<PAGE>
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:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
THE LEARNING COMPANY, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(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):
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(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
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/ / 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[THE LEARNING COMPANY LOGO]
April 2, 1998
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, May 21, 1998, at 9:00 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 an amendment to the Company's Long Term Equity Incentive Plan and an
amendment to the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of the Company's common stock from 120,000,000 to
200,000,000. 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 May 21, 1998.
Sincerely,
Michael J. Perik
Chairman of the Board and
Chief Executive Officer
<PAGE>
THE LEARNING COMPANY, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1998
NOTICE IS HEREBY GIVEN that the 1998 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 9:00 a.m. on Thursday, May 21, 1998 for the following purposes:
1. To elect twelve 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 2,
1999;
3. To approve an amendment to the Company's Long Term Equity Incentive
Plan;
4. To approve an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of the
Company's Common Stock from 120,000,000 to 200,000,000; and
5. 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 and Series A Convertible
Participating Preferred Stock at the close of business on March 26, 1998 (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 3, 1998 accompanies this Notice of Annual Meeting and the enclosed Proxy
Statement.
BY ORDER OF THE BOARD OF DIRECTORS
NEAL S. WINNEG
Secretary
April 2, 1998
Cambridge, Massachusetts
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>
PROXY STATEMENT
1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 21, 1998
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 1998 Annual Meeting of Stockholders
(the "Annual Meeting") to be held on Thursday, May 21, 1998, at 9:00 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,
the Special Voting Share (defined below) and the shares of Common Stock into
which the shares of the Company's Series A Convertible Participating Preferred
Stock, $.01 par value per share (the "Series A Preferred Stock"), outstanding as
of the Record Date are convertible (the "Series A Conversion Shares"), 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, the Special
Voting Share and the Series A Conversion Shares, voting together as one class,
present in person or represented by proxy at the Annual Meeting is required,
except that the proposal to amend the Company's Restated Certificate of
Incorporation requires the affirmative vote of a majority of the votes
represented by the shares of Common Stock, the Special Voting Share and the
Series A Conversion Shares outstanding as of the Record Date, voting together as
one class. (See "Voting Securities" below.)
Shares that 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 other than the proposal to amend the
Company's Restated Certificate of Incorporation. With respect to the proposal to
amend the Company's Restated Certificate of Incorporation, abstentions and
"broker non-votes" will have the effect of votes against such proposal.
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.
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 3, 1998 WILL BE FIRST MAILED TO STOCKHOLDERS ON OR ABOUT APRIL 2,
1998. THE COMPANY WILL, UPON WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH WITHOUT
CHARGE A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 3,
1998, 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>
VOTING SECURITIES
Stockholders of record at the close of business on March 26, 1998 (the
"Record Date") are entitled to vote at the Annual Meeting. On the Record Date,
the Company had outstanding shares of Common Stock. In addition, on the
Record Date, there were outstanding one share of special voting stock of the
Company, $1.00 par value per share (the "Special Voting Share"), and 750,000
shares of Series A Preferred Stock, which were convertible as of the Record Date
into 15,000,000 Series A Conversion Shares.
At the Annual Meeting, CIBC Mellon Trust Company, as the holder of record of
the Special Voting Share, will be entitled to cast 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 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, the Special Voting Share and the Series A Preferred Stock
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>
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 March 2, 1998 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>
NUMBER OF
SHARES APPROXIMATE
BENEFICIALLY PERCENTAGE
NAME OWNED (1) OWNED
- -------------------------------------------------------------------------------------- ------------ ---------------
<S> <C> <C>
Lamar Alexander(2).................................................................... 75,000 *
Michael A. Bell(2).................................................................... 144,372 *
Anthony J. DiNovi(3).................................................................. 9,146,340 15.7%
James C. Dowdle(4).................................................................... 5,234,796 10.7%
Robert Gagnon(5)...................................................................... 269,789 *
R. Scott Murray(6).................................................................... 174,188 *
Mark E. Nunnelly(7)................................................................... 3,414,640 6.5%
Kevin O'Leary(8)...................................................................... 825,157 1.7%
Charles L. Palmer(9).................................................................. 1,725,231 3.5%
David E. Patrick(2)................................................................... 191,835 *
Michael J. Perik(10).................................................................. 1,016,081 2.0%
Kathryn M. Quinby-Johnson(2).......................................................... 77,840 *
Carolynn Reid-Wallace(2).............................................................. 18,750 *
Robert A. Rubinoff(11)................................................................ 202,497 *
Scott M. Sperling(3)(12).............................................................. 9,303,212 15.9%
Paul J. Zepf(13)...................................................................... 2,440,020 4.7%
All current directors and executive officers as a group 25,328,740 37.6%
(19 persons)(14)....................................................................
Affiliates of Bain Capital, Inc.(7)................................................... 3,414,640 6.5%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Mellon Bank Corporation(15)........................................................... 2,721,501 5.6%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Affiliates of Thomas H. Lee........................................................... 9,146,340 15.7%
Company(3)
c/o Thomas H. Lee Company
75 State Street
Boston, Massachusetts 02109
Tribune Company(16)................................................................... 5,210,796 10.6%
435 North Michigan Avenue
Chicago, Illinois 60611
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding shares of Common Stock.
3
<PAGE>
(1) Unless otherwise indicated, each person or entity named in the table has
sole 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, based upon information provided to the Company by
directors (and nominees), officers and principal stockholders.
(2) Consists of shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after the Record Date.
(3) Certain affiliates of Thomas H. Lee Company, including Thomas H. Lee Equity
Fund III, L.P., Thomas H. Lee Foreign Fund III, L.P., THL-CCI Limited
Partnership, Anthony J. DiNovi and Scott M. Sperling, own 457,317 shares of
Series A Preferred Stock, which were convertible as of March 2, 1998 into
9,146,340 shares of Common Stock. Each of Messrs. DiNovi and Sperling,
directors of the Company, is the direct owner of 1,628 shares of Series A
Preferred Stock, which were convertible as of March 2, 1998 into 32,560
shares of Common Stock. Messrs. DiNovi and Sperling are also Managing
Directors of Thomas H. Lee Company and therefore may be deemed to have
shared voting and investment power with respect to the shares of Series A
Preferred Stock owned by the affiliates of Thomas H. Lee Company. Each of
Messrs. DiNovi and Sperling disclaims beneficial ownership of all shares of
Series A Preferred Stock other than those shares he owns directly. Based
upon information contained in a Schedule 13D dated December 12, 1997 filed
with the SEC.
(4) Consists of 3,000 shares of Common Stock owned directly by Mr. Dowdle,
20,000 shares of Common Stock issuable to Mr. Dowdle pursuant to stock
options exercisable within 60 days after the Record Date, 1,000 shares of
Common Stock owned by the James C. and Sally Dowdle Trust UAD November 11,
1995 and 5,210,796 shares of Common Stock owned by Tribune Company. Mr.
Dowdle, a director of the Company, is the Executive Vice President and a
director of Tribune Company and therefore may be deemed to have shared
voting and investment power with respect to the 5,210,796 shares of Common
Stock owned by Tribune Company. Mr. Dowdle disclaims beneficial ownership of
the 5,210,796 shares owned by Tribune Company.
(5) Consists of 29,304 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after the Record Date and 240,485 shares of
Common Stock issuable upon exchange of Exchangeable Shares owned by a
corporation wholly-owned by Mr. Gagnon.
(6) Consists of 173,328 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days after the Record Date and 860 shares of
Common Stock issuable upon exchange of Exchangeable Shares owned by Mr.
Murray.
(7) Certain affiliates of Bain Capital, Inc., including Bain Capital Fund V,
L.P., Bain Capital Fund V-B, L.P., BCIP Associates, L.P., BCIP Trust
Associates, L.P. and Brookside Capital Partners Fund, L.P., own 170,732
shares of Series A Preferred Stock, which were convertible as of March 2,
1998 into 3,414,640 shares of Common Stock. Mr. Nunnelly, a director of the
Company, is a Managing Director of Bain Capital, Inc. and therefore may be
deemed to have shared voting and investment power with respect to the shares
of Series A Preferred Stock owned by the affiliates of Bain Capital, Inc.
Mr. Nunnelly disclaims beneficial ownership of all shares of Series A
Preferred Stock. Based upon information contained in a Schedule 13D dated
December 12, 1997 filed with the SEC.
(8) Consists of 612,999 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days after the Record Date and 212,158 shares
of Common Stock issuable upon exchange of Exchangeable Shares owned by a
corporation wholly-owned by Mr. O'Leary.
(9) Consists of 17,412 shares of Common Stock owned directly by Mr. Palmer,
37,500 shares of Common Stock issuable pursuant to stock options exercisable
within 60 days after the Record Date and 1,670,319 shares of Common Stock
owned by North American Fund II, L.P. Mr. Palmer is President and Principal
of North American Business Development Company, L.L.C., 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., 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 shared voting and investment power with respect
to the 1,670,319 shares of Common Stock owned by North American Fund II,
L.P.
4
<PAGE>
(10) Consists of 57,960 shares of Common Stock owned directly by Mr. Perik,
955,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after the Record Date and 3,121 shares of Common
Stock issuable upon exchange of Exchangeable Shares owned by Mr. Perik.
(11) Consists of 147,497 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days after the Record Date and 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.
(12) Consists of 153,747 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days after the Record Date and shares of
Common Stock issuable pursuant to the conversion of Series A Preferred Stock
held directly and beneficially by Mr. Sperling. See note (3) above.
(13) Consists of 1,000 shares of Common Stock owned directly by Mr. Zepf and
2,439,020 shares of Common Stock issuable upon the conversion of Series A
Preferred Stock owned by certain affiliates of Centre Partners Management
LLC. Certain affiliates of Centre Partners Management LLC, including Centre
Capital Investors II, L.P., Centre Capital Tax-Exempt Investors II, L.P.,
Centre Capital Offshore Investors II, L.P., State Board of Administration of
Florida, Centre Parallel Management Partners, L.P. and Centre Partners
Coinvestment, L.P., own 121,951 shares of Series A Preferred Stock, which
were convertible as of March 2, 1998 into 2,439,020 shares of Common Stock.
Mr. Zepf, a director of the Company, is a Managing Director of Centre
Partners Management LLC and therefore may be deemed to have shared voting
and investment power with respect to the shares of Series A Preferred Stock
owned by the affiliates of Centre Partners Management LLC. Mr. Zepf
disclaims beneficial ownership of all shares of Series A Preferred Stock.
Based upon information contained in a Schedule 13D dated December 12, 1997
filed with the SEC.
(14) Includes (i) 2,851,629 shares of Common Stock issuable pursuant to stock
options exercisable within 60 days after the Record Date, (ii) 511,624
shares of Common Stock issuable upon exchange of Exchangeable Shares and
(iii) 15,000,000 shares of Common Stock issuable upon conversion of 750,000
shares of Series A Preferred Stock.
(15) Based upon information contained in a Schedule 13G dated January 20, 1998
filed with the SEC.
(16) Based upon information contained in Amendment No. 2 to a Schedule 13D dated
April 16, 1996 filed with the SEC.
5
<PAGE>
PROPOSAL 1. ELECTION OF DIRECTORS
Twelve directors will be elected at the Annual Meeting. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for the
twelve 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, but if any nominee should be
unable to serve, the shares represented by the proxies may be voted for a
substitute nominee designated by the Board of Directors.
NOMINEES
Set forth below are the names of the twelve 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 March 2, 1998.
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 and the Special Subcommittee of
the Compensation Committee.
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 and
the Special Subcommittee of the Compensation
Committee.
Anthony J. DiNovi.................................... 35 Mr. DiNovi became a director of the Company in
December 1997. He has been employed by Thomas H. Lee
Company, a private investment
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ----------------------------------------------------- --- -----------------------------------------------------
company, since 1988 and currently serves as a
Managing Director. Mr. DiNovi is also an officer,
trustee or member of a number of investment
partnerships affiliated with Thomas H. Lee Company.
Mr. DiNovi serves as a director of First Alert, Inc.,
Safelite Glass Corporation, Fisher Scientific
International, Inc. and several private corporations.
He is a member of the Compensation Committee.
<S> <C> <C>
James C. Dowdle...................................... 64 Mr. Dowdle became a director of the Company in
December 1995. He is Executive Vice President of
Tribune Company, a media entertainment company, and
has been a director of Tribune 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 a
predecessor corporation to SoftKey Software, which
was also called SoftKey Software Products Inc.
("Former SoftKey"), from 1991 to 1994 and Vice
President, Finance, of Informatrix 2000, Inc., a
Canadian predecessor of Former SoftKey, from 1987 to
1994.
Mark E. Nunnelly..................................... 38 Mr. Nunnelly became a director of the Company in
December 1997. He has been a Managing Director of
Bain Capital, Inc., an investment company, since May
1993, and a general partner of Bain Venture Capital,
an investment company, 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 Procter & Gamble Company Inc. in product
management. He is a director of several companies,
including Dade International Inc., Stream
International, Inc., SR Research and Doubleclick Inc.
He is a member of the Audit (Chairman) and Executive
Committees.
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.
</TABLE>
7
<PAGE>
<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................................... 59 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 and the Special Subcommittee of
the Compensation Committee.
Scott M. Sperling.................................... 40 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
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ----------------------------------------------------- --- -----------------------------------------------------
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 Compensation and
Executive Committees.
<S> <C> <C>
Paul J. Zepf......................................... 33 Mr. Zepf became a director of the Company in December
1997. He is a Managing Director of Centre Partners
Management LLC and a Managing Director of Corporate
Advisors, L.P. Mr. Zepf served as a Principal of
Centre Partners Management LLC and a Principal of
Corporate Advisors, L.P. from 1995 to 1998, as a Vice
President of Corporate Advisors, L.P. from 1993 to
1995 and as an Associate of such partnership from
1989 to 1993. He is also a director of LaSalle
Holdings Limited, a property catastrophe reinsurance
company, and Firearms Training Systems, Inc., a
training and simulation company. He is a member of
the Audit Committee.
</TABLE>
The Securities Purchase Agreements dated August 26, 1997 among the Company
and the purchasers of 750,000 shares of Series A Preferred Stock required, as a
condition to the sale of such shares, that (i) the representative of Thomas H.
Lee Company then serving on the Board of Directors (Scott M. Sperling), or any
successor nominee of Thomas H. Lee Company, be renominated and reelected and
(ii) 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.
In addition, the Company agreed to use its best efforts to cause the election of
two nominees from such representatives to each of the Executive, Compensation
and Audit Committees of the Board of Directors. Accordingly, Messrs. Anthony J.
DiNovi, Mark E. Nunnelly and Paul J. Zepf were appointed to the Board of
Directors in December 1997, Mr. Sperling was reelected as a director in December
1997 and at least one of the representatives is a member of each committee of
the Board of Directors.
Mr. Dowdle was appointed to the Board of Directors of the Company in
accordance with the Standstill Agreement dated November 30, 1995 between the
Company and Tribune Company, which requires that a representative of Tribune
Company serve on the Board of Directors of the Company. The Standstill Agreement
also provides that if the Company's Board of Directors at any time consists of
11 or more members, the Company shall appoint a second representative of Tribune
Company to the Board. Tribune Company waived its right to have a second
representative appointed to the Board in connection
9
<PAGE>
with the appointment of Messrs. DiNovi, Nunnelly and Zepf pursuant to the
Securities Purchase Agreements described in the immediately preceding paragraph.
ADDITIONAL CURRENT DIRECTOR
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Charles L. Palmer.................................... 56 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>
OTHER EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Gregory L. Bestick................................... 46 Mr. Bestick became the Executive Vice President,
Product Development of the Company in February 1998
in connection with the Company's acquisition of
Creative Wonders, Inc., an educational software
company. From
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ----------------------------------------------------- --- -----------------------------------------------------
December 1994 until the Company's acquisition of
Creative Wonders, he served as President of Creative
Wonders. Prior to founding Creative Wonders, Mr.
Bestick was a Vice President and General Manager of
the EA Kids division of Electronic Arts, Inc. From
1991 to 1993 Mr. Bestick was Chief Executive Officer
of MediaShare Corp., and from 1986 to 1991 he served
as a Group Vice President for Jostens Learning Corp.
and its predecessor corporation, Education Systems
Corp.
<S> <C> <C>
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.
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.
David E. Patrick..................................... 41 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.
Kathryn M. Quinby-Johnson............................ 39 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
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE AND OTHER DIRECTORSHIPS
- ----------------------------------------------------- --- -----------------------------------------------------
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.
<S> <C> <C>
Neal S. Winneg....................................... 37 Mr. Winneg joined the Company in April 1994 as Vice
President, General Counsel and Secretary, and became
Senior Vice President in February 1998. From 1986 to
1989 and again from 1990 to 1993, Mr. Winneg was
associated with the law firm of Skadden, Arps, Slate,
Meagher & Flom. From 1989 to 1990, Mr. Winneg was
Vice President and a director of Dimensional Foods
Corporation, a food technology company.
</TABLE>
DIRECTORS' COMPENSATION
Directors receive no fees for their service as directors of the Company.
Under the Company's 1996 Non-Employee Director Stock Option Plan, each
Eligible Person who becomes a director after May 16, 1996 receives, at the time
he or she first becomes a director, 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. An "Eligible Person" is a director who is not an employee of the
Company or any of the Company's affiliates and is not designated for nomination,
election or appointment to the Board of Directors by, or by any agreement or
arrangement with, any person or entity (other than the Company). 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.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held 13 meetings during the fiscal year ended January
3, 1998. Each director attended 75% or more of all meetings of the Board and the
committees on which he or she served, except for Mr. Alexander, Mr. Bell, Mr.
Dowdle, Ms. Reid-Wallace and Mr. Sperling. The Board of Directors requested that
Mr. Sperling not attend, and Mr. Sperling did not attend, five meetings of the
Board of Directors at which the proposed sale of shares of Series A Preferred
Stock to certain investors, including affiliates of Thomas H. Lee Company, was
discussed. Mr. Sperling is a Managing Director of Thomas H. Lee Company (see
"Certain Relationships and Related Transactions").
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, Nunnelly, Perik (Chairman)
12
<PAGE>
and Sperling. The Committee acted by written consent one time and did not meet
during the fiscal year ended January 3, 1998.
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, 1996 Stock Option Plan and 1997 Employee Stock Purchase Plan. The
Committee's current members are Messrs. Alexander, Bell, DiNovi, Rubinoff
(Chairman) and Sperling. The Compensation Committee held three meetings and
acted by written consent eight times during the fiscal year ended January 3,
1998.
In January 1998, the Compensation Committee created a Special Subcommittee
of the Compensation Committee to ensure that matters with respect to executive
compensation would, to the extent required, be considered by "outside directors"
for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), and "disinterested persons" for purposes of Rule 16b-3 promulgated
under Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Special Subcommittee has all of the powers and authority of
the Compensation Committee (including the power and authority of the
Compensation Committee to authorize the issuance of stock) except for those
powers reserved for the Board of Directors under Section 141 of the Delaware
General Corporation Law. The Special Subcommittee's current members are Messrs.
Alexander, Bell and Rubinoff (Chairman). Because the Special Subcommittee was
created in January 1998, it did not meet during the fiscal year ended January 3,
1998.
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, Nunnelly (Chairman) and
Zepf. The Audit Committee met twice during the fiscal year ended January 3,
1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Alexander, Bell,
DiNovi, Rubinoff and Sperling (Chairman), none of whom is an employee of the
Company. Messrs. Alexander, Bell and Rubinoff have no 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 a
predecessor corporation to SoftKey Software, which was also called SoftKey
Software Products Inc. ("Former SoftKey"). Messrs. DiNovi and Sperling are
Managing Directors of Thomas H. Lee Company, which, together with its
affiliates, purchased 457,317 shares of Series A Preferred Stock in December
1997 in exchange for the surrender of the Company's 5 1/2%
Convertible/Exchangeable Notes due 2000 in an aggregate principal amount of
$91,463,400 (see "Certain Relationships and Related Transactions"). Mr. Sperling
has also received stock options described above in Compensation of Directors.
None of the executive officers of the Company has served on the Board of
Directors or compensation committee of any other entity, any of whose officers
served either on the Company's Board of Directors or the Compensation Committee.
13
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation of the Named Executive Officers for each of
the last three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- --------------------------------------------------- --------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Michael J. Perik................................... 1997 400,000 300,000 517,500 --
Chairman of the Board 1996 400,000 312,125 1,000,000 --
and Chief Executive Officer 1995 300,000 -- 475,000 33,847(1)
R. Scott Murray.................................... 1997 250,000 179,374 230,000(2) --
Executive Vice President 1996 250,000 125,000 100,000 --
and Chief Financial Officer 1995 230,000 30,000 100,000 37,260(3)
Kevin O'Leary...................................... 1997 400,000 300,000 475,499 --
President 1996 400,000 312,125 1,000,000 --
1995 300,000 -- 475,000 4,574(4)
David E. Patrick................................... 1997 240,000 220,000 230,000(2) --
Executive Vice President, 1996 240,000 -- 150,000 21,615(5)
Worldwide Sales 1995 181,008 -- 80,000 109,237(5)
Kathryn M. Quinby-Johnson.......................... 1997 179,049 52,813 150,714(6) --
Executive Vice President, Marketing 1996 67,642 -- 75,714 --
</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) Consists of options that were repriced during the fiscal year ended January
3, 1998, replacing options granted at an earlier date. See "Repricing of
Options."
(3) Represents amounts paid to reimburse Mr. Murray for income taxes incurred
from payments he received from the Company for rent and moving expenses.
(4) Represents amounts paid to reimburse Mr. O'Leary for income taxes incurred
from payments he received from the Company for rent and moving expenses.
(5) Represents commissions.
(6) Includes options to purchase 75,714 shares that were repriced during the
fiscal year ended January 3, 1998, replacing options granted at an earlier
date. See "Repricing of Options."
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
14
<PAGE>
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 March [ ], 1998, Ms. Quinby-Johnson entered into a two-year employment
agreement with the Company as Executive Vice President, Marketing. The agreement
provides for, among other things, an annual base salary of not less than
$200,000 and eligibility to participate in the Company's Management Committee
bonus program, or any similar program that may replace such program, approved by
the Company's Compensation Committee for each employment year. The agreement
also provides that if Ms. Quinby-Johnson's employment with the Company is
terminated by the Company other than for just cause or by Ms. Quinby-Johnson for
good reason, the Company will make severance payments to Ms. Quinby-Johnson 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.
In October 1993, Mr. Patrick entered into a three-year employment agreement
with the Company as an Executive Vice President, which provides for, among other
things, an annual base salary of not less than $175,000, the grant to Mr.
Patrick of an option to purchase 50,000 shares of Common Stock at $9.375 per
share (the fair market value of the Common Stock on October 13, 1993, the day of
the grant, as adjusted for a subsequent 1-for-10 reverse stock split), a bonus
of $75,000 paid when the agreement became effective and eligibility for a target
bonus of $85,000 per year payable on a quarterly basis on such terms as the
Board of Directors determines. The agreement also provides that if the Company
terminates Mr. Patrick's employment with the Company other than for just cause,
Mr. Patrick will be entitled severance payments (in addition to accrued and
unpaid salary) in an aggregate amount equal to his annual
15
<PAGE>
base salary then in effect. The agreement is automatically extended from year to
year unless one party gives a specified notice to the other party of his or its
intention not to extend the agreement.
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
March 2, 1998, the aggregate principal amount of the loan outstanding was CDN
$203,000. In addition, as of March 2, 1998, 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 December 5, 1997, the Company issued an aggregate of 750,000 shares of
Series A Preferred Stock to affiliates of Thomas H. Lee Company, Bain Capital,
Inc. and Centre Partners Management LLC (collectively, the "Investor Group") in
exchange for the surrender of the Company's 5 1/2% Convertible/ Exchangeable
Notes due 2000 (the Private Notes") pursuant to Securities Purchase Agreements
dated as of August 26, 1997. The Investor Group had purchased the Private Notes
in a private transaction from Tribune Company, a stockholder of the Company. In
connection with this transaction, the Company paid transaction fees in the
amount of (i) $1,125,000 to an affiliate of Thomas H. Lee Company, (ii) $420,000
to an affiliate of Bain Capital, Inc. and (iii) $300,000 to an affiliate of
Centre Partners Management LLC. Messrs. Sperling and DiNovi, directors of the
Company, are Managing Directors of Thomas H. Lee Company. Mr. Nunnelly, a
director of the Company, is a Managing Director of Bain Capital, Inc. Mr. Zepf,
a director of the Company, is a Managing Director of Centre Partners Management
LLC. Mr. Dowdle, a director of the Company, is Executive Vice President and a
director of Tribune Company.
Mr. Perik, the Chief Executive Officer of the Company, is indebted to the
Company under a promissory note dated October 15, 1997 between the Company and
Mr. Perik, pursuant to which the Company loaned Mr. Perik $500,000, at an
interest rate of 5.76% per annum, to assist Mr. Perik in paying the exercise
price of certain employee stock options. The promissory note is due and payable
on the earlier of December 31, 1998 or the date on which Mr. Perik's employment
with the Company is terminated for any reason. As of March 2, 1998, the
aggregate principal amount of the loan outstanding was $500,000.
16
<PAGE>
STOCK OPTION GRANTS
The following table summarizes certain information concerning stock options
granted during fiscal year 1997 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
----------------- PERCENT OF AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION
OPTIONS EMPLOYEES OR BASE FOR OPTION TERM
GRANTED (# OF IN FISCAL PRICE EXPIRATION --------------------
SHARES) (1) YEAR (%) ($/SH) DATE 5%($) 10%($)
----------------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael Perik............ 67,500(2) 0.95 14.50 1/14/07 615,530 1,559,875
450,000 6.31 9.25 3/5/07 2,617,772 6,633,952
R. Scott Murray.......... 11,785(2)(3) 0.17 10.40 8/15/04 49,896 116,279
100,000(3)(4) 1.40 10.40 6/2/05 496,553 1,189,332
100,000(3)(5) 1.40 10.40 2/5/06 573,381 1,412,266
18,215(2)(3) 0.26 10.40 8/15/04 77,119 179,721
Kevin O'Leary............ 25,499(2) 0.36 14.50 1/14/07 232,524 589,263
450,000 6.31 9.25 3/5/07 2,617,772 6,633,952
David E. Patrick......... 80,000(3)(4) 1.12 10.40 6/2/05 397,243 951,466
45,000(3)(6) 0.63 10.40 2/5/06 258,021 635,519
105,000(3)(7) 1.47 10.40 2/5/06 602,050 1,482,879
Kathryn M. Quinby-
Johnson................ 50,000 0.70 9.25 3/5/07 290,864 737,106
25,714(3)(8) 0.36 10.40 4/25/05 127,684 305,825
50,000(3)(9) 0.70 10.40 9/17/06 286,691 706,133
25,000 0.35 8.00 6/18/07 125,779 318,748
</TABLE>
- ------------------------
(1) All options granted under the Company's Long Term Equity Incentive Plan and
1996 Stock Option Plan are granted at a price equal to the fair market value
of the Common Stock on the date of grant. Unless otherwise noted, options
become exercisable in quarterly increments over a three-year period,
beginning three months after the date on which the options are granted.
(2) Exercisable in full on the date of grant.
(3) Consists of options that were repriced during the fiscal year ended January
3, 1998, replacing options granted at an earlier date. See "Repricing of
Options."
(4) Exercisable in quarterly increments over a three-year period, beginning on
September 2, 1995.
(5) In March 1997, options to purchase an aggregate of 100,000 shares, which had
originally been granted in February 1996, were canceled and replaced as part
of the option repricing. See "Repricing of Options." The repriced options
were exercisable in full on February 5, 2002, subject to acceleration upon
the attainment of certain performance goals. In July 1997, the repriced
options were canceled and replaced with an option to purchase 100,000 shares
that is exercisable in quarterly increments over a three-year period,
beginning on April 29, 1996.
(6) Exercisable in quarterly increments over a three-year period, beginning on
April 29, 1996.
(7) In March 1997, an option to purchase an aggregate of 105,000 shares, which
had originally been granted in February 1996, was canceled and replaced as
part of the option repricing. See "Repricing of
17
<PAGE>
Options." The repriced option was exercisable (i) as to 5,000 of the shares
subject thereto in quarterly increments over a three-year period, beginning
on April 29, 1996, and (ii) as to 100,000 of the shares subject thereto in
full on February 5, 2002, subject to acceleration upon the attainment of
certain performance goals. In July 1997, the repriced option was canceled
and replaced with an option to purchase 105,000 shares that is exercisable
in quarterly increments over a three-year period, beginning on April 29,
1996.
(8) Exercisable in annual increments over a three-year period, beginning on
April 25, 1996.
(9) Exercisable in quarterly increments over a three-year period, beginning on
December 17, 1996.
OPTION EXERCISES AND YEAR-END OPTION TABLE
The following table provides information regarding the exercise of stock
options during fiscal year 1997 and stock options held as of the end of fiscal
year 1997 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
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE FISCAL YEAR END (#) FISCAL YEAR END ($)
ON EXERCISE REALIZED -------------------------- ---------------------------
NAME (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ----------------------------------------- ----------- --------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Perik......................... 57,960 166,055 955,000 1,337,500 2,368,125 2,151,563
R. Scott Murray.......................... 15,000 120,563 156,662 58,338 818,559 304,816
Kevin O'Leary............................ -- -- 612,999 1,337,500 745,873 2,151,563
David E. Patrick......................... 19,000 176,375 172,669 75,831 1,786,795 788,642
Kathryn M. Quinby-Johnson................ -- -- 77,840 96,073 474,196 595,106
</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 2, 1998
($15.625 per share) less the option exercise price.
REPRICING OF OPTIONS
The following table sets forth certain information concerning all repricings
of options to purchase the Company's Common Stock held by any executive officer
of the Company during the last 10 completed fiscal years.
18
<PAGE>
TEN-YEAR OPTION/REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL OPTION
SECURITIES MARKET PRICE EXERCISE TERM
UNDERLYING OF STOCK AT PRICE REMAINING AT
OPTIONS TIME OF AT TIME OF DATE OF
REPRICED OR REPRICING OR REPRICING OR NEW REPRICING OR
AMENDED AMENDMENT AMENDMENT EXERCISE AMENDMENT
NAME DATE (#) ($) ($) PRICE($) (IN MONTHS)
- ----------------------------------------- --------- ----------- ------------ ------------- --------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Bordon........................ 2/5/96 50,000 16.0625 22.7500 16.0625 111
President, International 3/13/97 65,000 8.75 16.0625 10.4000 106
3/13/97 50,000 8.75 16.0625 10.4000 98
R. Scott Murray.......................... 3/13/97 11,785 8.75 12.3750 10.4000 89
Executive Vice President and Chief 3/13/97 100,000 8.75 22.7500 10.4000 98
Financial Officer 3/13/97 100,000 8.75 16.0625 10.4000 106
3/13/97 18,215 8.75 12.3750 10.4000 89
David E. Patrick......................... 3/13/97 80,000 8.75 22.7500 10.4000 98
Executive Vice President, Worldwide 3/13/97 45,000 8.75 16.0625 10.4000 106
Sales 3/13/97 105,000 8.75 16.0625 10.4000 106
Kathryn M. 3/13/97 25,714 8.75 13.5700 10.4000 98
Quinby-Johnson........................... 3/13/97 50,000 8.75 16.7500 10.4000 114
Executive Vice President, Marketing
David P. Rubin........................... 3/13/97 50,000 8.75 16.0625 10.4000 106
Senior Vice President, Research and
Development
Neal S. Winneg........................... 3/13/97 18,750 8.75 12.3750 10.4000 89
Senior Vice President and General 3/13/97 35,000 8.75 22.7500 10.4000 98
Counsel 3/13/97 45,000 8.75 16.0625 10.4000 106
Diana James-Cairns....................... 3/13/97 100,000 8.75 16.0625 10.4000 106
Former Vice President, Marketing
Martin Rice.............................. 3/13/97 50,000 8.75 16.0625 10.4000 106
Former Executive Vice President, 3/13/97 25,000 8.75 24.0000 10.4000 110
Research and Development 3/13/97 25,000 8.75 18.3750 10.4000 111
</TABLE>
COMPENSATION COMMITTEE REPORT ON OPTION REPRICING
In March 1997, the Compensation Committee approved the repricing of certain
options granted to employees pursuant to the Company's stock option plans.
Because of the decline in the market price of the Common Stock, certain
outstanding options in March 1997 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 the Company's employees 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. No
options issued to directors of the Company were repriced.
Pursuant to the terms of the repricing, employee options having an exercise
price per share greater than $10.40 were canceled, and the Company issued new
options (the "New Options") having an exercise price of $10.40 per share, which
was the average closing price of the Company's Common Stock on the
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New York Stock Exchange for the eight trading days immediately preceding March
13, 1997, the date on which the Board approved the option repricing, plus 15%.
The exercise price of the New Options is approximately eighteen percent above
the $8.75 closing price of the Common Stock on the New York Stock Exchange on
the date of the repricing. 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 or Long Term Equity Incentive Plan. The option agreements for
the New Options contain substantially the same terms as the option agreements
for the Existing Options, including the expiration date, the number of shares
issuable pursuant to the option and the vesting schedule. Each employee who
elected to have his or her options repriced agreed not to exercise his or her
New Options for a nine-month period, unless such employee's employment with the
Company was terminated during such period by the Company without cause.
20
<PAGE>
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 3, 1998.
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 a performance-based bonus plan to ensure that an individual's
compensation is directly related to the Company's financial and other goals.
BASE SALARY. Salaries paid to executive officers, other than the President
and Chief Executive Officer, are reviewed by the Chief Executive Officer and the
Vice President, Human Resources based upon their assessments 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 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
and were not increased in 1997 from 1996 levels.
PERFORMANCE BONUS. The Chief Executive Officer, President and Chief
Financial Officer, as well as those executive officers who are not compensated
through sales commissions, are eligible to earn bonuses based on overall Company
performance targets set at the beginning of the fiscal year by the Compensation
Committee. In March 1997 the Compensation Committee established these targets
based on the attainment of specified levels of after-tax cash flow per share.
The amounts paid to the Named Executive Officers in 1997 are set forth in the
Summary Compensation Table above.
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 Long Term 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
and Vice President, Human Resources, who determine 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 March 1997, the
Compensation Committee granted to each of Mr. Perik and Mr. O'Leary options
under the Company's
21
<PAGE>
stock option plans to purchase 450,000 shares of Common Stock at a price of
$9.25 per share. In addition, in January 1997, the Compensation Committee
granted options under its stock option plans to Mr. Perik to purchase 67,500
shares and to Mr. O'Leary to purchase 25,699 shares, vesting in full on the date
of grant, at price of $14.50 per share. These options were granted to replace
options that were expiring. All options were granted at fair market value on the
date of grant.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee did not change Mr. Perik's salary or bonus target
for the fiscal year ended January 3, 1998, as compared to fiscal 1996. In order
to more effectively align Mr. Perik's interests with those of the Company's
stockholders, the Compensation Committee granted him an option to purchase
450,000 shares of Common Stock at a price of $9.25 per share, the fair market
value of the Common Stock on the date of grant. The option will vest quarterly
over a three-year period.
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.
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<PAGE>
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 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 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 3,
1998 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, except that, due to an administrative error, each of Messrs.
Murray and Patrick filed one late Form 4 relating to the exercise of stock
options and the sale of the underlying shares, and Mr. Perik failed to timely
report the exercise of two stock options, which he reported on Form 5.
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 30, 1992 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
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INDEX 6/30/92 6/30/93 1/7/94 1/6/95 1/5/96 1/3/97 1/2/98
- --------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
The Learning Company, Inc.................... 100.00
S&P 500 Index................................ 100.00
Industry Index............................... 100.00
</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 2,
1999. 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.
23
<PAGE>
PROPOSAL 3. APPROVAL OF AN AMENDMENT 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 December 1997 to cover 9,000,000 shares of Common
Stock.
On January 30, 1998 the Company's Board approved an amendment to the Equity
Incentive Plan, subject to stockholder approval, (i) to eliminate the
restriction on the number of shares of Restricted Stock (as defined below) that
the Company may grant to any named executive officer in any year and (ii) to
expand the types of performance goals that may be used for performance-based
awards made to named executive officers. "Restricted Stock" is defined in the
Equity Incentive Plan to mean shares of Common Stock that the Compensation
Committee may award to an employee subject to certain restrictions, including
the forfeiture by the employee of all or a portion of the Restricted Stock upon
termination of employment or in the event that performance goals are not
achieved. The Plan currently provides that the Company may not grant to named
executive officers Restricted Stock in any fiscal year with a fair market value
as of the date of grant that exceeds the lesser of (i) 100% of such employee's
annual base salary and (ii) $500,000. The Plan also currently provides that the
vesting of Restricted Stock granted to named executive officers must include
achievement of performance goals based on the Company's attainment of a level of
net profit before income tax during a tax year. The amendment to the Plan would
eliminate the restriction in the Plan on the value of the Restricted Stock that
may be granted to named executive officers in any fiscal year and would provide
the Compensation Committee more flexibility in establishing performance goals
with respect to such executive officers. Under the proposed amendment, the
Compensation Committee would have the ability under the Equity Incentive Plan to
establish performance goals based on earnings, earnings growth, revenues, gross
margin, expenses, market share, improvement of financial ratings or achievements
of balance sheet or income statement objectives and may be absolute in their
terms or measured against or in relationship to other companies comparably or
similarly situated. The Board of Directors believes that the proposed amendment
is necessary to establish meaningful performance-based equity incentives for
named executives and other participants under the Equity Incentive Plan.
In order to comply with Section 162(m) of the Code, the Equity Incentive
Plan limits the number of shares of Common Stock that may be issued to any
person in any calendar year to a number equal to 20% of the total number of
shares of Common Stock authorized under the Plan. This limitation will not be
modified by the proposed amendment.
The Company entered into letter agreements, dated as of January 31, 1998,
with each of Messrs. Perik and O'Leary pursuant to which the Company issued and
sold 350,000 shares of Restricted Stock to each of Messrs. O'Leary and Perik at
a price of $.01 per share. Under the terms of the letter agreements, the
Restricted Stock will vest in quarterly installments over a ten-year period,
provided that none of the Restricted Stock will vest unless (a) the Company's
stockholders approve the proposed amendment to the Equity Incentive Plan, and
(b) the Company achieves certain revenue goals for a specified period. [The
Company has achieved such performance goals.] If the Company's stockholders
approve the proposed amendment to the Plan, each Restricted Stock award will
vest quarterly over ten years for so long as the executive is employed by the
Company, provided that the Restricted Stock will fully vest and will no longer
by subject to any repurchase option of the Company in the event of a "Change in
Control" of the Company (as defined in the Equity Incentive Plan). If the
stockholders do not approve the proposed amendment to the Equity Incentive Plan,
(i) the Restricted Stock issued to each of Messrs. Perik and O'Leary will be
repurchased by the Company, and (ii) in the event of a Change in Control of the
Company, each of Messrs. Perik and O'Leary would be entitled to receive cash
payments equal to 350,000 multiplied by the fair market value of the Company's
Common Stock on the date of the Change in Control.
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<PAGE>
The closing price of the Common Stock on the New York Stock Exchange on
March 2, 1998 was $17.375 per share.
In order to comply with Section 162(m) of the Code, the amendment to the
Equity Incentive Plan and the continuance of the Plan must be approved by
stockholders. A vote in favor of the proposed amendment 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
March 2, 1998, approximately 1,500 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) Restricted
Stock awards; (d) Stock Purchase Rights, similar in certain respects to Options;
and (e) 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
25
<PAGE>
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 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.
26
<PAGE>
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 amendment to the Equity Incentive Plan
is in the best interests of the Company and its stockholders and therefore
recommends that the stockholders vote FOR this proposal.
PROPOSAL 4. AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION
By resolution adopted on February 26, 1998, the Company's Board of Directors
proposed the adoption of an amendment to the Company's Restated Certificate of
Incorporation (the "Charter") pursuant to which the number of authorized shares
of Common Stock would be increased from 120,000,000 to 200,000,000, and the
Board directed that the proposed amendment be submitted for approval by the
stockholders at the Annual Meeting.
If the Company's stockholders approval the amendment, the Charter will be
amended to increase the authorized shares of Common Stock to 200,000,000.
Of the 120,000,000 currently authorized shares of Common Stock, as of March
2, 1998, 49,062,341 were issued and outstanding. In addition, the Company had
reserved 15,000,000 shares for issuance upon conversion of the Series A
Preferred Stock, 5,550,749 shares of Common Stock for issuance upon exchange of
the Exchangeable Shares and approximately 20,367,500 shares of Common Stock for
issuance under the Company's stock option plans and stock purchase plans, upon
conversion of the Company's 5 1/2% Convertible Notes Due 2000 and upon exercise
of certain warrants issued by the Company. The Company has also reserved
8,687,500 shares of Common Stock upon issuance upon exchange of Exchangeable
Shares for which SoftKey Software has issued 8,687,500 special warrants. On
March 5, 1998, the Company entered into a Stock Purchase Agreement among the
Company, Mindscape Holding Company, Pearson Overseas Holdings Ltd. and Pearson
Netherlands, BV pursuant to which the Company agreed to purchase all of the
stock of Mindscape, Inc. and certain of Mindscape's affiliates for a purchase
price of $150,000,000, payable primarily in cash and the remainder through the
issuance of shares of Common Stock.. Other than the reservations of Common Stock
and transactions described above, the Company does not now have any present
understanding or agreement to issue additional shares of Common Stock. Although
currently authorized shares are sufficient to meet all known present
requirements, the Board believes that it is desirable that the Company have the
flexibility to issue additional shares of Common Stock without further
stockholder action. In particular, the Company continuously evaluates products
and technologies for acquisition, including acquisitions payable in whole or in
part in Common Stock. In addition, the availability of additional shares of
Common Stock will enhance the Company's flexibility in connection with possible
future actions such as stock dividends, stock splits, financings, employee
benefit programs, acquisitions of property, corporate mergers, the possible
funding of new product programs or businesses or other corporate purposes.
Authorized shares of Common Stock in excess of those shares outstanding also
could be used to make more difficult a change in control of the Company. The
Board will determine whether, when and on what terms the issuance of shares of
Common Stock may be warranted in connection with any of the foregoing purposes.
27
<PAGE>
If the proposed amendment to the Charter is adopted, all or any of the
authorized shares of Common Stock may be issued in the future for such corporate
purposes and such consideration as the Board deems advisable from time to time,
without further action by the stockholders of the Company and without first
offering such shares to the stockholders for subscription. The issuance of
shares otherwise than on a pro rata basis to all current stockholders would
reduce the current stockholders' proportionate interests in the Company and
could therefore be dilutive to the financial and voting interests of current
stockholders. However, in any such event, stockholders wishing to maintain their
interests may be able to do so through normal market purchases. The Company does
not believe that the issuance of authorized, unissued Common Stock will have any
other effect on the rights of holders of the Common Stock.
ADOPTION OF AMENDMENT TO THE CHARTER BY STOCKHOLDERS
The affirmative vote of a majority of the votes represented by the shares of
Common Stock, the Special Voting Share and the Series A Conversion Shares,
voting together as one class, that are entitled to vote at the Annual Meeting is
required for adoption of the proposed amendment to the Charter. If the proposed
amendment is adopted by the stockholders, it will become effective upon filing
and recording a Certificate of Amendment as required by the Delaware General
Corporation Law.
BOARD RECOMMENDATION
The Board of Directors believes the amendment to the Charter is in the best
interests of the Company and its stockholders and therefore recommends that the
stockholders vote FOR this proposal.
PROPOSAL 5. OTHER BUSINESS
The Company does not know of any matters that 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 1999 ANNUAL MEETING
It is currently anticipated that the 1999 Annual Meeting of Stockholders of
the Company will be held on or about May 21, 1999. Stockholder proposals
intended to be presented at such Annual Meeting must be received by the Company
not later than December 3, 1998 for inclusion in the proxy materials for such
Annual Meeting.
By Order of the Board of Directors
NEAL S. WINNEG
Secretary
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THE LEARNING COMPANY, INC.
LONG TERM EQUITY INCENTIVE PLAN
RESTATED AS OF FEBRUARY 26, 1998
1. PURPOSE; DEFINITIONS.
A. PURPOSE. The purpose of the Plan is to provide selected eligible
employees of, and consultants to, The Learning Company, Inc., a Delaware
corporation, its Subsidiaries (as defined herein) and Affiliates (as defined
herein) an opportunity to participate in The Learning Company, Inc.'s future by
offering them long-term, performance-based and other incentives and equity
interests in The Learning Company, Inc. so as to retain, attract and motivate
management personnel.
B. DEFINITIONS. For purposes of the Plan, the following terms have the
following meanings:
1. "AFFILIATE" means a parent or subsidiary corporation, as defined in the
applicable provisions (currently Section 425) of the Code.
2. "ANNUAL BASE SALARY" with respect to a participant who is a Covered
Employee as of the end of the year shall mean the annual rate of base salary of
such participant as in effect as of the first day of any year, without regard to
any optional or mandatory deferral of base salary pursuant to a salary deferral
arrangement.
3. "AWARD" means any award under the Plan, including any Option, Stock
Appreciation Right, Restricted Stock, Stock Purchase Right, or Performance Share
Award.
4. "AWARD AGREEMENT" means, with respect to each Award, the signed written
agreement between the Company and the Plan participant setting forth the terms
and conditions of the Award.
5. "BOARD" means the Board of Directors of the Company.
6. "CHANGE IN CONTROL" has the meaning set forth in Section 10A.
7. "CHANGE IN CONTROL PRICE" has the meaning set forth in Section 10C.
8. "CODE" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor.
9. "COMMISSION" means the Securities and Exchange Commission and any
successor agency.
10. "COMMITTEE" means the Committee referred to in Section 2, or the Board
in its capacity as administrator of the Plan in accordance with Section 2.
11. "COMPANY" means The Learning Company, Inc., a Delaware corporation.
12. "COVERED EMPLOYEE" has the meaning set forth in Section 162(m)(3) of the
Code.
13. [Intentionally Omitted]
14. "DISABILITY" means permanent and total disability as determined by the
Committee for purposes of the Plan.
15. "DISINTERESTED PERSON" has the meaning set forth in Rule 16b-3(d)(3)
under the Exchange Act and any successor definition adopted by the Commission.
16. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor.
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17. "FAIR MARKET VALUE" means as of any given date:
(a) If the Stock is listed on any established stock exchange or a
national market system, including without limitation the Nasdaq National
Market, the closing sale price for the Stock or the closing bid, if no sales
are reported, as quoted on such system or exchange (or the largest such
exchange) for the date the value is to be determined (or if there are no
sales for such date, then for the last preceding business day on which there
were sales), as reported in the WALL STREET JOURNAL or similar publication.
(b) If the Stock is regularly quoted by a recognized securities dealer
but selling prices are not reported, the mean between the high bid and low
asked prices for the Stock on the date the value is to be determined (or if
there are no quoted prices for the date of grant, then for the last
preceding business day on which there were quoted prices).
(c) In the absence of an established market for the Stock, as determined
in good faith by the Committee, with reference to the Company's net worth,
prospective earning power, dividend-paying capacity, and other relevant
factors, including the goodwill of the Company, the economic outlook in the
Company's industry, the Company's position in the industry and its
management and the values of stock of other corporations in the same or a
similar line of business.
18. "INCENTIVE STOCK OPTION" means any Option intended to be and designated
as an "Incentive Stock Option" within the meaning of Section 422 of the Code.
18A. "NON-EMPLOYEE DIRECTOR" has the meaning set forth in Rule 16b-3 under
the Exchange Act and any successor definition adopted by the Commission.
19. "NON-QUALIFIED STOCK OPTION" means any Option that is not an Incentive
Stock Option.
20. "OUTSIDE DIRECTOR" has the meaning set forth in Section 162(m).
21. "OPTION" means an Option granted under Section 5.
22. "PERFORMANCE SHARE" means the equivalent, as of any time such assessment
is made, of the Fair Market Value of one share of Stock.
23. "PERFORMANCE SHARE AWARD" means an Award under Section 9.
24. "PLAN" means this Learning Company, Inc. Long Term Equity Incentive
Plan, as amended from time to time.
25. "PRE-TAX PROFIT" shall mean the net profit before income taxes of the
Company for each year determined in accordance with generally accepted
accounting principles and reported upon by the Company's independent
accountants.
26. "RESTRICTED STOCK" means an Award of Stock subject to restrictions, as
more fully described in Section 7.
27. "RULE 16B-3" means Rule 16b-3 under Section 16(b) of the Exchange Act,
as amended from time to time, and any successor rule.
28. "SECTION 162(M)" means Section 162(m) of the Code, as amended from time
to time, and any successor provision.
29. "STOCK" means the Common Stock, $0.01 par value, of the Company, and any
successor security.
30. "STOCK APPRECIATION RIGHT" means an Award granted under Section 6.
31. "STOCK PURCHASE RIGHT" means an Award granted under Section 8.
32. "SUBSIDIARY" has the meaning set forth in Section 425 of the Code.
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33. "TERMINATION" means, for purposes of the Plan, with respect to a
participant, that the participant has ceased to be, for any reason, with or
without cause, an employee of, or a consultant to, the Company, or a Subsidiary
or Affiliate of the Company, such that such participant is neither an employee
of, or a consultant to, the Company, a Subsidiary, or any Affiliate.
2. ADMINISTRATION.
A. COMMITTEE. The Plan shall be administered by the Board or, upon
delegation by the Board, by a committee of the Board comprised of not less than
two members (i) each member of which shall be, to the extent required to comply
with Rule 16b-3 and unless the Committee determines that Rule 16b-3 is not
applicable to the Plan, a Non-Employee Director, and (ii) each member of which
shall be, to the extent required to comply with Section 162(m) and unless the
Committee determines that Rule 162(m) is not applicable to the Plan, an Outside
Director. In connection with the administration of the Plan, the Committee shall
have the powers possessed by the Board. The Committee may act only by a majority
of its members, except that the Committee (i) may authorize any one or more of
its members or any officer of the Company to execute and deliver documents on
behalf of the Committee and (ii) so long as not otherwise required for the Plan
to comply with Rule 16b-3 (unless the Committee determines that Rule 16b-3 is
not applicable to the Plan) and so long as not otherwise required for the Plan
to comply with Section 162(m) (unless the Committee determines that Section
162(m) is not applicable to the Plan), may delegate to one or more officers or
directors of the Company authority to grant Awards to persons who are not
subject to Section 16 of the Exchange Act with respect to Stock and who are not
Covered Employees. The Board at any time may abolish the Committee and revest in
the Board the administration of the Plan.
B. AUTHORITY. The Committee shall grant Awards to eligible employees and
consultants. In particular and without limitation, the Committee, subject to the
terms of the Plan, shall:
1. Select the officers, other employees and consultants to whom Awards may
be granted;
2. Determine whether and to what extent Awards are to be granted under the
Plan;
3. Determine the number of shares to be covered by each Award granted under
the Plan;
(a) determine the terms and conditions of any Award granted under the
Plan and any related loans to be made by the Company, based upon factors
determined by the Committee;
(b) determine to what extent and under what circumstances any Award
payments may be deferred by a Plan participant; and
4. Make adjustments in the Performance Goals (as hereinafter defined) in
recognition of unusual or non-recurring events affecting the Company or the
financial statements of the Company, or in response to changes in applicable
laws, regulations, or accounting principles.
C. COMMITTEE DETERMINATIONS BINDING. The Committee may adopt, alter and
repeal administrative rules, guidelines and practices governing the Plan as it
from time to time shall deem advisable, interpret the terms and provisions of
the Plan, any Award, any Award Agreement and otherwise supervise the
administration of the Plan. Any determination made by the Committee pursuant to
the provisions of the Plan with respect to any Award shall be made in its sole
discretion at the time of the grant of the Award or, unless in contravention of
any express term of the Plan or Award, at any later time. All decisions made by
the Committee under the Plan shall be binding on all persons, including the
Company and Plan participants.
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3. STOCK SUBJECT TO PLAN.
A. NUMBER OF SHARES. The total number of shares of Stock reserved and
available for issuance pursuant to Awards under the Plan shall be 9,000,000
shares. Such shares may consist, in whole or in part, of authorized and unissued
shares or shares reacquired in private transactions or open market purchases,
but all shares issued under the Plan regardless of source shall be counted
against the 9,000,000 share limitation. If any Option terminates or expires
without being exercised in full or if any shares of Stock subject to an Award
are forfeited or if an Award otherwise terminates without a payment being made
to the participant in the form of Stock, the shares issuable under such Option
or Award shall again be available for issuance in connection with Awards;
provided that, to the extent required for the Plan to comply with Rule 16b-3, in
the case of forfeiture, cancellation, exchange or surrender of shares of
Restricted Stock, the number of shares with respect to such Awards shall not be
available for Awards hereunder unless dividends paid on such shares are also
forfeited, canceled, exchanged or surrendered. If any shares of Stock subject to
an Award are repurchased by the Company, the shares issuable under such Award
shall again be available for issuance in connection with Awards other than
Options and Stock Appreciation Rights. To the extent an Award is paid in cash,
the number of shares of Stock representing, at Fair Market Value on the date of
the payment, the value of the cash payment shall not be available for later
grant under the Plan.
B. INDIVIDUAL LIMITS. In any year during the term of this Plan (commencing
January 1, 1995), no Plan participant can receive stock-based Awards including
Options, Stock Appreciation Rights which are granted without reference to an
Option, Restricted Stock, Stock Purchase Rights and Performance Shares, relating
to shares of Stock which in the aggregate exceed 20% of the total number of
shares of Stock authorized pursuant to the Plan, as adjusted pursuant to the
terms hereof.
C. ADJUSTMENTS. In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, spin-off, sale of substantial
assets or other change in corporate structure affecting the Stock, such
substitution or adjustments shall be made in the aggregate number and kind of
shares of Stock reserved for issuance under the Plan, in the number, kind and
exercise price of shares subject to outstanding Options, in the number, kind and
purchase price of shares subject to outstanding Stock Purchase Rights and in the
number and kind of shares subject to other outstanding Awards, as may be
determined to be appropriate by the Committee in its sole discretion; provided
that the number and kind of shares subject to any Award shall always be rounded
down to the nearest whole number; and provided further that with respect to
Incentive Stock Options, such adjustment shall be made in accordance with
Section 424 of the Code. Such adjusted exercise price shall also be used to
determine the amount payable by the Company upon the exercise of any Stock
Appreciation Right associated with any Option.
4. ELIGIBILITY.
Awards may be granted to officers and other employees of, and consultants
to, the Company, its Subsidiaries and its Affiliates (excluding any person who
serves only as a director).
5. STOCK OPTIONS.
A. TYPES. Any Option granted under the Plan shall be in such form as the
Committee may from time to time approve. The Committee shall have the authority
to grant to any Plan participant Incentive Stock Options, Non-Qualified Stock
Options, or any type of Option (in each case with or without Stock Appreciation
Rights). Incentive Stock Options may be granted only to employees of the
Company, its parent (within the meaning of Section 425 of the Code) or its
Subsidiaries. Any portion of an Option that does not qualify as an Incentive
Stock Option shall constitute a Non-Qualified Stock Option.
B. TERMS AND CONDITIONS. Options granted under the Plan shall be subject to
the following terms and conditions:
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1. OPTION TERM. The term of each Option shall be fixed by the Committee,
but no Incentive Stock Option shall be exercisable more than ten years after
the date the Option is granted, and no Non-Qualified Stock Option shall be
exercisable more than 11 years after the date the Option is granted. If, at
the time the Company grants an Incentive Stock Option, the optionee owns
directly or by attribution stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any
Affiliate of the Company, the Incentive Stock Option shall not be
exercisable more than five years after the date of grant.
2. GRANT DATE. The Company may grant Options under the Plan at any time
and from time to time before the Plan terminates. The Committee shall
specify the date of grant or, if it fails to do so, the date of grant shall
be the date of action taken by the Committee to grant the Option; provided
that no Option may be exercised prior to execution of the applicable Award
Agreement. However, if an Option is approved in anticipation of employment,
the date of grant shall be the date the intended optionee is first treated
as an employee for payroll purposes.
3. EXERCISE PRICE. The exercise price per share of Stock purchasable
under a Non-Qualified Stock Option shall be equal to at least 50%, and not
more than 100%, of the Fair Market Value on the date of grant, provided that
no Option granted to an employee whom the Committee determines is likely to
be a Covered Employee at the end of the year shall have an exercise price
below 100% of Fair Market Value on the date of grant. The exercise price per
share of Stock purchasable under an Incentive Stock Option shall be equal to
at least the Fair Market Value on the date of grant; provided that if at the
time the Company grants an Incentive Stock Option, the optionee owns
directly or by attribution stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any
Affiliate of the Company the exercise price shall be not less than 110% of
the Fair Market Value on the date the Incentive Stock Option is granted.
4. EXERCISABILITY. Subject to the other provisions of the Plan, an
Option shall be exercisable in its entirety at the time of grant or at such
times and in such amounts as are specified in the Award Agreement evidencing
the Option. The Committee, in its absolute discretion, at any time may waive
any limitations respecting the time at which an Option first becomes
exercisable in whole or in part.
5. METHOD OF EXERCISE; PAYMENT. To the extent the right to purchase
shares has accrued, Options may be exercised, in whole or in part, from time
to time, by written notice from the optionee to the Company stating the
number of Shares being purchased, accompanied by payment of the exercise
price for the shares. The Committee, in its discretion, may elect at the
time of Option exercise that any Non-Qualified Stock Option be settled in
cash rather than Stock.
6. NO DISQUALIFICATION. Notwithstanding any other provision in the Plan,
no term of the Plan relating to Incentive Stock Options shall be
interpreted, amended or altered nor shall any discretion or authority
granted under the Plan be exercised so as to disqualify the Plan under
Section 422 of the Code or, without the consent of the optionee affected, to
disqualify any Incentive Stock Option under such Section 422.
6. STOCK APPRECIATION RIGHTS.
A. RELATIONSHIP TO OPTIONS; NO PAYMENT BY PARTICIPANT. A Stock Appreciation
Right may be awarded either (i) with respect to Stock subject to an Option held
by a participant or (ii) without reference to an Option. If an Option is an
Incentive Stock Option, a Stock Appreciation Right granted with respect to such
Option may be granted only at the time of grant of the related Incentive Stock
Option, but if the Option is a Non-Qualified Stock Option, the Stock
Appreciation Right may be granted either simultaneously with the grant of the
related Non-Qualified Stock Option or at any time during the term of such
related Non-Qualified Stock Option. No consideration shall be paid by a
participant with respect to a Stock Appreciation Right.
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B. WHEN EXERCISABLE. A Stock Appreciation Right shall be exercisable at such
times and in whole or in part, each as determined by the Committee, subject,
with respect to Plan participants subject to Section 16(b) of the Exchange Act,
to Rule 16b-3. Any exercise by the participant of a Stock Appreciation Right for
cash shall be made only during the window period specified in Rule
16b-3(e)(3)(iii) and any successor rule (the "Window Period"), unless the
Committee determines that Rule 16b-3 is not applicable to the Plan. If a Stock
Appreciation Right is granted with respect to an Option, unless the Award
Agreement otherwise provides, the Stock Appreciation Right may be exercised only
to the extent to which shares covered by the Option are not at the time of
exercise subject to repurchase by the Company.
C. EFFECT ON RELATED RIGHT; TERMINATION OF STOCK APPRECIATION RIGHT. If a
Stock Appreciation Right granted with respect to an Option is exercised, the
Option shall cease to be exercisable and shall be canceled to the extent of the
number of shares with respect to which the Stock Appreciation Right was
exercised. Upon the exercise or termination of an Option, related Stock
Appreciation Rights shall terminate to the extent of the number of shares as to
which the Option was exercised or terminated, except that, unless otherwise
determined by the Committee at the time of grant, a Stock Appreciation Right
granted with respect to less than the full number of shares covered by a related
Option shall not be reduced until the number of shares covered by exercise or
termination of the related Option exceeds the number of shares not covered by
the Stock Appreciation Right. A Stock Appreciation Right granted independently
from an Option shall terminate and shall be no longer exercisable at the time
determined by the Committee at the time of grant, but not later than 10 years
from the date of grant. Upon the Termination of the participant, a Stock
Appreciation Right granted with respect to an Option shall be exercisable only
to the extent to which the Option is then exercisable.
D. FORM OF PAYMENT UPON EXERCISE. Despite any attempt by a Plan participant
to elect payment in a particular form upon exercise of a Stock Appreciation
Right, the Committee, in its discretion, may elect to cause the Company to pay
cash, Stock, or a combination of cash and Stock upon exercise of the Stock
Appreciation Right.
E. AMOUNT OF PAYMENT UPON EXERCISE. Upon the exercise of a Stock
Appreciation Right, the Plan participant shall be entitled to receive one of the
following payments, as determined by the Committee under Section 6D. hereof:
1. STOCK. That number of whole shares of Stock equal to the number
computed by dividing (A) an amount (the "Stock Appreciation Right Spread"),
rounded to the nearest whole dollar, equal to the product computed by
multiplying (x) the excess of (1) if the Stock Appreciation Right may only
be exercised during the Window Period, the highest Fair Market Value on any
day during the Window Period, and otherwise, the Fair Market Value on the
date the Stock Appreciation Right is exercised, over (2) the exercise price
per share of Stock of the related Option, or in the case of a Stock
Appreciation Right granted without reference to an Option, such other price
as the Committee establishes at the time the Stock Appreciation Right is
granted, by (y) the number of shares of Stock with respect to which a Stock
Appreciation Right is being exercised by (B) (1) if the Stock Appreciation
Right may only be exercised during the Window Period, the highest Fair
Market Value during the Window Period in which the Stock Appreciation Right
was exercised, and (2) otherwise, the Fair Market Value on the date the
Stock Appreciation Right is exercised; plus, if the foregoing calculation
yields a fractional share, an amount of cash equal to the applicable Fair
Market Value multiplied by such fraction (such payment to be the difference
of the fractional share); or
2. CASH. An amount in cash equal to the Stock Appreciation Right Spread;
or
3. CASH AND STOCK. A combination of cash and Stock, the combined value of
which shall equal the Stock Appreciation Right Spread.
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7. RESTRICTED STOCK.
Shares of Restricted Stock shall be subject to the following terms and
conditions:
A. PRICE. Plan participants awarded Restricted Stock, within 45 days of
receipt of the applicable Award Agreement, which in no event shall be later than
ten (10) days after the Award grant date, shall pay to the Company, if required
by applicable law, an amount equal to the par value of the Stock subject to the
Award. If such payment is not made and received by the Company by such date, the
Award of Restricted Stock shall lapse.
B. RESTRICTIONS. Subject to the provisions of the Plan and the Award
Agreement, during a period set by the Committee, commencing with, and not
exceeding 10 years from, the date of such award (the "Restriction Period"), the
Plan participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock. Within these limits, the
Committee may in its discretion provide for the lapse of such restrictions in
installments and may accelerate or waive such restrictions, in whole or in part,
based on service, performance or such other factors or criteria as the Committee
may determine.
C. DIVIDENDS. Unless otherwise determined by the Committee, cash dividends
with respect to shares of Restricted Stock shall be automatically reinvested in
additional Restricted Stock, and dividends payable in Stock shall be paid in the
form of Restricted Stock.
D. TERMINATION. Except to the extent otherwise provided in the Award
Agreement and pursuant to Section 7B., upon termination of a Plan participant's
employment for any reason during the Restriction Period, all shares still
subject to restriction shall be forfeited by the participant.
E. SPECIAL PROVISIONS REGARDING AWARDS. Notwithstanding anything to the
contrary contained in this Section 7, all awards of Restricted Stock granted
pursuant to this Section 7 to participants who are employees whom the Committee
determines are likely to be Covered Employees at the end of the year shall have
restrictions which will lapse contingent on the attainment of such performance
goals as may be established by the Committee which may be based on earnings,
earnings growth, revenues, gross margin, expenses, market share, improvement of
financial ratings or achievement of balance sheet or income statement objectives
and may be absolute in their terms or measured against or in relationship to
other companies comparably or similarly situated. Such performance goals may be
particular to a participant or the division, department, line of business,
subsidiary or other unit in which the participant works, or may be based on the
performance of the Company generally, and may cover such period as may be
specified by the Committee. Notwithstanding the foregoing, all performance
objectives shall comply with the provisions of Section 162(m) of the Code and
the regulations promulgated thereunder.
F. TIME AND FORM OF PAYMENT. In the case of Plan participants who are
Covered Employees as of the end of the year, unless otherwise determined by the
Committee, shares of Restricted Stock shall be released from restrictions only
after achievement of the applicable performance goals has been certified by the
Committee.
8. STOCK PURCHASE RIGHTS.
A. PRICE. The Committee may grant Stock Purchase Rights which shall enable
the recipients to purchase Stock at a price equal to not less than 50%, and not
more than 100%, of Fair Market Value on the date of grant.
B. EXERCISABILITY. Stock Purchase Rights shall be exercisable for a period
determined by the Committee not exceeding 30 days from the date of grant. The
Committee, however, may provide that, if required under Rule 16b-3, Stock
Purchase Rights granted to persons subject to Section 16(b) of the Exchange Act
shall not become exercisable until six months and one day after the grant date
and shall then be exercisable for 10 trading days at the purchase price
specified by the Committee in accordance with Section 8A.
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C. SPECIAL PROVISIONS REGARDING AWARDS. In no event shall any awards be
granted under this Section 8 to an employee who the Committee determines is
likely to be a Covered Employee at the end of the year.
9. PERFORMANCE SHARES.
A. AWARDS. The Committee shall determine the nature, length (which shall in
no event be greater than 10 years) and starting date of the performance (the
"Performance Period") for each Performance Share Award. The consideration
payable to a participant with respect to a Performance Share Award shall be an
amount determined by the Committee in the exercise of the Committee's discretion
at the time of the Award; provided that the amount of consideration may be zero
and may in no event exceed 50% of a Plan participant's Annual Base Salary at the
time of grant. The Committee shall determine the performance objectives to be
used in awarding Performance Shares (the "Performance Goals") and the extent to
which such Performance Shares have been earned. Performance Periods may overlap
and participants may participate simultaneously with respect to Performance
Share Awards that are subject to different Performance Periods and different
performance factors and criteria. At the beginning of each Performance Period,
the Committee shall determine for each Performance Share Award subject to such
Performance Period the number of shares of Stock (which may constitute
Restricted Stock) to be awarded to the participant at the end of the Performance
Period if and to the extent that the relevant measures of performance for such
Performance Share Award are met. Such number of shares of Stock may be fixed or
may vary in accordance with such performance or other criteria as may be
determined by the Committee. The Committee may provide that amounts equivalent
to interest at such rates as the Committee may determine or amounts equivalent
to dividends paid shall be payable with respect to Performance Share Awards. In
addition to the provisions set forth in Section 11J., the Committee, in its
discretion, may modify the terms of any Performance Share Award (except for
those Participants who are Covered Employees), including the specification and
measurement of performance goals.
B. TERMINATION OF EMPLOYMENT. Except as otherwise provided in the Award
Agreement or determined by the Committee, in the event of Termination during a
Performance Period for any reason, then the Plan participant shall not be
entitled to any payment with respect to the Performance Shares subject to the
Performance Period.
C. FORM OF PAYMENT. Payment shall be made in the form of cash or whole
shares of Stock as the Committee, in its discretion, shall determine.
D. SPECIAL PROVISIONS REGARDING AWARDS. In no event shall any awards be
granted under this Section 9 to an employee whom the Committee determines is
likely to be a Covered Employee at the end of the year.
10. CHANGE IN CONTROL.
A. DEFINITION OF "CHANGE IN CONTROL". For purposes of Section 1B., a "Change
in Control" means the occurrence of either of the following:
1. Any "person", as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company, a Company Subsidiary, a Company
Affiliate, or a Company employee benefit plan, including any trustee of such
plan acting as trustee) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company (or a successor to the Company) representing 35% or more of the
combined voting power of the then outstanding securities of the Company or
such successor; or
2. At any time that the Company has registered shares under the Exchange
Act, at least 40% of the directors of the Company constitute persons who
were not at the time of their first election to the Board, candidates
proposed by a majority of the Board in office prior to the time of such
first election; or
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3. The dissolution of the Company or liquidation of more than 50% in
value of the Company or a sale of assets involving 50% or more in value of
the assets of the Company, (x) any merger or reorganization of the Company
whether or not another entity is the survivor, (y) a transaction pursuant to
which the holders, as a group, of all of the shares of the Company
outstanding prior to the transaction hold, as a group, less than 50% of the
combined voting power of the Company or any successor company outstanding
after the transaction, or (z) any other event which the Board determines, in
its discretion, would materially alter the structure of the Company or its
ownership.
B. IMPACT OF EVENT. Except as expressly provided in any Award agreement, in
the event of a "Change in Control" as defined in Section 10A, the following
provisions shall apply:
1. Any Stock Appreciation Rights and Options outstanding as of the date
such Change in Control is determined to have occurred and not then
exercisable and vested shall become fully exercisable and vested; provided,
that in the case of the holder of Stock Appreciation Rights who is actually
subject to Section 16(b) of the Exchange Act, such Stock Appreciation Rights
shall have been outstanding for at least six months at the date such Change
in Control is determined to have occurred;
2. The restrictions and limitations applicable to any Restricted Stock
and Stock Purchase Rights shall lapse and such Restricted Stock shall become
fully vested;
3. The value (net of any exercise price and required tax withholdings)
of all outstanding Options, Stock Appreciation Rights, Restricted Stock, and
Stock Purchase Rights, unless otherwise determined by the Committee at or
after grant and subject to Rule 16b-3, shall be cashed out on the basis of
the "Change in Control Price," as defined in Section 11C., as of the date
such Change in Control is determined to have occurred or such other date as
the Board may determine prior to the Change in Control;
4. Any outstanding Performance Share Awards shall be vested and paid in
full as if all performance criteria had been met; provided, however, that
the foregoing provision shall only apply, with respect to the events
described in Section 10A.1, 10A.3(x), 10A.3(z), and 10A.4, if and to the
extent so specifically determined by the Committee in the exercise of the
Committee's discretion, which determination may be amended or reversed only
by the affirmative vote of a majority of the persons who were directors at
the time such determination was made.
C. CHANGE IN CONTROL PRICE. For purposes of this Section 10, "Change in
Control Price" means the highest price per share paid in any transaction
reported on any established stock exchange, national market system or other
established market for the Stock, or paid or offered in any bona fide
transaction related to a potential or actual Change in Control of the Company at
any time during the preceding 60-day period as determined by the Committee,
except that in the case of Incentive Stock Options and Stock Appreciation Rights
relating to Incentive Stock Options, such price shall be based only on
transactions reported for the date on which the Board decides to cash out such
Options.
11. GENERAL PROVISIONS.
A. AWARD GRANTS. Any Award may be granted either alone or in addition to
other Awards granted under the Plan. Subject to the terms and restrictions set
forth elsewhere in the Plan, the Committee shall determine the consideration, if
any, payable by the participant for any Award and, in addition to those set
forth in the Plan, any other terms and conditions of the Awards. The Committee
may condition the grant or payment of any Award upon the attainment of
Performance Goals or such other factors or criteria, including vesting based on
continued employment or consulting, as the Committee shall determine.
Performance Goals may vary from Plan participant to Plan participant and among
groups of Plan participants and shall be based upon such Company, subsidiary,
group or division factors or criteria as the Committee may deem appropriate,
including, but not limited to, earnings per share or return on equity (except as
otherwise required for Plan participants who are Covered Employees as of the end
of the year in
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order to comply with Section 162(m)). The other provisions of Awards also need
not be the same with respect to each recipient. Unless otherwise specified in
the Plan or by the Committee, the date of grant of an Award shall be the date of
action by the Committee to grant the Award. The Committee may also substitute
new Options for previously granted Options, including previously granted Options
having higher exercise prices.
B. TYPES OF SHARES. The Committee, in its discretion, may determine at the
time of an Award that in lieu of Stock there shall be issuable under, or
applicable to the measurement of, any Award any of the following: (i) Restricted
Stock; (ii) shares of any series of common stock of the Company other than Stock
and shares of any series of common stock of any Subsidiary or Affiliate of the
Company ("Common Shares"); or (iii) shares of any series of preferred stock of
the Company ("Preferred Shares"); provided that (A) with respect to shares
issuable upon exercise of Incentive Stock Options, Common Shares and Preferred
Shares shall be limited to shares of any Subsidiary authorized as of the date
the Plan is approved by the Board and (B) with respect to shares issuable upon
exercise of Non-Qualified Stock Options and Stock Appreciation Rights, Common
Shares and Preferred Shares shall be limited to shares of any Subsidiary or
Affiliate of the Company. In such event, the Committee shall determine the
number of shares of Stock equivalent to such Restricted Stock, Common Shares or
Preferred Shares for the purpose of calculating the shares of Stock issued under
the Plan; provided that a Common Share or a Preferred Share in no event shall be
deemed equal to less than one share of Stock.
C. AWARD AGREEMENT. As soon as practicable after the date of an Award grant,
the Company and the participant shall enter into a written Award Agreement
specifying the date of grant and the terms and conditions of the Award.
D. CERTIFICATES. All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Commission, any stock exchange upon
which the Stock is then listed, any national market system over which the Stock
is then quoted and any applicable federal, state or foreign securities law.
E. TERMINATION. With respect to Awards (other than Options), in the event of
Termination for any reason other than death or Disability, Awards held at the
date of Termination (and only to the extent then exercisable or payable, as the
case may be) may be exercised in whole or in part at any time within 90 days
after the date of Termination, or such lesser period specified in the Award
Agreement (but in no event after the expiration date of the Award), but not
thereafter. With respect to Options, in the event of Termination for any reason
other than death or Disability, Options held at the date of Termination (to the
extent then exercisable) may be exercised in whole or in part within 90 days
after the date of Termination, or such other period (which may be longer or
shorter than 90 days) which shall be specified in the Award Agreement (but in no
event shall any Option remain exercisable after the expiration date of such
Option). If Termination is due to death or Disability, or a participant dies or
becomes disabled within the period that the Award remains exercisable or
payable, as the case may be, after Termination, only Awards (including Options)
held at the date of death or Disability (and only to the extent then exercisable
or payable, as the case may be) may be exercised in whole or in part by the
participant in the case of Disability, by the participant's personal
representative or by the person to whom the Award is transferred by will or the
laws of descent and distribution, at any time within 18 months after the death
or one year after the Disability, as the case may be, of the participant (or
such other period which shall be specified in the Award Agreement, but in no
event shall any Award remain exercisable after the expiration of such Award). In
the event of Termination by reason of the participant's retirement (as
determined in the exercise of the Committee's sole discretion), Awards
(including Options) may be exercised in whole or in part at any time within two
years after the date of Termination (or such other period which shall be
specified in the Award Agreement, but in no event shall any Award remain
exercisable after the expiration date of such Award).
10
<PAGE>
F. DELIVERY OF PURCHASE PRICE. Plan participants shall make all or any
portion of any payment due to the Company with respect to the consideration
payable for, upon exercise of, or for federal, state, local or foreign tax
payable in connection with, an Award by delivery of cash; and if and only to the
extent authorized by the Committee, all or any portion of such payment may be
made by delivery of any property (including without limitation a promissory note
of the participant or shares of Stock or other securities and, in the case of an
Option, surrender of shares issuable upon exercise of that Option) other than
cash, so long as, if applicable, such property constitutes valid consideration
for the Stock under applicable law. To the extent participants may make payments
due to the Company upon grant or exercise of Awards by the delivery of shares of
Stock or other securities, the Committee, in its discretion, may permit
participants constructively to deliver for any such payment securities of the
Company held by the participant for at least three months. Constructive delivery
shall be effected by (i) identification by the participant of shares intended to
be delivered constructively, (ii) confirmation by the Company of participant's
ownership of such shares (for example, by reference to the Company's stock
records, or by some other means of verification) and (iii) if applicable, upon
exercise, delivery to the participant of a certificate for that number of shares
equal to the number of shares for which the Award is exercised less the number
of shares constructively delivered.
G. TAX WITHHOLDING. If and to the extent authorized by the Committee in its
discretion, a person who has received an Award or payment under an Award may
make an election to deliver to the Company a promissory note of the Plan
participant on the terms set forth in Section 11F or to have shares of Stock or
other securities of the Company withheld by the Company or to tender any such
securities to the Company to pay the amount of tax that the Committee in its
discretion determines to be required to be withheld by the Company.
1. Such election shall be irrevocable;
2. Such election shall be subject to the disapproval of the Committee;
3. In the case of participants subject to Section 16(b) of the Exchange
Act, the election and the exercise of the Award may not be made within
six months after the grant of the Award (and in the case of a Stock
Appreciation Right, any related Award) to be exercised (except that this
limitation shall not apply in the event of death or Disability of such
person before the six-month period expires); and
4. In the case of participants subject to Section 16(b) of the Exchange
Act, such election may be made either (A) at least six months before the
date that the amount of tax to be withheld in connection with such
exercise is determined or (B) in any ten-day period beginning on the
third business day following the date of release for publication of
quarterly or annual summary statements of sales and earnings.
Any shares or other securities so withheld or tendered will be valued by the
Committee as of the date they are withheld or tendered; provided, that Stock
shall be valued at the Fair Market Value on such date. The value of the shares
withheld or tendered may not exceed the required federal, state, local and
foreign withholding tax obligations as computed by the Company. Unless the
Committee permits otherwise, the Plan participant shall pay to the Company in
cash, promptly when the amount of such obligations becomes determinable, all
applicable federal, state, local and foreign withholding taxes that the
Committee in its discretion determines to result from the lapse of restrictions
imposed upon an Award or upon exercise of an Award or from a transfer or other
disposition of shares acquired upon exercise or payment of an Award or otherwise
related to the Award or the shares acquired in connection with an Award.
H. TRANSFERABILITY. Unless otherwise provided in an Award Agreement, no
Award shall be assignable or otherwise transferable by the participant other
than by will or by the laws of descent and distribution, and, during the life of
the participant, an Award shall be exercisable, and any elections with respect
to an Award shall be made, only by the Plan participant or such participant's
guardian or legal representative.
11
<PAGE>
I. RIGHTS OF FIRST REFUSAL. At the time of grant, the Committee may provide
in connection with any Award that the shares of Stock received as a result of
such Award shall be subject to a right of first refusal pursuant to which the
participant shall be required to offer to the Company any shares that the
participant wishes to sell at the then Fair Market Value subject to such other
terms and conditions as the Committee may specify at the time of grant
J. ADJUSTMENT OF AWARDS; WAIVERS. The Committee may adjust the Performance
Goals and measurements applicable to Awards (i) to take into account changes in
law and accounting and tax rules, (ii) to make such adjustments as the Committee
deems necessary or appropriate to reflect the inclusion or exclusion of the
impact of extraordinary or unusual items, events, or circumstances in order to
avoid windfalls or hardships, (iii) to make such adjustments as the Committee
deems necessary or appropriate to reflect any material changes in business
conditions and (iv) in any other manner determined in its discretion. In the
event of hardship or other special circumstances of a participant and otherwise
in its discretion, the Committee may waive in whole or in part any or all
restrictions, conditions, vesting, or forfeiture with respect to any Award
granted to such Plan participant.
K. ELECTION TO DEFER PAYMENT. To the extent, if any, permitted by the
Committee, a Plan participant may elect, at such time as the Committee may in
its discretion specify, to defer payment of all or a portion of an Award.
L. NON-COMPETITION. The Committee may condition the Committee's
discretionary waiver of a forfeiture or vesting acceleration at the time of
Termination of a Plan participant holding any unexercised or unearned Award or
the waiver of restrictions upon any Award upon a requirement that such
participant agree to and actually (i) not engage in any business or activity
competitive with any business or activity conducted by the Company and (ii) be
available, unless such participant shall have died, for consultations at the
request of the Company's management, all on such terms and conditions (including
conditions in addition to (i) and (ii)) as the Committee may determine.
M. DIVIDENDS. The reinvestment of dividends in additional Stock or
Restricted Stock at the time of any dividend payment shall only be permissible
if sufficient shares of Stock are available under Section 3 for such
reinvestment (taking into account then outstanding Awards).
N. REGULATORY COMPLIANCE. Each Award under the Plan shall be subject to the
condition that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the shares of Stock upon any
securities exchange or under any state or federal law, (ii) the consent or
approval of any government or regulatory body, or (iii) an agreement or
representations by the participant with respect thereto, is necessary or
desirable, then such Award shall not be consummated in whole or in part unless
such listing, registration, qualification, consent, approval, agreement or
representations shall have been effected or obtained free of any conditions not
acceptable to the Committee.
O. RIGHTS AS STOCKHOLDER. Unless the Plan or the Committee expressly
specifies otherwise, a Plan participant shall have no rights as a stockholder
with respect to any shares covered by an Award until the participant is
entitled, under the terms of the Award, to receive such shares. Subject to
Sections 3B. and 7C., no adjustment shall be made for dividends or other rights
for which the record date is prior to the date the certificates are delivered.
P. BENEFICIARY DESIGNATION. The Committee, in its discretion, may establish
procedures for a participant to designate a beneficiary to whom any amounts
payable in the event of the participant's death are to be paid.
Q. ADDITIONAL PLANS. Nothing contained in the Plan shall prevent the Company
or a Subsidiary or Affiliate of the Company from adopting other or additional
compensation arrangements for its employees.
12
<PAGE>
R. NO EMPLOYMENT RIGHTS. The adoption of the Plan shall not confer upon any
employee any right to continued employment nor shall it interfere in any way
with the right of the Company or a Subsidiary or Affiliate of the Company to
terminate the employment of any employee at any time.
S. INTERPRETATION. Notwithstanding any provision of the Plan, the Plan shall
always be administered, and Awards shall always be granted and exercised, in
such a manner as to conform to the provisions of Rule 16b-3 and Section 162(m),
unless the Committee determines that Rule 16b-3 or Section 162(m) are not
applicable to the Plan. The Plan is designed and intended to comply with Rule
16b-3 and, to the extent applicable, with Section 162(m), and all provisions
hereof shall be construed in a manner to so comply.
T. GOVERNING LAW. The Plan and all Awards shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts.
U. USE OF PROCEEDS. All cash proceeds to the Company under the Plan shall
constitute general funds of the Company.
V. UNFUNDED STATUS OF PLAN. The Plan shall constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation of
trusts or arrangements to meet the obligations created under the Plan to deliver
Stock or make payments; provided, that unless the Committee otherwise
determines, the existence of such trusts or other arrangements shall be
consistent with the "unfunded" status of the Plan.
W. ASSUMPTION BY SUCCESSOR. The obligations of the Company under the Plan
and under any outstanding Award may be assumed by any successor corporation,
which for purposes of the Plan shall be included within the meaning of
"Company".
X. PLAN DESIGNATION AND STATUS. Notwithstanding the designation of this
document as a plan for convenience of reference and to standardize certain
provisions applicable to all types of Awards, each type of Award shall be deemed
to be a separate "plan" for purposes of Section 16 of the Exchange Act and any
applicable state securities laws.
12. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuance shall be made which would impair the rights of a
participant under an outstanding Award without the Plan participant's consent.
In addition, to the extent required for the Plan to comply with Rule 16b-3 or
Section 162(m) or, with respect to provisions solely as they relate to Incentive
Stock Options, to the extent required for the Plan to comply with Section 422A
of the Code, the Board may not amend or alter the Plan without the approval of a
majority of the votes cast at a duly held stockholders' meeting at which a
quorum of the voting power of the Company is represented in person or by proxy,
where such amendment or alteration would:
A. Except as expressly provided in the Plan, increase the total number of
shares reserved for issuance pursuant to Awards under the Plan;
B. Except as expressly provided in the Plan, change the minimum price terms
of Section 5B.3 or Section 8A;
C. Change the class of employees and consultants eligible to participate in
the Plan;
D. Extend the maximum Option term under Section 5B. or the maximum exercise
period under Section 8B.; or
E. Materially increase the benefits accruing to participants under the Plan.
The Board of Directors may, at any time without stockholder approval, amend
the Plan and the terms of any Award outstanding under the Plan, provided that
such amendment is designed to maximize federal
13
<PAGE>
income tax benefits accorded to Awards or, if the Committee determines that Rule
16b-3 is applicable to the Plan, to comply with Rule 16b-3 and provided further
that with respect to outstanding Awards, the Plan participant consents to such
amendment.
13. EFFECTIVE DATE OF PLAN.
The Plan, and any amendments thereto, shall be effective on the date the
same is adopted by the Board, but all Awards shall be conditioned upon approval
of the Plan, and any amendment thereto requiring such approval, at a duly held
stockholders' meeting by the affirmative vote of the holders of shares
representing a majority of the voting power of the Company represented in person
or by proxy and entitled to vote at the meeting.
14. TERM OF PLAN.
No Award shall be granted on or after July 1, 2000, but Awards granted prior
to July 1, 2000 (including, without limitation, Performance Share Awards for
Performance Periods commencing prior to July 1, 2000) may extend beyond that
date.
14
<PAGE>
THE LEARNING COMPANY, INC.
ONE ATHENAEUM STREET
CAMBRIDGE, MASSACHUSETTS 02142
PROXY CARD FOR THE MAY 21, 1998
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 April 2, 1998, 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 May 21, 1998, at 9:00 a.m. local time, and any adjournment thereof, with
respect to all shares of common stock, par value $.01 per share (the "Common
Stock"), held of record by the undersigned on March 26, 1998, with all the
powers that the undersigned would possess if personally present and acting, as
follows:
THIS PROXY WILL BE VOTED AS DIRECTED BUT IN THE ABSENCE OF SUCH DIRECTION,
IT WILL BE VOTED FOR ITEMS 1-4 BELOW. AS TO ANY OTHER MATTERS THAT MAY PROPERLY
COME BEFORE THE ANNUAL MEETING, PROXIES WILL BE VOTED IN THE DISCRETION OF THE
PROXY HOLDERS.
1. To elect Lamar Alexander, Michael A. Bell, Anthony J. DiNovi, James C.
Dowdle, Robert Gagnon, Mark E. Nunnelly, Kevin O'Leary, Michael J. Perik,
Carolynn Reid-Wallace, Robert A. Rubinoff, Scott M. Sperling and Paul J.
Zepf 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 / / WITHHELD
/ /
-----------------------------------------------------
FOR ALL NOMINEES EXCEPT AS NOTED ABOVE
<PAGE>
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 2,
1999.
/ / FOR / / AGAINST / / ABSTAIN
3. TO APPROVE AN AMENDMENT TO THE COMPANY'S LONG TERM EQUITY INCENTIVE PLAN.
/ / FOR / / AGAINST / / ABSTAIN
4. TO APPROVE AN AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF THE COMPANY'S
COMMON STOCK FROM 120,000,000 TO 200,000,000.
/ / FOR / / AGAINST / / ABSTAIN
5. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL
MEETING OR ANY ADJOURNMENT THEREOF.
/ / MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW
PLEASE DATE AND SIGN EXACTLY AS
NAME(S) APPEAR(S) ON THIS
PROXY. WHEN SIGNING AS
ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUST, GUARDIAN,
ETC., GIVE TITLE AS SUCH. IF
JOINT ACCOUNT, EACH JOINT OWNER
SHOULD SIGN.
Signature:___________ Date:___
Signature:___________ Date:___
<PAGE>
April 2, 1998
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, May 21, 1998, at 9:00 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, May 19,
1
<PAGE>
1998 (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), 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 4 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 8:00 a.m. on
May 21, 1998 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.
2
<PAGE>
THE LEARNING COMPANY, INC.
----------------------------------------
DIRECTION TO BE GIVEN BY HOLDERS OF EXCHANGEABLE
NON-VOTING SHARES OF SOFTKEY SOFTWARE PRODUCTS INC.
----------------------------------------
DIRECTION FOR THE MAY 21, 1998 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, May 21, 1998, at 9:00 a.m. local time, the Proxy
Statement and the Information Statement dated April 2, 1998, 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, Anthony J. DiNovi, James C.
Dowdle, Robert Gagnon, Mark E. Nunnelly, Kevin O'Leary, Michael J. Perik,
Carolynn Reid-Wallace, Robert A. Rubinoff, Scott M. Sperling and Paul J.
Zepf 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.
<TABLE>
<S> <C>
/ / FOR all nominees listed above / / WITHHOLD authority to vote for all nominees listed above
</TABLE>
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 2,
1999.
/ / FOR / / AGAINST / / ABSTAIN
3. To approve an amendment to the Company's Long Term Equity Incentive
Plan.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE>
4. To approve an amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of the
Company's Common Stock from 120,000,000 to 200,000,000.
/ / FOR / / AGAINST / / ABSTAIN
5. 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 1-4 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: ____________________, 1998
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.
