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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
__
EXCHANGE ACT OF 1934
For the fiscal year ended January 6, 1996.
Commission file number : 0-13069
SOFTKEY INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2562108
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 494-1200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
5 1/2% Senior Convertible Notes Due 2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X ___ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The aggregate market value of voting stock of the registrant held by
non-affiliates of the registrant as of March 1, 1996 was approximately
$591,137,488. As of March 1, 1996, 31,633,774 shares of the registrant's common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Special Meeting in Lieu of Annual
Meeting of Stockholders expected to be held in May 1996 are incorporated by
reference into Part III.
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TABLE OF CONTENTS
PART I
Page
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1. Business 1
2. Properties 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters 12
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
8. Consolidated Financial Statements and Supplementary Data 27
9. Changes in and Disagreements with Accountants 57
PART III
10. Directors and Executive Officers of the Registrant 58
11. Executive Compensation 58
12. Security Ownership of Certain Beneficial Owners and Management 58
13. Certain Relationships and Related Transactions 58
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 59
Signatures 64
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PART I
ITEM 1. BUSINESS
SoftKey International Inc. ("SoftKey" or the "Company") is a developer and
publisher of high quality consumer software for personal computers ("PCs"),
primarily produced on CD-ROM. The Company currently offers over 500 software
titles in consumer-oriented categories, including education, lifestyle,
edutainment, reference, productivity and, to a lesser extent, entertainment in
North America. The Company distributes additional products internationally. The
Company's Premium products include titles such as: Calendar Creator Plus,
Infopedia, 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(TM). The Company 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 the Company's recent acquisition of The Learning Company,
the Company added a number of educational products, classified into several
product "families," to its offerings, including those in The Learning Company's
"Rabbit" family (including the Reader Rabbit series), "Treasure" family, "Super
Solvers" family, "Writing Tools" family, "College Prep" family and the "Foreign
Languages" family. The Company publishes school editions of a number of these
products.
SoftKey's strategy is to develop, license and acquire a broad range of high
quality software products with significant unit-volume potential and to
continuously introduce these new products through a wide variety of established
and emerging distribution channels worldwide, including retail channels, direct
mail, original equipment manufacturers ("OEMs") and school channels. Other key
elements of this strategy include focusing on consumer software that is broadly
distributed to the consumer market at multiple price points, building strong
relationships with the retail channel, acquiring complementary products,
technologies and businesses and enhancing brand awareness and customer loyalty.
The Company was created through a combination of three corporations (the
"Three-Party Combination"). On February 4, 1994, the Company, which was then
known as WordStar International Incorporated ("WordStar"), completed a three-way
business combination with SoftKey Software Products Inc. ("Former SoftKey") and
Spinnaker Software Corporation ("Spinnaker"). Effective February 4, 1994, the
Company changed its name to SoftKey International Inc.
RECENT ACQUISITIONS
The Company has a history of acquiring companies in order to broaden its product
lines and geographic sales channels. In 1995, the Company's acquisitions
included, among others, The Learning Company, a publisher of educational
software, Compton's NewMedia, Inc. and Compton's Learning Company (collectively,
"Compton's"), publishers of educational software and encyclopedia products (two
former wholly owned subsidiaries of Tribune Company), tewi Verlag GmbH ("tewi"),
a German publisher and distributor of CD-ROM software and computer-related books
and Future Vision Holding, Inc. ("Future Vision"), a multimedia software
company.
Additionally, the Company has entered into a definitive merger agreement to
acquire Minnesota Educational Computing Corporation (MECC) ("MECC"), a publisher
and distributor of high quality educational software for children. The closing
of this transaction is subject to a number of conditions and approvals,
including the approval of the stockholders of MECC and the Company. There can be
no assurance that this transaction will be consummated.
The Company's acquisition of The Learning Company and proposed acquisition of
MECC, which together would make it the largest educational software company in
the United States based on sales, represent a new product-content focus for the
Company's business in the education area. The Company believes this new focus
will likely result in, among other things, significant investments by the
Company in product planning and research and development, which The Company
anticipates will be funded by cash generated from operations and a higher degree
of product acceptance risk. In order for the Company to sell a sufficient volume
of products to offset the increased costs associated with the development of
educational software products, SoftKey currently plans to continue its strategy
of extending product lines by offering multiple titles at various price points
(including offering full-featured educational products in its Premium product
line) based on a common source code and to further expand its existing
distribution channels.
The Company is incorporated in Delaware. Its principal executive offices are
located at One Athenaeum Street, Cambridge, Massachusetts 02142, and its
telephone number is (617) 494-1200. "SoftKey" and all of the Company's logos and
product names are trademarks of the Company.
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INDUSTRY BACKGROUND
The consumer software market has grown significantly over the past few years as
a result of several major trends. These trends include: the increasing installed
base of PCs in the home, the improved multimedia capabilities of PCs and the
increasing demand for a greater number of high quality, value-priced software
applications in order to take full advantage of these multimedia capabilities.
In addition, consumers are exposed to software purchase opportunities from a
wide variety of sources and with increased frequency.
Declining prices, improved performance, expanded memory and enhanced multimedia
capabilities have been the main drivers of growth of the consumer software
market. Current multimedia capabilities are facilitated by CD-ROM technology
(which permits increased data storage and faster data access than is possible
with traditional magnetic media diskettes) and include enhanced graphics, video
and sound, greater interactivity and richer content. These capabilities are
particularly relevant to the lifestyle, entertainment, education and edutainment
segments of the consumer software market, as specific software purchases within
these segments are largely driven by their content, appearance and degree of
interactivity.
The Company believes, based on its knowledge of and experience in the PC
software industry, that while home PCs historically have served as a
productivity tool which employed a few applications such as word processing and
spreadsheets, multimedia PC owners increasingly will use multimedia PCs as
general purpose tools and as a source of home entertainment capable of a broad
range of functionality. This functionality includes traditional and new
productivity applications as well as reference, creativity, entertainment and
communication applications. In order to take advantage of this broad range of
functionality, the Company, based on its knowledge of and experience in the PC
software industry, believes that multimedia PC users are purchasing more
software products than traditional PC users. The increasing installed base of
multimedia PCs, together with the advanced multimedia capabilities and increased
functionality of these PCs, have both allowed and motivated software developers
to produce, and consumers to use, more engaging software which fully exploits
the improved functionality of multimedia PCs.
The increased demand by individual consumers for a larger, broader selection of
high quality software applications has resulted in a strong demand for products
at multiple price points. In particular, demand for software products in the
lifestyle, reference, entertainment and education categories has been
significant. This demand for more and varied software at lower price points is
changing the nature of the typical consumer software purchase. While consumers
historically purchased few applications and generally did so only with
significant forethought and analysis, the Company believes that due to lower
pricing and a broader range of potential applications more consumers today are
purchasing a variety of value-priced software products on an impulse basis,
similar to that which drives the purchase of music CDs.
The demand for a large number and broad spectrum of value-priced software
products is also having significant impact on consumer software distribution.
The distribution of consumer software has expanded beyond traditional software
retailers and computer stores to include general mass merchandisers, book
stores, grocery stores and drug stores. As this trend continues, it will become
increasingly important for software developers and publishers to create
significant brand name recognition, establish strong retail relationships and
consistently publish value-oriented, high-quality software.
STRATEGY
SoftKey's objective is to be the leading worldwide provider of value-priced,
high-quality consumer software. Accordingly, SoftKey's strategy is to develop,
license and acquire a broad range of quality software products with significant
unit-volume potential at the lowest possible cost and to continuously introduce
these new products through a wide variety of established and emerging
distribution channels worldwide, including retail, direct mail, OEM and school
channels. Key elements of this strategy include:
Focusing on High-Growth Consumer Software Categories. The Company believes that
based on its observance of trends in the consumer software industry the
lifestyle, entertainment and education based products will continue to
experience a high rate of annual unit volume and revenue growth. SoftKey intends
to continue to concentrate its publishing and development efforts primarily on
these categories in order to further solidify its established position in these
segments and fully exploit these segments of the consumer software market.
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Broadly Distributing to the Consumer Market at Various Price Points. The Company
believes that actively managing a broad distribution strategy and offering
quality products across a variety of price points will maximize consumers'
exposure to, and potential purchases of SoftKey's products. The Company markets
its products worldwide through traditional software retail channels, direct mail
and OEMs as well as through emerging consumer software distribution channels
such as book, music, drug and grocery store chains. SoftKey currently has
relationships with over 50 national retailers and direct distributors
controlling over 22,000 individual retail storefronts, including the retailers
and distributors responsible for most of the nation's software sales. Such
retailers include: CompUSA, Circuit City, Best Buy, Staples and Office Depot.
Continuously Introducing High Volumes of New Titles with Shorter Lead Times and
at Lower Costs . SoftKey believes that the consumer segment of the software
market is beginning to be driven by dynamics similar to those in the music CD
and book industries. The Company believes, based on its knowledge of and
experience in the PC software industry, that in order to compete effectively,
successful companies will ultimately need to publish large numbers of successful
titles and introduce them to the market rapidly. Recently, the life cycle of
consumer software products has become substantially shorter than it was in the
past and customer preferences continue to change rapidly. SoftKey's product
development strategy is to develop and acquire products in high-growth
categories for rapid release and maintain development cycles that result in
ongoing upgrades and product rotations in short periods of time. This practice
of publishing a large number of titles in a broad range of categories and
refreshing those titles on an ongoing basis effectively reduces the Company's
dependence on any one "hit" title. To minimize product development costs,
SoftKey's core development team focuses its efforts on developing proprietary
products through enhancements, modifications and upgrades of acquired brand name
products. SoftKey uses a shared code philosophy, which allows it to develop
multiple products at different price points and for different branding
strategies using the same core code. For example, SoftKey has published
successful titles rapidly by combining well-recognized third-party brands (such
as Time, Sports Illustrated and American Heritage) with readily available,
quality technology and content. This strategy enables SoftKey to maximize
product line profitability by leveraging successful "core" products. The Company
also attempts to minimize fixed development costs by licensing a number of its
products from outside developer/authors and paying such licensors royalties
based on net sales proceeds from the licensed products.
Building Strong Relationships with Retail Channels. SoftKey's retail
distribution strategy is to foster strong direct relationships with large
retailers through broad product offerings, actively assisting in channel
management and innovative merchandising. These direct relationships have been
the result of an established history of developing and publishing a wide range
of products and actively working with retailers to understand consumer
purchasing behavior and trends. Retailers routinely share sell-through data with
SoftKey, providing the Company with the ability to proactively tailor its
product offerings, modify distribution tactics and optimize product marketing,
merchandising, promotion and mix for specific retail channels and stores. The
Company sponsors merchandising programs and provides for electronic data
interchange ("EDI") with most major accounts. The Company intends to continue to
build its relationships with the retail channels in an effort to further
strengthen these strategic relationships.
Acquiring Complementary Products, Technologies and Businesses. The Company
believes the consumer software industry will continue to consolidate. Developers
and publishers compete to achieve critical mass and leverage established and new
distribution channels. The current SoftKey business results from a business
combination of three formerly independent software publishers in February 1994
and continued to grow in 1995 through acquisitions which included Future Vision,
Compton's, tewi and The Learning Company. SoftKey intends to actively explore
additional product-driven and technology-driven acquisition opportunities
consistent with the Company's overall publishing strategy.
Enhancing Brand Awareness and Loyalty. The Company believes that its utilization
of brand names and its focus on developing and publishing value-priced,
high-quality consumer software will result in increased SoftKey brand
recognition, further differentiate the Company's products from those of its
competitors and continue to generate customer loyalty. SoftKey employs brand
names such as The Learning Company, Compton's, Time, Sports Illustrated and
American Heritage, and easily identifiable packaging, which the Company believes
creates brand awareness and enhances customer loyalty. These branded products
req uire frequent upgrade and modification to remain competitive and satisfy
customer demand.
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PRODUCTS
SoftKey develops and publishes software products in a broad range of
consumer-oriented categories, including education, lifestyle, edutainment,
productivity and, to a lesser extent, entertainment. SoftKey's product strategy
is to continuously introduce and offer its, high-quality consumer software
products through multiple distribution channels and at multiple price points.
Currently, the Company's product lines contain over 500 titles on a variety of
platforms, including DOS, Windows and Macintosh. In fiscal 1995, the Company's
percentage of CD-ROM sales from its retail publishing business increased to over
95% of retail publishing revenues. SoftKey's product offerings are sold under
the Premium, Key and Platinum lines, among others, and under The Learning
Company and Compton's brands.
Premium. SoftKey's Premium product line is the Company's most full-featured line
with product pricing at retail generally ranging from $29.95 to $49.95. The
Premium products have distinctive, oversized packaging that includes a "book
flap" on the front sleeve or box. These products are designed to be less impulse
purchase driven than the Company's other product lines. Products in the Premium
line are often co-branded with recognizable consumer brand names and include:
Time Almanac, The American Heritage Talking Dictionary, The Sports Illustrated
Swimsuit Calendar, BodyWorks, Mosby's Medical Encyclopedia and Compton's
Interactive Encyclopedia. The Premium product line currently includes over 65
titles.
Key. SoftKey's Key product line is the Company's other "boxed" line with pricing
at retail from $19.95 to $29.95. The Key line's established history and familiar
packaging distinguishes this brand within the value priced content and
application market segment. The Key product line currently contains 35 titles
and includes: KeyCAD Complete, Key Travel Map, Key Mega Clip Art 7000, Key Home
Gourmet and KeyFonts Pro, among others.
Platinum. In December 1994, SoftKey became the first consumer software company
to introduce a jewel-case only format software offering generally sold at retail
for $12.99. SoftKey's Platinum products are designed for impulse purchases and
are sold on racks that can range from 16 to 80 facings. The Platinum line
products and merchandising strategy are specifically designed for the retail
channel to optimize gross margins per square foot. SoftKey currently offers a
broad selection of over 60 titles within this product line and actively manages
product mix and stock rotation for its direct retail relationships to maximize
sell-through potential. The Platinum line includes titles in various
consumer-oriented categories, including games, lifestyle (for, among others,
cooking and gardening enthusiasts), education, reference and productivity (for
generating labels, resumes and calendars and for other applications). The
Platinum line currently includes 125 titles.
The Learning Company. The Learning Company is a developer of quality educational
software products for use at home and at school. Its product strategy is to
offer both home and school markets a comprehensive line of engaging software
products that help build important life-long learning and communications skills
in key curricular subject areas that are appropriate for different age groups.
The subject, theme, setting, characters and activity for each title are selected
to optimize the interest and learning experience for the targeted age group.
Most of the products are available in home editions, and certain products are
also available in school editions designed to help teachers integrate the
software into their classroom curricula. SoftKey's and The Learning Company's
combined education line currently contains over 125 titles. The education line
of products generally sell at retail at prices from $14.95 to $119.00. The
Learning Company's products are divided into the following families of products:
- - Rabbit Family (Target Ages: 3 to 7). The central character in the
Rabbit family is an animated rabbit who takes the user through a series
of journeys with colorful graphics to create a playful learning
experience. The Reader Rabbit series helps children develop reading,
communication and reading readiness skills, while Math Rabbit
introduces children to key math concepts and skills.
- - Super Solvers Family (Target Ages: 8 to 14). The Super Solvers family
of products was developed to take advantage of children's interest in
fast-action games. Each title in this family offers children a
different challenge to solve in areas such as spelling, math, deductive
reasoning and physical science.
- - Writing Tools Family (Target Ages: 8 and up). The Writing Tools family
of products is designed to strengthen and facilitate early writing
skills.
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- - Treasure Family (Target Ages: 5 to 9). The Treasure family engages
young minds with learning adventures that enrich math, science reading
and thinking skills. Each Treasure title is a self-contained play
world, featuring its own unique characters, surprises and learning
challenges.
- - College Prep (Target Ages: 14 and up). The College Prep family is The
Learning Company's newest family designed to help high school students
successfully prepare for entrance into institutions of higher
education. Scorebuilder for the SAT, introduced in September 1995, is
the first product in this family.
- - Foreign Language Family (Target Ages: 15 and up). The Foreign Language
family is composed of a number of products designed to provide grammar
instruction, build vocabulary and/or improve pronunciation in such
languages as Spanish, French, German, Italian and Japanese.
Tax. In Canada, SoftKey is a supplier of tax software products and services.
Large and small accounting firms, corporations and small businesses in Canada
rely on SoftKey to develop and update software products for all aspects of tax
preparation. SoftKey has also made significant inroads into the home tax market
for preparation of individual tax returns. The Company intends to continue to
create additional and enhanced tax software products for the Canadian
marketplace by leveraging its core complementary areas of expertise. Moreover,
the Company's market presence positions it to take advantage of the increasing
demand for home tax products driven by the increase in consumer ownership of
PCs. In fiscal 1995, the sale of tax software and related services in Canada
represented 12% of net revenues of the Company.
SALES AND MARKETING
The Company distributes its consumer software products through retail channels,
direct mail, OEMs and school channels within North America and through
international channels including Europe and the Pacific Rim.
Retail Channels. SoftKey has relationships with over 50 national retailers and
direct distributors controlling over 22,000 individual storefronts where most of
the nation's software sales occur. SoftKey's retail distribution strategy is to
foster strong direct relationships with large retailers through a broad product
offering, actively assisting in channel management and innovative merchandising.
The Company's dealer sales channel consists of traditional PC hardware and
software retail stores, including national and regional chains and superstores.
Increasingly, the Company sells its products to office superstores such as
Staples, electronic superstores such as Circuit City and Best Buy and mass
merchants such as Kmart and Sears. In addition, the Company sells to
distributors in the United States and Canada such as Ingram Micro Inc. and
Navarre.
Direct Mail. SoftKey's database of over 4 million end-users provides many
cross-mailing opportunities. The Company mailed over 22.7 million pieces of
targeted direct mail in fiscal 1995. The Company typically utilizes targeted
customer mailings highlighting specific products. Prior to a full mailing, the
Company conducts test mailings at different price points and marketing
approaches in order to maximize response rates from its customers. The Company
also sells its products through direct mailings to potential end-users who are
not part of the installed user base using rented mailing lists. SoftKey's direct
mail efforts also include supplying products for the Company's catalog reseller
customers, such as MicroWarehouse, Paper Direct, PC Connection and Global.
Original Equipment Manufacturers. The objective of SoftKey's OEM strategy is to
assist OEMs to differentiate their product lines at retail and to introduce the
SoftKey brands to new hardware buyers. The Company licenses its software
products to OEMs (including IBM, Apple, Compaq, Hewlett Packard and Dell), which
typically purchase the Company's products in higher volumes and at lower prices
than retail stores and distributors. The costs incurred by the Company for OEM
sales are typically lower than its boxed product because in many cases the
products are duplicated by the OEMs and sold without packaging or, in some
instances, documentation.
School Channel. The Company sells products directly to schools and school
districts through telemarketing and field sales organizations. Sales are also
made through an authorized group of resellers and distributors, including Ingram
Micro Inc. and Baker & Taylor. In addition, the Company has entered into
relationships with Houghton Mifflin, Scholastic, IBM, Apple and Jostens for
sales of the Writing Tools family of products in conjunction with their textbook
offerings.
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International. The Company believes that the international consumer software
markets are rapidly growing as a result of trends similar to those driving the
United States market. In 1995, the Company enhanced its established presence in
international markets by acquiring Personal Soft S.A., a small French software
publisher, and tewi, in order to leverage SoftKey's development and distribution
expertise as these markets continue to emerge. The Company operates subsidiaries
outside of North America in Germany, France, Ireland, Australia, Israel, the
United Kingdom and Japan. The Company conducts a portion of its research and
development and foreign language translation in Jerusalem, Israel. In addition
to having distributors in those countries where it has subsidiaries, the Company
has distributors in major European, Latin American and Pacific Rim countries, as
well as in South Africa. The Company's subsidiary in Ireland generally
coordinates manufacturing and distribution for all of the Company's sales in
Europe and the Pacific Rim. Generally, retail stores outside of North America
are more reliant on distributors than retail stores in North America. As
distribution environments differ from country to country, the Company tailors
its distribution strategy accordingly. Financial Information pertaining to the
Company's international and domestic operations is set forth in Note 11 included
in Item 8 and presented as a separate section of this report.
PRODUCT DEVELOPMENT
SoftKey develops and publishes products through internal development as well as
licensing. Through this dual strategy approach, the Company is able to introduce
new products while minimizing research and development costs.
Internal Product Development. The Company's internal product development efforts
are designed to result in efficient and timely product introductions by focusing
on "core code" development. Where possible, the Company specifies, develops and
manages (or purchases) one base of source code from which many products are
created. Using one base of source code permits the Company to maximize
programming efficiency because the investment of time and capital in developing
the base source code is shared among multiple products and additional
programming time is minimized. As a result, production schedules are more
predictable and development costs are lower since the underlying code for new
programs has previously been tested and debugged and the software already
documented. Even with these "core codes" SoftKey must continuously update and
improve the content and the technology in order to remain competitive.
In certain instances, the Company's internally developed products contain
components that have been developed by outside developers or authors and are
licensed by the Company. SoftKey pays these outside developer/authors a royalty
based on a percentage of net sales. The Company expects that, particularly with
respect to multimedia products, it will increasingly develop products which
contain content licensed from third parties.
The Company derives substantially all of its net revenues from the sale of
computer software products for popular CD-ROM based and floppy disk based
personal computers, including IBM-compatible and Apple Macintosh. The Company
continues to experience significant increases in demand for its CD-ROM based
products as a result of the growing installed base of CD-ROM machines in the
home and school environments and the ongoing shift in consumer preference from
floppy-disk based products to CD-ROM based products. The Company expects that
this trend will result in increased demand for software which takes advantage of
the graphics, music, digitized speech, sound, video, and data capabilities of
such technology and the Company is selectively designing and adapting its
products accordingly. In order to remain competitive, the Company intends to
continue to design and adapt its products to operate on these and other computer
platforms and environments.
The Company maintains research and development facilities and personnel in
Cambridge, MA, Fremont, CA, Knoxville, TN and Jerusalem, Israel. The Company's
development efforts include product development, documentation and testing as
well as the translation of certain of its products into foreign languages. Among
the Company's current products that were developed internally are Calendar
Creator, Compton's Interactive Encyclopedia, Time Almanac, the "Learn to Speak"
series, The American Heritage Talking Dictionary, Infopedia, the "Reader Rabbit"
series, PC Paintbrush and PhotoFinish.
The Company believes that its premium educational products require significant
investments in product marketing and research and development in order to take
advantage of new technologies that benefit educational software products and to
remain competitive. In addition to expenses related to engineering and quality
assurance, the Company's research and development expenses include costs
associated with the identification and validation of educational content and
engagement features and the development and incorporation of new technologies
into new products.
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The Company's premium educational products require varying degrees of
development time, frequently depending on treatment of the subject matter, the
number of activities and the general complexity of the product. The typical
length of research and development time ranges from 6 to 24 months with the
first product in a new family generally requiring the longest period of
development. The development and introduction of new products that operate on,
and the adaptation of existing titles to new platforms or operating systems or
that incorporate emerging technologies may require greater development time and
expense and may generate less revenue per product as compared with recent
introductions of new products or product adaptations.
Most of the Company's educational products have been designed and developed
internally by Company employees. The Company uses third-party designers, artists
and programmers in its research and development efforts and will continue to do
so in the future. The Company believes that a mix of internal and third-party
resources, as well as potential acquisitions of products or technologies, is a
cost-effective method of facilitating the development of new educational
software products. Products that are developed using third parties are generally
owned or licensed exclusively by the Company and are published and marketed
under the Company's various brand names, including The Learning Company and
Compton's brands.
Licensed Products. The Company supplements its development efforts by acquiring
the rights to products on either an exclusive or non-exclusive basis, both
through the purchase of products and under royalty-bearing licenses. Generally,
the Company's license agreements provide for the payment of royalties based on a
percentage of the Company's net sales proceeds of such products.
The products typically are repackaged under the Company's proprietary labels and
sold through its distribution channels. The advantage of this distribution
method to the outside software developers is that the Company is generally able
to provide a significantly greater volume of sales than the software developer
would be able to command itself. The Company leverages its broad distribution
strength and reputation for successfully publishing products to attract outside
developer/authors and further enhance its relationships with the software
development community. Retail and direct mail marketers benefit from this
arrangement by having convenient access to a wide range of products offered by
the Company.
The Company's licensing of fully developed products allows for efficiencies
because the cost of development is borne by the licensor. Licensing also reduces
the financial and market risk to the Company from a product that is not well
accepted by customers since the Company generally pays royalties based on actual
sales.
Among the Company's current products that have been licensed from third parties
are KeyCad Complete, Key 3D Design Center, Key Travel Map, Key Org Chart and
many of the products in the Company's "Platinum" and "KeyKids" lines.
Both internally developed and licensed products under development are
extensively tested by the Company's quality assurance department before being
released for production. The department tests for bugs, functionality,
ease-of-use and compatibility with the many popular PC configurations that are
available to consumers.
PRODUCTION
SoftKey strives to minimize production costs, driving costs down as unit volumes
and the rate of new title introductions increase through process efficiencies
and economies of scale. Production of the Company's products involves the
duplication of diskettes or CD-ROMs and assembly of the diskettes, user manuals
and other purchased components. In April 1994, in order to reduce its fixed
product costs and minimize variable cost, the Company entered into a three-year
agreement with Stream International Inc. ("Stream") (formerly known as the
Global Software Services business unit of R.R. Donnelley & Sons Company)
pursuant to which Stream provides all duplication, assembly and fulfillment,
with certain specified exceptions (including CD-ROMs and products reproduced by
OEMs), for all of the Company's existing U.S. products at Stream's plant in
Crawfordsville, Indiana. All CD-ROM duplication is provided by other third-party
vendors. The Company believes that its existing production capacity is
sufficient to handle anticipated increases in volume and titles into the
foreseeable future. The Company is also in the process of securing alternative
production capacity from Stream and other vendors in the event that the
Crawfordsville plant suffers unforeseen production interruptions. Duplication of
diskettes and assembly of the Company's international products take place at the
Company's facilities in Dublin, Ireland.
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TECHNICAL SUPPORT
The Company provides a variety of technical support services to dealers,
distributors, corporations and end users. Users of the Company's products
currently receive free telephone support for the life of the product (until the
next version is released or manufacturing of the product is discontinued). This
support is provided by the Company's Technical Support Centers in Marietta,
Georgia and in Fremont, California.
COMPETITION
The PC consumer software industry is intensely competitive and is characterized
by rapid changes in technology and customer requirements. The changing nature of
the consumer software industry and rapidly changing demand for products make it
difficult to predict the future success of the Company in the business of
producing packaged software products for the retail market. The Company competes
for retail shelf space and general consumer awareness with a number of companies
that market software products. The Company encounters competition from both
established companies, including the largest companies in the industry, and new
companies that may develop comparable products. A number of the Company's
competitors and potential competitors possess significantly greater capital,
marketing resources and brand recognition than the Company. Rapid changes in
technology, product obsolescence and advances in computer software and hardware
require the Company to develop or acquire new products and to enhance its
existing products on a timely basis. The Company'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 the Company's
existing products and future performance may change.
Many large companies with sophisticated product marketing and technical
abilities and financial resources that do not presently compete with the Company
may enter the PC software market. 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, Mattel, 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, the Company 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 Corporation is the dominant supplier of computer operating systems and
frequently coordinates its operating system marketing efforts with those for its
applications software. Competition in Microsoft's Windows application segment
from major software publishers is intensifying and "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, the Company has embarked on a
program to transition many of its titles to Windows'95 format. In 1995 Microsoft
Corporation 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.
The Company competes with other companies for access to retail shelf space and
inclusion in OEM sales programs. Competition in this aspect of the industry is
intense, and the type and number of 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 distribution channels will further
change and new types of competitors, such as cable or telephone companies, are
likely to emerge.
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, the
Company's customers have increased leverage in negotiating favorable terms of
sale, including price discounts and product return policies. In addition, a
number of the Company's competitors, such as
8
<PAGE> 11
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. Should the occurrence of these
exclusive arrangements increase and the Company not be able to offer a competing
product line or arrangement, the Company's operating results may be negatively
impacted. There can be no assurance that the Company will be able to continue to
have access to sufficient retail marketing distribution channels or obtain
adequate distribution for all of its products in the future. Accordingly, such
concentration may have an adverse effect in the future on the profitability of
the Company's operations.
Regardless of the retail strategy chosen by the Company, the retail channels of
distribution available for products will be subject to rapid changes as
retailers and distributors enter and exit the software market segments or alter
their product inventory preferences. 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 the Company's business and operations
including 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 the Company will be required to modify its
existing technology bases in order for its products to be compatible and remain
competitive. It is critical to the success of the Company that, as these changes
occur, it maintain access to those channels of distribution offering software in
its market segments.
In both the professional and home income tax preparation markets, there are
relatively few barriers to entry for competitors. In Canada, there are numerous
companies offering tax preparation software products for both the professional
and home user. As a result, there is significant price competition in this
market. Currently, the Company's tax products are generally designed to run on
DOS and Windows operating systems, with certain professional packages running on
the Macintosh system. The demand for and ability to develop successful packages
to run in the Windows operating environment may affect the success of such
products. In both the professional and home income tax markets, there is a large
degree of product loyalty because of the ability to update previously entered
information (rather than re-entering all information on a new product) and
familiarity with the product's features.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of trade secret, copyright, trademark and
other proprietary rights laws and license agreements to protect its rights to
its software products and related documentation. The Company does not have any
patents. United States copyright law, international conventions and
international treaties, however, may not provide meaningful protection against
unauthorized duplication of the Company's software. The Company generally
licenses its externally developed products rather than transferring title and
has relied on contractual arrangements with recipients and users of its products
to establish certain proprietary rights and to maintain confidentiality of those
products protected by trade secret law. Consistent with standard industry
practice, the Company's products generally are licensed pursuant to
"shrink-wrap" licenses that are not signed by the licensee. The enforceability
of such licenses has not been conclusively determined. The Company's products do
not contain any mechanisms to prevent or inhibit unauthorized copying.
The Company 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.
The Company periodically receives communications alleging or suggesting that its
products may incorporate material covered by the copyrights, trademarks or other
proprietary rights of third parties. With increased use of music and animation
in CD-ROM products and the increased number of products on the market generally,
the Company is likely to experience an increase in the number of infringement
claims asserted against it in the future. With respect to licensed products, the
Company is generally indemnified against liability on these matters. The
Company's policy is to investigate the factual basis of such communications and
to resolve such matters promptly by enforcing its rights, negotiating licenses
(if necessary) or taking other appropriate actions.
9
<PAGE> 12
In certain circumstances, litigation may be necessary to enforce the Company's
proprietary rights, to protect copyrights, trademarks and trade secrets and
other intellectual property rights owned by the Company or its licensors, to
defend the Company against claimed infringements of the rights of others and to
determine the scope and validity of the proprietary rights of the Company and
others. Any such litigation, whether with or without merit, could be costly and
could result in a diversion of management's attention, which could have an
adverse effect on the Company's business, operating results or financial
condition. Adverse determinations in litigation relating to any of the Company's
products could result in the loss of the Company's proprietary rights, subject
the Company to liabilities, require the Company to seek licenses from third
parties or prevent the Company from selling particular products.
HISTORY
Corporate Background. The business of Former SoftKey prior to the Three-Party
Combination commenced in 1984 and focused originally on vertical software
applications, or software packages designed for specific types of businesses. By
1993, Former SoftKey was generally engaged in the computer software and services
businesses, operating in three business units: a publishing division, which
acquired software application packages from various software developers and
distributed them to end users under its own Key, Titanium Seal and New Vision
PowerWare private labels through wholesale, retail and direct mail distributors;
a tax division, which developed and distributed professional tax software
products and also engaged in the computer processing of tax data; and a
consulting division, which has been discontinued. Since the Three-Party
Combination, SoftKey Software's publishing division operations have been
consolidated with the operations of the Company and SoftKey Software continues
to operate the businesses of the former tax division.
WordStar was founded and incorporated in California under the name MicroPro
International Corporation in October 1978. In November 1986, it changed its
state of incorporation from California to Delaware, and in May 1989, it changed
its corporate name to WordStar International Incorporated. On February 4, 1994,
WordStar changed its name to SoftKey International Inc.
During 1995, the Company completed a number of acquisitions in order to expand
both its geographic markets and its product mix. On December 22, 1995, the
Company acquired approximately a 95% interest in The Learning Company, a leading
developer of high quality educational software products for the home and school
markets, as the first step in a two-step, all cash transaction resulting in the
Company owning, effective as of December 27, 1995, the entire equity interest of
The Learning Company. On December 28, 1995, the Company acquired Compton's
NewMedia, Inc. and Compton's Learning Company, publishers and developers of
education and reference software products, from Tribune Company. On August 31,
1995, the Company acquired Future Vision, publisher of reference and educational
software products. On July 21, 1995, the Company acquired tewi, a software
publisher and distributor located in Munich, Germany.
Accounting Periods. The Company's fiscal year is the 52 or 53 week period ending
on or after December 31. For ease of reference herein, the period from January
1, 1995 to January 6, 1996 is referred to as the Year Ended December 31, 1995,
the period from January 2, 1994 to December 31, 1994 is referred to as the Year
Ended December 31, 1994 and the six month transition period from July 4, 1993 to
January 1, 1994 is referred to as the Transition Period Ended December 31, 1993.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General-- Fiscal Periods.")
EMPLOYEES
At March 1, 1996, the Company had approximately 775 employees. The Company
believes that its success is highly dependent on its ability to attract and
retain qualified employees. As necessary, the Company supplements its regular
employees with temporary and contract personnel. No employees are covered by a
collective bargaining agreement, and there have been no work stoppages.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial Information pertaining to the Company's foreign and domestic
operations is set forth in Note 11 included in Item 8 and presented as a
separate section of this report.
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<PAGE> 13
FORWARD LOOKING STATEMENTS
Certain of the information contained in this Annual Report on Form 10-K,
including without limitation statements made under this Part I, Item 1,
"Business" and part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts,
may include "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
reviewing such information, it should be kept in mind that the Company's actual
results may differ materially from those set forth in such forward-looking
statements.
Important factors and assumptions that could cause the Company'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 the Company's operating results generally. These factors include
without limitation the integration of operations resulting from acquisitions of
companies, 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 Company 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 the Company's actual results to differ materially
from those included in the forward-looking statements made herein include
without limitation the Company'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 the Company's production capacity to meet
future demand for its products, the Company's ability to keep pace with the
evolution of the technology platforms for which the Company develops and
produces products and the Company'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
derivation 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. The Company assumes no
obligation to update these forward-looking statements to reflect actual results
or changes in factors or assumptions affecting such forward-looking statements.
ITEM 2. PROPERTIES
FACILITIES
The Company's headquarters are currently located in approximately 71,000 square
feet of leased space in an office building in Cambridge, Massachusetts, where
the Company's executive, operational, administrative and certain marketing and
product development activities are currently conducted. The lease for the
Cambridge facility expires in April 1997. In addition to its headquarters in
Cambridge, the Company leases approximately 20,000 square feet of office space
in Marietta, Georgia, where the Company's technical support activities are
principally conducted. The Marietta lease expires in October 1996. The Company
also leases approximately 71,480 square feet of office and warehouse space in
Fremont, California expiring from October 1999 to March 2003, which is primarily
used for marketing and development of its educational products. In addition, the
Company leases 18,656 square feet of space in Knoxville, Tennessee which is used
for development of the Company's foreign language based products. The lease for
this facility expires in May 2000.
The Company's Canadian subsidiary, SoftKey Software Products Inc., owns land and
a building with approximately 18,600 square feet of office space in Sherbrooke,
Quebec, leases approximately 22,000 square feet of office space in Mississauga,
Ontario, and leases additional warehouse and office space in Mississauga,
Ontario, Sherbrooke, Quebec, and Calgary, Alberta.
The Company also leases office, manufacturing and warehouse space in London,
England, Dublin, Ireland, Munich, Germany, Jerusalem, Israel, Paris, France and
certain other foreign countries in which it operates. The Company believes that
its facilities, in general, are adequate for its present and currently
foreseeable needs. All properties leased or owned by the Company are in suitable
condition for the purposes for which they are used by the Company.
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<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings other than ordinary
routine litigation and arbitration incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value, is traded in the over-the-counter
market and prices are quoted on the Nasdaq National Market ("NNM") under the
symbol "SKEY." As of March 1, 1996, to the Company's knowledge, there were
approximately 1,366 holders of record of the common stock. The Company has not
paid cash dividends on its common stock and does not anticipate doing so in the
foreseeable future.
The following sets forth the quarterly high and low sales prices for the Years
Ended December 31, 1995 and 1994, as quoted by the NNM.
<TABLE>
<CAPTION>
1994 HIGH LOW
---- ---
<S> <C> <C>
First Quarter $ 14.375 $ 9.75
Second Quarter 14.625 9.75
Third Quarter 15.125 11.50
Fourth Quarter 27.25 14.625
1995 HIGH LOW
---- ---
First Quarter $ 29.125 $ 22.00
Second Quarter 32.125 21.00
Third Quarter 51.75 30.375
Fourth Quarter 45.625 20.375
</TABLE>
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the Years Ended December 31,
1995 and 1994, the Transition Period Ended December 31, 1993 and the three years
ended June 30, 1993, 1992 and 1991 are derived from the Company's audited
consolidated financial statements. The following selected financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto, included elsewhere in this report.
OPERATING INFORMATION:
<TABLE>
<CAPTION>
Transition
Years Ended Period Ended Years Ended
December 31, December 31, June 30,
------------------------------ ------------ ------------------------------------------------
1995 1994 1993 1993 1992 1991
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 167,042 $ 121,287 $ 41,645 $ 109,704 $ 119,518 $ 76,037
Operating income (loss) (60,870) 25,741 (69,057) (56,981) (599) (3,847)
Net income (loss) (65,960) 21,145 (73,258) (57,250) (4,983) (6,148)
Net income (loss) per
share (fully diluted) $ (2.65) $ 1.04 $ (5.01) $ (4.36) $ (0.47) $ (0.78)
============ ============ ============ ============ ============ ============
Weighted average number
of shares outstanding -
fully diluted 24,855,000 21,115,000 14,618,000 13,129,000 10,502,000 7,893,000
============ ============ ============ ============ ============ ============
</TABLE>
BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
December 31, June 30,
---------------------------------- ----------------------------------
1995 1994 1993 1993 1992 1991
-------- -------- -------- -------- -------- --------
( In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total assets $900,413 $ 90,815 $ 79,334 $128,474 $132,862 $ 89,238
Total long-term
liabilities 554,947 21,859 24,687 30,248 23,449 16,173
Total stockholders'
equty (deficit) 214,519 37,485 (8,632) 61,933 87,049 58,501
</TABLE>
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto, and the information included
elsewhere herein. All dollar amounts presented in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are presented in
thousands, except share and per share amounts.
GENERAL
Business Combinations
On February 4, 1994, the Company completed a three-party business combination
("Three-Party Combination") among SoftKey Software Products Inc. ("Former
SoftKey"), WordStar International Incorporated ("WordStar") and Spinnaker
Software Corporation ("Spinnaker"). The Three-Party Combination was accounted
for using the pooling-of-interests method of accounting. On February 4, 1994,
WordStar changed its name to SoftKey International Inc. ("SoftKey" or the
"Company"). See "Consolidated Financial Statements - Note 2 - Business
Combinations" for further discussion.
On October 30, 1995, SoftKey entered into a definitive 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 SoftKey common stock and other consideration and costs with a total
estimated purchase price of approximately $260,000, based upon the market value
of SoftKey's common stock. During the first quarter of 1996, the parties reached
agreement regarding the framework to implement SoftKey's strategic plan,
including the business strategy and management responsibilities upon
consummation of the transaction. The ultimate purchase price will depend upon
the number of shares issued to acquire MECC, which will be in the range of
approximately 7,150,000 to 9,200,000 shares of SoftKey common stock (which
number could be increased to approximately 10,500,000 shares 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)),
dependent upon the volume weighted average of the closing prices for the 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 closing of this transaction is subject
to, among other things, stockholder approval of both the Company and MECC. 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 and reference multimedia titles and each a former 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 of intercompany debt to Tribune Company and
executed a promissory note to Tribune Company for $3,000 in cancellation of
certain remaining intercompany indebtedness. The total purchase price was
$104,394, including estimated transaction costs, settlement of certain
intercompany debt to Tribune Company, deferred income taxes related to certain
identifiable intangible assets acquired and assumption of the fair value of net
liabilities of Compton's. The transaction was accounted for as a purchase.
On December 22, 1995, SoftKey acquired control of The Learning Company, a
leading developer of education software products for use at home and school.
Under the terms of the merger agreement, SoftKey acquired, in a two step
business combination, all of the outstanding common shares of The Learning
Company for total consideration of $684,066, including estimated transaction
costs, value of stock options assumed and deferred income taxes related to
certain identifiable intangible assets acquired. Approximately 1.1 million
unvested Learning Company stock options were assumed and converted into stock
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 or before January
26, 1996.
On August 31, 1995, the Company acquired all of the issued and outstanding
capital stock of Future Vision Holding, Inc. ("Future Vision"), a multimedia
software company, in exchange for the issuance of 1,088,149 shares of common
stock. This transaction was accounted for using the pooling-of-interests method
of accounting. The consolidated financial statements of the Company for the
years prior to December 31, 1995 included in this report do not include the
results and
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<PAGE> 17
balances of Future Vision as they were determined to be immaterial to the
consolidated financial statements for those periods.
On July 21, 1995, the Company acquired tewi Verlag GmbH ("tewi"), a German
software publisher and distributor, for a combination of cash and stock. This
transaction was accounted for as a purchase. One of the former stockholders of
tewi is also eligible to receive additional consideration for the purchase up to
a maximum of DM 1,080 in each of fiscal 1996 and 1997 based upon achievement of
certain revenue and profitability goals. The amount will be settled annually in
shares of the Company's common stock, the number of which is to be determined
based on a volume weighted average of the closing stock price following the
closing of each fiscal year.
On June 15, 1994 and July 5, 1994, the Company acquired all of the outstanding
common stock of Aris Multimedia Entertainment, Inc. ("Aris") and Compact
Publishing, Inc. ("Compact"), respectively, in exchange for the issuance of a
total of 872,229 shares of common stock. These transactions have been accounted
for using the pooling-of-interests method of accounting. On September 13, 1994,
the Company acquired all of the outstanding common stock of Software Marketing
Corporation ("SMC") in exchange for the issuance of an aggregate of 602,257
shares of common stock, 116,995 of which were subsequently repurchased by the
Company. This transaction has been accounted for as a purchase.
The consolidated financial statements for years prior to the Year Ended December
31, 1994 of the Company included in this report are restated to reflect the
Three-Party Combination, which was consummated on February 4, 1994, but do not
include the results and balances of Aris or Compact as they were determined to
be immaterial to the consolidated financial statements for those periods.
Fiscal Periods
The Company's fiscal year is the 52 or 53 week period ending on or after
December 31. For clarity of presentation herein, all references to the Year
Ended December 31, 1995 relate to the period January 1, 1995 to January 6, 1996;
all references to the Year Ended December 31, 1994 relate to the period January
2, 1994 to December 31, 1994; all references to December 31, 1993 relate to
balances as of January 1, 1994; and the period from July 4, 1993 to January 1,
1994 is referred to as the "Transition Period Ended December 31, 1993" or the
"Transition Period."
Former SoftKey previously used the fiscal year end of January 31 for financial
reporting purposes. Former SoftKey's results of operations for the twelve month
period ended July 31, 1993 have been combined with those of Spinnaker and
WordStar for the year ended June 30, 1993. Former SoftKey's results of
operations for the six months ended December 31, 1993 have been combined with
those of Spinnaker and WordStar. The duplication in the Transition Period Ended
December 31, 1993 of Former SoftKey's net loss of $595 for the one month period
ended July 31, 1993 has been eliminated by a credit to accumulated deficit in
the Transition Period Ended December 31, 1993.
Period-to-Period Comparisons
A variety of factors may cause period-to-period fluctuations in the Company's
operating results, including the integration of operations resulting from
acquisitions of companies, revenues and expenses related to the introduction of
new products or new versions of existing products, delays in customer purchases
in anticipation of upgrades to existing products, currency fluctuations, dealer
and distributor order patterns and seasonality of buying patterns of customers.
Historical operating results are not indicative of future operating results and
performance. This is particularly true of historical data presented herein,
which results from the combination of Former SoftKey, Spinnaker and WordStar in
the Three-Party Combination and SoftKey prior to its acquisitions of The
Learning Company and Compton's and the consummation of the proposed merger with
MECC.
Certain prior period amounts have been reclassified in order to conform with
current year presentation.
15
<PAGE> 18
Summary of Results
The following table summarizes the audited results of operations of the Company
for the periods shown. Reference is made to the Consolidated Financial
Statements included in this report and on which the following table is based.
<TABLE>
<CAPTION>
Transition
Years Ended Period Ended Year Ended
December 31, December 31, June 30,
------------------------ ------------- ----------
1995 1994 1993 1993
--------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues $ 167,042 $ 121,287 $ 41,645 $ 109,704
Operating income (loss) (60,870) 25,741 (69,057) (56,981)
Net income (loss) (65,960) 21,145 (73,258) (57,250)
Net income (loss)per
share (fully diluted) $ (2.65) $ 1.04 $ (5.01) $ (4.36)
</TABLE>
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1994
Revenues by distribution channel for the Years Ended December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, % of December 31, % of
1995 total revenues 1994 total revenues
------------ -------------- ------------ --------------
Distribution Channel
<S> <C> <C> <C> <C>
Retail $ 75,734 45 $ 48,085 39
OEM 20,021 12 15,912 13
Catalog -- -- 3,176 3
Direct response 26,203 16 17,951 15
International 25,631 15 13,067 11
Tax software and services 19,453 12 18,158 15
Lansa software -- -- 4,938 4
-------- -------- -------- --------
$167,042 100 $121,287 100
======== ======== ======== ========
</TABLE>
Total revenues increased by 38% in the Year Ended December 31, 1995 as compared
to the Year Ended December 31, 1994 due to general growth in the consumer
software market and the expansion of market share by the Company through various
acquisitions and new product offerings. Retail revenues increased by 58% in the
Year Ended December 31, 1995 as compared to the Year Ended December 31, 1994 due
to the foregoing as well as an increase in the number of North American retail
outlets selling the Company's products from approximately 15,000 to 22,000, an
increase in the number of products available for sale and an increase in the
sales of the Company's Platinum "jewel-case only" line of products, which was
launched in December 1994. Original equipment manufacturer ("OEM") sales
increased by 26% in the Year Ended December 31, 1995 as compared to the Year
Ended December 31, 1994 primarily due to the acquisition of Future Vision which
had a strong presence and sales network in the OEM channel. Direct response
sales increased by 46% in the Year Ended December 31, 1995 as compared to the
Year Ended December 31, 1994 primarily due to an increase in the number of
mailings completed by the Company during the year. The Company's international
revenues increased by 96% in the Year Ended December 31, 1995 as compared to the
Year Ended December 31, 1994. This increase was driven by both the acquisition
of tewi, 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. Tax software and services revenues were
relatively constant on a year over year basis due to increasing competition and
the saturation of the tax software market in Canada. During 1994, the Company
closed its catalog operations and sold its Lansa software operations.
The Company expects that its future revenue growth will depend on, among other
things, its ability to introduce new products to the marketplace, the extent of
competition, unit pricing trends, the rate of proliferation of personal
computers into the home market and the demand for its consumer software
products. Unit pricing will be affected by the extent of
16
<PAGE> 19
competition in the consumer software industry, which is expected to increase. In
addition, the Company's ability to develop products for new platforms and
introduce titles into new distribution channels will impact future revenues and
growth rates. The consumer software industry has experienced continued
consolidation of formerly independent companies. To the extent that these
companies gain greater market share than the Company, future results will be
affected. In this regard, the Company considers its future revenues to be
unpredictable.
Costs and Expenses
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, % of total December 31, % of total
1995 revenues 1994 revenues
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Costs of production $ 53,070 32 $ 37,885 31
Sales, marketing and support 38,370 23 27,274 22
General and administrative 20,813 12 21,259 18
Research and development 12,487 7 6,696 6
Amortization and merger
related charges 103,172 62 2,432 2
-------- -------- -------- --------
$227,912 136 $ 95,546 79
======== ======== ======== ========
</TABLE>
Costs of production as a percentage of revenues increased to 32% in the Year
Ended December 31, 1995 from 31% in the Year Ended December 31, 1994. Costs of
production increased in the Year Ended December 31,1995 primarily due to the
acquisition of tewi, which operates at a higher costs of production due to the
distribution element of its revenue base. This increase was somewhat offset by
lower costs of production caused by improved manufacturing costs in North
America, which primarily relate to the lower cost of purchasing CD-ROM's and a
greater proportion of business on CD-ROM as compared to magnetic disk.
Costs of production are comprised of, among other things, the cost of product
documentation, packaging and disks. Other items included in costs of production
are royalties to third-party developers and reserves for obsolete inventory.
The Company expects costs of production to remain the same or slightly decrease
in the foreseeable future due to pricing economies of scale on CD-ROM costs and
the effect of The Learning Company's and Compton's costs of production being
historically lower as a percentage of revenues than SoftKey's. To the extent
that unit pricing declines, costs and expenses as a percentage of revenues of
the Company will rise. The Company has consolidated its North American
manufacturing operations at Stream International Inc. (formerly called R.R.
Donnelley & Sons Company) in Crawfordsville, Indiana in order to benefit from of
certain economies of scale.
Sales, marketing and support increased slightly as a percentage of revenues in
the Year Ended December 31, 1995 as compared to the Year Ended December 31, 1994
due to a higher proportion of the Company's revenues arising from its
international and direct response distribution channels. Each of these
distribution channels have higher sales and marketing costs as a percentage of
revenues than the other distribution channels of the Company.
General and administrative expenses were lower on a percentage of revenues basis
in the Year Ended December 31, 1995 as compared to the Year Ended December 31,
1994, but are relatively consistent with the prior year in absolute dollar
amounts due to flat employee head count.
Amortization and merger related charges increased to $103,172 in the Year Ended
December 31, 1995 as compared to $2,432 in the Year Ended December 31, 1994. The
increase is related to the amortization and merger related charges associated
with the acquisitions of The Learning Company, Compton's, tewi and Future
Vision, among others, during the Year Ended December 31, 1995 and certain
charges associated with the proposed merger with MECC.
17
<PAGE> 20
Amortization and merger related charges are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------
1995 1994
-------- --------
<S> <C> <C>
Charge for incomplete technology $ 60,483 $ --
Amortization of goodwill and other assets 24,783 1,185
Amortization of technology and product
related costs 7,185 422
Professional fees and transaction related costs 5,653 636
Other 5,068 189
======== ========
$103,172 $ 2,432
======== ========
</TABLE>
The charge for incomplete technology relates to products being developed by The
Learning Company and Compton's which the Company believes had not yet reached
technological feasibility at the date of acquisition and for which additional
development will be required to complete the software technology and products.
The increase in amortization of goodwill and other assets relates primarily to
the goodwill resulting from acquisitions of The Learning Company, Compton's and
tewi and a full year's amortization of SMC, which was acquired in September
1994. Goodwill is primarily being amortized on a straight-line basis over two
years. Amortization of goodwill and other assets is expected to substantially
increase in fiscal 1996 due to the impact of a full year's amortization of
goodwill resulting from the acquisition of The Learning Company and Compton's.
In addition, should the MECC merger become effective, it will be accounted for
using the purchase method of accounting and in turn will result in a charge for
incomplete technology and additional goodwill, technology related assets, and
other identifiable intangible assets, which are expected to be amortized on a
straight-line basis primarily over two years.
The increase in amortization of technology and of product related costs in the
Year Ended December 31, 1995 as compared to the Year Ended December 31, 1994
relates to the amortization of completed technology and products acquired in
connection with the acquisitions of The Learning Company and Compton's plus
increased amortization of product development costs related to products acquired
in connection with the merger with Future Vision during the year. Amortization
of technology and product related costs are expected to increase in 1996 as a
result of the effect of a full year's amortization of the technology and product
related assets acquired in connection with the acquisitions of The Learning
Company and Compton's and the amortization of any such assets acquired in
connection with the proposed merger with MECC.
Professional fees increased in the Year Ended December 31, 1995 as compared to
the Year Ended December 31, 1994 due to charges related to the investment
banking, legal and accounting costs incurred to date for the proposed merger
with MECC and the professional fees associated with the acquisition of Future
Vision on August 31, 1995. Approximately $3,500 of these costs remained to be
paid at December 31, 1995. The remainder is expected to be paid prior to
December 31, 1996. Professional fees in 1994 were for investment banking,
accounting and legal fees incurred in connection with the acquisitions of Aris
and Compact. These costs have been paid. The other costs relate primarily to the
consolidation of the acquired facilities and related work force reductions and
litigation costs.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO TRANSITION
PERIOD ENDED DECEMBER 31, 1993
Results of operations for the Year Ended December 31, 1994 include amounts for a
twelve month period while results for the Transition Period Ended December 31,
1993 include amounts for a six month period. Results (in terms of dollar
amounts) for these periods are not directly comparable. Accordingly,
management's discussion and analysis for these periods is generally based upon a
comparison of specified results as a percentage of total revenues.
18
<PAGE> 21
Revenues
Revenues by geographic region for the Year Ended December 31, 1994 and
Transition Period Ended December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, % of total December 31, % of total
1994 revenues 1993 revenues
---------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
North America $108,772 90 $ 36,051 87
Europe 11,422 9 4,296 10
Other 1,093 1 1,298 3
-------- -------- -------- --------
Total $121,287 100 $ 41,645 100
======== ======== ======== ========
</TABLE>
North American revenues increased in absolute dollars during the Year Ended
December 31, 1994 by a total of $72,721 as compared to the Transition Period
Ended December 31, 1993 because the Transition Period included only six months
as compared to twelve months in the Year Ended December 31, 1994. A greater than
proportional increase in absolute revenue dollars earned has occurred primarily
due to benefits achieved as a result of the Three-Party Combination. The
increase in percentage of total revenues earned in North America is primarily
due to the synergies achieved as a result of the Three-Party Combination. These
synergies included increases in direct mail, OEM and international revenues
achieved as a result of combining the operations of the three companies and
creating distribution channels that did not previously exist in each separate
company operating individually prior to the Three-Party Combination. In
addition, the acquisitions of Aris, Compact and SMC added to the North American
revenue base in the Year Ended December 31, 1994 as compared to the Transition
Period. Revenues also increased in the Year Ended December 31, 1994 as a result
of the Company's new marketing strategy to increase product launches. During
1994, the Company introduced 75 new products plus the new Platinum rack which
holds a maximum of 40 titles. During 1994, the Power Up catalog operation was
closed. Revenues from the catalog operation totaled $3,176 in the Year Ended
December 31, 1994 as compared to $8,465 in the Transition Period. Revenues in
the Year Ended December 31, 1994 included $18,138 from the Company's income tax
software sales and processing operation in Canada as compared to $4,771 in the
Transition Period. The majority of revenues from sales of income tax software
and related services in Canada occur in the first six months of the year to
correspond with the income tax filing requirement period.
Revenues in Europe as a percentage of total revenues decreased from 10% to 9% in
the Year Ended December 31, 1994 as compared to the Transition Period. The
decrease is primarily due to the decline of DOS-based consumer product sales in
Europe and a decline in the Company's revenues from the sale of word-processing
software products due to a higher level of competition.
Revenues in other geographic regions include those in Latin America, the Pacific
Rim and Barbados. Revenues in the Pacific Rim decreased as a percentage of total
revenues due to closure of the Company's office in Singapore. This decline was
partially offset by an increase in revenues as a percentage of total revenues in
Japan due to increased customer demand for consumer software products.
19
<PAGE> 22
Costs and Expenses
Costs and expenses and their respective percentages of revenues for the Year
Ended December 31, 1994 and the Transition Period Ended December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, % of total December 31, % of total
1994 revenues 1993 revenues
---------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Costs of production $ 37,885 31 $ 27,748 67
Sales, marketing and support 27,274 22 19,322 46
General and administrative 21,259 18 15,598 37
Research and development 6,696 6 2,563 6
Amortization and merger related charges 2,432 2 45,471 110
-------- -------- -------- --------
$ 95,546 79 $110,702 266
======== ======== ======== ========
</TABLE>
Costs of production as a percentage of revenues decreased to 31% in the Year
Ended December 31, 1994 from 67% in the Transition Period Ended December 31,
1993. The decrease in costs of production as a percentage of revenues during the
Year Ended December 31, 1994 is primarily due to a lower revenue base in
Transition Period caused by higher provision for product returns as a percentage
of sales. The decrease in costs of production as a percentage of revenues also
results from an increase in CD-ROM based and higher OEM sales and solo direct
mail sales, which have lower costs of production than traditional retail
magnetic disk based product sales. In addition, costs of production as a
percentage of revenues improved due to the closing of the Power Up catalog
operations in 1994, which generated higher costs of production due to the
inclusion of distributed products in the catalog. Costs of production in the
Transition Period Ended December 31, 1993 as a percentage of revenues were also
higher without the seasonal nature of sales from income tax software and related
services that occur primarily in the first six months of the calendar year.
Costs of production are comprised of, among other things, the cost of product
documentation, packaging and disks. Other items included in cost of revenues are
royalties to third party developers and reserves for obsolete inventory.
Sales, marketing and support and general and administrative expenses decreased
as a percentage of revenues primarily due to a reduction in operating expenses
during the Year Ended December 31, 1994 associated with cost reduction
measurements undertaken by management as a result of the Three-Party Combination
and changes implemented in connection with the acquisitions of Aris, Compact and
SMC. The cost reduction program included a reduction in employee workforce from
a total of 650 employees to 450 employees, the reduction in the number of
facilities from 25 to 11 locations and savings generated from the consolidation
of sales and marketing activities. The Company also consolidated its five
separate technical support operations that existed prior to the Three-Party
Combination into one facility in Marietta, Georgia.
Amortization and merger related charges decreased to $2,432 in the Year Ended
December 31, 1994 from $45,471 in the Transition Period Ended December 31, 1993.
Amortization and merger related charges in the Year Ended December 31, 1994
relate to the acquisitions of Aris and Compact and the closing of the Barbados
facility, whereas the amortization and merger related charges in the Transition
Period relate to the Three-Party Combination costs. Amortization and merger
related charges were expensed as incurred or were recorded when it became
probable that the transaction would occur and the expense could be reasonably
estimated. Amortization and merger related charges consist of the following:
20
<PAGE> 23
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Amortization of technology and
product related costs $ 422 $15,521
Amortization of goodwill and other assets 1,185 8,082
Provision (reversal) for litigation (254) 5,817
Professional fees and other transaction costs 636 8,705
Employee severance 163 4,429
Termination of leases 98 1,533
Other 182 1,384
------- -------
Total $ 2,432 $45,471
======= =======
</TABLE>
Amortization of technology and product related costs declined by $15,099 because
during the Transition Period Ended December 31, 1993, in connection with the
Three-Party Combination, the Company recorded write-downs of product related
intangible assets of $15,521 due to a change in the consumer software marketing
strategy of the Company. The Company decided to approach consumer software
distribution through fixturing, specialty shelf space and direct merchandising
and marketing with the retailer and customer. The new marketing strategy focused
on new products, and an increase in the number of available offerings of
consumer software and recognized a reduction in product shelf life. The Company
has also reduced its dependence on predominantly internally developed products,
and its new product introduction strategy includes a higher number of products
originating from its external developer relationships through licensing
contracts. As a result of the new marketing strategy, the Company decided to
phase out certain brands (primarily the PFS: brand) and recorded expenses of
$15,521 in the Transition Period Ended December 31, 1993 related to write-downs
of capitalized software developments costs, prepaid royalties, including a loss
of $710 on the sale of the EasyTax product line, trademarks and technology
rights associated with products.
Amortization of goodwill and other assets declined by $6,897 in the Year Ended
December 31, 1994 as compared to the Transition Period because in connection
with its change in marketing strategy the Company's Power up catalog operation
was closed. As a result, the Company recorded an expense of $4,205 in the
Transition Period Ended December 31, 1993 to reflect a write-down to net
realizable value of certain trademarks and mailing lists. The Company also
recorded an expense of $3,877 in the Transition Period Ended December 31, 1993
to record a write-down to net realizable value of a license held by LANSA USA,
Inc. ("Lansa").
Professional fees in 1994 were for investment banking, accounting and legal fees
incurred in connection with the acquisitions of Aris and Compact. These costs
were substantially paid prior to December 31, 1994. Professional fees and other
transaction costs in the Transition Period Ended December 31, 1993 relate
primarily to investment banking, legal and accounting fees in connection with
the Three-Party Combination and have been paid at December 31, 1994. The amount
accrued at December 31, 1993 of $5,954 includes $1,781 which was paid through
the issuance of 129,555 shares of common stock.
Employee severance costs in 1994 relate to termination of employees in
connection with the acquisitions of Aris and Compact and the closing of the
Barbados facility. The employee terminations were substantially in the areas of
product development and sales and marketing. A total of 20 employees were
terminated in the Year Ended December 31, 1994. At December 31, 1994, $54 of
severance costs remained to be paid to the employees in accordance with the
terminations. The remaining employee severance payments were paid prior to
December 31, 1995. Employee severance in the Transition Period relates to
employee terminations in connection with the Three-Party Combination primarily
in the areas of product development, technical support, customer service,
finance and administration. Substantially all employee terminations were
completed through December 31, 1994 and $3,866 of the $4,833 severance accrued
at December 31, 1993 was paid at December 31, 1994 in accordance with the
Company's plan. The remaining severance amounts were substantially paid before
December 31, 1995 in accordance with the severance contract terms.
21
<PAGE> 24
Lease termination costs in the Year Ended December 31, 1994 relate to the
closure of the Aris facility in California. Lease termination costs in the
Transition Period represent costs associated with the closure of the Power Up
catalog operations and the shutdown of the manufacturing facility in
Charlestown, MA in connection with the consolidation of the Company's production
facilities. In addition, offices were vacated in Toronto, Boca Raton, Novato and
San Mateo. These facilities were consolidated into one central location in
Cambridge, MA. The amount accrued at December 31, 1993 for lease termination
costs was $2,254, of which $1,341 had been paid through December 31, 1994. The
balance was substantially paid before December 31, 1995 in accordance with lease
terms.
In the Year Ended December 31, 1994, the Company sold its Lansa operations to
Insight Business Consultants Inc. ("Insight"), a company of which an executive
officer of the Company is the majority shareholder, in exchange for $650, which
was paid by the forgiveness of $250 of amounts payable to Insight by the Company
and $400 as a note receivable to be paid evenly over an eight month period (the
"Note"), which has been collected as of December 31, 1995. In connection with
the sale of Lansa, the Company has recognized a gain of $778 in the Year Ended
December 31, 1994.
During the Year Ended December 31, 1994, the Company settled a judgment issued
by the Supreme Court of Australia commenced by Perfect Information Pty. Limited.
A reserve of $3,658 had been recorded to reflect the original amount of the
judgment and related legal fees. In August 1994, the Company reached a revised
settlement agreement with the plaintiff and agreed to pay a total of $2,400 in
four equal installments. Accordingly, a reversal of the overaccrual of $1,096
was recorded in the Year Ended December 31, 1994.
During 1994, the Company entered into a settlement agreement with Computer
Associates ("CA") with respect to an action, captioned Parsons Technology Inc.
v. Computer Associates which alleged that CA's tax preparation software package,
CA-Simply Tax (previously known as EasyTax), infringed upon certain of Parson's
copyrights. As a result of the sale of EasyTax to CA, SoftKey was required to
indemnify CA for any loss it might suffer as a result of the Parson's
litigation. The settlement agreement reached between the Company, CA and Parsons
released the Company from its indemnification commitment in connection with the
Parson's litigation. The Company has expensed a total of $900 in 1994, net of
insurance proceeds, related to this settlement.
The provision for litigation of $5,817 in the Transition Period Ended December
31, 1993 relates to a settlement award of $2,617, which includes legal fees,
made by the American Arbitration Association on December 3, 1993 in connection
with a claim made against Spinnaker on April 27, 1992 by Software Publishing
Corporation, which has been subsequently paid, and a settlement with a
distributor in Chapter 11 bankruptcy proceedings which had filed a motion for
authority to assume certain purchase orders issued to the Company, for which the
Company recorded a provision of $3,200 for the settlement and related legal
fees. The settlement of $3,200 includes $495, which was settled by the issuance
of 40,825 shares of common stock.
Other Income (Expense)
Other expense decreased to $535 in the Year Ended December 31, 1994 from $744 in
the Transition Period Ended December 31, 1993 primarily due to lower interest
expense as a result of the conversion of the $3,000 term debt due to Phemus
Corporation ("Phemus"), a former stockholder, into equity in February 1994 and
the conversion of Cdn$12,650 convertible debentures into equity in September and
October 1994.
RESULTS OF OPERATIONS - TRANSITION PERIOD ENDED DECEMBER 31, 1993 AS COMPARED TO
YEAR ENDED JUNE 30, 1993
Results of operations for the Transition Period Ended December 31, 1993 include
amounts for a six month period, while results for the year ended June 30, 1993
include amounts for a twelve month period. Results (in terms of dollar amounts)
for these periods are not directly comparable. Accordingly, management's
discussion and analysis for these periods is generally based upon a comparison
of specified results as a percentage of total revenues.
22
<PAGE> 25
Revenues
Revenues by geographic region for the Transition Period Ended December 31, 1993
and the year ended June 30, 1993 are as follows:
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
December 31, % of total June 30, % of total
1993 revenues 1993 revenues
------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
North America $ 36,051 87 $ 94,214 86
Europe 4,296 10 8,901 8
Other 1,298 3 6,589 6
-------- -------- -------- --------
Total $ 41,645 100 $109,704 100
======== ======== ======== ========
</TABLE>
Revenues in the Transition Period Ended December 31, 1993 are lower due to the
seasonal nature of revenues from income tax software and related services and an
increase in provision for returns. The Company recorded provisions for returns
and allowances of $15,424 in the Transition Period Ended December 31, 1993 as
compared to $5,205 in the year ended June 30, 1993. The increase in provision
relates primarily to returns related to discontinued products, specific customer
situations and known returns in the retail channel. The majority of revenues
from sales of income tax software and related services occur in the first six
months of the calendar year to correspond with the income tax filing requirement
period. Revenues for the Transition Period Ended December 31, 1993 are also
lower due to the disposition of Insight Business Consultants ("Insight"), in May
1993. This decrease is partially offset by the inclusion of results of the Power
Up catalog operation for the entire Transition Period Ended December 31, 1993 as
compared to the inclusion of such results for a limited period following its
acquisition (March 29, 1993) in the year ended June 30, 1993.
European revenues increased as a percentage of total revenues in the Transition
Period Ended December 31, 1993 as compared to the year ended June 30, 1993 due
to an increase in sales in the OEM market, primarily in Italy. Revenues in other
geographic regions include those in Latin America, the Pacific Rim and Barbados.
Revenues in the Pacific Rim declined due to closure of the Company's office in
Singapore. This decline was partially offset by an increase in revenues in Japan
due to increased customer demand for consumer software products.
Costs and Expenses
Costs and expenses and their respective percentages of revenues for the
Transition Period Ended December 31, 1993 and the year ended June 30, 1993 are
as follows:
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, % of total Year Ended % of total
1993 revenues June 30, 1993 revenues
-------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Costs of production $ 27,748 67 $ 49,993 46
Sales, marketing and support 19,322 46 38,014 35
General and administrative 15,598 37 24,278 22
Research and development 2,563 6 8,198 7
Amortization and merger related
charges 45,471 110 46,202 42
-------- -------- -------- --------
Total $110,702 266 $166,685 152
======== ======== ======== ========
</TABLE>
Costs of production as a percentage of revenues increased to 67% in the
Transition Period Ended December 31, 1993 from 46% in the year ended June 30,
1993. The increase in costs of production as a percentage of revenues results
primarily from lower revenues due to increased provisions for returns and the
fact that revenues from the sale of income tax
23
<PAGE> 26
software, which have lower costs of production as a percentage of revenues than
the rest of the Company's operations, seasonally occur in the first six months
of the calendar year, as described above. Revenues from the Power Up catalog
operation, which have a higher cost of production than the rest of the
Company's operations, were included for the entire Transition Period Ended
December 31, 1993 as compared to the inclusion of such revenues for a limited
period under purchase accounting following the acquisition (March 29, 1993) in
the year ended June 30, 1993.
Costs of production are comprised of, among other things, the costs of product
documentation, packaging and disks. Other items included in cost of revenues
are royalties to third-party developers and reserves for obsolete inventory.
Sales, marketing and support and general and administrative expenses increased
as a percentage of revenues due primarily to lower net revenues due to higher
provisions for returns, and to lower income tax software revenues during the
Transition Period Ended December 31, 1993, reflecting the seasonality of income
tax software and related service revenues. The inclusion of results of the
Power Up catalog operation for the entire Transition Period Ended December 31,
1993, as compared to the inclusion of such results from March 29, 1993 through
June 30, 1993, also contributed to the increased costs as a percentage of
revenues as the catalog operations have higher sales and marketing costs as a
percentage of revenues.
Research and development costs decreased as a percentage of revenues to 6% in
the Transition Period from 7% in the year ended June 30, 1993. The decrease is
primarily due to a reduction in development activities at the Novato,
California facility due to its closure and reduced development expenditures on
DOS-based titles (including without limitation WordStar word processing
products).
Amortization and merger related charges decreased to $45,471 in the Transition
Period from $46,202 in the year ended June 30, 1993. Merger costs in the
Transition Period Ended December 31, 1993 include costs which were probable and
reasonably estimated at December 31, 1993 and related to the Three-Party
Combination. Amortization and merger related charges consist of the following:
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
December 31, June 30,
1993 1993
------------ ----------
<S> <C> <C>
Amortization of technology and product related
costs $15,521 $ 9,463
Amortization of goodwill and other assets 8,082 -
Professional fees and other transaction costs 8,705 3,424
Provision for litigation 5,817 3,200
Employee severance 4,429 3,975
Termination of leases 1,533 2,792
Charge for incomplete technology - 19,051
Other 1,384 4,297
------- -------
Total $45,471 $46,202
======= =======
</TABLE>
During the Transition Period Ended December 31, 1993, in connection with the
Three-Party Combination, the Company recorded amortization and write-downs of
technology and product related assets of $15,521 due to a change in the
consumer software marketing strategy of the Company. The Company decided to
approach consumer software distribution through fixturing, specialty shelf
space and direct merchandising and marketing with the retailer and customer.
The new marketing strategy focuses on new products, and an increase in the
number of available offerings of consumer software and recognizes a reduction
in product shelf life. The Company has also reduced its dependence on
predominantly internally developed products, and its new product introduction
strategy includes a higher number of products originating from its external
developer relationships through licensing contracts. As a result of the new
marketing strategy, the Company decided to phase out certain brands (primarily
the PFS: brand) and recorded expenses of $15,521 in the Transition Period Ended
December 31, 1993 related to write-downs of capitalized software development
costs, prepaid royalties, including a loss on disposition of the EasyTax
product line of $710, trademarks and technology rights.
24
<PAGE> 27
Amortization of goodwill and other assets increased by $8,082 in the Transition
Period as compared to the year ended June 30, 1993 because in connection with
its change in marketing strategy the Company's Power Up catalog operation was
discontinued. As a result, the Company recorded an expense of $4,205 in the
Transition Period Ended December 31, 1993 to reflect a write-down to net
realizable value of certain trademarks and mailing lists. The Company also
recorded an expense of $3,877 in the Transition Period Ended December 31, 1993
to record a write-down to net realizable value of the Lansa license.
Professional fees and other transaction costs relate primarily to investment
banking, legal and accounting fees in connection with the Three-Party
Combination. The amount accrued at December 31, 1993 of $5,954 includes $1,781
which was paid through the issuance of 129,555 shares of common stock.
Employee severance relates to employee terminations primarily in the areas of
product development, technical support, customer service, finance and
administration. Substantially all employee terminations were completed through
December 31, 1994 and $3,866 of the $4,833 severance accrued for at December
31, 1993 has been paid in accordance with the Company's plan. The remaining
severance amounts were substantially paid before December 31, 1995 in
accordance with the severance contract terms.
Lease termination costs represent costs associated with the closure of the
Power Up catalog operations and the shutdown of the manufacturing facility in
Charlestown, MA in connection with the consolidation of the Company's
production facilities. In addition, offices were vacated in Toronto, Ontario;
Boca Raton, FL; Novato, CA; and San Mateo, CA. These facilities were
consolidated into one central location in Cambridge, MA. The amount accrued at
December 31, 1993 for lease termination costs was $2,254, which has been paid.
The provision for litigation of $5,817 in the Transition Period Ended December
31, 1993 relates to a settlement award of $2,617, which includes legal fees,
made by the American Arbitration Association on December 3, 1993 in connection
with a claim made against Spinnaker on April 27, 1992 by Software Publishing
Corporation, which has been subsequently paid, and a settlement with a
distributor in Chapter 11 bankruptcy proceedings which had filed a motion for
authority to assume certain purchase orders issued to the Company, for which
the Company recorded a provision of $3,200 for the settlement and related legal
fees. The settlement of $3,200 includes $495 which was settled by the issuance
of 40,825 shares of common stock. The provision for litigation of $3,200 in
the year ended June 30, 1993 relates to a judgment entered against WordStar in
May 1993 in the Superior Court in Australia in a lawsuit commenced by Perfect
Information Pty Limited, which was settled in August 1994.
In the year ended June 30, 1993, the Company recorded a total of $46,202 of
amortization and merger related charges. These charges related to the
write-down of intangible assets to net realizable value of $9,463 in connection
with the acquisition of ZSoft, write- downs of certain discontinued products
and the disposal of the operations of Insight. In addition, legal and
professional fees and other transaction costs of $3,424 related primarily to
the Three-Party Combination and employee severance related to staff reductions
at the Company's Novato, CA; European, Boca Raton, FL and Insight operations of
$3,975 were recorded. The Company also recorded a provision for termination of
various leases in connection with facility closures as a result of the
Three-Party Combination, settlement of lease commitments for unoccupied space
which has no planned future use and settlement of lease commitments in
connection with the disposal of the Insight operations of $2,792, and other
merger-related costs of $4,297 related to the acquisition of ZSoft and the
Three-Party Combination.
The charge of $19,051 for purchased research and development during the year
ended June 30, 1993 relates to the purchase of in- process technology for
$14,051 by Spinnaker in connection with its acquisition of Power Up and the
purchase by Former SoftKey of certain CD-ROM and other products under or
proposed for development for $5,000.
Other Income (Expense).
Other expense increased to $744 in the Transition Period Ended December 31,
1993 from $166 in the year ended June 30, 1993 primarily due to lower interest
income resulting from lower average cash balances during the period.
25
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
The market for personal computer software has been characterized by shifts in
product popularity and sales volume and is also subject to seasonal and
technological change. In light of these factors, there can be no assurance
that the Company's current and planned products will continue to receive the
same level of customer acceptance and price level support as they have in the
past. In the event that historical customer acceptance and price level support
declines, the Company's liquidity will decline.
Cash and cash equivalents increased from $12,205 at December 31, 1994 to
$77,832 at December 31, 1995. During the Year Ended December 31, 1995, the
Company completed several financing transactions. These include an issuance of
2,713,106 shares of common stock in an underwritten public offering, which
generated $74,434 to the Company, a private offering of $350,000 principal
amount 5 1/2% Senior Convertible Notes due 2000 and a private offering of
$150,000 principal amount 5 1/2% Senior Exchangeable/Convertible Notes due 2000
to Tribune Company. Each of the senior notes are redeemable by the Company on
or after November 2, 1998 at declining redemption prices. Interest is due
semi-annually on May 1 and November 1 of each year. In addition, the Company
generated approximately $28,000 of proceeds from exercise of employee stock
options and warrants during the year. On December 27, 1995, the Company's
merger agreement with The Learning Company became effective. As of December
31, 1995, the Company paid a total $517,809 in cash for 7,674,393 shares of The
Learning Company. The Company will acquire the remaining 375,602 Learning
Company shares not yet tendered at December 31, 1995 for $25,353 cash. The
remaining amounts due to the former stockholders of The Learning Company of
$25,353 were substantially paid following year end. The Company expects the
merger related costs accrued at December 31, 1995, totaling $40,089 to be paid
over the next twelve months, which will reduce the Company's cash balances. On
July 21, 1995, the Company acquired tewi for a combination of cash and stock.
In connection with this acquisition, the Company issued 99,045 shares of common
stock and paid $12,688 in cash.
Cash generated from operations during the Year Ended December 31, 1995 was
$23,593. During the Year Ended December 31, 1995 the Company had a reduction
of $7,341 in merger and legal related amounts payable. Accounts receivable and
inventories have increased somewhat over prior years, before effect of acquired
companies, due to an increase in the number and mix of customers serviced and
the number of product offerings.
In February 1996, SoftKey Inc., a wholly owned subsidiary of the Company,
amended its revolving line of credit (the "Line"), to provide for a maximum
availability of $50,000. Borrowings under the Line become due on July 1, 1997
and bear interest at the prime rate (8 1/2% at December 31, 1995). The Line is
subject to certain financial covenants, is secured by a general security
interest in the assets of SoftKey Inc. and certain other subsidiaries of the
Company and by a pledge of the stock of certain of its subsidiaries. The Line
is guaranteed by the Company. The full amount of the Line is available at
December 31, 1995.
Income generated by the Company's subsidiaries in certain foreign countries
cannot be repatriated to the Company in the United States without payment of
additional taxes since the Company does not currently receive a U.S. tax credit
with respect to income taxes paid by the Company (including its subsidiaries)
in those foreign countries. The Company also conducts its tax software
business in Canada. In order to mitigate any foreign currency exposure in
Canada the Company has purchased a Cdn $6,000 foreign exchange option contract
expiring on March 29, 1996.
The Company believes that its existing cash balances are sufficient to meet its
current and planned requirements for the foreseeable future.
Cash flow from operations on a short-term basis is positively impacted by the
seasonality of the income tax software business in the first two quarters of
the calendar year. At the present time, the Company expects that its cash
flows from operations will be sufficient to finance the Company's operations
for at least the next twelve months. Longer term cash requirements are
dictated by a number of external factors, which include the Company's ability
to launch new and competitive products, the strength of competition in the
consumer software industry and the growth of the home computer market. The
Company is continuously evaluating products and technologies for acquisitions,
however, no estimate of short-term or long-term cash requirements for such
acquisitions can be made at this time.
26
<PAGE> 29
FUTURE OPERATING RESULTS
The Company's future operating results are subject to a number of
uncertainties, including its ability to develop and introduce new products, the
introduction of competitive products and general economic conditions. In
addition, the Company expects the level of competition in the consumer software
industry will become more intense and that companies with greater access to
capital, new products and retail shelf space may enter its market. In
addition, should competitors of the Company continue to consolidate, it will
increase the risk associated with channel management and product offerings.
The Company has recently completed the acquisitions of The Learning Company and
Compton's and may plan to seek acquisitions of businesses, products or
technologies in the future that are complementary to its current business. In
addition, the Company has entered into a definitive merger agreement with MECC.
The consummation of this merger is subject to, among other things, stockholder
approval of both the Company and MECC. There can be no assurance that the
Company will not encounter difficulties in integrating these or future
businesses, products or technologies. As a result of the acquisitions in 1995
and the proposed acquisition of MECC, the Company will have substantial amounts
of non-cash amortization of goodwill and intangible assets over the next few
years. This will result in operating losses in the future.
The rate of change in the consumer software industry has continued to increase
in the Year Ended December 31, 1995. As consumers have become more accustomed
to purchasing multimedia software the Company believes they have developed, and
will continue to develop, increased sophistication with respect to the content
and quality of their software purchases, demanding increasingly full featured
and content rich programs. In addition, the development time for new platforms
on which the Company's products run is decreasing, requiring the Company to
update or discontinue products at shorter intervals. The Company also
anticipates that the future demand for on-line and Internet compatible products
will increase and it will be required to continuously re-evaluate its product
strategy. The Company continually assesses and re-defines its existing
distribution strategy to meet these future demands. These factors make the
Company's future revenue and profitability increasingly unpredictable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements set forth on page 28 hereof.
27
<PAGE> 30
SOFTKEY INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants ........................................... 29
Consolidated Balance Sheets as of December 31, 1995 and 1994 ................. 33
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994, Transition Period Ended December 31, 1993
and the year ended June 30, 1993 ........................................ 34
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1995 and 1994, Transition Period Ended
December 31, 1993 and the year ended June 30, 1993 ...................... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994, Transition Period Ended December 31, 1993
and the year ended June 30, 1993 ........................................ 36
Notes to Consolidated Financial Statements ................................... 38
</TABLE>
28
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of SoftKey International Inc.:
We have audited the accompanying 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
each of the two years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SoftKey
International Inc. as of December 31, 1995 and 1994 and the consolidated
results of its operations and cash flows for each of the two years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
In connection with our audits of the financial statements referred to above, we
have also audited the related financial statement schedule. In our opinion,
this financial statement schedule for each of the two years in the period ended
December 31, 1995 when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 20, 1996
29
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
SoftKey International Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of SoftKey International Inc. and
subsidiaries (the "Company") for the Transition Period from July 4, 1993 to
December 31, 1993 and for the year ended June 30, 1993. These consolidated
financial statements and the financial statement schedule referred to below are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the financial
statement schedule based on our audits. As discussed in Notes 1 and 2, SoftKey
Software Products Inc., Spinnaker Software Corporation ("Spinnaker") and
WordStar International Incorporated ("WordStar") completed a three-way merger
on February 4, 1994 (the "Three-Party Combination") that has been accounted for
as a pooling-of-interests in the accompanying financial statements. We did not
audit the financial statements or the financial statement schedules of
Spinnaker or WordStar for the year ended June 30, 1993. Such financial
statements and financial statement schedules are included in the accompanying
consolidated financial statements of SoftKey International Inc. and reflect 55
percent of the consolidated total revenues the year ended June 30, 1993. The
financial statements and financial statement schedules of Spinnaker and
WordStar were audited by other auditors whose reports have been furnished to us
and our opinion, insofar as it relates to amounts included for Spinnaker or
WordStar, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of SoftKey
International Inc. and subsidiaries for the Transition Period from July 4, 1993
to December 31, 1993 and for the year ended June 30, 1993, in conformity with
generally accepted accounting principles.
The report of Price Waterhouse LLP on the consolidated financial statements of
Spinnaker as of June 30, 1993 and for the year then ended contains an
explanatory paragraph relating to Spinnaker's ability to continue as a going
concern as described in Note 12 of the consolidated financial statements of
Spinnaker (not included herein).
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, based on our audits and the reports
of other auditors, fairly states, in all material respects, the financial data
required to be set forth therein, in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 16, 1995
30
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
WordStar International Incorporated:
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of WordStar International Incorporated and subsidiaries
for the year ended June 30, 1993 (note presented separately herein). In
connection with our audit of the consolidated financial statements, we also
have audited the related financial statement schedule (not presented separately
herein). These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statements and financial statement schedule based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of the operations and their cash
flows of WordStar International Incorporated and subsidiaries for the year
ended June 30, 1993, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
San Francisco, California
September 13, 1993
31
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Spinnaker Software Corporation
In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows (not presented separately herein)
present fairly, in all material respects, the financial position of Spinnaker
Software Corporation and its subsidiaries at June 30, 1993 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
The financial statements referred to above have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has incurred a significant obligation from
the resolution of an arbitration proceeding which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to this matter are also described in Note 12. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Price Waterhouse LLP
Boston Massachusetts
September 28, 1993, except as to Note 12,
which is as of December 3, 1993
32
<PAGE> 35
SOFTKEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 77,832 $ 12,205
Accounts receivable, less allowances for returns and 32,402 16,745
doubtful accounts of $6,851 and $6,744, respectively
Inventories 18,997 9,795
Other current assets 23,627 8,247
--------- ---------
152,858 46,992
--------- ---------
Property and equipment, net 19,621 9,325
Goodwill and other intangible assets, net 727,934 34,498
--------- ---------
$ 900,413 $ 90,815
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 47,485 $ 22,956
Merger related accruals 40,089 3,669
Current portion of long-term obligations 963 1,008
Current portion of related party debt 4,314 1,008
Due to The Learning Company stockholders 25,353 --
Other current liabilities 12,743 2,830
--------- ---------
130,947 31,471
--------- ---------
LONG-TERM OBLIGATIONS:
Long-term debt 350,651 9,103
Related party debt 150,000 1,115
Deferred income taxes 50,965 4,323
Other long-term obligations 3,331 7,318
--------- ---------
554,947 21,859
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value - Authorized - 60,000,000
shares; issued and outstanding 30,364,710 and 16,697,003
shares at December 31, 1995 and 1994, respectively 304 167
Special voting stock - Authorized and issued - one share
representing the voting rights of 1,596,742 and 4,104,978
outstanding Exchangeable Shares (for common stock) at December
31, 1995 and 1994, respectively -- --
Additional paid-in-capital 436,261 191,390
Accumulated deficit (212,596) (142,792)
Cumulative translation adjustment (9,450) (9,651)
Treasury stock, $0.01 par value, 130,995 shares at December
31, 1994 -- (1,629)
--------- ---------
214,519 37,485
--------- ---------
$ 900,413 $ 90,815
========= =========
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements)
33
<PAGE> 36
SOFTKEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended Transition
December 31, Period Ended Year Ended
-------------------------- December 31, June 30,
1995 1994 1993 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 167,042 $ 121,287 $ 41,645 $ 109,704
COSTS AND EXPENSES:
Costs of production 53,070 37,885 27,748 49,993
Sales, marketing and support 38,370 27,274 19,322 38,014
General and administrative 20,813 21,259 15,598 24,278
Research and development 12,487 6,696 2,563 8,198
Amortization and merger related charges 103,172 2,432 45,471 46,202
----------- ----------- ----------- -----------
Total operating expenses 227,912 95,546 110,702 166,685
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (60,870) 25,741 (69,057) (56,981)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 6,020 520 639 1,799
Interest expense (5,379) (1,036) (1,641) (2,296)
Other income (expense), net 64 (19) 258 331
----------- ----------- ----------- -----------
Total other income (expense) 705 (535) (744) (166)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES (60,165) 25,206 (69,801) (57,147)
PROVISION FOR INCOME TAXES 5,795 4,061 3,457 103
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (65,960) $ 21,145 $ (73,258) $ (57,250)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Primary $ (2.65) $ 1.07 $ (5.01) $ (4.36)
Fully Diluted $ (2.65) $ 1.04 $ (5.01) $ (4.36)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Primary 24,855,000 19,672,000 14,618,000 13,129,000
Fully Diluted 24,855,000 21,115,000 14,618,000 13,129,000
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements)
34
<PAGE> 37
SOFTKEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Series A Series B Common Stock Additional Cumulative
Preferred Preferred ------------ Paid-In Accumulated Translation
Stock Stock Shares Amount Capital Deficit Adjustment
--------- --------- ------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1992 -- -- 12,648 $ 126 $119,915 $ (32,300) $ (548)
Stock issued under exercise of -- -- 161 2 1,360 -- --
options and warrants
Stock issued under Lifetree -- -- 38 -- 860 -- --
Software, Inc. and N.B.I
agreements
Sale of common stock -- -- 573 6 12,116 -- --
Stock issued for settlement of -- -- 66 1 1,093 -- --
expenses
Sale of Series B preferred and -- 50 382 4 22,896 -- --
common stock
Translation adjustments -- -- -- -- -- -- (6,254)
Net loss -- -- -- -- -- (57,250) --
--- --- ------ ----- -------- --------- -------
BALANCE, JUNE 30, 1993 -- 50 13,868 139 158,240 (89,550) (6,802)
Stock issued under exercise of -- -- 4 -- 36 -- --
options and warrants
Stock issued for settlement of -- -- 1 -- 27 -- --
expenses
Exercise of stock warrants -- -- 895 9 3,537 -- --
Preferred dividend -- 2 -- -- 810 (812) --
Translation adjustments -- -- -- -- -- -- (1,511)
Net loss duplicated in -- -- -- -- -- 595 --
consolidation
Net loss -- -- -- -- -- (73,258) --
--- --- ------ ----- -------- --------- -------
BALANCE, DECEMBER 31, 1993 -- 52 14,768 148 162,650 (163,025) (8,313)
Acquisition of Aris -- -- 463 5 5 (230) --
Acquisition of Compact -- -- 409 4 848 (382) --
Acquisition of SMC -- -- 602 6 6,809 -- --
Spinnaker rights offering and -- (52) 2,668 27 25 -- --
redemption of Series B
preferred stock
Issuance of Series A preferred 30 -- -- -- 2,970 -- --
stock upon conversion of
Phemus debt
Preferred dividend 3 -- -- -- 297 (300) --
Conversion of common stock to -- -- (7,582) (75) 75 -- --
Exchangeable Shares
Conversion of Exchangeable -- -- 4,156 41 (41) -- --
Shares to common stock
Conversion of debt to common -- -- 126 1 9,637 -- --
stock
Conversion of Series A (33) -- 268 3 30 -- --
preferred stock to common
stock
Treasury stock purchased -- -- -- -- -- -- --
Stock issued under exercise of -- -- 648 6 5,811 -- --
options and warrants
Stock issued for settlement of -- -- 171 1 2,274 -- --
expenses
Translation adjustments -- -- -- -- -- -- (1,338)
Net income -- -- -- -- -- 21,145 --
--- --- ------ ----- -------- --------- -------
BALANCE, DECEMBER 31, 1994 -- -- 16,697 167 191,390 (142,792) (9,651)
Acquisition of Future Vision -- -- 1,135 11 8,455 (3,608) --
Acquisition of tewi -- -- 99 1 3,639 -- --
Acquisition of The Learning -- -- -- -- 43,369 -- --
Company
Acquisition of Compton's -- -- 5,053 51 86,634 -- --
Acquisitions of others -- -- 262 3 2,673 (236) --
Sale of common stock -- -- 2,713 27 73,584 -- --
Stock issued under exercise of -- -- 1,898 19 28,172 -- --
options and warrants
Treasury stock retirement -- -- -- -- (1,629) -- --
(25) -- --
Conversion of Exchangeable -- -- 2,508 25 -- -- --
Shares common stock
Translation adjustments -- -- -- -- -- -- 201
Net loss -- -- -- -- -- (65,960) --
--- --- ------ ----- -------- --------- -------
BALANCE, DECEMBER 31, 1995 -- -- 30,365 $ 304 $436,261 $(212,596) $(9,450)
=== === ====== ===== ======== ========= =======
<CAPTION>
Total
Stockholders'
Treasury Equity
Stock (Deficit)
-------- -------------
<S> <C> <C>
BALANCE, JUNE 30, 1992 $ (144) $ 87,049
Stock issued under exercise of -- 1,362
options and warrants
Stock issued under Lifetree -- 860
Software, Inc. and N.B.I
agreements
Sale of common stock -- 12,122
Stock issued for settlement of -- 1,094
expenses
Sale of Series B preferred and -- 22,950
common stock
Translation adjustments -- (6,254)
Net loss -- (57,250)
------- ---------
BALANCE, JUNE 30, 1993 (144) 61,933
Stock issued under exercise of -- 36
options and warrants
Stock issued for settlement of -- 27
expenses
Exercise of stock warrants -- 3,546
Preferred dividend -- --
Translation adjustments -- (1,511)
Net loss duplicated in -- 595
consolidation
Net loss -- (73,258)
------- ---------
BALANCE, DECEMBER 31, 1993 (144) (8,632)
Acquisition of Aris -- (220)
Acquisition of Compact -- 470
Acquisition of SMC -- 6,815
Spinnaker rights offering and -- --
redemption of Series B
preferred stock
Issuance of Series A preferred -- 3,000
stock upon conversion of
Phemus debt
Preferred dividend -- --
Conversion of common stock to -- --
Exchangeable Shares
Conversion of Exchangeable -- --
Shares to common stock
Conversion of debt to common -- 9,638
stock
Conversion of Series A -- --
preferred stock to common
stock
Treasury stock purchased (1,485) (1,485)
Stock issued under exercise of -- 5,817
options and warrants
Stock issued for settlement of -- 2,275
expenses
Translation adjustments -- (1,338)
Net income -- 21,145
------- ---------
BALANCE, DECEMBER 31, 1994 (1,629) 37,485
Acquisition of Future Vision -- 4,858
Acquisition of tewi -- 3,640
Acquisition of The Learning -- 43,369
Company
Acquisition of Compton's -- 86,685
Acquisitions of others -- 2,440
Sale of common stock -- 73,611
Stock issued under exercise of -- 28,190
options and warrants
Treasury stock retirement 1,629 --
Conversion of Exchangeable -- --
Shares common stock
Translation adjustments -- 201
Net loss -- (65,960)
------- ---------
BALANCE, DECEMBER 31, 1995 $ -- $ 214,519
======= =========
</TABLE>
(The accompanying notes are an integral part of these consolidated
financial statements)
35
<PAGE> 38
SOFTKEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED TRANSITION
DECEMBER 31, PERIOD ENDED YEAR ENDED
--------------------- DECEMBER 31, JUNE 30,
1995 1994 1993 1993
--------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (65,960) $ 21,145 $(73,258) $(57,250)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation, amortization and write-off of
intangible assets 29,802 5,217 34,494 18,528
Charge for purchased research and development 60,483 - - 19,051
Provision for returns and doubtful accounts 22,358 13,744 15,424 5,205
Provision for product lines sold or discontinued - - 710 2,989
Loss (gain) on disposition of property and
equipment and products - - 7 874
Other - - 1,128 (1,341)
Change in assets and liabilities (net of acquired assets
and liabilities):
Accounts receivable (39,811) (17,193) (7,290) (1,543)
Inventories (4,441) (4,763) 751 1,469
Other current assets 8,865 (2,460) (1,487) 78
Other long-term assets 11,990 1,380 757 (1,277)
Accounts payable and accrued expenses 3,600 (10,594) 6,208 (2,418)
Merger related accruals (7,341) (19,903) 13,568 10,004
Other current liabilities 6,342 2,676 2,766 (224)
Other long-term obligations (2,294) 23 134 (318)
--------- -------- -------- --------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES 23,593 (10,728) (6,088) (6,173)
--------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for businesses acquired, net of cash
on-hand (547,889) - - (17,208)
Purchases of property and equipment (7,811) (5,514) (1,130) (2,931)
Software development costs (2,410) (1,200) (914) (4,314)
Royalty advances - - - (237)
Purchase of marketable securities - - - (5,670)
Proceeds from sale of marketable securities - - 1,400 5,245
Sale (purchase) of intangible assets - - 1,967 (3,727)
--------- -------- -------- --------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES: (558,110) (6,714) 1,323 (28,842)
--------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stocks, options and
warrants 106,616 8,852 3,582 36,434
Redemption of Series B preferred stock - (4,660) - -
Sale (repayment) of debentures 500,000 (500) - 500
Borrowings under term notes and line-of-credit 3,150 7,700 3,196 1,900
Payments on term notes and line-of-credit (8,815) (2,500) (6,316) (3,258)
Payments on capital lease obligations (1,008) (904) (138) (385)
Other - - 62 (290)
--------- -------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 599,943 7,988 386 34,901
--------- -------- -------- --------
--------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH 201 (1,138) (753) (681)
--------- -------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 65,627 (10,592) (5,132) (795)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,205 22,797 27,929 28,724
--------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,832 $ 12,205 $ 22,797 $ 27,929
========= ======== ======== ========
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements)
36
<PAGE> 39
SOFTKEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED TRANSITION
DECEMBER 31, PERIOD ENDED YEAR ENDED
------------------- DECEMBER 31, JUNE 30,
1995 1994 1993 1993
------- ------ ------------ ----------
<S> <C> <C> <C> <C>
SUPPLEMENTAL SCHEDULING OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued to acquire tewi $ 3,640 $ -- $ -- $ --
Common stock issued to acquire Compton's 86,685 -- -- --
Common stock issued to acquire others 4,967 -- -- --
Increase in APIC due to value of in-the money
employee stock options in connection with the
acquisition of The Learning Company 43,369 -- -- --
Common stock issued for settlement of expenses 111 2,275 27 1,094
Conversion of debt to equity 3,471 9,638 700 --
Common stock issued to purchase SMC -- 6,815 -- --
Equipment acquired under capital leases 627 1,475 60 360
Common stock issued on conversion of Series A preferred
stock -- 3,000 -- --
Dividend on Series A preferred stock settled by issuance
of common stock -- 300 -- --
Accounts payable converted to long-term debt -- -- -- 700
Common stock issued to N.B.I -- -- -- 860
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during period for:
Interest $ 524 $1,387 $1,006 $1,568
Income taxes (12) (254) 5,434 2,233
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements)
37
<PAGE> 40
SOFTKEY INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Business
SoftKey International Inc. ("SoftKey" or the "Company") develops, publishes and
markets consumer software in the education, reference, productivity lifestyle
and, to a lesser extent, entertainment categories. The Company sells its
products through mass merchants, office supply stores, software specialty
stores, distributors, original equipment manufacturers (OEMs), and to end users
through direct mail. The Company also develops and distributes income tax
software products and offers computerized processing of income tax returns in
Canada. The Company's principal market is in the United States and Canada.
The Company has international operations in Germany, Ireland, France, Israel,
the United Kingdom, Japan and Australia.
On February 4, 1994, WordStar International Incorporated ("WordStar") completed
a three-way business combination transaction (the "Three-Party Combination")
with SoftKey Software Products Inc. ("Former SoftKey"), and Spinnaker Software
Corporation ("Spinnaker") pursuant to a combination agreement dated as of
August 17, 1993, as amended and restated (the "Combination Agreement"). The
Three- Party Combination was accounted for as a pooling-of-interests. On
February 4, 1994, WordStar changed its name to SoftKey International Inc.
The Company's fiscal year is the 52 or 53 weeks ending on or after December 31.
For clarity of presentation herein, all references to December 31, 1995 relate
to balances as of January 6, 1996, references to December 31, 1993 relate to
balances as of January 1, 1994, the period from January 1, 1995 to January 6,
1996 is referred to as the "Year Ended December 31, 1995", the period from
January 2, 1994 to December 31, 1994 is referred to as the "Year Ended December
31, 1994" and the period from July 4, 1993 to January 1, 1994 is referred to as
the "Transition Period Ended December 31, 1993" or the "Transition Period".
For comparative purposes the unaudited results of operations for the six months
ended December 31, 1992 include revenues of $60,076, a net loss of $9,482 and a
net loss per share of $.82.
On December 22, 1995, the Company acquired control of The Learning Company for
cash. On December 28, 1995, the Company acquired Compton's NewMedia, Inc. and
Compton's Learning Company (collectively, "Compton's") in exchange for a
combination of common stock and the assumption of certain intercompany
indebtedness from Tribune Company. On July 21, 1995, the Company acquired tewi
Verlag GmbH ("tewi") in exchange for a combination of cash and common stock.
Each of these acquisitions was accounted for using the purchase method of
accounting. On August 31, 1995, the Company acquired Future Vision Holding,
Inc. ("Future Vision") for common stock. This transaction was accounted for
using the pooling-of-interests method. The accompanying financial statements
for years prior to the Year Ended December 31, 1995 do not include amounts
related to Future Vision as they were deemed to be immaterial to the
consolidated financial statements for those periods.
On October 30, 1995, the Company 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 SoftKey common stock, including
transaction related costs value of stock options acquired with a total
estimated purchase price of approximately $260,000 based upon the market value
of SoftKey's common stock. During the first quarter of 1996, the parties
reached agreement regarding the framework of a plan to implement SoftKey's
strategic plan, including the business strategy and management responsibilities
upon consummation of the transaction. The ultimate purchase price will depend
upon the number of shares issued to acquire MECC, which will be in the range of
approximately 7,150,000 to 9,200,000 shares of SoftKey common stock (which
number could be increased to approximately 10,500,000 shares to the extent that
outstanding options to purchase common shares of MECC, are exercised prior to
the effective time of the merger), 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 of a wholly owned
subsidiary of SoftKey with MECC, as contemplated by the merger agreement. The
closing of this transaction is subject to, among other things, stockholder
approval of both the Company and MECC. The transaction will be accounted for
as a purchase.
38
<PAGE> 41
On June 15, 1994 and July 5, 1994, respectively, the Company acquired Aris
Multimedia Entertainment, Inc. ("Aris") and Compact Publishing, Inc.
("Compact"). Each of these combinations was accounted for using the
pooling-of-interests method. The accompanying financial statements for years
prior to the Year Ended December 31, 1994, do not include amounts related to
Compact or Aris as they were deemed to be immaterial to the consolidated
financial statements for those periods. On September 13, 1994, the Company
acquired all the outstanding capital stock of Software Marketing Corporation
("SMC"). This transaction has been accounted for using the purchase method of
accounting.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions regarding items
such as return reserves and allowances, net realizable value of intangible
assets and valuation allowances for deferred tax assets, that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Former SoftKey's statements of cash flows and operations for the twelve months
ended July 31, 1993 have been combined with those of Spinnaker for the year
ended June 30, 1993 and those of WordStar for the year ended July 3, 1993. The
duplication in the Transition Period of Former SoftKey's net loss for the one
month period ended July 31, 1993 of $595 has been adjusted by a credit to
accumulated deficit in the Transition Period.
Certain prior period amounts have been reclassified to conform with current
year presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
amounts and transactions have been eliminated.
Revenue Recognition
Revenues are primarily derived from the sale of software products and software
licensing arrangements. Revenues from the sale of software products is
recognized upon shipment, provided that no significant obligations remain
outstanding and collection of the receivable is probable. Costs related to
insignificant post shipment technical support and other obligations are accrued
when revenue is recognized for the sale of the related products. Allowances
for estimated returns are provided at the time of sale. The Company evaluates
the adequacy of allowances for returns and doubtful accounts primarily based
upon its evaluation of historical and expected sales experience and by channel
of distribution. The estimates determined for reserves for returns and
allowances are based upon information available at the reporting date. To the
extent the future market, sell through experience, channels of distribution and
general economic conditions change, the estimated reserves required for returns
and allowances may also change. Revenues from royalties pursuant to license
arrangements is recognized as earned based upon performance or product
shipments.
Cash Equivalents
Cash equivalents are valued at cost, which approximates market value, and
consist principally of commercial paper, bankers' acceptances, short-term
government securities and money market accounts. The Company considers all
such investments having original maturities of less than 90 days to be cash
equivalents.
39
<PAGE> 42
Inventories
Inventories are stated at the lower of weighted average cost or net realizable
value, and include third-party assembly costs, CD-ROM diskettes, manuals and an
allocation of fixed overhead.
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
------- ------
<S> <C> <C>
Components $ 2,526 $2,475
Finished goods 16,471 7,320
------- ------
$18,997 $9,795
======= ======
</TABLE>
Property and Equipment
Property and equipment are stated at the lower of cost, net of accumulated
depreciation or net realizable value. Depreciation is calculated using
accelerated and straight-line methods over the following useful lives:
<TABLE>
<S> <C>
Building 40 years
Computer equipment 3-5 years
Furniture and fixtures 3-5 years
Leasehold improvements Shorter of the life of the lease
or the estimated useful life
</TABLE>
Goodwill and Intangible Assets
The excess cost over the fair value of net assets acquired, goodwill, is
amortized on a straight-line basis over 2 years, except for the goodwill
associated with the Company's Canadian income tax software business, which is
being amortized on a straight-line basis over its estimated useful life of 40
years. The cost of identified intangible assets is generally amortized on a
straight-line basis over its estimated useful life of 2 to 7 years. Deferred
financing costs are being amortized on a straight-line basis over the term of
the related debt financing. The carrying value of goodwill and intangible
assets is reviewed on a quarterly and annual basis for the existence of facts
or circumstances both internally and externally that may suggest impairment.
To date no such impairment has occurred. Should there be an impairment in the
future, the Company will measure the amount of the impairment based on
discounted expected future cash flows. The cash flow estimates that will be
used will contain management's best estimates, using appropriate and customary
assumptions and projections at the time. Goodwill and other intangible assets
have been presented net of accumulated amortization of $21,916 and $3,687 as of
December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Description Estimated Net Balance at
----------- useful life in December 31,
years 1995
-------------- --------------
<S> <C> <C>
Goodwill 2 and 40 $580,165
Purchased technology and
product related costs 1 to 2 123,929
Brands 7 10,798
Deferred financing costs 5 11,188
Other intangibles assets 3 1,854
--------
$727,934
========
</TABLE>
The Company 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. The Company has estimated the useful life of
the majority of its goodwill and acquired technology to be a short period based
upon rapidly changing industry trends, an intense competitive environment,
changing technology trends and rapidly changing customer preferences for the
40
<PAGE> 43
Company's products and other anticipated economic factors. Should the
Company's business environment or conditions of business change, it may result
in an impairment of these assets and may in turn result in an adjustment of the
future carrying values.
Research and Development Costs
Research and development costs are expensed as incurred. Development costs for
new software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been established. As
discussed in Note 9, the Company changed its marketing strategy in connection
with the Three-Party Combination, which resulted in a significant write-down of
capitalized software development costs during the Transition Period Ended
December 31, 1993. Consistent with the Company's revised marketing strategy,
capitalized software development costs are being amortized on a straight-line
basis over the estimated product life, generally twelve months. During the
Year Ended June 30, 1993 the Company had amortized capitalized software
development costs generally over three years or based on the ratio of current
revenues to total projected revenues, whichever was greater.
Income Taxes
Deferred tax liabilities and assets are determined based on the differences
between the financial statement basis and tax basis of assets and liabilities,
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Foreign Currency Translation
The functional currency of each foreign subsidiary is the local currency.
Accordingly, assets and liabilities of foreign subsidiaries are translated to
U.S. dollars at period end exchange rates. Revenues and expenses are
translated using the average rates during the period. The effects of foreign
currency translation adjustments have been accumulated and are included as a
separate component of stockholders' equity.
Computation of Earnings Per Share
Net income (loss) per share is computed using the weighted average number of
common and dilutive common stock equivalent shares outstanding during the
period. Dilutive common stock equivalent shares consist of convertible
debentures and notes, convertible Series A and Series B preferred stock and
stock options and warrants using the treasury stock method. The computations
do not include common stock equivalents where the effect would be antidilutive.
Primary earnings per share computations differ from fully diluted earnings per
share due to the exclusion of the dilutive effect of convertible debentures and
notes plus the effect of using the average price of the Company's common stock
versus the ending price in the treasury stock computation.
(2) BUSINESS COMBINATIONS
Three-Party Combination
In connection with the Three-Party Combination, each Former SoftKey stockholder
was entitled to receive, for each share held, .36 shares of the Company's
common stock or .36 Exchangeable Non-Voting Shares (the "Exchangeable Shares")
of SoftKey Software Products Inc. ("SoftKey Software"), the successor by
amalgamation to Former SoftKey. Upon completion of the Three-Party
Combination, the Company issued Former SoftKey stockholders a total of
1,354,219 shares of common stock and 7,582,498 Exchangeable Shares. The
Company also issued a special voting share (the "Voting Share") which has a
number of votes equal to the number of Exchangeable Shares outstanding. The
holder of the Voting Share is not entitled to dividends and shall vote with the
common stockholders as a single class. The Exchangeable Shares may be
exchanged for the Company's common stock on a one-for-one basis until February
4, 2005, at which time any outstanding Exchangeable Shares automatically
convert to shares of the Company's common stock. Each share of Spinnaker
common stock was converted into .1624 shares of the Company's common stock. In
connection with the Three-Party Combination and the Spinnaker rights offering,
the Company issued a total of 5,887,295 shares of common stock to the former
Spinnaker stockholders. In addition, the Company issued 129,555 shares of
common stock valued at $1,781 as payment for certain investment banking fees
incurred in connection with the Three-Party Combination.
41
<PAGE> 44
The following information presents the operating results of WordStar, Spinnaker
and Former SoftKey, as previously reported, for the periods preceding the
merger and combined restated operating results to reflect the Three-Party
Combination:
<TABLE>
<CAPTION>
FORMER COMBINED
WORDSTAR SPINNAKER SOFTKEY ELIMINATIONS RESTATED
<S> <C> <C> <C> <C> <C>
Transition Period
Revenues $ 14,881 $ 21,758 $ 8,540 $(3,534) $ 41,645
Net loss (7,369) (34,069) (30,857) (963) (73,258)
Year ended June 30, 1993
Revenues $ 29,967 $ 31,345 $ 50,142 $(1,750) $ 109,704
Net loss (27,484) (22,648) (5,845) (1,273) (57,250)
</TABLE>
There were no adjustments to the above separate results to conform the separate
entities in the application of generally accepted accounting principles.
Compton's
On December 28, 1995, SoftKey acquired Compton's, developers and publishers of
educational multimedia titles. In and in connection with the acquisition,
SoftKey issued a total of 5,052,697 shares of SoftKey common stock, which
included 587,036 shares of common stock to settle $14,000 of intercompany debt
due to Tribune Company and executed a promissory note for $3,000 in
cancellation of the remaining intercompany debt. The total purchase price was
$104,394, including estimated transaction costs, deferred income taxes related
to certain identifiable intangible assets acquired, settlement of certain
intercompany debt to Tribune Company and the fair value of net liabilities
assumed.
The Learning Company
On December 22, 1995, SoftKey acquired control of The Learning Company, a
leading developer of educational software products for use at home and school.
Under the terms of the merger agreement, SoftKey acquired, in a two-step
business combination, all of the outstanding shares of The Learning Company
for total consideration of approximately $684,066, including the value of stock
options assumed, estimated transaction related costs and deferred income taxes
related to certain identifiable intangible assets acquired. Approximately 1.1
million unvested employee stock options of The Learning Company 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 or before
January 26, 1996. Approximately $543,163 of the purchase price was settled in
cash.
tewi Verlag GmbH
On July 21, 1995, the Company acquired tewi, a publisher and distributor of
CD-ROM software and computer-related books, located in Munich, Germany. The
purchase price was settled by a combination of cash and issuance of common
stock. The Company issued 99,045 shares of common stock valued at $3,640 and
may issue additional shares of common stock to a former shareholder of tewi
pursuant to an earn-out agreement. The Company 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.
42
<PAGE> 45
The purchase price for the 1995 acquisitions has been allocated based on fair
value as follows:
<TABLE>
<CAPTION>
The
Learning
tewi Company Compton's Others Total
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Purchase Price $16,915 $684,066 $104,394 $ 8,571 $813,946
Less: Fair value of net tangible
assets (liabilities) (3,757) 72,595 (12,075) (1,102) 55,661
------- -------- -------- ------- --------
Excess to allocate 20,672 611,471 116,469 9,673 758,285
------- -------- -------- ------- --------
Less: excess allocated to:
Incomplete technology - 41,409 19,074 - 60,483
Completed technology and
products - 100,171 22,483 - 122,654
Brands and trademarks - 9,759 1,100 - 10,859
------- -------- -------- ------- --------
- 151,339 42,657 - 193,996
------- -------- -------- ------- --------
Goodwill $20,672 $460,132 $ 73,812 $ 9,673 $564,289
======= ======== ======== ======= ========
</TABLE>
The Company engaged a nationally recognized, independent appraiser to express
an opinion on the Company's estimated fair market value of a substantial
portion of the assets acquired, to serve as a basis for the allocation of the
purchase price. The Company primarily used the income approach to determine
the fair market value of the identified intangible assets acquired. The
debt-free cash flows, net of provision for operating expenses, were discounted
to a net present value. The value of certain completed technology was based
upon comparable fair values in the open market. Software technology was
divided into two categories. Software technology and products under
development not considered to have reached technological feasibility were
expensed on acquisition. Software technology and products currently available
in the market place as of the acquisition date and brands and trademarks were
recorded as assets and are being amortized on a straight-line basis over their
estimated useful lives of two and seven years, respectively.
Each of the above 1995 acquisitions was accounted for using the purchase
method of accounting. The pro forma adjustments detailed below include the
effect of amortization of intangible assets and goodwill related to the
acquisitions over their estimated useful lives of two years and the interest
expense related to the $500,000 of debt for the period prior to acquisition or
issuance, net of any related income tax effects. Unaudited pro forma results
of operations for the transactions accounted for using the purchase method of
accounting as though the acquisitions had occurred at the beginning of the
Years Ended December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Year Ended The Learning Pro forma Pro forma
December 31, 1995 SoftKey tewi Compton's Company Adjustments Combined
- -------------------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $167,042 $ 3,720 $ 23,204 $60,698 $ - $ 254,664
Operating income (60,870) (3,589) (13,904) 10,874 (321,830) (389,319)
(loss)
Net income (loss) (65,960) (3,643) (9,626) 7,398 (310,112) (381,943)
Net income (loss) per
share $ (2.65) $ (12.95)
<CAPTION>
Year Ended
December 31, 1994
- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $121,287 $12,320 $ 42,575 $44,761 $ - $ 220,943
Operating income 25,741 (666) (13,850) 6,252 (344,064) (326,587)
(loss)
Net income (loss) 21,145 (757) (9,225) 4,979 (333,861) (317,719)
Net income (loss)
per share $ 1.04 $ (13.32)
</TABLE>
Future Vision Holding, Inc.
On August 31, 1995, the Company acquired all of the issued and outstanding
capital stock of Future Vision, a multimedia software company, in exchange for
the issuance of 1,088,149 shares of common stock of the Company. This
acquisition has been accounted for using the pooling-of-interests method of
accounting. The financial statements for periods prior to the Year Ended
December 31, 1995 do not include amounts for this acquisition as they were
deemed to be immaterial to the consolidated financial statements for those
periods.
43
<PAGE> 46
Aris Multimedia Entertainment, Inc.
On June 15, 1994, the Company acquired the outstanding capital stock of Aris in
exchange for 462,822 shares of the Company's common stock. This acquisition
has been accounted for as a pooling-of-interests. The accompanying financial
statements for periods prior to the Year Ended December 31, 1994 do not include
amounts for this acquisition as they were deemed to be immaterial.
Compact Publishing Inc.
On July 5, 1994, the Company acquired the outstanding capital stock of Compact
in exchange for 409,407 shares of the Company's common stock. This acquisition
has been accounted for as a pooling-of-interests. The accompanying financial
statements for periods prior to the Year Ended December 31, 1994 do not include
amounts for this acquisition as they were deemed to be immaterial.
Software Marketing Corporation
On September 13, 1994, the Company acquired the outstanding capital stock of
SMC in exchange for 602,257 shares of the Company's common stock. Subsequent
to the acquisition, 116,995 shares were repurchased by the Company for $1,485.
The transaction has been accounted for using the purchase method of accounting.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Purchase Price $ 7,319
Plus: fair value of net tangible liabilities assumed 2,836
-------
Excess to allocate 10,155
-------
Identifiable intangible assets acquired:
Non-compete agreement 420
Mailing list 125
-------
545
-------
Goodwill $ 9,610
=======
</TABLE>
This acquisition was deemed to be immaterial for presentation of pro forma
information purposes.
Power Up Software Corporation
In March 1993, the Company acquired the outstanding capital stock of Power Up
Software Corporation ("Power Up"). The acquisition was accounted for as a
purchase. The Power Up catalog operation has been closed (see Note 9-
Amortization and Merger Related Charges). The purchase price was allocated as
follows:
<TABLE>
<S> <C>
Purchase Price $18,532
Plus: fair value of net tangible liabilities assumed 2,319
-------
Excess to allocate 20,851
-------
Identifiable intangible assets acquired
Incomplete technology 14,051
Mailing lists 3,000
Trademarks 2,000
Software rights 1,800
-------
$20,851
=======
</TABLE>
44
<PAGE> 47
The following unaudited pro forma information reflects the combined results of
operations of the Company and Power Up as if the acquisition had occurred on
July 1, 1992, excluding the $14,051 non-recurring charge for incomplete
technology recorded in the Year Ended June 30, 1993:
<TABLE>
<CAPTION>
Proforma for
the Year Ended
June 30,
1993
--------------
(unaudited)
<S> <C>
Revenues $134,278
Net loss (43,757)
Net loss per share (3.33)
</TABLE>
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
-------- --------
<S> <C> <C>
Building, land and leasehold improvements $ 3,770 $ 1,084
Computer equipment 22,695 12,151
Furniture and fixtures 8,738 4,905
-------- -------
35,203 18,140
Less: accumulated depreciation
and amortization (15,582) (8,815)
-------- -------
$ 19,621 $ 9,325
======== =======
</TABLE>
Included in computer equipment is equipment under capital lease of $3,340 and
$3,731 at December 31, 1995 and 1994, respectively.
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
-------- -------
<S> <C> <C>
Senior Convertible Notes $350,000 $ -
Obligations under capital 1,614 2,411
leases
Revolving line-of-credit - 7,700
-------- -------
351,614 10,111
Less: current portion (963) (1,008)
-------- -------
$350,651 $ 9,103
======== =======
</TABLE>
On October 23, 1995, the Company completed a private offering of $350,000
principal amount 5 1/2% Senior Convertible unsecured Notes due 2000 (the
"Notes"), which are unsecured. The Notes will be redeemable by the Company 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 and
are convertible into common stock at a price of $53 of share. Interest is
payable on the Notes semi-annually on May 1 and November 1 each year.
In February 1996, SoftKey Inc., a wholly owned subsidiary of the Company,
amended its revolving line of credit (the "Line"), to provide for a maximum
availability of $50,000. Borrowings under the Line become due on July 1, 1997
and bear interest at the prime rate (8 1/2% at December 31, 1995). The Line is
subject to certain financial covenants, is secured by a general security
interest in the assets of SoftKey Inc. and certain other subsidiaries of the
Company and by a
45
<PAGE> 48
pledge of the stock of certain of its subsidiaries. The Line is guaranteed by
the Company. There were no amounts drawn on the Line at December 31, 1995.
(5) Related Party Debt
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Senior Convertible/Exchangeable Notes $150,000 $
-
Term Notes 4,214 1,928
Accrued interest 100 195
----------- -----------
154,314 2,123
Less: current portion (4,314) (1,008)
----------- -----------
$150,000 $1,115
========== ===========
</TABLE>
On December 28, 1995, the Tribune Company made a strategic investment in the
Company in the form of $150,000 principal amount 5 1/2% of Senior
Convertible/Exchangeable Notes due 2000 (the "Tribune Notes"). The Tribune Notes
are exchangeable into 5 1/2% Series C Convertible Preferred Shares (the
"Preferred Shares") at the Tribune Company's option. Both the Tribune Notes and
the Preferred Shares are convertible to common stock of the Company. The Tribune
Notes and Preferred Shares will be redeemable by the Company 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 November 1, 2000 and are convertible into
common stock at a price of $53 per share. The Tribune Notes rank pari passu with
the Notes and are unsecured. Interest is payable on the Tribune Notes
semi-annually on May 1 and November 1 each year.
In and in connection with the acquisition of Compton's from the Tribune Company,
the Company issued a $3,000 note payable (the "Compton's Note"). The Compton's
Note bears interest at a rate of 6 1/2% and is due December 28, 1996. At the
Company's option it may repay the Compton's Note plus accrued interest in common
stock on any of the three, six or nine month periods since issuance of the
Compton's Note.
In addition, the Company has a term note payable to a former stockholder which
was issued in August 1993. The amount due at December 31, 1995 and 1994 is $964
and $1,928, respectively. The remaining amount of the term note is repayable on
February 4, 1996, and was repaid subsequent to year end. The term notes bears
interest at the Adjusted Applicable Federal Rate (5.65% at December 31, 1995).
(6) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various legal actions involving copyright, breach
of contract and various other claims incident to the conduct of its business.
Management does not expect the results of any of these actions to have a
material effect on the operations or financial condition of the Company.
46
<PAGE> 49
Lease Obligations
The Company leases office facilities and equipment under operating and capital
leases. Rental expense for operating leases was approximately $2,308 and $1,756
for the Years Ended December 31, 1995 and 1994, respectively, $1,770 for the
Transition Period and $4,013 for the year ended June 30, 1993. Future annual
payments under capital and operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1996 $1,133 $ 5,286
1997 412 4,068
1998 159 2,996
1999 79 2,342
2000 - 2,171
Thereafter - 2,274
------- ---------
$19,137
1,783 =========
Less: interest (169)
Less: current portion (963)
-------
$ 651
========
</TABLE>
(7) Common Stock
At December 31, 1995, the Company has reserved for issuance approximately
3,661,631 shares of its common stock related to options and warrants plus
reserved a further 3,122,823 related to The Learning Company employee stock
options. In addition, the Company has reserved a total of 9,433,962 shares of
its common stock for issues related to the Notes and the Tribune Note. In
connection with the Three-Party Combination, the Company has reserved at
December 31, 1995 1,596,742 shares of its common stock for issuance related to
the Exchangeable Shares. The Exchangeable Shares are represented by the one
share of Special Voting Stock. During the Year Ended December 31, 1995, the
Company increased its authorized number of common shares from 24,500,000 to
60,000,000.
On June 26, 1995, the Company completed an underwritten public offering of
common stock. As a result the Company issued 2,713,106 shares of common stock,
which generated net proceeds of $74,434 to the Company.
(8) Stock Options and Warrants
STOCK OPTION PLANS
Long Term Equity Incentive Plan
The Company has a Long Term Equity Incentive Plan (the "LTIP"). The LTIP allows
for incentive stock options, non-qualified stock options and various other stock
awards. Administration of the LTIP is conducted by the Company's Compensation
Committee of the Board of Directors. The administrator determines the amount and
type of option or award and terms and conditions and vesting schedules of the
award or option. Upon a change of control, as defined, awards and options then
outstanding become fully vested, subject to certain limitations.
On May 25, 1995, the stockholders of the Company approved an amendment to the
LTIP, to increase the maximum number of shares of common stock issuable
thereunder to 5,000,000. Subsequently, on June 2, 1995, the Board of Directors
of the Company approved an amendment to increase the maximum number of shares of
common stock issuable under the LTIP to 5,450,000. The total number of shares of
common stock reserved and available for issuance under the LTIP at December 31,
1995 was 4,353,988 shares, 1,046,012 of which remained available for grant.
47
<PAGE> 50
Non-Employee Director Stock Option Plan
On April 26, 1994, the Board of Directors approved a non-employee director
stock option plan (the "Non-Employee Director's Plan"). The Non-Employee
Director's Plan provides for an initial grant of 20,000 options at fair market
value to be issued to each non- employee director who first became a director
of the Company after February 1, 1994 ("Initial Grants"). During the Year
Ended December 31, 1995, a further 100,000 options were granted to each of the
non-employee directors ("Subsequent Grants"). The maximum number of common
shares issuable under the Non-Employee Director's Plan is 500,000, of which
80,000 remain available for grant at December 31, 1995. Options granted to
non-employee directors as Initial Grants were 100% exercisable at the time of
grant and options issued as Subsequent Grants become exercisable over a
three-year period. All such options are exercisable for a period of 10 years
from date of grant.
The following table summarizes the stock option activity under the LTIP and the
Non-Employee Director Stock Option Plan:
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
June 30, 1993 December 31, 1993
------------------------------------- ---------------------------------
Shares Price Shares Price
--------- ------------------- --------- ------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of
period 1,289,476 $1.11 -- $376.91 1,453,991 $1.11 -- $376.91
Granted 598,146 8.07 -- 36.01 633,965 8.47 -- 22.34
Exercised (141,697) 1.11 -- 29.49 (3,883) 2.28 -- 20.99
Canceled (291,934) 2.28 -- 32.33 (84,870) 3.85 -- 32.33
--------- -------------------- --------- ------------------
Outstanding, end of period 1,453,991 $1.11 -- $376.91 1,999,203 $1.11 -- $376.91
========= ==================== ========= ==================
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1995
-----------------------------------
Shares Price Shares Price
--------- ------------------ --------- ------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of
period 1,999,203 $1.11 -- $376.91 2,599,980 $2.39 -- $32.330
Granted 1,287,707 8.47 -- 18.00 2,446,996 22.75 -- 41.625
Exercised (513,078) 1.11 -- 21.61 (1,394,035) 2.39 -- 32.330
Canceled (173,852) 1.11 -- 376.91 (113,110) 3.85 -- 32.330
--------- ------------------ ---------- ------------------
Outstanding, end of period 2,599,980 $2.39 -- $32.33 3,539,831 $2.39 -- $41.625
========= ================== ========== ==================
</TABLE>
Options to purchase 1,697,054 shares of common stock were exercisable at
December 31, 1995.
Upon the acquisition of The Learning Company 1,088,585 employee stock options
were converted into 3,122,823 stock options of the Company. These converted
employee stock options are exercisable at prices ranging from $2.00 to
$67.321. Under the terms of the merger agreement all of these options were
vested on January 26, 1996 and became exercisable.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") which requires adoption of the disclosure
provisions no later than fiscal years beginning after December 15, 1995 and
adoption of the recognition and measurement provisions for non-employee
transactions no later than December 15, 1995. The new standard defines a fair
value method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
48
<PAGE> 51
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("Opinion 25") but would be required to disclose in a
note to the financial statements pro forma net income and, if presented,
earnings per share as if the company had applied the new method of accounting.
The Company has determined that it will continue to apply Opinion 25 for stock
options and provide the note disclosure required under SFAS 123 beginning in its
year ended December 31, 1996.
Warrants
On July 31, 1995, the Company announced that it would redeem all of its
2,925,000 publicly traded warrants for $0.10 per warrant on August 31, 1995 in
accordance with the terms and conditions of the warrants. Holders of such
warrants received in exchange for the warrants an aggregate of 289,959 shares of
Common Stock. The remaining 25,410 warrants were redeemed by the Company.
During 1993, the Company issued a warrant expiring June 30, 1999 for the
purchase of 121,800 shares of common stock at an exercise price of $6.16 per
share.
(9) AMORTIZATION AND MERGER RELATED CHARGES
During the Year Ended December 31, 1995, the Company completed the acquisitions
of The Learning Company, Compton's, tewi and Future Vision. Amortization and
merger related charges are as follows:
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
Years Ended December 31, June 30,
December 31, 1993 1993
--------------------- ------------ --------
1995 1994
-------- --------
<S> <C> <C> <C> <C>
Charge for incomplete technology $ 60,483 $ -- $ -- $ 19,051
Amortization of goodwill and other assets 24,783 1,185 -- 6,474
Amortization of technology and product related
costs 7,185 422 23,603 2,989
Professional fees and other transaction related
costs 5,653 636 8,705 3,424
Provision for (reversal of) litigation 2,633 (254) 5,817 3,200
Employee severance costs 1,304 163 4,429 3,975
Termination of leases and relocation costs 693 98 1,533 2,792
Write-down of inventories and fixed assets -- -- 362 2,296
Other 438 182 1,022 2,001
-------- -------- -------- --------
$103,172 $ 2,432 $ 45,471 $ 46,202
======== ======== ======== ========
</TABLE>
Merger related costs were expensed as incurred or were recorded when it became
probable that the transaction would occur and the expense could be reasonably
estimated.
The charge for incomplete technology in the Year Ended December 31, 1995 relates
to products being developed by The Learning Company and Compton's, which the
Company believes had not yet reached technological feasibility at the date of
acquisition and additional development will be required to complete the software
technology. The amortization of technology assets in 1995 represent primarily
those acquired in connection with the acquisitions of The Learning Company and
Compton's plus increased product development amortization related to products
acquired in connection with the merger with Future Vision during the year.
Professional fees and other transaction related costs in the Year Ended December
31, 1995 relate to the investment banking, legal and accounting costs incurred
to date for the proposed merger with MECC and the professional fees associated
with the acquisition of Future Vision on August 31, 1995. Approximately $3,500
of these costs remain to be paid at December 31, 1995. The remainder is expected
to be paid prior to December 31, 1996.
49
<PAGE> 52
The provision for litigation in the Year Ended December 31, 1995 relates
primarily to estimated legal settlements for claims that were determined by the
Company to be probable related to the operations of Future Vision. The Company
expects these amounts to be paid prior to December 31, 1996.
Lease termination costs in 1995 relate primarily to the closure of the Great
Neck, NY facility, the former Future Vision headquarters, and are expected to be
paid by December 31, 1996.
Employee severance costs in the Year Ended December 31, 1995 related to
termination of employees in connection with the acquisitions of Future Vision
and tewi and certain severances related to changes in the Company's operations
related to the acquisitions and changes in strategy. A total of 63 employees
were terminated in the areas of operations, product development and
administration. These costs were substantially paid prior to December 31, 1995.
At December 31, 1995, the Company had merger related accruals of $40,089,
primarily related to the acquisitions during the year. These accruals consisted
of amounts due for professional fees for investment banking, legal and
accounting services, settlement of litigation, employee severance, lease
termination costs, out of pocket costs and other costs described above related
to the acquisitions. The Company expects to substantially pay these amounts
prior to December 31, 1996.
Amortization and merger related charges in the Year Ended December 31, 1994
related to the acquisitions of Aris and Compact and the closure of the Barbados
operation. Professional fees in 1994 were for investment banking, accounting and
legal fees incurred in connection with the Aris and Compact transactions. These
costs have been paid. Severance costs relate to termination of employees
occurring in connection with the acquisitions of Aris and Compact and the
closing of the Barbados location. The employee terminations were substantially
in the areas of product development and sales and marketing. A total of 20
employees were terminated by December 31, 1994. The employee severance payments
have been paid.
During 1994, the Company settled a judgment issued by the Supreme Court of
Australia commenced by Perfect Information Pty Limited. A reserve of $3,658 had
been recorded to reflect the original amount of the judgment and related legal
fees. In August 1994, the Company reached a revised settlement agreement with
the plaintiff and agreed to pay a total of $2,400 in four equal installments.
Accordingly, a reversal of the overaccrual of $1,096 was recorded in the Year
Ended December 31, 1994.
Lease termination costs in 1994 relate to the closure of the operations in
Barbados and the office facility in Marina del Rey, CA, the former Aris
headquarters, and have been paid.
During 1994, the Company entered into a settlement agreement with Computer
Associates ("CA") with respect to an action, captioned Parsons Technology Inc.
v. Computer Associates, which alleged that CA's tax preparation software
package, CA-Simply Tax (previously known as EasyTax), infringed upon certain of
Parson's copyrights. As a result of the sale of EasyTax to CA, SoftKey was
required to indemnify CA for any loss it might suffer as a result of the
Parson's litigation. The settlement agreement reached between the Company, CA
and Parsons released the Company from its indemnification commitment in
connection with the Parson's litigation. The Company has expensed a total of
$900 in 1994, net of insurance proceeds, related to this settlement.
The merger related charges during the Transition Period and the Year Ended June
30, 1993, relate to the Three-Party Combination except for $2,038 expensed
during the year ended June 30, 1993, which related to the acquisition of ZSoft
Corporation ("ZSoft"). These costs were paid by December 31, 1995.
In connection with the Three-Party Combination the Company closed the WordStar
headquarters in Novato, CA; the Former SoftKey retail operations in Boca Raton,
FL; the corporate head office of Former SoftKey in Toronto, Canada; the
manufacturing facility of Spinnaker in Charlestown, MA and of Former SoftKey in
Minneapolis, MN; and the Power Up catalog operation in San Mateo, CA and
terminated approximately 220 employees. The employee terminations in the
Transition Period were primarily in the areas of product development, technical
support, customer service, finance and administration. All employee terminations
related to the Three-Party Combination were completed by December 31, 1995.
50
<PAGE> 53
In connection with the Three-Party Combination, the Company decided to approach
consumer software distribution through fixturing, specialty shelf space and
direct merchandising and marketing with the retailer and customer. The new
marketing strategy focused on new products, and an increase in the number of
available offerings of consumer software and recognizes a reduction in product
shelf life. The Company has also reduced its dependence on predominantly
internally-developed products, and its new product introduction strategy
includes a higher number of products originating from its external developer
relationships through licensing contracts and acquisitions. As a result of the
new marketing strategy, the Company decided to phase out certain brands
(primarily the PFS: brand) and recorded expenses of $15,521 in the Transition
Period Ended December 31, 1993, related to write-downs of certain intangible
assets, primarily capitalized software development costs and prepaid royalties,
including a loss of $710 associated with the sale of the EasyTax line of product
trademarks and technology rights associated with products. The Power Up catalog
operation was closed and, as a result, the Company recorded a provision of
$4,205 in the Transition Period Ended December 31, 1993 to reflect the
write-down of certain trademarks and mailing lists to their net realizable
value. The Company also recorded an expense of $3,877 in the Transition Period
Ended December 31, 1993 to record the write-down of the Lansa license to its net
realizable value.
Lease termination costs in 1993 represent costs associated with the closure of
the Power Up catalog operations and the shutdown of the manufacturing facility
in Charlestown, MA, in connection with the consolidation of the Company's
production facilities. In addition, in the Transition Period, offices were
vacated in Toronto, Ontario; Boca Raton, FL; Novato, CA; and San Mateo, CA.
These facilities were consolidated in the Transition Period into one central
location in Cambridge, MA. The amount accrued at December 31, 1993 for lease
termination costs was $2,254, which has been paid.
In the year ended June 30, 1993, the Company recorded a total of $46,202 of
amortization and merger related charges. These charges related to the write-down
of intangible assets to net realizable value of $9,463 in connection with the
acquisition of ZSoft, write-downs of certain discontinued products and the
disposal of the operations of Insight. In addition, legal and professional fees
and other transaction costs of $3,424 related primarily to the Three-Party
Combination and employee severance related to staff reductions at the Company's
Novato, California, European, Boca Raton, Florida and Insight operations of
$3,975 were recorded. The Company also recorded a provision for termination of
various leases in connection with facility closures as a result of the
Three-Party Combination, settlement of lease commitments for unoccupied space
for which the Company has no planned future use, settlement of lease commitments
in connection with the disposal of the Insight operations of $2,792 and other
merger-related costs of $4,297 related to the acquisition of ZSoft and the
Three-Party Combination.
The charge of $19,051 for incomplete technology during the year ended June 30,
1993 relates to the purchase of incomplete technology for $14,051 by Spinnaker
in connection with its acquisition of Power Up and the purchase by Former
SoftKey of certain CD-ROM and other products under or proposed for development
for $5,000 that were not technologically feasible.
The provision for litigation of $3,200 in the year ended June 30, 1993 relates
to a judgment entered against WordStar in May 1993 in the Superior Court in
Australia in a lawsuit commenced by Perfect Information Pty Limited, which was
settled in August 1994.
(10) INCOME TAXES
The Company's 1995 net income (loss) before taxes includes amortization and
merger related charges of $103,172. The Company's income (loss) before income
taxes consists of the following:
<TABLE>
<CAPTION>
Transition
Years Ended Period Ended Year Ended
December 31, December 31, June 30,
---------------------- ---------------------- --------------
1995 1994 1993 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States $(64,987) $ 13,734 $(39,210) $(46,571)
Foreign 4,822 11,472 (30,591) (10,576)
======== ======== ======== ========
Income (loss), before taxes $(60,165) $ 25,206 $(69,801) $(57,147)
======== ======== ======== ========
</TABLE>
51
<PAGE> 54
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Transition
Years Ended Period Ended Year Ended
December 31, December 31, June 30,
----------------------- ------------ -------------
1995 1994 1993 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current income taxes:
Federal $ 6,000 $ 70 $ -- $ --
State 1,500 50 80 24
Foreign 250 -- 3,377 105
------- ------- ------- -------
$ 7,750 $ 120 $ 3,457 $ 129
------- ------- ------- -------
Deferred income taxes:
Federal $(1,955) $ -- $ -- $ --
State -- -- -- --
Foreign -- 3,941 -- (26)
------- ------- ------- -------
$(1,955) $ 3,941 $ -- $ (26)
------- ------- ------- -------
$ 5,795 $ 4,061 $ 3,457 $ 103
======= ======= ======= =======
</TABLE>
The Company's reconciliation of actual tax with 1995 statutory tax reported on
income before amortization and merger related charges is as follows:
<TABLE>
<CAPTION>
Transition
Years Ended Period Ended Year Ended
December 31, December 31, June 30,
------------------------- ------------ -------------
1995 1994 1993 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Tax (benefit) provision at statutory
federal income tax rate $ 15,052 $ 8,822 $(23,843) $(19,430)
State income tax 2,500 50 80 24
Net foreign earnings taxed at rates
different than federal tax rate 700 (74) 13,461 3,598
Withholding tax on net foreign income -- -- -- 77
Utilization of prior year tax benefits (12,457) (4,737) -- --
Unrealized income tax provision -- -- 13,759 15,834
-------- -------- -------- --------
$ 5,795 $ 4,061 $ 3,457 $ 103
======== ======== ======== ========
</TABLE>
Effective July 4, 1993, the Company prospectively adopted SFAS No. 109. The
cumulative effect of this change in the method of accounting for income taxes
was not material to the Company's consolidated financial statements.
52
<PAGE> 55
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating losses and credits $ 19,300 $ 22,755
Accounts receivable reserves 3,557 4,260
Development costs 1,848 2,398
Other reserves and accruals 1,605 3,259
-------- --------
26,310 32,672
Less: valuation allowance (17,214) (32,290)
-------- --------
$ 9,096 $ 382
-------- --------
Deferred tax liabilities:
Intangible assets $(54,656) $ --
Foreign taxes (3,941) (3,941)
Other (1,464) (382)
-------- --------
(60,061) (4,323)
-------- --------
Net deferred tax liability $(50,965) $ (3,941)
======== ========
</TABLE>
The valuation allowance relates to uncertainties surrounding the recoverability
of deferred tax assets. The utilization of tax loss carry-forwards is subject to
limitations under Section 382, the U.S. consolidated tax return provisions, and
local country tax regulations. At December 31, 1995, the Company had worldwide
net operating loss carry-forwards and other tax benefits of approximately
$55,000 for income tax purposes, expiring from the year 1999 through 2009.
Certain tax benefits have also been generated as part of the Company's 1995
acquisitions. The tax savings from such benefits are dependent on future events
and may reduce goodwill if and when realized. The Company expects to reduce
deferred tax liabilities for intangible assets acquired in proportion to the
amortization recorded on the related assets. The amortization of the intangible
assets and the related deferred tax liabilities will not impact the future cash
flows of the Company.
53
<PAGE> 56
(11) GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment - software for use with
microcomputers. The following table presents information concerning the
Company's North American, European and other operations during the Years Ended
December 31, 1995 and 1994, the Transition Period Ended December 31, 1993 and
the year ended June 30, 1993.
<TABLE>
<CAPTION>
North
America Europe Other Eliminations Consolidated
--------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
REVENUES:
Customers $ 140,811 $ 27,380 $ 1,227 $ (2,376) $ 167,042
Inter-company 696 (3,071) (1) 2,376 --
--------- --------- --------- --------- ---------
Total $ 141,507 $ 24,309 $ 1,226 $ -- $ 167,042
========= ========= ========= ========= =========
INCOME (LOSS) FROM
OPERATIONS $ (64,754) $ 3,256 $ 628 $ -- $ (60,870)
========= ========= ========= ========= =========
IDENTIFIABLE ASSETS $ 891,266 $ 9,062 $ 85 $ -- $ 900,413
========= ========= ========= ========= =========
DECEMBER 31, 1994
REVENUES:
Customers $ 110,278 $ 11,422 $ 1,093 $ (1,506) $ 121,287
Inter-company 3,006 2,172 (60) (5,118) --
========= ========= ========= ========= =========
Total $ 113,284 $ 13,594 $ 1,033 $ (6,624) $ 121,287
========= ========= ========= ========= =========
INCOME FROM OPERATIONS $ 24,617 $ 1,096 $ 482 $ (454) $ 25,741
========= ========= ========= ========= =========
IDENTIFIABLE ASSETS $ 89,131 $ 2,801 $ (146) $ (971) $ 90,815
========= ========= ========= ========= =========
TRANSITION PERIOD ENDED
DECEMBER 31, 1993
REVENUES:
Customers $ 38,585 $ 4,296 $ 2,298 $ (3,534) $ 41,645
Inter-company 502 1,164 1,994 (3,660) --
========= ========= ========= ========= =========
Total $ 39,087 $ 5,460 $ 4,292 $ (7,194) $ 41,645
========= ========= ========= ========= =========
LOSS FROM OPERATIONS $ (56,509) $ (901) $ (10,799) $ (848) $ (69,057)
========= ========= ========= ========= =========
IDENTIFIABLE ASSETS $ 72,010 $ 1,812 $ 5,407 $ 105 $ 79,334
========= ========= ========= ========= =========
JUNE 30, 1993
REVENUES:
Customers $ 94,964 $ 8,901 $ 7,589 $ (1,750) $ 109,704
Inter-company 3,504 4,231 6,858 (14,593) --
========= ========= ========= ========= =========
Total $ 98,468 $ 13,132 $ 14,447 $ (16,343) $ 109,704
========= ========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS $ (54,010) $ (3,995) $ 2,300 (1,276) $ (56,981)
========= ========= ========= ========= =========
IDENTIFIABLE ASSETS $ 115,970 $ 2,048 $ 6,538 $ 3,918 $ 128,474
========= ========= ========= ========= =========
</TABLE>
54
<PAGE> 57
The Company conducts a portion of its operations outside the United States. At
December 31, 1995, $6,345 of cash and cash equivalents predominantly denominated
in Canadian dollars were subject to currency fluctuations. Sales and transfers
between geographic areas are generally priced at market, less an allowance for
marketing costs. No single customer accounted for greater than 10% of revenues
for any of the periods presented.
(12) RELATED PARTY TRANSACTIONS
Sale of Insight Operation
In May 1993, the Company sold the Insight operations of its consulting division
for $25 to an employee group, while retaining the sales and distribution rights
for Lansa software. The employee group formed a new company, Insight Business
Consultants Inc. ("Insight"), the president and majority shareholder of which
was also at the time an executive officer and stockholder of the Company (former
executive officer and stockholder at December 31, 1995). In connection with this
sale, the Company recorded $1,101 of restructuring costs for termination of
equipment and facility leases, employee severance, write-off of certain assets,
transaction costs and operating losses until disposition. During the Years Ended
December 31, 1995 and 1994, the Company paid Insight and Lansa $1,633 and
$2,337, respectively, related to systems development and implementation services
rendered under arms-length terms.
Sale of Lansa
On September 30, 1994, the Company sold LANSA USA to Insight, a company of which
a former executive officer of the Company is the majority shareholder in
exchange for $650, which was paid through the forgiveness of $250 of amounts
payable to Insight and $400 cash, which has been received. The Company has
recognized a gain of $778 in 1994 related to the sale.
Series B Preferred Stock
During 1993, the Company sold 5,000,000 shares of Series B convertible preferred
stock (the "Series B Stock") and 381,640 shares of common stock and agreed to
issue 24,360 supplemental shares of common stock to Phemus, a stockholder at the
time, for $23,000, the fair market value of the stock at the time of the
transaction. Each share of Series B Stock was redeemable by the Company for
$4.60, plus accrued dividends, and each share was convertible into .072 shares
of the Company's common stock. Commencing September 30, 1993, the holder of each
share was entitled to a special quarterly dividend of .0175 shares of Series B
Stock for each share of Series B Stock held on such a date. Prior to redemption
on February 4, 1994, total accrued dividends of $812 were settled by issuance of
87,931 shares of common stock.
Concurrent with the Three-Party Combination, the Company effected a rights
offering to the Spinnaker shareholders in satisfaction of its commitment to
Phemus under the Series B Stock Purchase Agreement (the "Series B Agreement").
The rights offering allowed Spinnaker stockholders to purchase a total of
approximately 2,492,000 shares of the Company's unregistered common stock at a
price of $9.24 per share. Phemus committed to purchase one-half of the common
shares offered, plus any common stock not purchased in the rights offering by
other Spinnaker shareholders. Additionally, the Company issued 89,320 additional
shares of common stock to Phemus in exchange for its guarantee to purchase
shares of common stock in the rights offering. The proceeds of the rights
offering were used to redeem the Series B Stock. In connection with the rights
offering, the Company sold 2,073,878 shares of common stock to Phemus and
504,479 shares to other Spinnaker stockholders.
55
<PAGE> 58
Schedule II
SOFTKEY INTERNATIONAL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994, THE
TRANSITION PERIOD ENDED DECEMBER 31, 1993,
AND THE YEAR ENDED JUNE 30, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
------------------------------
Balance at Charged to Charged to
Beginning of Cost and Other End of
Period Expenses Accounts Deductions Period
------------ ----------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for returns and doubtful
accounts $ 6,744 $ 22,358 -- $(22,251) $ 6,851
YEAR ENDED DECEMBER 31, 1994
Allowance for returns and doubtful $ 16,216 $ 13,744 -- $(23,216) $ 6,744
accounts
TRANSITION PERIOD ENDED DECEMBER 31, 1993
Allowance for returns and doubtful $ 8,168 $ 15,424 -- $ (7,376) $ 16,216
accounts
YEAR ENDED JUNE 30, 1993
Allowance for returns and doubtful $ 5,606 $ 5,205 -- $ (2,643) $ 8,168
accounts
</TABLE>
56
<PAGE> 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On February 6, 1995, the Company appointed Coopers & Lybrand L.L.P. ("Coopers")
as independent accountants for the Company, commencing with the fiscal year
ended December 31, 1994. The decision to appoint Coopers as independent public
accountants for the Company was approved by the Audit Committee of the Company's
Board of Directors as of February 6, 1995. Coopers replaced the firm of Arthur
Andersen LLP ("Andersen"), whose engagement as the Company'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 the Company for the
Transition Period and the year 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 WordStar 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 the Company and Andersen
as described in Item 304(a)(1)(iv) of Regulation S-K. As a result of management
changes, reductions in work force and the consolidation of the finance functions
of the Company's formerly separate constituent corporations, the Company
requested that Andersen consult with and advise the Company in connection with
the closing of its books in the first quarter of 1994. Andersen also performed
certain review procedures on the Company'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 the Company'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 Company's Board of
Directors and Audit Committee, and the Company has authorized Andersen to
respond fully to Coopers' inquiries regarding these matters.
During 1994, the Company 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 the Company's financial operations. The Company believes that it has fully
considered the matters and recommendations communicated by Andersen relating to
the Company'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 the Company on April 7, 1994, commencing with the
Transition Period. Andersen had replaced the Company's previous independent
accountants, KPMG Peat Marwick LLP. 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 the Company 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)(v) of Regulation S-K.
57
<PAGE> 60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item appears in sections captioned Management of
SoftKey and "Ownership of SoftKey Common Stock" in the Company's definitive
Proxy Statement to be delivered to stockholders in connection with the Special
Meeting in Lieu of an Annual Meeting of Stockholders expected to be held in May
1996 (the "1996 Proxy Statement"). Such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item appears in sections captioned "SoftKey
Executive Compensation -- Compensation of Directors," "-- Compensation Committee
Interlocks and Insider Participation," "-- Compensation Committee Report,"
"Comparative Stock Performance," "-- Executive Compensation," "-- Employment and
Severance Arrangements," "Stock Options Granted in 1995" and "Option Exercises
and Values for 1995" in the 1996 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item appears in sections captioned "Ownership of
SoftKey Common Stock" in the 1996 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item appears in section(s) captioned "Compensation
of Directors" and "Related Transactions" in the 1996 Proxy Statement. Such
information is incorporated herein by reference.
58
<PAGE> 61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Reports of Independent Accountants 29
Consolidated Balance Sheets as of December 31, 1995 and 1994 33
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994, Transition Period Ended
December 31, 1993 and for the year ended June 30, 1993 34
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1995 and 1994, Transition
Period Ended December 31, 1993 and for the year ended June
30, 1993 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994, Transition Period Ended
December 31, 1993 and for the year ended June 30, 1993. 36
Notes to Consolidated Financial Statements 38
(2) FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED SUPPLEMENTARY FINANCIAL SCHEDULE:
Schedule II - Valuation and Qualifying Accounts 56
</TABLE>
59
<PAGE> 62
(3) EXHIBITS
Exhibit
Number Description
- -------- -----------
2.1 Amended and Restated Combination Agreement by and among WordStar
International Incorporated, SoftKey Software Products Inc.,
Spinnaker Software Corporation and SSC Acquisition Corporation
dated as of August 17, 1993, as amended (1)
2.2 Agreement and Plan of Merger dated November 30, 1995 by among the
Company, Cubsco I Inc., Cubsco II Inc., Tribune Company, Compton's
NewMedia, Inc., and Compton's Learning Company (2)
2.3 SoftKey/TLC Agreement and Plan of Merger dated December 6, 1995
among the Company, Kidsco Inc. and The Learning Company (2)
2.4 Agreement and Plan of Merger by and among the Company, SchoolCo
Inc. and Minnesota Educational Computing Corporation (MECC) dated
as of October 30, 1995 (3)
3.1 Restated Certificate of Incorporation, as amended
3.2 Bylaws of the Company, as amended (4)
4.1 Indenture dated as of October 16, 1995 between the Company and
State Street Bank and Trust Company, as Trustee, for 5 1/2% Senior
Convertible Notes due 2000 (the "Indenture")(3)
4.2 First Supplemental Indenture to the Indenture, dated as of
November 22, 1995, by and between the Company and State Street
Bank and Trust Company, as Trustee (5)
4.3 Note Resale Registration Rights Agreement dated as of October 23,
1995 by and between the Company, on the one hand, and the Initial
Purchasers set forth therein, on the other hand (the "Registration
Rights Agreement")(5)
4.4 Letter Agreement dated November 22, 1995 amending the
Registration Rights Agreement (5)
4.5 Form of Securities Resale Registration Rights Agreement by and
among the Company and Tribune Company(6)
4.6 Form of Indenture between the Company and State Street Bank and
Trust Company, as Trustee, for 5 1/2% Senior
Convertible/Exchangeable Notes Due 2000(2)
10.1 SoftKey Production Agreement dated April 6, 1994 by and between
the Company and R.R. Donnelley & Sons Company(7)
10.2 Employment Agreement dated May 27, 1994 by and between the
Company and Michael Perik(8)
10.3 Employment Agreement dated May 27, 1994 by and between the
Company and Kevin O'Leary(8)
10.4 Employment Agreement dated February 1, 1994 by and between the
Company and R. Scott Murray(7)
10.5 Employment Agreement dated October 8, 1993 by and between SoftKey
Software Products Inc. and David E. Patrick(7)
10.6 1991 Employee Payroll Stock Purchase Plan(9)
10.7 1994 Non-Employee Director Stock Option Plan, as amended and
restated effective February 5, 1996
60
<PAGE> 63
10.8 Form of Stock Option Agreement under 1994 Non-Employee Director
Stock Option Plan
10.9 Employment Agreement dated September 15, 1993 by and between
WordStar International Incorporated and Edward Sattizahn(8)
10.10 Employment Agreement dated June 20, 1994 by and between the
Company and Neal S. Winneg(8)
10.11 Credit Agreement dated as of September 30, 1994 between SoftKey
Inc. and Fleet Bank of Massachusetts, N.A. (10)
10.12 Second Amendment dated as of May 17, 1995 by and between SoftKey
Inc. and Fleet Bank of Massachusetts, N.A. to Credit Agreement
dated as of September 30, 1994(11)
10.13 Third Amendment dated as of December 22, 1995 by and among
SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit
Agreement dated as of September 30, 1994
10.14 Fourth Amendment dated as of February 28, 1996 by and among
SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit
Agreement dated as of September 30, 1994
10.15 Employment Agreement dated March 1, 1994 by and between SoftKey
Software Products Inc. and Robert Gagnon(12)
10.16 Amendment No. 1 dated as of March 1, 1995, to Employment
Agreement dated as of February 1, 1994 by and between R. Scott
Murray and the Company(12)
10.17 Sublease Agreement dated as of January 5, 1995 by and between
Mellon Financial Services Corporation #1 and SoftKey Inc. (12)
10.18 Continuing Guaranty of Lease dated as of January 5, 1995 by the
Company in favor of Mellon Financial Services Corporation #1(12)
10.19 1990 Long Term Equity Incentive Plan, as amended and restated
through June 2, 1995(11)
10.20 Form of Stock Option Agreement under 1990 Long Term Equity
Incentive Plan
10.21 Stock Purchase Agreement by and between SoftKey International
Inc., Flextech Holdings Pte Ltd, Harry Fox, Joseph Abrams, Sol
Rosenberg, Mathew Barlow, Samuel Zemsky, K.H. Trustees Ltd., Seth
Altholz and Shelly Abrahami dated as of July 17, 1995(11)
10.22 Share Purchase Agreement dated July 21, 1995 by and among the
Company, Ziff-Davis Verlag GmbH and Helmut Kunkel(13)
10.23 Earn-Out Agreement dated July 21, 1995 by and between the Company
and Helmut Kunkel(13)
10.24 1996 Stock Option Plan
10.25 Form of Stock Option Agreement under 1996 Stock Option Plan
10.26 Form of Standstill Agreement by and between the Company and
Tribune Company(6)
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Written Consent of Coopers & Lybrand L.L.P.
61
<PAGE> 64
23.2 Written Consent of Arthur Andersen LLP
23.3 Written Consent of KPMG Peat Marwick LLP
23.4 Written Consent of Price Waterhouse LLP
- -------------------------
(1) Incorporated by reference to schedules included in the Company's
definitive Joint Management Information Circular and Proxy Statement
dated December 27, 1993.
(2) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
(3) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995.
(4) Incorporated by reference to exhibits filed with The Company's
Registration Statement on Form S-3 (Reg.No. 33-88728) filed
January 23, 1995.
(5) Incorporated by reference to exhibits filed with Company's Registration
Statement on Form S-3 (Reg No. 333- 145), filed January 26, 1996.
(6) Filed as exhibits to Exhibit 2.2 hereto.
(7) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 2,
1994.
(8) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 2,
1994.
(9) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the Transition period ended June 30, 1992.
(10) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 1,
1994.
(11) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 1,
1995.
(12) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(13) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated July 21, 1995.
62
<PAGE> 65
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K reporting the offering on
October 11, 1995 of $350 million principal amount of Senior Convertible Notes
due 2000. The registrant filed a Current Report on Form 8-K reporting the
execution on October 30, 1995 of a definitive merger agreement with Minnesota
Educational Computing Corporation (MECC) and the commencement of a cash tender
offer for shares of common stock of The Learning Company. The registrant filed a
Current Report on Form 8-K reporting (a) the execution on November 30, 1995 of
an Agreement and Plan of Merger with Tribune Company and certain subsidiaries of
the Company and Tribune Company pursuant to which the Company would acquire from
Tribune Company Compton's NewMedia, Inc. and Compton's Learning Company, (b) the
execution on November 30, 1995 of an agreement pursuant to which Tribune Company
would purchase $150 million principal amount of 5-1/2% Senior
Convertible/Exchangeable Notes due 2000 and (c) the execution on December 6,
1995 of an Agreement and Plan of Merger with The Learning Company. The
registrant filed a Current Report on Form 8-K reporting, among other things, the
acquisition of The Learning Company, Compton's NewMedia, Inc. and Compton's
Learning Company and the sale of $150 million principal amount of 5-1/2% Senior
Convertible/Exchangeable Notes due 2000.
63
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SOFTKEY INTERNATIONAL INC.
By: /s/ Michael Perik Date: April 5, 1996
----------------------------------------- --------------
Michael Perik
Chief Executive Officer and Chairman of the Board
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of April 5, 1996.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Michael Perik
- -------------------------------------------
Michael Perik Director, Chief Executive Officer and
Chairman of the Board of Directors
/s/ Robert Gagnon
- -------------------------------------------
Robert Gagnon Director
/s/ Kevin O'Leary
- -------------------------------------------
Kevin O'Leary Director and President
/s/ Robert Rubinoff
- -------------------------------------------
Robert Rubinoff Director
/s/ Michael Bell
- -------------------------------------------
Michael Bell Director
/s/ Scott Sperling
- -------------------------------------------
Scott Sperling Director
/s/ James Dowdle
- -------------------------------------------
James Dowdle Director
/s/ R. Scott Murray
- -------------------------------------------
R. Scott Murray Chief Financial Officer (principal financial
officer and principal accounting officer)
</TABLE>
64
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <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 dated November 30, 1995 by among
the Company, Cubsco I Inc., Cubsco II Inc., Tribune Company,
Compton's NewMedia, Inc., and Compton's Learning Company(2)
2.3 SoftKey/TLC Agreement and Plan of Merger dated December 6,
1995 among the Company, Kidsco Inc. and The Learning
Company(2)
2.4 Agreement and Plan of Merger by and among the Company,
SchoolCo Inc. and Minnesota Educational Computing Corporation
(MECC) dated as of October 30, 1995(3)
3.1 Restated Certificate of Incorporation, as amended
3.2 Bylaws of the Company, as amended(4)
4.1 Indenture dated as of October 16, 1995 between the Company
and State Street Bank and Trust Company, as Trustee, for 5
1/2% Senior Convertible Notes due 2000 (the "Indenture")(3)
4.2 First Supplemental Indenture to the Indenture, dated as of
November 22, 1995, by and between the Company and State Street
Bank and Trust Company, as Trustee(5)
4.3 Note Resale Registration Rights Agreement dated as of
October 23, 1995 by and between the Company, on the one hand,
and the Initial Purchasers set forth therein, on the other
hand (the "Registration Rights Agreement")(5)
4.4 Letter Agreement dated November 22, 1995 amending the
Registration Rights Agreement(5)
4.5 Form of Securities Resale Registration Rights Agreement by
and among the Company and Tribune Company(6)
4.6 Form of Indenture between the Company and State Street Bank
and Trust Company, as Trustee, for 5 1/2% Senior
Convertible/Exchangeable Notes Due 2000(2)
10.1 SoftKey Production Agreement dated April 6, 1994 by and
between the Company and R.R. Donnelley & Sons Company(7)
10.2 Employment Agreement dated May 27, 1994 by and between the
Company and Michael Perik(8)
10.3 Employment Agreement dated May 27, 1994 by and between the
Company and
</TABLE>
65
<PAGE> 68
Kevin O'Leary(8)
10.4 Employment Agreement dated February 1, 1994 by and between
the Company and R. Scott Murray(7)
10.5 Employment Agreement dated October 8, 1993 by and between
SoftKey Software Products Inc. and David E. Patrick(7)
10.6 1991 Employee Payroll Stock Purchase Plan(9)
10.7 1994 Non-Employee Director Stock Option Plan, as amended and
restated effective February 5, 1996
10.8 Form of Stock Option Agreement under 1994 Non-Employee
Director Stock Option Plan
10.9 Employment Agreement dated September 15, 1993 by and between
WordStar International Incorporated and Edward Sattizahn(8)
10.10 Employment Agreement dated June 20, 1994 by and between the
Company and Neal S. Winneg(8)
10.11 Credit Agreement dated as of September 30, 1994 between
SoftKey Inc. and Fleet Bank of Massachusetts, N.A. (10)
10.12 Second Amendment dated as of May 17, 1995 by and between
SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit
Agreement dated as of September 30, 1994(11)
10.13 Third Amendment dated as of December 22, 1995 by and among
SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit
Agreement dated as of September 30, 1994
10.14 Fourth Amendment dated as of February 28, 1996 by and among
SoftKey Inc. and Fleet Bank of Massachusetts, N.A. to Credit
Agreement dated as of September 30, 1994
10.15 Employment Agreement dated March 1, 1994 by and between
SoftKey Software Products Inc. and Robert Gagnon(12)
10.16 Amendment No. 1 dated as of March 1, 1995, to Employment
Agreement dated as of February 1, 1994 by and between R. Scott
Murray and the Company(12)
10.17 Sublease Agreement dated as of January 5, 1995 by and
between Mellon Financial Services Corporation #1 and SoftKey
Inc. (12)
10.18 Continuing Guaranty of Lease dated as of January 5, 1995 by
the Company in favor of Mellon Financial Services Corporation
#1(12)
10.19 1990 Long Term Equity Incentive Plan, as amended and restated
through June 2, 1995(11)
10.20 Form of Stock Option Agreement under 1990 Long Term Equity
Incentive Plan
10.21 Stock Purchase Agreement by and between SoftKey International
Inc.,
66
<PAGE> 69
Flextech Holdings Pte Ltd, Harry Fox, Joseph Abrams, Sol
Rosenberg, Mathew Barlow, Samuel Zemsky, K.H. Trustees Ltd.,
Seth Altholz and Shelly Abrahami dated as of July 17, 1995(11)
10.22 Share Purchase Agreement dated July 21, 1995 by and among the
Company, Ziff-Davis Verlag GmbH and Helmut Kunkel(13)
10.23 Earn-Out Agreement dated July 21, 1995 by and between the
Company and Helmut Kunkel(13)
10.24 1996 Stock Option Plan
10.25 Form of Stock Option Agreement under 1996 Stock Option Plan
10.26 Form of Standstill Agreement by and between the Company and
Tribune Company(6)
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of the Company
23.1 Written Consent of Coopers & Lybrand L.L.P.
23.2 Written Consent of Arthur Andersen LLP
23.3 Written Consent of KPMG Peat Marwick LLP
23.4 Written Consent of Price Waterhouse LLP
- -------------------------
(1) Incorporated by reference to schedules included in the Company's
definitive Joint Management Information Circular and Proxy Statement
dated December 27, 1993.
(2) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
(3) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995.
(4) Incorporated by reference to exhibits filed with The Company's
Registration Statement on Form S-3 (Reg.No. 33-88728) filed January 23,
1995.
(5) Incorporated by reference to exhibits filed with Company's Registration
Statement on Form S-3 (Reg No. 333- 145), filed January 26, 1996.
(6) Filed as exhibits to Exhibit 2.2 hereto.
(7) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended April 2,
1994.
(8) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 2,
1994.
(9) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the Transition period ended June 30, 1992.
67
<PAGE> 70
(10) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended October 1,
1994.
(11) Incorporated by reference to exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarterly period ended July 1,
1995.
(12) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(13) Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated July 21, 1995.
68
<PAGE> 1
EXHIBIT 3.1
[NOTE: THE FOLLOWING RESTATED CERTIFICATE OF INCORPORATION HAS BEEN
FURTHER RESTATED, FOR PURPOSES OF FILING THE SAME WITH THE SECURITIES
AND EXCHANGE COMMISSION ONLY, TO GIVE EFFECT TO THE CERTIFICATE OF
AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF SOFTKEY
INTERNATIONAL INC. FILED WITH THE SECRETARY OF STATE OF THE STATE OF
DELAWARE ON MAY 25, 1995.]
RESTATED CERTIFICATE OF INCORPORATION
OF
SOFTKEY INTERNATIONAL INC.
SoftKey International Inc. a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), the
original Certificate of Incorporation of which was filed with the Secretary of
State of the State of Delaware on October 1, 1986 under the name Orporcim
Corporation, HEREBY CERTIFIES that this Restated Certificate of Incorporation
restating, integrating and amending its Certificate of Incorporation was duly
adopted by its Board of Directors in accordance with Sections 242 and 245 of the
general Corporation Law of the State of Delaware.
1. Name. The name of the Corporation is "SoftKey International Inc."
2. Registered Office. The address of the registered office of the Corporation in
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. Purposes. The purpose of the Corporation is to engage in any lawful act or
activity for which corpora- tions may be organized under the General Corporation
Law of the State of Delaware.
4. Capital Stock
4.1 Authorized Capital Stock. The total number of shares of
all classes of capital stock that the Corporation is authorized to issue is
65,000,001, of which 60,000,000 shares are to be designated shares of "Common
Stock", each such share of Common Stock to have a par value of $0.01, 5,000,000
shares are to be designated shares of "Preferred Stock", each such share of
Preferred Stock to have a par value of $0.01, and one share is to
<PAGE> 2
be designated the share of "Special Voting Stock," such share of Special Voting
Stock to have a par value of $1.00.
4.2 Rights, Privileges and Restrictions.
4.2.1 Common Stock and Special Voting Stock. The
rights, privileges and restrictions of the Common Stock and the Special Voting
Stock shall be set forth in this Section 4.
4.2.2 Preferred Stock. The Board of Directors is
expressly authorized to provide for the issuance of all or any shares of the
Preferred Stock in one or more classes or series, and to fix for each such class
or series such voting powers, full or limited, or no voting powers, and such
distinctive designations, preferences and relative, participating, optional or
other special rights and such qualifications, limitations or restrictions
thereof, as shall be stated and expressed in the resolution or resolutions
adopted by the Board of Directors providing for the issuance of such class or
series and as may be permitted by the General Corporation Law of the State of
Delaware, including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times and at
such price or prices; (ii) entitled to receive dividends (which may be
cumulative or non-cumula- tive) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes of stock, or of any other series of the
same or any other class or classes of stock, of the Corporation; (iii) entitled
to such rights upon the dissolution of, or upon any distribution of the assets
of, the Corporation; or (iv) convertible into, or exchangeable for, shares of
any other class or classes of stock, or of any other series of the same or any
other class or classes of stock, of the Corporation at such price or prices or
at such rates of exchange and with such adjustments; all as may be stated in
such resolution or resolutions.
4.3 Voting Rights of Common Stock and Special Voting Stock.
4.3.1 General. Except as otherwise required by law or
this Restated Certificate, (i) each
2
<PAGE> 3
holder of record of Common Stock shall have one vote in respect of each share of
stock held by the holder on the books of the Corporation, and (ii) the holder of
record of the share of Special Voting Stock shall have a number of votes equal
to the number of outstanding Exchangeable Non-Voting Shares ("Exchangeable
Shares") of SoftKey Software Products Inc. from time to time which are not owned
by the Corporation, any of its subsidiaries or any person directly or indirectly
controlled by or under common control of the Corporation, in each case for the
election of directors and on all matters submitted to a vote of stockholders of
the Corporation. Any vacancy in the Board of Directors occurring because of the
death, resignation or removal of a director elected by the holders of Common
Stock and Special Voting Stock shall be filled by the vote or written consent of
the holders of such Common Stock and Special Voting Stock or, in the absence of
action by such holders, such vacancy shall be filled by action of the remaining
directors. A director elected by the holders of Common Stock and Special Voting
Stock may be removed from the Board of Directors with or without cause by the
vote or consent of the holders of such Common Stock and Special Voting Stock, as
provided by the Delaware General Corporation Law. For the purposes hereof,
"control" (including the correlative meanings, the terms "controlled by" and
"under common control of") as applied to any person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of that person through the ownership of voting
securities, by contract or otherwise.
4.3.2 Common Stock and Special Voting Stock Identical
in Voting. In respect of all matters concerning the voting of shares, the Common
Stock and the Special Voting Stock shall vote as a single class and such voting
rights shall be identical in all respects.
4.4 Liquidation. In the event of any liquidation, dissolution
or winding up of the Corporation, and subject to any prior rights of holders of
shares of Preferred Stock, the holders of Common Stock shall be entitled to
receive, pro rata, all of the remaining assets of the Corporation available for
distribution to its stockholders and the holders of Special Voting Stock shall
not be entitled to receive any such assets.
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4.5 Dividends. The holders of shares of Common Stock shall be
entitled to receive, when, as and if declared by the Board of Directors, out of
the assets of the Corporation which are by law available therefor, dividends
payable either in cash, in property or in shares of capital stock and the
holders of Special Voting Stock shall not be entitled to receive any such
dividends.
4.6 Special Voting Stock. (a) Pursuant to the terms of that
certain Combination Agreement, dated as of August 17, 1993, as amended and
restated, by and among the Corporation, SoftKey Software Products Inc., an
Ontario corporation, Spinnaker Software Corporation, a Minnesota corporation and
SSC Acquisition Corporation, a Delaware corporation, one share of Special Voting
Stock is being issued to the trustee (the "Trustee") under the Voting and
Exchange Trust Agreement, dated as of February 4, 1994, by and between the
Corporation, SoftKey Software Products Inc. and the Trustee.
(b) The holder of the share of Special Voting Stock
is entitled to exercise the voting rights attendant thereto in such manner as
such holder desires.
(c) At such time as the Special Voting Stock has no
votes attached to it because there are no Exchangeable Shares of SoftKey
outstanding which are not owned by the Corporation, any of its subsidiaries or
any person directly or indirectly controlled by or under common control of the
Corporation, and there are no shares of stock, debt, options or other agreements
of SoftKey Software Products Inc. which could give rise to the issuance of any
Exchangeable Shares of SoftKey Software Products Inc. to any person (other than
the Corporation, any of its subsidiaries or any person directly or indirectly
controlled by or under common control of the Corporation), the Special Voting
Stock shall be cancelled.
5. Management of Business. The business and affairs of the Corporation shall be
managed by or under the direc- tion of the Board of Directors, and the directors
need not be elected by ballot unless required by the Bylaws of the Corporation.
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<PAGE> 5
6. By-Laws. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors and the stockholders of the Corporation are each
expressly authorized to adopt, amend, or repeal the Bylaws of the Corporation.
7. Arrangement with Creditors. Whenever a compromise or arrangement is proposed
between this Corporation and its creditors or any class of them and/or between
this Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for this Corporation
under the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
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 know-
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<PAGE> 6
ing 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 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
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<PAGE> 7
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 advance 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.
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<PAGE> 8
9. Amendments. The Corporation reserves the right to amend and repeal any
provision contained in this Restated Certificate, and to take other corporate
action to the extent and in the manner now or hereafter permitted or prescribed
by the laws of the State of Delaware. All rights herein conferred are granted
subject to this reservation.
IN WITNESS WHEREOF, SoftKey International Inc. has caused this
Restated Certificate of Incorporation to be signed in its name and on its behalf
and attested on this 4th day of February, 1994.
SOFTKEY INTERNATIONAL INC.
By /S/ Michael J. Perik
-----------------------------
Name: Michael J. Perik
Title: Chairman
ATTEST:
By /S/ David L. Lewis
-----------------------------
Name: David L. Lewis
Title: Secretary
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<PAGE> 9
SoftKey International Inc.
CERTIFICATE OF DESIGNATION
OF 5-1/2% SERIES C CONVERTIBLE
PREFERRED STOCK SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF
SUCH SERIES OF PREFERRED STOCK
Pursuant to Section 151 of the General Corporation Law of the
State of Delaware, SoftKey International Inc. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of
Directors of the Company (the "Board of Directors") by Article 4.2.2 of the
Restated Certificate of Incorporation of the Company, as amended, and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors on November 30, 1995, adopted the
following resolution authorizing and creating a series of Preferred Stock
designated as 5-1/2% Series C Convertible Preferred Stock:
RESOLVED that, pursuant to the authority vested in the Board
of Directors in accordance with the provisions of the Restated Certificate of
Incorporation, as amended, a series of the class of authorized Preferred Stock,
par value $.01 per share, of the Company is hereby authorized and created and
that the designation and number of shares thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations and restrictions
thereof are as follows:
Section 1. Designation and Number.
Section 1.1 Designation. The shares of such series shall be
designated as "5-1/2% Series C Convertible Preferred Stock" (the "Series C
Preferred Stock"). The maximum number of shares of Series C Preferred Stock
hereby authorized shall be 150,000 shares.
Section 1.2 Priority. The Series C Preferred Stock
shall, with respect to the payment of dividends and the
<PAGE> 10
distribution of assets on liquidation, dissolution or winding up, (i) rank prior
to the Common Stock, par value $0.01 per share, of the Company (the "Common
Stock") and (ii) rank on a parity with any other series of Preferred Stock
hereinafter issued by the Company.
Section 2. Dividends and Distributions.
Section 2.1 Dividends. The holders of shares of Series C
Preferred Stock, in preference to the holders of shares of Common Stock and of
any shares of other capital stock of the Company ranking junior to the Series C
Preferred Stock as to payment of dividends, shall be entitled to receive, when,
as and if declared by the Board of Directors, out of the assets of the Company
legally available therefor, dividends in the amount per share equal to 5-1/2%
per annum of the Liquidation Preference (as defined herein) of such share
payable or accrued semi-annually on May 1 and November 1 in each year commencing
May 1, 1996 (each such date a "Dividend Payment Date") to the persons in whose
names the Series C Preferred Stock is registered at the close of business on the
April 15 and October 15 immediately preceding such Dividend Payment Date, as the
case may be. Such dividends shall begin to accrue on outstanding shares of
Series C Preferred Stock from the date of issuance of such shares of Series C
Preferred Stock; provided, in the case of any Series C Preferred Stock issued
upon exchange for the Company's $150 million principal amount of 5-1/2% Senior
Convertible/Exchangeable Notes due 2000 (the "Notes"), such dividend shall begin
to accrue and accumulate from the date on which interest was last paid or duly
provided for on such Notes, or if no interest has been paid or duly provided for
prior to the date of such exchange, from December 22, 1995. Dividends payable
for any partial dividend period shall be computed on the basis of a 360-day year
of twelve 30-day months. Dividends on the Series C Preferred Stock shall accrue
on a daily basis whether or not funds shall be legally available for the payment
thereof. Accrued but unpaid dividends on the Series C Preferred Stock shall
cumulate as of the Dividend Payment Date on which they first become payable, and
any and all such accrued dividends shall be paid as provided in this Section 2,
Section 5 and Section 7.
Section 2.2 No Additional Dividends. The holders of shares of
Series C Preferred Stock shall not be entitled to receive any dividends or other
distributions except as provided herein.
Section 3. Voting Rights. In addition to any voting
rights provided by law, the holders of shares of Series C
Preferred Stock shall have the following voting rights:
Section 3.1 With Common Stock. So long as the Series
C Preferred Stock is outstanding, each share of Series C
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Preferred Stock shall entitle the holder thereof to vote on all matters voted on
by holders of Common Stock voting together as a single class with other shares
entitled to vote at all meetings of the stockholders of the Company. With
respect to any such vote, each share of Series C Preferred Stock shall entitle
the holder thereof to cast the number of votes equal to the number of votes
which could be cast in such vote by a holder of the shares of capital stock of
the Company into which such share of Series C Preferred Stock is convertible on
the record date for such vote.
Section 3.2 As a Class. The affirmative vote of the holders of
at least 66-2/3% of the outstanding shares of Series C Preferred Stock, in
person or by proxy, at a special or annual meeting of stockholders called for
the purpose, shall be necessary to (i) authorize, increase the authorized number
of shares of, or issue (including on conversion or exchange of any convertible
or exchangeable securities or by reclassification), any shares of any class or
classes of the Company's capital stock ranking prior to (either as to dividends
or upon voluntary or involuntary liquidation, dissolution or winding up) the
Series C Preferred Stock; (ii) increase the authorized number of shares of, or
issue (including on conversion or exchange of any convertible or exchangeable
securities or by reclassification) any shares of, Series C Preferred Stock,
except in connection with the exchange of the Notes; (iii) authorize, adopt or
approve an amendment to the Restated Certificate of Incorporation of the Company
which would decrease the aggregate number of authorized shares of Series C
Preferred Stock, increase or decrease the par value of the shares of Series C
Preferred Stock, or alter or change the powers, preferences or special rights of
the shares of Series C Preferred Stock so as to affect such shares of Series C
Preferred Stock adversely; (iv) authorize or issue shares of any class or series
of stock not authorized herein having any preference or priority as to dividends
or assets superior to any such preference or priority of the Series C Preferred
Stock; or (v) reclassify any shares of Common Stock or any other shares of
capital stock of the Company other than the Series C Preferred Stock (such
shares other than (A) shares of capital stock of the Company ranking senior
(either as to dividends or upon liquidation, dissolution or winding up of the
Company) to the Series C Preferred Stock and (B) Parity Stock (as hereinafter
defined) are hereinafter referred to as "Junior Stock") into shares having any
preference or priority as to dividends or liquidation superior to or on a parity
with any such preference or priority of the Series C Preferred Stock; provided
that Parity Stock may be reclassified into a different series of Parity Stock
without the approval of the holders of Series C Preferred Stock.
Section 3.3 Right to Elect Directors as a Class. If on any
date dividends payable on the Series C Preferred Stock shall have been in
arrears and not paid in full for three semi-annual periods, whether or not
consecutive, the number of
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directors constituting the Board of Directors shall, without further action, be
increased by two and the holders of shares of Series C Preferred Stock shall
have, in addition to the other voting rights set forth herein, the exclusive
right, voting separately as a single class or as a class with the holders of
shares of Parity Stock (as hereinafter defined), if such holders are then
entitled to elect additional directors pursuant to any provision of the
Certificate of Designation for such stock that is similar to this Section 3.3
("Defaulted Parity Stock"), to elect the directors of the Company to fill such
newly created directorships, the remaining directors to be elected by the other
classes of stock entitled to vote therefor (including the Series C Preferred
Stock in accordance with Section 3.1), at each meeting of stockholders held for
the purpose of electing directors. Such additional directors shall continue as
directors and such additional voting right shall continue until such time as all
dividends accumulated on the Series C Preferred Stock have been paid in full or
all necessary funds have been set aside for payment, as the case may be, at
which time such additional directors shall cease to be directors and such
additional voting right of the holders of Series C Preferred Stock shall
terminate subject to revesting in the event of each and every subsequent event
of the character indicated above. In no event shall the holders of Series C
Preferred Stock and/or the holders of Parity Stock voting separately or together
as a class be entitled to elect a total of more than two directors to the Board
of Directors of the Company pursuant to this Section 3.3 and/or any similar
provision of the Certificate of Designation for any Parity Stock.
Section 3.4.1 Exercise. The foregoing rights of holders of
shares of Series C Preferred Stock to take any actions as provided in this
Section 3 may be exercised at any annual meeting of stockholders or at a special
meeting of stockholders held for such purpose as hereinafter provided or at any
adjournment thereof, or by the written consent, delivered to the Secretary of
the Company, of the holders of the minimum number of shares required to take
such action.
So long as such right to vote continues (and unless such right
has been exercised by written consent of the minimum number of shares required
to take such action), the Chairman of the Board of the Company may call, and,
upon the written request of holders of record of 20% of the outstanding shares
of Series C Preferred Stock, if the holders of Series C Preferred Stock are to
vote separately as a single class, or the holders of record of 20% of the
outstanding shares of Series C Preferred Stock and Defaulted Parity Stock, if
the holders of shares of Series C Preferred Stock are to vote as a class with
the holders of shares of any Defaulted Parity Stock, addressed to the Secretary
of the Company at the principal office of the Company, shall call a special
meeting of the holders of shares entitled to vote as
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provided herein. Such meeting shall be held within 30 days after delivery of
such request to the Secretary, at the place and upon the notice provided by law
and in the By-laws of the Company for the holding of meetings of stockholders.
Section 3.4.2 Quorum. At each meeting of stockholders at which
the holders of shares of Series C Preferred Stock shall have the right, voting
separately as a single class or as a class with the holders of shares of any
Defaulted Parity Stock, to elect directors of the Company as provided in this
Section 3 or to take any action, the presence in person or by proxy of the
holders of record of one-third of the total number of shares of Series C
Preferred Stock, if the holders of shares of Series C Preferred Stock are to
vote separately as a single class, or the holders of record of one-third of the
total number of shares of Series C Preferred Stock and Defaulted Parity Stock,
if the holders of shares of Series C Preferred Stock are to vote as a class with
the holders of shares of any Parity Stock, then outstanding and entitled to vote
on the matter shall be necessary and sufficient to constitute a quorum. At any
such meeting or at any adjournment thereof:
(i) the absence of a quorum of the holders of shares of Series
C Preferred Stock, if the holders of Series C Preferred Stock are to
vote separately as a single class, or the holders of shares of Series C
Preferred Stock and Defaulted Parity Stock, if the holders of shares of
Series C Preferred Stock are to vote as a class with the holders of
shares of any Parity Stock, shall not prevent the election of directors
other than those to be elected by the holders of shares of Series C
Preferred Stock or the holders of shares of Series C Preferred Stock
and Defaulted Parity Stock, as the case may be, and the absence of a
quorum of the holders of shares of any other class or series of capital
stock shall not prevent the election of directors to be elected by the
holders of shares of Series C Preferred Stock or the holders of shares
of Series C Preferred Stock and Defaulted Parity Stock, as the case may
be, or the taking of any action as provided in this Section 3; and
(ii) in the absence of a quorum of the holders of shares of
Series C Preferred Stock, if the holders of Series C Preferred Stock
are to vote separately as a single class, or the holders of shares of
Series C Preferred Stock and Defaulted Parity Stock, if the holders of
Series C Preferred Stock are to vote as a class with the holders of
shares of any Defaulted Parity Stock, a majority of the holders of such
shares present in person or by proxy shall have the power to adjourn
the meeting as to the actions to be taken by
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the holders of shares of Series C Preferred Stock or the holders of
shares of Series C Preferred Stock and Defaulted Parity Stock, as the
case may be, from time to time and place to place without notice other
than announcement at the meeting until a quorum shall be present.
Section 3.4.3 Votes. For the taking of any action as provided
in Sections 3.2 and 3.3 by the holders of shares of Series C Preferred Stock or
the holders of shares of Series C Preferred Stock and Defaulted Parity Stock, as
the case may be, each such holder shall have one vote for each share of such
stock standing in his name on the transfer books of the Company as of any record
date fixed for such purpose or, if no such date be fixed, at the close of
business on the Business Day (as defined in Section 11) next preceding the day
on which notice is given, or if notice is waived, at the close of business on
the Business Day next preceding the day on which the meeting is held.
Section 3.4.4 Directors. Each director elected by the holders
of shares of Series C Preferred Stock or the holders of shares of Series C
Preferred Stock and Defaulted Parity Stock, as the case may be, as provided in
Section 3.3 shall, unless his term shall expire earlier, hold office until the
annual meeting of stockholders next succeeding his election or until his
successor, if any, is elected and qualified.
In case any vacancy shall occur among the directors elected by
the holders of shares of Series C Preferred Stock or the holders of shares of
Series C Preferred Stock and Defaulted Parity Stock, as the case may be, as
provided in Section 3.3, such vacancy may be filled for the unexpired portion of
the term by vote of the remaining director theretofore elected by such holders
(if there is a remaining director), or such director's successor in office. If
any such vacancy is not so filled within 20 days after the creation thereof or
if both directors so elected by the holders of Series C Preferred Stock or the
holders of Series C Preferred Stock and Defaulted Parity Stock, as the case may
be, shall cease to serve as directors before their terms shall expire, the
holders of the Series C Preferred Stock or the holders of Series C Preferred
Stock and Defaulted Parity Stock, as the case may be, then outstanding and
entitled to vote for such directors may, by written consent as herein provided,
or at a special meeting of such holders called as provided herein, elect
successors to hold office for the unexpired terms of the directors whose places
shall be vacant.
Any director elected by the holders of shares of Series C
Preferred Stock voting separately as a single class or the holders of shares of
Series C Preferred Stock voting as a class with the holders of shares of
Defaulted Parity Stock may be removed from office with or without cause by the
vote or written
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<PAGE> 15
consent of the holders of at least a majority of the outstanding shares of
Series C Preferred Stock or a majority of the outstanding shares of Series C
Preferred Stock and Defaulted Parity Stock, as the case may be. A special
meeting of the holders of shares of Series C Preferred Stock or the holders of
shares of Series C Preferred Stock and Defaulted Parity Stock, as the case may
be, may be called in accordance with the procedures set forth in Section 3.4.1.
Section 3.4.5 Parity Stock. "Parity Stock" shall mean any
capital stock of the Company ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up of the Company) with the Series C
Preferred Stock.
Section 4. Certain Restrictions.
Section 4.1 Restrictions on Dividends. Whenever dividends
payable on shares of Series C Preferred Stock as provided in Section 2 are not
paid in full, thereafter and until all unpaid dividends payable, whether or not
declared, on the outstanding shares of Series C Preferred Stock shall have been
paid in full or declared and set apart for payment, until all necessary funds
have been set apart for payment, the Company shall not: (A) declare or pay
dividends, or make any other distributions, on any shares of Junior Stock (as
defined in Section 3.2), other than dividends or distributions payable in Junior
Stock; or (B) declare or pay dividends, or make any other distributions, on any
shares of Parity Stock, except (1) dividends or distributions payable in Junior
Stock and (2) dividends or distributions paid ratably on the Series C Preferred
Stock and all Parity Stock on which dividends are payable or in arrears, in
proportion to the total amounts to which the holders of all shares of the Series
C Preferred Stock and such Parity Stock are then entitled; provided, however,
that in the case of clause (2) the holders of at least 66-2/3% of the
outstanding shares of Series C Preferred Stock, voting separately as a single
class, or the holders of at least 66-2/3% of the outstanding shares of Series C
Preferred Stock and of any Parity Stock the approval of holders of which is
required for such a pro rata dividend or distribution pursuant to any similar
provision of the Certificate of Designation for such stock, voting together as a
class, shall have approved the payment of such dividend or distribution; and
provided, further, that the restrictions of this Section 4.1 shall not apply
upon the affirmative vote of the holders of 66-2/3% of the outstanding shares of
Series C Preferred Stock.
Section 4.2 Restrictions on Redemption or Purchase. Whenever
dividends payable on shares of Series C Preferred Stock as provided in Section 2
are not paid in full, thereafter and until all unpaid dividends payable, whether
or not declared, on the outstanding shares of Series C Preferred Stock shall
have
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been paid in full or declared and set apart for payment, the Company shall not:
(A) redeem, purchase or otherwise acquire for consideration any shares of Junior
Stock or Parity Stock; provided that (1) the Company may at any time redeem,
purchase or otherwise acquire shares of Junior Stock or Parity Stock in exchange
for any shares of Junior Stock, (2) the Company may accept shares of any Parity
Stock for conversion and (3) the Company may at any time redeem, purchase or
otherwise acquire shares of any Parity Stock pursuant to any mandatory
redemption, put, sinking fund or other similar obligation, pro rata with the
Series C Preferred Stock in proportion to the total amount then required to be
applied by it to repurchase or otherwise acquire shares of Series C Preferred
Stock and shares of such Parity Stock; provided, however, that in the case of
clause (3) the holders of at least 66-2/3% of the outstanding shares of Series C
Preferred Stock, voting separately as a single class, or the holders of at least
66-2/3% of the outstanding shares of Series C Preferred Stock and of any Parity
Stock the approval of holders of which is required for such a pro rata
repurchase or other acquisition pursuant to any similar provision of the
Certificate of Designation for such stock, voting together as a class, shall
have approved such repurchase or other acquisition; or (B) redeem or purchase or
otherwise acquire for consideration any shares of Series C Preferred Stock;
provided that the Company (1) may accept shares of Series C Preferred Stock
surrendered for conversion into shares of capital stock of the Company pursuant
to Section 8, or (2) may redeem shares of Series C Preferred Stock pro rata
pursuant to Section 5.2; and provided, further, that the restrictions of this
Section 4.2 shall not apply upon the affirmative vote of the holders of 66-2/3%
of the outstanding shares of Series C Preferred Stock.
Section 4.3 Purchase by Subsidiary. The Company shall not
permit any subsidiary of the Company to purchase or otherwise acquire for
consideration any shares of capital stock of the Company unless the Company
could, pursuant to Section 4.2, purchase such shares at such time and in such
manner.
Section 5. Redemption.
Section 5.1 Redemption Prices. The Company may, at its option,
redeem all or from time to time any part of the Series C Preferred Stock on any
date, upon notice as set forth in Section 5.2, and at the redemption prices set
forth below, provided, however, that no such redemption shall be effected before
November 2, 1998; provided, further, that, notwithstanding the foregoing, on
November 1, 2000 the Company shall redeem all of the Series C Preferred Stock
then outstanding. The redemption prices (expressed as percentages of the
liquidation value of $1,000.00), together in each case with accrued and unpaid
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dividends thereon, whether or not declared, to the date of redemption, payable
in cash, shall be as follows:
If redeemed during the 12-month period beginning:
<TABLE>
<CAPTION>
Date Percentage
<S> <C>
November 1, 1998 102.2%
November 1, 1999 101.1%
</TABLE>
and 100% on and after November 1, 2000.
Section 5.2 Notice of Redemption, Selection of Series C
Preferred Stock. In case the Company shall desire to exercise the right to
redeem all or, as the case may be, any part of the Series C Preferred Stock
pursuant to Section 5.1, it shall fix a date for redemption and, in the case of
any redemption pursuant to Section 5.1, it shall mail or cause to be mailed a
notice of such redemption at least 30 and not more than 60 days prior to the
date fixed for redemption to the holders of Series C Preferred Stock so to be
redeemed as a whole or in part at their last addresses as the same appear on the
books of the Company. Such mailing shall be by first class mail. The notice, if
mailed in the manner herein provided, shall be conclusively presumed to have
been duly given, whether or not the holder receives such notice. In any case,
failure to give such notice by mail or any defect in the notice to the holder of
any Series C Preferred Stock designated for redemption as a whole or in part
shall not affect the validity of the proceedings for the redemption of any other
shares of Series C Preferred Stock.
Each such notice of redemption shall specify the aggregate
number of shares of Series C Preferred Stock to be redeemed, the date fixed for
redemption, the redemption price at which Series C Preferred Stock is to be
redeemed, the place or places of payment, that payment will be made upon
presentation and surrender of certificates representing such Series C Preferred
Stock, that dividends accrued to the date fixed for redemption will be paid as
specified in said notice and that on and after said date, dividends thereon or
on the portion thereof to be redeemed will cease to accrue. Such notice shall
also state the current Conversion Price (as defined below) and the date on which
the right to convert such Series C Preferred Stock into Common Stock will
expire. If fewer than all the Series C Preferred Stock is to be redeemed, the
notice of redemption shall identify the Series C Preferred Stock to be redeemed.
On or prior to the Business Day prior to the redemption date
specified in the notice of redemption given as provided in this Section, the
Company will deposit with one or more paying agents (or, if the Company is
acting as its own paying agent, set aside, segregate and hold in trust) an
amount of money sufficient
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<PAGE> 18
to redeem on the redemption date all the Series C Preferred Stock so called for
redemption (other than those shares theretofore surrendered for conversion into
Common Stock) at the appropriate redemption price, together with accrued
dividends to the date fixed for redemption. If any shares of Series C Preferred
Stock called for redemption are converted pursuant hereto, any money deposited
with any paying agent or so segregated and held in trust for the redemption of
such shares of Series C Preferred Stock shall be paid to the Company upon its
request or, if then held by the Company, shall be discharged from such trust.
If fewer than all the shares of Series C Preferred Stock are
to be redeemed, the Company shall select the shares of Series C Preferred Stock
to be redeemed by lot or, in its sole discretion, on a pro rata basis.
Section 5.3 Payment of Series C Preferred Stock Called for
Redemption. If notice of redemption has been given as above provided, the Series
C Preferred Stock with respect to which such notice has been given shall, unless
converted into Common Stock pursuant to the terms hereof, become due and payable
on the date and at the place or places stated in such notice at the applicable
redemption price, together with dividends thereon accrued to the date fixed for
redemption, and on and after said date (unless the Company shall default in the
payment of such redemption price, together with dividends thereon accrued to
said date), dividends on the Series C Preferred Stock so called for redemption
shall cease to accrue, and such Series C Preferred Stock shall cease after the
close of business on the Business Day next preceding the date fixed for
redemption to be convertible into Common Stock and the holders thereof shall
have no right in respect of such shares of Series C Preferred Stock except the
right to receive the redemption price thereof and dividends thereon to the date
fixed for redemption. On presentation and surrender of Series C Preferred Stock
at a place of payment in said notice specified, the said Series C Preferred
Stock shall be paid and redeemed by the Company at the applicable redemption
price, together with dividends accrued thereon to the date fixed for redemption.
Section 5.4 Conversion Arrangement on Call for Redemption. In
connection with any redemption of Series C Preferred Stock, the Company may
arrange for the purchase and conversion of any Series C Preferred Stock by an
agreement with one or more investment bankers or other purchasers to purchase
such Series C Preferred Stock by paying to the Company or a paying agent
designated by the Company in trust for the holders of Series C Preferred Stock,
on or before the date fixed for redemption, an amount not less than the
applicable redemption price, together with dividends accrued to the date fixed
for redemption, of such Series C Preferred Stock. Notwithstanding anything to
the contrary contained in this Section 5, the
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<PAGE> 19
obligation of the Company to pay the redemption price of such Series C Preferred
Stock, together with dividends accrued to the date fixed for redemption, shall
be deemed to be satisfied and discharged to the extent such amount is so paid by
such purchasers. If such an agreement is entered into, any Series C Preferred
Stock not duly surrendered for conversion by the holders thereof may, at the
option of the Company, be deemed, to the fullest extent permitted by law,
acquired by such purchasers from such holders and (notwithstanding anything to
the contrary contained in Section 8) surrendered by such purchasers for
conversion, all as of immediately prior to the close of business on the date
fixed for redemption (and the right to convert any such Series C Preferred Stock
shall be deemed to have been extended through such time), subject to payment of
the above amount as aforesaid. At the direction of the Company, any payment
agent appointed by the Company shall hold and dispose of any such amount paid to
it in the same manner as it would monies deposited with it by the Company for
the redemption of Series C Preferred Stock.
Section 5.5. Purchase of Series C Preferred Stock Upon
a Change of Control.
Section 5.5.1 If a Change of Control (as defined in Section
11) shall occur at any time, then each holder of Series C Preferred Stock shall
have the right to require that the Company purchase, to the extent that the
Company shall have funds legally available therefor, such holder's shares of
Series C Preferred Stock in whole or in part at a purchase price (the "Change of
Control Purchase Price") in cash in an amount equal to 101% of the Liquidation
Preference of such Series C Preferred Stock, plus accrued and unpaid dividends
thereon, if any, to the repurchase date (the "Change of Control Purchase Date")
pursuant to the offer described below (the "Change of Control Offer") and in
accordance with the other procedures set forth herein.
Section 5.5.2 Within 30 days following any Change of Control,
the Company shall give written notice of such Change of Control to each holder
of Series C Preferred Stock, by first-class mail, postage prepaid, at his
address appearing on the books of the Company, stating, among other things: that
a Change of Control has occurred; the Change of Control Purchase Price and the
Change of Control Purchase Date (which shall be a Business Day no earlier than
30 days nor later than 60 days from the date such notice is mailed, or such
later date as is necessary to comply with requirements under the Exchange Act);
that any shares of Series C Preferred Stock not tendered will continue to accrue
dividends; that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any shares of Series C Preferred Stock accepted for
payment pursuant to the Change of Control Offer shall cease to accrue dividends
after the Change of Control Purchase Date; and certain other procedures that a
holder
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<PAGE> 20
of Series C Preferred Stock must follow to accept a Change of Control Offer or
to withdraw such acceptance.
Section 5.5.3 The Company will comply with the applicable
tender offer rules, including Rule 13e-4 under the Exchange Act, and any other
applicable securities laws or regulations in connection with a Change of Control
Offer.
Section 5.5.4 The Company will not, and will not permit any
subsidiary to, create or permit to exist or become effective any restriction
that would materially impair the ability of the Company to make a Change of
Control Offer to purchase the Series C Preferred Stock or, if such Change of
Control Offer is made, to pay for the Series C Preferred Stock tendered for
purchase.
Section 6. Reacquired Shares. Any shares of Series C Preferred
Stock converted, redeemed, purchased or otherwise acquired by the Company in any
manner whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares of Series C Preferred Stock shall upon their
cancellation, and upon the filing of an appropriate certificate with the
Secretary of State of the State of Delaware, become authorized but unissued
shares of Preferred Stock, par value $.01 per share, of the Company,
undesignated as to series, and may be reissued as part of another series of
Preferred Stock, par value $.01 per share, of the Company subject to the
conditions or restrictions on issuance set forth herein.
Section 7. Liquidation, Dissolution or Winding Up.
Section 7.1 Bankruptcy or Insolvency. If the Company shall
commence a voluntary case under the Federal bankruptcy laws or any other
applicable Federal or State bankruptcy, insolvency or similar law, or consent to
the entry of an order for relief in an involuntary case under any such law or to
the appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Company or of any substantial
part of its property, or make an assignment for the benefit of its creditors, or
admit in writing its inability to pay its debts generally as they become due, or
if a decree or order for relief in respect of the Company shall be entered by a
court having jurisdiction in the premises in an involuntary case under the
Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Company or
any substantial part of its property, or ordering the winding up or liquidation
of its affairs, and any such decree or order shall be unstayed and in effect for
a period of 90 consecutive days and on account of any such event the Company
shall liquidate, dissolve or wind up, or if the Company shall otherwise
liquidate, dissolve or wind up, no
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<PAGE> 21
distribution shall be made (i) to the holders of shares of Junior Stock unless,
prior thereto, the holders of shares of Series C Preferred Stock, subject to
Section 8, shall have received the Liquidation Preference with respect to each
share, or (ii) to the holders of shares of Parity Stock, except distributions
made ratably on the Series C Preferred Stock and all Parity Stock in proportion
to the total amounts to which the holders of all shares of the Series C
Preferred Stock and Parity Stock are entitled upon such liquidation, dissolution
or winding up. "Liquidation Preference" shall mean $1,000.00 per share of Series
C Preferred Stock, plus an amount equal to all accrued and unpaid dividends
thereon. After payment of the full amount to which the holders of Series C
Preferred Stock are entitled as provided in this Section 7.1, such holders shall
have no further right or claim to any of the remaining assets of the Company.
Section 7.2 Consolidation or Merger. Neither the
consolidation, merger or other business combination of the Company with or into
any other person or persons nor the sale, lease, exchange or other transfer of
all or substantially all the assets of the Company shall be deemed to be a
liquidation, dissolution or winding up of the Company for purposes of this
Section 7.
Section 7.3 Proportionate Amount. The Liquidation Preference
with respect to each fractional share of Series C Preferred Stock outstanding
shall be equal to a ratably proportionate amount of the Liquidation Preference
with respect to each outstanding share of Series C Preferred Stock.
SECTION 8.
CONVERSION OF SERIES C PREFERRED STOCK
Section 8.1 Right to Convert. Subject to and upon compliance
with the provisions of this Certificate of Designation, the holder of any share
of Series C Preferred Stock shall have the right, at his option, at any time
(except that, with respect to any shares of Series C Preferred Stock which shall
be called for redemption or delivered for repurchase, such right shall
terminate, except as provided in the third paragraph of Section 8.2, at the
close of business on the last Trading Day prior to the date fixed for redemption
of such shares of Series C Preferred Stock unless the Company shall default in
payment due upon redemption thereof) to convert any such share into that number
of fully paid and nonassessable shares of Common Stock (as such shares shall
then be constituted) obtained by dividing $1,000.00 for each such share so
converted by the Conversion Price in effect at such time, by surrender of the
shares so to be converted in the manner provided in Section 8.2. A holder of
Series C Preferred Stock is not entitled to any rights of a holder of Common
Stock until such holder has converted his Series
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<PAGE> 22
C Preferred Stock to Common Stock, and only to the extent such Series C
Preferred Stock is deemed to have been converted to Common Stock under this
Section 8.
Section 8.2 Exercise of Conversion Privilege; Issuance of Common
Stock on Conversion; No Adjustment for Dividends. In order to exercise the
conversion privilege with respect to any Series C Preferred Stock, the holder of
any such share of Series C Preferred Stock to be converted in whole or in part
shall surrender such share of Series C Preferred Stock, duly endorsed, at the
principal office of the Company or with the Transfer Agent for the Common Stock,
and shall give written notice of conversion in the form provided on the share of
Series C Preferred Stock (or such other notice which is acceptable to the
Company) to the office or agency that the holder elects to convert such shares
specified in said notice. Such notice shall also state the name or names (with
address) in which the certificate or certificates for shares of Common Stock
which shall be issuable on such conversion shall be issued and shall be
accompanied by transfer taxes, if required pursuant to Section 8.7. Each such
share surrendered for conversion shall, unless the shares issuable on conversion
are to be issued in the same name as the registration of such share of Series C
Preferred Stock, be duly endorsed by, or be accompanied by instruments of
transfer in form satisfactory to the Company duly executed by, the holder or his
duly authorized attorney.
As promptly as practicable after satisfaction of the
requirements for conversion set forth above, subject to compliance with any
restrictions on transfer if shares issuable on conversion are to be issued in a
name other than that of the shareholder (as if such transfer were a transfer of
the shares so converted), the Company shall issue and shall deliver to such
holder at the address designated in the notice of conversion, a certificate or
certificates for the number of full shares issuable upon the conversion of such
shares in accordance with the provisions of this Section 8 and a check or cash
in respect of any fractional interest in respect of a share of Common Stock
arising upon such conversion, as provided in Section 8. In case any certificate
shall be surrendered for partial conversion, the Company shall issue and deliver
to the holder of the certificate so surrendered, without charge to him, a new
certificate or certificates in an aggregate share amount equal to the
unconverted portion of the surrendered certificate.
Each conversion shall be deemed to have been effected as to any
such certificate on the date on which the requirements set forth above in this
Section 8.2 have been satisfied as to such certificate, and the person in whose
name any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become on said date the
holder of record of the shares represented thereby; provided,
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<PAGE> 23
however, that any such surrender on any date when the stock transfer books of
the Company shall be closed shall constitute the person in whose name the
certificates are to be issued as the record holder thereof for all purposes on
the next succeeding day on which such stock transfer books are open, but such
conversion shall be at the Conversion Price in effect on the date upon which
such Series C Preferred Stock shall have been surrendered.
Section 8.3 Cash Payments in Lieu of Fractional Shares. No
fractional shares of Common Stock or scrip representing fractional shares shall
be issued upon conversion of Series C Preferred Stock. If more than one
certificate for shares of Preferred Stock shall be surrendered for conversion at
one time by the same holder, the number of full shares which shall be issuable
upon conversion shall be computed on the basis of the aggregate shares of Series
C Preferred Stock (or specified portions thereof to the extent permitted hereby)
so surrendered. If any fractional share of stock would be issuable upon the
conversion of any Series C Preferred Stock, the Company shall make an adjustment
therefor in cash at the current market value thereof. The current market value
of a share of Common Stock shall be the Closing Price on the first Trading Day
immediately preceding the day on which the Series C Preferred Stock is deemed to
have been converted and such Closing Price shall be determined as provided in
Section 8.5.7.
Section 8.4 Conversion Price. The conversion price shall be
$53.00 (herein called the "Conversion Price") subject to adjustment as provided
in this Section 8.
Section 8.5 Adjustment of Conversion Price. The Conversion Price
shall be adjusted from time to time by the Company as follows:
Section 8.5.1 In case the Company shall hereafter pay a dividend
or make a distribution to all holders of the outstanding Common Stock in shares
of Common Stock, the Conversion Price in effect at the opening of business on
the date following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution shall be reduced by multiplying
such Conversion Price by a fraction the numerator of which shall be the number
of shares of Common Stock outstanding at the close of business on the Record
Date (as defined in Section 8.5.7) fixed for such determination and the
denominator of which shall be the sum of such number of shares and the total
number of shares constituting such dividend or other distribution, such
reduction to become effective immediately after the opening of business on the
day following the Record Date. The Company will not pay any dividend or make any
distribution on shares of Common Stock held in the treasury of the Company.
- 15 -
<PAGE> 24
Section 8.5.2 In case the Company shall issue rights or warrants
to all holders of its outstanding shares of Common Stock entitling them (for a
period expiring within 45 days after the date fixed for determination of
stockholders entitled to receive such rights or warrants) to subscribe for or
purchase shares of Common Stock at a price per share less than the Current
Market Price (as defined in Section 8.5.7) on the Record Date fixed for
determination of stockholders entitled to receive such rights or warrants, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect at the opening of
business on the date after the Record Date by a fraction the numerator of which
shall be the number of shares of Common Stock outstanding at the close of
business on the Record Date plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase at such
Current Market Price, and the denominator of which shall be the number of shares
of Common Stock outstanding on the close of business on the Record Date plus the
total number of additional shares of Common Stock so offered for subscription or
purchase. Such adjustment shall become effective immediately after the opening
of business on the day following the Record Date fixed for determination of
stockholders entitled to receive such rights or warrants. To the extent that
shares of Common Stock are not delivered after the expiration or termination of
such rights or warrants, the Conversion Price shall be readjusted to the
Conversion Price which would then be in effect had the adjustments made upon the
issuance of such rights or warrants been made on the basis of delivery of only
the number of shares of Common Stock actually delivered. In the event that such
rights or warrants are not so issued, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such date
fixed for the determination of stockholders entitled to receive such rights or
warrants had not been fixed. In determining whether any rights or warrants
entitle the holders to subscribe for or purchase shares of Common Stock at less
than such Current Market Price, and in determining the aggregate offering price
of such shares of Common Stock, there shall be taken into account any
consideration received for such rights or warrants, the value of such
consideration, if other than cash, to be determined by the Board of Directors.
Section 8.5.3 In case outstanding shares of Common Stock shall
be subdivided into a greater number of shares of Common Stock, the Conversion
Price in effect at the opening of business on the day following the day upon
which such subdivision becomes effective shall be proportionately reduced, and
conversely, in case outstanding shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the Conversion Price in effect at the
opening of business on the day following the day upon which such combination
becomes effective shall be proportionately increased, such reduction or
increase,
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<PAGE> 25
as the case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or combination
becomes effective.
Section 8.5.4 In case the Company shall, by dividend or
otherwise, distribute to all holders of its Common Stock shares of any class of
capital stock of the Company (other than any dividends or distributions to which
Section 8.5.1 applies) or evidences of its indebtedness or assets (including
securities, but excluding any rights or warrants referred to in Section 8.5.2,
and excluding any dividend or distribution (x) in connection with the
liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, (y) exclusively in cash or (z) referred to in Section 8.5.1 (any of
the foregoing hereinafter in this Section 8.5.4 called the "Securities")), then,
in each such case, the Conversion Price shall be reduced so that the same shall
be equal to the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the Record Date (as defined in
Section 8.5.7) with respect to such distribution by a fraction of which the
numerator shall be the Current Market Price (determined as provided in Section
8.5.7) on such date less the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a resolution
of such board) on such date of the portion of the Securities so distributed
applicable to one share of Common Stock and the denominator shall be such
Current Market Price, such reduction to become effective immediately prior to
the opening of business on the day following the Record Date; provided, however,
that in the event the then fair market value (as so determined) of the portion
of the Securities so distributed applicable to one share of Common Stock is
equal to or greater than the Current Market Price on the Record Date, in lieu of
the foregoing adjustment, adequate provision shall be made so that each holder
of Series C Preferred Stock shall have the right to receive upon conversion the
amount of Securities such holder would have received had such holder converted
each Series C Preferred Stock on such date. In the event that such dividend or
distribution is not so paid or made, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such
dividend or distribution had not been declared. If the Board of Directors
determines the fair market value of any distribution for purposes of this
Section 8.5.4 by reference to the actual or when issued trading market for any
securities comprising all or part of such distribution, it must in doing so
consider the prices in such market over the same period used in computing the
Current Market Price pursuant to Section 8.5.7 to the extent possible.
Notwithstanding the foregoing provisions of this Section 8.5.4,
no adjustment shall be made hereunder for any distribution of Securities if the
Company makes proper provision so that each holder of Series C Preferred Stock
who converts such Series C
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<PAGE> 26
Preferred Stock after the date fixed for determination of stockholders entitled
to receive such distribution shall be entitled to receive upon such conversion,
in addition to the shares of Common Stock issuable upon such conversion, the
amount and kind of Securities that such holder would have been entitled to
receive if such holder had, immediately prior to such determination date,
converted such Series C Preferred Stock into Common Stock; provided that, with
respect to any Securities that are convertible, exchangeable or exercisable, the
foregoing provision shall only apply to the extent (and so long as) the
Securities receivable upon conversion of such Series C Preferred Stock would be
convertible, exchangeable or exercisable, as applicable, without any loss of
rights or privileges for a period of at least 60 days following conversion of
such Series C Preferred Stock.
Rights or warrants distributed by the Company to all holders of
Common Stock entitling the holders thereof to subscribe for or purchase shares
of the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a specified
event or events ("Trigger Event"): (i) are deemed to be transferred with such
shares of Common Stock, (ii) are not exercisable and (iii) are also issued in
respect of future issuances of Common Stock, shall not be deemed distributed for
purposes of this Section 8.5.4 (and no adjustment to the Conversion Price under
Section 8.5.4 will be required) until the occurrence of the earliest Trigger
Event. In addition, in the event of any distribution of rights or warrants, or
any Trigger Event with respect thereto, that shall have resulted in an
adjustment to the Conversion Price under this Section 8.5.4, (1) in the case of
any such rights or warrants which shall all have been redeemed or repurchased
without exercise by any holders thereof, the Conversion Price shall be
readjusted upon such final redemption or repurchase to give effect to such
distribution or Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received by
a holder of Common Stock with respect to such rights or warrants (assuming such
holder had retained such rights or warrants), made to all holders of Common
Stock as of the date of such redemption or repurchase, and (2) in the case of
such rights or warrants all of which shall have expired or been terminated
without exercise by any holder thereof, the Conversion Price shall be readjusted
as if such issuance had not occurred.
For purposes of this Section 8.5.4 and Sections 8.5.1 and 8.5.2,
any dividend or distribution to which this Section 8.5.4 is applicable that also
includes shares of Common Stock, or rights or warrants to subscribe for or
purchase shares of Common Stock (or both), shall be deemed instead to be (1) a
dividend or distribution of the evidences of indebtedness, assets or shares of
capital stock other than such shares of Common Stock or rights
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<PAGE> 27
or warrants (and any Conversion Price reduction required by this Section 8.5.4
with respect to such dividend or distribution shall then be made) immediately
followed by (2) a dividend or distribution of such shares of Common Stock or
such rights or warrants (and any further Conversion Price reduction required by
Sections 8.5.1 and 8.5.2 with respect to such dividend or distribution shall
then be made, except (A) the Record Date of such dividend or distribution shall
be substituted as "the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution" and "the date fixed for such
determination" within the meaning of Sections 8.5.1 and 8.5.2 and (B) any shares
of Common Stock included in such dividend or distribution shall not be deemed
"outstanding at the close of business on the date fixed for such determination"
within the meaning of Section 8.5.1).
Section 8.5.5 In case the Company shall, by dividend or
otherwise, distribute to all holders of its Common Stock cash (excluding any
cash that is distributed upon a merger or consolidation to which Section 8.6
applies or as part of a distribution referred to in Section 8.5.4) in an
aggregate amount that, combined together with (1) the aggregate amount of any
other such distributions to all holders of its Common Stock made exclusively in
cash within the twelve (12) months preceding the date of payment of such
distribution, and in respect of which no adjustment pursuant to this Section
8.5.5 has been made, and (2) the aggregate of any cash plus the fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a resolution of such board) of consideration payable
in respect of any tender offer, by the Company or any of its subsidiaries for
all or any portion of the Common Stock concluded within the twelve (12) months
preceding the date of payment of such distribution, and in respect of which no
adjustment pursuant to Section 8.5.6 has been made, exceeds 20.0% of the product
of the Current Market Price (determined as provided in Section 8.5.7) on the
Record Date with respect to such distribution times the number of shares of
Common Stock outstanding on such date, then, and in each such case, immediately
after the close of business on such date, unless the Company elects to reserve
such cash for distribution to the holders of the Series C Preferred Stock upon
the conversion of the Series C Preferred Stock so that any such holder
converting Series C Preferred Stock will receive upon such conversion, in
addition to the shares of Common Stock to which such holder is entitled, the
amount of cash which such holder would have received if such holder had,
immediately prior to the Record Date for such distribution of cash, converted
its Series C Preferred Stock into Common Stock, the Conversion Price shall be
reduced so that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the close of business on such
date by a fraction (i) the numerator of which shall be equal to the Current
Market Price on the Record Date
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<PAGE> 28
less an amount equal to the quotient of (x) the excess of such combined amount
over such 20.0% and (y) the number of shares of Common Stock outstanding on the
Record Date and (ii) the denominator of which shall be equal to the Current
Market Price on such date; provided, however, that in the event the portion of
the cash so distributed applicable to one share of Common Stock is equal to or
greater than the Current Market Price of the Common Stock on the Record Date, in
lieu of the foregoing adjustment, adequate provision shall be made so that each
Series C Preferred Stock shareholder shall have the right to receive upon
conversion the amount of cash such holder would have received had such holder
converted each share of Series C Preferred Stock on the Record Date. In the
event that such dividend or distribution is not so paid or made, the Conversion
Price shall again be adjusted to be the Conversion Price which would then be in
effect if such dividend or distribution had not been declared.
Section 8.5.6 In case a tender offer made by the Company or any
of its subsidiaries for all or any portion of the Common Stock shall expire and
such tender offer (as amended upon the expiration thereof) shall require the
payment to stockholders (based on the acceptance (up to any maximum specified in
the terms of the tender offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined by the Board
of Directors, whose determination shall be conclusive and described in a
resolution of such board) that combined together with (1) the aggregate of the
cash plus the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a resolution of such board),
as of the expiration of such tender offer, of consideration payable in respect
of any other tender offer, by the Company or any of its subsidiaries for all or
any portion of the Common Stock expiring within the twelve (12) months preceding
the expiration of such tender offer, and in respect of which no adjustment
pursuant to this Section 8.5.6 has been made, and (2) the aggregate amount of
any distributions to all holders of the Company's Common Stock made exclusively
in cash within twelve (12) months preceding the expiration of such tender offer,
and in respect of which no adjustment pursuant to Section 8.5.5 has been made,
exceeds 20.0% of the product of the Current Market Price (determined as provided
in Section 8.5.7) as of the last time (the "Expiration Time") tenders could have
been made pursuant to such tender offer (as it may be amended) times the number
of shares of Common Stock outstanding (including any tendered shares) on the
Expiration Time, then, and in each such case, immediately prior to the opening
of business on the day after the date of the Expiration Time, the Conversion
Price shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to close of
business on the date of the Expiration Time by a fraction of which the numerator
shall be the number of shares of
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<PAGE> 29
Common Stock outstanding (including any tendered shares) on the Expiration Time
multiplied by the Current Market Price of the Common Stock on the Trading Day
next succeeding the Expiration Time and the denominator shall be the sum of (x)
the fair market value (determined as aforesaid) of the aggregate consideration
payable to stockholders based on the acceptance (up to any maximum specified in
the terms of the tender offer) of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased shares") and (y) the product of the
number of shares of Common Stock outstanding (less any Purchased Shares) on the
Expiration Time and the Current Market Price of the Common Stock on the Trading
Day next succeeding the Expiration Time, such reduction to become effective
immediately prior to the opening of business on the day following the Expiration
Time. In the event that the Company is obligated to purchase shares pursuant to
any such tender offer, but the Company is permanently prevented by applicable
law from effecting any such purchases or all such purchases are rescinded, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such tender offer had not been made.
Section 8.5.7 For purposes of this section 8.5, the following
terms shall have the meaning indicated:
(1) "Closing Price" with respect to any securities on any day
shall mean the closing sale price regular way on such day or, in case no such
sale takes place on such day, the average of the reported closing bid and asked
prices, regular way, in each case on the New York Stock Exchange, or, if such
security is not listed or admitted to trading on such Exchange, on the principal
national security exchange or quotation system on which such security is quoted
or listed or admitted to trading, or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system, the average of
the closing bid and asked prices of such security on the over-the-counter market
on the day in question as reported by the National Quotation Bureau
Incorporated, or a similar generally accepted reporting service, or if not so
available, in such manner as furnished by any New York Stock Exchange member
firm selected from time to time by the Board of Directors for that purpose, or a
price determined in good faith by the Board of Directors, whose determination
shall be conclusive and described in a resolution of such board.
(2) "Current Market Price" shall mean the average of the daily
Closing Prices per share of Common Stock for the ten consecutive Trading Days
immediately prior to the date in question; provided, however, that (1) if the
"ex" date (as hereinafter defined) for any event (other than the issuance or
distribution or Change of Control requiring such computation) that requires an
adjustment to the Conversion Price pursuant to
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<PAGE> 30
Section 8.5.1, 8.5.2, 8.5.3, 8.5.4, 8.5.5 or 8.5.6 occurs during such ten
consecutive Trading Days, the Closing Price for each Trading Day prior to the
"ex" date for such other event shall be adjusted by multiplying such Closing
Price by the same fraction by which the Conversion Price is so required to be
adjusted as a result of such other event, (2) if the "ex" date for any event
(other than the issuance, distribution or Change of Control requiring such
computation) that requires an adjustment to the Conversion Price pursuant to
Section 8.5.1, 8.5.2, 8.5.3, 8.5.4, 8.5.5 or 8.5.6 occurs on or after the "ex"
date for the issuance or distribution requiring such computation and prior to
the day in question, the Closing Price for each Trading Day on and after the
"ex" date for such other event shall be adjusted by multiplying such Closing
Price by the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event and (3) if the "ex" date
for the issuance, distribution or Change of Control requiring such computation
is prior to the day in question, after taking into account any adjustment
required pursuant to clause (1) or (2) of this proviso, the Closing Price for
each Trading Day on or after such "ex" date shall be adjusted by adding thereto
the amount of any cash and the fair market value (as determined by the Board of
Directors in a manner consistent with any determination of such value for
purposes of Section 8.5.4 or 8.5.6, whose determination shall be conclusive and
described in a resolution of such board) of the evidences of indebtedness,
shares of capital stock or assets being distributed applicable to one share of
Common Stock as of the close of business on the day before such "ex" date. For
purposes of any computation under Section 8.5.6, the Current Market Price of the
Common Stock on any date shall be deemed to be the average of the daily Closing
Prices per share of Common Stock for such day and the next two succeeding
Trading Days; provided, however, that if the "ex" date for any event (other than
the tender or exchange offer requiring such computation) that requires an
adjustment to the Conversion Price pursuant to Section 8.5.1, 8.5.2, 8.5.3,
8.5.4, 8.5.5 or 8.5.6 occurs on or after the Expiration Time for the tender or
exchange offer requiring such computation and prior to the day in question, the
Closing Price for each Trading Day on and after the "ex" date for such other
event shall be adjusted by multiplying such Closing Price by the reciprocal of
the fraction by which the Conversion Price is so required to be adjusted as a
result of such other event. For purposes of this paragraph, the term "ex" date,
(1) when used with respect to any issuance or distribution, means the first date
on which the Common Stock trades regular way in the relevant exchange or in the
relevant market from which the Closing Price was obtained without the right to
receive such issuance or distribution, (2) when used with respect to any
subdivision or combination of shares of Common Stock, means the first date on
which the Common Stock trades regular way on such exchange or in such market
after the time at which such subdivision or combination becomes effective and
(3) when used
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<PAGE> 31
with respect to any tender or exchange offer means the first date on which the
Common Stock trades regular way on such exchange or in such market after the
expiration of such offer. Notwithstanding the foregoing, whenever successive
adjustments to the Conversion Price are called for pursuant to this Section 8.5,
such adjustments shall be made to the Current Market Price as may be necessary
or appropriate to effectuate the intent of this Section 8.5 and to avoid unjust
or inequitable results as determined in good faith by the Board of Directors.
(3) "fair market value" shall mean the amount which a willing
buyer would pay a willing seller in an arm's-length transaction.
(4) "Record Date" shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date fixed for
determination of stockholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).
(5) "Trading Day" shall mean (x) if the applicable security is
listed or admitted for trading on the New York Stock Exchange or another
national security exchange, a day on which the New York Stock Exchange or that
other national security exchange is open for business or (y) if the applicable
security is quoted on the Nasdaq National Market, a day on which trades may be
made thereon or (z) if the applicable security is not so listed, admitted for
trading or quoted, any day other than a Saturday or Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
Section 8.5.8 The Company may make such reductions in the
Conversion Price, in addition to those required by Sections 8.5.1, 8.5.2, 8.5.3,
8.5.4, 8.5.5 and 8.5.6 as the Board of Directors considers to be advisable to
avoid or diminish any income tax to holders of Common Stock or rights to
purchase Common Stock resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income tax
purposes. To the extent permitted by applicable law, the Company from time to
time may reduce the Conversion Price by any amount for any period of time if the
period is at least 20 days, the reduction is irrevocable during the period and
the Board of Directors shall have made a determination that such reduction would
be in the best interests of the Company, which determination shall be conclusive
and described in a resolution of such board. Whenever the Conversion Price is
reduced pursuant to the preceding sentence, the Company shall mail to all
holders
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<PAGE> 32
of record of the Series C Preferred Stock a notice of the reduction at least 15
days prior to the date the reduced Conversion Price takes effect, and such
notice shall state the reduced Conversion Price and the period it will be in
effect.
Section 8.5.9 No adjustment in the Conversion Price shall be
required unless such adjustment would require an increase or decrease of at
least 1% in such price; provided, however, that any adjustments which by reason
of this Section 8.5.9 are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 8 shall be made by the Company and shall be made to the nearest cent or
to the nearest one one-hundredth of a share, as the case may be.
No adjustment need be made for rights to purchase Common Stock
pursuant to a Company plan for reinvestment of dividends or interest.
No adjustment need be made for a change in the par value, or to
or from no par value, of the Common Stock.
To the extent the Series C Preferred Stock becomes convertible
into cash, assets, property or securities (other than Common Stock of the
Company), no adjustment need be made thereafter as to the cash, assets, property
or such securities (except as such securities may otherwise by their terms
provide), and interest shall not accrue on such cash.
Section 8.5.10 In any case in which this Section 8.5 provides
that an adjustment shall become effective immediately after a Record Date for an
event, the Company may defer until the occurrence of such event (i) issuing to
the holder of any Series C Preferred Stock converted after such Record Date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such event
over and above the Common Stock issuable upon such conversion before giving
effect to such adjustment and (ii) paying to such holder any amount in cash in
lieu of any fraction pursuant to Section 8.3.
Section 8.6 Effect of Reclassification, Consolidation, Merger or
Sale. If any of the following events occur, namely (i) any reclassification or
change of outstanding shares of Common Stock (other than a change in par value,
or to or from no par value, as a result of a subdivision or combination), (ii)
any consolidation, merger, or combination of the Company with another
corporation as a result of which holders of Common Stock shall be entitled to
receive stock, securities or other property or assets (including cash) with
respect to or in exchange for such Common Stock or (iii) any sale or conveyance
of the properties and assets of the Company as, or substantially as, an entirety
to any
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<PAGE> 33
other corporation as a result of which holders of Common Stock shall be entitled
to receive stock, securities or other property or assets (including cash) with
respect to or in exchange for such Common Stock, (each of the foregoing being
referred to as a "Transaction"), each share of Series C Preferred Stock then
outstanding shall thereafter be convertible into the kind and amount of shares
of stock and other securities or property or assets (including cash) receivable
upon such reclassification, change, consolidation, merger, combination, sale or
conveyance by a holder of a number of shares of Common Stock issuable upon
conversion of such share of Series C Preferred Stock (assuming, for such
purposes, a sufficient number of authorized shares of Common Stock available to
convert all such Series C Preferred Stock) immediately prior to such
reclassification, change, consolidation, merger, combination, sale or
conveyance, assuming each holder of Common Stock did not exercise his rights of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such reclassification, change, consolidation, merger,
combination, sale or conveyance (provided that, if the kind or amount of
securities, cash or other property receivable upon such reclassification,
change, consolidation, merger, combination, sale or conveyance is not the same
for each share of Common Stock in respect of which such rights of election shall
not have been exercised ("non-electing share"), then for the purposes of this
Section 8.6 the kind and amount of securities, cash or other property receivable
upon such reclassification, change, consolidation, merger, combination, sale or
conveyance for each non-electing share shall be deemed to be the kind and amount
so receivable per share by a plurality of the non-electing shares).
Notwithstanding anything contained herein to the contrary, the
Company will not effect any Transaction unless, prior to the consummation
thereof, (i) the Surviving Person thereof shall assume, by written instrument
mailed to each holder of shares of Series C Preferred Stock if such shares are
held by 50 or fewer holders or groups of affiliated holders or to each Transfer
Agent for the shares of Series C Preferred Stock if such shares are held by a
greater number of holders, the obligation to deliver to such holder such stock,
securities or other property or assets (including cash) with respect to or in
exchange for Common Stock to which, in accordance with the foregoing provisions,
such holder is entitled and (ii) proper provision is made to ensure that the
holders of shares of Series C Preferred Stock will be entitled to receive the
benefits afforded by Section 8.6. Such written instrument should provide for
adjustments which shall be as nearly as equivalent as may be practicable to the
adjustments provided for in this Section 8.6.
The above provisions of this Section shall similarly apply to
successive reclassifications, changes, consolidations, mergers, combinations,
sales and conveyances.
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<PAGE> 34
If this Section 8.6 applies to any event or occurrence, Section
8.5 shall not apply.
Section 8.7 Transfer or Similar Taxes on Shares Issued. The issue
of stock certificates on conversions of Series C Preferred Stock shall be made
without charge to the converting holder of Series C Preferred Stock for any
transfer or similar tax in respect of the issue thereof. The Company shall not,
however, be required to pay any such tax which may be payable in respect of any
transfer involved in the issue and delivery of stock in any name other than that
of the holder of any Series C Preferred Stock converted, and the Company shall
not be required to issue or deliver any such stock certificate unless and until
the person or persons requesting the issue thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
Section 8.8 Reservation of Shares; Shares to Be Fully Paid;
Listing of Common Stock. The Company shall provide, free from preemptive rights,
out of its authorized but unissued shares or shares held in treasury, sufficient
shares to provide for the conversion of the Series C Preferred Stock from time
to time as such Series C Preferred Stock is presented for conversion.
Before taking any action which would cause an adjustment reducing
the Conversion Price below the then par value, if any, of the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock, the Company will
take all corporate action which may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue shares of such Common
Stock at such adjusted Conversion Price.
The Company covenants that all shares of Common Stock which may
be issued upon conversion of Series C Preferred Stock will, upon issue, be fully
paid and nonassessable by the Company and free from all transfer or similar
taxes as described in Section 8.7, liens and charges with respect to the issue
thereof.
The Company further covenants that, if at any time the Common
Stock shall be listed on the New York Stock Exchange or any other national
securities exchange, the Company will, if permitted by the rules of such
exchange, list and keep listed, so long as the Common Stock shall be so listed
on such exchange, all Common Stock issuable upon conversion of the Series C
Preferred Stock.
Section 8.9 Notice to Stockholders Prior to Certain
Actions. In case:
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<PAGE> 35
(a) the Company makes any distribution or dividend that
would require an adjustment in the Conversion Price pursuant to
Section 8.5; or
(b) the Company takes any action that would result in a
Transaction as defined in Section 8.6; or
(c) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
the Company shall cause to be mailed to each holder of Series C Preferred Stock
at his address appearing on the books of the Company, as promptly as possible
but in any event at least 15 days prior to the applicable date hereinafter
specified, a notice stating (x) the date on which a record date is to be taken
for the purpose of such dividend, distribution, rights or warrants, or, if a
record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants are to
be determined or (y) the date on which such reclassification, change,
consolidation, merger, sale, conveyance, transfer, dissolution, liquidation or
winding-up is expected to become effective or occur and the date as of which it
is expected that holders of record of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon such
reclassification, change consolidation, merger, sale, conveyance, transfer,
dissolution, liquidation or winding-up. Failure to give such notice, or any
defect therein, shall not affect the legality or validity of such dividend,
distribution, reclassification, change, consolidation, merger, sale, conveyance,
transfer, dissolution, liquidation or winding-up. Neither the failure to give
such notice nor any defect therein shall affect the legality or validity of the
proceedings referenced in clauses (a) through (c) of this Section 8.9.
Section 9. Reports as to Adjustments. Upon any adjustment of
the Conversion Price then in effect and any increase or decrease in the number
of shares of Common Stock issuable upon the operation of the conversion set
forth in Section 8, then, and in each such case, the Company shall promptly
deliver to the Transfer Agent for the Series C Preferred Stock and the Transfer
Agent for the Common Stock, a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Company setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment was calculated
and specifying the Conversion Price then in effect following such adjustment and
the increased or decreased number of shares issuable upon the conversion set
forth in Section 8. The Company shall also promptly after the making of such
adjustment give written notice to the registered holders of the Series C
Preferred Stock at the address of each holder as
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<PAGE> 36
shown on the books of the Company maintained by the Transfer Agent thereof,
which notice shall state the Conversion Price then in effect, as adjusted, and
the increased or decreased number of shares issuable upon the exercise of the
right of conversion granted by Section 8, and shall set forth in reasonable
detail the method of calculation of each with a brief statement of the facts
requiring such adjustment. Where appropriate, such notice to holders of the
Series C Preferred Stock may be given in advance and included as part of the
notice required under the provisions of Section 8.9.
Section 10. Certain Covenants. Any registered holder of Series
C Preferred Stock may proceed to protect and enforce its rights and the rights
of such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designation or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
Section 11. Definitions. For the purposes of this
Certificate of Designation of Series C Preferred Stock, the
following terms shall have the meanings indicated:
"Acquisition Prices" shall mean the volume weighted average of
the per share prices paid by a specified person or group in acquiring Voting
Stock.
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act.
"Business Day" shall mean a day, other than a Saturday, a
Sunday or other day on which the banking institutions in the State of New York,
the State of California or the Commonwealth of Massachusetts are authorized or
obligated by law or executive order to close or a day which is declared a
national or New York, California or Massachusetts state holiday.
"Change in Control" shall mean an event or series of events
pursuant to which (i) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) acquires beneficial ownership (as
determined in accordance with Rule 13d-3 under the Exchange Act), directly or
indirectly, of more than 50% of the total Voting Stock of the Company at an
Acquisition Price less than the Conversion Price then in effect with respect to
the Series C Preferred Stock and (ii) holders of Common Stock receive
consideration which is not all or substantially all common stock that is (or
upon consummation of or immediately following such event or events will be)
listed on a United States national securities exchange or approved for quotation
on the Nasdaq National Market or any similar United States system of automated
dissemination of quotations of
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<PAGE> 37
securities prices; provided, however, that any such person or group shall not be
deemed to be the beneficial owner of, or to beneficially own, any Voting Stock
tendered into a tender offer until such tendered Voting Stock is accepted for
purchase under the tender offer.
Commission: The term "Commission" shall mean the Securities
and Exchange Commission.
Company: The term "Company" shall mean SoftKey International
Inc., a Delaware corporation.
Conversion Price: The term "Conversion Price" shall have the
meaning specified in Section 8.4.
Exchange Act: The term "Exchange Act" means the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
Junior Stock: The term "Junior Stock" shall have the meaning
set forth in Section 3.2.
Parity Stock: The term "Parity Stock" shall have the meaning
set forth in Section 3.4.5.
person: The terms "person" shall mean a corporation, an
association, a partnership, an individual, a joint venture, a joint stock
company, a trust, an unincorporated organization or a government or an agency or
a political subdivision thereof.
subsidiary: The term "subsidiary" of any specified person
shall mean (i) a corporation a majority of whose capital stock with voting power
under ordinary circumstances, to elect directors is at the time directly or
indirectly owned by such person or (ii) any other person (other than a
corporation) in which such person or a subsidiary or subsidiaries of such person
directly or indirectly, at the date of determination thereof, has at least
majority ownership.
Surviving Person shall mean the continuing or surviving person
of a merger, consolidation or other corporate combination, the person receiving
a transfer of all or substantially all of the properties and assets of the
Company, or the person consolidating with or merging into the Company in a
merger, consolidation or other combination in which the Company is the
continuing or surviving person, but in connection with which Series C Preferred
Stock or Common Stock of the Company is exchanged, converted or reinstated into
the securities of any other person or cash or any other property.
Voting Stock: The term "Voting Stock" means stock of
the class or classes pursuant to which the holders thereof have
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<PAGE> 38
the general voting power under ordinary circumstances to elect at least a
majority of the board of directors, managers or trustees of a corporation
(irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency).
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<PAGE> 39
IN WITNESS WHEREOF, SoftKey International Inc. has caused this
Certificate to be signed by Neal S. Winneg, its Vice President and Secretary, on
this 22nd day of December, 1995.
SOFTKEY INTERNATIONAL INC.
By /S/ Neal S. Winneg
---------------------------------------
Name: Neal S. Winneg
Title: Vice President and Secretary
- 31 -
<PAGE> 1
EXHIBIT 10.7
SOFTKEY INTERNATIONAL INC.
1994 NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 5, 1996)
1. Purpose. The purpose of this Plan is to encourage stock
ownership by non-employee directors of SoftKey International Inc. (the
"Corporation") in order to increase their identification with the interests of
the Corporation's stockholders, and to encourage such directors to remain in the
service of the Corporation and put forth maximum efforts for the success of the
business.
2. Definitions. For purposes of this Plan:
(a) "Agreement" means the written agreement between
the Corporation and an Optionee evidencing the grant of an Option, if
applicable, and setting forth the terms and conditions thereof.
(b) "Board" means the Board of Directors of the
Corporation.
(c) "Cause" means (i) the willful neglect or refusal
to perform the Optionee's duties or responsibilities, or the willful taking of
actions which materially impair the Optionee's ability to perform the Optionee's
duties or responsibilities which continues after being brought to the attention
of the Optionee (other than any such failure resulting from the Optionee's
incapacity due to physical or mental illness) or (ii) the willful act or failure
to act by the Optionee which is materially injurious to the Corporation and
which is brought to the attention of the Optionee in writing not more than
thirty days from the date of its discovery by the Corporation or the Board.
(d) "Code" means the Internal Revenue Code of 1986,
as amended.
(e) "Committee" means a committee appointed by the
Board to administer this Plan and to perform the functions set forth herein.
(f) "Corporation" means SoftKey International Inc., a
Delaware corporation.
(g) "Disability" means the inability, due to illness
or injury, to engage in any gainful occupation for which the individual is
suited by education, training or experience, which condition continues for at
least six (6) months.
<PAGE> 2
(h) "Eligible Person" means any Non-Employee Director
not designated for nomination, election or appointment to the Board by, or by
agreement or arrangement with, any person or entity (other than the
Corporation).
(i) "Exchange Act" means the Securities Exchange Act
of 1934, as amended.
(j) "Exercise Price" means the price per share at
which the Optionee may exercise his right to purchase Shares pursuant to an
Option.
(k) "Fair Market Value" means the fair market value
of the Shares as determined by the Committee in its sole discretion; provided,
however, that (i) if the Shares are admitted to trading on a national securities
exchange, Fair Market Value on any date shall be the low bid price reported for
the Shares on such exchange on such date or on the last date preceding such date
on which a sale was reported, (ii) if the Shares are admitted to quotation on
the Nasdaq Stock Market ("Nasdaq") and have been designated as a Nasdaq National
Market ("NNM") security, Fair Market Value on any date shall be the low bid
price reported for the Shares on such system on such date or on the last day
preceding such date on which a sale was reported, or (iii) if the Shares are
admitted to quotation on Nasdaq or other comparable quotation system and have
not been designated an NNM security, Fair Market Value on any date shall be the
low bid price of the Shares reported on such system on such date.
(l) "Non-Employee Director" means a member of the
Board who is not an employee of the Corporation or of any affiliate (as such
term is defined in Rule 12b-2 promulgated under the Exchange Act) of the
Corporation.
(m) "Option" means a stock option granted pursuant to
this Plan.
(n) "Optionee" means a person to whom an Option has
been
granted under this Plan.
(o) "Plan" means this SoftKey International Inc. 1994
Non- Employee Director Stock Option Plan, as amended from time to time.
(p) "Securities Act" means the Securities Act of
1933, as amended.
(q) "Share" or "Shares" means a share or shares of
the common stock, par value $.01 per share, of the Corporation (including any
new, additional or different stock or securities resulting from a change in
capitalization described in Section 7 hereof).
2
<PAGE> 3
3. Administration.
(a) This Plan shall be administered by the Committee.
If there shall be no Committee, then the Board shall carry out all functions
specified in this Plan to be carried out by the Committee. The Committee shall
hold meetings at such times as may be necessary for the proper administration of
this Plan. The Committee shall keep minutes of its meetings. A majority of the
Committee shall constitute a quorum and a majority of a quorum may authorize any
action. Any decision reduced to writing and signed by a majority of the members
of the Committee shall be fully effective as if it had been made at a meeting
duly held. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to this Plan or
the Options, and all members of the Committee shall be fully indemnified by the
Corporation with respect to any such action, determination or interpretation.
The Corporation will pay all expenses incurred in the administration of this
Plan.
(b) The Committee shall have the powers vested in it
by the terms of this Plan. The Committee shall, subject to and not inconsistent
with the express provisions of this Plan, have the authority to administer this
Plan and to exercise all the powers and authorities either specifically granted
to it under this Plan or necessary or advisable in the administration of this
Plan, including, without limitation, the authority to prescribe, amend and
rescind rules and regulations relating to this Plan and to make all other
determinations deemed necessary or advisable for the administration of this
Plan.
4. Stock Subject to Plan.
(a) The maximum number of Shares that may be issued
or transferred pursuant to Options is 500,000 (or the number and kind of shares
of stock or other securities which are substituted for those Shares or to which
those Shares are adjusted pursuant to Section 7 hereof), and the Corporation
shall reserve for the purposes of this Plan, out of its authorized but unissued
Shares or out of Shares held in the Corporation's treasury, or partly out of
each, such number of Shares as shall be determined by the Board.
(b) Whenever any outstanding Option or portion
thereof expires, is cancelled or is otherwise terminated (other than by exercise
of the Option), the Shares allocable to the unexercised portion of such Option
may again be the subject of Options hereunder.
5. Eligibility. Each Eligible Person shall be granted Options
in accordance with Section 6 hereof.
6. Options. Each Option granted pursuant to this Plan shall be
evidenced by an Agreement, which shall comply with and be subject to the
following terms and conditions, which may not be altered except by mutual
agreement and only to
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<PAGE> 4
the extent consistent with this Plan:
(a) Exercise Price. The Exercise Price for Shares
under each Option shall be equal to one hundred percent (100%) of the Fair
Market Value of the Shares subject to such Option on the date of grant thereof.
The Exercise Price is subject to adjustment as provided in Section 7 hereof.
(b) Grants To New Eligible Persons. Each Eligible
Person who, after the Effective Date, is elected or appointed to the Board for
the first time, will, at the time such director is elected or appointed and duly
qualified, be granted automatically, without action by the Committee, an Option
to purchase 20,000 Shares (the "Initial Grant"). Except as set forth in Section
8 of this Plan, each Initial Grant shall vest and become exercisable with
respect to an incremental one-eighth of the Shares subject thereto at the end of
each of the eight consecutive three-month periods commencing on the date of
grant.
(c) Continuation Grants. On November 28, 1995 (the
"First Continuation Grant Date"), each Eligible Person as of such date shall be
granted automatically, without any action by the Committee, an Option to
purchase 100,000 Shares (the "First Continuation Grant"). On February 5, 1996
(the "Second Continuation Grant Date"), each Eligible Person as of such date
shall be granted automatically, without any action by the Committee, an Option
to purchase 26,666 Shares (the "Second Continuation Grant"). Except as set forth
in Section 8 of this Plan: each of the First Continuation Grant and the Second
Continuation Grant shall vest and become exercisable with respect to an
incremental one-twelfth of the Shares subject thereto at the end of each of the
twelve consecutive three-month periods commencing on, respectively, the First
Continuation Grant Date and the Second Continuation Grant Date.
(d) Type of Option. Each Option granted under this
Plan shall be a stock option which is not an "incentive stock option" within the
meaning of Section 422 of the Code.
(e) Transferability. No Option granted hereunder
shall be transferable by an Optionee otherwise than by will or the laws of
descent and distribution, except that an Optionee may transfer any Option (i) to
one or more members of his or her immediate family (which, for purposes of this
Plan, shall mean any spouse, child or grandchild of the Optionee), (ii) to one
or more trusts for the benefit of any such family member or members or (iii) to
one or more partnerships in which any such family member or members is or are
the only partners, but only if the Agreement with respect to the Option
expressly permits such a transfer and the Optionee receives no consideration for
the transfer. Unless an Option is transferred in accordance with the immediately
preceding sentence, an Option may be exercised during the lifetime of an
Optionee only by the Optionee or such Optionee's guardian or legal
representative. The terms of a transferred Option shall be binding upon the
beneficiaries, executors,
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<PAGE> 5
administrators, heirs, successors and the permitted transferees of the Optionee.
The Committee and the Optionee may amend any Agreement to expressly permit
transfers to be made in accordance with this Section 6(e).
(f) Term Of Options. An Option shall expire on the
tenth anniversary of the date of grant of such Option; provided, however, that
the exercise period shall be subject to earlier termination as provided in
Section 6(g) hereof.
(g) Termination. In the event that an Optionee ceases
to be in service to the Corporation as a director, any Options held by such
Optionee shall terminate as follows:
(i) If the Optionee ceases to be in service
as a director of the Corporation due to such Optionee's death or
Disability, the Option (to the extent exercisable at the time of such
cessation of service) shall be exercisable by the Optionee's legal
representative, estate or other person to whom the Optionee's rights
are transferred by will or by laws of descent or distribution (in the
event of death) or by the Optionee (in the event of Disability) for a
period of one (1) year following such cessation of service (but in no
event after the expiration date of the Option) and shall thereafter
terminate.
(ii) The Optionee shall, if the Optionee's
cessation of service as a director is by the Corporation for Cause,
have a period of time to be determined by the Committee not to exceed
ten (10) days from the date of such cessation of service (but in no
event after the expiration date of the Option), to exercise the Option
(to the extent exercisable at the time of the Optionee's cessation of
service), and the Option shall thereafter terminate.
(iii) The Optionee shall, if the Optionee
ceases to be in service as a director for any other reason, be entitled
to exercise the Option (to the extent exercisable at the time of the
Optionee's cessation of service) for a period of ninety (90) days
following such cessation service (but in no event after the expiration
date of the Option) and shall thereafter terminate; provided, however,
that if the Optionee dies within such ninety-day period, the Option (to
the extent exercisable at the time of the Optionee's cessation of
service) shall be exercisable by the Optionee's legal representative,
estate or other person to whom the Optionee's rights are transferred by
will or by laws of descent or distribution for a period of one (1) year
following the Optionee's death (but in no event after the expiration
date of the Option) and shall thereafter terminate.
(h) Method of Exercise. The exercise of an Option
shall be made only by a written notice delivered in person or by mail to the
Secretary of the Corporation at the Corporation's principal executive office,
specifying the number of Shares to be purchased and accompanied by payment
therefor and otherwise in
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<PAGE> 6
accordance with the Agreement pursuant to which the Option was granted.
(i) Method of Payment. The Exercise Price for any
Shares purchased pursuant to the exercise of an Option shall be paid in full
upon such exercise in United States dollars and may be paid: (a) in cash or by
check, or any combination of the foregoing, equal in amount to the Exercise
Price multiplied by the number of Shares with respect to which the Option is
being so exercised; or (b) in the discretion of the Committee and upon such
terms and conditions as the Committee shall approve, by transfer of Shares
having an aggregate value (calculated as set forth below) equal to the Exercise
Price multiplied by the number of Shares with respect to which the Option is
being so exercised; or (c) in the discretion of the Committee and upon such
terms and conditions as the Committee shall approve, by delivery of a personal
recourse note from the Optionee bearing interest payable not less than annually
at no less than 100% of the lowest applicable federal rate, as defined in
Section 1274(d) of the Code, with the principal amount of the note equal to the
Exercise Price multiplied by the number of Shares with respect to which the
Option is being exercised; or (d) in the discretion of the Committee, and upon
such terms and conditions as the Committee shall approve, by any combination of
the foregoing, equal in amount to the Exercise Price multiplied by the number of
Shares with respect to which the Option is being so exercised. Any Shares
transferred to the Corporation as payment of the Exercise Price shall be valued
at their Fair Market Value on the day preceding the date of exercise of such
Option.
(j) Rights of Optionees. No Optionee shall be deemed
for any purpose to be the owner of any Shares subject to any Option unless and
until (i) the Option shall have been exercised pursuant to the terms thereof,
(ii) the Corporation shall have issued and delivered the Shares to the Optionee
and (iii) the Optionee's name shall have been entered as a stockholder of record
on the books of the Corporation. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such Shares.
7. Adjustments Upon Changes in Capitalization. Upon the
occurrence of any of the following events, an Optionee's rights with respect to
Options granted hereunder shall be adjusted as hereinafter provided or as the
Committee shall conclusively determine.
(a) Stock Dividends and Stock Splits. If the Shares
shall be subdivided or combined into a greater or smaller number of Shares or if
the Corporation shall issue any Shares as a stock dividend on its outstanding
Shares, the number of Shares deliverable upon the exercise of Options shall be
appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the Exercise Price to reflect such subdivision,
combination or stock dividend.
(b) Reorganization. In case the Corporation is merged
or consolidated with another corporation and the Corporation is not the
surviving
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<PAGE> 7
corporation, or in case the property or stock of the Corporation is acquired by
any other corporation, or in case of a recapitalization or reorganization of the
Corporation, the Board, or the board of directors of any corporation assuming
the obligations of the Corporation hereunder, shall, as to outstanding Options,
either (i) make appropriate provision for the protection of any such outstanding
Options by the substitution on an equitable basis of appropriate Shares of the
Corporation, or of the merged, consolidated or otherwise reorganized corporation
which will be issuable in respect of the Shares, provided only that the excess
of the aggregate Fair Market Value of the Shares subject to the Options
immediately after such substitution over the purchase price thereof is not more
than the excess of the aggregate Fair Market Value of the Shares subject to such
Options immediately before such substitution over the purchase price thereof, or
(ii) upon written notice to the Optionees, provide that all unexercised Options
must be exercised within a specified number of days of the date of such notice
or they will be terminated. In either such case the Board may, in its
discretion, advance the lapse of any waiting or installment periods and exercise
dates.
(c) Dissolution or Liquidation. In the event of a
proposed dissolution or liquidation of the Corporation, each Option will
terminate immediately prior to the consummation of such proposed action or at
such other time and subject to such other conditions as shall be determined by
the Board.
(d) Issuances of Securities. Except as expressly
provided herein, no issuance by the Corporation of shares of stock of any class,
or securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Corporation.
(e) Fractional shares. No fractional shares shall be
issued under this Plan and the Optionee shall receive from the Corporation cash
in lieu of fractional shares.
(f) Adjustments. Upon the happening of any of the
foregoing events described in subsections (a) or (b) of this Section 7, the
class and aggregate number of Shares set forth in Section 4 hereof that are
subject to issuance upon exercise of Options which previously have been or
subsequently may be granted under this Plan shall also be appropriately adjusted
to reflect the events described in such subsections. The Committee shall
determine the specific adjustments to be made under this Section 7 and, subject
to Section 3, its determination shall be conclusive.
If any person or entity owning restricted Shares obtained by
exercise of an Option made hereunder receives shares or securities or cash in
connection with a corporate transaction described in subsections (a) or (b) of
this Section 7 as a result of owning such restricted Shares, such shares or
securities or cash shall be subject to all of
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<PAGE> 8
the conditions and restrictions applicable to the restricted Shares in respect
of which such shares or securities or cash were issued, unless otherwise
determined by the Committee.
8. Change in Control.
(a) Definition of "Change in Control." A "Change in
Control" means the occurrence of any of the following:
(i) any "person," as such term is used in
Sections 13(d) and 14(d) of the Exchange Act (other than the
Corporation, any subsidiary of the Corporation, any affiliate of the
Corporation or a Corporation employee benefit plan, including any
trustee of such plan acting as trustee) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation (or a successor to the
Corporation) representing 35% or more of the combined voting power of
the then outstanding securities of the Corporation or such successor;
or
(ii) at any time that the Corporation has
registered shares under the Exchange Act, at least 40% of the directors
of the Corporation constitute persons who were not at the time of their
first election to the Board candidates proposed by a majority of the
Board in office prior to the time of such first election; or
(iii) the dissolution of the Corporation or
liquidation of more than 50% in value of the Corporation or a sale of
assets involving 50% or more in value of the assets of the Corporation;
any merger or reorganization of the Corporation whether or not another
entity is the survivor; a transaction pursuant to which the holders, as
a group, of all of the shares of the Corporation outstanding prior to
the transaction hold, as a group, less than 50% of the combined voting
power of the Corporation or any successor company outstanding after the
transaction; or any other event which the Board determines, in its
discretion, would materially alter the structure of the Corporation or
its ownership.
(b) Impact of Event. Except as expressly provided in
any Agreement, in the event of a "Change in Control," the following provisions
shall apply:
(i) any Options outstanding as of the date
such Change in Control is determined to have occurred and not then
exercisable and vested shall become fully exercisable and vested; and
(ii) at the election of the Board, either
(A) the value (net of any exercise price and required tax withholdings)
of all outstanding Options shall be cashed out on the basis of the
"Change in Control Price," as defined in paragraph (c) of this Section
8, as of the date such Change in Control is deter-
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<PAGE> 9
mined to have occurred or (B) in the case of a sale of assets, merger,
reorganization or other transaction referred to in paragraph (a) (iii)
of this Section 8, provision shall be made to treat all outstanding
Options in either of the ways provided for in Section 7(b).
Notwithstanding the foregoing, in the event that anything in this Section 8(b)
is determined to prevent any transaction referred to in paragraph (a)(iii) of
this Section 8 from being accounted for as a pooling of interests and the Board
desires that the transaction be accounted for as a pooling of interests, then
the value of outstanding Options shall not be cashed out in accordance with
paragraph (ii)(A) of this Section 8(b) and provision shall be made to treat
outstanding Options as provided for in Section 7(b)(i).
(c) Change in Control Price. For purposes of this
Section 8, "Change in Control Price" means the highest price per Share paid in
any transaction reported on any established stock exchange, national market
system or other established market for the Shares or paid or offered in any bona
fide transaction related to a potential or actual Change in Control of the
Company at any time during the preceding 60-day period.
9. Termination and Amendment of the Plan. This Plan shall
terminate on the day preceding the tenth anniversary of its effective date,
except with respect to Options outstanding on such date, and no Option may be
granted thereafter. The Board may sooner terminate this Plan at any time or
amend this Plan at any time, and from time to time. Except as provided in
Section 7 hereof, rights and obligations under any Option granted before any
amendment of this Plan shall not be adversely altered or impaired by such
amendment, except with the prior written consent of the Optionee.
10. Non-Exclusivity of Plan. The adoption of this Plan by the
Board shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under this Plan, and such arrangements may be either applicable generally or
only in specific cases.
11. Limitation of Liability. As illustrative of the
limitations of liability of the Corporation, but not intended to be exhaustive
thereof, nothing in this Plan shall be construed to:
(a) give any Non-Employee Director any right to be
granted an Option other than in accordance with the terms of this Plan;
(b) give any person any rights whatsoever with
respect to Shares except as specifically provided in this Plan; or
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<PAGE> 10
(c) confer upon any person any right to continue in
service as a director of the Corporation or interfere in any way with the right
of the Corporation to terminate such service.
12. Regulations and Other Approvals; Governing Law.
(a) This Plan and the rights of all persons claiming
hereunder shall be construed and determined in accordance with the laws of the
State of Delaware without giving effect to the choice of law principles thereof,
except to the extent that such law is preempted by federal law.
(b) The obligation of the Corporation to sell or
deliver Shares with respect to Options granted under this Plan shall be subject
to all applicable laws, rules and regulations, including all applicable federal
and state securities laws, and the obtaining of all such approvals by
governmental agencies as may be deemed necessary or appropriate by the
Committee.
(c) Subject to Section 8, the Board may make such
changes as may be necessary or appropriate to comply with the rules and
regulations of any government authority.
(d) Each Option is subject to the requirement that,
if at any time the Committee determines, in its absolute discretion, that the
listing, registration or qualification of Shares issuable pursuant to this Plan
is required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
the issuance of Shares, no Options shall be granted or Shares issued, in whole
or in part, unless listing, registration, qualification, consent or approval has
been effected or obtained free of any conditions that are not acceptable to the
Committee.
(e) In the event that the disposition of Shares
acquired pursuant to this Plan is not covered by a then current registration
statement under the Securities Act and is not otherwise exempt from such
registration, such Shares shall be restricted against transfer to the extent
required by the Securities Act or regulations promulgated thereunder.
13. Miscellaneous.
(a) Withholding of Taxes. The Corporation shall have
the right to deduct from any payment of cash to any Optionee an amount equal to
the federal, state and local income taxes and other amounts required by law to
be withheld with respect to any Option. Notwithstanding anything to the contrary
contained herein, if an Optionee is entitled to receive Shares upon exercise of
an Option, the Corporation shall have the right
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<PAGE> 11
to require such Optionee, prior to the delivery of such Shares, to pay to the
Corporation the amount of any federal, state or local income taxes and other
amounts which the Corporation is required by law to withhold.
(b) Designation of Beneficiary. Each Optionee may,
with the consent of the Committee, designate a person or persons to receive, in
the event of such Optionee's death, any Option or any amount or Shares payable
pursuant thereto, to which such Optionee would then be entitled. Such
designation will be made upon forms supplied by and delivered to the Corporation
and may be revoked or changed in writing. In the event of the death of an
Optionee and in the absence of a beneficiary validly designated under this Plan
who is living at the time of such Optionee's death, the Corporation shall
deliver such Options and/or amounts payable to the executor or administrator of
the estate of the Optionee, or if no such executor or administrator has been
appointed (to the knowledge of the Corporation), the Corporation, in its
discretion, may deliver such Options and/or amounts payable to the spouse or to
any one or more dependents or relatives of the Optionee, or if no spouse,
dependent or relative is known to the Corporation, then to such other person as
the Corporation may designate.
14. Effective Date. The effective date of this Plan shall be
April 26, 1994.
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<PAGE> 1
EXHIBIT 10.8
SOFTKEY INTERNATIONAL INC.
Form of Stock Option Agreement
1994 Non-Employee Director
Stock Option Plan
STOCK OPTION AGREEMENT ("Option Agreement"), dated as of [ ],
by and between SoftKey International Inc., a Delaware corporation (the
"Corporation"), and [ ], a non-employee director of the Corporation (the
"Optionee"). As used herein, the term "Optionee" shall refer, upon the death of
the Optionee, to the Optionee's designated beneficiary, spouse, executor,
administrators, heirs, successor, estate or any person requiring the right to
exercise the Option by reason of the death of the Optionee, as the case may be.
WHEREAS, the SoftKey International Inc. 1994 Non-Employee
Director Stock Option Plan, as amended (the "Plan") provides that the Optionee
is to be granted, on the terms and conditions set forth herein, an option (the
"Option") to purchase shares of the common stock, par value $.01 per share (the
"Shares"), of the Corporation;
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter set forth and for other good and valuable consideration, the parties
hereto agree as follows:
1. Number of Shares and Exercise Price. The Option represents
the right, on the terms and conditions set forth herein, to purchase [ ] Shares
at a price of $[ ] per share (the "Exercise Price").
2. Term of Option and Conditions of Exercise.
(a) Term of Option. Unless the Option is previously
terminated pursuant to this Option Agreement, the term of the Option and of this
Option Agreement shall commence on the date hereof (the "Date of Grant") and
terminate upon the expiration of ten (10) years from the Date of Grant. Upon the
termination of the Option, all rights of the Optionee hereunder shall cease.
(b) Conditions of Exercise. The Option shall vest and
become exercisable with respect to an incremental one-twelfth of the Shares
subject thereto at the end of each of the twelve consecutive three-month periods
commencing on the Date of Grant; provided, however, that the Option may be
exercised only to purchase whole Shares, and in no case may a fraction of a
Share be purchased. The right of the Optionee to purchase any or all full Shares
with respect to which this Option has become exercisable as herein provided may
be exercised in whole or in part or from time to time, prior to the tenth
anniversary of the Date of Grant; provided, however, that the Option may not be
exercised at any one time as to fewer than 100 Shares unless the remaining
number of Shares as to which the Option is exercisable prior to such exercise is
less than 100 and such exercise is for all such remaining shares.
<PAGE> 2
3. Rights Upon Termination of Service.
(a) Except as provided in this Section 3, the Option
may not be exercised after the Optionee has ceased to be in service as a
director of the Corporation.
(b) If the Optionee's cessation of service as a
director is due to such Optionee's death or Disability, the entire outstanding
Option shall be exercisable by the Optionee's legal representative, estate or
other person to whom the Optionee's rights are transferred by will or by laws of
descent or distribution (in the event of death) or by the Optionee (in the event
of Disability) for a period of one (1) year following such cessation of service
(but in no event after the expiration date of the Option), and shall thereafter
terminate.
(c) The Optionee shall, if the Optionee's cessation
of service as a director is by the Corporation for Cause, have a period of time
to be determined by the Committee not to exceed ten (10) days from the date of
such cessation of service (but in no event after the expiration date of the
Option), to exercise the Option (to the extent exercisable at the time of the
Optionee's cessation of service), and the Option shall thereafter terminate.
(d) The Optionee shall, if the Optionee ceases to be
in service as a director for any other reason, be entitled to exercise the
Option (to the extent exercisable at the time of the Optionee's cessation of
service) for a period of ninety (90) days following such cessation of service,
and shall thereafter terminate, provided, however, that if the Optionee dies
within such ninety-day period, the Option (to the extent exercisable at the time
of the Optionee's cessation of service) shall be exercisable by the Optionee's
legal representative, estate or other person to whom the Optionee's rights are
transferred by will or by laws of descent or distribution for a period of one
(1) year following the Optionee's death (but in no event after the expiration
date of the Option), and shall thereafter terminate.
(e) Notwithstanding anything to the contrary in this
Section 3, the Option shall not be exercisable later than ten years from the
Date of Grant.
4. Transferability of Option. The Option and this Option
Agreement shall be assignable or transferable as follows:
(a) by will or by the laws of descent and
distribution; or
(b) to one or more of the following: (i) any spouse,
child or grandchild of the Optionee, (ii) any trust for the benefit of any such
family member or members or (iii) any partnership in which any such family
member or members is or are the only partners, but only if the Optionee receives
no consideration for the transfer. Unless the Option is transferred in
accordance with the immediately preceding sentence, the Option may be exercised,
during the lifetime of the Optionee, only by the Optionee or by the Optionee's
legal representative.
5. Exercise of Option. The Option shall be exercised in the
following manner: the Optionee, or the person(s) having the right to exercise
the Option upon the death or Disability of the Optionee, shall deliver to the
Secretary of the
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<PAGE> 3
Corporation written notice specifying the number of Shares which the Optionee
elects to purchase, together with either:
(a) cash or check in an amount equal to the Exercise
Price multiplied by the number of Shares with respect to which this Option is
being exercised; or
(b) in the discretion of the Committee and upon such
terms and conditions as the Committee shall approve, the number of Shares having
a Fair Market Value (as of the day preceding the date of exercise) equal to the
Exercise Price multiplied by the number of Shares with respect to which this
Option is being exercised; or
(c) in the discretion of the Committee and upon such
terms and conditions as the Committee shall approve, a personal recourse note
from the Optionee bearing interest payable not less than annually at no less
than 100% of the lowest applicable federal rate, as defined in Section 1274(d)
of the Code, with the principal amount of the note equal to the Exercise Price
multiplied by the number of Shares with respect to which this Option is being
exercised; or
(d) in the discretion of the Committee and upon such
terms and conditions as the Committee shall approve, any combination of cash or
check, Shares or Optionee's personal recourse note, the aggregate value of which
equals the Exercise Price multiplied by the number of Shares with respect to
which this Option is being exercised.
In such event, the Corporation shall issue or cause to be issued, and deliver as
promptly as possible to the Optionee, consistent with the terms and provisions
hereof, certificates representing the appropriate number of Shares which
certificates shall be registered in the name of the Optionee.
6. Notices. Any notice required or permitted under this Option
Agreement shall be duly given upon delivery, if delivered by hand, or five (5)
days after posting if sent by certified mail, return receipt requested (i) if to
the Optionee, either at the Optionee's address as last known by the Corporation
or such other address as last known by the Corporation or such other address as
the Optionee may designate in writing to the Corporation; or (ii) if to the
Corporation, at the Corporation's address.
7. Failure to Enforce Not a Waiver. The failure of the
Corporation to enforce at any time any provision of this Option Agreement shall
in no way be construed to be a waiver of such provision or of any other
provision hereof.
8. Incorporation of Plan. The Plan is hereby incorporated
herein by reference and made a part hereof, and the Option and this Option
Agreement are subject to all terms and conditions of the Plan. If there is a
difference between the provisions of this Option Agreement and the Plan, the
provisions of the Plan shall govern. Capitalized terms used and not defined
herein shall have the meanings ascribed to such terms in the Plan.
9. General Restrictions. This award of an Option shall be
subject to the requirement that, if at any time the Committee shall determine
that (i) the listing
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<PAGE> 4
registration or qualification of the Shares subject or related thereto upon any
securities exchange or under any state or federal law, or (ii) the consent or
approval of any government regulatory body, or (iii) an agreement by the
recipient of an award with respect to the disposition of Shares, is necessary or
desirable as a condition of, or in connection with, the granting of such award
or the issue or purchase of Shares thereunder, such award or issue or purchase
of Shares thereunder, as the case may be, may not be consummated in whole or in
part unless such listing, registration, qualification, consent, approval or
agreement shall have been effected or obtained free of any conditions not
acceptable to the Committee.
10. Rights of a Stockholder. The Optionee shall have no rights
as a stockholder with respect to any Shares unless and until certificates for
such Shares are issued to Optionee.
11. Rights to Terminate. Nothing in the Plan or in this Option
Agreement shall confer upon the Optionee the right to continue in the service as
a director of the Corporation or affect any right which the Corporation may have
to terminate such service.
12. Withholding. Whenever the Corporation proposes or is
required to issue or transfer Shares under this Option Agreement, the
Corporation shall have the right to require the Optionee or the Optionee's legal
representative to remit to the Corporation an amount sufficient to satisfy any
federal, state or local tax withholding requirements prior to the delivery of
any certificate or certificates for such Shares. Whenever under this Option
Agreement or the Plan payments are to be made to the Optionee in cash, such
payments shall be net of an amount sufficient to satisfy any federal, state or
local tax withholding requirements.
13. Effect of Certain Changes. The Option granted under this
Option Agreement is subject to the adjustments specified in Section 7 and
Section 8 of the Plan.
14. Provision of Documentation to Optionee. By signing this
Option Agreement the Optionee acknowledges receipt of a copy of this Option
Agreement and a copy of the Plan.
15. Governing Law. This Option Agreement shall be governed by
and construed according to the laws of the State of Delaware, without regard to
the conflicts of law rules thereof.
16. Amendment and Termination. The Committee may amend or
terminate the Plan at any time; provided, however, that the amendment or
termination of the Plan shall not, without the consent of the Optionee or his or
her legal representative, adversely alter or impair the Optionee's rights under
this Option Agreement.
17. Non-Qualified Stock Option. It is the intent of the
parties hereto that the Option not be classified as an Incentive Stock Option
(as defined in the Plan) and that any ambiguities in construction be interpreted
in order to effectuate that intent.
18. Successors. Subject to the provisions of Section 4 hereof,
each and all of the provisions of this Option Agreement shall be binding upon
and inure to
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<PAGE> 5
the benefit of the Corporation and the Optionee and, as applicable, their
respective estates, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this
Option Agreement as of the date and year set forth first above.
SoftKey International Inc.
By:
-------------------------
Michael Perik
Chief Executive Officer
Address: One Atheneum Street
Cambridge, MA 02142
Optionee's Acceptance
The undersigned hereby accepts and agrees to all the terms and
provisions of the foregoing Option Agreement and to all of the terms and
provisions of the SoftKey International Inc. 1994 Non-Employee Director Stock
Option Plan, as amended, incorporated herein by reference.
Date
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[ ]
Address:
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5
<PAGE> 1
EXHIBIT 10.13
THIRD AMENDMENT TO LOAN DOCUMENTS
---------------------------------
AMENDMENT dated as of December 22, 1995 by and among SOFTKEY INC., a
Minnesota corporation ("SOFTKEY") and the Acquisition Subsidiaries as defined
below (each a "BORROWER" and collectively the "BORROWERS") and FLEET BANK OF
MASSACHUSETTS, N.A., a national banking association (together with its
successors, the "BANK").
PRELIMINARY STATEMENT
1. The Bank and SoftKey entered into a Credit Agreement dated as of
September 30, 1994, as previously amended by a letter amendment dated as of
December 5, 1994 and by a Second Amendment to Loan Documents dated as of May 17,
1995 (the "CREDIT AGREEMENT"), pursuant to which the Bank agreed to make
Revolving Line of Credit Loans to SoftKey up to a maximum aggregate amount of
$20,000,000. Unless otherwise defined herein, capitalized terms used herein
shall have the same respective meanings as set forth in the Credit Agreement.
2. The Bank and the Borrowers wish to amend certain provisions of the
Credit Agreement and the other Loan Documents on the terms set forth herein,
including without limitation, (a) adding the Acquisition Subsidiaries as
co-borrowers with SoftKey; (b) increasing the Line of Credit Commitment to
$50,000,000; (c) eliminating the Borrowing Base requirement; and (d) amending
certain financial covenants in accordance with the terms hereof.
NOW THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Amendments to Credit Agreement.
------------------------------
1.1 Section 1.1 of the Credit Agreement is hereby amended by deleting
the amount "$20,000,000" appearing in the sixth line thereof and substituting
the amount "$50,000,000."
1.2 Section 1.4 is hereby deleted in its entirety and there is hereby
substituted in place thereof the following:
"1.4 CLEAN UP PERIOD. There shall be a period of ten (10)
consecutive days during each fiscal quarter during which no Extensions
of Credit, excluding Letters of Credit then outstanding pursuant to
Section 1.7, shall be outstanding."
1.3 Section 1.8 is hereby deleted in its entirety and there is hereby
substituted in place thereof the following:
"1.8 FACILITY FEE. The Borrowers shall pay to the Bank
quarterly in arrears on the first day of each quarter (unless such day
in not a Banking Day, in which event the payment shall be due on the
next succeeding Banking Day) a Facility Fee, equal to the Applicable
Percentage of the unutilized portion of the Line of Credit Commitment.
For purposes hereof, the Applicable Percentage shall be (a) one-quarter
percent (1/4%) in the event the Leverage Ratio is less than 1.0 to 1
and (b) three-eighths percent (3/8%) in the event the Leverage Ratio is
equal to or greater than 1.0 to 1. PROVIDED, HOWEVER, that for the
fiscal quarter ending January 6, 1996, the Borrowers shall pay a fee
equal to the sum of (a) one-half percent (1/2%)
<PAGE> 2
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of the unutilized portion of the $20,000,000 Line of Credit Commitment
in effect for the portion of such quarter ending on December 21, 1995,
and (b) three-eighths percent (3/8%) of the unutilized portion of the
$50,000,000 Line of Credit Commitment in effect for the portion of such
quarter beginning on December 22, 1995 through the end of such quarter.
Given the fact that on each Facility Fee payment date, the Leverage
Ratio will not be known for the immediately preceding fiscal quarter
(the "Measuring Quarter") because of the unavailability of financial
statements for such quarter, the Facility Fee payment will be
provisionally calculated and paid by the Borrowers based on the
Leverage Ratio for the next preceding fiscal quarter. A subsequent
adjustment will then be made to the next Facility Fee payment based
upon the actual Leverage Ratio for the Measuring Quarter. Upon notice
of termination by the Borrowers of the Line of Credit Commitment
pursuant to Section 1.6 above, any portion of the Facility Fee that has
accrued but is unpaid shall be immediately payable, together with any
previously unpaid adjustment payment.
1.4 Section 5.17 is hereby deleted in its entirety and there is hereby
inserted in place thereof the following:
"5.17 ACQUISITION SUBSIDIARIES." Each of the Acquisition
Subsidiaries is a recently formed corporation with minimal assets and
with the Guarantor as the sole stockholder of all the outstanding
shares of its capital stock. Each Acquisition Subsidiary has conducted
no business operations, other than incident to the acquisitions
identified on SCHEDULE A hereto, and will be utilized for the sole
purpose of pursuing the respective acquisition identified on SCHEDULE A
hereto."
1.5 Section 6.11 is hereby amended by inserting at the end of such
Section the following:
"SoftKey anticipates that the acquisition of The Learning Company will
close on or about December 22, 1995 and agrees to provide the Bank
written notice three (3) days prior to the closing of each of the other
Identified Acquisitions by the Acquisition Subsidiaries set forth on
SCHEDULE A hereto. At the closing of any such Identified Acquisition,
SoftKey shall cause the surviving entity to execute and deliver such
documentation as the Bank may reasonably request (including without
limitation assumption agreements, amendments or restatements of the
Loan Documents and Security Instruments, UCC financing statements ,
copyright mortgages, collateral assignments of patents and trademarks
and such other documents, certificates and legal opinions as the Bank
may reasonably request) in order to confirm that such surviving
corporation is a co-borrower hereunder and that it has granted to the
Bank a first priority lien in all its assets, subject only to Permitted
Liens."
1.6 Section 7.3 is hereby amended by relettering the last two
parenthetical clauses in such Section from (c) and (d) to (d) and (e) and is
further amended by inserting at the end of such Section the following:
"The term "PERMITTED ACQUISITION" shall also include the Identified
Acquisitions PROVIDED THAT: (i) the conditions set forth in clauses (b)
and (c) of the foregoing sentence are satisfied in connection with each
such acquisition; (ii) each such acquisition is closed upon the terms
and conditions described in SCHEDULE A, with any changes or
modifications thereto subject to the prior written consent of the Bank;
(iii) the acquisition of MECC (as defined below) shall close prior to
or no later than June 30, 1996; and (iv) the cash consideration paid
for The Learning Company shall not exceed $450,000,000, PROVIDED
FURTHER that upon the closing of the sale by the Guarantor of its 5
1/2% Convertible Exchangeable Notes to the Tribune
<PAGE> 3
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Company in a minimum aggregate principal amount of $150,000,000 as
further described in SCHEDULE A (the "Tribune Notes"), such maximum
cash consideration may be increased to $600,000,000."
1.7 Section 7.5 is hereby amended by inserting at the end of
subsection (b) the following: "and the Tribune Notes, provided that SoftKey
agrees that the Guarantor will not issue the Tribune Notes except in connection
with the acquisition of The Learning Company."
1.8 Section 7.12 through 7.15 of the Credit are hereby restated in
their entirety as follows:
"7.12 QUICK RATIO. The Borrowers will not permit the Quick
Ratio at the end of any fiscal quarter, commencing with the fiscal
quarter ending April 6, 1996 to be less than 1.25 to 1.
7.13 MINIMUM PROFITABILITY. The Borrowers will not permit
Adjusted Net Income to be less than: (a) $5,000,000 at the end of the
fiscal quarters ending January 6, 1996 and April 6, 1996 and
$10,000,000 at the end of the fiscal quarter ending July 6, 1996 and
each fiscal quarter thereafter; and (b) $25,000,000 at the end of the
fiscal year ending January 6, 1996; and (c) $50,000,000 at the end of
the fiscal year ending January 4, 1997; PROVIDED, HOWEVER, if closing
of the acquisitions of The Learning Company and MECC on a so-called
purchase accounting basis (the "EDUCATIONAL ACQUISITION EVENT") occurs
prior to the end of the quarter ending April 6, 1996, the minimum
quarterly profitability requirement shall be increased by an additional
$5,000,000 to a total of $10,000,000, PROVIDED FURTHER, HOWEVER, if the
Educational Acquisition Event occurs in the midst of such fiscal
quarter, the respective increases in minimum profitability described
above shall be adjusted proportionately based upon the days remaining
in such fiscal quarter.
7.14 LEVERAGE RATIO. The Borrowers will not permit the
Leverage Ratio to be greater than 3.0 to 1: (a) in the case of the
fiscal quarters ending April 6, 1996, July 6, 1996 and October 5, 1996,
for each such quarter annualized to a full year; and (b) in the case of
the fiscal quarter ending January 4, 1997 and each fiscal quarter
thereafter, for the four fiscal quarters ending with such quarter,
PROVIDED HOWEVER, upon the closing of the sale of the Tribune Notes,
the maximum Leverage Ratio shall be increased to 3.5 to 1 for the
fiscal quarter ending April 6, 1996 and to 3.25 to 1 for the fiscal
quarter ending July 6, 1996, but shall otherwise remain unchanged,
PROVIDED, FURTHER, HOWEVER, in the event that the Tribune Notes are
during such fiscal quarter exchanged for preferred stock (unless the
Borrowers furnish evidence reasonably satisfactory to the Bank in the
form of a legal opinion, accountants' letter or otherwise to the effect
that such preferred stock would not be treated as stockholders' equity
but as indebtedness under GAAP or applicable law) in accordance with
the terms thereof, the maximum Leverage Ratio shall be immediately
readjusted to 3.0 to 1.
7.15 INTEREST COVERAGE RATIO The Borrowers will not permit the
Interest Coverage Ratio to be less than 3.5 to 1:(a) in the case of the
fiscal quarters ending April 6, 1996, July 6, 1996 and October 5, 1996,
for each such fiscal quarter annualized to a full fiscal year; and (b)
in the case of the quarter ending January 4, 1997 and each fiscal
quarter thereafter, for the four fiscal quarters ending with such
quarter."
1.9 Section 9 is hereby amended by deleting the following definitions:
"Borrowing Base" and "Current Ratio."
<PAGE> 4
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1.10 Section 9 is hereby further amended by restating the definitions
of "Adjusted Net Income" and "Security Instruments" as follows:
"ADJUSTED NET INCOME" for any period shall mean Net Income for
such period PLUS (i) the sum of amortization for such period; PLUS (ii)
the sum of non-cash acquisition expenses for such period, PLUS (iii)
one-time expenses for transaction costs and restructuring charges
associated with the Identified Acquisitions up to a maximum aggregate
amount of $100,000,000.
"SECURITY INSTRUMENTS" means, collectively, the Security
Agreement, the Pledge Agreement, the Subsidiary Security Agreements and
each other instrument or agreement that purports to secure the
Obligations of the Borrowers to the Bank.
1.11 Section 9 is hereby further amended by inserting the following
additional definitions in alphabetical order:
"ACQUISITION SUBSIDIARIES" means the following wholly-owned
Subsidiaries of SoftKey: (a) Schoolco. Inc., a Minnesota corporation;
(b) Cubsco I Inc., a California corporation; (c) Cubsco II Inc., a
Delaware corporation and (d) Kidsco Inc. a Delaware corporation.
"BORROWERS" shall mean SoftKey and each of the Acquisition
Subsidiaries.
"FUNDED INDEBTEDNESS" shall mean, as to any Person, all
Indebtedness, without duplication, (a) for borrowed money, evidenced by a bond,
debenture, note, credit agreement or other similar evidence of an obligation to
repay borrowed funds; (b) for the deferred purchase price of property or
services (other than trade payables and other routine accruals), (c) in respect
of Capital Lease Obligations; or (d) in respect of Guaranties of Indebtedness of
another Person of the types described in clauses (a) through (c).
"IDENTIFIED ACQUISITIONS" shall mean the acquisition of
Minnesota Educational Computing Corporation ("MECC"), The Learning
Company, Compton's NewMedia, Inc., and Compton's Learning Company on
the terms set forth in attached SCHEDULE A.
"INTEREST COVERAGE RATIO" shall mean the ratio of Operating
Cash Flow to Interest Expense.
"INTEREST EXPENSE" means, for any period, the sum (determined
without duplication) of the aggregate amount of interest accrued during
such period on Indebtedness of the Borrowers and their Subsidiaries (on
a consolidated basis).
"EDUCATIONAL ACQUISITION EVENT" shall mean the closing of the
acquisition of The Learning Company by Kidsco., Inc. and MECC by
Schoolco Inc. upon the terms set forth in attached SCHEDULE A.
"LEVERAGE RATIO" means, for any period, the ratio of Funded
Indebtedness less cash in excess of $25 million to Operating Cash Flow.
"OPERATING CASH FLOW" means, for any period, Net Income, PLUS
the sum of depreciation, amortization and other non-cash charges for
such period, PLUS Interest Expense for such period, PLUS one-time
expenses for transaction costs and restructuring charges associated
with the Identified Acquisitions up to a maximum aggregate amount of
$100,000,000, PLUS income tax expense for such period, MINUS, software
development expenses capitalized during such period.
<PAGE> 5
-5-
"QUICK RATIO" means, at any time, all cash and accounts
receivable of the Borrowers and their Subsidiaries at such time net of
all reserves as reflected on the financial statements furnished to the
Bank pursuant to Section 6.4, on a consolidated basis, determined in
accordance with GAAP, divided by the aggregate of all Current
Liabilities at such time.
"TRIBUNE NOTES" shall have the meaning set forth in Section
7.3.
1.12 There is hereby inserted immediately following Section 10.13 the
following new sections:
"10.14 JOINT AND SEVERAL OBLIGATIONS. Each and every
representation, warranty, covenant and agreement made by any of the
Borrowers, hereunder and under the other Loan Documents, shall be joint
and several, whether or not so expressed, and such obligations of the
Borrowers shall not be subject to any counterclaim, setoff, recoupment
or defense based upon any claim any Borrowers may have against the
other Borrowers or the Bank, and shall remain in full force and effect
without regard to, and shall not be released, discharged or in any way
affected by, any circumstance or condition affecting the other
Borrowers, including without limitation (a) any waiver, consent,
extension, renewal, indulgence or other action or inaction under or in
respect of this Agreement or any other Loan Document, or any agreement
or other document related thereto with respect to the other Borrowers,
or any exercise or nonexercise of any right, remedy, power or privilege
under or in respect of any such agreement or instrument with respect to
the other Borrowers, or the failure to give notice of any of the
foregoing to the other Borrowers; (b) any invalidity or
unenforceability, in whole or in part, of any such agreement or
instrument with respect to the other Borrowers; (c) any failure on the
part of the other Borrowers for any reason to perform or comply with
any term or any such agreement or instrument; (d) any bankruptcy,
insolvency, reorganization, arrangement, readjustment, composition,
liquidation or similar proceeding with respect to the other Borrowers
or their properties or creditors; or (e) any other occurrence
whatsoever whether similar or dissimilar to the foregoing, with respect
to the other Borrowers. Each Borrower hereby waives any requirement of
diligence or promptness on the part of the Bank in the enforcement of
the rights of the Bank hereunder or under any other Loan Document with
respect to the obligations of itself or of the other Borrowers. Without
limiting the foregoing, any failure to make any demand upon, or to
pursuant or exhaust any rights or remedies against, a Borrower, or any
delay with respect thereto, shall not affect the obligations of the
other Borrowers hereunder or under any other Loan Document.
"10.15 SOFTKEY AS AGENT FOR BORROWERS. Each Acquisition
Subsidiary hereby appoints SoftKey as its agent with respect to the
receiving and giving of any notices, requests, instructions, reports,
schedules, revisions, financial statements or any other written or oral
communications hereunder or under the Loan Documents. SoftKey shall
keep complete, correct and accurate records of all Revolving Line of
Credit Loans and the application of proceeds thereof, all Letters of
Credit and all payments in respect of Revolving Line of Credit Loans
and other amounts due hereunder. SoftKey shall determine the allocation
of proceeds of Revolving Credit Loans among the Borrowers. The Bank is
hereby entitled to rely on any communications given or transmitted by
SoftKey as if such communication were given or transmitted by each and
every Borrower; PROVIDED, HOWEVER, that any communication given or
transmitted by any Borrower other than SoftKey shall be binding with
respect to such Borrower. Any communication given or transmitted by the
Bank to SoftKey shall be deemed given and transmitted to each and every
Borrower."
<PAGE> 6
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1.13 The form of Compliance Certificate attached to the Credit
Agreement as Exhibit D is hereby restated in the form of Exhibit D hereto."
Section 2. Conditions of Effectiveness.
---------------------------
This Amendment shall be deemed effective as of December 22, 1995 (the
"EFFECTIVE DATE"), provided that the Bank shall have received the following on
or before December 22, 1995:
(a) two copies of this Amendment executed by each Borrower
with the accompanying Consent duly executed by the Guarantor;
(b) an amended and restated promissory note in the form
enclosed duly executed by each Borrower (the "AMENDED NOTE");
(c) a pledge agreement in the form enclosed herewith (the
"PLEDGE AGREEMENT") duly executed by SoftKey, together with stock certificates
representing all the outstanding shares of capital stock of the Acquisition
Subsidiaries and stock powers executed in blank;
(d) security agreements executed in the form enclosed herewith
(the "SUBSIDIARY SECURITY AGREEMENTS") duly executed by each of the Acquisition
Subsidiaries pursuant to which each such Subsidiary grants to the Bank a
security interest in all its assets together with such UCC financing statements
as the Bank may request duly executed by such Acquisition Subsidiary;
(e) an amendment to the Guaranty signed by SoftKey
International Inc. (the "GUARANTY AMENDMENT");
(f) a certificate of the Secretary or Assistant Secretary of
SoftKey as to resolutions of the Board of Directors of SoftKey authorizing this
Amendment and the Amended Note;
(g) a certificate of the Secretary or Assistant Secretary of
each Acquisition Subsidiary certifying as to (i) the charter and by-laws of each
such corporation; (ii) resolutions of the Board of Directors of such entity
authorizing the transactions and the execution of the documents contemplated
hereby; and (iii) the incumbency and specimen signatures of the officers of such
corporation authorize to execute and deliver this Amendment, the Subsidiary
Security Agreement and any other Loan Documents;
(h) a Certificate of the Secretary or Assistant Secretary of
the Guarantor as to resolutions of the Board of Directors of the Guarantor
authorizing the Guaranty Amendment; and
(i) a solvency certificate in the form enclosed duly executed
by the chief financial officer of SoftKey.
With respect to the closing fee of $150,000 associated with the transactions
contemplated hereby, the Bank acknowledges receipt of the first installment of
such fee in the amount of $75,000 and SoftKey hereby authorizes the Bank to
debit its regular depositary account with the Bank in the amount of $75,000 in
payment of the second and final installments of such fee. In the event the Bank
and the Borrowers close a larger credit facility during 1996, the Bank agrees
that $50,000 of the foregoing closing fee shall be applied to closing,
arrangement with syndication fees associated with such larger facility.
In addition to the foregoing, the Borrowers agree to execute and
deliver to the Bank on or before February 28, 1996, an amendment to the Pledge
Agreement providing for the pledge of all the outstanding shares of capital
stock of SoftKey, together with stock certificates representing such shares and
stock powers duly executed in blank.
<PAGE> 7
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Section 3. SPECIAL COVENANTS AND REPRESENTATIONS WITH REGARD TO THE ADDITION OF
THE ACQUISITION SUBSIDIARIES AS CO-BORROWERS.
3.1 Each Acquisition Subsidiary hereby agrees, jointly and severally
with SoftKey, to be bound by the terms and conditions of the Credit Agreement
and shall, for all purposes thereunder, be a "Borrower", as of the Effective
Date.
3.2 Each Acquisition Subsidiary, jointly and severally with SoftKey,
hereby represents, warrants and covenants to you that after giving effect to
this Amendment and to the transactions contemplated hereby:
(a) The execution, delivery and performance by each
Acquisition Subsidiary of this Amendment, the Amended Note and the
Security Instruments to which it is a party will directly and
indirectly inure to the benefit of each Acquisition Subsidiary, are in
pursuant of its business purposes as an integral part of the business
conducted and proposed to be conducted by SoftKey together with each
Acquisition Subsidiary and are reasonably necessary and convenient in
connection with the conduct of the business conducted and proposed to
be conducted by it. By virtue of the foregoing, among other things,
each Acquisition Subsidiary is receiving at least reasonably equivalent
consideration from the Bank for its obligations undertaken under this
Amendment, the Amended Note and the Security Instruments to which it is
a party.
(b) After giving effect to the transactions contemplated by
this Amendment, each Acquisition Subsidiary has, and will have access
to, adequate capital for the conduct of its business and the ability to
pay its debts from time to time incurred in connection therewith as
such debts mature.
(c) Each Acquisition Subsidiary has and, after giving effect
to the transactions contemplated hereby, will have assets having a fair
saleable value in excess of the amount required to pay its probable
liability on its existing debts as they become absolute and matured.
The foregoing representations and warranties shall constitute representations
and warranties of SoftKey and the Acquisition Subsidiaries under the Credit
Agreement. Each of representations and warranties shall survive and not be
waived by the execution and delivery of this Amendment.
Section 4. Confirmation of Representations, Absence of Default.
---------------------------------------------------
Each Borrower (including without limitation the Acquisition
Subsidiaries) hereby confirms that the representations set forth in the Loan
Documents (including without limitation those set forth in Section 6.9 of the
Credit Agreement as to use of proceeds), as amended by this Amendment are true
and correct as of the date hereof, subject to the exceptions and further
disclosures set forth in SCHEDULE A hereto. Each Borrower hereby confirms that,
except as set forth in SCHEDULE A hereto, no Event of Default has occurred and
is continuing under the Credit Agreement.
Section 5. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
5.1 Upon the Effective Date, each reference in the Credit Agreement to
"this Credit Agreement", "hereunder", "hereof", "herein", or words of like
import referring to the Credit Agreement, and each reference in the Note and
each of the other Loan Documents to "the Credit
<PAGE> 8
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Agreement", "thereunder", "thereof", "therein", or words of like import
referring to the Credit Agreement, shall mean and be a reference to the Credit
Agreement as amended hereby.
5.2 Upon the Effective Date, each reference in the Credit Agreement
and the other Loan Documents to the "Borrower" shall mean and be a reference
to the "Borrowers" or to "each Borrower" as the context may require, reflecting
the addition of the Acquisition Subsidiaries as coborrowers on a joint and
several basis under the Credit Agreement and the other Loan Documents.
5.3 Except as specifically amended above, the Credit Agreement shall
remain in full force and effect and is hereby ratified and confirmed. Except for
the original promissory note which is superseded by the Amended Note and which
will be marked "cancelled" and returned to SoftKey, each of the other Loan
Documents is in full force and effect and is hereby ratified and confirmed. Each
Borrower (and SoftKey International Inc. in consenting hereto as Guarantor by
signing below) agrees that, as of the date hereof, it has no defenses against
the obligations represented by the Credit Agreement, the Amended Note, the
Guaranty or the other Loan Documents.
5.4 The amendments set forth above in Section 1 hereof (i) do not
constitute a waiver or modification of any term, condition or covenant of the
Credit Agreement, the Amended Note, any other Loan Documents or any of the
instruments or documents referred to by the foregoing documents, other than as
expressly set forth herein, and (ii) shall not prejudice any rights which the
Bank may now or hereafter have under or in connection with the Credit Agreement,
the Amended Note, the other Loan Documents or any of the instruments or
documents referred to therein.
Section 6. Cost and Expenses.
-----------------
Each Borrower agrees, jointly and severally, to pay on demand all costs
and expenses of the Bank in connection with the preparation, reproduction,
execution and delivery of this Amendment and any other instruments and documents
to be delivered hereunder, including the reasonable fees and out-of-pocket
expenses of Sullivan & Worcester, special counsel for the Bank with respect
thereto.
Section 7. Governing Law.
-------------
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
Section 8. Counterparts.
------------
This Amendment may be signed in one or more counterparts each of which
taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be
executed under seal by their respective officers thereunto duly authorized as of
the date first above written.
SOFTKEY INC.
By: /s/ Neal S. Winneg
-------------------------------
Name: Neal S. Winneg
Title: Vice President
<PAGE> 9
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SCHOOLCO, INC.
By: /s/ Neal S. Winneg
-------------------------------
Name:
Title:
CUBSCO I INC.
By: /s/ Neal S. Winneg
-------------------------------
Name:
Title:
CUBSCO II INC.
By: /s/ Neal S. Winneg
-------------------------------
Name:
Title:
KIDSCO INC.
By: /s/ Neal S. Winneg
-------------------------------
Name:
Title:
FLEET BANK OF MASSACHUSETTS, N.A.
By: /s/ Thomas W. Davies
-------------------------------
Name: Thomas W. Davies
Title: Vice President
<PAGE> 1
EXHIBIT 10.14
FOURTH AMENDMENT TO LOAN DOCUMENTS
----------------------------------
AMENDMENT dated as of February 28, 1996 (the "AMENDMENT") by and among
SOFTKEY INC., a Minnesota corporation ("SOFTKEY"), SCHOOLCO INC., a Minnesota
corporation ("SCHOOLCO"), SOFTKEY MULTIMEDIA INC., a Massachusetts corporation
("MULTIMEDIA"), and THE LEARNING COMPANY, a Delaware corporation (each a
"BORROWER" and collectively the "BORROWERS"), FLEET BANK OF MASSACHUSETTS, N.A.,
a national banking association (together with its successors, the "BANK"), and,
exclusively for purposes of the releases from liability in Section 3 hereof,
COMPTON'S NEW MEDIA, INC., a California corporation, and COMPTON'S LEARNING
COMPANY, a Delaware corporation.
PRELIMINARY STATEMENT
1. SoftKey and its corporate affiliates SchoolCo, Kidsco Inc., a
Delaware corporation, Cubsco I Inc., a California corporation, and Cubsco II
Inc., a Delaware corporation, each a wholly-owned subsidiary of SoftKey
International Inc., a Delaware Corporation ("SOFTKEY INTERNATIONAL") (SoftKey
and such affiliates being collectively referred to herein as the "ORIGINAL
BORROWERS"), are parties with the Bank to a Credit Agreement dated as of
September 30, 1994, as previously amended by a letter amendment dated as of
December 5, 1994, a Second Amendment to Loan Documents dated as of May 17, 1995
and a Third Amendment to Loan Documents dated as of December 22, 1995 (the
"CREDIT AGREEMENT"), pursuant to which the Bank agreed to make Revolving Line of
Credit Loans to SoftKey and the other Original Borrowers up to a maximum
aggregate principal amount of $50,000,000. Unless otherwise defined herein,
capitalized terms used herein shall have the same respective meanings as set
forth in the Credit Agreement.
2. Pursuant to certain plans of reorganization and merger, Kidsco Inc.
has merged with and into The Learning Company, Cubsco I Inc. has merged with and
into Compton's New Media, Inc., and Cubsco II Inc. has merged with and into
Compton's Learning Company. As a consequence of these mergers, (A) The Learning
Company, Compton's New Media, Inc., and Compton's Learning Company are the legal
successors to Kidsco Inc., Cubsco I Inc. and Cubsco II Inc., respectively; and
(B) each of these successor corporations is a wholly-owned subsidiary of SoftKey
International.
3. Multimedia is a wholly-owned subsidiary of SoftKey International
formed for the exclusive purpose of holding title to certain intellectual
property and licensing such intellectual property to SoftKey or its corporate
affiliates.
4. The Bank, the Borrowers, Compton's New Media, Inc., and Compton's
Learning Company wish to amend certain provisions of the Credit Agreement and
the other Loan Documents on the terms set forth herein, including, without
limitation, by (A) adding Multimedia as a coBorrower with SoftKey, SchoolCo and
The Learning Company under the Credit Agreement and the other Loan Documents,
(B) deleting Compton's New Media, Inc., and Compton's Learning Company as
co-Borrowers with SoftKey, SchoolCo and the New Subsidiaries (as defined below)
under the Credit Agreement and the other Loan Documents, (C) confirming that The
Learning Company has become a co-Borrower with SoftKey, SchoolCo and Multimedia
under the Credit Agreement and the other Loan Documents and (D) making certain
arrangements regarding the holding, licensing and hypothecation of certain
intellectual property now or in the future owned by Multimedia, SoftKey or their
corporate affiliates. Multimedia and The Learning Company are collectively
referred to herein as the "NEW SUBSIDIARIES".
<PAGE> 2
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NOW THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Amendments to Credit Agreement.
------------------------------
1.1 Section 3.2 is hereby amended by changing the references in
subsection (a) to "the Borrower" to "SoftKey" and by inserting immediately
following such subsection (a) the following new subsection (b):
"(b) Each of the New Subsidiaries agrees to grant to
the Bank a security interest in, and a lien on, all right, title and
interest of such New Subsidiary in and to substantially all the assets
of such New Subsidiary and to enter into a security agreement (or
amended and restated security agreement as the case may be)
(collectively, the "NEW SUBSIDIARY SECURITY AGREEMENTS") in order to
secure payment and performance of the Borrowers' obligations to the
Bank under this Agreement, the Note and the other Loan Documents."
1.2 Section 3.2 is hereby further amended by inserting at the end
thereof the following:
"In order to secure the obligations of the Guarantor under Guaranty,
the Guarantor shall enter into an amended and restated pledge agreement
in the form previously agreed upon by the Guarantor and the Bank (the
"NEW PLEDGE AGREEMENT"), pursuant to which the Guarantor shall pledge
to the Bank all the outstanding shares of capital stock of SoftKey,
SchoolCo and the New Subsidiaries."
1.3 Section 5 is hereby amended by inserting the following new
Sections 5.18 and 5.19 after Section 5.17:
"5.18 NEW SUBSIDIARIES. Each of the New Subsidiaries is a
corporation duly organized, validly existing and in corporate good
standing under the laws of the jurisdiction under whose laws it
purports to be organized. Each of the New Subsidiaries is duly
qualified to transact business as a foreign corporation (or is in the
process of so qualifying) and is in good standing in each jurisdiction
in which the nature of the business transacted by it or the character
or location of the properties owned or leased by it requires such
qualification, except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect. Each of the New
Subsidiaries has the corporate power and authority to own its
properties and to carry on its business as now being conducted
"5.19 OPERATIONS OF SOFTKEY MULTIMEDIA INC. Multimedia has
engaged in no business or activity other than owning, holding and
maintaining Intellectual Property and licensing such Intellectual
Property, on an exclusive basis, to SoftKey or its U.S. Affiliates."
1.4 Section 6 is hereby amended by inserting the following new
Sections 6.12 and 6.13 after Section 6.11:
"6.12 Hypothecation of Intellectual Property.
--------------------------------------
(a) The Borrowers shall take all necessary action to
provide the Bank, on or before February 28, 1996, with a comprehensive
list and description of all registered copyrights and trademarks and
all patents owned by any of the Borrowers, together with information as
to relative dollar sales of the software products to which such items
of intellectual property relate. The Borrowers shall update such list
(i) annually, (ii) semi-
<PAGE> 3
-3-
annually upon request of the Bank and (iii) more frequently upon
request of the Bank if an Event of Default has occurred and is
continuing.
(b) Each Borrower shall take, on or before March 15,
1996, all necessary action, including the execution and delivery of
trademark security agreements, copyright security agreements and any
other instruments requested by the Bank (collectively, "INTELLECTUAL
PROPERTY ASSIGNMENTS"), to provide the Bank with first-priority
security interests relating to (i) each registered trademark of a
corporate name of a Borrower, and (ii) each registered trademark and
registered copyright for the Designated Software Products. For purposes
hereof, "Designated Software Products" shall mean the individual
software products of the Borrowers identified on SCHEDULE B hereto;
PROVIDED, HOWEVER, the Bank reserves the right to modify and supplement
the list of Designated Software Products from time to time based upon
the updated lists of intellectual property furnished pursuant to
Section 6.12. In addition, upon the occurrence and continuance of an
Event of Default, each Borrower shall take such action, including the
execution and delivery of additional Intellectual Property Assignments,
as the Bank may from time to time request with respect to all other
items of Intellectual Property of the Borrowers.
"6.13 Assignment of Certain Intellectual Property.
-------------------------------------------
(a) Each Borrower other than Multimedia that is a
U.S. Affiliate of the Borrower shall by March 15, 1996 take all
necessary action to assign to Multimedia any and all trademarks and
registered copyrights issued or granted to it, or acquired by it, or
arising in its favor, on or after January 1, 1996.
(b) Each Borrower shall promptly take all necessary
action to cause each of its present or future U.S. Affiliates to comply
with the provisions of subsection (a) of this Section 6.13."
1.5 Section 7 is hereby amended by inserting the following new Section
7.16 after Section 7.15:
"7.16 OPERATIONS OF SOFTKEY MULTIMEDIA INC. Multimedia shall
not engage in any business or activity other than owning, holding and
maintaining Intellectual Property and licensing such Intellectual
Property, on an exclusive basis, to SoftKey or its Affiliates."
1.6 Section 9 is hereby amended by restating the definition of
"Borrowers" and "Security Instruments" as follows:
""BORROWERS" shall mean SoftKey, SchoolCo, and each of the New
Subsidiaries."
""SECURITY INSTRUMENTS" means, collectively, the security
agreements executed by SoftKey, SchoolCo and the New
Subsidiaries, including without limitation the New Subsidiary
Security Agreements, and each other instrument or agreement
that purports to secure the Obligations of the Borrowers to
the Bank."
1.7 Section 9 is hereby further amended by inserting the following
additional definitions in alphabetical order:
""NEW SUBSIDIARIES" shall mean The Learning Company and
Multimedia."
""NEW SUBSIDIARY SECURITY AGREEMENTS" has the meaning set
forth in Section 3.2(b)."
<PAGE> 4
-4-
1.8 Section 10.15 is hereby restated in its entirety as follows:
"10.15 SOFTKEY AS AGENT FOR BORROWERS. SchoolCo and each New
Subsidiary hereby appoints SoftKey as its agent with respect to the
receiving and giving of any notices, requests, instructions, reports,
schedules, revisions, financial statements or any other written or oral
communications hereunder or under the Loan Documents. SoftKey shall
keep complete, correct and accurate records of all Revolving Line of
Credit Loans and the application of proceeds thereof, all Letters of
Credit and all payments in respect of Revolving Line of Credit Loans
and other amounts due hereunder. SoftKey shall determine the allocation
of proceeds of Revolving Credit Loans among the Borrowers. The Bank is
hereby entitled to rely on any communications given or transmitted by
SoftKey as if such communication were given or transmitted by each and
every Borrower; PROVIDED, HOWEVER, that any communication given or
transmitted by any Borrower other than SoftKey shall be binding with
respect to such Borrower. Any communication given or transmitted by the
Bank to SoftKey shall be deemed given and transmitted to each and every
Borrower."
1.9 The Credit Agreement is hereby further amended by appending
thereto immediately following Schedule A thereto a new schedule to be entitled
"Schedule B -- Designated Software Products" in the form appended hereto as
SCHEDULE B.
Section 2. Amendments to Other Loan Documents.
----------------------------------
2.1 (a) The definition of "Secured Obligations" in the Security
Agreement dated as of September 30, 1994 between SoftKey and the Bank (the
"SOFTKEY SECURITY AGREEMENT") is hereby amended by deleting the phrase "all
obligations of the Company to the Bank" appearing in the first line thereof and
substituting in lieu thereof the phrase
"all obligations to the Bank of the Company, SoftKey Multimedia Inc.,
The Learning Company, SchoolCo Inc., the respective successors of the
foregoing corporations and any other corporation or entity that shall
in the future become a "Borrower" for purposes of the Credit
Agreement".
(b) The SoftKey Security Agreement is hereby further amended by
making such other changes thereto as may be necessary or appropriate to
reflect the amendment to the definition of "Secured Obligations" set forth in
Section 2.1(a) hereof.
2.2 (a) The definition of "Borrowers" in the Security Agreement dated
as of December 22, 1995 between SchoolCo and the Bank (the "SCHOOLCO SECURITY
AGREEMENT") is hereby amended and restated in its entirety as follows:
""BORROWERS" means the Company, SoftKey, The Learning Company
and SoftKey Multimedia Inc., together with the respective successors of
the foregoing corporations and any other corporation or entity that
shall in the future become a "Borrower" for purposes of the Credit
Agreement."
(b) The SchoolCo Security Agreement is hereby further amended by
making such other changes thereto as may be necessary or appropriate to
reflect the amendment to the definition of "Borrowers" set forth in Section
2.2(a) hereof.
Section 3. RELEASE OF AND BY COMPTON'S NEW MEDIA, INC. AND COMPTON'S LEARNING
COMPANY.
The Bank, Compton's New Media, Inc., the corporate successor to Cubsco
I Inc. ("CUBSCO I") and Compton's Learning Company, the corporate successor to
Cubsco II Inc. ("CUBSCO II"),
<PAGE> 5
-5-
hereby release one another from any and all obligations, debts, demands,
actions, causes of action, suits, accounts, covenants, contracts, agreements,
damages, and any and all claims, demands and liabilities whatsoever of every
name and nature, both at law and in equity, arising under, involving, or in any
way relating to Cubsco I's or Cubsco II's having been a party to the Credit
Agreement, the Note and a certain Security Agreement in connection therewith.
The Bank agrees to deliver termination statements termininating UCC financing
statements previously executed by Cubsco I and Cubsco II.
Section 4. Conditions of Effectiveness.
---------------------------
This Amendment shall be deemed effective as of February 28, 1996 (the
"EFFECTIVE DATE"), provided that the Bank shall have received the following on
or before such date:
(a) two copies of this Amendment executed by each Borrower,
Compton's New Media, Inc., and Compton's Learning Company;
(b) the Second Amendment to Guaranty in the form enclosed duly
executed by the Guarantor;
(c) an amended and restated promissory note in the form
enclosed duly executed by each Borrower (the "AMENDED NOTE");
(d) an amended and restated pledge agreement in the form
enclosed herewith (the "NEW PLEDGE AGREEMENT") duly executed by the Guarantor,
together with stock certificates representing all the outstanding shares of
capital stock of SoftKey, SchoolCo and each of the New Subsidiaries together
with stock powers executed in blank;
(e) the New Subsidiary Security Agreements, duly executed by
each of the New Subsidiaries, pursuant to which each such New Subsidiary grants
to the Bank a security interest in all its assets, together with such UCC
financing statements as the Bank may request duly executed by each such New
Subsidiary;
(f) a certificate of the Secretary or Assistant Secretary of
each of SoftKey and SchoolCo as to resolutions of the Board of Directors of
SoftKey and SchoolCo authorizing this Amendment and the Amended Note;
(g) a certificate of the Secretary or Assistant Secretary of
each New Subsidiary certifying as to (i) the charter and by-laws of each such
corporation; (ii) resolutions of the Board of Directors of such entity
authorizing the transactions and the execution of the documents contemplated
hereby; and (iii) the incumbency and specimen signatures of the officers of such
corporation authorize to execute and deliver this Amendment, the Amended Note,
the New Subsidiary Security Agreement and any other Loan Documents;
(h) a Certificate of the Secretary or Assistant Secretary of
the Guarantor as to resolutions of the Board of Directors of the Guarantor
authorizing the New Pledge Agreement and the Consent;
(i) opinions of counsel to each of SoftKey, SchoolCo, the New
Subsidiaries and the Guarantor in a form reasonably acceptable to the Bank; and
(j) a certificate of the chief financial officer of SoftKey to
the effect that each of the acquisitions of The Learning Company, Compton's New
Media, Inc., and Compton's Learning Company has been consummated substantially
in accordance with the acquisition terms and conditions previously disclosed to
the Bank and attaching true and complete copies of the operative acquisition
documents.
<PAGE> 6
-6-
Section 5. SPECIAL COVENANTS AND REPRESENTATIONS WITH REGARD TO THE ADDITION OF
THE NEW SUBSIDIARIES AS CO-BORROWERS.
5.1 The Learning Company does hereby assume and agree to perform all
of the obligations of its respective Acquisition Subsidiary and corporate
predecessor of whatever kind under and pursuant to the Credit Agreement and the
other Loan Documents to which such Acquisition Subsidiary was a party. Each of
the New Subsidiaries hereby agrees, jointly and severally with SoftKey and
SchoolCo, to be bound by the terms and conditions of the Credit Agreement and
shall, for all purposes thereunder, be a "Borrower", as of the Effective Date.
5.2 Each of the New Subsidiaries, jointly and severally with SoftKey
and SchoolCo, hereby represents, warrants and covenants to the Bank that after
giving effect to this Amendment and to the transactions contemplated hereby:
(a) The execution, delivery and performance by each New
Subsidiary of this Amendment, the Amended Note and the Security
Instruments to which it is a party will directly and indirectly inure
to the benefit of such New Subsidiary, are in pursuit of its business
purposes as an integral part of the business conducted and proposed to
be conducted by SoftKey together with such New Subsidiary and are
reasonably necessary and convenient in connection with the conduct of
the business conducted and proposed to be conducted by it. By virtue of
the foregoing, among other things, each New Subsidiary is receiving at
least reasonably equivalent consideration from the Bank for its
obligations undertaken under this Amendment, the Amended Note and the
Security Instruments to which it is a party.
(b) After giving effect to the transactions contemplated by this
Amendment, each New Subsidiary has, and will have access to, adequate
capital for the conduct of its business and the ability to pay its
debts from time to time incurred in connection therewith as such
debts mature.
(c) Each New Subsidiary has and, after giving effect to the
transactions contemplated hereby, will have assets having a fair
saleable value in excess of the amount required to pay its probable
liability on its existing debts as they become absolute and matured.
The foregoing representations and warranties shall constitute representations
and warranties of the New Subsidiaries under the Credit Agreement. Each of such
representations and warranties shall survive and not be waived by the execution
and delivery of this Amendment.
Section 6. Confirmation of Representations, Absence of Default.
---------------------------------------------------
Each Borrower (including without limitation the New Subsidiaries)
hereby confirms that the representations set forth in the Loan Documents
(including without limitation those set forth in Section 6.9 of the Credit
Agreement as to use of proceeds), as amended by this Amendment, are true and
correct as of the date hereof, subject to the exceptions and further disclosures
set forth in SCHEDULE A hereto. Each Borrower hereby confirms that, except as
set forth in SCHEDULE A hereto, no Event of Default has occurred and is
continuing under the Credit Agreement.
Section 7. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
7.1 Upon the Effective Date, each reference in the Credit Agreement to
"this Credit Agreement", "hereunder", "hereof", "herein", or words of like
import referring to the Credit
<PAGE> 7
-7-
Agreement, and each reference in the Amended Note and each of the other Loan
Documents to "the Credit Agreement", "thereunder", "thereof", "therein", or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement as amended hereby.
7.2 Upon the Effective Date, each reference in the Credit Agreement
and the other Loan Documents to the "Borrowers" shall mean and be a reference
to the "Borrowers" or to "each Borrower" as the context may require, reflecting
the addition of the New Subsidiaries, and the deletion of Compton's New Media,
Inc., and Compton's Learning Company, as co-borrowers on a joint and several
basis under the Credit Agreement and the other Loan Documents.
7.3 Except as specifically amended above, the Credit Agreement shall
remain in full force and effect and is hereby ratified and confirmed. Except for
the original promissory note and the amended and restated promissory note dated
as of December 22, 1995, each of which is superseded by the Amended Note and has
been, or will be, marked "canceled" and returned to SoftKey, each of the other
Loan Documents is in full force and effect and is hereby ratified and confirmed.
Each Borrower (and the Guarantor by its execution of the Second Amendment to
Guaranty) agrees that, as of the date hereof, it has no defenses against the
obligations represented by the Credit Agreement, the Amended Note, the Guaranty
or the other Loan Documents.
7.4 The amendments set forth herein (i) do not constitute a waiver or
modification of any term, condition or covenant of the Credit Agreement, the
Amended Note, any other Loan Documents or any of the instruments or documents
referred to by the foregoing documents, other than as expressly set forth
herein, and (ii) shall not prejudice any rights which the Bank may now or
hereafter have under or in connection with the Credit Agreement, the Amended
Note, the other Loan Documents or any of the instruments or documents referred
to therein.
Section 8. Cost and Expenses.
-----------------
Each Borrower agrees, jointly and severally, to pay on demand all costs
and expenses of the Bank in connection with the preparation, reproduction,
execution and delivery of this Amendment and any other instruments and documents
to be delivered hereunder, including the reasonable fees and out-of-pocket
expenses of Sullivan & Worcester, special counsel for the Bank with respect
thereto.
Section 9. Governing Law.
-------------
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
Section 10. Counterparts.
------------
This Amendment may be signed in one or more counterparts each of which
taken together shall constitute one and the same instrument.
<PAGE> 8
-8-
IN WITNESS WHEREOF the parties hereto have caused this Amendment to be
executed under seal by their respective officers thereunto duly authorized as of
the date first above written.
SOFTKEY INC.
By: /s/ R. Scott Murray
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
SCHOOLCO INC.
By: /s/ R. Scott Murray
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
THE LEARNING COMPANY
By: /s/ R. Scott Murray
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
SOFTKEY MULTIMEDIA INC.
By: /s/ R. Scott Murray
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
FLEET BANK OF MASSACHUSETTS, N.A.
By: /s/ Thomas W. Davies
------------------------------
Name: Thomas W. Davies
Title: Vice President
For purposes of Section 3 only:
COMPTON'S NEW MEDIA, INC.
By: /s/ R. Scott Murray
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
COMPTON'S LEARNING COMPANY
By: /s/ R. Scott Murray
------------------------------
Name: R. Scott Murray
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 10.20
SOFTKEY INTERNATIONAL INC.
LONG TERM EQUITY INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
SoftKey International Inc. (the "Company") has granted to you an option
(the "Option) to purchase the number of shares (the "Shares") of common stock,
par value $.01 per share, of the Company ("Common Stock") listed on Exhibit A
hereto at the exercise price set forth on Exhibit A. The Option is granted
subject in all respects to the terms of the Company's Long Term Equity Incentive
Plan (the "Plan"). The Option does not constitute an "incentive stock option"
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended. Capitalized terms used and not defined in this Agreement shall have the
meanings assigned to such terms in the Plan.
Some of the details of the Option are as follows:
1. Term. The term of the Option commences on the Grant Date set
forth in Exhibit A and, except as provided in Section 4, ends on the expiration
date set forth on Exhibit A.
2. Exercisability. The Option shall be exercisable at the times, and
with respect to the number of Shares, set forth on Exhibit A. Exercisability of
the Option may also be accelerated or adjusted as provided in the Plan.
3. Exercise and Payment.
(a) Exercise. You, or the person or persons having the right
to exercise the Option upon death or Disability, may exercise the Option to
purchase all or any part of the Shares for which it is then exercisable by
delivering to the Secretary of the Company a completed Notice of Exercise Form
attached hereto as Exhibit B (the "Exercise Form"), together with payment of the
exercise price. The date the Company receives full payment of the exercise price
and any required documents from you will be considered the date that the Option
was exercised. You shall not have privileges as a stockholder until the date of
issuance of a stock certificate representing Shares.
(b) Payment of Exercise Price. Payment of the exercise price
must be made in full at the time of exercise in cash, or by certified or
cashier's check. In lieu of full payment of the exercise price in cash, upon
request, the Company may, in its sole discretion, allow you (or the person or
persons having the right to exercise the Option upon your death or Disability),
to exercise the Option or a portion thereof by tendering shares of Common Stock
(including Shares received upon exercise of the Option), valued at Fair Market
Value on the date of exercise, equal to the exercise price for the Shares being
acquired, as permitted by the Plan.
<PAGE> 2
(c) Withholding Tax. You may be subject to withholding or
employment taxes which, in the Company's judgment, result from the purchase of
shares upon exercise of the Option. At the time of any exercise of the Option
(or at any such later time as such obligation arises or as the amount of such
obligation becomes determinable), you shall pay to the Company in cash all
applicable federal, state, and local withholding and employment taxes required
to be withheld resulting from exercise of the Option, from the lapse of any
restriction imposed on the Shares, from a transfer or other disposition of the
Shares, or otherwise related to the Shares. The Company may withhold from your
wages, or require you to pay to the Company, such amount. The Committee may in
its discretion permit you to pay some or all of such amount as provided in
Section 11G of the Plan, with all decisions of the Committee to be made at any
time at or prior to each exercise of the Option.
4. Termination of Employment.
(a) General. In the event of your Termination for any reason
other than death or Disability before exercise in full of your option, you may
(only to the extent then exercisable on the date of such Termination) exercise
your option in whole or in part any time within 90 days after the date of
Termination (unless otherwise indicated on Exhibit A hereto).
(b) Death or Disability. In the event of your Termination by
reason of death or Disability prior to the exercise in full of your option, you,
your personal representative or the person to whom the Option is transferred by
will or the laws of descent and distribution may (only to the extent exercisable
on the date of such Termination) exercise the Option in whole or in part at any
time within 18 months after the date of death or one year after the date of
Disability, as the case may be.
(c) Retirement. In the event of your Termination by reason of
your retirement (as determined in the exercise of the sole discretion of the
Committee), you may (only to the extent exercisable on the date of such
Termination) exercise your option in whole or in part at any time within two
years after the date of Termination.
(d) Final Cut-Off. In no event may this option be exercised by
anyone after the Expiration Date.
5. Tax Consequences. The tax consequences associated with this
option are complex and can depend upon your particular circumstances. The
Company is not making any warranties or representations to you with respect to
the income tax consequences of the transactions contemplated by the option
agreement, and you should consult a tax advisor before exercising this option.
2
<PAGE> 3
6. The Plan.
(a) Plan Provisions Applicable. The Option is subject to all
provisions of the Plan, a copy of which is being delivered to you with this
Agreement. The plan is described in the Prospectus which is also being delivered
to you with this Agreement.
(b) OPTION AND PLAN PROVISIONS CONTROL. THE OPTIONS DESCRIBED
IN THE PROSPECTUS MAY VARY SUBSTANTIALLY FROM THIS OPTION. YOUR RIGHTS ARE AS
SET FORTH IN THIS AGREEMENT AND THE PLAN, WHICH CONTROL IN THE EVENT OF ANY
INCONSISTENCY WITH THE DESCRIPTION IN THE PROSPECTUS.
7. Adjustments. The Company may adjust the number and kind of Stock
issuable upon exercise of the Option and the exercise price thereof in certain
circumstances in accordance with the provisions of Section 3C of the Plan.
8. Legality of Issuance. The Company shall not be obligated to sell
or issue any Shares pursuant to this Agreement if such sale or issuance, in the
opinion of the Company or the Company's counsel, might constitute a violation by
the Company of any provision of law, including without limitation the provisions
of the Securities Act of 1933, as amended.
9. Investment Representations. The Company may, as a condition of
issuance Shares, require you to make such investment representations as the
Company and the Company's counsel deem necessary or desirable in order to assure
compliance with applicable federal or state securities law.
10. Legends. The Company may impose restrictions upon the sale,
pledge or other transfer of Shares acquired upon exercise of this option
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company or the Company's counsel, such restrictions are
necessary or desirable in order to achieve compliance with any federal or state
securities or other laws.
11. Miscellaneous.
11.1 Assignment; Binding Effect; No Transfer. Subject to the
limitations set forth in this Agreement, this Agreement shall be binding upon
and inure to the benefit of the executors, administrators, heirs, legal
representatives, successors and assigns of the parties hereto; provided,
however, that you may not assign any of your rights under this Agreement. The
Option is not transferable except at death by will or the laws of descent and
distribution, and is exercisable during your lifetime only by you.
11.2 Damages. You shall be liable to the Company for all costs
and damages, including incidental and consequential damages and attorneys' fees
and
3
<PAGE> 4
expenses, resulting from a disposition of shares which is not in conformity with
the provisions of this Agreement.
11.3 Governing Law. Except as required by the Delaware General
Corporation Law, this Agreement shall be governed by and construed in accordance
with the internal laws of the Commonwealth of Massachusetts.
11.4 Notices. All notices and other communications under this
Agreement shall be in writing. Unless you are notified in writing to the
contrary, all notices, communications and documents directed to the Company and
related to the Agreement, if not delivered by hand, shall be mailed, addressed
as follows:
SoftKey International Inc.
201 Broadway
Cambridge, MA 02139
Attention: Secretary
Unless and until the Company is notified in writing to the contrary, all
notices, communications and documents intended for you and related to this
Agreement, if not delivered by hand, shall be mailed to your last known address
as shown on the Company's books. Notices and communications shall be mailed by
first class mail, postage prepaid; documents shall be mailed by U.S. registered
mail, return receipt requested, postage prepaid. All mailing and deliveries
related to the Agreement shall be deemed delivered, if mailed, on the second day
after they are deposited in the U.S. mail.
11.5 Exhibits. The exhibits attached to, or delivered to you
with, this Agreement (including without limitation the Plan) are incorporated
herein and form a part of this Agreement.
11.6 Entire Agreement. This Agreement, including the Plan,
contains all of the terms and conditions agreed upon by the parties relating to
its subject matter and supersedes any and all prior and contemporaneous
agreements, negotiations, correspondence, understandings and communications of
the parties whether oral or written, respecting that subject matter.
11.7 Attorneys' Fees. If any party to this Agreement seeks to
enforce this Agreement by legal proceedings or otherwise, the nonprevailing
party shall pay the prevailing party's costs and expenses, including without
limitation reasonable attorneys' fees.
11.8 Validity of Provisions; Severability. If any provision of
this Agreement is held invalid, illegal or unenforceable, the provision shall be
adjusted if possible rather than voided to carry out its intent to the maximum
extent possible and in all events the remainder of this Agreement will remain in
full force and effect.
4
<PAGE> 5
11.9 Counterparts. This Agreement may be signed in
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same agreement.
11.10 No Employment Rights. This Agreement shall not confer
upon you any right to continued employment, nor shall it interfere in any way
with the right of the Company, a subsidiary or affiliate to terminate your
employment at any time.
SOFTKEY INTERNATIONAL INC.
By:
-----------------------------
R. Scott Murray
Chief Financial Officer
--------------------------------
Optionee
Consent of Spouse
If the Optionee resides in California, or another community property
jurisdiction, I, as the Optionee's spouse, also accept and agree to be bound by
the terms and conditions of this option and the Plan.
--------------------------------
Optionee's Spouse
<PAGE> 1
EXHIBIT 10.24
SOFTKEY INTERNATIONAL INC.
1996 STOCK OPTION PLAN
SECTION 1. PURPOSE; DEFINITIONS.
A. PURPOSE. The purpose of this Plan is to enhance the ability of the
Company and its Affiliates (as such terms are defined herein) to retain, attract
and motivate their personnel. Accordingly, this Plan will provide selected
eligible employees, directors and consultants of the Company and its Affiliates
an opportunity to participate in the Company's future by offering them equity
interests in the Company. All employees and directors of the Company and its
Affiliates are eligible to participate in and to receive Awards (as defined
herein) under this Plan. Awards under the Plan will be made by the Committee (as
defined herein).
B. DEFINITIONS. For purposes of this Plan, the following terms have the
following meanings:
1. "AFFILIATE" means a parent or subsidiary corporation, each as
defined in Section 424 of the Code, and their successors.
2. "AWARD" means any award of an Option under this Plan.
3. "AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Plan Participant
setting forth the terms and conditions of the Award.
4. "BOARD" means the Board of Directors of the Company.
5. "CHANGE IN CONTROL" has the meaning set forth in Section 6.A of
this Plan.
6. "CHANGE IN CONTROL PRICE" has the meaning set forth in Section
6.C of this Plan.
7. "CODE" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor.
8. "COMMITTEE" means the Committee referred to in Section 2 of
this Plan, or the Board in its capacity as administrator of
this Plan in accordance with Section 2 of this Plan.
<PAGE> 2
9. "COMPANY" means SoftKey International Inc., a Delaware
corporation.
10. "COVERED EMPLOYEE" means a covered employee as such term is
defined in Section 162(m)(3) of the Code and the regulations
promulgated thereunder.
11. "DISABILITY" means permanent and total disability as determined
by the Committee.
12. "FAIR MARKET VALUE" means as of any given date:
(a) If the Stock is listed on any established stock exchange or
a national market system, including without limitation the
Nasdaq National Market, the closing sale price for a share
of the Stock or the closing bid, if no sales are reported,
as quoted on such exchange (or the largest such exchange)
or system for the date the value is to be determined (or if
there are no sales for such date, then for the last
preceding business day on which there were sales), as
reported in THE WALL STREET JOURNAL or a similar
publication; or
(b) If the Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, the mean
between the high bid and low asked prices for a share of
the Stock on the date the value is to be determined (or if
there are no quoted prices for the date of grant, then for
the last preceding business day on which there were quoted
prices); or
(c) In the absence of an established market for the Stock, the
per share value of the Stock, as determined in good faith
by the Committee, with reference to the Company's net
worth, prospective earning power, dividend-paying capacity
and other relevant factors, including the goodwill of the
Company, the economic outlook in the Company's industry,
the Company's position in its industry and its management
and the values of stock of other corporations in the same
or a similar line of business.
13. "OPTION" means an Option granted under Section 5 of this Plan.
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14. "PLAN" means this SoftKey International Inc. 1996 Stock Option
Plan, as amended from time to time.
15. "PLAN PARTICIPANT" means any recipient of an Award under this
Plan.
16. "STOCK" means the Common Stock, $0.01 par value, of the
Company, and any successor security.
17. "SUBSIDIARY" has the meaning set forth in Section 424(f) of the
Code, and its successors.
18. "TERMINATION" means, for purposes of this Plan, with respect to
a Plan Participant, that the Plan Participant has ceased to be,
for any reason, with or without cause, an employee, director or
consultant as the case may be, of the Company or an Affiliate
of the Company, such that such Plan Participant is neither an
employee, director or consultant of the Company or any
Affiliate.
SECTION 2. ADMINISTRATION.
A. COMMITTEE. This Plan shall be administered by a committee of the
Board comprised of two or more non-employee directors. In connection with the
administration of this Plan, the Committee shall have the powers possessed by
the Board. The Committee may act only by a majority of its members, except that
the Committee may authorize any one or more of its members or any officer of the
Company to execute and deliver documents on behalf of the Committee.
B. AUTHORITY. The Committee shall grant Awards to any person eligible
under Section 4 of this Plan. In particular and without limitation, the
Committee, subject to the terms of this Plan, shall:
1. Select the persons to whom Awards may be granted;
2. Determine whether and to what extent Awards are to be granted
under this Plan;
3. Determine the number of shares to be covered by each Award
granted under this Plan; and
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4. Determine the terms and conditions of any Award granted under
this Plan, based upon factors determined by the Committee.
C. COMMITTEE DETERMINATIONS BINDING. The Committee may adopt, alter and
repeal administrative rules, guidelines and practices governing this Plan as it
from time to time shall deem advisable, interpret the terms and provisions of
this Plan, any Award, any Award Agreement and otherwise supervise the
administration of this Plan. Any determination made by the Committee pursuant to
the provisions of this Plan with respect to any Award shall be made in its sole
discretion at the time of the grant of the Award or, unless in contravention of
any express term of this Plan or the Award, at any later time. All decisions
made by the Committee under this Plan shall be binding on all persons, including
the Company and Plan Participants and the Plan Participant's guardian, estate
and heirs.
SECTION 3. STOCK SUBJECT TO PLAN.
A. ISSUABLE SHARES. The aggregate number of shares of Stock which may
be issued under this Plan shall be 5,000,000 shares of Stock; provided that the
shares of Stock issuable pursuant to Awards made to all Covered Employees and
directors shall not exceed 2,000,000 shares of Stock. Shares of Stock issuable
pursuant to Awards under the Plan may consist, in whole or in part, of
authorized and unissued shares or reacquired shares in the Company's treasury.
The determination of whether a person is a Covered Employee or a director for
purposes of the 2,000,000 share limitation shall be made at the time the Award
is made.
B. ADJUSTMENTS. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split, spin-off, sale of
substantial assets or other change in corporate structure affecting the Stock,
such substitution or adjustments shall be made in the number, kind and exercise
price of shares subject to outstanding Awards, as may be determined by the
Committee as appropriate or as necessary in order to prevent dilution or
enlargement of the rights of Plan Participants; provided that the adjusted
number of shares subject to any Award shall always be rounded down to the
nearest whole number.
SECTION 4. ELIGIBILITY.
Awards may be granted to any employee, director or consultant of the
Company or an Affiliate (including without limitation employees or consultants
of corporations acquired by the Company) as designated by the Committee.
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<PAGE> 5
SECTION 5. STOCK OPTIONS.
A. TYPES. Any Option granted under this Plan shall be in such form as
the Committee may from time to time approve. Options which qualify under Section
422 of the Code may not be granted under this Plan.
B. TERMS AND CONDITIONS. Options granted under this Plan shall be
subject to the following terms and conditions:
1. OPTION TERM. The term of each Option shall be fixed by the
Committee and will be stated in the Award Agreement.
2. GRANT DATE. The Company may grant Options under this Plan at
any time and from time to time before this Plan terminates. The
Committee shall specify the date of grant or, if it fails to do
so, the date of grant shall be the date of action taken by the
Committee to grant the Option; provided that no Option may be
exercised prior to execution of the applicable Award Agreement.
However, if an Option is approved in anticipation of employment
or engagement as a consultant, the date of grant shall be the
date the intended optionee is first treated as an employee or
consultant for payroll purposes.
3. EXERCISE PRICE. The exercise price per share of Stock
purchasable under any Option shall be at least equal to 85% of
the Fair Market Value on the date of grant.
4. EXERCISABILITY. Subject to the other provisions of this Plan,
an Option shall be exercisable at such times and in such
amounts as are specified in the Award Agreement evidencing the
Option. The Committee, in its absolute discretion, at any time
may waive any limitations respecting the time at which an
Option first becomes exercisable in whole or in part.
5. METHOD OF EXERCISE; PAYMENT. To the extent the right to
purchase shares of Stock has accrued, Options may be exercised,
in whole or in part, from time to time, by written notice from
the optionee to the Company stating the number of shares of
Stock being purchased, accompanied by payment of the exercise
price for the shares of Stock.
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<PAGE> 6
SECTION 6. CHANGE IN CONTROL.
A. DEFINITION OF "CHANGE IN CONTROL". A "Change in Control" means the
occurrence of either of the following:
1. Any "person," as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), other than the Company, any of its
subsidiaries, any Affiliate of the Company or a Company
employee benefit plan, including any trustee of such plan
acting as trustee, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company (or a successor to the
Company) representing 35% or more of the combined voting power
of the then outstanding securities of the Company or such
successor; or
2. At any time that the Company has registered shares under the
Exchange Act, at least 40% of the directors of the Company
constitute persons who were not at the time of their first
election to the Board, candidates proposed by a majority of the
Board in office prior to the time of such first election; or
3. Any one of the following events: (w) the dissolution of the
Company or liquidation of more than 50% in value of the Company
or a sale of assets involving 50% or more in value of the
assets of the Company; (x) any merger or reorganization of the
Company whether or not another entity is the survivor; (y) a
transaction pursuant to which the holders, as a group, of all
of the shares of capital stock of the Company outstanding prior
to the transaction hold, as a group, less than 50% of the
combined voting power of the Company or any successor company
outstanding after the transaction; or (z) any other event which
the Committee determines, in its discretion, would materially
alter the structure of the Company or its ownership.
B. IMPACT OF EVENT. Except as expressly provided in any Award
Agreement, in the event of a Change in Control, the following provisions shall
apply:
1. Any Options outstanding as of the date such Change in Control
is determined to have occurred and not then exercisable and
vested shall become fully exercisable and vested; and
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2. At the sole discretion of the Committee either (i) the value
(net of any exercise price and required tax withholdings) of
all outstanding Options, unless otherwise determined by the
Committee at or after grant, shall be paid in cash to Plan
Participants holding the same on the basis of the Change in
Control Price as of the date such Change in Control is
determined to have occurred or such other date as the Board may
determine prior to the Change in Control, or (ii) in the event
that the Company shall not be the surviving company, the
Options shall be converted into options to purchase shares of
the surviving company or other entity that such Plan
Participant could have acquired upon such Change of Control had
all of the Options been exercised prior to the Change of
Control, and the exercise price of such Options shall be equal
to the quotient determined by dividing the exercise price per
share of the Options in effect immediately prior to the Change
of Control by the number of shares of the surviving company or
other entity that one share of Stock was converted into in
connection with the Change of Control.
Notwithstanding the foregoing, in the event that anything in
this Section 6.B is determined to prevent any transaction
referred to in Section 6.A.3 from being accounted for as a
pooling of interests, then the value of outstanding Options
shall not be cashed out in accordance with paragraph 2(i) of
this Section 6.B and provisions shall be made to treat
outstanding Options as provided for in paragraph 2(ii) of this
Section 6.B.
C. CHANGE IN CONTROL PRICE. "Change in Control Price" means the highest
price per share paid in any transaction reported on any established stock
exchange, national market system or other established market for the Stock, or
paid or offered in any bona fide transaction related to a Change in Control of
the Company at any time during the preceding 60-day period as determined by the
Committee.
SECTION 7. GENERAL PROVISIONS.
A. AWARD GRANTS. Any Award may be granted either alone or in addition
to other Awards granted under this Plan. Subject to the terms and restrictions
set forth elsewhere in this Plan, the Committee shall determine the
consideration, if any, payable by the Plan Participant for any Award and, in
addition to those set forth in this Plan, any other terms and conditions of the
Awards. The Committee may condition the grant or payment of any Award upon the
attainment of performance goals or such other factors or criteria, including
vesting based on continued employment or consulting, as the Committee shall
determine. Performance goals may vary from Plan Participant to Plan Participant
and among groups of
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<PAGE> 8
Plan Participants and shall be based upon such Company, subsidiary, group or
division factors or criteria as the Committee may deem appropriate. The other
provisions of Awards also need not be the same with respect to each recipient.
Unless otherwise specified in this Plan or by the Committee, the date of grant
of an Award shall be the date of action by the Committee to grant the Award.
B. AWARD AGREEMENT. As soon as practicable after the date of an Award
grant, the Company and the Plan Participant shall enter into a written Award
Agreement specifying the date of grant and the terms and conditions of the
Award. In the case of a conflict between this Plan and an Award Agreement, this
Plan will control.
C. CERTIFICATES. All certificates for shares of Stock or other
securities delivered under this Plan shall be subject to such stock transfer
orders, legends and other restrictions as the Committee may deem advisable under
the rules, regulations and other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Stock is then listed, any national
market system over which the Stock is then quoted and any applicable federal,
state or foreign securities law.
D. TERMINATION. In the event of Termination for any reason other than
death or Disability or retirement, Options held at the date of Termination (to
the extent then exercisable) may be exercised in whole or in part within 90 days
after the date of Termination, or such other period (which may be longer or
shorter than 90 days) which shall be specified in the Award Agreement (but in no
event shall any Option remain exercisable after the expiration date of such
Option as specified under the Award Agreement). If Termination is due to death
or Disability, or a Plan Participant dies or becomes disabled within the period
that the Award remains exercisable or payable, as the case may be, after
Termination, only Awards (including Options) held at the date of death or
Disability (and only to the extent then exercisable or payable, as the case may
be) may be exercised in whole or in part by the Plan Participant in the case of
Disability, by the Plan Participant's personal representative or executor or by
the person to whom the Award is transferred by will or the laws of descent and
distribution, at any time within 18 months after the death or one year after the
Disability, as the case may be, of the Plan Participant (or such other period
which shall be specified in the Award Agreement, but in no event shall any Award
remain exercisable after the expiration of such Award as specified under the
Award Agreement). In the event of Termination by reason of the Plan
Participant's retirement (as determined in the exercise of the Committee's sole
discretion), Awards (including Options) may be exercised in whole or in part at
any time within two years after the date of Termination (or such other period
which shall be specified in the Award Agreement, but in no event shall any Award
remain exercisable after the expiration date of such Award as specified under
the Award Agreement). Notwithstanding anything to the
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<PAGE> 9
contrary, the Committee shall have the discretion to accelerate the vesting of
or to waive any forfeiture of any Awards upon termination or otherwise.
E. DELIVERY OF PURCHASE PRICE. Plan Participants shall make all or any
portion of any payment due to the Company with respect to the consideration
payable for, upon exercise of, or for federal, state, local or foreign tax
payable in connection with, an Award by delivery of cash; and if and only to the
extent authorized by the Committee, all or any portion of such payment may be
made by delivery of any property (including without limitation a promissory note
of the Plan Participant or shares of Stock or other securities and surrender of
shares issuable upon exercise of that Option) other than cash, so long as, if
applicable, such property constitutes valid consideration for the Stock under
applicable law.
F. TAX WITHHOLDING. To the extent authorized by the Committee in its
discretion, a person who has received an Award may make an election to deliver
to the Company a promissory note of the Plan Participant on the terms set forth
in Section 7.E of this Plan, or to have shares of Stock or other securities of
the Company withheld by the Company or to tender any such securities to the
Company to pay the amount of tax that the Committee in its discretion determines
to be required to be withheld by the Company; provided that (i) such election
shall be irrevocable and (ii) such election shall be subject to the disapproval
of the Committee.
Any shares or other securities so withheld or tendered will be
valued by the Committee as of the date they are withheld or tendered; provided
that Stock shall be valued at the Fair Market Value on such date. The value of
the shares withheld or tendered may not exceed the required federal, state,
local and foreign withholding tax obligations as computed by the Company. Unless
the Committee permits otherwise, the Plan Participant shall pay to the Company
in cash, promptly when the amount of such obligations becomes determinable, all
applicable federal, state, local and foreign withholding taxes that the
Committee in its discretion determines to result from the lapse of restrictions
imposed upon an Award or upon exercise of an Award or from a transfer or other
disposition of shares of Stock acquired upon exercise or payment of an Award or
otherwise related to the Award or the shares acquired in connection with an
Award.
G. NO TRANSFERABILITY. Unless otherwise provided in an Award Agreement,
no Award shall be assignable or otherwise transferable by the Plan Participant
other than by will or by the laws of descent and distribution and, during the
life of a Plan Participant, an Award shall be exercisable, and any elections
with respect to an Award may be made, only by the Plan Participant or such Plan
Participant's guardian or legal representative.
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<PAGE> 10
H. ADJUSTMENT OF AWARDS; WAIVERS. The Committee may adjust the
performance goals and measurements applicable to Awards (i) to take into account
changes in law and accounting and tax rules, (ii) to make such adjustments as
the Committee deems necessary or appropriate to reflect the inclusion or
exclusion of the impact of extraordinary or unusual items, events or
circumstances in order to avoid windfalls or hardships, (iii) to make such
adjustments as the Committee deems necessary or appropriate to reflect any
material changes in business conditions and (iv) in any other manner determined
in its discretion. In the event of hardship or other special circumstances of a
Plan Participant and otherwise in its discretion, the Committee may waive in
whole or in part any or all restrictions, conditions, vesting or forfeiture with
respect to any Award granted to such Plan Participant.
I. ELECTION TO DEFER PAYMENT. To the extent, if any, permitted by the
Committee, a Plan Participant may elect, at such time as the Committee may in
its discretion specify, to defer payment of all or a portion of an Award.
J. NON-COMPETITION. The Committee may condition the Committee's
discretionary waiver of a forfeiture or vesting acceleration at the time of
Termination of a Plan Participant holding any unexercised or unearned Award or
the waiver of restrictions upon any Award upon a requirement that such Plan
Participant agree to and actually (i) not engage in any business or activity
competitive with any business or activity conducted by the Company and (ii) be
available, unless such Plan Participant shall have died, for consultations at
the request of the Company's management, all on such terms and conditions
(including conditions in addition to (i) and (ii)) as the Committee may
determine.
K. REGULATORY COMPLIANCE. Each Award under this Plan shall be subject
to the condition that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the shares of Stock upon any
securities exchange or under any state or federal law, (ii) the consent or
approval of any government or regulatory body or (iii) an agreement or
representations by the Plan Participant with respect thereto, is necessary or
desirable, then the exercise of such Award shall not be consummated in whole or
in part unless such listing, registration, qualification, consent, approval,
agreement or representations shall have been effected or obtained free of any
conditions not acceptable to the Committee.
L. RIGHTS AS STOCKHOLDER. Unless this Plan or the Committee expressly
specifies otherwise, a Plan Participant shall have no rights as a stockholder
with respect to any shares covered by an Award until the Plan Participant
receives such shares. Subject to Section 3.B of this Plan, no adjustment shall
be made for dividends or other rights for which the record date is prior to the
date the certificates are delivered.
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<PAGE> 11
M. BENEFICIARY DESIGNATION. The Committee, in its discretion, may
establish procedures for a Plan Participant to designate a beneficiary to whom
any amounts payable in the event of the Plan Participant's death are to be paid.
N. ADDITIONAL PLANS. Nothing contained in this Plan shall prevent the
Company or an Affiliate of the Company from adopting other or additional
compensation arrangements for its employees.
O. NO EMPLOYMENT/ENGAGEMENT RIGHTS. The adoption of this Plan shall not
confer upon any Plan Participant any right to continued employment or engagement
as a consultant nor shall it interfere in any way with the right of the Company
or an Affiliate of the Company to terminate the employment of any employee or
the engagement of any consultant at any time.
P. GOVERNING LAW. This Plan and all Awards shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts.
Q. USE OF PROCEEDS. All cash proceeds to the Company under this Plan
shall constitute general funds of the Company.
R. UNFUNDED STATUS OF PLAN. This Plan shall constitute an "unfunded"
plan for incentive and deferred compensation. The Committee may authorize the
creation of trusts or arrangements to meet the obligations created under this
Plan to deliver Stock or make payments; provided, that unless the Committee
otherwise determines, the existence of such trusts or other arrangements shall
be consistent with the "unfunded" status of this Plan.
S. ASSUMPTION BY SUCCESSOR. The obligations of the Company under this
Plan and under any outstanding Award may be assumed by any successor
corporation, which for purposes of this Plan, shall be included within the
meaning of "Company."
SECTION 8. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue this Plan, but no amendment,
alteration or discontinuance shall be made which would impair the rights of a
Plan Participant under an outstanding Award without the Plan Participant's
consent.
SECTION 9. EFFECTIVE DATE OF PLAN.
This Plan, and any amendments thereto, shall be effective on the date
the same is or are adopted by the Board.
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EXHIBIT 10.25
SOFTKEY INTERNATIONAL INC.
1996 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
SoftKey International Inc. (the "Company") has granted to you an option
(the "Option) to purchase the number of shares (the "Shares") of common stock,
par value $.01 per share, of the Company ("Common Stock") listed on Exhibit A
hereto at the exercise price set forth on Exhibit A. The Option is granted
subject in all respects to the terms of the Company's 1996 Stock Option Plan
(the "Plan"). The Option does not constitute an "incentive stock option" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
Capitalized terms used and not defined in this Agreement shall have the meanings
assigned to such terms in the Plan.
The terms of the Option are as follows:
1. TERM. The term of the Option commences on the Grant Date set forth in
Exhibit A and, except as provided in Section 4 hereof, ends on the Expiration
Date set forth on Exhibit A.
2. EXERCISABILITY. The Option shall be exercisable at the times, and with
respect to the number of Shares, set forth on Exhibit A. Exercisability of the
Option may also be accelerated or adjusted as provided in the Plan.
3. Exercise and Payment.
--------------------
(a) EXERCISE. You, or the person or persons having the right to
exercise the Option upon death or Disability, may exercise the Option to
purchase all or any part of the Shares for which it is then exercisable by
delivering to the Secretary of the Company (or the person designated by the
Secretary) a completed Notice of Exercise Form attached hereto as Exhibit B (the
"Exercise Form"), together with payment of the exercise price. The date the
Company receives full payment of the exercise price and any required documents
from you will be considered the date that the Option was exercised. You shall
not have privileges as a stockholder until the date of issuance of a stock
certificate representing Shares.
(b) PAYMENT OF EXERCISE PRICE. Payment of the exercise price must be
made in full at the time of exercise in cash, or by certified or cashier's
check. In lieu of full payment of the exercise price in cash, upon request, the
Company may, in its sole discretion, allow you (or the person or persons having
the right to exercise the Option upon your death or Disability), to exercise the
Option or a portion thereof by tendering
<PAGE> 2
shares of Common Stock (including Shares received upon exercise of the Option),
valued at Fair Market Value on the date of exercise, equal to the exercise price
for the Shares being acquired, as permitted by the Plan.
(c) WITHHOLDING TAX. You may be subject to withholding or employment
taxes which, in the Company's judgment, result from the purchase of shares upon
exercise of the Option. At the time of any exercise of the Option (or at any
such later time as such obligation arises or as the amount of such obligation
becomes determinable), you shall pay to the Company in cash all applicable
federal, state, local and foreign withholding and employment taxes required to
be withheld resulting from exercise of the Option, from the lapse of any
restriction imposed on the Shares, from a transfer or other disposition of the
Shares, or otherwise related to the Shares. The Company may withhold from your
wages, or require you to pay to the Company, such amount. The Committee may in
its discretion permit you to pay some or all of such amount as provided in
Section 7F of the Plan, with all decisions of the Committee to be made at any
time at or prior to each exercise of the Option.
4. Termination of Employment.
-------------------------
(a) GENERAL. In the event of your Termination for any reason other
than death or Disability before exercise in full of your Option, you may (only
to the extent then exercisable on the date of such Termination) exercise your
Option in whole or in part any time within 90 days after the date of Termination
(unless otherwise indicated on Exhibit A hereto).
(b) DEATH OR DISABILITY. In the event of your Termination by reason of
death or Disability prior to the exercise in full of your option, you, your
personal representative or the person to whom the Option is transferred by will
or the laws of descent and distribution may (only to the extent exercisable on
the date of such Termination) exercise the Option in whole or in part at any
time within 18 months after the date of death or one year after the date of
Disability, as the case may be.
(c) RETIREMENT. In the event of your Termination by reason of your
retirement (as determined in the exercise of the sole discretion of the
Committee), you may (only to the extent exercisable on the date of such
Termination) exercise your option in whole or in part at any time within two
years after the date of Termination.
(d) FINAL CUT-OFF. In no event may this option be exercised by
anyone after the Expiration Date, as modified under Section 1 hereof for
Covered Employees.
5. TAX CONSEQUENCES. The tax consequences associated with this option
are complex and can depend upon your particular circumstances. The Company is
not making any warranties or representations to you with respect to the income
tax consequences of the transactions contemplated by the option agreement, and
you should consult a tax advisor before exercising this option.
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6. The Plan.
--------
(a) PLAN PROVISIONS APPLICABLE. The Option is subject to all
provisions of the Plan, a copy of which is being delivered to you with this
Agreement. The plan is described in the Prospectus which is also being delivered
to you with this Agreement.
(b) OPTION AND PLAN PROVISIONS CONTROL. THE OPTIONS DESCRIBED IN
THE PROSPECTUS MAY VARY SUBSTANTIALLY FROM THIS OPTION. YOUR RIGHTS ARE AS SET
FORTH IN THIS AGREEMENT AND THE PLAN, WHICH CONTROL IN THE EVENT OF ANY
INCONSISTENCY WITH THE DESCRIPTION IN THE PROSPECTUS.
7. ADJUSTMENTS. The Company may adjust the number and kind of Stock
issuable upon exercise of the Option and the exercise price thereof in certain
circumstances in accordance with the provisions of Section 3B of the Plan.
8. LEGALITY OF ISSUANCE. The Company shall not be obligated to sell or
issue any Shares pursuant to this Agreement if such sale or issuance, in the
opinion of the Company or the Company's counsel, might constitute a violation by
the Company of any provision of law, including without limitation the provisions
of the Securities Act of 1933, as amended.
9. INVESTMENT REPRESENTATIONS. The Company may, as a condition of issuance
Shares, require you to make such investment representations as the Company and
the Company's counsel deem necessary or desirable in order to assure compliance
with applicable federal or state securities law.
10. LEGENDS. The Company may impose restrictions upon the sale, pledge or
other transfer of Shares acquired upon exercise of this option (including the
placement of appropriate legends on stock certificates) if, in the judgment of
the Company or the Company's counsel, such restrictions are necessary or
desirable in order to achieve compliance with any federal or state securities or
other laws.
11. Miscellaneous.
-------------
11.1 ASSIGNMENT; BINDING EFFECT; NO TRANSFER. Subject to the
limitations set forth in this Agreement, this Agreement shall be binding upon
and inure to the benefit of the executors, administrators, heirs, legal
representatives, successors and assigns of the parties hereto; provided,
however, that you may not assign any of your rights under this Agreement. The
Option is not transferable except at death by will or the laws of descent and
distribution, and is exercisable during your lifetime only by you.
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11.2 DAMAGES. You shall be liable to the Company for all costs and
damages, including incidental and consequential damages and attorneys' fees and
expenses, resulting from a disposition of shares which is not in conformity with
the provisions of this Agreement.
11.3 GOVERNING LAW. Except as required by the Delaware General
Corporation Law, this Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massachusetts.
11.4 NOTICES. All notices and other communications under this
Agreement shall be in writing. Unless you are notified in writing to the
contrary, all notices, communications and documents directed to the Company and
related to the Agreement, if not delivered by hand, shall be mailed, addressed
as follows:
SoftKey International Inc.
One Athenaeum Street
Cambridge, MA 02142
Attention: Secretary
Unless and until the Company is notified in writing to the contrary, all
notices, communications and documents intended for you and related to this
Agreement, if not delivered by hand, shall be mailed to your last known address
as shown on the Company's books. Notices and communications shall be mailed by
first class mail, postage prepaid; documents shall be mailed by U.S. registered
mail, return receipt requested, postage prepaid. All mailing and deliveries
related to the Agreement shall be deemed delivered, if mailed, on the second day
after they are deposited in the U.S. mail.
11.5 EXHIBITS. The exhibits attached to, or delivered to you with,
this Agreement (including without limitation the Plan) are incorporated herein
and form a part of this Agreement.
11.6 ENTIRE AGREEMENT. This Agreement, including the Plan, contains
all of the terms and conditions agreed upon by the parties relating to its
subject matter and supersedes any and all prior and contemporaneous agreements,
negotiations, correspondence, understandings and communications of the parties
whether oral or written, respecting that subject matter.
11.7 ATTORNEYS' FEES. If any party to this Agreement seeks to enforce
this Agreement by legal proceedings or otherwise, the nonprevailing party shall
pay the prevailing party's costs and expenses, including without limitation
reasonable attorneys' fees.
4
<PAGE> 5
11.8 VALIDITY OF PROVISIONS; SEVERABILITY. If any provision of this
Agreement is held invalid, illegal or unenforceable, the provision shall be
adjusted if possible rather than voided to carry out its intent to the maximum
extent possible and in all events the remainder of this Agreement will remain in
full force and effect.
11.9 COUNTERPARTS. This Agreement may be signed in counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same agreement.
11.10 NO EMPLOYMENT RIGHTS. This Agreement shall not confer upon you
any right to continued employment, nor shall it interfere in any way with the
right of the Company, a subsidiary or affiliate to terminate your employment at
any time.
SOFTKEY INTERNATIONAL INC.
By:
-----------------------------
R. Scott Murray
Chief Financial Officer
OPTIONEE
-----------------------------
Consent of Spouse
-----------------
If the Optionee resides in California, or another community property
jurisdiction, I, as the Optionee's spouse, also accept and agree to be bound by
the terms and conditions of this option and the Plan.
-------------------------------
Optionee's Spouse
5
<PAGE> 1
Exhibit 11.1
SOFTKEY INTERNATIONAL INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Transition
Years Ended Period Ended Year Ended
December 31, December 31, June 30,
--------------------------------- ------------- ------------
1995 1994 1993 1993
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (65,960) $ 21,145 $ (73,258) $ (57,250)
Add:
Interest on convertible debentures and notes -- 663 -- --
Amortization of convertible debenture issue
costs -- 119 -- --
============ ============ ============ ============
Adjusted net income (loss) $ (65,960) $ 21,927 $ (73,258) $ (57,250)
============ ============ ============ ============
Weighted average common and exchangeable
shares outstanding 24,855,000 18,710,123 14,618,000 13,129,000
Common equivalent shares:
Incremental shares calculated by the Treasury
Stock method applied to options, convertible
debentures and warrants issued, using the
greater of the closing and average fair value -- 2,404,877 -- --
------------ ------------ ------------ ------------
Common and common share equivalents
outstanding for purposes of calculating fully
diluted earnings per share 24,855,000 21,115,000 14,618,000 13,129,000
============ ============ ============ ============
Fully diluted earnings (loss) per share $ (2.65) $ 1.04 $ (5.01) $ (4.36)
============ ============ ============ ============
</TABLE>
<PAGE> 1
Exhibit 21.1
Subsidiaries
Compton's NewMedia, Inc. (California)
Compton's Learning Company (Delaware)
Future Vision Holding, Inc. (New York)
Future Vision Multimedia Inc. (New York)
Multimedia Products Corp. (New York)
SuperStudio Ltd. (Israel)
SoftKey Holdings Corporation (Ontario)
SoftKey Software Products Inc. (Ontario)
SoftKey Holdings GmbH (Germany)
tewi Verlag GmbH (Germany)
Personal Soft S.A. (France)
SoftKey International Limited (England)
SoftKey International (Ireland) Ltd. (Ireland)
SoftKey International K.K. (Japan)
SoftKey Inc. (Minnesota)
SoftKey Multimedia Inc. (Massachusetts)
The Learning Company (Delaware)
Hyperglot Software Co., Inc. (Tennessee)
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
SoftKey International Inc. on Form S-8 (Nos. 33-75134, 33-92920, 33-92922,
33-61931, and 333-00107) and on Form S-3 (Nos. 33-59706, 33-72050, 33-73422,
33-60087, 33-60593, 33-63073, and 333-145) of our report dated February 22,
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.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 4, 1996
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated January 16, 1995 included in this Form 10-K,
into the Company's previously filed Registration Statement File Nos. 33-59706,
33-72050, 33-75134, 33-73422, 33-92920, 33-92922, 33-60087, 33-60593, 33-61931,
33-63073, 333-00107 and 333-145.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 4, 1996
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SoftKey International Inc.
(formerly WordStar International Incorporated):
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-75134, 33-92920, 33-92922, 33-61931, and 333-00107) and on Form S-3
(Nos. 33-59706, 33-72050, 33-73422, 33-60087, 33-60593, 33-63073, and 333-145)
of SoftKey International Inc. 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 December
31, 1995 annual report on Form 10-K of SoftKey International Inc.
/s/ KPMG Peat Marwick LLP
San Francisco, California
April 4, 1996
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reerence in the Form 10-K constituting
part of the Registration Statements on Form S-3 (Nos. 33-59706, 33-72050,
33-73422, 33-60087, 33-60593, 33-63073, 333-145) and the Registration Statements
on Form S-8 (Nos. 33-75134, 33-92920, 33-92922, 33-61931, 333-00107) 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 for the year ended June 30, 1993,
appearing on page 32 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
Boston, Massachusetts
April 4, 1996
