<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT /X/ FILED BY A PARTY OTHER THAN THE REGISTRANT / /
- --------------------------------------------------------------------------------
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
THE LEARNING COMPANY, INC.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE> 2
[THE LEARNING COMPANY LOGO]
October 24, 1997
Dear Stockholder:
I am delighted to invite you to attend the Annual Meeting of Stockholders
of The Learning Company, Inc. to be held on Thursday, December 4, 1997, at 10:00
a.m. at The Royal Sonesta Hotel, located at 5 Cambridge Parkway, Cambridge,
Massachusetts.
In addition to the election of directors and approval of the selection of
accountants, the principal items of business to be considered and acted upon
will be the approval of the Company's Non-Employee Director Stock Option Plan,
the Company's 1997 Employee Stock Purchase Plan, amendments to the Company's
Long Term Equity Incentive Plan and the issuance and sale of an aggregate of
750,000 shares of Series A Convertible Participating Preferred Stock of the
Company to affiliates of Thomas H. Lee Company, Bain Capital, Inc. and Centre
Partners Management LLC. Detailed information concerning these matters is
contained in the accompanying Notice of Annual Meeting and Proxy Statement.
Whether or not you plan to attend the Annual Meeting, it is important that
your shares be represented. I urge you to register your vote now by completing
and returning the enclosed proxy card promptly. Should you attend the Annual
Meeting, you may, of course, vote your shares even though you have sent in your
proxy.
I look forward to seeing you on December 4, 1997.
Sincerely,
/s/ Michael Perik
------------------------------
Michael J. Perik
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
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<PAGE> 4
THE LEARNING COMPANY, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 4, 1997
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders of The
Learning Company, Inc., a Delaware corporation (the "Company"), will be held at
The Royal Sonesta Hotel, located at 5 Cambridge Parkway, Cambridge,
Massachusetts at 10:00 a.m. on Thursday, December 4, 1997 for the following
purposes:
1. To elect ten directors of the Company;
2. To ratify the appointment of Coopers & Lybrand L.L.P. as the
independent public accountants for the Company for the fiscal year ending
January 3, 1998;
3. To approve the Company's 1996 Non-Employee Director Stock Option
Plan;
4. To approve the Company's 1997 Employee Stock Purchase Plan;
5. To approve amendments to the Company's Long Term Equity Incentive
Plan;
6. To approve the issuance of an aggregate of 750,000 shares of Series
A Convertible Participating Preferred Stock of the Company to affiliates of
Thomas H. Lee Company, Bain Capital, Inc. and Centre Partners Management
LLC; and
7. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Holders of record of the Company's Common Stock at the close of business on
October 20, 1997 (the "Record Date") will be entitled to notice of and to vote
at the Annual Meeting. In addition, holders of record of Exchangeable Shares of
the Company's Canadian subsidiary, SoftKey Software Products Inc., at the close
of business on the Record Date will be entitled to notice of the Annual Meeting
and to direct the vote of CIBC Mellon Trust Company, the holder as trustee for
such persons, of the one outstanding share of the Company's Special Voting
Stock. A list of persons entitled to vote at the Annual Meeting will be
available for examination by any stockholder of the Company for any purpose
germane to the Annual Meeting during normal business hours for ten days prior to
the Annual Meeting at the offices of the Company at One Athenaeum Street,
Cambridge, Massachusetts.
A copy of the Company's Annual Report to Stockholders for the year ended
January 4, 1997 accompanies this Notice of Annual Meeting and the enclosed Proxy
Statement.
By Order of the Board of Directors
NEAL S. WINNEG
Secretary
October 24, 1997
Cambridge, Massachusetts
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WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE PROMPTLY
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED
STATES.
- --------------------------------------------------------------------------------
<PAGE> 5
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<PAGE> 6
THE LEARNING COMPANY, INC.
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
PROXY STATEMENT
1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 4, 1997
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of The Learning Company, Inc., a Delaware
corporation (the "Company"), for use at the 1997 Annual Meeting of Stockholders
(the "Annual Meeting") to be held on Thursday, December 4, 1997, at 10:00 a.m.
(local time) at The Royal Sonesta Hotel, located at 5 Cambridge Parkway,
Cambridge, Massachusetts.
All proxies will be voted in accordance with the instructions of the
stockholder. If no choice is specified, the proxies will be voted in favor of
the matters set forth in the accompanying Notice of Annual Meeting. Any proxy
may be revoked by a stockholder at any time before its exercise by delivery of a
written revocation to the Secretary of the Company. Attendance at the Annual
Meeting will not itself be deemed to revoke a proxy unless the stockholder gives
affirmative notice at the Annual Meeting that the stockholder intends to revoke
the proxy and vote in person.
The representation in person or by proxy of at least a majority of the
outstanding shares of common stock of the Company, $.01 par value per share (the
"Common Stock"), entitled to vote at the Annual Meeting is necessary to
establish a quorum for the transaction of business. The affirmative vote of the
holders of a plurality of the votes represented by the shares of Common Stock
and the Special Voting Share (defined below), voting together as one class,
present in person or represented by proxy at the Annual Meeting, is required for
the election of directors. For all other matters to be considered and acted upon
at the Annual Meeting, the affirmative vote of a majority of the votes
represented by the shares of Common Stock and the Special Voting Share, voting
together as one class, present in person or represented by proxy at the Annual
Meeting is required. (See "Voting Securities" below.) Tribune Company, which
owns approximately 11% of the outstanding shares of Common Stock as of the
Record Date, has contractually agreed to vote "FOR" the sixth proposal set forth
in this Proxy Statement.
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees, who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be counted as votes in favor of such matter, and will also not
be counted as votes cast or shares voting on such matter. Accordingly,
abstentions and "broker non-votes" will have no effect on the voting on a matter
that requires the affirmative vote of a certain percentage of the votes cast or
shares voting on a matter, such as each of the items being considered by the
stockholders at the Annual Meeting.
The Company will pay the cost of soliciting proxies for the Annual Meeting.
Proxies may be solicited by officers or employees of the Company in person or by
mail, courier, telephone or facsimile. In addition, the Company has retained
D.F. King & Co., Inc. to solicit proxies by mail, courier, telephone and
facsimile and to request brokerage houses and other nominees to forward
soliciting material to beneficial owners. For these services the Company will
pay a fee of approximately $5,000 plus expenses.
IT IS ANTICIPATED THAT THE NOTICE OF ANNUAL MEETING, THIS PROXY STATEMENT,
THE ENCLOSED PROXY AND THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR
ENDED JANUARY 4, 1997 WILL BE FIRST MAILED TO STOCKHOLDERS ON OR ABOUT OCTOBER
24, 1997. THE COMPANY WILL, UPON WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH
WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON FORM 10-K, AS AMENDED, FOR THE
YEAR ENDED JANUARY 4, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "SEC"), WITHOUT EXHIBITS. PLEASE ADDRESS ALL SUCH REQUESTS TO THE LEARNING
COMPANY, INC., ONE ATHENAEUM STREET, CAMBRIDGE, MASSACHUSETTS 02142, ATTENTION:
INVESTOR RELATIONS. TELEPHONE REQUESTS MAY BE DIRECTED TO INVESTOR RELATIONS AT
(617) 494-5816. EXHIBITS WILL BE PROVIDED UPON WRITTEN REQUEST AND PAYMENT OF AN
APPROPRIATE PROCESSING FEE.
<PAGE> 7
VOTING SECURITIES
Stockholders of record at the close of business on October 20, 1997 (the
"Record Date") are entitled to vote at the Annual Meeting. On the Record Date,
the Company had outstanding 47,951,812 shares of Common Stock. In addition, on
the Record Date, there was outstanding one share of special voting stock of the
Company, $1.00 par value per share (the "Special Voting Share").
At the Annual Meeting, CIBC Mellon Trust Company, as the holder of record
of the Special Voting Share, will be entitled to cast 1,527,369 votes. These
votes represent the number of Exchangeable Shares (the "Exchangeable Shares") of
SoftKey Software Products, Inc. ("SoftKey Software") that were outstanding on
the Record Date (other than Exchangeable Shares held by the Company, its
subsidiaries or any entity controlled by or under common control of the Company,
if any). The Exchangeable Shares are exchangeable on a one-for-one basis for
Common Stock. The Exchangeable Shares were originally issued to certain holders
of common shares of a predecessor corporation to SoftKey Software which was also
called SoftKey Software Products Inc. ("Former SoftKey").
The Special Voting Share was issued to CIBC Mellon Trust Company, as
Trustee (the "Trustee"), under a Voting and Exchange Trust Agreement pursuant to
which each holder of an Exchangeable Share (other than the Company, its
subsidiaries, or any entity controlled by the Company) is entitled to instruct
the Trustee to exercise one of the votes attached to the Special Voting Share
for each Exchangeable Share held by such holder. Enclosed with this Proxy
Statement are materials informing holders of Exchangeable Shares of their rights
with respect to voting at the Annual Meeting and instructing such holders as to
how to exercise such rights.
The Common Stock and the Special Voting Share vote as a single class and,
except as set forth above, are identical in all respects with respect to matters
subject to the vote of stockholders of the Company.
2
<PAGE> 8
SECURITY OWNERSHIP OF THE COMPANY
The following table sets forth information with respect to the beneficial
ownership of the shares of Common Stock as of August 15, 1997 held by (i) the
Company's Chief Executive Officer and the other executive officers listed in the
Summary Compensation Table below (collectively, the "Named Executive Officers"),
(ii) each current director of the Company, (iii) all current directors and
executive officers as a group and (iv) each person known to the Company to own
beneficially more than 5% of the shares outstanding.
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES PERCENTAGE
NAME BENEFICIALLY OWNED(1) OWNED
- ---- --------------------- -----------
<S> <C> <C>
Lamar Alexander............................ 56,250 *
Michael A. Bell............................ 109,996 *
Anthony J. Bordon.......................... 82,353 *
James C. Dowdle............................ 24,000 *
Robert Gagnon(2)........................... 254,789 *
R. Scott Murray(3)......................... 155,855 *
Kevin O'Leary(4)........................... 1,787,657 3.8%
Charles L. Palmer(5)....................... 1,712,731 3.8%
Michael J. Perik(6)........................ 1,978,581 4.2%
Carolynn Reid-Wallace...................... 6,250 *
Martin Rice................................ -- *
Robert A. Rubinoff(7)...................... 164,996 *
Scott M. Sperling.......................... 116,246 *
All current directors and executive
officers as a group (15 persons)......... 6,720,470 13.4%
State Street Global Advisors(8)............ 3,515,627 7.8%
Tribune Company(9)......................... 8,040,984 17.9%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Unless otherwise indicated, each person or entity named in the table has
voting and investment power (or shares such power with his or her spouse)
with respect to all shares of capital stock listed as owned by such person
or entity.
(2) Includes 240,485 shares of Common Stock issuable upon exchange of
Exchangeable Shares owned by a corporation wholly-owned by Mr. Gagnon.
(3) Includes 860 shares of Common Stock issuable upon exchange of Exchangeable
Shares owned by Mr. Murray.
(4) Includes (i) 212,158 shares of Common Stock issuable upon exchange of
Exchangeable Shares owned by a corporation wholly-owned by Mr. O'Leary and
(ii) 1,000,000 shares of Common Stock subject to options that may become
exercisable within 60 days if the market price of the Common Stock reaches
certain levels and if a specified portion of the Company's outstanding
indebtedness is repaid.
(5) All shares beneficially owned by Mr. Palmer (except for 17,412 shares of
Common Stock that Mr. Palmer owns directly and 25,000 shares of Common Stock
subject to options that are exercisable within 60 days) are owned by North
American Fund II, L.P., a Delaware limited partnership. Mr. Palmer is
President and Principal of North American Business Development Company,
L.L.C., a Delaware limited liability company, which is the general partner
of North American Fund II, L.P. Mr. Palmer is also the managing general
partner of North American Company Ltd., a Florida limited partnership, which
is a member of North American Business Development Company, L.L.C., and
which is a limited partner of North American Fund II, L.P. As a result of
the foregoing, Mr. Palmer may be deemed to have sole voting and investment
power with respect to these shares.
3
<PAGE> 9
(6) Includes (i) 3,121 shares of Common Stock issuable upon exchange of
Exchangeable Shares owned by Mr. Perik and (ii) 1,000,000 shares of Common
Stock subject to options that may become exercisable within 60 days if the
market price of the Common Stock reaches certain levels and if a specified
portion of the Company's outstanding indebtedness is repaid.
(7) Includes 55,000 shares of Common Stock issuable upon exchange of
Exchangeable Shares owned by a corporation over which Mr. Rubinoff exercises
investment and voting power.
(8) The business address of State Street Global Advisors is 225 Franklin Street,
Boston, Massachusetts 02110. Based upon information contained in a Schedule
13G dated February 14, 1997 filed with the SEC by State Street Global
Advisors ("State Street"), State Street has sole voting power with respect
to 2,499,027 shares of Common Stock and sole dispositive power with respect
to 3,515,627 shares of Common Stock.
(9) The business address of Tribune Company is 435 North Michigan Avenue,
Chicago, Illinois 60611. Based upon information contained in Amendment No. 2
to a Schedule 13D dated April 16, 1996 filed with the SEC by Tribune
Company. Includes 2,830,188 shares issuable to Tribune Company upon
conversion of the Company's 5 1/2% Senior Convertible/Exchangeable Notes due
2000 held by Tribune. Mr. Dowdle is a director of Tribune Company. Mr.
Dowdle disclaims beneficial ownership of these shares.
PROPOSAL 1. ELECTION OF DIRECTORS
A board of ten directors will be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the ten nominees of the Board of Directors named below. All of the nominees
are presently directors of the Company. It is not expected that any nominee will
be unable or will decline to serve as a director.
NOMINEES
Set forth below are the names of the ten nominees, their ages, the year in
which each first became a director of the Company, their principal occupations
and employment during the past five years and the names of other public
companies of which they are a director as of October 24, 1997.
The Board of Directors recommends a vote FOR the nominees listed below:
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ---- --- -------------------------------------------
<S> <C> <C>
Lamar Alexander......... 57 Mr. Alexander became a director of the Company in
October 1996. He was a co-founder and has been
Vice Chairman of Corporate Family Solutions, a
manager of worksite childcare centers, schools and
family centers, since May 1996. From January 1993
until March 1995, he was counsel to the law firm
of Baker Donelson. Mr. Alexander served as U.S.
Secretary of Education from 1991 until 1993, was
President of the University of Tennessee from 1988
until 1991 and served as Governor of Tennessee
from 1979 until 1987. He chaired President
Reagan's Commission on American Outdoors from 1985
until 1987 and was awarded the James Conant Award
by the Education Commission of the States in 1988.
In 1986 he chaired the National Governors'
Association and its 50-state education survey,
Time for Results. During 1996, Mr. Alexander was a
candidate for the President of the United States.
He is a member of the Audit, Compensation and
Executive Committees.
</TABLE>
4
<PAGE> 10
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ---- --- -------------------------------------------
<S> <C> <C>
Michael A. Bell...... 42 Mr. Bell became a director of the Company in
February 1994. He has been a director of Monitor
Company, Inc., a management consulting firm, since
1983. He is a member of the Audit and Compensation
Committees.
James C. Dowdle...... 63 Mr. Dowdle became a director of the Company in
December 1995. He is Executive Vice
President/Media Operations of Tribune Company and
has been a director of Tribune Company, a media
entertainment company, since 1985. He is a member
of the Executive Committee.
Robert Gagnon........ 60 Mr. Gagnon became a director of the Company in
February 1994 and has been a director and
Executive Vice President of SoftKey Software since
February 1994. Prior thereto, he had been a
director of Former SoftKey from 1991 to 1994 and
Vice President, Finance, of Informatrix 2000,
Inc., a Canadian predecessor of Former SoftKey
from 1987 to 1994.
Kevin O'Leary........ 43 Mr. O'Leary became President and a director of the
Company in February 1994. He is a founder of
SoftKey Software and, prior to February 1994, had
been President and a director of Former SoftKey
and its predecessors since 1984.
Charles L. Palmer.... 55 Mr. Palmer became a director of the Company in
July 1996. Prior thereto he had served as Chairman
of the Board and a director of Minnesota
Educational Computing Corporation ("MECC"), an
educational software company, from January 1991
until its acquisition by the Company in May 1996.
Mr. Palmer has been President and Principal of
North American Business Development Company, III,
L.L.C., which is the general partner of North
American Fund III L.P., a business development
company, since 1996. Mr. Palmer has been President
and Principal of North American Business
Development Company, L.L.C., or its predecessor,
which is the general partner of North American
Fund II, L.P., a business development company,
since 1989, and has been Managing General Partner
of North American Company Ltd. since 1972. North
American Company Ltd., a private investment
company, is an affiliate of North American Fund
II, L.P., North American Business Development
Company, L.L.C., North American Fund III and North
American Business Development Company III, L.L.C.
Prior to joining North American Company Ltd., Mr.
Palmer was a founder, Vice President and
subsequently a director of Heizer Corporation, a
business development company. Mr. Palmer serves on
the boards of directors of Allied Capital
Commercial Corporation and SunBank of South
Florida, N.A.
</TABLE>
5
<PAGE> 11
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ---- --- -------------------------------------------
<S> <C> <C>
Michael J. Perik......... 40 Mr. Perik became a director, Chairman of the Board
and Chief Executive Officer of the Company in
February 1994. He is also President and a director
of SoftKey Software. Prior to February 1994, Mr.
Perik had been Chief Executive Officer and a
director of Former SoftKey since 1991. From 1988
until 1991, he was Vice President of Investments
of Denbridge Capital Corporation, a Canadian
investment company. He is the Chairman of the
Executive Committee.
Carolynn Reid-Wallace.... 55 Dr. Reid-Wallace became a director of the Company
in September 1997. Dr. Reid-Wallace became Senior
Vice President for Education and Programming at
the Corporation for Public Broadcasting, a
broadcasting company, in October 1995, after
having served as Senior Vice President for
Education from April 1993 to September 1995. Prior
thereto, from September 1991 to January 1993, she
served as Assistant Secretary for Postsecondary
Education at the United States Department of
Education. From August 1987 to August 1991, Dr.
Reid-Wallace served as Vice Chancellor for
Academic Affairs at the City University of New
York. From May 1982 to June 1987, Dr. Reid-Wallace
served as Director of Precollegiate Education and
Assistant Director in the Division of Educational
Programs at the National Endowment for the
Humanities.
Robert A. Rubinoff....... 58 Mr. Rubinoff became a director of the Company in
February 1994. Mr. Rubinoff is also a director of
SoftKey Software. Prior to February 1994, he had
been a director of Former SoftKey and its
predecessors from 1987. Since 1986, he has been
the President of Inglewood Holdings Inc., a
private Canadian investment firm. Mr. Rubinoff is
a director of Place Resources Ltd., a Canadian oil
and gas company, and is also a director of several
private corporations. He is a member of the Audit
and Compensation (Chairman) Committees.
Scott M. Sperling........ 39 Mr. Sperling became a director of the Company in
February 1994. He had been a director of Spinnaker
Software Corporation from 1987 to February 1994.
Mr. Sperling has been Managing Director of the
Thomas H. Lee Company, a private investment
company, since September 1994. Prior thereto, he
was Managing Partner of Aeneas Group, Inc., an
investment company and a wholly owned subsidiary
of Harvard Management Company, Inc., where he was
an officer from 1984 to September 1994. Mr.
Sperling is also a director of Beacon Properties
Corporation, a real estate company, General
Chemical Group Inc., a chemical manufacturing
company, Object Design Inc., a data management
systems company, Livent, Inc. a theater production
company, and Safelite Glass Corporation, an auto
glass replacement corporation, and is a director
of several private corporations. He is a member of
the Audit (Chairman), Compensation and Executive
Committees.
</TABLE>
6
<PAGE> 12
OTHER EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ---- --- -------------------------------------------
<S> <C> <C>
David E. Patrick............ 40 Mr. Patrick joined the Company in October 1990 as
Vice President of Marketing, Development and
Strategic Planning. In May 1992, he became
Executive Vice President and in August 1993 he
became Chief Operating Officer of the Company. In
February 1994, he became Executive Vice President,
Worldwide Sales and Marketing of the Company. In
August 1994, his office was renamed Executive Vice
President, Worldwide Sales. From February 1996 to
January 1997 Mr. Patrick served as President,
International. Mr. Patrick became Executive Vice
President, Worldwide Sales in January 1997.
R. Scott Murray............. 34 Mr. Murray became Executive Vice President and
Chief Financial Officer in May 1994 after having
joined the Company in February 1994 as Vice
President, Corporate Acquisitions. Prior thereto,
Mr. Murray was a manager with Arthur Andersen &
Co., a public accounting firm, from September 1985
until February 1994.
Anthony J. Bordon........... 39 Mr. Bordon joined Former SoftKey in December 1991
as Vice President, Retail Sales and in June 1994
he became Senior Vice President, Retail Sales of
the Company. In January 1996, he became Senior
Vice President, North American Sales. Mr. Bordon
became President, International in January 1997.
Kathryn M. Quinby-Johnson... 38 Ms. Quinby-Johnson became an officer of the
Company in connection with the acquisition of
Minneapolis Educational Computing Corporation
("MECC") in May 1996. Prior to joining MECC in
December 1993, Ms. Quinby-Johnson served as Vice
President, Account Supervisor of Rapp Collins
Communications, an integrated marketing agency,
where she had been employed since December 1989.
From December 1993 until December 1994, Ms.
Quinby-Johnson served as Director of Product
Marketing of MECC. From December 1994 until May
1996, Ms. Quinby-Johnson served as Vice President
of Marketing of MECC. Ms. Quinby-Johnson served as
Senior Vice President, Channel Marketing of the
Company from May 1996 until May 1997. Ms.
Quinby-Johnson became Executive Vice President,
Marketing of the Company in May 1997.
</TABLE>
7
<PAGE> 13
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ---- --- -------------------------------------------
<S> <C> <C>
David P. Rubin........ 48 Dr. Rubin became an officer of the Company in
connection with the acquisition of the Learning
Company (the "Former Learning Company") in
December 1995. From May 1992 until April 1994, Dr.
Rubin served as Director, Development Tools and
Technology of the Former Learning Company. From
April 1994 until December 1995, Dr. Rubin served
as Vice President, Development Tools and
Technology of the Former Learning Company. From
December 1995 until July 1996, Dr. Rubin served as
Vice President, Development Tools and Technology
of the Company. From July 1996 until May 1997, Dr.
Rubin served as Vice President, Research and
Development. Dr. Rubin became Senior Vice
President, Research and Development in May 1997.
</TABLE>
ELECTION OF ADDITIONAL DIRECTORS
It is a condition to the closing of the sale of 750,000 shares of Series A
Preferred Stock (as defined below) of the Company pursuant to the Securities
Purchase Agreements (as defined below) that (i) the representative of Thomas H.
Lee Company currently serving on the Board of Directors (Scott M. Sperling), or
any successor nominee of Thomas H. Lee Company, be renominated and reelected and
(ii) that a representative of each of the three investor groups acquiring shares
of Series A Preferred Stock be appointed to the Board of Directors of the
Company. See "Approval of Issuance of Series A Convertible Participating
Preferred Stock -- Summary of the Securities Purchase Agreements." Accordingly,
upon such closing, the number of directors of the Company will be increased by
three and it is expected that Messrs. Anthony J. DiNovi, Mark E. Nunnelly and
Paul J. Zepf will be appointed to the Board of Directors. The backgrounds of
such individuals are as follows:
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ---- --- ------------------------------------------
<S> <C> <C>
Anthony J. DiNovi....... 35 Mr. DiNovi has been employed by Thomas H. Lee
Company, an investment company, since 1988 and
currently serves as a Managing Director. Mr. DiNovi
is also Vice President and Trustee of THL Equity
Trust III, the general partner of the THL Equity
Advisors III Limited Partnership, which is the
general partner of the Thomas H. Lee Equity Fund
III, L.P. and Vice President of Thomas H. Lee
Advisors I and T.H. Lee Mezzanine II, affiliates of
ML-Lee Acquisition Fund, L.P., ML-Lee Acquisition
Fund II, L.P. and ML-Lee Acquisition Fund II
(Retirement Accounts), L.P., respectively. Mr.
DiNovi also serves as a director of First Alert,
Inc., Safelite Glass Corporation and several private
corporations.
Mark E. Nunnelly........ 38 Mr. Nunnelly has been a Managing Director of Bain
Capital, Inc. since May 1993, and a general partner
of Bain Venture Capital since 1990. Prior to joining
Bain Venture Capital, Mr. Nunnelly was a partner at
Bain & Company where he managed several
relationships in the manufacturing sector, and he
was also employed by Proctor & Gamble Company Inc.
in product management. He is a director of several
companies, including Dade International Inc., Stream
International, Inc., EduServ Technologies, SR
Research and Strategic Mapping.
</TABLE>
8
<PAGE> 14
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ---- --- -------------------------------------------
<S> <C> <C>
Paul J. Zepf........ 32 Mr. Zepf has been a Principal of Centre Partners
Management LLC and a Principal of Corporate
Advisors, L.P. since 1995. Mr. Zepf served as a Vice
President of Corporate Advisors, L.P. from 1993 to
1995 and an Associate from 1989 to 1993. He also is
a director of LaSalle Holdings Limited, a property
catastrophe reinsurance company, and Firearms
Training Systems, Inc., a training and simulation
company.
</TABLE>
DIRECTORS' COMPENSATION
Directors receive no fees for their service as directors of the Company.
Under the Company's 1996 Non-Employee Stock Option Plan (the "1996 Plan"),
each Eligible Director who becomes a director after May 16, 1996 receives, at
the time he or she first becomes a director, subject to stockholder approval, an
option to purchase 50,000 shares of Common Stock, and at the time he or she is
elected or appointed to a committee of the Board of Directors, an option to
purchase an additional 25,000 shares of Common Stock. These options vest
quarterly over a two-year period, and have an exercise price equal to the fair
market value of the Common Stock on the date of grant. See "Approval of 1996
Non-Employee Director Stock Option Plan."
In addition, in recognition of their substantial efforts on behalf of the
Company during the fiscal year ended January 4, 1997, Messrs. Bell, Sperling and
Rubinoff were each granted an option to purchase 23,333 shares of Common Stock
in October 1996. These options vest quarterly over a three-year period and have
an exercise price equal to the fair market value of the Common Stock on the date
of grant.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held five meetings during the fiscal year ended
January 4, 1997. Each director attended 75% or more of all meetings of the Board
and the committees on which he served, except for Mr. Sperling who attended 71%
of all the meetings. The standing committees of the Board of Directors are the
Executive Committee, the Compensation Committee and the Audit Committee.
EXECUTIVE COMMITTEE. The Executive Committee meets in place of the full
Board of Directors when scheduling makes it difficult to convene all of the
directors or when issues arise requiring immediate attention. The Committee's
current members are Messrs. Alexander, Dowdle, Perik (Chairman) and Sperling.
The Committee was appointed in early 1997 and, accordingly, did not meet in
1996.
COMPENSATION COMMITTEE. The Compensation Committee determines the
compensation of the President and the Chief Executive Officer of the Company and
approves the compensation of directors and certain executive officers of the
Company. The Committee also administers the Company's Long Term Equity Incentive
Plan and 1996 Stock Option Plan. The Committee's current members are Messrs.
Alexander, Bell, Rubinoff (Chairman) and Sperling. The Compensation Committee
had one formal meeting and acted by written consent four times during the fiscal
year ended January 4, 1997.
AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors
the appointment of the Company's independent public accountants, and reviews and
approves the results, findings and recommendations of audits performed by the
independent public accountants. The Committee also reviews the Company's system
of internal accounting controls, the significant accounting policies of the
Company as they apply to the consolidated financial statements, the audit fees
to be paid to the independent public accountants and the nature of non-audit
services performed by the independent public accountants. The Committee's
current members are Messrs. Alexander, Bell, Rubinoff and Sperling (Chairman).
The Audit Committee met twice during the fiscal year ended January 4, 1997.
9
<PAGE> 15
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Alexander, Bell,
Rubinoff and Sperling (Chairman), none of whom is an employee of the Company or
has any direct or indirect material interest in or relationship to the Company,
other than their receipt of stock options described above in Compensation of
Directors or, in the case of Mr. Rubinoff, options granted prior to 1994 under a
stock option plan of Former SoftKey. None of the executive officers of the
Company has served on the Board of Directors or compensation committee of any
other entity, any of whose officers served either on the Company's Board of
Directors or the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation of the Named Executive Officers for each of
the last three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Michael J. Perik.................. 1996 400,000 312,125 1,000,000 --
Chairman of the Board and 1995 300,000 -- 475,000 33,847(1)
Chief Executive Officer 1994 200,000 -- 535,000 98,059(2)
Kevin O'Leary..................... 1996 400,000 312,125 1,000,000 --
President 1995 300,000 -- 475,000 4,574(3)
1994 200,000 -- 1,152 41,796(4)
R. Scott Murray................... 1996 250,000 125,000 100,000 --
Chief Financial Officer 1995 230,000 30,000 100,000 37,260(5)
1994 123,264 17,000 70,000 45,683(6)
Martin Rice(7).................... 1996 166,266 97,500(8) 100,000 56,333(9)
Executive Vice President,
Research & Development
Anthony J. Bordon................. 1996 150,000 141,413(10) 115,000 --
President, International
</TABLE>
- ---------------
(1) Represents amounts paid to reimburse Mr. Perik for income taxes incurred
from payments he received from the Company for rent and moving expenses.
(2) Includes $57,600 for rent of Mr. Perik's apartment in Boston and certain
moving expenses, and $40,459 to reimburse Mr. Perik for income taxes
incurred from payments he received from the Company for rent and moving
expenses.
(3) Represents amounts paid to reimburse Mr. O'Leary for income taxes incurred
from payments he received from the Company for rent and moving expenses.
(4) Includes $27,239 for expenses incurred by Mr. O'Leary in connection with
moving to the Boston area, and $14,557 to reimburse Mr. O'Leary for income
taxes incurred from payments he received from the Company for moving
expenses.
(5) Represents amounts paid to reimburse Mr. Murray for income taxes incurred
from payments he received from the Company for rent and moving expenses.
(6) Includes $34,091 paid to reimburse Mr. Murray for expenses incurred in
connection with moving to the Boston area and $11,592 in fees paid for
consulting services provided by Mr. Murray prior to becoming an employee of
the Company.
(7) Dr. Rice's employment with the Company terminated on May 19, 1997.
10
<PAGE> 16
(8) Includes $50,000 paid to Dr. Rice under a non-competition agreement between
Dr. Rice and the Former Learning Company in connection with the Former
Learning Company's acquisition of HyperGlot Software Company, Inc. in July
1993.
(9) Includes $36,250 for expenses incurred by Dr. Rice in connection with
moving to the San Francisco Bay area, and $20,083 to reimburse Dr. Rice for
income taxes incurred from payments he received from the Company for moving
expenses.
(10) Represents commissions.
EMPLOYMENT ARRANGEMENTS
On April 9, 1997, Messrs. Perik and O'Leary each entered into a three-year
employment agreement with the Company providing for their continued employment
by the Company in their present capacities. Each of the agreements provides for,
among other things, an annual base salary of not less than $400,000 and
eligibility for a target cash bonus of up to $300,000 per year payable on a
quarterly basis based upon performance objectives approved by the Compensation
Committee. Each of the agreements also provides that if the executive's
employment with the Company is terminated by the Company other than for just
cause or by the executive for good reason, the Company will make severance
payments to the executive over a three-year period (the "Continuation Period")
in an aggregate amount equal to three times the then-current annual base salary
plus three times the amount of all bonuses paid or accrued under the agreement
with respect to the twelve month period immediately preceding such termination.
Each of the agreements also provides that the Company will provide the
executive, during the Continuation Period, with life, disability, accident and
health insurance benefits and a monthly automobile allowance identical or
substantially similar to that which the executive received immediately prior to
such termination. In addition, each of the agreements provides that, during the
Continuation Period, all of the executive's then outstanding options for the
purchase of capital stock of the Company will continue to vest and remain
exercisable in accordance with the terms of the applicable stock option
agreement as if the employment of the executive were not terminated until the
last day of the Continuation Period. Also, under each of the agreements, the
Company agreed that if any of the severance payments provided for by the
agreements become subject to tax (the "Excise Tax") under Section 4999 of the
Code, the Company will pay the executive an additional payment (a "Gross-up
Payment") such that the net amount retained by the executive, after deduction of
any Excise Tax and any other tax on such payments and the Gross-up Payment, will
be equal to the original severance payments. The Gross-up Payments will only
apply to severance payments if the event that causes the severance payments to
be subject to the Excise Tax occurs during the three-year term of the agreement.
The Company has also agreed to enter into a security arrangement reasonably
acceptable to each of Messrs. Perik and O'Leary to secure the severance payments
under each of the agreements.
On May 22, 1997, Mr. Murray entered into a three-year employment agreement
with the Company providing for his continued employment by the Company in his
present capacity. The agreement provides for, among other things, an annual base
salary of not less than $250,000 and eligibility for a target cash bonus of up
to $150,000 per year payable on a quarterly basis based upon performance
objectives approved by the Compensation Committee. The agreement also provides
that if Mr. Murray's employment with the Company is terminated by the Company
other than for just cause or by the executive for good reason, the Company will
make severance payments to Mr. Murray over a three-year period in an aggregate
amount equal to three times the then-current annual base salary plus three times
the amount of all bonuses paid or accrued under this agreement with respect to
the twelve month period immediately preceding such termination. The agreement
contains benefit continuation and tax provisions similar to those set forth in
the employment agreements of Messrs. Perik and O'Leary.
On April 7, 1997, Dr. Rice entered into a two-year employment agreement
with the Company as Senior Vice President, Development. The agreement provides
for, among other things, an annual base salary of not less than $150,000 and
eligibility for a target cash bonus of up to 75% of the annual base salary per
year payable on a quarterly basis based upon a plan agreed upon with the Chief
Executive Officer of the Company for each employment year. The agreement also
provides that if Dr. Rice's employment with the Company is terminated by the
Company other than for just cause or by Dr. Rice for good reason, the Company
will make
11
<PAGE> 17
severance payments to Dr. Rice over a one-year period in an aggregate amount
equal to the then-current annual base salary plus the amount of all bonuses paid
or accrued under the agreement with respect to the twelve month period
immediately preceding such termination. Dr. Rice's employment with the Company
terminated on May 19, 1997.
On March 5, 1997, Mr. Bordon entered into a two-year employment agreement
with the Company as President, International. The agreement provides for, among
other things, an annual base salary of not less than $200,000 and eligibility
for a target cash bonus of up to $165,000 per year payable on a quarterly basis
based upon a plan agreed to by the Chief Executive Officer of the Company for
each employment year. The agreement also provides that if Mr. Bordon's
employment with the Company is terminated by the Company other than for just
cause or by Mr. Bordon for good reason, the Company will make severance payments
to Mr. Bordon over a two-year period in an aggregate amount equal to two times
the then-current annual base salary plus two times the amount of all bonuses
paid or accrued under the agreement with respect to the twelve month period
immediately preceding such termination.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Helen Wright, former Director of Investment Relations for the Company and
Mr. Perik's sister, is indebted to the Company under a loan agreement entered
into on June 30, 1991 between Former SoftKey and Ms. Wright pursuant to which
Former SoftKey loaned Ms. Wright 267,000 Canadian dollars ("CDN $") to assist
Ms. Wright in paying the exercise price of certain employee stock options. As of
August 15, 1997 the aggregate principal amount of the loan outstanding was CDN
$203,000. In addition, as of August 15, 1997, Ms. Wright was also indebted to
the Company in the principal amount of CDN $77,500 pursuant to a loan by Former
SoftKey to Ms. Wright for the purchase of common shares of Former SoftKey. Both
loans are interest-free and payable on demand.
On April 5, 1996, the Company issued 158,099 shares of Common Stock to
Tribune Company in payment of a $3,000,000 promissory note and all interest
accrued thereon. Mr. Dowdle, a director of the Company, is a director of Tribune
Company.
On August 26, 1997, the Company entered into Securities Purchase Agreements
with affiliates of Thomas H. Lee Company, Bain Capital, Inc. and Centre Partners
Management LLC (collectively, the "Purchasers") pursuant to which the Company
agreed to issue an aggregate of 750,000 shares of Series A Preferred Stock
(defined below) to the Purchasers in exchange for the surrender of the Company's
5 1/2% Convertible/Exchangeable Notes due 2000 (the "Notes") in an aggregate
principal amount of $150,000,000, which Notes shall be purchased by the
Purchasers from Tribune Company for approximately $123,000,000. Mr. Sperling, a
director of the Company, is a Managing Director of Thomas H. Lee Company. Mr.
Dowdle, a director of the Company, is a director of Tribune Company. See
"Approval of the Issuance of Series A Convertible Participating Preferred
Stock."
12
<PAGE> 18
STOCK OPTION GRANTS
The following table summarizes certain information concerning stock options
granted during fiscal year 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE OR TERM
OPTIONS GRANTED FISCAL BASE PRICE EXPIRATION ------------------------
(# OF SHARES)(1) YEAR(%) ($/SH) DATE 5%($) 10%($)
---------------- ------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Perik.... 1,000,000(2) 12.41 16.0625 2/5/2006 10,101,620 25,599,488
Kevin O'Leary....... 1,000,000(2) 12.41 16.0625 2/5/2006 10,101,620 25,599,488
R. Scott Murray..... 100,000(3) 1.24 16.0625(4) 2/5/2006 1,010,162 2,559,949
Martin Rice......... 50,000 0.62 16.0625(4) 2/5/2006 505,081 1,279,974
25,000 0.31 24.0000(4) 6/3/2006 377,337 956,245
25,000 0.31 18.3750(4) 7/8/2006 288,898 732,125
Anthony J. Bordon... 65,000 0.81 16.0625(4) 2/5/2006 656,605 1,663,967
50,000(5) 0.62 16.0625(4) 6/2/2005 462,424 1,149,351
</TABLE>
- ---------------
(1) All options granted under the Company's Long Term Equity Incentive Plan are
granted at a price equal to the fair market value of the Common Stock on the
date of grant. Options generally become exercisable in quarterly increments
over a three year period.
(2) Option vests on February 6, 2002, subject to acceleration based on the
following conditions: (a) after $300,000,000 of the Company's outstanding
convertible or convertible/exchangeable notes is repaid under certain
circumstances, (b) as to one-tenth of the aggregate shares, at such time
that the closing price of Common Stock reaches $43 per share for a specified
period, (c) as to additional one-tenths of the aggregate shares, at such
time that the closing price of Common Stock reaches $45, $47, $49 and $51
per share, respectively, for a specified period and (d) as to the remaining
one-half of the aggregate shares, at such time that the closing price of
Common Stock reaches $53 per share for a specified period.
(3) Option vests quarterly over a three year period pursuant to an amendment to
Mr. Murray's stock option agreement in August 1997.
(4) Options repriced to $10.40 on March 13, 1997 as part of an option repricing
in fiscal 1997.
(5) Option replaced as part of an option repricing in fiscal 1996. See
"Repricing of Options."
13
<PAGE> 19
OPTION EXERCISES AND YEAR-END OPTION TABLE
The following table provides information regarding the exercise of stock
options during fiscal year 1996 and stock options held as of the end of fiscal
year 1996 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END(#) FISCAL YEAR END($)
SHARES ACQUIRED VALUE -------------------------- -----------------------------
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ---- --------------- -------------- ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Perik.... -- -- 812,280 1,137,500 1,945,657 --
Kevin O'Leary....... -- -- 362,999 1,137,500 53,420 --
R. Scott Murray..... -- -- 79,998 150,002 97,500 --
Martin Rice......... 43,272 750,466 144,487 -- 349,890 --
Anthony J. Bordon... 5,000 100,250 49,602 73,748 40,056 --
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and the fair market
value of Common Stock on the date of exercise.
(2) Based on the fair market value of the Common Stock on January 3, 1997
($15.625 per share) less the option exercise price.
REPRICING OF OPTIONS
The following table sets forth certain information concerning the repricing
of stock options held by the Named Executive Officers during fiscal year 1996.
TEN-YEAR OPTION/REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL OPTION
SECURITIES TERM REMAINING
UNDERLYING MARKET PRICE OF EXERCISE PRICE AT AT DATE OF
OPTIONS STOCK AT TIME TIME OF REPRICING OR
REPRICED OR OF REPRICING OR REPRICING OR NEW EXERCISE AMENDMENT
NAME DATE AMENDED(#) AMENDMENT($) AMENDMENT($) PRICE($) (IN MONTHS)
- ---- ------- ------------ --------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Bordon....... 2/5/96 50,000 16.0625 22.75 16.0625 111
President, International
</TABLE>
COMPENSATION COMMITTEE REPORT ON OPTION REPRICING
In February 1996, the Compensation Committee approved the repricing of
certain options granted to employees pursuant to the Long Term Equity Incentive
Plan (the "Equity Incentive Plan"). Because of the decline in the market price
of the Common Stock, certain outstanding options in February 1996 were
exercisable at prices that exceeded the market price of Common Stock thereby
substantially impairing the effectiveness of such options as performance
incentives. In view of this decline and in keeping with the Company's philosophy
of utilizing equity incentives to motivate and retain qualified employees, the
Compensation Committee felt that it was important to restore for eight key
employees of the Company the performance incentives intended to be provided by
options through the repricing of options with exercise prices in excess of the
market price at the time of repricing.
14
<PAGE> 20
Pursuant to the terms of the repricing, eight option holders were issued
new options having an exercise price of $16.0625 per share, the market price of
the Common Stock on the date of the repricing (the "New Options"). None of the
eight option holders was an executive officer at the time of the repricing.
Subsequent to the repricing, one of the option holders became an executive
officer. The New Options modify the exercise price of the existing options (the
"Existing Options") and are governed by the Company's 1996 Stock Option Plan.
The option agreements for the New Options contain substantially the same terms
as the option agreements for the Existing Options, including continuation of the
same vesting schedules.
COMPENSATION COMMITTEE
Lamar Alexander
Michael A. Bell
Robert Rubinoff
Scott M. Sperling
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is furnishing the
following report on the compensation policies applicable to the Company's
executive officers with respect to compensation reported for the fiscal year
ended January 4, 1997.
EXECUTIVE OFFICER COMPENSATION
The objective of the Company's executive compensation program is to attract
and retain key executives critical to the success of the Company. To closely
align the interests of such executives with those of the Company's stockholders,
the Company relies on the use of stock-based compensation plans to comprise a
high proportion of executive officers' total compensation. In addition, the
Company uses discretionary bonuses to ensure that an individual's compensation
is directly related to the Company's financial and other goals.
As a result of its acquisitions of the Former Learning Company and
Compton's NewMedia, Inc. in the closing days of 1995 and of MECC in May 1996,
the Company was significantly larger and more complex than previously and faced
significant operational challenges in integrating all of its constituent parts
during the year ended January 4, 1997. The Compensation Committee recognized in
early 1996 the significant efforts that would be required of the Company's
executive officers to achieve the Company's goals, and sought to implement an
executive compensation program that would reward executive officers' successful
efforts while aligning their interests with those of the Company's stockholders.
BASE SALARY. Salaries paid to executive officers, other than the President
and Chief Executive Officer, are reviewed by the Chief Executive Officer based
upon his assessment of the nature of the position, and the contribution,
experience and tenure of the executive officer. At the request of the Chief
Executive Officer, the Compensation Committee reviews any recommendations of the
Chief Executive Officer resulting from such review. The Compensation Committee
is responsible for determining the salaries of the President and Chief Executive
Officer. Messrs. Perik and O'Leary, the Chief Executive Officer and President of
the Company, respectively, are compensated pursuant to employment agreements.
The terms of such agreements were approved by the Compensation Committee. The
base salaries and annual bonus targets under those agreements are subject to
review by the Compensation Committee annually.
DISCRETIONARY BONUS. Periodically during the year, the Chief Executive
Officer may grant or recommend the payment of discretionary bonuses to executive
officers (other than himself and the President) based upon his evaluation of
such executive officer's tangible and direct contribution to the Company's
performance. In February 1996, the Compensation Committee established an overall
Company performance target which had to be attained before any bonuses could be
paid to the Company's Chief Executive Officer, President, Chief Financial
Officer and Chief Operating Officer for the fiscal year ended January 4, 1997.
This
15
<PAGE> 21
performance target related to the attainment of a specified level of after-tax
cash flow per share, which after the end of the year the Compensation Committee
determined was satisfied.
STOCK OPTIONS. The Company believes that the most effective way to align
the interests of executives with those of the Company's stockholders is to
ensure that executive officers hold equity stakes in the Company. Accordingly,
the Compensation Committee and management have determined that continued use of
stock options is an important mechanism for long-term incentive compensation of
executive officers. The Compensation Committee administers the Equity Incentive
Plan, under which options are granted to executive officers as well as other
employees of the Company. Generally, option grants are approved by the
Compensation Committee upon the recommendation of the Chief Executive Officer,
who determines the amount of such grants based upon factors similar to those
used to determine salary and any bonus. Options are granted at fair market value
on the date of grant, have ten year terms and generally have vesting periods of
three years. In February 1996, the Compensation Committee granted to each of Mr.
Perik and Mr. O'Leary options under the Company's stock option plans to purchase
1,000,000 shares of Common Stock. The options will not vest for six years unless
the market price of the Common Stock reaches $43 per share and the Company
eliminates a substantial portion of its outstanding long-term debt. The
Compensation Committee granted these options in recognition of Messrs. Perik's
and O'Leary's important contributions to the Company's success and the
achievement of its goals in 1995 and to further align their interests with those
of the Company's stockholders. The option awards were designed to incorporate a
number of features to lessen their immediate value and appeal, while providing a
large potential gain if significant stockholder value is created. During the
fiscal year ended January 4, 1997, the Committee granted options to the
Company's Chief Financial Officer, Chief Operating Officer and President,
International that were in whole or in part subject to a vesting schedule and
certain other performance measures identical to those imposed on the Chief
Executive Officer and President described above. See "Stock Option Grants."
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee increased the salary of Mr. Perik from $300,000
in the fiscal year ended January 6, 1996 to $400,000 in the fiscal year ended
January 4, 1997, reflecting his contributions to the Company. See "Employment
and Severance Arrangements."
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Code, enacted in 1993, generally disallows a tax
deduction to public companies for compensation over $1,000,000 paid to the
Company's Chief Executive Officer and four other most highly compensated
executive officers. The Committee believes that it is in the best interests of
the Company's stockholders to comply with the new tax law while still
maintaining the goals of the Company's executive compensation program, thereby
maximizing the deductibility of the Company's executive compensation payments.
The Company currently intends to structure grants under future stock option
plans in a manner that complies with this section of the Code.
COMPENSATION COMMITTEE
Lamar Alexander
Michael A. Bell
Robert Rubinoff
Scott M. Sperling
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934, as amended (the "Exchange Act")
requires the Company's directors, executive officers and holders of more than
10% of a registered class of equity securities of the Company to file initial
reports of ownership and reports of changes in ownership of equity securities
with the
16
<PAGE> 22
Securities and Exchange Commission (the "SEC") and to furnish the Company with
copies of all such forms filed. Based solely on its review of copies of such
forms received by it or written representations from certain reporting persons,
the Company believes that during the year ended January 4, 1997 all directors,
executive officers and holders of more than 10% of the Company's equity
securities complied with all applicable Section 16(a) filing requirements.
COMPARATIVE STOCK PERFORMANCE
The graph below compares the five-year cumulative total returns for the
Company's Common Stock, Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500 Index") and an industry index (the "Industry Index"). The graph assumes
a $100 investment on June 28, 1991 in the Company's Common Stock and in each of
the two indices, and assumes the reinvestment of all dividends paid by companies
represented in the two indices. The Industry Index includes all companies listed
on the Nasdaq National Market with the standard industry code 7372 (Computer and
Data Processing Services). The graph is in this Proxy Statement in accordance
with the rules of the SEC and is not necessarily indicative of future
performance.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
INDEX 6/28/91 6/30/92 6/30/93 1/7/94 1/6/95 1/5/96 1/3/97
- ----- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
The Learning Company, Inc.. $100.00 89.80 49.00 43.90 78.80 75.50 51.40
S&P 500 Index.............. $100.00 113.30 128.70 135.90 137.20 188.60 234.20
Industry Index............. $100.00 137.60 175.30 183.80 212.10 309.50 412.70
</TABLE>
PROPOSAL 2. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Coopers & Lybrand L.L.P. as the
Company's independent public accountants for the fiscal year ending January 3,
1998. The Board of Directors recommends that the stockholders vote FOR
ratification of that appointment. If the stockholders do not ratify the
selection of Coopers & Lybrand L.L.P., the Board of Directors will reconsider
this matter. Representatives of Coopers & Lybrand L.L.P. are expected to be
present at the Annual Meeting and will have the opportunity to make a statement
if they so desire and will be available to respond to appropriate questions from
stockholders.
17
<PAGE> 23
PROPOSAL 3. APPROVAL OF 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On July 31, 1996, the Board of Directors adopted the Company's 1996
Non-Employee Director Stock Option Plan (the "1996 Plan"), subject to
stockholder approval. Under the 1996 Plan, certain directors who are not
officers or employees of the Company or any affiliate of the Company (the
"Non-Employee Directors") are eligible to receive stock options. There are
currently seven Non-Employee Directors on the Board of Directors.
The Board of Directors believes that the success of the Company depends
largely on its ability to attract and retain directors with relevant and
beneficial experience who are motivated to exert their best efforts on behalf of
the Company. The Board of Directors believes that a program permitting the grant
of stock options to Non-Employee Directors promotes the long term financial
success of the Company by further aligning the interests of Non-Employee
Directors with the interests of the Company and its stockholders. The purpose of
the 1996 Plan, therefore, is (i) to encourage equity ownership in the Company by
outside directors of the Company whose continued services are considered
essential to the Company's success and progress and (ii) to provide such
directors with incentive to remain as directors. The Board of Directors has
appointed a committee (the "Committee") to supervise and administer the 1996
Plan.
SUMMARY OF THE 1996 PLAN
The 1996 Plan provides that each Non-Employee Director who became a
director after May 16, 1996 but prior to August 16, 1996 (the "Effective Date")
was entitled to receive a non-statutory stock option (the "Initial Option") to
purchase 50,000 shares of Common Stock on the Effective Date. The 1996 Plan
further provides that each Non-Employee Director who becomes a director after
the Effective Date is entitled to receive the Initial Option to purchase 50,000
shares of Common Stock on the date that he or she first becomes a member of the
Board of Directors. In addition, the 1996 Plan provides that each Non-Employee
Director is entitled to receive a non-statutory option (the "Committee Option")
to purchase 25,000 shares of Common Stock upon initial appointment to a
committee of the Board of Directors. The Board of Directors may also grant
additional non-statutory options (the "Discretionary Options") to Non-Employee
Directors in its or the Committee's sole discretion. Initial Options, Committee
Options and Discretionary Options are exercisable in eight quarterly
installments, with the first of such installments becoming exercisable three
months after the date of grant (provided that, for each such installment, the
optionee continues to serve as a director on such date).
The 1996 Plan provides for the grant of stock options for up to 500,000
shares of Common Stock (subject to adjustment in the event of stock splits and
other similar events). To date, no options to purchase shares of Common Stock
have been granted under the 1996 Plan; however, options to purchase 400,000
shares of Common Stock have been granted under the Company's 1996 Stock Option
Plan, which options shall be converted into options to purchase the same number
of shares under the 1996 Plan if and when the 1996 Plan is approved by the
Company's stockholders. The closing price of the Common Stock on the New York
Stock Exchange on October 20, 1997 was $16.4375. All options granted under the
1996 Plan are granted at a price equal to the fair market value of the Common
Stock on the date of grant and require that the exercise price be paid in full.
Options granted under the 1996 Plan generally are not transferable by the option
holder except by will or by the laws of descent and distribution and are
exercisable during the lifetime of the director only while he or she is serving
as a director of the Company or in accordance with certain circumstances set
forth below. No option is exercisable more than ten years after the date of
grant. If a director dies or becomes disabled while he or she is serving as a
director of the Company, the option is exercisable, to the extent exercisable at
the time of such death or disability, for a one-year period thereafter. In the
event that (i) a director's service is terminated by the Company under certain
circumstances or (ii) the director ceases to serve as a director for any other
reason, the option is exercisable, to the extent exercisable at the time of such
cessation of service, for ten days and ninety days, respectively, from the date
of such cessation of service.
In most circumstances, the Board of Directors may suspend, terminate,
discontinue or amend the 1996 Plan in any respect. Without the approval of the
stockholders, however, no amendment may (i) change the number of shares subject
to the 1996 Plan (with certain exceptions in the case of mergers,
recapitalizations
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<PAGE> 24
and related transactions), (ii) materially modify eligibility requirements under
the 1996 Plan, or (iii) materially increase the benefits accruing to
participants under the 1996 Plan.
In the event of a "change in control" of the Company, all outstanding
options immediately vest and, at the election of the Board of Directors, either
(i) the value of all outstanding options shall be cashed out on the basis of a
formula determined under the 1996 Plan or (ii) in the case of a sale of assets
of the Company, merger, reorganization or other similar transaction, the Board
of Directors shall make any appropriate adjustments to all outstanding options.
FEDERAL INCOME TAX CONSEQUENCES
All options granted under the 1996 Plan are non-statutory stock options and
are not entitled to special tax treatment under Section 422 of the Code.
No taxable income is recognized by a director upon the grant of a
non-statutory stock option. The director must recognize as ordinary income in
the year in which the option is exercised the amount by which the fair market
value of the purchased shares on the date of exercise exceeds the option price.
However, if a director exercises the option within six months of the date of
grant, upon exercise of such option, no income will be recognized by the
director until six months have expired from the date the option was granted. The
income then recognized will include any appreciation in the value of the shares
during the period between the date of exercise and the date six months after the
date of grant, unless the director makes an election under Section 83(b) of the
Code to have the difference between the exercise price and fair market value at
the time of exercise recognized as ordinary income as of the time of exercise.
The Company will be entitled to a business expense deduction equal to the amount
of ordinary income recognized by the director. The director will recognize a
gain or any loss upon the subsequent disposition of the purchased shares equal
to the difference between his or her basis and the amount realized upon the
sale. The gain or loss will be a capital gain or loss, and will be a long-term
gain or loss if the shares are held for more than one year after the date of
exercise, or if the director exercised the option within six months of the date
of grant and did not make a Section 83(b) election, more than one year from the
date six months after the date of grant.
BOARD RECOMMENDATION
The Board of Directors believes that the approval of the 1996 Plan is in
the best interests of the Company and its stockholders and therefore recommends
a vote FOR this proposal.
PROPOSAL 4. APPROVAL OF THE COMPANY'S 1997 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors believes that the continued growth and profitability
of the Company depends, in large part, upon the ability of the Company to
maintain a competitive position in attracting and retaining key personnel.
Accordingly, on September 9, 1997, the Board of Directors adopted, subject to
stockholder approval, the 1997 Employee Stock Purchase Plan (the "1997 Stock
Purchase Plan"). Up to 1,000,000 shares of Common Stock (subject to adjustment
in the event of stock splits and other similar events) may be issued pursuant to
awards granted under the 1997 Stock Purchase Plan.
SUMMARY OF THE 1997 STOCK PURCHASE PLAN
The 1997 Stock Purchase Plan, which provides for six offerings, one
beginning every six months commencing December 1, 1997 until and including
November 30, 2000, provides eligible employees with the opportunity to purchase
shares of the Company's Common Stock at a discounted price. A maximum of
1,000,000 shares of Common Stock may be issued under the 1997 Stock Purchase
Plan. The closing price of the Common Stock on the New York Stock Exchange on
October 20, 1997 was $16.4375 per share.
All employees of the Company and its participating subsidiaries, including,
with certain limitations, officers or directors who are also employees, are
eligible to participate in the 1997 Stock Purchase Plan, provided he or she (i)
is employed by the Company or any participating subsidiary on the applicable
offering commencement date, (ii) is regularly employed by the Company or any
participating subsidiary for 20 or
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<PAGE> 25
more hours per week and for more than five months in a calendar year and (iii)
has been employed by the Company or any participating subsidiary for at least 90
days on the applicable offering commencement date. An employee may elect to have
a whole number percentage from 1% to up to 10% withheld from his or her base pay
for purposes of purchasing shares under the 1997 Stock Purchase Plan, subject to
certain limitations on the maximum number of shares that may be purchased. The
price at which shares may be purchased during each offering will be the lower of
(i) 85% of the last sale price of the Common Stock as reported on the New York
Stock Exchange (the "NYSE") on the date that the offering commences or (ii) 85%
of the last sale price of the Common Stock as reported on the NYSE on the date
that the offering terminates.
The 1997 Stock Purchase Plan is administered by the Board of Directors and
the Compensation Committee. Pursuant to the terms of the 1997 Stock Purchase
Plan, the Board has appointed the Compensation Committee to administer certain
aspects of the 1997 Stock Purchase Plan. The Compensation Committee has the
authority to make rules and regulations for the administration of the 1997 Stock
Purchase Plan. The Compensation Committee or the Board may at any time terminate
or amend the 1997 Stock Purchase Plan, provided that no such amendment may be
made without approval of the stockholders of the Company if such approval is
required by Rule 16b-3 under the Exchange Act and other applicable securities
and tax laws. The 1997 Stock Purchase Plan contains provisions relating to the
disposition of options in the event of certain mergers or consolidations
involving the Company.
As of September 8, 1997, approximately 760 employees were eligible to
participate in the 1997 Stock Purchase Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to participation in the 1997
Stock Purchase Plan and with respect to the sale of Common Stock acquired under
the 1997 Stock Purchase Plan. The 1997 Stock Purchase Plan is intended to
qualify as an "Employee Stock Purchase Plan" within the meaning of Section 423
of the Code.
In general, a participant will not recognize taxable income upon enrolling
in the 1997 Stock Purchase Plan or upon purchasing shares of Common Stock at the
end of an offering. Instead, if a participant sells Common Stock acquired under
the 1997 Stock Purchase Plan at a sale price that exceeds the price at which the
participant purchased the Common Stock, then the participant will recognize
taxable income. A portion of that taxable income will be ordinary income, and a
portion may be capital gain.
If the participant sells the Common Stock more than one year after
acquiring it and more than two years after the date on which the offering
commenced (the "Grant Date"), then the participant will be taxed as follows. If
the sale price of the Common Stock is higher than the price at which the
participant purchased the Common Stock, then the participant will recognize
ordinary compensation income in an amount equal to the lesser of: (i) the excess
of the fair market value of the Common Stock on the Grant Date over the price at
which the participant purchased the Common Stock; or (ii) the excess of the sale
price of the Common Stock over the price at which the participant purchased the
Common Stock.
Any further income will be long-term capital gain. If the sale of the
Common Stock is less than the price at which the participant purchased the
Common Stock, then the participant will recognize long-term capital loss in an
amount equal to the excess of the price at which the participant purchased the
Common Stock over the sale price of the Common Stock.
If the participant sells the Common Stock within one year after acquiring
it or within two years after the Grant Date (a "Disqualifying Disposition"),
then the participant will recognize ordinary compensation income in an amount
equal to the excess of the fair market value of the Common Stock on the date
that it was purchased over the price at which the participant purchased the
Common Stock. The participant will also recognize capital gain in an amount
equal to the excess of the sale price of the Common Stock over the fair market
value of the Common Stock on the date that it was purchased, or capital loss in
an amount equal to the excess of the fair market value of the Common Stock on
the date that it was purchased over the sale price of the Common Stock. This
capital gain or loss will be a long-term capital gain or loss if the participant
has held
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<PAGE> 26
the Common Stock for more than one year prior to the date of the sale and will
be a short-term capital gain or loss if the participant has held the Common
Stock for a shorter period.
The offering of Common Stock under the 1997 Stock Purchase Plan will have
no tax consequences to the Company. Moreover, in general, neither the purchase
nor the sale of Common Stock acquired under the 1997 Stock Purchase Plan will
have any tax consequences to the Company except that the Company will be
entitled to a business-expense deduction with respect to any ordinary
compensation income recognized by a participant upon making a Disqualifying
Disposition. Any such deduction will be subject to the limitations of Section
162(m) of the Code.
The amount that a participant elects to have deducted from his or her base
pay for the purchase of Common Stock under the 1997 Stock Purchase Plan
constitutes taxable wages and is subject to withholding. Moreover, the Company
will have a withholding obligation with respect to ordinary compensation income
recognized by a participant upon making a Disqualifying Disposition. The Company
will require any affected participant to make arrangements to satisfy this
withholding obligation.
BOARD RECOMMENDATION
The Board of Directors believes that the 1997 Stock Purchase Plan is in the
best interests of the Company and its stockholders and therefore recommends a
vote FOR this proposal.
PROPOSAL 5. APPROVAL OF AMENDMENTS TO THE COMPANY'S LONG TERM EQUITY INCENTIVE
PLAN
The Company's Long Term Equity Incentive Plan (the "Equity Incentive
Plan"), which was initially approved by the stockholders of the Company on
October 10, 1990, had been amended through May 1996 to cover 7,000,000 shares of
Common Stock.
On September 9, 1997 the Company's Board approved amendments to the Equity
Incentive Plan, subject to stockholder approval, to increase the number of
shares of Common Stock issuable under the Equity Incentive Plan from 7,000,000
to 9,000,000 and to eliminate the Company's ability to grant options at below
the fair market value of the Common Stock at the time of grant. The closing
price of the Common Stock on the New York Stock Exchange on October 20, 1997 was
$16.4375 per share.
In order to comply with Section 162(m) of the Code, the increase in the
number of shares covered by the Equity Incentive Plan and the continuance of the
Plan must be approved by stockholders. A vote in favor of the proposed
amendments will constitute approval of the continuance of the Equity Incentive
Plan.
SUMMARY OF THE EQUITY INCENTIVE PLAN
A summary of the terms and provisions of the Equity Incentive Plan and the
proposed amendment thereto is set forth below and is qualified in its entirety
by reference to the full text of the Equity Incentive Plan, as proposed to be
amended. Capitalized terms used and not otherwise defined in this summary have
the meanings ascribed to them in the Equity Incentive Plan.
GENERAL. The purpose of the Equity Incentive Plan is to provide selected
eligible employees of and consultants to the Company, its subsidiaries and its
affiliates an opportunity to participate in the Company's future by offering
them long-term performance-based and other incentives and equity interests in
the Company so as to retain, attract and motivate management personnel. As of
October 15, 1997, approximately 12,000 persons were eligible to participate in
the Equity Incentive Plan.
The Equity Incentive Plan provides for grants to eligible employees and
consultants of awards including (a) options to purchase shares of Common Stock
("Options") at the fair market value of such shares at the time such Options are
granted, consisting of (i) Incentive Stock Options ("ISOs"), (ii) Non-Qualified
Stock Options ("NQSOs") and (iii) any other type of Option (in each case with or
without SARs); (b) SARs, which are rights to receive an amount equal to the
increase, between the date of grant and the date of exercise, in the fair market
value of the number of shares of Common Stock subject to the SAR; (c) Stock
Purchase
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<PAGE> 27
Rights, similar in certain respects to Options; and (d) Performance Shares which
are equivalent in value to shares of Common Stock and may be awarded based on
the extent to which a participant achieves selected performance objectives over
a specified period of time.
The Equity Incentive Plan is administered by the Compensation Committee.
The Compensation Committee has the authority, except to the extent that it
violates Section 162(m) of the Code, (x) to select the eligible participants to
whom awards under the Equity Incentive Plan shall be granted, (y) to determine
the nature and extent of such awards granted and (z) to determine the terms and
conditions applicable to such awards. In administering the Equity Incentive
Plan, the Compensation Committee may, except to the extent it violates Section
162(m) of the Code, (a) adopt, alter or repeal administrative rules, guidelines
and practices governing the Equity Incentive Plan as it deems advisable, (b)
interpret the terms and provisions of the Equity Incentive Plan and (c) adjust
performance goals and measurements applicable to awards to account for (i)
continued compliance with applicable laws, tax regulations and accounting rules,
(ii) unusual or extraordinary items, events or occurrences (including Changes in
Control as defined in the Equity Incentive Plan) in order to avoid windfall or
hardship, (iii) material changes in business conditions and (iv) such other
changes as it deems appropriate in the exercise of its discretion.
The Compensation Committee may also amend, alter or discontinue the Equity
Incentive Plan as it deems advisable, provided that any such action which would
impair the rights of a participant under an outstanding award requires such
participant's consent. In addition, to the extent necessary to comply with
certain federal securities and income tax laws including without limitation
Section 162(m) of the Code, stockholder approval is required for any amendment,
alteration or discontinuance of the Equity Incentive Plan where such action
would (i) increase the number of shares of Common Stock reserved for issuance
pursuant to awards under the Equity Incentive Plan, (ii) change certain minimum
price terms for Options or Stock Purchase Rights, (iii) change the class of
employees and consultants eligible to participate in the Equity Incentive Plan,
(iv) extend the maximum term of an Option or a Stock Purchase Right exercise
period or (v) materially increase the Equity Incentive Plan benefits accruing to
Equity Incentive Plan participants.
The Compensation Committee may also, at any time without stockholder
approval, amend the Equity Incentive Plan and the terms of any outstanding award
(a) to maximize certain federal income tax benefits accorded to awards or (b) to
comply with federal securities laws; provided that any such amendment with
respect to outstanding awards requires the consent of the participants whose
awards are affected thereby.
Unless earlier terminated by the Board, the Equity Incentive Plan will
terminate on July 1, 2000, but any award granted pursuant to the Equity
Incentive Plan prior to July 1, 2000 may extend beyond such date, in accordance
with its terms.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to options granted under the
Equity Incentive Plan and with respect to the sale of Common Stock acquired
under the Equity Incentive Plan.
INCENTIVE STOCK OPTIONS
In general, an optionee will not recognize taxable income upon the grant or
exercise of an incentive stock option. Instead, an optionee will generally
recognize taxable income with respect to an incentive stock option only upon the
sale of Common Stock acquired through the exercise of the option ("ISO Stock").
Generally, the tax consequences of selling ISO Stock will vary with the
length of time that an optionee has owned the ISO Stock at the time it is sold.
If the optionee sells ISO Stock after having owned it for at least two years
from the date the option was granted (the "Grant Date") and one year from the
date the option was exercised (the "Exercise Date"), then the optionee will
recognize long-term capital gain in an amount equal to the excess of the sale
price of the ISO Stock over the exercise price.
If the optionee sells ISO Stock prior to having owned it for at least two
years from the Grant Date and one year from the Exercise Date (a "Disqualifying
Disposition"), then generally all or a portion of the gain
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<PAGE> 28
recognized will be ordinary compensation income and the remaining gain will be a
capital gain, long-term if the optionee has held the ISO Stock for more than one
year prior to the date of the sale.
If an optionee sells ISO Stock for less than the exercise price, then the
optionee will recognize capital loss equal to the excess of the exercise price
over the sale price of the ISO Stock. This capital loss will be a long-term
capital loss if the optionee has held the ISO Stock for more than one year prior
to the date of the sale.
NON-STATUTORY OPTIONS
As in the case of an incentive stock option, an optionee will not recognize
taxable income upon the grant of a non-statutory option. Unlike the case of an
incentive stock option, however, an optionee who exercises a non-statutory
option generally will recognize ordinary compensation income in an amount equal
to the excess of the fair market value of the Common Stock acquired through the
exercise of the option (the "NSO Stock") on the Exercise Date over the exercise
price.
With respect to any NSO Stock, an optionee will have a tax basis equal to
the exercise price plus any income recognized upon the exercise of the option.
Upon selling NSO Stock, an optionee generally will recognize capital gain or
loss in an amount equal to the excess of the sale price of the NSO Stock over
the optionee's tax basis in the NSO Stock. This capital gain or loss will be a
long-term capital gain or loss if the participant has held the NSO Stock for
more than one year prior to the date of the sale.
TAX CONSEQUENCES TO THE COMPANY
The grant of a stock option under the Equity Incentive Plan will have no
tax consequences to the Company. Moreover, in general, neither the exercise of
an incentive stock option acquired under the Equity Incentive Plan nor the sale
of any Common Stock acquired under the Equity Incentive Plan will have any tax
consequences to the Company. The Company generally will be entitled to a
business-expense deduction, however, with respect to any ordinary compensation
income recognized by an optionee under the Equity Incentive Plan. Any such
deduction will be subject to the limitations of Section 162(m) of the Code.
BOARD RECOMMENDATION
The Board of Directors believes the amendments to the Equity Incentive Plan
are in the best interests of the Company and its stockholders and therefore
recommends that the stockholders vote FOR this proposal.
PROPOSAL 6. APPROVAL OF ISSUANCE OF SERIES A CONVERTIBLE PARTICIPATING
PREFERRED STOCK
On August 26, 1997, (i) the Company entered into three separate Securities
Purchase Agreements (collectively, the "Securities Purchase Agreements") with
affiliates of Thomas H. Lee Company, Bain Capital, Inc. and Centre Partners
Management LLC (collectively, the "Purchasers") pursuant to which the Company
agreed to issue and sell to the Purchasers, and the Purchasers agreed to
purchase, an aggregate of 750,000 shares of Series A Convertible Participating
Preferred Stock, par value $.01 per share, of the Company (the "Series A
Preferred Stock") in exchange for the surrender of the Company's 5 1/2% Senior
Convertible/Exchangeable Notes due 2000 (the "Notes") in an aggregate principal
amount of $150,000,000 then held by the Purchasers, (ii) the Company and the
Purchasers entered into a Registration Rights Agreement (the "Registration
Rights Agreement"), and (iii) the Company and the Purchasers entered into three
separate Stock Option Agreements (the "Stock Option Agreements") with Thomas H.
Lee Company, Bain Capital, Inc. and. Centre Partners Management LLC (the "Option
Purchasers").
Each share of Series A Preferred Stock shall have an initial liquidation
preference of $200 (subject to adjustment as described below) and shall
initially be convertible into a number of shares of Common Stock determined by
dividing $200 by the Conversion Price. The initial Conversion Price (subject to
adjustment as described below) shall be $10.00.
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<PAGE> 29
Upon the Closing, assuming conversion of all the Series A Preferred Stock
at the initial Conversion Price, the Purchasers would own approximately
15,000,000 shares of Common Stock of the Company, representing approximately 31%
of the issued and outstanding shares of Common Stock of the Company.
The Purchasers and Tribune Company have entered into a Securities Purchase
Agreement dated as of August 26, 1997 (the "Note Purchase Agreement") pursuant
to which the Purchasers have agreed to purchase from Tribune Company, for an
aggregate purchase price of approximately $123,000,000, the Notes that will be
surrendered by the Purchasers to the Company in payment for the 750,000 shares
of Series A Preferred Stock. Mr. Sperling, a director of the Company, is a
Managing Director of Thomas H. Lee Company. Mr. Dowdle, a director of the
Company is a director of Tribune Company.
The affirmative vote of a majority of the votes represented by the shares
of Common Stock and the Special Voting Share, voting together as one class,
present in person or represented by proxy at the Annual Meeting is required to
approve the issuance of Series A Preferred Stock to the Purchasers.
REASONS FOR THE TRANSACTION
The reason for the proposed issuance and sale of Series A Preferred Stock
in exchange for the surrender of the Notes is to enable the Company to reduce
the amount of leverage on the Company. The Series A Preferred Stock has certain
rights that are preferential to the rights of the Common Stock, including rights
(i) to vote as a separate class under certain circumstances, (ii) to receive a
specified distribution amount before any distribution is made to the holders of
Common Stock in the event of liquidation, dissolution or winding up of the
Company, (iii) to request that the Company purchase the Series A Preferred Stock
upon a Purchase Event (as defined below), and (iv) the right to receive
specified consideration in certain circumstances upon an Acquisition Event (as
defined below). The rights and preferences of the Series A Preferred Stock are
summarized below under the heading "Summary of the Terms of the Series A
Convertible Participating Preferred Stock."
In 1995, the Company completed a series of major acquisitions, including
the acquisition of the Former Learning Company for a total consideration of
$684,066,000, including cash consideration of $543,153,000. These acquisitions
were financed in part through the issuance in 1995 of $350,000,000 in principal
amount of the 5 1/2% Senior Convertible Notes due 2000 (the "Senior Convertible
Notes") and $150,000,000 in principal amount of the Notes. The Company has to
date repurchased approximately $36,350,000 in principal amount of the Senior
Convertible Notes.
As of August 15, 1997, the Company had total outstanding indebtedness of
$463,650,000, requiring annual interest service costs of approximately
$25,000,000.
In order to continue to compete effectively in the intensely competitive
consumer software environment, the Company determined in mid-1997 that it would
be prudent to seek to raise additional equity capital in order to reduce its
outstanding indebtedness and thus deleverage its balance sheet. The Company
believes that a significant reduction in the indebtedness of the Company will
provide it with increased financial flexibility to address both the risks of,
and opportunities in, the consumer software market. The Company also believes
that a reduction in its indebtedness should enable the Company to achieve
appropriate market recognition for the performance of its business.
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<PAGE> 30
CAPITALIZATION
The following table sets forth the capitalization of the Company at July 5,
1997 and as adjusted to reflect the issuance of 750,000 shares of Series A
Preferred Stock to the Purchasers in exchange for the Notes.
<TABLE>
<CAPTION>
JULY 5, 1997
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior Convertible Notes..................................... $313,650 $313,650
Senior Convertible/Exchangeable Note -- Related Party........ 150,000 --
-------- --------
$463,650 $313,650
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value
Authorized -- 120,000,000 shares
Issued and outstanding -- 44,771,950 shares................ $ 492 $ 492
Special voting stock, (represents Exchangeable Shares
that are exchangeable into 1,549,707 shares of common
stock)Authorized and Issued -- 1 share..................... -- --
Series A Preferred Stock -- 750,000 Shares................... -- 150,000
Additional paid-in-capital(1)................................ 735,517 729,122
Accumulated deficit.......................................... (827,666) (827,666)
Cumulative translation adjustment............................ (14,657) (14,657)
-------- --------
Total stockholders' equity......................... (106,314) 37,291
-------- --------
Total capitalization............................... $357,336 $350,941
======== ========
</TABLE>
- ---------------
(1) The As Adjusted reflects $6,395,000 of professional fees and expenses
estimated to be incurred in connection with the proposed sale of Series A
Preferred Stock to the Purchasers.
SUMMARY OF THE SECURITIES PURCHASE AGREEMENTS
The Securities Purchase Agreements provide that the Purchasers shall
purchase from the Company an aggregate of 750,000 shares of Series A Preferred
Stock (the "Shares") in exchange for the surrender to the Company of
$150,000,000 in aggregate principal amount of the Company's Notes, which Notes
shall be purchased by the Purchasers from Tribune Company for $123,000,000 plus
an amount equal to the interest accrued on the Notes from the last interest
payment date on the Notes up to and including the Closing Date (the "Accrued
Interest"). In addition, the Company will pay to the Purchasers the Accrued
Interest. As of December 4, 1997, the Accrued Interest will be approximately
$768,500.
The Securities Purchase Agreements provide that the closing (the "Closing")
of the transactions contemplated thereunder shall take place on such date (the
"Closing Date") as agreed to by the Company and the Purchasers but in no event
later than three business days following the date upon which all of the
conditions set forth therein and in the Note Purchase Agreement are satisfied or
waived. Assuming the requisite stockholder approval at the Annual Meeting with
respect to the issuance of Series A Preferred Stock, the Company and the
Purchasers currently anticipate closing on or about December 4, 1997.
The Securities Purchase Agreements contain customary representations and
warranties by the Company as to, among other things, (i) the filing of all
required documents with the SEC and the accuracy of such documents when filed,
(ii) financial statements, (iii) the absence of material adverse changes in the
Company's business, properties, prospects, operations, condition or results of
operations, (iv) corporate authority, (v) the absence of certain material
defaults or violations, (vi) capitalization, (vii) subsidiaries, (viii) material
litigation, (ix) compliance with the Securities Act of 1933, as amended (the
"Securities Act"), (x) the absence of material undisclosed liabilities, (xi) no
violations of law, (xii) enforceability of the
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<PAGE> 31
Securities Purchase Agreements and related agreements, (xiii) outstanding
capital stock, (xiv) properties, intellectual property, taxes and insurance, and
(xv) the inapplicability of Section 203 of the Delaware Corporation Law to the
transactions contemplated by the Securities Purchase Agreements.
Consummation of the purchase of the Series A Preferred Stock by the
Purchasers pursuant to the Securities Purchase Agreements is subject to various
conditions, including: (i) continued accuracy of the representations and
warranties of the Company as of the Closing Date and the performance in all
material respects by the Company of its obligations under the Securities
Purchase Agreements, (ii) the absence of any material adverse effect on the
business, properties, prospects, operations, condition (financial or other) or
results of operations of the Company and its subsidiaries taken as a whole;
provided, that a decline in the trading price of the Common Stock shall not be
deemed to be of such material adverse effect if such decline is not attributable
to a material adverse change in the business, properties, prospects, operations,
condition (financial or other) or results of operations of the Company and its
subsidiaries taken as a whole, (iii) the absence of any temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction prohibiting or preventing consummation of the
transactions contemplated by the Securities Purchase Agreements, (iv) expiration
or early termination of the applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (v) approval
of the issuance of the Series A Preferred Stock to the Purchasers by the
affirmative vote of a majority of the votes represented by the shares of Common
Stock and the Special Voting Share, voting together as one class, present in
person or represented by proxy at the Annual Meeting and (vi) appointment of
three directors designated by the Purchasers to the Board of Directors of the
Company.
Under the Securities Purchase Agreements, the Company shall indemnify,
defend and hold harmless each Purchaser from and against all demands, claims,
actions or causes of action, assessments, losses, damages, liabilities, costs
and expenses asserted against, resulting to, or imposed upon or incurred by such
Purchaser directly or indirectly in connection with the transactions
contemplated by the Securities Purchase Agreements. Any claim for
indemnification, insofar as it is related to any of the representations and
warranties of the Company contained in the Securities Purchase Agreements, must
be made within one year of the Closing Date.
The Securities Purchase Agreements provide that the Securities Purchase
Agreements may be terminated at any time prior to the Closing Date: (a) by the
mutual written consent of the Purchasers and the Company; (b) by any Purchaser
or the Company if the Closing has not occurred on or before February 26, 1998;
provided, however, that the right to terminate the Securities Purchase
Agreements under this clause shall not be available to any party whose failure
to fulfill any obligation under the Securities Purchase Agreements has been the
cause of or resulted in the failure of the Closing to occur on or before such
date; or (c) by any Purchaser or the Company if any of the Securities Purchase
Agreements or the Note Purchase Agreement is terminated; or (d) by any Purchaser
if the stockholders of the Company do not approve the issuance of the shares of
Series A Preferred Stock to the Purchasers.
Upon the execution of the Securities Purchase Agreements, the Company paid
to the Purchasers an aggregate fee of $615,000. On the Closing Date, the Company
shall pay to the Purchasers an additional aggregate fee of $1,230,000. The
Company has also agreed to pay, whether or not the Closing occurs, all
documented out-of-pocket costs and expenses, including attorneys', accountants'
and consultants' fees, incurred by each of the Purchasers in connection with the
Securities Purchase Agreements and the transactions contemplated thereby, up to
$800,000 in the aggregate for all Purchasers.
Under the Securities Purchase Agreements, the Company has agreed (i) to
take all action necessary to ensure that one representative of the Lee Purchaser
Group, the Bain Purchaser Group and the Centre Purchaser Group (collectively,
the "Purchasers' Representatives") shall be elected to the Board of Directors of
the Company and that the representative of Thomas H. Lee Company currently
serving on the Board of Directors be renominated and reelected when his initial
and any subsequent term expires, and (ii) to use its best efforts to cause the
election of two nominees from the Purchasers' Representatives to each of the
executive, compensation and audit committees of the Board of Directors, except,
in each case, to the extent that the Board of Directors determines in good
faith, after consultation with outside counsel, that contrary
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action is required by the Board of Directors' fiduciary duties under applicable
law. If the Lee Purchaser Group in the aggregate holds less than 40% or 20% of
the Shares initially owned by the Lee Purchaser Group, the Lee Purchaser Group
shall only be entitled to nominate one or no nominees to the Board of Directors,
respectively. If either the Bain Purchaser Group or the Centre Purchaser Group
holds less than 40% of the Shares initially owned by the Bain Purchaser Group or
Centre Purchaser Group, respectively, then such Group shall not be entitled to
nominate any nominees to the Board of Directors. If at any time there are only
two Purchasers' Representatives serving on the Board of Directors, the Company
will use its best efforts to cause the election of only one of such Purchasers'
Representatives to each of the executive, compensation and audit committees, and
if at any time there is only one Purchasers' Representative serving on the Board
of Directors, the Company is not obligated to use its best efforts to cause the
election of such Purchasers' Representative to any of the committees. The Lee
Purchaser Group consists of Thomas H. Lee Equity Fund III, L.P., Thomas H. Lee
Foreign Fund III, L.P., Thomas H. Lee Company and affiliates. The Bain Purchaser
Group consists of Bain Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP
Associates, L.P., BCIP Trust Associates, L.P. and affiliates. The Centre
Purchaser Group consists of Centre Capital Investors II, L.P., Centre Capital
Tax-Exempt Investors II, L.P., Centre Capital Offshore Investors II, L.P., State
Board of Administration of Florida, Centre Parallel Management Partners, L.P.,
Centre Partners Co-Investment L.P. and affiliates. The Purchasers have indicated
to the Company that they intend to designate Anthony J. DiNovi, Mark E. Nunnelly
and Paul J. Zepf for appointment to the Board of Directors.
In the Securities Purchase Agreements, each of the Purchasers covenants
with the Company that, without the consent of the Company, for a period
continuing through the fifth anniversary of the date of the Securities Purchase
Agreements, it will not, among other things, purchase or acquire, or offer,
propose or agree to purchase or acquire, directly or indirectly, any of the
Common Stock, (other than by conversion of the Shares) any option, warrant or
other right to acquire, directly or indirectly, any Common Stock or any
securities which are convertible into or are exchangeable or exercisable for
Common Stock, provided, however, that if at any time the percentage of the
outstanding Common Stock owned by a Purchaser on a fully-diluted basis is less
than the percentage of the outstanding Common Stock owned by such Purchaser on a
fully-diluted basis on the Closing Date (the "Maximum Amount"), such Purchaser
may purchase additional shares of Common Stock up to the Maximum Amount. In
addition, no Purchaser shall, without the Company's consent, sell, transfer,
effect a short sale of, grant any option for the purchase of, or loan any Shares
or Common Stock for a period of 18 months from the date of issuance of the
Shares, except to an affiliate or another Purchaser or an affiliate thereof;
provided this restriction will cease to apply upon a mandatory conversion of the
Shares into Common Stock pursuant to the Restated Certificate of Incorporation
of the Company, and provided further that each Purchaser may sell its Shares or
Common Stock in any tender offer or exchange offer made for any securities of
the Company.
SUMMARY OF THE REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement provides the Purchasers with certain
rights with respect to the registration under the Securities Act of shares of
Series A Preferred Stock, Common Stock issued upon conversion thereof and Option
Shares (as defined below) (the "Registrable Securities"). Purchasers have the
right under the Registration Rights Agreement to require the Company to prepare
and file from time to time registration statements under the Securities Act with
respect to their Registrable Securities; provided, however, that no demand shall
be made to register shares of Common Stock issued upon conversion of Series A
Preferred Stock until 18 months after the Closing Date and no demand shall be
made to register shares of Series A Preferred Stock until 30 months after the
Closing Date (unless the shares of Series A Preferred Stock are mandatorily
converted into Common Stock prior to such dates). The Company is not required to
effect, in the aggregate, more than four such registrations, provided that the
Company is required to effect only one registration of Option Shares. The
Registration Rights Agreement also provides that in the event the Company
proposes to register any of its securities under the Securities Act, whether or
not for sale on its own account, the Purchasers shall be entitled to include
Registrable Securities in the registration statement which covers the securities
the Company proposes to register, subject to the right of the managing
underwriter of any such offering to exclude some or all of such Registrable
Securities from such registration if and to the extent that inclusion of such
Registrable Securities would interfere with the successful marketing of
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the securities being distributed by the underwriters of such offering. In such
event, the amount of Registrable Securities to be offered for the accounts of
the Purchasers shall be reduced pro rata among all of the requesting Purchasers
based upon the number of shares requested to be included in such registration by
all requesting Purchasers. The Registration Rights Agreement provides that the
Company may delay a registration requested by a party to the Registration Rights
Agreement for a period not to exceed 90 days in the event the Board of Directors
of the Company makes a good faith determination that the filing of the requested
registration would adversely affect either a pending transaction of the Company
or a securities offering which the Company plans to undertake, provided that
such right to delay may not be exercised more than once in any twelve month
period.
SUMMARY OF THE STOCK OPTION AGREEMENTS
Under the Stock Option Agreements, the Company granted an option (the
"Option") to the Option Purchasers to purchase up to 448,500 authorized but
unissued shares of Common Stock at a price of $11.50 per share (the "Option
Shares"). The closing price of Common Stock on the New York Stock Exchange on
August 25, 1997 was $11.50 per share. The Option may be exercised by the Option
Purchasers in whole or in part and from time to time for a period of three years
from the earlier of (i) the second business day following the first meeting of
the Company stockholders at which such stockholders fail to approve the issuance
of the Series A Preferred Stock or (ii) six months from the execution of the
Securities Purchase Agreements, if a meeting of the Company stockholders to
consider and act upon such issuance has not been held by such date. The Option
shall terminate upon the Closing.
SUMMARY OF THE TERMS OF THE SERIES A CONVERTIBLE PARTICIPATING PREFERRED STOCK
The following is a summary of the terms of the Series A Preferred Stock.
This summary is not intended to be complete and is subject to, and qualified in
its entirety by reference to, the Certificate of Designation of the Series A
Preferred Stock (the "Designation"), to be filed with the Secretary of State of
Delaware amending the Company's Restated Certificate of Incorporation and
setting forth the rights, preferences and limitations of the Series A Preferred
Stock, a copy of which is filed as an exhibit hereto.
DIVIDENDS AND DISTRIBUTIONS. Holders of shares of Series A Preferred Stock
shall be entitled to receive from the Company, subject to certain exceptions,
with respect to each share of Series A Preferred Stock held, the same dividend
or other distribution received by a holder of the number of shares of Common
Stock into which such share of Series A Preferred Stock is convertible on the
record date for such dividend or other distribution.
VOTING RIGHTS. Each share of Series A Preferred Stock shall entitle the
holder thereof to vote on all matters voted on by holders of Common Stock voting
together as a single class with other shares entitled to vote at all meetings of
the stockholders of the Company. The affirmative vote of the holders of at least
66 2/3% of the outstanding shares of Series A Preferred Stock shall be necessary
to (i) authorize, increase the authorized number of shares of or issue any
shares of any class or series of capital stock of the Company (other than Common
Stock) ranking prior to or on parity with (either as to dividends or the
distribution of assets upon liquidation, dissolution or winding up) the Series A
Preferred Stock; (ii) increase the authorized number of shares of, or issue any
shares of Series A Preferred Stock; (iii) authorize, adopt or approve an
amendment to the Restated Certificate of Incorporation of the Company which
would decrease the aggregate number of authorized shares of Series A Preferred
Stock, increase or decrease the par value of such shares or change the powers,
or alter the preferences or special rights of such shares so as to affect such
shares of Series A Preferred Stock adversely; or (iv) reclassify any shares of
Common Stock or any other shares into shares ranking prior to or on parity with
the Series A Preferred Stock.
PURCHASE OF SERIES A PREFERRED STOCK UPON A PURCHASE EVENT. If a Purchase
Event (as defined below) shall occur, then each holder of Series A Preferred
Stock shall have the right to require that the Company purchase, to the extent
that the Company shall have funds legally available therefor, such holder's
shares of Series A Preferred Stock, in whole or in part, at a purchase price in
cash in an amount equal to the Purchase Event Purchase Price (as defined below).
A "Purchase Event" shall be deemed to have occurred if any person
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(other than any of the initial purchasers of the Series A Preferred Stock) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing 50% or more of the combined voting power of the Company's
then outstanding securities, other than in an Acquisition Event, (as defined
below). The "Purchase Event Purchase Price" shall mean an amount per share equal
to $200 (the "Base Purchase Event Amount") plus, if such Purchase Event occurs
after the second anniversary of the date of issuance of the shares of Series A
Preferred Stock, a 9% annual cumulative return on the Base Purchase Event
Amount, compounded quarterly, from such second anniversary date through the date
of such Purchase Event.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Company (including the commencement of proceedings under
applicable bankruptcy laws), no distribution shall be made (i) to the holders of
Common Stock or other capital stock junior to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A Preferred Stock shall
have received the Liquidation Amount (as defined below) with respect to each
such share or (ii) to the holders of shares of capital stock on a parity with
the Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock. If upon any liquidation, dissolution
or winding up of the Company, the assets of the Company, or proceeds thereof,
distributable among the holders of the shares of Series A Preferred Stock shall
be insufficient to pay in full the Liquidation Amount and the liquidation
preference on all parity stock, then such assets, or the proceeds thereof, shall
be distributed ratably among the holders of shares of Series A Preferred Stock
and any such parity stock in accordance with the respective amounts that would
be payable on such shares if all amounts payable thereon were paid in full. Upon
receipt of the Liquidation Amount, holders of shares of Series A Preferred Stock
shall not be entitled to any further payments following a liquidation,
dissolution or winding up of the Company. The "Liquidation Amount" for a share
of Series A Preferred Stock shall mean the greater of (a) an amount per share
equal to $200 (the "Base Liquidation Preference"), plus, if such liquidation,
dissolution or winding up occurs after the second anniversary of the issuance of
such shares of Series A Preferred Stock, an amount equal to a 9% annual
cumulative return on the Base Liquidation Preference, compounded quarterly, from
such second anniversary date through the date of such liquidation, dissolution
or winding up, and (b) the amount that would be distributed with respect to the
shares of Common Stock issuable upon conversion of such share of Series A
Preferred Stock if all outstanding shares of Series A Preferred Stock were
converted into Common Stock immediately prior to such liquidation, dissolution
or winding up.
CONVERSION RIGHTS. The holders of shares of Series A Preferred Stock shall
have the right at any time (and from time to time) to convert each such share of
Series A Preferred Stock into a number of shares of Common Stock to be
determined by dividing $200 by the Conversion Price (as defined below) in effect
at the time of such conversion. The initial Conversion Price is $10.00. The
initial Conversion Price is subject to adjustment in certain events, including
subdivisions and combinations of the Common Stock; a tender offer by the Company
for all or any portion of the Common Stock, that shall require the payment to
stockholders of aggregate consideration having a fair market value that combined
with certain previous payments made by the Company for Common Stock shall exceed
20% of the product of the then current market price of Common Stock times the
number of shares of Common Stock then outstanding; and certain reclassifications
of Common Stock.
ACQUISITION EVENT. Upon the occurrence of any Acquisition Event (as
defined below), each share of Series A Preferred Stock then outstanding shall
thereafter be convertible into the kind and amount of shares of stock and other
securities or property or assets (including cash) paid in such Acquisition Event
(the "Acquisition Event Consideration") for a number of shares of Common Stock
issuable upon conversion of such shares of Series A Preferred Stock immediately
prior to such Acquisition Event; provided, however, that if such Acquisition
Event occurs after the date which is two years from the date of issuance of such
share of Series A Preferred Stock and the fair market value of the Acquisition
Event Consideration paid for the number of shares of Common Stock issuable upon
conversion of such share of Series A Preferred Stock is less than an amount
equal to the sum of the Base Liquidation Preference and an amount equal to a 9%
annual cumulative return on the Base Liquidation Preference, compounded
quarterly, from such second anniversary date through the date of such
Acquisition Event (the amount, if any, by which such fair market value is less
than such sum being hereinafter referred to as the "Difference"), then each
share of the Series A Preferred
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Stock shall thereafter be convertible into the Acquisition Event Consideration
into which it becomes convertible pursuant to the foregoing provisions, plus
additional Acquisition Event Consideration having a fair market value equal to
the Difference (or, at the option of the Company, cash equal to the Difference).
An "Acquisition Event" shall be deemed to have occurred if (i) a merger,
consolidation or other corporate combination of the Company with any other
person is consummated, other than (a) a merger, consolidation or other corporate
combination which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent at least 51% of
the combined voting power of the voting securities of the Company or the
surviving corporation outstanding immediately after such merger, consolidation
or other corporate consolidation or (b) a merger, consolidation or other
corporate combination effected to implement certain recapitalizations, or (ii)
the sale or disposition by the Company of all or substantially all of the
property and assets of the Company is consummated. The term "substantially all"
is not defined in the Designation. However, this term is used in the Delaware
Business Corporation Law ("Delaware Law") and, in that context, has been subject
to interpretation by courts in Delaware. The absence of any specific
quantitative definition of this term under Delaware Law could lead to a
disagreement between the Company and the holders of Series A Preferred Stock as
to whether an "Acquisition Event" has occurred and, in such event, it could be
necessary for the holders of Series A Preferred Stock to commence legal
proceedings to enforce their rights under the Designation.
MANDATORY CONVERSION. The Company shall have the right, at its option, at
a time after the initial period, if any, of 130 consecutive trading days for
which the weighted average closing price for the Common Stock for such period is
greater than 200% of the Conversion Price, to cause the conversion of each share
of Series A Preferred Stock (but not less than all of such shares) into shares
of Common Stock at the then effective Conversion Price.
CERTAIN FEES
Pursuant to a letter agreement dated June 26, 1997 (the "Engagement
Letter"), the Company engaged Goldman Sachs & Co. ("Goldman Sachs") to act as
its financial advisor in connection with the sale of shares of Series A
Preferred Stock to the Purchasers. The Company has agreed to pay Goldman Sachs a
transaction fee of $3,000,000 in connection with the transactions contemplated
by the Securities Purchase Agreements. This fee is also creditable against
certain other fees that would become due upon the occurrence of transactions
covered by the Engagement Letter. The Company has also agreed to reimburse
Goldman Sachs for its reasonable out-of-pocket expenses, including reasonable
attorney's fees, and to indemnify Goldman Sachs against certain liabilities,
including certain liabilities under the federal securities laws.
BOARD RECOMMENDATION
The Board of Directors believes the issuance of the Series A Preferred
Stock to the Purchasers is in the best interests of the Company and its
stockholders and therefore recommends that the stockholders vote FOR this
proposal.
PROPOSAL 7. OTHER BUSINESS
The Company does not know of any matters which may come before the Annual
Meeting other than the matters described in the attached Notice. However, if any
other matters properly come before the Annual Meeting, the persons named as
proxies on the enclosed proxy card intend to vote the proxies in accordance with
their judgment. If any nominee has become unavailable at the date of the Annual
Meeting, which there is no reason to expect, your proxy, in the enclosed or any
other form that so provides, may be voted for a new nominee of the management,
unless the Board reduces the number of directors.
STOCKHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
It is currently anticipated that the 1998 Annual Meeting of stockholders of
the Company will be held on May 21, 1998. Stockholder proposals intended to be
presented at such Annual Meeting must be received by the Company not later than
January 5, 1998 for inclusion in the proxy materials for such Annual Meeting.
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INCORPORATION BY REFERENCE
The Company hereby incorporates by reference into this Proxy Statement (i)
its Annual Report on Form 10-K for the fiscal year ended January 4, 1997, (ii)
its Quarterly Report on Form 10-Q for the three months ended April 5, 1997,
(iii) its Quarterly Report on Form 10-Q for the three months ended July 5, 1997
and (iv) all reports filed by the Company with the SEC pursuant to Section 13(a)
of the Securities Act after the date hereof and prior to the date of the Annual
Meeting. These documents, excluding exhibits to such documents, are available
without charge upon request to The Learning Company, Inc., One Athenaeum Street,
Cambridge, Massachusetts 02142, Attention: Investor Relations. Telephone
requests may be directed to Investor Relations at (617) 494-5816. Exhibits will
be provided upon written request and payment of an appropriate fee.
By Order of the Board of Directors
NEAL S. WINNEG
Secretary
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EXHIBIT A
THE LEARNING COMPANY, INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE.
The purpose of this 1996 Non-Employee Director Stock Option Plan (the
"Plan") of The Learning Company, Inc. (the "Company") is to encourage ownership
in the Company by Non-Employee Directors (as defined below) of the Company whose
continued services are considered essential to the Company's future progress and
to provide them with a further incentive to remain as directors of the Company.
Non-Employee Director means a member of the Board of Directors of the Company
(the "Board of Directors") who is not an employee of the Company or of any
affiliate (as such term is defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the
Company.
2. ADMINISTRATION.
A committee appointed by the Board of Directors (the "Committee") shall
supervise and administer the Plan. If there shall be no Committee, then the
Board of Directors shall carry out all functions specified in the Plan to be
carried out by the Committee. Grants of stock options under the Plan and the
amount and nature of the awards to be granted shall be in accordance with
Section 6. However, all questions concerning interpretation of the Plan or any
options granted under it shall be resolved by the Committee and such resolution
shall be final and binding upon all persons having an interest in the Plan.
3. STOCK SUBJECT TO PLAN.
(a) The maximum number of shares that may be issued or transferred pursuant
to options is 500,000 (or the number and kind of shares of stock or other
securities which are substituted for those shares or to which those shares are
adjusted pursuant to Section 8 hereof), and the Company shall reserve for the
purposes of this Plan, out of its authorized but unissued shares or out of
shares held in the Company's treasury, or partly out of each, such number of
shares as shall be determined by the Board of Directors.
(b) Whenever any outstanding option or portion thereof expires, is
cancelled or is otherwise terminated (other than by exercise of the option), the
shares allocable to the unexercised portion of such option may again be the
subject of options hereunder.
4. PARTICIPATION IN THE PLAN.
Subject to the provisions of Section 6 below, Non-Employee Directors not
designated for nomination, election or appointment to the Board of Directors by,
or by agreement or arrangement with, any entity (other than the Company) or
person ("Eligible Person") shall be eligible to receive Initial Options (as
defined below), Committee Options (as defined below) and Discretionary Options
(as defined below) under the Plan.
5. NON-STATUTORY OPTIONS.
All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
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6. TERMS, CONDITIONS AND FORM OF OPTIONS.
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a) OPTION GRANT DATES. Options shall be granted as follows:
(i) An option to purchase 50,000 shares (the "Initial Option") shall
be granted (1) on the effective date of the Plan (the "Effective Date"), to
each Eligible Person who became a director after May 16, 1996, and (2)
after the Effective Date, to each Eligible Person upon his or her initial
election as a director of the Company.
(ii) An option to purchase 25,000 shares (the "Committee Option")
shall be granted to each Eligible Person upon initial appointment to a
committee of the Board of Directors.
(iii) The Board of Directors may from time to time in the sole
discretion of the Committee or the Board of Directors grant additional
options (the "Discretionary Options").
(b) OPTION EXERCISE PRICE. The option exercise price per share for each
Initial Option, Committee Option and Discretionary Option shall be equal to 100%
of the Fair Market Value of the shares subject to such option on the date of
grant thereof. "Fair Market Value" means the fair market value of the shares as
determined by the Committee in its sole discretion; provided, however, that (i)
if the shares are admitted to trading on a national securities exchange, Fair
Market Value on any date shall be the closing price reported for the shares on
such exchange on such date or on the last date preceding such date on which a
sale was reported, (ii) if the shares are admitted to quotation on the Nasdaq
Stock Market ("Nasdaq") and have been designated as a Nasdaq National Market
("NNM") security, Fair Market Value on any date shall be the closing price
reported for the shares on such system on such date or on the last day preceding
such date on which a sale was reported, or (iii) if the shares are admitted to
quotation on Nasdaq or other comparable quotation system and have not been
designated an NNM security, Fair Market Value on any date shall be the closing
price of the shares reported on such system on such date.
(c) VESTING PERIOD.
Except as set forth in Section 9, each option described in Section 6(a)
shall become exercisable in eight (8) equal quarterly installments with the
first of such installments becoming exercisable three months after the date of
grant; provided, however, that for each such installment the optionee continue
to serve as a director on such date.
(d) TERMINATION. Each option shall terminate, and may no longer be
exercised, on the earlier of the (i) the date 10 years after the Option Grant
Date or (ii)
(1) If the optionee ceases to be in service as a director of the
Company due to such optionee's death or Disability (as defined below), the
option (to the extent exercisable at the time of such cessation of service)
shall be exercisable by the optionee's legal representative, estate or
other person to whom the optionee's rights are transferred by will or by
laws of descent or distribution (in the event of death) or by the optionee
(in the event of Disability) for a period of one (1) year following such
cessation of service (but in no event after the expiration date of the
option) and shall thereafter terminate. Disability means the inability, due
to illness or injury, to engage in any gainful occupation for which the
individual is suited by education, training or experience, which condition
continues for at least six months).
(2) The optionee shall, if the optionee's cessation of service as a
director is by the Company for Cause (as defined below), have a period of
time to be determined by the Committee not to exceed ten days from the date
of such cessation of service (but in no event after the expiration date of
the option), to exercise the option (to the extent exercisable at the time
of the optionee's cessation of service), and the option shall thereafter
terminate. Cause means (A) the willful neglect or refusal to perform the
optionee's duties or responsibilities, or the willful taking of actions
which materially impair the optionee's ability to perform the optionee's
duties or responsibilities which continues after being brought to the
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attention of the optionee (other than any such failure resulting from the
optionee's incapacity due to physical or mental illness) or (B) the willful
act or failure to act by the optionee which is materially injurious to the
Company and which is brought to the attention of the optionee in writing
not more than thirty days from the date of its discovery by the Company or
the Board of Directors.
(3) The optionee shall, if the optionee ceases to be in service as a
director for any other reason, be entitled to exercise the option (to the
extent exercisable at the time of the optionee's cessation of service) for
a period of ninety (90) days following such cessation service (but in no
event after the expiration date of the option) and shall thereafter
terminate; provided, however, that if the optionee dies within such
ninety-day period, the option (to the extent exercisable at the time of the
optionee's cessation of service) shall be exercisable by the optionee's
legal representative, estate or other person to whom the optionee's rights
are transferred by will or by laws of descent or distribution for a period
of one (1) year following the optionee's death (but in no event after the
expiration date of the option) and shall thereafter terminate.
(e) EXERCISE PROCEDURE. The exercise of an option shall be made only by a
written notice delivered in person or by mail to the Secretary of the Company at
the Company's principal executive office, specifying the number of shares to be
purchased and accompanied by payment therefor and otherwise in accordance with
the agreement pursuant to which the option was granted.
(f) METHOD OF PAYMENT. The exercise price for any shares purchased
pursuant to the exercise of an option shall be paid in full upon such exercise
in United States dollars and may be paid: (i) in cash or by check, or any
combination of the foregoing, equal in amount to the exercise price multiplied
by the number of shares with respect to which the option is being so exercised;
or (ii) in the discretion of the Committee and upon such terms and conditions as
the Committee shall approve, by transfer of shares having an aggregate value
(calculated as set forth below) equal to the exercise price multiplied by the
number of shares with respect to which the option is being so exercised; or
(iii) in the discretion of the Committee and upon such terms and conditions as
the Committee shall approve, by delivery of a personal recourse note from the
optionee bearing interest payable not less than annually at no less than 100% of
the lowest applicable federal rate, as defined in Section 1274(d) of the Code,
with the principal amount of the note equal to the exercise price multiplied by
the number of shares with respect to which the option is being exercised; or
(iv) in the discretion of the Committee, and upon such terms and conditions as
the Committee shall approve, by any combination of the foregoing, equal in
amount to the exercise price multiplied by the number of shares with respect to
which the option is being so exercised. Any shares transferred to the Company as
payment of the exercise price shall be valued at their Fair Market Value on the
day preceding the date of exercise of such option.
(g) EXERCISE BY REPRESENTATIVE FOLLOWING DEATH OF DIRECTOR.
An optionee, by written notice to the Company, may designate one or more
persons (and from time to time change such designation), including his or her
legal representative, who, by reason of the optionee's death, shall acquire the
right to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.
7. LIMITATION OF RIGHTS.
(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the granting
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain the optionee as a director for any period of time.
(b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. An optionee shall have no rights
as a stockholder with respect to the shares covered by his or her option until
the date of the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 8) for which the record date is prior to the date such certificate is
issued.
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8. ADJUSTMENT PROVISIONS FOR MERGERS, RECAPITALIZATIONS AND RELATED
TRANSACTIONS.
If, through or as a result of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar transaction, (a) the outstanding shares of Common Stock
are exchanged for a different number or kind of securities of the Company or of
another entity, or (b) additional shares or new or different shares or other
securities of the Company or of another entity are distributed with respect to
such shares of Common Stock, the Board of Directors shall make an appropriate
and proportionate adjustment in (i) the maximum number and kind of shares
reserved for issuance under the Plan, (ii) the number and kind of shares or
other securities subject to then outstanding options under the Plan, and/or
(iii) the price for each share subject to any then outstanding options under the
Plan (without changing the aggregate purchase price for such options), to the
end that each option shall be exercisable, for the same aggregate exercise
price, for such securities as such optionholder would have held immediately
following such event if he had exercised such option immediately prior to such
event. No fractional shares will be issued under the Plan on account of any such
adjustments.
9. CHANGE IN CONTROL.
(a) DEFINITION OF CHANGE IN CONTROL. A Change in Control means the
occurrence of any of the following:
(i) any person, as such term is used in Sections 13(d) and 14(d) of
the Exchange Act (other than the Company, any subsidiary of the Company,
any affiliate of the Company or a Company employee benefit plan, including
any trustee of such plan acting as trustee) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company (or a successor to the Company)
representing 35% or more of the combined voting power of the then
outstanding securities of the Company or such successor; or
(ii) 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 of
Directors candidates proposed by a majority of the Board of Directors in
office prior to the time of such first election; or
(iii) 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; any merger or reorganization of the Company
whether or not another entity is the survivor; a transaction pursuant to
which the holders, as a group, of all of the shares of the 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 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 agreement, in the
event of a Change in Control, the following provisions shall apply:
(i) any options outstanding as of the date such Change in Control is
determined to have occurred and not then exercisable and vested shall
become fully exercisable and vested; and
(ii) at the election of the Board, either (A) the value (net of any
exercise price and required tax withholdings) of all outstanding options
shall be cashed out on the basis of the Change in Control Price, as defined
in paragraph (c) of this Section 9, as of the date such Change in Control
is determined to have occurred or (B) in the case of a sale of assets,
merger, reorganization or other transaction referred to in paragraph
(a)(iii) of this Section 9, provision shall be made to treat all
outstanding options as provided in Section 8.
Notwithstanding the foregoing, in the event that anything in this Section
9(b) is determined to prevent any transaction referred to in paragraph (a)(iii)
of this Section 9 from being accounted for as a pooling of interests and the
Board of Directors desires that the transaction be accounted for as a pooling of
interests, then
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the value of outstanding options shall not be cashed out in accordance with
paragraph (ii)(A) of this Section 9(b) and provision shall be made to treat
outstanding options as provided for in Section 8.
(c) CHANGE IN CONTROL PRICE. For purposes of this Section 9, Change in
Control Price means the highest price per share paid in any transaction reported
on any established stock exchange, national market system or other established
market for the shares or paid or offered in any bona fide transaction related to
a potential or actual Change in Control of the Company at any time during the
preceding 60-day period.
10. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS.
The Committee shall have the power to modify or amend outstanding options;
provided, however, that no modification or amendment may (a) have the effect of
altering or impairing any rights or obligations of any option previously granted
without the consent of the optionee, or (b) modify the number of shares of
Common Stock subject to the option (except as provided in Section 8).
11. TERMINATION AND AMENDMENT OF THE PLAN.
The Board of Directors may suspend, terminate or discontinue the Plan or
amend it in any respect whatsoever; provided, however, that without approval of
the stockholders of the Company, no amendment may (a) increase the number of
shares subject to the Plan (except as provided in Section 8), (b) materially
modify the requirements as to eligibility to receive options under the Plan, or
(c) materially increase the benefits accruing to participants in the Plan; and
provided further that the Board of Directors may not amend the provisions of
Sections 4, 6(a) or 6(b) more frequently than once every six months, other than
to comply with changes in the Code or the rules thereunder.
12. NOTICE.
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Secretary of the Company and shall become
effective when it is received.
13. GOVERNING LAW.
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware.
14. REGULATIONS AND OTHER APPROVALS.
(a) Each option is subject to the requirement that, if at any time the
Committee determines, in its absolute discretion, that the listing,
registration, or qualification of shares issuable pursuant to this Plan is
required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an option or
the issuance of shares, no options shall be granted or shares issued, in whole
or in part, unless listing, registration, qualification, consent or approval has
been effected or obtained free of any conditions that are not acceptable to the
Committee.
(b) In the event that the disposition of shares acquired pursuant to this
Plan is not covered by a then current registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise
exempt from such registration, such shares shall be restricted against transfer
to the extent required by the Securities Act or regulations promulgated
thereunder.
15. MISCELLANEOUS.
(a) WITHHOLDING OF TAXES. The Company shall have the right to deduct from
any payment of cash to any optionee an amount equal to the federal, state and
local income taxes and other amounts required by law to be withheld with respect
to any option. Notwithstanding anything to the contrary contained herein, if an
optionee is entitled to receive shares upon exercise of an option, the Company
shall have the right to require
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such optionee, prior to the delivery of such shares, to pay to the Company the
amount of any federal, state or local income taxes and other amounts which the
Company is required by law to withhold.
(b) DESIGNATION OF BENEFICIARY. Each optionee may, with the consent of the
Committee, designate a person or persons to receive, in the event of such
optionee's death, any option or any amount or shares payable pursuant thereto,
to which such optionee would then be entitled. Such designation will be made
upon forms supplied by and delivered to the Company and may be revoked or
changed in writing. In the event of the death of an optionee and in the absence
of a beneficiary validly designated under this Plan who is living at the time of
such optionee's death, the Company shall deliver such options and/or amounts
payable to the executor or administrator of the estate of the optionee, or if no
such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such options and/or
amounts payable to the spouse or to any one or more dependents or relatives of
the optionee, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. EFFECTIVE DATE.
The Effective Date of this Plan shall be August 16, 1996.
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EXHIBIT B
THE LEARNING COMPANY, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
(AS ADOPTED BY THE BOARD OF DIRECTORS ON SEPTEMBER 9, 1997)
1. PURPOSES.
The 1997 Employee Stock Purchase Plan of The Learning Company, Inc. (the
"Plan") is intended to provide a method whereby employees of The Learning
Company and participating subsidiaries (hereinafter collectively referred to,
unless the context otherwise requires, as the "Company") will have an
opportunity to acquire a proprietary interest in the Company through the
purchase of shares of the common stock, $.01 par value per share, of the Company
("Common Stock"). It is the intention of the Company to have the Plan qualify as
an "employee stock purchase plan" under Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"). The provisions of the Plan shall, accordingly,
be construed so as to extend and limit participation in a manner consistent with
the requirements of Section 423 of the Code. However, unless specified in the
Code, the fact that an employee is not a resident of the United States and
therefore may not receive the tax benefits under the Code will not bar such
employee from participation in the Plan.
2. DEFINITIONS.
(a) "Coordinator" means the officer of the Company or other person charged
with day-to-day supervision of the Plan as appointed from time to time by the
Board of Directors of the Company (the "Board of Directors"). The Vice
President, Human Resources of the Company shall be the initial Coordinator.
Notice of any change in such Coordinator shall be given to all employees
eligible under the Plan.
(b) "Base Pay" means regular straight-time earnings (as the same may be
adjusted from time to time), excluding payments for commissions, overtime, shift
differentials, incentive compensation, bonuses and other special payments.
Disability insurance payments shall not be included in Base Pay for purposes of
the Plan
(c) "Employee" means any person who is customarily employed for 20 or more
hours per week and more than five months in a calendar year by the Company or by
a participating subsidiary. For purposes of the Plan, the employment
relationship shall be treated as continuing intact while the individual is on
sick leave or other leave of absence approved by the company. Where the period
of leave exceeds ninety (90) days and the individual's right to reemployment is
not guaranteed either by statute or by contract, the employment relationship
shall be deemed to have terminated on the 91st day of such leave.
(d) "Offering Commencement Date" means the applicable date on which an
Offering under the Plan commences pursuant to Paragraph 4.
(e) "Offering Termination Date" means the applicable date on which an
Offering under the Plan terminates pursuant to Paragraph 4.
(f) "Participating subsidiary" means any present or future corporation
which (i) is a "subsidiary corporation" as that term is defined in Section 425
of the Code and (ii) is designated as a participant in the Plan by the Board of
Directors or the Compensation Committee thereof.
3. ELIGIBILITY.
(a) Any employee who has completed at least 90 days of employment with the
Company and who shall be employed by the Company on the applicable Offering
Commencement Date shall be eligible to participate in such Offering under the
Plan; provided, however, that the Coordinator may limit the participation of
employees with the title of Vice President or any higher title who are highly
compensated employees on the applicable Offering Commencement Date.
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(b) Any provision of the Plan to the contrary notwithstanding, no employee
shall be granted an option under the Plan (an "Option") if, immediately after
the grant, such employee would own stock, and/or hold outstanding options to
purchase stock, possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or of any subsidiary (for purposes
of this subparagraph the rules of Section 425(d) of the Code shall apply in
determining stock ownership of any employee and the term subsidiary shall be as
defined in Section 425(f) of the Code).
(c) No employee may be granted an option which permits such employee the
right to purchase Common Stock under the Plan and any other stock purchase plan
of the Company and its subsidiaries to accrue at a rate which exceeds $25,000 of
the fair market value (determined at the Offering Commencement Date in
accordance with subparagraph 7(b)(1)) of the shares of Common Stock for each
calendar year in which the option is outstanding at any time.
4. OFFERING DATES.
The Plan will be implemented by six, six-month offerings, one beginning
every six months commencing December 1, 1997 until and including November 30,
2000 (referred to herein collectively as "Offerings" and individually as an
"Offering"), as follows:
(a) Offering I shall commence on December 1, 1997, and terminate on
May 31, 1998.
(b) Offering II shall commence on June 1, 1998, and terminate on
November 30, 1998.
(c) Offering III shall commence on December 1, 1998, and terminate on
May 31, 1999.
(d) Offering IV shall commence on June 1, 1999, and terminate on
November 30, 1999.
(e) Offering V shall commence on December 1, 1999, and terminate on
May 31, 2000.
(f) Offering VI shall commence on June 1, 2000, and terminate on
November 30, 2000.
Participation in any one or more of the six Offerings under the Plan shall
neither limit, nor require, participation in any other Offering.
5. PARTICIPATION.
(a) An eligible employee may become a participant in the Plan by completing
an authorization for a payroll deduction ("Authorization") on the form provided
by the Company and filing the Authorization with the Company at least 15 days
and no more than 30 days prior to the applicable Offering Commencement Date
immediately preceding such eligible employee's initial participation in the
Plan. Such Authorization shall remain in effect until the participant files a
new Authorization with the Company terminating his or her participation or
otherwise amending the most recent Authorization by filing a new Authorization
with the Company at least 15 days but no more than 30 days prior to the next
Offering Commencement Date.
(b) Payroll deductions for a participant shall commence with the first
payday on or after the applicable Offering Commencement Date of the Offering for
which such participant's authorization is filed and shall end with the final
payday on or before the Offering Termination Date of such Offering, unless
sooner terminated pursuant to Paragraph 10.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her Authorization, the
participant shall elect to have deductions made for his or her Base Pay on each
payday during the time he or she is a participant in an Offering at the rate of
1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his or her Base Pay in effect on the
applicable Offering Commencement Date. Notwithstanding the foregoing, the
participant's participation in any Offering under the Plan shall not exceed
$5,000.
(b) All payroll deductions made for a participant shall be credited to his
or her account maintained by the Company under the Plan. A participant may not
make any separate cash payment into such account.
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(c) Except as provided in Paragraph 10, a participant may not make any
changes to his or her participation during an Offering and, specifically, a
participant may not during an Offering alter the percentage of his or her Base
Pay deducted and credited to his or her account under the Plan. However, if the
Base Pay of the participating employee increases or decreases during the period
of an Offering, the dollar amount of his or her payroll deductions will increase
or decrease accordingly.
7. GRANTING OF OPTION.
(a) Subject to Paragraph 3, for each of the Offerings, a participating
employee shall be deemed to have been granted, on the applicable Offering
Commencement Date, an Option to purchase, on the applicable Offering Termination
Date, a maximum number of shares of Common Stock equal to the largest number of
whole shares which does not exceed the number of shares determined by dividing
$5,000 by 85% of the fair market value of a share of the Common Stock on the
applicable Offering Commencement Date. For all purposes of the Plan, the fair
market value of the Common Stock shall be determined as provided in clause (i)
of subparagraph (b) below.
(b) The purchase price per share of Common Stock purchased during each
Offering (the "Option Exercise Price") shall be the lower of:
(i) 85% of the last sale price of the Common Stock on the New York
Stock Exchange on the applicable Offering Commencement Date (or on the next
regular business day on which shares of Common Stock shall be traded if no
shares of Common Stock shall have been traded on such Offering Commencement
Date), as reported in The Wall Street Journal; or
(ii) 85% of the last sale price of Common Stock on the New York Stock
Exchange on the applicable Offering Termination Date (or on the next
regular business day on which shares of Common Stock shall be traded if no
shares of Common Stock shall have been traded on such Offering Termination
Date), as reported in The Wall Street Journal.
8. EXERCISE OF OPTION.
With respect to each Offering during the term of the Plan:
(a) Unless a participant has given written notice of withdrawal to the
Company as provided in Paragraph 10, his or her Option will be deemed to have
been exercised automatically on the Offering Termination Date applicable to such
Offering, for the purchase of the number of full shares of Common Stock which
the accumulated payroll deductions (without interest) in his or her account
maintained by the Company under the Plan at that time will purchase at the
applicable Option Exercise Price (provided that (i) such number of shares may be
reduced pursuant to Paragraph 12 in the event the Offering is oversubscribed and
(ii) such number of shares may not exceed the number of shares covered by the
Option granted to the participant pursuant to Paragraph 7(a)), and any excess in
his or her account at that time will be returned to him or her without interest
promptly following the termination of the Offering.
(b) Fractional shares will not be issued under the Plan and any accumulated
payroll deductions which would have been used to purchase fractional shares
shall be returned (without interest) to a participant promptly following the
termination of the Offering.
9. DELIVERY.
The Company will coordinate the maintenance of an account in street name at
an approved brokerage firm reflecting all purchases pursuant to the Plan. Common
Stock issued upon the exercise of a participant's option will be delivered
electronically for deposit in the participant's brokerage account.
If requested by a participant, the Company will deliver to such participant
a certificate representing the shares of Common Stock purchased upon the
exercise of such participant's Option as promptly as practicable after the
Offering in which the participant has requested a certificate. Any such request
must be in writing and
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must be received by the Coordinator no later than 15 days and no more than 30
days prior to the Offering Termination Date.
10. WITHDRAWAL.
(a) A participant may elect to withdraw all, but not less than all, payroll
deductions credited to his or her account with the Company under any Offering at
any time prior to the applicable Offering Termination Date by giving written
notice of withdrawal to the Coordinator. All of the participant's payroll
deductions credited to his or her account will be paid to the participant
(without interest) promptly after receipt of such notice of withdrawal and no
further payroll deductions will be made from his or her pay during such
Offering. The Company may, at its option, treat any attempt by a participant to
borrow on the security of accumulated payroll deductions as an election, under
this Paragraph, to withdraw such deductions.
(b) A participant's withdrawal from any Offering will not have any effect
upon his or her eligibility to participate in any succeeding Offering or in any
similar plan which may hereafter be adopted by the Company.
(c) Upon termination of the participant's employment for any reason,
including retirement but excluding death or disability (as defined in Section
22(e)(3) of the Code) while in the employ of the Company, such participant will
be deemed to have withdrawn from participation in the pending Offering, and the
payroll deductions credited to his or her account will be returned to the
participant (without interest), or, in the case of his or her death subsequent
to the termination of employment, to the person or persons entitled thereto
under Paragraph 14.
(d) Upon termination of the participant's employment because of disability
or death, the participant or his or her beneficiary (as defined in Paragraph 14)
shall have the right to elect, by written notice given to the Coordinator prior
to the expiration of the period of 30 days commencing with the date of the
disability or death of the participant, either
(i) to withdraw all of the payroll deductions credited to the
participant's account under the Plan (without interest); or
(ii) to exercise the participant's Option on the applicable Offering
Termination Date for the purchase of the number of full shares of Common
Stock which the accumulated payroll deductions (without interest) in the
participant's account at the date of the participant's disability or death
will purchase at the applicable Option Exercise Price, and to receive any
excess money in such account (without interest).
If no such written notice of election is received by the Coordinator, the
participant or beneficiary shall automatically be deemed to have elected to
withdraw the payroll deductions credited to the participant's account at the
date of the participant's disability or death and the same will be paid promptly
following such 30-day period to the participant or said beneficiary without
interest.
11. INTEREST.
No interest will be paid or allowed on any money paid into the Plan or
credited to the account of any participant employee.
12. STOCK.
(a) The maximum number of shares of Common Stock which shall be made
available for sale under the Plan during the Offerings is 1,000,000 shares,
subject to adjustment upon changes in capitalization of the Company as provided
in Paragraph 17.
(b) There shall be no maximum number of shares available for sale during
any of the Offerings. If the total number of shares for which Options are
exercised on any Offering Termination Date in accordance with Paragraph 8
(together with all prior exercises under the Plan during such Offering) exceeds
the maximum number of shares available under the Plan as set forth in Paragraph
12(a) above, the Company shall make a pro rata allocation (based on the number
of shares subject to the Option held by each participant) of the
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shares available for delivery and distribution in as nearly a uniform manner as
shall be practicable and as it shall determine to be equitable, and the balance
of payroll deductions credited to the account of each participant under the Plan
shall be returned to him or her (without interest) as promptly as practicable.
In such event, no further Offerings shall be commenced under the Plan unless and
until the Plan is amended to increase the number of shares set forth in
Paragraph 12(a) above.
(c) The participant will have no interest in the Common Stock covered by
his or her Option until such Option has been exercised.
(d) Common Stock issued pursuant to the Plan will be registered in street
name and deposited in the participant's approved brokerage account as
established by the Company, or, if the participant so directs by written notice
to the Company prior to the Offering Termination Date applicable thereto, a
certificate in the name of the participant or of the participant and one such
other person as may be designated by the participant, as joint tenants with
rights of survivorship, to the extent permitted by applicable law.
13. ADMINISTRATION.
The Plan shall be administered by the Compensation Committee of the Board
of Directors of the Company (the "Committee"). The Coordinator shall, for
matters involving the Plan, be an ex officio member of that Committee. The
interpretation and construction of any provision of the Plan and the adoption of
rules and regulations for administering the Plan shall be made by the Committee,
subject, however, at all times to the final jurisdiction which shall rest in the
Board of Directors. Determinations made by the Committee and approved by the
Board of Directors with respect to any matter or provision contained in the Plan
shall be final, conclusive and binding upon the Company and upon all
participants, their heirs or legal representatives. Any rule or regulation
adopted by the Committee shall remain in full force and effect unless and until
altered, amended, or repealed by the Committee or the Board of Directors. The
Company shall indemnify Committee members, to the fullest extent permitted by
applicable law, for any expenses incurred in defending a civil or criminal
action or proceeding, arising out of such member's actions with respect to
administration of the Plan, in advance of the final disposition of such action
or proceeding, upon receipt of an undertaking by the person indemnified to repay
such payment if such member shall be adjudicated not to have acted in good faith
in the reasonable belief that such member's action was in the best interest of
the Company.
14. DESIGNATION OF BENEFICIARY.
A participant may file a written designation of a beneficiary who is to
receive any shares of Common Stock and/or cash in the event of the death of the
participant. Such designation shall be effective as to all future distributions
of cash and securities with respect to the participant's account under the Plan.
Such designation of beneficiary may be changed by the participant at any time by
written notice to the Coordinator. Within 30 days after the participant's death,
the beneficiary may, as provided in Paragraph 10(d), elect to exercise the
participant's Option when it becomes exercisable on the Offering Termination
Date of the then current Offering. Upon the death of a participant and upon
receipt by the Company of proof of the identity and existence at the
participant's death of a beneficiary validly designated by the participant under
the Plan, and notice of election of the beneficiary to exercise the
participant's Option, the Company shall deliver such stock and/or cash to such
beneficiary. In the event of the death of a participant and in the absence of a
beneficiary validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such cash to the spouse or to anyone or
dependents of the participant as the Company may determine. No beneficiary shall
prior to the death of the participant by whom he has been designated acquire any
interest in the stock or cash credited to the participant's account maintained
by the Company under the Plan.
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15. TRANSFERABILITY.
Neither payroll deductions credited to a participant's account nor any
rights with regard to the exercise of an Option or to receive Common Stock under
the Plan may be assigned, transferred, pledged, or otherwise disposed of in any
way by the participant otherwise than by will or the laws of descent and
distribution or, in the case of an officer (as defined in Section 16 of the
Exchange Act) or director of the Company, by such other means as may be
permitted by Rule 16b-3 (or any successor provision) under the Exchange Act. Any
such attempted assignment, transfer, pledge, or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with Paragraph 10. Notwithstanding anything to the
contrary contained herein, shares of Common Stock acquired under the Plan by an
officer (as defined in Section 16 the Exchange Act) or director of the Company
may not be assigned, transferred, pledged, or otherwise disposed of for at least
six months following the Offering Termination Date of the Offering in which such
shares of Common Stock are acquired.
16. USE OF FUNDS.
All payroll deductions received or held by the Company under this Plan may
be used by the Company for any corporate purpose and the Company shall not be
obligated to segregate such payroll deductions.
17. EFFECT OF CHANGES OF COMMON STOCK.
In the event of any changes in outstanding shares of Common Stock by reason
of stock dividends, subdivisions, combinations and exchanges of shares,
recapitalizations, and the like, the aggregate number and class of shares
available under the Plan and the Option Exercise Price per share shall be
appropriately adjusted by the Board of Directors of the Company, whose
determination shall be conclusive. Any such adjustments may provide for the
elimination of any fractional shares which would otherwise become subject to any
Options.
18. AMENDMENT OR TERMINATION.
The Committee or the Board of Directors may at any time terminate or amend
the Plan, provided that no amendment may be made to the Plan without approval of
the stockholders of the Company if such approval is required in order to comply
with Rule 16b-3 under the Exchange Act and other applicable securities and tax
laws. If the Board of Directors elects at any time to terminate the Plan, the
payroll deductions credited to each participant's account will be returned to
the participant (without interest) as soon as practicable after such
termination.
Without stockholder consent and without regard to whether any participant
rights may be considered to have been "adversely affected," the Committee or the
Board of Directors shall be entitled to change the Offering Periods, limit the
frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its Committee) determines in its sole discretion advisable
which are consistent with the Plan.
19. NOTICES.
All notices or other communications by a participant to the Company under
or in connection with the Plan shall be deemed to have been duly given when
received by the Coordinator.
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20. MERGER OR CONSOLIDATION.
If the Company shall at any time merge or consolidate with another
corporation and the Company is the surviving entity, the holder of each Option
then outstanding will thereafter be entitled to receive at the next Offering
Termination Date upon the automatic exercise of such Option under Paragraph 8(a)
(unless previously withdrawn pursuant to Paragraph 10) for each share as to
which such Option shall be exercised the securities or property which a holder
of one share of the Common Stock was entitled to upon and at the time of such
merger or consolidation, and the Board of Directors shall take such steps in
connection with such merger or consolidation as the Board of Directors shall
deem necessary to ensure that the provisions of Paragraph 17 shall thereafter be
applicable, as nearly as reasonably may be, to such securities or property. In
the event of a merger or consolidation in which the Company is not the surviving
entity, or of a sale of substantially all of the assets of the Company, the Plan
shall terminate, and all payroll deductions credited to participants' accounts
shall be returned to them (without interest) provided, however, that the Board
of Directors may, in the event of such merger or sale, accelerate the Offering
Termination Date of the Offering then in effect and permit participants to
purchase shares under the Plan at such accelerated Offering Termination Date.
21. TERM OF PLAN.
The Plan shall become effective upon the earlier to occur of its adoption
by the Board of Directors or its approval by the stockholders of the Company. It
shall continue in effect until December 1, 2000 unless sooner terminated under
Paragraph 18 hereof.
22. REGISTRATION AND QUALIFICATION OF THE PLAN UNDER APPLICABLE SECURITIES
LAWS.
No Option shall be exercised under the Plan until such time as the Company
has qualified and registered the shares which are subject to the Option under
the applicable state and federal securities laws to the extent required by such
laws.
In the event the Plan does not qualify under Section 423 of the Code for
any reason, the payroll deductions credited to the account of each participant
under the Plan shall be returned to him or her (without interest) as promptly as
practicable.
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EXHIBIT C
THE LEARNING COMPANY, INC.
CERTIFICATE OF DESIGNATION
OF SERIES A CONVERTIBLE PARTICIPATING
PREFERRED STOCK SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF
SUCH SERIES OF PREFERRED STOCK
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, The Learning Company, Inc. (the "Company"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of the
Company (the "Board of Directors") by Article 4.2.2 of the Restated Certificate
of Incorporation of the Company, as amended, and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors on August 26, 1997, adopted the following
resolution authorizing and creating a series of Preferred Stock, par value $.01
per share, of the Company (the "Preferred Stock") designated as Series A
Convertible Participating Preferred Stock:
RESOLVED that, pursuant to the authority vested in the Board of Directors
in accordance with the provisions of the Restated Certificate of Incorporation
of the Company, as amended, a series of the class of authorized Preferred Stock
is hereby authorized and created and that the designation and number of shares
thereof and the voting powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations and restrictions thereof are as follows:
Section 1. DESIGNATION AND NUMBER.
Section 1.1 DESIGNATION. The shares of such series shall be designated as
"Series A Convertible Participating Preferred Stock" (the "Series A Preferred
Stock"). The maximum number of shares of Series A Preferred Stock hereby
authorized shall be 750,000 shares.
Section 1.2 PRIORITY. The Series A Preferred Stock shall, with respect to
the payment of dividends and the distribution of assets on liquidation,
dissolution or winding up, rank prior to (i) the Common Stock, par value $0.01
per share, of the Company (the "Common Stock") and (ii) any other class or
series of capital stock of the Company (including the Preferred Stock)
hereinafter issued by the Company, other than shares of a class or series of
capital stock of the Company ranking prior to or on parity with (either as to
dividends or the distribution of assets on liquidation, dissolution or winding
up) the Series A Preferred Stock approved by the holders of Series A Preferred
Stock pursuant to Section 3.2.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
Section 2.1 DIVIDENDS. In case the Company shall at any time or from time
to time declare, order, pay or make a dividend or other distribution (including,
without limitation, any dividend or other distribution of stock or other
securities or property or rights or warrants to subscribe for securities of the
Company or any of its subsidiaries) on its Common Stock, and in each such case,
the holder of shares of Series A Preferred Stock shall be entitled to receive
from the Company, with respect to each share of Series A Preferred Stock held,
the same dividend or other distribution received by a holder of the number of
shares of Common Stock into which such share of Series A Preferred Stock is
convertible on the record date for such dividend or other distribution;
provided, however, that if the Company shall dividend or otherwise distribute
rights to all holders of Common Stock entitling the holders thereof to subscribe
for or purchase shares of capital stock of the Company, which rights (i) until
the occurrence of a specified event or events are deemed to be transferred with
such shares of Common Stock and are not exercisable and (ii) are issued in
respect of future issuances of Common Stock, the holders of shares of Series A
Preferred Stock shall not be entitled to receive any such rights until such
rights separate from the Common Stock or become exercisable. Any such dividend
or distribution shall be
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declared, ordered, paid or made on the Series A Preferred Stock at the same time
such dividend or other distribution is declared, ordered, paid or made on the
Common Stock (or in the case of rights referred to in the proviso of the
immediately preceding sentence, at the time such rights separate from the Common
Stock or become exercisable).
Section 2.2 NO ADDITIONAL DIVIDENDS. The holders of shares of Series A
Preferred Stock shall not be entitled to receive any dividends or other
distributions except as provided herein.
Section 3. VOTING RIGHTS. In addition to any voting rights provided by
law, the holders of shares of Series A Preferred Stock shall have the following
voting rights:
Section 3.1 WITH COMMON STOCK. So long as the Series A Preferred Stock is
outstanding, each share of Series A Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock voting
together as a single class with other shares entitled to vote at all meetings of
the stockholders of the Company. With respect to any such vote, each holder of
shares of Series A Preferred Stock shall be entitled to cast the number of votes
equal to the number of votes which could be cast in such vote by a holder of the
shares of capital stock of the Company into which such shares of Series A
Preferred Stock are convertible on the record date for such vote.
Section 3.2 AS A CLASS. The affirmative vote of the holders of at least
66 2/3% of the outstanding shares of Series A Preferred Stock, in person or by
proxy, at a special or annual meeting of stockholders called for the purpose,
shall be necessary to (i) authorize, increase the authorized number of shares
of, or issue (including on conversion or exchange of any convertible or
exchangeable securities or by reclassification), any shares of any class or
series of capital stock of the Company (other than Common Stock) ranking prior
to or on parity with (either as to dividends or the distribution of assets upon
liquidation, dissolution or winding up) the Series A Preferred Stock; (ii)
increase the authorized number of shares of, or issue (including on conversion
or exchange of any convertible or exchangeable securities or by
reclassification) any shares of Series A Preferred Stock; (iii) authorize, adopt
or approve an amendment to the Restated Certificate of Incorporation of the
Company which would decrease the aggregate number of authorized shares of Series
A Preferred Stock, increase or decrease the par value of the shares of Series A
Preferred Stock, or alter or change the powers, preferences or special rights of
the shares of Series A Preferred Stock so as to affect such shares of Series A
Preferred Stock adversely; or (iv) reclassify any shares of Common Stock or any
other shares of any class or series of capital stock of the Company into shares
ranking prior to or on parity with (either as to dividends or the distribution
of assets upon liquidation, dissolution or winding up) the Series A Preferred
Stock. With respect to any such vote, each such holder of Series A Preferred
Stock shall have one vote for each share of such stock standing in his name on
the transfer books of the Company as of any record date fixed for such purpose
or, if no such date be fixed, at the close of business on the Business Day (as
defined in Section 11) next preceding the day on which notice is given, or if
notice is waived, at the close of business on the Business Day next preceding
the day on which the meeting is held or, if such vote is by written consent, the
date of such consent.
Section 3.3 EXERCISE. The foregoing rights of holders of shares of Series
A Preferred Stock to take any actions as provided in this Section 3 may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the Company,
of the holders of the minimum number of shares required to take such action.
So long as such right to vote continues (and unless such right has been
exercised by written consent of the minimum number of shares required to take
such action), the Chairman of the Board of the Company may call, and, upon the
written request of holders of record of 20% or more of the outstanding shares of
Series A Preferred Stock addressed to the Secretary of the Company at the
principal office of the Company, shall call a special meeting of the holders of
shares entitled to vote as provided herein. Such meeting shall be held within 30
days after delivery of such request to the Secretary, at the place and upon the
notice provided by law and in the By-laws of the Company for the holding of
meetings of stockholders.
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Section 3.4 QUORUM. At each meeting of stockholders at which the holders
of shares of Series A Preferred Stock shall have the right, voting separately as
a single class to take any action, the presence in person or by proxy of the
holders of record of at least 50% of the outstanding shares of Series A
Preferred Stock and entitled to vote on the matter shall be necessary and
sufficient to constitute a quorum. In the absence of a quorum of the holders of
shares of Series A Preferred Stock, a majority of the holders of such shares
present in person or by proxy shall have the power to adjourn the meeting as to
the actions to be taken by the holders of shares of Series A Preferred Stock
from time to time and place to place without notice other than announcement at
the meeting until a quorum shall be present.
Section 4. CERTAIN RESTRICTIONS.
Section 4.1 RESTRICTIONS ON DIVIDENDS. Whenever dividends payable on
shares of Series A Preferred Stock as provided in Section 2 are not paid in
full, thereafter and until all unpaid dividends payable, whether or not
declared, on the outstanding shares of Series A Preferred Stock shall have been
paid in full or declared and set apart for payment, the Company shall not: (A)
declare or pay dividends, or make any other distributions, on any shares of
Common Stock or any other shares of any class or series of capital stock ranking
junior to (either as to dividends or the distribution of assets upon
liquidation, dissolution or winding up) the Series A Preferred Stock ("Junior
Stock"), other than dividends or distributions payable in Junior Stock; or (B)
declare or pay dividends, or make any other distributions, on any shares of any
class or series of capital stock of the Company ranking on a parity with (either
as to dividends or the distribution of assets upon liquidation, dissolution or
winding up of the Company) the Series A Preferred Stock ("Parity Stock") except
(1) dividends or distributions payable in Junior Stock and (2) dividends or
distributions paid ratably on the Series A Preferred Stock and all Parity Stock
on which dividends are payable or in arrears, in proportion to the total amounts
to which the holders of all shares of the Series A Preferred Stock and such
Parity Stock are then entitled; provided, however, that in the case of clause
(2) the holders of at least 66 2/3% of the outstanding shares of Series A
Preferred Stock, voting separately as a single class, or the holders of at least
66 2/3% of the outstanding shares of Series A Preferred Stock and of any Parity
Stock the approval of holders of which is required for such a pro rata dividend
or distribution pursuant to any similar provision of the Certificate of
Designation for such stock, voting together as a class, shall have approved the
payment of such dividend or distribution.
Section 4.2 RESTRICTIONS ON REDEMPTION OR PURCHASE. Whenever dividends
payable on shares of Series A Preferred Stock as provided in Section 2 are not
paid in full, thereafter and until all unpaid dividends payable, whether or not
declared, on the outstanding shares of Series A Preferred Stock shall have been
paid in full or declared and set apart for payment, the Company shall not: (A)
redeem, purchase or otherwise acquire for consideration any shares of Junior
Stock or Parity Stock; provided that (1) the Company may at any time redeem,
purchase or otherwise acquire shares of Junior Stock or Parity Stock in exchange
for any shares of Junior Stock and (2) the Company may accept shares of any
Parity Stock for conversion.
Section 4.3 PURCHASE BY SUBSIDIARY. The Company shall not permit any
subsidiary (as defined in Section 11) of the Company to purchase or otherwise
acquire for consideration any shares of capital stock of the Company unless the
Company could, pursuant to Section 4.2, purchase such shares at such time and in
such manner.
Section 5. PURCHASE OF SERIES A PREFERRED STOCK UPON A PURCHASE EVENT.
Section 5.1 If a Purchase Event (as defined in Section 11) shall occur at
any time, then each holder of Series A Preferred Stock shall have, in addition
to the other rights set forth herein (including, without limitation, the right
to convert any such share pursuant to Section 8), the right to require that the
Company purchase, to the extent that the Company shall have funds legally
available therefor, such holder's shares of Series A Preferred Stock in whole or
in part at a purchase price in cash in an amount equal to the Purchase Event
Purchase Price (as defined below) pursuant to the offer described below (the
"Purchase Event Offer") and in accordance with the other procedures set forth
herein. With respect to any Purchase Event, the Purchase Event Purchase Price
shall mean an amount per share equal to $200.00 (the "Base Purchase Event
Amount"), plus if such Purchase Event occurs after the second anniversary of the
date of issuance of such
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shares of Series A Preferred Stock, a 9% annual cumulative return on the Base
Purchase Event Amount, compounded quarterly, from such second anniversary date
through the date of such Purchase Event.
Section 5.2 Within 30 days following any Purchase Event, the Company shall
give written notice of such Purchase Event to each holder of Series A Preferred
Stock, by first-class mail, postage prepaid, at his address appearing on the
books of the Company, stating, among other things: that a Purchase Event has
occurred; the Purchase Event Purchase Price and the date on which the Company
will purchase shares of Series A Preferred Stock pursuant to Section 5.1 (which
shall be a Business Day no earlier than 30 days nor later than 60 days from the
date such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act (as defined in Section 11)); and certain
other procedures that a holder of Series A Preferred Stock must follow to accept
a Purchase Event Offer or to withdraw such acceptance.
If at the time of any Purchase Event, the Company does not have sufficient
funds legally available to purchase all of the outstanding shares of Series A
Preferred Stock, the Company shall offer in its written notice of such Purchase
Event to purchase as many shares of Series A Preferred Stock as it has funds
legally therefor, ratably from the holders thereof in proportion to the total
number of shares tendered, and shall thereafter, whenever it shall have funds
legally therefor, offer to purchase as many shares of Series A Preferred Stock
as it has funds available therefor until it has offered to purchase all of the
outstanding shares of Series A Preferred Stock.
Section 5.3 The Company will comply with the applicable tender offer
rules, including Rule 13e-4 under the Exchange Act, and any other applicable
securities laws or regulations in connection with a Purchase Event Offer.
The above provisions of this Section 5 shall similarly apply to successive
Purchase Events.
Section 6. REACQUIRED SHARES. Any shares of Series A Preferred Stock
converted, purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares of Series A Preferred Stock shall upon their cancellation, and
upon the filing of an appropriate certificate with the Secretary of State of the
State of Delaware, become authorized but unissued shares of Preferred Stock, par
value $.01 per share, of the Company, undesignated as to series, and may be
reissued as part of another series of Preferred Stock, par value $.01 per share,
of the Company subject to the conditions or restrictions on issuance set forth
herein.
Section 7. LIQUIDATION, DISSOLUTION OR WINDING UP.
Section 7.1 BANKRUPTCY OR INSOLVENCY. If the Company shall commence a
voluntary case under the Federal bankruptcy laws or any other applicable Federal
or State bankruptcy, insolvency or similar law, or consent to the entry of an
order for relief in an involuntary case under any such law or to the appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its property, or
make an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Company shall be entered by a court having
jurisdiction in the premises in an involuntary case under the Federal bankruptcy
laws or any other applicable Federal or State bankruptcy, insolvency or similar
law, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Company or any substantial part
of its property, or ordering the winding up or liquidation of its affairs, and
any such decree or order shall be unstayed and in effect for a period of 90
consecutive days and on account of any such event the Company shall liquidate,
dissolve or wind up, or if the Company shall otherwise liquidate, dissolve or
wind up, no distribution shall be made (i) to the holders of shares of Junior
Stock unless, prior thereto, the holders of shares of Series A Preferred Stock
shall have received the Liquidation Amount (as defined below) with respect to
each share, or (ii) to the holders of shares of Parity Stock, except
distributions made ratably on the Series A Preferred Stock and all Parity Stock
in proportion to the total amounts to which the holders of all shares of the
Series A Preferred Stock and Parity Stock are entitled upon such liquidation,
dissolution or winding up. If, upon any liquidation, dissolution or winding up
of the Company, the assets of the Company, or proceeds thereof, distributable
among the holders of the shares of Series A Preferred Stock shall be
insufficient to pay in full the Liquidation Amount and the liquidation
preference on all Parity Stock, then
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'
such assets, or the proceeds thereof, shall be distributed ratably among the
holders of shares of Series A Preferred Stock and any such Parity Stock in
accordance with the respective amounts that would be payable on such shares of
Series A Preferred Stock and any such Parity Stock if all amounts payable
thereon were paid in full. Upon receipt of the Liquidation Amount, the holders
of shares of Series A Preferred Stock shall not be entitled to any further
payments following a liquidation, dissolution or winding up of the Company. The
"Liquidation Amount" for a share of Series A Preferred Stock shall mean the
greater of (a) an amount per share equal to $200.00 (the "Base Liquidation
Preference"), plus if such liquidation, dissolution or winding up occurs after
the second anniversary of the issuance of such shares of Series A Preferred
Stock, an amount equal to a 9% annual cumulative return on the Base Liquidation
Preference, compounded quarterly, from such second anniversary date through the
date of such liquidation, dissolution or winding up and (b) the amount that
would be distributed with respect to the shares of Common Stock issuable upon
conversion of such share of Series A Preferred Stock if all outstanding shares
of Series A Preferred Stock were converted into Common Stock immediately prior
to such liquidation, dissolution or winding up.
Section 7.2 PROPORTIONATE AMOUNT. The Liquidation Amount with respect to
each fractional share of Series A Preferred Stock outstanding shall be equal to
a ratably proportionate amount of the Liquidation Amount with respect to each
outstanding share of Series A Preferred Stock.
Section 8. CONVERSION OF SERIES A PREFERRED STOCK.
Section 8.1 HOLDER RIGHT TO CONVERT. Subject to and upon compliance with
the provisions of this Certificate of Designation, the holder of any shares of
Series A Preferred Stock shall have the right, at his option, at any time (and
from time to time) to convert each such share of Series A Preferred Stock into a
number of fully paid and nonassessable shares of Common Stock (as such shares
shall then be constituted) determined by dividing $200.00 by the Conversion
Price (as defined in Section 8.4) in effect at the time of such conversion, by
surrender of the shares so to be converted in the manner provided in Section
8.2. A holder of Series A Preferred Stock is not entitled to any rights of a
holder of Common Stock until his Series A Preferred Stock is converted into
Common Stock, and only to the extent such Series A Preferred Stock is deemed to
have been converted into Common Stock under this Section 8.
Section 8.2 EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON
CONVERSION; NO ADJUSTMENT FOR DIVIDENDS. In order to exercise the conversion
privilege with respect to any Series A Preferred Stock, the holder of any such
share of Series A Preferred Stock to be converted in whole or in part shall
surrender such share of Series A Preferred Stock, duly endorsed, at the
principal office of the Company or with the transfer agent for the Common Stock,
and shall give written notice of conversion in the form provided on the share of
Series A Preferred Stock (or such other notice which is acceptable to the
Company) to the office or agency that the holder elects to convert such shares
specified in said notice. Such notice shall also state the name or names (with
address) in which the certificate or certificates for shares of Common Stock
which shall be issuable on such conversion shall be issued and shall be
accompanied by transfer taxes, if required pursuant to Section 8.7. Each such
share surrendered for conversion shall, unless the shares issuable on conversion
are to be issued in the same name as the registration of such share of Series A
Preferred Stock, be duly endorsed by, or be accompanied by instruments of
transfer in form satisfactory to the Company duly executed by, the holder or his
duly authorized attorney.
As promptly as practicable after satisfaction of the requirements for
conversion set forth above, subject to compliance with any restrictions on
transfer if shares issuable on conversion are to be issued in a name other than
that of the shareholder (as if such transfer were a transfer of the shares so
converted), the Company shall issue and shall deliver to such holder at the
address designated in the notice of conversion, a certificate or certificates
for the number of full shares issuable upon the conversion of such shares in
accordance with the provisions of this Section 8 and a check or cash in respect
of any fractional interest in respect of a share of Common Stock arising upon
such conversion, as provided in this Section 8. In case any certificate shall be
surrendered for partial conversion, the Company shall issue and deliver to the
holder of the certificate so surrendered, without charge to him, a new
certificate or certificates in an aggregate share amount equal to the
unconverted portion of the surrendered certificate.
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Each conversion shall be deemed to have been effected as to any such
certificate on the date on which the requirements set forth above in this
Section 8.2 have been satisfied as to such certificate, and the person in whose
name any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become on said date the
holder of record of the shares represented thereby; provided, however, that any
such surrender on any date when the stock transfer books of the Company shall be
closed shall constitute the person in whose name the certificates are to be
issued as the record holder thereof for all purposes on the next succeeding day
on which such stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date upon which such Series A Preferred Stock
shall have been surrendered.
Section 8.3 CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional
shares of Common Stock or scrip representing fractional shares shall be issued
upon conversion of Series A Preferred Stock. If more than one certificate for
shares of Preferred Stock shall be surrendered for conversion at one time by the
same holder, the number of full shares which shall be issuable upon conversion
shall be computed on the basis of the aggregate shares of Series A Preferred
Stock (or specified portions thereof to the extent permitted hereby) so
surrendered. If any fractional share of stock would be issuable upon the
conversion of any Series A Preferred Stock, the Company shall make an adjustment
therefor in cash at the current market value thereof. The current market value
of a share of Common Stock shall be the Closing Price (determined as provided in
Section 8.5.3) on the first Trading Day (as defined in Section 8.5.3)
immediately preceding the day on which the Series A Preferred Stock is deemed to
have been converted and such Closing Price.
Section 8.4 CONVERSION PRICE. The initial conversion price shall be
$10.00, (herein called the "Conversion Price") subject to adjustment as provided
in this Section 8.
Section 8.5 ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall be
adjusted from time to time by the Company as follows:
Section 8.5.1 In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and
conversely, in case outstanding shares of Common Stock shall be combined into a
smaller number of shares of Common Stock, the Conversion Price in effect at the
opening of business on the day following the day upon which such combination
becomes effective shall be proportionately increased, such reduction or
increase, as the case may be, to become effective immediately after the opening
of business on the day following the day upon which such subdivision or
combination becomes effective.
Section 8.5.2 In case a tender offer made by the Company or any of its
subsidiaries for all or any portion of the Common Stock shall expire and such
tender offer (as amended upon the expiration thereof) shall require the payment
to stockholders (based on the acceptance (up to any maximum specified in the
terms of the tender offer) of Purchased Shares (as defined below)) of an
aggregate consideration having a fair market value (as determined by the Board
of Directors, whose determination shall be conclusive and described in a
resolution of such board) that combined together with the aggregate of the cash
plus the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a resolution of such board),
as of the expiration of such tender offer, of consideration payable in respect
of any other tender offer, by the Company or any of its subsidiaries for all or
any portion of the Common Stock expiring within the twelve (12) months preceding
the expiration of such tender offer, and in respect of which no adjustment
pursuant to this Section 8.5.2 has been made, exceeds 20.0% of the product of
the Current Market Price (as defined in Section 8.5.3) as of the last time (the
"Expiration Time") tenders could have been made pursuant to such tender offer
(as it may be amended) times the number of shares of Common Stock outstanding
(including any tendered shares) on the Expiration Time, then, and in each such
case, effective immediately prior to the opening of business on the day after
the date of the Expiration Time, the Conversion Price shall be adjusted so that
the same shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to close of business on the date of the Expiration Time
by a fraction of which the numerator shall be the number of shares of Common
Stock outstanding (including any tendered shares) on the Expiration Time
multiplied by the Current Market Price of the Common Stock on the Trading Day
next
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succeeding the Expiration Time and the denominator shall be the sum of (x) the
fair market value (determined as aforesaid) of the aggregate consideration
payable to stockholders based on the acceptance (up to any maximum specified in
the terms of the tender offer) of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased shares") and (y) the product of the
number of shares of Common Stock outstanding (less any Purchased Shares) on the
Expiration Time and the Current Market Price of the Common Stock on the Trading
Day next succeeding the Expiration Time, such reduction to become effective
immediately prior to the opening of business on the day following the Expiration
Time. In the event that the Company is obligated to purchase shares pursuant to
any such tender offer, but the Company is permanently prevented by applicable
law from effecting any such purchases or all such purchases are rescinded, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such tender offer had not been made.
Section 8.5.3 For purposes of this Section 8, the following terms shall
have the meaning indicated:
(1) "Closing Price" with respect to any securities on any day shall
mean the closing sale price regular way on such day or, in case no such
sale takes place on such day, the average of the reported closing bid and
asked prices, regular way, in each case on the New York Stock Exchange, or,
if such security is not listed or admitted to trading on such Exchange, on
the principal national security exchange or quotation system on which such
security is quoted or listed or admitted to trading, or, if not quoted or
listed or admitted to trading on any national securities exchange or
quotation system, the average of the closing bid and asked prices of such
security on the over-the-counter market on the day in question as reported
by the National Quotation Bureau Incorporated, or a similar generally
accepted reporting service, or if not so available, in such manner as
furnished by any New York Stock Exchange member firm selected from time to
time by the Board of Directors for that purpose, or a price determined in
good faith by the Board of Directors, whose determination shall be
conclusive and described in a resolution of such board.
(2) "Current Market Price" shall mean the average of the daily Closing
Prices per share of Common Stock for the ten consecutive Trading Days
immediately prior to the day on which any adjustment of the Conversion
Price pursuant to Section 8.5.2 becomes effective; provided, however, that
if the "ex" date (as hereinafter defined) for any subdivision or
combination that requires an adjustment to the Conversion Price pursuant to
Section 8.5.1 occurs during such ten consecutive Trading Days, the Closing
Price for each Trading Day prior to the "ex" date for such other event
shall be adjusted by multiplying such Closing Price by the same fraction by
which the Conversion Price is required to be adjusted as a result of such
subdivision or combination. For purposes of this paragraph, the term "ex"
date for any subdivision or combination of shares of Common Stock, means
the first date on which the Common Stock trades regular way on such
exchange or in such market after the time at which such subdivision or
combination becomes effective. Notwithstanding the foregoing, whenever
successive adjustments to the Conversion Price are called for pursuant to
this Section 8.5, such adjustments shall be made to the Current Market
Price as may be necessary or appropriate to effectuate the intent of this
Section 8.5 and to avoid unjust or inequitable results as determined in
good faith by the Board of Directors.
(3) "fair market value" shall mean the amount which a willing buyer
would pay a willing seller in an arm's-length transaction.
(4) "Trading Day" shall mean (x) if the applicable security is listed
or admitted for trading on the New York Stock Exchange or another national
security exchange, a day on which the New York Stock Exchange or that other
national security exchange is open for business or (y) if the applicable
security is quoted on the Nasdaq National Market, a day on which trades may
be made thereon or (z) if the applicable security is not so listed,
admitted for trading or quoted, any day other than a Saturday or Sunday or
a day on which banking institutions in the State of New York are authorized
or obligated by law or executive order to close.
Section 8.5.4 The Company may make such reductions in the Conversion
Price, in addition to those required by Sections 8.5.1 and 8.5.2 as the Board of
Directors considers to be advisable to avoid or diminish
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any income tax to holders of Common Stock or rights to purchase Common Stock
resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax purposes. To the extent
permitted by applicable law, the Company from time to time may reduce the
Conversion Price by any amount for any period of time if the period is at least
20 days, the reduction is irrevocable during the period and the Board of
Directors shall have made a determination that such reduction would be in the
best interests of the Company, which determination shall be conclusive and
described in a resolution of such board. Whenever the Conversion Price is
reduced pursuant to the preceding sentence, the Company shall mail to all
holders of record of the Series A Preferred Stock a notice of the reduction at
least 15 days prior to the date the reduced Conversion Price takes effect, and
such notice shall state the reduced Conversion Price and the period it will be
in effect.
Section 8.5.5 No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such price; provided, however, that any adjustments which by reason of this
Section 8.5.5 are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section 8
shall be made by the Company and shall be made to the nearest cent or to the
nearest one one-hundredth of a share, as the case may be.
No adjustment need be made for rights to purchase Common Stock pursuant to
a Company plan for reinvestment of dividends or interest.
No adjustment need be made for a change in the par value, or to or from no
par value, of the Common Stock.
To the extent the Series A Preferred Stock becomes convertible into cash,
assets, property or securities (other than Common Stock of the Company), no
adjustment need be made thereafter as to the cash, assets, property or such
securities (except as such securities may otherwise by their terms provide), and
interest shall not accrue on such cash.
Section 8.5.6 In any case in which this Section 8.5 provides that an
adjustment shall become effective immediately after a Record Date for an event,
the Company may defer until the occurrence of such event (i) issuing to the
holder of any Series A Preferred Stock converted after such Record Date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such event
over and above the Common Stock issuable upon such conversion before giving
effect to such adjustment and (ii) paying to such holder any amount in cash in
lieu of any fraction pursuant to Section 8.3.
Section 8.6 EFFECT OF RECLASSIFICATION OR ACQUISITION EVENT.
Section 8.6.1 If any reclassification or change of outstanding shares of
Common Stock (other than a change in par value, or to or from no par value, as a
result of a subdivision or combination) (each of the foregoing being referred to
as a "Reclassification"), each share of Series A Preferred Stock then
outstanding shall thereafter be convertible into the kind and amount of shares
of stock and other securities or property or assets (including cash) receivable
upon such reclassification or change by a holder of a number of shares of Common
Stock issuable upon conversion of such share of Series A Preferred Stock
(assuming, for such purposes, a sufficient number of authorized shares of Common
Stock available to convert all such Series A Preferred Stock) immediately prior
to such reclassification or change, assuming each holder of Common Stock did not
exercise his rights of election, if any, as to the kind or amount of securities,
cash or other property receivable upon such reclassification or change
(provided, that if the kind or amount of securities, cash or other property
receivable upon such reclassification or change is not the same for each share
of Common Stock in respect of which such rights of election shall not have been
exercised ("non-electing share"), then for the purposes of this Section 8.6.1
the kind and amount of securities, cash or other property receivable upon such
reclassification or for each non-electing share shall be deemed to be the kind
and amount so receivable per share by a plurality of the non-electing shares).
Section 8.6.2 If any Acquisition Event (as defined in Section 11) occurs,
each share of Series A Preferred Stock then outstanding shall thereafter be
convertible into the kind and amount of shares of stock and other securities or
property or assets (including cash) paid in such Acquisition Event (the
"Acquisition
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Event Consideration") for a number of shares of Common Stock issuable upon
conversion of such share of Series A Preferred Stock (assuming, for such
purposes, a sufficient number of authorized shares of Common Stock available to
convert all such Series A Preferred Stock) immediately prior to such Acquisition
Event, assuming each holder of Common Stock did not exercise his rights of
election, if any, as to the kind or amount of securities, cash or other property
paid upon such Acquisition Event (provided, that if the kind or amount of
securities, cash or other property is not the same for each share of Common
Stock in respect of which such rights of election shall not have been exercised
("non-electing share"), then for the purposes of this Section 8.6.2 the kind and
amount of securities, cash or other property receivable upon such Acquisition
Event for each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares); provided,
however, if such Acquisition Event occurs after the date which is two years from
the date of issuance of such share of Series A Preferred Stock and the fair
market value (as determined by the Board of Directors of the Company in good
faith, whose determination shall be described in a resolution of such board) of
the Acquisition Event Consideration paid for on number of shares of Common Stock
issuable upon conversion of such share of Series A Preferred Stock immediately
prior to such Acquisition Event is less than an amount equal to the sum of the
Base Liquidation Preference and an amount equal to a 9% annual cumulative return
on the Base Liquidation Preference, compounded quarterly, from such second
anniversary date through the date of such Acquisition Event (with the amount, if
any, by which such fair market value is less than such sum being hereinafter
referred to as the "Difference"), then each share of Series A Preferred Stock
shall thereafter be convertible into the Acquisition Event Consideration into
which it becomes convertible pursuant to the foregoing provisions of this
Section 8.6.2, plus additional Acquisition Event Consideration having a fair
market value (as determined by the Board of Directors of the Company in good
faith, whose determination shall be described in a resolution of such board)
equal to the Difference (or, at the option of the Company, cash equal to the
Difference).
Section 8.6.3 Notwithstanding anything contained herein to the contrary,
the Company will not effect any Reclassification or Acquisition Event unless,
prior to the consummation thereof, (i) the Surviving Person (as defined in
Section 11) thereof shall assume, by written instrument mailed to each holder of
shares of Series A Preferred Stock if such shares are held by 50 or fewer
holders or groups of affiliated holders or to each transfer agent for the shares
of Series A Preferred Stock if such shares are held by a greater number of
holders, the obligation to deliver to such holder such stock, securities or
other property or assets (including cash) with respect to or in exchange for
Common Stock to which, in accordance with the foregoing provisions, such holder
is entitled and (ii) proper provision is made to ensure that the holders of
shares of Series A Preferred Stock will be entitled to receive the benefits
afforded by this Section 8.6. Such written instrument should provide for
adjustments which shall be as nearly as equivalent as may be practicable to the
adjustments provided for in this Section 8.6.
The above provisions of this Section shall similarly apply to successive
reclassifications, changes, consolidations, mergers, combinations, sales and
conveyances.
Section 8.6.4 If this Section 8.6 applies to any event or occurrence,
Section 8.5 shall not apply to such event or occurrence.
Section 8.7 TRANSFER OR SIMILAR TAXES ON SHARES ISSUED. The issue of
stock certificates on conversions of Series A Preferred Stock shall be made
without charge to the converting holder of Series A Preferred Stock for any
transfer or similar tax in respect of the issue thereof. The Company shall not,
however, be required to pay any such tax which may be payable in respect of any
transfer involved in the issue and delivery of stock in any name other than that
of the holder of any Series A Preferred Stock converted, and the Company shall
not be required to issue or deliver any such stock certificate unless and until
the person or persons requesting the issue thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
Section 8.8 RESERVATION OF SHARES; SHARES TO BE FULLY PAID; LISTING OF
COMMON STOCK. The Company shall provide, free from preemptive rights, out of
its authorized but unissued shares or shares held in treasury, sufficient shares
to provide for the conversion of the Series A Preferred Stock from time to time
as such Series A Preferred Stock is presented for conversion.
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Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value, if any, of the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock, the Company will take
all corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue shares of such Common Stock
at such adjusted Conversion Price.
The Company covenants that all shares of Common Stock which may be issued
upon conversion of Series A Preferred Stock will, upon issue, be fully paid and
nonassessable by the Company and free from all transfer or similar taxes as
described in Section 8.7, liens and charges with respect to the issue thereof.
The Company further covenants that, if at any time the Common Stock shall
be listed on the New York Stock Exchange or any other national securities
exchange, the Company will, if permitted by the rules of such exchange, list and
keep listed, so long as the Common Stock shall be so listed on such exchange,
all Common Stock issuable upon conversion of the Series A Preferred Stock.
Section 8.9 NOTICE TO STOCKHOLDERS PRIOR TO CERTAIN ACTIONS. In case:
(a) the Company takes any action that would result in a
Reclassification or an Acquisition Event; or
(b) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company shall cause to be mailed to each holder of Series A Preferred Stock
at his address appearing on the books of the Company, as promptly as possible
but in any event at least 15 days prior to the applicable date hereinafter
specified, a notice stating the date on which such Reclassification, Acquisition
Event, dissolution, liquidation or winding-up is expected to become effective or
occur and the date as of which it is expected that holders of record of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such Reclassification, Acquisition Event, dissolution,
liquidation or winding-up. Failure to give such notice, or any defect therein,
shall not affect the legality or validity of such Reclassification, Acquisition
Event, dissolution, liquidation or winding-up. Neither the failure to give such
notice nor any defect therein shall affect the legality or validity of the
proceedings referenced in clauses (a) through (b) of this Section 8.9.
Section 8.10.1 COMPANY RIGHT TO CAUSE CONVERSION. Subject to and upon
compliance with the provisions of this Certificate of Designation, the Company
shall have the right, at its option, at any time after the initial period, if
any, of 130 consecutive Trading Days for which the weighted average Closing
Price for the Common Stock for such period is greater than 200% of the
Conversion Price, to cause the conversion of each share of Series A Preferred
Stock (but not less than all shares of Series A Preferred Stock) into that
number of fully paid and nonassessable shares of Common Stock (as such shares
shall then be constituted) that the holder of such share of Series A Preferred
Stock would have received had such holder exercised such holder's right to
convert such share pursuant to Section 8.1 at the time the Company exercises its
right pursuant to this Section 8.10.1.
Section 8.10.2 NOTICE OF CONVERSION. In case the Company shall desire to
exercise the right to cause conversion of the Series A Preferred Stock pursuant
to Section 8.10.1, it shall fix a date for conversion and it shall mail or cause
to be mailed a notice of such conversion at least 30 and not more than 60 days
prior to the date fixed for conversion to the holders of Series A Preferred
Stock so to be converted at their last addresses as the same appear on the books
of the Company. Such mailing shall be by first class mail. The notice, if mailed
in the manner herein provided, shall be conclusively presumed to have been duly
given, whether or not the holder receives such notice. In any case, failure to
give such notice by mail or any defect in the notice to the holder of any Series
A Preferred Stock designated for conversion shall not affect the validity of the
proceedings for the conversion of any other shares of Series A Preferred Stock.
Each such notice of conversion shall specify the date fixed for conversion,
the number of shares of Common Stock into which each share of Series A Preferred
Stock is to be converted, the place or places for surrender of certificates
representing such Series A Preferred Stock and that such shares of Common Stock
will be delivered upon presentation and surrender of certificates representing
such Series A Preferred Stock.
Section 8.10.3 SURRENDER OF CERTIFICATES. Promptly upon receipt of such
notice of conversion, each holder of any shares of Series A Preferred Stock
shall surrender the certificate or certificates for such shares of
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Series A Preferred Stock, duly endorsed, at a place designated for such
surrender along with instructions regarding the name or names (with address) in
which the certificate or certificates for shares of Common Stock which shall be
issuable on such conversion. Each such share surrendered for conversion shall,
unless the shares issuable on conversion are to be issued in the same name as
the registration of such share of Series A Preferred Stock, be duly endorsed by,
or be accompanied by instruments of transfer in form satisfactory to the Company
duly executed by, the holder or his duly authorized attorney.
As promptly as practicable after satisfaction of the requirements for
surrender set forth above, the Company shall issue and shall deliver to such
holder at the address designated in such instructions a certificate or
certificates for the number of full shares issuable upon the conversion of such
shares in accordance with the provisions of this Section 8 and a check or cash
in respect of any fractional interest in respect of a share of Common Stock
arising upon such conversion, as provided in Section 8.
Each conversion shall be deemed to have been effected as to any such
certificate on the date on which the requirements set forth above in this
Section 8.10.3 have been satisfied as to such certificate, and the person in
whose name any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become on said date the
holder of record of the shares represented thereby; provided, however, that any
such surrender on any date when the stock transfer books of the Company shall be
closed shall constitute the person in whose name the certificates are to be
issued as the record holder thereof for all purposes on the next succeeding day
on which such stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date upon which such Series A Preferred Stock
shall have been surrendered.
Section 9. REPORTS AS TO ADJUSTMENTS. Upon any adjustment of the
Conversion Price then in effect and any increase or decrease in the number of
shares of Common Stock issuable upon the operation of the conversion set forth
in Section 8, then, and in each such case, the Company shall promptly deliver to
the transfer agent for the Series A Preferred Stock and the transfer agent for
the Common Stock, a certificate signed by the President or a Vice President and
by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company setting forth in reasonable detail the event requiring
the adjustment and the method by which such adjustment was calculated and
specifying the Conversion Price then in effect following such adjustment and the
increased or decreased number of shares issuable upon the conversion set forth
in Section 8. The Company shall also promptly after the making of such
adjustment give written notice to the registered holders of the Series A
Preferred Stock at the address of each holder as shown on the books of the
Company maintained by the transfer agent thereof, which notice shall state the
Conversion Price then in effect, as adjusted, and the increased or decreased
number of shares issuable upon the exercise of the right of conversion granted
by Section 8, and shall set forth in reasonable detail the method of calculation
of each with a brief statement of the facts requiring such adjustment. Where
appropriate, such notice to holders of the Series A Preferred Stock may be given
in advance and included as part of the notice required under the provisions of
Section 8.9.
Section 10. CERTAIN COVENANTS. Any registered holder of Series A
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designation or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
Section 11. DEFINITIONS. For the purposes of this Certificate of
Designation of Series A Preferred Stock, the following terms shall have the
meanings indicated:
ACQUISITION EVENT: An "Acquisition Event" shall be deemed to have
occurred if (i) a merger, consolidation or other corporate combination of
the Company with any other person is consummated, other than (x) a merger,
consolidation or other corporate combination which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the Surviving Person) at least 51% of
the combined voting power of the voting securities of the Company or such
Surviving Person outstanding immediately after such merger, consolidation
or other corporate combination or (y) a
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merger, consolidation or other corporate combination effected to implement
a recapitalization of the Company (or similar transaction) in which no
person acquires more than 50% of the combined voting power of the Company's
then outstanding securities; or (ii) the sale or disposition by the Company
of all or substantially all of the properties and assets of the Company is
consummated.
BENEFICIAL OWNER: A "Beneficial Owner" shall have the meaning defined
in Rule 13d-3 under the Exchange Act.
BUSINESS DAY: A "Business Day" shall mean a day, other than a
Saturday, a Sunday or other day on which the banking institutions in the
State of New York, the State of California or the Commonwealth of
Massachusetts are authorized or obligated by law or executive order to
close or a day which is declared a national or New York, California or
Massachusetts state holiday.
EXCHANGE ACT: The term "Exchange Act" means the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
PERSON: The term "person" shall mean a corporation, an association, a
partnership, an individual, a joint venture, a joint stock company, a
trust, an unincorporated organization or a government or an agency or a
political subdivision thereof.
PURCHASE EVENT: A "Purchase Event" shall be deemed to have occurred if
any person (other than any of the initial purchasers of the Series A
Preferred Stock) is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities other
than in an Acquisition Event.
SUBSIDIARY: The term "subsidiary" of any specified person shall mean
(i) a corporation a majority of whose capital stock with voting power under
ordinary circumstances, to elect directors is at the time directly or
indirectly owned by such person or (ii) any other person (other than a
corporation) in which such person or a subsidiary or subsidiaries of such
person directly or indirectly, at the date of determination thereof, has at
least majority ownership.
SURVIVING PERSON: The term "Surviving Person" shall mean (i) the
continuing or surviving person of a merger, consolidation or other
corporate combination with the Company; or (ii) the person receiving a
transfer of all or substantially all of the properties and assets of the
Company.
IN WITNESS WHEREOF, The Learning Company, Inc. has caused this Certificate
to be signed by Neal S. Winneg, its Vice President and Secretary, on this day
of December, 1997.
THE LEARNING COMPANY, INC.
By
------------------------------------
Name: Neal S. Winneg
Title: Vice President and Secretary
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<PAGE> 65
656-PS-97
<PAGE> 66
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
<PAGE> 67
PROXY THE LEARNING COMPANY, INC. PROXY
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
PROXY CARD FOR THE DECEMBER 4, 1997
ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having read the Notice of Annual Meeting of Stockholders and
the Proxy Statement dated October 24, 1997, receipt of which is hereby
acknowledged, does hereby appoint Neal S. Winneg, R. Scott Murray and Mark G.
Borden, and each of them, the lawful attorneys and proxies of the undersigned,
each with several powers of substitution, to vote and act at the Annual Meeting
of Stockholders of The Learning Company, Inc. (the "Company") to be held at The
Royal Sonesta Hotel, located at 5 Cambridge Parkway, Cambridge, Massachusetts,
on December 4, 1997, at 10:00 a.m. local time, and any adjournment thereof, with
respect to all shares of Common Stock, par value $.01 per share, held of record
by the undersigned on October 20, 1997, with all the powers that the
undersigned would possess if personally present and acting, as follows:
<TABLE>
<S> <C>
1. To elect Lamar Alexander, Michael A. [ ] FOR [ ] WITHHELD
Bell, James C. Dowdle, Robert Gagnon,
Kevin O'Leary, Charles L. Palmer,
Michael J. Perik, Carolynn Reid-Wallace,
Robert A. Rubinoff and Scott M.
Sperling as Directors for a one
year term. If any of such nominees
should be unavailable, the proxies and
each or any of them may vote for
substitute nominees at their discretion. [ ] _______________________
FOR ALL NOMINEES EXCEPT
AS NOTED ABOVE
2. To ratify the appointment of Coopers
& Lybrand L.L.P. as the independent
public accountants for the Company for
the fiscal year ending January 3, 1998. [ ] FOR [ ] AGAINST [ ] WITHHELD
3. To approve the Company's 1996
Non-Employee Director Stock Option
Plan. [ ] FOR [ ] AGAINST [ ] WITHHELD
4. To approve the Company's 1997
Employee Stock Purchase Plan. [ ] FOR [ ] AGAINST [ ] WITHHELD
5. To approve amendments to the Company's
Long Term Equity Incentive Plan. [ ] FOR [ ] AGAINST [ ] WITHHELD
</TABLE>
<PAGE> 68
<TABLE>
<S> <C>
6. To approve the issuance of an aggregate
of 750,000 shares of Series A Conver-
tible Participating Preferred Stock of
the Company to affiliates of Thomas H.
Lee Company, Bain Capital, Inc. and
Centre Partners Management LLC. [ ] FOR [ ] AGAINST [ ] WITHHELD
7. To transact such other business as
may properly come before the Annual
Meeting or any adjournment thereof.
THIS PROXY WILL BE VOTED AS DIRECTED BUT IN
THE ABSENCE OF SUCH DIRECTION, IT WILL BE
VOTED FOR ITEMS 1-6 ABOVE. AS TO ANY OTHER
MATTERS THAT MAY PROPERLY COME BEFORE THE
ANNUAL MEETING, PROXIES WILL BE VOTED IN THE
DISCRETION OF THE PROXY HOLDERS.
[ ] MARK HERE FOR ADDRESS CHANGE
AND NOTE AT LEFT
PLEASE DATE AND SIGN ABOVE
EXACTLY AS NAME(S) APPEAR(S)
ON THIS PROXY. WHEN SIGNING
AS ATTORNEY, EXECUTOR, ADMI- __________________________________________
NISTRATOR, TRUST, GUARDIAN, Please print name of stockholder here
ETC., GIVE TITLE AS SUCH. IF
JOINT ACCOUNT, EACH JOINT Signature:_________________________________
OWNER SHOULD SIGN.
Date: ____________________________________
</TABLE>
<PAGE> 69
October 24, 1997
INFORMATION STATEMENT WITH RESPECT TO
THE EXCHANGEABLE NON-VOTING SHARES OF
SOFTKEY SOFTWARE PRODUCTS INC.
TO: HOLDERS OF EXCHANGEABLE NON-VOTING SHARES OF
SOFTKEY SOFTWARE PRODUCTS INC.
Enclosed with this Notice are proxy materials relating to The Learning
Company, Inc. ("TLC"), the parent company of SoftKey Software Products Inc.
("SSPI"), in connection with TLC's upcoming annual meeting of stockholders (the
"Meeting") to be held at The Royal Sonesta Hotel, located at 5 Cambridge
Parkway, Cambridge, Massachusetts on Thursday, December 4, 1997, at 10:00 a.m.
local time. Proxy materials relating to TLC are being provided to you because,
as a holder of SSPI's exchangeable non-voting shares ("Exchangeable Shares"),
you have voting rights at stockholders' meetings of TLC. Pursuant to certain
orders or rulings issued by the securities commissions in the Provinces of
Ontario, British Columbia, Quebec and Nova Scotia, TLC is required to provide
holders of Exchangeable Shares with all disclosure material furnished to holders
of TLC's common stock ("TLC Common Shares") residing in the United States.
ECONOMIC EQUIVALENCY OF EXCHANGEABLE SHARES AND TLC COMMON SHARES
The Exchangeable Shares provide holders thereof with a security of SSPI
having economic and voting rights which are, as nearly as practicable,
equivalent to those of a TLC Common Share. In particular, Exchangeable Shares
are: (a) entitled to dividends from SSPI payable at the same time as, and in the
Canadian dollar equivalent of, dividends paid by TLC on TLC Common Shares; (b)
retractable at the option of the holder at any time for TLC Common Shares; (c)
entitled on the liquidation, dissolution or winding-up of SSPI to be exchanged
for TLC Common Shares; (d) entitled on the dissolution of TLC to be
automatically exchanged for TLC Common Shares; and (e) entitled to direct voting
rights at stockholders' meetings of TLC.
As a result of the economic equivalency of the Exchangeable Shares and
the TLC Common Shares, holders of Exchangeable Shares effectively have a
participating interest in TLC, rather than SSPI. Accordingly, information
respecting the financial condition of SSPI would not be relevant to holders of
Exchangeable Shares because the value of Exchangeable Shares is dependent on the
consolidated financial condition of TLC and the value of the TLC Common Shares.
To ensure that you receive meaningful disclosure respecting the nature of your
investment, you are being provided with the same disclosure material that TLC
provides to holders of TLC Common Shares.
RIGHT TO DIRECT VOTING AT MEETINGS OF TLC STOCKHOLDERS
As you are aware, CIBC Mellon Trust Company, which was formerly known
as The R-M Trust Company (the "Trustee"), is entitled at the Meeting to cast a
number of votes attaching to the single outstanding share of Special Voting
Stock of TLC equal to the number of outstanding Exchangeable Shares on the
record date of the Meeting. These votes to be cast by the Trustee may only be
exercised in accordance with the instructions of the holders of the Exchangeable
Shares of SSPI. This information statement outlines the nature and extent of
your right as a holder to instruct the Trustee and describes the process by
which your instructions will be carried out.
A form of direction (the "Direction") is enclosed with this information
statement that will serve as your instructions to the Trustee. The Direction
should be completed as soon as possible and returned to CIBC Mellon Trust
Company, 393 University Avenue, 5th Floor, Toronto, Ontario, Canada, M5G 2M7.
Please note that unless the Direction has been received by 5:00 p.m. (Toronto
time) on Tuesday, December 2, 1997 (the "Filing Time"), your instructions will
not be binding upon the Trustee and your voting rights will not be exercised.
Each of you is entitled to attend the Meeting and to vote in person, or
to designate a person who will attend the Meeting and vote on your behalf. These
alternatives appear as items (B) and (C),
<PAGE> 70
respectively, on the Direction. If you decide to choose one of these
alternatives, you can instruct the Trustee to provide you (or the person
designated by you) with a proxy card which will be delivered to you (or the
person designated by you) at the Meeting by the Trustee's representatives upon
the presentation of satisfactory identification. At the Meeting, you (or the
person designated by you) will be entitled to cast one vote for each
Exchangeable Share of SSPI held by you on the record date for the Meeting (and
not subsequently disposed of) (the "Beneficiary Votes") in respect of each
matter to be voted on at the Meeting.
Alternatively, you are entitled to instruct the Trustee to give a proxy
card to a representative of the Company who will exercise the Beneficiary Votes
at the Meeting in accordance with your instructions. This alternative appears as
item (A) on the Direction. If you decide to proceed in this manner, you should
complete items 1 through 6 on the Direction which represent the items of
business to be considered and voted on at the Meeting.
In addition to revocation in any manner permitted by law, you may
revoke or amend your instructions by filing an instrument in writing executed by
you, or by your attorney authorized in writing, and delivered to the office of
the Trustee shown above at any time up to and including the Filing Time. Your
instructions may also be revoked in person at the Meeting prior to 9:00 a.m. on
December 4, 1997 by submitting written revocation of your instructions and
satisfactory identification to the Trustee's representatives. In the event that
the Meeting is adjourned, your instructions may be revoked or amended at any
time up to and including 5:00 p.m. (Toronto time) on the second business day
prior to the day of any adjournment of the Meeting by delivering an instrument
in writing to the office of the Trustee (in the manner described above), or your
instructions may be revoked in person at any adjournment of the Meeting not less
than one hour prior to the time of such adjourned meeting.
Failure to comply with the foregoing will not affect your right to
attend the Meeting, or any adjournment thereof, and to vote in person so long as
satisfactory identification is presented to the Trustee's representatives.
<PAGE> 71
THE LEARNING COMPANY, INC.
-------------------------
DIRECTION TO BE GIVEN BY HOLDERS OF EXCHANGEABLE
NON-VOTING SHARES OF SOFTKEY SOFTWARE PRODUCTS INC.
-------------------------
DIRECTION FOR THE DECEMBER 4, 1997 ANNUAL MEETING
OF STOCKHOLDERS OF THE LEARNING COMPANY, INC.
The undersigned, having read the Notice of Annual Meeting (the "Annual
Meeting") of Stockholders of The Learning Company, Inc. (the "Company") to be
held at The Royal Sonesta Hotel, located at 5 Cambridge Parkway, Cambridge,
Massachusetts on Thursday, December 4, 1997, at 10:00 a.m. local time, the Proxy
Statement and the Information Statement dated October 24, 1997, receipt of
which are hereby acknowledged, DOES HEREBY INSTRUCT AND DIRECT CIBC MELLON TRUST
COMPANY (THE "TRUSTEE"), pursuant to the provisions of the Voting and Exchange
Trust Agreement (the "Agreement") dated February 4, 1994 among the Company,
SoftKey Software Products Inc. and the Trustee, as follows:
(PLEASE SELECT ONE OF A, B OR C)
A. [ ] Exercise or cause to be exercised, whether by proxy given by the
Trustee to a representative of the Company or otherwise, the
Beneficiary Votes (as defined in the Agreement) at the Annual Meeting,
or any postponement or adjournment thereof as follows:
(PLEASE COMPLETE THE FOLLOWING ONLY IF YOU HAVE SELECTED ALTERNATIVE A)
1. To elect Lamar Alexander, Michael A. Bell, James C. Dowdle,
Robert Gagnon, Kevin O'Leary, Charles L. Palmer, Michael J.
Perik, Carolynn Reid-Wallace, Robert A. Rubinoff and Scott M.
Sperling as Directors for a one-year term. If any of such
nominees should be unavailable, the Trustee may vote for
substitute nominee(s) at its discretion.
[ ] FOR all nominees listed above [ ] TO WITHHOLD authority
to vote for all
nominees listed above
WITHHOLD AUTHORITY for the following nominee(s) only: (Write
name(s) in the space provided below.)
..............................................................
2. To ratify the appointment of Coopers & Lybrand L.L.P. as the
independent public accountants for the Company for the fiscal
year ending January 3, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve the Company's 1996 Non-Employee Director Stock
Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To approve the Company's 1997 Employee Stock Purchase Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To approve amendments to the Company's Long Term Equity
Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 72
6. To approve the issuance of an aggregate of 750,000 shares of
Series A Convertible Participating Preferred Stock of the
Company to affiliates of Thomas H. Lee Company, Bain Capital,
Inc. and Centre Partners Management LLC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
7. To transact such other business as may properly come before
the Annual Meeting or any adjournment thereof.
(PLEASE NOTE: THE TRUSTEE WILL VOTE AS DIRECTED BUT IN THE ABSENCE OF
ANY SUCH DIRECTION, THE TRUSTEE IS HEREBY AUTHORIZED AND DIRECTED TO
VOTE FOR ITEMS 1-6 ABOVE AND AS TO ANY OTHER MATTERS THAT MAY PROPERLY
COME BEFORE THE ANNUAL MEETING TO VOTE IN ITS DISCRETION.)
(PLEASE GO DIRECTLY TO THE SIGNATURE LINE AT THE BOTTOM OF THIS PAGE.)
- --------------------------------------------------------------------------------
B. [ ] Deliver a proxy card to the undersigned at the Annual Meeting,
with respect to all Exchangeable Non-Voting Shares of SoftKey
Software Products Inc. held of record by the undersigned on
the record date for the Annual Meeting (and not subsequently
disposed of) (the "Exchangeable Shares") so that the
undersigned may exercise personally the Beneficiary Votes (as
defined in the Agreement) at the Annual Meeting, or any
postponement or adjournment thereof.
(IF YOU HAVE SELECTED ALTERNATIVE B, GO DIRECTLY TO THE SIGNATURE LINE AT THE
BOTTOM OF THIS PAGE.)
- --------------------------------------------------------------------------------
C. [ ] Deliver a proxy card to......................................
as the designee of the undersigned to attend and act for and
on behalf of the undersigned at the Annual Meeting, with
respect to the Exchangeable Shares with all the powers that
the undersigned would possess if personally present and acting
thereat including the power to exercise the Beneficiary Votes
(as defined in the Agreement) at the Annual Meeting, or any
postponement or adjournment thereof.
(IF YOU HAVE SELECTED ALTERNATIVE C, GO DIRECTLY TO THE
SIGNATURE LINE AT THE BOTTOM OF THIS PAGE.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Name of Holder of Exchangeable Shares)
Date: ______________________________, 1997
PLEASE DATE AND SIGN ABOVE. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUST, GUARDIAN, ETC., GIVE TITLE AS SUCH. IF JOINT ACCOUNT, EACH JOINT OWNER
SHOULD SIGN.
