taxable income will be realized by an optionee
upon the grant or exercise of an ISO. If shares of SoftKey Common Stock are
issued to an optionee pursuant to the exercise of an ISO, then in general, and
except as otherwise provided below, (i) upon a sale of such shares, any amount
realized in excess of the exercise price of such shares will be taxed to such
optionee as a long-term capital gain and any amount realized which is less
than the exercise price will be a long-term capital loss and (ii) no deduction
will be allowed to SoftKey. However, if shares of SoftKey Common Stock
acquired upon the exercise of an ISO are disposed of in a Disqualifying
Disposition (as defined below), generally (x) the optionee will realize
ordinary income in the year of the Disqualifying Disposition in an amount
equal to the excess (if any) of the fair market value of the shares at the
time of exercise (or, if less, the amount realized on the disposition of such
shares) over the exercise price of such shares and (y) SoftKey will be
entitled to deduct an amount equal to such income in the year of such
Disqualifying Disposition, subject to certain withholding and reporting
requirements. Any additional gain recognized by the optionee upon a
Disqualifying Disposition will be taxed as a short-term or long-term capital
gain, as the case may be, and will not result in any deduction by SoftKey. A
"Disqualifying Disposition" occurs if an optionee disposes of shares of
SoftKey Common Stock received upon exercise of an ISO within two years after
the date of grant of the ISO or within one year after the receipt of such
shares by such optionee.
Subject to certain exceptions, an ISO generally will not be eligible for the
federal income tax treatment described above if it is exercised more than
three months following termination of employment. If an ISO is otherwise
exercised at a time when it no longer qualifies as an ISO, the optionee will
be taxed as if the option were an NQSO, as set forth above.
Proposed regulations would modify the foregoing discussion if the optionee
pays the exercise price, in full or in part, with previously acquired shares.
The proposed regulations provide that if the shares surrendered in payment of
the exercise price of an ISO are shares that were acquired pursuant to the
exercise of an ISO, and if the surrender constitutes a Disqualifying
Disposition of those shares (as would be the case, for example, if in
satisfaction of the exercise price SoftKey withholds shares of SoftKey Common
Stock which otherwise would be delivered to the employee upon exercise of an
ISO), then all or a portion of any gain realized as a result of the surrender
could be taxable to the optionee as ordinary income, as discussed above. If
surrender of the shares upon exercise of the ISO does not constitute a
Disqualifying Disposition, in general, (i) no gain or loss will be recognized
as a result of the surrender and (ii) for purposes of determining the amount
and character of any gain or loss on the ultimate disposition of the shares
received upon exercise, (x) the number of shares received that is equal in
number to the shares surrendered will have a basis equal to that of the shares
surrendered and (except for purposes of determining whether a disposition will
be a Disqualifying Disposition) will have a holding period that includes the
holding period of the shares exchanged and (y) any additional shares received
will have a zero basis and will have a holding period that begins on the date
of the surrender. Where the exercise price is satisfied through the
withholding by SoftKey of shares of SoftKey Common Stock that otherwise would
be delivered to the employee upon exercise of an ISO, the withheld shares
should be treated as if they had been issued to the employee and immediately
redeemed. In general, this deemed issuance and redemption should not give rise
to any additional tax consequences, but may in the case of certain individuals
give rise to dividend income equal to the fair market value of the withheld
shares. If any of the shares of SoftKey Common Stock received are later
disposed of in a Disqualifying Disposition, the shares with the lowest basis
will be deemed to be disposed of first, and such disposition will give rise to
ordinary income as discussed above.
In general, SoftKey will not be required to withhold income or payroll taxes
on exercise of an ISO that qualifies as an ISO as of the exercise date.
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PROPOSAL TO AMEND SOFTKEY'S RESTATED CERTIFICATE OF INCORPORATION TO AUTHORIZE
ADDITIONAL SHARES
PROPOSED AMENDMENT TO THE SOFTKEY CHARTER
By resolution adopted on December 22, 1995, the SoftKey Board proposed the
adoption of an amendment to the Restated Certificate of Incorporation of
SoftKey (the "SoftKey Charter") pursuant to which the number of authorized
shares of SoftKey Common Stock would be increased from 60,000,000 to
120,000,000, and the SoftKey Board directed that the proposed amendment be
submitted for adoption by the stockholders at the SoftKey Special Meeting.
If stockholders of SoftKey adopt the amendment, the SoftKey Charter will be
amended as proposed by the SoftKey Board, and the number of authorized shares
of SoftKey Common Stock will be increased to 120,000,000.
Of the 60,000,000 currently authorized shares of SoftKey Common Stock, as of
April 6, 1996, 32,146,964 were issued and outstanding. An additional 1,595,308
shares were reserved for issuance upon exchange of the Exchangeable Shares,
approximately 10,370,000 shares were reserved for issuance upon exercise of
stock options under SoftKey's stock option plans, 9,433,963 shares were
reserved for issuance upon conversion of the Notes and 158,800 shares were
reserved for issuance upon exercise of certain warrants issued by SoftKey.
Except for (i) the issuance of these reserved shares and the Merger Shares and
(ii) the issuance of shares of SoftKey Common Stock (the amounts of which are
not yet determinable) pursuant to two earn-out agreements entered into by
SoftKey in connection with recent acquisitions of foreign publishers and
distributors of software products, SoftKey does not now have any present
understanding or agreement to issue additional shares of SoftKey Common Stock.
Although currently authorized shares are sufficient to meet all known present
requirements, the SoftKey Board believes that it is desirable that SoftKey
have the flexibility to issue additional shares of SoftKey Common Stock
without further stockholder action. In particular, SoftKey continuously
evaluates products and technologies for acquisition, including acquisitions
payable in whole or in part in SoftKey Common Stock. In addition, the
availability of additional shares of SoftKey Common Stock will enhance
SoftKey's flexibility in connection with possible future actions such as stock
dividends, stock splits, financings, employee benefit programs, acquisitions
of property, corporate mergers, the possible funding of new product programs
or businesses or for other corporate purposes. Authorized shares of SoftKey
Common Stock in excess of those shares outstanding also could be used to make
more difficult a change in control of SoftKey. The SoftKey Board will
determine whether, when and on what terms the issuance of shares of SoftKey
Common Stock may be warranted in connection with any of the foregoing
purposes.
If the proposed amendment to the SoftKey Charter is adopted, all or any of
the authorized shares of SoftKey Common Stock may be issued in the future for
such corporate purposes and such consideration as the SoftKey Board deems
advisable from time to time, without further action by the stockholders of
SoftKey and without first offering such shares to the stockholders for
subscription. The issuance of shares otherwise than on a pro rata basis to all
current stockholders would reduce the current stockholders' proportionate
interests in SoftKey and could therefore be dilutive to the financial and
voting interests of current stockholders. However, in any such event,
stockholders wishing to maintain their interests may be able to do so through
normal market purchases. SoftKey does not believe that the issuance of
authorized, unissued SoftKey Common Stock will have any other effect on the
rights of holders of the SoftKey Common Stock.
ADOPTION OF AMENDMENT TO THE SOFTKEY CHARTER BY STOCKHOLDERS
The affirmative vote of a majority of the outstanding shares of SoftKey
Common Stock entitled to vote at the SoftKey Special Meeting is required for
adoption of the proposed amendment to the SoftKey Charter. If the proposed
amendment is adopted by the stockholders, it will become effective upon filing
and recording a Certificate of Amendment as required by the DGCL.
THE SOFTKEY BOARD RECOMMENDS A VOTE FOR ADOPTION OF THE PROPOSED AMENDMENT
TO THE SOFTKEY CHARTER.
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SELECTION OF SOFTKEY'S INDEPENDENT PUBLIC ACCOUNTANTS
On February 5, 1996, the SoftKey Board appointed Coopers & Lybrand L.L.P. as
independent public accountants for SoftKey for the 1996 fiscal year.
Although the SoftKey Charter and the SoftKey Bylaws do not require it, the
SoftKey Board has proposed that the selection of independent public
accountants for SoftKey for 1996 be approved by SoftKey's stockholders. If the
stockholders do not ratify the selection of SoftKey's independent public
accountants, the SoftKey board will reconsider its selection. Representatives
of Coopers & Lybrand L.L.P. are expected to be present at the meeting with the
opportunity to make a statement if they so desire and to respond to
appropriate questions.
The decision to appoint Coopers & Lybrand L.L.P. as independent public
accountants for SoftKey commencing with fiscal year 1994 was originally
approved by the Audit Committee of the SoftKey Board as of February 6, 1995.
Coopers & Lybrand L.L.P. replaced the firm of Arthur Andersen L.L.P.
("Andersen"), whose engagement as SoftKey's independent public accountants was
terminated effective February 6, 1995.
Except as set forth in the following paragraph, the Andersen report dated
January 16, 1995 on the consolidated financial statements of SoftKey as of
December 31, 1993, June 30, 1993 and June 30, 1992 and for the Transition
Period from July 4, 1993 to December 31, 1993 (the "Transition Period") and
each year in the three year period ended June 30, 1993 (the "Andersen Report")
did not contain an adverse opinion or a disclaimer of opinion, nor was the
Andersen Report qualified or modified as to uncertainty, audit scope or
accounting principles.
The Three-Party Combination, consummated on February 4, 1994, has been
accounted for as a pooling of interests. In the Andersen Report, Andersen
stated that it did not audit the financial statements and schedules of
Spinnaker or WorkStar as of June 30, 1993 or 1992, or for any of the years in
the three year period ended June 30, 1993. The financial statements of
Spinnaker and WordStar were audited by other auditors whose reports were
furnished to Andersen, and the Andersen Report, insofar as it relates to
amounts included for Spinnaker or WordStar, is based solely on the reports of
the other auditors. In the Andersen Report, Andersen also stated that the
report of Price Waterhouse LLP on the consolidated financial statements of
Spinnaker as of June 30, 1993 and for the year then ended contains an
explanatory paragraph relating to Spinnaker's ability to continue as a going
concern as described in Note 12 of the consolidated financial statements of
Spinnaker. The report of Deloitte & Touche LLP on the consolidated financial
statements of Spinnaker as of June 30, 1992 and for the two years then ended
expresses an unqualified opinion and includes an explanatory paragraph
referring to an uncertainty in connection with an arbitration proceeding
referred to in Note 12 of the consolidated financial statements of Spinnaker.
During the Transition Period and the two years ended June 30, 1993 and
through February 6, 1995, there were no "disagreements" between SoftKey and
Andersen as described in Item 304(a) (1) (iv) of Regulation S-K. As a result
of management changes, reduction in work force and the consolidation of the
finance functions of SoftKey's formerly separate constituent corporations,
SoftKey requested that Andersen consult with and advise SoftKey in connection
with the closing of its books in the first quarter of 1994. Andersen also
performed certain review of procedures of SoftKey's financial statements for
the second quarter of 1994 and discussed with management the results of those
review procedures. As a result of the work performed, Andersen communicated
certain matters and recommendations to SoftKey's management concerning the
design and implementation of its internal financial controls, including the
need to further develop and document formal policies and procedures, to
develop integrated financial reporting systems and to improve the analysis
supporting recorded amounts. These matters were discussed with the Audit
Committee of the SoftKey Board, and SoftKey has authorized Andersen to respond
fully to Coopers & Lybrand L.L.P.'s inquiries regarding these matters.
During 1994, SoftKey implemented organizational and operational procedures
designed to supplement its existing internal financial controls and, in late
1994, implemented a new management information system covering substantially
all of SoftKey's financial operations. SoftKey believes that it has fully
considered the
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matters and recommendations communicated by Andersen relating to SoftKey's
internal financial controls and that it has appropriately addressed these
matters.
In connection with the Three-Party Combination, Andersen had been appointed
as independent auditors for SoftKey on April 7, 1994, commencing with the
Transition Period. Andersen had replaced SoftKey's previous independent
accountants, KPMG Peat Marwick. During the two years ended June 30, 1993 and
through April 7, 1994, the date of KPMG Peat Marwick's termination, there were
no "disagreements" between SoftKey and KPMG Peat Marwick as described in Item
304(a)(1)(iv) of Regulation S-K or "reportable events" as defined in Item
304(a)(1)(iv) of Regulation S-K.
THE SOFTKEY BOARD RECOMMENDS A VOTE FOR RATIFICATION OF THE SELECTION OF
COOPERS & LYBRAND L.L.P. AS INDEPENDENT PUBLIC ACCOUNTANTS FOR SOFTKEY FOR THE
1996 FISCAL YEAR.
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OWNERSHIP OF MECC COMMON SHARES
The following table sets forth certain information regarding the beneficial
ownership of MECC Common Shares as of April 6, 1996, by (i) each person who is
known to MECC to own beneficially more than 5% of the outstanding MECC Common
Shares, (ii) each director, (iii) MECC's Chief Executive Officer and each of
MECC's four other most highly compensated executive officers whose salary plus
bonus exceeded $100,000 in fiscal 1995, and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
------------------
NUMBER OF PERCENT
NAME AND ADDRESS SHARES(1) OF CLASS
- ---------------- --------- --------
<S> <C> <C>
North American Fund II, L.P.(2).............................. 1,461,762 18.2%
135 South LaSalle Street, Suite 4000
Chicago, Illinois 60603
North American Business Development Company, L.L.C.(2)....... 1,461,762 18.2%
135 South LaSalle Street, Suite 4000
Chicago, Illinois 60603
North American Company Ltd.(2)............................... 1,461,762 18.2%
312 S.E. 17th Street, Suite 300
Fort Lauderdale, Florida 33316
Charles L. Palmer(2)......................................... 1,476,762 18.4%
c/o North American Fund II, L.P.
312 S.E. 17th Street, Suite 300
Fort Lauderdale, Florida 33316
GeoCapital Corporation....................................... 509,450 6.3%
767 Fifth Avenue
New York, NY 10153
Dale E. LaFrenz(3)(4)........................................ 266,675 3.3%
c/o MECC
6160 Summit Drive North
Minneapolis, Minnesota 55430
Donald W. Anderson(3)(4)..................................... 59,300 0.7%
c/o MECC
6160 Summit Drive North
Minneapolis, Minnesota 55430
Susan L. Schilling(3)(5)..................................... 59,750 0.7%
c/o MECC
6160 Summit Drive North
Minneapolis, Minnesota 55430
R. David Bergonia(2)......................................... 1,463,262 18.2%
c/o North American Fund II, L.P.
135 South LaSalle Street, Suite 4000
Chicago, Illinois 60603
Craig Dougherty(3)........................................... 8,400 0.1%
c/o Craig Dougherty & Associates
R.D. #7, Box 166
Fulton, New York 13069
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
------------------
NUMBER OF PERCENT
NAME AND ADDRESS SHARES(1) OF CLASS
- ---------------- --------- --------
<S> <C> <C>
Robert L. Underwood(2)...................................... 1,461,762 18.2%
c/o North American Fund II, L.P.
135 South LaSalle Street, Suite 4000
Chicago, Illinois 60603
Paul K. Gullickson(3)....................................... 33,495 0.4%
c/o MECC
6160 Summit Drive North
Minneapolis, Minnesota 55430
SoftKey International Inc.(6)............................... 794,284 9.9%
One Athenaeum Street
Cambridge, Massachusetts 02142
Wyser-Pratte & Co., Inc..................................... 430,100 5.4%
Wyser-Pratte Management Co., Inc.
63 Wall Street
New York, New York 10005
All directors and executive officers as a group (7 per- 1,846,132 22.5%
sons)(2)(3)(4).............................................
</TABLE>
- --------
(1) Except as indicated in the footnotes to this table and subject to
applicable community property laws, the persons named in this table have
sole voting and investment power with respect to all shares beneficially
owned by them.
(2) All shares shown as beneficially owned by North American Business
Development Company, L.L.C., North American Company Ltd., Charles L.
Palmer (except for 15,000 shares that Mr. Palmer owns directly). Robert L.
Underwood and R. David Bergonia (except for 1,500 shares that Mr. Bergonia
owns directly) are owned of record by North American Fund II, L.P., a
Delaware limited partnership. North American Business Development Company,
L.L.C., a Delaware limited liability company, is the general partner of
North American Fund II, L.P. North American Company Ltd., a Florida
limited partnership of which Mr. Palmer is the managing general partner,
and Messrs. Palmer, Underwood and Bergonia are members of North American
Business Development Company, L.L.C., and Messrs. Palmer, Underwood and
Bergonia are officers of North American Business Development Company,
L.L.C. Mr. Palmer could be deemed to have sole voting and investment power
with respect to all such shares shown as beneficially owned by him, and
Messrs. Underwood and Bergonia could be deemed to have shared voting and
investment power with respect to all such shares shown as beneficially
owned by each of them.
(3) Includes 105,800 shares (Mr. LaFrenz), 29,300 shares (Mr. Anderson),
33,500 shares (Ms. Schilling), 8,400 shares (Mr. Dougherty), 33,495 shares
(Mr. Gullickson) and 176,995 shares (all directors and executive officers
as a group) subject to presently exercisable options or options
exercisable within 60 days and excludes 92,325 shares (Mr. LaFrenz),
37,600 shares (Mr. Anderson), 12,600 shares (Mr. Dougherty), 103,331
shares (Mr. Gullickson) and 245,856 shares (all directors and executive
officers as a group) subject to options which are not presently
exercisable or exercisable within 60 days.
(4) Includes 159,875 restricted shares owned by Mr. LaFrenz, 30,000 restricted
shares owned by Mr. Anderson, and 189,875 restricted shares owned by all
directors and executive officers as a group. The unvested portion of the
restricted shares are subject to repurchase by MECC at a price of $0.0476
per share upon termination of employment of the holder thereof.
(5) Ms. Schilling's employment with MECC terminated effective March 15, 1996.
(6) The shares shown as beneficially owned by SoftKey are the Voting Agreement
Shares.
105
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF MECC
In March 1994, MECC and the Fund entered into an agreement pursuant to which
each agreed to contribute to any joint and several liability incurred by
either of them to the underwriters or others in connection with MECC's initial
public offering in March 1994. The agreement provides generally that MECC and
the Fund will allocate between them such liability in relative proportion to
the proceeds received by each of them from the underwriters in MECC's initial
public offering. In July 1995, MECC entered into a Registration Rights
Agreement with the Fund that provides the Fund with certain demand and
piggyback rights to register MECC Common Shares pursuant to registration
statements under the Securities Act, and provides for MECC to pay for the
expenses of such registration in certain circumstances and to indemnify the
Fund against certain liabilities it might incur pursuant to the offers and
sales under such registration statements. In July 1995, MECC entered into an
Indemnification Agreement with Mr. LaFrenz, Mr. Anderson and Ms. Schilling,
pursuant to which MECC agreed to indemnify them against certain liabilities
that they might incur under the Securities Act in connection with the proposed
sale of MECC Common Shares by them pursuant to a registration statement. On
August 21, 1995, the Fund, Mr. LaFrenz, Mr. Anderson and Ms. Schilling sold
3,000,000, 100,000, 20,000 and 20,000 MECC Common Shares, respectively, to the
underwriters of a public offering of MECC Common Shares pursuant to a
registration statement under the Securities Act, at a per share price of
$29.53.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires SoftKey's directors and executive
officers, and persons who own more than ten percent of a registered class of
SoftKey's equity securities to file with the SEC initial reports of ownership
and reports of changes in ownership of SoftKey Common Stock and other equity
securities. Officers, directors and greater than ten percent beneficial owners
of SoftKey Common Stock are required by SEC regulation to furnish SoftKey with
copies of all forms filed by them under Section 16(a) of the Exchange Act.
To SoftKey's knowledge, based solely on a review of the copies of such
reports furnished to SoftKey for the fiscal year ended January 6, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except that one
report covering a transaction was inadvertently filed late by Peter Hamilton,
formerly an executive officer of the Company.
LEGAL OPINION
The validity of the shares of SoftKey Common Stock offered hereby will be
passed upon for SoftKey by Neal S. Winneg, General Counsel of SoftKey. Mr.
Winneg owns options to purchase an aggregate of 99,375 shares of SoftKey
Common Stock, which are or become exercisable in periodic installments through
January 1999.
EXPERTS
The consolidated financial statements and related schedule of SoftKey as of
and for the years ended January 6, 1996 and December 31, 1994 included in
SoftKey's Annual Report on Form 10-K for the year ended January 6, 1996, have
been audited by Coopers & Lybrand L.L.P., independent public accountants, as
set forth in their report therein dated February 20, 1996, and incorporated
herein by reference in reliance on such report, given on the authority of that
firm as experts in accounting and auditing. The consolidated statements of
operations, stockholders' equity (deficit) and cash flows and the related
financial statement schedule of SoftKey for the six month transition period
from July 4, 1993 to January 1, 1994 and for the year ended June 30, 1993,
included in SoftKey's Annual Report on Form 10-K for the year ended January 6,
1996, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report therein dated January 16,
106
<PAGE>
1995 and incorporated herein by reference. In its report, Arthur Andersen LLP
states that with respect to the consolidated statements of operations,
stockholders' equity (deficit) and cash flows and the related financial
statement schedule of WordStar and Spinnaker for the year ended June 30, 1993,
its opinion based on the reports of other independent accountants, namely KPMG
Peat Marwick LLP and Price Waterhouse LLP, respectively. The consolidated
statements of operations, stockholders' equity (deficit) and cash flows and
the related financial statement schedule of SoftKey have been included therein
in reliance upon the authority of those firms as experts in accounting and
auditing. The report of Price Waterhouse LLP on the consolidated financial
statements of Spinnaker for the year ended June 30, 1993 contains an
explanatory paragraph relating to Spinnaker's ability to continue as a going
concern as described in Note 12 of the consolidated financial statements of
Spinnaker (not included herein).
The financial statements and related financial statement schedules of MECC
as of March 31, 1995 and for each of the three years in the period ended March
31, 1995, incorporated in this Joint Proxy Statement- Prospectus by reference
to MECC's Annual Report on Form 10-K for the year ended March 31, 1995 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated balance sheets of TLC as of June 30, 1995 and the
consolidated statements of income, retained earnings and cash flows of TLC for
each of the three years in the period ended June 30, 1995 incorporated by
reference in this Joint Proxy Statement-Prospectus, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The combined financial statements of Compton's as of December 25, 1994 and
for the fiscal year then ended included in the Current Report on Form 8-K/A of
SoftKey dated January 25, 1996, incorporated by reference in this Joint Proxy
Statement-Prospectus, have been incorporated herein in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The audited annual financial statements of tewi as of December 31, 1994,
incorporated by reference in this Joint Proxy Statement-Prospectus by
reference to SoftKey's Current report on Form 8-K/A dated October 4, 1995,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING OF SOFTKEY STOCKHOLDERS
It is currently anticipated that the 1997 Annual Meeting of stockholders of
SoftKey will be held in May 1997. Stockholder proposals intended to be
presented at such meeting must by received by SoftKey not later than November
26, 1996 for inclusion in the proxy materials for such meeting.
SHAREHOLDER PROPOSALS FOR THE 1996 ANNUAL MEETING OF MECC SHAREHOLDERS
If the Merger is not consummated, it is currently anticipated that the 1996
Annual Meeting of shareholders of MECC will be held on or about November 15,
1996. If such meeting is held, shareholder proposals intended to be presented
at such meeting must by received by MECC not later than June 18, 1996 for
inclusion in the proxy materials for such meeting.
107
<PAGE>
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to the management, executive compensation,
various benefit plans (including stock plans), voting securities and the
principal holders thereof, certain relationships and related transactions and
other related matters as to SoftKey and MECC may be set forth in or
incorporated herein by reference to, in the case of SoftKey, its Annual Report
on Form 10-K for the year ended January 6, 1996, and, in the case of MECC, its
Annual Report on Form 10-K for the fiscal year ended March 31, 1995, which are
incorporated by reference in this Joint Proxy Statement-Prospectus. All
documents filed by SoftKey or MECC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof and prior to the date of the
Special Meetings, in the case of MECC, or the date on which the offering
terminates, in the case of SoftKey, shall be deemed to be incorporated herein
by reference and to be a part hereof from the date of filing of such
documents. See "Incorporation By Reference." SoftKey stockholders and MECC
shareholders who wish to obtain copies of these documents may contact SoftKey
or MECC, as applicable, at its address or telephone number set forth under
"Incorporation by Reference."
108
<PAGE>
APPENDIX A
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
SOFTKEY INTERNATIONAL INC.,
SCHOOLCO INC.
AND
MINNESOTA EDUCATIONAL COMPUTING CORPORATION (MECC)
DATED AS OF OCTOBER 30, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I THE MERGER................................................ A-1
Section 1.1 The Merger ............................................... A-1
Section 1.2 Effective Time of the Merger ............................. A-1
Section 1.3 Closing .................................................. A-1
ARTICLE II THE SURVIVING CORPORATION ................................ A-2
Section 2.1 Articles of Incorporation ................................ A-2
Section 2.2 By-Laws .................................................. A-2
Section 2.3 Directors and Officers of Surviving Corporation .......... A-2
ARTICLE III CONVERSION OF SHARES ..................................... A-2
Section 3.1 Exchange Ratio ........................................... A-2
Section 3.2 Exchange of Company Common Stock; Procedures ............. A-3
Section 3.3 Dividends; Escheat ....................................... A-3
Section 3.4 No Fractional Securities ................................. A-4
Section 3.5 Closing of Company Transfer Books ........................ A-4
Section 3.6 Further Assurances ....................................... A-4
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY ............ A-4
Section 4.1 Corporate Organization; Related Entities ................. A-4
Section 4.2 Capitalization ........................................... A-5
Section 4.3 Authority Relative to This Agreement ..................... A-5
Section 4.4 Consents and Approvals; No Violations .................... A-5
Section 4.5 Reports and Financial Statements ......................... A-6
Section 4.6 Absence of Certain Changes or Events ..................... A-6
Section 4.7 Litigation ............................................... A-6
Section 4.8 Absence of Undisclosed Liabilities ....................... A-7
Section 4.9 No Default ............................................... A-7
Section 4.10 Taxes .................................................... A-7
Section 4.11 Intellectual Property .................................... A-9
Section 4.12 Stockholder Rights Plan .................................. A-10
Information in Disclosure Documents and Registration
Section 4.13 Statement ................................................ A-10
Section 4.14 Employee Benefit Plans; ERISA ............................ A-11
Section 4.15 Vote Required ............................................ A-11
Section 4.16 Opinion of Financial Advisor ............................. A-12
Section 4.17 MBCA Sections 302A.671 and 302A.673 ...................... A-12
Section 4.18 Affiliate Transactions ................................... A-12
Section 4.19 Brokers .................................................. A-12
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT ................. A-12
Section 5.1 Organization ............................................. A-12
Section 5.2 Capitalization ........................................... A-13
Section 5.3 Authority Relative to This Agreement ..................... A-13
Section 5.4 Consents and Approvals; No Violations .................... A-14
Section 5.5 Reports and Financial Statements ......................... A-14
Absence of Certain Changes or Events; Material Agreements
Section 5.6 .......................................................... A-14
Section 5.7 Absence of Undisclosed Liabilities ....................... A-14
Section 5.8 No Default ............................................... A-15
Information in Disclosure Documents and Registration
Section 5.9 Statement ................................................ A-15
Section 5.10 Vote Required ............................................ A-15
Section 5.11 Opinion of Financial Advisor ............................. A-15
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER ................... A-15
Section 6.1 Conduct of Business by the Company Pending the Merger .... A-15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 6.2 Conduct of Business by Parent Pending the Merger ......... A-16
Section 6.3 Conduct of Business of Sub ............................... A-17
ARTICLE VII ADDITIONAL AGREEMENTS .................................... A-17
Section 7.1 Access and Information ................................... A-17
Section 7.2 No Other Negotiations .................................... A-17
Section 7.3 Registration Statement ................................... A-18
Section 7.4 Proxy Statement-Prospectus; Stockholder Approvals ........ A-18
Section 7.5 Compliance with the Securities Act ....................... A-19
Section 7.6 Best Efforts ............................................. A-19
Section 7.7 Voting Agreement ......................................... A-20
Section 7.8 Company Stock Options .................................... A-20
Section 7.9 Public Announcements ..................................... A-21
Section 7.10 Directors' and Officers' Indemnification ................. A-21
Section 7.11 Expenses ................................................. A-21
Section 7.12 Listing Application ...................................... A-21
Section 7.13 Supplemental Disclosure .................................. A-21
Section 7.14 Letters of Accountants ................................... A-21
Section 7.15 Conveyance Taxes ......................................... A-22
Section 7.16 Non-solicitation of Employees ............................ A-22
Section 7.17 Exchange Act Filings ..................................... A-22
ARTICLE VIII CONDITIONS TO CONSUMMATION OF THE MERGER ................. A-22
Conditions to Each Party's Obligation to Effect the Merger
Section 8.1 .......................................................... A-22
Conditions to Obligations of Parent and Sub to Effect the
Section 8.2 Merger ................................................... A-23
Conditions to Obligation of the Company to Effect the
Section 8.3 Merger ................................................... A-23
ARTICLE IX TERMINATION .............................................. A-24
Section 9.1 Termination .............................................. A-24
Section 9.2 Effect of Termination .................................... A-24
ARTICLE X GENERAL PROVISIONS ....................................... A-25
Section 10.1 Amendment and Modification ............................... A-25
Section 10.2 Waiver ................................................... A-25
Section 10.3 Survivability; Investigations ............................ A-26
Section 10.4 Notices .................................................. A-26
Section 10.5 Descriptive Headings; Interpretation ..................... A-26
Section 10.6 Entire Agreement; Assignment ............................. A-27
Section 10.7 Governing Law ............................................ A-27
Section 10.8 Severability ............................................. A-27
Section 10.9 Counterparts ............................................. A-27
</TABLE>
Exhibits
A Voting Agreement
B Form of Affiliate Letter
ii
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
- ---- --------
<S> <C>
Acquisition Transaction............................................... 9.2(b)
Affiliates............................................................ 7.5(a)
Affiliate Letters..................................................... 7.5(b)
Agreement............................................................. Preamble
Allen & Company....................................................... 4.16
Alternative Acquisition............................................... 7.2(a)
Bear Stearns.......................................................... 5.11
Certificates.......................................................... 3.2(b)
Closing............................................................... 1.3
Closing Date.......................................................... 1.3
Code.................................................................. Preamble
Company............................................................... Preamble
Company Common Stock.................................................. Preamble
Company Material Adverse Effect....................................... 4.1(d)
Company Plans......................................................... 4.14(a)
Company SEC Reports................................................... 4.5
Company Stock Option.................................................. 3.1(d)
Confidentiality Agreement............................................. 7.1
Contract.............................................................. 4.4
DGCL.................................................................. Preamble
Dissenting Shares..................................................... 3.1(a)
Effective Time........................................................ 1.2
ERISA................................................................. 4.14(a)
ERISA Affiliate....................................................... 4.14(a)
Exchange Act.......................................................... 4.4
Exchange Agent........................................................ 3.2(a)
Exchange Ratio........................................................ 3.1(a)
GAAP.................................................................. 4.5
Gardner, Carton....................................................... 8.3(c)
Governmental Entity................................................... 4.4
HSR Act............................................................... 4.4
Intellectual Property................................................. 4.11
Liens................................................................. 4.4
MBCA.................................................................. Preamble
Merger................................................................ 1.1
NASD.................................................................. 4.4
New Option............................................................ 7.8
NNM................................................................... 3.1
North American........................................................ 7.7
Parent................................................................ Preamble
Parent Common Stock................................................... 3.1(a)
Parent Material Adverse Effect........................................ 5.1
Parent SEC Reports.................................................... 5.5
Parent Stock Options.................................................. 5.2(a)
Parent Subsidiaries................................................... 5.1(b)
Person................................................................ 10.5
Proxy Statement-Prospectus............................................ 4.13
Registration Statement................................................ 4.13
SEC................................................................... 4.5
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
- ---- ----------
<S> <C>
Securities Act...................................................... 4.4
Service............................................................. 4.10(b)(iv)
Skadden, Arps....................................................... 8.2(d)
Stockholder Rights Plan............................................. 4.12
Sub................................................................. Preamble
Sub Common Stock.................................................... 3.1(c)
Subsidiary.......................................................... 3.1(b)
Superior Proposal................................................... 7.2(a)
Surviving Corporation............................................... 1.1
Tax(es)............................................................. 4.10(c)
Tax Returns......................................................... 4.10(b)(i)
Voting Agreement.................................................... Preamble
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of October 30, 1995 (this
"Agreement"), by and among SoftKey International Inc., a Delaware corporation
("Parent"), SchoolCo Inc., a Minnesota corporation and a wholly owned
subsidiary of Parent ("Sub"), and Minnesota Educational Computing Corporation
(MECC), a Minnesota corporation (the "Company").
WHEREAS, the Boards of Directors of Parent and Sub and the Company deem it
advisable and in the best interests of their respective stockholders that
Parent acquire the Company pursuant to the terms and conditions of this
Agreement, and, in furtherance of such acquisition, such Boards of Directors
(and Parent as the sole stockholder of Sub) have approved this Agreement and
the merger of Sub with and into the Company in accordance with the terms of
this Agreement and, in the case of Parent, the General Corporation Law of the
State of Delaware (the "DGCL") and, in the case of Sub and the Company, the
Minnesota Business Corporation Act (the "MBCA"); and
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Parent's willingness to enter into this
Agreement, a holder of shares of the Common Stock, par value $.01 per share
(the "Company Common Stock"), of the Company, is entering into an agreement
with Parent in the form attached hereto as Exhibit A (the "Voting Agreement")
to vote certain shares of Company Common Stock according to the terms set
forth in the Voting Agreement; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
The Merger
Section 1.1 The Merger. In accordance with the provisions of this Agreement
and the MBCA, at the Effective Time (as defined in Section 1.2), Sub shall be
merged with and into the Company (the "Merger"), the separate existence of Sub
shall thereupon cease, and the Company shall be the surviving corporation in
the Merger (sometimes hereinafter called the "Surviving Corporation") and
shall continue its corporate existence under the laws of the State of
Minnesota. The Merger shall have the effects set forth in Section 302A.641 of
the MBCA. At Parent's option, the Merger may be structured so that (i) any
direct subsidiary of Parent other than Sub is merged with and into the Company
or (ii) the Company is merged with and into Parent or any direct subsidiary of
Parent. In the event of such an election by Parent, the parties hereto agree
to execute an appropriate amendment to this Agreement in order to reflect such
election.
Section 1.2 Effective Time of the Merger. The Merger shall become effective
at the time of filing of properly executed Articles of Merger in the form
required by and executed in accordance with the provisions of Section 302A.615
of the MBCA. The parties hereto shall cause such filing to be made as soon as
practicable after the Closing (as defined in Section 1.3). When used in this
Agreement, the term "Effective Time" shall mean the date and time at which the
Merger shall become effective.
Section 1.3 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Skadden, Arps,
Slate, Meagher & Flom, One Beacon Street, Boston, Massachusetts, at 10:00
a.m., local time, on the day on which all of the conditions set forth in
Article VIII are satisfied or waived or on such other date and at such other
time and place as Parent and the Company shall agree (such date, the "Closing
Date").
<PAGE>
ARTICLE II
The Surviving Corporation
Section 2.1 Articles of Incorporation. The Articles of Incorporation of Sub
in effect at the Effective Time shall be the Articles of Incorporation of the
Surviving Corporation until amended in accordance with applicable law, except
that the name of the Surviving Corporation shall be "Minnesota Educational
Computing Corporation (MECC)."
Section 2.2 By-Laws. The By-Laws of Sub as in effect at the Effective Time
shall be the By-Laws of the Surviving Corporation until amended in accordance
with applicable law.
Section 2.3 Directors and Officers of Surviving Corporation.
(a) The directors of Sub at the Effective Time shall be the initial
directors of the Surviving Corporation and shall hold office from the
Effective Time until their respective successors are duly elected or appointed
and qualified in the manner provided in the Articles of Incorporation or By-
Laws of the Surviving Corporation or as otherwise provided by law.
(b) The officers of the Company at the Effective Time shall be the initial
officers of the Surviving Corporation and shall hold office from the Effective
Time until their respective successors are duly elected or appointed and
qualified in the manner provided in the Articles of Incorporation or By-Laws
of the Surviving Corporation or as otherwise provided by law.
ARTICLE III
Conversion of Shares
Section 3.1 Exchange Ratio. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof:
(a) Each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than (i) shares to be cancelled in
accordance with Section 3.1(b) and (ii) shares as to which dissenters
rights shall have been duly demanded pursuant to Sections 302A.471 and
302A.473 of the MBCA ("Dissenting Shares")) shall be converted into the
right to receive a number of shares of Common Stock, par value $.01 per
share (the "Parent Common Stock"), of Parent, equal to the result obtained
by dividing $40 by the volume weighted average of the closing prices for
the Parent Common Stock on the Nasdaq National Market ("NNM") for the
twenty full trading days ending on the third full trading day prior to the
Effective Time (the "Exchange Ratio"), payable upon the surrender of the
certificate formerly representing such share of Company Common Stock in
accordance with Section 3.2 hereof; provided, however, that in no event
shall the Exchange Ratio be greater than 1.14286 or less than .88889;
(b) All shares of Company Common Stock that, in either case, are (i) held
by the Company as treasury shares or (ii) owned by Parent or any wholly-
owned Subsidiary of Parent, shall be cancelled and retired and cease to
exist, and no securities of Parent or other consideration shall be
delivered in exchange therefor. As used in this Agreement, the term
"Subsidiary" means, with respect to any party, any corporation or other
organization, whether incorporated or unincorporated, of which (x) such
party or any other Subsidiary of such party is a general partner (excluding
partnerships, the general partnership interests of which held by such party
or any Subsidiary of such party do not have a majority of the voting
interest in such partnership) or (y) at least a majority of the securities
or other interests having by their terms ordinary voting power to elect a
majority of the board of directors or others performing similar functions
with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party and/or one or more of its
Subsidiaries.
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(c) The share of Common Stock, no par value per share ("Sub Common
Stock"), of Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and become one fully paid and nonassessable
share of Common Stock, par value $.01 per share, of the Surviving
Corporation.
(d) Each outstanding option to purchase Company Common Stock (each, a
"Company Stock Option") shall be assumed by Parent as more specifically
provided in Section 7.8.
(e) The holders of Dissenting Shares, if any, shall be entitled to
payment by the Surviving Corporation (or at the election of Parent, by
Parent or an affiliate of Parent) of the fair value of such shares in cash
to the extent permitted by and in accordance with the provisions of
Sections 302A.471 and 302A.473 of the MBCA; provided, however, that (i) if
any holder of Dissenting Shares shall deliver a written withdrawal of such
holder's demand for fair value of such shares, or (ii) if any holder fails
to establish such holder's entitlement to rights to payment as provided in
such Section 302A.473, such holder or holders (as the case may be) shall
forfeit such right to payment for such shares and such shares shall
thereupon be deemed to have been converted into the right to receive shares
of Parent Common Stock pursuant to Section 3.1(a) as of the Effective Time.
Unless Parent shall have made the election referred to in the first
sentence of this Section 3.2(e), the Surviving Corporation shall be solely
responsible for, and shall pay out of its own funds, any amounts which
become due and payable to holders of Dissenting Shares, and such amounts
shall not be paid directly or indirectly by Parent. The Company shall
notify Parent of each demand for dissenters' rights under the MBCA promptly
after such demand is received by the Company.
Section 3.2 Exchange of Company Common Stock; Procedures.
(a) Prior to the Closing Date, Parent shall designate a bank or trust
company reasonably acceptable to the Company to act as Exchange Agent
hereunder (the "Exchange Agent"). As soon as practicable after the Effective
Time, Parent shall deposit with or for the account of the Exchange Agent stock
certificates representing the number of shares of Parent Common Stock issuable
pursuant to Section 3.1 in exchange for outstanding shares of Company Common
Stock, which shares of Parent Common Stock shall be deemed to have been issued
at the Effective Time.
(b) As soon as practicable after the Effective Time, Parent shall cause the
Exchange Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates") that were
converted pursuant to Section 3.1 into the right to receive shares of Parent
Common Stock (i) a form of letter of transmittal specifying that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent and (ii)
instructions for use in surrendering such Certificates in exchange for
certificates representing shares of Parent Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter
of transmittal, duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor (x) a certificate representing that
number of whole shares of Parent Common Stock which such holder has the right
to receive pursuant to the provisions of this Article III, (y) cash in lieu of
any fractional shares of Parent Common Stock to which such holder is entitled
pursuant to Section 3.4, after giving effect to any required tax withholdings,
and the Certificate so surrendered shall forthwith be cancelled and (z) any
dividends or distributions to which such holder may be entitled pursuant to
Section 3.3. In the event of a transfer of ownership of Company Common Stock
which is not registered in the transfer records of the Company, a certificate
representing the proper number of shares of Parent Common Stock may be issued
to a transferee if the Certificate representing such Company Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer, and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 3.2(b), each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender a
certificate representing shares of Parent Common Stock, cash in lieu of any
fractional shares of Parent Common Stock and any dividends or distributions,
which may be payable pursuant to Section 3.3 hereof.
Section 3.3 Dividends; Escheat. No dividends or distributions that are
declared on shares of Parent Common Stock will be paid to persons entitled to
receive certificates representing shares of Parent Common
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Stock until such persons surrender their Certificates. Upon such surrender,
there shall be paid to the person in whose name the certificates representing
such shares of Parent Common Stock shall be issued, any dividends or
distributions with respect to such shares of Parent Common Stock which have a
record date on or after the Effective Time and shall have become payable
between the Effective Time and the time of such surrender. In no event shall
the person entitled to receive such dividends or distributions be entitled to
receive interest thereon. Promptly following the date which is six months
after the Effective Time, the Exchange Agent shall deliver to the Surviving
Corporation all cash, certificates and other documents in its possession
relating to the transactions described in this Agreement, and any holders of
Company Common Stock who have not theretofore complied with this Article III
shall look thereafter only to the Surviving Corporation for the shares of
Parent Common Stock, any dividends or distributions thereon, and any cash in
lieu of fractional shares thereof to which they are entitled pursuant to this
Article III. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of Company Common Stock for any
shares of Parent Common Stock, any dividends or distributions thereon or any
cash in lieu of fractional shares thereof delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
Section 3.4 No Fractional Securities. No certificates or scrip representing
fractional shares of Parent Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional interests shall not entitle
the owner thereof to vote or to any rights of a security holder. In lieu of
any such fractional securities, each holder of Company Common Stock who would
otherwise have been entitled to a fraction of a share of Parent Common Stock
upon surrender of such holder's Certificates will be entitled to receive a
cash payment (without interest) determined by multiplying (i) the fractional
interest to which such holder would otherwise be entitled (after taking into
account all shares of Company Common Stock then held of record by such holder)
and (ii) the average of the per share closing prices for Parent Common Stock
on the NNM for the five trading days immediately preceding the Effective Time.
Section 3.5 Closing of Company Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of shares
of Company Common Stock shall thereafter be made. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged as provided in this Article III.
Section 3.6 Further Assurances. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills
of sale, assignments, assurances or any other actions or things are necessary
or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of Sub or the Company acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with,
the Merger or otherwise to carry out this Agreement, the officers of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of each of Sub and the Company or otherwise, all such deeds,
bills of sale, assignments and assurances and to take and do, in such names
and on such behalves or otherwise, all such other actions and things as may be
necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such rights, properties or assets in the
Surviving Corporation or otherwise to carry out the purposes of this
Agreement.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to Parent and Sub as follows:
Section 4.1 Corporate Organization; Related Entities.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota and has the corporate
power and authority to own or lease its properties and to carry on its
business as it is presently being conducted. Schedule 4.1(a) lists, and the
Company is duly qualified or
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licensed as a foreign corporation to do business and is in good standing in,
every jurisdiction where the character of the Company's properties (owned or
leased) or the nature of its activities makes such qualification or licensure
necessary, except for failures, if any, to be so qualified or licensed which
would not in the aggregate have a Company Material Adverse Effect (as
hereinafter defined).
(b) Except as set forth on Schedule 4.1(b), the Company does not own,
directly or indirectly, any capital stock of any corporation or have any
direct or indirect equity or ownership interest of any kind in any business,
joint venture, partnership or other entity.
(c) The copies of the Articles of Incorporation and By-Laws of the Company
heretofore delivered to Parent are complete and correct copies of such
instruments as presently in effect.
(d) As used in this Agreement, any reference to any event, change or effect
having a "Company Material Adverse Effect" shall mean that such event, change
or effect is, individually or in the aggregate, materially adverse to the
business, operations, prospects, properties, assets (including intangible
assets), liabilities (including contingent liabilities), condition (financial
or other) or results of operations of the Company or to the ability of the
Company to consummate the Merger and the other transactions contemplated by
this Agreement.
Section 4.2 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of the
Company consists of 20,000,000 shares of Company Common Stock, 8,023,080 of
which are issued and outstanding; 1,000,000 shares of Series A redeemable
preferred shares, par value $5.00 per share, none of which are issued or
outstanding; and 9,000,000 undesignated preferred shares, par value $5.00 per
share, none of which are issued or outstanding. As of the date of this
Agreement, 1,365,002 shares of Company Common Stock are reserved for issuance
pursuant to the Company Stock Options and all other employee benefit plans of
the Company. All of the issued and outstanding shares of Company Common Stock
are validly issued, fully paid and nonassessable.
(b) Except as disclosed in this Section 4.2 or on Schedule 4.2(b), (i) there
is no outstanding right, subscription, warrant, call, unsatisfied preemptive
right, option or other agreement or arrangement of any kind to purchase or
otherwise to receive from the Company any of the outstanding authorized but
unissued or treasury shares of the capital stock or any other security of the
Company, (ii) there is no outstanding security of any kind convertible into or
exchangeable for such capital stock, and (iii) there is no voting trust or
other agreement or understanding to which the Company is a party or is bound
with respect to the voting of the capital stock of the Company.
(c) Except as set forth on Schedule 4.2(c), none of the awards, grants or
other agreements pursuant to which Company Stock Options were issued have
provisions which accelerate the vesting or right to exercise such options upon
the execution of this Agreement (including the documents attached as Exhibits
hereto), the consummation of the transactions contemplated hereby (or thereby)
or any other "change of control" or similar events.
Section 4.3 Authority Relative to This Agreement. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by the Company and the consummation by the Company
of the transactions contemplated on its part hereby have been duly authorized
by the Company's Board of Directors and, except for the approval of its
stockholders to be sought at the stockholders meeting contemplated by
Section 7.4(a) with respect to this Agreement, no other corporate proceedings
on the part of the Company are necessary to authorize this Agreement or for
the Company to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by the Company and
constitutes a valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms.
Section 4.4 Consents and Approvals; No Violations. Neither the execution,
delivery and performance of this Agreement by the Company, nor the
consummation by the Company of the transactions contemplated
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hereby, will (i) conflict with or result in any breach of any provisions of
the charter, by-laws or other organizational documents of the Company, (ii)
require a filing with, or a permit, authorization, consent or approval of, any
federal, state, local or foreign court, arbitral tribunal, administrative
agency or commission or other governmental or other regulatory authority or
administrative agency or commission (a "Governmental Entity"), except in
connection with or in order to comply with the applicable provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), for the filing of a registration statement on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act") with respect to
Parent Common Stock to be offered to the Company stockholders, the filing of
the Proxy Statement-Prospectus under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), filings or approvals required under state
securities or "blue sky" laws, the By-Laws of the National Association of
Securities Dealers (the "NASD") and the filing and recordation of Articles of
Merger as required by the MBCA, (iii) except as set forth on Schedule 4.4
hereto, result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, or result in the creation of
any mortgage, pledge, security interest, encumbrance, lien, claim or charge of
any kind or right of others of whatever nature ("Liens"), on any property or
asset of the Company pursuant to, any of the terms, conditions or provisions
of any material note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation (each, a "Contract") to which the
Company is a party or by which it or any of its properties or assets may be
bound or (iv) violate any law, order, writ, injunction, decree, statute, rule
or regulation of any Governmental Entity applicable to the Company or any of
its properties or assets, except, in the case of clauses (ii), (iii) and (iv),
where failures to make such filing or obtain such authorization, consent or
approval would not have, or where such violations, breaches or defaults or
Liens would not have, in the aggregate, a Company Material Adverse Effect.
Section 4.5 Reports and Financial Statements. The Company has timely filed
all reports required to be filed with the Securities and Exchange Commission
(the "SEC") pursuant to the Exchange Act or the Securities Act since March 31,
1994 (collectively, the "Company SEC Reports"), and has previously made
available to Parent true and complete copies of all such Company SEC Reports.
Such Company SEC Reports, as of their respective dates, complied in all
material respects with the applicable requirements of the Securities Act and
the Exchange Act, as the case may be, and none of such Company SEC Reports, as
of their respective dates, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of the Company included in
the Company SEC Reports have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") consistently applied
throughout the periods indicated (except as otherwise noted therein or, in the
case of unaudited statements, as permitted by Form 10-Q of the SEC) and fairly
present (subject, in the case of unaudited statements, to normal recurring
year-end adjustments and any other adjustments described therein) the
financial position of the Company as at the dates thereof and the results of
operations and cash flows of the Company for the periods then ended. Since
March 31, 1994, there has been no change in any of the significant accounting
(including tax accounting) policies, practices or procedures of the Company.
Section 4.6 Absence of Certain Changes or Events. Except as set forth on
Schedule 4.6 or in the Company SEC Reports filed as of the date of this
Agreement, since March 31, 1995, (i) the Company has not conducted its
business and operations other than in the ordinary course of business and
consistent with past practices or taken any actions that, if it had been in
effect, would have violated or been inconsistent with the provisions of
Section 6.1 and (ii) there has not been any fact, event, circumstance or
change affecting or relating to the Company which has had or is reasonably
likely to have a Company Material Adverse Effect. Except as set forth on
Schedule 4.6 or as would not represent a Company Material Adverse Effect, the
transactions contemplated by this Agreement will not constitute a change of
control under or require the consent from or the giving of notice to a third
party pursuant to the terms, conditions or provisions of any Contract to which
the Company is a party.
Section 4.7 Litigation. Except as disclosed on Schedule 4.7 and except for
litigation disclosed in the notes to the financial statements included in the
Company's Annual Report to Stockholders for the fiscal year
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ended March 31, 1995 or in the Company SEC Reports filed subsequent thereto,
as of the date hereof, there is no suit, action, proceeding or investigation
pending or, to the best knowledge of the Company, threatened against the
Company or with respect to which the Company could be required to provide
indemnification or to otherwise contribute to liabilities or damages relating
thereto, the outcome of which could reasonably be expected to have a Company
Material Adverse Effect; nor is there any judgment, decree, injunction, rule
or order of any Governmental Entity outstanding against the Company having, or
which, insofar as can reasonably be foreseen, in the future may have a Company
Material Adverse Effect.
Section 4.8 Absence of Undisclosed Liabilities. Except for liabilities or
obligations which are accrued or reserved against in the Company's financial
statements (or reflected in the notes thereto) included in the Company SEC
Reports or which were incurred after June 30, 1995 in the ordinary course of
business and consistent with past practice, and except as set forth on
Schedule 4.8, the Company has no liabilities or obligations (whether absolute,
accrued, contingent or otherwise) of a nature required by GAAP to be reflected
in a balance sheet (or reflected in the notes thereto) or which could
reasonably be expected to have a Company Material Adverse Effect.
Section 4.9 No Default. Except as set forth in Schedule 4.9, the Company is
not in breach or violation of, or in default under (and no event has occurred
which with notice or lapse of time or both would constitute such a breach,
violation or default), any term, condition or provision of (a) the Company's
Articles of Incorporation or By-Laws, or (b) (x) any order, writ, decree,
statute, rule or regulation of any Governmental Entity applicable to the
Company or any of its properties or assets or (y) any Contract to which the
Company is a party or by which the Company or any of its properties or assets
may be bound, except in the case of this clause (b), which breaches,
violations or defaults, individually or in the aggregate, would not have a
Company Material Adverse Effect. The Company has, and is in compliance with,
all licenses, permits, variances, exemptions, orders, approvals and other
authorizations of all Governmental Entities as are necessary in order to
enable it to own its business and conduct its business as currently conducted
and as currently proposed to be conducted by the Company and to enter into the
transactions contemplated hereby, the lack of which, under applicable law,
rule or regulation, (x) would render legally impermissible the transactions
contemplated hereby or (y) could reasonably be expected to result in the
material impairment of the continued use or exercise by the Company after the
date hereof of any material right used or exercised (or reasonably expected to
be used or exercised) by the Company, in the conduct of the Company's business
as currently conducted and as currently proposed to be conducted by the
Company or (z) could reasonably be expected to have a Company Material Adverse
Effect.
Section 4.10 Taxes.
(a) The Company has heretofore delivered or will make available to Parent
true, correct and complete copies of the federal, state, local and foreign
income, franchise sales and other Tax Returns (as hereinafter defined) filed
by the Company for the period from January 3, 1991 to March 31, 1991, and for
each of the Company's years ended March 31, 1992, 1993 and 1994, inclusive.
(b) Except as disclosed in Schedule 4.10(b):
(i) All returns, declarations, reports, estimates, statements, schedules
or other information or document with respect to Taxes (as hereinafter
defined) (collectively, "Tax Returns") required to be filed by the Company
have been timely filed (giving effect to extensions granted with respect
thereto), and all such Tax Returns are true, correct and complete. The
Company is not required to file any state Tax Returns other than in the
State of Minnesota.
(ii) The Company has timely paid all Taxes due or claimed to be due from
it by any federal, state, local, foreign or other taxing authority.
(iii) There are no liens for Taxes upon the assets of the Company except
Liens for Taxes not yet due and payable.
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(iv) No Tax Returns of the Company have been examined by the Internal
Revenue Service (the "Service"). No deficiency for any Taxes has been
proposed, asserted or assessed against the Company which has not been
resolved and paid in full. There are no outstanding waivers, extensions or
comparable consents regarding the application of the statute of limitations
with respect to any Taxes or Tax Returns that have been given by the
Company (including the time for filing of Tax Returns or paying Taxes).
(v) The Company has not made any change in accounting methods, received a
ruling from any taxing authority or signed an agreement with any taxing
authority which could reasonably be expected to have a Company Material
Adverse Effect.
(vi) The Company has complied in all material respects with all
applicable laws, rules and regulations relating to the payment and
withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to Sections 1441 and 1442 of the Code or similar provisions under
any foreign laws) and has, within the time and the manner prescribed by
law, withheld from employee wages and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over under
applicable laws.
(vii) Other than as set forth in Schedule 4.10(b)(vii), no audit or other
proceeding by any federal, state, local or foreign court, governmental,
regulatory, administrative or similar authority is presently pending with
respect to any Taxes or Tax Return of the Company, and the Company has not
received a written notice of any pending audits or proceedings. Schedule
4.10(b)(vii) shall set forth the nature of any such audit or proceeding,
the type of Tax Return, any deficiencies proposed, asserted or assessed and
the amount thereof and the tax year in question.
(viii) The Company is not a party to, is bound by or has any obligation
under, any Tax sharing, allocation or indemnity agreement or similar
contract or arrangement.
(ix) There are no outstanding requests, agreements, consents or waivers
to extend the statutory period of limitations applicable to the assessment
of any Taxes or deficiencies against the Company.
(x) No power of attorney granted by the Company with respect to any Taxes
is currently in force.
(xi) The Company has not, with regard to any assets or property held,
acquired or to be acquired by any of them, filed a consent to the
application of Section 341(f) of the Code, or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by the
Company.
(xii) The Company has identified for Parent all agreements, contracts and
arrangements with the Company, and has provided to Parent all such
information as of the date hereof concerning the Company and its employees
as may be necessary to enable Parent to determine the amount, if any, of
any "excess parachute payment" within the meaning of Section 280G of the
Code that could result solely from the transactions contemplated by this
Agreement.
(xiii) The Company is not and has not been during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code a "United States real
property holding company" (as defined in Section 897(c)(2) of the Code).
(xiv) The Company has not participated in, or cooperated with, an
"international boycott" within the meaning of Section 999 of the Code.
(xv) The charges, accruals and reserves for Taxes reflected on the books
of the Company are adequate under GAAP to cover the Tax liabilities
accruing or payable by the Company in respect of periods prior to the date
hereof.
(xvi) The Company is not subject to any joint venture, partnership or
other arrangement or contract that is treated as a partnership for U.S.
federal income tax purposes.
(xvii) The Company is not subject to liability for Taxes of any other
person (other than with respect to the Company), including, without
limitation, liability arising from the application of U.S. Treasury
Regulation (S)1.1502-6 or any analogous provision of Tax law.
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(xviii) The shares of Company Common Stock are of "a class of stock that
is regularly traded on an established securities market" within the meaning
of Section 1445(b)(6) of the Code.
(c) For purposes of this Agreement, "Taxes" (including, with correlative
meaning, the term "Tax") shall include all taxes, charges, fees, levies or
other assessments, including, without limitation, all net income, gross
income, gross receipts, sales, use, service, service use, ad valorem,
transfer, franchise, profits, license, withholding, social security, payroll,
employment, excise, estimated, severance, stamp, recording, occupation,
property or other taxes, customs duties, fees, assessments or charges of any
kind whatsoever, whether computed on a separate consolidated, unitary,
combined or other basis, together with any interest, fines, penalties,
additions to tax or other additional amounts imposed thereon or with respect
thereto imposed by any taxing authority (domestic or foreign).
Section 4.11 Intellectual Property. The Company owns, licenses or otherwise
has such rights to use, sell, license or dispose of all industrial and
intellectual property rights, including without limitation all patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyrights, copyright registrations,
computer programs, content and other computer software (including CD-ROMs),
source code and object code for the software programs already published,
currently being published, or proposed to be published by the Company,
technology, know-how, trade secrets, proprietary processes and formulae
(collectively, "Intellectual Property") as are material to the conduct of the
business of the Company as currently conducted. Set forth on Schedule 4.11 is
a true and complete listing of (i) all titles currently marketed by the
Company, whether owned by the Company or licensed from others, indicating
which are owned by the Company and, for any that are licensed from others, the
identity of the licensor, (ii) all of the Company's registered trademarks and
pending applications for trademark registrations, (iii) trademarks that are
used in conjunction with the titles currently marketed by the Company and are
licensed from third parties, indicating the identity of the licensor, and (iv)
the Company's registered copyrights and pending applications for copyright
registration. The rights of the Company to all such Intellectual Property are
in full force. Except as set forth on Schedule 4.11:
(a) the Company has the rights to bring actions for the infringement of
its rights to the Intellectual Property necessary to protect such rights in
the Intellectual Property, with such exceptions as could not reasonably be
expected to have in the aggregate a Company Material Adverse Effect;
Schedule 4.11(a) sets forth a list, for the period from April 1, 1995
through September 30, 1995, of the twenty-one titles the distribution of
which generated for the Company the highest net revenue during such period,
such twenty-one titles accounting for at least 65% of the net revenue
generated from distribution of titles during such period, indicating the
net revenue generated during such period attributable to each of such
titles, and the aggregate amount of all ongoing, periodic royalties,
honoraria, fees or other payments paid by the Company during such period
for each such title to any individual, corporation, partnership, joint
venture, association, organization or other entity by reason of ownership,
use, licensure, sale or disposition of any Intellectual Property contained
in or relating to the use, sale or license of such title; and the
consummation of the transactions contemplated hereby will not (i) give rise
to any right of termination, amendment, renegotiation, cancellation or
acceleration with respect to any license or other agreement to use, sell,
license or dispose of such Intellectual Property which could reasonably be
expected to have in the aggregate a Company Material Adverse Effect or (ii)
in any way impair any currently existing right of the Company to use, sell,
license or dispose of or to bring any action for the infringement of any of
the rights of the Company to the Intellectual Property or any portion
thereof;
(b) none of the former or present employees, officers or directors of the
Company holds any right, title or interest, directly or indirectly, in
whole or in part, in or to any Intellectual Property owned by the Company;
the Company does not license from any present or, to the Company's
knowledge, former employees, officers or directors of the Company any
Intellectual Property which is necessary for the business of the Company as
presently conducted; the Company is not a party to any employment contract,
patent disclosure agreement or any other contract or agreement with any
employee of the Company relating to any Intellectual Property;
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(c) each license and other agreement with respect to the use of any
Intellectual Property currently used in the Company's business is a valid,
legally binding obligation of the Company and, to the best knowledge of the
Company, all other parties thereto, enforceable in accordance with its
terms, with such exceptions as could not reasonably be expected to have in
the aggregate a Company Material Adverse Effect and except as enforcement
may be limited by general principles of equity whether applied in a court
of law or a court of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally, and the Company is not
in breach, violation or default thereof (and no event has occurred which
with the giving of notice or the passage of time or both would constitute
such a breach, violation or default or give rise to any right of
termination, amendment, renegotiation, cancellation or acceleration under
any such license or agreement), and the Company has no reason to believe
that any other party to any such license or other agreement is in breach,
violation or default thereof, other than, in each case, such breaches,
violations and defaults as could not reasonably be expected to have in the
aggregate a Company Material Adverse Effect;
(d) the manufacture, marketing, use, sale, licensure or disposition of
any Intellectual Property in the manner currently used, sold, licensed or
disposed of by the Company or in the manner currently proposed to be used,
sold, licensed or disposed of by the Company does not and will not violate
any license or agreement between the Company and any third party or to the
knowledge of the Company based on representations and warranties from third
parties from whom Intellectual Property is licensed by the Company,
infringe on the rights of any person, nor has such an infringement been
alleged within three years preceding the date of this Agreement (other than
such as have been resolved); there is no pending or threatened claim or
litigation challenging or questioning the validity, ownership or right to
use, sell, license or dispose of any Intellectual Property in the manner in
which currently used, sold, licensed or disposed of by the Company, nor is
there a valid basis for any such claim or litigation, nor has the Company
received any notice asserting that the proposed use, sale, license or
disposition by the Company of any of the Intellectual Property of the
Company conflicts or will conflict with the rights of any other party, nor
is there a valid basis for any such assertion in each case, with such
exceptions as could not reasonably be expected in the aggregate to have a
Company Material Adverse Effect; and the Company has not asserted any claim
of infringement, misappropriation or misuse within the past three years.
Section 4.12 Stockholder Rights Plan. The Company has not proposed, adopted,
approved or implemented any stockholder rights plan, or authorized the
issuance of any similar dividend or the distribution of any securities to its
stockholders, or entered into any agreement with respect to the foregoing (any
such plan, authorization, dividend, distribution or agreement being referred
to herein as a "Stockholder Rights Plan"), which could have the effect of
restricting, prohibiting, impeding or otherwise affecting the consummation of
the transactions contemplated by this Agreement or the Voting Agreement, in
each case by the respective parties thereto.
Section 4.13 Information in Disclosure Documents and Registration
Statement. None of the information to be supplied by the Company for inclusion
in (i) the Registration Statement to be filed with the SEC by Parent on Form
S-4 under the Securities Act for the purpose of registering the shares of
Parent Common Stock to be issued in connection with the Merger (the
"Registration Statement") or (ii) the joint proxy statement-prospectus to be
distributed in connection with Parent's and the Company's meetings of
stockholders to vote upon this Agreement (the "Proxy Statement-Prospectus")
will, in the case of the Registration Statement, at the time it becomes
effective and at the Effective Time, or, in the case of the Proxy Statement-
Prospectus or any amendments thereof or supplements thereto, at the time of
the mailing of the Proxy Statement-Prospectus and any amendments or
supplements thereto, and at the time of the meeting of stockholders of the
Company to be held in connection with the Merger, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy Statement-
Prospectus will comply as to form in all material respects with the applicable
provisions of the Exchange Act, and the rules and regulations promulgated
thereunder, except that no representation is made by the Company with respect
to statements made
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therein based on information supplied by Parent or its representatives for
inclusion in the Proxy Statement- Prospectus or with respect to information
concerning Parent or any of the Parent Subsidiaries incorporated by reference
in the Proxy Statement-Prospectus.
Section 4.14 Employee Benefit Plans; ERISA.
(a) Schedule 4.14 hereto sets forth a true and complete list of each
employee benefit plan, arrangement or agreement that is maintained, or was
maintained or contributed to at any time during the six (6) calendar years
preceding the date of this Agreement (the "Company Plans"), by the Company or
by any trade or business, whether or not incorporated (an "ERISA Affiliate"),
which together with the Company would be deemed a "single employer" within the
meaning of Section 4001 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Neither the Company nor any ERISA Affiliate has
any formal plan or commitment to create any additional plan or modify any
existing Company Plan.
(b) Each of the Company Plans that is subject to ERISA is in compliance with
ERISA in all material respects; each of the Company Plans intended to be
"qualified" within the meaning of Section 401(a) of the Code is so qualified,
no event has occurred which may affect such qualification and the trusts
maintained thereunder are exempt from taxation under Section 501(a) of the
Code; no Company Plan has an accumulated or waived funding deficiency within
the meaning of Section 412 of the Code; neither the Company nor an ERISA
Affiliate has incurred, directly or indirectly, any material liability
(including any material contingent liability) to or on account of a Company
Plan pursuant to Title IV of ERISA; no proceedings have been instituted to
terminate any Company Plan that is subject to Title IV of ERISA; no
"reportable event," as such term is defined in Section 4043(b) of ERISA, has
occurred with respect to any Company Plan; and no condition exists that
presents a material risk to the Company or an ERISA Affiliate of incurring a
liability to or on account of a Company Plan pursuant to Title IV of ERISA.
(c) The current value of the assets of each of the Company Plans that are
subject to Title IV of ERISA, based upon the actuarial assumptions (to the
extent reasonable) presently used by the Company Plans, exceeds the present
value of the accrued benefits under each such Company Plan; no Company Plan is
a multiemployer plan (within the meaning of Section 4001(a)(3) of ERISA) and
no Company Plan is a multiple employer plan as defined in Section 413 of the
Code; and all contributions or other amounts payable by the Company as of the
Effective Time with respect to each Company Plan in respect of current or
prior plan years have been either paid or accrued on the balance sheet of the
Company. There are no pending, threatened or anticipated claims (other than
routine claims for benefits) by, on behalf of or against any of the Company
Plans or any trusts related thereto.
(d) Neither the Company nor any ERISA Affiliate, nor any Company Plan, nor
any trust created thereunder, nor any trustee or administrator thereof has
engaged in a transaction in connection with which the Company or any ERISA
Affiliate, any Company Plan, any such trust, or any trustee or administrator
thereof, or any party dealing with any Company Plan or any such trust could be
subject to either a material civil penalty assessed pursuant to Section 409 or
502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976 of
the Code. No amounts payable under the Company Plans will, individually or in
the aggregate, fail to be deductible for federal income tax purposes by virtue
of Section 280G of the Code. No Company Plan provides death or medical
benefits (whether or not insured), with respect to current or former employees
of the Company or any ERISA Affiliate beyond their retirement or other
termination of service other than (i) coverage mandated by applicable law or
(ii) death benefits under any "employee pension plan," as that term is defined
in section 3(2) of ERISA. The consummation of the transactions contemplated by
this Agreement will not (i) entitle any current or former employee or officer
of the Company or any ERISA Affiliate to severance pay, unemployment
compensation or any other payment, except as expressly provided in this
Agreement or (ii) accelerate the time of payment or vesting, or increase the
amount of compensation due any such employee or officer.
Section 4.15 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock is the only vote of
the holders of any class or series of the Company's capital stock
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necessary to approve the Merger. The Board of Directors of the Company (at a
meeting duly called and held) has unanimously (i) approved this Agreement,
(ii) determined that the transactions contemplated hereby are in the best
interests of the holders of Company Common Stock and (iii) determined to
recommend this Agreement, the Merger and the other transactions contemplated
hereby to such holders for approval and adoption.
Section 4.16 Opinion of Financial Advisor. The Company has received the
opinion of Allen & Company Incorporated ("Allen & Company"), dated October 30,
1995, substantially to the effect that the consideration to be received in the
Merger by the holders of Company Common Stock is fair to such holders from a
financial point of view, a copy of which opinion has been delivered to Parent.
Section 4.17 MBCA Sections 302A.671 and 302A.673. Prior to the date hereof,
the full Board of Directors of the Company has approved this Agreement and,
assuming that Parent is not, and prior to the Effective Time will not be, the
"beneficial owner" (as such term is defined in Section 302A.011 of the MBCA)
of any shares of Company Common Stock other than pursuant to the Voting
Agreement, the Merger and the other transactions contemplated hereby will not
be subject to the provisions of Section 302A.671 or Section 302A.673 of the
MBCA.
Section 4.18 Affiliate Transactions. Except as disclosed in the Company SEC
Reports, there are no material Contracts or other transactions between the
Company, on the one hand, and any (i) officer or director of the Company, (ii)
record or beneficial owner of five percent or more of the voting securities of
the Company or (iii) affiliate (as such term is defined in Regulation 12b-2
promulgated under the Exchange Act) of any such officer, director or
beneficial owner, on the other hand.
Section 4.19 Brokers. Except for its financial advisor, Allen & Company, no
broker, finder or financial advisor is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company.
ARTICLE V
Representations and Warranties of Parent
Parent represents and warrants to the Company as follows:
Section 5.1 Organization. (a) Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the corporate power to carry on its business as it is now being
conducted or presently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease
or the nature of its activities make such qualification necessary, except
where the failure to be so qualified will not have a Parent Material Adverse
Effect (as hereinafter defined). Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota. Sub
has not engaged in any business (other than in connection with this Agreement
and the transactions contemplated hereby) since the date of its incorporation.
(b) Schedule 5.1(b) lists all of the Subsidiaries of Parent which would be
required to be set forth as an exhibit to Parent's Annual Report on Form 10-K
pursuant to the rules and regulations under the Exchange Act (the "Parent
Subsidiaries"). Each of the Parent Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization or incorporation and has the corporate power and
authority to own or lease its properties and to carry on its business as it is
presently being conducted, except for failures, if any, to be so organized,
validly existing or in good standing or to have such corporate power and
authority which would not in the aggregate have a Parent Material Adverse
Effect.
(c) The copies of the Certificate of Incorporation and By-Laws of Parent
heretofore delivered to the Company are complete and correct copies of such
instruments as presently in effect.
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(d) As used in this Agreement, any reference to any event, change or effect
having a "Parent Material Adverse Effect" shall mean that such event, change
or effect is, individually or in the aggregate, materially adverse to the
business, operations, prospects, properties, assets (including intangible
assets), liabilities (including contingent liabilities), condition (financial
or other) or results of operations of the Parent and the Parent Subsidiaries
taken as a whole or to the ability of Parent to consummate the Merger and the
other transactions contemplated by this Agreement.
Section 5.2 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of Parent
consists of 60,000,000 shares of Parent Common Stock, of which 25,152,779
shares are issued and outstanding; 5,000,000 shares of Preferred Stock, par
value $.01 per share, none of which are issued and outstanding and one share
of special voting stock, par value $1.00 per share (the "Special Voting
Share") which is issued and outstanding. The Special Voting Share entitles the
holder thereof, a Parent Subsidiary, to vote, together with the holders of
Parent Common Stock, on all matters submitted for the vote of the holders of
Parent Common Stock. The number of votes represented by the Special Voting
Share is equal to the number of shares of such Parent Subsidiary outstanding
which are exchangeable into shares of Parent Common Stock. As of the date of
this Agreement, options to acquire 3,317,331 shares of Parent Common Stock
(the "Parent Stock Options") are outstanding under all stock option plans of
Parent; 4,128,719 shares of Parent Common Stock are reserved for issuance
pursuant to the Parent Stock Options and all other employee benefit plans of
Parent and Parent Common Stock warrants; 1,641,082 shares of Parent Common
Stock are reserved for issuance related to shares of capital stock of a Parent
Subsidiary exchangeable into shares of Parent Common Stock; and 7,594,340
shares of Parent Common Stock are reserved for issuance in exchange for
Parent's 5 1/2% Senior Convertible Notes due 2000. All of the shares of Parent
Common Stock issuable in exchange for shares of Company Common Stock at the
Effective Time in accordance with this Agreement will be, when so issued, duly
authorized, validly issued, fully paid and nonassessable.
(b) The authorized capital stock of Sub consists of one share of Sub Common
Stock, which share, as of the date hereof, is issued and outstanding, owned by
Parent and is validly issued, fully paid and nonassessable.
(c) Except as disclosed in this Section 5.2 or in the Parent SEC Reports (as
hereinafter defined), (i) there is no outstanding right, subscription,
warrant, call, unsatisfied preemptive right, option or other agreement or
arrangement of any kind to purchase or otherwise to receive from Parent or Sub
any of the outstanding authorized but unissued or treasury shares of the
capital stock or any other security of Parent or Sub, (ii) there is no
outstanding security of any kind convertible into or exchangeable for such
capital stock, and (iii) other than the Voting and Exchange Trust Agreement
dated as of February 4, 1994 among Parent, SoftKey Software Products Inc. and
the R-M Trust Company with respect to the Special Voting Share, there is no
voting trust or other agreement or understanding to which Parent or Sub is a
party or is bound with respect to the voting of the capital stock of Parent or
Sub.
(d) Except for qualifying shares required by certain foreign jurisdictions,
all of the issued and outstanding capital stock of each of the Parent
Subsidiaries has been validly issued, is fully paid and nonassessable and is
owned of record and beneficially, directly or indirectly, by Parent, free of
any Liens, preemptive rights or other restrictions with respect thereto.
Section 5.3 Authority Relative to This Agreement. Each of Parent and Sub has
the requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by each of Parent and Sub and the
consummation by Parent and Sub of the transactions contemplated on their part
hereby have been duly authorized by their respective Boards of Directors, and
by Parent as the sole stockholder of Sub, and, except for the approval of
Parent's stockholders (including the votes represented by the Special Voting
Share) to be sought at the stockholders' meeting contemplated by Section
7.4(b), no other corporate proceedings on the part of Parent or Sub are
necessary to authorize this Agreement or for Parent and Sub to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Parent and
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Sub and constitutes a valid and binding agreement of each of Parent and Sub,
enforceable against Parent and Sub in accordance with its terms.
Section 5.4 Consents and Approvals; No Violations. Neither the execution,
delivery and performance of this Agreement by Parent or Sub, nor the
consummation by Parent or Sub of the transactions contemplated hereby will (i)
conflict with or result in any breach of any provisions of (x) the Certificate
of Incorporation or By-Laws of Parent or of Sub or (y) the organizational
documents of the Parent Subsidiaries, (ii) require a filing with, or a permit,
authorization, consent or approval of, any Governmental Entity except in
connection with or in order to comply with the applicable provisions of the
HSR Act, the filing of the Proxy Statement-Prospectus under the Exchange Act,
filings or approvals required under state or foreign laws relating to
takeovers, if applicable, state securities or "blue sky" laws, the By-Laws of
the NASD, and the filing and recordation of Articles of Merger as required by
the MBCA, (iii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation or acceleration) under, or result in the
creation of a Lien on any property or asset of Parent or any Parent
Subsidiaries pursuant to, any of the terms, conditions or provisions of any
material Contract to which Parent or Sub or any other Parent Subsidiary is a
party or by which any of them or any of their properties or assets may be
bound or (iv) violate any law, order, writ, injunction, decree, statute, rule
or regulation of any Governmental Entity applicable to Parent, Sub or any
other Parent Subsidiary or any of their properties or assets, except, in the
case of clauses (ii), (iii) and (iv), where the failure to make such filing or
obtain such authorization, consent or approval would not have, or where such
violations, breaches or defaults or Liens would not have, in any such case, a
Parent Material Adverse Effect.
Section 5.5 Reports and Financial Statements. Parent has timely filed all
reports required to be filed with the SEC pursuant to the Exchange Act or the
Securities Act since January 1, 1994 (collectively, the "Parent SEC Reports"),
and has previously made available to the Company true and complete copies of
all such Parent SEC Reports. Such Parent SEC Reports, as of their respective
dates, complied in all material respects with the applicable requirements of
the Securities Act and the Exchange Act, as the case may be, and none of such
SEC Reports contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Parent included in the Parent SEC
Reports have been prepared in accordance with GAAP consistently applied
throughout the periods indicated (except as otherwise noted therein or, in the
case of unaudited statements, as permitted by Form 10-Q of the SEC) and fairly
present (subject, in the case of unaudited statements, to normal, recurring
year-end adjustments and any other adjustments described therein) the
consolidated financial position of Parent and its consolidated Subsidiaries as
at the dates thereof and the consolidated results of operations and cash flows
of Parent and its consolidated Subsidiaries for the periods then ended. Since
January 1, 1994, there has been no change in any of the significant accounting
(including tax accounting) policies, practices or procedures of the Parent or
any of its consolidated Subsidiaries.
Section 5.6 Absence of Certain Changes or Events; Material
Agreements. Except as set forth in the Parent SEC Reports filed as of the date
of this Agreement, since December 31, 1994, (i) neither Parent nor the Parent
Subsidiaries has conducted its business and operations other than in the
ordinary course of business and consistent with past practices (except for the
discontinuation of operations in certain Subsidiaries acquired by Parent) and
(ii) there has not been any fact, event, circumstance or change affecting or
relating to Parent and the Parent Subsidiaries which has had or is reasonably
likely to have a Parent Material Adverse Effect.
Section 5.7 Absence of Undisclosed Liabilities. Except for liabilities or
obligations which are accrued or reserved against in Parent's financial
statements (or reflected in the notes thereto) included in the Parent SEC
Reports filed as of the date of this Agreement or which were incurred after
June 30, 1995 in the ordinary course of business and consistent with past
practices, none of Parent and the Parent Subsidiaries has any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of a nature
required by GAAP to be reflected in a consolidated balance sheet (or reflected
in the notes thereto) or which could reasonably be expected to have a Parent
Material Adverse Effect.
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Section 5.8 No Default. Neither Parent nor any Parent Subsidiary is in
breach or violation, or in default under (and no event has occurred which with
notice or the lapse of time or both would constitute such a breach, default or
violation) of any term, condition or provision of (a) the Parent's Certificate
of Incorporation or By-Laws, or (b) (x) any order, writ, decree, statute, rule
or regulation of any Governmental Entity applicable to Parent or any Parent
Subsidiary or any of their properties or assets or (y) any Contract to which
the Parent or a Parent Subsidiary is a party or by which Parent or a Parent
Subsidiary or any of their properties or assets may be bound except in the
case of this clause (b), which breaches, violations or defaults, individually
or in the aggregate, would not have a Parent Material Adverse Effect.
Section 5.9 Information in Disclosure Documents and Registration
Statement. None of the information to be supplied by Parent or Sub for
inclusion in (i) the Registration Statement or (ii) the Proxy Statement-
Prospectus will in the case of the Registration Statement, at the time it
becomes effective and at the Effective Time, or, in the case of the Proxy
Statement-Prospectus or any amendments thereof or supplements thereto, at the
time of the mailing of the Proxy Statement-Prospectus and any amendments or
supplements thereto, and at the time of the meeting of stockholders of Parent
to be held in connection with the Merger, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Registration
Statement and the Proxy Statement-Prospectus will comply as to form in all
material respects with the applicable provisions of the Securities Act and the
Exchange Act, and the rules and regulations promulgated thereunder, except
that no representation is made by Parent with respect to statements made
therein based on information supplied by the Company or its representatives
for inclusion in the Registration Statement or the Proxy Statement-Prospectus
or with respect to information concerning the Company incorporated by
reference in the Registration Statement or the Proxy Statement-Prospectus.
Section 5.10 Vote Required. The affirmative vote of the holders of a
majority of the shares of Parent Common Stock (including the votes represented
by the Special Voting Share) present in person or represented by proxy at the
stockholders meeting of Parent contemplated by Section 7.4(b) (provided that
the shares so present or represented constitute a majority of the outstanding
shares of Parent Common Stock) is the only vote of the holders of any class or
series of Parent capital stock necessary to approve the issuance of shares of
Parent Common Stock pursuant to the Merger. The affirmative vote of Parent, as
the sole stockholder of all outstanding shares of Sub Common Stock, is the
only vote of the holders of any class or series of Sub capital stock necessary
to approve the Merger. The Board of Directors of Parent (at a meeting duly
called and held) has unanimously (i) approved this Agreement, (ii) determined
that the transactions contemplated hereby are fair to and in the best
interests of Parent and the holders of Parent Common Stock, and (iii)
determined to cause Parent, as the sole stockholder of Sub, to approve and
adopt this Agreement. The Board of Directors of Sub (by unanimous written
consent) has approved this Agreement.
Section 5.11 Opinion of Financial Advisor. Parent has received the opinion
of Bear, Stearns & Co. Inc. ("Bear Stearns"), dated October 30, 1995,
substantially to the effect that the Merger is fair to the stockholders of
Parent from a financial point of view, a copy of which opinion has been
delivered to the Company.
ARTICLE VI
Conduct of Business Pending the Merger
Section 6.1 Conduct of Business by the Company Pending the Merger. Prior to
the Effective Time, unless Parent shall otherwise agree in writing, or as set
forth on Schedule 6.1 or as otherwise expressly contemplated by this
Agreement:
(a) The Company shall conduct its business only in the ordinary and usual
course consistent with past practice, and the Company shall use its
reasonable efforts to preserve intact the present business organization,
keep available the services of its present officers and key employees, and
preserve the goodwill of those having business relationships with it; the
Company shall not hire any person to any
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position within the Company or as a consultant to the Company where the
total annual compensation payable to such person, whether in cash or
otherwise, would exceed $75,000;
(b) the Company shall not (i) amend its charter, by-laws or other
organizational documents, (ii) split, combine or reclassify any shares of
its outstanding capital stock, (iii) declare, set aside or pay any dividend
or other distribution payable in cash, stock or property, or (iv) directly
or indirectly redeem or otherwise acquire any shares of its capital stock;
(c) the Company shall not (i) authorize for issuance, issue or sell or
agree to issue or sell any shares of, or rights or securities of any kind
to acquire, rights or securities convertible into any shares of, its
capital stock (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise),
except for the issuance of shares of Company Common Stock upon the exercise
of Company Stock Options outstanding on the date of this Agreement; (ii)
merge or consolidate with another entity (other than transactions pending
as of the date hereof that have been disclosed to Parent); (iii) acquire or
purchase an equity interest in or a substantial portion of the assets of
another corporation, partnership or other business organization or
otherwise acquire any assets outside the ordinary and usual course of
business and consistent with past practice or otherwise enter into any
material contract, commitment or transaction outside the ordinary and usual
course of business consistent with past practice; (iv) sell, lease,
license, waive, release, transfer, encumber or otherwise dispose of any of
its assets outside the ordinary and usual course of business and consistent
with past practice; (v) incur, assume or prepay any material indebtedness
or any other material liabilities other than in the ordinary course of
business and consistent with past practice; (vi) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently
or otherwise) for the obligations of any other person in the ordinary
course of business and consistent with past practice; (vii) make any loans,
advances or capital contributions to, or investments in, any other person;
(viii) authorize or make capital expenditures in excess of the amounts
currently budgeted therefor; (ix) permit any insurance policy naming the
Company as a beneficiary or a loss payee to be cancelled or terminated
other than in the ordinary course of business; or (x) enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing;
(d) the Company shall not (i) adopt, enter into, terminate or amend
(except as may be required by applicable law) any Company Plan or other
arrangement for the current or future benefit or welfare of any director,
officer or current or former employee, (ii) increase in any manner the
compensation or fringe benefits of, or pay any bonus to, any director,
officer or employee (except for normal increases in salaried compensation
in the ordinary course of business consistent with past practice), or (iii)
take any action to fund or in any other way secure, or to accelerate or
otherwise remove restrictions with respect to, the payment of compensation
or benefits under any employee plan, agreement, contract, arrangement or
other Company Plan (including the Company Stock Options);
(e) the Company shall not take any action with respect to, or make any
material change in, its accounting policies or procedures;
(f) the Company shall not knowingly take any action which would
jeopardize qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code;
(g) the Company shall not make any Tax election or settle or compromise
any income Tax liability or file any income tax return prior to the last
day (including extensions) prescribed by law, in the case of any of the
foregoing, material to the business, financial condition or results of
operations of the Company;
(h) the Company shall not propose, adopt, approve or implement any
Stockholder Rights Plan which could have the effect of restricting,
prohibiting, impeding or otherwise affecting the consummation of the
transactions contemplated by this Agreement or the Voting Agreement, in
each case by the respective parties thereto.
Section 6.2 Conduct of Business by Parent Pending the Merger. Prior to the
Effective Time, unless the Company shall otherwise agree in writing, or as
otherwise expressly contemplated by this Agreement:
(a) the business of Parent and the Parent Subsidiaries shall be conducted
only in the ordinary and usual course consistent with past practice, and
Parent shall use its reasonable efforts to preserve intact the present
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business organization, to keep available the services of its present
officers and key employees, and preserve the goodwill of those having
business relationships with it;
(b) Parent shall not declare, set aside or pay any dividend or other
distribution payable in cash, stock or property;
(c) Parent shall not split, combine or reclassify the outstanding Parent
Common Stock;
(d) neither Parent nor Sub shall take any action with respect to, or make
any material change in, its accounting policies or procedures;
(e) neither Parent nor Sub shall knowingly take any action which would
jeopardize qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
Section 6.3 Conduct of Business of Sub. During the period from the date of
this Agreement to the Effective Time, Sub shall not engage in any activities
of any nature except as provided in or contemplated by this Agreement.
ARTICLE VII
Additional Agreements
Section 7.1 Access and Information. Each of the Company and Parent shall
(and shall cause its Subsidiaries and its and their respective officers,
directors, employees, auditors and agents to) afford to the other and to the
other's officers, employees, financial advisors, legal counsel, accountants,
consultants and other representatives reasonable access during normal business
hours throughout the period prior to the Effective Time to all of its books
and records (other than privileged documents and subject to any
confidentiality provisions applicable to communications between any party and
its counsel) and its properties, plants and personnel and, during such period,
each shall furnish promptly to the other a copy of each report, schedule and
other document filed or received by it pursuant to the requirements of federal
securities laws, provided that no investigation pursuant to this Section 7.1
shall affect any representations or warranties made herein or the conditions
to the obligations of the respective parties to consummate the Merger. Unless
otherwise required by law, each party agrees that it (and its Subsidiaries and
its and their respective representatives) shall hold in confidence all non-
public information so acquired in accordance with the terms of the
confidentiality agreement, dated October 18, 1995 between Parent and the
Company (the "Confidentiality Agreement").
Section 7.2 No Other Negotiations. (a) Upon execution of this Agreement, the
Company is not engaged in or shall immediately terminate, any discussions with
any third party concerning an Alternative Acquisition (as defined below). From
and after the date of this Agreement until the earlier of the Effective Time
or the termination of this Agreement in accordance with its terms, the Company
shall not, directly or indirectly, (a) solicit, engage in discussions or
negotiate with any person (whether such discussions or negotiations are
initiated by the Company or otherwise) or take any other action intended or
designed to facilitate the efforts of any person, other than Parent, relating
to the possible acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its capital stock or assets (with any such efforts by any such person,
including a firm proposal to make such an acquisition, to be referred to as an
"Alternative Acquisition"), (b) provide information with respect to the
Company to any person, other than Parent, relating to a possible Alternative
Acquisition by any person, other than Parent, (c) enter into an agreement with
any person, other than Parent, providing for a possible Alternative
Acquisition, or (d) make or authorize any statement, recommendation or
solicitation in support of any possible Alternative Acquisition by any person,
other than by Parent.
Notwithstanding the foregoing, the restrictions set forth in this Agreement
shall not prevent the Board of Directors of the Company (or its agents
pursuant to its instructions) from taking any of the following actions: (a)
furnishing information concerning the Company and its business, properties and
assets to any third party or (b) negotiating with such third party concerning
an Alternative Acquisition provided that all of the following events
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shall have occurred: (1) such third party has made a written proposal to the
Board of Directors of the Company (which proposal may be conditional) to
consummate an Alternative Acquisition which proposal identifies a price or
range of values to be paid for the outstanding securities or substantially all
of the assets of the Company, and if consummated, based on the advice of the
Company's investment bankers, the Board of Directors of the Company has
determined is financially more favorable to the stockholders of the Company
than the terms of the Merger (a "Superior Proposal"); (2) the Company's Board
of Directors has determined, based on the advice of its investment bankers,
that such third party is financially capable of consummating such Superior
Proposal; (3) the Board of Directors of the Company shall have determined,
after consultation with its outside legal counsel, that the fiduciary duties
of the Board of Directors of the Company require the Company to furnish
information to and negotiate with such third party; and (4) Parent shall have
been notified in writing of such Superior Proposal, including all of its terms
and conditions, and shall have been given copies of such proposal.
Notwithstanding the foregoing, the Company shall not provide any non-public
information to such third party unless (1) the Company has prior to the date
thereof provided such information to Parent's representatives; (2) the Company
has notified Parent in advance of any such proposed disclosure of non-public
information to any such third party, with a description of the information
proposed to be disclosed; and (3) the Company provides such non-public
information pursuant to a nondisclosure agreement with terms which are at
least as restrictive as the nondisclosure agreement heretofore entered into
between Parent and the Company.
In addition to the foregoing, the Company shall not accept or enter into any
agreement concerning an Alternative Acquisition for a period of not less than
48 hours after Parent's receipt of a copy of such proposal of an Alternative
Acquisition. Upon compliance with the foregoing, the Company shall be entitled
to (1) not recommend or change its recommendation concerning the Merger; and
(2) enter into an agreement with such third party concerning an Alternative
Acquisition provided that the Company shall immediately make payment in full
to Parent of the Termination Fee as defined in Section 9.2(b) below.
(b) If the Company receives any unsolicited offer or proposal to enter into
discussions or negotiations relating to an Alternative Acquisition, the
Company shall notify Parent thereof within twenty-four hours of the Company's
receipt thereof, including information as to the identity of the party making
any such offer or proposal and the specific terms of such offer or proposal,
as the case may be.
The Company shall be entitled to provide copies of this Section 7.2 to third
parties who on an entirely unsolicited basis after the date hereof, contact
the Company concerning an Alternative Acquisition; provided that Parent shall
concurrently be notified of such contact and the delivery of such copy.
Section 7.3 Registration Statement. As promptly as practicable, Parent and
the Company shall in consultation with each other prepare and file with the
SEC the Proxy Statement-Prospectus and Parent, in consultation with the
Company, shall prepare and file with the SEC the Registration Statement. Each
of Parent and the Company shall use its reasonable best efforts to have the
Registration Statement declared effective as soon as practicable. Parent shall
also use its reasonable best efforts to take any action required to be taken
under state securities or blue sky laws in connection with the issuance of the
shares of Parent Common Stock pursuant to this Agreement in the Merger. The
Company shall furnish Parent with all information concerning the Company and
the holders of its capital stock and shall take such other action as Parent
may reasonably request in connection with the Registration Statement and the
issuance of shares of Parent Common Stock. If at any time prior to the
Effective Time any event or circumstance relating to Parent, any Subsidiary of
Parent, the Company, or their respective officers or directors, should be
discovered by such party which should be set forth in an amendment or a
supplement to the Registration Statement or the Proxy Statement-Prospectus,
such party shall promptly inform the other thereof and take appropriate action
in respect thereof.
Section 7.4 Proxy Statement-Prospectus; Stockholder Approvals.
(a) The Company, acting through its Board of Directors, shall, subject to
and in accordance with applicable law and its Articles of Incorporation and
By-Laws, promptly and duly call, give notice of, convene and hold as soon as
practicable following the date upon which the Registration Statement becomes
effective a meeting of the
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holders of Company Common Stock for the purpose of voting to approve and adopt
this Agreement and the transactions contemplated hereby, and, subject to the
fiduciary duties of the Board of Directors of the Company under applicable law
as advised by outside legal counsel, (i) recommend approval and adoption of
this Agreement and the transactions contemplated hereby by the stockholders of
the Company and include in the Proxy Statement-Prospectus such recommendation,
and (ii) take all reasonable and lawful action to solicit and obtain such
approval.
(b) Parent, acting through its Board of Directors, shall, subject to and in
accordance with applicable law and its Certificate of Incorporation and By-
Laws, promptly and duly call, give notice of, convene and hold as soon as
practicable following the date upon which the Registration Statement becomes
effective a meeting of the holders of Parent Common Stock for the purpose of
voting to approve the issuance of the shares of Parent Common Stock to be
issued in the Merger, and, subject to the fiduciary duties of the Board of
Directors of Parent under applicable law as advised by outside counsel, (i)
recommend approval of such issuance by the stockholders of Parent and include
in the Proxy Statement-Prospectus such recommendation, and (ii) take all
reasonable and lawful action to solicit and obtain such approval.
(c) Parent and the Company, as promptly as practicable (or with such other
timing as Parent and the Company mutually agree), shall cause the definitive
Proxy Statement-Prospectus to be mailed to the Company's stockholders.
(d) At or prior to the Closing, each of Parent and the Company shall deliver
to the other a certificate of its Secretary setting forth the voting results
from its stockholder meeting.
Section 7.5 Compliance with the Securities Act.
(a) At least 30 days prior to the Effective Time, the Company shall cause to
be delivered to Parent a list identifying all persons who were, in its
reasonable judgment, at the record date for the Company's stockholders'
meeting convened in accordance with Section 7.4(a) hereof, "affiliates" of the
Company as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act (the "Affiliates").
(b) The Company shall use its reasonable best efforts to cause each person
who is identified as one of its Affiliates in its list referred to in Section
7.5(a) above to deliver to Parent (with a copy to the Company), at or prior to
the Effective Time, a written agreement, in the form attached hereto as
Exhibit B, (the "Affiliate Letters").
(c) If any Affiliate of the Company refuses to provide an Affiliate Letter,
Parent may place appropriate legends on the certificates evidencing the shares
of Parent Common Stock to be received by such Affiliate pursuant to the terms
of this Agreement and to issue appropriate stop transfer instructions to the
transfer agent for shares of Parent Common Stock to the effect that the shares
of Parent Common Stock received by such Affiliate pursuant to this Agreement
only may be sold, transferred or otherwise conveyed (i) pursuant to an
effective registration statement under the Securities Act, (ii) in compliance
with Rule 145 promulgated under the Securities Act, or (iii) pursuant to
another exemption under the Securities Act.
Section 7.6 Best Efforts. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its best efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, the obtaining of all necessary waivers,
consents and approvals and the effecting of all necessary registrations and
filings. Without limiting the generality of the foregoing, as promptly as
practicable, the Company, Parent and Sub shall make all filings and
submissions under the HSR Act as may be reasonably required to be made in
connection with this Agreement and the transactions contemplated hereby.
Subject to the Confidentiality Agreement, the Company will furnish to Parent
and Sub, and Parent and Sub will furnish to the Company, such information and
assistance as the other may reasonably request in connection with the
preparation of any such filings or submissions. Subject to the
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Confidentiality Agreement, the Company will provide Parent and Sub, and Parent
and Sub will provide the Company, with copies of all material written
correspondence, filings and communications (or memoranda setting forth the
substance thereof) between such party or any of its representatives and any
Governmental Entity, with respect to the obtaining of any waivers, consent or
approvals and the making of any registrations or filings, in each case that is
necessary to consummate the Merger and the other transactions contemplated
hereby. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers or directors of Parent and the Surviving Corporation shall take all
such necessary action. Each of the parties will use its reasonable efforts to
ensure that the tax opinion to be delivered by its counsel pursuant to Section
8.2(d) or 8.3(c), as the case may be, be delivered and not withdrawn or
modified in any material respect (including with respect to any restructuring
of the Merger contemplated by Section 1.1 hereof).
Section 7.7 Voting Agreement. Concurrently herewith, and as an essential
inducement for Parent's entering into this Agreement, Parent is entering into
the Voting Agreement with North American Fund II, L.P. ("North American") with
respect to certain shares of Company Common Stock owned (beneficially or of
record) by North American.
Section 7.8 Company Stock Options. At the Effective Time, each of the
Company Stock Options which is outstanding immediately prior to the Effective
Time shall be assumed by Parent and converted automatically into an option to
purchase shares of Parent Common Stock (a "New Option") in an amount and at an
exercise price determined as provided below:
(a) The number of shares of Parent Common Stock to be subject to the New
Option shall be equal to the product of the number of shares of Company
Common Stock remaining subject (as of immediately prior to the Effective
Time) to the original option and the Exchange Ratio, provided that any
fractional shares of Parent Common Stock resulting from such multiplication
shall be rounded down to the nearest share; and
(b) The exercise price per share of Parent Common Stock under the New
Option shall be equal to the exercise price per share of Company Common
Stock under the original option divided by the Exchange Ratio, provided
that such exercise price shall be rounded up to the nearest cent.
The adjustment provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be and
is intended to be effected in a manner which is consistent with Section 424(a)
of the Code. After the Effective Time, each New Option shall be exercisable
and shall vest upon the same terms and conditions as were applicable to the
related Company Stock Option immediately prior to the Effective Time, except
that all references to the Company shall be deemed to be references to Parent
and provided that as to each employee of the Company identified on Schedule
7.8, Parent agrees to take all necessary action to provide that upon such
employee's termination of employment with Parent or with any Subsidiary of
Parent for any reason, other than a voluntary termination by such employee or
termination for Cause (as defined herein), each New Option held by each such
employee shall become fully vested. As used herein the term "Cause" means
(x) the willful and continued failure of the employee to perform his duties
and responsibilities with the Surviving Corporation or to comply with
reasonable directions of his superiors that is not cured to the Surviving
Corporation's satisfaction within 15 days after written notice to the employee
by such superiors specifying in reasonable detail the manner in which the
employee has failed to perform such duties and responsibilities or comply with
such directions; (y) the conviction of the employee of a criminal offense
involving fraud, dishonesty or moral turpitude; or (z) the engaging by the
employee in any act which is intended to be, and is, materially injurious to
the Parent, monetarily or otherwise which is not cured (if curable) to the
Surviving Corporation's satisfaction within 15 days after notice to the
employee by such employee's superiors. Parent shall file with the SEC a
registration statement on Form S-8 (or other appropriate form) or a post-
effective amendment to the Registration Statement for purposes of registering
all shares of Parent Common Stock issuable after the Effective Time upon
exercise of the New Options, and use all reasonable efforts to have such
registration statement or post-effective amendment become effective with
respect thereto as promptly as practicable after the Effective Time.
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Section 7.9 Public Announcements. Each of Parent, Sub, and the Company
agrees that it will not issue any press release or otherwise make any public
statement with respect to this Agreement (including the Exhibits hereto) or
the transactions contemplated hereby or thereby without the prior consent of
the other party, which consent shall not be unreasonably withheld or delayed;
provided, however, that such disclosure can be made without obtaining such
prior consent if (i) the disclosure is required by law or by obligations
imposed pursuant to any listing agreement with the NNM or any national
securities exchange and (ii) the party making such disclosure has first used
its best efforts to consult with the other party about the form and substance
of such disclosure.
Section 7.10 Directors' and Officers' Indemnification. All rights to
indemnification, advancement of litigation expenses and limitation of personal
liability existing in favor of the directors and officers of the Company under
the provisions existing on the date hereof in the Company's Articles of
Incorporation or By-Laws shall, with respect to any matter existing or
occurring at or prior to the Effective Time (including the transactions
contemplated by this Agreement), survive the Effective Time, and, as of the
Effective Time, the Surviving Corporation shall assume all obligations of the
Company in respect thereof as to any claim or claims asserted prior to or
within a six-year period immediately after the Effective Time.
Section 7.11 Expenses. Except as otherwise set forth in Section 9.2(b),
whether or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement (including the Exhibits hereto) and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, except that sixty percent (60%) and forty percent (40%) of the
following expenses shall be borne by Parent and the Company, respectively: (i)
the filing fee in connection with filings under the HSR Act, (ii) the expenses
incurred in connection with printing the Registration Statement and the Proxy
Statement and (iii) the filing fee with the SEC relating to the Registration
Statement or the Proxy Statement.
Section 7.12 Listing Application. Parent will use its reasonable best
efforts to cause the shares of Parent Common Stock to be issued pursuant to
this Agreement in the Merger to be listed for quotation on the NNM.
Section 7.13 Supplemental Disclosure. The Company shall give prompt notice
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause (x) any representation or warranty contained
in this Agreement to be untrue or inaccurate or (y) any covenant, condition or
agreement contained in this Agreement not to be complied with or satisfied and
(ii) any failure of the Company or Parent, as the case may be, to comply with
or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 7.13 shall not have any effect for the purpose of
determining the satisfaction of the conditions set forth in Article VIII of
this Agreement or otherwise limit or affect the remedies available hereunder
to any party.
Section 7.14 Letters of Accountants.
(a) Parent shall use all reasonable efforts to cause to be delivered to the
Company a letter of Coopers & Lybrand L.L.P., Parent's independent auditors,
dated a date within two business days before the date on which the
Registration Statement shall become effective and addressed to the Company, in
form and substance reasonably satisfactory to the Company and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement,
which letter shall be brought down to the Effective Time.
(b) The Company shall use all reasonable best efforts to cause to be
delivered to Parent a letter of Deloitte & Touche, the Company's independent
auditors, dated a date within two business days before the date on which the
Registration Statement shall become effective and addressed to Parent, in form
and substance reasonably satisfactory to Parent and customary in scope and
substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement,
which letter shall be brought down to the Effective Time.
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Section 7.15 Conveyance Taxes. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires,
applications, or other documents regarding (i) any real property transfer
gains, sales, use, transfer, value-added, stock transfer, and stamp taxes,
(ii) any recording, registration and other fees, and (iii) any similar taxes
or fees that become payable in connection with the transactions contemplated
hereby that are required or permitted to be filed on or before the Effective
Time.
Section 7.16 Non-solicitation of Employees. Each of Parent and the Company
agree, for a period of one year from the date hereof, not to directly or
indirectly solicit any employee of the other or to induce or encourage any
employee of the other to terminate such employee's employment.
Section 7.17 Exchange Act Filings. For so long as Parent may be required to
do so pursuant to the Purchase Agreements with the purchasers of its 5 1/2%
Senior Convertible Notes Due 2000, Parent shall timely file with the SEC all
reports required to be filed with the SEC pursuant to the Exchange Act.
ARTICLE VIII
Conditions to Consummation of the Merger
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following
conditions:
(a) HSR Approval. Any waiting period applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated, and no
action shall have been instituted by the Department of Justice or Federal
Trade Commission challenging or seeking to enjoin the consummation of this
transaction, which action shall have not been withdrawn or terminated.
(b) Stockholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the requisite
vote (as described in Section 4.15) of the stockholders of the Company in
accordance with applicable law and the issuance of the shares of Parent
Common Stock to be issued in the Merger shall have been approved by the
requisite vote (as described in Section 5.10) of the stockholders of Parent
in accordance with the requirements of the rules of the NNM.
(c) NNM Listing for Quotation. The shares of Parent Common Stock issuable
to the holders of Company Common Stock pursuant to this Agreement in the
Merger shall have been authorized for listing on the NNM, upon official
notice of issuance.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceeding by the SEC seeking a stop order.
(e) No Order. No Governmental Entity (including a federal or state court)
of competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which materially restricts, prevents or prohibits
consummation of the Merger or any transaction contemplated by this
Agreement; provided, however, that the parties shall use their reasonable
best efforts to cause any such decree, judgment, injunction or other order
to be vacated or lifted.
(f) Approvals. Other than the filing of Merger documents in accordance
with the MBCA, all authorizations, consents, waivers, orders or approvals
of, or declarations or filings with, or expirations of waiting periods
imposed by, any Governmental Entity that are listed on Schedule 8.1(f), or
the failure of which to obtain, make or occur would have a material adverse
effect at or after the Effective Time on Parent or the Surviving
Corporation shall have been obtained, been filed or have occurred. Parent
shall have received all state securities or "blue sky" permits and other
authorizations necessary to issue the shares of Parent Common Stock
pursuant to this Agreement in the Merger.
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Section 8.2 Conditions to Obligations of Parent and Sub to Effect the
Merger. The obligations of Parent and Sub to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
additional conditions, unless waived in writing by Parent:
(a) Representations and Warranties. (i) The aggregate effect of all
inaccuracies in the representations and warranties of the Company set forth
in this Agreement does not and will not have a material adverse effect on
the business, operations, prospects, properties, assets (including
intangible assets), liabilities (including contingent liabilities)
condition (financial or other) or results of operations of the Company and
(ii) the representations and warranties of the Company that are qualified
with reference to a Company Material Adverse Effect or materiality shall be
true and correct and the representations and warranties that are not so
qualified shall be true and correct in all material respects, in each case
as of the date hereof, and, except to the extent such representations and
warranties speak as of an earlier date, as of the Effective Time as though
made at and as of the Effective Time, and Parent shall have received a
certificate signed on behalf of the Company by the chief executive officer
or the chief financial officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time, and Parent
shall have received a certificate signed on behalf of the Company by the
chief executive officer or the chief financial officer of the Company to
such effect.
(c) Affiliate Letters. Parent shall have received the Affiliate Letters
from each of the Affiliates of the Company, as contemplated in Section 7.5.
(d) Tax Opinion of Counsel. Parent shall have received an opinion of
Skadden, Arps, Slate, Meagher & Flom ("Skadden, Arps") dated on or about
the date that is two business days prior to the date the Proxy Statement-
Prospectus is first mailed to stockholders of the Company to the effect
that the Merger will constitute a reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Code, which opinion
shall not have been withdrawn or modified in any material respect.
In rendering such opinion, Skadden, Arps may require and rely upon
representations contained in certificates of officers of Parent, Sub and the
Company, certain stockholders and others dated on or before the date of such
opinion and shall not have been withdrawn or modified in any material respect;
provided, however, that the condition set forth in this Section 8.2(d) shall
be deemed to be satisfied if Skadden, Arps is unable to render such opinion
solely by reason of any of the holders of Company Common Stock refusing or
failing to provide Skadden, Arps with requested representations. The specific
provisions of each such certificate and representation shall be in form and
substance satisfactory to Skadden, Arps.
Section 8.3 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following additional
conditions:
(a) Representations and Warranties. (i) The aggregate effect of all
inaccuracies in the representations and warranties of Parent set forth in
this Agreement does not and will not have a material adverse effect on the
business, operations, prospects, properties, assets (including intangible
assets), liabilities (including contingent liabilities), condition
(financial or other) or results of operations of the Parent and (ii) the
representations and warranties of Parent contained in this Agreement that
are qualified with reference to a Parent Material Adverse Effect or
materiality shall be true and correct and the representations and
warranties that are not so qualified shall be true and correct in all
material respects as of the date hereof, and, except to the extent such
representations and warranties speak as of an earlier date, as of the
Effective Time as though made on and as of the Effective Time, and the
Company shall have received a certificate signed on behalf of Parent by the
chief executive officer or the chief operating officer of Parent to such
effect.
(b) Performance of Obligations of Parent and Sub. Each of Parent and Sub
shall have performed in all material respects all obligations required to
be performed by it under this Agreement at or prior to the Effective Time,
and the Company shall have received a certificate signed on behalf of
Parent by the chief executive officer or the chief operating officer of
Parent to such effect.
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(c) Tax Opinion of Counsel. The Company shall have received an opinion of
Gardner, Carton & Douglas ("Gardner, Carton") dated on or about the date
that is two business days prior to the date the Proxy Statement-Prospectus
is first mailed to stockholders of the Company to the effect that the
Merger will constitute a reorganization for federal income tax purposes
within the meaning of Section 368(a) of the Code, which opinion shall not
have been withdrawn or modified in any material respect.
In rendering such opinion, Gardner, Carton may require and rely upon
representations contained in certificates of officers of Parent, Sub and the
Company, certain stockholders and others dated on or before the date of such
opinion and shall not have been withdrawn or modified in any material respect;
provided, however, that the condition set forth in this Section 8.3(c) shall
be deemed to be satisfied if Gardner, Carton is unable to render such opinion
solely by reason of any of the holders of Company Common Stock refusing or
failing to provide Gardner, Carton with requested representations. The
specific provisions of each such certificate and representation shall be in
form and substance satisfactory to Gardner, Carton.
ARTICLE IX
Termination
Section 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval by the stockholders of
Parent or the Company:
(a) by mutual consent of Parent and the Company;
(b) by either Parent or the Company, if the Merger shall not have been
consummated before June 30, 1996 (unless the failure to so consummate the
Merger by such date shall be due to the action or failure to act of the
party (or its Subsidiaries, if any) seeking to terminate this Agreement,
which action or failure to act constitutes a breach of this Agreement);
(c) by either Parent or the Company, if any permanent injunction or
action by any Governmental Entity of competent jurisdiction preventing the
consummation of the Merger shall have become final and nonappealable;
(d) by Parent, if (i) there has been a breach of any representations or
warranties of the Company set forth herein the effect of which is a Company
Material Adverse Effect, (ii) there has been a breach in any material
respect of any of the covenants or agreements set forth in this Agreement
on the part of the Company, which breach is not curable or, if curable, is
not cured within 30 days after written notice of such breach is given by
Parent to the Company, or (iii) the Board of Directors of the Company (x)
fails to recommend approval and adoption of this Agreement and the Merger
by the stockholders of the Company or withdraws or amends or modifies in a
manner adverse to Parent and Sub its recommendation or approval in respect
of this Agreement or the Merger, (y) makes any recommendation with respect
to an Alternative Acquisition other than a recommendation to reject such
Alternative Acquisition, or (z) takes any action prohibited by Section 7.2;
(e) by the Company, if (i) there has been a breach of any representations
or warranties of Parent set forth herein the effect of which is a Parent
Material Adverse Effect, (ii) there has been a breach in any material
respect of any of the covenants or agreements set forth in this Agreement
on the part of Parent, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given by the
Company to Parent or (iii) such termination is necessary to allow the
Company to enter into an agreement with respect to a Superior Proposal
(provided that the termination described in this clause (iii) shall not be
effective unless and until the Company shall have paid to Parent in full
the fee and expense reimbursement described in Section 9.2(b))
Section 9.2 Effect of Termination.
(a) In the event of termination of this Agreement pursuant to this
Article IX, the Merger shall be deemed abandoned and this Agreement shall
forthwith become void, without liability on the part of any party hereto,
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except as provided in this Section 9.2, Section 7.1 and Section 7.11, and
except that nothing herein shall relieve any party from liability for any
breach of this Agreement, except that Parent and the Company shall have no
rights with respect to the recovery of expenses, except as provided for in
Sections 9.2(b)(i) and 9.2(b)(ii), respectively.
(b)(i) If Parent shall have terminated this Agreement pursuant to Section
9.1(d)(i) or (ii) or if this Agreement is terminated pursuant to Section
9.1(a) or 9.1(b) and this Agreement and the Merger shall have failed to
receive the requisite vote of the stockholders of the Company at the meeting
of the stockholders of the Company called to vote thereon, then the Company
shall promptly reimburse Parent for all out-of-pocket expenses, up to an
amount of Two Million Dollars ($2,000,000), incurred in connection with the
transactions contemplated hereby.
(ii) If the Company shall have terminated this Agreement pursuant to Section
9.1(e)(i) or (ii) or if this Agreement is terminated pursuant to Section
9.1(a) or 9.1(b) and this Agreement and the issuance of shares of Parent
Common Stock pursuant hereto shall have failed to receive the requisite vote
of the stockholders of Parent called to vote thereon, then Parent shall
promptly reimburse the Company for all out-of-pocket expenses, up to an amount
of Two Million Dollars ($2,000,000), incurred in connection with the
transactions contemplated hereby.
(iii) If Parent shall have terminated this Agreement pursuant to Section
9.1(d)(iii) or the Company shall have terminated this Agreement pursuant to
Section 9.1(e)(iii), then in any such case the Company shall promptly, but in
no event later than two business days after the date of such termination, pay
Parent a termination fee of Ten Million Dollars ($10,000,000) and shall have
no obligation to pay any amounts under Section 9.2(b)(i).
(iv) If this Agreement is terminated pursuant to Section 9.1(a) or 9.1(b)
and the Board of Directors of Parent (A) withdraws or amends or modifies in
any manner adverse to the Company its recommendation with respect to this
Agreement or (B) makes any recommendation with respect to any proposed
acquisition of Parent (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its capital stock
or assets (an "Acquisition Transaction") other than a recommendation to reject
such Acquisition Transaction and in either such case the stockholders of
Parent shall not approve the issuance of the shares of Parent Common Stock in
the Merger, then Parent shall promptly, but in no event later than two
business days after the date of such termination, pay the Company a
termination fee of Ten Million Dollars ($10,000,000) and shall have no
obligation to pay any amounts under Section 9.2(b)(ii).
(v) Notwithstanding any other provision hereof, no fee or expense
reimbursement shall be paid pursuant to this Section 9.2(b) to any party who
shall be in material breach of its obligations hereunder.
ARTICLE X
General Provisions
Section 10.1 Amendment and Modification. At any time prior to the Effective
Time, this Agreement may be amended, modified or supplemented only by written
agreement (referring specifically to this Agreement) of Parent, Sub and the
Company with respect to any of the terms contained herein; provided, however,
that after any approval and adoption of this Agreement by the stockholders of
the Company, no such amendment, modification or supplementation shall be made
which under applicable law requires the approval of such stockholders, without
the further approval of such stockholders.
Section 10.2 Waiver. At any time prior to the Effective Time, Parent and
Sub, on the one hand, and the Company, on the other hand, may (i) extend the
time for the performance of any of the obligations or other acts of the other,
(ii) waive any inaccuracies in the representations and warranties of the other
contained herein or in any documents delivered pursuant hereto and (iii) waive
compliance by the other with any of the agreements or
A-25
<PAGE>
conditions contained herein which may legally be waived. Any such extension or
waiver shall be valid only if set forth in an instrument in writing
specifically referring to this Agreement and signed on behalf of such party.
Section 10.3 Survivability; Investigations. The respective representations
and warranties of Parent and the Company contained herein or in any
certificates or other documents delivered prior to or as of the Effective Time
(i) shall not be deemed waived or otherwise affected by any investigation made
by any party hereto and (ii) shall not survive beyond the Effective Time.
Section 10.4 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or by next-day
courier or telecopied with confirmation of receipt, to the parties at the
addresses specified below (or at such other address for a party as shall be
specified by like notice; provided that notices of a change of address shall
be effective only upon receipt thereof). Any such notice shall be effective
upon receipt, if personally delivered or telecopied, or one day after delivery
to a courier for next-day delivery.
(a) If to Parent or Sub, to:
SoftKey International Inc.
One Athenaeum Street
Cambridge, MA 02142
Attention: Office of the General Counsel
Telecopier No.: (617) 494-5660
with copies to:
Skadden, Arps, Slate, Meagher & Flom
One Beacon Street
Boston, MA 02108
Attention: Louis A. Goodman, Esq.
Telecopier No.: (617) 573-4822
and
(b) if to the Company, to:
Minnesota Educational Computing
Corporation (MECC)
6160 Summit Drive North
Minneapolis, MN 5540-4003
Attention: Chief Executive Officer
Telecopier No.: (612) 569-1551
with a copy to:
Gardner, Carton & Douglas
321 North Clark Street
Chicago, IL 60610-4795
Attention: Charles R. Manzoni, Jr., Esq.
Telecopier No.: (312) 644-3381
Section 10.5 Descriptive Headings; Interpretation. The headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. References in this Agreement
to Sections, Schedules, Exhibits or Articles mean a Section, Schedule, Exhibit
or Article of this Agreement unless otherwise indicated. References to this
Agreement shall be deemed to include
A-26
<PAGE>
the Exhibits and Schedules hereto, unless the context otherwise requires. The
term "person" shall mean and include an individual, a partnership, a joint
venture, a corporation, an association, a trust, a Governmental Entity or an
unincorporated organization or other entity.
Section 10.6 Entire Agreement; Assignment. This Agreement (including the
Schedules and other documents and instruments referred to herein), together
with the Confidentiality Agreement, constitute the entire agreement and
supersede all other prior agreements and understandings, both written and
oral, among the parties or any of them, with respect to the subject matter
hereof. Except for Sections 7.8, 7.10 and 7.17, this Agreement is not intended
to confer upon any person not a party hereto any rights or remedies hereunder.
This Agreement shall not be assigned by operation of law or otherwise;
provided that Parent or Sub may assign its rights and obligations hereunder to
a direct or indirect subsidiary of Parent, but no such assignment shall
relieve Parent or Sub, as the case may be, of its obligations hereunder.
Section 10.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without giving
effect to the provisions thereof relating to conflicts of law.
Section 10.8 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall
only apply as to such party in the specific jurisdiction where such judgment
shall be made.
Section 10.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
IN WITNESS WHEREFORE, each of Parent, Sub and the Company has caused this
Agreement to be executed under seal on its behalf by its officers thereunto
duly authorized, all as of the date first above written.
PARENT:
SOFTKEY INTERNATIONAL INC.
By: /s/ Michael J. Perik
---------------------------------
Name: Michael J. Perik
Title: Chairman and Chief
Executive Officer
SUB:
SCHOOLCO INC.
By: /s/ Michael J. Perik
---------------------------------
Name: Michael J. Perik
Title: Chairman and Chief
Executive Officer
THE COMPANY:
MINNESOTA EDUCATIONAL COMPUTING
CORPORATION (MECC)
By: /s/ Charles L. Palmer
---------------------------------
Name: Charles L. Palmer
Title: Chairman
A-27
<PAGE>
EXHIBIT A
VOTING AGREEMENT
VOTING AGREEMENT (the "Agreement"), dated as of October 30, 1995, between
North American Fund II, L.P., a Delaware limited partnership and a stockholder
(the "Stockholder") of Minnesota Educational Computing Corporation (MECC), a
Minnesota corporation (the "Company"), and SoftKey International Inc., a
Delaware corporation ("Parent").
WHEREAS, concurrently with the execution of this Agreement, the Company,
Parent and SchoolCo Inc., a Minnesota corporation and a wholly owned
subsidiary of Parent ("Sub"), have entered into an Agreement and Plan of
Merger (as the same may be amended from time to time, the "Merger Agreement"),
providing for the merger (the "Merger") of Sub with and into the Company
pursuant to the terms and conditions of the Merger Agreement; and
WHEREAS, upon consummation the Merger, the stockholders of the Company will
receive a number of shares of common stock, par value $.01 per share, of
Parent ("Parent Common Stock") equal to the Exchange Ratio (as defined in the
Merger Agreement) for each share of common stock, par value $.01 per share
(the "Company Common Stock") of the Company owned by them;
WHEREAS, the Stockholder owns of record and beneficially 1,461,762 shares of
Company Common Stock wishes to enter into this Agreement with respect to
794,284 of such shares (such 794,284 shares of Company Common Stock being
referred to as the "Shares"); and
WHEREAS, in order to induce Parent to enter into the Merger Agreement, the
Stockholder has agreed, upon the terms and subject to the conditions set forth
herein, to vote the Shares and to deliver an irrevocable proxy to Parent to
vote the Shares at a meeting of the Company's stockholders, in favor of
approval and adoption of the Merger Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. Agreement to Vote Shares. The Stockholder agrees during the term of
this Agreement to vote the Stockholder's Shares, in person or by proxy, (a)
in favor of approval and adoption of the Merger Agreement and the Merger at
every meeting of the stockholders of the Company at which such matters are
considered and at every adjournment thereof, and (b) against an Alternative
Acquisition (as such term is defined in the Merger Agreement). The
Stockholder agrees to deliver to Parent upon request immediately prior to
any vote contemplated by clause (a) or (b) above a proxy substantially in
the form attached hereto as Annex A (a "Proxy"), which Proxy shall be
irrevocable during the term of this Agreement to the extent permitted under
Minnesota law, and Parent agrees to vote the Shares subject to each such
Proxy in favor of approval and adoption of the Merger Agreement and the
Merger. Notwithstanding anything herein to the contrary, the obligation of
the Stockholder to vote its Shares in accordance with the terms of this
Agreement and to deliver the Proxy, and the validity of a Proxy delivered
hereunder, will be conditional on the Parent Price (as hereinafter defined)
being at least $30. The "Parent Price," as used herein, refers to the
volume weighted average of the closing prices of Parent Common Stock on the
Nasdaq National Market for the twenty full trading days immediately
preceding the meeting of the stockholders of the Company (or adjournment
thereof) at which the Merger and the Merger Agreement are considered.
2. No Voting Trusts. The Stockholder agrees that the Stockholder will
not, nor will the Stockholder permit any entity under the Stockholder's
control to, deposit any of the Stockholder's Shares in a voting trust or
subject any of its Shares to any arrangement with respect to the voting of
the Shares inconsistent with this Agreement.
<PAGE>
3. Limitation on Dispositions and Proxies. During the term of this
Agreement, the Stockholder agrees not to sell, assign, pledge, transfer or
otherwise dispose of, or grant any proxies with respect to (except for a
Proxy or a proxy which is not inconsistent with the terms of this
Agreement) any of the Stockholder's Shares.
4. Specific Performance. Each party hereto acknowledges that it will be
impossible to measure in money the damage to the other party if a party
hereto fails to comply with the obligations imposed by this Agreement,
that, in the event of any such failure, the other party will not have an
adequate remedy at law or in damages. Accordingly, each party hereto agrees
that injunctive relief or other equitable remedy, in addition to remedies
at law or damages, is the appropriate remedy for any such failure and will
not oppose the granting of such relief on the basis that the other party
has an adequate remedy at law. Each party hereto agrees that it will not
seek, and agrees to waive any requirement for, the securing or posting of a
bond in connection with any other party's seeking or obtaining such
equitable relief.
5. Term of Agreement; Termination. Subject to Section 9(e), the term of
this Agreement shall commence on the date hereof and such term and this
Agreement shall terminate upon the earliest to occur of (i) the Effective
Time, and (ii) the date on which the Merger Agreement is terminated in
accordance with its terms. Upon such termination, no party shall have any
further obligations or liabilities hereunder; provided, that such
termination shall not relieve any party from liability for any breach of
this Agreement prior to such termination.
6. Representations and Warranties of the Stockholders. Each Stockholder
represents and warrants to Parent that, as of the date hereof, (a) such
Stockholder has full legal power and authority to execute and deliver this
Agreement and the Proxy, and (b) such Stockholder's Shares are free and
clear of all proxies (except for a proxy which is not inconsistent with the
terms of this Agreement).
7. Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject
matter hereof and contains the entire agreement among the parties with
respect to the subject matter hereof. This Agreement may not be amended,
supplemented or modified, and no provisions hereof may be modified or
waived, except by an instrument in writing signed by all parties hereto. No
waiver of any provisions hereof by any party shall be deemed a waiver of
any other provisions hereof by any such party, nor shall any such waiver be
deemed a continuing waiver of any provision hereof by such party.
8. Notices. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be deemed given when
delivered personally, upon receipt of a transmission confirmation if sent
by telecopy or like transmission (with confirmation) and on the next
business day when sent by Federal Express, Express Mail or other reputable
overnight courier service to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
If to Parent:
SoftKey International Inc.
One Athenaeum Street
Cambridge, MA 02142
Attention: Office of the General Counsel
Telecopy: (617) 494-5660
With a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Beacon Street
Boston, Massachusetts 02108
Attention: Louis A. Goodman, Esq.
Telecopy: (617) 573-4822
2
<PAGE>
If to Stockholder:
North American Fund II, L.P.
135 South LaSalle Street, Suite 4000
Chicago, IL 60603
Attention: Charles L. Palmer
Telecopy: (312) 332-1540
With a copy to:
Gardner, Carton & Douglas
Quaker Tower, Suite 3400
321 North Clark Street
Chicago, IL 60160-4795
Attention: Charles R. Manzoni, Jr., Esq.
Telecopy: (312) 644-3381
9. Miscellaneous.
(a) This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of
Delaware, without reference to its conflicts of law principles.
(b) If any provision of this Agreement or the application of such provision
to any person or circumstances shall be held invalid or unenforceable by a
court of competent jurisdiction, such provision or application shall be
unenforceable only to the extent of such invalidity or unenforceability, and
the remainder of the provision held invalid or unenforceable and the
application of such provision to persons or circumstances, other than the
party as to which it is held invalid, and the remainder of this Agreement,
shall not be affected.
(c) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
(d) All Section headings herein are for convenience of reference only and
are not part of this Agreement, and no construction or reference shall be
derived therefrom.
(e) The obligations of the Stockholder set forth in this Agreement shall not
be effective or binding upon the Stockholder until after such time as the
Merger Agreement is executed and delivered by the Company, Parent and Sub, and
the parties agree that there is not and has not been any other agreement,
arrangement or understanding between the parties hereto with respect to the
matters set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
SOFTKEY INTERNATIONAL INC.
By: _________________________________
Name: Michael J. Perik
Title: Chairman and Chief
Executive Officer
NORTH AMERICAN FUND II, L.P.
By: _________________________________
Name:
Title:
3
<PAGE>
(ANNEX A)
FORM OF PROXY
The undersigned, for consideration received, hereby appoints SoftKey
International Inc., a Delaware corporation ("Parent"), its proxy to vote
794,284 shares of Common Stock, par value $.01 per share, of Minnesota
Educational Computing Corporation (MECC), a Minnesota corporation (the
"Company"), owned by the undersigned and described in the Voting Agreement
referred to below and which the undersigned is entitled to vote at any meeting
of stockholders of the Company, and at any adjournment thereof, to be held for
the purpose of considering and voting upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger
Agreement"), by and among the Company, Parent, and SchoolCo Inc., a Minnesota
corporation and a wholly owned subsidiary of Parent ("Sub"), providing for the
merger (the "Merger") of Sub with and into the Company, FOR such proposal and
AGAINST any Alternative Acquisition (as such term is defined in the Merger
Agreement). This proxy is subject to the terms of the Voting Agreement, is
coupled with an interest and revokes all prior proxies granted by the
undersigned with respect to such 794,284 shares, is irrevocable and shall
terminate and be of no further force or effect automatically at such time as
the Voting Agreement, dated as of October 30, 1995 between the undersigned and
Parent, a copy of such Agreement being attached hereto, terminates in
accordance with its terms.
Dated ________________________ , 199_
NORTH AMERICAN FUND II, L.P.
By: _________________________________
Name:
Title:
4
<PAGE>
EXHIBIT B
FORM OF AFFILIATE LETTER
[ ], 1995
SoftKey International Inc.
One Athenaeum Street
Cambridge, Massachusetts 02142
Attention: General Counsel
Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Minnesota Educational Computing Corporation (MECC), a
Minnesota corporation (the "Company"), as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act").
Pursuant to the terms of the Agreement and Plan of Merger dated as of
October 30, 1995 (the "Agreement"), by and among SoftKey International Inc., a
Delaware corporation ("Parent"), SchoolCo Inc., a Minnesota corporation and a
wholly owned subsidiary of Parent ("Sub"), and the Company, Parent will
acquire all of the issued and outstanding shares of common stock, par value
$.01 per share, of the Company ("Company Common Stock") and Sub will merge
with and into the Company (the "Merger").
As a result of the Merger, I may receive shares of Common Stock, par value
$.01 per share of Parent ("Parent Common Stock"). I would receive the Parent
Common Stock in exchange for shares (or options for shares) owned by me of
Company Common Stock.
I represent, warrant and covenant to Parent that in the event I receive
Parent Common Stock as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the Parent
Common Stock in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed the
requirements of such documents and other applicable limitations upon my
ability to sell, transfer or otherwise dispose of Parent Common Stock to
the extent I felt necessary, with my counsel or counsel for the Company.
C. I have been advised that the issuance of Parent Common Stock to me
pursuant to the Merger has been registered with the Commission under the
Act on a Registration Statement Form S-4. However, I have also been advised
that, because at the time the Merger is submitted for a vote of the
stockholders of the Company, (a) I may be deemed to be an affiliate of the
Company and (b) the distribution by me of the Parent Common Stock has not
been registered under the Act, I may not sell, transfer or otherwise
dispose of Parent Common Stock issued to me in the Merger unless (i) such
sale, transfer or other disposition is made in conformity with the volume
and other limitations of Rule 145 promulgated by the Commission under the
Act, (ii) such sale, transfer or other disposition has been registered
under the Act or (iii) in the opinion of counsel reasonably acceptable to
Parent, such sale, transfer or other disposition is otherwise exempt from
registration under the Act.
D. I understand that Parent is under no obligation to register the sale,
transfer or other disposition of the Parent Common Stock by me or on my
behalf under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available solely as a
result of the Merger.
<PAGE>
E. I also understand that there will be placed on the certificates for
the Parent Common Stock issued to me, or any substitutions therefor, a
legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED ,
1995 BETWEEN THE REGISTERED HOLDER HEREOF AND SOFTKEY INTERNATIONAL
INC., A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF
SOFTKEY INTERNATIONAL INC."
F. I also understand that unless a sale or transfer is made in conformity
with the provisions of Rule 145, or pursuant to a registration statement,
Parent reserves the right to put the following legend on the certificates
issued to any transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if the undersigned shall have delivered to Parent a copy of a letter
from the staff of the Commission, or an opinion of counsel reasonably
satisfactory to Parent in form and substance reasonably satisfactory to
Parent, to the effect that such legend is not required for purposes of the
Act.
*[We understand, and you agree, that, notwithstanding anything herein to the
contrary, we may distribute the Parent Common Stock received by us in the
Merger to our partners in accordance with the terms of our partnership
agreement so long as each partner receiving a distribution of Parent Common
Stock from us agrees to execute a letter agreement addressed to you containing
substantially the same terms as this letter agreement.]
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of the Company as described in the first paragraph of
this letter, as or a waiver of any rights I may have to object to any claim
that I am such an affiliate or on after the date of this letter.
- --------
* To be inserted only into the Affiliate Letter to be executed by North
American Fund II, L.P.
Very truly yours,
_____________________________________
Name:
Accepted this day of , 1995, by
SOFTKEY INTERNATIONAL INC.
By___________________________________
Name:
Title:
2
<PAGE>
APPENDIX B
[ART]
Board of Directors October 29, 1995
SoftKey International Inc.
1 Athenaeum Street
Cambridge, MA 02142
Dear Sirs:
We understand that pursuant to an Agreement and Plan of Merger dated as of
October 30, 1995 (the "Agreement") among SoftKey International Inc.
("SoftKey"), SchoolCo Inc. ("Sub"), a wholly-owned subsidiary of SoftKey, and
Minnesota Educational Computing Corporation ("MECC"), SoftKey and MECC intend
to consummate a transaction in which Sub will merge with and into MECC (the
"Merger"), with MECC as the surviving corporation and a wholly-owned
subsidiary of SoftKey, and in which each outstanding share of common stock of
MECC would be converted into the right to receive a number of shares of
SoftKey common stock equal to the result obtained by dividing $40.00 by the
volume weighted average of the closing prices for SoftKey Common Stock for the
twenty full trading days ending on the third full trading day prior to the
effective time of the Merger (the "Exchange Ratio"); provided, however, that
in no event will the Exchange Ratio be greater than 1.14286 or less than
0.88889.
You have asked us to render our opinion as to whether the Merger is fair,
from a financial point of view, to the stockholders of SoftKey.
In the course of our analysis for rendering this opinion, we have:
1. reviewed the Agreement in substantially final form;
2. reviewed SoftKey's Annual Report to Shareholders and Annual Report on
Form 10-K for the years ended January 1 and December 31, 1994, and its
Quarterly Reports on Form 10-Q for the periods ended March 31 and June 30,
1995;
3. reviewed MECC's Annual Report to Shareholders and Annual Report on
Form 10-K for the years ended March 31, 1994 and 1995, and its Quarterly
Report on Form 10-Q for the period ended June 30, 1995;
4. reviewed certain operating and financial information provided to us
by the managements of SoftKey and MECC relating to such businesses,
including internal projections of future financial results used for
budgeting purposes;
5. met with certain members of SoftKey's senior management to discuss
SoftKey's operations, historical financial statements and future prospects,
as well as their views with respect to the operations, historical financial
statements and future prospects of MECC, and their views of the business,
operational and strategic benefits, potential synergies and other
implications of the Merger;
6. met with certain members of MECC's senior management to discuss
MECC's operations, historical financial statements and future prospects, as
well as their views of the business, operational and strategic benefits,
potential synergies and other implications of the Merger;
7. reviewed the pro forma financial impact of the Merger on SoftKey;
<PAGE>
8. reviewed the historical stock prices and trading volumes of the
common stocks of SoftKey and MECC;
9. reviewed certain publicly available financial information and stock
market performance data of other publicly-held companies which we deemed
generally comparable to SoftKey and to MECC;
10. reviewed the financial terms of certain other recent acquisitions of
companies which we deemed generally comparable to MECC; and
11. conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
In the course of our review, and subject to the following sentence, we have
relied upon and assumed, without independent verification, (i) the accuracy
and completeness of the financial and other information provided to us or
reviewed for us by SoftKey and MECC, (ii) the reasonableness of the
assumptions made by the managements of SoftKey and MECC with respect to their
respective projected financial results and potential synergies which could be
achieved upon consummation of the Merger, and (iii) the reasonableness of the
assumptions made by the management of SoftKey with respect to the projected
financial results of MECC; we have not assumed any responsibility for
independent verification of such information and have relied upon the
assurances of the management of SoftKey and the management of MECC that they
are unaware of any facts that would make the information provided to us
incomplete or misleading. In arriving at our opinion, we have not performed or
obtained any independent appraisal of the assets of SoftKey or MECC nor have
we been furnished with any such appraisals. Our opinion is necessarily based
on the economic, market and other conditions as in effect on, and the
information made available to us as of the date hereof. This opinion does not
address the Company's underlying decision to effect the Merger and does not
constitute a recommendation to any stockholder of SoftKey as to how such
stockholder should vote at any stockholder meeting of SoftKey held in
connection with the Merger.
We have acted as financial advisor to SoftKey in connection with the Merger
and will receive a fee for such advisory services, including the rendering of
this opinion, payment of a significant portion of which is contingent upon the
consummation of the Merger.
In the ordinary course of our business, we may actively trade the equity
securities of SoftKey and MECC for our own account and for the accounts of
customers and accordingly, may, at any time, hold a long or short position in
such securities.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of SoftKey and is not to be used for any other purpose
without our prior written consent, which shall not be unreasonably withheld.
Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger is fair, from a financial point of view, to the
stockholders of SoftKey.
Very truly yours,
Bear, Stearns & Co. Inc.
By: /s/ Michael J. Urfifer
----------------------------------
Managing Director
B-2
<PAGE>
APPENDIX C
[ART]
October 30, 1995
The Board of Directors
Minnesota Educational Computing Corporation
6160 Summit Drive North
Minneapolis, MN 55430
Dear Members of the Board:
We understand that Minnesota Educational Computing Corporation, a Minnesota
corporation (the "Company"), and Softkey International Inc., a Delaware
corporation ("Softkey"), have entered into an Agreement and Plan of Merger,
dated as of the date hereof (the "Merger Agreement"), which provides, among
other things, for the merger of a wholly owned subsidiary of Softkey with and
into the Company (the "Merger"). Pursuant to the Merger Agreement, the Company
will become a wholly-owned subsidiary of Softkey and each issued and
outstanding share of common stock, par value $.01 per share, of the Company
("Company Common Stock") other than the shares held in treasury or held by
Softkey or an affiliate of Softkey will be converted automatically into the
right to receive the number of shares of common stock, par value $.01 per
share, of Softkey ("Softkey Common Stock") as set forth in the Merger
Agreement. The terms and conditions of the Merger are more fully set forth in
the Merger Agreement.
You have requested our opinion, as of this date, as to whether the
consideration to be received by the holders of shares of Company Common Stock
pursuant to the Merger Agreement is fair to such holders from a financial
point of view.
In arriving at our opinion set forth herein, we have, among other things:
(i) reviewed the Merger Agreement and certain related documents;
(ii) analyzed certain publicly available historical business and
financial information relating to the Company, as presented in documents
filed with the Securities and Exchange Commission, including the Company's
Annual Report to Stockholders and Annual Report on Form 10-K for its fiscal
year ended March 31, 1995 and the Company's Quarterly Report on Form 10-Q
for its quarter ended June 30, 1995;
(iii) analyzed certain publicly available historical business and
financial information relating to Softkey as presented in documents filed
with the Securities and Exchange Commission, including Softkey's Annual
Report to Stockholders and Annual Report on Form 10-K for its fiscal year
ended December 31, 1994 and Softkey's Quarterly Report on Form 10-Q for its
quarter ended June 30, 1995;
(iv) reviewed a draft of the Company's Quarterly Report on Form 10-Q for
its quarter ended September 30, 1995;
(v) analyzed certain internal financial and operating data concerning the
Company and Softkey prepared by the respective management of such
companies;
(vi) reviewed certain financial forecasts and budgets for the Company and
Softkey prepared by the respective management of such companies;
(vii) conducted discussions with certain members of the senior management
of the Company and Softkey concerning their respective businesses,
operations and strategic objectives, as well as the strategic implications
and operating efficiencies that might be realized following the
consummation of the Merger;
<PAGE>
(viii) compared the financial performance of the Company and Softkey, and
the price and trading activity of Company Common Stock and Softkey Common
Stock with that of certain other publicly-traded companies which we
considered to be generally comparable to the Company and Softkey;
(ix) reviewed the trading history of Company Common Stock and Softkey
Common Stock, including each company's respective performance in comparison
to market indices and to selected companies in comparable businesses and
the market reaction to selected public announcements regarding each
company;
(x) reviewed the financial terms, to the extent publicly available, of
certain merger and acquisition transactions we considered to be comparable
to the Merger; and
(xi) performed such other analyses as we have considered appropriate.
In addition to the foregoing, we have reviewed certain publicly available
historical business and financial information relating to The Learning
Company, a Delaware corporation ("TLC"), and other information regarding TLC
provided to us by management of Softkey. We also have given consideration to
the fact that Softkey has advised us that it intends to make an offer (the
proposed terms of which have been disclosed to us but have not been publicly
announced) to acquire TLC for a combination of cash and stock of Softkey (the
"Proposed Acquisition"). We understand that the consummation of the Merger is
not conditioned upon a successful completion of the Proposed Acquisition.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information respecting the Company and
Softkey and any other information provided to us, and we have not assumed any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets of the Company or
Softkey. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on a basis reflecting the best
currently available judgments of the management of the Company and Softkey as
to the future financial performance of the Company and Softkey, respectively.
In addition to our review and analysis of the specific information set forth
above, our opinion herein reflects and gives effect to our assessment of
general economic, monetary and market conditions existing as of the date
hereof as they may affect the business and prospects of the Company.
As you know, we will receive a fee for our services to the Company pursuant
to an engagement letter dated October 29, 1995.
The opinion rendered herein does not constitute a recommendation of the
Merger over any other alternative transactions which may be available to the
Company. Our engagement and the opinion expressed herein are for the benefit
of the Board of Directors of the Company. Furthermore, the opinion rendered
herein does not constitute a recommendation that any stockholder of the
Company vote to approve the Merger.
Based on and subject to the foregoing, we are of the opinion that, as of
this date, the consideration to be received by the holders of shares of
Company Common Stock pursuant to the Merger Agreement is fair to such holders
from a financial point of view.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ Nancy B. Peretsman
-------------------------
Nancy B. Peretsman
Managing Director
C-2
[Art]
<PAGE>
APPENDIX D
[ART]
March 6, 1996
The Board of Directors
Minnesota Educational Computing Corporation
6160 Summit Drive North
Minneapolis, MN 55430
Ladies & Gentleman:
Reference is made to the letter of Allen & Company Incorporated ("Allen")
addressed to you and dated October 30, 1995 (the "Opinion"), relating to
Allen's opinion as to the fairness, from a financial point of view, of the
consideration to be received by the holders of MECC Common Shares pursuant to
the Agreement and Plan of Merger (the "Merger Agreement") with SoftKey
International Inc. ("SoftKey"). Capitalized terms used but not otherwise
defined herein have the meanings ascribed thereto in the Opinion. You have
asked us, pursuant to the terms of that engagement letter agreement between
MECC and Allen dated October 29, 1995 to confirm the Opinion to the effect
that, as of the date hereof, the consideration to be received by the holders
of MECC Common Shares pursuant to the Merger Agreement remains fair from a
financial point of view.
In reaching the conclusion contained herein we have:
1. Reviewed factual developments since the date of the Opinion, including
without limitation (a) SoftKey's acquisition of The Learning Company for
approximately $607 million in cash and SoftKey securities, (b) the
investment by Tribune Company ("Tribune") pursuant to which, among other
things, Tribune has invested $150 million in SoftKey securities, and (C)
SoftKey's acquisition from Tribune of Compton's NewMedia Inc. and Compton's
Learning Company;
2. Reviewed the strategic and financial considerations underlying the
Merger, including the formation of a leading educational software company
with strong distribution capabilities and the economic benefits of
consolidation;
3. Reviewed developments in the financial markets since the date of the
Opinion, including (a) the current market valuation and trading multiples
of other publicly-traded companies which we considered to be generally
comparable to the Company and SoftKey, (b) the common stock prices and
trading volume of SoftKey and MECC Common Stock since the date of the
Opinion, (c) the performance of Softkey and MECC Common Stock compared to
other educational and entertainment software companies, the S&P Computer
Software Index and the S&P 500 since the date of the Opinion, (d)
comparable transactions occurring since the date of the Opinion;
4. Considered the possible impacts that the failure to consummate such
Agreement could have on the price of MECC Common Shares in light of current
market conditions and the current valuations of other publicly-traded
companies which we considered to be generally comparable to the Company and
SoftKey;
5. Reviewed updated Pro Forma Information provided by management of
SoftKey as to pro forma revenues, net income, earnings per share, EBIT,
EBIT margins and anticipated revenue enhancements and cost savings for
SoftKey, The Learning Company, MECC, Compton's NewMedia and Compton's
Learning Co. for calendar year 1996.
D-1
<PAGE>
6. Reviewed the terms and conditions of the Merger Agreement, the terms
of SoftKey's acquisitions of The Learning Company, Compton's NewMedia Inc.
and Compton's Learning Co., as well as the terms of Tribune's investment in
SoftKey.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information respecting MECC and
SoftKey and any other information provided to us, although we have not assumed
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets of MECC. With respect
to the financial information referred to above, we have assumed that it has
been reasonably prepared on a basis reflecting the best currently available
judgments of the management of SoftKey as to the future financial performance
of SoftKey (including The Learning Company, Compton's NewMedia Inc. and
Compton's Learning Co.) and MECC.
In connection with the preparation of this opinion, we have not been
authorized by MECC or its Board of Directors to solicit, nor have we
solicited, third party indications of interest for the acquisition of all or
any part of MECC. Furthermore, the opinion rendered herein does not constitute
a recommendation by our firm as to how any MECC stockholder should vote its
shares in connection with the Merger.
Based on the foregoing, we hereby confirm, as of the date hereof, the
conclusion set forth in the Opinion that the consideration to be received by
the holders of MECC Common Shares pursuant to the Agreement and Plan of Merger
between SoftKey and MECC is fair from a financial point of view.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ Nancy B. Peretsman
------------------------------
Nancy B. Peretsman
Managing Director
D-2
[Art]
<PAGE>
APPENDIX E
VOTING AGREEMENT
VOTING AGREEMENT (the "Agreement"), dated as of October 30, 1995, between
North American Fund II, L.P., a Delaware limited partnership and a stockholder
(the "Stockholder") of Minnesota Educational Computing Corporation (MECC), a
Minnesota corporation (the "Company"), and SoftKey International Inc., a
Delaware corporation ("Parent").
WHEREAS, concurrently with the execution of this Agreement, the Company,
Parent and SchoolCo Inc., a Minnesota corporation and a wholly owned
subsidiary of Parent ("Sub"), have entered into an Agreement and Plan of
Merger (as the same may be amended from time to time, the "Merger Agreement"),
providing for the merger (the "Merger") of Sub with and into the Company
pursuant to the terms and conditions of the Merger Agreement; and
WHEREAS, upon consummation the Merger, the stockholders of the Company will
receive a number of shares of common stock, par value $.01 per share, of
Parent ("Parent Common Stock") equal to the Exchange Ratio (as defined in the
Merger Agreement) for each share of common stock, par value $.01 per share
(the "Company Common Stock") of the Company owned by them;
WHEREAS, the Stockholder owns of record and beneficially 1,461,762 shares of
Company Common Stock wishes to enter into this Agreement with respect to
794,284 of such shares (such 794,284 shares of Company Common Stock being
referred to as the "Shares"); and
WHEREAS, in order to induce Parent to enter into the Merger Agreement, the
Stockholder has agreed, upon the terms and subject to the conditions set forth
herein, to vote the Shares and to deliver an irrevocable proxy to Parent to
vote the Shares at a meeting of the Company's stockholders, in favor of
approval and adoption of the Merger Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. Agreement to Vote Shares. The Stockholder agrees during the term of
this Agreement to vote the Stockholder's Shares, in person or by proxy, (a)
in favor of approval and adoption of the Merger Agreement and the Merger at
every meeting of the stockholders of the Company at which such matters are
considered and at every adjournment thereof, and (b) against an Alternative
Acquisition (as such term is defined in the Merger Agreement). The
Stockholder agrees to deliver to Parent upon request immediately prior to
any vote contemplated by clause (a) or (b) above a proxy substantially in
the form attached hereto as Annex A (a "Proxy"), which Proxy shall be
irrevocable during the term of this Agreement to the extent permitted under
Minnesota law, and Parent agrees to vote the Shares subject to each such
Proxy in favor of approval and adoption of the Merger Agreement and the
Merger. Notwithstanding anything herein to the contrary, the obligation of
the Stockholder to vote its Shares in accordance with the terms of this
Agreement and to deliver the Proxy, and the validity of a Proxy delivered
hereunder, will be conditional on the Parent Price (as hereinafter defined)
being at least $30. The "Parent Price," as used herein, refers to the
volume weighted average of the closing prices of Parent Common Stock on the
Nasdaq National Market for the twenty full trading days immediately
preceding the meeting of the stockholders of the Company (or adjournment
thereof) at which the Merger and the Merger Agreement are considered.
2. No Voting Trusts. The Stockholder agrees that the Stockholder will
not, nor will the Stockholder permit any entity under the Stockholder's
control to, deposit any of the Stockholder's Shares in a voting trust or
subject any of its Shares to any arrangement with respect to the voting of
the Shares inconsistent with this Agreement.
<PAGE>
3. Limitation on Dispositions and Proxies. During the term of this
Agreement, the Stockholder agrees not to sell, assign, pledge, transfer or
otherwise dispose of, or grant any proxies with respect to (except for a
Proxy or a proxy which is not inconsistent with the terms of this
Agreement) any of the Stockholder's Shares.
4. Specific Performance. Each party hereto acknowledges that it will be
impossible to measure in money the damage to the other party if a party
hereto fails to comply with the obligations imposed by this Agreement,
that, in the event of any such failure, the other party will not have an
adequate remedy at law or in damages. Accordingly, each party hereto agrees
that injunctive relief or other equitable remedy, in addition to remedies
at law or damages, is the appropriate remedy for any such failure and will
not oppose the granting of such relief on the basis that the other party
has an adequate remedy at law. Each party hereto agrees that it will not
seek, and agrees to waive any requirement for, the securing or posting of a
bond in connection with any other party's seeking or obtaining such
equitable relief.
5. Term of Agreement; Termination. Subject to Section 9(e), the term of
this Agreement shall commence on the date hereof and such term and this
Agreement shall terminate upon the earliest to occur of (i) the Effective
Time, and (ii) the date on which the Merger Agreement is terminated in
accordance with its terms. Upon such termination, no party shall have any
further obligations or liabilities hereunder; provided, that such
termination shall not relieve any party from liability for any breach of
this Agreement prior to such termination.
6. Representations and Warranties of the Stockholders. Each Stockholder
represents and warrants to Parent that, as of the date hereof, (a) such
Stockholder has full legal power and authority to execute and deliver this
Agreement and the Proxy, and (b) such Stockholder's Shares are free and
clear of all proxies (except for a proxy which is not inconsistent with the
terms of this Agreement).
7. Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject
matter hereof and contains the entire agreement among the parties with
respect to the subject matter hereof. This Agreement may not be amended,
supplemented or modified, and no provisions hereof may be modified or
waived, except by an instrument in writing signed by all parties hereto. No
waiver of any provisions hereof by any party shall be deemed a waiver of
any other provisions hereof by any such party, nor shall any such waiver be
deemed a continuing waiver of any provision hereof by such party.
8. Notices. All notices, requests, claims, demands or other
communications hereunder shall be in writing and shall be deemed given when
delivered personally, upon receipt of a transmission confirmation if sent
by telecopy or like transmission (with confirmation) and on the next
business day when sent by Federal Express, Express Mail or other reputable
overnight courier service to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
If to Parent:
SoftKey International Inc.
One Athenaeum Street
Cambridge, MA 02142
Attention: Office of the General Counsel
Telecopy: (617) 494-5660
With a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Beacon Street
North American Fund II, L.P.
Boston, Massachusetts 02108
Attention: Louis A. Goodman, Esq.
Telecopy: (617) 573-4822
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<PAGE>
If to Stockholder:
North American Fund II, L.P.
135 South LaSalle Street, Suite 4000
Chicago, IL 60603
Attention: Charles L. Palmer
Telecopy: (312) 332-1540
With a copy to:
Gardner, Carton & Douglas
Quaker Tower, Suite 3400
321 North Clark Street
Chicago, IL 60160-4795
Attention: Charles R. Manzoni, Jr., Esq.
Telecopy: (312) 644-3381
9. Miscellaneous.
(a) This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of
Delaware, without reference to its conflicts of law principles.
(b) If any provision of this Agreement or the application of such
provision to any person or circumstances shall be held invalid or
unenforceable by a court of competent jurisdiction, such provision or
application shall be unenforceable only to the extent of such invalidity or
unenforceability, and the remainder of the provision held invalid or
unenforceable and the application of such provision to persons or
circumstances, other than the party as to which it is held invalid, and the
remainder of this Agreement, shall not be affected.
(c) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
(d) All Section headings herein are for convenience of reference only and
are not part of this Agreement, and no construction or reference shall be
derived therefrom.
(e) The obligations of the Stockholder set forth in this Agreement shall
not be effective or binding upon the Stockholder until after such time as
the Merger Agreement is executed and delivered by the Company, Parent and
Sub, and the parties agree that there is not and has not been any other
agreement, arrangement or understanding between the parties hereto with
respect to the matters set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
SOFTKEY INTERNATIONAL INC.
By: /s/ Michael J. Perik
---------------------------------
Name: Michael J. Perik
Title: Chairman and Chief
Executive Officer
NORTH AMERICAN FUND II, L.P.
By: /s/ Charles L. Palmer
---------------------------------
Name: Charles L. Palmer
Title: President of North American
Business Development Company,
L.L.C., the General Partner of
North American Fund II, L.P.
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<PAGE>
(ANNEX A)
FORM OF PROXY
The undersigned, for consideration received, hereby appoints SoftKey
International Inc., a Delaware corporation ("Parent"), its proxy to vote
794,284 shares of Common Stock, par value $.01 per share, of Minnesota
Educational Computing Corporation (MECC), a Minnesota corporation (the
"Company"), owned by the undersigned and described in the Voting Agreement
referred to below and which the undersigned is entitled to vote at any meeting
of stockholders of the Company, and at any adjournment thereof, to be held for
the purpose of considering and voting upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of October 30, 1995 (the "Merger
Agreement"), by and among the Company, Parent, and SchoolCo Inc., a Minnesota
corporation and a wholly owned subsidiary of Parent ("Sub"), providing for the
merger (the "Merger") of Sub with and into the Company, FOR such proposal and
AGAINST any Alternative Acquisition (as such term is defined in the Merger
Agreement). This proxy is subject to the terms of the Voting Agreement, is
coupled with an interest and revokes all prior proxies granted by the
undersigned with respect to such 794,284 shares, is irrevocable and shall
terminate and be of no further force or effect automatically at such time as
the Voting Agreement, dated as of October 30, 1995 between the undersigned and
Parent, a copy of such Agreement being attached hereto, terminates in
accordance with its terms.
Dated _________________________, 199_
NORTH AMERICAN FUND II, L.P.
By: _________________________________
Name:
Title:
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<PAGE>
APPENDIX F
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters and abolishes a preferential right of the shares;
(2) creates, alters or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting
rights; except that an amendment to the articles of an issuing public
corporation that provides that section 302A.671 does not apply to a
control share acquisition does not give rise to the right to obtain
payment under this section:
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court,
or a disposition for cash on terms requiring that all or substantially all
of the net proceeds of disposition be distributed to the shareholders in
accordance with their respective interests within one year after the date
of the disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their
shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of
the shareholder and discloses the name and address of each beneficial owner on
whose behalf the shareholder dissents. In that event, the rights of the
dissenter shall be determined as if the shares as to which the shareholder has
dissented and the other shares were registered in the names of different
shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of
this section and section 302A.473, if the beneficial owner submits to the
corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain
payment under this section does not apply to a shareholder of the surviving
corporation in a merger, if the shares of the shareholder are not entitled to
be voted on the merger.
<PAGE>
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at
law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1 up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If a proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the
shareholder and must not vote the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision
3 and to all shareholders entitled to dissent if no shareholder vote was
required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting
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<PAGE>
shareholder who has complied with subdivisions 3 and 4 the amount the
corporation estimates to be the fair value of the shares, plus interest,
accompanied by:
(1) the corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person
who was not a beneficial owner on that date. If the dissenter has complied
with subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for
withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision
4 and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest,
within 30 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only
to the amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that
the court determine the fair value of the shares, plus interest. The petition
shall be filed in the county in which the registered office of the corporation
is located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of
the constituent corporation was located. The petition shall name as parties
all dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing
the petition, serve all parties with a summons and copy of the petition under
the rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The
court shall determine whether the shareholder or shareholders in question have
fully complied with the requirements of this section, and shall determine the
fair value of the shares, taking into account any and all factors the court
finds relevant, computed by any method or combination of methods that the
court, in its discretion, sees fit to use, whether or not used by the
corporation or by a dissenter. The fair value of the shares as determined by
the court is binding on all shareholders, wherever located. A dissenter is
entitled to judgment in cash for the amount by which the fair value of the
shares as determined by the court, plus interest, exceeds the
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<PAGE>
amount, if any, remitted under subdivision 5, but shall not be liable to the
corporation for the amount, if any, by which the amount, if any, remitted to
the dissenter under subdivision 5 exceeds the fair value of the shares as
determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously,
or not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law, as amended, allows a
corporation to eliminate the personal liability of directors of a corporation
to the corporation or to any of its stockholders for monetary damages for a
breach of fiduciary duty as a director, except in the case where the director
breached his duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or knowingly violated a law, authorized the payment of
a dividend or approved a stock repurchase in violation of Delaware corporate
law or obtained an improper personal benefit.
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at its request in such capacity in another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 8 of SoftKey's Restated Certificate of Incorporation, as amended,
provides for elimination of directors' personal liability and indemnification
as follows:
"8. LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS.
8.1 Elimination of Certain Liabilities of Directors. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the Delaware General Corporation Law is amended after approval by the
stockholders of this Section to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended. Any
repeal or modification of this Section by the stockholders of the Corporation
shall not adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
8.2 Indemnification and Insurance.
8.2.1 Right To Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director
or officer, of the Corporation or is or was serving at the request of the
Corporation, as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, or other enterprise,
including service with respect to employee benefit plans, whether the basis
of such proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held
harmless by the Corporation to its fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability, and loss (including attorneys'
fees, judgments, fines, Employee Retirement Income Security Act of 1974
excise taxes
II-1
<PAGE>
or penalties, and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of his
or her heirs, executors, and administrators; provided, however, that the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation. The right to indemnification conferred in
this Section shall be a contract right and shall include the right to be
paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if
the Delaware General Corporation Law requires, the payment of such expenses
incurred by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered
by such person while a director or officer, including, without limitation,
service to an employee benefit plan) in advance of the final disposition of
a proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director
or officer is not entitled to be indemnified under this Section or
otherwise. The Corporation may, by action of its Board of Directors,
provide indemnification to employees and agents of the Corporation with the
same scope and effect as the foregoing indemnification of directors and
officers.
8.2.2 Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, provision of this Restated Certificate, Bylaw, agreement, vote of
stockholders, or disinterested directors or otherwise.
8.2.3 Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee, or agent of the
Corporation or another corporation, partnership, joint venture, trust, or
other enterprise against any such expense, liability or loss, whether or
not the Corporation would have the power to indemnify such person against
such expense, liability, or loss under the Delaware General Corporation
Law."
SoftKey has purchased directors' and officers' liability insurance which
would indemnify the directors and officers of SoftKey against damages arising
out of certain kinds of claims which might be made against them based on their
negligent acts or omissions while acting in their capacity as such.
II-2
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 by and among SoftKey, Sub and MECC
dated as of October 30, 1995 (attached as Appendix A to Part I of
this Registration Statement)
2.3 Agreement and Plan of Merger, dated November 30, 1995 by and among
SoftKey, Cubsco I Inc., Cubsco II Inc., Tribune Company, Compton's
NewMedia, Inc., and Compton's Learning Company(2)
2.4 SoftKey/TLC Agreement and Plan of Merger dated December 6, 1995
among SoftKey, Kidsco Inc. and The Learning Company(2)
4.1 Indenture dated as of October 16, 1995 between SoftKey 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 SoftKey and State Street Bank and
Trust Company, as Trustee(4)
4.3 Note Resale Registration Rights Agreement dated as of October 23,
1995 by and between SoftKey, on the one hand, and the Intial
Purchasers on the other hand (the "Registration Rights
Agreement")(4)
4.4 Letter Agreement dated November 22, 1995 amending the Registration
Rights Agreement(4)
4.5 Securities Resale Registration Rights Agreement by and among
SoftKey and Tribune Company(5)
4.6 Indenture between SoftKey and State Street Bank and Trust Company,
as Trustee, for 5 1/2% Senior Convertible/Exchangeable Notes Due
2000 (including the Form of Notes)(5)
5.1 Opinion of Neal S. Winneg, Esq., Vice President, General Counsel
and Secretary of SoftKey, regarding legality of securities being
registered
8.1 Opinion of Gardner, Carton & Douglas as to federal income tax
consequences of the Merger
8.2 Opinion of Skadden, Arps, Slate, Meagher & Flom as to federal
income tax consequences of the Merger
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of Deloitte & Touche LLP
23.5 Consent of Deloitte & Touche LLP
23.6 Consent of Price Waterhouse LLP
23.7 Consent of Price Waterhouse LLP
23.8 Consent of Neal S. Winneg, Esq., Vice President, General Counsel
and Secretary of SoftKey (contained in the opinion filed as
Exhibit 5.1)
23.9 Consent of Gardner, Carton & Douglas (contained in the opinion
filed as Exhibit 8.1)
23.10 Consent of Skadden, Arps, Slate, Meagher & Flom (contained in the
opinion filed as Exhibit 8.2)
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
</TABLE>
- --------
(1) Incorporated by reference to schedules included in SoftKey's definitive
Joint Management Information Circular and Proxy Statement dated December
27, 1993.
II-3
<PAGE>
(2) Incorporated by reference to exhibits filed with SoftKey's Current Report
on Form 8-K dated December 11, 1995.
(3) Incorporated by reference to exhibits filed with SoftKey's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995.
(4) Incorporated by reference to exhibits filed with SoftKey's Registration
Statement on Form S-3 (Registration No. 333-145) filed January 6, 1996.
(5) Incorporated by reference to exhibits filed with SoftKey's Registration
Statement on Form S-3 (Registration No. 333-02385) filed April 9, 1996.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(2) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
(3) that every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(4) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of Form
S-4 under the Securities Act of 1933, within one business day of receipt of
any such request, and to send the incorporated documents by first class
mail or other equally prompt means, including information contained in
documents filed subsequent to the effective date of the Registration
Statement through the date of responding to such request; and
(5) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In
the event that a claim of indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in a successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cambridge, the
Commonwealth of Massachusetts on April 11, 1996.
SoftKey International Inc.
/s/ Michael J. Perik
By: _________________________________
MICHAEL J. PERIK CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below hereby authorizes Neal S. Winneg and R. Scott Murray and each of them,
with full power of substitution, to execute in the name and on behalf of such
person any amendment (including any post-effective amendment) to this
Registration Statement and to file the same, with exhibits thereto, and other
documents in connection therewith, making such changes in this Registration
Statement as the person(s) so acting deems appropriate, and appoints each of
such persons, each with full power of substitution, attorney-in-fact to sign
any amendment (including any post-effective amendment) to this Registration
Statement and to file the same, with exhibits thereto, and other documents in
connection therewith.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael J. Perik Chairman of the April 11, 1996
- ------------------------------------- Board and Chief
MICHAEL J. PERIK Executive Officer
(principal
executive officer)
/s/ R. Scott Murray Chief Financial April 11, 1996
- ------------------------------------- Officer (principal
R. SCOTT MURRAY financial and
accounting officer)
/s/ Kevin O'Leary President and April 11, 1996
- ------------------------------------- Director
KEVIN O'LEARY
/s/ Michael Bell Director April 11, 1996
- -------------------------------------
MICHAEL BELL
/s/ James C. Dowdle Director April 11, 1996
- -------------------------------------
JAMES C. DOWDLE
Director April 11, 1996
- -------------------------------------
ROBERT GAGNON
/s/ Robert Rubinoff Director April 11, 1996
- -------------------------------------
ROBERT RUBINOFF
Director April 11, 1996
- -------------------------------------
SCOTT M. SPERLING
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ------------
<C> <S> <C>
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 by and among SoftKey,
Sub and MECC dated as of October 30, 1995 (attached
as Appendix A to Part I of this Registration
Statement)
2.3 Agreement and Plan of Merger, dated November 30,
1995 by and among SoftKey, Cubsco I Inc., Cubsco II
Inc., Tribune Company, Compton's NewMedia, Inc.,
and Compton's Learning Company(2)
2.4 SoftKey/TLC Agreement and Plan of Merger dated
December 6, 1995 among SoftKey, Kidsco Inc. and The
Learning Company(2)
4.1 Indenture dated as of October 16, 1995 between
SoftKey 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
SoftKey and State Street Bank and Trust Company, as
Trustee(4)
4.3 Note Resale Registration Rights Agreement dated as
of October 23, 1995 by and between SoftKey, on the
one hand, and the Intial Purchasers on the other
hand (the "Registration Rights Agreement")(4)
4.4 Letter Agreement dated November 22, 1995 amending
the Registration Rights Agreement(4)
4.5 Securities Resale Registration Rights Agreement by
and among SoftKey and Tribune Company(5)
4.6 Indenture between SoftKey and State Street Bank and
Trust Company, as Trustee, for 5 1/2% Senior
Convertible/Exchangeable Notes Due 2000 (including
Form of Notes)(5)
5.1 Opinion of Neal S. Winneg, Esq., Vice President,
General Counsel and Secretary of SoftKey, regarding
legality of securities being registered
8.1 Opinion of Gardner, Carton & Douglas as to federal
income tax consequences of the Merger
8.2 Opinion of Skadden, Arps, Slate, Meagher & Flom as
to federal income tax consequences of the Merger
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of Deloitte & Touche LLP
23.5 Consent of Deloitte & Touche LLP
23.6 Consent of Price Waterhouse LLP
23.7 Consent of Price Waterhouse LLP
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ------------
<C> <S> <C>
23.8 Consent of Neal S. Winneg, Esq., Vice President,
General Counsel and Secretary of SoftKey (contained
in the opinion filed as Exhibit 5.1)
23.9 Consent of Gardner, Carton & Douglas (contained in
the opinion filed as
Exhibit 8.1)
23.10 Consent of Skadden, Arps, Slate, Meagher & Flom
(contained in the opinion filed as Exhibit 8.2)
24.1 Power of Attorney (included on the signature page
of this Registration Statement)
</TABLE>
- --------
(1) Incorporated by reference to schedules included in SoftKey's definitive
Joint Management Information Circular and Proxy Statement dated December
27, 1993.
(2) Incorporated by reference to exhibits filed with SoftKey's Current Report
on Form 8-K dated December 11, 1995.
(3) Incorporated by reference to exhibits filed with SoftKey's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995.
(4) Incorporated by reference to exhibits filed with SoftKey's Registration
Statement on Form S-3 (Registration No. 333-145) filed January 6, 1996.
(5) Incorporated by reference to exhibits filed with SoftKey's Registration
Statement on Form S-3 (Registration No. 333-02385) filed April 9, 1996.
<PAGE>
EXHIBIT 5.1
[SOFTKEY LOGO APPEARS HERE]
- --------------------------------------------------------------------------------
April 11, 1996
SoftKey International Inc.
One Athenaeum Street
Cambridge, Massachusetts 02142
Re: SoftKey International Inc. Registration Statement on Form S-4
-------------------------------------------------------------
Ladies and Gentlemen:
I am Vice President and General Counsel of SoftKey International Inc., a
Delaware corporation (the "Company"), and am issuing this opinion in connection
with the Registration Statement on Form S-4 being filed by the Company with the
Securities and Exchange Commission (the "Commission") on the date hereof (the
"Registration Statement") for the purpose of registering with the Commission
under the Securities Act of 1933, as amended (the "1933 Act"), up to 10,500,000
shares (the "Shares") of common stock of the Company, par value $.01 per share,
issuable pursuant to the Agreement and Plan of Merger by and among the Company,
SchoolCo Inc. ("SchoolCo") and Minnesota Educational Computing Corporation
(MECC) ("MECC") dated as of October 30, 1995 (the "Merger Agreement").
In this connection, I have examined and am familiar with originals or copies,
certified or otherwise identified to my satisfaction, of (i) the Registration
Statement, (ii) the Merger Agreement, (iii) the Restated Certificate of
Incorporation and the Bylaws of the Company, as amended, each as currently in
effect and (iv) certain resolutions adopted by the Board of Directors of the
Company relating to the issuance of the Shares and certain related matters. I
have also examined originals or copies, certified or otherwise identified to my
satisfaction of such records of the Company and such agreements, certificates
of public officials, certificates of others of the Company and others, and such
other documents, certificates and records as I have deemed necessary or
appropriate as a basis for the opinions set forth herein.
In my examination, I have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to me as originals, the conformity to original documents of all documents
submitted to me as certified, conformed or photostatic copies and the
authenticity of the originals of such copies. In making my examination of
documents executed or to be executed by parties other than the Company, I have
assumed that such parties had or will have the power, corporate or other, to
enter into and perform all obligations thereunder and have also assumed the due
authorization by all requisite action, corporate or other, and execution and
delivery by such parties and the validity and binding effect thereof. As to any
facts material to the opinions expressed herein which I have not independently
established or verified, I have relied upon statements and representations of
other officers and representatives of the Company and others.
I am admitted to the Bar of the Commonwealth of Massachusetts and do not
purport to be an expert on, or express any opinion concerning, any law other
than the substantive law of the Commonwealth of Massachusetts.
Based upon and subject to the foregoing, I am of the opinion that the Shares
have been duly authorized for issuance and, upon consummation of the merger of
SchoolCo Inc. with MECC pursuant to the Merger Agreement, and the issuance of
the Shares and delivery of proper stock certificates therefor in the manner
contemplated in the Merger Agreement, the Shares will be validly issued, fully
paid and nonassessable.
[LOGO OF SOFTKEY INTERNATIONAL APPEARS HERE]
<PAGE>
SoftKey International Inc.
April 11, 1996
Page 2
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this opinion under the caption
"Legal Opinion" in the Joint Proxy Statement-Prospectus included therein. In
giving such consent, I do not thereby admit that I am in the category of
persons whose consent is required under Section 7 of the 1933 Act or the rules
and regulations of the Commission promulgated thereunder.
This opinion is furnished by me, as counsel to the Company, in accordance
with the requirements of Item 401(b)(5) of Regulation S-K under the 1933 Act
and, except as provided in the immediately preceding paragraph, is not to be
used, circulated or quoted for any other purpose or otherwise referred to or
relied upon by any other person without the express written permission of the
Company.
Very truly yours,
/s/ Neal S. Winneg
Neal S. Winneg
General Counsel
<PAGE>
EXHIBIT 8.1
GARDNER, CARTON & DOUGLAS
SUITE 3400--QUAKER TOWER
321 NORTH CLARK STREET
CHICAGO, ILLINOIS 60610-4795
(312) 644-3000
TELEX: 25-3628 WASHINGTON, D.C.
TELECOPIER: (312) 644-3381
April 11, 1996
Minnesota Educational
Computing Corporation (MECC)
6160 Summit Drive North
Minneapolis, MN 55430-4003
Gentlemen:
We have acted as special counsel to Minnesota Educational Computing
Corporation (MECC), a Minnesota corporation ("MECC"), in connection with (i)
the Merger, as defined and described in the Agreement and Plan of Merger by
and among SoftKey International Inc., a Delaware corporation ("SoftKey"),
SchoolCo Inc., a Minnesota corporation and a wholly owned subsidiary of
SoftKey ("SchoolCo"), and MECC, dated as of October 30, 1995 (the "Merger
Agreement") and (ii) the preparation and filing of the Joint Proxy Statement-
Prospectus, filed with the Securities and Exchange Commission on November 22,
1995, as amended by Amendment No. 1 thereto filed on December 4, 1995, as
further amended by Amendment No. 2 thereto filed on December 8, 1995, as
further amended by Amendment No. 3 thereto filed on January 4, 1996, as
further amended by Amendment No. 4 thereto filed on March 13, 1996, and as
further amended by Amendment No. 5 thereto filed on April 10, 1996 (the "Joint
Proxy Statement-Prospectus"), under the Securities Exchange Act of 1934, as
amended, and the preparation of a Registration Statement on Form S-4 (the
"Registration Statement"), of which the Joint Proxy Statement-Prospectus forms
a part. Unless otherwise indicated, each defined term has the meaning ascribed
to it in the Merger Agreement.
In the Merger, each issued and outstanding common share, par value $.01 per
share, of MECC ("MECC Common Shares") (other than shares to be canceled in
accordance with clause (ii) below and shares as to which dissenters' rights
have been duly demanded under Minnesota law) will be converted into the right
to receive a number of fully paid and nonassessable shares of SoftKey Common
Stock equal to the result (the "Exchange Ratio") obtained by dividing $40 by
the volume weighted average of the closing prices for SoftKey Common Stock on
the NNM for the twenty full trading days ending on the third full trading day
prior to the Effective Time (but in no event will the Exchange Ratio be
greater than 1.14286 or less than .88889), and (ii) all MECC Common Shares
that are held by MECC as treasury shares and any MECC Common Shares owned by
SoftKey, SchoolCo or any other wholly owned subsidiary of SoftKey will be
canceled and retired and shall cease to exist and no stock of SoftKey or other
consideration shall be delivered in exchange therefor.
In connection with this opinion, we have examined and are familiar with
originals and copies, certified or otherwise identified to our satisfaction,
of (i) the Joint Proxy Statement-Prospectus, (ii) the Merger Agreement and
(iii) such other documents as we have deemed necessary or appropriate in order
to enable us to render the opinion below. In our examination, we have assumed
the legal capacity of all natural persons, the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to original documents of all documents submitted to us as certified or
photostatic copies, and the authenticity of the originals of such latter
documents.
<PAGE>
Minnesota Educational Computing Corporation (MECC)
6160 Summit Drive North
Minneapolis, MN 55430-4003
April 11, 1996
Page 2
Based upon these assumptions and subject to (i) the Merger being consummated
in the manner described in the Merger Agreement, (ii) the accuracy of the
facts concerning the Merger that have come to our attention during our
engagement, (iii) certain representations made by SoftKey, SchoolCo, MECC and
certain MECC stockholders in connection with the issuance of our opinion,
including the representations contained in their respective letters to us,
dated as of the date hereof and (iv) the retention after the completion of the
Merger of a significant continuing equity interest in SoftKey by the historic
shareholder of MECC, we are of the opinion that the material U.S. federal
income tax consequences of the Merger to SoftKey, MECC and the holders of MECC
Common Stock are as follows:
1. The Merger will constitute a reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code").
2. As a reorganization for federal income tax purposes within the meaning
of Section 368(a) of the Code, the Merger will result in the following
general federal income tax consequences:
A. SoftKey, MECC and SchoolCo will not recognize any gain or loss as
a result of the Merger.
B. No gain or loss will be recognized by holders of MECC Common
Shares who exchange their MECC Common Shares for SoftKey Common Stock,
except with respect to any cash received by MECC shareholders in lieu
of fractional shares of SoftKey Common Stock.
C. A holder of MECC Common Shares who receives cash in lieu of a
fractional share of SoftKey Common Stock in the Merger generally will
be treated as if the fractional share had been distributed to such
holder as part of the Merger and then redeemed by Softkey in exchange
for the cash distributed in lieu of the fractional share in a
transaction qualifying as an exchange under Section 302 of the Code. As
a result, a holder of MECC Common Shares generally will recognize
capital gain or loss with respect to the cash payment received in lieu
of a fractional share.
D. Each holder's aggregate tax basis in the SoftKey Common Stock
received in the Merger will equal his aggregate tax basis in the MECC
Common Shares exchanged therefor, decreased by the amount of any tax
basis allocable to any fractional share interest for which cash is
received.
E. Provided that the MECC Common Shares are held as a capital asset
at the Effective Time, the holding period of SoftKey Common Stock
received in the Merger in exchange therefor will include the holding
period of such MECC Common Shares.
We express no opinion as to whether such description addresses all of the
U.S. federal income tax consequences of the Merger that may be applicable to
SoftKey, MECC, or the holders of MECC Common Stock. In addition, we express no
opinion as to the U.S. federal, state, or local, or foreign or other tax
consequences, other than as set forth in the Joint Proxy Statement-Prospectus
under the heading "Certain Federal Income Tax Consequences of the Merger."
In rendering our opinion, we have considered the applicable provisions of
the Code, Treasury regulations promulgated thereunder, pertinent judicial
authorities, interpretive rulings of the Internal Revenue Service and such
other authorities as we have considered relevant. It should be noted that
statutes, regulations, judicial decisions and administrative interpretations
are subject to change at any time and, in some circumstances, with retroactive
effect. We are under no obligation to supplement or revise our opinion to
reflect any changes (including changes that have retroactive effect) (i) in
applicable law or (ii) that would cause any representation to no longer be
true or correct.
<PAGE>
This letter is furnished to you solely for use in connection with the Merger,
as described in the Merger Agreement, and is not to be used, circulated,
quoted, or otherwise referred to for any other purpose without our express
written permission.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading
"Certain Federal Income Tax Consequences of the Merger" in the Joint Proxy
Statement-Prospectus. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Gardner, Carton & Douglas
-------------------------------------
<PAGE>
EXHIBIT 8.2
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
1440 NEW YORK AVENUE, N.W.
WASHINGTON, D.C. 20005 April 11, 1996
SoftKey International Inc.
One Athenaeum Street
Cambridge, Massachusetts 02142
Gentlemen:
We have acted as special counsel to SoftKey International Inc., a Delaware
corporation ("SoftKey"), in connection with (i) the Merger, as defined and
described in the Agreement and Plan of Merger by and among SoftKey, SchoolCo
Inc., a Minnesota corporation and a wholly owned subsidiary of SoftKey
("SchoolCo"), and Minnesota Educational Computing Corporation (MECC), a
Minnesota corporation ("MECC"), dated as of October 30, 1995 (the "Merger
Agreement") and (ii) the preparation and filing of the Joint Proxy Statement-
Prospectus, filed with the Securities and Exchange Commission on November 22,
1995, as amended by Amendment No. 1 thereto filed on December 4, 1995, as
further amended by Amendment No. 2 thereto filed on December 8, 1995, as
further amended by Amendment No. 3 thereto filed on January 4, 1996, as
further amended by Amendment No. 4 thereto filed on March 13, 1996, and as
further amended by Amendment No. 5 thereto filed on April 10, 1996 (the "Joint
Proxy Statement-Prospectus"), under the Securities Exchange Act of 1934, as
amended, and the preparation of a Registration Statement on Form S-4 (the
"Registration Statement"), of which the Joint Proxy Statement-Prospectus forms
a part. Unless otherwise indicated, each defined term has the meaning ascribed
to it in the Merger Agreement.
In the Merger, each issued and outstanding common share, par value $.01 per
share, of MECC ("MECC Common Shares") (other than shares to be cancelled in
accordance with clause (ii) below and shares as to which dissenters' rights
have been duly demanded under Minnesota law) will be converted into the right
to receive a number of fully paid and nonassessable shares of SoftKey Common
Stock equal to the result (the "Exchange Ratio") obtained by dividing $40 by
the volume weighted average of the closing prices for SoftKey Common Stock on
the NNM for the twenty full trading days ending on the third full trading day
prior to the Effective Time (but in no event will the Exchange Ratio be
greater than 1.14286 or less than .88889), and (ii) all MECC Common Shares
that are held by MECC as treasury shares and any MECC Common Shares owned by
SoftKey, SchoolCo or any other wholly owned subsidiary of SoftKey will be
cancelled and retired and shall cease to exist and no stock of SoftKey or
other consideration shall be delivered in exchange therefor.
In connection with this opinion, we have examined and are familiar with
originals and copies, certified or otherwise identified to our satisfaction,
of (i) the Joint Proxy Statement-Prospectus, (ii) the Merger Agreement, and
(iii) such other documents as we have deemed necessary or appropriate in order
to enable us to render the opinion below. In our examination, we have assumed
the legal capacity of all natural persons, the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to original documents of all documents submitted to us as certified or
photostatic copies, and the authenticity of the originals of such latter
documents.
Based upon these assumptions and subject to (i) the Merger being consummated
in the manner described in the Merger Agreement, (ii) the accuracy of the
facts concerning the Merger that have come to our attention during our
engagement, (iii) certain representations made by SoftKey, SchoolCo, MECC and
certain MECC stockholders in connection with the issuance of our opinion,
including the representations contained in their respective letters to us,
dated as of the date hereof, and (iv) the retention after the completion of
the Merger of a significant continuing equity interest in SoftKey by the
historic shareholders of MECC, we are of the opinion that the material U.S.
federal income tax consequences of the Merger to SoftKey, MECC, and holders of
MECC Common Shares are as follows:
1. The Merger will constitute a reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code").
<PAGE>
SoftKey International Inc.
One Anthenaeum Street
Cambridge, Massachusetts 02142
April 11, 1996
Page 2
2. As a reorganization for federal income tax purposes within the meaning
of Section 368(a) of the Code, the Merger will result in the following
general federal income tax consequences:
A. SoftKey, MECC and SchoolCo will not recognize any gain or loss as
a result of the Merger.
B. No gain or loss will be recognized by holders of MECC Common
Shares who exchange their MECC Common Shares for SoftKey Common Stock,
except with respect to any cash received by MECC shareholders in lieu
of fractional shares of SoftKey Common Stock.
C. A holder of MECC Common Shares who receives cash in lieu of a
fractional share of SoftKey Common Stock in the Merger generally will
be treated as if the fractional share had been distributed to such
holder as part of the Merger and then redeemed by Softkey in exchange
for the cash distributed in lieu of the fractional share in a
transaction qualifying as an exchange under Section 302 of the Code. As
a result, a holder of MECC Common Shares generally will recognize
capital gain or loss with respect to the cash payment received in lieu
of a fractional share.
D. Each holder's aggregate tax basis in the SoftKey Common Stock
received in the Merger will equal his aggregate tax basis in the MECC
Common Shares exchanged therefor, decreased by the amount of any tax
basis allocable to any fractional share interest for which cash is
received.
E. Provided that the MECC Common Shares are held as a capital asset
at the Effective Time, the holding period of SoftKey Common Stock
received in the Merger in exchange therefor will include the holding
period of such MECC Common Shares.
We express no opinion as to whether such description addresses all of the
U.S. federal income tax consequences of the Merger that may be applicable to
SoftKey, MECC, or holders of MECC Common Shares. In addition, we express no
opinion as to the U.S. federal, state, or local, or foreign or other tax
consequences, other than as set forth in the Joint Proxy Statement-Prospectus
under the heading "Certain Federal Income Tax Consequences of the Merger."
In rendering our opinion, we have considered the applicable provisions of
the Code, Treasury regulations promulgated thereunder, pertinent judicial
authorities, interpretive rulings of the Internal Revenue Service and such
other authorities as we have considered relevant. It should be noted that
statutes, regulations, judicial decisions and administrative interpretations
are subject to change at any time and, in some circumstances, with retroactive
effect. We are under no obligation to supplement or revise our opinion to
reflect any changes (including changes that have retroactive effect) (i) in
applicable law or (ii) that would cause any representation to no longer be
true or correct.
This letter is furnished to you solely for use in connection with the
Merger, as described in the Merger Agreement, and is not to be used,
circulated, quoted, or otherwise referred to for any other purpose without our
express written permission.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading
"Certain Federal Income Tax Consequences of the Merger" in the Joint Proxy
Statement-Prospectus. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended.
Very truly yours,
Skadden, Arps, Slate, Meagher & Flom
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
SoftKey International Inc. on Form S-4 of our report dated February 20, 1996,
on our audits of the consolidated balance sheets of SoftKey International Inc.
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years ended December
31, 1995 and 1994, and the related financial statement schedule and our report
dated July 31, 1995, on our audits of the consolidated balance sheets of
The Learning Company as of June 30, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1995. We also consent
to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 10, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-4 of our report dated
January 16, 1995 included in SoftKey International Inc.'s Form 10-K for the
year ended January 6, 1996 and to all references to our Firm included in this
registration statement.
Arthur Andersen LLP
Boston, Massachusetts
April 10, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SoftKey International Inc.
(formerly Word Star International Inc.):
We consent to the incorporation by reference in this registration statement on
Form S-4 of SoftKey International Inc. (the "Form S-4") of our report dated
September 13, 1993, relating to the consolidated statements of operations,
stockholders' equity, and cash flows of WordStar International Incorporated
and subsidiaries for the year ended June 30, 1993, and the related schedule,
which report appears in the annual report on Form 10-K of SoftKey
International Inc. for the year ended January 6, 1996, and to the reference to
our firm under the heading "Experts" in the prospectus forming a part of the
S-4.
KPMG Peat Marwick LLP
San Francisco, California
April 10, 1996
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of SoftKey International Inc. on Form S-4 of our report relating to the
financial statements and related financial statement schedules dated May 24,
1995 (June 30, 1995 as to the first paragraph of Note 4) appearing in and
incorporated by reference in the Annual Report on Form 10-K of Minnesota
Educational Computing Corporation (MECC) for the year ended March 31, 1995.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
Deloitte & Touche LLP
Minneapolis, Minnesota
April 10, 1996
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the Incorporation by reference in this Registration
Statement of SoftKey International Inc. on Form S-4 of our report dated July
7, 1995 relating to the financial statements of tewi Verlag GmbH Incorporated
by reference in the Prospectus which is a part of this Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
Munich, April 10, 1996
Deloitte & Touche GmbH
Wirtschaftsprufungsgesellschaft
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of SoftKey
International Inc. of our report dated September 28, 1993, except as to Note
12 which is as of December 3, 1993, relating to the consolidated financial
statements of Spinnaker Software Corporation, appearing on page 32 of SoftKey
International Inc.'s Annual Report on Form 10-K for the year ended January 6,
1996. We also consent to the references to us under the heading "Experts" in
such Prospectus.
PRICE WATERHOUSE LLP
Boston, Massachusetts
April 10, 1996
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of SoftKey
International Inc. ("SoftKey") of our report dated January 5, 1996, relating
to the combined financial statements of Compton's NewMedia Group as of
December 25, 1994 and for the fiscal year then ended, which appears in the
Current Report on Form 8-K/A of SoftKey dated January 25, 1996. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Chicago, Illinois
April 9, 1996
