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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 4, 1997.
COMMISSION FILE NUMBER : 0-13069
THE LEARNING COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2562108
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION)
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 494-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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, 1997 was approximately
$427,917,345.63. As of March 1, 1997, 44,458,945 shares of the registrant's
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders
expected to be held in May 1997 are incorporated by reference into Part III.
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TABLE OF CONTENTS
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PART I
1. Business 1
2. Properties 10
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for the Registrant's Common Stock and Related Stockholder Matters 11
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
8. Consolidated Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 47
PART III
10. Directors and Executive Officers of the Registrant 47
11. Executive Compensation 47
12. Security Ownership of Certain Beneficial Owners and Management 47
13. Certain Relationships and Related Transactions 47
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47
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PART I
ITEM 1. BUSINESS
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 the "Reader Rabbit" family,
"Trail" family, "Treasure" family, "Super Solvers" 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. 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" brand 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.
The Company's strategy is to develop and publish 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. Other key elements of this
strategy include focusing on consumer software that is broadly sold 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 has a history of acquiring companies in order to broaden its
product lines and sales channels. In May 1996 the Company consummated the
acquisition of Minnesota Educational Computing Corporation (MECC) ("MECC"). That
acquisition, together with the acquisitions in December 1995 of The Learning
Company ("The Former Learning Company") and Compton's NewMedia, Inc.
("Compton's"), marked the completion of a strategic initiative launched by the
Company in 1995 to expand its educational software franchise. The Company also
continued to expand internationally in 1996. In August 1996, the Company
acquired all the outstanding shares of Edusoft S.A., a French developer and
publisher of educational software ("Edusoft"), and in September it acquired
Domus Software B.V., a Dutch publisher of consumer software.
The Company was incorporated in California in October 1978 and
reincorporated in Delaware in October 1986. In February 1994, the Company, which
was then known as WordStar International Incorporated, completed a three-way
business combination with SoftKey Software Products Inc. and Spinnaker Software
Corporation in which the Company changed its name to SoftKey International Inc.
In October 1996, the Company changed its name to The Learning Company, Inc. to
reflect its expanded emphasis on educational software. The Company's executive
offices are located at One Athenaeum Street, Cambridge, Massachusetts 02142. Its
telephone number is (617) 494-1200, and its internet web site is located at
http:/www.learningco.com.
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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, including 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, affordably priced
software applications. In addition, consumers are exposed to software purchase
opportunities from a wide variety of sources and with increased frequency.
Declining retail prices, improved performance, expanded memory and enhanced
multimedia capabilities have been the main drivers of growth in the consumer
software market. Improvements in multimedia technology have made possible
engaging, highly interactive environments filled with rich content such as
enhanced graphics, animation and photographs, realistic sounds and music and
clips of film and video. These capabilities are particularly relevant to the
education, reference, lifestyle and entertainment categories, as specific
software purchases within these categories are largely driven by their content,
appearance and degree of interactivity.
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 mass merchandisers, book stores,
grocery stores and drug stores. As demand for consumer software has grown with
improvements in multimedia technology, consumers have also grown more
sophisticated in their expectations for software, requiring increasingly easy to
use, content rich products. Furthermore, competition has continued to increase
among new and existing multimedia software publishers, increasing price pressure
and competition for limited retail shelf space. 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 high-quality software at affordable prices to consumers.
PRODUCTS
TLC develops, publishes and markets premium CD-ROM software products for
Windows and Macintosh platforms that educate across every age, from young
children to adults. The Company's product line comprises education, reference,
lifestyle and productivity categories under such high quality brands as The
Learning Company, MECC, Compton's Home Library and SoftKey.
The Company's strategy is to leverage its name brands and breadth of
content by selling across a range of price points and through multiple
distribution channels. Products range in price from "Premium" ($29.95 to $59.95)
to "Key" ($19.95 to $29.95) to "Value" ($9.95 to $19.95). The Learning Company's
products are sold in more than 23,000 retail stores in North America and through
such diverse channels as international, school, direct response, OEM and
on-line.
Products are organized by brand and by category with corresponding
packaging, merchandising and promotional activities designed in support of the
products.
The Learning Company and MECC Educational Software
These brands represent a series of products tailored to support the most
fundamental learning topics taught in school. The product line is organized by
age and by subject area, covering everything from learning essentials for
preschoolers to test preparation for college-bound students and foreign language
instruction for adults. Market research and an experienced staff of educational
specialists seek to ensure that the content of each program is educational,
engaging, age-appropriate, non-violent and effectively delivered. Highlights
from the product line include:
- The Reader Rabbit family of language arts software is designed to develop
a lifelong love of reading in children ages 2 through 9. This series of ten
titles covers everything from letter recognition and phonics to reading
comprehension. The Reader Rabbit products have been developed based on a wealth
of research by educators, parents, children and reading specialists in order to
create the most educational, engaging, easy-to-use reading software.
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- The Writing and Creativity Tools family is designed to make writing and
communication fun and exciting for children at all ages -- from age 4 all the
way through high school age. Every program includes specific features to meet
the needs of children at each stage of their writing and communication
development, along with creativity features to spark the imagination.
- The Super Solvers family of products for children ages 8 to 14 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.
- Designed for children 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 different world featuring its own unique
characters, surprises and learning challenges.
- The Munchers family of products for children ages 6 to 12 is used widely
in both schools and homes to build children's skills and confidence in math,
spelling and trivia.
- The Trail series, including Oregon Trail II, are simulation games where
children learn about history and geography while taking part in exciting
adventures.
- TLC is a leader in foreign language software with its Learn To Speak,
Berlitz Think & Talk, Practice Makes Perfect and Travel Talk series of products
covering language instruction in Spanish, French, German, Italian, Japanese and
English. Appropriate for high school age through adult users, each line combines
state-of-the-art technology with advanced learning methodologies to create
highly interactive and effective products.
Reference and Lifestyle Software
- The Compton's Home Library brand comprises a complete line of core
reference, lifestyle and special interest programs. The Compton's Home Library
products are designed specifically to meet consumers' home information needs.
Each product in the line provides easy access to a wealth of information for
researching, learning and exploring, with many providing direct links to the
World-Wide-Web for up-to-date information. Products in this line include
Compton's Interactive Encyclopedia -- 1997 Edition, Compton's World Atlas, The
Complete Interactive Cookbook and Compton's Interactive Bible -- NIV.
- SoftKey branded reference products are among the best-selling titles in
the industry. Strong brands and rich multimedia content enable the Company to
sell these products across all its channels. Some of the most popular titles
include: BodyWorks 5.0, American Heritage Talking Dictionary, Infopedia and Time
Almanac.
Productivity Software
Productivity titles targeted at the home, small business and home office
users are the flagship titles under the SoftKey brand. The price points and
content of these programs are designed for the consumer who purchases programs
to meet very specific needs. The Key line is designed to meet productivity needs
of those users who appreciate a good value. This line includes a range of
personal productivity tools, content such as fonts and clip art, office
productivity solutions and design tools. Popular titles in the Productivity line
include: Calendar Creator 4.0, Labels Unlimited, Super Mega Clip Art and KeyCAD
Pro.
Value Software
The Value line under the Platinum, KeyKids and Classic brands are
recognized as top performers in the budget category of software. This CD-ROM
line offers consumers brand name software at affordable prices in a jewel case
only and boxed format. The line covers all software categories including
reference, education, productivity, lifestyle and games.
Tax Software and Services
In Canada, the Company is a supplier of income tax software products and
services through its subsidiary SoftKey Software Products Inc. ("SoftKey
Software"). Large and small accounting firms, corporations and
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small businesses in Canada rely on the Company to develop and update software
products for all aspects of income tax preparation. The Company also publishes
personal tax preparation software for use by individuals. The Company offers tax
software products under the TaxPrep, CanTax, Informatrix, HomeTax and L'Impot
Personnel brands.
SALES AND MARKETING
The Company distributes its consumer software products through retail
channels, direct response, OEMs and school channels within North America and
through international channels throughout Europe and the Pacific Rim.
Retail Channels. The Company has relationships with over 50 national
retailers and direct distributors controlling over 23,000 individual North
American storefronts where most of the nation's software sales occur. The
Company'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. 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
the Company, 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 electronic data interchange
("EDI") to 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. 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 Office Depot, OfficeMax and Staples, electronic
superstores such as CompUSA, Circuit City and Best Buy and mass merchants such
as Wal-Mart, K-Mart and Sears. In addition, the Company sells to distributors
such as Ingram Micro Inc., GT Interactive and Navarre.
Direct Response. The Company's database of over 5 million end-users
provides many cross-marketing opportunities. The Company mailed over 30 million
pieces of targeted direct mail in fiscal 1996. 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. The
Company made over 1.4 million outbound telephone calls in 1996 to sell products
to its customers. In 1996, the Company launched its "virtual store," an on-line
catalog on the Company's internet website. Using the virtual store, customers
can browse through the Company's products, try on-line before buying and submit
an on-line or telephone order. The Company has recently introduced electronic
registration for its consumer products that allows it to collect data from its
customers that in turn provide customer leads for the direct response business.
Original Equipment Manufacturers. The objective of the Company's OEM
strategy is to assist hardware manufacturers and on-line services to
differentiate their product lines and to introduce the Company's brands to new
computer hardware buyers. The Company licenses its software products to OEMs
(including IBM, Apple, Compaq, Hewlett-Packard and America On-Line), which
typically purchase the Company's products in higher volumes and at lower prices
than retail stores and distributors. The manufacturing 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. In addition, the Company receives royalties from
a number of OEMs that have no production costs, which results in higher gross
margins.
School Channel. The Company's efforts in the school channel focus on the
unique needs of the school market through targeted and specialized marketing and
services. The Company sells products directly to schools and school districts
through field based direct sales representatives, telemarketing and direct mail.
Sales are also made through authorized resellers and distributors including
Education Resources, Ingram Micro and Baker & Taylor. The Company markets its
school products to over 795 key school districts, 84,500
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school buildings and, in turn, to over 2.6 million classrooms across the United
States. The Company believes that through its MECC, The Learning Company and
Compton's brands it has a 24% share of the 1996 installed base of school
districts in the United States. The Company intends to continue to leverage its
established position in the school market to expand its sales in the home
market. The Company believes that the history of acceptance of its products in
schools, coupled with its broad range of award-winning products, positions it to
further enhance its market share position and brand awareness in the home
market.
International. The Company believes that the international consumer
software markets are rapidly growing as a result of trends similar to those
driving the North American market. The Company operates subsidiaries outside of
North America in Germany, France, Holland, Ireland, Australia, Japan, the United
Kingdom and Ireland. In addition, the Company has distributors in major
European, Latin American and Pacific Rim countries, as well as in South Africa.
The Company's subsidiaries in Ireland and Germany generally coordinate
manufacturing and distribution for all of the Company's sales in Europe, Latin
America 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 the Consolidated
Financial Statements Note 12 included in Item 8 and presented as a separate
section of this report.
PRODUCT DEVELOPMENT
The Company develops and publishes products through internal development as
well as licensing. Approximately 86% of the Company's domestic 1996 revenues
were derived from products that have been internally developed. Through this
dual product strategy approach, the Company is able to introduce new products
while managing its research and development costs. During 1996, the Company
launched a total of 49 new and upgraded premium education, reference and
productivity products, of which 35 were developed internally.
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" the Company must continuously update
and improve the content and the technology of its products 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. The Company generally pays these outside
developers/authors royalties based on a percentage of net sales.
The Company maintains research and development facilities and personnel in
Fremont, CA, Knoxville, TN and Minneapolis, MN. The Company's development
efforts include product development, documentation and testing as well as the
translation of certain of its products into foreign languages.
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.
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
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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 occasionally 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 external 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 external 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, MECC, SoftKey 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 licensed 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 developers/authors and further enhance its relationships with
the software development community. Retail and direct response 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
net sales.
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 defects, functionality,
ease-of-use and compatibility with the many popular PC and printer
configurations that are available to consumers.
The process of developing software products such as those offered by the
Company is extremely complex and is becoming more complex and expensive over
time. As a result, the financial risks borne by the Company associated with new
product development have increased. The Company's product development expense
levels are based largely on its expectations regarding future sales, and,
accordingly, operating results would be disproportionately adversely affected by
a decrease in sales or failure to meet the Company's sales expectations due to
delays in new product introductions, or lower than expected demand. If the
Company does not accurately anticipate and successfully adapt its products to
emerging platforms, environments and technologies, or new products are not
introduced when planned or do not achieve anticipated revenues, the Company's
operating results could be materially adversely affected. In addition, the
Company believes that on-line or Internet products and services will become an
increasingly important platform and distribution media; and as such the
Company's failure to timely and successfully adapt to and utilize such
technologies could materially and adversely affect its competitive position and
its financial results.
PRODUCTION
The Company 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
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Company's products involves the duplication of diskettes or CD-ROM disks and the
printing and assembly of packaging, labels, user manuals and other purchased
components. The Company subcontracts all of the manufacture and fulfillment of
its products to third party vendors. In 1996, the production, assembly and
distribution of the Company's North American budget, jewel-case only line of
products was performed by two units of Bertelsmann AG (collectively, "BMG"), and
the production, assembly and distribution of the Company's other North American
products, with certain exceptions (including duplication of CD-ROM disks, School
and OEM products), was performed by Stream International Inc. ("Stream"), a
different third party vendor. On February 24, 1997 the Company terminated its
business relationship with Stream due to Stream's inability to perform its
contractual obligations. See Item 3 -- Legal Proceedings. In connection with the
termination, in February 1997 units of BMG began to provide substantially all
duplication, assembly and fulfillment of the Company's North American products,
other than school products. While the Company believes that its expanded
relationship with BMG will result in greater manufacturing and fulfillment
efficiency, there can be no assurance that the Company will not experience
difficulties or delays in the manufacture and fulfillment as a result of the
transition of those functions. The Company believes that its existing production
capacity is sufficient to handle anticipated increases in volume and titles into
the foreseeable future. Duplication of diskettes and assembly of the Company's
international products take place primarily at the Company's facilities in
Dublin, Ireland and to a lesser extent in Munich, Germany.
TECHNICAL SUPPORT
The Company provides a variety of technical support services to dealers,
distributors, corporations and end users. Users of the Company's products
generally 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 Center in Knoxville, TN.
COMPETITION
The consumer software industry is intensely and increasingly competitive
and is characterized by rapid changes in technology and customer requirements.
The Company competes for retail shelf space and general consumer awareness with
a number of companies that market consumer software. The Company encounters
competition from both established companies, including the largest companies in
the industry, and new companies that may develop comparable or superior
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 distribution channel. To the
extent that demand increases for on-line products and content, the demand for
the Company's existing products may change. There can be no assurance that the
Company will be able to maintain market share or that the market will not
continue to erode, and otherwise compete successfully in the future.
Competitive pressures in the software industry have resulted, and the
Company believes are likely to continue to result, in pressure to reduce the
prices of its products or risk loss of market share. In response to such
competitive pressures the Company has reduced the price of certain of its
educational products. There can be no assurance that the Company's product
prices will not continue to decline in the future or that the Company will not
respond to such declines with additional price reductions. Such price reductions
may reduce the Company's revenues and operating margins in the future.
Large companies with substantial bases of intellectual property content in
the motion picture and media industries, sophisticated product marketing and
technical abilities and/or financial resources that may not need to realize an
immediate profit or return on investment have increasingly entered or announced
their intention to enter the consumer software market. These competitors
include: Microsoft, Disney, Mattel, Hasbro and CUC International Inc. For
example, technology companies have begun to acquire greater access to content,
and content-oriented companies have begun to acquire greater technological
capabilities. To the extent that competitors achieve a performance, price or
distribution advantage, the Company could be
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adversely affected. Furthermore, increased consolidation of the consumer
software market may impact future growth potential and performance.
In the retail distribution channel resellers typically have a limited
amount of shelf space and promotional resources. There is intense competition
for high quality and adequate levels of shelf space and promotional support from
retailers. To the extent that the number of consumer computer platforms and
products increases, this competition for shelf space may also increase. The
retail channel increasingly includes non-traditional software retailers such as
book, music, video, magazine, toy, gift, convenience, drug and grocery store
chains. Mass merchants such as Wal-Mart and K-Mart are increasingly representing
a larger portion of the Company's sales. As these retailers achieve greater
market share from the traditional software retailers, the Company may experience
higher marketing costs and increased competition for shelf space which could
impact future sales and operating margins. 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.
There can be no assurance that the Company will compete effectively in these
channels.
The retail channels of distribution available for products are subject to
rapid changes as retailers and distributors enter and exit the consumer software
market 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 platforms 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 in Canada,
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 and product
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.
PROPRIETARY RIGHTS AND LICENSES
Consistent with industry practice, the Company does not have signed license
agreements with the end users of its products, and its products do not contain
mechanisms to inhibit unauthorized copying. Instead, the Company relies on the
copyright laws to prevent unauthorized distribution of its software. The Company
also relies on a combination of trade secret, patent, trademark and other
proprietary rights, laws and license agreements to protect its proprietary
rights. Existing copyright laws afford only limited protection. It may be
possible for unauthorized third parties to copy the Company's products or to
obtain and use information the Company regards as proprietary.
Policing unauthorized use and distribution of the Company's products is
difficult, and while it is difficult to determine the extent to which such use
or distribution exists, software piracy can be expected to be a persistent
problem. These problems are particularly acute in certain international markets
such as South America, the Middle East, the Pacific Rim and the Far East, and
the laws of certain countries in which the Company's products are or may be
distributed provide less protection than those of the United States.
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
8
<PAGE> 11
communications and to resolve such matters promptly by enforcing its rights,
negotiating licenses (if necessary) or taking other appropriate actions.
In certain circumstances, litigation may be necessary to enforce 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 Company 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. In February 1994, WordStar changed its name to
SoftKey International Inc. in connection with a three-way business combination
including the Company, SoftKey Software Products Inc. ("Former SoftKey") and
Spinnaker Software Corporation (the "Three-Party Combination"). The business of
Former SoftKey prior to such transaction 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; 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. After the Three-Party Combination, SoftKey Software
publishing division operations were consolidated with the operations of the
Company and SoftKey Software continued to operate the businesses of the tax
division.
In 1995 and 1996, the Company acquired several consumer software companies,
including The Former Learning Company, Compton's, tewi Verlag, Edusoft S.A., and
MECC. In October 1996, the Company changed its name to The Learning Company,
Inc. to reflect its expanded emphasis on educational software.
EMPLOYEES
At March 1, 1997, the Company had approximately 990 full time 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 the Consolidated Financial Statements -- Note 12
included in Item 8 and presented as a separate section of this report.
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"). The
Company's actual results may differ materially from those set forth in such
forward-looking statements.
9
<PAGE> 12
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
timing of such new product introductions, expenses relating to the development
and promotion of such new product introductions, changes in pricing policies by
the Company or its competitors, projected and actual changes in platforms and
technologies, timely and successful adaptation to such platforms or
technologies, the accuracy of forecasts of consumer demand, product returns,
market seasonality, changes or disruptions in the consumer software distribution
channels, the effects of general economic conditions, the rate of growth in the
consumer software industry, 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 and the Company's ability to
continue to exploit new channels of distribution for its products. Additional
factors that may cause the Company's actual results to vary from those set forth
in forward-looking statements are described elsewhere in the Annual Report on
Form 10-K under the heading "Future Operating Results".
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 sales
activities are currently conducted. The lease for the Cambridge facility expires
in December 2002. The Company 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 products. The
Company leases approximately 50,000 square feet of office space in Minneapolis,
Minnesota which is used primarily for its school sales operation and the
development of certain educational products expiring in April 1998. In addition,
the Company leases 18,656 square feet of office space in Knoxville, Tennessee,
which is used for development of the Company's foreign language based products
and for its technical support activities. 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; Amsterdam, Holland; 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.
10
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
On February 24, 1997, the Company terminated its business relationship with
Stream International, Inc. ("Stream"). Stream had been providing the Company
with duplication, assembly and fulfillment services for certain of the Company's
products. In September 1996, Stream relocated the operations to a new facility.
The Company terminated the relationship due to Stream's inability to perform its
contractual obligations at the new location. On February 26, 1997, the Company
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.
Specifically, the Complaint asserts that the Company has been harmed by Stream's
misrepresentations, breaches of guarantee, breaches of duty and conversion.
While the Company continues to assess the full nature and amount of its damages,
the Company currently estimates that in litigation it will be seeking direct and
consequential damages from Stream in an amount in excess of $38 million. The
Company sought a pretrial determination of the status of certain proprietary
materials in the possession of Stream, which are used in the manufacture of the
Company's products. On March 10, 1997, the Court ordered that Stream place such
materials in escrow with an independent third-party pending resolution of the
action. The Court did not place restrictions on the sale of certain inventory in
Stream's possession. Stream has responded to the complaint by denying the
Company's claims and asserting counterclaims for certain outstanding invoices
and other matters in the amount of approximately $26 million.
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 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 is listed on the New York Stock Exchange under
the symbol "TLC." As of March 1, 1997, to the Company's knowledge, there were
approximately 1,371 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
fiscal periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
1995
First Quarter $29.125 $22.00
Second Quarter 32.125 21.00
Third Quarter 51.75 30.375
Fourth Quarter 45.625 20.375
1996 HIGH LOW
-------- -------
First Quarter $27.75 $13.375
Second Quarter 30.3125 17.25
Third Quarter 22.375 15.25
Fourth Quarter 25.75 13.375
</TABLE>
On April 5, 1996 the Company issued 158,099 shares of common stock to
Tribune Company in payment of a $3 million promissory note and all interest
accrued thereon. The Company has relied upon the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). The
11
<PAGE> 14
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 and the purchaser was an
accredited investor.
On May 21, 1996 the Company issued 500,000 shares (the "Bear Stearns
Shares") of common stock to Bear, Stearns & Co., Inc. ("Bear Stearns") pursuant
to the terms and provisions of an Adjustment Agreement dated as of May 20, 1996.
The Adjustment Agreement relates to the settlement of up to $10,131,394.17 in
fees, costs and expenses (the "Aggregate Fee Amount") payable by the Company to
Bear Stearns for investment banking advice and financial advisory services
rendered by Bear Stearns to the Company in connection with certain acquisitions
and the reimbursement and settlement of certain fees, costs and expenses in
connection therewith. Pursuant to the terms of the Adjustment Agreement, if the
Sale Proceeds (as defined in the Adjustment Agreement) to Bear Stearns relating
to the offer and sale of the Bear Stearns Shares were less than the Aggregate
Fee Amount, the Company agreed to pay Bear Stearns an amount in cash equal to
the difference in price between the Aggregate Fee Amount and the Sale Proceeds.
If the Sale Proceeds exceeded the Aggregate Fee Amount, Bear Stearns agreed to
pay the Company an amount in cash equal to the portion of the Sale Proceeds
which exceeded the Aggregate Fee Amount.
Under the Adjustment Agreement, Bear Stearns agreed to use all reasonable
efforts to sell all of the Bear Stearns Shares by the halt of trading on the
twentieth trading day after the date of the effectiveness of a registration
statement covering Bear Stearns' resale of the Bear Stearns Shares. If all Bear
Stearns Shares were not sold by the halt of the trading on the twentieth trading
day after such date, such remaining Bear Stearns Shares were to be sold by Bear
Stearns for its own account pursuant to the terms of the Adjustment Agreement.
Such sales could be made by Bear Stearns, subject to the timing, volume and
price limitations of the Adjustment Agreement described below, in transactions
on the Nasdaq National Market, in negotiated transactions, pursuant to an
underwritten offering or pursuant to one or more of the following methods (among
others): (a) purchases by a broker-dealer as principal and resale by such broker
or dealer for its account pursuant to a prospectus; (b) ordinary brokerage
transactions and transactions in which a broker solicits purchasers; and (c)
block trades in which a broker-dealer so engaged would attempt to sell the Bear
Stearns Shares as agent but could take a position and resell a portion of the
block as principal to facilitate the transaction. In connection with any such
sales, Bear Stearns could be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and could also
receive commissions from purchasers of the Bear Stearns Shares for whom it may
act as agent.
Pursuant to the terms of the Adjustment Agreement, Bear Stearns agreed to
sell no more than 75,000 Shares in any single trading day without the prior
consent of the Company and to sell all of the Bear Stearns Shares at a price
equal to or in excess of the prevailing per share market price of the Common
Stock at the time of sale, as determined by reference to then current quotations
on the Nasdaq National Market, unless the Company gave prior consent to a sale
of the Bear Stearns Shares at a lower price.
The Adjustment Agreement provided that the Company would indemnify Bear
Stearns against certain liabilities, including civil liabilities under the
Securities Act, or would contribute to certain payments Bear Stearns may be
required to make in respect thereof.
The Company has relied upon the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended (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 and each purchaser who was not
an accredited investor, 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.
On August 12, 1996 the Company issued an aggregate of 752,275 shares of
common stock to Beaucour Investissements, Society Fabry SCS and Michel Bussac,
the three selling stockholders of Edusoft, as the consideration for the purchase
by the Company of all the outstanding shares of Edusoft. 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
12
<PAGE> 15
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 and
each purchaser who was not an accredited investor, 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the Years Ended December
31, 1996, 1995 and 1994, the six month period ended December 31, 1993 (the
"Transition Period Ended December 31, 1993") and the Years Ended June 30, 1993
and 1992 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
PERIOD ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, YEARS ENDED JUNE 30,
------------------------------------ ----------- -----------------------
1996 1995 1994 1993 1993 1992
---------- ---------- ---------- ------------ ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 343,321 $ 167,042 $ 121,287 $ 41,645 $ 109,704 $ 119,518
Operating income (loss) (381,312) (60,870) 25,741 (69,057) (56,981) (599)
Net income (loss) (405,451) (65,960) 21,145 (73,258) (57,250) (4,983)
Net income (loss) per
share (fully diluted) $ (9.94) $ (2.65) $ 1.04 $ (5.01) $ (4.36) $ (.47)
Weighted average number
of shares outstanding --
fully diluted 40,801,000 24,855,000 21,115,000 14,618,000 13,129,000 10,502,000
</TABLE>
BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- -------------------
1996 1995 1994 1993 1993 1992
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total assets $793,518 $900,413 $90,815 $79,334 $128,474 $132,862
Total long-term obligations 574,928 561,101 21,859 24,687 30,248 23,449
Total stockholders' equity
(deficit) 104,937 214,519 37,485 (8,632) 61,933 87,049
</TABLE>
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-way business combination
(the "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. and on October 24, 1996,
changed its name to The Learning
13
<PAGE> 16
Company, Inc. ("TLC" or the "Company"). See "Consolidated Financial
Statements -- Note 2 -- Business Combinations" for further discussion.
On May 17, 1996, the Company acquired Minnesota Educational Computing
Corporation (MECC) ("MECC"), a publisher and developer of high quality
educational software for children sold to consumers and schools, in exchange for
9,214,007 shares of common stock. The total purchase price was $284,631,
including estimated transaction costs, the value of stock options assumed and
deferred income taxes related to certain identifiable intangible assets
acquired. In the transaction, approximately 1,048,000 MECC employee stock
options were converted into options to purchase approximately 1,198,000 shares
of TLC common stock. The transaction was accounted for as a purchase.
On August 12, 1996, the Company acquired Edusoft S.A. ("Edusoft"), an
educational software company located in Paris, France, in exchange for the
issuance of 752,275 shares of common stock. The total purchase price was
$13,313, including estimated transaction costs. In addition, certain
stockholders are eligible to earn additional purchase price dependent upon
future operating results and certain other conditions. The amount may be settled
annually in shares of the Company's common stock, the number of which is to be
determined on a volume-weighted average of the closing stock price following the
close of each fiscal year. This acquisition was accounted for as a purchase.
On December 28, 1995, the Company purchased Compton's NewMedia, Inc. and
Compton's Learning Company (collectively, "Compton's"), developers and
publishers of educational and reference multimedia software titles and each a
former wholly-owned subsidiary of Tribune Company. In and in connection with the
acquisition, the Company 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 $3,000 promissory note was repaid in 1996 by the
issuance of 158,099 shares of common stock. The transaction was accounted for as
a purchase.
On December 22, 1995, the Company acquired control of The Learning Company
("The Former Learning Company"), a leading developer of education software
products for use at home and school. Under the terms of the merger agreement,
the Company acquired, in a two step business combination, all of the outstanding
common stock of The Former 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 $543,163 of the purchase price was settled in cash.
Approximately 1.1 million unvested Former Learning Company stock options were
assumed and converted into stock options to purchase 3,123,000 shares of TLC
common stock, based on the merger consideration of $67.50 per share, and were
vested on or before January 26, 1996. This transaction was accounted for as a
purchase.
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 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 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 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 may be settled annually in
shares of the Company's common stock, the number of which to be determined based
on a volume-weighted average of the closing stock price following the closing of
each fiscal year.
14
<PAGE> 17
Fiscal Periods
On January 27, 1994, the Company changed its fiscal year end to the 52 or
53 weeks ending on or after December 31. For clarity of presentation herein, all
references to the Year Ended December 31, 1996 relate to the period January 7,
1996 to January 4, 1997; 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.
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 reflects the results of TLC prior to its acquisitions of
The Former Learning Company, MECC and Compton's.
Certain prior period amounts have been reclassified in order to conform
with current year presentation.
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>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Revenues $ 343,321 $167,042 $121,287
Operating income (loss) (381,312) (60,870) 25,741
Net income (loss) (405,451) (65,960) 21,145
Net income (loss) per share (fully diluted) $ (9.94) $ (2.65) $ 1.04
</TABLE>
Operating income (loss) includes amortization and merger related charges
related to acquisitions of $501,330, $103,172 and $2,432 in the Years Ended
December 31, 1996, 1995 and 1994, respectively.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1995
Revenues
Revenues by distribution channel for the Years Ended December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL
DISTRIBUTION CHANNEL 1996 REVENUES 1995 REVENUES
-------------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Retail $174,812 51 $ 75,734 45
OEM 27,855 8 20,021 12
School 21,701 6 -- --
Direct response 38,548 11 26,203 16
International 57,684 17 25,631 15
Tax software and services 22,721 7 19,453 12
-------- --- -------- ---
$343,321 100 $167,042 100
======== === ======== ===
</TABLE>
Total revenues increased 106% in the Year Ended December 31, 1996 as
compared to the Year Ended December 31, 1995 due to several factors, including
the effect of revenues from the acquisitions of The Former Learning Company,
Compton's and MECC and an increase in sales of new and upgraded products
launched by the Company during the year. Retail revenues increased as a result
of the acquisitions of The
15
<PAGE> 18
Former Learning Company, Compton's and MECC plus a general increase in sales of
consumer software products through retailers such as Wal-Mart, Office Depot,
K-Mart and OfficeMax and sales from new and upgraded products. International
sales increased primarily as a result of the acquisition of Edusoft in 1996, a
full year of sales from tewi which was acquired in July 1995 and an increase in
the number of translated foreign language versions of the Company's products
available for sale in the international markets. Original equipment manufacturer
("OEM") revenues increased due to the availability of new product offerings for
this channel and an increased demand for multi-language titles. Direct response
revenues increased on a dollar basis but decreased as a percentage of revenues
due to the overall increase in revenues resulting from product sales of the
acquired companies, which did not formerly participate in the direct response
channel. Direct response revenues also increased as a result of the introduction
of an outbound telephone sales program during 1996. Prior to the acquisitions of
The Former Learning Company and MECC, the Company did not participate in the
school channel. Revenues from tax software and services increased for the Year
Ended December 31, 1996 as compared to the Year Ended December 31, 1995 as a
result of earlier delivery of product to the Company's customers.
The Company expects that its future revenue growth will depend on, among
other things, its ability to introduce new and upgraded 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 along with the Company's respective share in the
consumer software market. Unit pricing will be affected by the extent of
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 negatively. During 1996, the Company experienced lower dollar and unit
market share in the retail consumer software market in the United States as
compared to the prior year. The Company believes that this combined company loss
of market share is due primarily to the entrance of large competitors with well
known brands such as Disney and Mattel and due to the success of a certain
number of its competitors' strategies to introduce lower priced offerings and
reduce current pricing. As a result of this increased competition the Company's
future revenues and market share may be adversely effected.
Costs and Expenses
The Company's costs and expenses and the respective percentages of revenues
for the Year Ended December 31, 1996 as compared to the Year Ended December 31,
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL
1996 REVENUES 1995 REVENUES
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Costs of production $ 91,045 27 $ 53,070 32
Sales and marketing 67,690 20 38,370 23
General and administrative 28,550 8 20,813 12
Research and development 36,018 10 12,487 7
Amortization and merger related
charges 501,330 146 103,172 62
-------- --- -------- ---
$724,633 211 $227,912 136
======== === ======== ===
</TABLE>
Total costs and expenses increased as a percentage of revenues to 211% in
the Year Ended December 31, 1996, as compared with 136% in the Year Ended
December 31, 1995. This increase as a percentage of revenues was caused
primarily by the charges for incomplete technology, the amortization of goodwill
and acquired technology resulting from the acquisitions of The Former Learning
Company, Compton's and MECC, offset by the reduction in general and
administrative costs, sales and marketing costs and costs of production as a
percentage of revenues as a result of the integration and centralization of the
operations of the acquired companies.
Costs of production includes the cost of manuals, packaging, diskettes and
CD-ROM disks, duplication, assembly and fulfillment charges. In addition, costs
of production includes royalties paid to third party
16
<PAGE> 19
developers and inventory obsolescence reserves. Costs of production, as a
percentage of revenues, decreased to 27% in the Year Ended December 31, 1996 as
compared to 32% in the Year Ended December 31, 1995. The decrease in costs of
production as a percentage of revenues was caused by reduced prices on the cost
to manufacture product due to increased unit volumes, changes in the production
components, the impact from The Former Learning Company and MECC having
historically higher gross margin selling products than the Company prior to the
acquisitions. In addition, during 1996 the Company experienced an increase in
revenues in the OEM, school and direct response channels, all of which typically
experience higher gross margins than the Company's traditional retail box
product sales channel. As well, the Company has seen an increase in sales of its
Value line of products, which, due to the nature of the low cost packaging in a
jewel-case, also generate higher gross margins.
The Company expects costs of production as a percentage of revenues to
increase in the foreseeable future due to sales pricing pressure on its products
by retailers. In February 1997, the Company moved a substantial portion of its
North American manufacturing operations from Stream International Inc., located
in Utah, to Sonopress, Inc. and BMG Distribution, units of Bertelsmann AG,
located in North Carolina. There can be no assurance that the Company will not
experience transition difficulties in connection with this move, which in turn
could result in higher costs of production and shipping delays to customers. If
the Company experiences higher costs of production and shipping delays, its
results of operations may be adversely affected.
Sales and marketing expenses decreased to 20% of revenues in the Year Ended
December 31, 1996 as compared to 23% of revenues in the Year Ended December 31,
1995. The percentage decrease was a result of the Company reducing both fixed
costs and employee headcount of its combined operations following the
acquisitions in late 1995 and May 1996.
General and administrative expenses decreased to 8% of revenues in the Year
Ended December 31, 1996 as compared to 12% in the Year Ended December 31, 1995.
This is primarily the result of a general reduction in overhead costs and
employee headcount following the acquisitions in 1995 and 1996.
Research and development expenses increased to 10% of revenues for the Year
Ended December 31, 1996 as compared to 7% in the Year Ended December 31, 1995.
The increase is a result of a higher proportion of internally developed products
from The Former Learning Company, Compton's and MECC than developed by the
Company prior to these acquisitions. The Company expects that as technologies
become more complex it will continue to spend an increasing percentage of its
revenues on research and development.
Amortization and merger related charges increased to 146% of revenues in
the Year Ended December 31, 1996 as compared to 62% in the Year Ended December
31, 1995. The increase results from the amortization of the goodwill and
acquired technology arising on the acquisitions of The Former Learning Company
and Compton's for a full year in the Year Ended December 31, 1996 as compared to
less than a month in the Year Ended December 31, 1995, and from the amortization
of goodwill and acquired technology and the charge for incomplete technology
arising from the acquisition of MECC in May 1996.
Amortization and merger related charges are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Amortization of goodwill and other assets $333,858 $ 24,783
Amortization of acquired technology 101,008 7,185
Charge for incomplete technology 56,688 60,483
Employee severance costs 4,260 1,304
Provision for earn-outs 2,917 --
Professional fees and other transaction related costs 1,267 5,653
Other 1,332 1,131
Provision for litigation -- 2,633
-------- --------
$501,330 $103,172
======== ========
</TABLE>
17
<PAGE> 20
The increase in amortization of goodwill and other assets in the Year Ended
December 31, 1996 as compared to the Year Ended December 31, 1995 relates
primarily to the goodwill resulting from acquisitions of MECC in May 1996 and a
full year of amortization of goodwill arising from The Former Learning Company
and Compton's, which were acquired in December 1995. Goodwill is primarily being
amortized on a straight-line basis over two years.
The increase in amortization of technology and of product related costs in
the Year Ended December 31, 1996 as compared to the Year Ended December 31, 1995
relates to the amortization of acquired technology in connection with the
acquisition of MECC in May 1996 and a full year of amortization of technology
and product related costs arising from The Former Learning Company and
Compton's, which were acquired in December 1995.
The charge for incomplete technology for the Year Ended December 31, 1996
relates to products being developed by MECC and in the Year Ended December 31,
1995 for products developed by The Former 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 was required to complete the
software technology and products.
Employee severance costs in each year related to severance paid to
employees of the Company terminated in connection with the acquisitions.
The provision for earn-outs relates to additional payments which may be
earned by the former owners of certain international acquisitions purchased in
1996 and 1995. The earn-out requirements are based upon meeting certain
financial and other goals and will be recorded when those conditions are met.
Professional fees decreased in the Year Ended December 31, 1996 as compared
to the Year Ended December 31, 1995 due to decreased charges related to the
investment banking, legal and accounting costs.
Interest Income (Expense)
Interest income (expense) increased to a net expense of $24,139 in the Year
Ended December 31, 1996 as compared to net income of $705 in 1995 as a result of
increased interest expense arising from the Senior Convertible Notes issued by
the Company in 1995.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1994
Revenues
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 TOTAL DECEMBER 31, % OF TOTAL
DISTRIBUTION CHANNEL 1995 REVENUES 1994 REVENUES
-------------------- ------------ ---------- ------------ ----------
<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.
18
<PAGE> 21
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 software 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.
Costs and Expenses
The Company's costs and expenses and the respective percentages of revenues
for the Year Ended December 31, 1995 as compared to the Year Ended December 31,
1994 are as follows:
<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 and marketing 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 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. 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-ROMs
and a greater proportion of business on CD-ROM as compared to magnetic disk.
Sales and marketing expenses 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 Former Learning Company, Compton's, tewi
and Future Vision, among others, during the Year Ended December 31, 1995 and
certain charges associated with the merger with MECC.
19
<PAGE> 22
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 Former 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 was 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 Former Learning Company,
Compton's and tewi and a full year's amortization of the goodwill resulting from
the acquisition of Software Marketing Corporation, which was acquired in
September 1994. Goodwill is primarily being amortized on a straight-line basis
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 Former 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.
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 through year end for the 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 was 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 Multimedia Entertainment,
Inc. and Compact Publishing, Inc.. 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $110,120 at December 31, 1996 from
$77,832 at December 31, 1995. This increase was attributable to the cash
provided by general operations, cash received from the acquisition of MECC of
$21,481 and proceeds from stock option exercises and other stock related
transactions of $27,905, offset by the repayment of approximately $38,091 of
merger related liabilities, repurchase of Senior Convertible Notes of $18,350
and purchases of equipment for $4,939. During the Year Ended December 31, 1996
the Company paid $25,025 of amounts due to the stockholders of The Former
Learning Company as the remaining purchase price due from the acquisition in
1995 and drew $25,000 on its line of credit. During the Year Ended December 31,
1996 the Company generated cash from operations of $65,655.
As of February 6, 1997, the Company has outstanding $331,650 principal
amount 5 1/2% Senior Convertible Notes due 2000 (the "Senior Convertible Notes")
and $150,000 principal amount 5 1/2% Senior Convertible/Exchangeable Notes due
2000 held by the Tribune Company (the "Tribune Notes"). The Senior Convertible
Notes and Tribune Notes will be redeemable by the Company on or after November
2, 1998 at declining redemption prices. 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
20
<PAGE> 23
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 1, 1996, the Company announced that its Board of Directors
authorized the repurchase by the Company over the next twelve months of up to
$50 million principal amount of its Senior Convertible Notes from time to time
in the open market and privately negotiated transactions. Any purchases would
depend on price, market conditions and other factors. During the Year Ended
December 31, 1996 Senior Convertible Notes declined by $18,350 through
repurchases.
In March 1997, the Company announced that its Board of Directors authorized
the repurchase by the Company of up to 3 million shares of its common stock from
time to time in open market and privately negotiated transactions. Any purchases
would depend on price, market conditions and other factors.
The Company also has in place a revolving line of credit (the "Line") with
a bank, to provide for a maximum availability of $50,000. Borrowings under the
Line become due on July 1, 1998 and bear interest at the prime rate (8.25% at
December 31, 1996). 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. There was $25,000 drawn on the Line at December 31,
1996, which has been subsequently repaid.
Income generated by the Company's subsidiaries in certain foreign countries
cannot be repatriated to the Company in the United States without payment of
additional taxes since the Company does not currently receive a U.S. tax credit
with respect to income taxes paid by the Company (including its subsidiaries) in
those foreign countries. The Company also conducts its tax software business in
Canada, which has experienced foreign currency exchange rate fluctuation
relative to the US dollar.
At the present time, the Company expects that its cash and cash equivalents
and 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. In
addition, the Company's Senior Convertible Notes and Tribune Notes mature in the
year 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 elsewhere in this Annual Report on Form 10-K.
INTENSE COMPETITIVE ENVIRONMENT
The consumer software industry is intensely and increasingly competitive
and is characterized by rapid changes in technology and customer requirements.
The Company competes for retail shelf space and general consumer awareness with
a number of companies that market consumer software. The Company encounters
competition from both established companies, including the largest companies in
the industry, and new companies that may develop comparable or superior
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 may change. There can be no
21
<PAGE> 24
assurance that the Company will be able to successfully maintain market share
and otherwise compete successfully in the future.
Competitive pressures in the software industry have resulted, and the
Company believes are likely to continue to result, in pressure to reduce the
prices of its products or risk loss of market share. In response to such
competitive pressures the Company has reduced the price of certain of its
educational products. There can be no assurance that Company's product prices
will not continue to decline in the future or that the Company will not respond
to such declines with additional price reductions. Such price reductions may
reduce the Company's revenues and operating margins in the future.
Large companies with substantial bases of intellectual property content in
the motion picture and media industries, sophisticated product marketing and
technical abilities and/or financial resources that may not need to realize an
immediate profit or return on investment have increasingly entered or announced
their intention to enter the consumer software market. These competitors include
Microsoft, Disney, Mattel, Hasbro and CUC International Inc. For example,
technology companies have begun to acquire greater access to content, and
content-oriented companies have begun to acquire greater technological
capabilities. To the extent that competitors achieve a performance, price or
distribution advantage, the Company could be adversely affected. Furthermore,
increased consolidation of the consumer software market may impact future growth
potential and performance.
In the retail distribution channel resellers typically have a limited
amount of shelf space and promotional resources. There is intense competition
for high quality and adequate levels of shelf space and promotional support from
retailers. To the extent that the number of consumer computer platforms and
products increases, this competition for shelf space may also increase. The
retail channel increasingly includes non-traditional software retailers such as
book, music, video, magazine, toy, gift, convenience, drug and grocery store
chains. Mass merchants such as Wal-Mart and K-Mart are increasingly becoming a
larger portion of the Company's sales. As these retailers achieve greater market
share from the traditional software retailers, the Company may experience higher
marketing costs and increased competition for shelf space, which could impact
future sales and operating margins. 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. There
can be no assurance that the Company will compete effectively in these channels.
The retail channels of distribution available for products are subject to
rapid changes as retailers and distributors enter and exit the consumer software
market 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 platforms 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.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
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. Software companies must continue to
develop or acquire new products or upgrade existing products on a timely basis
to sustain revenues and profitable operations. Factors contributing to the short
life span of PC software have included rapid technological change and an
expanded demand for content-rich products. Software companies must continue to
create or acquire innovative new products reflecting technological changes in
hardware and software and translate current products into newly accepted
hardware and software formats, in order to gain and maintain a viable market for
their products. PC hardware, in particular, is steadily advancing in power and
function, expanding the market for increasingly complex and flexible software
products. This has also resulted in longer periods necessary for research and
development of new products and a greater degree of
22
<PAGE> 25
unpredictability in the time necessary to develop products. Furthermore, the
rapid changes in the market and the increasing number of new products available
to consumers have increased the degree of consumer acceptance risk with respect
to any specific title that the Company may publish. It is expected that this
trend will continue and may become more pronounced in the future.
Similarly, the Company's recent product-content focus and enhanced presence
in the educational and reference software market have required and will continue
to require the Company to evaluate and adopt appropriate development and
marketing strategies and methods, which may differ from those historically
employed by the Company and subject the Company to the risks and competitive
pressures associated with those new strategies.
The Company's rights to license many of its software products are
non-exclusive and, generally, of limited duration, and there is no assurance the
Company will be able to continue to obtain new products from developers or to
maintain or expand its market share in the event that a competitor offers the
same or similar software products. If the Company is unable to develop or
acquire new products in a timely manner as revenues decrease from products
reaching the end of their natural life cycle, the Company's results of
operations will be adversely affected.
DEPENDENCE ON MAJOR SUPPLIER
In 1996, the production, assembly and distribution of the Company's North
American budget, jewel-case only line of products was performed by two units of
Bertelsmann AG (collectively, "BMG"), and the production, assembly and
distribution of the Company's other North American products, with certain
exceptions (including duplication of CD-ROM disks, School and OEM products), was
performed by Stream International, Inc. In February 1997, BMG began to provide
substantially all duplication, assembly and fulfillment of the Company's North
American products, other than school products. While the Company believes that
its expanded relationship with BMG will result in greater manufacturing and
fulfillment efficiency, there can be no assurance that the Company will not
experience difficulties or delays in the manufacture and fulfillment as a result
of the transition of those functions. The Company believes that its existing
production capacity is sufficient to handle anticipated increases in volume and
titles into the foreseeable future. Although the Company believes that suitable
alternative suppliers exist, there can be no assurance that any termination or
modification of its arrangement with BMG would not result in a short-term
business interruption for the Company.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share", which modifies
the way in which earnings per share ("EPS") is calculated and disclosed.
Currently, the Company discloses primary and fully diluted EPS. Upon adoption of
this standard for the fiscal year ending December 27, 1997, the Company will
disclose basic and diluted EPS for fiscal 1997 and will restate all prior period
EPS data presented. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for this period. Diluted EPS, similar to fully diluted EPS,
reflects the potential that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shares in the earnings of the entity.
Management believes the adoption of SFAS 128 will not have a material impact on
reported earnings per share.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements set forth on page 24 hereof.
23
<PAGE> 26
THE LEARNING COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants 25
Consolidated Balance Sheets as of December 31, 1996 and 1995 26
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1995 and 1994 27
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1996, 1995 and 1994 28
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994 29
Notes to Consolidated Financial Statements 31
Financial Statement Schedule of Valuation and Qualifying Accounts for the Years Ended
December 31, 1996, 1995 and 1994 46
</TABLE>
24
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of
The Learning Company, Inc.:
We have audited the accompanying consolidated balance sheets of The
Learning Company, Inc. (formerly known as SoftKey International Inc.) as of
January 4, 1997 and January 6, 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three fiscal
years in the period ended January 4, 1997. 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 The Learning
Company, Inc. as of January 4, 1997 and January 6, 1996 and the consolidated
results of its operations and its cash flows for each of the three fiscal years
in the period ended January 4, 1997 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 of
valuation and qualifying accounts. In our opinion, this financial statement
schedule for each of the three fiscal years in the period ended January 4, 1997,
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.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 27, 1997
25
<PAGE> 28
THE LEARNING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $110,120 $ 77,832
Accounts receivable, less allowances for returns and doubtful
accounts of $15,191 and $6,851, respectively 79,610 32,402
Inventories 15,894 18,997
Other current assets 20,349 23,627
-------- --------
225,973 152,858
-------- --------
Other long-term assets, net 22,975 19,621
Goodwill and other intangible assets, net 544,570 727,934
-------- --------
$793,518 $900,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 65,729 $ 47,485
Line of credit 25,000 --
Merger related accruals 10,667 40,089
Current portion of long-term obligations 2,819 963
Current portion of related party debt 5,264 4,314
Purchase price payable 3,245 25,353
Other current liabilities 929 6,589
-------- --------
113,653 124,793
-------- --------
Long-term obligations:
Long-term debt 332,930 350,651
Related party debt 150,000 150,000
Deferred income taxes 86,920 57,119
Other long-term obligations 5,078 3,331
-------- --------
574,928 561,101
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
Stockholders' equity:
Common stock, $.01 par value -- Authorized -- 120,000,000 and
60,000,000 shares; issued and outstanding 44,379,781 and
30,364,710 shares at December 31, 1996 and 1995, respectively 444 304
Special voting stock -- Authorized and issued -- one share
representing the voting rights of 1,551,428 and 1,596,742
outstanding Exchangeable Shares (for common stock) at December
31, 1996 and 1995, respectively -- --
Additional paid-in-capital 733,229 436,261
Accumulated deficit (618,047) (212,596)
Cumulative translation adjustment (10,689) (9,450)
-------- --------
104,937 214,519
-------- --------
$793,518 $900,413
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
26
<PAGE> 29
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 343,321 $ 167,042 $ 121,287
COSTS AND EXPENSES:
Costs of production 91,045 53,070 37,885
Sales and marketing 67,690 38,370 27,274
General and administrative 28,550 20,813 21,259
Research and development 36,018 12,487 6,696
Amortization and merger related charges 501,330 103,172 2,432
----------- ----------- -----------
Total operating expenses 724,633 227,912 95,546
----------- ----------- -----------
OPERATING INCOME (LOSS) (381,312) (60,870) 25,741
----------- ----------- -----------
INTEREST INCOME (EXPENSE):
Interest income 2,564 6,020 520
Interest expense (26,703) (5,315) (1,055)
----------- ----------- -----------
Total interest income (expense) (24,139) 705 (535)
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES (405,451) (60,165) 25,206
PROVISION FOR INCOME TAXES:
Current 23,645 5,795 4,061
Deferred (23,645) -- --
----------- ----------- -----------
-- 5,795 4,061
----------- ----------- -----------
NET INCOME (LOSS) $ (405,451) $ (65,960) $ 21,145
=========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Primary $ (9.94) $ (2.65) $ 1.07
Fully diluted $ (9.94) $ (2.65) $ 1.04
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary 40,801,000 24,855,000 19,672,000
Fully diluted 40,801,000 24,855,000 21,115,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
27
<PAGE> 30
THE LEARNING COMPANY, 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, 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 stock 30 -- -- -- 2,970 -- --
upon conversion of Phemus debt
Preferred dividend 3 -- -- -- 297 (300) --
Conversion of common stock to -- -- (7,582) (75) 75 -- --
Exchangeable Shares
Conversion of Exchangeable Shares to -- -- 4,156 41 (41) -- --
common stock
Conversion of debt to common stock -- -- 126 1 9,637 -- --
Conversion of Series A preferred stock (33) -- 268 3 30 -- --
to common stock
Treasury stock purchased -- -- -- -- -- -- --
Stock issued under exercise of options -- -- 648 6 5,811 -- --
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 -- -- 1,135 11 8,455 (3,608) --
Vision
Acquisition of tewi -- -- 99 1 3,639 -- --
Acquisition of The Former Learning -- -- -- -- 43,369 -- --
Company
Acquisition of Compton's -- -- 5,053 51 86,634 -- --
Other acquisitions -- -- 262 3 2,673 (236) --
Sale of common stock -- -- 2,713 27 73,584 -- --
Stock issued under exercise of options -- -- 1,898 19 28,171 -- --
and warrants
Treasury stock retirement -- -- -- -- (1,629) -- --
Conversion of Exchangeable Shares to -- -- 2,508 25 (25) -- --
common stock
Translation adjustments -- -- -- -- -- -- 201
Net loss -- -- -- -- -- (65,960) --
---- ---- ------ ---- -------- --------- --------
BALANCE, DECEMBER 31, 1995 -- -- 30,365 304 436,261 (212,596) (9,450)
Acquisition of MECC -- -- 9,214 92 240,670 -- --
Other acquisitions -- -- 899 9 15,247 -- --
Conversion of debt to common stock -- -- 158 2 3,051 -- --
Stock issued under exercise of options -- -- 3,198 32 24,985 -- --
Conversion of Exchangeable Shares to -- -- 45 -- -- -- --
common stock
Stock issued for settlement of -- -- 500 5 13,015 -- --
expenses
Translation adjustments -- -- -- -- -- -- (1,239)
Net loss -- -- -- -- -- (405,451) --
---- ---- ------ ---- -------- --------- --------
BALANCE, DECEMBER 31, 1996 $ -- $ -- 44,379 $444 $733,229 $(618,047) $(10,689)
==== ==== ====== ==== ======== ========= ========
<CAPTION>
TOTAL
STOCKHOLDERS'
TREASURY EQUITY
STOCK (DEFICIT)
-------- -------------
<S> <C> <C>
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 stock -- 3,000
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 stock -- 9,638
Conversion of Series A preferred stock -- --
to common stock
Treasury stock purchased (1,485) (1,485)
Stock issued under exercise of options -- 5,817
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 -- 4,858
Vision
Acquisition of tewi -- 3,640
Acquisition of The Former Learning -- 43,369
Company
Acquisition of Compton's -- 86,685
Other acquisitions -- 2,440
Sale of common stock -- 73,611
Stock issued under exercise of options -- 28,190
and warrants
Treasury stock retirement 1,629 --
Conversion of Exchangeable Shares to -- --
common stock
Translation adjustments -- 201
Net loss -- (65,960)
------ ---------
BALANCE, DECEMBER 31, 1995 -- 214,519
Acquisition of MECC -- 240,762
Other acquisitions -- 15,256
Conversion of debt to common stock -- 3,053
Stock issued under exercise of options -- 25,017
Conversion of Exchangeable Shares to -- --
common stock
Stock issued for settlement of -- 13,020
expenses
Translation adjustments -- (1,239)
Net loss -- (405,451)
------ ---------
BALANCE, DECEMBER 31, 1996 $ -- $ 104,937
====== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
28
<PAGE> 31
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(405,451) $ (65,960) $ 21,145
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 451,133 29,802 5,217
Charge for incomplete technology 56,688 60,483 --
Provision for returns and doubtful accounts 38,112 22,358 13,744
Change in assets and liabilities (net of acquired assets
and liabilities):
Accounts receivable (91,413) (39,811) (17,193)
Inventories 3,332 (4,441) (4,763)
Other current assets 4,203 8,865 (2,460)
Other long-term assets (4,308) 11,990 1,380
Accounts payable and accrued expenses 12,338 3,600 (10,594)
Other current liabilities 1,021 6,342 2,676
Other long-term obligations -- (2,294) 23
--------- --------- --------
Net cash provided by operating activities 65,655 30,934 9,175
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for businesses acquired, net of cash on-hand 21,518 (547,889) --
Purchases of property and equipment, net (4,939) (7,811) (5,514)
Software development costs (12,344) (2,410) (1,200)
Merger related accruals (38,091) (7,341) (19,903)
Payments to stockholders of The Former Learning Company (25,025) -- --
--------- --------- --------
Net Cash (Used for) Provided by Investing Activities (58,881) (565,451) (26,617)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock, options and warrants 27,905 106,616 8,852
Borrowings under term notes and line of credit 25,000 3,150 7,700
Payments on term notes and line of credit (4,832) (8,815) (2,500)
Payments on capital lease obligations (1,874) (1,008) (904)
Other (1,092) -- --
Sale (repurchase) of senior notes (18,350) 500,000 (500)
Redemption of Series B preferred stock -- -- (4,660)
--------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,757 599,943 7,988
--------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH (1,243) 201 (1,138)
--------- --------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 32,288 65,627 (10,592)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 77,832 12,205 22,797
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 110,120 $ 77,832 $ 12,205
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
29
<PAGE> 32
THE LEARNING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULING OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued to acquire MECC $221,319 $ -- $ --
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 Edusoft 13,099 -- --
Conversion of debt to equity 3,053 3,471 9,638
Common stock issued to acquire others 2,156 4,967 --
Common stock issued for settlement of expenses 10,132 111 2,275
Equipment acquired under capital leases 1,262 627 1,475
Common stock issued to acquire tewi -- 3,640 --
Common stock issued to acquire Compton's -- 86,685 --
Increase in APIC due to value of in-the money employee stock
options in connection with the acquisition of The Former
Learning Company -- 43,369 --
Common stock issued to purchase SMC -- -- 6,815
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
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (refunded) during period for:
Interest paid $ 28,466 $ 524 $1,387
Income taxes refunded (7,886) (12) (254)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
30
<PAGE> 33
THE LEARNING COMPANY, 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
The Learning Company, Inc. ("TLC" 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 in the retail channel through mass merchants, consumer electronic
stores, price clubs, office supply stores, software specialty stores and
distributors; to original equipment manufacturers (OEMs); to schools and to end
users through direct response methods. 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,
Holland, the United Kingdom, Japan and Australia. On October 24, 1996, SoftKey
International Inc. changed its name to The Learning Company, 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, 1996
relate to balances as of January 4, 1997, references to December 31, 1995 relate
to balances as of January 6, 1996, the period from January 7, 1996 to January 4,
1997 is referred to as the "Year Ended December 31, 1996", the period from
January 1, 1995 to January 6, 1996 is referred to as the "Year Ended December
31, 1995", and the period from January 2, 1994 to December 31, 1994 is referred
to as the "Year Ended December 31, 1994".
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. Significant estimates in
these financial statements include: return reserves, inventory reserves,
valuation of deferred tax assets and valuation of intangible assets.
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 from
software licensing and royalty arrangements. Revenues from the sale of software
products are 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
31
<PAGE> 34
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from royalty and license arrangements are 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 maturities at purchase of less than 90 days to be cash
equivalents.
Inventories
Inventories are stated at the lower of weighted average cost or net
realizable value, and include third-party assembly costs, CD-ROM disks, manuals
and an allocation of fixed overhead.
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Components $ 1,213 $ 2,526
Finished goods 14,681 16,471
------- -------
$15,894 $18,997
======= =======
</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>
Betterments and major renewals are capitalized and included in property,
plant, and equipment accounts while expenditures for maintenance and repairs and
minor renewals are charged to expense. When assets are retired or otherwise
disposed of, the assets and related allowances for depreciation and amortization
are eliminated from the accounts and any resulting gain or loss is reflected in
income.
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 3 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
32
<PAGE> 35
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
projections at the time. Goodwill and other intangible assets have been
presented net of accumulated amortization of $354,813 and $21,916 as of December
31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Net Balance
Estimated at December 31,
Useful Life ---------------------
Description in Years 1996 1995
----------- ----------- -------- --------
<S> <C> <C> <C>
Goodwill 2 and 40 $397,459 $580,165
Purchased technology and product related costs 1 to 2 126,763 123,929
Brands 2 10,061 10,798
Deferred financing costs 5 9,423 11,188
Other intangible assets 3 864 1,854
-------- --------
$544,570 $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 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 or may result in a change in estimated
useful life.
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.
Capitalized software development costs are being amortized on a straight-line
basis over the estimated product life, generally twelve months.
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
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 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.
33
<PAGE> 36
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BUSINESS COMBINATIONS
Three-Party Combination
On February 4, 1994, the Company completed a three-way business combination
(the "Three-Party Combination") among SoftKey Software Products Inc. ("Former
SoftKey"), WordStar International Incorporated ("WordStar") and Spinnaker
Software Corporation ("Spinnaker"). 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. The Three-Party Combination was accounted for
using the pooling-of-interests method of accounting.
MECC
On May 17, 1996, the Company acquired Minnesota Educational Computing
Corporation (MECC) ("MECC"), a publisher and developer of high quality
educational software for children sold to consumers and schools, in exchange for
9,214,007 shares of the Company's common stock. The total purchase price was
$284,631, including estimated transaction costs, value of stock options assumed
and deferred income taxes related to certain identifiable intangible assets
acquired. Approximately 1,048,000 MECC employee stock options were converted
into stock options to purchase approximately 1,198,000 shares of TLC common
stock.
Compton's
On December 28, 1995, the Company acquired Compton's New Media, Inc. and
Compton's Learning Company (collectively, "Compton's"), developers and
publishers of multimedia software titles. In and in connection with the
acquisition, TLC issued a total of 5,052,697 shares of the Company's 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 promissory note was repaid in 1996.
The Learning Company
On December 22, 1995, the Company acquired control of The Learning Company
(the "The Former Learning Company"), a leading developer of educational software
products for use at home and school. Under the terms of the merger agreement,
the Company acquired, in a two-step business combination, all of the outstanding
shares of The Former 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 Former Learning Company were converted into options to purchase
3,123,000 shares of the
34
<PAGE> 37
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's 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 Verlag GmbH ("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 if and when certain future conditions are met. During 1996, $540 of
consideration related to the contingent consideration was earned and recorded as
expense by the Company.
The purchase price for the 1996 acquisitions has been allocated based on
fair value as follows:
<TABLE>
<CAPTION>
MECC Others Total
-------- -------- --------
<S> <C> <C> <C>
Purchase price $284,631 $ 15,681 $300,312
Less: fair value of net tangible assets
(liabilities) 13,990 (15,424) (1,434)
-------- -------- --------
Excess to allocate 270,641 31,105 301,746
Less: excess allocated to:
Incomplete technology 56,688 -- 56,688
Completed technology and products 88,501 285 88,786
Brand and trademarks 894 -- 894
-------- -------- --------
146,083 285 146,368
-------- -------- --------
Goodwill $124,558 $ 30,820 $155,378
======== ======== ========
</TABLE>
The purchase price for the 1995 acquisitions has been allocated based on
fair value as follows:
<TABLE>
<CAPTION>
The Former
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 with respect to the estimated fair market value of a
substantial portion of the assets acquired, to serve as a basis for the
allocation of the purchase price for MECC, The Former Learning Company and
Compton's. 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.
35
<PAGE> 38
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software technology was divided into two categories. Software technology and
products under development not considered to have reached technological
feasibility were expensed on acquisition.
Each of the above 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 issue of 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
The Former
Year Ended Learning Pro forma Pro forma
December 31, 1996 TLC tewi Compton's Company MECC Adjustments Combined
- ----------------- --------- ------- -------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 343,321 $ -- $ -- $ -- $ 7,800 $ -- $ 351,121
Operating income (loss) (381,312) -- -- -- (9,212) (41,128) (431,652)
Net income (loss) (405,451) -- -- -- (7,021) (34,009) (446,481)
Net income (loss) per
share (9.94) -- -- -- -- -- (10.12)
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 167,042 $ 3,720 $ 23,204 $60,698 $33,815 $ -- $ 288,479
Operating income (loss) (60,870) (3,589) (13,904) 10,874 6,079 (428,239) (489,649)
Net income (loss) (65,960) (3,643) (9,626) 7,398 5,070 (398,195) (464,956)
Net income (loss) per
share (2.65) -- -- -- -- -- (12.01)
</TABLE>
Future Vision Holding, Inc.
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 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.
(3) OTHER LONG-TERM ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Building, land and leasehold improvements $ 4,516 $ 3,770
Computer equipment 26,362 22,695
Furniture and fixtures 9,062 8,738
-------- --------
39,940 35,203
Less: accumulated depreciation and amortization (22,273) (15,582)
-------- --------
17,667 19,621
Other 5,308 --
-------- --------
$ 22,975 $ 19,621
======== ========
</TABLE>
36
<PAGE> 39
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in computer equipment is equipment under capital lease of $2,207
and $3,340 at December 31, 1996 and 1995, respectively. Depreciation expense was
$6,491, $6,767 and $2,832 in each of the Years Ended December 31, 1996, 1995 and
1994, respectively.
(4) LINE OF CREDIT
TLC Multimedia Inc., a wholly owned subsidiary of the Company, has a
revolving line of credit (the "Line"), to provide for a maximum availability of
$50,000. Borrowings under the Line become due on July 1, 1998 and bear interest
at the prime rate (8 1/4% at December 31, 1996). The Line is subject to certain
financial covenants, is secured by a general security interest in the assets of
The Learning Company, 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. $25,000 was drawn on the Line at December 31, 1996. This amount was
repaid subsequent to year end.
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Senior Convertible Notes $331,650 $350,000
Obligations under capital leases 2,099 1,614
-------- --------
333,749 351,614
Less: current portion (819) (963)
-------- --------
$332,930 $350,651
======== ========
</TABLE>
On October 23, 1995, the Company completed a private offering of $350,000
principal amount 5 1/2% Senior Convertible Notes due 2000 (the "Notes"), which
are unsecured. The Notes will be redeemable by the Company on or after November
2, 1998 at 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 per share. Interest is payable on the Notes
semi-annually on May 1 and November 1 each year. Principal totaling $18,350 was
repurchased during the year.
(6) RELATED PARTY DEBT
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Senior Convertible/Exchangeable Notes $150,000 $150,000
Accrued interest 5,264 100
Term Notes -- 4,214
-------- --------
155,264 154,314
Less: current portion (5,264) (4,314)
-------- --------
$150,000 $150,000
======== ========
</TABLE>
On December 28, 1995, Tribune Company made a strategic investment in the
Company in the form of $150,000 principal amount 5 1/2% Senior
Convertible/Exchangeable Notes due 2000 (the "Tribune Notes"). The Tribune Notes
are exchangeable into 5 1/2% Series C Convertible Preferred Stock (the
"Preferred Shares") at Tribune Company's option. The Tribune Notes and Preferred
Shares will be redeemable by the Company on or after November 2, 1998 at
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.
37
<PAGE> 40
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 bore interest at a rate of 6 1/2% and was repaid in April 1996
through the issuance of 158,099 shares of common stock.
(7) COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases office facilities and equipment under operating and
capital leases. Rental expense for operating leases was approximately $3,234,
$2,308 and $1,756 for the Years Ended December 31, 1996, 1995 and 1994,
respectively. Future annual payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1997 $ 960 $ 5,403
1998 797 5,128
1999 573 4,503
2000 91 4,162
2001 -- 3,412
Thereafter -- 616
------ -------
2,421 $23,224
=======
Less: interest (322)
Less: current portion (819)
------
$1,280
======
</TABLE>
Legal Claims
On February 24, 1997, the Company terminated its business relationship with
Stream International, Inc. ("Stream") which had been providing duplication,
assembly and fulfillment services for certain of the Company's products. The
Company terminated the relationship due to Stream's inability to perform its
obligations under its contract after it relocated the facility responsible for
the manufacture of the Company's product. The Company filed suit against Stream
and currently estimates that in litigation it will be seeking direct and
consequential damages from Stream in an amount in excess of $38 million. Stream
has asserted counterclaims for certain outstanding invoices and other matters in
the amount of approximately $26 million. Management believes that the outcome of
these claims will not have a material adverse effect on the financial position
or results of operations of the Company.
(8) COMMON STOCK
At December 31, 1996, the Company has reserved for issuance approximately
11,762,648 shares of its common stock related to options and warrants. In
addition, the Company has reserved a total of 9,433,963 shares of its common
stock for issuance related to the Notes and the Tribune Note. In connection with
the Three-Party Combination, the Company has reserved 1,551,428 shares of its
common stock for issuance related to the Exchangeable Shares at December 31,
1996. The Exchangeable Shares are represented by the one share of Special Voting
Stock. During the Year Ended December 31, 1996, the Company increased its
authorized common stock from 60,000,000 to 120,000,000 shares.
38
<PAGE> 41
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) STOCK OPTIONS AND WARRANTS
Stock Option Plans
1990 Long-Term Equity Incentive Plan
The Company has a Long-Term Equity Incentive Plan (the "LTIP"). The LTIP
allows for incentive stock options, nonqualified 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 Compensation Committee
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 28, 1996, 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 7,000,000 from 5,450,000. The total number of shares of common
stock reserved and available for issuance under the LTIP at December 31, 1996
was 4,800,599 shares, 1,232,883 of which remained available for grant.
1996 Non-Qualified Stock Option Plan
The Company initiated a non-qualified stock option plan (the "1996 Plan")
that was approved by the Company's Board of Directors on February 5, 1996. The
1996 plan allows for non-qualified stock options and various other stock awards.
Administration of the 1996 Plan 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. The maximum
number of shares issuable under the 1996 plan is 5,000,000. The total number of
shares of common stock reserved and available under the 1996 Plan at December
31, 1996 was 4,967,133 shares, 219,645 of which remained available for grant.
1994 Non-Employee Director Stock Option Plans
On April 26, 1994, the Board of Directors approved a non-employee director
stock option plan (the "Non-Employee Directors Plan"). The Non-Employee
Directors 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. During the Year Ended December 31, 1996, a further
26,667 options were granted to each of the non-employee directors. The maximum
number of common shares issuable under the Non-Employee Directors Plan is
500,000, all of which were granted at December 31, 1996. 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.
39
<PAGE> 42
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the stock option activity under the LTIP,
the 1996 Plan and the Non-Employee Directors Plan:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning 6,663,769 $14.30 2,599,980 $11.62 1,999,203 $12.02
Assumed in acquisitions 1,197,852 8.39 3,123,938 8.10 -- --
Granted 7,202,103 17.79 2,446,996 25.72 1,287,707 11.60
Exercised (3,198,476) 7.73 (1,394,035) 28.76 (513,078) 11.08
Canceled (1,787,297) 19.77 (113,110) 19.81 (173,852) 15.96
---------- ------ ---------- ------ --------- ------
Ending 10,077,951 $17.22 6,663,769 $14.30 2,599,980 $11.62
========== ====== ========== ====== ========= ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Exercise Outstanding Contractual Average Exercisable Average
Prices at 12/31/96 Life Exercise Price at 12/31/96 Exercise Price
- --------------------- ------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.05 - $14.05 2,042,707 6.58 $ 9.35 1,781,554 $ 9.15
14.87 - 16.06 4,394,275 8.99 16.05 731,721 16.05
16.19 - 22.75 2,599,363 7.77 21.12 1,326,341 22.17
23.40 - 38.62 1,036,606 9.19 27.78 194,028 28.09
39.62 - 39.62 5,000 8.66 39.63 2,085 39.63
- ------ ------ ---------- ---- ------ --------- ------
$ 0.05 - $39.62 10,077,951 8.21 $17.22 4,035,729 $15.61
====== ====== ========== ==== ====== ========= ======
</TABLE>
Options to purchase 4,035,729, 1,697,054 and 2,043,357 shares of common
stock were exercisable at December 31, 1996, 1995 and 1994, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for its plans. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Accordingly, no compensation expense has been recognized for the stock option
plans as calculated under SFAS 123. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date for
awards in 1996 and 1995 consistent with the provisions of SFAS 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Net loss -- as reported $(405,451) $(65,960)
Net loss -- pro forma (430,765) (80,670)
Net loss per share -- as reported (9.94) (2.65)
Net loss per share -- pro forma (10.56) (3.25)
</TABLE>
The above compensation cost does not include the fair value of the stock
options assumed in connection with the acquisitions, as the fair value of such
options have been included in the purchase price of the acquired companies.
40
<PAGE> 43
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Dividend yield -- --
Expected volatility .7857 .6827
Risk free interest rate 5.47% 5.31%
Expected lives 4 yrs 4 yrs
Weighted average grant-date fair value of options
granted $10.79 $15.61
</TABLE>
The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts. SFAS 123 does not apply to grants prior to 1995, and additional
grants in future years are anticipated.
On March 13, 1997, the Company instituted an Option Exchange Program under
which certain employees (other than employees who are directors) with options
exercisable at $10.40 per share or higher were given the opportunity to exchange
such options for options with an exercise price of $10.40 per share.
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.
(10) AMORTIZATION AND MERGER RELATED CHARGES
During the year ended December 31, 1996 the Company completed the
acquisition of MECC. During the Year Ended December 31, 1995 the Company
completed the acquisitions of The Former Learning Company, Compton's, tewi and
Future Vision. Amortization and merger related charges are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Amortization of goodwill and other assets $333,858 $ 24,783 $1,185
Amortization of acquired technology 101,008 7,185 422
Charge for incomplete technology 56,688 60,483 --
Employee severance costs 4,260 1,304 163
Provision for earnouts 2,917 -- --
Professional fees and other transaction related costs 1,267 5,653 636
Other 1,332 1,131 280
Provision for (reversal of) litigation -- 2,633 (254)
-------- -------- ------
$501,330 $103,172 $2,432
======== ======== ======
</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 amortization of goodwill and acquired technology related costs in 1996
and 1995 represent primarily the amortization of the goodwill and acquired
technology assets in connection with the acquisitions of MECC, The Former
Learning Company and Compton's. The charge for incomplete technology in the Year
Ended December 31, 1996 relates to products being developed by MECC and in the
Year Ended December 31, 1995 relates to products being developed by The Former
Learning Company and Compton's, in each case which the Company believes had not
reached technological feasibility at the date of acquisition and additional
development would be required to complete the software technology.
41
<PAGE> 44
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Professional fees and other transaction related costs in the Year Ended
December 31, 1996 relate to additional legal and accounting costs incurred
primarily in the first quarter of 1996 in connection with the acquisition of
MECC. 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 such date for the proposed merger with MECC and the professional
fees associated with the acquisition of Future Vision on August 31, 1995.
Substantially all of these costs were paid prior to December 31, 1996.
Employee severance costs in the Year Ended December 31, 1996 related to
termination of employees of the Company in connection with the acquisitions of
The Former Learning Company and MECC and the related changes in strategy. A
total of 108 employees were terminated in the areas of operations, marketing,
sales, technical support and product development. Employee severance costs in
the Year Ended December 31, 1995 related to termination of employees in
connection with the acquisitions of Future Vision 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 all substantially paid
prior to December 31, 1996.
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. Substantially
all of these amounts were paid prior to December 31, 1996.
At December 31, 1996, the Company had merger related accruals of $10,667,
primarily related to the acquisitions. The accruals consisted of amounts due for
investment banking fees, settlement of litigation, legal and accounting fees,
employee severance and lease termination costs related to the acquisitions. The
Company expects to substantially pay the remaining amounts prior to December 31,
1997.
(11) INCOME TAXES
The Company's net income for the years ended December 31, 1996, 1995 and
1994 includes amortization and acquisition charges of $501,330, $103,172 and $0,
respectively, which are not deductible for income tax purposes. The Company's
income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
United States $(420,905) $(64,987) $13,734
Foreign 15,454 4,822 11,472
--------- -------- -------
$(405,451) $(60,165) $25,206
========= ======== =======
</TABLE>
42
<PAGE> 45
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Current income taxes:
Federal $ 16,777 $ 6,000 $ 70
State 2,868 1,500 50
Foreign 4,000 250 --
-------- ------- ------
23,645 7,750 120
-------- ------- ------
Deferred income taxes (benefit):
Federal (23,645) (1,955) --
State -- -- --
Foreign -- -- 3,941
-------- ------- ------
(23,645) (1,955) 3,941
-------- ------- ------
$ -- $ 5,795 $4,061
======== ======= ======
</TABLE>
Deferred taxes result from timing differences in the recognition of certain
items for income tax and financial reporting purposes. The source of these
differences and the tax effects are primarily from tax depreciation and certain
allowances and reserves not deductible in the current period.
The Company's actual tax, with 1996, 1995 and 1994 statutory tax reported
on income before acquisition related charges, is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Tax provision at statutory federal
income tax rate (35%) $ 33,558 $ 15,052 $ 8,822
State income tax, net of federal benefit 5,571 2,500 50
Net foreign earnings taxed at rates
different than federal tax rate 2,319 700 (74)
Utilization of prior year tax benefits (41,448) (12,457) (4,737)
-------- -------- -------
$ -- $ 5,795 $ 4,061
======== ======== =======
</TABLE>
43
<PAGE> 46
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating losses and credits $ 14,284 $ 19,300
Accounts receivable reserves 286 3,557
Development costs -- 1,848
Other reserves and accruals 7,818 1,605
-------- --------
22,388 26,310
Less: Valuation allowance (18,052) (17,214)
-------- --------
4,336 9,096
-------- --------
Tax liabilities:
Acquired intangible assets (54,429) (54,656)
Deferred foreign taxes (3,941) (3,941)
Other liabilities (28,550) (7,618)
-------- --------
(86,920) (66,215)
-------- --------
Net deferred tax liability $(82,584) $(57,119)
======== ========
</TABLE>
The valuation allowance relates to uncertainties surrounding the
recoverability of deferred tax assets. In assessing the realizability of
deferred assets, management considers whether it is more likely than not that
some or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during periods in which benefits from net operating loss carry
forwards are available and temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and other matters in making this assessment. As a result of its
evaluation of these factors at December 31, 1996 management recorded a valuation
reserve for deferred tax assets of $18,052. At December 31, 1996, the Company
had worldwide net operating loss carryforwards and other tax benefits before
merger related benefits of approximately $40,810 for income tax purposes,
expiring from the year 1999 through 2009. The Company expects to reduce its
deferred tax liability in proportion to the amortization taken on certain
intangible assets established in the acquisitions. The reduction of the
intangible assets and the deferred tax liability will not impact future cash
flows of the Company. The utilization of tax loss carryforwards is subject to
limitations under Section 382 of the Internal Revenue Code, the US consolidated
tax return provisions, and local country tax regulations.
44
<PAGE> 47
THE LEARNING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) 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, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE OTHER ELIMINATION'S CONSOLIDATED
--------- ------- ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
REVENUES:
Customers $ 284,537 $57,094 $1,690 $ -- $ 343,321
Inter-company 383 6,698 -- (7,081) --
--------- ------- ------ ------- ---------
Total $ 284,920 $63,792 $1,690 $(7,081) $ 343,321
========= ======= ====== ======= =========
INCOME (LOSS) FROM OPERATIONS $(392,905) $10,531 $1,062 $ -- $(381,312)
========= ======= ====== ======= =========
IDENTIFIABLE ASSETS $ 769,338 $23,096 $1,084 $ -- $ 793,518
========= ======= ====== ======= =========
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
========= ======= ====== ======= =========
</TABLE>
The Company conducts a portion of its operations outside the United States.
At December 31, 1996, $8,432 of cash and cash equivalents 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.
45
<PAGE> 48
SCHEDULE II
THE LEARNING COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995 and 1994,
(In thousands)
<TABLE>
<CAPTION>
Additions
---------------------------
Balance at Charged to Balance at
Beginning of Cost and Charged to End of
Period Expenses Other Accounts Deductions(1) Period
------------ ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for returns and doubtful
accounts $ 6,851 $38,112 -- $(29,772) $15,191
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
accounts $16,216 $13,744 -- $(23,216) $ 6,744
</TABLE>
- ---------------
(1) Deductions relate to credits issued for returns and allowances against
accounts receivable.
46
<PAGE> 49
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item appears in sections captioned "Nominees,"
"Executive Officers," and "Management's Stock Ownership" in the Company's
definitive Proxy Statement to be delivered to stockholders in connection with
the 1997 Annual Meeting of Stockholders (the "1997 Proxy Statement"). Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item appears in sections captioned
"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 1997," "Option Exercises and Values for 1996" and
section 16(a) "Beneficial Ownership Reporting Compliance" in the 1997 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
"Management's Stock Ownership" and "Security Ownership of Certain Beneficial
Owners" in the 1997 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 1997 Proxy
Statement. Such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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:
Report of Independent Accountants 25
Consolidated Balance Sheets as of December 31, 1996 and 1995 26
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1995 and 1994 27
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1996, 1995 and 1994 28
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994 29
Notes to Consolidated Financial Statements 31
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED SUPPLEMENTARY FINANCIAL SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts 46
</TABLE>
47
<PAGE> 50
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C><S>
2.1 -- Amended and Restated Combination Agreement by and among WordStar International
Incorporated, SoftKey Software Products Inc., Spinnaker Software Corporation and
SSC Acquisition Corporation dated as of August 17, 1993, as amended(1)
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 -- Employment Agreement dated March 5, 1997 by and between the Company and Tony
Bordon*
10.2 -- Employment Agreement dated May 27, 1994 by and between the Company and Michael
Perik(7)*
10.3 -- Employment Agreement dated May 27, 1994 by and between the Company and Kevin
O'Leary(7)*
10.4 -- Employment Agreement dated February 1, 1994 by and between the Company and R.
Scott Murray(8)*
10.5 -- Employment Agreement dated October 8, 1993 by and between SoftKey Software
Products Inc. and David E. Patrick(8)*
10.6 -- 1994 Non-Employee Director Stock Option Plan, as amended and restated effective
February 5, 1996(9)*
10.7 -- Form of Stock Option Agreement under 1994 Non-Employee Director Stock Option
Plan(9)*
10.8 -- Credit Agreement dated as of September 30, 1994 between SoftKey Inc. and Fleet
Bank of Massachusetts, N.A. (10)
10.9 -- 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)
10.10 -- 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(9)
10.11 -- 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(9)
10.12 -- Fifth Amendment dated as of October 4, 1996 by and among SoftKey Inc. and Fleet
National Bank, as successor in interest to Fleet Bank of Massachusetts, to Credit
Agreement dated as of September 30, 1994(12)
10.13 -- Employment Agreement dated March 1, 1994 by and between SoftKey Software Products
Inc. and Robert Gagnon(13)*
10.14 -- 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(13)*
10.15 -- Sublease Agreement dated as of January 5, 1995 by and between Mellon Financial
Services Corporation #1 and SoftKey Inc.(13)
10.16 -- Continuing Guaranty of Lease dated as of January 5, 1995 by the Company in favor
of Mellon Financial Services Corporation #1(13)
10.17 -- 1990 Long Term Equity Incentive Plan, as amended and restated through October 31,
1996*
10.18 -- Form of Stock Option Agreement under 1990 Long Term Equity Incentive Plan(9)*
10.19 -- 1996 Stock Option Plan, as amended and restated through October 31, 1996*
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C><S>
10.20 -- Form of Stock Option Agreement under 1996 Stock Option Plan(9)*
10.21 -- Form of Standstill Agreement by and between the Company and Tribune Company(5)
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.
</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.
(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 the 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 Quarterly
Report on Form 10-Q for the quarterly period ended July 2, 1994.
(8) Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 2, 1994.
(9) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 6, 1996.
(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 Quarterly
Report on Form 10-Q for the quarterly period ended October 5, 1996.
(13) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(b) Reports on Form 8-K
The registrant filed a Current Report on Form 8-K reporting that, effective
October 24, 1996, it had changed its name to The Learning Company, Inc.
49
<PAGE> 52
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.
THE LEARNING COMPANY, INC.
By: /s/ MICHAEL PERIK
------------------------------------
Michael Perik
Chief Executive Officer and
Chairman of the Board
(principal executive officer)
Date: April 3, 1997
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 3, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MICHAEL PERIK Director, Chief Executive Officer and Chairman
- --------------------------------------------- of the Board of Directors
Michael Perik
/s/ ROBERT GAGNON Director
- ---------------------------------------------
Robert Gagnon
/s/ KEVIN O'LEARY Director and President
- ---------------------------------------------
Kevin O'Leary
/s/ ROBERT RUBINOFF Director
- ---------------------------------------------
Robert Rubinoff
/s/ MICHAEL BELL Director
- ---------------------------------------------
Michael Bell
/s/ SCOTT SPERLING Director
- ---------------------------------------------
Scott Sperling
/s/ JAMES DOWDLE Director
- ---------------------------------------------
James Dowdle
/s/ LAMAR ALEXANDER Director
- ---------------------------------------------
Lamar Alexander
/s/ CHARLES PALMER Director
- ---------------------------------------------
Charles Palmer
/s/ R. SCOTT MURRAY Executive Vice President and Chief
- --------------------------------------------- Financial Officer (principal financial
R. Scott Murray officer and principal accounting officer)
</TABLE>
50
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ------
<C> <C><S>
2.1 -- Amended and Restated Combination Agreement by and among WordStar
International Incorporated, SoftKey Software Products Inc., Spinnaker
Software Corporation and SSC Acquisition Corporation dated as of August
17, 1993, as amended(1)
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 -- Employment Agreement dated March 5, 1997 by and between the Company and
Tony Bordon*
10.2 -- Employment Agreement dated May 27, 1994 by and between the Company and
Michael Perik(7)*
10.3 -- Employment Agreement dated May 27, 1994 by and between the Company and
Kevin O'Leary(7)*
10.4 -- Employment Agreement dated February 1, 1994 by and between the Company
and R. Scott Murray(8)*
10.5 -- Employment Agreement dated October 8, 1993 by and between SoftKey
Software Products Inc. and David E. Patrick(8)*
10.6 -- 1994 Non-Employee Director Stock Option Plan, as amended and restated
effective February 5, 1996(9)*
10.7 -- Form of Stock Option Agreement under 1994 Non-Employee Director Stock
Option Plan(9)*
10.8 -- Credit Agreement dated as of September 30, 1994 between SoftKey Inc. and
Fleet Bank of Massachusetts, N.A.(10)
10.9 -- 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)
10.10 -- 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(9)
10.11 -- 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(9)
10.12 -- Fifth Amendment dated as of October 4, 1996 by and among SoftKey Inc. and
Fleet National Bank, as successor in interest to Fleet Bank of
Massachusetts, N.A., to Credit Agreement dated as of September 30,
1994(12)
10.13 -- Employment Agreement dated March 1, 1994 by and between SoftKey Software
Products Inc. and Robert Gagnon(13)
10.14 -- 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(13)*
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
<S> <C> <C> <C>
10.15 -- Sublease Agreement dated as of January 5, 1995 by and between Mellon
Financial Services Corporation #1 and SoftKey Inc.(13)
10.16 -- Continuing Guaranty of Lease dated as of January 5, 1995 by the Company
in favor of Mellon Financial Services Corporation #1(13)
10.17 -- 1990 Long Term Equity Incentive Plan, as amended and restated through
October 31, 1996*
10.18 -- Form of Stock Option Agreement under 1990 Long Term Equity Incentive
Plan(9)*
10.19 -- 1996 Stock Option Plan, as amended and restated through October 31, 1996*
10.20 -- Form of Stock Option Agreement under 1996 Stock Option Plan(9)*
10.21 -- Form of Standstill Agreement by and between the Company and Tribune
Company(5)
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.
</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.
(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 the 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 Quarterly
Report on Form 10-Q for the quarterly period ended July 2, 1994.
(8) Incorporated by reference to exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarterly period ended April 2, 1994.
(9) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended January 6, 1996.
(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 Quarterly
Report on Form 10-Q for the quarterly period ended October 5, 1996.
(13) Incorporated by reference to exhibits filed with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
52
<PAGE> 1
Exhibit 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made effective as of this 5th day of March, 1997 by
and between THE LEARNING COMPANY, INC., a Delaware corporation (the
"Corporation"), and Tony Bordon (the "Executive").
WHEREAS the Corporation desires to employ the Executive in the position of
President, International or a position with similar responsibilities, and the
Executive wishes to be so employed by the Corporation.
NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements hereinafter set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
ARTICLE I
EMPLOYMENT
1.1 EMPLOYMENT AND POSITION. Effective as of the date hereof and for the
Term (as defined in Section 3.1 herein), the Corporation hereby employs the
Executive in the capacity of President, International, and the Executive hereby
accepts such employment, all on and pursuant to the terms and conditions set out
herein.
1.2 DUTIES AND RESPONSIBILITIES. The Executive shall have such powers and
duties as are customarily associated with the office or offices of the
Corporation held by the Executive and as may from time to time be prescribed by
the Board of Directors of the Corporation (the "Board") or the Chief Executive
Officer or such other officer to whom the Executive may then report.
Notwithstanding the foregoing, it is expressly understood and agreed that the
Board may at any time give any other person authority equivalent or superior to
that of the Executive if, in the reasonable judgment of the Board such a change
is advisable under the circumstances.
1.3 FULL TIME AND ATTENTION. The Executive shall well and faithfully
serve the Corporation and its subsidiaries and shall devote his or her full
working time and attention to the business and affairs of the Corporation and
its subsidiaries and the performance of his or her duties and responsibilities
hereunder; provided, however, that the Executive may participate in other
business ventures and activities from time to time which do not interfere with
his or her duties hereunder.
1.4 PROHIBITED INTERESTS. Neither the Executive nor any member of his or
her immediate family shall purchase or hold an interest in any company doing
business with the Corporation (other than as a customer of the Corporation) or
competing with the Corporation other than a two percent or lesser interest in
publicly traded stock or such other interests to which the Corporation has given
its prior written consent.
1
<PAGE> 2
ARTICLE II
REMUNERATION AND BENEFITS
2.1 ANNUAL BASE SALARY. Effective as of the date hereof and for each year
of employment during the Term (an "Employment Year"), the Corporation shall pay
to the Executive an annual base salary (the "Annual Base Salary") of not less
than $200,000. The Annual Base Salary shall be payable twice monthly in equal
installments or in such other regular installments as the Corporation may pay
its employees from time to time.
2.2 BENEFITS. The Corporation shall provide to the Executive benefits
consistent with benefits provided under the existing benefit plans, practices,
programs and policies of the Corporation in effect for executive officers from
time to time during the Term.
2.3 VACATION. The Executive shall be entitled to paid vacation in
accordance with the Corporation's vacation policy, as the same may be in effect
from time to time; provided, however that the Executive shall be entitled to at
least four weeks of paid vacation per year.
2.4 BONUS. In addition to the Annual Base Salary, the Executive shall be
eligible to receive a targeted annual cash bonus of $160,000 (the "Bonus"),
payable in quarterly installments, based upon a plan agreed upon by the
Executive and the Chief Executive Officer of the Corporation for each Employment
Year.
2.5 EXPENSES. During the Term the Corporation will reimburse the
Executive for all normal and customary expenses incurred by the Executive in
carrying out his or her duties under this Agreement, provided that the Executive
complies with the policies, practices and procedures of the Corporation for
submission of expense reports, receipts or other similar documentation of such
expenses.
ARTICLE III
TERM AND TERMINATION
3.1 TERM. Unless otherwise terminated in accordance with the provisions
hereof, this Agreement shall have a term of two years from the effective date
hereof, as the same is first set forth above (the "Term"). On the expiration of
the Term and on each anniversary of the expiration of the Term this Agreement
shall automatically renew for an additional one year period (each of which
renewal periods shall form part of the Term) unless the Corporation notifies the
Executive in writing three months in advance of the expiration of the Term, or
any subsequent anniversary thereof, that the Corporation does not wish to
further extend this Agreement.
3.2 TERMINATION FOR JUST CAUSE.
(a) The Corporation may terminate the employment of the Executive
hereunder at any time for Just Cause, such termination to be communicated by the
Corporation to the
2
<PAGE> 3
Executive by written notice. For the purposes hereof, "Just Cause" means a
determination by the Board, in the exercise of its reasonable judgment and after
permitting the Executive a reasonable opportunity to be heard, that any of the
following has occurred:
(i) the willful and continued failure by the Executive to
perform his or her duties and responsibilities with the Corporation under
this Agreement (other than any such failure resulting from incapacity due
to physical or mental illness or disability) which is not cured within 30
days of receiving written notice from the Corporation specifying in
reasonable detail the duties and responsibilities which the Corporation
believes are not being adequately performed;
(ii) the willful engaging by the Executive in any act which is
demonstrably and materially injurious to the Corporation;
(iii) the conviction of the Executive of a criminal offense
involving fraud, dishonesty or other moral turpitude;
(iv) any material breach by the Executive of the terms of this
Agreement or any other written agreement between the Executive and the
Corporation relating to proprietary information, confidentiality,
non-competition or non-solicitation which is not cured within 30 days of
receiving written notice from the Corporation specifying in reasonable
detail such breach; or
(v) the engaging by the Executive in any intentional act of
dishonesty resulting or intended to result, directly or indirectly, in
personal gain to the Executive at the Corporation's expense.
(b) Upon the termination of the Executive's employment for Just
Cause, the Executive shall not be entitled to any severance, termination or
other compensation payment other than unpaid base salary earned by the Executive
up to the date of termination, together with any amount to which the Executive
may be entitled under the provisions of applicable employment legislation in
force at the date of termination of the Executive's employment (less any
deductions required by law).
3.3 TERMINATION WITHOUT JUST CAUSE OR FOR GOOD REASON.
(a) The Corporation may terminate the employment of the Executive
hereunder at any time without Just Cause, such termination to be communicated by
the Corporation to the Executive by at least 30 days prior written notice. In
addition, the Executive may terminate his or her employment for Good Reason,
such termination to be communicated by the Executive to the Corporation by at
least 30 days prior written notice. For purposes of this Agreement, "Good
Reason" shall mean (i) a substantial diminution in the Executive's position,
duties, responsibilities or authority with the Corporation, (ii) any purported
termination of the Executive's employment which is not effected in accordance
with this
3
<PAGE> 4
Agreement (which purported termination shall not be effective), (iii) the
failure of the Corporation to obtain a satisfactory agreement from any successor
to assume and agree to perform this Agreement, as contemplated in Section 4.8
hereof or (iv) any material breach by the Corporation of this Agreement which is
not cured within 30 days of receiving written notice from the Executive
specifying in reasonable detail such breach. The Executive's right to terminate
his or her employment for Good Reason shall not be affected by his or her
incapacity due to physical or mental illness or disability. The Executive's
continued employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance constituting Good Reason hereunder.
(b) Upon the termination of the Executive's employment without Just
Cause or for Good Reason, the Corporation shall have the following obligations:
(i) if not theretofore paid, the Corporation shall pay to or
to the order of the Executive within 10 days after the date of termination
of the Executive's employment hereunder any unpaid base salary earned by
the Executive up to the date of termination (less any deductions required
by law); and
(ii) the Corporation shall pay to or to the order of the
Executive, in equal installments in accordance with its normal payroll
practices over a two-year period, as compensation for the Executive's loss
of employment, an amount equal to two times the Annual Base Salary plus
two times the amount of all bonuses pursuant to Section 2.4 hereof paid to
or accrued by the Executive with respect to the twelve month period
immediately preceding such termination (less any deductions required by
law).
3.4 TERMINATION UPON DEATH OR DISABILITY OR BY EXECUTIVE FOR OTHER THAN GOOD
REASON.
(a) The Corporation may terminate the employment of the Executive
hereunder at any time forthwith upon the death or permanent disability of the
Executive, such termination to be communicated by written notice given by the
Corporation to the Executive or, in the event of the death of the Executive, to
his or her personal representative or his or her estate. The Executive shall be
considered to have become permanently disabled if in any period of 12
consecutive months during the Term, because of ill health, physical or mental
disability, or for other causes beyond the control of the Executive, the
Executive has been or is reasonably likely to be continuously unable or
unwilling or has failed to perform his or her duties and responsibilities
hereunder for 120 consecutive days, or if, during any period of 12 consecutive
months during the Term, the Executive has been unable or unwilling or has failed
to perform his or her duties and responsibilities hereunder for a total of 180
days, consecutive or not.
(b) The Executive may, upon three months' prior written notice to
the Corporation, voluntarily terminate his or her employment hereunder for other
than Good Reason.
4
<PAGE> 5
(c) On termination of the Executive's employment as a result of the
Executive's death or as a result of the Executive having become permanently
disabled, or upon the termination by the Executive of his or her or her
employment for other than Good Reason, the Corporation shall pay to the
Executive or his or her personal representative on behalf of the estate of the
Executive, within 10 days after date of termination of the Executive's
employment, any unpaid base salary earned by the Executive up to the date of
termination, together with any amount to which the Executive may be entitled
under the provisions of applicable employment legislation in force at the date
of termination of the Executive's employment (less any deductions required by
law).
(d) The several payments and other obligations of the Corporation
described in this Section 3.4 are the only severance, compensation or
termination payments or benefits that the Executive will receive in the event of
any termination of employment set forth in this Section 3.4.
3.6 RETURN OF PROPERTY. Upon the termination of the employment of the Executive
hereunder, regardless of the reason therefor, the Executive will immediately
deliver or cause to be delivered to the Corporation all books, documents,
effects, money, securities, equipment or other property (including manuals,
computer disks and software products) belonging to the Corporation, or for which
the Corporation is liable to others, which are in the possession, charge or
custody of the Executive. The Executive agrees not to make for personal or
business use or for the use of any other party any reproductions or copies of
any such books, documents, effects or other property belonging to the
Corporation or for which the Corporation is liable to others.
ARTICLE IV
GENERAL
4.1 CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity
for the benefit of the Corporation all secret or confidential information,
knowledge or data relating to the Corporation and its subsidiaries and their
respective businesses which shall have been obtained by the Executive during the
Executive's employment by the Corporation and which shall not be or become
public knowledge (other than by acts of the Executive or representatives of the
Executive in violation of this Agreement). If the employment of the Executive
hereunder is terminated for any reason, the Executive shall not, without the
prior written consent of the Corporation or as may otherwise be required by law
or legal process, communicate or divulge any such information, knowledge or data
to any person other than the Corporation and those persons designated by it.
4.2 NON-INTERFERENCE WITH PERSONNEL RELATIONS. During the Executive's employment
with the Corporation and for a period of twelve months thereafter, the Executive
will not, directly or indirectly, solicit, entice or persuade any employee of
the Corporation or any of its subsidiaries to leave the services of the
Corporation for any reason.
5
<PAGE> 6
4.3 EQUITABLE RELIEF. The Executive acknowledges that a breach of the
restrictions contained in Sections 4.1 and 4.2 hereof will cause irreparable
damage to the Corporation, the exact amount of which will be difficult to
ascertain, and that the remedies at law for any such breach will be inadequate.
Accordingly, the Executive and the Corporation agree that if the Executive
breaches or attempts to breach any of the restrictions contained in Sections 4.1
and 4.2 hereof, then the Corporation shall be entitled to temporary or permanent
injunctive relief with respect to any such breach or attempted breach (in
addition to any other remedies, at law or in equity, as may be available to the
Corporation), without posting bond or other security.
4.4 RESIGNATIONS. If the employment of the Executive hereunder is terminated in
accordance with the terms of this Agreement, the Executive shall tender his or
her resignation from all positions he may hold as an officer or director of the
Corporation or any of its subsidiaries.
4.5 MITIGATION. The Executive shall have no duty to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Agreement be reduced by
any compensation earned by the Executive as the result of employment by another
employer after the date of termination of the Employee's employment with the
Corporation, or otherwise.
4.6 NOTICES. Any notice required or permitted to be given under this Agreement
shall be in writing and shall be properly given if delivered personally or
mailed by prepaid registered mail addressed as follows:
(a) in the case of the Corporation, to:
The Learning Company, Inc.
One Athenaeum Street
Cambridge, Massachusetts 02142
Attention: General Counsel
(b) in the case of the Executive, to:
Tony Bordon
77 Beacon Street
Boston, MA 02108
or to such other address as the parties may from time to time specify by notice
given in accordance herewith. Any notice so given shall be conclusively deemed
to have been given or made on the day of delivery, if delivered, or, if mailed
by registered mail, upon the date shown on the postal return receipt as the date
upon which the envelope containing such notice was actually received by the
addressee.
4.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the
6
<PAGE> 7
parties with respect to the employment relationship contemplated hereby and
cancels and supersedes all prior understandings and agreements between the
parties with respect thereto, and no agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
4.8 SUCCESSORS AND ASSIGNS. Neither the Executive nor the Corporation may assign
its rights hereunder to another person without the consent of the other;
provided, however, that the Corporation may assign its rights hereunder to a
successor corporation which acquires (whether directly or indirectly, by
purchase, arrangement, merger, consolidation, dissolution or otherwise) all or
substantially all of the business or assets of the Corporation and expressly
assumes and agrees to perform this Agreement in the same manner and to the same
extent that the Corporation would be required to perform it if no such
succession had taken place and provided that such successor shall reasonably be
able to perform all of its obligations under this Agreement. As used in this
Agreement, the term "Corporation" shall mean the Corporation (as herein defined)
and any successor to its business or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law or otherwise.
4.9 ENUREMENT. This Agreement shall enure to the benefit of and be binding upon
the Executive and his or her personal representatives and upon the Corporation
and its successors and permitted assigns.
4.10 FURTHER ASSURANCES. Each of the Corporation and the Executive agrees to
execute all such documents and to do all such acts and things as the other party
may reasonably request and as may be lawful and within its power to do or to
cause to be done in order to carry out or implement in full the provisions and
intent of this Agreement.
4.11 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and the federal
laws of the United States of America applicable therein. Each of the parties
assents to the jurisdiction of the courts of the Commonwealth of Massachusetts
to hear any action, suit or proceeding arising in connection with this
Agreement.
4.12 WAIVER OF RIGHTS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
by the party against whom the same is sought to be enforced and no failure by
any party to enforce any of its rights hereunder shall, except as aforesaid, be
deemed to be a waiver of such right. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
provision of this Agreement to be performed by such other party shall be deemed
to be a waiver of a similar or dissimilar provision hereof at the same or at any
prior or subsequent time.
4.13 MANDATORY ARBITRATION. Except as expressly stated below, any dispute,
controversy or claim arising out of or relating to my employment by the
Corporation or its termination, including but not limited to claims of unlawful
discrimination or harassment
7
<PAGE> 8
(collectively, the "Arbitrable Claims"), will be settled by binding arbitration
in (a) Boston or Cambridge, Massachusetts (if the Executive's primary place of
work is in Massachusetts), or (b) Fremont or San Francisco, California (if the
Executive's primary place of work is in California) or (c) in such city as is
located the office of the Corporation in which constitutes the Executive's
primary place of work (if the Executive's primary place of work is not in
Massachusetts or California), in accordance with the then current rules of the
American Arbitration Association (the "AAA"), before an experienced employment
arbitrator licensed to practice law in the state in which the arbitration is
conducted (the "Arbitration Site") and selected in accordance with the Model
Employment Arbitration Procedures of the AAA. Notwithstanding the foregoing, and
for purposes of clarity, each of the Corporation and the Executive acknowledges
and agrees that any Arbitrable Claim shall be governed by the internal laws of
the Commonwealth of Massachusetts (regardless of the Arbitration Site) without
regard to the laws that might otherwise apply under applicable principles of
conflicts of laws. The Corporation and the Executive each knowingly waive the
right to a jury trial in a court of law with respect to the Arbitrable Claims.
For purposes of any arbitration under this Section 4.13, the Corporation and the
Executive hereby incorporate by reference, and adopt all of the discovery rights
and procedures referenced in, the Massachusetts Code of Civil Procedure, and
agree that each of the Corporation and the Executive shall pay the fees of its,
his or her own attorneys, the expenses of its, his or her own witnesses and any
other expenses connected with presenting its, his or her own claims. The fees of
the arbitrator will be paid half by the Executive and half by the Corporation,
provided that the Corporation will pay 100% of any portion of the arbitrator's
fee that exceeds $1000. The Arbitrator shall have the power to summarily
adjudicate claims and/or enter summary judgment in appropriate cases.
Notwithstanding any of the foregoing, any claim or counterclaim brought for
infringement or misappropriation of any patent, copyright, trade secret,
trademark or other proprietary right shall not be subject to arbitration, and
neither the Executive nor the Corporation waive any right to submit any such
claim, or any factual or legal issues relating to such a claim, to a court of
competent jurisdiction.
IN WITNESS WHEREOF the parties hereto have executed this Agreement
on the date and year first above written.
/s/ Tony Bordon
------------------------------------
TONY BORDON
THE LEARNING COMPANY, INC.
By: /s/ Michael J. Perik
--------------------------------
Michael J. Perik
Chief Executive Officer
8
<PAGE> 1
Exhibit 10.17
SOFTKEY INTERNATIONAL INC.
LONG TERM EQUITY INCENTIVE PLAN
Restated as of October 31, 1996
1. PURPOSE; DEFINITIONS.
A. Purpose. The purpose of the Plan is to provide selected eligible
employees of, and consultants to, SoftKey International Inc., a Delaware
corporation, its Subsidiaries (as defined herein) and Affiliates (as defined
herein) an opportunity to participate in SoftKey International Inc.'s future by
offering them long-term, performance-based and other incentives and equity
interests in SoftKey International Inc. so as to retain, attract and motivate
management personnel.
B. Definitions. For purposes of the Plan, the following terms have the
following meanings:
1. "Affiliate" means a parent or subsidiary corporation, as defined
in the applicable provisions (currently Section 425) of the Code.
2. "Annual Base Salary" with respect to a participant who is a
Covered Employee as of the end of the year shall mean the annual rate of base
salary of such participant as in effect as of the first day of any year, without
regard to any optional or mandatory deferral of base salary pursuant to a salary
deferral arrangement.
3. "Award" means any award under the Plan, including any Option,
Stock Appreciation Right, Restricted Stock, Stock Purchase Right, or Performance
Share Award.
4. "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.
5. "Board" means the Board of Directors of the Company.
6. "Change in Control" has the meaning set forth in Section 10A.
7. "Change in Control Price" has the meaning set forth in Section
10C.
<PAGE> 2
8. "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor.
9. "Commission" means the Securities and Exchange Commission and any
successor agency.
10. "Committee" means the Committee referred to in Section 2, or the
Board in its capacity as administrator of the Plan in accordance with Section 2.
11. "Company" means SoftKey International Inc., a Delaware
corporation.
12. "Covered Employee" has the meaning set forth in Section
162(m)(3) of the Code.
13. "Deep Discount Option" means an Option described in Section 5B.1
and Section 5B.3.
14. "Disability" means permanent and total disability as determined
by the Committee for purposes of the Plan.
15. "Disinterested Person" has the meaning set forth in Rule
16b-3(d)(3) under the Exchange Act and any successor definition adopted by the
Commission.
16. "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor.
17. "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 the Stock or the closing bid, if no sales are
reported, as quoted on such system or exchange (or the largest such exchange)
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 similar publication.
(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 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).
(c) In the absence of an established market for 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 the industry and its management
and the values of stock of other cor-
<PAGE> 3
porations in the same or a similar line of business.
18. "Incentive Stock Option" means any Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
18A "Non-Employee Director" has the meaning set forth in
Rule 16b-3 under the Exchange Act and any successor definition adopted by
the Commission.
19. "Non-Qualified Stock Option" means any Option that is
not an Incentive Stock Option or a Deep Discount Option.
20. "Outside Director" has the meaning set forth in Section 162(m).
21. "Option" means an Option granted under Section 5.
22. "Performance Share" means the equivalent, as of any time such
assessment is made, of the Fair Market Value of one share of Stock.
23. "Performance Share Award" means an Award under Section 9.
24. "Plan" means this SoftKey International Inc. Long Term Equity
Incentive Plan, as amended from time to time.
25. "Pre-tax Profit" shall mean the net profit before income taxes
of the Company for each year determined in accordance with generally accepted
accounting principles and reported upon by the Company's independent
accountants.
26. "Restricted Stock" means an Award of Stock subject to
restrictions, as more fully described in Section 7.
27. "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the
Exchange Act, as amended from time to time, and any successor rule.
28. "Section 162(m)" means Section 162(m) of the Code, as amended
from time to time, and any successor provision.
29. "Stock" means the Common Stock, $0.01 par value, of the Company,
and any successor security.
30. "Stock Appreciation Right" means an Award granted under Section
6.
31. "Stock Purchase Right" means an Award granted under Section 8.
32. "Subsidiary" has the meaning set forth in Section 425 of the
Code.
<PAGE> 4
33. "Termination" means, for purposes of the Plan, with respect to a
participant, that the participant has ceased to be, for any reason, with or
without cause, an employee of, or a consultant to, the Company, or a Subsidiary
or Affiliate of the Company, such that such participant is neither an employee
of, or a consultant to, the Company, a Subsidiary, or any Affiliate.
2. ADMINISTRATION.
A. Committee. The Plan shall be administered by the Board or, upon
delegation by the Board, by a committee of the Board comprised of not less than
two members (i) each member of which shall be, to the extent required to comply
with Rule 16b-3 and unless the Committee determines that Rule 16b-3 is not
applicable to the Plan, a Non-Employee Director, and (ii) each member of which
shall be, to the extent required to comply with Section 162(m) and unless the
Committee determines that Rule 162(m) is not applicable to the Plan, an Outside
Director. In connection with the administration of the 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 (i) 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 and (ii) so long as not otherwise required for the Plan
to comply with Rule 16b-3 (unless the Committee determines that Rule 16b-3 is
not applicable to the Plan) and so long as not otherwise required for the Plan
to comply with Section 162(m) (unless the Committee determines that Section
162(m) is not applicable to the Plan), may delegate to one or more officers or
directors of the Company authority to grant Awards to persons who are not
subject to Section 16 of the Exchange Act with respect to Stock and who are not
Covered Employees. The Board at any time may abolish the Committee and revest in
the Board the administration of the Plan.
B. Authority. The Committee shall grant Awards to eligible employees and
consultants. In particular and without limitation, the Committee, subject to the
terms of the Plan, shall:
1. Select the officers, other employees and consultants to whom
Awards may be granted;
2. Determine whether and to what extent Awards are to be granted
under the Plan;
3. Determine the number of shares to be covered by each Award
granted under the Plan;
(a) determine the terms and conditions of any Award granted
under the Plan and any related loans to be made by the Company, based upon
factors determined by the Committee;
<PAGE> 5
(b) determine to what extent and under what circumstances any
Award payments may be deferred by a Plan participant; and
4. Make adjustments in the Performance Goals (as hereinafter
defined) in recognition of unusual or non-recurring events affecting the Company
or the financial statements of the Company, or in response to changes in
applicable laws, regulations, or accounting principles.
C. Committee Determinations Binding. The Committee may adopt, alter and
repeal administrative rules, guidelines and practices governing the Plan as it
from time to time shall deem advisable, interpret the terms and provisions of
the Plan, any Award, any Award Agreement and otherwise supervise the
administration of the Plan. Any determination made by the Committee pursuant to
the provisions of the 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 the Plan or Award, at any later time. All decisions made by
the Committee under the Plan shall be binding on all persons, including the
Company and Plan participants.
3. STOCK SUBJECT TO PLAN.
A. Number of Shares. The total number of shares of Stock reserved and
available for issuance pursuant to Awards under the Plan shall be 7,000,000
shares. Such shares may consist, in whole or in part, of authorized and unissued
shares or shares reacquired in private transactions or open market purchases,
but all shares issued under the Plan regardless of source shall be counted
against the 7,000,000 share limitation. If any Option terminates or expires
without being exercised in full or if any shares of Stock subject to an Award
are forfeited or if an Award otherwise terminates without a payment being made
to the participant in the form of Stock, the shares issuable under such Option
or Award shall again be available for issuance in connection with Awards;
provided that, to the extent required for the Plan to comply with Rule 16b-3, in
the case of forfeiture, cancellation, exchange or surrender of shares of
Restricted Stock, the number of shares with respect to such Awards shall not be
available for Awards hereunder unless dividends paid on such shares are also
forfeited, canceled, exchanged or surrendered. If any shares of Stock subject to
an Award are repurchased by the Company, the shares issuable under such Award
shall again be available for issuance in connection with Awards other than
Options and Stock Appreciation Rights. To the extent an Award is paid in cash,
the number of shares of Stock representing, at Fair Market Value on the date of
the payment, the value of the cash payment shall not be available for later
grant under the Plan.
B. Individual Limits. In any year during the term of this Plan (commencing
January 1, 1995), no Plan participant can receive stock-based Awards including
Options, Stock Appreciation Rights which are granted without reference to an
Option, Restricted Stock, Stock Purchase Rights and Performance Shares, relating
to shares of Stock which in the aggregate exceed 20% of the total number of
shares of Stock authorized pursuant to the Plan, as adjusted pursuant to the
terms hereof.
<PAGE> 6
C. 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 aggregate number and kind of
shares of Stock reserved for issuance under the Plan, in the number, kind and
exercise price of shares subject to outstanding Options, in the number, kind and
purchase price of shares subject to outstanding Stock Purchase Rights and in the
number and kind of shares subject to other outstanding Awards, as may be
determined to be appropriate by the Committee in its sole discretion; provided
that the number and kind of shares subject to any Award shall always be rounded
down to the nearest whole number; and provided further that with respect to
Incentive Stock Options, such adjustment shall be made in accordance with
Section 424 of the Code. Such adjusted exercise price shall also be used to
determine the amount payable by the Company upon the exercise of any Stock
Appreciation Right associated with any Option.
4. ELIGIBILITY.
Awards may be granted to officers and other employees of, and consultants
to, the Company, its Subsidiaries and its Affiliates (excluding any person who
serves only as a director).
5. STOCK OPTIONS.
A. Types. Any Option granted under the Plan shall be in such form as the
Committee may from time to time approve. The Committee shall have the authority
to grant to any Plan participant Incentive Stock Options, Deep Discount Options,
Non-Qualified Stock Options, or any type of Option (in each case with or without
Stock Appreciation Rights). No more than 625,000 shares may be subject to Deep
Discount Options. Incentive Stock Options may be granted only to employees of
the Company, its parent (within the meaning of Section 425 of the Code) or its
Subsidiaries. Any portion of an Option that does not qualify as an Incentive
Stock Option shall constitute a Non-Qualified Stock Option.
B. Terms and Conditions. Options granted under the Plan shall be subject
to the following terms and conditions:
1. Option Term. The term of each Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the Option is granted, no Deep Discount Option shall be
exercisable more than 15 years after the date the Option is granted and no
Non-Qualified Stock Option shall be exercisable more than 11 years after the
date the Option is granted. If, at the time the Company grants an Incentive
Stock Option, the optionee owns directly or by attribution stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any Affiliate of the Company, the Incentive Stock Option shall not be
exercisable more than five years after the date of grant.
<PAGE> 7
2. Grant Date. The Company may grant Options under the Plan at any time
and from time to time before the 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, the date of grant shall
be the date the intended optionee is first treated as an employee for payroll
purposes.
3. Exercise Price. The exercise price per share of Stock purchasable under
a Non-Qualified Stock Option shall be equal to at least 50%, and not more than
100%, of the Fair Market Value on the date of grant, provided that no Option
granted to an employee whom the Committee determines is likely to be a Covered
Employee at the end of the year shall have an exercise price below 100% of Fair
Market Value on the date of grant. The exercise price per share of Stock
purchasable under a Deep Discount Option shall be equal to at least 10% (or such
other minimum price as may be established by the Internal Revenue Service as a
"safe harbor" against constructive receipt of income upon grant of the Option by
the recipient of the Option), and not more than 40%, of the Fair Market Value on
the date of grant, provided that no Deep Discount Option may be granted to an
employee who the Committee determines is likely to be a Covered Employee at the
end of the year. The exercise price per share of Stock purchasable under an
Incentive Stock Option shall be equal to at least the Fair Market Value on the
date of grant; provided that if at the time the Company grants an Incentive
Stock Option, the optionee owns directly or by attribution stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any Affiliate of the Company the exercise price shall be not less
than 110% of the Fair Market Value on the date the Incentive Stock Option is
granted.
4. Exercisability. Subject to the other provisions of the Plan, an Option
shall be exercisable in its entirety at the time of grant or 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
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
being purchased, accompanied by payment of the exercise price for the shares.
The Committee, in its discretion, may elect at the time of Option exercise that
any Non-Qualified Stock Option be settled in cash rather than Stock.
6. No Disqualification. Notwithstanding any other provision in the Plan,
no term of the Plan relating to Incentive Stock Options shall be interpreted,
amended or altered nor shall any discretion or authority granted under the Plan
be exercised so as to disqualify the Plan under Section 422 of the Code or,
without the consent of the optionee affected, to disqualify any Incentive Stock
Option under such Section 422.
<PAGE> 8
6. STOCK APPRECIATION RIGHTS.
A. Relationship to Options; No Payment by Participant. A Stock
Appreciation Right may be awarded either (i) with respect to Stock subject to an
Option held by a participant or (ii) without reference to an Option. If an
Option is an Incentive Stock Option, a Stock Appreciation Right granted with
respect to such Option may be granted only at the time of grant of the related
Incentive Stock Option, but if the Option is a Non-Qualified Stock Option, the
Stock Appreciation Right may be granted either simultaneously with the grant of
the related Non-Qualified Stock Option or at any time during the term of such
related Non-Qualified Stock Option. No consideration shall be paid by a
participant with respect to a Stock Appreciation Right.
B. When Exercisable. A Stock Appreciation Right shall be exercisable at
such times and in whole or in part, each as determined by the Committee,
subject, with respect to Plan participants subject to Section 16(b) of the
Exchange Act, to Rule 16b-3. Any exercise by the participant of a Stock
Appreciation Right for cash shall be made only during the window period
specified in Rule 16b-3(e)(3)(iii) and any successor rule (the "Window Period"),
unless the Committee determines that Rule 16b-3 is not applicable to the Plan.
If a Stock Appreciation Right is granted with respect to an Option, unless the
Award Agreement otherwise provides, the Stock Appreciation Right may be
exercised only to the extent to which shares covered by the Option are not at
the time of exercise subject to repurchase by the Company.
C. Effect on Related Right; Termination of Stock Appreciation Right. If a
Stock Appreciation Right granted with respect to an Option is exercised, the
Option shall cease to be exercisable and shall be canceled to the extent of the
number of shares with respect to which the Stock Appreciation Right was
exercised. Upon the exercise or termination of an Option, related Stock
Appreciation Rights shall terminate to the extent of the number of shares as to
which the Option was exercised or terminated, except that, unless otherwise
determined by the Committee at the time of grant, a Stock Appreciation Right
granted with respect to less than the full number of shares covered by a related
Option shall not be reduced until the number of shares covered by exercise or
termination of the related Option exceeds the number of shares not covered by
the Stock Appreciation Right. A Stock Appreciation Right granted independently
from an Option shall terminate and shall be no longer exercisable at the time
determined by the Committee at the time of grant, but not later than 10 years
from the date of grant. Upon the Termination of the participant, a Stock
Appreciation Right granted with respect to an Option shall be exercisable only
to the extent to which the Option is then exercisable.
D. Form of Payment Upon Exercise. Despite any attempt by a Plan
participant to elect payment in a particular form upon exercise of a Stock
Appreciation Right, the Committee, in its discretion, may elect to cause the
Company to pay cash, Stock, or a combination of cash and Stock upon exercise of
the Stock Appreciation Right.
<PAGE> 9
E. Amount of Payment Upon Exercise. Upon the exercise of a Stock
Appreciation Right, the Plan participant shall be entitled to receive one of the
following payments, as determined by the Committee under Section 6D. hereof:
1. Stock. That number of whole shares of Stock equal to the number
computed by dividing (A) an amount (the "Stock Appreciation Right Spread"),
rounded to the nearest whole dollar, equal to the product computed by
multiplying (x) the excess of (1) if the Stock Appreciation Right may only be
exercised during the Window Period, the highest Fair Market Value on any day
during the Window Period, and otherwise, the Fair Market Value on the date the
Stock Appreciation Right is exercised, over (2) the exercise price per share of
Stock of the related Option, or in the case of a Stock Appreciation Right
granted without reference to an Option, such other price as the Committee
establishes at the time the Stock Appreciation Right is granted, by (y) the
number of shares of Stock with respect to which a Stock Appreciation Right is
being exercised by (B) (1) if the Stock Appreciation Right may only be exercised
during the Window Period, the highest Fair Market Value during the Window Period
in which the Stock Appreciation Right was exercised, and (2) otherwise, the Fair
Market Value on the date the Stock Appreciation Right is exercised; plus, if the
foregoing calculation yields a fractional share, an amount of cash equal to the
applicable Fair Market Value multiplied by such fraction (such payment to be the
difference of the fractional share); or
2. Cash. An amount in cash equal to the Stock Appreciation Right
Spread; or
3. Cash and Stock. A combination of cash and Stock, the combined
value of which shall equal the Stock Appreciation Right Spread.
7. RESTRICTED STOCK.
Shares of Restricted Stock shall be subject to the following terms and
conditions:
A. Price. Plan participants awarded Restricted Stock, within 45 days of
receipt of the applicable Award Agreement, which in no event shall be later than
ten (10) days after the Award grant date, shall pay to the Company, if required
by applicable law, an amount equal to the par value of the Stock subject to the
Award. If such payment is not made and received by the Company by such date, the
Award of Restricted Stock shall lapse.
B. Restrictions. Subject to the provisions of the Plan and the Award
Agreement, during a period set by the Committee, commencing with, and not
exceeding 10 years from, the date of such award (the "Restriction Period"), the
Plan participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock. Within these limits, the
Committee may in its discretion provide for the lapse of such restrictions in
installments and may accelerate or waive such restrictions, in whole or in part,
based on
<PAGE> 10
service, performance or such other factors or criteria as the Committee may
determine.
C. Dividends. Unless otherwise determined by the Committee, cash dividends
with respect to shares of Restricted Stock shall be automatically reinvested in
additional Restricted Stock, and dividends payable in Stock shall be paid in the
form of Restricted Stock.
D. Termination. Except to the extent otherwise provided in the Award
Agreement and pursuant to Section 7B., upon termination of a Plan participant's
employment for any reason during the Restriction Period, all shares still
subject to restriction shall be forfeited by the participant.
E. Special Provisions Regarding Awards. Notwithstanding anything to the
contrary contained in this Section 7, (i) all awards of Restricted Stock granted
pursuant to this Section 7 to participants who are employees whom the Committee
determines are likely to be Covered Employees at the end of the year shall have
restrictions which will lapse contingent on the attainment of performance goals
based on the attainment of an amount of Pre-tax Profit of the Company during a
tax year and (ii) in no event shall the grant of Restricted Stock in any fiscal
year be made to an employee whom the Committee determines is likely to be a
Covered Employee at the end of the year with a Fair Market Value as of the date
of grant which exceeds the lesser of (i) 100% of such Participant's Annual Base
Salary and (ii) $500,000.
F. Time and Form of Payment. In the case of Plan participants who are
Covered Employees as of the end of the year, unless otherwise determined by the
Committee, shares of Restricted Stock shall be released from restrictions only
after achievement of the applicable performance goals has been certified by the
Committee.
8. STOCK PURCHASE RIGHTS.
A. Price. The Committee may grant Stock Purchase Rights which shall enable
the recipients to purchase Stock at a price equal to not less than 50%, and not
more than 100%, of Fair Market Value on the date of grant.
B. Exercisability. Stock Purchase Rights shall be exercisable for a period
determined by the Committee not exceeding 30 days from the date of grant. The
Committee, however, may provide that, if required under Rule 16b-3, Stock
Purchase Rights granted to persons subject to Section 16(b) of the Exchange Act
shall not become exercisable until six months and one day after the grant date
and shall then be exercisable for 10 trading days at the purchase price
specified by the Committee in accordance with Section 8A.
C. Special Provisions Regarding Awards. In no event shall any awards be
granted under this Section 8 to an employee who the Committee determines is
likely to be a Covered Employee at the end of the year.
<PAGE> 11
9. PERFORMANCE SHARES.
A. Awards. The Committee shall determine the nature, length (which shall
in no event be greater than 10 years) and starting date of the performance (the
"Performance Period") for each Performance Share Award. The consideration
payable to a participant with respect to a Performance Share Award shall be an
amount determined by the Committee in the exercise of the Committee's discretion
at the time of the Award; provided that the amount of consideration may be zero
and may in no event exceed 50% of a Plan participant's Annual Base Salary at the
time of grant. The Committee shall determine the performance objectives to be
used in awarding Performance Shares (the "Performance Goals") and the extent to
which such Performance Shares have been earned. Performance Periods may overlap
and participants may participate simultaneously with respect to Performance
Share Awards that are subject to different Performance Periods and different
performance factors and criteria. At the beginning of each Performance Period,
the Committee shall determine for each Performance Share Award subject to such
Performance Period the number of shares of Stock (which may constitute
Restricted Stock) to be awarded to the participant at the end of the Performance
Period if and to the extent that the relevant measures of performance for such
Performance Share Award are met. Such number of shares of Stock may be fixed or
may vary in accordance with such performance or other criteria as may be
determined by the Committee. The Committee may provide that amounts equivalent
to interest at such rates as the Committee may determine or amounts equivalent
to dividends paid shall be payable with respect to Performance Share Awards. In
addition to the provisions set forth in Section 11J., the Committee, in its
discretion, may modify the terms of any Performance Share Award (except for
those Participants who are Covered Employees), including the specification and
measurement of performance goals.
B. Termination of Employment. Except as otherwise provided in the Award
Agreement or determined by the Committee, in the event of Termination during a
Performance Period for any reason, then the Plan participant shall not be
entitled to any payment with respect to the Performance Shares subject to the
Performance Period.
C. Form of Payment. Payment shall be made in the form of cash or whole
shares of Stock as the Committee, in its discretion, shall determine.
D. Special Provisions Regarding Awards. In no event shall any awards be
granted under this Section 9 to an employee whom the Committee determines is
likely to be a Covered Employee at the end of the year.
10. CHANGE IN CONTROL.
A. Definition of "Change in Control". For purposes of Section 1B., 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
<PAGE> 12
Exchange Act (other than the Company, a Company Subsidiary, a Company Affiliate,
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. 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 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 Board 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" as defined in Section 10A, the following
provisions shall apply:
1. Any Stock Appreciation Rights and 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; provided, that
in the case of the holder of Stock Appreciation Rights who is actually subject
to Section 16(b) of the Exchange Act, such Stock Appreciation Rights shall have
been outstanding for at least six months at the date such Change in Control is
determined to have occurred;
2. The restrictions and limitations applicable to any Restricted
Stock and Stock Purchase Rights shall lapse and such Restricted Stock shall
become fully vested;
3. The value (net of any exercise price and required tax
withholdings) of all outstanding Options, Stock Appreciation Rights, Restricted
Stock, and Stock Purchase Rights, unless otherwise determined by the Committee
at or after grant and subject to Rule 16b-3, shall be cashed out on the basis of
the "Change in Control Price," as defined in Section 11C., 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;
4. Any outstanding Performance Share Awards shall be vested and paid
in full as if all performance criteria had been met; provided, however, that the
foregoing provision shall only apply, with respect to the events described in
Section 10A.1, 10A.3(x),
<PAGE> 13
10A.3(z), and 10A.4, if and to the extent so specifically determined by the
Committee in the exercise of the Committee's discretion, which determination may
be amended or reversed only by the affirmative vote of a majority of the persons
who were directors at the time such determination was made.
C. Change in Control Price. For purposes of this Section 10, "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 potential or actual Change in Control of the Company at
any time during the preceding 60-day period as determined by the Committee,
except that in the case of Incentive Stock Options and Stock Appreciation Rights
relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the Board decides to cash out such
Options.
11. GENERAL PROVISIONS.
A. Award Grants. Any Award may be granted either alone or in addition to
other Awards granted under the Plan. Subject to the terms and restrictions set
forth elsewhere in the Plan, the Committee shall determine the consideration, if
any, payable by the participant for any Award and, in addition to those set
forth in the 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 Plan participants and shall be based upon such Company, subsidiary,
group or division factors or criteria as the Committee may deem appropriate,
including, but not limited to, earnings per share or return on equity (except as
otherwise required for Plan participants who are Covered Employees as of the end
of the year in order to comply with Section 162(m)). The other provisions of
Awards also need not be the same with respect to each recipient. Unless
otherwise specified in the 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. The
Committee may also substitute new Options for previously granted Options,
including previously granted Options having higher exercise prices.
B. Types of Shares. The Committee, in its discretion, may determine at the
time of an Award that in lieu of Stock there shall be issuable under, or
applicable to the measurement of, any Award any of the following: (i) Restricted
Stock; (ii) shares of any series of common stock of the Company other than Stock
and shares of any series of common stock of any Subsidiary or Affiliate
<PAGE> 14
of the Company ("Common Shares"); or (iii) shares of any series of preferred
stock of the Company ("Preferred Shares"); provided that (A) with respect to
shares issuable upon exercise of Incentive Stock Options, Common Shares and
Preferred Shares shall be limited to shares of any Subsidiary authorized as of
the date the Plan is approved by the Board and (B) with respect to shares
issuable upon exercise of Deep Discount Options, Non-Qualified Stock Options and
Stock Appreciation Rights, Common Shares and Preferred Shares shall be limited
to shares of any Subsidiary or Affiliate of the Company. In such event, the
Committee shall determine the number of shares of Stock equivalent to such
Restricted Stock, Common Shares or Preferred Shares for the purpose of
calculating the shares of Stock issued under the Plan; provided that a Common
Share or a Preferred Share in no event shall be deemed equal to less than one
share of Stock.
C. Award Agreement. As soon as practicable after the date of an Award
grant, the Company and the participant shall enter into a written Award
Agreement specifying the date of grant and the terms and conditions of the
Award.
D. Certificates. All certificates for shares of Stock or other securities
delivered under the 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 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.
E. Termination. With respect to Awards (other than Options), in the event
of Termination for any reason other than death or Disability, Awards held at the
date of Termination (and only to the extent then exercisable or payable, as the
case may be) may be exercised in whole or in part at any time within 90 days
after the date of Termination, or such lesser period specified in the Award
Agreement (but in no event after the expiration date of the Award), but not
thereafter. With respect to Options, in the event of Termination for any reason
other than death or Disability, 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). If Termination is due to death or Disability, or a 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
participant in the case of Disability, by the participant's personal
representative 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 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). In
the event of Termination by reason of the 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).
F. 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
<PAGE> 15
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 participant or shares of
Stock or other securities and, in the case of an Option, 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. To the extent participants may make payments due to the Company
upon grant or exercise of Awards by the delivery of shares of Stock or other
securities, the Committee, in its discretion, may permit participants
constructively to deliver for any such payment securities of the Company held by
the participant for at least three months. Constructive delivery shall be
effected by (i) identification by the participant of shares intended to be
delivered constructively, (ii) confirmation by the Company of participant's
ownership of such shares (for example, by reference to the Company's stock
records, or by some other means of verification) and (iii) if applicable, upon
exercise, delivery to the participant of a certificate for that number of shares
equal to the number of shares for which the Award is exercised less the number
of shares constructively delivered.
G. Tax Withholding. If and to the extent authorized by the Committee in
its discretion, a person who has received an Award or payment under 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 11F 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.
1. Such election shall be irrevocable;
2. Such election shall be subject to the disapproval of the
Committee;
3. In the case of participants subject to Section 16(b) of the
Exchange Act, the election and the exercise of the Award may not be made within
six months after the grant of the Award (and in the case of a Stock Appreciation
Right, any related Award) to be exercised (except that this limitation shall not
apply in the event of death or Disability of such person before the six-month
period expires); and
4. In the case of participants subject to Section 16(b) of the
Exchange Act, such election may be made either (A) at least six months before
the date that the amount of tax to be withheld in connection with such exercise
is determined or (B) in any ten-day period beginning on the third business day
following the date of release for publication of quarterly or annual summary
statements of sales and earnings.
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
<PAGE> 16
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 acquired upon exercise or payment of an
Award or otherwise related to the Award or the shares acquired in connection
with an Award.
H. Transferability. Unless otherwise provided in an Award Agreement, no
Award shall be assignable or otherwise transferable by the participant other
than by will or by the laws of descent and distribution, and, during the life of
the participant, an Award shall be exercisable, and any elections with respect
to an Award shall be made, only by the Plan participant or such participant's
guardian or legal representative.
I. Rights of First Refusal. At the time of grant, the Committee may
provide in connection with any Award that the shares of Stock received as a
result of such Award shall be subject to a right of first refusal pursuant to
which the participant shall be required to offer to the Company any shares that
the participant wishes to sell at the then Fair Market Value subject to such
other terms and conditions as the Committee may specify at the time of grant
J. 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 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.
K. 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.
L. 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
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 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.
M. Dividends. The reinvestment of dividends in additional Stock or
Restricted Stock at the time of any dividend payment shall only be permissible
if sufficient shares of
<PAGE> 17
Stock are available under Section 3 for such reinvestment (taking into account
then outstanding Awards).
N. Regulatory Compliance. Each Award under the 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 participant with respect thereto, is necessary or
desirable, then 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.
O. Rights as Stockholder. Unless the 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 participant is
entitled, under the terms of the Award, to receive such shares. Subject to
Sections 3B. and 7C., no adjustment shall be made for dividends or other rights
for which the record date is prior to the date the certificates are delivered.
P. Beneficiary Designation. The Committee, in its discretion, may
establish procedures for a participant to designate a beneficiary to whom any
amounts payable in the event of the participant's death are to be paid.
Q. Additional Plans. Nothing contained in the Plan shall prevent the
Company or a Subsidiary or Affiliate of the Company from adopting other or
additional compensation arrangements for its employees.
R. No Employment Rights. The adoption of the Plan shall not confer upon
any employee any right to continued employment nor shall it interfere in any way
with the right of the Company or a Subsidiary or Affiliate of the Company to
terminate the employment of any employee at any time.
S. Interpretation. Notwithstanding any provision of the Plan, the Plan
shall always be administered, and Awards shall always be granted and exercised,
in such a manner as to conform to the provisions of Rule 16b-3 and Section
162(m), unless the Committee determines that Rule 16b-3 or Section 162(m) are
not applicable to the Plan. The Plan is designed and intended to comply with
Rule 16b-3 and, to the extent applicable, with Section 162(m), and all
provisions hereof shall be construed in a manner to so comply.
T. Governing Law. The Plan and all Awards shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts.
U. Use of Proceeds. All cash proceeds to the Company under the Plan shall
constitute general funds of the Company.
<PAGE> 18
V. Unfunded Status of Plan. The 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 the
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 the Plan.
W. Assumption by Successor. The obligations of the Company under the Plan
and under any outstanding Award may be assumed by any successor corporation,
which for purposes of the Plan shall be included within the meaning of
"Company".
X. Plan Designation and Status. Notwithstanding the designation of this
document as a plan for convenience of reference and to standardize certain
provisions applicable to all types of Awards, each type of Award shall be deemed
to be a separate "plan" for purposes of Section 16 of the Exchange Act and any
applicable state securities laws.
12. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuance shall be made which would impair the rights of a
participant under an outstanding Award without the Plan participant's consent.
In addition, to the extent required for the Plan to comply with Rule 16b-3 or
Section 162(m) or, with respect to provisions solely as they relate to Incentive
Stock Options, to the extent required for the Plan to comply with Section 422A
of the Code, the Board may not amend or alter the Plan without the approval of a
majority of the votes cast at a duly held stockholders' meeting at which a
quorum of the voting power of the Company is represented in person or by proxy,
where such amendment or alteration would:
A. Except as expressly provided in the Plan, increase the total number of
shares reserved for issuance pursuant to Awards under the Plan;
B. Except as expressly provided in the Plan, change the minimum price
terms of Section 5B.3 or Section 8A;
C. Change the class of employees and consultants eligible to participate
in the Plan;
D. Extend the maximum Option term under Section 5B. or the maximum
exercise period under Section 8B.; or
E. Materially increase the benefits accruing to participants under the
Plan.
The Board of Directors may, at any time without stockholder approval,
amend the Plan and the terms of any Award outstanding under the Plan, provided
that such amendment is designed to maximize federal income tax benefits accorded
to Awards or, if the Committee determines that Rule 16b-3 is applicable to the
Plan, to comply with Rule 16b-3 and provided
<PAGE> 19
further that with respect to outstanding Awards, the Plan participant consents
to such amendment.
13. EFFECTIVE DATE OF PLAN.
The Plan, and any amendments thereto, shall be effective on the date the
same is adopted by the Board, but all Awards shall be conditioned upon approval
of the Plan, and any amendment thereto requiring such approval, at a duly held
stockholders' meeting by the affirmative vote of the holders of shares
representing a majority of the voting power of the Company represented in person
or by proxy and entitled to vote at the meeting.
14. TERM OF PLAN.
No Award shall be granted on or after July 1, 2000, but Awards granted
prior to July 1, 2000 (including, without limitation, Performance Share Awards
for Performance Periods commencing prior to July 1, 2000) may extend beyond that
date.
<PAGE> 1
Exhibit 10.19
THE LEARNING COMPANY, INC.
1996 STOCK OPTION PLAN
Restated as of October 31, 1996
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 The Learning Company, 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.
14. "Plan" means this The Learning Company, Inc. 1996
Stock Option Plan, as amended from time to time.
-2-
<PAGE> 3
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" as 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. The Plan shall be administered by the Board or, upon
delegation by the Board, a committee of the Board comprised of not less than two
members (i) each member of which shall be, to the extent required under Rule
16b-3 promulgated under the Securities Exchange Act of 1934 and unless the
Committee determines that Rule 16b-3 is not applicable to the Plan, a
"non-employee director" (as defined in Rule 16b-3), and (ii) each member of
which shall be, to the extent required under Section 162(m) of the Code and
unless the committee determines that Section 162(m) is not applicable to the
Plan, an "outside director" within the meaning of Section 162(m). 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
4. Determine the terms and conditions of any Award
granted under this Plan, based upon factors
determined by the Committee.
-3-
<PAGE> 4
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.
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.
-4-
<PAGE> 5
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.
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
-5-
<PAGE> 6
"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
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
-6-
<PAGE> 7
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 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
-7-
<PAGE> 8
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 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
-8-
<PAGE> 9
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.
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
-9-
<PAGE> 10
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.
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 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
-10-
<PAGE> 11
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.
rev. 10/31/96
-11-
<PAGE> 1
EXHIBIT 11.1
THE LEARNING COMPANY, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $ (405,451) $ (65,960) $ 21,145
Add:
Interest on convertible debentures and notes -- -- 663
Amortization of convertible debenture issue costs -- -- 119
----------- ---------- ----------
Adjusted net income (loss) $ (405,451) $ (65,960) $ 21,927
=========== ========== ==========
Weighted average common and exchangeable shares
outstanding 40,801,000 24,855,000 18,710,123
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 40,801,000 24,855,000 21,115,000
=========== ========== ==========
Fully diluted earnings (loss) per share $ (9.94) $ (2.65) $ 1.04
</TABLE>
<PAGE> 1
Exhibit 21.1
THE LEARNING COMPANY, INC.
SUBSIDIARIES
Compton's Learning Company (Delaware)
Compton's NewMedia, Inc. (California)
Future Vision Holding, Inc. (New York)
Minnesota Educational Computing Corporation (MECC) (Minnesota)
SoftKey Holdings SARL (France)
Edusoft (France)(1)
SoftKey Holdings Corporation (Ontario)
SoftKey Software Products Inc. (Ontario)
SoftKey Holding GmbH (Germany)
TLC Tewi Verlag GmbH (Germany)
The Learning Company (Ireland) Limited (Ireland)
TLC Multimedia Inc. (Minnesota)
TLC Properties Inc. (Massachusetts)
The Learning Company Holland B.V. (Netherlands)
The Learning Company, K.K. (Japan)
The Learning Company (UK) Limited (England)
- --------
(1) 20.19% directly held by SoftKey Holdings SARL, 47.10% indirectly held by
SoftKey Holdings SARL, and 32.71% directly held by SoftKey Holding GmbH
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
The Learning Company, Inc. (formerly known as SoftKey International Inc.) on
Form S-3 (File Nos. 33-63073, 33-73422, 333-00145, 333-02385, 333-03271 and
333-10009) and Form S-8 (File Nos. 33-61931, 33-75134, 33-92920, 33-92922,
333-00107, 333-02337 and 333-04619) of our report dated March 27, 1997, on our
audits of the consolidated financial statements and financial statement schedule
of valuation and qualifying accounts of The Learning Company, Inc. as of January
4, 1997 and January 6, 1996 and for each of the three fiscal years in the period
ended January 4, 1997, which report is included in this Annual Report on Form
10-K.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000719612
<NAME> THE LEARNING COMPANY, INC
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-07-1996
<PERIOD-END> JAN-04-1997
<EXCHANGE-RATE> 1
<CASH> 110,120,000
<SECURITIES> 0
<RECEIVABLES> 79,610,000
<ALLOWANCES> 15,191,000
<INVENTORY> 15,894,000
<CURRENT-ASSETS> 225,973,000
<PP&E> 39,940,000
<DEPRECIATION> (22,273,000)
<TOTAL-ASSETS> 793,518,000
<CURRENT-LIABILITIES> 113,654,000
<BONDS> 482,930,000
0
0
<COMMON> 444,000
<OTHER-SE> 104,493,000
<TOTAL-LIABILITY-AND-EQUITY> 793,518,000
<SALES> 343,321,000
<TOTAL-REVENUES> 343,321,000
<CGS> (91,045,000)
<TOTAL-COSTS> (633,588,000)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (24,139,000)
<INCOME-PRETAX> (405,451,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (405,451,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (405,451,000)
<EPS-PRIMARY> (9.94)
<EPS-DILUTED> (9.94)
</TABLE>
