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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 1997
Commission File Number 0-13069
THE LEARNING COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-2562108
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(Address of Principal Executive Offices)
(617) 494-1200
(Registrant's Telephone Number, Including Area Code)
Indicate by check (X) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 11, 1997, there were 48,094,053 outstanding shares of
the issuer's common stock, par value $.01 per share.
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THE LEARNING COMPANY, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Page
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ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996.................. 3
Condensed Consolidated Statements of
Operations for the Three and Nine
Months Ended September 30, 1997 and 1996.................. 4
Condensed Consolidated Statements of
Cash Flows for the Nine Months
Ended September 30, 1997 and 1996......................... 5
Notes to Condensed Consolidated Financial Statements...... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings......................................... 14
ITEM 2. Changes in Securities..................................... 14
ITEM 6. Exhibits and Reports on Form 8-K.......................... 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 96,610 $110,120
Accounts receivable (less allowances for returns
of $21,256 and $15,191, respectively) 78,445 79,610
Inventories 23,669 15,894
Other current assets 26,985 20,349
--------- --------
225,709 225,973
Intangible assets, net 185,251 544,570
Other long-term assets 30,056 22,975
--------- --------
$ 441,016 $793,518
========= ========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities $ 120,820 $113,653
--------- --------
LONG-TERM OBLIGATIONS:
Senior Convertible Notes 303,650 331,650
Senior Convertible/Exchangeable Note - Related Party 150,000 150,000
Other long-term obligations 2,809 6,358
--------- --------
456,459 488,008
--------- --------
DEFERRED INCOME TAXES 65,413 86,920
--------- --------
STOCKHOLDERS' EQUITY (DEFICIT) (201,676) 104,937
--------- --------
$ 441,016 $793,518
========= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
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THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 96,051 $ 90,055 $ 272,236 $ 237,308
COSTS AND EXPENSES:
Costs of production 25,573 23,095 75,210 63,799
Sales and marketing 19,425 17,061 59,350 48,311
General and administrative 6,892 7,044 23,537 20,794
Research and development 9,189 9,710 29,835 26,457
Amortization and merger related charges 126,930 120,818 374,119 373,407
----------- ----------- ----------- -----------
188,009 177,728 562,051 532,768
----------- ----------- ----------- -----------
OPERATING LOSS (91,958) (87,673) (289,815) (295,460)
INTEREST EXPENSE, net 5,847 5,506 16,363 18,225
----------- ----------- ----------- -----------
LOSS BEFORE TAXES (97,805) (93,179) (306,178) (313,685)
PROVISION FOR INCOME TAXES:
Current 7,139 6,774 16,288 14,783
Deferred (7,139) (6,774) (16,288) (14,783)
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
NET LOSS $ (97,805) $ (93,179) $ (306,178) $ (313,685)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (1.98) $ (2.08) $ (6.25) $ (8.02)
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 49,315,000 44,798,000 49,013,000 39,124,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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THE LEARNING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
Nine Months Ended
September 30,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(306,178) $(313,685)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 377,453 321,555
Provisions for returns and doubtful accounts 47,627 26,218
Charge for purchased research and development -- 56,688
Changes in operating assets and liabilities:
Accounts receivable (44,679) (60,382)
Accounts payable and accruals (4,509) 6,025
Other (19,361) 8,823
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,353 45,242
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets and other (8,079) (13,456)
Acquisition related items (40,374) (38,921)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (48,453) (52,377)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases, and other long-term debt (515) (6,233)
Repurchase of Senior Convertible Notes (28,000) (8,350)
Borrowings (repayments) under line of credit 10,000 25,000
Proceeds from issuance of common stock for settlement of expenses -- 2,888
Proceeds from issuance of common stock related to exercise of
stock options and share repurchases, net 4,694 21,435
Other (531) (764)
--------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (14,352) 33,976
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,058) (197)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (13,510) 26,644
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 110,120 77,832
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 96,610 $ 104,476
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
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THE LEARNING COMPANY, INC .
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
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Nine Months Ended
September 30,
----------------------
1997 1996
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued to acquire MECC $ -- $220,184
Increase in APIC due to value of in-the-money employee stock
options acquired in connection with the acquisition of MECC -- 19,444
Common stock issued to acquire others 2,022
Common stock issued for settlement of expenses -- 10,132
Common stock issued to settle note payable to related party -- 3,053
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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THE LEARNING COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Learning Company, Inc.
(formerly known as SoftKey International Inc.) ("TLC" or the "Company") for the
three months and nine months ended September 30, 1997 and 1996 are unaudited and
reflect all adjustments, consisting of normal recurring adjustments, which are,
in the opinion of management, necessary for a fair presentation of the results
for the interim periods. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended January 4, 1997. The results of operations for the three months and nine
months ended September 30, 1997 are not necessarily indicative of the results
for the entire year ending December 31, 1997.
The third quarter reporting period for 1997 ended on October 4, 1997, and the
third quarter reporting period for 1996 ended on October 5, 1996. For clarity of
presentation and comparison, all references to the Year Ended December 31, 1996
relate to the period January 7, 1996 to January 5, 1997. The periods from
July 6, 1997 to October 4, 1997 and from July 7, 1996 to October 5, 1996 are
referred to as the "Third Quarter 1997" and the "Third Quarter 1996" or the
"Three Months Ended September 30, 1997" and the "Three Months Ended
September 30, 1996", respectively. The periods from January 6, 1997 to
October 4, 1997 and from January 7, 1996 to October 5, 1996 are referred to as
the "Nine Months Ended September 30, 1997" and the "Nine Months Ended
September 30, 1996," respectively, throughout these financial statements.
2. ACQUISITIONS
On September 19, 1997, the Company acquired Learning Services Inc. ("Learning
Services") in exchange for the issuance of 709,976 shares of common stock. On
September 29, 1997, the Company acquired Skills Bank Corporation ("Skills Bank")
in exchange for the issuance of 1,069,286 shares of common stock. On October 2,
1997, the Company acquired Microsystems Software, Inc. ("Microsystems") in
exchange for the issuance of 955,819 shares of common stock. Each of these
acquisitions was accounted for using the pooling-of-interest method of
accounting. The financial statements for periods prior to the Nine Months ended
September 30, 1997 have not been restated to reflect amounts for these
acquisitions as they were deemed to be immaterial.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The excess cost over the fair value of net assets acquired is recorded as
goodwill and other identifiable intangible assets are amortized on a
straight-line basis over two 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. 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 or a
change in useful life. To date no such impairment or change in useful life has
occurred. Should there be an impairment in the future, the Company will measure
the amount of the impairment based on undiscounted expected future cash flows or
other appropriate market estimates. The undiscounted cash flow estimates that
will be used will contain management's best estimates, using appropriate and
customary assumptions and projections at the time.
4. SIGNIFICANT ACCOUNTING POLICIES
The Company follows Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing Financial Assets and Extinguishments of
Liabilities ("FAS 125"). FAS 125 applies a control-oriented, financial-
components approach to financial-asset-transfer transactions whereby the Company
(1) recognizes the financial and servicing assets it controls and the
liabilities it has incurred, (2) derecognizes financial assets when
7
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control has been surrendered, and (3) derecognizes liabilities once they are
extinguished. The Company, through its wholly owned subsidiary The Learning
Company Funding, Inc. (a separate special purpose corporation), is party to a
receivables purchase agreement whereby it can sell without recourse undivided
interests in eligible pools of trade accounts receivable on a revolving basis
during a five year period ending September 30, 2002 of up to $75,000. The
Company acts as servicing agent for the sold receivables in the collection and
administration of the accounts.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 is effective for the Company beginning in the
fourth quarter of fiscal 1997, and requires restatement of all previously
reported interim and annual earnings per share data. Under SFAS No. 128, the
primary earnings per share calculation will be modified to exclude the dilutive
effect of common stock equivalents in determining basic earnings per share. The
Company expects that basic earnings per share would not be materially different
compared to primary earnings per share in the Three and Nine Months Ended
September 30, 1997 and 1996 due to the net loss. The impact of adoption of SFAS
No. 128 on the calculation of fully diluted earnings per share is not expected
to be material for either period.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company will implement SFAS No.
130 and SFAS No. 131 as required in fiscal 1998, which require the Company to
report and display certain information related to comprehensive income and
operating segments.
5. BORROWINGS AND LONG-TERM OBLIGATIONS
On August 26, 1997, the Company entered into an agreement to issue an aggregate
of $150,000 of Series A Convertible Participating Preferred Stock (the
"Preferred Stock") to an investor group. The Preferred Stock will be issued in
exchange for $150,000 principal amount of the Company's 5-1/2% Senior
Convertible/Exchangeable Notes, which the investor group has agreed to purchase
from Tribune Company in a privately negotiated transaction. The Preferred Stock
is convertible into common stock at a conversion price of $10 per share (subject
to adjustment in certain circumstances) resulting in 15,000,000 shares of common
stock in the aggregate. The Preferred Stock is non-redeemable, bears no
dividend, must be held for a period of at least eighteen months and is
mandatorily convertible into common stock upon satisfaction of certain
conditions. The closing of the transaction is subject to certain closing
conditions, including approval of the Company's stockholders at a meeting which
is scheduled to occur on December 4, 1997.
The Company has a revolving line of credit (the "Line") to provide a maximum
availability of $50,000, of which $35,000 is outstanding at September 30, 1997.
Borrowings under the line are due July 1, 1998 and bear interest at the prime
rate. The Line is subject to certain financial covenants, is secured by a
general security interest in certain operating subsidiaries of the Company and
by a pledge of the stock of certain of its subsidiaries.
6. SUBSEQUENT EVENTS
On October 23, 1997, the Company agreed to acquire Creative Wonders LLC for a
total purchase price of approximately $40,000, which includes cash and the value
of employee stock options to be assumed by the Company. The closing of the
transaction is subject to certain conditions, including expiration of applicable
waiting periods under pre-merger notification regulations and the receipt of
certain consents of third parties. The transaction is expected to close before
the end of December 1997.
On November 6, 1997, the Company's Canadian subsidiary, Softkey Software
Products Inc. ("SoftKey"), issued 4,072,000 special warrants in a private
placement for proceeds of approximately $62 million. Following release of the
proceeds from escrow as further described below, each special warrant will be
exercisable without additional payment for one exchangeable non-voting share of
SoftKey (an "Exchangeable Share"). SoftKey's Exchangeable Shares are
exchangeable on a one-for-one basis for common stock of the Company. The
proceeds of the private placement will be held in escrow subject to the
satisfaction of certain conditions, including approval of the holders of
outstanding Exchangeable Shares and receipt of certain regulatory approvals.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended January 4, 1997. All
dollar amounts presented in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are presented in thousands, except
per share amounts. Certain of the information contained in this Quarterly Report
on Form 10-Q 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"). The Company's actual results may differ
materially from those set forth in such forward-looking statements. Certain
risks and uncertainties including, but not limited to, those discussed below in
"Factors Affecting Future Operating Results," as well as in the Company's Annual
Report on Form 10-K for the 1996 fiscal year as filed with the Securities and
Exchange Commission (the "SEC"), 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.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations is provided pursuant to applicable
regulations of the SEC and is not intended to serve as a basis for projections
of future events.
INTRODUCTION
The Learning Company, Inc. ("TLC" or the "Company") develops and publishes a
broad range of high quality consumer software for personal computers ("PCs")
that educate across every age category, from young children to adults. The
Company's primary emphasis is in education and reference software, but it also
offers a selection of lifestyle, productivity and, to a lesser extent,
entertainment products, both in North America and internationally.
The Company's families of educational products are principally sold under The
Learning Company and MECC brands and include among other products the "Reader
Rabbit" family, "Trail" family, "Writing and Creativity Tools" family, "College
Prep" family, and the "Foreign Languages" family. In addition to consumer
versions, the Company also publishes school editions of a number of these
products. The Company's reference products include a line of Compton's Home
Library branded products (including Compton's Interactive Encyclopedia), as well
as the American Heritage Talking Dictionary, Mosby's Medical Encyclopedia and
BodyWorks and Cyber Patrol, an internet filtering product. The Company's premium
productivity and lifestyle products are largely published under the SoftKey
brand. The Company also publishes lower priced boxed products under the "Key"
and "Classic" brands and a line of budget, jewel-case only products under the
"Platinum" brand.
The Company distributes its products through retail channels, including direct
sales to computer electronics stores, office superstores, mass merchandisers,
discount warehouse stores and software specialty stores which control over
23,000 North American storefronts. The Company also sells its products directly
to consumers through the mail, telemarketing and the Internet, and directly to
schools. The Company's international sales are conducted from subsidiaries in
Germany, France, Holland, Ireland, the United Kingdom, Australia and Japan. The
Company also derives revenue from licensing its products to original equipment
manufacturers ("OEMs"), which bundle the Company's products for sale with
computer systems or components and through on-line offerings.
RESULTS OF OPERATIONS
NET LOSS. The Company incurred a net loss of $97,805 ($1.98 per share)
on revenues of $96,051 in the Third Quarter 1997 and a net loss of $306,178
($6.25 per share) on revenues of $272,236 in the Nine Months Ended September 30,
1997 as compared to a net loss of $93,179 ($2.08 per share) on revenues of
$90,055 in the Nine Months Ended September 30, 1996. The net loss in the Third
Quarter 1997 and 1996 and the Nine Months Ended September 30, 1997 and 1996 is a
result of the effect of the amortization and merger related charges of $126,930,
$120,818, $374,119 and $373,407, respectively.
REVENUES. Revenues by distribution channel for the Third Quarter 1997
as compared to the Third Quarter
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1996 and the Nine Months Ended September 30, 1997 as compared to the Nine Months
Ended September 30, 1996 and the respective percentage of revenues are as
follows:
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Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- ---------------------------------------
1997 % 1996 % 1997 % 1996 %
------- ---- ------- ---- -------- ---- -------- ----
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Retail $40,683 42% $50,394 56% $114,490 42% $123,503 52%
OEM 9,056 9% 8,113 9% 23,016 8% 21,708 9%
School 13,252 14% 7,722 9% 37,550 14% 17,220 7%
Direct response 9,283 10% 8,238 9% 29,004 11% 22,372 9%
International 20,803 22% 14,453 16% 55,320 20% 37,123 16%
Tax software and services 2,974 3% 1,135 1% 12,856 5% 15,382 7%
------- ---- ------- ---- -------- ---- -------- ----
$96,051 100% $90,055 100% $272,236 100% $237,308 100%
======= ==== ======= ==== ======== ==== ======== ====
</TABLE>
Retail sales declined as a percentage of total revenue for the Three Months
Ended September 30, 1997 and the Nine Months Ended September 30, 1997 as
compared to the Three Months Ended September 30, 1996 and the Nine Months Ended
September 30, 1996 primarily due to lower revenues in certain mall-based chains
due to a reduction in stores in those chains. During the Third Quarter 1997, the
Company launched several new products which included: The American Girls Premier
and Compton's Interactive Encyclopedia '98 Deluxe. International sales increased
primarily as a result of a license and distribution transaction in Australia and
revenues from the acquisitions of Edusoft SA and Domus BV in 1996, which were
purchase transactions. Direct response revenues increased due to increased
revenues from the outbound telephone sales program. School sales increased as a
result of the revenues from the acquisitions of Skills Bank Corporation and
Learning Services Inc. in September 1997. Revenues from the Tax Division
increased for the Three Months Ended September 30, 1997 as compared to the Three
Months Ended September 30, 1996 as a result of product introductions being
shipped earlier in the income tax season in order to meet customer delivery
dates.
COSTS AND EXPENSES. The Company's costs and expenses and the respective
percentages of revenues for the Third Quarter 1997 as compared to the Third
Quarter 1996 and the Nine Months Ended September 30, 1997 as compared to the
Nine Months Ended September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ -------------------------------------
1997 % 1996 % 1997 % 1996 %
------- --- ------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Costs of production $25,573 27% $23,095 26% $ 75,210 27% $ 63,799 27%
Sales and 19,425 20% 17,061 19% 59,350 22% 48,311 20%
marketing
Research and
development 9,189 10% 9,710 10% 29,835 11% 26,457 11%
General and
administrative 6,892 7% 7,044 8% 23,537 9% 20,794 9%
------- --- ------- --- -------- --- -------- ---
$61,079 64% $56,910 63% $187,932 69% $159,361 67%
======= === ======= === ======== === ======== ===
</TABLE>
Costs of production includes the cost of manuals, packaging, diskettes,
duplication, assembly and fulfillment charges. In addition, costs of production
includes royalties paid to third-party developers and inventory obsolescence
reserves. Costs of production, as a percentage of revenues, increased in the
Third Quarter 1997 as compared to the Third Quarter 1996 from 26% to 27%, and
remained constant in the Nine Months Ended September 30, 1997 as compared to the
Nine Months Ended September 30, 1996 at 27%. The increase in costs of production
as a percentage of revenues from Third Quarter 1997 to Third Quarter 1996 was
caused by lower selling prices for the Company's products from the prior year.
This increase was offset for the Nine Months Ended September 30, 1997 as
compared to the Nine Months Ended September 30, 1996 by a decrease in costs of
production as a percentage of revenues, which was caused by reduced prices on
the cost to manufacture products.
Sales and marketing expenses increased to 20% of revenues in the Third Quarter
1997 as compared to 19% of revenues in the Third Quarter 1996 and increased to
22% of revenue for the Nine Months Ended September 30, 1997 as compared to 20%
in the Nine Months Ended September 30, 1996. The increase relates to higher
spending on retail channel marketing and trade promotion programs.
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Research and development expenses remained constant at 10% of revenues in the
Third Quarter 1997 as compared to the Third Quarter 1996, and 11% of revenues in
the Nine Months Ended September 30, 1997 as compared to the Nine Months Ended
September 30, 1996.
General and administrative expenses decreased to 7% of revenues for the Third
Quarter 1997 as compared to 8% for the Third Quarter 1996 and remained constant
at 9% for the Nine Months Ended September 30, 1997 as compared to the Nine
Months Ended September 30, 1996. The reduction of general and administrative
expenses in Third Quarter 1997 as compared to Third Quarter 1996 is primarily
the result of continued efforts to reduce both fixed costs and employee
headcount.
The Company reported merger and amortization charges in the Third Quarter 1997
and the Third Quarter 1996 of $126,930 and $120,818, respectively, and during
the Nine Months Ended September 30, 1997 and the Nine Months Ended September 30,
1996, charges of $374,119 and $373,407, respectively, resulting primarily from
the acquisitions of The Learning Company ("The Former Learning Company"),
Compton's New Media, Inc. and Compton's Learning Company (collectively
"Compton's") and Minnesota Educational Computing Corporation ("MECC"). The
charges in the Nine Months Ended September 30, 1996 include $56,688 related to
in-process technology write-offs, with the remainder relating to amortization of
goodwill and acquired technology related assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $110,120 at December 31, 1996 to
$96,610 at September 30, 1997. This decrease was attributable to the repurchase
of $28,000 of 5 1/2% Senior Convertible Notes due 2000 (the "Senior Convertible
Notes") net of other financing proceeds, payments for other merger related
liabilities and purchases of equipment of $48,453 offset by cash generated from
operations of approximately $50,353. Included in cash from operations is $12,925
of interest paid related to the Senior Convertible Notes and the 5-1/2% Senior
Convertible/Exchangeable Notes due 2000 held by Tribune Company (the "Tribune
Notes").
As of November 15, 1997, the Company has outstanding $303,650 principal amount
Senior Convertible Notes and $150,000 principal amount Tribune Notes. The Senior
Convertible Notes and Tribune Notes will be redeemable by the Company on or
after November 2, 1998 at declining redemption prices. Should the Senior
Convertible Notes and the Tribune Notes not convert under their terms into
common stock, there can be no assurances that the Company will have sufficient
cash flows from future operations to meet payment requirements under the debt or
be able to re-finance the notes under favorable terms or at all.
On August 26, 1997, the Company announced that it had entered into an agreement
to issue an aggregate of $150,000 of Series A Convertible Participating
Preferred Stock (the "Preferred Stock") to an investor group. The Preferred
Stock will be issued in exchange for $150,000 principal amount of the Company's
5-1/2% Senior Convertible/Exchangeable Notes, which the investor group has
agreed to purchase from Tribune Company in a private negotiated transaction. The
Preferred Stock is convertible into common stock at a conversion price of $10
per share (subject to adjustment in certain circumstances) resulting in
15,000,000 shares of common stock in the aggregate. The Preferred Stock is
non-redeemable, bears no dividend, must be held for a period of at least
eighteen months and is manditorily convertible into common stock upon
satisfaction of certain conditions. The closing of the transaction is subject to
certain closing conditions, including approval of the Company's stockholders at
the annual meeting of stockholders which is scheduled to occur on December 4,
1997. The issuance of the Preferred Stock would reduce the Company's annual
interest expense by $8,250.
On November 6, 1997, the Company's Canadian subsidiary, Softkey Software
Products Inc. ("SoftKey"), issued 4,072,000 special warrants in a private
placement for proceeds of approximately $62 million. Following release of the
proceeds from escrow as further described below, each special warrant will be
exercisable without additional payment for one exchangeable non-voting share of
SoftKey (an "Exchangeable Share"). SoftKey's Exchangeable Shares are
exchangeable on a one-for-one basis for common stock of the Company. The
proceeds of the private placement will be held in escrow subject to the
satisfaction of certain conditions, including approval of the holders of
outstanding Exchangeable Shares and receipt of certain regulatory approvals.
11
<PAGE> 12
On August 1, 1996, the Company announced that its Board of Directors authorized
the repurchase by the Company over the next twelve months of up to $50,000
principal amount of its Senior Convertible Notes from time to time in the open
market and privately negotiated transactions. Any purchases would depend on
price, market conditions and other factors. During the Third Quarter 1997,
Senior Convertible Notes declined by $10,000. During the Nine Months Ended
September 30, 1997, Senior Convertible Exchangeable Notes declined by $28,000.
In September 1997, the Company announced that it has repealed its previously
announced 3,000,000 share common stock repurchase program.
The Company has in place a revolving line of credit (the "Line") to provide for
a maximum availability of $50,000, of which $35,000 is outstanding at
September 30, 1997. Borrowings under the Line become due on July 1, 1998 and
bear interest at the prime rate. The Line is subject to certain financial
covenants, is secured by a general security interest in certain operating
subsidiaries of the Company and by a pledge of the stock of certain of its
subsidiaries. The Line is guaranteed by the Company.
The Company, through its wholly owned subsidiary The Learning Company Funding,
Inc. (a separate special purpose corporation), is party to a receivables
purchase agreement whereby it can sell without recourse undivided interests in
eligible pools of trade accounts receivable on a revolving basis during a five
year period ending September 30, 2002 of up to $75,000. The Company acts as
servicing agent for the sold receivables in the collection and administration of
the accounts.
On October 23, 1997, the Company agreed to acquire Creative Wonders LLC for a
total purchase price of approximately $40,000, which includes cash and the value
of employee stock options to be assumed by the Company. The closing of the
transaction is subject to certain conditions, including expiration of applicable
waiting periods under pre-merger notification regulations and the receipt of
certain consents of third parties. The transaction is expected to close before
the end of December 1997.
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.
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 and software markets. In addition,
the Company's Senior Convertible Notes and Tribune Notes mature November 1,
2000. If not converted to common stock, the Company may be required to secure
alternative financing sources. There can be no assurance that alternative
financing sources will be available on terms acceptable to the Company in the
future or at all. The Company continuously evaluates products and technologies
for acquisitions, however no estimation of short-term or long-term cash
requirements for such acquisitions can be made at this time.
FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment that is subject to many
risks and uncertainties. Some of the important risks and uncertainties which may
cause the Company's operating results to differ materially or adversely are
discussed below and in the Company's Annual Report on Form 10-K for the 1996
fiscal year on file with the SEC.
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
competes for retail shelf space and general consumer awareness with a number of
companies that market consumer software, including competitors and potential
competitors that possess significantly greater capital, marketing resources and
brand recognition than the Company. Furthermore, the rapid changes in the market
and the increasing number of new products available to consumers have increased,
and are expected to continue to increase, the degree of consumer acceptance risk
with respect to any specific title that the Company may publish.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 24, 1997, the Company terminated its business relationship with
Stream International, Inc. ("Stream"), and, on February 26, 1997, filed suit
against Stream in Massachusetts Superior Court for Middlesex County, seeking
injunctive relief and damages resulting from Stream's delayed and defective
performance of its manufacturing and distribution obligations. Stream responded
to the complaint by denying the Company's claims and asserting counterclaims for
certain outstanding invoices and other matters. As of September 4, 1997 the
parties settled the litigation. The Company had previously accrued for the
anticipated settlement in its financial statements; accordingly, the settlement
did not have any material impact on the Company's results of operations.
The Company is subject to various other pending claims. Management, after review
and consultation with counsel, considers that any liability from the disposition
of such lawsuits in the aggregate would not have a material adverse effect upon
the consolidated financial position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES.
On September 19, 1997, the Company issued 709,976 shares of the Company's common
stock to the former stockholder of Learning Services Inc. ("Learning Services")
in connection with the Company's acquisition of Learning Services. On
September 29, 1997, the Company issued 1,069,286 shares of the Company's common
stock to the former stockholders of Skills Bank Corporation ("Skills Bank") in
connection with the Company's acquisition of Skills Bank. On October 2, 1997,
the Company issued 955,819 shares of the Company's common stock to the former
stockholders of Microsystems Software, Inc. ("Microsystems") in connection with
the Company's acquisition of Microsystems.
For each issuance described above the Company has relied upon the exemption from
registration under Section 4(2) of the Securities Act. The basis for this
exemption is satisfaction of the conditions of Rule 506 under the Securities Act
in that the offers and sales satisfied all the terms and conditions of Rules 501
and 502 under the Securities Act, there were no more than 35 purchasers of
securities from the Company, other than accredited investors, and each
purchaser, either alone or with his purchaser representative, had such knowledge
and experience in financial and business matters that he was capable of
evaluating the merits and risks of the prospective investment.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Amended and Restated Combination Agreement by and among WordStar
International Incorporated, SoftKey Software Products Inc., Spinnaker
Software Corporation and SSC Acquisition Corporation dated as of
August 17, 1993, as amended(1)
3.1 Restated Certificate of Incorporation, as amended(2)
3.2 Bylaws of the Company, as amended(2)
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(4)
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")(4)
4.4 Letter Agreement dated November 22, 1995 amending the Registration
Rights Agreement(4)
4.5 Form of Securities Resale Registration Rights Agreement by and among
the Company and Tribune Company(5)
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(6)
10.1 Securities Purchase Agreement dated as of August 26, 1997 between TLC
and Thomas H. Lee Company, Thomas H. Lee Equity Fund III, L.P. and
Thomas H. Lee Foreign Fund III, L.P.(7)
10.2 Securities Purchase Agreement dated as of August 26, 1997 TLC and
Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP Associates,
L.P. and BCIP Trust Associates, L.P.(7)
10.3 Securities Purchase Agreement dated as of August 26, 1997 TLC and
Centre Capital Investors II, L.P., Centre Capital Tax-Exempt
Investors II, L.P., Centre Capital Offshore Investors II, L.P. ,
State Board of Administration of Florida, Centre Parallel Management
Partners, L.P. and Centre Partners Coinvestment, L.P.(7)
10.4 Stock Option Agreement dated as of August 26, 1997 between TLC and
Thomas H. Lee Company.(7)
10.5 Stock Option Agreement dated as of August 26, 1997 between TLC and
Bain Capital, Inc.(7)
10.6 Stock Option Agreement dated as of August 26, 1997 between TLC and
Centre Capital Investors II, L.P.(7)
</TABLE>
- -----------------
* Denotes management contract or compensatory plan or arrangement.
14
<PAGE> 15
1 Incorporated by reference to schedules included in the Company's
definitive Joint Management Information Circular and Proxy Statement dated
December 27, 1993.
2 Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 6, 1996.
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 Company's Registration
Statement on Form S-3 (Reg No. 333- 145), filed January 26, 1996.
5 Filed as exhibits to the Agreement and Plan of Merger dated November 30,
1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc., Tribune
Company, Compton's NewMedia, Inc. and Compton's Learning Company,
incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
6 Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
7 Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated August 26, 1997
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated August 26, 1997
reporting that it had entered into separate Securities Purchase Agreements with
affiliates of Thomas H. Lee Company, Bain Capital, Inc. and Centre Partners
Management LLC pursuant to which the Company will issue an aggregate of 750,000
shares of Series A Convertible Participating Preferred Stock of the Company in
exchange for the surrender of the Company's 5 1/2% Senior Convertible/
Exchangeable Notes due 2000 in an aggregate principal amount of $150,000,000
then to be held by such investors.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEARNING COMPANY, INC.
/s/ R. Scott Murray
----------------------------------------------------
R. Scott Murray
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
November 15, 1997
16
<PAGE> 17
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)
3.1 Restated Certificate of Incorporation, as amended(2)
3.2 Bylaws of the Company, as amended(2)
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(4)
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")(4)
4.4 Letter Agreement dated November 22, 1995 amending the Registration
Rights Agreement(4)
4.5 Form of Securities Resale Registration Rights Agreement by and among
the Company and Tribune Company(5)
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(6)
10.1 Securities Purchase Agreement dated as of August 26, 1997 between TLC
and Thomas H. Lee Company, Thomas H. Lee Equity Fund III, L.P. and
Thomas H. Lee Foreign Fund III, L.P.(7)
10.2 Securities Purchase Agreement dated as of August 26, 1997 TLC and
Bain Capital Fund V, L.P., Bain Capital V-B. L.P., BCIP Associates,
L.P. and BCIP Trust Associates, L.P.(7)
10.3 Securities Purchase Agreement dated as of August 26, 1997 TLC and
Centre Capital Investors II, L.P., Centre Capital Tax-Exempt
Investors II, L.P., Centre Capital Offshore Investors II, L.P. ,
State Board of Administration of Florida, Centre Parallel Management
Partners, L.P. and Centre Partners Coinvestment, L.P.(7)
10.4 Stock Option Agreement dated as of August 26, 1997 between TLC and
Thomas H. Lee Company.(7)
10.5 Stock Option Agreement dated as of August 26, 1997 between TLC and
Bain Capital, Inc.(7)
10.6 Stock Option Agreement dated as of August 26, 1997 between TLC and
Centre Capital Investors II, L.P.(7)
</TABLE>
- ---------------------
* Denotes management contract or compensatory plan or arrangement.
(1) Incorporated by reference to schedules included in the Company's
definitive Joint Management Information Circular and Proxy Statement dated
December 27, 1993.
17
<PAGE> 18
2 Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended July 6, 1996.
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 Company's Registration
Statement on Form S-3 (Reg No. 333- 145), filed January 26, 1996.
5 Filed as exhibits to the Agreement and Plan of Merger dated November 30,
1995 by and among the Company, Cubsco I, Inc., Cubsco II, Inc., Tribune
Company, Compton's NewMedia, Inc. and Compton's Learning Company,
incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
6 Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated December 11, 1995.
7 Incorporated by reference to exhibits filed with the Company's Current
Report on Form 8-K dated August 26, 1997.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<CIK> 0000719612
<NAME> THE LEARNING COMPANY
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<PERIOD-START> JUL-06-1997
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